Introduction Flashcards
Macroeconomics
- The study of the behavior of large collections of economic agents
- It focuses on the aggregate behavior of consumers and firms, the behavior of governments, the overall level of economic activity in individuals and countries, the economic interactions among nations, and the effects of monetary and fiscal policy
Models
- Built to explain macroeconomic phenomena
- The important phenomena are long-run growth and business cycles
- Built up from from microeconomic principles (microfoundations approach)
Long-run growth
The increase in a nation’s productive capacity and average standard of living that occurs over a long period of time
Business cycles
The short-run ups and downs in aggregate economic activity
- Business cycles may have many causes, and causes important in one business event may be very unimportant in another
Gross Domestic Product (GDP)
- The quantity of goods and services produced within a country’s borders over a particular period of time
- The time series of GDP can be separated into trend and business cycle components.
When it useful to take the natural logarithm of the time series
When the slope of the graph is close to the growth rate
Business cycle component
The deviations from a smooth trend fit to the data
Macroeconomic models
- Organized structures structures used to explain long-run economic growth
- A macroeconomic model captures the essential features of the world needed to analyze a particular macroeconomic problem.
- Macroeconomic models should be simple, but they need not be realistic
Basic structure of a macroeconomic model is a description of the following features
- Consumers and Firms
- The Set of Goods that Consumers Consume
- Consumers’ Preferences
- The Production Technology
- Resources Available
Additional features of the model required to make economic predictions
- The goals of consumers and producers (Assume the optimize)
- How consistency is achieved in terms of the actions of consumers and producers (The economy must be in equilibrium)
Competitive equilibrium
Assume goods are bought and sold on markets in which consumers and firms are price takers
What do we learn from macroeconomic analysis
- What is produced and consumed in the economy is determined jointly by the economy’s productive capacity and the preferences of consumers.
- In free market economies, strong forces tend to produce socially efficient economic outcomes.
- Unemployment is painful for individuals, but it is a necessary evil in modern economies.
- Improvements in a country’s standard of living are brought about in the long run by technological progress.
- A tax cut is not a free lunch
- Credit markets, banks play key roles in the macroeconomy.
- What consumers and firms anticipate for the future has an important bearing on current macroeconomic events.
- Money takes many forms, and society is much better off with it than without it. Once we have it, however, changing its quantity ultimately does not matter.
- Business cycles are similar, but they can have many causes.
- Countries gain from trading goods and assets with each other, but trade is also a source of shocks to the domestic economy.
- In the long run, inflation is caused by growth in the money supply.
- If there is a short-run tradeoff between output and inflation, that has very different implications relative to the relationship between nominal interest rates and inflation.
- Read on p 33
Aggregate Productivity
- A measure of productivity in the aggregate economy is average labor productivity (Y(real GDP) / N(employment))
Important both in explaining business cycles, and in explaining long run growth in standards of living.
Unemployment and vacancies
- The unemployment rate is measured as the number of people actively searching for work, as a percentage of the labor force
- The unemployment rate can be explained by demographics, the generosity of unemployment insurance programs, and shocks to the economy that cause business cycles.
- The Beveridge curve is a negative relationship between the vacancy rate ( job postings by firms divided by total employment plus vacancies) – and the unemployment rate
- Basically, the number of vacancies relative to unemployment is a measure of labor market tightness, and tightness tends to increase in economic booms and decrease in recessions
- But the Beveridge curve has shifted. This is sometimes ascribed to long-run changes in the labor market – an increase in the mismatch between the skills needed by firms, and the skills unemployed workers possess.
Taxes, Government Spending and the Government deficit
- Increases in government activity in general causes crowding out of private economic activity - reduction in private consumption expenditures
- The government surplus/saving is the difference between taxes and spending
- The government deficit is the negative of government surplus where government spending exceeds taxes