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ECONOMICS. CHAPTER 10
THE NATURE OF MACROECONOMICS: THE BUSINESS CYCLE
MACROECONOMICS vs MICROECONOMICS.
MICROECONOMICS MACROECONOMICS Examines the aggregate behavior of the economy: How decisions are made by individuals and firms and the consequences of this decisions.
How the actions of all the individual and firms in the economy interact to produce a particular economic-wide level of economic performance.
The behavior of the whole is greater than the sum of individual actions + market outcomes PARADOX OF THRIFT: When families and businesses are worried about the possibility of economic hard times, they prepare by cutting their spending.
*As a result, families and businesses may end up worse off than if they hadn’t tried to act responsibly by cutting their spending.
MAIN TWO TOOLS OF MACROECONOMICS.
1-MONETARY POLICY: Uses changes in the quantity of money to alter interest rates and affect overall spending.
2- FISCAL POLICY: Uses changes in government spending and taxes to affect overall spending.
ECONOMICS. CHAPTER 10 THE BUSINESS CYCLE.
Is the short-run alternation between economic downturns and economic upturns.
Economic downturn = Recession Economic upturn = Expansion *Depression = Very deep and prolonged downturn.
RECESSIONS — Periods of economic downturns when output and employment are falling.
EXPANSIONS — Periods of economic upturns when output and employment are rising.
Business-cycle peak — Point when economy turns from expansion to recession.
Business-cycle trough — Point when economy turns from recession to expansion.
TAMING THE BUSINESS CYCLE.
-Stabilization policy: Policy efforts undertaken to reduce the severity of recessions.
-Monetary policy: Changes in the quantity of money or the interest rate.
-Fiscal policy: Changes in tax policy or government spending, or both.
THE LONG-RUN ECONOMIC GROWTH.
Sustained upward trend in the economy’s output over time.
Long-run economic growth is a relatively modern phenomenon.
In the last 50 years real GDP has grown about 3.5% per year.
CAUSES OF INFLATION AND DEFLATION.
INFLATION: Rising aggregate price level ECONOMICS. CHAPTER 10 -Inflation rate: Annual percent change in the aggregate price level.
DEFLATION: Falling aggregate price level Economy price stability — When the aggregate price level is changing only slowly.
An open economy is an economy that trades goods and services with other countries.
TRADE DEFICIT: When the value of goods and services brought from foreigners is more than the value of goods or services it sells to them.
TRADE SURPLUS: Value of good and services brought from foreigners is less than the value of good or services it sells to them.
IT IS A GOOD IDEA TO HAVE TRADE DEFICIT? There is no simple relationship between the success of an economy and whether it runs a trade deficit/surplus.
-What determines a trade deficit/surplus is the decision about saving and investment spending.
-Countries with high investment: Trade deficit (USA, Estonia) -Countries with low investment: Trade surplus (China, Germany) ...