MACROECONOMICSN. Gregory MankiwPowerPoint Slides by Ron
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The Science of Macroeconomics
2010 Worth Publishers, all rights reserved
SEVENTH EDITION
In this chapter, you will learn: about the issues
macroeconomists study the tools macroeconomists use some important
concepts in macroeconomicanalysis
Important issues in macroeconomicsMacroeconomics, the study of
the economy as a whole, addresses many topical issues, e.g.:
What causes recessions? What isgovernment stimulus and why might
it help?
How can problems in the housing marketspread to the rest of the
economy?
What is the government budget deficit?How does it affect
workers, consumers, businesses, and taxpayers?CHAPTER 1
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Important issues in macroeconomicsMacroeconomics, the study of
the economy as a whole, addresses many topical issues, e.g.:
Why does the cost of living keep rising? Why are so many
countries poor? What policiesmight help them grow out of
poverty?
What is the trade deficit? How does it affect thecountrys
well-being?
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U.S. Real GDP per capita(2000 dollars)9/11/2001 First oil shock
long-run upwardprice trend
Great DepressionWorld War II
Second oil price shock
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U.S. Inflation Rate(% per year)
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U.S. Unemployment Rate(% of labor force)
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Why learn macroeconomics?1. The macroeconomy affects societys
well-being.U.S. Unemployment and Property Crime Rates
crimes per 100,000 population
percent of labor force
Social problems like homelessness, domestic violence, crime, and
Property crimes (right scale) poverty are linked to the economy.
For exampleUnemployment (left scale)
Why learn macroeconomics?2. The macroeconomy affects your
well-being.percent change from 12 mos earlier
In most years, wage growth falls when unemployment is
rising.change from 12 mos earlier
Why learn macroeconomics?3. The macroeconomy affects election
outcomes.Unemployment & inflation in election years
year19761980 1984
U rate7.7%7.1% 7.5%
inflation rate5.8%13.5% 4.3%
elec. outcomeCarter (D)Reagan (R) Reagan (R)
19881992 1996
5.5%7.5% 5.4%
4.1%3.0% 3.3%
Bush I (R)Clinton (D) Clinton (D)
20002004 2008
4.0%5.5% 7.2%
3.4%3.3% 3.8%
Bush II (R)Bush II (R) Obama (D)
Economic modelsare simplified versions of a more complex reality
irrelevant details are stripped away are used to show relationships
between variables explain the economys behavior devise policies to
improve economic performance
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The use of multiple models No one model can address all the
issues wecare about.
E.g., a supply-demand model of the U.S. carmarket
can tell us how a fall in aggregate U.S. incomeaffects price
& quantity of cars.
cannot tell us why aggregate income falls.
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The use of multiple models So we will learn different models for
studyingdifferent issues (e.g., unemployment, inflation, long-run
growth).
For each new model, you should keep track of its assumptions
which variables are endogenous,which are exogenous the questions it
can help us understand, those it cannotCHAPTER 1
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Prices: flexible vs. sticky Market clearing: An assumption that
prices areflexible, adjust to equate supply and demand.
In the short run, many prices are sticky adjust sluggishly in
response to changes in supply or demand. For example: many labor
contracts fix the nominal wage for a year or longer many magazine
publishers change prices only once every 3-4 yearsCHAPTER 1
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Prices: flexible vs. sticky The economys behavior depends partly
onwhether prices are sticky or flexible: If prices sticky (short
run), demand may not equal supply, which explains: unemployment
(excess supply of labor) why firms cannot always sell all the goods
they produce
If prices flexible (long run), markets clear andeconomy behaves
very differentlyCHAPTER 1
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Outline of this book: Introductory material (Chaps. 1 & 2)
Classical Theory (Chaps. 3-6)How the economy works in the long run,
when prices are flexible
Growth Theory (Chaps. 7-8)The standard of living and its growth
rate over the very long run
Business Cycle Theory (Chaps. 9-14)How the economy works in the
short run, when prices are stickyCHAPTER 1
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Outline of this book: Policy debates (Chaps. 15-16)Should the
government try to smooth business cycle fluctuations? Is the
governments debt a problem?
Microeconomic foundations (Chaps. 17-19)Insights from looking at
the behavior of consumers, firms, and other issues from a
microeconomic perspective
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Chapter Summary Macroeconomics is the study of the economyas a
whole, including growth in incomes changes in the overall level of
prices the unemployment rate
Macroeconomists attempt to explain theeconomy and to devise
policies to improve its performance.
Chapter Summary Economists use different models to
examinedifferent issues.
Models with flexible prices describe theeconomy in the long run;
models with sticky prices describe the economy in the short
run.
Macroeconomic events and performance arisefrom many
microeconomic transactions, so macroeconomics uses many of the
tools of microeconomics.
