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INTRODUCTION TO MACROECONOMICS PDF

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Macroeconomics (Greek makro = 'big') describes and explains economic processes that concern aggregates. An aggregate is a multitude of economic subjects. Introduction to Macroeconomics. TOPIC 1: Introduction, definitions, measures. Anna¨ıg Morin. CBS - Department of Economics. August Introduction to. Chapter 1: Introduction to Macroeconomics. Cheng Chen. School of Economics and Finance. The University of Hong Kong. (Cheng Chen (HKU)).


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Macroeconomics is an analysis of a country s economic structure and performance and the government s policies in affecting its economic conditions. Introduction to Macroeconomics. What is Macroeconomics? The Basic Model: The Circular-Flow Model. The Basic Data: GDP and its Components. Macroeconomics is • the study of the economy as a whole. • it deals with broad aggregates. • but uses the same style of thinking about but uses the same style.

Factors primarily affecting in the first round any of these major components of GNP obviously also potentially affect He level of aggregate demand and, therefore, the fluctuations in output, employment, and the price level. It is likely that the policies that most directly affect the generation of new technology, and therefore lon:,-term growth, occur here, one layer down from aggregate GNP, at the level of the components of spending in the economy.

For example, while some people still focus on the level of real government spending in the control of economic fluctuations, the composition of that spending among research and development expenditures and physical and human investment, versus payments to individuals for income support, net interest, and purchases on noninvestment types of goods and services, obviously can affect the rate of technical change.

Probably the most important of these is direct government support of research and development. Tax policies make up a second set of policies that, by affecting the way in which the private sector utilizes its resources, can affect the generation of new technology.

Again, the first major issue, economic fluctuations, tends to focus on the aggregate level of taxes and changes in total tax receipts.

Monetary policy also can affect the composition of output, as well as the level of aggregate demand in the economy.

Finally, it is important to note some potential interactions among major categories of spending and the rate of technical change. Either of two. BOSKIN appealing but difficult-to-document conjectures would imply that a society with a high investment rate would not only have a temporarily high growth rate in its transition to a higher growth paw as in Figure 1 but actually could increase the long-run rate of growth.

These are the so-called learning- by-doing and embodiment hypotheses. The former reflects the anecdotal notion that in the process of investment we learn new ways of doing things, such as new production processes, and new potential products become known. Thus, the rate of investment affects He rate of technical change in a positive manner.

This process is displayed by growth path number 3 in Figure 1. At the microeconomic level, consider the options opening up in the course of a major project, e.

Just as new technologies arise sometimes to meet such chal- ienges, He rate of technical advance may depend on He level of investment. The embodiment hypothesis entails the notion that it is much too expensive to embody new technology in old capital by converting it and, therefore, that the rate at which new technology really does augment the productivity of labor and machinery will depend on the rate at which new capital is generated, i.

Thus, three very important issues in macroeconomics, which concern the short- and long-run standard of living of our citizens, drive much of our economic policy.

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They are concerned with economic fluctuations, long-run grown, and a detailed examination of the composition of output. The three issues are interrelated in many ways, only some of which have been hinted at in this discussion. Underlying each issue is He current state of technology and the rate at which new technology enables us to produce more goods and services with the same labor input.

Before turning to a more detailed dis- cussion of some of these grown issues and a partial research agenda, I want to develop a framework for analyzing, or at least a perspective on, some of the different schools of thought in macroeconomics Hat get so much press attention.

Unfortunately, events both worldwide and in the United States in the past 15 years have demonstrated the naivete of these Keynesian models and policy prescriptions. While there is no single model of the economy around which consensus can be reached, substantial strides have been made in improving our under- st;anding of the operation of the economy, which Is much more complex and subtle than had been presumed in earlier models. Since the economic events of the s were so important to the decline in the acceptance of earlier models, there follows a whirlwind tour of the economic history of the s.

Economic Events of the s The most important economic event from the late s to the early part of this decade was the tremendous slowdown in economic growth. In the decade from to , the standard of living for most working, taxpaying Americans improved hardly at all. This contrasts with the roughly 2 percent per year growth in real per capita income discussed above and the 2.

While the cause of the slowdown is disputed, its consequences are not: it was without a doubt, for example, a major cause of the tax revolt. Among explanations advanced for the slowdown are reduced sector-specific rates of technical change, a slowing rate of increase in the capital-labor ratio, energy price increases, changes in the legal environment, shifts in the economy toward services, and changes in the age and sex composition of the labor force.

One major school of thought, to which I subscnbe, is that a major culprit in the slowdown was the decline in the incentives to produce income and wealth. Reasons for these declining incentives include rising marginal tax rates, especially on the return on saving and investment; high and rising inflation, which greatly increased uncertainty about the returns on investment and saving; and the growth of government regulation.

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Undoubtedly, many other causes of the slowdown in growth and, by implication, potential remedies to restore our long-term growth can be found and defended; an exact allocation of the slowdown by cause is still a subject of some dispute, and additional research on the subject continues to be a high pnonty. To place some of these issues in perspective, recall that the s through mids were years of relatively low inflation, about 2 percent per year, on average.

Substantial inflation occurred in the United States primarily with the removal of price controls at the end of wars. We have not experienced anything like the hyperinflation that ravaged Central Europe in the s or the substantial inflation recently experienced in Latin America and Israel.

But recall that our current 4 percent inflation is down from double- digit rates in To place this in perspective, President Nixon imposed wage and price controls when inflation was no higher than current levels.

Certainly the energy price shocks in the s caused a substantial dis- ruption in our economy- most importantly, a transfer of wealth from Amer- ican consumers of energy to producers outside the United States. Although these price shocks and our reaction to them probably contributed to the inflation, increases in energy prices caused no more than 3 percentage points of the double-digit inflation rate in It was only a few years ago that both economists and politicians understated the cost of high and fluc- tuating inflation and oversold its benefits in permanently reducing unem- ployment.

It was common to argue that we could learn to live with double- digit inflation merely by indexing venous features of our contracts, tax system, and the like. Numerous studies, however, such as those by Martin Feldstein, Stanley Fischer, and Franco Modigliani, illustrated how inflation distorts incentives and increases uncertainty about future returns. The s destroyed the notion of a stable Phillips Curve relationship between inflation and unemployment.

If there ever was a short-run trade- off, conditions for it have worsened considerably, and it is probably simply a statistical artifact. Government spending increased substantially in the United States in Me s, but more significant was the change in its composition, both by level of government and by type of expenditure. By dollar volume, the federal government's major role by was to redistribute income, not provide goods and services.

While the result was a sharp reduction in poverty, the cost was staggering because the benefits were not targeted very effectively toward the poor. Accompanying the growth of spending, was the large increase in effective marginal tax rates the tax paid on incremental income. The fraction of American tax- payers subject to high marginal tax rates quadrupled between and No longer were high marginal tax rates exclusively the right of the rich.

While somewhat controversial with respect to measurement problems, the rates of saving and investment in the United States, I believe, have declined substantially, and, in addition, there has been a bias toward shorter-lived assets. The share of GNP devoted to net nonresidential investment fell from the already dangerously low level of 7 percent in the s and s to only 2 percent in the late s.

It fell precisely at a time in which it should have been rising to equip the additional primarily young and inexperienced 20 million workers with the capital and technology to make them productive.

This influx occurred primarily because of the maturing of the baby-boom generation and the substantial increase in the number of second earners in families, primarily working women.

Other major structural changes occurred In the U. Besides the demographic bulge described above, the changes included a shin in output away from manufacturing to services, the growth of world trade sparked by venous rounds of tariff reductions , the move from fixed to flexible exchange rates, and the energy price shocks. Economic policy was also changing. The Kennedy-Johnson tax cut of was the first major attempt to manage aggregate demand when the economy was not even in a recession.

The growth rate was too low, it was argued, and a tax cut could stimulate it.

In the early s, inflation in various sectors was dealt with by federal jawboning and threats, such as the proposal to dump excess supplies of government commodities onto the market if prices rose too rapidly.

The Federal Reserve Board through continued activist attempts at managing demand through frequent changes in monetary policy.

The s were also marked by schemes to control wages and prices in an attempt to control modest inflation, such as the administrative bureaucracy spawned by various-guidelines under the Carter administration. The notion Tat you could hold down wages and prices and control inflation through moral suasion and presidential support for cooperation between businessmen and unions was at best naive.

Since only about 20 percent of our labor force is unionized, it was strange to believe that hammering the wage demands of the larger unions could be the primary method of controlling inflation.

The s also saw the growth of government regulation of energy matters and new social regulations that attempted to correct perceived market failures in such areas as pollution, safety, and health.

Fortunately, a general move to deregulation in traditionally regulated activities began in the late s under President Carter. Where were we headed with these economic policies?

It is useful to recall various proposals made only a few years ago. One example is the proposal for a national reconstruction bank to help revitalize American industry.

An appointed group of business and labor leaders would decide where tens of billions of dollars of badly needed capital would be allocated. Fortunately, we were saved from such a policy, perhaps by the results of the election of One need only look at recent attempts in the United Kingdom, New Zealand, Mexico, and France, among others, to gain some perspective on direct government capital allocation schemes.

BOSKIN Closely connected was the call for indusmal policies, that is, that the government should target specific industries with subsidies and tax breaks. An increase in unemployment and a decrease in the price level.

A decrease in potential GDP and an increase in unemployment. Which of the following is usually deemed to be the most important variable for judging an economy's long-run performance? Growth in nominal GDP. Growth in real GDP. Growth in real GDP per capita. Growth in potential GDP. Growth in the capital stock. The growth of GDP can change because of technological improvements, which can result from: All of the answers given here are correct.

The output gap measures: None of the answers given here are correct. When the economy goes into a recession, we can generally expect that: Assume you deplete your savings to buy a new car and some government bonds and then take a vacation in New Zealand. Which of the following is true? Consumption will increase.

Net exports will increase. Government purchases will increase. Investment will increase.

Depreciation is: Which of the following is false? GDP underestimates actual economic activity because it does not include underground activity. An increase in the ratio of currency holdings to bank deposits may be seen as evidence for an increase in underground activity. If the underground economy grows rapidly, then the rate of economic growth will be tremendously underestimated. If the underground economy grows rapidly, then the standard of living will decline sharply.

ECON 1103 Introduction to Macroeconomics

Underground activity includes income from services produced at home but not reported, such as typing someone else's term paper.

By how much was GDP affected in ? Risks to national security and environmental degradation: The GDP deflator is calculated as: The CPI, a price index used to measure inflation, is imperfect since: If the consumer price index CPI in was and the CPI in was , the annual rate of inflation over that period was: Assume that the prices of cars increased solely due to an increase in quality.

Which of the following should happen if the same number of cars is produced? Nominal GDP should increase. The GDP-deflator should increase.The notion Tat you could hold down wages and prices and control inflation through moral suasion and presidential support for cooperation between businessmen and unions was at best naive.

The output gap measures: While there is no single model of the economy around which consensus can be reached, substantial strides have been made in improving our under- st;anding of the operation of the economy, which Is much more complex and subtle than had been presumed in earlier models. All of the answers given here are correct.

What causes firms to hire more workers or to lay workers off? Which of the following is NOT a central issue in macroeconomics? Included are brief discussions of the economic history of the s; current debates among Keynesians, monetarists, "new classical" macroeconomists, and supply-side economists; and my own tentative conclusions concerning some basic issues of macroeconomic policy. A decrease in potential GDP and the price level.

Factors primarily affecting in the first round any of these major components of GNP obviously also potentially affect He level of aggregate demand and, therefore, the fluctuations in output, employment, and the price level.

One need only look at recent attempts in the United Kingdom, New Zealand, Mexico, and France, among others, to gain some perspective on direct government capital allocation schemes.

RONNIE from Massachusetts
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