...IN THIS CHAPTER YOU WILL . . . Learn three key facts about shor t-run economic fluctuations Consider how the economy in the shor t run dif fers from the economy in the long run A G G R E G AT E AND DEMAND S U P P LY Use the model of aggregate demand and aggregate supply to explain economic fluctuations A G G R E G AT E Economic activity fluctuates from year to year. In most years, the production of goods and services rises. Because of increases in the labor force, increases in the capital stock, and advances in technological knowledge, the economy can produce more and more over time. This growth allows everyone to enjoy a higher standard of living. On average over the past 50 years, the production of the U.S. economy as measured by real GDP has grown by about 3 percent per year. In some years, however, this normal growth does not occur. Firms find themselves unable to sell all of the goods and services they have to offer, so they cut back on production. Workers are laid off, unemployment rises, and factories are left idle. With the economy producing fewer goods and services, real GDP and other measures of income fall. Such a period of falling incomes and rising 413 See how shifts in aggregate demand or aggregate supply can cause booms and recessions 414 PA R T E I G H T S H O R T - R U N E C O N O M I C F L U C T U AT I O N S recession a period of declining real incomes and rising unemployment depression a severe recession unemployment is...
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...everyday thinking. — Albert Einstein 1 O N E 1-1 What Macroeconomists Study Why have some countries experienced rapid growth in incomes over the past century while others stay mired in poverty? Why do some countries have high rates of inflation while others maintain stable prices? Why do all countries experience recessions and depressions—recurrent periods of falling incomes and rising unemployment—and how can government policy reduce the frequency and severity of these episodes? Macroeconomics, the study of the economy as a whole, attempts to answer these and many related questions. To appreciate the importance of macroeconomics, you need only read the newspaper or listen to the news. Every day you can see headlines such as INCOME GROWTH SLOWS, FED MOVES TO COMBAT INFLATION, or STOCKS FALL AMID RECESSION FEARS. Although these macroeconomic events may seem abstract, they touch all of our lives. Business executives forecasting the demand for their products must guess how fast consumers’ incomes will grow. Senior citizens living on fixed incomes wonder how fast prices will rise. Recent college graduates looking for jobs hope that the economy will boom and that firms will be hiring. Because the state of the economy affects everyone, macroeconomic issues play a central role in political debate.Voters are aware of how the economy is doing, and they know that government policy can affect the economy in powerful ways.As a result, the popularity of the incumbent president rises...
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...overall price level are determined. These economy-wide variables are based on the interaction of many households and many firms; therefore, microeconomics forms the basis for macroeconomics. 2. Economists build models as a means of summarizing the relationships among economic variables. Models are useful because they abstract from the many details in the economy and allow one to focus on the most important economic connections. 3. A market-clearing model is one in which prices adjust to equilibrate supply and demand. Market-clearing models are useful in situations where prices are flexible. Yet in many situations, flexible prices may not be a realistic assumption. For example, labor contracts often set wages for up to three years. Or, firms such as magazine publishers change their prices only every three to four years. Most macroeconomists believe that price flexibility is a reasonable assumption for studying long-run issues. Over the long run, prices respond to changes in demand or supply, even though in the short run they may be slow to adjust. Problems and Applications 1. The many recent macroeconomic issues that have been in the news lately (early 2002) include the...
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...everyday thinking. — Albert Einstein 1 O N E 1-1 What Macroeconomists Study Why have some countries experienced rapid growth in incomes over the past century while others stay mired in poverty? Why do some countries have high rates of inflation while others maintain stable prices? Why do all countries experience recessions and depressions—recurrent periods of falling incomes and rising unemployment—and how can government policy reduce the frequency and severity of these episodes? Macroeconomics, the study of the economy as a whole, attempts to answer these and many related questions. To appreciate the importance of macroeconomics, you need only read the newspaper or listen to the news. Every day you can see headlines such as INCOME GROWTH SLOWS, FED MOVES TO COMBAT INFLATION, or STOCKS FALL AMID RECESSION FEARS. Although these macroeconomic events may seem abstract, they touch all of our lives. Business executives forecasting the demand for their products must guess how fast consumers’ incomes will grow. Senior citizens living on fixed incomes wonder how fast prices will rise. Recent college graduates looking for jobs hope that the economy will boom and that firms will be hiring. Because the state of the economy affects everyone, macroeconomic issues play a central role in political debate.Voters are aware of how the economy is doing, and they know that government policy can affect the economy in powerful ways.As a result, the popularity of the incumbent president rises...
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...THE GREAT RECESSION Since publication of Robert L. Hetzel’s he Monetary Policy of the Federal Reserve (Cambridge University Press, 2008), the intellectual consensus that had characterized macroeconomics has disappeared. hat consensus emphasized eicient markets, rational expectations, and the eicacy of the price system in assuring macroeconomic stability. he 2008–2009 recession not only destroyed the professional consensus about the kinds of models required to understand cyclical luctuations but also revived the credit-cycle or asset-bubble explanations of recession that dominated thinking in the nineteenth century and irst half of the twentieth century. hese “market-disorder” views emphasize excessive risk taking in inancial markets and the need for government regulation. he present book argues for the alternative “monetary-disorder” view of recessions. A review of cyclical instability over the last two centuries places the 2008–2009 recession in the monetary-disorder tradition, which focuses on the monetary instability created by central banks rather than on a boom-bust cycle in inancial markets. Robert L. Hetzel is Senior Economist and Research Advisor in the Research Department of the Federal Reserve Bank of Richmond, where he participates in debates over monetary policy and prepares the bank’s president for meetings of the Federal Open Market Committee. Dr. Hetzel’s research on monetary policy and the history of central banking has appeared in publications...
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...onoECONOMICS RESOURCE | 1 ECONOMICS RESOURCE | 1 ECONOMICS 2009-10: FUNDAMENTALS OF ECONOMIC THINKING Table of Contents Preface to the Economics Resource .................................................................................. 5 Fundamentals of Economics ............................................................................................ 7 The Basic Economic Problem—Scarcity ............................................................................................ 8 Production of Goods and Services .................................................................................................... 10 Increasing Costs ............................................................................................................................... 12 The Factors of Production ............................................................................................................... 14 Benefit-Cost Analysis – Marginal Decision-Making ......................................................................... 15 Marginal Utility and Waffles ............................................................................................................ 17 More on Marginal Utility and the Effect of Prices ............................................................................ 19 Individual and Social Goals .............................................................................................................. 20 Positive and Normative Economics...
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...Answers to in-text Questions in Economics (5th edition) Chapter 1 Page 4 ( Could production and consumption take place without money? If you think they could, give examples. Yes. People could produce things for their own consumption. For example, people could grow vegetables in their garden or allotment; they could do their own painting and decorating. Alternatively people could engage in barter: they could produce things and then swap them for goods that other people had produced. ( Before reading on, how would you define scarcity? Must goods be at least temporarily unattainable to be scarce? See page 2 of text for a definition of scarcity. Goods need not be unattainable to be scarce. Because people’s incomes are limited, they cannot have everything they want from shops, even though the shops are stocked full. If all items in shops were free, the shelves would soon be emptied! ( If we would all like more money, why does the government not print a lot more? Could it not thereby solve the problem of scarcity ‘at a stroke’? The problem of scarcity is one of a lack of production. Simply printing more money without producing more goods and services will merely lead to inflation. To the extent that firms cannot meet the extra demand (i.e. the extra consumer expenditure) by extra production, they will respond by putting up their prices. Without extra production, consumers will end up unable to buy any more than previously...
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...medium of exchange and unit of account within the economy. The difference between inflation and a change in price of a particular good or service is that inflation reflects a general and overall increase in price across the whole economy In general, Inflation is caused by some combination of four factors. Those four factors are: Supply goes up or Supply of goods and services goes down or Demand for money goes down or Demand for goods and service goes up Inflation affects an economy in various ways, both positive and negative. Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Inflation also has positive effects: * Fundamentally, inflation gives everyone an incentive to spend and invest, because if they don't, their money will be worth less in the future. This increase in spending and investment can benefit the economy. However it may also lead to sub-optimal use of resources. * Inflation reduces the real burden of debt, both public and private. If you have a fixed-rate mortgage on your house, your salary is likely to increase over time due to wage inflation, but your mortgage payment will stay the same. Over time, your mortgage payment will become a smaller percentage of your earnings, which means that you will have...
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...even some deflation similar to Japan, in terms of outcome if not in terms of causes, are likely in the short term, but – also akin to Japan – a deflationary spiral is not), and LSE Professor Paul De Grauwe (there is a real risk of this outcome or worse unless policies change). We conclude that Euro area economies and assets could escape Japan’s fate but warn that Euro area stagnation would have a greater impact on the global economy than did Japan’s. Inside Interview with Masaaki Shirakawa Former Governor of the Bank of Japan 4 Headed for Japanese-style deflation? Silvia Ardagna, GS Rates Strategy 6 Interview with Huw Pill GS Chief European Economist 8 Euro area stagnation and its discontents Jose Ursua, GS Global Economics Research 10 Interview with Paul De Grauwe Professor, London School of Economics 14 European equities: a different story Sharon Bell, GS Portfolio Strategy 16 A look back at Japan’s deflation drivers Naohiko Baba, GS Japan Economics 18 Source: www.istockphoto.com I don’t see why [sovereign QE] couldn’t be as effective [in the Euro area] as in the US and in the UK. But even full-blown QE would lose full effectiveness if fiscal policies don’t...
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...Laureate in Economics, the prolific columnist and author Paul Krugman? In his prescient 1999 classic, The Return of Depression Economics, Krugman surveyed the economic crises that had swept across Asia and Latin America and pointed out that they were a warning for all of us: like diseases that have become resistant to antibiotics, the economic maladies that caused the Great Depression were making a comeback. In the years that followed, as Wall Street boomed and financial wheeler-dealers made vast profits, the international crises of the 1990s faded from memory. But now depression economics has come to America. When the great housing bubble of the mid-2000s burst, the U.S. financial system proved as vulnerable as those of developing countries caught up in earlier crises—and a replay of the 1930s seems all too possible. In this new, greatly updated edition of The Return of Depression Economics, Krugman shows how the failure of regulation to keep pace with an increasingly out-of-control financial system set the United States and the world up for the greatest financial crisis since the 1930s. He also lays out the steps that must be taken to contain the crisis and turn around a world economy sliding into a deep recession. Brilliantly crafted in Krugman's trademark style—lucid, lively, and supremely informed—this new edition of The Return of Depression Economics will become an instant cornerstone of the debate over how to respond to the crisis. »...
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...7/7/2014 Evernote Export Modern Welfare Criteria Created: 5/22/2012 9:12 PM General Equilibrium and Perfect Competition General Equilibrium of Exchange and Consumption 1. We assume that there is no production and the economy is a pure exchange economy. There are 2 individuals and 2 goods, who will exhaust the goods together. Naturally they will consume until (MRS x,y )A = (MRS x,y )B. But we don't know beforehand what will be the exact equilibrium. But if we know the initial distribution, we can define the boundary within which the equilibrium solution will lie. 2. Thus the initial distribution of goods and their relative bargaining strengths will determine the equilibrium position. This general equilibrium determines not only the final distribution of goods but also the rates of exchange or relative prices. Note that however, we can't determine absolute prices from here, we can only determine relative prices. Show that in PC, General Equilibrium can exist 1. This ca be shown using the fact that under PC, relative prices which A is facing will be same as relative prices which B is facing and hence MRS x,y for both will be same. General Equilibrium of Production 1. We assume that all labor is homogenous, receives equal wages, total quantity of each factor (L and K) is fixed, the production function is continuous and twice differentiable and the technology is given which together with factor endowments limits the production possibilities. Naturally the equilibrium condition...
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...Monetary policy: theory and practice by Peter Dawson Introduction Monetary policy has been at the forefront of government thinking about the workings of the economy for the last 30Monetary policy has been at the forefront of government thinking about 7.he workings of the economy for the last 30years. Together with fiscal policy it is one of the main methods governments employ in the pursuit of their economic objectives of high economic growth, low unemployment and low w-d stable inflation. Traditionally monetary policy has been conducted by central banks on behalf of governments. This means that although the central bank implements monetary policy~ it is the government which makes the final decision about the timing and the magnitude of the change. Recently governments in a number of countries have granted varying degrees of independence to central banks. In the UK, for example, the Bank of England (BoE) was given 'operational' independence in 1997 granting it a degree of discretionary power in the setting of interest rates and other monetary variables. The importance of monetary policy can be found in the increased media interest in monetary policy matters. Barely a day goes by without some mention of monetary policy Newspapers are filled with speculation about the likely moves monetary authorities will take in order to stabilise the economy Remarkably there is now broad agreement amongst economists that monetary policy is the only policy tool capable of reducing...
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...gov/committees/bank/hba57160.000/hba57160_0f.htm EXCHANGE RATE STABILITY IN INTERNATIONAL FINANCE FRIDAY, MAY 21, 1999 U.S. House of Representatives, Committee on Banking and Financial Services, Washington, DC. The committee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding. Present: Chairman Leach; Representatives Bachus, Ryan, Toomey, Frank, Sherman, Mascara and Inslee. Chairman LEACH. The hearing will come to order. On behalf of the committee, I would like to welcome our distinguished panel of expert witnesses to the second in the committee's series of hearings on international economic issues. Yesterday the committee addressed a wide spectrum of issues associated with debate over proposals for a new international financial architecture. Today we will home in on a critical element of that ongoing discussion, the question of which exchange rate systems best promote global economic growth and stability. Page 2 PREV PAGE TOP OF DOC Until very recently, the issue of appropriate currency arrangements was missing in action from the official agenda for global reform. The existence of this gap presumably reflected the substantial divisions on this issue among economists and policymakers. In any regard, these divisions became manifest in the remarkable inconsistency of policy advice provided on exchange rates by the official financial community...
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...Dictionary of Economics A & C Black London First published in Great Britain in 2003 Reprinted 2006 A & C Black Publishers Ltd 38 Soho Square, London W1D 3HB © P. H. Collin 2003 All rights reserved. No part of this publication may be reproduced in any form or by any means without the permission of the publishers A CIP record for this book is available from the British Library eISBN-13: 978-1-4081-0221-3 Text Production and Proofreading Heather Bateman, Katy McAdam A & C Black uses paper produced with elemental chlorine-free pulp, harvested from managed sustainable forests. Text typeset by A & C Black Printed in Italy by Legoprint Preface Economics is the basis of our daily lives, even if we do not always realise it. Whether it is an explanation of how firms work, or people vote, or customers buy, or governments subsidise, economists have examined evidence and produced theories which can be checked against practice. This book aims to cover the main aspects of the study of economics which students will need to learn when studying for examinations at various levels. The book will also be useful for the general reader who comes across these terms in the financial pages of newspapers as well as in specialist magazines. The dictionary gives succinct explanations of the 3,000 most frequently found terms. It also covers the many abbreviations which are often used in writing on economic subjects. Entries are also given for prominent economists, from Jeremy...
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...Absolute advantage |The ability to produce a good at lower cost, in terms of real resources, than another country. In a Ricardian model[->4], cost is in terms of only labor. Absolute advantage is neither necessary nor sufficient for a country to export a good. See comparative advantage[->5]. | Absolute advantage trade policy |The idea, advocated by opponents of globalization[->6], that a country should import only goods in which other countries have an absolute advantage[->7], particularly goods that the importing country cannot (or cannot "reasonably") produce itself. | Absolute Purchasing Power Parity |See purchasing power parity[->8]. | Absorption |Total demand for final goods and services by all residents (consumers, producers, and government) of a country (as opposed to total demand for that country's output). The term was introduced as part of the Absorption Approach[->9]. | Absorption approach |A way of understanding the determinants of the balance of trade, noting that it is equal to income minus absorption. Due to Alexander (1952)[->10] | Abundant |Available in large supply. Usually meaningful only in relative terms, compared to demand and/or to supply at another place or time. See factor abundance[->11]. | Abundant factor |The factor in a country's endowment[->12] with which it is best endowed, relative to other factors, compared to other countries. May be defined by quantity[->13] or by price[->14]. | Academic Consortium on International Trade[->15]...
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