Chapter 01 Flashcards
Macroeconomics
Studies the forces that influence the economy as a whole
Real GDP
The total income of everyone in the economy (adjusted for the level of prices/inflation)
Models
Economic models often explain economic variables such as GDP, inflation, and unemployment. These models are simplified theories that show the key relationships among economic variables We dispense the irrelevant details and focus on underlying connections.
2 types of variables in models
Endogenous and Exogenous Variables
Endogenous variables
are those variables that a model explains. It is determined by other variables in the model and is aka the dependent variable.`
Exogenous Variables
Those variables that a model takes as given.
Purpose of a model
To show how the exogenous variables influence the endogenous variables. exogenous variables come from outside the model and serve as the modelʼs input, whereas endogenous variables are determined within the model and are the modelʼs output.
In a model of supply and demand of pizza… The demand function of pizza is Q^d= D(P,Y) and supply Q^s= S(P, Pmaterials). The price of pizza adjusts to bring the Quantity supplied and demanded into balance Qs=Qd. What are the exogenous and endogenous variables
Exogenous (given): Aggregate income and the price of materials, we take it as given.
Endogenous: Price of pizza and quantity of pizza exchanged. (the variables that the model explains)
Market Clearing
Economists normally presume that the price of a good or a service moves quickly to bring quantity supplied and quantity demanded into balance. In other words, they assume that markets are normally in equilibrium, so the price of any good or service is found where the supply and demand curves intersect. This assumption, called market clearing.
Flexible v Sticky prices
For markets to clear continuously, prices must
adjust instantly to changes in supply and demand. In fact, many wages and prices adjust slowly. Although market- clearing models assume that all wages and prices are flexible, in reality some wages and prices are sticky.
Sticky prices
Happen in the Short Run…F or studying short-run issues, such as year-to-year fluctuations in real GDP and unemployment, the assumption of price flexibility is less plausible. Over short periods of time, many prices are fixed at predetermined levels. Therefore, most macroeconomists believe that price stickiness is a better assumption for studying the short- run behavior of the economy.
Flexible P
The apparent stickiness of prices does not make market-clearing models useless. A er all, prices are not stuck forever; eventually, they adjust to changes in supply and demand. Market-clearing models might not describe the economy at every instant, but they show the equilibrium toward which the economy gravitates. Therefore, most macroeconomists believe that price flexibility is a good assumption for studying long-run issues, such as the growth in real GDP that we observe from decade to decade.
How micro and macroeconomics is linked
When we study the economy as a whole, we must consider the decisions of individual economic actors. For example, to understand what determines total consumer spending, we consider a family deciding how much to spend today and how much to save for the future. To understand what determines total investment spending, we consider a firm deciding whether to build a new factory. Because aggregate variables are the sum of variables describing many individual decisions, macroeconomic theory rests on a microeconomic foundation.
Books quiz question: 1. Recessions are periods of
falling incomes
Books quiz question:2. The unemployment rate measures the fraction of
c. the labor force that has stopped looking for work.
Book quiz q3. In U.S. history, deflation
c. is rare now but has occurred at times in the past.
Economists use models because they
a. clarify our thinking.
b. show how exogenous variables influence endogenous variables.
c. are fun.
d. all of the above
ANSWER ALL OF THE ABOVE
Market-clearing models assume that prices are ______
and are best applied to understand the economy in the _____ run.
Flexible, Long Run
Microeconomics is
useful for understanding the decisions behind macroeconomic relationships.
