Focus on the third and fourth course objectives
from text page 93 today:
3. Explain why economic growth, unemployment,
inflation, and deficits matter.
4. Identify the macroeconomic policy challenges and
the tools for meeting them.
3. Outline
IV. Inflation
A. Inflation is an upward movement of prices.
B. The average level of prices is called the price level, and the
inflation rate is the percentage change (the growth rate) in the price level.
1. Over one year, the inflation rate equals:
C. In the early 1960s the inflation rate was low; it reached its highest
levels in 1974 and 1980. Inflation then decreased during the 1980s and has stayed
relatively low in the 1990s. Most of the world’s developed countries shared this
pattern.
1. Deflation occurs when the price level falls.
D. Inflation inflicts costs on the society:
1. Unanticipated changes in the value of money mean that the amounts
actually paid and received vary unpredictably.
2. People use resources to predict the inflation rate rather than to
produce additional goods and services.
3. At high inflation rates money loses value very quickly; therefore
people try to spend their money more rapidly. In the extreme case of a hyperinflation
— defined as an inflation rate that exceeds 50 percent per month — inflation
brings economic chaos and social disruption.
V. Deficits
A. The federal government has a government budget deficit if it spends
more than it collects in taxes.
1. The government has had a budget deficit every year since 1970 until
1998. As a fraction of GDP, the budget deficit increased in the 1980s but has fallen in
recent years.
B. The value of the goods and services sold to other countries (exports)
plus net interest receipts minus the value of the goods and services purchased from other
countries (imports) is the current account balance.
1. Until 1982, the United States generally had a current account
surplus; that is, it sold more to the rest of the world than it purchased. From 1982 to
1987, the current account deficit became large. It then decreased significantly between
1988 and 1991, after which it has increased once more and currently is about 2 percent of
GDP.
C. Deficits can be harmful if the borrowing is used to buy consumption
goods rather than more investment.
VI. Macroeconomic Policy Challenges and Tools
A. Generally agreed upon challenges for macroeconomic policy are as
follows:
1. To boost economic growth,
2. To stabilize the business cycle,
3. To reduce unemployment,
4. To keep inflation low, and
5. To lower the government and current account deficits.
B. Macroeconomic policy tools are of two general types:
1. Making changes in taxes and government spending is fiscal policy.
2. Changing interest rates and the amount of money in the economy is
monetary policy. The Federal Reserve (Fed) is in charge of monetary policy.
1. Review Helpful Hints in your study guide.
2. Complete even-numbered Questions in your study guide
and check your answers.
3. If you watched Video #3, write one or more sentence about each of its three
episodes which will bring the episodes and lessons learned from them to mind.
4. If not done in class, complete the Two-Minute-Feedback.
8.
Summary
A. This chapter provides basic
definitions (economic growth, real GDP, unemployment, inflation, and business cycles) used
in all remaining chapters.
B. Though it develops little in the way of "tools," it gives students
something equally important: a basic understanding of the issues that macro is about
and a strong motivation to learn how macroeconomists explore these issues.
9.
Preview
The optional Video #3 helps set the stage
for the next chapter on Measuring GDP by answering What is the Gross Domestic
Product?
Our national income accounting system (including GDP) was invented during the Great
Depression by a Russian-born graduate student studying under a statistician from Columbia
University.
Simon Kuznets was to later earn a Nobel Prize for the insights he provided to Wesley
Mitchell, a professor laboring under the desires of the U.S. Congress for data needed to
make political and economic policy.
10.
Two Minute Feedback
A. Take a minute and jot down the
problem, idea, or concept that was most interesting to you from this chapter.
B. Take another minute and jot down the problem, idea, or concept with which you
struggled the most.
C. Give the Two-Minute-Feedback to your instructor.
