Macroeconomics

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Is partial equilibrium analysis. • Provides a foundation for macroeconomics. 4. Macroeconomics. • Macro is Greek for large. • Explains how and why the economy ...
Introduction to Economics Agenda

Economics • Economics is the study of how people, both individually and collectively, choose to allocate, over time and space, scarce resources to the production and distribution of various goods and services.

• What is Macroeconomics? • Why Do We Study Macroeconomics? • How Do We Study Macroeconomics?

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Microeconomics

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Macroeconomics

• Micro is Greek for small.

• Macro is Greek for large.

• Explains how markets work and the economic decisions made by individuals, households, business firms, industries, and units of government.

• Explains how and why the economy grows and fluctuates over time based on the decisions made, in the aggregate, by consumers, businesses, and governments. • Is general equilibrium analysis.

• Is partial equilibrium analysis.

• Explains variables taken as given in microeconomics.

• Provides a foundation for macroeconomics. 3

Macroeconomics

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Overview of the Course

• Macroeconomics is a model-based discipline. • Plan of Action

• Definitions, Concepts, Key Relationships • Long-run Economic Growth ¾ EXAM #1

¾ Develop simple models that can generate useful and realistic explanations about the behavior of important macroeconomic variables.

• Short-run Business Fluctuations

¾ Apply these models to analyze historical and current macroeconomic developments and to make predictions about future events.

• International Trade and Finance • Medium-term Growth and Inflation 5

¾ EXAM #2

¾ EXAM #3

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Overview of the Course

Why Study Macroeconomics? • Macroeconomics is all around us.

• The 3 major topics are related by the assumptions we make about how quickly wages and prices adjust in non-equilibrium situations.

• Provides the environment in which business firms operate. • Provides the environment in which the political system operates.

¾ In the short-run, no adjustment. ¾ In the medium term, partial adjustment.

• Is essential for the formulation and evaluation of good economic policy.

¾ In the long-run, full adjustment.

• Is endlessly fascinating because it provides a description of how the world operates. 7

How To Study Macroeconomics

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How To Study Macroeconomics

• Macroeconomics is a model-based discipline. • Therefore, we need to:

• Building Economic Models ¾ Identify key economic variables. ¾ Posit a relationship between these variables. • Focus on a few key relationships.

¾ Develop simple models that can generate useful and realistic explanations about the behavior of important macroeconomic variables. ¾ Apply these models to analyze historical and current macroeconomic developments and to make predictions about future events.

¾ Provides a simplified way to think about the economy.

¾ Collect data and test the model relationships.

• Although this process abstracts from the complexity of the real world it still provides valuable insights and conclusions about how the economy operates.

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How To Study Macroeconomics

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How To Study Macroeconomics

• Types of Economic Variables ¾ Exogenous: explained outside of the model.

Exogenous Variables

¾ Endogenous: explained inside of the model.

Key Relationships: Constants and Parameters

Endogenous Variables

¾ Constants and parameters: measures sensitivity of the relationship between variables. 11

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How To Study Macroeconomics • Economic models helps us tell stories about: ¾ How the key economic variables are related to one another. ¾ What happens to the endogenous variables if an exogenous variable(s) changes.

How To Study Macroeconomics • Types of descriptions: ¾ Verbal ¾ Graphical ¾ Mathematical

¾ What can be inferred about what happened to an exogenous variable(s) if an endogenous variable(s) changes. 13

How To Study Macroeconomics

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How To Study Macroeconomics • Using Economic Models

• Drawbacks of Economic Models

¾ Economic Theory

¾ Economics is not an exact science. • The macroeconomy is highly complex and continues to evolve over time. ¾ General equilibrium analysis

• A description of “what is”. • Uses models to understand how the economy works. • “Positive” economics.

¾ Economic Policy

¾ Economics is a behavioral science.

• A description of “what should be”, a “value judgment.” • Uses models to make policy recommendations. • “Normative” economics.

• Behavior can change over time. • Relationships between variables can change. 15

Why Macroeconomist Disagree

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Brief History of Macroeconomics • Classical Macroeconomics

• Theoretical Differences ¾ About the structure of the economy. ¾ About the sensitivity of the economy.

• The Great Depression ¾ John Maynard Keynes

• Policy Differences

• Long-Term Economic Growth

¾ About the appropriate role for government spending/taxing and monetary policy.

¾ Robert Solow

• Inflation ¾ A.W. Phillips, Edmund Phelps and Milton Friedman

• Different Time Horizons ¾ Many disagreements revolve around different, but unspoken, time horizons.

• Unemployment 17

¾ Arthur Okun

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