Principles of Macroeconomics (Video)

The aggregate demand-aggregate supply model, or AD-AS model, can help us understand business fluctuations. We’ll start exploring this model by focusing on the aggregate demand curve. The aggregate demand curve shows us all of the possible combinations of...

Economic growth doesn’t happen at a steady pace; there are ebbs and flows. Prosperity on the national level depends on a country having good institutions in place. The factors of production – human capital, physical capital, and ideas – are also critical...

We previously discussed how economic growth depends on the combination of ideas, human and physical capital, and good institutions. The fundamental factors, at least in the long run, are not dependent on inflation. The long-run aggregate supply curve,...

Spider-Man fans likely recall Uncle Ben advising his nephew, Peter Parker, that “With great power, comes great responsibility.” As it turns out, that sage wisdom is also pretty applicable to the U.S. Federal Reserve System (aka the Fed). The Fed...

Imagine you’re an employer during a recession, and you desperately need to cut labor costs to keep your firm afloat. Are you more likely to cut wages across the board for all employees, or institute layoffs for only some? While it may seem that wage cuts...

In this video, we explore how rapid shocks to the aggregate demand curve can cause business fluctuations. As the government increases the money supply, aggregate demand also increases. A baker, for example, may see greater demand for her baked goods,...

What happens when aggregate demand shifts because of a change in the velocity of money? You’ll recall from earlier videos that an increase or decrease in velocity means that money is changing hands at a faster or slower rate. Changes in velocity are...

In the first video in this section on The Wealth of Nations and Economic Growth, you learned a basic fact of economic wealth—that countries can vary widely in standard of living. Specifically, you learned how variations in real GDP per capita can set...

Imagine that we’re in the late 1920s in the United States. Times are great. World War I is behind us and we’re in the early days of the “Golden Age of Hollywood.” Jazz music is blossoming. Automobiles are new and novel. As Art Deco style peaks, there’s...

In this video, which is also featured in Marginal Revolution University’s Everyday Economics course, we discuss the key factors behind the rise in innovation and entrepreneurship over the past couple of centuries. The economic historian Deirdre McCloskey...

Inflation can throw a kink in your savings plans. To accurately know your rate of return, you need to do a little more than calculate what you’ll receive off of the nominal interest rate. First off, returns on savings are taxed. Depending on where you...

What is money? That may seem like a really simple question, but it’s actually kind of complicated. Paper bills and coins, or currency, is obviously money. But it doesn’t end there. Technically, “money” is anything that is a widely accepted means of...

In previous videos, you learned two things. First, that there can be large disparities in economic wealth among different countries. And second, you learned that one key factor drives that disparity: growth rate. As we said, it changes everything. But...

In today’s video, we discuss a topic critical to understanding economic growth: the power of institutions. To better shed light on this, we're going to look at an example that's both tragic and extreme. In 1945, North and South Korea were divided, ending...

When you deposit money into a bank, do you know what happens to it? It doesn’t simply sit there. Banks are actually allowed to loan out up to 90% of their deposits. For every $10 that you deposit, only $1 is required to stay put. This practice is known...

If you look at the African continent, perhaps the first word to come to mind is "enormous." And that's true. You could fit most of the United States, China, India, and a lot of Europe, into Africa. But if you compare Africa to Europe, Europe has two to...

In the United States, the Federal Reserve controls the supply of money. This makes it a pretty massive player in the US – and world – economy. The Fed can use the money supply and interest as tools to influence aggregate demand. But how the Fed does this...

Throughout this section of the course, we’ve been trying to solve a complicated economic puzzle—why are some countries rich and others poor? There are various factors at play, interacting in a dynamic, and changing environment. And the final answer to...

Do you recall our question about Germany and Japan from our previous video? How did they achieve record economic growth following World War II? Today's video will help answer that question. We'll be digging into the K variable of our simplified Solow...

In response to the 2008 financial crisis, the Fed employed some new instruments and approaches to getting the economy back on track. In this video we explore three of these: quantitative easing, paying interest on reserves, and conducting repurchase (and...

Remember our simplified Solow model? One end of it is input, and on the other end, we get output. What do we do with that output? Either we can consume it, or we can save it. This saved output can then be re-invested as physical capital, which grows the...

If you heard a rumor that your bank was insolvent (in other words, it had more liabilities than assets), what would you do? A typical reaction is to panic. What if you can’t get your money out? Your next step would likely be to try and get all of your...

In our previous macroeconomics video, we said that the accumulation of physical capital only provides a temporary boost to economic growth. Does the same apply to human capital? To answer that, consider this: what happens to all new graduates, in the end...

Imagine that you’re the Fed and monetary policy is your domain. The economy has been doing fine: inflation isn’t too high, GDP is growing at a reasonable rate. But then something happens. Consumer confidence drops. The economy shrinks. What do you do?...

According to our previous videos in this section, the Solow model seems to predict that we’ll always end up in a steady state with no economic growth. But, the Solow model still has one variable unaccounted for: ideas. So, can ideas keep us growing?...

As we’ve seen, it can be difficult for the Federal Reserve to course-correct when dealing with a sluggish economy suffering from an aggregate demand shock. Now we’re going to see what happens when a negative real shock hits. For instance, suppose we see...

At the end of our last video, we asked, “What spurs the growth of new ideas?”To answer that, we’ll tell you two stories.The first is about a man named John Kay.He created the flying shuttle, one of the key inventions of the Industrial Revolution. His...

If you think through all of the variables that shape a country’s economy, it’s no wonder that monetary policy is difficult. It should also come as no surprise that the Federal Reserve doesn’t always get it right. In fact, sometimes the Fed’s actions have...

Growth on the cutting edge is all about the creation of new ideas. So, we want institutions that incentivize such creation. How do we do this? The answer is somewhat tricky. The first goal for good ideas is for them to spread as freely as possible. The...

Alex Tabarrok’s TED talk showed you that ideas can trump nearly every crisis. Now, since ideas are so important, we have to ask: is the future of ideas a bright one? To answer that, we’ll look at something we call the Idea Equation. It goes like this:...

In last week’s Principles of Macroeconomics video, you learned about the steady state level of capital and the Solow model of economic growth. Here are two of the practice questions from that video: Country A has K=10,000 and produces GDP according to...

Some people want to save and invest, others want to borrow. Sometimes, savers and borrowers link up directly. But most times, they don’t know each other. So they rely on institutions that bridge them together. These bridges are called financial...

Today, we’ll examine a new kind of financial intermediary: stock markets. As an individual, you participate in the stock market when you buy a company’s shares. This turns you into a part-owner, entitled to some of the company's profits. Sometimes,...

Most borrowers borrow through banks. But established and reputable institutions can also borrow from a different intermediary: the bond market. That’s the topic of this video. We’ll discuss what a bond is, what it does, how it’s rated, and what those...

In Intro to the Bond Market, you learned the basics about bonds and how they differ from stocks. But what if you’re investing and you’ve got a few possible companies to choose from? How would you evaluate which bond is likely to be the best investment...

There’s already been much discussion over what fueled the Great Recession of 2008. In this video, Tyler Cowen focuses on a central theme of the crisis: the failure of financial intermediaries. By 2008, the economy was in a very fragile state, with both...

Ideas are a major factor in economic growth. But so are saving and investing. If you were given the choice between living in an inventive (more ideas) or a thrifty (more savings) country, which would you choose? The Solow model of economic growth, which...

As we’ve discussed in previous videos, financial intermediaries bridge savers and borrowers. When these bridges crumble, the effects can be disastrous. For businesses, credit shortages can lead to bankruptcy, or layoffs. For individuals, they rely on...

How is unemployment defined in the United States? If someone has a job, they’re defined as “employed.” But does that mean that everyone without a job is unemployed? Not exactly. A minor without a job isn’t unemployed. Someone who has been incarcerated...

What is fiscal policy? Very simply, it’s a government’s policies on taxes, spending, and borrowing. But how it’s practiced is a little more complicated. Fiscal policy can be used in an effort to mitigate fluctuations in the business cycle – to soften the...

You may recall from our previous video that to be counted in the official unemployment rate in the U.S., you have to be an adult without a job and have actively looked for work within the past four weeks. That means that if someone has given up looking...

We’re going to explore the mechanics of the aggregate-demand aggregate-supply (AD-AS) model. In our example, we’ll measure the economy’s inflation rate as well as the real GDP growth rate on the vertical and horizontal axes. A country’s normal GDP growth...

Finding a job can be kind of like dating. When a new graduate enters the labor market, she may have the opportunity to enter into a long-term relationship with several companies that aren’t really a good fit. Maybe the pay is too low or the future...

Unemployment comes in many forms. Sometimes, like we saw with short-term, frictional unemployment, it can actually indicate a healthy, growing economy. But what about persistent, long-term unemployment? That’s not so good. When a large percentage of...

The best case for fiscal policy happens during a recession caused by an aggregate demand shock. Even so, it’s hard to get it right because the U.S. economy is massive and complex. An ideal stimulus is: 1. Timely 2. Targeted 3. Temporary All of these...

Unemployment rates ebb and flow with business cycle phases. We all saw this when unemployment rates increased in the United States during the 2008 recession. What we observed was called cyclical unemployment, and it usually accompanies slow economic...

In this video, we explore when and why the government might engage in expansionary fiscal policy. Specifically, we’ll discuss why the government might increase spending, or decrease taxes, to combat a recession. Think about an economy during a recession...