Macro-economics

Examines the functioning of individual industries and the behavior of individual decision-making units--firms and households.

Deals with the economy as a whole. Macro focuses on the determinants of total national income, deals with aggregates such was aggregate consumption and investment, and looks at the overall level of prices instead of individual prices.

The behavior of all household and firms together.

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.

The cycle of short-term ups and downs in the economy.

Def- The total quantity of goods and services produced in an economy in a given period. 

Lower production rates will cause average standard living rates to decline due to less goods and services to go around .When firms cut back on production workers are lay off, increasing unemployment rate.

1. A period during which aggregate output declines. Conventionally, a period in which aggregate output declines for two consecutive quarters.

2. A prolonged and deep recession.

The period in a business cycle from a trough up to a peak during which output and employment grow.

The period in the business cycle from a peak down to a trough during which output and employment fall.

The percentage rae of the labor force that is unemployed.

An increase in the overall price level.

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

A diagram showing the income received and payments made by each sector in the economy.

• Households receive income from firms and the govt., purchases goods and services from firms, and pays taxes to the govt.  They also purchase foreign made goods and services (imports).
• Firms receive payments from households and the govt. for goods and services; they pay wages, dividends, interests, and rents to households and taxes to the govt.
• The Government receives taxes from firms and households, pays firms and households for goods and services- including wages to govt. workers-and pays interest and transfers to households.
• People in other countries purchase goods and services produced domestically (exports).
• note: Although not shown in the diagram, firms and govt. also purchase imports.

Cash payments made by Govt. to the people who do not supply goods, services, or labor in exchange for these payments. They include Social Security benefits, veterans' benefits, and welfare benefits.

• In this market, firms also purchase goods and services from each other. e.g. Levi Strauss purchases denim from other firms to make its blue jeans. In addition firms buy capital goods from other firms.
• Firms supply to this market.
• Households, the govt, and firms demand from this market. The rest of the world buys from and sells to the goods and service market.

In this market interaction takes place when firms and the government purchase labor from households. Households supply labor and firms and the govt. demand labor.

• Total supply of labor in the economy depends on the sum of decisions made by households.
• individuals decide whether to enter the labor force and how many hours to work.

Also called Financial Market

In this market households purchase stocks and bonds from firms. Households supply funds to this market in the expectation of earning income in the form of dividends on stocks and interest on bonds.

Households also demand (borrow) funds from this market to finance various purchases. Firms borrow to build new facilities in hopes to profit more in the future.

Govt. borrow by issuing bonds.

1. Promissory notes issued by the federal government when it borrows money.

2. Promissory notes issued by firms when they borrow money.

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.

The portion of a firm’s profits that the firm pays out each period to its shareholders.

1. Government policies concerning taxes and spending.

2.The tools used by the Federal Reserve to control the quantity of money, which in turn affects interest rates.

A situation of both high inflation and high unemployment.

1. Microeconomics examines the functioning of individual industries and the behavior of individual decision-making units. Macroeconomics is concerned with the sum, or aggregate, of these individual decisions—the consumption of all households in the economy, the amount of labor supplied and demanded by all individuals and firms, and the total amount of all goods and services produced.

MACROECONOMIC CONCERNS p. 410

2. The three topics of primary concern to macroeconomists are the growth rate of aggregate output; the level of unemployment; and increases in the overall price level, or inflation.

THE COMPONENTS OF THE MACROECONOMY p. 412

• 3. The circular flow diagram shows the flow of income received and payments made by the four groups in the economy—households, firms, the government, and the rest of the world. Everybody’s expenditure is someone else’s receipt—every transaction must have
• two sides.

4. Another way of looking at how households, firms, the government, and the rest of the world relate is to consider the markets in which they interact: the goods-and-services market, labor market, and money (financial) market.

5. Among the tools that the government has available for influencing the macroeconomy are fiscal policy (decisions on taxes and government spending) and monetary policy (control of the money supply, which affects interest rates).

A BRIEF HISTORY OF MACROECONOMICS p. 415

6. Macroeconomics was born out of the effort to explain the Great Depression of the 1930s. Since that time, the discipline has evolved, concerning itself with new issues as the problems facing the economy have changed. Through the late 1960s, it was believed that the government could “fine-tune” the economy to keep it running on an even keel at all times. The poor economic performance of the 1970s, however, showed that fine-tuning does not always work.

THE U.S. ECONOMY SINCE 1970 p. 417

7. Since 1970, the U.S. economy has seen five recessions and two periods of high inflation.