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Chapter 01
Chapter 01
1
The Science of Macroeconomics
MACROECONOMICS
Learning Objectives
Important issues in
macroeconomics
Macroeconomics, the study of the economy as
a whole, addresses many topical issues:
Why does the cost of living keep rising?
Why are millions of people unemployed,
even when the economy is booming?
What causes recessions?
Can the government do anything to combat
recessions? Should it?
1
Important issues in
macroeconomics
Macroeconomics, the study of the economy as
a whole, addresses many topical issues:
What is the government budget deficit?
How does it affect the economy?
Why does the U.S. have such a huge trade
deficit?
Why are so many countries poor?
What policies might help them grow out of
poverty?
First oil
30,000
price shock
long-run upward trend…
20,000
Great
Depression Second oil
10,000
price shock
World War II
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
CHAPTER 1 The Science of Macroeconomics slide 4
25
20
15
10
-5
-10
-15
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
CHAPTER 1 The Science of Macroeconomics slide 5
2
U.S. unemployment rate
(% of labor force)
30
25
20
15
10
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
CHAPTER 1 The Science of Macroeconomics slide 6
3
3
1
2
1 -1
0
-3
-1
-5
-2
-3 -7
1965 1970 1975 1980 1985 1990 1995 2000 2005
unemployment
CHAPTER rate
1 The Science ofinflation-adjusted
Macroeconomics mean wage (right scale) slide 8
3
Why learn macroeconomics?
3. The macroeconomy affects politics.
Unemployment & inflation in election years
year U rate inflation rate elec. outcome
1976 7.7% 5.8% Carter (D)
1980 7.1% 13.5% Reagan (R)
1984 7.5% 4.3% Reagan (R)
1988 5.5% 4.1% Bush I (R)
1992 7.5% 3.0% Clinton (D)
1996 5.4% 3.3% Clinton (D)
2000 4.0% 3.4% Bush II (R)
2004 5.5% 3.3% Bush II (R)
CHAPTER 1 The Science of Macroeconomics slide 9
Economic models
Example of a model:
Supply & demand for new cars
shows how various events affect price and
quantity of cars
assumes the market is competitive: each buyer
and seller is too small to affect the market price
Variables:
Q d = quantity of cars that buyers demand
Q s = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)
CHAPTER 1 The Science of Macroeconomics slide 11
4
The demand for cars
demand equation: P
Price
d
Q D (P ,Y ) of cars
5
The market for cars: Supply
supply equation: P
Price
s S
Q S (P , Ps ) of cars
P
Price
of cars S
equilibrium
price
D
Q
Quantity
of cars
equilibrium
quantity
demand equation: P
Q d D (P ,Y ) Price
of cars S
An increase in income
increases the quantity P2
of cars consumers P1
demand at each price… D2
D1
Q
…which increases Q1 Q2
Quantity
the equilibrium price
of cars
and quantity.
6
The effects of a steel price increase
supply equation: P S2
Q s S (P , Ps ) Price
of cars S1
An increase in Ps
reduces the quantity of P2
cars producers supply P1
at each price…
D
…which increases the Q
Q2 Q1
market price and Quantity
of cars
reduces the quantity.
7
A multitude of models
A multitude of models
8
Prices: flexible vs. sticky
9
Chapter Summary
Chapter Summary
10