A. KEY CONCEPTS OF MACROECONOMICS

The 19305 marked the first stirrings of the science of macroeconomics, founded, by John Maynard Keynes as he tried to understand the economic mechanism that produced the Great Depression. After World War 11, reflecting both the increasing influence of Keynesian views and the fear of another depression. the U.S. Congress formally proclaimed , federal responsibility for macroeconomic performance. It enacted the landmark Employment Act of 1946, which stated:

For the first time, Congress affirmed the government’s role in, promoting output growth. fostering employment, and maintaining price stability. . Since the 1946 Employment Act, !h~ nation’s priorities among these three goals have shifted; but in the ,United States’,as in all market economies, these goals still frame’central macroeconomic; questions.

Why do output and sometimes’Unemployment be 7 All, market economies show patterns of expansion and known as business cycles. The last major business-cycle downturn in the United States came in 1990-1991, when production of goods and ‘services fell and millions of people lost their jobs. For much of the postwar period, one key , goal of macroeconomic policy has been to use monetary and policy to reduce ‘the severity -of business-cycle downturns and unemployment. From time to time countries experience high’unemployment that persists.Tor long periods. sometimes as long as a decade. Such a period  in the United States during the Great Depression, which began in 1929. In the next few’ years, unemployment rose to almost one-quarter _ of the workforce, while industrial production fell by one-half. European countries in the 1990 s had a mild depression, with persistent unemployment of over 10 percent in many countries. , Macroeconomics examines the sources of persistent unemployment. Having considered the possible diagnoses, macroeconomics also possible remedies, such as increasing aggregate demand or reforming labor market institutions. The lives and fortunes of millions of people depend upon.whether macro economists can find the right answers to these questions.

2. What art the  of price inflation, and can it be Under A market economy uses-prices as a yardstick to measure economic values and conduct business. During periods of rapidly , rising prices, called’price the price yardstick loses its, value. People become confused, make mistakes” and spend much of their time worrying about inflation eating away at their price changes lead to economic inefficiency.

Macroeconomic’ policy has increasingly emphasized price stability as a key goal. In the United States the overall rate of inflation has fallen from more than 10 percent pet year in the late 1970s to around 3 percent per Ye<lr in the 199Os. Some countries today have not succeeded in. containing inflation, Formerly socialist countries like Russia and many Latin American and developing countries experienced inflation rates of 50, 100, or 1000 percent per year in the 1980s and early 1990s: Why was the United States able to keep the inflationary tiger in the cage, while Russia, failed to do so? Macroeconomics can suggest the proper role of monetary and fiscal policies, of exchange-rate systems, and . of an independent central bank in containing inflation,

3. Can a nation increase its Tate of economic growth’ Above all, macroeconomics is concerned with economic growth, which refers to the. growth in the productive potential of an economy, An economy’s productive potential is the central factor in determining the growth in its real wages and living standards. Meter World War II, rapid economic growth in Asian countries such as Japan, South Korea, and Taiwan produced dramatic gains in living standards for their peoples. A few countries, particularly those of sub-Saharan Africa, have suffered declining per capital output and living standards over the last two decades. Nations want to know the ingredients in a successful growth recipe. Among the key factors in rapid economic growth are the predominance of . free markets, high rates of saving and investment, an outwardly oriented trade policy, and an honest government with strong property rights. All economies face inevitable trade-offs among these goals. Increasing the rate of growth of output over, the long run may require greater investment in education and capital, but higher investment requires lower current consumption of items like food, Clothing, and recreation. Additionally, policymakers are ‘Sometimes forced to rein in the economy through macroeconomic policies when it grows too fast, or when unemployment falls too low, in order to prevent rising inflation.

There are no simple formulas for resolving these dilemmas, and macro economists often differ on the proper approach to take when confronted with high inflation, rising unemployment, or slow growth. But with sound macroeconomic understanding, the inevitable pain that comes from choosing the best route can be minimized.

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