Chapter 23: An Introduction to Macroeconomics

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 pricesLO123-*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?LO223-*Performance and PolicyOutput growth2.7% per year 1995-2007Unemployment rate4.6% in 2007Inflation rate2.7% in 2007LO223-*Modern 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 countriesLO323-*Global PerspectiveLO323-*Savings and InvestmentSavingTrade-off current for future consumption InvestmentFinancial investmentEconomic investment Banks and financial institutionsLO423-*Uncertainty, Expectations, and ShocksThe future is uncertainExpectations affect investmentShocks What happens is not what you expectedDemand shocksSupply shocksLO523-*Uncertainty, Expectations, and ShocksDemand shocks and flexible pricesPrice falls if demand is lowSales unchangedDemand shocks and sticky pricesMaintain inventorySales changeBusiness cyclesLO523-*Demand ShocksCars Per WeekPriceDMDLDH900$40,000$37,000$35,000Flexible PricesLO523-*Demand ShocksCars Per WeekDMDLDH 700 900 1150$37,000Fixed PricesPriceLO523-*Sticky 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 demandLO523-*