Introduction To Macroeconomics: Chapter Outline

PART IV CONCEPTS AND PROBLEMS
IN MACROECONOMICS
Introduction to
Macroeconomics 20
CHAPTER OUTLINE
Macroeconomic Concerns
Output Growth
Unemployment
Inflation and Deflation
The Components of the Macroeconomy
The Circular Flow Diagram
The Three Market Arenas
PART IV Concepts and Problems in Macroeconomics
The Role of the Government in the Macroeconomy

A Brief History of Macroeconomics
The U.S. Economy Since 1970
© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

microeconomics Examines the functioning of individual industries and the
behavior of individual decision-making units—firms and households.
macroeconomics Deals with the economy as a whole. Macroeconomics

focuses on the determinants of total national income, deals with
aggregates such as aggregate consumption and investment, and looks at
the overall level of prices instead of individual prices.
aggregate behavior The behavior of all households and firms together.
sticky prices Prices that do not always adjust rapidly to maintain equality
between quantity supplied and quantity demanded.

Three of the major concerns of macroeconomics are
•Output growth
•Unemployment
•Inflation and deflation


Output Growth
business cycle The cycle of short-term ups and downs in the economy.
aggregate output The total quantity of goods and services produced in

an economy in a given period.
recession A period during which aggregate output declines.

Conventionally, a period in which aggregate output declines for two

consecutive quarters.
depression A prolonged and deep recession.

Output Growth
expansion or boom The period in the business cycle from a trough up to a

peak during which output and employment grow.
contraction, recession, or slump The period in the business cycle from a

peak down to a trough during which output and employment fall.

Output Growth
 FIGURE 20.1 A Typical Business

Cycle
In this business cycle, the
economy is expanding as it
moves through point A from the
trough to the peak.
When the economy moves from
a peak down to a trough,
through point B, the economy is
in recession.

Output Growth
 FIGURE 20.2 U.S. Aggregate Output (Real GDP), 1900–2009

The periods of the Great Depression and World Wars I and II show the largest fluctuations in aggregate output.

Unemployment
unemployment rate The percentage of the labor force that is

unemployed.

Inflation and Deflation
inflation An increase in the overall price level.
hyperinflation A period of very rapid increases in the overall price level.
deflation A decrease in the overall price level.


Understanding how the macroeconomy works can be challenging because a

great deal is going on at one time. Everything seems to affect everything else.
To see the big picture, it is helpful to divide the participants in the economy into
four broad groups:
(1) Households.
• Firms.
• The government.
• The rest of the world.

circular flow A diagram showing the income received and payments

made by each sector of the economy.
transfer payments Cash payments made by the government to people

who do not supply goods, services, or labor in exchange for these
payments. They include Social Security benefits, veterans’ benefits,
and welfare payments.

 FIGURE 20.3 The Circular Flow of Payments
Households receive income from firms and

the government, purchase goods and
services from firms, and pay taxes to the
government.
They also purchase foreign-made goods and
services (imports).
Firms receive payments from households and
the government for goods and services; they
pay wages, dividends, interest, and rents to

households and taxes to the government.
The government receives taxes from firms
and households, pays firms and households
for goods and services—including wages to
government workers—and pays interest and
transfers to households.
Finally, people in other countries purchase
goods and services produced domestically
(exports).
Note: Although not shown in this diagram,
firms and governments also purchase
imports.

Figure 1 The Circular-Flow Diagram
MARKETS
Revenue FOR Spending
GOODS AND SERVICES
•Firms sell Goods and
Goods
•Households buy services
and services
sold bought
FIRMS HOUSEHOLDS
•Produce and sell •Buy and consume
goods and services goods and services
•Hire and use factors •Own and sell factors
of production of production
Factors of MARKETS Labor, land,

production FOR and capital
FACTORS OF PRODUCTION
Wages, rent, •Households sell Income
and profit •Firms buy
= Flow of inputs
and outputs
= Flow of dollars
Copyright © 2004 South-Western

Another way of looking at the ways households, firms, the government,

and the rest of the world relate to one another is to consider the
markets in which they interact.
We divide the markets into three broad arenas:
• The goods-and-services market.

• The labor market.
(1) The money (financial) market.

Goods-and-Services Market
Firms supply to the goods-and-services market. Households,

the government, and firms demand from this market.
Labor Market
In this market, households supply labor and firms and the

government demand labor.

Money Market
Households supply funds to this market in the expectation of

earning income in the form of dividends on stocks and interest
on bonds.
Much of the borrowing and lending of households, firms, the

government, and the rest of the world are coordinated by

financial institutions.

Money Market
Treasury bonds, notes, and bills Promissory notes issued by the

federal government when it borrows money.
corporate bonds Promissory notes issued by firms when they

borrow money.
shares of stock Financial instruments that give to the holder a

share in the firm’s ownership and therefore the right to share
in the firm’s profits.
dividends The portion of a firm’s profits that the firm pays out
each period to its shareholders.

The Role of the Government in the Macroeconomy
fiscal policy Government policies concerning taxes and spending.
monetary policy The tools used by the Federal Reserve to control the
quantity of money, which in turn affects interest rates.

A Brief History of Macroeconomics
Great Depression The period of severe economic contraction and high

unemployment that began in 1929 and continued throughout the 1930s.
fine-tuning Government’s role in regulating inflation and unemployment.

stagflation A situation of both high inflation and high unemployment.

The U.S Economy Since 1970
 FIGURE 20.4 Aggregate Output (Real GDP), 1970 I–2010 I

Aggregate output in the United States since 1970 has risen overall, but there have been five recessionary
periods: 1974 I–1975 I, 1980 II–1982 IV, 1990 III–1991 I, 2001 I–2001 III, and 2008 I−2009 II.

 FIGURE 20.5 Unemployment Rate, 1970 I–2010 I

The U.S. unemployment rate since 1970 shows wide variations.
The five recessionary reference periods show increases in the unemployment rate.

 FIGURE 20.6 Inflation Rate (Percentage Change in the GDP Deflator, Four-Quarter Average), 1970 I–2010 I
Since 1970, inflation has been high in two periods: 1973 IV–1975 IV and 1979 I–1981 IV.
Inflation between 1983 and 1992 was moderate.
Since 1992, it has been fairly low.

The Turkish Economy Since 1980

The Turkish Economy Since 1980

ECONOMICS IN PRACTICE
John Maynard Keynes

Much of the framework of modern
macroeconomics comes from the works
of John Maynard Keynes, whose
General Theory of Employment, Interest
and Money was published in 1936.

REVIEW TERMS AND CONCEPTS
aggregate behavior hyperinflation

aggregate output inflation
business cycle macroeconomics
circular flow microeconomics
contraction, recession, or slump monetary policy
corporate bonds recession

deflation shares of stock
depression stagflation
dividends sticky prices
expansion or boom transfer payments

fine-tuning Treasury bonds, notes, and bills
fiscal policy unemployment rate
Great Depression

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PART IV CONCEPTS AND PROBLEMS

The Role of the Government in the Macroeconomy

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

macroeconomics Deals with the economy as a whole. Macroeconomics

aggregate behavior The behavior of all households and firms together.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

Three of the major concerns of macroeconomics are

•Inflation and deflation

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

aggregate output The total quantity of goods and services produced in

recession A period during which aggregate output declines.

Conventionally, a period in which aggregate output declines for two

depression A prolonged and deep recession.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

expansion or boom The period in the business cycle from a trough up to a

contraction, recession, or slump The period in the business cycle from a

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

 FIGURE 20.1 A Typical Business

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

 FIGURE 20.2 U.S. Aggregate Output (Real GDP), 1900–2009

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

unemployment rate The percentage of the labor force that is

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

Inflation and Deflation

inflation An increase in the overall price level.

hyperinflation A period of very rapid increases in the overall price level.

deflation A decrease in the overall price level.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

Understanding how the macroeconomy works can be challenging because a

• The rest of the world.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

The Circular Flow Diagram

circular flow A diagram showing the income received and payments

transfer payments Cash payments made by the government to people

and welfare payments.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

The Circular Flow Diagram

 FIGURE 20.3 The Circular Flow of Payments

Households receive income from firms and

pay wages, dividends, interest, and rents to

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

Factors of MARKETS Labor, land,

Copyright © 2004 South-Western

The Three Market Arenas

Another way of looking at the ways households, firms, the government,

We divide the markets into three broad arenas:

• The goods-and-services market.

• The labor market.

(1) The money (financial) market.

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

The Three Market Arenas

Firms supply to the goods-and-services market. Households,

In this market, households supply labor and firms and the

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26

The Three Market Arenas

Households supply funds to this market in the expectation of

Much of the borrowing and lending of households, firms, the

government, and the rest of the world are coordinated by

© 2012 Pearson Education, Inc. Publishing as Prentice Hall of 26