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

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