Transcript Performance and Policy - McGraw Hill Higher Education

Chapter 24
An Introduction to Macroeconomics
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Performance and Policy
• Business Cycle
• Recession
• Real GDP
• Corrects for price changes
• Nominal GDP
• Uses current prices
• Unemployment
• Inflation
• Increase in overall level of prices
LO1
24-2
Performance and Policy
• Can governments:
• Promote economic growth?
• Reduce severity of recession?
• Is monetary or fiscal policy more effective at
•
•
LO1
mitigating recession?
Is there a tradeoff between inflation and
unemployment?
Is anticipated or unanticipated government
policy more effective?
24-3
Performance and Policy
• Output growth
• 2.7% per year 1995-2007
• U.S. unemployment rate
• 9.1 in 2011
• 17.9% in Greece, 3.5% in S. Korea, 9.3% in France, etc.
• U.S. inflation rate
• 3% in 2011
• 1.3% in Norway, 14% in Kenya, 21% in Argentina, etc.
LO1
24-4
Modern Economic Growth
• Standard of living measured by output per
•
•
LO2
person
No growth in living standards prior to
Industrial Revolution
Modern economic growth
• Output per person rises
• Not experienced by all countries
24-5
Savings and Investment
• Saving
• Trade-off current for future consumption
• Investment
• Financial investment
• Economic investment
• Banks and financial institutions
LO3
24-6
Uncertainty, Expectations, and Shocks
• The importance of expectations and shocks
• Expectations affect investment
• Shocks
• What happens is not what you expected
• Demand shocks
• Supply shocks
LO4
24-7
Uncertainty, Expectations, and Shocks
• Demand shocks and flexible prices
• Price falls if demand is low
• Sales unchanged
• Demand shocks and sticky prices
• Maintain inventory
• Sales change
• Business cycles
LO4
24-8
Sticky Prices
Item
Months
Coin-operated laundry machines
46.4
Newspapers
29.9
Haircuts
25.5
Taxi fare
19.7
Veterinary services
14.9
Magazines
11.2
Computer software
5.5
Beer
4.3
Microwaves ovens
3.0
Milk
2.4
Electricity
1.8
Airline tickets
1.0
Gasoline
0.6
Source: Mark Bils and Peter J. Klenow, “Some Evidence on the Importance of Sticky Prices”, Journal of Political Economy,
October 2004, pp 947-985, Used with permission of The University of Chicago Press.
LO5
24-9
Sticky Prices
• Many prices are sticky in the short run
• Consumers prefer stable prices
• Firms want to avoid price wars
• All prices are flexible in the long run
• Firms adjust to unexpected, but permanent
changes in demand
LO5
24-10
Debating the Great Recession
• The Minksy Explanation: Euphoric Bubbles
• The Austrian Explanation: Excessively Low
•
•
Interest Rates
The Stimulus Solution
The Structural Solution
24-11