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Chapter 6

MGEA05H3 Chapter Notes - Chapter 6: Business Cycle, Deflation, John Maynard Keynes

Economics for Management Studies
Course Code
Michael H O

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Chapter 6 - The Big Picture
Great Depression of 1930s was by far the harshest recession Canada has
ever endured. Unemployment raised from 2% to almost 20%
Macroeconomics focuses on the behaviour of the economy as a whole
Microeconomics focuses on how decisions are made by individuals and
firms and the consequences of those decisions. Macroeconomics
examines the overall behaviour of the economy - how the actions of
economy all the individuals and firms in the economy interact to produce a
particular economy-wide level of economic performance.
Many thousands or millions of individual actions compound upon one
another to produce an outcome that isn't simply the sum of those
individual actions
The paradox of thrift: when families and businesses are worried about
the possibility of economic hard times, they prepare by cutting their
spending. This reduction in spending depresses the economy as
consumers spend less and businesses react by laying off workers. As a
result families and businesses may end up worse off than if they hadn't
tried to act responsibliy by cutting their spending. Paradox b/c instead of
saving more they end up harming everyone
The combined effect of indivudal decisions can have results that are very
different from what any one individual intended, results that are sometimes
Macroeconmists are concerned with questions about policy, about what
the government can do to make macroeconmic performance better
Before the 1930s, economists tended to regard the economy as self-
regulating: problems such as unemployment are resolved without
government intervention, through the working of the invisible hand. Great
Depression changed this view.
In 1936, British economist John Meynard Keynes published The General
Theory of Employment, Interest, and Money, a book that transformed
macroeconmics. According to Keynesian economics, a depressed
economy is the result of inadequate spending. Keynes argued that
governnment intervention can help a depressed economy through
monetary policy and fiscal policy.
Monetary policy uses the quantity and/or the growth rate of money to
affect economic activity. This policy influences the inflation rate, interest
rates, exchange rates, and other important short-run economic variables.
The Bank of Canada, Canada's central bank, is responsible for
implementation of canadian monetary policy.
Fiscal policy uses changes in taxes and government spending to affect
overall economic activity. The federal, provincial, and municipal
governments also design and implement fiscal policy
Recessions, or contractions, are periods of economic downturn when
output and employment are falling.
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