Lecture 1 [6 slides](1) - This lecture ECON7020 The...

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26/02/201410ECON7020 The MacroeconomyLecture 1Text treatment: Mankiw 8thedition, Ch. 1-21This lecturesquare4about the issues macroeconomists studysquare4the tools macroeconomists usesquare4some important concepts in macroeconomic analysis2Important issues in macroeconomicssquare4What causes recessions? What is “government stimulus” and why might it help? square4How can problems in the housing market spread to the rest of the economy?square4What 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.:3Important issues in macroeconomicssquare4Why does the cost of living keep rising?square4Why are so many countries poor? What policies might help them grow out of poverty? square4What is the trade deficit? How does it affect the country’s well-being? Why learn macroeconomics?1.The macroeconomy affects society’s well-being.2.The macroeconomy affects yourwell-being.3.The macroeconomy affects election outcomes.5Economic models…are simplified versions of a more complex realitysquare4irrelevant details are stripped away…are used to square4show relationships between variablessquare4explain the economy’s behaviorsquare4devise policies to improve economic performance
26/02/201426Example of a model: Supply & demand for new carssquare4shows how various events affect price and quantity of carssquare4assumes the market is competitive: each buyer and seller is too small to affect the market priceVariablesQd= quantity of cars that buyers demandQs= quantity that producers supplyP= price of new carsY= aggregate incomePs= price of steel (an input)7The demand for carsdemand equation: Qd= D(P,Y)square4shows that the quantity of cars consumers demand is related to the price of cars and aggregate income8The market for cars: DemandQQuantity of carsP Price of carsDThe demand curveshows the relationship between quantity demanded and price, other things equal. demand equation:Qd= D(P,Y)9The market for cars: SupplyQQuantity of carsP Price of carsDSThe supply curveshows the relationship between quantity supplied and price, other things equal. supply equation:Qs= S(P,PS)10The market for cars: EquilibriumQQuantity of carsP Price of carsSDequilibrium priceequilibriumquantity11Endogenous vs. exogenous variablessquare4The values of endogenousvariables are determined in the model.square4The values of exogenousvariables are determined outside the model: the model takes their values & behavior as given.square4In the model of supply & demand for cars,endogenous:P, Qd, Qsexogenous:Y,Ps
26/02/2014312The use of multiple modelssquare4So we will learn different models for studying different issues (e.g., unemployment, inflation, long-run growth).

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