SUMMARY

1. Macroeconomics is the study of the behavior of the economy as a whole, which can be different from the sum of its parts. Macroeconomics differs from microeconomics in the type of questions it tries to answer. Macroeconomics also has a strong policy focus: Keynesian economics, which emerged during the Great Depression, advocates the use of monetary policy and fiscal policy to fight economic slumps. Prior to the Great Depression, the economy was thought to be self-regulating.

2. One key concern of macroeconomics is the business cycle, the short-run alternation between recessions, periods of falling employment and output, and expansions, periods of rising employment and output. The point at which expansion turns to recession is a business-cycle peak. The point at which recession turns to expansion is a business-cycle trough.

3. Another key area of macroeconomic study is long-run economic growth, the sustained upward trend in the economy’s output over time. Long-run economic growth is the force behind long-term increases in living standards and is important for financing some economic programs. It is especially important for poorer countries.

4. When the prices of most goods and services are rising, so that the overall level of prices is going up, the economy experiences inflation. When the overall level of prices is going down, the economy is experiencing deflation. In the short run, inflation and deflation are closely related to the business cycle. In the long run, prices tend to reflect changes in the overall quantity of money. Because both inflation and deflation can cause problems, economists and policy makers generally aim for price stability.

5. Although comparative advantage explains why open economies export some things and import others, macroeconomic analysis is needed to explain why countries run trade surpluses or trade deficits. The determinants of the overall balance between exports and imports lie in decisions about savings and investment spending.