Where You Are!

1. Where You Are! Economics 201 – Principles of Macroeconomics Tuesday and Thursday from 2:00 to 3:15PM Discussion – Friday from 10:00 – 11:50AM Text: Macroeconomics, Principles & Applications, Hall & Lieberman, Cengage Learning, 6th edition. Course website: http://www.terpconnect.umd.edu/~jneri/Econ201

2. Who Am I Dr. John Neri Office Location: 1102B Morrill Hall Office Hours: Tand Th: 3:30pm – 4:30pm

3. Illness or Family Emergency & Exams Important Steps to follow: • Pre-Notification: If you are sick or have a family emergency and cannot take an exam, you must contact Professor Neri before the exam. You must fill out the Request for Excuse form. • Written Verification: Illness or family emergency must be subsequently verified in writing by a physician, the Student Health Center • If both steps are not followed, you will not be excused from the exam

4. Students using the DSS facility must meet with me within the first 2 weeks of classes.

5. Advice • Course is cumulative • Important to keep up with the lectures, and readings each week

6. A Little Macroeconomic History: The Great Depression (1929 to 1933) Worldwide economic crisis. Total amount of goods and services produced in the U.S. fell by more than 25% Unemployment up to 25% 1936: John Maynard Keynes “The General Theory of Employment, Interest, and Money” Replaces classical theory by theory based on: Aggregate (Total) Demand Wage and price rigidities Slow adjustments Birth of macroeconomics as a field separate from microeconomics

7. John Maynard Keynes Keynes believed government should intervene in the economy to stimulate the level of output and employment Keynes was not a socialist. He was a capitalist. He simply felt capitalism could be unstable. During periods of low private demand, the government should stimulate aggregate (total) demand to lift the economy out of recession.

8. private demand? Private demand? Public demand? What can the government do to stimulate aggregate total demand (private and public) to lift the economy out of recession. Big, Big Question – does this stuff work?

9. Recent examples of government attempts to stimulate the economy: Bush Administration: Economic Growth and Tax Relief Reconciliation Act of 2001 – reduced individual income tax rates. Set the stage for the “fiscal cliff” debate last year. Economic Stimulus Act 2008 (Bush Administration tax rebates in 2008) Obama Administration: American Recovery and Reinvestment Act (ARRA) of 2009 - $787 billion combination of spending and tax cuts.

10. Chapter 5 What Macroeconomics Tries to Explain: Introduction to Macroeconomics • Macroeconomics: • Examines the economy as a whole. • Focuses on total national income • Deals with aggregates such as aggregate • consumption and investment, and • Looks at the overall level of prices instead of • individual prices.

11. Microeconomics Examines the functioning of individual industries and the behavior of individual decision-making units - business firms and households.

12. INTRODUCTION TO MACROECONOMICS aggregate behaviorThe behavior of all households and firms together. sticky pricesPrices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.

13. Macroeconomic Goals • Three major goals (concerns) of macroeconomics: • Economic growth - Output growth (what we produce and can we keep it growing) • Full Employment - Low Unemployment • Stable Prices - Inflation and deflation

14. Economic Growth 1. Economic growth • Increase in production of goods and services that occurs over long periods of time • Real gross domestic product (real GDP) • Total quantity of goods and services produced in a country over a year

15. Economic Growth • When real GDP rises faster than the population - Output per person rises • Average standard of living rises • The U.S., 1929 to mid-2011 • Real GDP increased dramatically • Increase in population (more workers) • Rate of growth varied

16. shows real GDP—total annual U.S. production of goods and services (valued at 2005 prices) from 1930 through the first half of 2011. Real GDP has grown dramatically, much faster than the population. As a result, real GDP per capita has grown rapidly as well –NEXT SLIDE U.S. Real GDP: 1930 -2011

17. (b) U.S. Real GDP Per Capita: 1929 -2011

18. But, the Rate of Growth Varies! We have Business Cycles • Expansion • Period of increasing real GDP • Recession • Period of significant decline in real GDP • Severe or mild • Can last several years or less than a single year

19. peak trough • Over time, real GDP fluctuates around an overall upward trend. Such fluctuations are called business cycles. When output rises, we are in the expansion phase of the cycle; when output falls, we are in a recession. The Business Cycle

20. The Business Cycle expansion or boom The period in the business cycle from a trough up to a peak during which output and employment grow. contraction, recession The period in the business cycle from a peak down to a trough during which output and employment fall.

21. The Business Cycle • Depression • An unusually severe recession • 1929-1933 • U.S. output dropped by more than 25 percent • Since 1959 • Three severe recessions (in 1974–75, 1981–82, and 2008–2009) • And several more mild ones

22. The Components of the Macroeconomy • To see the “big picture”, macroeconomics focuses on four groups. Participants in the economy are divided into four broad groups: • households (you and me. We supply labor services and buy stuff), • business firms (they higher services of households and make they stuff), • government (the public sector) • rest of the world (exports and imports).

23. Recent History - Households

24. Recent History – Business Firms

25. Recent History - Government

26. Recent History – The Rest of the World Exports and Imports $ Billions - real

27. Bringing the Four Components Together Gross Domestic Product Expansion Gross Domestic Product – a measure of the total value of goods and services produced. Recession

28. Questions: Growth Rate of output & Income • What causes Expansions and Recessions? • What has caused the current recession - often referred to as the “Great Recession”? • What macroeconomic policies can be used to offset recessions or to sustain expansions?

29. Second Macroeconomic Goal 2. High Employment(or low unemployment) • Unemployment • Economy is not achieving its full economic potential • Affects the distribution of economic well-being among our citizens • Unemployment rate • Percentage of the workforce that is searching for a job but hasn’t found one

30. The unemployment rate fluctuates over time. During the Great Depression of the 1930s, unemployment was extremely high, reaching 25 percent in 1933, and plunged as the United States entered World War II. From the end of the war through the first half of 2011, it averaged 5.7%, with dramatic spikes upward during recessions, such as the mid-1970s, the early 1980s, and 2008 to 2011. Unemployment Rate: 1920 - 2011

31. High Employment • Unemployment rate is never zero • There are always somepeople looking for work • Even when the economy is doing well • Employment Act of 1946 • Federal government - to “promote maximum employment, production, and purchasing power” • Full Employment and Balanced Growth Act, 1978 • Called for an unemployment rate of 4 percent

32. Unemployment Rate The percentage of the labor force that is unemployed. = Number of Unemployed Workers Labor Force • Computing the unemployment rate for the months of July 2009 and July 2012: • 2009 2012 • Labor force: 154.5 million 155.0 million • Employed: 140.0 million 142.2 million • Unemployed: 14.5 million 12.8 million Unemployment rate2009 = Unemployment rate2012 =

33. Recent History - Unemployment Rate : Jan. 2002 to Dec. 2012 7.8% 4.6% In this last recession: Number of people unemployed increased from 7 million to 14 million

34. Questions: Unemployment Rate • What causes unemployment to rise and fall? • Can Monetary and Fiscal Policies be used to keep the unemployment rate low? • What are the obstacles?

35. Third Macroeconomic Goal 3. Stable Prices • Inflation rate • Percentage increase in the average level of prices • DeflationA decrease in the overall price level. • Dis-inflationa decrease in the rate of increase in the overall price level • HyperinflationA period of very rapid increases in the overall price level.

36. In most years, the inflation rate has been positive. The overall price level increased during those years. And during some periods (such as after World War II, and for a few years in the 1970s and early 1980s), the U.S. experienced double-digit inflation. For the last two decades, however, the U.S. inflation rate has been very low. U.S. Annual Inflation Rate, 1920–2011

37. INFLATION AND DEFLATION Inflation is measured as the percent increase in the overall price level: % per year Price of IPhone 2008 = $50.00 Price of IPhone 2009 = $60.00 Percent increase = ?

38. Examples of Hyperinflation: 1980s and 90s

39. The Components of the Macroeconomy The Circular Flow Diagram circular flowA diagram showing the income received and payments made by each sector of the economy. transfer paymentsCash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. They include Social Security benefits, veterans’ benefits, and welfare payments.

40. Simple Circular Flow The circular flow diagram shows the income received and payments made by each sector of the economy.