Topic

MACROECONOMICS
Introduction to
Macroeconomics

Content
Definition of
Macroeconomics
Three Big Macroeconomics
Questions
Government Policy

Key Terms

Definition of Macroeconomics
The study of the performance of the national economy
and the global economy.
Macroeconomics deals with the economy as a whole. It
studies the behavior of economic aggregates such as
aggregate income, consumption, investment, and the
overall level of prices.

Introduction to Macroeconomics

Definition of Macroeconomics
Connections to microeconomics:
Macroeconomic behavior is the sum of all the
microeconomic decisions made by individual
households and firms. We cannot understand the
former without some knowledge of the factors
that influence the latter.

Introduction to Macroeconomics

Definition of Macroeconomics
When we study macroeconomics we are looking at topics
such as:
Economic growth
National Income
Unemployment
Inflation
International trade
Interest rate

Introduction to Macroeconomics

The Roots of Macroeconomics

The Great Depression was a period
of severe economic contraction and
high unemployment that began in
1929 and continued throughout the
1930s.

Introduction to Macroeconomics

The Roots of Macroeconomics

Classical economists applied microeconomic models,
or market clearing models, to economy-wide
problems.
The failure of simple classical models to explain the
prolonged existence of high unemployment during
the Great Depression provided the impetus for the
development of macroeconomics.

Introduction to Macroeconomics

Macroeconomic Concerns
Three of the major concerns of
macroeconomics are:
Inflation
Output growth
Unemployment

Introduction to Macroeconomics

Inflation
Inflation is an increase in the overall price
level.
Hyperinflation is a period of very rapid
increases in the overall price level.
Hyperinflations are rare, but have been used
to study the costs and consequences of even
moderate inflation.

Introduction to Macroeconomics

Output Growth
The business cycle is the cycle of short-term
ups and downs in the economy.
The main measure of how an economy is
doing is aggregate output:
Aggregate output is the total quantity of goods
and services produced in an economy in a given
period.

Introduction to Macroeconomics

Output Growth
A recession is a period during which aggregate
output declines. Two consecutive quarters of
decrease in output signal a recession.
A prolonged and deep recession becomes a
depression.
The size of the growth rate of output over a long
period is also a concern of macroeconomists
and policy makers.
Introduction to Macroeconomics

Unemployment
The unemployment rate is the percentage of
the labor force that is unemployed.
The unemployment rate is a key indicator of
the economys health.
The existence of unemployment seems to
imply that the aggregate labor market is not in
equilibrium. Why do labor markets not clear
when other markets do?

Introduction to Macroeconomics

Government in the Macroeconomy

Policy efforts undertaken to reduce the severity of
recessions and inflation are called stabilization
policy.
One type of stabilization policy is monetary

policy

The second type of stabilization policy is fiscal

policy

Introduction to Macroeconomics

Government in the Macroeconomy

Fiscal policy refers to government
policies concerning taxes and
expenditures.
Monetary policy consists of tools used
by the Federal Reserve to control the
money supply.

Introduction to Macroeconomics

The Components of the

Macroeconomy
The circular flow
diagram shows the
income received and
payments made by
each sector of the
economy.

Introduction to Macroeconomics

The Components of the Macroeconomy

Everyones
expenditures go
somewhere. Every
transaction must
have two sides.

The Three Market Arenas

Households, firms, the government, and the rest of the
world all interact in the goods-and-services, labor, and
money markets.

The Three Market Arenas

Households and the government purchase goods and
services (demand) from firms in the goods-and
services market, and firms supply to the goods and
services market.
In the labor market, firms and government purchase
(demand) labor from households (supply).
The total supply of labor in the economy depends
on the sum of decisions made by households.

Introduction to Macroeconomics

The Three Market Arenas

In the money marketsometimes called the financial
markethouseholds purchase stocks and bonds from
firms.
Households supply funds to this market in the
expectation of earning income, and also demand
(borrow) funds from this market.
Firms, government, and the rest of the world also
engage in borrowing and lending, coordinated by
financial institutions.

Introduction to Macroeconomics

Business Cycle
Economic fluctuations are irregular and
unpredictable.
Fluctuations in the economy are often called the
business cycle.

Most macroeconomic variables fluctuate

together.

Introduction to Macroeconomics

Business Cycle
Most macroeconomic variables fluctuate
together.
Most macroeconomic variables that measure
some type of income or production fluctuate
closely together.
Although many macroeconomic variables
fluctuate together, they fluctuate by different
amounts.

Introduction to Macroeconomics

Business Cycle
Peak

Peak

Trough

Expansion
During a period of expansion:
Wages increase
Low unemployment
People are optimistic and spending money
High demand for goods
Businesses start
Easy to get a bank loan
Businesses make profits and stock prices increase

Introduction to Macroeconomics

Peak
When the economic cycle peaks:
The economy stops growing (reached the top)
GDP reaches maximum
Businesses cant produce any more or hire more
people
Cycle begins to contract

Introduction to Macroeconomics

Contraction
During a period of contraction:
Businesses cut back production and layoff people
Unemployment increases
Number of jobs decline
People are pessimistic (negative) and stop
spending money
Banks stop lending money

Introduction to Macroeconomics

Trough
When the economic cycle reaches a trough:
Economy bottoms-out (reaches lowest point)
High unemployment and low spending
Stock prices drop

But, when we hit bottom, no where to go but

up!
UNLESS.
Introduction to Macroeconomics

Who Cares?????
Why should you care about the business cycle
and economy?
Lots of reasons!

Introduction to Macroeconomics

Dont quit that job!

If the economy is going into a contraction,
jobs will become more scarce. If you quit, you
may not find another job!
But, if the economy is in a period of
expansion, jobs are readily available. It may be
a good time to switch careers.

Introduction to Macroeconomics

Should I make a big purchase?

Only if you know that you wont lose your job
in a contraction. So, buy your house during an
expansion.
HOWEVER,
When the economy starts to slow down
(contraction), interest rates will decrease.
Wait to buy a house until the rates drop to a
low point, if you are sure you wont lose your
job.
Introduction to Macroeconomics

The End

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