Prepared by:
Fernando & Yvonn Quijano
© 2007 Worth Publishers Essentials of Economics Krugman • Wells • Olney
chapter
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
Even the best students
had a tough time finding a
job in 2002.
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TABLE 14-1
Median Starting Salaries of New MBAs from Selected Schools in 2000, 2002, and
2004
School
2000 starting salary
2002 starting salary
2004 starting salary
Stanford
$165,500
$138,100
$150,000
Harvard
160,000
134,600
147,500
Pennsylvania
156,000
124,500
144,000
Columbia
142,500
123,600
142,500
Dartmouth
149,500
122,100
135,000
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Microeconomics versus Macroeconomics
TABLE 14-2
Microeconomic versus Macroeconomic Questions
Microeconomic Questions
Macroeconomic 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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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.
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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.
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Microeconomics versus Macroeconomics
Economic Aggregates
Economic aggregates are economic
measures that summarize data across
different markets for goods, services,
workers, and assets.
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economics in action
The Great Depression
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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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The Business Cycle
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The Business Cycle
Employment and Unemployment
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.
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The Business Cycle
Employment and Unemployment
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.
(14-1) Unemployment rate =
Number of unemployed workers
x 100
Number of unemployed workers  Number of employed workers
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The Business Cycle
Aggregate Output
Aggregate output is the economy’s
total production of final goods and
services for a given time period.
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The Business Cycle
Aggregate Output
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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.
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economics in action
Has the Business Cycle Been Tamed?
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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.
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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.
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Inflation and Deflation
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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.
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Inflation and Deflation
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KEY TERMS
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
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[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
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Okay, a lil book work- yuck..lol
Chapter 23 – last
page- review
Numbers 10 to 22
On page 520
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