CHAPTER ONE

What is Macroeconomics?

mac

ro

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What is Macroeconomics?

Instead of demonstrating the definitions, this chapter introduces you to types of issues macroeconomics deals with.

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Macroeconomic and Microeconomic Issues

Economics

How much leisure time will consumers enjoy?

How much output will a firm produce?

How much R&D will a company undertake?

What is the appropriate exchange rate between currencies?What will happen if taxes are raised?

What will the unemployment rate be?

How much income will a country save?

How much will a consumer spend on food?

Macroeconomics issues

Microeconomics issues

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The difference between Macro and Microeconomics

Macroeconomics focuses on aggregate outcome

Microeconomics looks at individual markets, firms, or households

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Important issues in macroeconomics

Why does the cost of living keep rising?

Why are millions of people unemployed, even when the economy is booming?

Why are there recessions? Can the government do anything to combat recessions? Should it??

How do lower interest rates lead to recovery?

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Important issues in macroeconomics

What is the government budget deficit? How does it affect the economy?

Why does the U.S. have such a huge trade deficit?

Why are so many countries poor? What policies might help them grow out of poverty?

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U.S. Gross Domestic Product

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U.S. Gross Domestic Product in billions of chained 1996 dollars

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1970 1975 1980 1985 1990 1995 2000

Recessions

longest economic expansion on record

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The inflation rate in the US Economy

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The unemployment rate in the US economy

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Why learn macroeconomics?

1. The macroeconomy affects society’s well-being.

example: Unemployment and social problems

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Unemployment and social problems

Each one-point increase in the unemployment rate is associated with:

920 more suicides 650 more homicides 4000 more people admitted to state

mental institutions 3300 more people sent to state prisons 37,000 more deaths increases in domestic violence and

homelessness

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Why learn macroeconomics?

1. The macroeconomy affects society’s well-being.

example: Unemployment and social problems2. The macroeconomy affects your well-being.

example 1: Unemployment and earnings growth

example 2:Interest rates and mortgage payments

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Unemployment and earnings growth

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1965 1970 1975 1980 1985 1990 1995 2000

%

growth rate of inflation-adjusted hourly earnings

change in Unemployment rate

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Interest rates and mortgage payments

For a $150,000 30-year mortgage:

$11,782$9816.84%Dec 2001

$12,771$10647.65%Dec 2000

annual payment

monthly payment

actual rate on 30-year mortgage

date

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Why learn macroeconomics?

1. The macroeconomy affects society’s well-being.

example: Unemployment and social problems2. The macroeconomy affects your well-being.

example 1: Unemployment and earnings growth

example 2:Interest rates and mortgage payments

3. The macroeconomy affects politics & current events.

example: Inflation and unemployment in election years

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Inflation and Unemployment in Election Years

year U rate inflation rate elec. outcome

19767.7% 5.8%Carter (D)

19807.1% 13.5% Reagan (R)

19847.5% 4.3%Reagan (R)

19885.5% 4.1%Bush I (R)

19927.5% 3.0%Clinton (D)

19965.4% 3.3%Clinton (D)

20004.0% 3.4%Bush II (R)