Chapter 1
Parks Economics 104
Introduction to the U.S. Economy
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What is Macroeconomics?
• Macroeconomics is the study of the aggregate
economy.
– It addresses the nature of and causes of the business
cycle: waves of output growth and job creation,
followed by periods of output contraction and
rising unemployment.
– It deals with broad issues like
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unemployment
inflation
economic growth
budget deficits and trade deficits
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Unemployment
• The unemployment rate is the percentage of the
labor force that is unemployed.
– Given the U.S. labor force of approximately 150
million people, a one percentage point increase in
the unemployment rate implies that an additional
1.5 million workers are unemployed.
• Thought question:
– What is the unemployment rate that the economy
“should” have? Is it zero?
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Inflation
• Inflation is a sustained increase in the overall
price level.
– Economists measure inflation as the percentage
change in a particular bundle of goods and services.
• Thought questions:
– How much inflation is too much?
– What is deflation?
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Economic Growth
• Economic growth results from an increase in
production from the economy over a particular
period of time.
• Thought questions:
– How fast should the economy be growing each
year?
– Can the economy grow too fast?
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Budget Deficits
• A budget deficit is the difference between
government outlays and tax receipts.
– Deficits result when the government spends more
than it collects in taxes, while surpluses result when
tax revenues exceed outlays.
• Thought questions:
– What is the difference between a budget deficit and
the national debt?
– Why are large budget deficits harmful?
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Trade Deficits
• A trade deficit occurs when a nation imports
more goods & services than it exports.
– The U.S. has run trade deficits every year since the
early 1980s.
• Thought questions:
– How does the U.S. “finance” the purchase of the
surplus imports?
– What impact does the trade deficit have on the
value of a nation’s currency?
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Stabilization Policy
• One of the primary goals of macroeconomics is
to stabilize the business cycle.
– That is, reduce the fluctuations in output (and
inflation) over time.
• Policy makers have two broad tools to help
stabilize the economy:
– Fiscal Policy
– Monetary Policy
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Fiscal Policy
• Fiscal policy is the (federal) government’s
manipulation of the budget to attempt to
stabilize the nation’s level of output.
• The “tools” of fiscal policy include:
– changing taxes and transfers
– changing the level of government spending
• Thought question:
– Why in early 2003 did President Bush push
through a new tax cut?
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Monetary Policy
• Monetary policy is the central bank’s (Federal
Reserve) manipulation of the money supply
and/or interest rates to attempt to stabilize the
nation’s level of output.
– By lowering interest rates, the central bank hopes
to spur additional investment and consumption.
• Thought question:
– What is the federal funds rate? the discount rate?
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Superb Economic Sites on the Net
• The Bureau of Labor Statistics publishes some of the
major economic indicators on their Economy at a Glance
web page.
• The Bureau of Economic Analysis contains up-to-date
figures on the nation's output and income.
• The Dismal Scientist is an excellent web site giving daily
updates and analysis of economic information.
• The St. Louis Federal Reserve Bank also has excellent
time series of the major macroeconomic data. Look for
FRED II (Federal Reserve Economic Data).
• ECONOMAGIC.COM is a great site for economic data.
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Take the quiz…
• Where is the U.S. economy now?
– Refer to the Chapter 1 quiz questions.
– How many can you answer correctly?
– http://economagic.com
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Terms
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unemployment
inflation
GDP and GNP
Personal Income
Disposable Income
money
budget deficit
recession/boom
fiscal policy
economic growth
Investment
trade deficit
monetary policy
national debt
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