6/3/2008. Macroeconomics, the study of the economy as a whole, addresses many topical issues:

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1 C H A T E R Thi chapter introuce you to the iue macroeconomit tuy the tool macroeconomit ue ome important concept in macroeconomic analyi CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory Macroeconomic, the tuy of the economy a a whole, aree many topical iue: Why oe the cot of living keep riing? Why are million of people unemploye, even when the economy i booming? What caue receion? Can the government o anything to combat receion? houl it? Macroeconomic, the tuy of the economy a a whole, aree many topical iue: What i the government buget eficit? How oe it affect the economy? Why oe the U U.. have uch a huge trae eficit? fiit? Why are o many countrie poor? What policie might help them grow out of poverty? CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory,,,, Firt oil price hock 9// long-run upwar tren Great epreion econ oil price hock - Worl War II CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory

2 . The macroeconomy affect ociety well being. rce percent of labor for 8 6 ocial problem like homelene, property crime ometic violence, crime, an poverty (right cale) are linke to the economy. For example unemployment (left cale) 6 crime per, population CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 6 CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 7. The macroeconomy affect your well being. change from mo earlier In mot year, wage growth fall when unemployment i riing unemployment rate inflation-ajute mean wage (right cale) CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory o earlier percent change from m 8. The macroeconomy affect politic. Unemployment & inflation in election year year U rate inflation rate elec. outcome %.8% Carter () 98 7.%.% Reagan (R) 98 7.%.% Reagan (R) 988.%.% Buh I (R) 99 7.%.% Clinton () 996.%.% Clinton ().%.% Buh II (R).%.% Buh II (R) CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 9 Economic Moel are implifie verion of a more complex reality irrelevant etail are trippe away are ue to how relationhip between variable explain the economy behavior evie policie to improve economic performance how how variou event affect price an quantity aume the market i competitive: each buyer an eller i too mall to affect the market price Variable: = quantity that buyer eman = quantity that proucer upply = price of new car Y = aggregate income = price of teel (an input) CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory

3 eman equation: = (, Y) how that the quantity conumer eman i relate to the price () an aggregate income (Y) General functional notation how only that the variable are relate. = (, Y) A pecific functional form how the precie A lit of quantitative the relationhip. Example: variable (, that Y) = affect 6 + Y CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory eman equation: = (, Y ) rice upply equation: = (, ) rice The eman curve how the relationhip between quantity emane an price, other thing equal. uantity The upply curve how the relationhip between quantity upplie an price, other thing equal. uantity CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory rice eman equation: = (, Y ) rice equilibrium price equilibrium quantity uantity An increae in income increae the quantity conumer eman at each price which increae the equilibrium price an quantity. uantity CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 6 CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 7

4 upply equation: = (, ) An increae in reuce the quantity of car proucer upply at each price which increae the market price an reuce the quantity. rice uantity The value of enogenou variable are etermine in the moel. The value of exogenou variable areetermine outie the moel: the moel take their value & behavior a given. In the moel of upply & eman for car, enogenou:,, exogenou: Y, CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 8 CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 9 Write own eman an upply equation for wirele phone; inclue two exogenou variable in each equation. raw a upply eman graph for wirele phone. Ue your graph to how how a change in one of your exogenou variable affect the moel enogenou variable. No one moel can are all the iue we care about. e.g., our upply eman moel of the car market can tell u how a fall in aggregate income affect price an quantity. cannot tell u why aggregate income fall. CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory o we will learn ifferent moel for tuying ifferent iue (e.g., unemployment, inflation, long run growth). For each new moel, you houl keep track of: aumption which variable are enogenou, an which are exogenou the quetion it can help u unertan, an thoe it cannot Market clearing: An aumption that price are flexible, ajut to equate upply an eman. In the hort run, many price are ticky ajut luggihly in repone to change in upply or eman. For example, many labor contract fix the nominal wage for a year or longer many magazine publiher change price only once every year CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory

5 The economy behavior epen partly on whether price are ticky or flexible: If price are ticky, then eman won t alway equal upply. Thi help explain unemployment (exce upply of labor) why firm cannot alway ell all the goo they prouce Long run: price flexible, market clear, economy behave very ifferently Microeconomic i the tuy of how iniviual houehol an firm make eciion. Houehol maximize utility Firm maximize profit. Moern macroeconomic theory i typically bae on microfounation of macroeconomic behavior. ometime thee microfounation are implicit, other time they are explicit in the moel ue. CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory Introuction to Macroeconomic ata & Analyi (Ch. ) How macroeconomit think an how we meaure key macroeconomic o c variable. ab Claical an Growth Theory (Ch. 8) How the economy work in the long run, when price are flexible. The tanar of living an it growth rate over the very long run. Buine Cycle Theory (Romer, Ch. ; Ch. ) How the economy work in the hort run, when price are ticky. olicy ebate (Ch. & 9) houl the government try to mooth buine cycle fluctuation? Which macro moel are bet? Microeconomic founation (Ch. 6) Inight from looking at the behavior of conumer, from a microeconomic perpective. CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 6 CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 7 Macroeconomic i the tuy of the economy a a whole, incluing growth in income, changein the overall levelof price, the unemployment rate. Macroeconomit attempt to explain the economy an to evie policie to improve it performance. Economit ue ifferent moel to examine ifferent iue. Moel with flexible price ecribe the economy inthe long run; moel with ticky price ecribe the economy in the hort run. Macroeconomic event an performance arie from many microeconomic tranaction, o macroeconomic ue many of the tool of microeconomic. CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 8 CHATER The cience of Macroeconomic ECON A : Intermeiate Macro Theory 9