Lecture 1 The Science of Macroeconomics

Lecture 1 C H A P T E R 1 This is the 2007 annual update to the PowerPoints for the 6th edition of Mankiw’s Macroeconomics The purpose of the annual updates is to update the data to the most recent.Why does the cost of living keep rising?Why are millions of people unemployed, even when the economy is booming?What causes recessions? Can the government do anything to combat recessions? Should it?annual updatesannual updatesannual updates

CHAPTER  This chapter introduces you to • the issues macroeconomists study • the tools macroeconomists use • some important concepts in macroeconomic analysis CHAPTER The Science of Macroeconomics ECON 100A : Intermediate Macro Theory Macroeconomics, the study of the economy as a whole, addresses many topical issues: • Why does the cost of living keep rising? • Why are millions of people unemployed, even when the economy is booming? • What causes recessions? • Can the government anything to combat recessions? Should it? CHAPTER The Science of Macroeconomics ECON 100A : Intermediate Macro Theory Macroeconomics, the study of the economy as a whole, addresses many topical issues: • What is the government budget deficit? How does it affect the economy? • Why does the U.S have such a huge trade deficit? • Why are so many countries poor? What policies might help them grow out of poverty? CHAPTER The Science of Macroeconomics ECON 100A : Intermediate Macro Theory 40,000 9/11/2001 First oil price shock 30,000 long-run upward trend… Great Depression 20,000 Second oil price shock 10,000 World War II CHAPTER The Science of Macroeconomics 2000 1990 1980 1970 1960 1950 1940 1930 1920 1910 1900 ECON 100A : Intermediate Macro Theory 25 20 15 10 -5 -10 CHAPTER The Science of Macroeconomics 2000 1990 1980 1970 1960 1950 1940 1930 1920 1910 1900 -15 ECON 100A : Intermediate Macro Theory 25 20 15 10 CHAPTER The Science of Macroeconomics 2000 1990 1980 1970 1960 1950 1940 1930 1920 1910 1900 ECON 100A : Intermediate Macro Theory The macroeconomy affects society’s well-being 6000 Social Social problems problems like like homelessness, homelessness, property crime domestic violence, crime,(right and poverty 5000 and poverty scale) domestic violence, crime, are are linked linked to to the the economy economy 10 4000 For example… For example… unemployment (left scale) 3000 crimes per 100,000 population percent of labor force  1970 2000 1980 1990 CHAPTER The Science of Macroeconomics 2000 ECON 100A : Intermediate Macro Theory In In most most years, years, wage wage growth growth falls falls when when unemployment unemployment is is rising rising 5 3 -1 -3 -1 -5 -2 -3 1965 -7 1970 1975 unemployment rate 1980 1985 1990 1995 2000 2005 percent change from 12 mos earlier The macroeconomy affects your well-being change from 12 mos earlier  inflation-adjusted mean wage (right scale) CHAPTER The Science of Macroeconomics ECON 100A : Intermediate Macro Theory  The macroeconomy affects politics Unemployment & inflation in election years year U rate inflation rate 1976 7.7% 5.8% Carter (D) 1980 7.1% 13.5% Reagan (R) 1984 7.5% 4.3% Reagan (R) 1988 5.5% 4.1% Bush I (R) 1992 7.5% 3.0% Clinton (D) 1996 5.4% 3.3% Clinton (D) 2000 4.0% 3.4% Bush II (R) 2004 5.5% 3.3% Bush II (R) CHAPTER The Science of Macroeconomics elec outcome ECON 100A : Intermediate Macro Theory 10 supply equation: s Q S (P , Ps ) P Price of cars The supply curve shows the relationship between quantity supplied and price, other things equal CHAPTER The Science of Macroeconomics S D Q Quantity of cars ECON 100A : Intermediate Macro Theory 16 P Price of cars S D Q Quantity of cars CHAPTER The Science of Macroeconomics ECON 100A : Intermediate Macro Theory 17 demand equation: Q d D (P ,Y ) An increase in income increases the quantity of cars consumers demand at each price… P Price of cars S P2 P1 …which increases the equilibrium price and quantity CHAPTER The Science of Macroeconomics D1 Q1 Q2 D2 Q Quantity of cars ECON 100A : Intermediate Macro Theory 18 supply equation: s Q S (P , Ps ) P S2 Price of cars An increase in Ps reduces the quantity of cars producers supply at each price… S1 P2 P1 …which increases the market price and reduces the quantity CHAPTER The Science of Macroeconomics D Q2 Q1 Q Quantity of cars ECON 100A : Intermediate Macro Theory 19    The values of endogenous variables are determined in the model The values of exogenous variables are determined outside the model: the model takes their values & behavior as given In the model of supply & demand for cars, endogenous: exogenous: CHAPTER The Science of Macroeconomics P , Qd , Qs Y , Ps ECON 100A : Intermediate Macro Theory 20 ... 19 80 19 70 19 60 19 50 19 40 19 30 19 20 19 10 19 00 -15 ECON 10 0A : Intermediate Macro Theory 25 20 15 10 CHAPTER The Science of Macroeconomics 2000 19 90 19 80 19 70 19 60 19 50 19 40 19 30 19 20 19 10 19 00... The Science of Macroeconomics 2000 19 90 19 80 19 70 19 60 19 50 19 40 19 30 19 20 19 10 19 00 ECON 10 0A : Intermediate Macro Theory 25 20 15 10 -5 -10 CHAPTER The Science of Macroeconomics 2000 19 90 19 80... P Price of cars S P2 P1 …which increases the equilibrium price and quantity CHAPTER The Science of Macroeconomics D1 Q1 Q2 D2 Q Quantity of cars ECON 10 0A : Intermediate Macro Theory 18 supply