23 An Introduction to Macroeconomics Mc Graw-Hill Irwin Copyright

23 An Introduction to Macroeconomics Mc. Graw-Hill/Irwin Copyright © 2012 by The Mc. Graw-Hill Companies, Inc. All rights reserved. .

Performance and Policy • Real GDP • Corrects for price changes • Nominal GDP • Uses current prices • Unemployment • Inflation • Increase in overall level of prices LO 1 23 -2

Performance and Policy • Can governments: • Promote economic growth? • Reduce severity of recession? • Is monetary or fiscal policy more • • LO 2 effective at mitigating recession? Is there a tradeoff between inflation and unemployment? Is anticipated or unanticipated government policy more effective? 23 -3

Performance and Policy • Output growth • 2. 7% per year 1995 -2007 • Unemployment rate • 4. 6% in 2007 • Inflation rate • 2. 7% in 2007 LO 2 23 -4

Modern Economic Growth • Standard of living measured by output • • LO 3 person No growth in living standards prior to Industrial Revolution Modern economic growth • Output person rises • Not experienced by all countries 23 -5

Global Perspective LO 3 23 -6

Savings and Investment • Saving • Trade-off current for future • • LO 4 consumption Investment • Financial investment • Economic investment Banks and financial institutions 23 -7

Uncertainty, Expectations, and Shocks • The future is uncertain • Expectations affect investment • Shocks • What happens is not what you • • LO 5 expected Demand shocks Supply shocks 23 -8

Uncertainty, Expectations, and Shocks • Demand shocks and flexible prices • Price falls if demand is low • Sales unchanged • Demand shocks and sticky prices • Maintain inventory • Sales change • Business cycles LO 5 23 -9

Demand Shocks Flexible Prices Price $40, 000 $37, 000 $35, 000 DL DM DH 900 Cars Per Week LO 5 23 -10

Demand Shocks Price Fixed Prices $37, 000 DH DL 700 900 DM 1150 Cars Per Week LO 5 23 -11

Sticky Prices • Many prices are sticky in the short run • Consumers prefer stable prices • Firms want to avoid price wars • All prices are flexible in the long run • Firms adjust to unexpected, but permanent changes in demand LO 5 23 -12