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ECON 1132 (72)
Chapter 4

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Boston College
ECON 1132
Glen Peterson

Chapter 4 – Overview of Macroeconomics 2 major themes of Economics: the business cycle and economic growth Business cycles – patterns of expansion and contraction in the economy Macroeconomics studies the sources of unemployment and high inflation. The goal is low, stable inflation Main goal: increase the rate of economic growth (growth of GDP). This may require greater investment in education and capital. Other goals include low unemployment and stable prices. Keynes’theories: 1. High unemployment and underused capital can persist in market economies 2. Fiscal and monetary policies can affect output Output – providing the goods and services that the public desires GDP – Gross Domestic Product, the measure of the market value of all final goods and services produced in a country in a year. - Nominal GDP: measured in actual market prices - Real GDP: calculated at constant prices GDP −GDP t t−1 % growth rate of real GDP in the year t = 100 x GDP t−1 Economic growth – when advanced economies exhibit steady long-term growth in real GDP and an improvement in living standards Potential GDP – maximum sustainable level of output that the economy can produce - When output rises above potential output, price inflation rises. When output is below potential, it leads to high unemployment. - Determined by the economy’s productive capacity, which depends upon inputs available and technological efficiency Recession – a period of significant decline in total output, income, and employment usually lasting a few months Depression – a severe recession when output is strained that usually requires assistance from monetary or fiscal policy The unemployment rate usually reflects the movement of the business cycle. When output falls, the demand for labor falls, and the unemployment
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