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Chapter 1 Policy and Practices of Macroeconomics

Chapter 1 Policy and Practices of Macroeconomics - Chapter...

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Chapter 1: The Policy and Practice of Macroeconomics Chapter Review and Helpful Hints Chapter Objectives From this chapter, you should be able to demonstrate and master the following concepts and definitions. Before reading each chapter, it may be helpful to briefly review these objectives. While reading, think about each of the objectives and how you would demonstrate your knowledge of them. After reading the chapter, review these objectives and try to explain and demonstrate your knowledge to yourself or another classmate. Understand the importance of macroeconomics as a discipline, how it affects aspects of your life, and the impact on your decision-making process. Understand what an economic model is, and how it is used. Understand how and why real GDP, the unemployment rate, and the inflation rate are common indicators of an economy’s performance. Have a basic understanding of how these indicators fluctuate over the business cycle. Have a basic understanding of the difficult policy questions that face policymakers today. Chapter Summary As an introductory chapter, the reader is given a brief overview of the themes, concepts, and issues that will be introduced and developed throughout the rest of the textbook. There are three main themes to the chapter: The ‘process’ of macroeconomics; the ‘purpose’ of macroeconomics; and finally a preview of some important policy questions that will be examined throughout the text. The Process of Macroeconomics Understanding macroeconomics allows one to make informed decisions about all sorts of things, from whether to forgo finding a job to attend graduate school, when to refinance a home loan, or where to vacation abroad. In order to develop an understanding of macroeconomics it is important to know how models are constructed and used to demonstrate macroeconomic outcomes. There are five steps in the development of economic models: 1. Identify an economic question. In other words, develop a curiosity for why the economy behaves in a particular way as an investigative question. 2. Specify the relevant variables that explain and are explained by the model. These are the exogenous and endogenous variables, respectively. 3. Propose a set of equations or graphical analysis linking the explanatory (exogenous) variables to the outcome you are trying to explain (endogenous variables). 4. Compare the outcomes of the model with what occurs in the real economy. If your model’s predictions do not match what actually occurs, then revisit step 2 and try to find another set of variables that explain what you are trying to model.
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5. Once the data matches the model predictions, use the model to extend your predictions to what will happen in the future, or how the economy may react to certain policies or shocks.
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Chapter 1 Policy and Practices of Macroeconomics - Chapter...

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