CHAPTER 5
WHAT MACROECONOMICS TRIES TO EXPLAIN
MASTERY GOALS
The objectives of this chapter are to:
1. List the three important macroeconomic goals, and explain why each is important.
2. Explain how economists track economic growth using real GDP.
3. Distinguish between the expansion and recession phases of the business cycle.
4. Explain why macroeconomists use aggregation.
5. Explain why macroeconomists sometimes disagree with each other.
THE CHAPTER IN A NUTSHELL
Macroeconomics answers questions about the overall economy. Although there is some
disagreement among economists about how to make the macroeconomy perform well, there is
widespread agreement about our goals: economic growth, full employment, and stable prices.
Economists monitor economic growth by tracking real gross domestic product. When real GDP
rises faster than the population, output per person rises, and so does the average standard of
living. Although growth does not necessarily benefit everyone equally, it is important to our
economic well-being.
High employment or low unemployment is important, both because it helps us achieve our full
productive potential, and because it affects the distribution of economic well-being among our
citizens. Employment varies over the business cycle, typically rising during expansions and falling
during contractions. When a contraction is considered significant it is officially labeled a recession.
Severe and long-lasting recessions are called depressions.
Stable prices or low inflation rates are important because coping with inflation uses up resources
that could otherwise be used to produce goods and services.
The macroeconomics approach uses the familiar three-step approach found in chapter 3.
Aggregating or combining different things into a single category also plays an important role in
macroeconomics.
Macroeconomists often disagree with each other. Some disputes are positive in nature, based on
different views of how the macroeconomy works. Other disagreements are normative, based on
different values individuals place on different macroeconomic outcomes. Most macroeconomists,
however, agree on many basic principles and agree on the approach that should be taken to
resolve their differences.
In order presented in chapter.
Economic growth: The increase in our production of goods and services that occurs over
long period of time.
Business cycles: Fluctuations in real GDP around its long-term growth trend.
Expansion: A period of increasing real GDP.
Recession: a period of significant decline in real GDP.
Depression: An unusually severe recession.
Aggregation: The process of combining different things into a single category.
TEACHING TIPS
1 This chapter provides an introduction to the study of the macroeconomy. Pique your
students’ interest in this topic by providing them with the latest figures on GDP and
unemployment. Some sources where you can find updated employment and GDP figures
include:
a. The Bureau of Labor Statistics homepage is www.bls.gov . See “The U.S. Economy
at a Glance” at http://www.bls.gov/eag/eag.us.htm for monthly labor force,
unemployment rate, and consumer price index figures.
b. The BLS’s current employment situation press release is located at
http://www.bls.gov/news.release/empsit.nr0.htm .
c. Real GDP figures can be found at the Federal Reserve Bank of St. Louis’ Federal
Reserve Economic Data site at http://research.stlouisfed.org/fred2 .
6. Visit the Federal Reserve Board at www.federalreserve.gov/boarddocs/hh for the
Fed’s latest report to Congress on the state of the economy (as required by the
Full Employment and Balanced Growth Act of 1978).
7. Point out that election results frequently depend on the state of the economy. Use
the George H. W. Bush-Bill Clinton presidential campaign as an example.
According to most polls, Bush lost the election due to the poor state of the
economy. A popular slogan around Clinton campaign headquarters was “It’s the
economy, stupid,” to remind workers of the central focus of the campaign.
8. Although a common definition of recession is two consecutive quarters of falling
real GDP, the National Bureau of Economic Research, a private research
organization that dates business cycles, does not use this convention. Go to
http://www.nber.org/cycles/main.html for the “Information on Recessions and
Recoveries, the NBER Business Cycle Dating Committee, and related topics”
web page. There you can read how the committee determined that a recession
ended in November 2001 or that a recession began in December 2007. Click on
“US Business Cycle Expansions and Contractions” to see the length of each
business cycle since 1854.
DISCUSSION STARTERS
1 In order to tie this chapter to current events, have students update the GDP,
unemployment, and inflation numbers (see Teaching Tips, above, for sources) in Figures
1, 2, and 4. Then have them use their updates to answer the following questions:
a. Is the unemployment rate rising or falling?
b. Is the inflation rate high or low?
c. Are we in an expansion or a recession?
9. Explain that policy makers in our government are studying the same GDP and
unemployment numbers that students have found in order to make decisions that
will affect each of us (for instance, policy decisions will influence students’ ability
to get job offers when they graduate.) How important is it that these policy makers
have a firm understanding of how the economy works? How important is it for
voters to have a firm understanding of how the economy works? Can voters
influence the economic health of our nation?