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First Look at Macro Study Guide

First Look at Macro Study Guide

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Estudiantes ECON 3022 UPR Rio Piedras - Esta es la guía de estudios del primer tema de MACRO. Estudiar y repasar junto con la presentación "Intro a Macro".
SE ASIGNAN LOS EJERCICIOS IMPARES PARA NOTA
Estudiantes ECON 3022 UPR Rio Piedras - Esta es la guía de estudios del primer tema de MACRO. Estudiar y repasar junto con la presentación "Intro a Macro".
SE ASIGNAN LOS EJERCICIOS IMPARES PARA NOTA

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Published by: Rosario Rivera Negrón on Oct 13, 2009
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65
 
4
A FIRST LOOK ATMACROECONOMICS*
Key Concepts
 
Origins and Issues of Macroeconomics
 
Modern macroeconomics began during the
Great De-pression
, 1929–1939. The
Great Depression
was adecade of high unemployment and stagnant produc-tion throughout the world. Macroeconomics initially focused on short-term problems, such as high unem-ployment. Recently long-term problems, such as eco-nomic growth, have come to be considered vital.
 
Economic Growth and Fluctuations
Economic growth
is the expansion of the economy’sproduction possibilities. It is measured by the increasein
real gross domestic product 
, also called
real GDP
.
Real GDP
is the value of the total production of all thenation’s farms, factories, shops, and offices measured inthe prices of a single year.
Potential GDP
is the quantity of real GDP that isproduced when all the economy’s labor, capital, land,and entrepreneurial ability are fully employed.
 
The
productivity growth slowdown
was theslowing of the growth rate of output per person thatoccurred during the 1970s.The periodic but irregular up-and-down movement inproduction is the
business cycle
. It occurs as realGDP fluctuates irregularly around potential GDP. A business cycle has four parts:
 
Trough
— the lower turning point, when a reces-sion ends and an expansion begins.
 
Expansion
— a period of time during which realGDP increases.
 
Peak 
— the upper turning point, when an expan-sion ends and a recession begins.
 
Recession
— a period during which real GDPdecreases for at least two successive quarters.
This chapter is Chapter 20 in
Economics 
.The most recent recession began in the first quarter of 2001 and ended in the fourth quarter of 2001. Thisrecession was milder than previous recessions. A depres-sion is a severe recession.
 
Between 1976 and 2006, the growth rate of realGDP in the United States was about equal to thatof the rest of the world but was more variable.
 
Between 1996 and 2006, of the advanced econo-mies Japan grew the slowest and the newly indus-trialized nations of Asia grew the fastest.The
Lucas wedge
is the accumulated loss of outputthat results from a slowdown in the growth rate of realGDP per person. The productivity growth slowdownof the 1970s has created a Lucas wedge of $72 trillion.The
Okun gap
(the
output gap
) is the gap between realGDP and potential GDP. The recessions since 1973have created an accumulated Okun gap of $3.3 trillion.Economic growth expands future consumption possi-bilities. However, economic growth allows less currentconsumption as resources must be devoted to capitalaccumulation and might lead to more rapid depletionof resources and more pollution.
 
 Jobs and Unemployment
In 2006, 143 million people had jobs. More new jobsare created during expansions and jobs are lost duringrecessions. A person is unemployed if he or she does not have a jobbut is looking for work. The
unemployment rate
isthe number of unemployed workers as a percentage of all the people who have jobs or are looking for one.
 
Unemployment increases during a recession anddecreases during an expansion.
 
The average unemployment rate in the UnitedStates is higher than in Japan, but lower than inCanada and Western Europe.
Chapter
 
 
 
CHAPTER 4 (20)
66
Unemployment is a serious problem because unem-ployed workers lose income and can find their future job prospects limited.
 
Inflation and the Dollar 
The
price level
is the average of the prices people pay for all the goods and services they buy.
Inflation
occurs when prices rise. The
inflation rate
is the annual per-centage change in the price level.
Deflation
occurs when the inflation rate is negative so that the price levelfalls. In recent years, deflation has been rare in theUnited States.Inflation was high in the 1970s and early 1980s, buthas been lower since then, though it has been on an up-tick since 2002. The U.S. experience with inflation hasbeen similar to that of other industrialized nations.Inflation in developing countries is generally higherthan that in developed countries.Inflation reduces the value of money, so unpredictableinflation makes transactions spread over time moredifficult to carry out. In times of high inflation, peopleuse resources to predict inflation rather than to producegoods and services. A 
hyperinflation
is a period whenthe inflation rate exceeds 50 percent per month. Atsuch rates, inflation causes economic chaos.The
exchange rate
is the value of the U.S. dollar interms of other currencies. The exchange rate fluctuates,sometimes rising in value—
appreciating 
—and some-times falling in value—
depreciating 
.
 
Surpluses, Deficits, and Debts
 A 
government budget surplus
occurs when the gov-ernment collects more in taxes than it spends; a
gov-ernment budget deficit
occurs when the governmentspends more than it collects in taxes. The U.S. federalgovernment had a surplus between 1998 to 2000 and adeficit after 2001.The
current account
 
balance equals exports minusimports plus interest income received from the rest of the world minus interest expense paid to the rest of the world. Payments (for, say, imports) greater than re-ceipts (from, say, exports) create a current account defi-cit. The United States has had a current account deficitsince 1980.The government debt is the
national debt
. The na-tional debt is the total amount the government owes. A government budget deficit increases the national debt.The U.S. international debt is the amount U.S. resi-dents owe to foreigners. Current account deficits in-crease the U.S. international debt.
 
Macroeconomic Policy Challengesand Tools
Five widely agreed upon challenges for macroeconomicpolicy are:
 
Boost economic growth
 
Keep inflation low 
 
Stabilize the business cycle
 
Reduce unemployment
 
Reduce the government and international deficits Achieving these challenges will help the economy.The two general macroeconomic policy tools the gov-ernment has at hand to help attain the policy goals are:
 
Fiscal policy
— setting and changing tax rates andthe amount of government spending. The federalgovernment can use fiscal policy in efforts to ac-complish some of the policy challenges.
 
Monetary policy
— changes in the interest rateand the amount of money in the economy. Mone-tary policy is under the control of the Federal Re-serve, or Fed. The Federal Reserve can use monetary policy to try to meet some of the policy challenges.
Helpful Hints
1.
 
T
HE
M
ACROECONOMIC
C
HALLENGES
:
Thechapter discusses five widely agreed upon macro-economic challenges. As you study the forthcomingchapters, keep these challenges in mind because ul-timately we return to see what policies, if any, thegovernment might adopt to help meet these goals. While these challenges are widely agreed upon,there is dispute among economists about rankingtheir importance as well as dispute about theproper polices necessary to attain some of them.The first disagreement matters because at times thegoals collide, so that achieving one causes setbacksin others. The second area of contention arises even with agreement on the ranking of the goals becausethere is disagreement amongst macroeconomistsabout how to meet the macroeconomic challengesand that this can lead to different policy advice.
 
A FIRST LOOK AT MACROECONOMICS
67
Questions
 
True/False and Explain
Origins and Issues of Macroeconomics
11. Modern macroeconomics was developed during thedecade of the Great Depression.12. All macroeconomic goals are long-term goals.
Economic Growth and Fluctuations
13. Real GDP is the amount of goods and services thatare produced in a year when resources are fully em-ployed.14. Real GDP per person grew slowly in the 1960s andquite rapidly in the 1970s.15. The trough is the lower turning point of the busi-ness cycle.16. Since 1996, the growth rate of real GDP has beenlower in Japan than in the United States.
 Jobs and Unemployment
17. Unemployment rates in recent years have beenlower than those during the Great Depression.18. In the recession phase of a business cycle, the un-employment rate rises.
Inflation and the Dollar 
19. The inflation rate can never be negative.10. Inflation in the United States has been similar tothat in other industrialized nations.
Surpluses, Deficits, and Debts
11. Ignoring interest income and expense, if U.S. ex-ports exceed U.S. imports, the United States has acurrent account deficit.12. A current account deficit definitely harms the na-tion.
Macroeconomic Policy Challenges and Tools
13. The government can use fiscal policy and monetary policy to pursue its macroeconomic goals.14. Fiscal policy includes government engineeredchanges in the interest rate.
 
Multiple Choice Questions
Origins and Issues of Macroeconomics
11.During the Great Depression,a. the major focus of macroeconomics switched topreventing inflation.b. the productivity growth slowdown occurred.c. economists switched their focus so that macro-economics began to emphasize business cycles.d. long-term economic growth was the major prob-lem facing capitalist nations.
Economic Growth and Fluctuations
12.Real GDPa. measures only the output of real goods, such asmachines and food, not “unreal” things such asservices.b. includes all the goods and services produced inthe economy, including those produced in thehome.c. is measured in the prices of a single year in orderto eliminate the effects of inflation.d. is the amount of goods and services that the na-tion is able to produce when its resources arefully employed.13.Which is the proper order for the business cycle?a. Peak, recession, trough, expansionb. Peak, trough, expansion, recessionc. Peak, expansion, trough, recessiond. Peak, recession, expansion, trough14.Real GDP rose in all four quarters of 2003; thus2003 was definitely a yeara. of expansion.b. with a business cycle peak.c. of recession.d. with a business cycle trough.15.Which of the following statements about the pro-ductivity growth slowdown is correct?a. The productivity growth slowdown was confinedto the United States.b. The productivity growth slowdown occurred inthe 1960s.c. The growth of potential GDP slowed during theproductivity growth slowdown.d. Extremely low oil prices were a major cause of the productivity growth slowdown.

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