The document discusses macroeconomics and provides an overview of the US economy since the Great Depression. It summarizes that macroeconomists study inflation, recession, unemployment, and economic growth at an aggregate level. It then reviews key events in the US economy such as the Great Depression, stagflation in the 1970s, recessions in the 1980s and 1990s, the economic boom of the 1990s, and the Great Recession beginning in 2008. The document uses graphs and diagrams to illustrate macroeconomic concepts like GDP, inflation, recessions, and shifts in aggregate supply and demand.

1. PowerPoint Slides prepared by:
Andreea CHIRITESCU
Eastern Illinois University
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
An Introduction to
Macroeconomics
Where the telescope ends, the microscope begins.
Which of the two has the grander view?
VICTOR HUGO

2. Drawing a Line
• Drawing a line between macroeconomics
and microeconomics
• Microeconomics
–Decisions of individual units
• No matter how large
• Macroeconomics
–Behavior of entire economies
• No matter how small
–Economic aggregates
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3. Drawing a Line
• Aggregation
–Combine many individual markets into
one overall market
• Composition of demand and supply
–In various markets
–Important for microeconomics issues
–Not important for macroeconomics issues
• During economic fluctuations
–Markets – move up or down together
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4. Drawing a Line
• Macroeconomics
–Assume most details
• Resource allocation and income distribution
• Relatively unimportant
• Microeconomics
–Ignore macroeconomics issues
–Focus on individual markets
• Allocate resources
• Distribute income
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5. Macroeconomics
• Aggregate demand curve
–Quantity of domestic product that is
demanded at each possible value of the
price level
• Aggregate supply curve
–Quantity of domestic product that is
supplied at each possible value of the
price level
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6. Figure 1
Two interpretations of a shift in the demand curve
6
0
Quantity
Price
(a)
D
D
0
Quantity
Price
(b)
Q0
S
S
P0
E
D0
D0
S
S
P0
D1
D1
P1
E
A
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Macroeconomics
• Inflation
–Sustained increase in the general price
level
• Recession
–A period of time during which the total
output of the economy declines
• Production falls
• People lose jobs
–Leftward shift of aggregate demand curve
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. Figure 2
An Economy Slipping into a Recession
8
0
Domestic Product
PriceLevel
D0
D0
Q0
S
S
P0
D2
D2
P2
Q2
E
B
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Macroeconomics
• Macroeconomists study
–Inflation
–Recession and unemployment
–Economic growth
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Figure 3
Economic Growth
10
0
Domestic Product
PriceLevel
D0
D0
Q0
S0
S0
D1
D1
Q1
E
S1
S1
C
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Gross Domestic Product
• Gross domestic product (GDP)
–Sum of the money values of all final
goods and services
–Produced in the domestic economy and
sold on organized markets
–During a specified period of time, usually
a year
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12. Gross Domestic Product
• Nominal GDP
–GDP in current dollars
–Calculated by valuing all outputs at
current prices
• Real GDP
–Calculated by valuing outputs of different
years at common prices
–Better measure than nominal GDP of
changes in total production
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13. Gross Domestic Product
• GDP - particular year
–Add up money value of things
–Goods and services
• Produced within the year
–Final goods and services
–Production: geographic boundaries of U.S.
–Organized markets
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14. Gross Domestic Product
• Final goods and services
–Purchased by their ultimate users
• Intermediate good - purchased
–For resale
–For use in producing another good
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15. Gross Domestic Product
• Limitations of GDP
–Not a measure of the nation’s economic
well-being
–Includes only market activity
–Places no value on leisure
–Counted: “Bads” and “Goods”
–Ecological costs are not netted out of the
GDP
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16. The Economy on a Roller Coaster
• U.S. economy
–Growth – with fluctuations
• Macroeconomic fluctuations
–Business cycles
• Real GDP per capita
–Ratio of real GDP divided by population
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17. Figure 4
Nominal GDP, Real GDP, and Real GDP per Capita since
1959
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18. Figure 5
The Growth Rate of U.S. Real Gross Domestic Product
since 1870
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19. The Economy on a Roller Coaster
• Inflation
–Sustained increase in the general price
level
• Deflation
–Sustained decrease in the general price
level
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20. Figure 6
The Inflation Rate in the United States since 1870
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21. The Economy on a Roller Coaster
• The Great Depression, 1929-1933
–Decline in economic activity
–Rapid deflation
–Production declined 30%
–Business investment ceased
–Unemployment rate
• Increased from 3% to 25%
–World-wide event
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22. The Economy on a Roller Coaster
• The Great Depression, 1929-1933
–Revolution in economic thought
• Before: economy corrects itself
• After: decrease in aggregate demand
– Monetary & fiscal policy
–Ended: early 1940s
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23. The Economy on a Roller Coaster
• From WWII to 1973
–Increased government spending
• Increased aggregate demand
• Accidental fiscal policy
• Price controls
• Shortage: consumer goods
–1960s – strong growth
–Vietnam war – increased spending
• Inflation and high unemployment
–Wage and price controls
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24. The Economy on a Roller Coaster
• Fiscal policy
–Government spending and taxation
–Used to steer aggregate demand
• Stagflation
–Inflation
–While economy
• Growing slowly (“stagnating”)
• Or recession
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25. The Economy on a Roller Coaster
• The Great Stagflation, 1973-1980
–OPEC – 1973 oil prices quadrupled
–Poor harvests
–Recession
• Inflation rate: 12%
• High unemployment
–Stagflation
–Inward shift of aggregate supply
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26. The Economy on a Roller Coaster
• The Great Stagflation, 1973-1980
–Economy recovered
• Government actions
• Natural economic forces
–1979 – OPEC soaring oil prices
• Stagflation
• Inflation: 16%
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27. Figure 7
The Effects of an Adverse Supply Shift
27
0
Real GDP
PriceLevel
D
D
S0
S0
E
S1
S1
A
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. The Economy on a Roller Coaster
• Reaganomics and its aftermath
–Recovery underway
–High inflation
–Federal Reserve
• Monetary policy, High interest rate
• Monetary policy
–Actions – Federal Reserve
• Change interest rates
• Influence aggregate demand
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29. The Economy on a Roller Coaster
• Reaganomics and its aftermath
–1981-1982 recession
–Large budget deficits
–Recovery started 1982-1983
–President Bush
• Inflation
• Deficit-reduction package
• Spike in oil prices
• 1990-1991 recession
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30. The Economy on a Roller Coaster
• Clintonomics: deficit reduction and the
“New Economy”
–Deficit-reduction package, 1993 & 1997
• Tax increase & spending cuts
–Large surplus
–Economy boomed
–Lower inflation
–Aggregate supply curves
• Pushed outward – rapid pace, 1996 – 1998
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31. Figure 8
The Effects of a Favorable Supply Shift
31
0
Real GDP
PriceLevel
D0
D0
S0
S0
D1
D1
E
S1
S1
C
S2
S2
B
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. The Economy on a Roller Coaster
• Tax cuts and the Bush economy
–2001 recession, the first in 10 years
–Tax cut 2001
–Budget deficit
–Burst of government spending
• War on terror
–Aggregate demand – shift outward
–Federal Reserve
• Lowered interest rate
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33. The Economy on a Roller Coaster
• Obamanomics and the Great Recession
–January 2009, economy was sinking
• Jobs - disappearing at a rapid pace
–More tax cuts
–A burst of federal spending
–Large-scale aid to state and local
governments
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34. The Economy on a Roller Coaster
• Obamanomics and the Great Recession
–Bush, Obama administrations, the Fed
• Variety of unprecedented emergency
measures - to rescue the collapsing financial
system
–Summer 2009, the Great Recession was
over
–Economy started growing again
–High unemployment
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35. Macroeconomic Stabilization
• Stabilization policy
–Government programs designed to
prevent or shorten recessions
–And to counteract inflation
• To stabilize prices
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36. Macroeconomic Stabilization
• Combating unemployment
–Increase aggregate demand
• Government - Fiscal policy
– Increase spending and / or cut taxes
• Federal Reserve - Monetary policy
– Lower interest rates
–Increase output
–Reduce unemployment
–Raise prices
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37. Figure 9
Stabilization Policy to Fight Unemployment
37
0
Real GDP
PriceLevel
D0
D0
S0
S0
D1
D1
E
A
Increase in output
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

38. Macroeconomic Stabilization
• Combating inflation
–Decrease aggregate demand
• Government - Fiscal policy
– Cut spending and / or increase taxes
• Federal Reserve - Monetary policy
– Increase interest rates
–Decrease inflation (decrease prices)
–Decrease output
–Increase unemployment
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39. Figure 10
Stabilization Policy to Fight Inflation
39
0
Real GDP
PriceLevel
D0
D0
S
S
D2
D2
E
Decrease
in prices
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
B

40. Stabilization policy
• Prewar data
–Fluctuations – unmanaged economy
• Booms & recessions
– “Natural” economic reasons
• Little government intervention
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41. Stabilization policy
• Postwar data
–Economy - managed by government
policy
• Successfully or unsuccessfully
–Recessions - less severe
–More inflation-prone
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