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MODULE 2 Introduction to Macroeconomics

MODULE 2 Introduction to Macroeconomics. What a business cycle is and why policy makers seek to diminish the severity of business cycles How employment and unemployment are measured and how they change over the business cycle

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MODULE 2 Introduction to Macroeconomics

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  1. MODULE 2Introduction to Macroeconomics

  2. What a business cycle is and why policy makers seek to diminish the severity of business cycles • How employment and unemployment are measured and how they change over the business cycle • The definition of aggregate output and how it changes over the business cycle

  3. The meaning of inflation and why price stability is preferred • How economic growth determines a country’s standard of living • Why models—simplified representations of reality—play a crucial role in economics

  4. The Business Cycle • The business cycle is the short-run alternation between economic downturns and economic upturns.

  5. The Business Cycle • A depression is a very deep and prolonged downturn. • Recessions are periods of economic downturns when output and employment are falling. • Expansions, sometimes called recoveries, are periods of economic upturns when output and employment are rising.

  6. The Business Cycle • The point at which the economy turns from expansion to recession is a business-cycle peak. • The point at which the economy turns from recession to expansion is a business-cycle trough.

  7. Defining Recessions and Expansions • In many countries, economists adopt the rule that a recession is a period of at least 6 months, or two quarters, during which aggregate output falls. • sometimes too strict • In the U.S., the task of determining when a recession begins and ends is assigned to an independent panel of experts at the National Bureau of Economic Research (NBER). • They look at a number of economic indicators, with the main focus on employment and production, but ultimately the panel makes a judgment call. • sometimes controversial

  8. Employment, Unemployment, and the Business Cycle • Employment is the total number of people currently working for pay. • Unemployment is the total number of people who are actively looking for work but aren’t currently employed.

  9. Employment, Unemployment, and the Business Cycle • The laborforce is the sum of employment and unemployment. • The unemploymentrate is the percentage of the labor force that is unemployed.

  10. The U.S. Unemployment Rate and the Timing of Business Cycles, 1989-2009

  11. Aggregate Output andthe Business Cycle • During a recession, the quantity of goods and services declines. • To measure the rise and fall of an economy’s output, we look at aggregateoutput. • Aggregate output is the economy’s total production of goods and services for a given time period. • Aggregate output normally falls during a recession and rises during an expansion.

  12. Inflation, Deflation, and Price Stability • A rising aggregate price level is inflation. • A falling aggregate price level is deflation. • The inflation rate is the annual percent change in the aggregate price level. • The economy has price stability when the aggregate price level is changing only slowly.

  13. Economic Growth • Americans have become able to afford many more material goods over time thanks to long-run economic growth. • Economicgrowth is an increase in the maximum possible output of an economy.

  14. Growth, the Long View

  15. Models in Economics • A model is a simplified representation of a real situation that is used to better understand real-life situations. • Create a real but simplified economy • Ex.: Cigarettes in World War II prison camps • Simulate an economy on a computer • Ex.: Tax models, money models…

  16. Models in Economics • The “other things equal” assumption means that all other relevant factors remain unchanged. • Latin word “Ceteris Paribus.”

  17. The business cycle is the short-run alternation between recessions, periods of falling employment and output, and expansions, periods of rising employment and output. • When the prices of most goods and services are rising, so that the overall level of prices is going up, the economy experiences inflation. • When the overall level of prices is going down, the economy is experiencing deflation.

  18. Economists and policy makers generally aim for price stability. • Aggregateoutput us the economy’s total production of goods and services for a given time period. • Almost all economics is based on models. • GDP (Video): https://www.mruniversity.com/courses/principles-economics-macroeconomics/gross-domestic-product-definition-what-is-gdp

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