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Chapter 1
2013/6/18
What is Macroeconomics?
Macroeconomics focuses on
the aggregate behavior of consumers and firms the behavior of government the overall level of economic activity in individual countries the economic interactions among nations the effects of fiscal and monetary policies
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What is Macroeconomics?
Macroeconomics differs from microeconomics in that it deals with the overall effects on economies of the choices that all economic agents make, rather than on the choices of individual consumers or firms. Long-run growth refers to the increase in a nations productive capacity and average standard of living over a long period of time. Business cycles refer to the short-run ups and downs in aggregate economic activity.
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Figure 1.1 Per Capita Real GNP (in 1996 dollars) for the United States, 1900 - 2005 2013/6/18 ECO 2021 Intermediate Macroeconomic Theory Professor C. K. Yip 5
y t y t 1 log y t log y t 1 y t 1
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Figure 1.2 Natural Logarithm of Per Capita Real GNP 2013/6/18 ECO 2021 Intermediate Macroeconomic Theory Professor C. K. Yip 7
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Figure 1.4 Percentage Deviations from Trend in Per Capita Real GNP 2013/6/18 ECO 2021 Intermediate Macroeconomic Theory Professor C. K. Yip 9
Macroeconomic Models
Purpose: To capture the essential features of the world needed for analyzing a particular economic problem. To be useful then, a model must be simple. Basic structure of a macroeconomic model:
The consumers and firms in the economy, who are assumed to optimize The sets of goods that consumers wish to consume Consumers preferences over goods The technology available to firms for producing goods The resources available
Competitive Equilibrium: All agents (consumers and firms) act as price-takers, and prices clear markets.
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Microeconomic Principles
Macroeconomic behavior is the aggregation of microeconomic decisions made by all the consumers and firms in the economy. Very often, we are interested in the macroeconomic effects of a policy change. In particular, we want to make predictions on those effects that are consistent with individual decisions. To achieve this, we must work our way up from decision making at the micro-level, then aggregating these decisions to arrive at the macroeconomic effects of the policy change.
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Disagreement in Macroeconomics
There is little disagreement in macroeconomics concerning the general approaches to modeling growth. There is much controversy concerning business cycle theory and the role of the government policy in smoothing out cycles:
Keynesian Sticky-Price Theory (Keynes, Hicks & Samuelson) Money Surprise Theory (Friedman & Lucas) Real Business Cycle Theory (Prescott & Kydland) Keynesian Coordination Failure Theory (Diamond, Cooper & John)
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