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Macro 103

Chapter 5: Introduction to Macroeconomics

* Microeconomics: examines the behavior of individual decision making units, business firms, and households

* Aggregate: added up

* Microeconomists generally conclude that markets work well (Markets clear, there is no excess demand). Macroeconomists, however, observe that some important prices often seem “sticky”.

* Sticky prices are prices that do not always adjust rapidly to maintain the equality between quantity supplied and quantity demanded.

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 1930’s.

* Classical economists (microeconomists assumptions) applied microeonomic models or “market clearing” models, to economy-wide problems. However, simple classical models failed to explain the prolonged existence of high unemployment during the Great Depression. This provided the impetus for the development of macroeconomics.

* In 1936, John Maynard Keynes published The General Theory of Employment, Interest, and Money.

-This book helped us to understand how macroeconomics work. Keynes believed governments could intervene in the economy and affect the level of output and employment. -During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession. -Keynes said problem with Depression was that we were not demanding enough goods and services, and if we could demand more, we’d start spending more and it’d be a virtuous effort.

Recent Macroeconomic History

* Fine-tuning was the phrase used by Walter Heller to refer to the government’s role in regulating inflation and unemployment. The use of Keynesian policy to fine-tune the economy in the 1970’s and early 1980’s. -We thought we were so confident that we could fix these government problems, we understood how...
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