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chaptertwenty - Ch. 20 A First Look at Macroeconomics...

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Ch. 20 A First Look at Macroeconomics Origins and Issues of Macroeconomics - Modern macroeconomics did not emerge until the Great Depression (1929-1939), a decade of high unemployment and stagnant production throughout the world economy. - 1936 publication: The General Theory of Employment, Interest, and Money , John Maynard Keynes - Short-Term Versus Long-Term Goals o Keynes’ theory was that depression and high unemployment result from insufficient private spending and that to cure these problems, the government must increase its spending. o Keynes focused on the short term, curing the immediate problem. o The long-term problems of inflation, slow growth, and persistent unemployment and the short-term problems of depression and economic fluctuations intertwine and are most usefully studied together. - Today, macroeconomics is a subject that studies long-term economic growth and inflation as well as short-term business fluctuations and unemployment Economic Growth and Fluctuations - Economic growth: the expansion of the economy’s production possibilities. An outward shift of the PPF. - Measured by the increase in real gross domestic product : the value of the total production of all the nation’s farms, factories, shops, and offices measured in the prices of a single year. o Real GDP in the U.S. is currently measured in the prices of 2000 (called 2000 dollars). o We use the dollar prices of a single year to eliminate the influence of inflation the increase in the average level of prices – and determine how much production has grown from one year to another. o Real GDP is not a perfect measure of total production because it does not include everything that is produced. It excludes the things we produce for ourselves at home. Also excludes production that people hide to avoid taxes or because the activity is illegal. o Rea GDP is still the best measure of total production available. - Economic Growth in the U.S. o The Growth of Potential GDP: When all the economy’s labor, capital, land, and entrepreneurial ability are fully employed, the value of production is called potential GDP . Real GDP fluctuates around potential GDP and the rate of long-term economic growth is measured by the growth rate of potential GDP. Shown by the steepness of the potential GDP line. Productivity growth slowdown : the growth rate of output per person slows. We all have smaller incomes today than we would have had if the economy had continued to grow at its rate before. In the long run, real GDP growth cannot exceed the growth rate of potential GDP.
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o Fluctuations of Real GDP around Potential GDP: Real GDP fluctuates around potential GDP in a business cycle. Business cycle : the periodic but irregular up-and-down movement in production. Measured by fluctuations in real GDP around potential GDP. When real GDP is less than potential GDP, some resources are underused
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chaptertwenty - Ch. 20 A First Look at Macroeconomics...

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