MECH 3360 - Macroeconomics

Economics - Lecture 3

What is a resource market?

It is a market where a business can go and purchase resources to product goods and services.

What is a product market?

It is a marketplace where goods and services are sold to businesses and public sectors.

Define macroeconomics.

It is the study of economy-wide phenomena, such as inflation, price levels, rate of economics growth, GDP, and unemployment.

Macroeconomists try to forecast economic conditions to help consumers, firms, and governments to make better decisions. Provide a brief description of each forcast.

Forecasts for consumers would include how easy it is to find work, how much it will cost to buy goods/services, and how much they can borrow.

Forecasts for businesses would include whether expanding production would be welcomed, and whether consumers will have the funds to buy their products.

Forecasts for governments would include budgeting spending, creating taxes, deciding on interest rates, and making policy decisions.

What is economic growth?

Economic growth is the increase in the production of goods and services in an economy.

What is growth commonly modeled as?

Physical capital, human capital, labor force, and technology.

Explain what business cycles are.

Business cycles are major macroeconomic variables that undergo occasional fluctuations. This can include employment and national output, in combination with expansions and recessions.

Illustrate what the classical (Free-Economic Policy ) school of thought is.

Classical economists advocate for free trade, non-interference economic policy, and expanding the division of labor.

Explain Keynesian (Planned-Economic Policy) economics.

Keynesian economics states that the business cycle can be managed by active government intervention by spending more during recessions (fiscal policy), and stimulating demand with lower interest rates. (monetary policy).

Explain Monetarist (Mixed-Economic Policy)

Monetarist economists argue that stable, free-market, monetary policy is best for managing the economy, but proposes that governments should control inflation by controlling the money supply.

Keynesian economics, despite its popularity, does not fair well when it came to supporting advanced economies. Explain what some of these critiques were.

Keynesian economics promote deficit spending, stifle private investment, can cause inflation, and has no appropriate policy response for stagflation.

Explain the Paradox of Thrift.

During an economic recession, individuals try to save money, which leads to a fall in demand and, in turn, economic growth. In this case, interest rates need to be lowered in order to boost spending.

What does monetary policy refer to?

Monetary policy refers to the actions taken by a country’s central bank to achieve its policy objectives.

Explain the difference between open market operations and reserve requirements when it comes to money supply.

Open market operations buy and sell bonds from banks to increase/reduce money supply. Reserve requirements order banks to keep a set amount of money on reserve each night to control the money in the market.

Why do banks borrow money?

To fulfill funding shortfalls, prevent liquidity problems, and stop the bank from failing.

What is a discount rate?

It is the rate at which central banks charge banks to borrow funds for short term loans of 24 hours or less.

Why would a central bank raise the discount rate?

The discount rate would be raised if the central bank wanted to discourage borrowing, and thus reduce the money supply.

What is fiscal policy?

It is the means at which a government adjusts its spending levels and tax rates to monitor and influence a nations economy.

Provide an example of short term fiscal policy.

The use of taxation of discourage negative externalities or incentivize non-profitable business.

In April of 2019, the International Monetary fund estimated that inflation would reach 10,000,000% by the end of 2019. Describe the reasons as to why inflation got so bad.

Subsidized imported food, bought for the poor with the country’s oil money, hurt domestic production and, when oil prices collapsed, government spending became unsustainable. The seizure of private property weakened agriculture production, and controlling the currency exchange lead to companies struggling to buy the dollars they needed to import raw materials and machinery.