The Full-Employment Economy

The “trick” of macroeconomics is to get economy-wide measures that are meaningful and that tell how much production is taking place, what workers are earning, how many people are employed, and how fast the economy is growing year to year. This chapter explains how GDP, wage level, interest rate, and employment level are determined. It also explains a full-employment economy, which is a benchmark for macroeconomists and is determined using a production function. There are three different time horizons of study for macroeconomics—short-term, medium-term, and long-term—and Professor Sachs focuses on the short-term of just one business cycle (or year) for this chapter. Macroeconomics is concerned with studying the short-run fluctuations of the economy, or shocks, from both the supply and demand side. Keynesian macroeconomics is a demand-side interpretation of business cycles.

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