CHAPTER SUMMARY

1. Macroeconomics is the study of the structure and per­formance of national economies and the policies that governments use to try to affect economic perfor­mance. Important topics in macroeconomics include the determinants of long-run economic growth, busi­ness cycles, unemployment, inflation, international trade and lending, and macroeconomic policy.

2. Because macroeconomics covers the economy as a whole, macroeconomists ignore the fine distinctions among different kinds of goods, firms, or markets and focus on national totals such as aggregate consumption. The process of adding individual economic variables to obtain economywide totals is called aggregation.

3. The activities engaged in by macroeconomists include (in addition to teaching) forecasting, macroeconomic anal­ysis, macroeconomic research, and data development.

4. The goal of macroeconomic research is to make general statements about how the economy works. Macroeconomic research makes progress toward this goal by developing economic theories and testing them empirically—that is, by seeing whether they are consis­tent with data obtained from the real world. A useful economic theory is based on reasonable and realistic assumptions, is easy to use, has implications that can be tested in the real world, and is consistent with the data and the observed behavior of the real-world economy.

5. A positive analysis of an economic policy examines the economic consequences of the policy but does not address the question of whether those consequences are desirable. A normative analysis of a policy tries to determine whether the policy should be used. Disagreements among macro­economists may arise because of differences in normative conclusions, as the result of differences in personal values and beliefs, and because of differences in the positive anal­ysis of a policy proposal.

6. The classical approach to macroeconomics is based on the assumptions that individuals and firms act in their own best interests and that wages and prices adjust quickly to achieve equilibrium in all markets. Under these assumptions the invisible hand of the free-market economy works well, with only a limited scope for government intervention in the economy.

7. The Keynesian approach to macroeconomics assumes that wages and prices do not adjust rapidly and thus the invisible hand may not work well. Keynesians argue that, because of slow wage and price adjust­ment, unemployment may remain high for a long time. Keynesians are usually more inclined than clas- sicals to believe that government intervention in the economy may help improve economic performance.

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