1. © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney Prepared by: Fernando & Yvonn Quijano

2. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 2 of 22 Even the best students had a tough time finding a job in 2002. What you will learn in this chapter: ➤ An overview of macroeconomics, the study of the economy as a whole, and how it differs from microeconomics ➤ The importance of the business cycle and why policy makers seek to diminish the severity of business cycles ➤ The meaning of inflation and deflation and why price stability is preferred

3. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 3 of 22 TABLE 14-1 Median Starting Salaries of New MBAs from Selected Schools in 2000, 2002, and 2004 School2000 starting salary2002 starting salary2004 starting salary Stanford$165,500$138,100$150,000 Harvard160,000134,600147,500 Pennsylvania156,000124,500144,000 Columbia142,500123,600142,500 Dartmouth149,500122,100135,000

4. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 4 of 22 Microeconomics versus Macroeconomics TABLE 14-2 Microeconomic versus Macroeconomic Questions Microeconomic QuestionsMacroeconomic Questions Should I go to business school or take a job right now? How many people are employed in the economy as a whole this year? What determines the salary offered by Citibank to Cherie Camajo, a new Columbia MBA? What determines the overall salary levels paid to workers in a given year? What determines the cost to a university or college of offering a new course? What determines the overall level of prices in the economy as a whole? What government policies should be adopted to make it easier for low-income students to attend college? What government policies should be adopted to promote employment in the economy as a whole?

5. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 5 of 22 Microeconomics versus Macroeconomics Macroeconomics: The Whole Is Greater Than the Sum of Its Parts A key insight into macroeconomics is that in the short run—a time period consisting of several years but typically less than a decade—the combined effect of individual decisions can have effects that are very different from what any one individual intended, effects that are sometimes perverse. The behavior of the macroeconomy is, indeed, greater than the sum of individual actions and market outcomes.

6. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 6 of 22 Microeconomics versus Macroeconomics Macroeconomic Policy The area of microeconomics, in general, suggests a limited role for government intervention. In contrast, economists generally believe there is a much wider role for government to play in macroeconomics—most importantly, to manage short-term fluctuations and adverse events in the economy.

7. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 7 of 22 Microeconomics versus Macroeconomics Economic Aggregates Economic aggregates are economic measures that summarize data across different markets for goods, services, workers, and assets.

8. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 8 of 22 economics in action The Great Depression

9. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 9 of 22 The Business Cycle The business cycle is the short-run alternation between economic downturns, known as recessions, and economic upturns, known as expansions. A depression is a very deep and prolonged downturn. Recessions are periods of economic downturns when output and employment are falling. Expansions, or recoveries, are periods of economic upturns when output and employment are rising.

10. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 10 of 22 The Business Cycle

11. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 11 of 22 The Business Cycle Employment is the number of people currently employed in the economy. Unemployment is the number of people who are actively looking for work but aren’t currently employed. The labor force is equal to the sum of employment and unemployment. Discouraged workers are nonworking people who are capable of working but have given up looking for a job. Employment and Unemployment

12. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 12 of 22 The Business Cycle Underemployment is the number of people who work during a recession but receive lower wages than they would during an expansion due to fewer number of hours worked, lower-paying jobs, or both. The unemployment rate is the percentage of the total number of people in the labor force who are unemployed. Employment and Unemployment (14-1)Unemployment rate =

13. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 13 of 22 The Business Cycle Aggregate output is the economy’s total production of final goods and services for a given time period. Aggregate Output

14. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 14 of 22 The Business Cycle Aggregate Output

15. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 15 of 22 The Business Cycle Taming the Business Cycle Policy efforts undertaken to reduce the severity of recessions and to rein in excessively strong expansions are called stabilization policy. Monetary policy is a type of stabilization policy that involves changes in the quantity of money in circulation or in interest rates, or both. Fiscal policy is a type of stabilization policy that involves changes in taxation or in government spending, or both.

16. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 16 of 22 economics in action Has the Business Cycle Been Tamed?

17. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 17 of 22 Inflation and Deflation A nominal measure is a measure that has not been adjusted for changes in prices over time. A real measure is a measure that has been adjusted for changes in prices over time.

18. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 18 of 22 Inflation and Deflation The aggregate price level is the overall price level for final goods and services in the economy. A rising aggregate price level is inflation. A falling aggregate price level is deflation.

19. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 19 of 22 Inflation and Deflation

20. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 20 of 22 Inflation and Deflation The economy has price stability when the aggregate price level is changing only slowly. The inflation rate is the annual percent change in the aggregate price level.

21. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 21 of 22 Inflation and Deflation

22. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 22 of 22 Economic aggregates Business cycle Depression Recessions Expansions Employment Unemployment Labor force Discouraged workers Underemployment Unemployment rate Aggregate output Stabilization policy Monetary policy Fiscal policy Nominal Real Aggregate price level Inflation Deflation Price stability Inflation rate K E Y T E R M S

23. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 23 of 22 [Macroeconomics] Develop an understanding of how economies function as a whole, including the causes and effects of inflation, unemployment, business cycles, and monetary and fiscal policies. What is it I’m good confused Business cycle/GDP Causes inflation Effects of inflation Causes unemployment Effects unemployment Monetary policies Fiscal policies Other stuff

24. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 24 of 22 Okay, a lil book work- yuck..lol Chapter 23 – last page- review Numbers 10 to 22 On page 520