Ch1: Broad View of Macroeconomics

Question 1

What is macroeconomics?

Answer 1

The study of structure and performance of national economies and government policies that affect economic performance.

Question 2

Microeconomics vs. Macroeconomics

Answer 2

• Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence of governments.
• Macroeconomics is the study of the performance of national and global economies.
• Aggregation: summing individual economic variables to obtain economywide totals.

Question 3

What do macroeconomics care about?

Answer 3

• Long-run economic growth
• Unemployment
• Inflation
• Macroeconomic policy
• Business cycles
• The international economy

Question 4

What causes a decrease and increase in long-run economic growth?

Answer 4

Decline: GDP declines (recession)
Increase: population growth and average labour productivity (output per worker)

Question 5

What is a business cycle?

Answer 5

They are short-run contractions and expansions in economic activity.

Question 6

What is a recession?

Answer 6

Occurs when economic activity declines and real GDP per person falls.

Question 7

What is a depression?

Answer 7

Occurs when the decline in real GDP is severe.

Question 8

What is unemployment?

Answer 8

The number of people who are available for work and actively seeking work but cannot find jobs.

Question 9

How do you calculate the unemployment rate?

Answer 9

Unemployment as a fraction of labour force.

Question 10

What is inflation?

Answer 10

It is when prices of most goods and services increase.

Question 11

What is deflation?

Answer 11

It is when prices of most goods and services decline.

Question 12

What is the inflation rate?

Answer 12

The percentage increase in the level of prices.

Question 13

Hyperinflation

Answer 13

An extremely high rate of inflation: 50% or more

Question 14

Disinflation

Answer 14

Slower inflation over time

Question 15

Open economy

Answer 15

An economy that has extensive trading and financial relationships with other national economies.

Question 16

Closed economy

Answer 16

• An economy that does not interact economically with the rest of the world.
• Exports/Imports = 0

Question 17

Trade surplus

Answer 17

Exports exceed imports

Question 18

Trade deficit

Answer 18

Imports exceed exports

Question 19

What are the two macroeconomic policy?

Answer 19

Monetary and fiscal policy

Question 20

Monetary policy

Answer 20

Determines the rate of growth of the nation’s money supply and is under the control of a government institution known as the central bank.

Question 21

Fiscal policy

Answer 21

Government spending and taxation

Question 22

Macroeconomic forecasting

Answer 22

• Predicting the economic environment in the future
• Examine the growth of money supply
• Difficult, as knowledge on how the economy works is imperfect
• Instead macroeconomists analyse and interpret events as they happen (macroeconomic analysis) or attempt to understand the structure of the economy in general (macroeconomic research)

Question 23

Macroeconomic analysis

Answer 23

• Macroeconomic analysts monitor the economy and think about the implications of current economic events.
• Private and public sector economists - analyse current conditions
• Public sector employs many macroeconomic analysts who provide policy advice.

Question 24

Positive analysis

Answer 24

Examines the economic consequences of a policy but doesn’t address the question of whether those consequences are desirable.

Question 25

Normative analysis

Answer 25

Determines whether a policy should be used

Question 26

The classical approach

Answer 26

• Economy works well on its own (the invisible hand)
• Wages and prices adjust rapidly to get to equilibrium
• Government has limited role in the economy

Question 27

Equilibrium

Answer 27

A situation in which the quantities demanded and supplied are equal.

Question 28

The Keynesian approach

Answer 28

• Persistent unemployment occurs because wages and prices adjust slowly, so markets remain out of equilibrium for long periods.
• Government should intervene to restore full employment

Question 29

Evolution of the classical-Keynesian debate

Answer 29

• Keynesian dominated from WWII to 1970.
• Stagflation resulted in the comeback of the classical approach in the 1970s
• There has been great research on both approaches in the last 30 years.

Question 30

Unified approach to macroeconomics

Answer 30

Presents both classical and Keynesian ideas:
-Three markets: goods, assets, labour
- Model begins with microfoundations : individual behaviour
- Long run: wages and prices are perfectly flexible
- Short run: Classical case-flexible wages and prices;
Keynesian case-wages and prices are slow to adjust