Chapter 6 - Macroeconomics: The Big Picture

If the economy grew at 3% this year and average prices increased _____, people would be better off this year than last year.

Less than 3%

Argentina used to be as rich as Canada; now it's much poorer. Does this mean that Argentina is poorer than it was in the past? Explain.

No. It's just that Canada had better long-term economic growth due to stability and macroeconomic policies than Argentina making Canada three times richer today.

What are recessions?

(also known as contractions) periods of economic downturn when output and employment are falling.

What are expansions?

(also known as recoveries) periods of economic upturn when output and employment are rising.

If you believe in self-regulating economy, what would you recommend the policy makers do?

Doing nothing during slumps.

What is the paradox of thrift?

If people save more during periods of recession, it will hurt the economy.

If a country has a trade deficit, does it indicate that the country has a serious problem?

No. Trade deficits occur when a country's investment spending is higher than its level of saving.

If you believe in keynesian economics, what would you recommend the policy makers do?

Put monetary and fiscal policy in place to stimulate the economy.

Describe who gets hurt in a recession and how?

Recessions hurt all types of classes in society. That includes both households and firms. People will lose jobs and the standard of living will decrease. More people will be under the poverty line.

Explain how drying up credit (people unable to get loans, etc) lead to compounding effects throughout the economy and result in economic slump.

Since people are unable to get credit, they will cut back on spending. Since people don't spend, it will damage the economy since there is nothing to simulate it.

Many poor countries have high rates of population growth. What does this imply about the long-run growth rates of overall output that they must achieve in order to generate a higher standard of living per person?

They would have to maintain higher rate of long-run growth for output to have an increased standard of living per person because output is divided by the population.

Why do we talk about business cycles for the economy as a whole rather than just talking about the ups and downs of particular industries?

This is because it is not just a few companies that are affected by expansions or recessions but rather the whole economy. In general, there is a trend among rise or fall in production across industries. We can also see the effects in multiple countries as well.

Historical evidence shows that for determining a country's living standards, over...

an extended period, long-run growth is much more important than the business cycle.

What do people in Keynesian economics think?

economic slumps are caused by inadequate spending, and they can be improved through government intervention.

What is deflation?

falling overall level of prices

If a country runs trade deficit, its investment spending is probably...

higher than its level of savings

What is price stability?

no change in price over time. It's what economists prefer.

For the past several months, per capita output has increased at a slower and slower rate. Over the same period, the unemployment rate has been falling, but it appears to have leveled off and may soon rise. Where in the business cycle is the economy?

peak

What is fiscal policy?

policy that uses changes in government and taxes to affect overall spending.

What is monetary policy?

policy that uses changes in the quantity of money to alter interest rates and affect overall spending.

What is inflation?

rising overall level of prices

What is a business cycle?

short-run alternation between recessions and expansions.

Price stability occurs when...

the overall cost of living is changing very slowly.

What is long-run economic growth?

the sustained rise in quantity of goods and services the economy produces.

What is trade surplus?

value of export is greater than value of import

What is trade deficit?

value of import is greater than value of export