The Study of Macroeconomics

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Micro vs. Macro
Microeconomics
the study of how individual households and firms make decisions and how they interact with one another in markets. •Macroeconomics
the study of the economy as a whole.
Its goal is to explain the economic changes that affect many households, firms, and markets at once. •The Two Groups of Economists
Macroeconomists
Focus on the economy as a whole.
Spend much time analyzing how total income changes and how changes in income cause changes in other modes of economic behavior. •Microeconomists
Focus on the markets for individual commodities and on the decisions of single economic agents. •Hold total income constant.
The Two Groups of Economists
Macroeconomists
Spend a great deal of time and energy investigating how people form their expectations and change them over time. •Consider the possibility that decision makers might change the quantities they produce before they change the prices they charge. •Microeconomists

Don’t worry much about how decision makers form their expectations. •Assume that economic adjustment occurs first through prices that change to balance supply and demand and that only afterward do producers and consumers react to the changed prices by changing the quantities they make, buy or sell. •Why Macroeconomics Matters…

Cultural Literacy
“If you want to follow and participate in public debates and discussions, you need to know about macroeconomics.” –Self-interest
“the macro economy matters to you personally”
Civic Responsibility
“working together, we can improve the macro economy.”

Macroeconomic Questions
Why do output and employment sometimes fall and how can unemployment be reduced? •What are the sources of price inflation and how can it be kept under control? •How can a nation increase its rate of economic growth?Objectives of Macroeconomics

OUTPUT
high level and rapid growth of output
to provide goods and services that the population desires •most comprehensive measure of total output in an economy is the gross domestic product / gross national product •potential output is determined by the economy’s productive capacity which depends on inputs available and the economy’s technological efficiency •Objectives of Macroeconomics

EMPLOYMENT
high employment and low unemployment
unemployment rate is the percentage of the labor force that is unemployed •When output is falling, the demand for labor falls and the unemployment rate rises •Objectives of Macroeconomics
STABLE PRICES
rate of inflation denotes the rate of growth or decline in the price level from one year to the next •consumer price index (CPI) measures the cost of a basket of goods bought by the average urban consumer •price stability is important because a smoothly functioning market system requires that prices accurately and easily convey information about relative scarcities •SIX KEY VARIABLES

Real gross domestic product
The unemployment rate
The inflation rate
The interest rate
The level of the stock market
The exchange rate
Tools of Macroeconomics
FISCAL POLICY
Denotes the use of taxes and government expenditures
MONETARY POLICY
through managing the country’s money, credit and banking system restricting money supply leads to higher interest rates and reduced investments which cause a decline in GDP and lower inflation •MACROECONOMIC POLICY

Growth policy
- aims to accelerate or decelerate long-run economic growth •Stabilization policy
-aims to avoid recessions and undue inflation by keeping total aggregate demand growing smoothly and unemployment near its NAIRU*. *Nonaccelerating inflation rate of unemployment (natural rate of unemployment) •SOME CONCEPTS…

Business cycle
- a short-run fluctuation in the output, income and employment of an economy. •Expansion
- a period when real GDP is growing
Recession
- a fall in the level of real GDP for at...
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