1.Please post a well-thought-out question about subject matter relating to this week’s topics and current events to the discussion board based on the 2 attached powerpoints2. MACRO QUESTIONS WEEK 5
Provide a brief answer to the following questions:
WEEK FIVE:
1)
What is a Business
Cycle?
2)
How a length or depth of
a Business Cycle is measured?
3)
What are the four phases
of a Business Cycle?
4)
What is Seasonal
Unemployment?
5)
What is Frictional
Unemployment?
6)
What is Structural
Unemployment?
7)
What is Cyclical
Unemployment?
8)
What is the Natural Rate
of Unemployment?
9)
How Unemployment Rate is
determined?
10) What is Participation Rate?
11) What is Inflation?
12) What is Demand Pull Inflation?
13) What is Cost Push Inflation?
14) What is Expectational Inflation?
15) What is Rational Expectation?
16) What is Adaptive Expectation?
17) What is Philips Curve? What are the differences between Short Run
and Long Run Philips curve?
18) Who are Activist Economics?
19) Who are Non-Activist Economics?
20) What is Crowding Out?
21) What is Liquidity Trap?
22) What is Natural Rate of Unemployment?
23) Provide a brief contrast between Activists and Non-Activist
economists.
week_5_powerpoint_ch6.pptx
week5_powerpoint_chp18.pptx
Unformatted Attachment Preview
CHAPTE
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Macroeconomics:
The Big Picture
FOOD FOR THOUGHT….
SOME GOOD BLOGS AND OTHER SITES TO GET THE JUICES FLOWING:
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What you will
learn in this chapter
▪ What makes macroeconomics different from
microeconomics
▪ What a business cycle is and why policy makers seek to
diminish the severity of business cycles
▪ How long-run economic growth determines a country’s
standard of living
▪ The meaning of inflation and deflation and why price
stability is preferred
▪ The importance of open-economy macroeconomics
and how economies interact through trade deficits and
trade surpluses
To
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To First
Active Learning
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LEARN BY DOING: DISCUSS
With a partner (and without
technology), discuss and decide what
you think is the (approximate) current
annual inflation rate.
http://www.bls.gov/
To Next
Active Learning
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LEARN BY DOING: DISCUSS
With a partner (and without
technology), discuss and decide what
you think is the (approximate) current
U.S. unemployment rate.
http://www.bls.gov/
To Next
Active Learning
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THE ORIGINS OF MACROECONOMICS
Hoover’s failure to understand what caused
the Great Depression (or how it could be
tamed) was common at the time.
Microeconomics was well-developed;
macroeconomics was not.
The effort to understand economic slumps
and find ways to prevent them is at the core
of macroeconomics.
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THE
BUSINESS
LEARN
BY DOING: CYCLE
APPLICATION VIDEO
During the Great Depression, “Hoovervilles”
sprang up across America, named after the
economically clueless President Herbert Hoover.
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C
OPYRIGHT
2015 W
ORTH
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UBLISHERS
The Nature of Macroeconomics
Macroeconomic Questions
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MACROECONOMICS: THE WHOLE IS
GREATER THAN THE SUM OF ITS
PARTS
An example
Paradox of thrift: When families and
businesses are worried about the possibility
of economic hard times, they prepare by
cutting their spending. This reduction in
spending depresses the economy as
consumers spend less and businesses react
by laying off workers. As a result, families
and businesses may end up worse off than
if they hadn’t tried to act responsibly by
cutting their spending.
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MACROECONOMICS: THEORY AND
POLICY
Pre-1930s conventional wisdom
Self-regulating economy: Problems such as
unemployment are resolved without
government intervention through the
working of the invisible hand.
Post-1930s conventional wisdom
Keynesian economics: Economic slumps are
caused by inadequate spending, and they
can be mitigated by government
intervention.
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COMPARING THE GREAT RECESSION TO
THE GREAT DEPRESSION
Measures of economic activity and world industrial production during
the Great Depression and the Great Recession
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MACROECONOMICS
“The long run is a misleading guide to
current affairs. In the long run we are all
dead. Economists set themselves too easy,
too useless a task if in tempestuous seasons
they can only tell us that when the storm is
past the ocean is flat again.”
-John Maynard Keynes, A Tract on Monetary Reform
(1923) Ch. 3
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THE BUSINESS CYCLE
Since the 1930s, the U.S. (and most national
governments) uses tools to improve the
economy.
Monetary policy: uses changes in the quantity of money
to alter interest rates and affect overall spending.
Fiscal policy: uses changes in government spending
and taxes to affect overall spending.
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IMAGES OF THE DEPRESSION
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GROWTH INTERRUPTED, 1985–2014
Source: Federal Reserve Bank of St. Louis (Shaded areas are recessions)
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CHARTING THE BUSINESS CYCLE
Recessions (contractions): periods of
economic downturn, when output and
employment are falling.
Expansions (recoveries): periods of
economic upturn, when output and
employment are rising.
Business cycle: the short-run alternation
between recessions and expansions.
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THE BUSINESS CYCLE
The point at which the economy turns from
expansion to recession is a business-cycle peak.
The point at which the economy turns from
recession to expansion is a business-cycle trough.
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THE PAIN OF RECESSION
The most important effect of a recession is its
effect on the ability of workers to find and
hold jobs.
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TAMING THE BUSINESS CYCLE
The business cycle is a main concern of modern
policy makers: they try to smooth out the business
cycle. They haven’t been completely successful.
Source: Bureau of Labor Statistics (Shaded areas are recessions)
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LEARN BY DOING: APPLICATION VIDEO
You might not understand everything mentioned in this
epic economist rap battle YET…but you will enjoy it
and get a taste for the philosophical debates about
stabilization policy within macroeconomics. (6:28
minutes)
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LEARN BY DOING: PRACTICE QUESTION
The use of taxes and government
spending to change the overall level of
spending in an economy is called:
a) monetary policy.
b) fiscal policy.
c) either monetary or fiscal policy
depending upon what is happening
to the interest rate.
To Next
Active Learning
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LEARN BY DOING: PRACTICE QUESTION
Do you think the government is right to begin
massive spending programs during deep
recessions?
a) Yes
b) No
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Active Learning
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ECONOMICS
IN ACTION
COMPARING RECESSIONS
The 2001 recession was milder than the 2007–2009
one.
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LONG-RUN ECONOMIC GROWTH
Long-run economic growth is the sustained
upward trend in the economy’s output over time.
Source: W. Michael Cox and Richard Alm, “How Are We Doing?” The American (July/August 2008).
http://www.american.com/ archive/2008/july-august-magazine-contents/how-are-we-doing
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GROWTH, THE LONG VIEW
Americans have become able to afford many more material
goods over time thanks to long-run economic growth.
Sources: Angus Maddison, Statisticson World Population, GDP, and Per Capita GDP, 1–
2008AD,http://www.ggdc.net/MADDISON/oriindex.htm; Bureau of Economic Analysis.
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GROWTH, THE LONG VIEW
Long-run growth is a relatively modern phenomenon.
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ECONOMICS
IN ACTION
A TALE OF TWO COUNTRIES
Canada and Argentina began the 20th century
looking like twins…
Political instability and high inflation slowed
Argentina down.
Now Canada’s standard of living is on par with the
U.S., 3x as high as Argentina
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INFLATION AND DEFLATION
A rising overall level of prices is inflation.
A falling overall level of prices is deflation.
The economy has price stability when the overall
level of prices changes slowly or not at all.
Rising Prices offset most of the rise in average wages.
Source: Bureau of Labor Statistics
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THE CAUSES OF INFLATION AND
DEFLATION
In the short run, movements in inflation are
closely related to the business cycle.
When the economy is depressed and jobs are
hard to find, inflation tends to fall; when the
economy is booming, inflation tends to rise.
In the long run, the overall level of prices is
mainly determined by changes in the
money supply.
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THE PAIN OF INFLATION AND
DEFLATION
Both inflation and deflation are problematic.
▪ Inflation discourages people from holding onto
cash (because cash loses value if prices are
rising). In extreme cases, people stop using
cash altogether.
▪ Deflation can cause the reverse problem. Since
cash gains value if the price level is falling,
holding on to it is more attractive than investing
in new factories and other productive assets.
This can deepen a recession.
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ECONOMICS
IN ACTION
A FAST (FOOD) MEASURE OF INFLATION
In 1954 the original McDonald’s sold hamburgers for
$0.15 each.
In 2013 the same burger sold for $1.00 (6.5x higher)
BUT overall consumer prices rose even faster (8.5x)
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INTERNATIONAL IMBALANCES
The United States is an open economy: it trades
goods and services with other countries.
In 2013, the United States ran a big trade deficit.
Trade deficit: the value of goods and services
bought from foreigners is more than the value of
goods and services sold to them.
Trade surplus: the value of goods and services
bought from foreigners is less than the value of
the goods and services sold to them.
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WHAT CAUSES TRADE IMBALANCES?
In a later chapter we’ll learn the surprising answer: the
determinants of the overall balance between exports and
imports lie in decisions about savings and investment
spending. Countries with high investment spending relative
to savings run trade deficits; countries with low investment
spending relative to savings run trade surpluses.
Source: CIA World Factbook.
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LEARN BY DOING: PRACTICE QUESTION
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:
a) trade surplus.
b) trade deficit.
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ECONOMICS
IN ACTION
SPAIN’S COSTLY SURPLUS
Giving up the Peseta for the Euro (and closer union with
Europe) in 1999 had benefits… and costs
Did the influx of foreign investment afterward lead to the
housing boom (and bust) that brought down Spain?
Spain’s Current Account Balance, 1999-2013
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LEARN BY DOING: BUSINESS CASE
THE DECLINE OF MONTGOMERY WARD
(THE IMPORTANCE OF UNDERSTANDING THE
MACROECONOMY)
1930’s: Montgomery Ward survived the Depressions
by cutting costs and hoarding cash
1940’s: Expecting a similar environment post WWII,
they repeated the strategy… and didn’t open a
new store until 1959… far too late to stop their
decline
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CHAPTE
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BY
S OLINA L INDAHL
18(33)
Crises and
Consequences
FOOD FOR THOUGHT….
SOME GOOD BLOGS AND OTHER SITES TO GET THE JUICES FLOWING:
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What you will
learn in this chapter
▪ Why classical macroeconomics was inadequate for the
problems posed by the Great Depression
▪ How Keynes and the experience of the Great Depression
legitimized macroeconomic policy activism
▪ What monetarism is and why monetarists claim there are
limits to the use of discretionary monetary policy
▪ How challenges led to a revision of Keynesian economics
and the emergence of the new classical
macroeconomics
▪ Why the Great Moderation consensus was challenged by
the 2008 financial crisis, leading to fierce debates among
economists about the best use of fiscal and monetary
policy during challenging economic times
To
To First
Video
Active Learning
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TWO RECESSIONS, SAME PROBLEM
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CLASSICAL MACROECONOMICS
Ye olde economics:
Before the Great Depression “classical”
macroeconomics reigned.
Main ideas:
• The short run was unimportant.
• Prices were assumed to be flexible, so
the aggregate supply curve was vertical
even in the short run.
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ECONOMICS
IN ACTION
CLASSICAL MACROECONOMICS
By the 1930s, measurement of business cycles
was well established, but classical economists
had no widely accepted theory of business
cycles.
Business cycles may have
been nonexistent (or small)
before 1854. Before then
data were not collected and
the United States was
overwhelmingly rural and
agricultural.
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THE GREAT DEPRESSION
AND THE KEYNESIAN REVOLUTION
The Great Depression demonstrated that
economists cannot safely ignore the short run.
The disastrous effects of the international depression
helped Adolf Hitler’s rise in Germany.
Economists were conflicted in analysis and
prognosis.
Classical economists advocated waiting it out, but as the
depression deepened, this approach was rejected.
Some thought capitalism had failed and only a
government takeover could end the slump.
Some thought the slump could be cured without giving
up the basic market economy.
John Maynard Keynes compared the problem to a car with a Back to
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defective
starter.
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W O R T H
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KEYNES’S THEORY
In 1936, Keynes
published The
General Theory of
Employment, Interest,
and Money, one of
the most influential
books on economics
ever written.
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THE GREAT DEPRESSION
AND THE KEYNESIAN REVOLUTION
Keynesian economics rests on two main tenets:
1) Changes in aggregate demand affect
aggregate output, employment, and prices.
2) Changes in business confidence cause the
business cycle.
Keynes’s term for business confidence:
“animal spirits”
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LEARN BY DOING: APPLICATION VIDEO
Now that you’ve spent time with macroeconomic
models, you will enjoy this rap battle between
Keynes and Hayek more. (6:28 minutes)
To Next Video
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THE CLASSICAL VS. THE KEYNESIAN VIEW
The classical view: Flexible
prices and focus on the long
run mean a vertical SRAS; shifts
in AD affect only aggregate
price level.
Aggregate
price level
Aggregate
price level
SRAS
P1
The Keynesian view:
Sticky prices and upwardsloping SRAS curve; shifts in
AD affect the price level
and output.
SRAS
P1
E1
E1
E2
P2
E2
P2
AD1
AD1
AD2
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THE POLITICS OF KEYNES
Be careful not to confuse Keynes with socialism.
Keynes himself was no socialist and not much
of a leftist.
When The General Theory was published, many
intellectuals believed the capitalist system was
dying.
Keynes, in contrast, argued that all the system
needed was a narrow technical fix.
In that sense, his ideas were pro-capitalist and
politically conservative.
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LEARN BY DOING: PRACTICE QUESTION
Which of the following statements about Keynes’s
contributions to economic theory is true?
a) In the long run, fluctuations in output are
primarily due to fluctuations in AD (aggregate
demand).
b) In the short run, the aggregate supply curve is
upward sloping, and therefore shifts in AD will
cause fluctuations in aggregate output.
c) Shifts in the aggregate demand curve in the
short run are primarily due to changes in the
money supply.
d) “Animal spirits” primarily affect aggregate
supply in the long run.
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POLICY TO FIGHT RECESSIONS
The main consequence of Keynes’s work was that
it legitimized macroeconomic policy activism.
Macroeconomic policy activism: the use of
monetary and fiscal policy to smooth out the
business cycle.
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ECONOMICS
IN ACTION
THE END OF THE GREAT DEPRESSION
The basic message young economists took from
Keynes in the 1930s was that economic recovery
requires aggressive fiscal expansion to create jobs.
Policy makers weren’t convinced…
…until World War II deficit spending created
economic growth.
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LEARN BY DOING: DISCUSS
With a partner, briefly describe the two primary
innovations in Keynesian economics. How did
Keynes’s work legitimize macroeconomic policy
activism? Use the graph to help illustrate your
answer, and be sure in your answer to compare the
Keynesian viewpoint with the classical viewpoint.
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LEARN BY DOING: PRACTICE QUESTION
“Animal spirits” refers to the:
a) effect of monetary policy on investment
decisions.
b) level of confidence businesses have and
how that confidence level affects spending
decisions by firms and households.
c) inappropriate policies enacted by Congress
during the political business cycle.
d) ability of the government through its
spending policies to manage the economy
and keep it from recession.
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