Spring 2010 – Introductory Macroeconomics – Econ 104a,c,d,e,f - Voorheis
Answer Key Worksheet 1 – What is Macroeconomics?
Unemployment, Inflation and Growth
What is macroeconomics?
When did it become important in economics?
Macroeconomics is the field of economic theory that analyzes the behavior and performance of the economy
as a whole, focusing on the total or aggregate performance of the economy. Macroeconomic theories
attempt to explain elements of the economy such as employment, income, output, and price levels. In
particular, macroeconomic theories attempt to understand the effect of monetary and fiscal policies on all
of these aspects of our economy.
Macroeconomics became important in the decades immediately after the Great Depression, when the US
government created new government instruments for managing the economy, such as the Federal Deposit
Insurance Corporation (1933), Social Security (1935), and in 1946 the Unemployment Act.
See page 311, and “Day 2” class notes.
How did the Great Depression affect the way we think about the economy and the role of
The Great Depression caused people to question (even more than before, or at least more than before) the
idea that markets could be self-regulating, and self-adjusting, and saw the need for government to have a
bigger role in the economy. In response to the lack of growth, high unemployment, and price instability/
high inflation experienced during the Great Depression, the government accepted responsibility for
avoiding another depression, and committed itself to the “three goals” of macroeconomics.
The Great Depression made people aware of the importance of government intervention when there is a
downturn in the cyclical fluctuations of the economy. The government can pursue expansionary fiscal and
monetary policies to help the economy recover from a recession. Without government intervention, it takes
a much longer time to recover from recessions.