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ECON 203 Week 1: Introduction to Macro Economics

by: Amanda Notetaker

ECON 203 Week 1: Introduction to Macro Economics Econ 203

Marketplace > Western Kentucky University > Economcs > Econ 203 > ECON 203 Week 1 Introduction to Macro Economics
Amanda Notetaker
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These are FREE notes with what was covered in class on the first week of the semester!
Robert W. Pulsinelli
Class Notes
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This 4 page Class Notes was uploaded by Amanda Notetaker on Saturday January 16, 2016. The Class Notes belongs to Econ 203 at Western Kentucky University taught by Robert W. Pulsinelli in Winter 2016. Since its upload, it has received 8 views. For similar materials see PRIN ECONOMICS-MACRO in Economcs at Western Kentucky University.


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Date Created: 01/16/16
(Note: This information is recorded from Dr. Robert Pulsinelli's Economics 203 class on dates Wednesday, January 27th, 2016 and Friday, January 29th, 2016, and from the corresponding book Economics Today, 16th edition.) Macro: "The whole group" - theory of national income Historical Perspective: Economics hasn't evolved because some macroeconomics stems from real crises. Conventional wisdom: an agreed upon subject matter - If this happens, this is probably going to happen. Classical neoclassical model: mathematicians said that shocks (or disruptions in the economy) can be adjusted until they return to their equilibrium. The recovery from these shocks will be relatively quick. -1776-1930s -Derived by people like Adam Smith (The General Theory) Adam Smith's Theory: If you leave people alone (laissez-faire), and governments do not intervene, in the long run it will lead to full employment. -Disruptions in the economy: new innovations, economic crises, changes in taste, new market If you spend more on one thing, you spend less on other things. (Markets expand and contract based on this.) -Unimportant role for government 1930: The Great Depression John Maynard Keynes: Said that everything written up until his time was incorrect. Mechanisms do not drive the economy back to full employment. -Problem: insufficient spending ADq: Aggregate demand (primary mover) -Total quantity C: Value of expenditures on consumer goods, or consumption expenditures IN: value of business expenditures on plans and equipment, or investment expenditure G: government expenditures on goods and services X - M: Exports - Imports ADq = C + IN + G + (X-M) Assumption #1: Wants are unlimited. That doesn't mean you can/should buy unlimited wants; you are constrained by your finances and budget. People need to spend more to boost the economy. Aggregate demand decreases: more unemployment Aggregate demand increases: less unemployment Find a way to positively introduce spending. C: Consumers: People don't want spend more if they don't have a safe enough budget for it. IN: Businesses: Don't want to spend more and/or expand if profits are low. G: Governments: FDR Deficit spending - spend more than we're bringing in. -Which is worse: more unemployment or deficit? People are less likely to spend more and more likely to spend less during a depression. Keynes's Theory of Inflation: When you're at full employment, (aggregate demand) ADq>ASq (aggregate supply) prices will rise. People have purchasing power. 1970s: High and rising unemployment, and high and rising inflation. -called Stagflation -Impossible according to Keynes's model. Surplus: an excess or abundance of something Surplus of labor = higher unemployment If there is more unemployment (and/or less labor), the price of labor is higher. Example: The Price of Bread -If bread is lacking in surplus, the price of bread becomes higher. "I will work for less if you give me a job!" The Great Depression revealed to economists that employers are willing to manipulate the market by holding less job positions so people are willing to work for less than what they normally would settle for. They are only interested in profit. If they could cause 1/3 of the society to starve in poverty because it was more profitable, they would do it. To Keynes: If you want full employment, you need an important government role in the economy. -If businesses and consumers aren't spending enough, -The government needs to spend more and tax less. -It was not a common idea for people to spend more than normal and within budget; it put them at risk for debt. Theories only work until they are no longer relevant and it is time to create a new theory to better fit the situation. Constructs Variables: Incomes, Wealth, Price, Quantity Demand, Quantity Supply, Firms, Industries, Gross National Income (GNI) -If we can measure these variables, we can develop theories that we can test. -It can help us better predict situations and keep/return to an equilibrium in the economy. Culture: People in different areas behave differently. Why? -They have different incomes. -They face different relative prices. This is a testable hypothesis because if the incomes and relative prices become similar between two cultures, they are likely to act similarly. This is not a perfect measure, but it is a likely measure that there will be similarities. Frustration: It's very difficult to measure this. Measuring How much does it cost to go to Princeton for one school year? Their Answer: $50,000 a year -This is not the same for all students. This is the maximum price. -Students receive loans, scholarships, etc. The real answer is: it depends. What is the income of the child's parents? What is the income of the child? True or false: Minority groups in inner cities pay higher prices for groceries and goods. Answer: True -Normally someone would think no, that's not true. -What if people steal from the markets? The customers pay more to help return the lost cash and keep the store in business. It is very difficult to measure unemployment and the unemployment rate. Example: People who win the lottery say "I'm going to keep my job" but quit the next day. They are not unemployed. You have to be looking for a job to be considered unemployed. Fundamental Economic Problem 1. Wants are unlimited 2. Resources are limited On an individual level: Mr. Smith cannot have everything he wants. He has constraints. This includes income and wealth. He understands that he needs money and must distribute it intelligently to thrive. Opportunity cost: the highest valued alternative to the option selected. Coming to class: You paid for the opportunity to come to class. Instead of coming to class, you could have been sleeping, playing video games, etc. If you would be sleeping if you hadn't come to class, sleeping would be your opportunity cost. There is a cost to all behavior. The resource base is shrinking. It is fixed. -Even though we have more oil discovered now than 100 years ago, our supply of that is shrinking, even if we have not discovered it yet. How do we answer the question "What are the 3 Fundamental Questions that All Societies Face?" Look at the Types of societies: Command/communist, Tribal/traditional, Voluntary exchange (Capitalism) (Market Economy) 1. What(/in what quantities) is there being produced? 2. How is it being produced? 3. For whom is it being produced? As long as you have money, you can buy or produce whatever you want, so long as it is legal and not harmful to others. Profit is very important to a Voluntary Exchange society. You have to have a resource/product that other people want. Profit is not very important in a Tribal society. Production is normally simple (kill an animal) and the person it is being produced for (normally a tribe) does not necessarily give back (or give the producer profit).


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