The Science of Macroeconomics

Сентябрь 5, 2022

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The Science of Macroeconomics

Содержание

2. IN THIS CHAPTER, YOU WILL LEARN: about the issues macroeconomists study about the tools macroeconomists use
3. Important issues in macroeconomics What causes recessions? What is “government stimulus” and why might it help?
4. Important issues in macroeconomics Why does the cost of living keep rising? Why are so many
5. microeconomics Examines the functioning of individual industries and the behavior of individual decision-making units—firms and households.
6. Three of the major concerns of macroeconomics are Output growth Unemployment Inflation and deflation Macroeconomic Concerns
7. Macroeconomic Concerns business cycle The cycle of short-term ups and downs in the economy. aggregate output
8. ▶ FIGURE 5.1 A Typical Business Cycle In this business cycle, the economy is expanding as
9. U.S. Real GDP per capita (2005 dollars) Great Depression World War II First oil price shock
10. Macroeconomic Concerns Unemployment unemployment rate The percentage of the labor force that is unemployed.
11. U.S. Unemployment Rate (% of labor force) Great Depression Financial crisis World War II World War
12. Macroeconomic Concerns Inflation and Deflation inflation An increase in the overall price level. hyperinflation A period
13. U.S. Inflation Rate (% per year) Great Depression First oil price shock Second oil price shock
14. Understanding how the macroeconomy works can be challenging because a great deal is going on at
15. Economic models …are simplified versions of a more complex reality irrelevant details are stripped away …are
16. Endogenous vs. exogenous variables The values of endogenous variables are determined in the model. The values
17. Example of a model: Supply & demand for new cars shows how various events affect price
18. The demand for cars demand equation: Q d = D (P,Y ) shows that the quantity
19. Digression: functional notation General functional notation shows only that the variables are related. Q d =
20. The market for cars: Demand Q Quantity of cars P Price of cars The demand curve
21. The market for cars: Supply supply equation: Q s = S (P,PS )
22. The market for cars: Equilibrium
23. The effects of an increase in income An increase in income increases the quantity of cars
24. The effects of a steel price increase An increase in Ps reduces the quantity of cars
25. NOW YOU TRY Supply and Demand 1. Write down demand and supply equations for smartphones; include
26. The use of multiple models No one model can address all the issues we care about.
27. The use of multiple models So we will learn different models for studying different issues (e.g.,
28. Prices: flexible vs. sticky Market clearing: An assumption that prices are flexible, adjust to equate supply
29. Prices: flexible vs. sticky The economy’s behavior depends partly on whether prices are sticky or flexible:
30. Outline of this book: Introductory material (Chaps. 1, 2) Classical Theory (Chaps. 3–7) How the economy
31. Outline of this book: Macroeconomic theory (Chaps. 15–17) Macroeconomic dynamics, models of consumer behavior, theories of
32. CHAPTER SUMMARY Macroeconomics is the study of the economy as a whole, including growth in incomes
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IN THIS CHAPTER, YOU WILL LEARN:
about the issues macroeconomists study
about the

tools macroeconomists use
some important concepts in macroeconomic analysis

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Important issues in macroeconomics
What causes recessions? What is “government stimulus” and

why might it help?
How can problems in the housing market spread to the rest of the economy?
What is the government budget deficit? How does it affect workers, consumers, businesses, and taxpayers?

Macroeconomics, the study of the economy as a whole, addresses many topical issues, e.g.:

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Important issues in macroeconomics
Why does the cost of living keep rising?
Why

are so many countries poor? What policies might help them grow out of poverty?
What is the trade deficit? How does it affect the country’s well-being?

Macroeconomics, the study of the economy as a whole, addresses many topical issues, e.g.:

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microeconomics Examines the functioning of individual industries and the behavior of

individual decision-making units—firms and households.

macroeconomics Deals with the economy as a whole. Macroeconomics focuses on the determinants of total national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices.

aggregate behavior The behavior of all households and firms together.

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Three of the major concerns of macroeconomics are
Output growth
Unemployment
Inflation and deflation
Macroeconomic

Concerns

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Macroeconomic Concerns
business cycle The cycle of short-term ups and downs in

the economy.

aggregate output The total quantity of goods and services produced in an economy in a given period.

recession A period during which aggregate output declines. Conventionally, a period in which aggregate output declines for two consecutive quarters.

depression A prolonged and deep recession.

Output Growth

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▶ FIGURE 5.1 A Typical Business Cycle
In this business cycle, the

economy is expanding as it moves through point A from the trough to the peak.
When the economy moves from a peak down to a trough, through point B, the economy is in recession.

Macroeconomic Concerns

Output Growth

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U.S. Real GDP per capita (2005 dollars)
Great Depression
World War II
First oil

price shock

Second oil price shock

9/11/2001

World War I

Financial crisis

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Macroeconomic Concerns
Unemployment
unemployment rate The percentage of the labor force that is

unemployed.

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U.S. Unemployment Rate (% of labor force)
Great Depression
Financial crisis
World War II
World War

Oil price shocks

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Macroeconomic Concerns
Inflation and Deflation
inflation An increase in the overall price level.

hyperinflation A period of very rapid increases in the overall price level.

deflation A decrease in the overall price level.

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U.S. Inflation Rate (% per year)
Great Depression
First oil price shock
Second oil price

shock

Financial crisis

World War I

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Understanding how the macroeconomy works can be challenging because a great

deal is going on at one time. Everything seems to affect everything else.
To see the big picture, it is helpful to divide the participants in the economy into four broad groups:
Households.
Firms.
The government.
The rest of the world.

The Components of the Macroeconomy

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Economic models
…are simplified versions of a more complex reality
irrelevant details are

stripped away
…are used to
show relationships between variables
explain the economy’s behavior
devise policies to improve economic performance

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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 and behavior as given.
In the model of supply & demand for cars,
endogenous: P, Q d, Q s
exogenous: Y, Ps

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Example of a model: Supply & demand for new cars
shows how

various events affect price and quantity of cars
assumes the market is competitive: each buyer and seller is too small to affect the market price
Variables
Qd = quantity of cars that buyers demand
Qs = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)

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The demand for cars
demand equation: Q d = D (P,Y )
shows

that the quantity of cars consumers demand is related to the price of cars and aggregate income

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Digression: functional notation
General functional notation shows only that the variables are

related.
Q d = D (P,Y )
A specific functional form shows the precise quantitative relationship.
Example: D (P,Y ) = 60 – 10P + 2Y

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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.

demand equation:
Q d = D (P,Y )

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The market for cars: Supply
supply equation:
Q s = S (P,PS )

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The market for cars: Equilibrium

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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.

demand equation:
Q d = D (P,Y )

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The effects of a steel price increase
An increase in Ps reduces

the quantity of cars producers supply at each price…

…which increases the market price and reduces the quantity.

supply equation:
Q s = S (P,PS )

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NOW YOU TRY Supply and Demand
1. Write down demand and supply equations for

smartphones; include two exogenous variables in each equation.
2. Draw a supply-demand graph for smartphones.
3. Use your graph to show how a change in one of your exogenous variables affects the model’s endogenous variables.

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The use of multiple models
No one model can address all the

issues we care about.
E.g., our supply-demand model of the car market…
can tell us how a fall in aggregate income affects price & quantity of cars.
cannot tell us why aggregate income falls.

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The use of multiple 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 variables are endogenous, which are exogenous
the questions it can help us understand, those it cannot

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Prices: flexible vs. sticky
Market clearing: An assumption that prices are flexible,

adjust to equate supply and demand.
In the short run, many prices are sticky – adjust sluggishly in response to changes in supply or demand. For example:
many labor contracts fix the nominal wage for a year or longer
many magazine publishers change prices only once every 3 to 4 years

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Prices: flexible vs. sticky
The economy’s behavior depends partly on whether prices

are sticky or flexible:
If prices sticky (short run), demand may not equal supply, which explains:
unemployment (excess supply of labor)
why firms cannot always sell all the goods they produce
If prices flexible (long run), markets clear and economy behaves very differently

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Outline of this book:
Introductory material (Chaps. 1, 2)
Classical Theory (Chaps. 3–7)

How the economy works in the long run, when prices are flexible
Growth Theory (Chaps. 8, 9) The standard of living and its growth rate over the very long run
Business Cycle Theory (Chaps. 10–14) How the economy works in the short run, when prices are sticky

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Outline of this book:
Macroeconomic theory (Chaps. 15–17) Macroeconomic dynamics, models of consumer

behavior, theories of firms’ investment decisions
Macroeconomic policy (Chaps. 18–20) Stabilization policy, government debt and deficits, financial crises

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CHAPTER SUMMARY
Macroeconomics is the study of the economy as a whole,

including
growth in incomes
changes in the overall level of prices
the unemployment rate
Macroeconomists attempt to explain the economy and to devise policies to improve its performance.

The Science of Macroeconomics

Содержание

IN THIS CHAPTER, YOU WILL LEARN:about the issues macroeconomists studyabout the

Important issues in macroeconomicsWhat causes recessions? What is “government stimulus” and

Important issues in macroeconomicsWhy does the cost of living keep rising?Why

microeconomics Examines the functioning of individual industries and the behavior of

Three of the major concerns of macroeconomics areOutput growthUnemploymentInflation and deflationMacroeconomic

Macroeconomic Concernsbusiness cycle The cycle of short-term ups and downs in

▶ FIGURE 5.1 A Typical Business CycleIn this business cycle, the

U.S. Real GDP per capita (2005 dollars)Great DepressionWorld War IIFirst oil

Macroeconomic ConcernsUnemploymentunemployment rate The percentage of the labor force that is

U.S. Unemployment Rate (% of labor force)Great DepressionFinancial crisisWorld War IIWorld War

Macroeconomic ConcernsInflation and Deflationinflation An increase in the overall price level.

U.S. Inflation Rate (% per year)Great DepressionFirst oil price shockSecond oil price

Understanding how the macroeconomy works can be challenging because a great

Economic models…are simplified versions of a more complex realityirrelevant details are

Endogenous vs. exogenous variablesThe values of endogenous variables are determined in

Example of a model: Supply & demand for new carsshows how

The demand for carsdemand equation: Q d = D (P,Y )shows

Digression: functional notationGeneral functional notation shows only that the variables are

The market for cars: DemandQ Quantity of carsP Price of carsThe

The market for cars: Supplysupply equation:Q s = S (P,PS )