Introduction to Economics 2 Dersi 1. Ünite Sorularla Öğrenelim

Please define the scope of macroeconomics briefly by giving example.

Contrary to microeconomics, in macroeconomics, we think big. We consider, in macroeconomics, not only the supply of and demand for bread in a particular
market, but the supply of and demand for all goods and services produced in the economy; not only the price of bread but the average price of all products in the economy; not only the consumption of a single person or family, but the overall consumption of all the people or families in the economy; not only the investment of a single automobile factory, but investments of all businesses in the economy as a whole. Macroeconomics is not only interested in the determinants of these large scale variables, but also mutual relationships among them and the meaning of changes they display in time. In other words, macroeconomic analysis deals with how macro variables of a national economy affect each other and how they are determined when the economy tends to achieve equilibrium.

Please give a short information about great depression.

Great Depression is the period started in 1929 and lasted through 1930s in which a huge economic contraction and very high level of unemployment were experienced.

Please give information about the decade just before the birth of macroeconomics briefly.

Economists started to discuss the topics about macroeconomics as a result of economic events during the Great Depression in the 1930s. It is possible to say that there were no big problems in the world economy until the 1920s. During this period, people could easily find a job, earnings significantly increased and prices were relatively stable. But by the end of 1929, things suddenly started to go wrong. For example, in the USA in 1929, there were 1.5 million unemployed people, but in 1933, the figure folded ten times and reached 13 million unemployed people. On the other hand, while the US economy was producing goods and services worth of 103 billion dollars in 1929, the figure decreased 55 billion dollars in 1933. As a result of stock market crash in October 1929, individual wealth of billions of dollars were lost.

Please mention the importance of the book 'General Theory of Employment, Interest and Money' in the emergence of macroeconomics briefly.

In the period before the Great Depression, economists were using microeconomic models (sometimes called as classic models) while reviewing large-scale economic issues. “Macroeconomics” was even not a term used until the period after World War II. For example, according to classical supply and demand analysis, it is considered that if there is an unemployment problem in the economy, excessive supply of labor decreases wages and generates a new equilibrium point and therefore there will be no unemployment period for a long time. But, during 10 years of Great Depression, unemployment levels were extremely high and the inadequacy of classical models to explain that much lasting unemployment period led to the development of macroeconomics. One of the most important studies of economic history is General Theory of Employment, Interest and Money written by John Maynard Keynes in 1936. Keynes has developed an economic theory for explaining complex economic events by using the information about markets and behaviors in these markets. Therefore, the origins of macroeconomics are widely based on Keynes’ book and theoretical breakthrough attributed to him is often called as the “Keynesian Revolution”.

Please summarize Keynes's ideas on employment.

Keynes refuse the idea that the employment was determined by prices and wages as
put forward by classical models and developed the opinion that the aggregate demand for goods and services produced in the economy was the main factor determining the employment. Keynes was arguing that the government may interfere to the economy with various policies, thus may affect production and employment volume. This opinion can be considered totally opposite to the philosophy of classical models which is summed up with the motto in French laissez faire, laissez passer (let them go, let them pass).

How did Keynes justified the government intervention on the free market economy? Please discuss briefly.

Keynes’ approach can be summarized as follows: When private sector’s spending
is insufficient, in order to prevent a reduction in output and employment, government should intervene to economy by supporting the aggregate demand (i.e., total spending). Keynes’ approach can be summarized that the state needs to interfere in economy by means of supporting to prevent the decrease of production and employment in a period of inadequacy of special sector demands.Keynes’ views were increasingly supported after World War II, especially in 1950s by both economists and government officials. In this period the idea that government can use tools like taxes and spending to achieve targets such as smoothing the fluctuations in production and employment, realizing a stable growth in production and employment became increasingly widespread. Thus, macroeconomics became a new issue with its topics, concepts and analyzing methodology differing from microeconomics.

What are the three basic indicators related to health of an economy in macroeconomics?

There are three basic indicators related to health of an economy, thus within the field of macroeconomics: Unemployment rate, inflation rate and output growth rate. Each government should watch these indicators carefully.

Please define the concepts of employment and unemployment briefly.

Employment is being hired the people deciding to work and earn income in order to benefit their labor services. Here, the phrase “being hired” means working not by force but rather willingly. In an economy, hired people and people actually seeking for a job together constitute the total labor force. Another way to find out the labor force figure is to subtract the sum of people who are not willing to work for current wage rate and
are insufficient physically and mentally from the sum of population within the range of workable ages. Here, it is required to make a clear definition for unemployment. Can we name the situation of people who are not willing to work for current wage rate as unemployment? It is difficult to answer this question positively. Because in an economy, the term “unemployed” is used for the person who is willing and able to work, but not finding a job even accepting the current wage rate.

What is unemployment rate?

Unemployment rate is the percentage of unemployed people in the total labor force.

What is Cyclical unemployment?

Cyclical unemployment is the unemployment which occurs during contraction of production volume experienced from time to time.

What is cyclical unemployment?

Cyclical unemployment is the unemployment which occurs during contraction of production volume experienced from time to time.

What is structural unemployment?

Structural unemployment is the unemployment which occurs when the overall economy with its all sectors stays in a recession continuously.

What is inflation?

Inflation: As widely seen in written and visual media, everybody has an idea about inflation more or less. Inflation is the general increase in all prices in the economy. However, it is necessary to separate the increase of a single good’s price from the increase of all goods’ prices (general price level). As you remember from microeconomics, the price of a single good may change due to fluctuations of that good’s supply and demand. If there is an increase in a single good’s price, it is not correct to consider this as inflation. If the prices of most of the goods and services in
an economy (namely average price level) increase, then inflation occurs.

Please define the concept of general price level.

General price level is the index value of weighted average of goods’ prices in a
specified period of time.

Please give brief information on the index which help economics in the creation of general price level.

General price level theoretically indicates the weighted average of all goods and services in an economy within a period of time. General price level is specified
with an index. For this purpose, firstly any year’s price level is taken as a basis and indicated as 100. Then, subsequent years’ levels are calculated according to
this 100 value. Thus, price levels in various years are explained in terms of increases and decreases according to base year’s price level. Base year is not selected randomly, rather various economic, politic and social events are considered in selection.

Please define hyperinflation and give brief information.

Hyperinflation is the very rapid increase in overall prices. Hyperinflation periods are rare. For example, in hyperinflation period in Germany after World War I between 1921-1924, prices have increased 30 billion percent. Recently, in another  hyperinflation period occurred in 1984, in Bolivia, the weekly price increase has reached 300 percent. More recent example of hyperinflation comes from Zimbabwe, an African country, with a monthly price increase of 79.6 billion percent in 2008.

What is production growth rate?

Production Growth Rate: One of the basic indicators used in assessing the performance of an economy and the general economic conditions in a country is the country’s total production, more correctly the rate of change of this quantity according to the previous period.

Please define the concept of economic growth.

The rise in the capacity of economy to produce goods and services is called as economic growth. On the other hand, economic growth can be defined as expansion of
production possibilities of a country. In this case, economic growth can be considered as outward shift of the country’s production possibilities frontier.

What is business cycle?

As it means a general improvement for a country’s wealth, economies are desired to grow as much as possible. However, all countries face with short term performance fluctuations in the economy instead of realizing steady and rapid growth rates. In other
words, while production capacity rises sometimes, at other times it decreases. These fluctuations in the form of rises and decreases in production are known as business cycle.

Please define the concepts of fiscal policy and monetary policy.

Fiscal policy is the decisions related to taxes that government collects and expenditures that government makes. On the other hand, monetary policy is the measures that the central bank takes to control the quantity of money in the economy.

What is circular flow diagram?

Circular flow diagram is the diagram which shows expenditures made and earnings
obtained by each sector of the economy.

Please define the concept of transfer payments.

Transfer payments are the payments that government and firms make to households
without having in return for good, service or labor.

What is gross domestic product?

Gross domestic product is the total value of all final (finished) goods and services
produced and expressed with market prices in a specific period of time.

Please define the concepts of intermediate goods and value added briefly.

Intermediate goods are the goods and services that are used to produce another
good and service. Value added is the addition to the value of intermediate goods and services in every production phase.

What are the three calculation methods ofgross domestic product?

GDP can be calculated in three different ways:
• In terms of the total value of goods and services produced,
• In terms of the income obtained in return for producing goods and services,
• In terms of the expenditures made for goods and services produced.