Macro-Economics Review

• Why are some countries really rich while others are poor?

• Why do all countries - even the richest - go through alternating boom and bust periods?

• Can governments do anything to improve living standards or fight recessions?

It studies the behavior of the economy as a whole

• Long-run economic growth

  • Short-run fluctuations in output and employment that comprise the business cycle

True

True

Sometimes rate of growth proceeds rapidly, sometimes slowly, but in this case it turns negative for awhile

• Sticky wages - wage goes down, you will be upset

They collect and analyze economic data and more to understand how economies operate and how to improve their performance

• Real GDP

• Unemployment

• Inflation

• Measures the value of the final goods and services produced within a country’s borders during a specific period of time, typically a year

• Stands for the whole pizza

• Tells us whether an economy’s output is growing

First calculate the value of real GDP

The dollar value of all goods and services produced within a country’s borders using their prices during the year they were produced.

• Wage right now = nominal wage

It can increase from one year to the next even if there is no increase in output

• Real GDP avoids this problem by accounting for price changes

True

Occurs when a person cannot get a job despite being willing to work and actively seeking work

• They indicate that a nation is not using a large portion of its most important resource - the talents and skills of its people

• It is wasteful because we lose all the goods and services that unemployed workers could have produced if they were working

True

Increase in the overall level of prices

• Families won’t be able to purchase as much as it used to

• A surprise jump in inflation reduces the purchasing power of people’s savings

  • Their savings will buy less than expected due to the higher-than expected prices

True

• Lead to Modern Economic Growth

• People started to work in factories - therefore they had more leisure time

  • Output began to grow faster than the population, and living standards began to rise as the amount of output per person increased

True

Output grows faster than population, living standards rise over time

• They are almost entirely the result of the fact that different countries began modern economic growth at different rates.

• The countries that have been at it the longest have ended up far richer than those that began modern economic growth only recently.

• They must devote at least some part of its current output to increasing future output.

  • This process requires both saving and investment

Occurs when current consumption is less than current income; the difference between them is savings

Happens when resources are directed toward increasing future output - either by paying for research to develop more efficient production technologies or by paying for the production of newly created capital goods (such as machinery, tools, and infrastructure) that will increase future output.

True

True

To increase present saving

It can only come at the price of reduced current consumption

They mean economic investment

Captures what ordinary people mean when they say investment, namely, the purchase of assets like stocks, bonds, and real estate in the hope of reaping a financial gain.

Relates to the expansion of the economy’s productive capacity

• Includes spending that pays for the production of newly created capital goods like factories and wireless networks as well as the costs of developing new technologies like solar powered helicopters or a cure for cancer

True

Households

Businesses

Banks and other financial institutions (mutual funds, pension plans, and insurance companies) act as intermediaries between households and businesses.

• Collect households’ savings, rewarding savers with interest, dividends, or capital gains (increases in asset values)

  • Lend funds to businesses, which invest in equipment, factories, and other capital goods as well as research and development

It promotes economic growth and stability by encouraging saving and by directing that saving into the most productive possible investments

It causes serious problems for an economy

True

Because increased pessimism leads to less current investment and, subsequently, less future consumption

• Involves the effects of changing expectations on current behavior

  • Concerns what happens when expectations are unmet

• Huge when it comes to investments

• Drive businesses decisions whether its a firm or consumers

True

Situations in which they were expecting one thing to happen but something else happened instead.

True

Unexpected changes in the demand for good services

• Sales unchanged

• Can have positive (answer) shocks like masks and toilet paper during Covid-19 pandemic

Refers to a situation in which actual demand is higher than expected

Refers to a situation in which actual demand is lower than expected

• They make less and put it into inventory

Unexpected changes in the supply of goods and services

• Sales change

• Business cycle

True

Demand Shocks

True

• Prices of many goods and services are inflexible (slow to change, or “sticky”) in he short run

  • Implies that price changes do not quickly equalize the quantities demanded of such goods and services with their respective quantities supplied

  • Because the prices are inflexible - economy forced to respond in the short run through changes in output and employment rather than through prices

the economy can always produce at its optimal capacity because prices will adjust to ensure that the quantity demanded of each good and service always equals the quantity supplied.

There will be no short-run fluctuations in output. Production levels will remain constant, and unemployment levels will not change because firms will always need the same number of workers to produce the same amount of output.

True

This flexible output strategy is very expensive because factories operate at their lowest costs when they are producing constantly at their optimal output levels.

• Operating at either a higher or lower production rate results in higher per-unit production costs.

True

A stock of output that has been produced but not yet sold.

Because companies can allow them to grow or decline in periods when demand is unexpectedly low or high - thereby allowing production to proceed smoothly and constantly at the optimal output level even when demand is variable

They hurt profits and management will want to reduce output if it sees inventories rising week after week due to unexpectedly low demand.

• As output falls, the firm will have to lay off workers, and unemployment will increase

A combination of unexpected changes in demand and inflexible prices

The firms that make those goods and services will be forced to cut production

Real GDP will fall and unemployment will rise.

Economy will boom and unemployment will fall

Economists call these “sticky” prices

Help to explain how unexpected changes in demand lead to the fluctuations in GDP and employment that occur over the course of the business cycle.

True

The markets for many commodities and raw materials such as corn, oil, and natural gas feature extremely flexible prices that react within seconds to changes in supply and demand

• Allow prices to move freely

• Ex. Corn, Oil, Natural Gas

True

• Consumers would be annoyed if the prices changed everyday

  • Consumers would feel like they are being taken advantage of if the price were high

A firm might feel this because they might think it will be counterproductive because its rivals might simply match the price cut - a situation often referred to as a “price war”

Rivals matching the price cut

Ex. Coca Cola and Pepsi

Firms that face this often have sticky prices

True

Firms will allow their prices to change so that price changes (in addition to quantity changes) can help to equalize quantities supplied with quantities demanded.

True, because it moderates over time

Prices are fully flexible and inflexible for a short amount of time

To fully flexible in the long run

How big is the pizza

Best way to evaluate an economy

• How big is each person’s slice

Real GDP

Government controls this

Federal reserve controls this

• adjust interest rates

  • currently the Fed is trying to slow us down due to inflation

• Spend it

  • Save it

True

True

5-20 year expectations and/or goals

1-3 year expectations and/or goals

Chaos ensues

You save your money

Less money you are spending, less money the employers take in

Now because it makes the loan more expensive because the interest rates are high

True, our GDP went significantly down in 3 months

Price changes due to demand shocks

Quantity changes due to demand shocks

Refers to the costs of changing listed prices

• Sticky prices are also called this

True because they take longer to adjust because they are more complicated

• If they raise prices, people will react

True because they are usually on salary

True