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Macroeconomics is more than just head lines, however: it is a fascinating intellectual adven ture. The breadth of issues it covers is evidence enough of its inherent complexity. Yet, a few sim ple ideas can go a long way seeing through com plex situations. Macroeconomics is also enormously useful.
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that the more people understood about basic economics the happier and more prosperous they would be. Accordingly, he established the Calvin K. Kazanjian Economics Foundation Inc, in 1949 as a philanthropic, nonpolitical educational organization to support efforts that enhanced economic understanding.
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Macroeconomics: an Introduction. Jes´us Fern´andez-Villaverde University of Pennsylvania. 1. The Scope of Macroeconomics • Microeconomics: Object of interest is a single (or small number of) household or firm. • Macroeconomics: Object of interest is the entire economy. We care mostly about: 1. Growth. 2. Fluctuations. 2.
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- 1.1 What is macroeconomics?
- 1.2.1 Timescales
- 1.3 Gross domestic product and the circular flow
- 1.4 National income accounting
- 2.1 Assumptions
- 2.3 The AD curve and the quantity theory of money
- 2.4 Analysis using accounting identities
- 3.1 Assumptions
- 4.2 The LM curve
- 4.3 IS-LM policy analysis
- 4.4 The closed economy AD curve
- 5.1 Money supply
- 5.2 Money demand
- 5.2.1 A reduction in the riskiness of bonds
- 5.2.2 The introduction of interest on demand deposits
- 5.2.3 The individual becomes self-employed
- 5.2.5 An increase in the price level
- 5.3.2 GDP growth targetting
- 5.3.3 Inflation targetting
- 6.1 The labour market
- 6.2 Sticky wages
- 6.3 Worker price misperception
- 6.4 Sticky prices
- = P − wP = 0 =⇒ w = ∂L ∂L P ∂L
- 6.5 Strengths and weaknesses of the models
- 6.7 SRAS with worker price misperception
- P KαL1−α − W L
- 7.1 Inflation control
- 7.2 The challenge of hysteresis
- 7.3 Gradualism vs. “Cold Turkey”
- 8.1 Open economy concepts
- P . A
- 8.1.1 Fixed exchange rates
- 8.1.2 The balance of payments
- 8.2 The Mundell-Fleming Model
- 8.2.1 A fiscal expansion
- 8.2.3 An increase in the world interest rate
- 1 − c1(1 − m1)(1 − t1)
- MS
- Y = − mD0 + β(r + πe) α P
- 9.1.1 Overview
- 9.2 Fixed vs. floating exchange rates
- 9.4 Conclusion
Macroeconomics is the branch of economics which seeks to model the econ-omy as a whole. Like microeconomics, macroeconomics is a social science, in that it tries to model and predict human behaviour. Macroeconomics sets itself a highly ambitious task. Human economies are not only highly complex entities, human behaviour is also inherently reflexive...
Throughout this book, a number of terminological and mathematical con-ventions will be used. We will firstly summarize the concepts of the very short run, short run and long run: In the very short run, the price level is completely fixed. This is some-times called the Keynesian short run, because it reflects the original and simplest interpretation...
Gross domestic product (GDP) is defined as the net value of all final goods and services produced in the economy within a given period. One of the prob-lems which arises when measuring GDP is the possibility of double counting. For example, if a firm manufactures the wheels for a car and then sells them on to the firm which builds the car, if the g...
National income accounting concepts provide a conceptual framework for breaking up the output from the economy’s goods market - GDP, represented by Y (nominal GDP) and y (real GDP) - into components that perform dif-ferent macroeconomic roles. In a closed economy, the three components most commonly used are private consumption (C), private investme...
The closed economy classical model provides the simplest framework in which to integrate the goods market, the labour market and the money mar-ket into a coherent framework. It is a long run model, in that it assumes that all markets clear but treats the population and the capital stock as fixed, so it is not concerned with economic growth which oc...
The simplest classical model of aggregate demand is the quantity theory of money. Although the classical model does not preclude more complex models of the money and goods markets, which we will examine in part II, the quantity theory of money is the best way to introduce the spirit of the classical view of the role of money in the economy. The qua...
Even with this simple model, with its limiting assumptions about instanta-neous market clearing, constant population size and highly simplified supply side and demand side, we can do some interesting analysis and introduce some macroeconomic policy concepts in a cursory way. To do this, we make the additional simplifying assumption that nominal pri...
We now build a very short run Keynesian multiplier model. This model will be the basis of our model of the goods market for the rest of the book. The key assumption behind this model is that the price level P ̄ is fixed. This is turn implies that nominal GDP Y = P ̄ y is proportional to real GDP y. Therefore we can deal with the nominal goods mar...
The LM curve shows all the points in (Y, r) space that are compatible with equilibrium in the money market. The demand for real money balances mD(Y, ι) is assumed to depend positively upon output Y and negatively upon the nominal interest rate ι. We will look at the microeconomic basis for this model in the next chapter but for now will explain it ...
We are now in a position to use the IS-LM framework to analyse the effect of various changes in the determinants of the money and goods markets. The power of the IS-LM model lies in its ability to allow different scenarios and policy responses to be explored.
The AD curve is plotted in (Y, P ) space where Y is output and P is the nominal price level. It represents all those points where both the goods market and the money market are in equilibrium for a given price level, nominal money supply and fixed position of the IS curve. The AD curve is thus derived from the IS-LM framework. This is done in the d...
In modern market economies, the Central Bank can only indirectly control the supply of wider monetary aggregates. This is due to the intermediary operation of the commercial banking sector. Commercial banks only have to hold a fraction xre (known as the reserve ratio) of their total deposits as cur-rency, because people on average only withdraw a s...
The most well-known simple model of money demand is the Baumol-Tobin model of cash management. This is a simple microeconomic model of the Figure 5.2: Goods market fluctuations with interest rate targetting transactions demand for money of a rational individual. The easiest way to understand the model is to imagine we are in a world before the inve...
If bonds become less risky whilst their expected rate of return remains unchanged then they will become more attractive to a risk averse individual. This will mean that the effective core interest rate r rises, because the bank account must become more attractive to keep pace with the greater desir-ability of investing in bonds. This will mean that...
A payment of interest on demand deposits will (assuming we include de-mand deposits as money) increase the demand for money, since money is now more attractive relative to other assets. This could be represented by replacing ι in equation 5.1 with (ι−d) where d is the nominal rate of interest on demand deposits. This is because the foregone interes...
If the individual chooses to become self employed, then they will prob-ably need to use more cash to earn the same amount of income as a non self-employed individual. This would be represented by an increase in the coefficient α. Their demand for money will increase.
An increase in the price level can be seen to raise the individual’s demand for nominal money balances because it depends upon the nominal income Y , where Y = yP . When the nominal price level goes up, with real income remaining unchanged, then the individual’s demand for nominal money bal-ances will increase.
A fixed money supply (or fixed monetary growth rule for an economy experiencing ongoing inflation) is not the only rule-based monetary policy regime that has been proposed. Other possibilities considered by economists have been that of nominal or real GDP growth targetting, and of targetting the rate of inflation. These would require the monetary a...
In order to target a particular inflation rate, the monetary authorities must set the interest rate so that IS-LM equilibrium output is equal to potential output Y ∗. The real interest rate required to achieve this will depend on the various components determining the position of the IS curve. For example, if autonomous consumption investment of go...
In order to model the labour market at a microeconomic level, we simplify greatly by assuming that all jobs are the same in terms of disutility of work effort, benefits and any other factors that cannot be captured in the real wage. We can then put the number of workers in the labour force ne along the x-axis and real wages w = W along the y-axis. ...
When wages are sticky, we are referring to a situation where the price level has changed, but nominal wages have remained unchanged. For this to occur there must be some kind of nominal rigidity in the economy. This could be for a number of reasons. It could be because bargaining between firms and workers only occurs periodically, so that wages hav...
An alternative to sticky wages in explaining why employment can deviate from the equilibrium level is a model where workers can misperceive the price level. For simplicity, we assume that firms know the actual price level, whereas workers have more limited information and so base their decisions on previously formed expectations. Suppose that there...
third explanation for fluctuations in employment and output around their market clearing values is that firms do not immediately adjust their prices. In terms of the classical labour market diagram, this can be thought of as shifting the neD curve. We can show this by supposing that the actual nominal price level is P but that firms have fixed thei...
From this equation, we can see that if P ̄ > P then the real wage will be greater than the MPL at the firm’s profit maximizing equilibrium. So, the firm will be operating above its labour demand curve. In other words, the effective labour demand curve is shifted inwards. This means that if some firms have their prices “stuck” above the actual pric...
In the simple form presented here, all three of these potential explanations for output and employment fluctuations have problems. The sticky wage model does not explain why nominal wages are sticky. It seems more plausible that workers target real, not nominal wages. The worker price misperception model does not explain why workers allow themselve...
The easiest way to generate an upward sloping short run aggregate supply curve using a rigorous foundation is to use Friedman’s idea of worker price misperception, or money illusion. Although sticky nominal wages work rea-sonably well to explain involuntary unemployment (because nominal wages do not fall enough there is excess labour supply), the p...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
This chapter has taken a whistle-stop tour of the impact that develop-ments in macroeconomic theory have had on macroeconomic policy. The impact also goes the other way. For example, New Keynesian economics was given an impetus both by the success of Monetarist and New Classical mod-els, but also the poltical success of monetarism. The institutions...
1 Macroeconomics. Macroeconomics (Greek makro = ‘big’) describes and explains economic processes that concern aggregates. An aggregate is a multitude of economic subjects that share some common features. By contrast, microeconomics treats economic processes that concern individuals.
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Jan 10, 2023 · Table of Contents. Chapter 1: Economics: The Study of Choice. Chapter 2: Confronting Scarcity: Choices in Production. Chapter 3: Demand and Supply. Chapter 4: Applications of Demand and Supply. Chapter 5: Macroeconomics: The Big Picture. Chapter 6: Measuring Total Output and Income.
INTRODUCTION TO MACROECONOMICS. Principles of Economics in Context (Goodwin et al.) Chapter Overview. This chapter presents standard macroeconomic topics such as the macroeconomic goals of growth and stability, and a basic “roadmap” of the most significant events and theories of the last century.
