Introduction to MacroeconomicsMini-Lecture # 1

William A. Branch

Outline

Contents

1 What is Macroeconomics? 2

2 Key Principles 3

3 This course... 4

1

1 What is Macroeconomics

What is Macroeconomics?

• Macroeconomicsis the study ofeconomy-wide(aggregate) phenomena.

• Example topics of interest:

– output/income – GDP

– inflation

– unemployment

– monetary policy

– fiscal policy

– stock and bond markets

What are the big macroeconomic issues of the day?

• Financial crisis and Great Recession 2007-2009.

• Slow recovery.

• Debt sustainability and austerity

• Eurozone crisis.

What is the learning objective of Intro. Macro?

1. To become educated citizens on topics of macro:

• to be able to assess important issues of the day.

• to recognize how the macroeconomy affects your own decisions, suchas saving, planning, working, education, ...

2. Motivate/exciteyou to become an economics major!

How does macro differ from micro?

Definition 1. microeconomics is the study of how households and firms make de-cisions and how they interact in markets.

Definition 2. macroeconomics is the study of how economy-wide phenomena in-cluding inflation, unemployment and economic growth.

2

2 Key Principles

Principle 1: A country’s standard of living depends on its ability to producegoods and services.

• Stark differences in living standards across poorest and richest.

– Haiti: average annual income $ 726.

– U.S.: average annual income $ 45,010.

• What accounts for the difference?Productivity– how much does a typicalworker actually produce.

Principle 2: Prices rise when the government produces too much money.

• Zimbabwe: inflation went from 20% in 1997 to 6.5 sextillion % in 11/08.

• What causes inflation?

– Almost all persistent inflation is from growth in the qty. of money.

– When gov’t creates large quantities of money, it’s value falls.

– The value of money is what it can buy, so it isinverselyrelated to theprice-level.

– So when qty. of money goes up so does the price-level⇔ inflation.

Principle 3: Society faces a short-run tradeoff between inflation and unem-ployment.

• In long-run, as money supply↑→ prices↑ proportionally.

• In short-run:

– prices are slow to adjust, so whenM ↑ the real purchasing power in-creases and it stimulates demand for goods and services.

– Higher demand may cause firms to raise prices in time, but immediatelyhire more workers to meet demand.

– more hiring, lower unemployment.

– But, at expense of some inflation.

• This tradeoff is an important aspect of the business cycle.

3

Definition 3. business cycle: fluctuations in economic activity such as em-ployment and production.

• In the U.S. the Federal Reserve has adual mandatefrom congress: maintainprice stability and full employment.

• The tradeoff means that sometimes Fed has to choose which mandate tomeet. (Means some political opposition.)

3 This course...

This course...The plan of this course:

1. How to measure and explain long-run economic growth.

2. How to measure prices and explain persistent inflation.

3. How to measure unemployment and explain persistent unemployment.

4. The financial system and it’s importance to the economy.

5. The short-run economy and macroeconomic stabilization policy.

4