Chapter 1 - The Science Of Macroeconomics Flashcards
Macroeconomics
The study of the economy as a whole
Give an example of an issue studied in macroeconomics
Many Answers:
-Why does the cost of living keep rising?
-What causes recessions?
-What is the government budget deficit? How does it affect workers, consumers, businesses, and taxpayers
Others…
What are the 3 key foundations of macroeconomics? Explain all 3 of them.
1) Measurements - to measure the performance of the economy
2) Policies - to actually improve the economy (follow through on changes models suggest)
3) Models - to understand how the economy works and how to improve the economy
Microeconomics
The study of how individuals, firms and governments make themselves as well off as possible in a world of scarce resources, and how their decisions affect markets and the economy
Inflation Rate
The rate of increase in prices over a given period of time.
Recessions
Mild period of falling real GDP (falling income)
Depression
Severe periods of falling real GDP (falling income)
Exogenous Variables (Definition & Example)
Variables in a model taken as given (cannot be explained by the model).
Example: Aggregate Income (Y) is an exogenous variable in the Supply/Demand model
Endogenous Variables (Definition & Example)
Variables that a model explains.
Example: Price is an endogenous variable in the Supply/Demand model
Economic Models
Simplified versions of reality with irrelevant details stripped away used to solve economic problems.
Why are economic models used? Give 4 reasons.
-Show relationships between variables
-Explain the economy’s behaviour
-Devise policies to improve economic performance
-They are FUN!
What are the 3 components of an economic model?
> Objective - the question the model answers
Assumption(s) - to simplify our model from our complex reality
Variables - allows economists to communicate in terms of mathematical quantities.
In the short run, prices are ________?
Sticky (adjust sluggishly in response to changes in supply or demand)
Market Clearing
An assumption that prices are flexible and adjust to equate supply and demand.
Are market clearing models useful in economics?
Yes. While prices are often sticky in the short run leading to market clearing models making incorrect assumptions in the short run, market clearing models can predict the direction the economy gravitates towards in the long run (since prices are flexible in the long run which is assumed by market clearing models)
