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The Three Goals of Macro Economic Policy Economic Growth:Economic Growth: –Is the economy increasing its capability to produce more goods and services? Full-Employment:Full-Employment: –Is the economy providing jobs for those who want to be employed? Price Stability:Price Stability: –Prices are signals that help us coordinate the resources of the economy. In order to be most efficient we must get clear and dependable signals. Without price stability, consumers and producers are less likely to make good decisions that will benefit the overall economy.
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Macro-EconomicsThe Big Picture
Macroeconomics is the study of the large economy as a whole. It is the study of the big picture.
• Instead of analyzing one consumer, we analyze everyone. • Instead of one business we study all businesses.
What is Macroeconomics?
Why study the whole economy?• The field of macroeconomics was born during
the Great Depression. • Government didn’t understand how to fix a depressed economy with 25% unemployment.
• Macro was created to:1. Measure the health of the whole economy.2. Guide government policies to fix problems.
2
The Three Goals of Macro Economic Policy
• Economic Growth:– Is the economy increasing its capability to
produce more goods and services?• Full-Employment:
– Is the economy providing jobs for those who want to be employed?
• Price Stability:– Prices are signals that help us coordinate the
resources of the economy. In order to be most efficient we must get clear and dependable signals. Without price stability, consumers and producers are less likely to make good decisions that will benefit the overall economy.
The circular flowof income
The circular flow of income
The Interdependenceof Product andFactor markets
FIRMS(suppliers of goods and services,
demanders of factor services)
HOUSEHOLDS(demanders of goods and services,
suppliers of factor services)
The interdependence of goods and factor markets
The interdependence of goods and factor markets
P
Q
P
Q
$ $
$$
Factorservices
Goods
GoodsFactor
services
(1) Consumer demand
(4) Factor supply
(3) Factor demand
(2) Producer supply
P1
Q1O
PF1
QF1O
D1
S
D1
S
The interdependence of goods and factor markets
P
Q
P
Q
$ $
$$
Factorservices
Goods
GoodsFactor
services
S S
D1 D1
(1) Consumer demand
(4) Factor supply
(3) Factor demand
(2) Producer supply
P1
Q1OO
D2
PF1
QF1
The interdependence of goods and factor markets
P
Q
P
Q
$ $
$$
Factorservices
Goods
GoodsFactor
services
S S
D1 D1
(1) Consumer demand
(4) Factor supply
(3) Factor demand
(2) Producer supply
P1
Q1OO
P2
Q2
PF1
QF1
D2
The interdependence of goods and factor markets
P
Q
P
Q
$ $
$$
Factorservices
Goods
GoodsFactor
services
S S
D1 D1
(1) Consumer demand
(4) Factor supply
(3) Factor demand
(2) Producer supply
P1
Q1OO
P2
Q2
D2
PF1
QF1
D2
The interdependence of goods and factor markets
P
Q
P
Q
$ $
$$
Factorservices
Goods
GoodsFactor
services
S S
D1 D1
(1) Consumer demand
(4) Factor supply
(3) Factor demand
(2) Producer supply
P1
Q1OO
P2
Q2
PF1
QF1
PF2
QF2
D2D2
The circular flow of income
Additional Sectors of the Circular Flow Model
We already know about HOUSEHOLDS and FIRMS, however, the GOVERNMENT and FOREIGN Sectors play a large part in
our Economy
Consumption ofdomestically
produced goodsand services (Cd)
The circular flow of income
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
The circular flow of income
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
The circular flow of income
ABROAD
Exportexpenditure (X)
Importexpenditure (M)
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
The circular flow of income
ABROAD
Exportexpenditure (X)
Importexpenditure (M)
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
GOV.
Nettaxes (T)
The circular flow of income
ABROAD
Exportexpenditure (X)
Importexpenditure (M)
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
GOV.
Governmentexpenditure (G)
Nettaxes (T)
The circular flow of income
ABROAD
Exportexpenditure (X)
Importexpenditure (M)
Markets Within the Circular Flow Model
• With the HOUSEHOLD, FIRM, GOVERNMENT, and FOREIGN sectors we’ve only talked about both the Product and Factor Markets.–The last portion of the circular flow
deals with the FINANCIAL MARKET
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
BANKS, etcGOV.ABROAD
Governmentexpenditure (G)
Netsaving (S)
Nettaxes (T)Import
expenditure (M)
The circular flow of income
Exportexpenditure (X)
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
BANKS, etcGOV.ABROAD
Investment (I)
Governmentexpenditure (G)
Exportexpenditure (X)
Netsaving (S)
Nettaxes (T)Import
expenditure (M)
The circular flow of income
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
BANKS, etcGOV.ABROAD
Investment (I)Government
expenditure (G)
Exportexpenditure (X)
Netsaving (S)
Nettaxes (T)Import
expenditure (M)
The circular flow of income
LEAKAGES
Factorpayments
Consumption ofdomestically
produced goodsand services (Cd)
BANKS, etcGOV.ABROAD
Investment (I)Government
expenditure (G)
Exportexpenditure (X)
Netsaving (S)
Nettaxes (T)Import
expenditure (M)
The circular flow of income
LEAKAGES
INJECTIONS
