1、about the issues macroeconomists studythe tools macroeconomists usesome important concepts in macroeconomic analysisImportant issues in macroeconomicsWhat 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?

2、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.:Important issues in macroeconomicsWhy does the cost of living keep rising?Why are so many countries poor?

3、What policies might help them grow out of poverty? What is the trade deficit? How does it affect the countrys well-being? Macroeconomics, the study of the economy as a whole, addresses many topical issues, e.g.:U.S. Real GDP per capita (2000 dollars)long-run upward trendGreat DepressionWorld War IIF

4、irst oil price shockSecond oil price shock9/11/2001U.S. Inflation Rate(% per year)U.S. Unemployment Rate(% of labor force)Social problems like homelessness, domestic violence, crime, and poverty are linked to the economy. For exampleWhy learn macroeconomics?1. The macroeconomy affects societys well-

5、being.percent of labor forcecrimes per 100,000 populationU.S. Unemployment and Property Crime RatesUnemployment (left scale)Property crimes (right scale)Why learn macroeconomics?2. The macroeconomy affects your well-being.change from 12 mos earlierpercent change from 12 mos earlierIn most years, wag

6、e growth falls when unemployment is rising.Why learn macroeconomics?3. The macroeconomy affects election outcomes.Unemployment & inflation in election yearsyear 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

7、%Clinton (D)19965.4%3.3%Clinton (D)20004.0%3.4%Bush II (R)20045.5%3.3%Bush II (R)20087.2%3.8%Obama (D)Economic modelsare simplified versions of a more complex realityirrelevant details are stripped awayare used to show relationships between variablesexplain the economys behaviordevise policies to im

8、prove economic performanceExample of a model: Supply & demand for new carsshows how various events affect price and quantity of carsassumes the market is competitive: each buyer and seller is too small to affect the market priceVariablesQd = quantity of cars that buyers demandQs = quantity that

9、producers supplyP = price of new carsY = aggregate incomePs = price of steel (an input)The demand for carsdemand equation: Q d = D (P,Y )shows that the quantity of cars consumers demand is related to the price of cars and aggregate incomeDigression: functional notationGeneral functional notation sho

10、ws 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 + 2YA list of the variables that affect Q dThe market for cars: DemandQ Quantity of carsP Price of carsDThe demand curve shows the relationship betwe

11、en quantity demanded and price, other things equal. demand equation:Q d = D (P,Y )The market for cars: SupplyQ Quantity of carsP Price of carsDSThe supply curve shows the relationship between quantity supplied and price, other things equal. supply equation:Q s = S (P,PS )The market for cars: Equilib

12、riumQ Quantity of carsP Price of carsSDequilibrium priceequilibriumquantityThe effects of an increase in incomeQ Quantity of carsP Price of carsSD1Q1P1An increase in income increases the quantity of cars consumers demand at each pricewhich increases the equilibrium price and quantity.P2Q2D2demand eq

13、uation:Q d = D (P,Y )The effects of a steel price increaseQ Quantity of carsP Price of carsS1DQ1P1An increase in Ps reduces the quantity of cars producers supply at each pricewhich increases the market price and reduces the quantity.P2Q2S2supply equation:Q s = S (P,PS )Endogenous vs. exogenous varia

14、blesThe values of endogenous variables are determined in the model.The values of exogenous variables are determined outside the model: the model takes their values & behavior as given.In the model of supply & demand for cars,endogenous:P, Qd, Qsexogenous:Y, PsNOW YOU TRY: Supply and Demand1.

15、Write down demand and supply equations for wireless phones; include two exogenous variables in each equation. 2.Draw a supply-demand graph for wireless phones.3.Use your graph to show how a change in one of your exogenous variables affects the models endogenous variables.The use of multiple modelsNo

16、 one model can address all the issues we care about. E.g., our supply-demand model of the car marketcan tell us how a fall in aggregate income affects price & quantity of cars.cannot tell us why aggregate income falls.The use of multiple modelsSo we will learn different models for studying diffe

17、rent 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 exogenousthe questions it can help us understand, those it cannotPrices: flexible vs. stickyMarket clearing: An assumption that prices

18、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 longermany magazine publishers change prices only once every 3-4 yearsPrices:

19、flexible vs. stickyThe economys 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 produceIf prices flexible (long run), markets clear and 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 (Chaps. 7-8)The standard of living and its growth ra