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# Macroeconomic Issues

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Maybe you don't like watching the news, but when you turn on the news by mistake, all you hear about are economic crises here and there, and this makes your dislike for the news even worse. Well, the news has followed you onto StudySmarter today! Haha - just kidding. Seriously, though, issues that affect economies are a real thing. They're just not as boring as the news makes it seem. Macroeconomic issues involve the things that matter to the overall well-being of the economy. Things like what causes the dollar to be of less value compared to another currency or why some people are unemployed and homeless. Macroeconomic issues even cover how the US is richer than other countries and why it gets richer or poorer sometimes! You must be curious at this point. Read on for an interesting discussion!

## Macroeconomic Issues Definition

Let's jump right into the definition of macroeconomic issues. Economists are always interested in how economies work, what makes them more successful, or what makes them less successful than other economies. The factors that explain the macroeconomic performance of an economy are known as macroeconomic issues. To do this, economists use information gathered from the economy to conduct analyses that give an idea of how the economy is performing.

Macroeconomic issues are the concerns surrounding the factors that explain macroeconomic performance.

You should know that economists could look at countless things when trying to assess macroeconomic performance.

For example, concerning roads alone, economists can look at how many roads have been constructed, how many contractors were involved, the time each construction took, the materials that were used for each construction, and how much each contractor was paid, among other factors.

It can be difficult to navigate all these considerations in one shot and explain it to others, and therefore, economists focus principally on Gross Domestic Product (GDP), unemployment, and inflation. Generally, these three constitute macroeconomic issues.

Macroeconomic issues include the Gross Domestic Product (GDP), unemployment, and inflation.

## Current Macroeconomic Issues

What constitutes the current macroeconomic issues? Now, we have said that the macroeconomic issues include GDP, unemployment, and inflation. However, what are these? And what makes them issues? Let's find out.

### Real Gross Domestic Product as a macroeconomic issue

When economists mention the GDP, they often mean real GDP. This is because the real GDP is different from the nominal GDP, and we will explain this. The real GDP is a measure of the value of all final goods and services produced in an economy during a given period, often a year.

The real GDP is a measure of the value of all final goods and services produced in an economy during a given period.

The real GDP is one of the macroeconomic issues because it is an important indicator of whether the economy's output is growing or declining. Obviously, if the economy's output is declining, then we have a serious problem on our hands, and this is why economists are so concerned about the real GDP. How will we know if the economy's output is growing or declining? Simple, we will compare the previous year's real GDP to the current year's real GDP.

So, we know how the real GDP is one of the macroeconomic issues. But why do we add "real" to it? Let's explain.

Economists determine the real GDP by first computing the nominal GDP, which is the dollar value of all goods and services an economy produces in a given year, based on the prices when those goods and services were produced.

Nominal GDP is the dollar value of all goods and services an economy produces in a given year, based on the prices when those goods and services were produced.

After determining the nominal GDP, economics takes into consideration the changes in prices that occur over different years. Therefore, real GDP uses a constant value for the economy's output. This gives a true picture of the GDP, whose goal is to measure the real value of an economy's output. Consider the following example.

The economy includes only one coffee processing plant. This coffee processing plant produced 5 bags in the previous year, with each bag selling for $10. In the following year, the coffee processing plant produced the same number of bags. But this time, the price of a bag of coffee was$20.

If we use the nominal GDP, we will have $50 in the previous year and$100 in the following year, which suggests that the economy had a higher output the following year. However, we know that the coffee processing plant produced the same 5 bags it produced the previous year. Using the real GDP solves this problem and ensures that the value of output from last year can be compared to the current year without losses.

Let's look at another example.

Coffee Processing, Pixabay

In one year, the government provides clothes for a population of 5 people at $10 each. The next year, the population increases to 10, and the price of clothes for one person increases to$20. The government then provides clothes for 5 people at $20 each for the next year. The government spent$50 in the first year and $100 in the next year. It looks like there was an improvement when you look at it this way. However, the population increased, so there are now 5 people without clothes. The real GDP helps to avoid overlooking such details. ### Unemployment as a macroeconomic issue Unemployment is an important macroeconomic issue as it means that the country is not using one of its largest inputs - labor. Unemployment means that an individual is unable to get a job even though they are willing to work and are actively looking for work. Unemployment means that an individual is unable to get a job even though they are willing to work and are actively looking for work. So, why is this a macroeconomic issue? First of all, the goal of economics is to satisfy the needs of the people with the limited resources available. If the economy is not able to satisfy the job needs of the people, then it is failing. So, you can imagine why economists take unemployment so seriously. Second of all, labor is one of the factors of production, if the economy is leaving some labor on the table unused, then it is not producing to its optimal potential, and something needs to be done about it. Outside these typically economic considerations, economists also suggest that high rates of unemployment can contribute to high rates of crime, political unrest, high rates of depression, and generally poor well-being for unemployed people. Homelessness, Pixabay So, you see how unemployment just ruins everything? It is a macroeconomic issue you would want to fix as an economist! ## Macroeconomic Issues Inflation Inflation is a serious macroeconomic issue because it represents a rise in the overall level of prices in an economy. Inflation is the rise in the overall level of prices in an economy. Inflation is a real problem because it makes life difficult for people. Let's see how this happens using an example. A family has an income of$30 and purchases 3 bags of rice each month for $10 per bag. The price of a bag of rice suddenly increases to$15, and this means the family can only afford 2 bags of rice in that month.

The above example describes the problem caused by inflation. If the prices of goods increase suddenly and the income of households remains the same, the households struggle to survive since they can't afford the same quantities they used to buy with their income. Therefore, in the above example, the family will go hungry at some point since they only have 2 bags, but they actually need three bags of rice.

Here's another problem caused by inflation. Imagine you've been saving $500,000 to buy your dream house. You finally make it to the$500,000, only to be told that the price of that house is now $750,000. Painful, eh? ## Macroeconomic Issues in the US The macroeconomic issues in the US involve real GDP, unemployment, and inflation. The government, therefore, has to ask and answer a series of related questions to address these issues. Let's briefly mention some of these issues here. In the US, the government is concerned with: 1. Reducing the impact of recessions by reducing fluctuations in the short-run - The government seeks to reduce how often market conditions change within a year. This helps reduce the pressure felt by the people in terms of inflation and unemployment. 2. Reducing short-run fluctuations through monetary policy - The government seeks to alleviate the effects of macroeconomic fluctuations by manipulating interest rates, tax rates, or government spending. 3. Maintaining economic growth in the long run - The government is concerned with ensuring that the economy constantly grows, as declines in growth result in unwanted issues like inflation and unemployment. 4. Managing the trade-off between lower unemployment rates and higher inflation rates - As more people work, they have higher spending power and demand more. This results in increased prices, hence, inflation. Therefore, the government seeks to manage the trade-off between unemployment and inflation. ## Example of Macroeconomics Issue Let's look at an example showing why inflation is a macroeconomic issue. A household of 4 consumes 40 bottles of water each month, and a bottle of water costs$10. The monthly income of that household is $400. In one month, the price of a bottle of water suddenly shoots up to$20 while the household's income remains the same.

From the above example, inflation has occurred in the short-run, and the family can now only afford 20 bottles of water in that month. This means that the cost of living has risen to a point the household can no longer afford to consume the same quantity of goods as it did before the inflation kicked in.

## Macroeconomic Issues - Key takeaways

• Macroeconomic issues are the concerns surrounding the factors that explain macroeconomic performance.
• Macroeconomic issues include the Gross Domestic Product (GDP), unemployment, and inflation.
• The real GDP is a measure of the value of all final goods and services produced in an economy during a given period, adjusted for inflation. It indicates whether the economy is growing or declining.
• Unemployment means that an individual is unable to get a job even though they are willing to work and are actively looking for work.
• Inflation is the rise in the overall level of prices in an economy. It is an issue when the incomes of households do not rise with the prices.

Macroeconomic issues are the concerns surrounding the factors that explain macroeconomic performance.

Inflation, unemployment, and poor real GDP performance are examples of macroeconomic issues.

Macroeconomic issues include the real Gross Domestic Product (GDP), unemployment, and inflation.

Inflation, unemployment, and poor real GDP performance are examples of macroeconomic issues.

1. Reducing the impact of recessions by reducing fluctuations in the short-run

2. Reducing short-run fluctuations through monetary policy

3. Maintaining economic growth in the long-run

4. Managing the trade-off between lower unemployment rates and higher inflation rates

## Macroeconomic Issues Quiz - Teste dein Wissen

Question

What are macroeconomic issues?

Macroeconomic issues are the concerns surrounding the factors that explain macroeconomic performance.

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What are the main macroeconomic issues?

Macroeconomic issues include the real Gross Domestic Product (GDP), unemployment, and inflation.

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Define real GDP

The real GDP is a measure of the value of all final goods and services produced in a given economy during a given period, adjusted for inflation

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Define nominal GDP

Nominal GDP is the dollar value of all goods and services an economy produces in a given year, based on the prices when those goods and services were produced.

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What is unemployment?

Unemployment means that an individual is unable to get a job even though they are willing to work and are actively looking for work.

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What is inflation?

Inflation is the rise in the overall level of prices in an economy.

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Inflation reduces the cost of living.

False

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Inflation reduces the standard of living.

True

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Unemployment does not have any opportunity cost.

False

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Unemployment means all the economy's resources are being used.

False

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Nominal GDP is a good indicator of real economic output.

False

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Economists use constant prices for real GDP.

True

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Real GDP provides a more accurate picture of economic performance.

True

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Economists compare the previous year's real GDP to it's nominal GDP to show economic growth or decline.

False

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Economic growth is determined by comparing previous and current real GDPs.

True

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What is Keynesian Economics?

Keynesian Economics posits that changes in aggregate demand have an impact on output, price level, and employment in the short run.

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What is expansionary fiscal policy?

when the government increases government spending and decreases taxes to mitigate a recession.

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What is contractionary fiscal policy?

when the government decreases government spending and increases taxes to mitigate inflation.

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What is the difference between Classical and Keynesian economics regarding the SRAS curve?

Classical economics has the SRAS curve vertical; Keynesian economics has the SRAS curve upward sloping.

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Classical economics believe that the aggregate demand curve is mainly altered by:

the money supply

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How are taxes different between Keynesian and Supply-Side economics?

Supply-Side believes that low taxes are good for economic growth; Keynesian believes that taxes need to be altered

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When the government excessively borrows from the loanable fund market, it can cause:

crowding out

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Business expectations altering aggregate demand is seen in which economic school of thought?

Keynesian economics

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True or False: Keynesian economics believes that there should be minimal government intervention.

False

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True or False: Between Classical and Keynesian economics, they both are similar in that aggregate demand only affects price level.

False

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Which of the following are criticisms of Keynesian economics?

crowding out

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Which economic theory believes that low taxation is key to economic growth?

supply-side

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Which economic theory believes that the SRAS curve is vertical?

classical

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True or False: contractionary fiscal policy uses lower taxes.

False

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True or False: expansionary fiscal policy uses high government spending.

True

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Define supply-side economics.

Supply-side economics is defined as the theory that aggregate supply is what drives economic growth, rather than aggregate demand.

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Supply-siders believe that tax increases will increase after-tax income, incentives to work and invest, tax revenue, and economic growth.

False

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Tax revenue increases or decreases depends on where tax rates are before the changes are made.

True

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When tax rates are lower, leisure carries a higher opportunity cost.

True

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The three pillars of supply-side economics are

fiscal policy

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Supply-siders believe in lower marginal tax rates.

True

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Supply-siders tend not to favor monetary policy when it comes to trying to manage the economy.

True

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Supply-siders advocate for low and stable inflation and stable money supply growth, interest rates, and economic growth.

True

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Supply-siders support more government regulation.

False

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Who is the economist that introduced supply-side economics?

Arthur Laffer

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Which three U.S. presidents have signed supply-side policies into law?

Ronald Reagan

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What is the main drawback of supply-side policies?

Larger budget deficits

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What are some benefits of supply-side policies?

Greater incentive to work, save, and invest, increased production and innovation, lower labor costs and inflation, and less tax avoidance and evasion.

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Define rational expectations.

Rational expectations is the idea that people and companies make optimal decisions by utilizing all of the information that is available to them.

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According to the theory of rational expectations, when estimating future rates of inflation, economists won't only look at previous inflation rates but also take into consideration the information that is now available regarding monetary and fiscal policy.

True

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According to rational expectations, an increase in inflation rate will cause wages to _____ ?

Rise

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According to the rational choice theory humans base their choices on ______ primary considerations.

three

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What are the three considerations humans base their choices on?

• Their own human reason.
• The knowledge that is readily accessible to them.
• The experiences that they have had in the past.

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Can people's present expectations about the condition of the economy influence the future state of the economy?

Yes

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According to the rational expectations theory the government is incapable of influencing individual's economic decision?

True

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