MACROECONOMIC QUESTIONS

LESSON

ONE

WHY DOES OUTPUT

FLUCTUATE?

Chapter 8 Figure 8.3(a)

• OUTPUT HAS FLUCTUATED FROM 1982 THRU 2002

• AS OUTPUT RISES AND FALLS, THE AMOUNT OF GOODS AND SERVICES PEOPLE HAVE, INCREASES AND DECREASES

• THE STANDARD OF LIVING RISES OR FALLS – PEOPLE ARE BETTER OFF OR WORSE OFF

• CHANGES IN OUTPUT CAUSE CHANGES IN EMPLOYMENT and CHANGES IN INCOME

#1 MACROECONOMICS LOOKS AT

• THE DETERMINANTS OF OUTPUT FLUCTUATION AND HOW THESE FACTORS CAN BE CONTROLLED.

Causation

• Most economists agree on changes in the total level of spending which will affect output, employment and income

• Some see– Major innovations– Changes in productivity– Changes in money supply

FROM MICRO WE KNOW

• POSITIVE CHANGES IN THE DETERMINANTS OF DEMAND OR THE DETERMINANTS OF SUPPLY –

• WILL INCREASE THE OUTPUT: QUANTITY SUPPLIED OR THE SUPPLY RESPECTFULLY

• FOR A PARTICULAR GOOD

• NEGATIVE CHANGES IN THE DETERMINANTS OF DEMAND OR THE DETERMINANTS OF SUPPLY –

• WILL DECREASE THE OUTPUT: QUANTITY SUPPLIED OR THE SUPPLY RESPECTFULLY

• FOR A PARTICULAR GOOD

WHAT DETERMINES ECONOMIC GROWTH?

GROWTH DEPENDS ON

• THE NUMBER OF WORKERS(LABOR)

• EDUCATION & SKILLS OF WORKERS

• THE LEVEL OF TECHNOLOGY

• THE AMOUNT OF MACHINERY AND TECHNOLOGY LABOR HAS TO WORK WITH (CAPITAL)

• THE BASIC MATERIAL RESOURCES AVAILABLE (LAND)

#2 MACROECONOMICS ADDRESSES

• HOW SOCIETY CAN ENCOURAGE THE DEVELOPMENT OF THESE FACTORS, WHICH DETERMINE ECONOMIC GROWTH

WHY DO WE HAVE UNEMPLOYMENT, AND WHY IS

IT A PROBLEM?

THE UNEMPLOYED ARE

• PEOPLE ACTIVELY SEEKING JOBS OR TEMPORARILY LAID OFF. BUT

• WHY WON’T THESE PEOPLE WORK FOR A LOWER WAGE AND THUS GET A JOB?

• SOME DO NOT HAVE THE SKILLS FIRMS REQUIRE TO TAKE LOWER PAYING JOBS

• SOME WITH SKILLS ARE WILLING TO WAIT FOR THE JOB AT THE MARKET RATE FOR THEIR SKILL

• THE JOBS ARE NOT AVAILABLE BECAUSE DEMAND FOR THE GOOD IS DOWN

UNEMPLOYMENT IMPOSES

• A PROBLEM FOR THE UNEMPLOYED

• A SOCIAL COST ON SOCIETY

• A PSYCHOLOGICAL COST ON SOCIETY

WHY DO WE HAVE INFLATION, AND WHY IS INFLATION A

PROBLEM?

• There’s too much money chasing too few goods

• RESOURCES ARE LIMITED– AS OUTPUT INCREASES, THE INCREASED

DEMAND FOR RESOURCES WILL CAUSE THE PRICE TO RISE

INFLATION IS

• AN INCEASE IN THE AVERAGE PRICE LEVEL OVER TIME

• ONE OF THE PROBLEMS IS UNPREDICTABILITY– IF WE KNEW WHAT INFLATION WAS

GOING TO BE, WE COULD BUILD IN ADJUSTMENTS FOR ITS AFFECTS

#3 MACROECONOMICS STUDIES

• THE CAUSES OF INFLATION

• THE MISALLOCATION OF RESOURCES THAT RESULT FROM INFLATION

• METHODS FOR CONTROLLING INFLATION

WHICH GOVERNMENT POLICY AFFECTS OUTPUT, GROWTH,

UNEMPLOYMENT AND INFLATION?

FISCAL POLICY

• GOV’T DECISIONS ABOUT EXPENDITURES AND TAXATION

• THESE DECISIONS AFFECT THE LEVEL OF– GROWTH– OUTPUT– UNEMPLOYMENT– INFLATION

HOW DO CHANGES IN THE AMOUNT OF MONEY IN THE ECONOMY AFFECT OUTPUT, GROWTH, UNEMPLOYMENT

AND INFLATION?

THE AMOUNT OF MONEY IN AN ECONOMIC SYSTEM

• DETERMINS TO A GREAT EXTENT THE AMOUNT OR LEVEL OF ECONOMIC ACTIVITY

• THE AMOUNT OF MONEY IN THE ECONOMY (MONEY SUPPLY) AND THE AMOUNT SOCIETY WANTS TO USE DETERMINES THE INTEREST RATE

THE FEDERAL RESERVE SYSTEM IN THE UNITED STATES• DECISIONS OF THE CENTRAL BANK

DETERMINE THE AMOUNT OF MONEY IN THE ECONOMY

• MONETARY POLICY– IS THE SUM OF FED DECISIONS ABOUT

• MONEY• INTEREST RATES

HOW DO DOMESTIC ECONOMIC ACTIVITIES

AFFECT OTHER COUNTRIES AND OUR TRADE?

• A NATION’S ECONOMY DOES NOT OPERATE INDEPENDENT OF OTHER COUNTRIES’ ECONOMIES

• TRADE POLICY– IMPORTS & EXPORTS– TARIFFS AND QUOTAS– FREE TRADE &/OR FAIR TRADE– TRADE ZONES– TRADE SANCTIONS

#4 OUR

• TRADE POLICY,

• MONETARY POLICY

• & FISCAL POLICY

• ALL AFFECT THE IMPACT OF OUR DOMESTIC ECONOMY ON THE ECONOMIES OF OTHER NATIONS