Chapter 1

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Macroeconomics

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is the study of economic activity andprices in the overall economy of a nation or a region

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Macro draws heavily on...

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•Macroeconomicresearch draws heavily on microeconomics,which looks at the behavior of individual firms, households, or markets

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economic theory

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logical framework to explain a particulareconomic phenomenon

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economic model

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•simplifiedrepresentation of the economic phenomenon that takes a mathematical orgraphical form

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development of an economic theory ormodel typically involves five steps

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1.Identifyan interesting economic question

2.Specifythe variables to be explained by the model (endogenous variables) andthe variables that explain them (exogenous variables)

3.Posita set of equations or graphical analysis to connect movements in the exogenousvariables to the endogenous variables

4.Comparethe conclusions of the model with what actually happens

5.Usethe model to make further predictions

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Variables in Models

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Exogenous - Model - Endogenous

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Macroeconomistsfocus in particular on three economic data series

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–realGDP

–unemploymentrate

–inflationrate

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RealGross Domestic Product (GDP)

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–measuresthe output of actual goods and services produced in an economy over a fixedperiod, usually a year

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Business Cycles

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arerecurrent up and down movements in economic activity that differ in how regularthey are

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Recession

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occurswhen economic activity declines and real GDP per person falls

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Depression

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occurswhen the decline in real GDP is severe

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Unemployment Rate

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•measuresthe percentage of workers looking for work, but who do not have jobs, at aparticular point in time

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Inflation rate

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tells us how rapidly the overall level ofprices is rising

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Deflation

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occurswhen the inflation rate is negative>

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Hyperinflation

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referstothesituation of super high inflation

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Fiscal Policy

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Deals with government spending and taxation

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Government Budget Deficit

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Is the excess of government spending over tax revenues for a particular year

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Monetary Policy

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is the management of the money supply andinterest rates

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Financial Crisis

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•is alarge-scale disruption in financial markets characterized by sharp declines inthe prices of assets(property that includes bonds, stocks, art, land) and business failuresC.

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Stabilization policy

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•ismacroeconomic policy that aims at minimizing business cycle fluctuations andstabilizing economic activity

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Activists

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advocate the use of policies to eliminateexcessive unemployment whenever it develops

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Nonactivists

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argue against the use of stabilizationpolicies because the economy has a self-correcting mechanism