1. 23 An Introduction to Macroeconomics. McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Performance and Policy Real GDP – measures the value of final goods and services within a nation’s borders during a year Nominal GDP - $ value of goods and services produced in a nation’s borders using their current price during year of production LO1 23-2

4. Unemployment You must be willing and able to work – actively looking for a job The current unemployment rate in the US is 5.8 % - in Texas the rate is 5.2

5. Inflation Inflation is an increase in overall level of prices September 2014 inflation rate has been calculated to be 1.7% Inflation reduces the family’s purchasing power of savings – basically $1 of goods would cost $1.02 in September

6. Modern Economic Growth Standard of living measured by output per person – GDP Per Person (per capita) No growth in living standards prior to Industrial Revolution due to the fact that as the economy grew, so did the population LO3 23-6

7. Modern Economic Growth Output per person rises Not experienced by all countries but a growth rate of 2% annually doubles the average citizens income every 35 years and again 35 years after that. (Rule of 70)

8. Global Perspective LO3 23-8 All currencies are changed into US dollars GDP is divided by population Purchasing power parity adjusts for price differences between countries

9. Savings and Investment Saving = current consumption is less than current output Investment = resources are devoted to increasing future output Financial investment – assets, stocks bonds, etc. Economic investment is creation/expansion of business enterprise**Key***Investment is limited by the amount of saving LO4 23-9

10. Uncertainty, Expectations, and Shocks The future is uncertain and this changes behavior - expectations affect investment Shocks - What happens is not what you expected Demand shocks – unexpected change in demand for g or s – economists believe these cause short run fluctuations in GDP Supply shocks – unexpected change in supply of g and s LO5 23-10

11. Uncertainty, Expectations, and Shocks Demand shocks and flexible prices Price falls if demand is low Sales are unchanged Production levels and unemployment levels would be constant – only the price changes LO5 23-11

12. Demand Shocks Cars Per Week Price DMDM DLDL DHDH 900 $40,000 $37,000 $35,000 Flexible Prices LO5 23-12

13. Demand shocks and sticky prices Prices are inflexible Adjusting production is very expensive because companies operate at lowest cost and produce constantly at optimum output Maintain inventory – store extra product but can cause a revenue issue if maintained too long Sales fall, unemployment rises, production falls

14. Demand Shocks Cars Per Week DMDM DLDL DHDH 700 900 1150 $37,000 Fixed Prices Price LO5 23-14

15. Sticky Prices Many prices are sticky in the short run – this leads to fluctuations in GDP and employment over the course of a business cycle Consumers prefer stable prices and producers know this Firms want to avoid price wars Coke and Pepsi LO5 23-15

16. Long Run Flexibility of Price All prices are flexible in the long run Firms adjust to the unexpected and there are permanent changes in demand