Ch. 19 - Introduction to Macroeconomics

What is fiscal policy?

The use of government purchases, transfer payments, taxes, and borrowing to influence economy-wide variables such as inflation, employment, and economic growth.

What is the NBER?

"The National Bureau of Economic Research is an American private nonprofit research organization 'committed to undertaking and disseminating unbiased economic research among public policymakers, business professionals, and the academic community.'"

What can you determine about the relationship between expansion and contraction?

Expansion happens with motivation: war, attacks, etc; while contraction happens with non-motivational crises: Great Depression, reconversion, OPEC oil, etc.

What three factors account for an increase in production over a period of time?

-Increases in the amount and quality of resources, especially labor and capital. -Better technology. -Improvements in the rules of the game that facilitate production and exchange, such as property rights, patent laws, the legal system, and market practices.

When did the U.S. suffer from stagflation? Which U.S. presidents do we associate with stagflation?

1973 to 1980. Richard Nixon.

What is the aggregate output?

A composite measure of all final goods and services produced in an economy during a govern period; real GDP.

What is the price level?

A composite measure reflecting the prices of all goods and services in the economy relative to prices in a base year.

What is stagflation?

A contraction, or stagnation, of a nation's output accompanied by inflation in the price level.

What relationship does the aggregate supply curve show?

A curve representing the relationship between the economy's price level and real GDP supplied per period, with other things constant.

What is a Federal Budget Deficit?

A flow variable measuring the amount by which federal government outlays exceed federal government revenues in a particular period, usually a year.

What is Supply-Side Economics?

A macroeconomic policy that focuses on a rightward shift of the aggregate supply curve through tax cuts or other changes to increase production incentives.

What is Demand-Side Economics?

A macroeconomic policy that focuses on shifting the aggregate demand curve as a way of promoting full employment and price stability.

What is government (federal) debt?

A stock variable that measures the net accumulation of annual federal deficits.

What is a stock variable?

A variable that measures something at a particular point in time, such as the amount of money you have with you right now.

What is a flow variable?

A variable that measures something over an interval of time, such as your income per week.

Into what four areas does McEachern divide the history of the American Economy? What characteristics does each one have?

A) Before and during the Great Depression: suffered from recessions and depressions, culminating in the Great Depression of the 1930s. 2) After the Great Depression to the early 1970s: generally strong economic growth, with only moderate increases in the price level. C) From the early 1970s to the early 1980s: saw both high unemployment and high inflation at the same time. D) Since the early 1980s: good economic growth on average and only moderate increases in the price level.

What factors led to the Great Depression beginning in 1929?

A) The stock market crash was the trigger. B) Grim business expectations cut investment. C) Consumer spending fell. D) Banks failed. E) The nation's money supply dropped by one third. F) World trade was severely restricted by high tariffs.

What is inflation?

An increase in the economy's average price level.

What does an increase in price level do to household wealth?

An increase in the price level, other things constant, decreases the purchasing power of bank accounts and currency. Therefore, households are poorer when the price level increases so the quantity of real GDP they demand decreases.

What are durable goods? Why does demand fall significantly during a recession?

Appliances, furniture, and automobiles. People will stick with what they already own and won't upsize to a newer model (because they are durable and long-lasting).

What policy ruled the American economy prior to the depression of 1929? Whose policy was that?

Before the Great Depression, macroeconomic policy was based primarily on the laissez-faire philosophy that if people were allowed to pursue their self-interest in free markets, resources would be guided as if by an "invisible hand" to produce the most efficient and most valued level of aggregate output. Laissez-faire was Adam Smith's policy.

When did the longest contraction in American history occur?

Between 1873 and 1879, when 80 railroads went bankrupt and most of the nation's steel industry shut down.

What DO YOU THINK the current devaluation of the Chinese Renminbi compared to the US Dollar has done to the aggregate demand in the US from China?

Chinese products are cheaper than nationally-produced products, so the aggregate demand for domestic products has decreased.

Conversely, what does a decrease in price level do for households?

Conversely, a reduction in the price level increases the purchasing power of bank accounts and currency. Because households are richer as the price level decreases, the quantity of real GDP demanded increases.

What is the difference between a depression and a recession?

Depression: A sharp reduction in an economy's total output accompanied by high unemployment lasting more than a year. Recession: A sustained decline in the economy's total output lasting at least two consecutive quarters, or six months; an economic contraction.

Which way does the aggregate demand curve slope?

Downward sloping.

Why are price levels indexed?

Economists use the price index to eliminate year-to-year changes in GDP due solely to changes in the price level. What's left is the change in real output--the change in the amount of goods and services produced.

How does Real GDP supplied vary with increased price levels? What happens to Real GDP if price levels rise? What happens if price levels fall?

Firms find a higher price level more profitable, so they increase real GDP supplied. Real GDP increases. Real GDP decreases.

What is the most common way to measure a nation's economy?

Gross product; which measures the market value of final goods and services produced in a particular geographical region during a given period, usually one year.

What has been the average growth in real GDP? Why do many economists argue that it is unlikely that we will sustain this average?

Growth since 1929 averaged 3.4 percent a year.

What was his idea for the government to stimulate the economy?

He recommended an expansionary fiscal policy to offset contractions. The government could achieve this stimulus either directly by increasing its own spending, or indirectly by cutting taxes to stimulate consumption and investment.

What two things did the Employment Act of 1946 do?

Imposed a clear responsibility on the federal government to promote "maximum employment, production, and purchasing power" and also required the president to appoint a Council of Economic Advisers which is a three-member team of economists to provide economic advice and report on the economy.

When was the deepest contraction in US history?

In October 1929, the stock market crash began what was to become the deepest, though not the longest, economic contraction in our nation's history, the Great Depression of the 1930s.

Who was John Maynard Keynes? What famous book did he write? What is the basic premise of this book?

John Maynard Keynes published The General Theory of Employment, Interest, and Money in 1936. The General Theory of Employment, Interest, and Money. In it, Keynes argued that aggregate demand was inherently unstable, in part because investment decisions were often guided by the unpredictable "animal spirits" of business expectations. Keynes proposed that the government jolt the economy out of its depression by increasing aggregate demand.

What was Herbert Hoover's plan to fix the Great Depression? Why was it the wrong approach?

President Hoover's plan was to introduce a major tax increase during the Great Depression. Many people could not support themselves, so to burden them with more taxes worsened their wellbeing and ultimately the national economy.

What did President Nixon do about the sudden rise in the rate of inflation?

President Nixon imposed ceilings on prices and wages.

What is Real GDP per capita? Why is this a good measure of a country's standard of living? Why is it somewhat misleading?

Real GDP divided by the population; the best measure of an economy's standard of living. Tells us how much an economy produces on average per resident. Not all of the goods and services produced are for the people, much is shipped internationally.

What relationship does the aggregate demand curve show?

Reflects an inverse relationship between the price level in the economy and real GDP demanded.

Which U.S. president do we associate with this policy (Supply-Side Economics)? Why do supply-side economists believe that tax cuts will increase government revenue?

Ronald Reagan (along with Congress) cut personal income tax rates by an average of 23 percent to be phased in over three years in hopes that lower tax rates would increase aggregate supply, thereby expanding output and employment. Higher tax revenue from a larger economy would more than make up for the cut in tax rates.

What is the purpose of running a Federal Deficit in terms of Aggregate Demand?

Running a Federal Deficit would increase aggregate demand, such a shift would raise real GDP, which would increase employment and could compensate for what Kaynes viewed as the instability of private-sector spending, especially investment.

What is OPEC? How did it contribute to Stagflation?

The Organization of Petroleum Exporting Countries (OPEC) cut its supply of oil, so oil prices jumped; assisted to reduce aggregate supply.

What country has the world's largest economy as measured by GDP?

The U.S. economy is the largest and most complex in world history.

What is aggregate demand?

The relationship between the economy's price level and aggregate output demanded, with other things constant.

What is an economic fluctuation?

The rise and fall of economic activity relative to the long-term growth trend to the economy; also called business cycles.

How high was the unemployment rate during the Panic of 1890?

The unemployment rate topped 18 percent.

What happened to the aggregate demand curve during the 1929 depression? What happened to price level and real GDP due to this shift?

The aggregate demand curve shifted to the left. Price level and real GDP dropped due to this leftward shift.

What happened to the Aggregate Supply Curve during this period? What did that do to the equilibrium price level?

The aggregate supply curve shifted leftward during this period of stagflation. Real GDP decreased while the price level increased.

What are some ways to measure a nation's economy?

The amount produced, the number of people working, or their total income.

What is Real GDP? What does this measure take into account?

The economy's aggregate output measured in dollars of constant purchasing power. Inflation

What does "real GDP growth" take into account?

The effects of inflation have been erased, so the remaining changes reflect real changes in the total amount of goods and services produced each year.

Why do many national economies contract and expand together?

The growth in the economy of one country has effects on the trading of another, and vise versa with a decline in an economy.

When did the U.S. have its longest expansion? Longest contraction?

The longest expansion on record lasted 10 years, from March 1991 to March 2001. The longest contraction lasted 5½ years from 1873 to 1879.

Define GDP

The market value of all final goods and services produced in the nation during a particular period, usually one year.

How is the standard of living affected by economic expansion?

The national economy is reflected by the standard of living, so as the economy expands, so does the standard of living.

What is expansion?

The period between a through and subsequent peak is an expansion.

In 2001, what was the equilibrium for AS and AD if 1996 was the base year? What would happen at any other price level? If the price level was too high, what would happen? If the price level was too low, what would happen?

There is no graph for this, but it would be where the AD curve intersects the AD curve. Quantity demanded would not match the quantity supplied. There would be too much supply for too little demand. There would be too much demand for too little supply.

What are leading economic indicators? What do they predict?

Variables that predict, or lead to, a recession or recovery; examples include consumer confidence, stock market prices, business investment, and big-ticket purchases such as automobiles and homes. A recession or recovery.