Introduction to Macroeconomics

Question 1

What are the two fundamental questions in Macroeconomics?

Answer 1

• Short-Run Business Cycle
• Long-Run Economic Growth
• Macroeconomics studies the aggregate behaviour of movements

Question 2

Which of SR/LR has greater variation? Why does the other not have these deviations?

Answer 2

• SR economic cycles deviates from trends
• LR economic growth has deterministic/stochastic trends

Question 3

How do you separate trends from cycles?

Answer 3

• Log-linear Detrending
• Hodrick-Prescott Filter
• Crafts-Leybourne-Mills Model

Question 4

What are some of the stylised facts (think of markets)?

Answer 4

• Output Market: Relative volatilities
  (Income>Consumption)
• Capital Marker: Relative volatilities (Investment>Output)
• Labour Market: Extensive (Work/Not Work) Vs Intensive (How Much to Work) Margin

Question 5

What is the correlation between Consumption and Output?

Answer 5

• 0.78

Question 6

What is the correlation between Investment and Output?

Answer 6

• 0.85

Question 7

What is the correlation between Number of People Employed and Output?

Answer 7

• 0.8

Question 8

What is the correlation between Wages and Output?

Answer 8

• 0.8

Question 9

What are macroeconomic models?

Answer 9

• Simplified: Details are ignored
• Idealisation: Under Perfect Conditions
• Informative: Models can be Useful
• Focus on the main variables and ignores less important details

Question 10

How can Macroeconomic models be built

Answer 10

• Ingredients: 2 Categorisations (Price Vs Quantity)
• Features: Static/Dynamic or Stochastic/Deterministic
• Links: Ad Hoc/Microfounded

Question 11

What are Ingredients? What are some of the parameters of Ingredients?

Answer 11

• Using mathematics, we can categorise ingredients differently
• You can look to endogenous (TBD in the model) and exogenous (beyond the model)
• Parameters- fixed relationship between exoVsendo
• Can also categorise by Stock Vs Flow quantity

Question 12

What are Features?

Answer 12

• You have to determine whether a model is static or dynamic
• LM static: What you do now only affects the present
  -CM dynamic: What you do now affects the future
• If models are dynamic, uncertainty may be an issue (Only SR)
• LR, deterministic
• SR, stochastic

Question 13

How is a model created?

Answer 13

• The question determines the model

Question 14

What are links? What are two types of philosophies?

Answer 14

Ad-Hoc model:
- 1930-1970; Mainstream macroeconomists rely on ad-hoc models to establish equations (IS-LM)
- Built ‘piece-by-piece’; isn’t necessarily compatible
Microfounnded model:
- 1980-; Derives rather than assumes all equations follow same microeconomic principles (RBC/DGSE)
- 2 resources that are optimised (Goods/Time)

Question 15

What are some inputs for each key agent?

Answer 15

• Consumers: supply labour/credit at a wage/interest rate
• Firms: demand labour/capital at a wage/interest rate
• Governments: use fiscal/monetary policies

Question 16

What are some outputs for each key agent?

Answer 16

-Consumers/Firms/Governments demand output at a price
- Firms supply output at a price

Question 17

What are some techniques that can be used to solve models?

Answer 17

Solution techniques:
- Inductive
- How to transfer a model form its structural form to its reduced form
Empirical techniques:
- Deductive
- How to test and estimate the model against the data

Question 18

How do you solve a deterministic model?

Answer 18

• Substitution method (algebra)
• Newton method: (iteration)

Question 19

How do you solve a stochastic model?

Answer 19

• Perturbation method (local approx.)
• Projection method (global approx)

Question 20

Provide a brief outline of the history of macroeconomics

Answer 20

• Physiocracy and mercantilism merge into classical economics
• Classical economics thinks about people’s self interest
• This then moved to marginalist and then Neo-classical
• This then branched into Keynesianism and. New Neo-classical