302-01 - MacroeconomicTheory Econ302 U.ofWisconsin CharlesEngel CourseObjectives Macroeconomic models we analyze the economy rather than learning

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Macroeconomic Theory Econ 302 U. of Wisconsin Charles Engel
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Ch1.02 slide 2 Course Objectives Macroeconomic models – we analyze the economy, rather than learning “facts”. Building blocks of macro models The economy as a whole – markets interacting Analytical approach to economic problems “Exogenous” variables vs. “endogenous” variables “Fallacy of composition” Policy as a scientific study rather than a political debate
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Ch1.02 slide 3 What Macroeconomics is About We will examine aggregate economic variables: GDP, the unemployment rate, inflation, the trade balance, etc. To look at aggregate variables, we need to aggregate individual variables in a simple way. We ignore many individual differences among households and firms.
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Ch1.02 slide 4 Short run and Long run In economics, there is not a single model for everything. We use different (but related) models to study the very long run, the long run, and the short run Very long run – why do some economies grow more than others over decades? Long run – what determines prices and employment when the price mechanism is at work? Short run – what determines prices and employment when wages and prices do not adjust immediately?
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Ch1.02 slide 5 Mathematical functions We use functional notation when we want to express the idea that one variable is determined by other variables. For example, supply of pizzas is a function of the price of pizzas and the price of materials: In this example, the quantity supplied of pizza is the “endogenous” variable in the pizza supply model. The price of pizza and the price of materials are “exogenous” for the pizza maker. She cannot influence those prices (assuming that she is not a monopoly seller of pizza!) = ( , ) s m Q S P P
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Ch1.02 slide 6 More on Endogenous and  Exogenous variables Variables that are exogenous in some models might be endogenous in other models. For example, in many macro models, we might take the share of income earned by females vs. males as exogenous. But some economic models are designed exactly to explain those shares. In some cases, a variable is exogenous in the building block of a more general model, but endogenous in the general model. Price of pizza is exogenous for the pizza supplier, but determined within our model of the pizza market.
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Ch1.02 slide 7 The Pizza market We can take the equations for supply of pizza, demand for pizza, and market equilibrium: P and P m are exogenous for the pizza supplier. P and Y are
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This note was uploaded on 01/22/2012 for the course 2341 13314 taught by Professor Camus during the Spring '11 term at Central Luzon State University.

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302-01 - MacroeconomicTheory Econ302 U.ofWisconsin CharlesEngel CourseObjectives Macroeconomic models we analyze the economy rather than learning

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