Economics, 11th Edition

CHAPTER 5Foundations of the Macroeconomy

CHAPTER OBJECTIVES

• Explain the pattern of changes in macroeconomic activity.
• Understand how total spending or the spending behavior of households, businesses, government units, and the foreign sector, drives the economy's levels of employment and production, and influences prices.
• Introduce the multiplier effect.
• Discuss the relationships between total spending and inflation and total spending and expectations, and the role of macroeconomic policies on total spending.

Part of the daily news coverage on the Internet, CNN, major television and cable networks, and newspapers is devoted to the state of the economy. There are stories on the stock market, jobs, and inflation; forecasts of recovery or recession; updates on the status of foreign trade; and numerous other topics devoted to reporting the pulse of the economy. What should be clear from the media is that the U.S. economy continually changes: It goes through upswings and downswings, or periods of expansion and contraction, and never stays at a particular level of activity. Two data series discussed in Chapter 4 attest to this movement: the unemployment rate and real GDP, both of which change on a regular basis.

This chapter deals with fluctuations in the level of production, or economic activity, in the macroeconomy. It identifies the pattern of these fluctuations and provides a foundation for understanding why they occur.

CHANGES IN MACROECONOMIC ACTIVITY

Generally, when ...