After reading this chapter, you should be able to: Interpret how macroeconomics studies both long-run economic growth and short-run fluctuations in output and unemployment; explain why economists focus on GDP, inflation, and unemployment when assessing the health of an entire economy; discuss why sustained increases in living standards are a historically recent phenomenon; identify why saving and investment are key factors in promoting rising living standards.
06 AnIntroductiontoMacroeconomics McGrawưHill/Irwin Copyrightâ2012byTheMcGrawưHillCompanies,Inc.Allrightsreserved PerformanceandPolicy Real GDP Corrects for price changes • Nominal GDP • Uses current prices • Unemployment • Inflation • Increase in overall level of prices LO1 6-2 Performance and Policy • Can governments: • Promote economic growth? • Reduce severity of recession? • Is monetary or fiscal policy more • • LO2 effective at mitigating recession? Is there a tradeoff between inflation and unemployment? Is anticipated or unanticipated government policy more effective? 6-3 Performance and Policy • Output growth • 2.7% per year 1995-2007 • Unemployment rate • 4.6% in 2007 • Inflation rate • 2.7% in 2007 LO2 6-4 Modern Economic Growth • Standard of living measured by output • • LO3 per person No growth in living standards prior to Industrial Revolution Modern economic growth • Output per person rises • Not experienced by all countries 6-5 Global Perspective LO3 6-6 Savings and Investment • Saving • Trade-off current for future • • LO4 consumption Investment • Financial investment • Economic investment Banks and financial institutions 6-7 Uncertainty, Expectations, and Shocks • The future is uncertain • Expectations affect investment • Shocks • What happens is not what you • • LO5 expected Demand shocks Supply shocks 6-8 Uncertainty, Expectations, and Shocks • Demand shocks and flexible prices • Price falls if demand is low • Sales unchanged • Demand shocks and sticky prices • Maintain inventory • Sales change • Business cycles LO5 6-9 Demand Shocks Flexible Prices Price $40,000 $37,000 $35,000 DL DM DH 900 Cars Per Week LO5 6-10 Demand Shocks Price Fixed Prices $37,000 DH DL 700 900 DM 1150 Cars Per Week LO5 6-11 Sticky Prices • Many prices are sticky in the short run • Consumers prefer stable prices • Firms want to avoid price wars • All prices are flexible in the long run • Firms adjust to unexpected, but permanent changes in demand LO5 6-12 ... Uncertainty, Expectations, and Shocks • Demand shocks and flexible prices • Price falls if demand is low • Sales unchanged • Demand shocks and sticky prices • Maintain inventory • Sales change • Business cycles LO5 6-9 ... countries 6-5 Global Perspective LO3 6-6 Savings and Investment • Saving • Trade-off current for future • • LO4 consumption Investment • Financial investment • Economic investment Banks and financial... tradeoff between inflation and unemployment? Is anticipated or unanticipated government policy more effective? 6-3 Performance and Policy • Output growth • 2.7% per year 199 5-2 007 • Unemployment rate