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Are you here today? yes no 20 Chapter 4: A First Look at Macroeconomics Origins and issues of macroeconomics Economic growth Unemployment & inflation Government budget surpluses/deficits International trade surpluses and deficits Macroeconomic policy challenges and tools

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Chapter 4 a first look at macroeconomics l.jpg
Chapter 4: A First Look at Macroeconomics

  • Origins and issues of macroeconomics

  • Economic growth

  • Unemployment & inflation

  • Government budget surpluses/deficits

  • International trade surpluses and deficits

  • Macroeconomic policy challenges and tools


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Origins and Issues of Macroeconomics

  • Economists began to study economic growth, inflation, and international payments during the 1750s.

  • Modern macro dates from the Great Depression, a decade (1929-1939) of high unemployment and stagnant production throughout the world economy.

  • John Maynard Keynes’ book, The General Theory of Employment, Interest, and Money, began the subject.


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Origins and Issues of Macroeconomics

  • Short-Term Versus Long-Term Goals

    Keynes focused on the short-term

    on unemployment and lost production.

    “In the long run, we’re all dead.”

    During the 1970s and 1980s, macroeconomists became more concerned about long-term—inflation and economic growth.


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Economic Growth and Fluctuations

Economic growth

  • expansion of the economy’s production possibilities

  • outward shifting Production possibilities frontier (PPF).

  • results from more resources (land, labor, capital) or improved technology

    Real Gross Domestic Product (GDP)

  • total market value of all the goods and services produced by domestically located factors of producing during a year, measured using a fixed prices.

  • inflation alone does not cause an increase in real GDP

    Economic Growth is measured by growth in Real GDP


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Economic Growth and Fluctuations

  • Potential GDP is GDP if economy operates at “full employment”

  • Real GDP<Potential GDP below full employment

  • A recession occurs when real GDP declines.


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Economic Growth and Fluctuations

Business cycles:

  • Fluctuations of real GDP around potential

  • 2 stages

    1. A recession: real GDP declining

    2. An expansion: real GDP rising

    • 2 turning points

      1. Peak

      2. Trough

      Business cycle dates officially determined by NBER

      http://www.nber.org/cycles.html




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Economic Growth and Fluctuations

How costly are the growth slowdown and the lost output over the business cycle?

To answer that question we measure:

  • The Lucas wedge

  • The Okun gap


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The Cost of a Productivity Slowdown

  • The Lucas Wedge

    accumulated loss of output from the productivity growth slowdown of the 1970s

    Productivity=RGDP/labor hours

    (4.3 percent from 1960s versus actual growth realized).

    $72 trillion or 6.5 times the real GDP in 2005.


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The Cost of a Recessions

  • The Okun Gap

    Real GDP minus potential GDP is the output gap (Okun gap)

    Okun gap from recessions since 1973 is $3.3 trillion or about 30 percent of real GDP in 2005.

    Pain of an Okun gap not equally distributed across society.


A larger okun gap would be caused by a larger lucas wedge would be caused by l.jpg
A larger Okun gap would be caused by ___ . A larger Lucas wedge would be caused by ______:

  • A longer recession; slower productivity growth

  • A shorter recession; slower productivity growth

  • Slower productivity growth; longer recession

  • None of the above.

20


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Determinants of Economic Growth wedge would be caused by ______:

  • Rate of growth in resources (land, labor, capital)

    • Tax policy

    • Social Insurance programs

    • Immigration

    • Environmental regulations

    • Government spending

    • Technological change

    • Education policy


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Which tax would be likely to lead to greater economic growth?

  • A tax rebate to households.

  • A tax credit to business subsidizing the purchase of new capital.

20


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Stricter environmental regulations would likely lead to _____ economic growth.

  • increased

  • decreased

20


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More generous unemployment insurance benefits would likely lead to ____ economic growth

  • increased

  • decreased

20


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More immigration would lead to ____ economic growth lead to ____ economic growth

  • faster

  • slower

20


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Jobs and Unemployment lead to ____ economic growth

  • Jobs

    In 2008, 145.3 million people in the United States had jobs.

    This number is 18 million more than in 1996 and 35 million more than in 1986.

    But the pace of job creation fluctuates.

    During a recession, the number of jobs shrinks.

    19901991 recession: >1 million jobs lost

    2001 recession, 2 million jobs lost

    2008 recession: 2 million jobs lost in 4th quarter, how many more??

    .


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Jobs and Unemployment lead to ____ economic growth

  • Unemployment

    On an average day in a normal year, 7 million people in the U.S. are unemployed (not employed, but searching for a job).

    Labor force statistics:

    Civilian Labor force = employed + unemployed (excludes military)

    Unemployment rate = unemployed/Civilian labor force


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Jobs and Unemployment lead to ____ economic growth

The unemployment rate is not a perfect measure of the underutilization of labor. For two reasons:

The unemployment rate

  • Excludes discouraged workers.

    • Workers who are discouraged about job prospects and quit searching.

      2. Excludes “under-employment”

      –part-time workers who want full-time jobs.


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Jobs and Unemployment lead to ____ economic growth

During the 1930s, the unemployment rate hit 25 percent.


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Jobs and Unemployment lead to ____ economic growth


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Inflation lead to ____ economic growth

We measure the price level as the average of the prices that people pay for all the goods and services that they buy.

Consumer Price Index (CPI) is a common measure of the price level.

Inflation rate:percentage change in the price level.

Inflation occurs when the price level is rising persistently.

Deflation occurs when inflation is negative and prices are falling.


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Inflation lead to ____ economic growth

  • Hyperinflation

    The most serious type of inflation is hyperinflation -- an inflation rate that exceeds 50 percent a month.

    Why Inflation is a Problem

    Inflation is a problem for many reasons, but the main one is that once it takes hold, it is unpredictable.

    Unpredictable inflation is a problem because it

    • Redistributes income and wealth

      • Borrowers and lenders

      • Taxes

    • Diverts resources from production toward forecasting inflation & contracts to deal with inflation


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If inflation is higher than borrowers and lenders expected, borrowers will ____ and lenders will _____.

  • Win; lose

  • Win; win

  • Lose; win

  • Lose; lose

20


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Value of the dollar borrowers will ____ and lenders will _____.

  • The Value of the Dollar

    in terms of other currencies is called the exchange rate —a measure of how much your dollar will buy in other parts of the world.

    An example is the number of pesos that 1 U.S. dollar will buy (pesos/dollar)


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Value of the dollar borrowers will ____ and lenders will _____.

Depreciation

  • value of the dollar decreases relative to other currencies.

    Appreciation

  • Value of the dollar increasesincreases relative to other currencies.


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A weighted average of the foreign exchange value of the U.S. dollar against a subset of the broad index currencies that circulate widely outside the country of issue. Major currencies index includes the Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden.


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Value of the Dollar dollar against a subset of the broad index currencies that circulate widely outside the country of issue. Major currencies index includes the Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden.

  • Why the Exchange Rate Matters

    When the U.S. dollar appreciates,

    • U.S. consumers pay less for imported goods

      • more imports and less demand for domestic goods.

    • Foreign consumers pay more for U.S. exports

      • fewer exports and less demand for domestic goods.

        When the U.S. dollar depreciates, the opposite occurs.


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When the dollar appreciates relative to other currencies, the cost of U.S. exports to other countries ______ and the cost of U.S. imports from other countries _____.

  • Rises; rises.

  • Rises; falls.

  • Falls; falls.

  • Falls; rises.

20


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Government Surpluses, Deficits, and Debts the cost of U.S. exports to other countries ______ and the cost of U.S. imports from other countries _____.

  • Government Budget Balance

    If a government collects more in taxes than it spends, it has a government budget surplus.

    If a government spends more than it collects in taxes, it has a government budget deficit.

  • Deficits Bring Debts

    A debt is the amount that is owed.

    When a government or a nation has a deficit, its debt grows.

    A government’s or a nation’s debt equals the sum of all past deficits minus past surpluses.

    A government’s debt is called national debt.


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If the U.S. debt grows from 2008 to 2009, the government must have experienced a budget deficit.

  • True

  • False

20


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Surpluses, Deficits, and Debts must have experienced a budget deficit.

The budget deficit as a percentage of GDP increases in recessions and shrinks in expansions


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Surpluses, Deficits, and Debts must have experienced a budget deficit.


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Surpluses, Deficits, and Debts must have experienced a budget deficit.

During the 1980s expansion, a large deficit appeared but it almost disappeared during the 1990–1991 recession.

The current account deficit in 2005 was 6.3 percent of GDP.


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International Surpluses, Deficits, and Debts must have experienced a budget deficit.

  • International Surplus and Deficit

    Trade surplus: imports > exports

    Trade deficit: exports> imports

    The balance on the current account equals U.S. exports minus U.S. imports but adds interest received and substracts interest paid to rest of the world.

    Current account surplus: net lender to rest of world

    Curernt account deficit: net borrower from rest of world


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International Surpluses, Deficits, and Debts must have experienced a budget deficit.

Until 1986, the United States was a net lender to the world.

But with increased deficits, the United States is now a net borrower from the world.


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U.S. borrowing from the rest of the world rises as imports ____ or exports _____.

  • Rise; rise

  • Rise; fall

  • Fall; fall

  • Fall; rise

20


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Macroeconomic Policy Challenges and Tools ____ or exports _____.

Two broad groups of macroeconomic policy tools are

Fiscal policy

changes in tax rates and government spending

Conducted by government

Monetary policy

changing interest rates and the amount of money in the economy

Conducted by Federal Reserve


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