Transcript Chapter 6
Chapter 6
Macroeconomics
the Big Picture
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
12-1
John Maynard Keynes
1936 Keynesian Economics
Government Can Help a
Depressed Economy
Through Monetary and
Fiscal Policies.
Monetary Policy
Monetary Policy- The
Government uses Changes
in the Quantity of Money to
Alter Interest Rates and
Affect Overall Spending
Fiscal Policy
The Setting of The
Level of Government
Spending and Taxation
By Government
Policymakers.
The Influence of Monetary and
Fiscal Policy on Aggregate
Demand
Many Factors Influence Aggregate
Demand Besides Monetary and Fiscal
Policy.
In Particular, Desired Spending By
Households and Business Firms
Determines The Overall Demand For
Goods and Services.
Fiscal Policy and Aggregate
Demand
Fiscal Policy Refers To The Government’s
Choices Regarding The Overall Level of
Government Purchases or Taxes.
Fiscal Policy Influences Saving, Investment,
and Growth In The Long Run.
In The Short Run, Fiscal Policy Primarily
Affects The Aggregate Demand.
Fiscal Policy
Fiscal policy is the manipulation of the
federal budget to attain price stability,
relatively full employment, and a
satisfactory rate of economic growth
To attain these goals, the government
must manipulate its spending and taxes
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
12-3
Putting Fiscal Policy into
Perspective
There was no such thing as fiscal
policy until John Maynard Keynes
invented it in the 1930s
He maintained that
The only way out of the Depression was to
boost aggregate demand by increasing
government spending
If we ran a big enough budget deficit, we
could jump-start the economy and, in effect,
spend our way out of the depression
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
12-4
When Firms Fall on Hard
Times They Cut Back on
Production and Employees.
This Lowers The Real GDP
and Incomes. If The Fall in
Income and The Rise in
Unemployment is Moderate
It Is Called a Recession, If
Severe It Is Called a
Depression.
Recession
A Period of Declining
Real Income and Rising
Unemployment.
Depression
A Severe Recession.
Economic Fluctuations
Are Normal and Occur
in Every Country and
Economy.
Let Us Look At These
Fluctuations in Terms of
Real GDP, Investment
Spending and The
Unemployment Rate Since
1965.
Note: That There is No
Discernable Pattern.
In The Following
Figures Recessions Are
Denoted As The
Shaded Areas.
Figure 1 A Look At Short-Run
Economic Fluctuations
(a) Real GDP
Billions of
2000 Dollars
$10,000
9,000
8,000
7,000
Real GDP
6,000
5,000
4,000
3,000
2,000
1965
1970
1975
1980
1985
1990
1995
2000
2005
Figure 1 A Look At Short-Run
Economic Fluctuations
(b) Investment Spending
Billions of
2000 Dollars
$1,500
1,000
Investment
Spending
500
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
Figure 1 A Look At Short-Run
Economic Fluctuations
(c) Unemployment Rate
Percent of
Labor Force
12%
10
Unemployment
Rate
8
6
4
2
1965
1970
1975
1980
1985
1990
1995
2000
2005
3 Key Facts About
Economic Fluctuations
Fact 1: Economic Fluctuations Are
Irregular and Unpredictable.
Fact 2: Most Macroeconomic
Quantities Fluctuate Together.
Fact 3: As Output Falls,
Unemployment Rises.
Fact 1: Economic
Fluctuations Are Irregular
and Unpredictable.
Fluctuations in The Economy
Are Called Business Cycles.
When Times Are Good
Businesses Expand and
When They Are Bad They
Contract.
Business Cycles
Fluctuations In
Economic Activity,
Such As Employment
and Production.
Important Note:
These Business Cycle
Fluctuations Are
Unpredictable and
Follow No Regular
Pattern.
Fact 2: Most Macroeconomic
Quantities Fluctuate Together.
When Real GDP Falls in a
Recession So Does Personal
Income, Corporate Profits,
Consumer Spending, Investment
Spending, Production, Home Sales,
Auto Sales and Other Items.
Fact 2: Most Macroeconomic
Quantities Fluctuate Together.
When Real GDP Falls in a
Recession So Does Personal
Income, Corporate Profits,
Consumer Spending,
Investment Spending,
Production, Home Sales, Auto
Sales and Other Items.
When Economic Conditions
Deteriorate, Much of The
Decline is Attributable To
Reductions in Investment
Spending Such As On New
Factories, Housing,
Equipment and Inventories.
Fact 3: As Output Falls,
Unemployment Rises.
When Firms Choose To
Produce A Smaller Quantity
of Goods and Services, They
Lay Off Workers, Increasing
The Unemployment.
In Each of The Recessions,
The Unemployment Rate
Rose Substantially. When
The Recession Ends and The
Real GDP Starts To Expand,
The Unemployment Rate
Gradually Declines. A
Normal Unemployment Rate
is 5-6 %.
Long-Run Economic Growth
Long-run Economic Growth
is the Sustained Upward
Trend in the Economy’s
Output Over Time
Figure 2.4 The Inflation Rate in the United
States, 1960-2005
Inflation
Inflation- is A Overall
Rising of Prices.
Deflation
Deflation- is an Overall
Falling in the Level of
Prices
Price Stability
The Economy Has Reached
Price Stability When The
Overall Level of Prices
Changes Slowly or Not At
All.
Stagflation
A Period of Falling
Output and Rising
Prices.
Open Economy
An Economy is an Open
Economy When it Actively
Trades Goods and Services
with Other Countries.
Trade Deficit
A Country Runs a Trade
Deficit When the Value of
Goods and Services
Bought From Foreigners is
More Than the Goods and
Services it Sells to Them.
Trade Surplus
An Economy Runs a Trade
Surplus When The Value of
Goods and Services
Bought From Foreigners is
Less Than The Value of
Goods and Services it Sells
to Them.