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Chapter 6

ECO102H1 Chapter Notes - Chapter 6: John Maynard Keynes, Monetary Policy, Business Cycle

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Michael Ho

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Chapter 6: Macroeconomics: The Big Picture
The Nature of Macroeconomics
Macroeconomic Questions
Microeconomics focuses on how decisions are made by individual firms and the
consequences of those decisions
Macroeconomics examines the overall behavior of the economy--how the actions
of all individuals and firms in the economy interact to produce a particular
economy-wide level of economic performance
Macroeconomics: The World is Greater Than the Sum of its Parts
Paradox of Thrift: When families and businesses are worried about the possibility
of economic hard times, they prepare by cutting their spending (i.e., increasing
their savings). This 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 responsibly by cutting their
Macroeconomics: Theory and Policy
Before the 1930's economists tended to regard the economy as self-regulating:
they believed that problems would be corrected through the working of the
invisible hand and that government attempts to improve the economy’s
performance would be ineffective at best--and would probably make things worse
The Great Depression change all that
John Maynard Keynes
Keynesian economics: argues a depressed economy is the result of
inadequate spending
Argued that government intervention an help a depressed economy
through monetary and fiscal policy
Monetary policy uses changes in the quantity of money to alter
interest rates, which in turn affects overall spending
Fiscal policy uses changes in taxes and government spending to
affect overall spending
Established the idea that managing the economy is a government
The Business cycle
Charting the Business Cycle
Recessions, or contractions, are periods of economic downturn when
output and employment are falling
Expansions, or recoveries, are periods of economic upturn when output
and employment are rising
The business cycle is the short-run alternation between recessions and
Business-cycle peak: the point at which the economy turns from
expansion to recession
Business-cycle trough: the point at which the economy turns from a
recession to expansion
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