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GDP
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Important aggregate measuring total national output (income); analyzes aggregate behavior
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Aggregate behavior
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The behavior of all firms and all households; "sum"
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Classical theory
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The economy is able to correct itself; first two decades of the twentieth century; (ex. 1920: unemployment & slowing of economy was temporary)
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The Great Depression
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1920s; steep and prolonged decline; unemployment to over 25% by 1933; (not temporary, disproved classical)
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The Keynesian Revolution
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Economy does not self correct; wages are "sticky"; government can intervene to improve the economy by stimulating demand
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"New Deal"
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FDR followed Keynes views and began to stimulate demand by creating federal job programs
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1960s
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Economists believed economy could be fine-tuned to achieve the desired rates of economic growth, employment, and inflation
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1970s-Early 1980s
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Shattered view of fine running when unemployment and inflation rose sharply and unexpectedly (stagflation); lead to new theories of economics
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1990s
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Growth was strong; inflation not a problem
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Main goal of macroeconomic policy
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Stable output growth (= avoiding business cycles)
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Inflation
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An increase in the overall price level; Caused by overly rapid expansions
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Deflation
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Decrease in overall price level
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Full employment
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Goal of macroeconomic policy; NOT when everyone in the economy is working (some people are between jobs, always unemployment)
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Unemployment rate
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The percentage of the labor force that is unemployed; can change due to increased unemployment or people in the work force
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Goals of macroeconomic policy
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Price stability, steady economic growth & full employment
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Three types of policies used by government to influence the economy
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Fiscal policy, Monetary policy & Growth (supply-side) policies
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Fiscal policy
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Involves changes in the governments spending and/or taxes in order to stimulate the aggregate demand and the production side of the economy
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Monetary policy
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Changes in the nation's money supply and interest rates
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Growth (supply-side) policies
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Efforts to stimulate economy should concentrate on the supply side; can stimulate research and development & technological innovations
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Macroeconomics focuses on four groups of people
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Households and firms (= private sector), government (public sector), and the rest of the world (international sector
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Macroeconomics is the sum of
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All the microeconomic decisions made by individual households and firms
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Aggregate demand (AD) Consists of:
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Consumption spending by consumers (C), purchases of new factories and equipment by firms (Investment), purchases of goods and services by the Government (G), net exports (NX)
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Net exports (NX)
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The difference between good and services produced in the US and exported to other countries (EXP) and those made in other con tries and imported to the US (IMP)
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Aggregate Demand (AD) =
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C + I + G + NX
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Aggregate Supply
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The sum of all the goods and services provided by all of the firms in the economy at different price levels
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Recession
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Declines in aggregate output over a period of time
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Trough
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When the economy has declined to its lowest level
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Expansion
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when economy begins to improve and aggregate output increases
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Peak
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When the economy reaches its highest level
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