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CHAPTER 19
INTRODUCTION TO MACROECONOMICS
Principles of Economics in Context (Goodwin et al.)
Chapter Overview
This chapter presents standard macroeconomic topics such as the macroeconomic goals of growth and stability, and a basic “roadmap” of the most significant events and theories of the last century. We note that the behavior of prices in real-world markets may differ from the stable equilibrium logic of basic supply and demand analysis. Prices that are sticky or slow to adjust, or prices that are unstable and subject to speculation, can create unexpected macroeconomic consequences. We define the well-being goals of macroeconomics as (1) living standards growth, (2) stability and security, and (3) financial, social, and ecological sustainability. The chapter also discusses differing macroeconomic perspectives, and concludes with a brief discussion of twenty-first century macro issues including poverty reduction and environmental constraints (to be dealt with later in detail in Chapters 32 and 33).
Chapter Objectives
After reading and reviewing this chapter, you should be able to:
- Distinguish the concerns of macroeconomics from microeconomics.
- Recognize potential consequences of slow or rapid price changes.
- Identify and describe the three main macroeconomic goals.
- Recognize new perspectives implied by the goal of sustainability.
- Identify and distinguish the major historical traditions of economic thought.
Key Terms
macroeconomics recession unemployment inflation macroeconomy global economy economic actor (agent) quantity adjustment menu costs speculation speculative bubble subprime mortgage assets
good living standards, stability and security, and environmental sustainability living standards growth economic growth economic development labor productivity business (trade) cycle restorative development precautionary principle classical economics division of labor specialization
laissez-faire economy Say’s Law aggregate demand Keynesian economics fiscal policy monetarist economics monetary policy
Active Review
Fill in the Blank
- While the study of economic activities of individuals, households, and businesses at the sub-national level is the concern of __________________, the study of economic activities at the national and global level is the concern of __________________.
- When producers change their level of output, rather than price, in response to higher or lower sales, this is called _____________________.
- The three main macroeconomic goals identified in this chapter are , , and.
- The increase in the level of production in a country or region is called _______________ growth while improvements in diet, housing, medical attention, education, working conditions, access to care, transportation, communication, entertainment, etc. is called growth.
- The process of moving from a situation of poverty and deprivation to a situation of increased production and plenty is referred to as.
- The fluctuations in the level of production, including recessions on the one hand and booms on the other hand, is called.
- The goal that recognizes a serious responsibility to future generations is the goal of .
- The school of economics that is associated with the idea that individual self-interest is a positive force and that governments should let markets function without interference is called.
- The economist who argued that the market mechanism can fail by leaving insufficient demand and that governments could intervene by increasing aggregate demand was named.
- The school of thought that argued that governments should aim for steadiness in the money supply rather than play an active role is called.
- Explain how Keynesian economics views the role of markets and government intervention in fighting business cycles.
- Explain how Monetarist economics views the role of markets and government intervention in fighting business cycles.
- How does the classical/Keynesian synthesis combine elements from both the classical and Keynesian schools?
- What two developments are demanding new ways of looking at the economic world in the 21st^ century? What kinds of sustainability questions do they raise?
Self Test
- With what kinds of topics does macroeconomics concern itself?
a. Economic activities of individual firms, households, and other organizations b. Forces of supply and demand in a particular market c. Consumer behavior and firms output decisions d. The labor market, wages, and hiring decisions e. Aggregate economic phenomena like the rate of unemployment and inflation
- Which of the following is an example of a normative question?
a. What is the nation’s rate of economic growth? b. What is the nation’s rate of inflation? c. What is the nation’s rate of unemployment? d. What is the nation’s level of GDP? e. Is the goal of sustainability of greater importance than the goal of economic growth as we move into the 21st^ century?
- Which of the following is one of the three macroeconomic goals discussed in the text?
a. Growth in the size of corporations b. Living standards growth c. Growth in trade and globalization d. Technological innovation e. None of the above
- Which of the following is not an example of one of the three macroeconomic goals discussed in the text?
a. Preventing the economy from experiencing too much unemployment. b. Preventing the economy from experiencing too much inflation. c. Keeping living standards high enough for people to live decent, meaningful lives. d. Making sure the economy is sustainable into the future. e. Providing the best environment for corporations.
- What explains the fact that the value of global production grew by a factor of 5. between 1960 and 2010, while the value of global production per capita has grown by a factor of 2.5?
a. Global population also grew, though not as fast as total production. b. The increase in global production has occurred simultaneously with a decline in global population. c. The increase in global production has occurred simultaneously with growth in the global workforce. d. The increase in global production has occurred simultaneously with decline in the global workforce. e. The growth in the global population has been greater than the growth in global production.
- How is labor productivity defined?
a. The level of output produced per capita. b. The level of output produced per worker (or worker-hour). c. The level of output produced as a share of GDP. d. The level of human capital in the workforce. e. The level of output produced per capital input.
- What problems are we most likely to see at which stage of the business cycle?
a. High inflation during recessions. b. High unemployment during booms. c. Low inflation during booms. d. High unemployment during recessions. e. Both high unemployment and high inflation during booms.
- Which of the following best describes the precautionary principle?
a. Clear cause and effect relationships must be established before taking action. b. We should err on the side of caution when dealing with natural systems or human health. c. The benefits of economic production and growth outweigh the risks of damage to natural systems or human health. d. Business should not have to prove a product to be safe before being released on the market; rather a product must be proven unsafe before it is banned and pulled from the market. e. We should take precautions before engaging in risky business investment.
- Which of the following is not one of the ideas associated with the school of classical economics?
a. Specialization and the division of labor b. Laissez-faire and the functioning of markets free of government intervention c. The pursuit of individual self-interest leads to positive economic outcomes. d. Supply creates its own demand e. Markets sometimes fail, necessitating government intervention.
- Which of the following is not one of the ideas of Keynesian economics?
a. An economy can experience insufficient demand b. Governments can step in to help boost aggregate demand c. Active use of fiscal policy can help keep employment rates up. d. Governments should focus on keeping the money supply steady e. Lowering interest rates alone may be insufficient if investors lack the confidence to engage in spending.
- Which of the following best distinguishes fiscal from monetary policy?
a. Monetary policy deals with the manipulation of government spending and taxation. b. Fiscal policy deals with the manipulation of interest rates and the money supply. c. Fiscal policy deals with the manipulation of levels of government spending and taxation. d. Monetary policy deals with both the manipulation of government spending and taxation, and interest rates and the money supply. e. Fiscal policy deals with both the manipulation of government spending and taxation, and interest rates and the money supply.
- Which of the following was one of Keynes’s suggested solutions, and was not generally adopted in the U.S. in the post-war era?
a. The use of fiscal policy to stabilize the business cycle. b. The use of monetary policy to stabilize the business cycle. c. The involvement of government in controlling of the level and direction of national investment. d. The role of government in purchasing goods and services to stimulate aggregate demand. e. The role of government in manipulating taxation to stimulate aggregate demand.
- Which of the following is not one of the ideas associated with monetarist economics?
a. Bad government monetary policies are the cause of economic crises b. It was easy credit, low interest rates and high levels of money supply that led to the overspending of the late 1920s. c. The Great Depression of the 1930s was caused primarily by tight money policies. d. Governments should not use active monetary policy, but should keep the money supply stable. e. There are times when the government should take an active role by intervening with fiscal policy.
- Which of the following best describes the classical/Keynesian synthesis?
a. In the short run we are in the classical world, but in the long run we are in the Keynesian world. b. In the short run we are in the Keynesian world, but in the long run we are in the classical world. c. We are always in the short run which is characterized by the Keynesian view. d. We are always in the long run, which is characterized by the classical view. e. The classical and Keynesian schools both share the same basic view of economic agents engaging in rational, optimizing behavior.
- According to the text, which of the following issues, not previously a major concern of macroeconomics, must macroeconomics confront in the 21st^ century?
a. The ecological sustainability of our reliance on fossil-fuel based economic growth b. The social sustainability of the traditional model of economic development with the persistence of global poverty. c. The problem of business cycle fluctuations in unemployment and inflation. d. (a) and (b) only e. None of the above.
- The three basic questions are: what is produced, how is it produced, and for whom is it produced.
- Once countries achieve a high level of production, they may achieve living standards growth by improving cultural, educational and environmental conditions, raising the quality of work-life, and promoting more equity.
- The instability over the business cycle can be accompanied by high rates of unemployment, which is associated with falling incomes and social stress, like suicide, domestic violence, illness and crime. Alternatively the instability may result in inflation, which can erode the purchasing power of income, or wipe out the value of savings and pensions.
- The goal of sustainability requires that we address whether economic activities are financially sustainable, whether they are socially sustainable, and whether they are ecologically sustainable.
- The classical school believes in the smooth functioning of market mechanisms, and that they work best when left alone. They generally do not think governments should intervene, and think that often government intervention makes things worse.
- Keynesian economics believes markets often fail and governments have a role to intervene, especially in boosting aggregate demand during downturns.
- Monetarist economics believes that the government should pursue a steady money supply and not use active monetary policy interventions over the course of the business cycle.
- The classical/Keynesian synthesis believes that in the short run we are in the Keynesian world (where markets fail to adjust and prices remain sticky), but in the long run we are in the classical world in which markets adjust and prices are flexible.
- Two developments that are demanding new ways of looking at the economic world in the 21st^ century are 1) the environmental impact of long-term fossil-fuel based economic growth, particularly with the dramatic rise in CO 2 emissions; and 2) the persistence of substantial global poverty and its threat to social sustainability.
Answers to Self Test Questions
- e
- e
- b
- e
- a
- b
- d
- e
- e
- a
- c
- b
- e
- d
- c
- c
- e
- b
- d
- e
