Macroeconomics, Third Edition

David G. Tuerck

Description

This book brings these theories together under one methodological roof, where the choices made by economic agents depend on their varying perceptions of the economic constraints they face, combining new classical principles, under which the economy operates at full employment, with theories that allow for extended periods of underemployment brought about by mixed signals from workers and employers.

The task of macroeconomics is to provide the tools for understanding the performance of the aggregate economy, as measured by production, employment, inflation, and other economic indicators. Most books on this topic compare different theories of macroeconomic performance, under alternative assumptions about how individual consumers, workers and investors adjust to the economic environment in which they find themselves.

This book brings these theories together under one methodological roof, where the choices made by economic agents depend on their varying perceptions of the economic constraints they face, combining new classical principles, under which the economy operates at full employment, with theories that allow for extended periods of underemployment brought about by mixed signals from workers and employers. The book takes up modern monetary theory and its bearing on the massive deficits run up the federal government over the ongoing ‘corona contraction’ and the earlier ‘great contraction’. The author also reviews the policy interventions undertaken by the federal government during these contractions, with a view toward assessing their effectiveness.

Sujets

• Macroeconomics
• Economics
• Business

Informations

• Publié par: Business Expert Press
• Date de parution: 01 février 2021
• Nombre de lectures: 0
• EAN13: 9781953349255
• Langue: English
• Poids de l'ouvrage: 2 Mo

Extrait

Macroeconomics
Macroeconomics
Third Edition
David G. Tuerck
Macroeconomics, Third Edition Copyright © Business Expert Press, LLC, 2021.
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopy, recording, or any other except for brief quotations, not to exceed 250 words, without the prior permission of the publisher.
First published in 2015 by Business Expert Press, LLC 222 East 46th Street, New York, NY 10017 www.businessexpertpress.com
ISBN-13: 978-1-95334-924-8 (paperback) ISBN-13: 978-1-95334-925-5 (e-book)
Business Expert Press Economics and Public Policy Collection
Collection ISSN: 2163-761X (print) Collection ISSN: 2163-7628 (electronic)
Cover design by Charlene Kronstedt Interior design by S4Carlisle Publishing Services Private Ltd., Chennai, India
Third Edition: 2021
10 9 8 7 6 5 4 3 2 1
Dedication
To the memory of my parents, George and Bertha Tuerck
Description
The task of macroeconomics is to provide the tools for understanding the performance of the aggregate economy, as measured by production, employment, inflation, and other economic indicators. Most books on this topic compare different theories of macroeconomic performance, under alternative assumptions about how individual consumers, workers and investors adjust to the economic environment in which they find themselves.
This book brings these theories together under one methodological roof, where the choices made by economic agents depend on their varying perceptions of the economic constraints they face, combining new classical principles, under which the economy operates at full employment, with theories that allow for extended periods of underemployment brought about by mixed signals from workers and employers. The book takes up modern monetary theory and its bearing on the massive deficits run up the federal government over the ongoing ‘corona contraction’ and the earlier ‘great contraction’. The author also reviews the policy interventions undertaken by the federal government during these contractions, with a view toward assessing their effectiveness.
Keywords
aggregate demand; aggregate supply; classical tradition; monetary and fiscal policy; excess demand; excess supply; full employment; individual equilibrium; Laffer curve; natural unemployment rate; nonaccelerating inflation rate of unemployment; nonaccelerating inflation rate of labor-force participation; Phillips curve; potential GDP; steady state of economic growth; structural unemployment; supply-side economics; modern monetary theory; intertemporal elasticity of substitution; income and substitution effects of tax rate changes; permanent income hypothesis; total factor productivity; National Income and Product Accounts; replacement rate; self-reliance rate; Keynesian model; suppressed inflation; INUS explanations for macroeconomic activity
Contents
Acknowledgments
Chapter 1 Introduction
Chapter 2 Macro Measures
Chapter 3 Individual Equilibrium
Chapter 4 Saving
Chapter 5 Capital and Labor
Chapter 6 Economic Growth
Chapter 7 Taxes and the Macroeconomy
Chapter 8 Government Spending
Chapter 9 Monetary Policy
Chapter 10 Budget Policy
Chapter 11 Managing Aggregate Supply and Aggregate Demand
Chapter 12 Diagnosing the Economy
Chapter 13 The Twin U.S. Contractions
Chapter 14 Lessons from Recent Macroeconomic Policy Making
References
About the Author
Index
Acknowledgments
I would like to express my appreciation to a few of the many people to whom I am indebted for help in writing this book and getting it into print. First and foremost, as with the first and second editions, I want to thank my wife, Prema Popat, without whose encouragement and patience the book would never have seen the light of day. Next, my thanks go to Nicholas Sammarco, of the Beacon Hill Institute, who helped me by finding and verifying data and by proofing much of the book. Also, and as before, Scott Isenberg, Executive Editor at Business Expert Press, provided both patience and encouragement, as did Rene Caroline Balan and her team. Finally, and again as with the first edition, my thanks to colleague Alison Kelly, whose prodding got me to refocus on this project after many years of hesitation.
CHAPTER 1
Introduction
Macroeconomics is the study of the economy as a whole, as distinguished from microeconomics, which is the study of individual consumers, workers, firms, industries, and markets. Microeconomics focuses on the individual economic decision maker (or “agent”) without attempting to take into account the full range of interactions that take place between one decision maker and another. Thus, for example, a microeconomic study of an excise tax on the purchase of cigarettes would consider the effect of that tax on the sales of cigarettes but not attempt to account for the effects of that tax on the sales of watermelons and then its feedback effects on the demand for cigarettes.
Macroeconomics, on the other hand, is a study of feedback effects—of interactions between major economic sectors in response to extraneous events and changes in government policy. It’s just that when we do macroeconomics, we don’t focus on individual products such as cigarettes or watermelons. We focus on major economic indicators such as gross domestic product (GDP), the capital stock, and the supply of goods and workers.
Yet macroeconomics does take into account how individual decision makers affect these indicators. At the heart of the question of how these indicators behave is the question of how individual economic agents adjust their actions to changes in government policies and other events that influence their behavior. Even though macroeconomics considers the economy broken down into major sectors, it can take—and here we do take—what is called a “microfoundations” approach to its study. Thus, in studying the labor sector, we first ask how the individual worker adjusts the amount of time he spends working to the reward he gets for working and how the individual saver adjusts his saving to the reward he gets for saving. Only after we have understood how the individual adjusts his decision to work and save can we understand how the aggregate supply of labor and the aggregate supply of capital adjust to changes in the rewards for work and saving.
The purpose of any economic system is to provide a mechanism through which buyers and sellers can coordinate their activities to their advantage and in such a way as to exploit as many opportunities as possible for mutual gain. For the most part, and throughout the developed world, it is the marketplace through which this goal is achieved. There is, to be sure, a great deal of direction that comes from government as well. Every country has a government that engages in its own transactions and imposes taxes to finance those transactions. And in some countries with mostly free economies, government transactions account for a large fraction of economic activity. But most of the transactions that take place around the world come about as a result of voluntary exchanges between buyers and sellers. The microfoundations of macroeconomics lie in the decisions taken by individual economic actors to work and save and, at the firm level, to hire labor and acquire capital.
In this book, we focus first on the services of labor and capital as supplied by, and as demanded by, individual economic agents. This provides a framework for understanding the effects of taxes and government spending on individual choices and, through those choices, the aggregate economy. Macroeconomics, however, is also the study of major swings in the economy that originate from forces beyond the control of any individual. Those we take up in the later chapters.
This book appears as the United States attempts to recover from a major economic contraction. The outbreak of the coronavirus and the resulting government restrictions on business caused U.S. GDP to fall by 5% in the first quarter of 2020 and employment to fall from 3.5% in February 2020 to 13.3% in May.
The current contraction—labelled the “Corona Contraction” here—follows the Great Contraction of 2007 through 2009. Between that earlier contraction and the one under way now, the country experienced a period of economic growth and low unemployment. Thus, the recent past is rich in contrasting macroeconomic episodes, and with those episodes, challenges for the macroeconomist to explain.
Macroeconomics as a field of study came into being from the publication of The General Theory of Employment, Interest, and Money, in 1936, by economist John Maynard Keynes (Keynes 1936). Keynes tried to show why existing theories—“classical” theories he called them—could not explain the persistence of the Great Depression, then underway, or how government could use its policy tools to escape it. Keynes did not use the term “macroeconomics”; it was coined by someone else, apparently before Keynes wrote his fateful book. 1 But Keynes did set the stage for a theory of the economy in which wage and price adjustments that normally keep the economy at full employment (a term on which we elaborate later) fail and, having failed, leave the economy in a state that calls for government intervention in the form of expansive monetary and fiscal policy. Government policies aimed at correcting for the failure of an economic system to achieve full employment are frequently referred to as stabilization policies , connoting the idea