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1、Learning objectives,This chapter introduces you tothe issues macroeconomists studythe tools macroeconomists usesome important concepts in macroeconomic analysis,Important issues in macroeconomics,Why does the cost of living keep rising?Why are millions of people unemployed,even when the economy is b
2、ooming?Why are there recessions?Can the government do anything to combat recessions?Should it?,Important issues in macroeconomics,What is the government budget deficit?How does it affect the economy?Why does the U.S.have such a huge trade deficit?Why are so many countries poor?What policies might he
3、lp them grow out of poverty?,U.S.Gross Domestic Product in billions of chained 1996 dollars,U.S.Gross Domestic Product in billions of chained 1996 dollars,Why learn macroeconomics?,The macroeconomy affects societys well-being.example:Unemployment and social problems,Unemployment and social problems,
4、Each one-point increase in the unemployment rate is associated with:920 more suicides650 more homicides4000 more people admitted to state mental institutions3300 more people sent to state prisons37,000 more deathsincreases in domestic violence and homelessness,Why learn macroeconomics?,The macroecon
5、omy affects societys well-being.example:Unemployment and social problems,The macroeconomy affects your well-being.example 1:Unemployment and earnings growthexample 2:Interest rates and mortgage payments,Unemployment and earnings growth,Interest rates and mortgage payments,For a$150,000 30-year mortg
6、age:,$11,782,$981,6.84%,Dec 2001,$12,771,$1064,7.65%,Why learn macroeconomics?,The macroeconomy affects societys well-being.example:Unemployment and social problems,The macroeconomy affects your well-being.example 1:Unemployment and earnings growthexample 2:Interest rates and mortgage payments,The m
7、acroeconomy affects politics¤t events.example:Inflation and unemployment in election years,Inflation and Unemployment in Election Years,year U rate inflation rate elec.outcome19767.7%5.8%Carter(D)19807.1%13.5%Reagan(R)19847.5%4.3%Reagan(R)19885.5%4.1%Bush I(R)19927.5%3.0%Clinton(D)19965.4%3.3%
8、Clinton(D)20004.0%3.4%Bush II(R),Economic models,are simplied versions of a more complex realityirrelevant details are stripped awayUsed to show the relationships between economic variablesexplain the economys behaviordevise policies to improve economic performance,Example of a model:The supply&dema
9、nd for new cars,explains the factors that determine the price of cars and the quantity sold.assumes the market is competitive:each buyer and seller is too small to affect the market priceVariables:Q d=quantity of cars that buyers demandQ s=quantity that producers supplyP=price of new carsY=aggregate
10、 incomePs=price of steel(an input),The demand for cars,shows that the quantity of cars consumers demand is related to the price of cars and aggregate income.,Digression:Functional notation,General functional notation shows only that the variables are related:,Digression:Functional notation,General f
11、unctional notation shows only that the variables are related:,A specific functional form shows the precise quantitative relationship:,The market for cars:demand,Q Quantity of cars,P Price of cars,The demand curve shows the relationship between quantity demanded and price,other things equal.,The mark
12、et for cars:supply,The market for cars:equilibrium,The effects of an increase in income:,An increase in income increases the quantity of cars consumers demand at each price,which increases the equilibrium price and quantity.,The effects of a steel price increase:,An increase in Ps reduces the quanti
13、ty of cars producers supply at each price,which increases the market price and reduces the quantity.,Endogenous vs.exogenous variables:,The values of endogenous variables are determined in the model.The values of exogenous variables are determined outside the model:the model takes their values&behav
14、ior as given.In the model of supply&demand for cars,Now you try:,Write down demand and supply equations for wireless phones;include two exogenous variables in each equation.Draw a supply-demand graph for wireless phones.Use your graph to show how a change in one of your exogenous variables affects t
15、he models endogenous variables.,A Multitude of Models,No one model can address all the issues we care about.For example,If we want to know how a fall in aggregate income affects new car prices,we can use the S/D model for new cars.But if we want to know why aggregate income falls,we need a different
16、 model.,A Multitude of Models,So we will learn different models for studying different issues(e.g.unemployment,inflation,long-run growth).For each new model,you should keep track of its assumptions,which of its variables are endogenous and which are exogenous,the questions it can help us understand,
17、and those it cannot.,Prices:Flexible Versus Sticky,Market clearing:an assumption that prices are flexible and adjust to equate supply and demand.In the short run,many prices are sticky-they adjust only sluggishly in response to supply/demand imbalances.For example,labor contracts that fix the nomina
18、l wage for a year or longermagazine prices that publishers change only once every 3-4 years,Prices:Flexible Versus Sticky,The economys behavior depends partly on whether prices are sticky or flexible:If prices are sticky,then demand wont always equal supply.This helps explainunemployment(excess supp
19、ly of labor)the occasional inability of firms to sell what they produceLong run:prices flexible,markets clear,economy behaves very differently.,Outline of this book:,Introductory material(chaps.1&2)Classical Theory(chaps.3-6)How the economy works in the long run,when prices are flexibleGrowth Theory
20、(chaps.7-8)The standard of living and its growth rate over the very long runBusiness Cycle Theory(chaps 9-13)How the economy works in the short run,when prices are sticky.,Outline of this book:,Policy debates(Chaps.14-15)Should the government try to smooth business cycle fluctuations?Is the governme
21、nts debt a problem?Microeconomic foundations(Chaps.16-19)Insights from looking at the behavior of consumers,firms,and other issues from a microeconomic perspective.,Chapter summary,Macroeconomics is the study of the economy as a whole,includinggrowth in incomeschanges in the overall level of pricest
22、he unemployment rateMacroeconomists attempt to explain the economy and to devise policies to improve its performance.,Chapter summary,Economists use different models to examine different issues.Models with flexible prices describe the economy in the long run;models with sticky prices describe economy in the short run.Macroeconomic events and performance arise from many microeconomic transactions,so macroeconomics uses many of the tools of microeconomics.,
