Ch. 1 - The Science of Macroeconomics Flashcards
What does Real GDP measure?
The total income of everyone in the economy (adjusted for the level of prices).
What does inflation measure?
How quickly prices are rising.
What does unemployment measure?
The fraction of the labor force that is out of work.
What are Endogenous variables?
Variables which the model tries to explain.
What are Exogenous variables?
Variables which the model takes as given.
Assume a market for pizza, Qd = Qs where
Qd = D(P,Y)
Qs = S(P,Pm) where Pm = price of materials
This model has two exogenous variables and two endogenous variables. What are the Exogenous variables?
-Aggregate Income
-Price of Materials (Inputs)
The model doesn’t try to explain them but instead takes them as given (perhaps to be explained by another model)
Assume a market for pizza, Qd = Qs where
Qd = D(P,Y)
Qs = S(P,Pm) where Pm = price of materials
This model has two exogenous variables and two endogenous variables. What are the Endogenous variables?
-Price of Pizza
-Quantity of Pizza
These are the variables that the model attempts to explain.
Assume a market for pizza, Qd = Qs where
Qd = D(P,Y)
Qs = S(P,Pm) where Pm = price of materials
This model has two exogenous variables and two endogenous variables. What does the model show?
How a change in one of the exogenous variables affects both endogenous variables.
Throughout this book, which group of assumptions will prove especially important?
Those concerning the speed with which wages and prices adjust to changing economic conditions.
Economists normally presume that the price of a good or a service moves quickly to bring Qd and Qs into balance. In other words, they assume that markets are not normally in equilibrium, so the price of any good or service is found where the supply and demand curves intersect. This assumption is essential to the pizza example, what is it called? Is it realistic? Why or why not?
The assumption of continuous market clearing is not entirely realistic. For markets to clear continuously, prices must adjust instantly to changes in supply and demand. Many wages and prices adjust slowly.
What is the conclusion from the fact that many wages and prices take time to adjust?
Although market clearing models assume that all wages and prices are flexible, in the real world some wages and prices are sticky.
Why is it that the apparent stickiness of prices does not necessarily make market-clearing models useless?
Market-clearing models might not describe the economy at every instant, but they do describe the equilibrium toward which the economy slowly gravitates.
Which assumption do most macroeconomists us for studying long-run issues?
Price Flexibility
Which assumption do most macroeconomists us for studying short-run issues?
Price Stickiness
Why does macroeconomic theory inevitably rest on a microeconomic foundation?
Because aggregate variables are simply the sum of the variables describing many individual decision.
