Outline of Text Material
I. Introduction
A. Microeconomics studies the behavior of firms, houholds, individuals, and other gments of societies. Macroeconomics focus on the determinants of total national output.
1. Macroeconomics is concerned with aggregates, or sums. For example, aggregate beh
avior is the behavior of all houholds and firms together. GDP is an aggregate. So is national income.
2. Macroeconomics is also concerned with averages such as the average price level, the unemployment rate, and “the” interest rate.
B. Macroeconomists obrve that important prices in the economy often are “sticky downward”; that is, the price does not em to always adjust rapidly to maintain equilibrium in the particular market.
1. The real wage rate is the most notorious example of this. When there is excess supply in the labor market, the real wage falls very slowly. However, the real wage is only “sticky downward.” Real wages ri rapidly when there is excess demand for labor.
2. Other markets may also exhibit sticky prices caud by long-term contracts or other institutional arrangements.
C. Since about 1970 much work in macroeconomics has been concerned with understa
nding the microeconomic behavior that caus macroeconomic effects.
1. This is referred to as the microeconomic foundations of macroeconomics.
2. For example, labor economists have developed the arch theory of unemployment and other information-related theories to explain sticky wages.
II. The Roots of Macroeconomics
A. The Great Depression of the 1930s spurred a great deal of thinking about macroeconomic issues.
男生动漫图片 TEACHING TIP: Students may have a general idea of what happened in the 1930s but not much in the way of facts. It might be a good idea to look ahead to Figure 5.4 [17.4] to give them some n as to how bad things were. Point out that when the unemployment rate reached 10% in 1983 it was viewed as a crisis. Contrast that with 25% unemployment in 1933.
1. Before 1930 there was no such field as macroeconomics. About the only macroeconomic issue economists were concerned with was the interest rate (Irving Fisher).
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2. Classical春尽 or market clearing models were the models applied by economists to economywide problems before the Great Depression. Classical economists12导联心电图 believed that recessions (downturns in the economy) were lf-correcting. The failure of such models to explain the prolonged high unemployment of the Great Depression gave some urgency to the work of economists developing macroeconomic theories (notably John Maynard Keynes and John Hicks).
3. The Keynesian Revolution refers to a new way of looking at the macroeconomy developed by John Maynard Keynes.
a. According to his theory, the level of aggregate demand determines the level of employment.
b. When aggregate demand is low the economy can become stuck in a recession.
c. Keynes thought the government should increa spending or cut taxes to rai aggregate demand and lift the economy out of the recession.
B. Recent Macroeconomic History
TEACHING TIP: Remember that most of your students were likely born after 1980 and have grown up in a time of almost ideal economic conditions. They therefore have no real n of rapid inflation or high rates of unemployment. Although economists may e the times as unusual, to your students good economic times are the rule rather than the exception. Encourage them to read the box titled “The Great Depression and John Maynard Keynes.”
I like to tell my students that one of the best leading indicators of a recession is when people start referring to “the end of the business cycle.”
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1. After World War II Keynes’s views became increasingly influential. The view that government could intervene in the economy to attain specific employment and output goa
ls became firmly established in the United States with the passage of the Employment Act of 1946.
2. During the 1960s economists began to talk about fine tuning the economy. They believed the government could u the tools available to manipulate unemployment and inflation to hit fairly preci targets.
TEACHING TIP: The word to describe this is “hubris.”
3. During the 1970s and early 1980s “fine tuning” became irrelevant as macroeconomists were forced to substantially revi their models. The economy simply did not behave the way it had before 1970. There was also the vexing problem of stagflation (stagnation and inflation). This is the term Paul Samuelson coined to describe the combination of high unemployment and high inflation that characterized this era. Conquently, economists and the public lost their faith in the simplified Keynesian model ud during the 1950s and 1960s. What had been “conventional wisdom” during the 1960s was largely consigned to the dustheap of failed theories.
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