Outside of macroeconomic theory, these topics are also important to all economic agents including workers, consumers, and producers. National output is the total amount of everything a country produces in a given period of time. Everything that is produced and sold generates an equal amount of income.
The total output of the economy is measured GDP per person.
The output and income are usually considered equivalent and the two terms are often used interchangeably,output changes into income. Output can be measured or it can be viewed from the production side and measured as the total value of final goods and services or the sum of all value added in the economy. Macroeconomic output is usually measured by gross domestic product GDP or one of the other national accounts. Economists interested in long-run increases in output study economic growth.
Advances in technology, accumulation of machinery and other capital , and better education and human capital are all factors that lead to increase economic output over time.
However, output does not always increase consistently over time. Business cycles can cause short-term drops in output called recessions. Economists look for macroeconomic policies that prevent economies from slipping into recessions and that lead to faster long-term growth.
The amount of unemployment in an economy is measured by the unemployment rate, i. The unemployment rate in the labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work by a lack of job prospects are excluded. Unemployment can be generally broken down into several types that are related to different causes. A general price increase across the entire economy is called inflation. When prices decrease, there is deflation. Economists measure these changes in prices with price indexes.
Inflation can occur when an economy becomes overheated and grows too quickly. Similarly, a declining economy can lead to deflation. Central bankers , who manage a country's money supply, try to avoid changes in price level by using monetary policy. Raising interest rates or reducing the supply of money in an economy will reduce inflation. Inflation can lead to increased uncertainty and other negative consequences. Deflation can lower economic output.
Central bankers try to stabilize prices to protect economies from the negative consequences of price changes. Changes in price level may be the result of several factors. The quantity theory of money holds that changes in price level are directly related to changes in the money supply.
Most economists believe that this relationship explains long-run changes in the price level. For example, a decrease in demand due to a recession can lead to lower price levels and deflation.
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A negative supply shock, such as an oil crisis, lowers aggregate supply and can cause inflation. Macroeconomic policy is usually implemented through two sets of tools: fiscal and monetary policy. Both forms of policy are used to stabilize the economy , which can mean boosting the economy to the level of GDP consistent with full employment. Central banks implement monetary policy by controlling the money supply through several mechanisms.
1. Core elements
Typically, central banks take action by issuing money to buy bonds or other assets , which boosts the supply of money and lowers interest rates, or, in the case of contractionary monetary policy, banks sell bonds and take money out of circulation. Usually policy is not implemented by directly targeting the supply of money.
Central banks continuously shift the money supply to maintain a targeted fixed interest rate. Some of them allow the interest rate to fluctuate and focus on targeting inflation rates instead. Central banks generally try to achieve high output without letting loose monetary policy that create large amounts of inflation. Conventional monetary policy can be ineffective in situations such as a liquidity trap. When interest rates and inflation are near zero, the central bank cannot loosen monetary policy through conventional means. Central banks can use unconventional monetary policy such as quantitative easing to help increase output.
Instead of buying government bonds, central banks can implement quantitative easing by buying not only government bonds, but also other assets such as corporate bonds, stocks, and other securities. This allows lower interest rates for a broader class of assets beyond government bonds.
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In another example of unconventional monetary policy, the United States Federal Reserve recently made an attempt at such a policy with Operation Twist. Unable to lower current interest rates, the Federal Reserve lowered long-term interest rates by buying long-term bonds and selling short-term bonds to create a flat yield curve. Fiscal policy is the use of government's revenue and expenditure as instruments to influence the economy. Examples of such tools are expenditure , taxes , debt.
For example, if the economy is producing less than potential output, government spending can be used to employ idle resources and boost output. Government spending does not have to make up for the entire output gap. There is a multiplier effect that boosts the impact of government spending. For instance, when the government pays for a bridge, the project not only adds the value of the bridge to output, but also allows the bridge workers to increase their consumption and investment, which helps to close the output gap.
The effects of fiscal policy can be limited by crowding out. When the government takes on spending projects, it limits the amount of resources available for the private sector to use. Crowding out occurs when government spending simply replaces private sector output instead of adding additional output to the economy.
Crowding out also occurs when government spending raises interest rates, which limits investment. Defenders of fiscal stimulus argue that crowding out is not a concern when the economy is depressed, plenty of resources are left idle, and interest rates are low. Fiscal policy can be implemented through automatic stabilizers. Automatic stabilizers do not suffer from the policy lags of discretionary fiscal policy. Automatic stabilizers use conventional fiscal mechanisms but take effect as soon as the economy takes a downturn: spending on unemployment benefits automatically increases when unemployment rises and, in a progressive income tax system, the effective tax rate automatically falls when incomes decline.
Economists usually favor monetary over fiscal policy because it has two major advantages. First, monetary policy is generally implemented by independent central banks instead of the political institutions that control fiscal policy. Independent central banks are less likely to make decisions based on political motives. Central banks can quickly make and implement decisions while discretionary fiscal policy may take time to pass and even longer to carry out. From Wikipedia, the free encyclopedia. Part of a series on Macroeconomics Basic concepts.
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Fiscal Monetary Commercial Central bank. Related fields. Econometrics Economic statistics Monetary economics Development economics International economics. Edward C. Sargent Paul Krugman N. Gregory Mankiw. See also. Macroeconomic model Publications in macroeconomics Economics Applied Microeconomics Political economy Mathematical economics. Main article: History of macroeconomic thought. Main article: Unemployment.
Further information: Monetary policy.
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Further information: Fiscal policy. Business and economics portal. Modern Macroeconomics — Its origins, development and current state. Edward Elgar. Retrieved Economic Synopses. Number 4. Retrieved 7 December Neoclassical economics Neo-Keynesian economics Saltwater and freshwater economics Stockholm school Supply-side economics.
Monetarism New classical macroeconomics New Keynesian economics. Economic theory Political economy Applied economics. Economic model Economic systems Microfoundations Mathematical economics Econometrics Computational economics Experimental economics Publications. Schools history of economic thought.