Ch1: Broad View of Macroeconomics Flashcards
What is macroeconomics?
The study of structure and performance of national economies and government policies that affect economic performance.
Microeconomics vs. Macroeconomics
- 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.
What do macroeconomics care about?
- Long-run economic growth
- Unemployment
- Inflation
- Macroeconomic policy
- Business cycles
- The international economy
What causes a decrease and increase in long-run economic growth?
Decline: GDP declines (recession)
Increase: population growth and average labour productivity (output per worker)
What is a business cycle?
They are short-run contractions and expansions in economic activity.
What is a recession?
Occurs when economic activity declines and real GDP per person falls.
What is a depression?
Occurs when the decline in real GDP is severe.
What is unemployment?
The number of people who are available for work and actively seeking work but cannot find jobs.
How do you calculate the unemployment rate?
Unemployment as a fraction of labour force.
What is inflation?
It is when prices of most goods and services increase.
What is deflation?
It is when prices of most goods and services decline.
What is the inflation rate?
The percentage increase in the level of prices.
Hyperinflation
An extremely high rate of inflation: 50% or more
Disinflation
Slower inflation over time
Open economy
An economy that has extensive trading and financial relationships with other national economies.
Closed economy
- An economy that does not interact economically with the rest of the world.
- Exports/Imports = 0
Trade surplus
Exports exceed imports
Trade deficit
Imports exceed exports
What are the two macroeconomic policy?
Monetary and fiscal policy
Monetary policy
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.
Fiscal policy
Government spending and taxation
Macroeconomic forecasting
- 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)
Macroeconomic analysis
- 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.
Positive analysis
Examines the economic consequences of a policy but doesn’t address the question of whether those consequences are desirable.
Normative analysis
Determines whether a policy should be used
The classical approach
- 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
Equilibrium
A situation in which the quantities demanded and supplied are equal.
The Keynesian approach
- 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
Evolution of the classical-Keynesian debate
- 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.
Unified approach to macroeconomics
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
