Where You Are!
Economics 201 – Principles of Macroeconomics
Tuesday and Thursday from 2:00 to 3:15pm
Discussion – Friday from 10:00am – 10:50am
Text:
Course website:
http://www.terpconnect.umd.edu/~jneri/Econ201
Who Am I
Dr. John Neri
Office Location: 1102B Morrill Hall
Office Hours: T and Th: 3:30pm – 4:30pm
Illness or Family Emergency & Exams
Important Steps to follow:
• Pre-Notification: If you are sick or have a family
emergency and cannot take an exam, you must
contact Professor Neri before the exam. You must
fill out the Request for Excuse form.
• Written Verification: Illness or family emergency
must be subsequently verified in writing by a
physician, the Student Health Center
• If both steps are not followed, you will not be
excused from the exam
•Students using the DSS facility must
meet with me within the first 2 weeks of
classes.
Advice!!!
• Course is cumulative.
• Important to keep up with the lectures,
and readings each week.
• We will have practice quizzes in the
Friday discussion and review the
answers.
• The collection of quizzes from the
Friday discussion constitutes a practice
exam. I do not post old exams.
Introduction to Macroeconomics
microeconomics Examines the functioning of individual
industries and the behavior of individual decision-making
units—firms and households.
macroeconomics Deals with the economy as a whole.
Macroeconomics focuses on the determinants of total
national income, deals with aggregates such as aggregate
consumption and investment, and looks at the overall level
of prices instead of individual prices.
aggregate behavior The behavior of all households and
firms together.
sticky prices Prices that do not always adjust rapidly to
maintain equality between quantity supplied and quantity
demanded.
Examples of Macroeconomic Questions
• What causes inflation?
• Why is the unemployment rate sometimes
high and sometimes low?
• Why do some national economies grow faster
than other national economies?
• What might cause interest rates to be low one
year and high the next?
• How do changes in the money supply affect
the economy?
• How do changes in government spending and
tax policy affect the economy
A couple of questions for you:
What/Who is …….
the current unemployment rate in the US?
fiscal policy?
the federal government budget deficit?
the Federal Reserve System?
the head of the Federal Reserve System?
monetary policy?
Three Major Macroeconomic Concerns
•
Output growth -Economic growth
•
•
Unemployment
•
•
how much we produce and can we keep
it growing
High employment - Low unemployment
Inflation and deflation
• Low stable inflation
Economic Growth
1. Economic Growth
– Defined as the increase in total production
of goods and services in an economy that
occurs over long periods of time
• Real Gross Domestic Product (real GDP)
– Total quantity of goods and services
produced in a country over a year
– Also called “total output”
Output Growth
aggregate output The total quantity of goods and services produced in an
economy in a given period.
business cycle The cycle of short-term ups and downs in the economy.
recession A period during which aggregate output declines. Conventionally, a
period in which aggregate output declines for two consecutive quarters.
depression A prolonged and deep recession.
expansion or boom The period in the business cycle from a trough up to a
peak during which output and employment grow.
contraction, recession, or slump The period in the business cycle from a
peak down to a trough during which output and employment fall.
FIGURE 5.1 A
Typical Business
Cycle

In this business cycle, the
economy is expanding as
it moves through point A
from the trough to the
peak.
The economy is in
recession when it moves
through point B from a
peak down to a trough.
The Business Cycle
peak
-2%
+4%
trough
+3%
Long-run upward trend is 3%. In the expansion phase of the cycle,
growth rate is > the trend. When output falls, we are in a recession.
 FIGURE 5.2 U.S. Aggregate Output (Real GDP), 1900–2009
The periods of the Great Depression and World War I and II show the largest fluctuations
in aggregate output.
Questions - Economic Growth
• What causes Expansions and Recessions?
• What macroeconomic policies can be used to
offset recessions or to sustain expansions?
• What has caused the recent/current
recession - often referred to as the “Great
Recession”?
Unemployment
unemployment rate The percentage of the labor force that is unemployed.
Inflation and Deflation
inflation Percentage increase in the overall price level.
hyperinflation A period of very rapid increases in the overall price level.
deflation A decrease in the overall price level.
dis-inflation a decrease in the rate of increase in the overall price level
Unemployment Rate : 1950 - July 2015
July 2015:
5.3%
In this last recession: Number of people unemployed
increased from 7 million to 14 million
Questions - Unemployment Rate
• What causes unemployment to rise and fall?
• Can Monetary and Fiscal Policies be used to
keep the unemployment rate low?
• What are the obstacles?
U.S. Annual Inflation Rate, 1920–2015
• In most years, the inflation rate has been positive.
• During some periods (after World War II, and a few years in the 1970s
and early 1980s), the U.S. experienced double-digit inflation. For the
last two decades, however, the U.S. inflation rate has been very low.
The Components of the Macroeconomy
Understanding how the macroeconomy works can be challenging
because a great deal is going on at one time. Everything seems to
affect everything else.
To see the big picture, it is helpful to divide the participants
in the economy into four broad groups:
(1) Households.
The Private Sector
(2) Firms.
(3) The government.
The Public Sector
(4) The rest of the world.
The Foreign Sector
Households and firms make up the private sector, the government is the public
sector, and the rest of the world is the foreign sector.
Simple Circular Flow
Income($)
Labor
Households
The circular flow diagram shows
the income received and
payments made by each
sector of the economy.
Goods(bread)
Expenditure($)
Firms

FIGURE 5.3 The Circular Flow of Payments
Households receive income from firms
and the government, purchase goods
and services from firms, and pay taxes
to the government.
They also purchase foreign-made
goods and services (imports).
Firms receive payments from
households and the government for
goods and services; they pay wages,
dividends, interest, and rents to
households and taxes to the
government.
The government receives taxes from
firms and households, pays firms and
households for goods and services—
including wages to government
workers—and pays interest and
transfers to households.
Finally, people in other countries
purchase goods and services produced
domestically (exports).
Note: Although not shown in this
diagram, firms and governments also
purchase imports.
The Three Market Arenas
Another way of looking at the ways households, firms, the government, and the
rest of the world relate to one another is to consider the markets in which they
interact.
We divide the markets into three broad arenas:
(1) The goods-and-services market.
(2) The labor market.
(3) The money (financial) market.
Goods-and-Services Market
Households and the government purchase goods and services from firms in
the goods-and-services market.
Firms purchase goods and services from each other and also supply to the
goods-and-services market.
Households, the government, and firms demand from this market.
The rest of the world buys from and sells to the goods-and-services market.
Labor Market
In the labor market, households supply labor and firms and the government
demand labor.
Labor is also supplied to and demanded from the rest of the world.
Money Market
Households supply funds to the money market—sometimes called the
financial market—in the expectation of earning income in the form of
dividends on stocks and interest on bonds.
Households also demand (borrow) funds from this market to finance
various purchases.
Firms borrow to build new facilities in the hope of earning more in the
future.
The government borrows by issuing bonds.
The rest of the world borrows from and lends to the money market.
Much of this borrowing and lending is coordinated by financial institutions,
which take deposits from one group and lend them to others.
Treasury bonds, notes, and bills Promissory notes issued by the federal
government when it borrows money.
corporate bonds Promissory notes issued by firms when they borrow money.
shares of stock Financial instruments that give to the holder a share in the
firm’s ownership and therefore the right to share in the firm’s profits.
dividends The portion of a firm’s profits that the firm pays out each period to
its shareholders.
A Little Macroeconomic History:
• 19th and early 20th century, Classical
Theory/Classical Economist
• They focused on microeconomics
• They argued that market forces drive the
economy toward full employment, possibly quickly
– markets clear.
• In Macro Speak “The economy self-corrects”
• If unemployment exist, wages would adjust(fall)
to move the economy back to full employment.
A Little Macroeconomic History:
• 1929 to 1933: The Great Depression
• Worldwide economic crisis.
• Total amount of goods and services
produced in the U.S. fell by more
than 25%.
• Unemployment up to 25%.
• A lot of unemployment for a long
period of time.
A Little Macroeconomic History:
• 1936: John Maynard Keynes, “The
General Theory of Employment, Interest,
and Money”
• Replaces classical theory with theory
based on:
– Aggregate (Total) Demand
– Wage and price rigidities
– Markets don’t clear and it may take a
long time for the economy to “self-correct”
• Birth of Macroeconomics as a field
separate from microeconomics
A Little Macroeconomic History:
• Keynes believed government should
intervene in the economy to stimulate the
level of output and employment
– During periods of low private demand, the
government should take action to stimulate
aggregate (total) demand to lift the economy to
full employment.
– Keynes was not a socialist. He was a capitalist.
He simply felt capitalism could be unstable.
A Little Macroeconomic History:
• Private demand and Public demand?
• What can the government do to stimulate
aggregate total demand (private and public) to
lift the economy out of recession?
• Big, Big Question – does this stuff work?
• Almost 80 years later still debating this!
The U.S Economy Since 1970
 FIGURE 5.4 Aggregate Output (Real GDP), 1970 I–2012 IV
Aggregate output in the United States since 1970 has risen overall, but
there have been five recessionary periods: 1974 I–1975 I, 1980 II–1982
IV, 1990 III–1991 I, 2001 I–2001 III, and 2008 I2009 II.
 FIGURE 5.5 Unemployment Rate, 1970 I–2012 IV
The U.S. unemployment rate since 1970 shows wide variations.
The five recessionary reference periods show increases in the
unemployment rate.
 FIGURE 5.6 Inflation Rate (Percentage Change in the GDP Deflator, Four-Quarter Average),
1970 I–2012 IV
Since 1970, inflation has been high in two periods: 1973 IV–1975 IV and
1979 I–1981 IV.
Inflation between 1983 and 1992 was moderate.
Since 1992, it has been fairly low.
REVIEW TERMS AND CONCEPTS
aggregate behavior
hyperinflation
aggregate output
inflation
business cycle
macroeconomics
circular flow
microeconomics
contraction, recession, or slump
monetary policy
corporate bonds
recession
deflation
shares of stock
depression
stagflation
dividends
sticky prices
expansion or boom
transfer payments
fine-tuning
Treasury bonds, notes, and bills
fiscal policy
unemployment rate
Great Depression