Macroeconomics

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1. Macroeconomics
Discussions

The origin of economics as a
science dates back to the
publication of An Inquiry into
the Nature and Causes of the
Wealth of Nations by Adam
Smith in 1776. Smith
believed a market economy
would generally bring
individual self-interest and
the public interest into
harmony.

Based upon those notions of
self-interest and public
interest and the bringing of
both into harmony, according
to Adam Smith, how would a
market economy accomplish
that harmony about which he
describes? What is
government’s place in that
market economy?

Think about society’s need to
choose amongst competing
resources and goals. How
does personal gain affect
choices by individuals and
government? Opportunity
costs. While we want to do
one thing, we can’t do others
based upon scarcity and
opportunity costs. Resources
are finite. What about
incentives as opposed to free
offerings? What about trade?

2. Markets seek equilibrium,
and the demand for goods
and services will come to an
equilibrium with supply of
goods and services. When
markets are not in
equilibrium, surpluses and
shortages, as well as
underground markets, can
exist. Sometimes, the
government may want to
intervene in markets to try to
help reduce economic
hardships.

What is the difference
between a price floor and
price ceiling? According to
the laws of demand and
supply and how market
equilibrium, efficiency, and
equity are reached, do
attempts to repeal those laws
and market results with price
floors and price ceilings
justify legislative bodies to
implement price controls?

3. Politicians have a strong
incentive to follow a strategy
that will enhance their
chances of getting elected
and re-elected. Political
competition more or less
forces them to focus on how
their actions influence their
support among voters and
political contributors.

Are voters likely to be well
informed on issues and the
positions of candidates?
Why or why not?

4. Gross domestic product
(GDP) is a measure of the
market value of final goods
and services produced within
the borders of a country
during a specific time period,
usually a year.

What is the GDP deflator?
How does the GDP deflator
relate to real GDP?

Review GDP and nominal
versus real. Real adjusts for
inflation, so how do we arrive
at the real GDP number from
nominal GDP? Review the
GDP deflator formula, where
GDP deflator = (Nominal
GDP/Real GDP) X 100.

5. It is important to
distinguish between changes
that are anticipated and
unanticipated because the
impact on the economy will
differ between the two. The
economy is in long-run
equilibrium when the short-
run aggregate supply curve,
aggregate demand curve,
and long-run aggregate
supply curve are in
equilibrium.

What are the major factors
causing a shift in aggregate
demand (inward or outward)?
What are the major factors
that will affect short-run
aggregate supply? Long-run
aggregate supply?

Review what factors will lead
to a shift in the AD, SAS, and
LRAS. An increase in output
due to economic growth will
increase both short-run and
long-run aggregate supply.
Unanticipated changes in
either aggregate demand or
aggregate supply will disrupt
long-run equilibrium and
cause current output to differ
from the economy’s long-run
potential.

6. When the economy is in a
recessionary mode,
aggregate demand shifting
inward is often the culprit.
Deflationary pressures on
prices ensue, and output
falls, causing problems like
higher unemployment and
contraction of the economy.

When the economy is in a
recessionary mode, what will
likely be the actions by
government using fiscal
policy? Is it better to
concentrate on aggregate
demand or aggregate

supply? Why?

Review how and why
aggregate demand and
aggregate supply shift inward
and outward. English
economist John Maynard
Keynes developed a model
that provides an explanation
for the high and prolonged
rate of unemployment of the
Great Depression. According
to Keynes, what are the major
sources of economic
instability? Fiscal policy is
spending and taxation of the
executive branch of the
federal government; in
recessionary times, what
initiatives in spending and/or
taxation are going to help the
economy?

7. The Federal Reserve
System was established to
provide a stable monetary
system for the entire
economy. The Federal
Reserve Bank (the Fed) has
three major tools to control
the money supply: 1) reserve
requirements, 2) discount
window for loans to member
banks, and 3) open market
operations.

When the economy is in a
recessionary mode, what will
likely be the actions by the

Federal Reserve using
monetary policy? Suppose
the Federal Reserve
purchases a $100,000 bond
from John Doe, who deposits
the proceeds in the
Manufacturer’s National
Bank; what will be the impact
of this transaction on the
supply of money?

How do each of the Fed’s
tools work? What is the
fractional reserve system,
and how does it work in
relation to the Fed? Review
the Federal Reserve System
and how the Fed alters the
monetary base to achieve the
levels of money supply in the
economy.

8. Imports increase the
domestic supply and lead to
lower prices for consumers.
Exports reduce the domestic
supply and push price
upward. The net effect of
international trade is an
expansion in total output and
higher income levels for both
trading partners (law of
comparative advantages).

“The United States is
suffering from an excess of
imports. Cheap foreign
products are driving
American firms out of

business and leaving the U.S.
economy in shambles.”
Evaluate this view.

Review absolute and
comparative advantages.
Personal private property
protection allows for greater
entrepreneurial ventures, and
thus an expanding economy
and job growth; can import
tariffs and quotas reduce the
benefits of trade? Review
the mechanics of import
tariffs and quotas and world
price.