Introduction Flashcards
Micro vs. macro?
Microeconomics focuses on individual decision-making by individuals, firms, and governments and tries to predict and explain their choices and outcomes.
Whereas macroeconomics focuses on the structure and performance of economics and tries to predict and explain causal links between aggregate variables.
normative analysis
Normative analysis tries to evaluate outcomes and states that are desirable
social objective
A social objective is an objective that in principle is shared by social consensus.
economic growth
expansion of output over time. Economic growth is the growth in the economic standards of living that occurs over substantial periods of time
labor productivity
Labor productivity is the output produced per unit of labor input.
business cycle
Business cycles are the short-run fluctuations in GDP, including recessions and booms
Recession
A recession is the period of time when actual output in an economy falls below potential output and has not yet started to recover.
boom
boom is the period of time when actual output in an economy raises well above potential output.
depression
depression is an extremely severe recession that is marked by rising unemployment.
unemployment rate
unemployment rate measures the number of people who are unemployed as a fraction of the labor force.
unemployed/total labor force
inflation
Inflation is the change in the aggregate price level of an economy. price level can affect individuals’ purchasing power and therefore their standards of living
deflation
Deflation is a negative rate of inflation and implies a decline of the aggregate price level in an economy.
hyperinflation
Hyperinflation describes extraordinarily high rates of inflation, such as 100% or more per year.
fiscal policy
Fiscal policy refers to government spending and taxation and is determined by the government
monetary policy
Monetary policy refers to the growth of the money supply and is in most countries determined by central banks.
Classical Approach
Adam Smith/invisible hand.
Individuals conduct their economic activities according to their best interests and if there are free markets in
which individuals interact, then the overall economy achieves efficient economic outcomes under
specific conditions.
After an exogenous shock, wages and prices adjust quickly and the markets return to an equilibrium in which quantities demanded equal quantities supplied.
Therefore, limited role for govt.
Keynesian Approach
Great Depression observations. persistent unemployment occurred because wages and prices adjust slowly (“sticky wages” and “sticky prices”).
Wages and prices are slow to adjust to economic shocks.
Therefore, govt should intervene (..e., by increasing the demand for goods and services through fiscal and/or monetary policies
inflation rate
percentage increase in avg level of prices over 1 year
positive vs. normative analysis
positive - examines the economic consequences of a policy but doesn’t address the question of whether those consequences are desirable
normative - tries to determine whether policy SHOULD be used
stagflation
high unemployment + high inflation
