Chapter 23: An Introduction to Macroeconomics

• Business cycle - Long-run economic growth and the short-run fluctuations in output and employment
• Recession - Output + living standards decline
• Performance + policy
  • Real gross domestic product - Measures the value of final goods and services produced within the borders of a given country during a given period of time, typically a year
  • Nominal GDP - The dollar value of all goods and services produced within the borders of a given country using their current prices during the year that they were produced
  • Fisher Equation of Nominal GDP = Real GDP + Inflation
  • Unemployment - The state a person is in if he or she cannot get a job despite being willing to work and actively seeking work
  • Inflation - Increase in overall level of prices
• Modern economic growth - Output per person rises as compared with earlier times in which output (but not output per person) increased
• Savings, investment, + choosing b/w present + future consumption
  • Savings - Generated when current consumption is less than current output
  • Investment - When resources are devoted to increasing future output
  • Financial investment - Purchase of assets in the hope of reaping financial gain
  • Economic investment - Creation + expansion of business enterprises
• Banks collect household savings + lend funds to businesses
• Uncertainty, expectations, + shocks
  • Expectations have large effect on investment + economic growth
  • Shocks - Situations in which firms were expecting one thing to happen but then something else happened
  • Demand shocks - Unexpected changes in demand for goods + services
  • Causes short-run fluctations
  • Supply shocks - Unexpected changes in supply of goods + services
• Demand shocks + sticky prices
  • Many prices are inflexible + unable to change rapidly
  • Inventory - Store of output that has been produced but not yet sold
  • Demand falls → Firms that produce will be forced to cut production (vice versa)
• Inflexible (sticky) prices - Prices that cannot change rapidly in response to changes in demand
  • Flexible prices - React within seconds to changes in supply + demand
  • Consumers prefer stable + predictable prices
• Economy behaves differently based on how much time has passed after demand shock
  • Fully flexible prices in long run

\