Economics: Theory and Practice, 10th Edition

CHAPTER 5

Foundations of the Macroeconomy

CHAPTER OBJECTIVES

To define and explain business cycles.

To understand how total spending drives the economy's levels of employment and production, and influences prices.

To examine the spending behavior of households, businesses, government units, and the foreign sector.

To identify the macroeconomy's “leakages” and “injections” and to show how they affect economic activity.

To introduce the multiplier effect.

To discuss how expectations affect the economy's output and price levels.

To identify the role of total spending in macroeconomic policies.

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 ...