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Unformatted text preview: Macroeconomic Policy Class Notes An introduction to Macroeconomic Policy Revised: September 12, 2011 Latest version available at www.fperri.net/teaching/macropolicyf11.htm Every day you read and hear about stuff like recessions, monetary policy, international trade, financial crises, exchange rates etc etc. These economic news are not about a firm or a person in particular but they are affecting us all. Understanding the causes and the effects of these events is interesting per se (at least I think) but it is also important to make everyday, business and political decisions. Unfortunately the dynamics and the causes of these events are very complicated. Macroeconomists are people that spend most of their time thinking about these issues. Even though unfortunately even for them not everything is clear, they have developed analytical frameworks that can help organize all these facts, establish some causal relations and make some predictions. In this class you will learn some of these frameworks and they will be useful to you throughout your life/career. What is macroeconomics? A literal translation of the world from its Greek origin would be Management of the large household. This is not that far from the actual meaning. What is a large household? A key feature is that large should not be interpreted in terms of size but rather in term of number of different economic subjects. For example the annual gross domestic revenues of Ford are larger than the annual gross product of Portugal but studying and understanding the behavior of Ford is in the realm of microeconomics while understanding the perspectives of growth of Portugal is one of the objectives of macroeconomics. You can think of the large agent as a country, that is a place in which many different economic agents, such as households, firms, government all interact together. Households are the private decision units of the economy. These are the units that decide where and how much to work, how much to spend and save, how to save, whether to go school or not, whether to have children or not. Introduction 2 The firms are the production units of the economy. They are the units that decide to hire or fire a worker, to increase or reduce production, to build a new plant. The government represents the set of rules, institutions and policies that affect eco- nomic activity. Monetary policy and fiscal policy are two examples of such policies that have a strong impact on both the real and financial sector. A lot of these rules change over time and across countries. For example the level of development of the welfare system is a policy choice that is very different in the US now, in the US 30 years ago and in Europe now. One question that is very interesting to economist is to understand the consequences of these policy changes to possibly design policies that are optimal under certain criteria....
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