Notesale: Turn your study into money

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8/28/13
Macroeconomics Chapter 6
Macro vs Micro
Microeconomics focuses on how decisions are made by individuals and firms and the consequences
of those decisions
This focuses on one actor in the economy, one person, one household, one firm and how they get
their money and how much the y allocate money towards consumer spending etc
...

Individual decisions made by individual actors
The broadest part of micro is individual industries
Macroeconomics examine the aggregate behaviors of the economy ie how the actions of the
individuals and firms in the economy interact to produce a particular level of economic performance
In macro the behavior of the whole macroeconomy is, indeed different than the sum of individual
actions and market outcomes
In the 30’s it was believed if everyone pursued their own goals and acted responsibly then the
economy would be fine, but this isn’t true
Paradox of Thrift: when families are afraid of hard times and prepare by saving and cutting their
spending
This reduction in spending depresses the economy as consumers spend less
...

In the gulf war recession people began saving because they were afraid oil prices would go up and
cause a rcession, which caused one
In fact incomes may fall enough to reduce what the private sector can save
Another example: the fallacy of composition: cutting wages may raise profits; but if all firms cut
wages, this may lower demand for all products, thus lowering profits for all firms

In the 30’s there was only economics and microeconomics, it was studied how firms should act
responsibly by minimizing costs and maximizing profits
People were encouraged to always save and act responsibly, without knowing the macroeconomic
implications
A modern capitalist economy can go into a fail mode if someone doesn’t step in
In a self-regulating economy, problems such as unemployment are resolved without government
intervention, through the work of the invisible hand
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The paradox of thrift kicking in etc, and unless some group can make up for the inadequate
spending of another group, a recession will ensue
Keynes used the government as the balancing actor
Spending can be through cutting taxes (encouraging spending) cutting interst rates, or through
stimulus like the ARRA and TARP funds
Monetary policy changes the quantity of money to alter interest rates and affect overall spending
Fiscal policy uses changes in government spending and taxes to affect overall spending
Fending of Depression
In 2008 the world economy experienced a severe financial crisis that was all too reminiscent of the
early days of the Great Depression
In the spring of 2009, the economic historians Barry Eichengreen and Kevin O’Rourke, reviewing
the available data, pointed out that “globally, we are tracking or even doing worse than the Great
Depression

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