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Intro to Macroeconomics. Gross domestic product The business cycle The U.S. economic record Aggregate demand curve Aggregate supply curve Equilibrium GDP and price level. Keynesian revolution. John Maynard Keynes. The General Theory of Employment, Interest, and Money , 1936.

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slide1

Intro to Macroeconomics

Gross domestic product

The business cycle

The U.S. economic record

Aggregate demand curve

Aggregate supply curve

Equilibrium GDP and price level

slide2

Keynesian revolution

John Maynard Keynes. The General Theory of Employment, Interest, and Money, 1936.

The macroeconomic problem: Persistent underutilization of resources or “poverty in the midst of plenty.”

slide3

Stocks versus flows

Stock variables are cumulated values measured at a specific point in time.

Examples: Bank balances, debt, inventories.

Flow variables are measured per unit point in time.

Examples: Income (including profits), output.

slide4

Gross domestic product (GDP)

The market value of new goods and services produced within the nation’s border within one year.

GDP is our basic measure of aggregate (total) economic activity

slide6

The business cycle

Wave-like movement of aggregate economic activity over time.

  • Business cycles are irregularly recurring
  • A full cycle consists of an expansion and a contraction (recession).
slide10

The quantity of aggregate output demanded is inversely related to the price level, other things constant.

This inverse relationship is reflected by the aggregate demand curve AD.

150

100

Price level (2000 = 100)

50

AD

Real GDP

(trillions of 2000 dollars)

0

2

4

6

8

10

12

14

16

Aggregate demand curve

slide11

Real balance (Wealth) effect

Let M denote money balances and P is the price level. Real money balances (RB) are given by:

As the price level rises, my money loses its buying power. Thus I will buy less.

slide12

Aggregate supply curve

AS

Price Level

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

0

Real GDP

slide13

AS

The total output of the economy and its price level are determined at the intersection of the Ad and AS curves.

This point reflects real GDP and the price level for 2006 using 2000 as the base year.

150

116.6

Price level (2000 = 100)

50

AD

Real GDP

(trillions of 2000 dollars)

0

11.3

Aggregate Demand and Supply in 2006

slide14

AS

The Great Depression of the 1930s can be represented by the shift to the left of the AD curve, from AD1929 to AD1933.

In the resulting depression, real GDP fell from $865 billion to $636 billion, and the price level dropped from 11.9 to 8.9, measured relative to a price level of 100 in the base year 2000.

12.0

Price level (2000 = 100)

8.9

AD1929

AD1933

Real GDP

(billions of 2000 dollars)

636

0

865

The decrease in AD from 1929 to 1933

slide15

Stagflation

  • Word is a conflation of “stagnation” and “inflation.”
  • Stagnation means stagnant or negative growth of output and jobs.
  • Inflations means a sustained increase in the cost-of-living.
slide16

AS1975

AS1973

The stagflation of the mid-1970s can be represented as a leftward shift of the AS curve from AS1973 to AS1975.

Aggregate output fell from $4.34 trillion in 1973 to $4.31 trillion in 1975, for a decline of about $30 billion (stagnation).

The price level rose from 31.9 to 38.0, for a growth of 19% (inflation).

38.0

31.9

Price level (2000 = 100)

AD

Real GDP

(trillions of 2000 dollars)

4.31

0

4.34

Stagflation from 1973 to 1975