Macroeconomics is the study of the aggregate economy.

Chapter One: Notes -- Overview of the U.S. Economy

What is Macroeconomics and Why Do We Study It?

"Are you better off now than you were four years ago?" This was the campaign slogan that President Reagan used to defeat President Carter in the 1980 elections. Many people in 1980 felt that they were not better off than they were in 1976. Indeed, the economy went through a tumultuous period in the 1970s. The U.S. economy felt the impact of two oil shocks, high inflation, slow productivity growth, and falling real wages. It is not surprising that Reagan defeated Carter in that election. People were upset at the high inflation rates of the 1970s and they blamed Carter for a portion of their problems. But was Carter really to blame? Could he have prevented or slowed inflation? If so, how?

President Bush (Senior) and then Senator Dole lost consecutive elections to President Clinton in 1992 and 1996. In 1992 the economy had a 7.5 percent unemployment rate and people blamed Bush for the economy's woes. With hindsight we know that the economy technically pulled out of recession in the Spring of 1991, one and a half years before the November 1992 election. But people were still unhappy about the state of the economy and blamed Bush for a portion of their problems. Was Bush really to blame? Was there something that Bush could have done to lower unemployment? If so, why didn't he act? In 1996, the economy was flourishing with low unemployment and inflation. President Clinton won re-election in a land slide victory.

Alan Greenspan was the chairman of the U.S. Central Bank (the Federal Reserve) between 1987 and January 2006. Today his is a household name. Ben Bernanke is the new chairman of the Federal Reserve. People commonly believe that he has the power to "set interest rates." In June 2006 the Federal Reserve's monetary policy committee, the Federal Market Open Committee (FOMC) raised the federal funds rate for the seventeeth time in as many meetings. What is the federal funds rate and how does the Fed change this rate? What impact do rate changes have on the economy? Should the F.O.M.C. be raising or lowering rates today?

Production in economies tends to move in a cyclical motion--called the business cycle--with waves of output growth and job creation (and sometimes with high rates of inflation), followed by periods of output contraction and high unemployment. The labor force in the United States consists of a bit more than 150 million people. When one percent of the labor force is unemployed, about 1.5 million people are out of work. In a typical recession, the unemployment rate rises two or three percentage points. This increase means that 3 million to 4.5 million more workers are displaced at any given time. Conversely, when inflation rises to high levels, many (perhaps most) people lose real income because their wages do not increase as quickly. People work just as hard or harder and fall behind.

Macroeconomics is the study of the aggregate economy. It addresses the nature of and causes of the business cycle. It deals with broad issues like unemployment, inflation, economic growth, and budget and trade deficits. Macroeconomics also explains the tools that the government and the central bank have at their disposal to stabilize the economy. As it turns out, there are some things that a President can do, working in conjunction with the Congress, to stabilize the business cycle. We call these tools fiscal policy. The Federal Reserve also has tools to reduce unemployment and inflation, called monetary policy. Unfortunately, both fiscal and monetary policy are often blunt and imprecise, leaving lots of room for second-guessing and debate about the appropriate policy.

Studying macroeconomics is like assembling a puzzle. Once the pieces are assembled, the big picture becomes clear. The student who masters the material in Introduction to Macroeconomics will be able to read the newspaper and understand the big-picture economic discussions. For example, the FOMC reduced interest rates sharply and kept banks flush with reserves following the terrorist attacks of September 11, 2001. Why? The the Committee feared that consumers and investors would retrench for a while, causing production to slow and unemployment to rise. It also feared that consumers might rush to withdraw cash from banks, causing instability in the financial sector. The interest rate cuts reduced the likelihood of both a slowing economy and an unstable financial system.

Where is the economy now?

Test your knowledge of the U.S. (or your own) economy. How many of these questions can you answer?
  1. Is the U.S. economy in a recession right now? Yes or no? If yes, for how long has it been in recession?
  2. What is the current unemployment rate? Is this high, low, or about right?
  3. What is the current inflation rate? Is this high, low, or about right?
  4. What is the growth rate of the economy? Is this a strong rate, weak, or indicative of a recession?
  5. What is the size of the national government's budget deficit (surplus)? national debt? Are these numbers large? Should you be concerned?
  6. What is the current stance of the Central Bank regarding monetary policy?
  7. What is happening to the value of the domestic currency? Is it becoming stronger? weaker?

These are just some of the issues that we deal with in this book. After studying Introduction to Macroeconomics, you should be familiar with where the U.S. economy is, where it "should" be, and what the government and the Central Bank can--and cannot--do to get it there.

Superb Economic Sites on the Net

The [Outside Econweb] Bureau of Labor Statistics publishes some of the major economic indicators on their Economy at a Glance web page. This site is an excellent snapshot of the U.S. economy.

The (Outside Econweb) Bureau of Economic Analysis contains up-to-date figures on the nation's output and income.

The (Outside Econweb) Dismal Scientist is an excellent web site giving daily updates of comprehensive national and regional economic information. A subscription is required for full access.

The (Outside Econweb) St. Louis Federal Reserve Bank also has excellent time series of the major macroeconomic data. Look for FRED (Federal Reserve Economic Data).

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