Chapter 06: An Introduction to Macroeconomics

Performance and Policy Real GDP Corrects for price changes Nominal GDP Uses current prices Unemployment Inflation Increase in overall level of prices

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An Introduction to Macroeconomics.McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Performance and PolicyReal GDPCorrects for price changesNominal GDPUses current prices UnemploymentInflation Increase in overall level of pricesLO16-*Performance and PolicyCan governments:Promote economic growth?Reduce severity of recession?Is monetary or fiscal policy more effective at mitigating recession?Is there a tradeoff between inflation and unemployment?Is anticipated or unanticipated government policy more effective?LO2Performance and PolicyOutput growth2.7% per year 1995-2007Unemployment rate4.6% in 2007Inflation rate2.7% in 2007LO2Modern Economic GrowthStandard of living measured by output per personNo growth in living standards prior to Industrial RevolutionModern economic growthOutput per person risesNot experienced by all countriesLO3Global PerspectiveLO3Savings and InvestmentSavingTrade-off current for future consumption InvestmentFinancial investmentEconomic investment Banks and financial institutionsLO4Uncertainty, Expectations, and ShocksThe future is uncertainExpectations affect investmentShocks What happens is not what you expectedDemand shocksSupply shocksLO5Uncertainty, Expectations, and ShocksDemand shocks and flexible pricesPrice falls if demand is lowSales unchangedDemand shocks and sticky pricesMaintain inventorySales changeBusiness cyclesLO5Demand ShocksCars Per WeekPriceDMDLDH900$40,000$37,000$35,000Flexible PricesLO5Demand ShocksCars Per WeekDMDLDH 700 900 1150$37,000Fixed PricesPriceLO5Sticky PricesMany prices are sticky in the short runConsumers prefer stable pricesFirms want to avoid price warsAll prices are flexible in the long runFirms adjust to unexpected, but permanent changes in demandLO5