192 Putting It Together: Macro Workings

Summary

The goal of this module was ambitious: to teach you how the macro economy changes over time, and then how to analyze the workings of the economy using the most important macro model we will learn in this course. You learned how to:

• Describe the business cycle and its primary phases
• Define economic growth
• Use the AD-AS model to explain the equilibrium levels of real GDP and price level.

Examples

You learned that economic activity whether measured by production, income, spending or employment tends to grow over time. Sometimes economic activity grows faster than average, sometimes it grows slower than average, and sometimes it even declines. This growth (or decline) is the result of the interaction between changes in total spending by consumers, businesses, governments and the rest of the world, and changes in factors of production such as labor supply, capital and technology. While the presentation was technical and mechanical in this module, the real world is anything but that. Economics is, after all, a social science and human beings do not behave like molecules. Rather, their behavior is influenced by institutions, culture and feelings.

Beginning in the next module, you will see that economists differ on the relative importance they place on changes in spending versus changes in factors of production as drivers of economic activity. They also differ on what they see as the appropriate role of government in the process.

While you may not feel you fully understand this material yet, as you work with it during the remainder of this text, your learning will be reinforced and your understanding will become more complete.