1. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney BRIC papers Rubric category Poi nts Elements F ormat 5Paper written in proper APA, MLA, or Chicago format. In text citations and proper works cited page, foot notes, or end notes. Double-spaced, 1 inch margins, at least pages of written text E vidence 10Borrowed and cited statistics, quotes, explanations 4 or more valid sources Evidence supports your thesis/answers your question (s) A nalysis 10Your interpretation of evidence, used to answer. Your words and your voice; has unique elements Gives meaning to the paper C lear coherent complete convincing 5Clearly and comprehensively answers the question/supports the thesis Convinces the reader adequately

2. © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney Prepared by: Fernando & Yvonn Quijano What is it and how does it relate to: a)Our 3 rd quarter projects? b)Your spring breaks?

3. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 3 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

4. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 4 of 22 How would a macroeconomist view the business cycle and what might (s)he want to do about it?

5. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 5 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 What do you see here? Why did it occur?

6. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 6 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?

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8. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 8 of 22 Microeconomics versus Macroeconomics Economic Aggregates Economic aggregates are economic measures that summarize data across different markets for goods, services, workers, and assets.

9. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 9 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. i.e. - Rubber necking And The “paradox of thrift” and vice versa

10. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney p. 366 #2 10 of 22

11. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 11 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. Entonces, in which decade was American macroeconomic policy really born?

12. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 12 of 22 economics in action The Great Depression p. 366 #3

13. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney How did the Great Depression of the 1930’s affect macroeconomic policy in 2008?

14. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 14 of 22 Who is John Maynard Keynes and what influence did he have in the development of modern macroeconomic theory?

15. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney John Maynard Keynes, 1st Baron Keynes (5 June 1883 – 21 April 1946), was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments. He greatly refined earlier work on the causes of business cycles, and advocated the use of fiscal and monetary measures to mitigate the adverse effects of economic recessions and depressions. His ideas are the basis for the school of thought known as Keynesian economics, as well as its various offshoots. In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older ideas of neoclassical economics that held that free markets would in the short to medium term automatically provide full employment, as long as workers were flexible in their wage demands. Keynes instead argued that aggregate demand determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. Following the outbreak of World War II, Keynes's ideas concerning economic policy were adopted by leading Western economies. During the 1950s and 1960s, the success of Keynesian economics resulted in almost all capitalist governments adopting its policy recommendations, promoting the cause of social liberalism. 15 of 22

16. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 16 of 22 The Business Cycle

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19. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney What do you think were the opinions and effects of the: American Recovery and Reinvestment Act? Troubled Asset Relief Program? 19 of 22

20. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 20 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.

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22. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 22 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

23. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney p. 362 #1,2,3 23 of 22

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25. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 25 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 =

26. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney Unemployment mathematics 1. P. 366 #4 2. Number of people employed: 120,500 Number of people unemployed: 4,050 How many total people are in the workforce? What is the unemployment rate? 26 of 22

27. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 27 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

28. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 28 of 22 The Business Cycle Aggregate Output

29. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney Thursday 3/24/2011 1.Lecture ch 14 Macroeconomics 2.Look at Homework: p. 364 #1 and page 366 #5 HW – Be sure all problems are complete. Tomorrow – Finish up and Review Monday – Ch 14 Quiz 29 of 22

30. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney What tools can policy makers use to affect the state of the business cycle? 30 of 22

31. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 31 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.

32. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 32 of 22 economics in action Has the Business Cycle Been Tamed?

33. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney What’s misleading about this statement? 'Country A is becoming wealthier each year than Country B because its wage levels are rising by an average of $500 compared to $250 in Country B'. 33 of 22

34. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 34 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.

35. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 35 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. Inflation reduces the real value of money over time; conversely, deflation increases the real value of money Which one would encourage consumption? Which one would encourage saving? What can go wrong when everyone starts saving?

36. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney A consumer price index (CPI) measures changes in the price level of consumer goods and service purchased by households. The CPI is defined by the United States Bureau of Labor Statistics as "a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect of inflation) the real value of wages and salaries In most countries, the CPI is, along with the population census and the USA National Income and Product Accounts, one of the most closely watched national economic statistics. 36 of 22 Inflation and Deflation The CPI

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38. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 38 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.

39. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 39 of 22 Inflation and Deflation

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41. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney Economics in Action Let’s read “A Fast Food measure of Inflation” on p. 364 P. 366 #5 41 of 22

42. chapter © 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 42 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