Chapter 6 Macroeconomics: The Big Picture

I.

II.

The Nature of Macroeconomics

i. Macroeconomics: Study of economy as a whole, can be
different than the sum of its parts
b. Macroeconomic Questions
i. Microeconomics: Focus on decisions of individuals and firms and
consequences of those decisions
ii. Macroeconomics: Examines overall behavior of the economy
c. Macroeconomics: The Whole is Greater Than the Sum of its Parts
i. Individual actions compound on one another to produce
outcomes that are not simply sums of those actions
d. Macroeconomics: Theory and Policy
i. Strong focus on policy
ii. Self-Regulating Economy: Invisible hand guides the economy,
government shouldnt interfere
1. Pre 1930s mindset
2. Market Clearing: Wages adjust up and down
iii. Keynesian Economics: Economic slumps caused by
inadequate spending, government intervention can help through
monetary and fiscal policy
1. Monetary Policy: Changes in quantity of money to alter
interest rates and overall spending
2. Fiscal Policy: Changes in government spending and
taxes to affect overall spending
3. Proposed by John Maynard Keynes in The General Theory
of Employment during the Great Depression
4. Current mindset
The Business Cycle
a. Charting the Business Cycle
i. Business Cycle: Short-run alternations between recessions and
expansions
1. Recession (contraction): Periods of falling
employment/output
a. Downward sloping
b. When aggregate output declines for 2 successive
quarters
2. Expansion (recovery): Periods of rising
employment/output
a. Upward sloping
ii. Business Cycle Peak ( ^ ): Economy shifts from expansion to
recession
1. Rising to falling
iii. Business Cycle Trough ( V ): Economy shifts from recession to
expansion
1. Falling to rising
b. The Pain of Recession
i. Most important effect is ability of workers to find jobs
ii. Unemployment rate indicates conditions of labor market

III.

IV.

V.

Long Run Economic Growth

i. Long Run Economic Growth: Sustained upward trend in the
economys output over time
ii. Key to higher wages and increases in standards of living
Inflation and Deflation
i. Inflation: Rising overall level of prices
1. Stagflation: RAPID increases in price level
ii. Deflation: Falling overall level of prices
b. The Causes of Inflation and Deflation
i. In the short run, related to the business cycle
ii. In the long run, mainly determined by changes in money supply
c. The Pain of Inflation and Deflation
i. Inflation causes people to spend too much, deflation causes
people to spend too little
ii. Economists aim for price stability
1. Price Stability: Overall level of prices changes slowly or
not at all
International Imbalances
i. Open Economy: Economy that trades goods and services with
other countries
1. What is traded in/out determined by comparative
advantage
ii. Trade Deficit: More in than out (Imports > Exports)
iii. Trade Surplus: More out than in (Exports > Imports)
iv. Trade balances determined by decisions about
savings/investment spending