EC202: Macroeconomics. Other issues. Key question in macroeconomics. Call me Matteo if you want / feel. Feel free the me at any time

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1 EC202: Macroeconomics Teacher: rofessor Matteo Iacoviello Office hours: Tuesay, M Book: Mankiw G., Macroeconomics, 6 th eition Aitional sources: The Economist, WSJ, NYT, Journal of Economic erspectives, Blogs slie 0 Other issues Call me Matteo if you want / feel Feel free the me at any time Don t feel afrai to ask me any question I am generally a nice person (you shoul not feel scare by me) slie 1 Key question in macroeconomics How will the exam look like? Mi-term : Tuesay October 23 th (40%) Final (60%): December 17 th (9 AM, Monay) Do grae assignments (every two weeks) count? 6 grae assignments, ue on THURSDAY every other week or so. (beginning September 20 st ) They count in borerline cases. Do we have iscussion sections? Discussion sections will be hel after the homework is hane in (THURSDAY at 5 M). T.A. Ra Raykov, place to be announce slie 2 1

Can the government o anything to combat recessions? Shoul it? Why are so many countries poor?

2 Important issues in macroeconomics Why oes the cost of living keep rising? Why are millions of people unemploye, even when the economy is booming? Why are there recessions? Can the government o anything to combat recessions? Shoul it? Why are so many countries poor? What policies might help them grow out of poverty? slie 3 U.S. Gross Domestic rouct slie 4 U.S. Gross Domestic rouct per person slie 5 2

US GD, current ollars, 2006: 13194 billion (entire year) US population, 2006: 301 million (employe: 145 million) GD per capita: 43,833 ollars GD per worker: 90,993 ollars [ Disposable personal

3 US GD, current ollars, 2006: billion (entire year) US population, 2006: 301 million (employe: 145 million) GD per capita: 43,833 ollars GD per worker: 90,993 ollars [ Disposable personal income: 9799 billion ] slie 6 slie 7 Why learn macroeconomics? 1. The macroeconomy affects society s well-being. example: Unemployment an social problems 2. The macroeconomy affects your well-being. Example: Interest rates an your creit car payments 3. The macroeconomy affects politics & current events. example: Inflation an unemployment in election years slie 8 3

4 Unemployment an social problems Each one-point increase in the unemployment rate is associate with: 920 more suicies 650 more homicies 4000 more people amitte to state mental institutions 3300 more people sent to state prisons 37,000 more eaths increases in omestic violence an homelessness slie 9 Interest rates an mortgage payments For a $300, year, fixe rate mortgage: ate actual rate on 30-year mortgage monthly payment annual payment % $2130 $ % $1722 $20660 Mortgage rates ata: NYtimes / Business / Markets / Rates Mortgage calculator: slie 10 Inflation an Unemployment in Election Years year U rate inflation rate elec. outcome % 5.8% Carter (D) % 13.5% Reagan (R) % 4.3% Reagan (R) % 4.1% Bush I (R) % 3.0% Clinton (D) % 3.3% Clinton (D) % 3.4% Bush II (R) % 3% Bush II (R) slie 11 4

5 Economic moels simplifie versions of a more complex reality irrelevant etails are strippe away Use to show the relationships between economic variables explain the economy s behavior evise policies to improve economic performance slie 12 Example: The supply & eman for new cars explains the factors that etermine the price of cars an the quantity sol. assumes the market is competitive: each buyer an seller is too small to affect the market price Variables: = quantity that buyers eman s = quantity that proucers supply = price of new cars Y = aggregate income s = price of steel (an input) slie 13 The eman for cars eman equation: = DY (, ) shows that the quantity consumers eman is relate to the price an aggregate income. slie 14 5

6 Digression: Functional notation General functional notation shows only that the variables are relate: = DY (, ) A specific functional form shows the precise quantitative relationship: Examples: 1) = DY (, ) = Y 2) = (, ) = 0.3 Y D Y slie 15 The market for cars: eman eman equation: = D(, Y ) rice The eman curve shows the relationship between quantity emane an price, other things equal. D uantity slie 16 The market for cars: supply supply equation: s = S(, ) rice S s The supply curve shows the relationship between quantity supplie an price, other things equal. D uantity slie 17 6

7 The market for cars: equilibrium rice S equilibrium price equilibrium quantity D uantity slie 18 The effects of an increase in income D =D(,Y) An increase in income increases the quantity consumers eman at each price which increases the equilibrium price an quantity. rice S D 1 D 2 uantity slie 19 The effects of a steel price increase: supply equation: s = S(, s ) S rice 2 S 1 An increase in s reuces the quantity of cars proucers supply at each price which increases the market price an reuces the quantity D uantity slie 20 7

8 Enogenous vs. exogenous variables: Enogenous variables etermine in the moel. Exogenous variables etermine outsie the moel: their values & behavior taken as given. In the moel of supply & eman for cars, s enogenous:,, exogenous: Y, s Try moel for mobile phones! slie 21 A Multitue of Moels No one moel can aress all the issues we care about. For example, If we want to know how a fall in aggregate income affects new car prices, we can use the S/D moel for new cars. But if we want to know why aggregate income falls, we nee a ifferent moel. slie 22 A Multitue of Moels So we will learn ifferent moels for stuying ifferent issues (e.g. unemployment, inflation, long-run growth). For each new moel, you shoul keep track of its assumptions, which of its variables are enogenous an which are exogenous, the questions it can help us unerstan, an those it cannot. slie 23 8

9 rices: Flexible Versus Sticky Market clearing: assumption that prices are flexible an ajust to equate S an D. In the short run, many prices are sticky--- they ajust only sluggishly in response to supply/eman imbalances (e.g. magazine prices). slie 24 rices: Flexible Versus Sticky The economy s behavior epens partly on whether prices are sticky or flexible: If prices are sticky, then eman won t always equal supply. This helps explain unemployment (excess supply of labor) the occasional inability of firms to sell what they prouce Long run: prices flexible, markets clear, economy behaves very ifferently. slie 25 Outline of the course: Introuctory material Classical Theory (flex ) Growth Theory Business Cycle Theory olicy ebates Microeconomic founations slie 26 9

Learning objectives. The Science of Macroeconomics slide 1. Important issues in macroeconomics

Learning objectives. The Science of Macroeconomics slide 1. Important issues in macroeconomics Learning objectives This chapter introduces you to the issues macroeconomists study the tools macroeconomists use some important concepts in macroeconomic analysis The Science of Macroeconomics slide 1