What is Macroeconomics?

The study of structure and performance of national economics and of the policies the governments use to try to affect economic performance.

A. Economy in aggregation, combining the activates of individuals

A. Long-run economic growth

Measure output by analyzing the gross domestic product (GDP)

%∆GDP=     x100%

What creates growth? Why is it important?

B. Business Cycles

Fluctuations in output—(periods of expansions and contractions)why do these fluctuations occur and what policy will effect the course of business cycle?

C. Unemployment

Unemployment rate: The number of people available for work and activity seeking work who are unable to find a job divided but the total labor force.

What causes unemployment? Is it possible to control?

D. Inflation

An increase in the general price level over an extended period of time

Inflation rate is calculated similar to the growth rate above.

Real vs. Open Nominal values. "Real" values are measured in economic quantities and control for changes in prices.

E. International Economy

Closed vs. Open economy

Open economy – An economy which trades and conducts financial transactions with other national economies.

Closed Economy--Does not interact with the rest of the world.

F. Macroeconomics Policy

Fiscal policy--Changes in government spending and taxation conducted at the national level by the executive and legislative branches. Also occurs at the state and local level.

Monetary Policy—Controlled by the central bank of a given country (for the US it is the Federal reserve). Changes in the level and the rate of growth of the money supply.

A. Positive vs. normative analysis

Positive analysis—addresses the economic consequences of an action but not whether those consequences are desirable.

Normative Analysis—attempts to answer whether a policy is desirable

Example: Two economists might agree that an increase in taxes will slow economic activity (positive analysis), but disagree on whether it is the appropriate policy action on grounds of size and of the government (normative analysis) or whether the economy is growing too fast or not fast enough, or how long it would take for change in taxes to slow economic activity ect.

Economists also disagree on positive issues often can be separated into two schools of thought Classical and Keynesian.

B. Classical vs. Keynesian

Classical

Individuals make economic decisions that are in their own best interest, this will lead to the most efficient allocation of resources at an aggregate level as well. Wages and prices adjust quickly to help markets "clear"(supply equals demand). Therefore the economy will automatically utilize all its resources efficiently. Sense markets will work "efficiently" on their own government should have a limited role in managing economy.

KEY IDEA: Markets adjust quickly to keep the economy producing at "full employment"

Keynesian

Wages and prices are often slow and adjust, which creates periods where markets are not in equilibrium. Since it takes time for wedges and prices to adjust, governments should play a role to help markets reach equilibrium.

KEY IDEA: Markets are slow to adjust; therefore there is a role for government to help the markets adjust toward full employment.

C. Approach in this course

Focuses on common ground between the two schools of thought. Then compares where they differ. Course will focus on three markets: Land, Goods, and Assets.

The basic response of participants in each market is based upon individual behavior which is then aggregated across the individuals. The course will develop a basic model one market at a time then put the three markets together. The model can be used to examine the economy based on wither Classical or Keynesian assumptions and we will compare the two in detail at the end of the course.