Chapter 10 Macroeconomic Variables

What is macroeconomics?

Is macroeconomics the same for all countries?

What three main differences separate micro- and macroeconomics?

Who introduced macroeconomics, and what was its major objective?

Why is macroeconomics said to be a typical public good?

What are economic indicators of macro-economic variables; and why is knowledge about them important?


What is economic growth?

How is growth measured?

Why is growth important?

In which three ways can growth be defined?

Imperfections of the GDP


# does not take account services produced at home.

# adds the income from economic activities that detract from the well being of citizens such as drug trafficking and use.

•developing country real-GDP excludes all of their rather significant but nonofficial economic sector because of lack of records.

•does not include much of the rural non-pecuniary economic activity that does not pass through the market such as self-subsistence production, and reciprocal, communitarian, and voluntary exchange.


The Business Cycle

Nature of a Typical Business Cycle.

So What Is a Healthy Economy?

The economy is healthy, that is, stable and steady over the long term if:

•fluctuates but not widely out of control;

•is able "to stay between the lines" meaning the actual growth path stays close to the projected growth path;

•able to avoid long-drawn recessions;

•able either by itself or with a little help from policy, to pull out of recession and inflation;

•does not have any major structural constraints so that it can respond to policy.

Are the concepts of a healthy and an efficient economy the same things?

What is a Full-employment Economy?




    producers are forced to use inferior resources and less competent labor

•producers are forced to tap into expensive overtime work

•over-utilization of factory plants results in a higher rate of machine depreciation

•productivity of overstretched workers declines

•producers are forced to increase wages to retain efficient labor

•producers are forced to pay higher than normal wages to attract the frictionally unemployed.




Question: What is the Federal Reserve System’s role in macro-managing the economy?

The Federal Reserve System is the central bank of the United States and the institution through which government carries out its monetary policy.

The banking system is a critical part of US political economy, where government and the private banking system cooperate to ensure the economic health of the country.

Not all commercial banks are members of the Federal Reserve System, but most are.

The government can act through the banks because their chief commodity, money, is nothing but the debt of commercial banks and government. Money is essentially government IOUs. (More on this shortly).

The Federal Reserve System is designed for maximum independence from other branches of government, especially, the executive presidency, in order to suggest the independence of monetary policy from political controls, especially of the sitting president.

The Federal Reserve Board of Governors: or the Fed, the core of the Federal Reserve, consists of seven appointees of the president confirmed by the Senate, and is most directly responsible for setting individual bank reserve requirements, as well as the final discount rate.

The 12 Presidents of the Federal Reserve District Banks is collectively responsible for establishing and recommending to the Fed the discount rate. (More on this later).

The Federal Reserve Open Market Committee, made up of 7 Fed representatives and 5 Federal Reserve District Bank presidents, has exclusive responsibility for determining when to sell or buy government bonds and how much is necessary to fight recession or inflation.

The Federal Reserve Advisory Council, a 12 member advisory council which together with the Consumer Advisory Council and the Thrift Institutions Advisory Council advises the fed on its macro-management responsibilities.

The Twelve Federal Reserve District Banks each representing one of the 12 banking districts in the country and responsible for all banking activities within the districts, including:

(a) the coinage and distribution of the country’s currency;

(b) the operation of a nationwide payments network,

(c) supervising and regulating member banks and financial holding companies;

(d) issuing, servicing, and redeeming Treasury securities or bonds;

(e) conducting nationwide auctions of Treasury securities;

(f) daily monitoring of federal tax receipts;

(g) meeting every two weeks to recommend to the Fed, the discount rate.


25 Federal Reserve Branch Banks created over time to aid in the ever expanding banking and monetary responsibilities of the Federal Reserve District Banks.

Member Banks of the Federal Reserve System are commercial banking institutions that form the vital link between individual US citizens and residents and the Federal Reserve System. Members banks are required by law to subscribe to stock with their Federal Reserve Regional Bank in amount equal to three percent of their total capital and surplus.

Consumers, the millions of individual persons and institutions brought into the monetary system as customers of commercial banks, as borrowers of money, and generally as uses of government commercial debt (also called money).

The effectiveness of Fed monetary policies depends greatly on how successfully these policy alter consumers’ demand for money habits; and in turn, on how much confidence consumers have in the fed’s monetary policy as well as the money it issues.

The Logic of Banking

The Role of Consumers: The banking system is a system built on the trust and confidence of the public that its hard earned money when deposited with banks will retain their value over time as well as earn some interest; thus the decision to consume now or consume in the future will not be a false empty choice. This trust is based on four considerations:

a rational weighing of personal current versus future consumptive needs and the projected future trends in prices;

current versus future interest rates; whichever is higher will determine consumers’ demand for money;

consumers’ confidence in the banking system to deliver on its promises;

consumers’ confidence in the stability of the economy as a whole.

The Role of Commercial Banks: Their primary task and objective is to retain the confidence of their depositors by being in position to honor their withdrawal demands at all times.

This they do by maintaining a fraction of their total deposits or liabilities as reserves with the Federal Reserve District Banks.

The Role of the Federal Reserve System: The Fed determines the amount of commercial banks’ total deposits they must keep as reserves in order to maintain the public’s confidence in the banking system.

Commercial banks and other financial depositories submit to the Fed because their interest of maintaining a steady value of money coincides with, indeed, is exactly the same as the interest of the Fed, as the monetary branch of government, to ensure that at anytime the money supply is exactly equal to the actual total value of goods and services, in order words, to ensure zero inflation.

In return, commercial banks and other financial depositories benefit from the insurance backing of the financial power of government, that is, the entire economic power of United States. That is powerful insurance.