Macroeconomics

McManamon Spring 2019

Triangle talk time...

(Macroeconomics = the study of the whole economy.)

Think about how you have been affected by nationwide economic forces.

Macroeconomics

Macroeconomics is a branch of the economics field that studies how the aggregate economy behaves.

In macroeconomics, a variety of economy-wide phenomena is examined such as, inflation, price levels, rate of growth, national income, gross domestic product and changes in unemployment.

-Investopedia

Why Macroeconomics?

❖ To measure the economy.❖ To propose methods of

“fixing” the economy.

What does every economy want???

Growth.

Low unemployment.

Low inflation.

Goal #1: Economic Growth

Increase in the output of goods and services.

It may not be perfect, but this is the standard method of measuring an economy...

Gross Domestic Product “GDP”GDP = C + I + G + (X - M)

“Real” GDP & “Nominal” GDP

The Business Cycle

Alternating periods of expansion and recession.

Review your notes with a neighbor...

What are the three (3) goals for every economy?

What is the standard measure of an economy?

What are the four (4) components of the GDP formula?

An economy can only be in any one of three possible conditions at any given time… What are they?

Goal #2: Keep Unemployment Low

Unemployment: {measured by the Bureau of Labor Statistics (BLS)} The part of the labor force actively seeking work but unable to find a job.

➔ Frictional: in between jobs.➔ Structural: obsolete skills.

4 - 6% “full employment”

❏ Cyclical: caused by a recession

Review your notes with a neighbor...

What is the definition of “unemployment?”

What are the three (3) types of unemployment?

Define:

● “frictional” unemployment.● “structural” unemployment.● “cyclical” unemployment.

What is the range for “full employment?”

Goal #3: Keep Inflation Low

Inflation: a period of rising prices and falling purchasing power of money.

Consumer Price Index: measuring the price of a standard basket of goods that reflects typical consumption.

CPI basket of goods

Targeted rate of inflation… 2%

Goal #3: Keep Inflation Low

Inflation: a period of rising prices and falling purchasing power of money.

Consumer Price Index: measuring the price of a standard basket of goods that reflects typical consumption.

8 Major Groups (200 sub categories)

● Food & Beverage● Housing● Apparel● Transportation● Medical Care● Recreation● Education & Communication● Other goods & services

Causes of Inflation

Government printing money: Attempting to pay off debts. Leads to hyperinflation.

Demand-Pull Inflation: Too many dollars chasing too few goods.

Cost-Push Inflation: Production costs increase.

Review your notes with a neighbor...

What is the definition of inflation?

Give an example of inflation with products you consume.

What does “CPI” stand for and what does it do?

Name one of the eight (8) categories in the CPI basket of goods.

What is an “acceptable” rate of inflation?

Hyperinflation! Yikes...

Hyperinflation! Yikes...

Hyperinflation! Yikes...

Inflation… Good or Bad?

HURT BY INFLATION

Lenders.

Fixed Incomes.

Savers.

HELPED BY INFLATION

Borrowers.

AGGREGATE DEMAND

AGGREGATE SUPPLY

AD & AS graphs

Aggregate Demand:

The total of all goods and services demanded by all households, businesses, governments and foreigners.

Aggregate supply:

The total amount of goods and services in the economy available at all possible price levels.

AD & AS graphs

Short Run changes in AD

If AD Increases If AD Decreases

Short Run changes in AS

If AS Increases If AS Decreases

YIKES!

STAGFLATION

Long Run Aggregate Supply (LRAS)

Full employment or Natural Rate of Output

The long run output that an economy can produce when operating at full employment.

Is a vertical “curve” and not affected by the price level.

The Business Cycle

Alternating periods of expansion and recession.

Can only be in one of three “phases.”

The “self correcting” nature of the economy...

AD curve shifts and self correcting economy

Government policies to “fix” the economy

Two policy “fixes”

FISCAL POLICY

Taxing and Spending

MONETARY POLICY

Managing the supply of money in the economy.

FISCAL POLICY- Getting OUT of a Recession

Tax policy- Reduced taxes leads to more consumer spending and investment. This tends to increase overall economic growth.

Spending policy- Increased government spending helps create jobs and lower the unemployment rate.

* Some economist dispute this by claiming both tax and spending policies tend to be narrowly targeted and lose their overall macroeconomic impact.

FISCAL POLICY- Reducing Inflation

Tax policy- Increased taxes leads to less consumer spending and investment. This tends to decrease overall economic growth.

Spending policy- Decreased government spending helps slow down job creation. This tends to slow down overall economic growth.

MONETARY POLICY

Managing the amount of money in circulation.

Expanding the money supply:

More money = less value = lower interest rates = more loans = more spending and investment = more economic growth.

Contracting the money supply:

Less money = higher value = higher interest rates = less loans = less spending and investment = less economic growth.

MONETARY POLICY

Getting out of a RECESSION:

Expansionary Monetary Policy. Increases economic growth, reduces unemployment, increases inflation.

Reducing INFLATION:

Contractionary Monetary Policy. Decreases economic growth, slows down new job creation, reduces inflation.

Three “tools” used for Monetary Policy:1. Fractional Reserve Ratio2. Discount Rate3. Open Market Operations

Monetary Policy Tools- FRACTIONAL RESERVE RATIO

Expansionary

☛ Lower Reserve Ratio.

Banks lend out more money.

Increases supply of money.

↓ INTEREST RATES ↓

↑ INFLATION ↑

Contractionary

☛ Raise Reserve Ratio.

Banks lend out less money.

Decreases supply of money.

↑ INTEREST RATES ↑

↓ INFLATION ↓

Monetary Policy Tools- DISCOUNT RATE

Expansionary

☛ Lower Discount Rate.

Money is “cheaper” for banks to buy.

Banks lend out more money.

Increases supply of money.

↓ INTEREST RATES ↓

↑ INFLATION ↑

Contractionary

☛ Raise Discount Rate.

Money is “more expensive for banks to buy.

Banks lend out less money.

Decreases supply of money.

↑ INTEREST RATES ↑

↓ INFLATION ↓

Monetary Policy Tools- OPEN MARKET OPERATIONS

Expansionary

☛ Government buys bonds.

Adds to supply of money in banks.

Banks lend out more money.

Increases the supply of money.

↓ INTEREST RATES ↓

↑ INFLATION ↑

Contractionary

☛ Government sells bonds.

Reduces supply of money in banks.

Banks lend out less money.

Decreases the supply of money.

↑ INTEREST RATES ↑

↓ INFLATION ↓