1. From Markets to Macro Lecture 7
Dr. Jennifer P. Wissink
©2014 John M. Abowd and Jennifer P. Wissink, all rights reserved.
February 12, 2014 1

2. Announcements (MACRO) S2014
Make sure you are working on items you can find on Quizzes, Homework & Sample Exams
Please consult the syllabus and Blackboard for what to do about prelim 1 conflicts and follow instructions there.
NO CLASS ON MONDAY!

3. i>clicker question 7.1
For Winter Break I am
Going home.
Going on a vacation someplace warm.
Going on a vacation, but not necessarily someplace warm.
Staying at Cornell.
Going to a friend’s or relative’s house.

4. Price Ceilings Government established maximum selling price.
Must be below P* to be binding.
Why? Government usually thinks the market price is too high for some reason.
Usually end up with….
Shortages!
And all the problems they generate.
Examples:
Gas price ceilings
Apartment rent control

5. Price Ceilings & Market Shortage
Equilibrium is at P*=17 and Q*=23.
Price
Supply
Quantity
Demand
Pceiling=$10.
At the artificially low price of $10, buyers want to buy 30. 17 23
But sellers only want to sell 16. 10 16
Shortage = 14 30
There is a shortage of 14.

6. Quantity Quota Government established maximum number of units sold.
Qmax must be below Q* to be binding.
Why? Government thinks too many units are being traded.
Example: import restrictions
Usually end up with...
Higher prices and more.
On your own.... see if you can draw demand and supply curves and analyze.

7. Final Comments

8. The Roots of Macroeconomics
The Great Depression
a period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930s.
Classical economists applied microeconomic models, or “market clearing” models, to economy-wide problems.
However, simple classical models failed to explain the prolonged existence of high unemployment during the Great Depression.
This provided the impetus for the development of macroeconomics.

9. The Roots of Macroeconomics
In 1936, John Maynard Keynes published The General Theory of Employment, Interest, and Money.
Keynes believed governments could intervene in the economy and affect the level of output and employment.
During periods of low private demand, the government can stimulate aggregate demand to lift the economy out of recession.
Fiscal policy
Monetary policy
For nice short bio, see
John Maynard Keynes

10. A Very Brief Macroeconomic History
F.D.R. and The New Deal
WWII and its aftermath
Keynesian “success” into the 60’s
Fine-tuning was the phrase used by Walter Heller in the 60’s to refer to the government’s role in regulating inflation and unemployment.
Keynesian “disillusionment”
The use of Keynesian policy to fine-tune the economy in the 1960s, led to disillusionment in the 1970s and early 1980s.
Inflation and Stagflation
Inflation occurs when there an increase in the overall price level.
Stagflation occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation).
Supply Side and “Reaganomics” in the 80’s
Micro-foundations of macroeconomics
Keynesian “renaissance?”

11. Macroeconomic Concerns
Output/Production
Income/Employment
Price Levels/Interest Rates
Global Trade
Growth

12. Output & Growth: Short & Long Run
The business cycle is the cycle of short-term ups and downs in the economy.
Growth looks at what happens to output (inter alia) over long periods of time.
The main measure of how an economy is doing is aggregate output.
Aggregate output is the total quantity of goods and services produced in an economy in a given period.
Note: In order to add up all the different things an economy produces, one uses a currency value.
For example, in the U.S., we use the dollar value of the total quantity of goods and services produced in the U.S. in a given period.
This is basically what we call “Gross Domestic Product” or GDP.

13. Output & Growth: Short & Long Run
A recession is a period during which aggregate output declines. Two consecutive quarters of decrease in output (as measured by real GDP) signal a recession.
A prolonged and deep recession becomes a depression.
Policy makers attempt not only to smooth fluctuations in output during a business cycle but also to increase the growth rate of output in the long-run.
“It's official: U.S. is in recession Economy began shrinking in December 2007, panel declares”
“Diagnosing depression: What is the difference between a recession and a depression?”

14. Unemployment
The unemployment rate is the percentage of the labor force that is unemployed.
The unemployment rate is a key indicator of the economy’s health.
The existence of unemployment seems to imply that the aggregate labor market is not in equilibrium.
Why do labor markets not clear when other markets do?

15. Inflation and Deflation
Inflation is an increase in the overall price level.
Hyperinflation is a period of very rapid increases in the overall price level. Hyperinflations are rare, but have been used to study the costs and consequences of even moderate inflation.
Deflation is a decrease in the overall price level. Prolonged periods of deflation can be just as damaging for the economy as sustained inflation.
Stagflation occurs when the overall price level rises rapidly (inflation) during periods of recession or high and persistent unemployment (stagnation).

16. The Business Cycle
An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise.
A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall.
A positive trend line indicates long run growth.
MACRO QUESTIONS

17. Macroeconomic Data – Real Output Growth
FIGURE 5.2 U.S. Aggregate Output (Real GDP), 1900–2009
The periods of the Great Depression and World Wars I and II show the largest fluctuations in aggregate output.

18.  FIGURE 5.4 Aggregate Output (Real GDP), 1970 I–2012 IV
Macroeconomic Data – Recent Real Output Growth
 FIGURE 5.4 Aggregate Output (Real GDP), 1970 I–2012 IV
Aggregate output in the United States since 1970 has risen overall, but there have been five recessionary periods: 1974 I–1975 I, 1980 II–1982 IV, 1990 III–1991 I, 2001 I–2001 III, and 2008 I2009 II.

19.  FIGURE 5.5 Unemployment Rate, 1970 I–2012 IV
Macroeconomic Data – Unemployment
 FIGURE 5.5 Unemployment Rate, 1970 I–2012 IV
The U.S. unemployment rate since 1970 shows wide variations.
The five recessionary reference periods show increases in the unemployment rate.

20. Macroeconomic Data – Inflation
 FIGURE 5.6 Inflation Rate (Percentage Change in the GDP Deflator, Four-Quarter Average), 1970 I–2012 IV
Since 1970, inflation has been high in two periods: 1973 IV–1975 IV and 1979 I–1981 IV.
Inflation between 1983 and 1992 was moderate.
Since 1992, it has been fairly low.

21. Government Policy Options
Main policies that the government considers to influence the economy:
Fiscal policy: government policies concerning taxes and spending.
Monetary policy: tools used by the Federal Reserve to control the quantity of money in the economy.
Growth or supply-side policies: government policies that focus on stimulating aggregate supply instead of aggregate demand; includes both fiscal and monetary as well as other policies (e.g., regulatory, industrial, antitrust...)
Short term vs. Long term
Counter-the-cycle vs. Growth

22. The Circular Flow & National Income Accounting

23. National Income & Product Accounts
National income and product accounts are data collected and published by the government describing the various components of national income and output in the economy.
The U.S. Department of Commerce is responsible for producing and maintaining the “National Income and Product Accounts” that keep track of economic activity.
Arguably the most well known of these is GDP.

24. GDP: Gross Domestic Product
Gross domestic product (GDP) is the total “dollar” market value of all final goods and services currently produced within a given period by factors of production located within a country.
About how big is it?

25. Important GDP Notes Market prices... Final goods and services...
Market transactions...
Productive transactions...
Currently produced stuff...
Produced HERE...
Output produced by a country’s citizens, regardless of where the output is produced, is measured by Gross National Product (GNP).
It’s gross.