THE SCIENCE OF MACROECONOMICS

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					 THE SCIENCE OF
MACROECONOMICS
    CHAPTER 1
 What macroeconomists study
• List three macroeconomic issues that have
  been in the news lately
  – Growth?
  – Inflation?
  – Business cycle fluctuations?
• What do macroeconomists do?
  – Collect data on income, prices,
    unemployment, etc. from different time
    periods and different countries
  – Formulate theories that help explain the data
  – Macroeconomists cannot conduct controlled
    experiments – they observe differences
    across economies and over time
• The performance of the Canadian
  economy
  – Three variables are of particular interest – real
    GDP, the inflation rate, the unemployment
    rate
  – Real GDP grows over time, but this growth is
    not steady. (What are periods of falling GDP
    called?)
– What are inflation and deflation?
– What is the relation between recessions and
  depressions on one hand and the rate of
  unemployment?
– Is there a relationship between the rate of
  inflation and the rate of unemployment?
       How economists think
• Model building
  – Exogenous variables
  – Endogenous variables
• Let’s construct a model of the market for
  pizza
  – What determined the demand for pizza
          Qd = D(P,Y)
  – What determines the supply of pizza?
          Qs = S(P, Pm)
– Condition for market equilibrium
          Qd=Qs
– Which variables are exogenous?
    Income (Y) and the price of materials (Pm)
– Which variables are endogenous?
    The price of pizza and the quantity
    exchanged
– What is the impact of a change in exogenous
  variables? What happens if i) Y increases, or
  ii) Pm increases?
– Is this model realistic?
• Why are there many models in
  macroeconomics?
  – No single model answers all questions
  – Which models will we develop and use?
• The assumption about flexible vs. sticky
  prices
• Microeconomic thinking behind the
  macroeconomic model

				
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