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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