Essentials of Economics, Krugman Wells Olney

Essentials of Economics, Krugman Wells Olney

Prepared by: Fernando & Yvonn Quijano 2007 Worth Publishers Essentials of Economics Krugman Wells Olney chapt er What you will learn in this chapter: An overview of macroeconomics, the study of the economy as a whole, and how it differs from microeconomics The importance of the business cycle and why policy makers seek to diminish the severity of business cycles The meaning of inflation and deflation and why price stability is preferred

Even the best students had a tough time finding a job in 2002. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 2 of 22 chapt er TABLE 14-1 Median Starting Salaries of New MBAs from Selected Schools in 2000, 2002, and 2004 School 2000 starting salary 2002 starting salary 2004 starting salary

Stanford $165,500 $138,100 $150,000 Harvard 160,000 134,600 147,500 Pennsylvania

156,000 124,500 144,000 Columbia 142,500 123,600 142,500 Dartmouth 149,500 122,100

135,000 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 3 of 22 chapt er Microeconomics versus Macroeconomics TABLE 14-2 Microeconomic versus Macroeconomic Questions Microeconomic Questions Macroeconomic Questions Should I go to business school or take a

job right now? How many people are employed in the economy as a whole this year? What determines the salary offered by Citibank to Cherie Camajo, a new Columbia MBA? What determines the overall salary levels paid to workers in a given year? What determines the cost to a university or college of offering a new course? What determines the overall level of prices in the economy as a whole? What government policies should be

adopted to make it easier for low-income students to attend college? What government policies should be adopted to promote employment in the economy as a whole? 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 4 of 22 chapt er Microeconomics versus Macroeconomics Macroeconomics: The Whole Is Greater Than the Sum of Its Parts A key insight into macroeconomics is that in the short runa time period consisting of

several years but typically less than a decadethe combined effect of individual decisions can have effects that are very different from what any one individual intended, effects that are sometimes perverse. The behavior of the macroeconomy is, indeed, greater than the sum of individual actions and market outcomes. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 5 of 22 chapt er Microeconomics versus Macroeconomics Macroeconomic Policy

The area of microeconomics, in general, suggests a limited role for government intervention. In contrast, economists generally believe there is a much wider role for government to play in macroeconomicsmost importantly, to manage short-term fluctuations and adverse events in the economy. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 6 of 22 chapt er Microeconomics versus Macroeconomics Economic Aggregates Economic aggregates are economic

measures that summarize data across different markets for goods, services, workers, and assets. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 7 of 22 chapt er economics in action The Great Depression 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 8 of 22 chapt

er The Business Cycle The business cycle is the short-run alternation between economic downturns, known as recessions, and economic upturns, known as expansions. A depression is a very deep and prolonged downturn. Recessions are periods of economic downturns when output and employment are falling. Expansions, or recoveries, are periods of economic upturns when output and employment are rising. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney

9 of 22 chapt er The Business Cycle 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 10 of 22 chapt er The Business Cycle Employment and Unemployment Employment is the number of people currently employed in the economy. Unemployment is the number of

people who are actively looking for work but arent currently employed. The labor force is equal to the sum of employment and unemployment. Discouraged workers are nonworking people who are capable of working but have given up looking for a job. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 11 of 22 chapt er The Business Cycle Employment and Unemployment Underemployment is the number of people who work during a recession but

receive lower wages than they would during an expansion due to fewer number of hours worked, lower-paying jobs, or both. The unemployment rate is the percentage of the total number of people in the labor force who are unemployed. (14-1) Unemployment rate = Number of unemployed workers x 100 Number of unemployed workers Number of employed workers 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 12 of 22 chapt er

The Business Cycle Aggregate Output Aggregate output is the economys total production of final goods and services for a given time period. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 13 of 22 chapt er The Business Cycle Aggregate Output 2007 Worth Publishers Essentials of Economics Krugman Wells Olney

14 of 22 chapt er The Business Cycle Taming the Business Cycle Policy efforts undertaken to reduce the severity of recessions and to rein in excessively strong expansions are called stabilization policy. Monetary policy is a type of stabilization policy that involves changes in the quantity of money in circulation or in interest rates, or both. Fiscal policy is a type of stabilization policy that involves changes in taxation or in government spending, or both.

2007 Worth Publishers Essentials of Economics Krugman Wells Olney 15 of 22 chapt er economics in action Has the Business Cycle Been Tamed? 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 16 of 22 chapt er Inflation and Deflation

A nominal measure is a measure that has not been adjusted for changes in prices over time. A real measure is a measure that has been adjusted for changes in prices over time. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 17 of 22 chapt er Inflation and Deflation The aggregate price level is the overall price level for final goods and services in the economy.

A rising aggregate price level is inflation. A falling aggregate price level is deflation. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 18 of 22 chapt er Inflation and Deflation 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 19 of 22 chapt er

Inflation and Deflation The economy has price stability when the aggregate price level is changing only slowly. The inflation rate is the annual percent change in the aggregate price level. 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 20 of 22 chapt er Inflation and Deflation 2007 Worth Publishers Essentials of Economics Krugman Wells Olney

21 of 22 chapt er KEY TERMS Economic aggregates Business cycle Depression Recessions Expansions Employment Unemployment Labor force Discouraged workers Underemployment Unemployment rate

Aggregate output Stabilization policy Monetary policy Fiscal policy Nominal Real Aggregate price level Inflation Deflation Price stability Inflation rate 2007 Worth Publishers Essentials of Economics Krugman Wells Olney 22 of 22

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