Macroeconomics: Chapter 6

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Self-regulating economy
Problems such as unemployment are resolved without the intervention of the government. The economic problems are solved through the working of the invosible hand
Keynesian Economics – who developed it
John Maynard Keynes (British Economist) developed Keynesian economics
When was Keynesian economics developed
Keynesian economics was developed in 1936
Keynesian economics definition
Keynesian economics is an ideology that explains that economic slumps are caused by the consumers’ inadequate spending. Keynesian economics also supports government intervention, and says that it is crucial for economic success
These economic slumps can be mitigated by government intervention
What are two policies that the government may enact to help the economy
Monetary Policy
Fiscal Policy
Monetary Policy
Monetary Policy uses changes in the quantity of money to alter interest rates and affect overall spending
Fiscal Policy
Uses changes in the government spending and taxes to affect overall spending
Another word for recessions
Another word for expansions
Periods of economic downturn when output and employment rates are falling
Periods of economic upturn when output and employment rates are rising
Business Cycle
The short-run alternation between recessions and expansions
Business-cycle peak
The point at which the economy switches from an expansion to a recession
Business-cycle trough
The point at which the economy switches from a recession into an expansion
Long-run economic growth (definition and is it a relatively new phenomenon?)
The sustained upward trend of economic output over time
Yes, long-run economic growth is a relatively new phenomenon
A rising overall level of prices
A falling of the overall level of prices
Will the employment rate ever be at 0%
The unemployment rate will never be at 0%, simply because of different factors. A person may quit the job because of difficulties, or an individual may be fired for doing poorly. But, there is indeed a type of unemployment rate that should be avoided.
What type of unemployment rate is always tried by economists to be avoided
Cyclical unemployment rate should be tried to always be kept at 0% – this unemployment rate is caused and increased due to recessions
Price Stability – is it wanted by all economists?
The economy has price stability when the overall level of prices hardly changes, or does not change at all
Open Economy
An economy that trades goods and services with other countries
Trade deficit
A country runs a trade deficit when the value of goods and services bought from other countries is more than the value of goods and services it sells to them (the country imports more than it exports)
Trade Surplus
A country runs a trade surplus when the value of goods and services bought is less than the value of goods and services being sold to the other countries (the country exports more than it imports)
What is an example of a country that is running a trade deficit
The United States
What are three countries that are running trade surpluses
Saudi Arabia
Do trade deficits and trade surpluses indicate the success of the company?
No, trade surpluses and trade deficits do not indicate the success of the country’s economy because of how one may think that being in a trade deficit is bad, but, the United States’ economy is certainly more sound than that of Saudi Arabia’s. The United States is running a trade deficit (importing more than exporting) because of how that fits with the economy at the moment. The nation’s GDP is doing just fine, and when looking around, it is clear that the nation’s economy is doing well. This does not mean that having a trade surplus (exporting more than importing) is bad by any means
What is a good indicator of a country’s success?
The GDP – Gross Domestic Product
What is the GDP
The gross domestic product is the total value of goods and services produced within the country over a certain period of time (this certain period of time is typically one year in length)
What study of economics came first, Macro or Micro?
Microeconomics came first because of how it had already been developed and a well studied branch by the Great Depression in the 1930s. Macroeconomics came soon after the Great Depression as people wanted to know why economic slumps occurred, and how to fix them
Economics is about….
Choices! Decisions!
What do policy makers seek to do to business cycles
Policy makers seek to diminish the severity of business cycles
Macroeconomics definition
The study of the economy as a whole rather than individual markets
Macroeconomists study things like:
Unemployment Rates
Government Policies
Trade Deficits and Surpluses
And so on
What is the definition of macroeconomics -slide
Macroeconomics is the study of large scale economic issues such as those which affect the entire economy
Is it true that macroeconomics is a highly practical discipline because of how it deals with principles that impact every part of life?
Yes, macroeconomics is a highly practical discipline
Why does the economy have an impact on almost every part of people’s lives:
The economy has an impact on almost every part of people’s lives because of how the nation’s economic well-being affects its employment, healthcare, consumer confidence, and so forth
What two things does macroeconomics do?
Macroeconomics does really just two things;
It measures the economy
Fixes it when it’s broken
The rest is details:
What should the economy look like? How should the economy be fixed?
Label whether question is microeconomic or macro:
Should I go to business school or take a job right now?
What determines the cost to a university or college of offering a new course?
What determines the overall level of prices in the economy as a whole?
What determines whether Citibank opens a new office in shanghai
How many people are employed in the economy as a whole this year?
National income
Analyses the wealth a nation generates
GNP stands for
Gross National Product
GDP stands for
Gross Domestic Product
National Net Income definition
The sum of income taken from household incomes, business incomes, and government in ones
What’s the difference between GNP and GDP
GDP – total value of goods and services produced by the country within a certain period of time

GNP – total value of goods and services produced by a country, plus, the value of the goods and services produced by the companies but are located in other countries.

How the cost of goods and services increases over time
Economic output
Goods and services which a national economy produces
International trade
Trade that occurs between nations and involves the trading of goods, services, and raw materials
Paradox of thrift
This paradox of thrift explains the people’s reactions toward deflation and inflation. When there is a deflation, consumers will resist themselves from purchasing goods and services because of how they believe that the prices will continue to go down. This lack of investment will negatively affect the economy’s success. When there is an inflation, many people will no longer be able to afford certain products, which will no longer allow them to invest into the economy’s well-being.

Basically, when families are worried about economic hard times, they cut back on spending, which hurts the economy even more!

Can production and trade be illustrated through the circular-flow diagram?
Yes, production and trade may indeed be illustrated through the circular-flow diagram.
How does the circular flow diagram work? – draw it out on a sheet of paper
Draw it
Macroeconomics focuses on…
Macroeconomics focuses o the economy as a whole
Who supported a self regulating economy?
Hayek vs Keynesian (major difference)
Hayek supported a self regulating economy, one that fixes its economic slumps through the use of the invisible hand, NO government intervention

Keynesian economics – consumers play a large role in the economy’s success, and government intervention should be available to mitigate economic simple

What four aspects are part of the business cycle
How has the GDP been since the 1950s?
The GDP, since 1950, has shown long run economic growth (a sustained upward trend in economic output over time)
What is the difference between GDP and Real GDP
GDP includes inflation rates while Real GDP excludes the inflation rates from its totals
Is GDP or Real GDP used more often
Real GDP is used more often than GDP because of how it provides more accurate statistics on the nation’s success
What is a quarter?
A quarter signifies three months in one year
When do economists officially label an economic situation a recession or an expansion
If the economic situation portrays economic recession or expansion factors/indications for three months in a row (a quarter)
How has the unemployment rate been since 2007
The unemployment rate increased dramatically from 2007 to 2009 because of the Great Recession, but since then, it has been decreasing over a long period of time.
What is the current unemployment rate
The current unemployment rate is hovering around 4.3 or 4.4 percent – which is amazing, considering how in 2009, it had been 10 percent
What was different between the Great Recession and the Great Depression
While the Great Recession and Great Depression were both horrible, the major difference between the two was that the recession lasted for far less time than the Great Depression. Not only was there more government involvement, but the study of Macroeconomics has developed drastically since the Great Depression, allowing us to deal with recessions much more efficiently
What is a Depression?
The worst form of a recession
Recession – my next door neighbor was fired from work yesterday
Depression – my next door neighbor and I were fired yesterday
What do economists try to do to the business cycle and have they been successful?
Economists try to smooth out the business cycle, but sadly, they haven’t been too successful at doing so : multiple recessions and the Great recession
Americans have become able to afford many more material goods over time thanks to…
Americans have been able to afford many more material goods over time thanks to long-run economic growth
Was the 2001 recession milder than the 2007-2009 recession?
Yes, the 2001 recession was milder than the 2007-2009 recession
Is the European Union still being affected by the Great Recession?
Definitely, especially the country of Greece, whose GDP has been decreasing continuously over the last several years
What happened to Canada and Argentina during the 20th century?
Argentina and Canada began the 20th Century looking like twins but ever since, Canadas standard of living is 3x higher than Argentina’s. Canada is on par with the US’s standard of living b/c of how Argentina dealt with high inflation and political instability
In the short-run, movements of inflation are closely related to the…
Business cycle
When the economy is depressed, inflation tends to decrease, but if the economy is booming, inflation tends to rise
What is the overall level of prices determined by in the long run
In the long run, the overall level of prices is determined by the changes in money supply
Why are inflation and deflation problematic
These are problematic because deflation will cause people to save money, because of how money ultimately gains value over time. This can deepen a recession.

On the other hand, inflation causes people to spend all of their money, because of how the value of money decreases over time, and in the worst cases, people stop using cash all together.

Fast food measure of economy: McDonald’s sold hamburgers for how much in 1954, and how much I’m 2013? What happened to overall consumer prices?
1954 – hamburgers were sold for .15 cents each
2013 – hamburgers were sold for 1 dollar (6.5x higher) each
Overall consumer prices rose even faster than this increase (8.5x)
Countries with high investment relative to savings run…
Trade Deficit
Countries with low investment, relative to savings run…
Trade surplus
This year the value of a country’s imports is equal to $1.2 billion, and the value of its exports is equal to $1.3 billion. This country is running a:
Trade Deficit
Trade Surplus
This country is running a trade surplus
When did Spain give up the Peseta for the Euro and what happened
Spain gave up the Peseta for the Euro in 1999 and at first, the surplus caused a decrease in GDP, but over years, the GDP began to rise and stabilize itself one more (long-run economic growth)
Montgomery Ward – what happened?
Montgomery Ward during the Great Depression, had cut back on spending and saved money, which allowed them to survive. After WWII, the company did this yet again, which caused them to lose out on investments, and ultimately make them lose their success (Sears took over)
Categories: Macroeconomics