L1 - What are Macroeconomic Studies? Flashcards
How should you structure a 10 mark mathematical type question?
Introduction (2/10)
Working (3/10)
Explanation (3/10)
Final answer (2/10)
So essentially working and explanation take up the biggest portion of the marks
How should you structure a 10 mark theoretical type question?
Introduction (3/10)
Explanation (4/10)
Final answer (3/10)
So essentially the explanation take up the biggest portion of the marks here
What is the difference between micro and macroeconomics?
Microeconomics studies the economic choices of individuals and firms (economic agents)
Macroeconomics studies how the interaction between many economic agents leads to aggregate economic outcomes
Macroeconomics looks at aggregate measures (information pooled together) e.g. GDP (aggregate output/income), unemployment, inflation, inequality etc
What are the 2 timescales we will look or have looked at in macroeconomics?
Long run and short run
What do long run models look at/what is their time scale?
They look at what happens with the economy over decades
What is long run growth determined by?
1) Capital accumulation (the pursuit of profit and investment in a financial asset for monetary gain)
2) Productivity growth (output per unit of input)
What you of policies are typically associated with/cause long term growth?
Supply side polices typically cause long term growth (e.g. government spending in building a new hospital - creates new jobs - doctors, nurses, admin staff etc - they then go and spend their incomes in the economy leading to the increase in incomes of shopkeepers, supermarkets, etc … the effect of an initial injection by the government is exaggerated by the multiplier effect)
What are prices like in the long run?
Prices are fully flexible in the long run
What do short run models look at/what is their timescale?
They look at quarters (3 months) to several years
What do short run models study?
They study business cycle fluctuations (booms and recessions)
What is important in short run models?
Demand fluctuations are important - affect short run growth greatly
What you of policies are typically associated with/cause short term growth?
Demand side policies (includes both monetary and fiscal policy) - … QE/interest rates and government spending/taxation respectively
Why is demand important for short term growth?
Changes in demand lead to changes in output as firms adjust supply to the quantity demanded
How does macroeconomic analysis work? List the steps
1) Document the facts
2) Develop a theory to explain the facts (build a model)
3) Test the theory (is the model consistent with the facts)
4) Use the model to make predictions and give policy advice
What is the challenge when using models in macroeconomics?
Macroeconomic phenomena are typically very complex … difficult to represent all forces in the economy in a model
How do economists use models?
Economists use models to understand the complex reality of the economy
What is a model?
A simplified, theoretical representation of reality
What are the features of a good model?
A good model:
- dispenses (omits or leaves out) irrelevant details
- focuses on the main forces/mechanisms
How does a macroeconomist decide which features/mechanisms are relevant?
It depends on the question being answered the by the model (being asked by the macroeconomist and being explained by the model)
What is an example of irrelevant details being omitted from a model?
The London Underground map - early maps contain/show irrelevant details like hills, valleys, parks etc as well as up to scale distances between stations and accurate directions of the lines (all of these are irrelevant and actually make the map harder and more confusing to read) - by dispensing these details you make the map more fit for purpose which is to help people find the best way to travel by tube from station A to station B
… here the purpose of the map is important as it helps to distinguish between which details to include and which to omit
What do modern economic models consist of?
They consist of mathematical equations that represent relationships between economic variables (basically what you find is that better and more modern models tend to include mathematics)
What is the structure of economic models?
Parameters (measurable factor) and exogenous (external to model) variables (independent variables) are inputted into a model to find values for your endogenous (internal to model - being investigated) variables (dependent variables)
What are the inputs of a model and give examples of what these may be
The inputs of a mode are parameters and exogenous variables which are external to the model e.g. government policies like taxes and interest rates
So you would essentially being seeing the effect of a certain government policy like a change in interest rates on a particular endogenous variable
What is the difference between parameters and exogenous variables?
A similarity is that they’re both inputs to a model
A difference is that parameters are fixed whereas exogenous variables can change over time