Chapter24 Additional Insights

Chapter24 Additional Insights - Chapter 24: Economic...

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Chapter 24: Economic Growth, Business Cycles, Unemployment, and Inflation A Comment on the Focus of Macroeconomics : Recall that in economics, economists are interested in how scarce resources are used and distributed among members of society. Think back to the circular flow diagram that we looked at the beginning of the course. The circular flow diagram is a very simple picture that depicts how members of society interact within an economy. Also recall that members of our society can be categorized into four major economic groups in society, which are households (consumers), firms (businesses), government, and the international sector. The first part of this course focused on markets in general (demand, supply, and price adjustments) and a microeconomic perspective, which looks at the economic decisions that individual consumers and individual firms face in an economy. In macroeconomics, economists are interested in the interactions of the four major economic groups within an economy at the aggregate level. In the circular flow diagram, the counter-clockwise directional arrows represent the flow of physical resources through the economy. The clockwise directional arrows represent the flow of financial resources through the economy. If the directional arrows are flowing smoothly, then the macroeconomy (overall aggregate markets) is healthy (low unemployment, low inflation, sufficient economic growth). If there are any bottlenecks at any place in the circular flow diagram, then there is a chain reaction of events and the entire flow can slow down, indicating problems in the economy. If one arrow begins to move too fast, that can also cause problems through the rest of the economy. These snags show up as business cycles. From a policy perspective, there are two kinds of policies that are offered as solutions to keep the aggregate economy flowing smoothly: fiscal policy and monetary policy. Fiscal policy refers to action by the government (federal, state, or local) that comes in the form of expenditures (the government spends money) and taxation (the government collects money). Monetary policy refers to deliberate attempts to affect the money supply and this policy tool is conducted by the Federal Reserve Bank (FED). The focus of this half of the course is to understand macroeconomic goals and how fiscal and monetary policy can be implemented to attain those goals. The goals are low unemployment, low inflation, a dampened business cycle, and economic growth. If the unemployment rate is high, then that is indicative of inefficiency…. remember that labor is a scarce resource (i.e., availability is less than desire) so we want to be careful not to waste it. If the inflation rate is high, we become concerned because it means that more of
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Chapter24 Additional Insights - Chapter 24: Economic...

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