Macroeconomic study and tools

Question 1

What is Macroeconomics?

Answer 1

• The study of how agents behave and how they can affect the overall economy

Question 2

What are the 3 Main agents that can affect an economy?

Answer 2

• Households (Earn Wages, Buy Product)
• Firms (Hire Workers, Sell Products)
• Public Sector (Fiscal Policy, Monetary Policy)

Question 3

What are Economic Models? Why are they used?

Answer 3

• Simplified versions of more complex realities with irrelevant details stripped away
• Shows relations between variables
• Explains the economy’s behaviour
• Devise policies to improve performance

Question 4

What are the requirements for an economic model?

Answer 4

• Assumptions: These aren’t bad, but you have to understand the assumption
• Variables: Is the variable endogenous or exogenous?
• Question: The model should pose, and then answer or partially answer a question

Question 5

What are Endogenous and Exogenous Variables?

Answer 5

• Exogenous are found outside the model (Predetermined)
• Endogenous are found within the model which must be experimented with to find out
• Exogenous -> Endogenous

Question 6

Why are prices ‘Sticky’ in the S-R while ‘Flexible’ in the L-R

Answer 6

• ‘Market Clearing’: Assuming prices are ‘flexible’ & adjustable to equate Supply and Demand
• In the Short-Run, many prices are ‘sticky’ or fixed
• If it is in the Short-Run, demand may not equal supply
• If prices are variable and flexible, the economy is different