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Introduction to Macroeconomics

Introduction to Macroeconomics. Chapter 19. Contemporary Macroeconomics. Contemporary Macroeconomics. 1. Employment - Unemployment 2. Business Cycle 3. Aggregate Supply/Demand Curves 4. Discretionary Government Policy. 1. Employment - Unemployment. Measurement Types of Unemployment

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Introduction to Macroeconomics

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  1. Introduction to Macroeconomics Chapter 19. Contemporary Macroeconomics

  2. Contemporary Macroeconomics 1. Employment - Unemployment 2. Business Cycle 3. Aggregate Supply/Demand Curves 4. Discretionary Government Policy

  3. 1. Employment - Unemployment • Measurement • Types of Unemployment • Natural Rate of Unemployment • Okun’s Law

  4. Unemployment Rates Great Depression (1929 - 1933) World War II (1941 - 1945) 1981 - 1982 recession 1973 - 1975 recession 1990 - 1991 recession U.S. Fairfax Co., VA.

  5. Measurement Employed persons + Unemployed persons Total labor force + Not in labor force Civilian noninstitutional population(16 and over) Unempoyment Rate (percent) = Unemployed * 100 Total Labor Force

  6. U.S. Labor Force Participation Rate Men Women

  7. Types of Unemployment • Frictional Unemployment - dynamic labor force in a stable economy (voluntary unemployment) • Structural Unemployment - stable labor force in a dynamic economy (involuntary unemployment but probably unavoidable) • Cyclical Unemployment - unstable economy (involuntary unemployment and possibly avoidable through gov’t policy)

  8. “Natural Rate” of Unemployment • Natural Rate of Unemployment - consistent with frictional and structural unemployment. • Full Employment Output - total output of economy when unemployment is at the natural rate. During the business cycle total output fluctuates around the full employment level.

  9. Okun’s Law Output fluctuates more than unemployment over the business cycle 1 % decline in output leads to 1/2% of workers becoming unemployed

  10. Business Cycles Recurrent, systematic fluctuations in the level of business activity: - real GDP growth rate - inflation - unemployment

  11. Peak Trough Peak Contraction Expansion (Recession) Real GDP Unemployment Rate (percent) Inflation Rate (percent)

  12. Quarterly Changes in Real GDP

  13. Index of Leading Economic Indicators P T P T P T P T P T P T Sources: The Conference Board: www.tcb-indicators.org/ NBER: www.nber.org

  14. 2. Aggregate Supply and Demand • Aggregate Demand - total spending in an economy at various “average” price levels • Aggregate Supply - total production in an economy at various “avereage” price levels • Equilibrium - aggregate demand equals aggregate supply

  15. 3. Discretionary Government Policy • Fiscal Policy and Monetary Policy • Demand-side and Supply-side Policy

  16. Fiscal and Monetary Policy • Fiscal Policy - U.S. Congress • Government spending • Taxes • Monetary Policy - Federal Reserve • Discount (interest) rate • Money supply (T-Bill sales/purchases) • Required bank reserves • Stock market margin requirements

  17. Supply-Side and Demand-Side • Demand-Side Policy - intended to alter the overall level of spending (aggregate demand) • Supply-Side Policy - intended to alter incentives to produce output (aggregate supply)

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