guía de estudio 5 - perspectiva macro

8/9/2019 Gua de Estudio 5 - Perspectiva Macro

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4A FIRST LOOK ATMACROECONOMICS*

K e y C o n c e p t s

Origins and Issues of MacroeconomicsModern macroeconomics began during the Great De-pression, 19291939. The Great Depression was adecade of high unemployment and stagnant produc-tion throughout the world. Macroeconomics initiallyfocused on short-term problems, such as high unem-ployment. Recently long-term problems, such as eco-

nomic growth, have come to be considered vital.

Economic Growth and FluctuationsEconomic growth is the expansion of the economysproduction possibilities. It is measured by the increasein real gross domestic product, also called real GDP.Real GDP is the value of the total production of all thenations farms, factories, shops, and offices measured inthe prices of a single year.

Potential GDP is the quantity of real GDP that isproduced when all the economys labor, capital, land,and entrepreneurial ability are fully employed.

The productivity growth slowdown was theslowing of the growth rate of output per person thatoccurred during the 1970s.

The periodic but irregular up-and-down movement inproduction is the business cycle. It occurs as realGDP fluctuates irregularly around potential GDP. Abusiness cycle has four parts:

Trough the lower turning point, when a reces-sion ends and an expansion begins.

Expansion a period of time during which realGDP increases.

Peak the upper turning point, when an expan-sion ends and a recession begins.

Recession a period during which real GDPdecreases for at least two successive quarters.

This chapter is Chapter 20 in Economics.

The most recent recession began in the first quarter of2001 and ended in the fourth quarter of 2001. Thisrecession was milder than previous recessions. A depres-sion is a severe recession.

Between 1976 and 2006, the growth rate of realGDP in the United States was about equal to thatof the rest of the world but was more variable.

Between 1996 and 2006, of the advanced econo-mies Japan grew the slowest and the newly indus-trialized nations of Asia grew the fastest.

The Lucas wedge is the accumulated loss of outputthat results from a slowdown in the growth rate of realGDP per person. The productivity growth slowdownof the 1970s has created a Lucas wedge of $72 trillion.The Okun gap (the output gap) is the gap between realGDP and potential GDP. The recessions since 1973have created an accumulated Okun gap of $3.3 trillion.

Economic growth expands future consumption possi-bilities. However, economic growth allows less currentconsumption as resources must be devoted to capitalaccumulation and might lead to more rapid depletionof resources and more pollution.

Jobs and UnemploymentIn 2006, 143 million people had jobs. More new jobsare created during expansions and jobs are lost duringrecessions.

A person is unemployed if he or she does not have a jobbut is looking for work. The unemployment rate isthe number of unemployed workers as a percentage ofall the people who have jobs or are looking for one.

Unemployment increases during a recession anddecreases during an expansion.

The average unemployment rate in the UnitedStates is higher than in Japan, but lower than inCanada and Western Europe.

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Unemployment is a serious problem because unem-ployed workers lose income and can find their future

job prospects limited.

Inflation and the DollarThe price level is the average of the prices people payfor all the goods and services they buy. Inflation occurs

when prices rise. The inflation rate is the annual per-centage change in the price level. Deflation occurs

when the inflation rate is negative so that the price levelfalls. In recent years, deflation has been rare in theUnited States.

Inflation was high in the 1970s and early 1980s, buthas been lower since then, though it has been on an up-tick since 2002. The U.S. experience with inflation hasbeen similar to that of other industrialized nations.Inflation in developing countries is generally higherthan that in developed countries.

Inflation reduces the value of money, so unpredictableinflation makes transactions spread over time moredifficult to carry out. In times of high inflation, peopleuse resources to predict inflation rather than to producegoods and services. Ahyperinflation is a period whenthe inflation rate exceeds 50 percent per month. Atsuch rates, inflation causes economic chaos.

The exchange rate is the value of the U.S. dollar interms of other currencies. The exchange rate fluctuates,sometimes rising in valueappreciatingand some-times falling in valuedepreciating.

Surpluses, Deficits, and DebtsAgovernment budget surplus occurs when the gov-ernment collects more in taxes than it spends; a gov-ernment budget deficit occurs when the governmentspends more than it collects in taxes. The U.S. federalgovernment had a surplus between 1998 to 2000 and adeficit after 2001.

The current accountbalance equals exports minusimports plus interest income received from the rest ofthe world minus interest expense paid to the rest of the

world. Payments (for, say, imports) greater than re-ceipts (from, say, exports) create a current account defi-

cit. The United States has had a current account deficitsince 1980.

The government debt is the national debt. The na-tional debt is the total amount the government owes. Agovernment budget deficit increases the national debt.

The U.S. international debt is the amount U.S. resi-dents owe to foreigners. Current account deficits in-crease the U.S. international debt.

Macroeconomic Policy Challengesand Tools

Five widely agreed upon challenges for macroeconomicpolicy are:

Boost economic growth Keep inflation low Stabilize the business cycle Reduce unemployment Reduce the government and international deficits

Achieving these challenges will help the economy.

The two general macroeconomic policy tools the gov-ernment has at hand to help attain the policy goals are:

Fiscal policy setting and changing tax rates andthe amount of government spending. The federalgovernment can use fiscal policy in efforts to ac-complish some of the policy challenges.

Monetary policy changes in the interest rateand the amount of money in the economy. Mone-tary policy is under the control of the Federal Re-serve, or Fed. The Federal Reserve can use monetarypolicy to try to meet some of the policy challenges.

H e l p f u l H i n t s

1. THE MACROECONOMIC CHALLENGES : Thechapter discusses five widely agreed upon macro-economic challenges. As you study the forthcomingchapters, keep these challenges in mind because ul-timately we return to see what policies, if any, thegovernment might adopt to help meet these goals.

While these challenges are widely agreed upon,there is dispute among economists about rankingtheir importance as well as dispute about theproper polices necessary to attain some of them.The first disagreement matters because at times thegoals collide, so that achieving one causes setbacks

in others. The second area of contention arises evenwith agreement on the ranking of the goals becausethere is disagreement amongst macroeconomistsabout how to meet the macroeconomic challengesand that this can lead to different policy advice.


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A F I R S T L O O K A T M A C R O E C O N O M I C S 6 7

Q u e s t i o n s

True/False and ExplainOrigins and Issues of Macroeconomics

11. Modern macroeconomics was developed during thedecade of the Great Depression.

12. All macroeconomic goals are long-term goals.

Economic Growth and Fluctuations

13. Real GDP is the amount of goods and services thatare produced in a year when resources are fully em-ployed.

14. Real GDP per person grew slowly in the 1960s andquite rapidly in the 1970s.

15. The trough is the lower turning point of the busi-ness cycle.

16. Since 1996, the growth rate of real GDP has beenlower in Japan than in the United States.

Jobs and Unemployment

17. Unemployment rates in recent years have beenlower than those during the Great Depression.

18. In the recession phase of a business cycle, the un-employment rate rises.

Inflation and the Dollar

19. The inflation rate can never be negative.

10. Inflation in the United States has been similar tothat in other industrialized nations.

Surpluses, Deficits, and Debts

11. Ignoring interest income and expense, if U.S. ex-ports exceed U.S. imports, the United States has acurrent account deficit.

12. A current account deficit definitely harms the na-tion.

Macroeconomic Policy Challenges and Tools

13. The government can use fiscal policy and monetarypolicy to pursue its macroeconomic goals.

14. Fiscal policy includes government engineeredchanges in the interest rate.

Multiple Choice QuestionsOrigins and Issues of Macroeconomics

11. During the Great Depression,

a. the major focus of macroeconomics switched topreventing inflation.

b. the productivity growth slowdown occurred.c. economists switched their focus so that macro-economics began to emphasize business cycles.

d. long-term economic growth was the major prob-lem facing capitalist nations.


12. Real GDP

a. measures only the output of real goods, such asmachines and food, not unreal things such asservices.

b. includes all the goods and services produced inthe economy, including those produced in the

home.c. is measured in the prices of a single year in order

to eliminate the effects of inflation.d. is the amount of goods and services that the na-

tion is able to produce when its resources arefully employed.

13. Which is the proper order for the business cycle?

a. Peak, recession, trough, expansionb. Peak, trough, expansion, recessionc. Peak, expansion, trough, recessiond. Peak, recession, expansion, trough

14. Real GDP rose in all four quarters of 2003; thus2003 was definitely a year

a. of expansion.b. with a business cycle peak.c. of recession.d. with a business cycle trough.

15. Which of the following statements about the pro-ductivity growth slowdown is correct?

a. The productivity growth slowdown was confinedto the United States.

b. The productivity growth slowdown occurred in

the 1960s.c. The growth of potential GDP slowed during theproductivity growth slowdown.

d. Extremely low oil prices were a major cause ofthe productivity growth slowdown.


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16. Since 1976, compared to the rest of the world, realGDP growth in the United States was ____ variablethan in the rest of the world and was ____ the worldgrowth rate.

a. more; greater thanb. less; equal to

c. more; slightly less thand. less; equal to

17. The accumulated loss of output that results from aslowdown in the growth rate of real GDP per personis called the ____

a. Lucas wedge.b. Okun gap.c. output gap.d. growth gap.

18. Which of the following is NOT a cost of more rapideconomic growth?

a. Current consumption must be foregone in orderto develop new technology or new capital.

b. Environmental damage may increase because ofeconomic growth.

c. Consumption possibilities expand in the futurebecause of economic growth.

d. The Lucas wedge increases in size.


19. In 2006, ____ people had jobs in the United States.

a. 1,000,000b. 143,000,000

c. 85,000,000d. 180,000,000

10. The unemployment rate generally rises during ____in the business cycle.

a. a peakb. a recessionc. a troughd. an expansion

11. Comparing the United States, Western Europe, andJapan, in recent years the unemployment rate hasbeen highest in

a. the United States.b. Western Europe.c. Japan.d. the United States and Japan.


12. In the United States, the average inflation rate washighest over the decade of the

a. 1960s.b. 1970s.c. 1990s.

d. 2000s.

13. Which of the following is a cost of unpredictableinflation?

a. People use resources to predict inflation ratherthan to produce output.

b. It becomes too easy to obtain loans.c. Deflation becomes an increasing problem.d. All of the above are costs of unpredictable

inflation.


14. Which of the following statements about the gov-ernment budget is correct?

a. Whenever tax revenues exceed governmentspending, the government has a budget deficit,

b. As a fraction of GDP, the budget deficit has in-creased steadily since 1980.

c. The government has had a budget deficit everyyear since 1970.

d. None of the above are correct.

15. Since 1980, the U.S. current account has had

a. a deficit that has been large at times and small atother times.

b. a surplus that has been consistently large.c. a deficit that has gotten consistently larger.d. alternating small surpluses and deficits.


16. Which of the following is NOT a policy challenge?

a. Boosting long-term growth.b. Lowering unemployment.c. Stabilizing the business cycle.d. Raising the government budget deficit.

17. Which of the following is an example of monetarypolicy?

a. Changing the interest rate.b. Changing government spending.c. Changing tax rates.d. Changing the governments deficit.


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Short Answer Problems1. What was the productivity growth slowdown? Why

is it important?

2. Suppose that real GDP per person in the UnitedStates in 2007 is $30,000.

a. If the U.S. real GDP per person grows at 2 per-cent per year, what is real GDP per person in2008? In 2009? In 2012? In 2017?

b. If the U.S. real GDP per person grows at 3 per-cent per year, what is real GDP per person in2008? In 2009? In 2012? In 2017?

c. In 2017 what is the difference in real GDP perperson if the growth rate is 3 percent per yearversus 2 percent? What does this result illus-trate?

3. Between 1996 and 2006, how has the growth rateof real GDP in the United States compared to thatin Japan? To that of the European Union? To thatof the newly industrialized nations of Asia?

4. What happens to real GDP and the unemploymentrate during each of the four phases of the businesscycle?

5. What are the costs of unemployment?

6. How has inflation in the United States comparedto inflation in other countries?

Youre the Teacher1. After class, your friend asks you: You know, I

wonder whats more important: stabilizing thebusiness cycle or boosting long-term economicgrowth. Both seem important, and it would be coolif we could achieve both of these goals, but do youthink one is more important than the other? Youknow, what I mean is that if we can actuallyachieve only one of these goals, which one do youthink it ought to be? Your friend has posed a verythoughtful question; what is your equally thought-ful response?


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A n s w e r s

True/False AnswersOrigins and Issues of Macroeconomics

11. T The initial focus of modern macroeconomicswas on overcoming the very high unemploy-ment that existed in the Great Depression.

12. F Short-term goals, such as avoiding a depression,as well as long term goals, such as the rate ofeconomic growth, are both important parts ofmacroeconomics.


13. F Potential real GDP is the amount of goods andservices produced when all resources are fullyemployed.

14. F Real GDP per person started growing more

slowly in the 1970s. Indeed, that was the pro-ductivity growth slowdown.

15. T After the trough, the economy enters the expan-sion phase of the business cycle.

16. T Between 1996 and 2006, the United States hasgrown more rapidly than Japan.


17. T In the Great Depression, unemployment ratesapproximated 25 percent; during the past 50years, at its monthly peak, the unemploymentrate was approximately 12 percent.

18. T As real GDP falls during a recession, the unem-ployment rate rises.


19. F The inflation rate can be negative (called defla-tion), though in recent years inflation has rarelybeen negative.

10. T In industrial nations worldwide, the inflationrate was very high in the 1970s and lower in re-cent years.


11. F If exports exceed imports, the United States hasa current account surplus.

12. F If the current account deficit occurs because thenation is buying capital equipment and otherinvestments from abroad, the deficit can help

the nation; if the nation is buying consumptiongoods and services, it can prove harmful to thenation.


13. T In chapters to come, we explore fiscal and mone-

tary policy in detail.14. F Interest rate changes are part of monetary policy.

Multiple Choice AnswersOrigins and Issues of Macroeconomics

11. c During the Great Depression, the extraordinar-ily high unemployment rates caused economiststo stress short-term goals, such as reducing theseverity of recessions or depressions.


12. c By measuring prices in a single year, real GDPeliminates the effects of inflation.

13. a Keep in mind that the business cycle is not asmooth cycle; some expansions last longerthan others, some troughs are deeper than oth-ers, and so on.

14. a By definition, an expansion is a period of timeduring which real GDP increases.

15. c The slowdown in productivity growth is re-flected in the slower growth rate of potentialGDP.

16. c On average the United States has grown only

slightly less rapidly than the rest of the world, sothe U.S. share of world GDP has fallen onlyslightly from 21 percent to 20 percent.

17. d The question gives the definition of the Lucaswedge.

18. c The expansion of future consumption possibili-ties is a benefit of economic growth.


19. b In recessions, jobs are destroyed and in expan-sions more jobs are created.

10. b As real GDP falls in a recession, the unemploy-

ment rate rises.11. b Relatively high unemployment rates in Western

Europe have emerged as a major economic prob-lem in those countries.


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12. b The inflation rate was markedly highest duringthe 1970s.

13. a By becoming amateur inflation predictors,people take time and effort away from their oc-cupations and so the nation produces fewer

goods and services.


14. d Until 1998 to 2000, when it had a budget sur-plus, the government had had a budget deficitevery year since 1970.

15. a The United States has had a deficit that initiallybecame large, diminished in size, and then be-came even larger than before.


16. d Loweringany government budget deficit is the

macroeconomic policy challenge.17. a Monetary policy includes changing the interest

rate and/or the nations money supply. Theother answers are examples of fiscal policy.

Answers to Short Answer Problems1. The productivity growth slowdown refers to period

that started in the 1970s when growth in real GDPfell. During the 1970s, growth in real GDP slowedand has remained lower since than. Growth in realGDP is important because economic growth in-creases peoples consumption possibilities; the largerreal GDP, then the more goods and services peoplecan consume. Basically, because of the productivitygrowth slowdown, today we all have smaller in-comes than we would have had if productivitygrowth had not slowed.

2. a. In 2008 real GDP per person equals $30,600; in2009 it equals $31,212; in 2012 it equals$33,122.42; and in 2017 it equals $36,569.83.

b. In 2008 real GDP per person equals $30,900; in2009 it equals $31,827; in 2012 it equals34,778.22; and in 2017 it equals $40,317.49.

c. The difference is $3,747.66, or almost $4,000

per person. This result illustrates the point of theLucas wedge, that a relatively small difference inthe growth rate of real GDP per person caneventually make a large difference in the totalamount of real GDP per person.

3. Between 1996 and 2006, real GDP has grown mostrapidly in the new industrialized nations of Asia andhas grown most slowly in Japan. The growth rate ofreal GDP in the European Union tops that in Ja-pan, but the growth rate of real GDP in the UnitedStates exceeds that in the European Union.

4. During the recession phase of the business cycle,real GDP falls. During this phase of the cycle, theunemployment rate rises, although the rise in un-employment starts somewhat after the time that realGDP starts falling. At the trough, real GDP reachesits lowest point below potential GDP, and soonthereafter the unemployment rate is at its highestpoint over the business cycle. The trough is theturning point between the recession phase and theexpansion phase. During the expansion, real GDPgrows and the unemployment rate generally falls. Atthe end of an expansion, the economy reaches thepeak of the business cycle. The peak is characterized

by real GDP at its highest point above potentialGDP and the rate of unemployment is either thenor soon thereafter at its lowest point over the busi-ness cycle.

5. There are two important costs of unemployment:one paid immediately and the other incurred overa longer time horizon. First, and immediately, un-employed workers suffer a loss of income and thenation loses production. Second, and perhapsequally significant, when workers are unemployedfor long periods of time, their skills and abilities de-teriorate, which hurts their future job prospects.

6. Inflation in the United States has been similar tothat in other industrialized countries. In particular,inflation rates rose in the 1970s and early 1980s andhave fallen substantially since then.

Youre the Teacher1. You are talking about the Lucas wedge and the

Okun gap and its an excellent question. I asked ourteacher about it, and our teacher said that econo-mists dont agree about which of these macroeco-nomic challenges is more important.

Some economists think that boosting long-term

growth is most important. They point to the Lucaswedgeits $72 trillion!! Thats an immenseamount. They also point out that if we are able toincrease the growth rate of potential real GDP by 1percentage point, after one generation, or two dec-


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ades, real GDP per person would be over 22 per-cent higher than otherwise. That means that ourconsumption possibilities would expand by 22 per-cent so that, on the average, we could buy 22 per-cent more goods and services than otherwise. Theseeconomists also point out that this 22 percent in-

crease in consumption possibilities dwarfs the fall ofreal GDP per person in a recession. So they arguethat increasing the growth rate of potential GDP ismore important than eliminating business cycles.

Other economists disagree. Although they agreethat boosting the growth rate of potential real GDPis important, they point out that sustaining even a 1percent increase in real GDP over 20 years is ex-tremely difficult. And they say that eliminating theLucas wedge simply isnt possible. Instead, they ar-

gue that taming the business cycle should be con-sidered the major goal of macroeconomic policy.They contend that this task is easier than increasingthe growth rate of potential real GDP. Indeed,some of these economists suggest that we havetamed the business cycle a bit because there hasnt

been a recession nearly as severe as the Great De-pression since 1940.

But our teacher says that neitherof these objectivesis easy to meet because if either were easy, wed al-ready be doing it. But, both challenges really areimportant. You know, I learned that our instructorbecame an economist exactly because these are cru-cial challenges and that by becoming a professionaleconomist, our instructor hoped to help resolvethese issues.


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C h a p t e r Q u i z

11. The unemployment rate was approximately 25 per-cent

a. during the Great Depression.

b. during the most recent recession.c. during the 1974-1975 recession.d. in most years during the 1990s.

12. If the price level is rising, then the inflation rate

a. is positive.b. is zero.c. is negative.d. could be positive, negative, or zero depending on

the speed with which prices are rising.

13. Economic growth can be viewed as outward shiftsthe nations PPF. Economic growth is the expansion

in the economys real GDP.a. Both sentences are true.b. The first sentence is true and the second is false.c. The first sentence is false and the second is true.d. Both sentences are false.

14. Which of the following statements is correct?

a. Real GDP is the same as potential GDP.b. Real GDP can be larger or smaller than potential

GDP.c. In the United States, real GDP generally grows

at rate of 10 percent per year.d. Since 1960, real GDP has decreased about as

many years as it has increased.

15. The productivity growth slowdown refers to the

a. increase in output growth during the 1970s.b. decrease in output per person growth during the

1970s.c. increase in employment growth in the 1990s.d. recession that occurred in 2001.

16. You notice that over the last year the unemploymentrate has gone from 7.2 percent to 5.8 percent andgrowth in real GDP has increased. So over this yearthe economy is likely

a. in a recession.b. at the trough of a business cycle.

c. in an expansion.d. at the peak of a business cycle.

17. Unemployment is a problem because

a. it leads to higher inflation.b. it leads to deflation.c. there is lost income and production.d. real GDP does not measure the unemployment

rate.

18. One of the costs of increasing growth in GDP is

a. it does not increase the wealth available for all.b. it makes too many goods available for consump-

tion in the future.c. people must give up current consumption.d. inflation must rise.

19. In recent decades, unemployment in the UnitedStates has been

a. higher than in Western Europe.b. lower than in Japan.c. lower than in Canada.d. None of the above answers are correct.

10. The government collects $2,500 billion in taxes andspends $2,550 billion. The government has

a. a budget surplus of $2,500 billion.b. a budget surplus of $50 billion.c. a budget deficit of $2,550 billion.d. a budget deficit of $50 billion.

The answers for this Chapter Quiz are on page 265


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guía de estudio 5 - perspectiva macro

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