2. What we have learned
in macroeconomics
2
Chap 25
Chap 26
Chap 27
Chap 28
Chap 29
Chap 30
The level and growth of productivity and real GDP
How the financial system works and
How the real interest rate adjusts to balance
saving and investment
Why there is always some unemployment
in the economy
The monetary system and how changes in the money
supply affect the price level,the inflation rate, and
the nominal interest rate
Chap 31
Chap 32
Extension of this analysis to open economies to explain
the trade balance and the exchange rate.
GDP
Financial
system
Unemployment
Monetary
system
Open
Economy
Chapter
Key words
Contents
Chap 33
.Discussing some of the important facts about short run
fluctuations in economic activity and introducing a basic
model to explain those fluctuations.
Aggregate demand
and aggregate supply
Chap 34
・How monetary policy influences aggregate demand.
・How fiscal policy influences aggregate demand
Aggregate demand
and aggregate supply
Chap 35
・rela>onship
between
infla>on
and
unemployment
The
short-‐run
trade
off
Between
Infla>on
and
Unemployment
3. Proposi>on
(and
percentage
of
economists
who
agree)
1. A
ceiling
on
rents
reduces
the
quan>ty
and
quality
of
housing
available.(93%)
2. Tariffs
and
important
quotas
usually
reduce
general
economic
welfare.(93%)
3. Flexible
and
floa>ng
exchange
rates
offer
an
effec>ve
interna>onal
monetary
arrangement.(90%)
4. Fiscal
policy(e.g.,
tax
cut
and/or
government
expenditure
increase)
has
a
significant
s>mula>ve
impact
on
a
less
than
fully
employed
economy.
5. The
United
States
should
not
restrict
employers
from
outsourcing
work
to
foreign
countries.(90%)
6. Economic
growing
in
developed
countries
like
that
United
States
leads
to
greater
levels
of
well-‐being.(88%)
7. The
United
States
should
eliminate
agricultural
subsidies.(85%)
8. An
appropriately
designed
fiscal
policy
can
increase
the
long-‐run
rate
of
capital
forma>on.(85%)
9. Local
and
state
governments
should
eliminate
subsidies
to
professional
sports
franchises.(85%)
10. If
the
federal
budget
is
to
balanced,
it
should
be
done
over
the
business
cycle
rather
than
yearly.(88%)
4. Ten Principles of Economics
Ⅰ.How People Make Decisions.
1:People Face Trade-offs.
2:The Cost of Something Is What You Give Up to Get It.
3:Rational People Think at the Margin.
4:People Respond to Incentives.
Ⅱ.How People Interact.
5:Trade Can Make Everyone Better Off.
6:Markets Are Usually a Goodway to Organize Economic Activity.
7:Governments Can Sometimes Improve Market Outcomes.
Ⅲ.How the Economy as a Whole Works
8:A Country's Standard of Living Depends on its Ability to Produce Goods and
Services.
9:Prices Rise When the Government Prints Too Much Money.
10:Society Faces a Short-Run Trade-off between Inflation and Unemployment.
4
6. Six
debates
over
Macroeconomic
Policy
1. Should
monetary
and
fiscal
policymakers
try
to
stabilize
the
economy?
2. Should
the
government
fight
recessions
with
spending
hikes
rather
than
tax
cuts?
3. Should
monetary
policy
be
made
by
rule
rather
than
by
discre>on?
4. Should
the
central
bank
aim
for
zero
infla>on?
5. Should
the
government
balance
its
Budget?
6. Should
the
tax
laws
be
reformed
encourage
Saving?
7. Six
debates
over
Macroeconomic
Policy
1. Should
monetary
and
fiscal
policymakers
try
to
stabilize
the
economy?
2. Should
the
government
fight
recessions
with
spending
hikes
rather
than
tax
cuts?
3. Should
monetary
policy
be
made
by
rule
rather
than
by
discre>on?
4. Should
the
central
bank
aim
for
zero
infla>on?
5. Should
the
government
balance
its
Budget?
6. Should
the
tax
laws
be
reformed
encourage
Saving?
8. Pro:
Policymakers
should
try
to
stabilize
the
economy
• The
development
of
macroeconomic
theory
has
shown
policymakers
how
to
reduce
the
severity
of
economic
fluctua>ons.
• When
aggregate
demand
demand
is
inadequate
to
ensure
full
employment,
policymaker
should
boost
government
spending,
cut
taxes,
and
expand
the
money
supply.
• Such
policy
ac>ons
put
macroeconomic
theory
to
its
best
use
by
leading
to
a
more
stable
economy,
which
benefits
everyone.
9. Con:
Policymakers
should
not
try
to
stabilize
the
economy
• Monetary
policy
and
fiscal
policy
do
not
affect
the
economy
immediately
but
instead
work
with
a
long
lag.
• Too
o_en,
policymakers
trying
to
stabilize
the
economy
do
just
the
opposite.
– The
Great
Depression
of
1930’s,
Lehman
shock
in
2008
etc
• Economic
policymakers
should
refrain
from
intervening
o_en
with
monetary
and
fiscal
policy
and
be
content
if
they
do
no
harm.
10. Six
debates
over
Macroeconomic
Policy
1. Should
monetary
and
fiscal
policymakers
try
to
stabilize
the
economy?
2. Should
the
government
fight
recessions
with
spending
hikes
rather
than
tax
cuts?
3. Should
monetary
policy
be
made
by
rule
rather
than
by
discre>on?
4. Should
the
central
bank
aim
for
zero
infla>on?
5. Should
the
government
balance
its
Budget?
6. Should
the
tax
laws
be
reformed
encourage
Saving?
11. Pro:
The
government
should
fight
recessions
with
spending
hikes
Barack
Hussein
Obama
Franklin
Delano
Roosevelt
12. Pro:
The
government
should
fight
recessions
with
spending
hikes
• Economists
have
understood
that
the
fundamental
problem
during
recessions
is
inadequate
aggregate
demand.
– Monetary
policy
is
the
first
line
of
defense
against
economic
downturns.
– Fiscal
policy
is
par>cularly
useful
when
the
tools
of
monetary
policy
lose
their
effec>veness.
• Tradi>onal
Keynesian
analysis
indicates
that
increase
in
government
purchases
are
a
more
potent
tool
than
decrease
taxes.
– When
the
government
gives
a
dollar
in
tax
cuts
to
a
household
tool
than
decreases
in
taxes.
• Policymakers
focused
on
three
kinds
of
spending.
– Shovel
ready
projects
such
as
as
repairs
to
highways
and
bridges.
– Federal
aid
to
state
and
local
government.
– Increased
payments
to
the
jobless
through
the
unemployment
insurance
system.
13. Goods
and
services
market
Labor
Market
Financial
Market
Interest,
money
supply,
Stock
price, Exchange
rate
Labor
demand,
Labor
demand
employment
Market
type
in
macroeconomics
Consump>on+
Investment
+
Government
expenditure
+export-‐import
14. Con:
The
government
should
fight
recessions
with
tax
cuts
Ronald
Wilson
Reagan
John
Fitzgerald
"Jack"
Kennedy,
15. Con:
The
government
should
fight
recessions
with
tax
cuts
• Tax
cuts
have
important
influence
on
both
aggregate
demand
and
aggregate
supply.
– Tax
cuts
increase
aggregate
demand
by
increasing
household’s
disposable
supply
and
inducing
increased
spending
on
investment
goods.
– When
government
reduces
marginal
tax
rates,
workers
keep
a
higher
frac>on
of
any
income
they
earn.
• There
are
various
problems
with
increasing
government
spending
during
recessions.
– Consumers
understand
that
higher
government
spending,
together
with
the
government
borrowing
needed
to
finance
it,
will
likely
lead
to
higher
taxes
in
the
future.
– The
an>cipa>on
of
those
future
taxes
will
induce
consumers
to
cut
back
spending
today.
Moreover,
like
most
taxes,
those
in
the
future
will
likely
cause
a
variety
of
deadweight
losses.
16. Six
debates
over
Macroeconomic
Policy
1. Should
monetary
and
fiscal
policymakers
try
to
stabilize
the
economy?
2. Should
the
government
fight
recessions
with
spending
hikes
rather
than
tax
cuts?
3. Should
monetary
policy
be
made
by
rule
rather
than
by
discre>on?
4. Should
the
central
bank
aim
for
zero
infla>on?
5. Should
the
government
balance
its
Budget?
6. Should
the
tax
laws
be
reformed
encourage
Saving?
17. Pro:
Monetary
policy
should
be
made
by
rule
• Discre>on
in
the
conduct
of
monetary
policy
has
two
problems.
– Poli>cal
Business
Cycle:
Central
bankers
are
some>mes
tempted
to
use
monetary
policy
to
affect
the
outcome
of
elec>ons.
– Time
Inconsistency
of
Policy:
Central
bankers
tempted
to
renege
on
their
announcement
of
price
stability
to
achieve
lower
unemployment.
• One
way
to
avoid
these
problems
with
discre>onary
policy
to
commit
the
central
bank
to
a
policy
rule.
• An
ac>ve
rule
might
allow
some
feedback
from
the
state
of
the
economy
to
changes
in
monetary
policy.
– To
increase
monetary
growth
by
1
%
for
every
percentage
point
that
unemployment
rises
above
its
natural
rate.
18. Con:
Monetary
policy
should
not
be
made
by
rule
• There
may
be
pikalls
with
discre>onary
monetary
policy,
but
there
is
also
an
important
advantage
to
it.
– In
the
1930s,
banks
failed
in
record
numbers.
– In
the
1970s,
the
price
of
oil
skyrocketed
around
the
world.
– In
October
1987,
the
stock
market
fell
by
22%
in
a
single
day.
– From
2007
to
2009,
house
prices
dropped,
foreclosures
soared,
and
the
financial
system
experienced
significant
problems.
• Despite
much
research
examining
the
costs
and
benefits
of
alterna>ve
rules,
economists
have
not
reached
consensus
about
what
a
good
rule
would
be.
19. Six
debates
over
Macroeconomic
Policy
1. Should
monetary
and
fiscal
policymakers
try
to
stabilize
the
economy?
2. Should
the
government
fight
recessions
with
spending
hikes
rather
than
tax
cuts?
3. Should
monetary
policy
be
made
by
rule
rather
than
by
discre>on?
4. Should
the
central
bank
aim
for
zero
infla>on?
5. Should
the
government
balance
its
Budget?
6. Should
the
tax
laws
be
reformed
encourage
Saving?
20. Pro:
The
central
bank
should
aim
for
zero
infla>on
• Infla>on
confers
no
benefit
on
society,
but
it
imposes
several
real
costs.
– Shoeleather
costs
associated
with
reduced
money
holdings.
– Menu
costs
associated
with
more
frequent
adjustment
of
prices.
– Increased
variability
of
rela>ve
prices.
– Unintended
changes
in
tax
liabili>es
due
to
nonindexa>on
of
the
tax
cost.
– Confusion
and
inconvenience
resul>ng
from
a
changing
unit
of
account.
– Arbitrary
redistribu>ons
of
wealth
associated
with
dollar-‐denominated
debt.
• One
advantage
of
a
zero
infla>on
target
is
that
zero
provides
a
more
natural
focal
point
for
policymakers
than
any
number.
21. Con:
The
central
bank
should
not
aim
for
zero
infla>on
• The
benefits
of
zero
infla>on
are
small,
whereas
the
costs
of
reaching
zero
infla>on
are
large.
– Es>mates
of
the
sacrifice
ra>o
suggest
that
reducing
infla>on
by
1
%
requires
giving
about
5%
of
one
year’s
output.
• A
lille
bit
of
infla>on
may
even
be
a
good
thing.
– Some
economists
believe
that
infla>on
“geases
the
wheels”
of
the
labor
market.
Because
workers
resist
cuts
in
nominal
wages.
• Some>mes
the
economy
may
need
nega>ve
real
interest
rates
to
provide
sufficient
to
aggregate
demand
– an
op>on
ruled
out
by
zero
infla>on.
22. Six
debates
over
Macroeconomic
Policy
1. Should
monetary
and
fiscal
policymakers
try
to
stabilize
the
economy?
2. Should
the
government
fight
recessions
with
spending
hikes
rather
than
tax
cuts?
3. Should
monetary
policy
be
made
by
rule
rather
than
by
discre>on?
4. Should
the
central
bank
aim
for
zero
infla>on?
5. Should
the
government
balance
its
Budget?
6. Should
the
tax
laws
be
reformed
encourage
Saving?
23. Pro:
The
government
should
balance
its
budget
• The
most
direct
effect
of
the
government
debt
is
to
place
a
burden
on
future
genera>ons
of
taxpayers.
• Budget
deficits→
nega>ve
public
saving
→
lower
na>onal
saving
→
raise
real
interest
rate→
to
fall
investment
→smaller
stock
market
• U.S
government
debt
as
a
percentage
of
GDP
increased
from
26%
in
1980
to
50%
in
1995.
– During
this
period,
U.S
experienced
neither
a
major
military
conflict
nor
a
major
economic
downturn.
24. Con:
The
government
should
not
balance
its
budget
• The
problem
of
government
debt
is
o_en
exaggerated.
– Although
the
government
debt
does
represent
a
tax
burden
on
younger
genera>ons,
it
is
not
large
compared
to
the
average
person’s
life>me
income.
• Cri>cs
of
budget
deficits
some>mes
assert
that
the
government
debt
cannot
con>nue
to
rise
forever,
but
in
fact,
it
can.
– As
long
as
the
government
debt
grows
more
slowly
than
the
na>on’s
income,
there
is
nothing
to
prevent
the
government
debt
from
growing
forever.
• As
long
as
the
deficit
is
only
moderate
in
size,
there
will
never
be
a
day
of
reckoning
that
forces
the
budget
deficits
to
end
or
the
economy
to
collapse.
25. Six
debates
over
Macroeconomic
Policy
1. Should
monetary
and
fiscal
policymakers
try
to
stabilize
the
economy?
2. Should
the
government
fight
recessions
with
spending
hikes
rather
than
tax
cuts?
3. Should
monetary
policy
be
made
by
rule
rather
than
by
discre>on?
4. Should
the
central
bank
aim
for
zero
infla>on?
5. Should
the
government
balance
its
Budget?
6. Should
the
tax
laws
be
reformed
encourage
Saving?
26. Pro:
The
tax
laws
should
be
reformed
to
encourage
saving
• Unfortunately,
the
U.S
system
discourage
saving
by
taxing
the
return
to
saving
quite
heavily.
• The
double
taxa>on
substan>ally
reduces
the
return
to
the
stockholder,
thereby
reducing
the
incen>ve
to
save.
• A
switch
from
income
to
consump>on
taxa>on
would
greatly
increase
the
incen>ve
to
save.
27. Con:
The
tax
laws
should
not
be
reformed
to
encourage
saving
• By
reducing
the
tax
burden
on
the
wealthy
who
can
take
advantage
of
these
accounts,
they
force
the
government
to
raise
the
tax
burden
on
the
poor.
• There
are
ways
to
increase
na>onal
saving
other
than
by
giving
tax
breaks
to
the
rich.
– Instead
of
trying
to
alter
the
tax
code
to
encourage
greater
private
saving,
policymakers
can
simply
raise
public
saving
by
reducing
the
budget
deficit,
perhaps
by
raising
taxes
on
the
wealthy.
28. Why
we
should
study
economics
• It will help you understand the world in which you live.
• It will make you a more astute participant in the economy.
• It will give you a better understanding of both the potential and limits of
economic policy.