Macroeconomics 352x Week 1 Notes
Macroeconomics 352x Week 1 Notes ECON 352
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This 2 page Class Notes was uploaded by Manisha Malhotra on Tuesday August 30, 2016. The Class Notes belongs to ECON 352 at University of Southern California taught by Fatemeh Ibrahimi Nazarian in Fall 2016. Since its upload, it has received 6 views. For similar materials see in Economics at University of Southern California.
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Date Created: 08/30/16
Chapter 1: Introduction to Macroeconomics (8/25) • Macroeconomics is the study of structure and performance of national economies and gov. policies that affect economic performance • Macroeconomists explain how the economy works by using an economic theory a logical framework to explain a particular economic phenomenon Economic theory typically involves 5 steps: 1. Identify an interesting economic question 2. Specify the variables to be explained by the model (endogenous variables ex. unemployment rate) and the variables that explain them (exogenous variablesex. gov spending) 3. Posit a set of equations to connect movements in the exogenous variables to the endogenous variables 4. Compare the conclusion of the model with what actually happens 5. Use the model to make further predictions • GDP market value of all new goods and services sold within a period of a time in a nation, US GDP growing at 3%; has been growing because of population and average labor productivity • Aggregation: from microeconomics to macroeconomics • Real Gross Domestic Product (GDP) measure the output of actual goods produced in an economy over a fixed period, usually a year • Unemployment the number of people who are available for work and actively seeking work but cannot find jobs • Recessions cause unemployment rate to rise • Inflation rate tells us how rapidly the overall level of prices is rising • Deflation occurs when the inflation rate is negative • Hyperinflation refers to the situation of super high inflation • Macroeconomic Policy: • Fiscal Policy gov spending and taxation • Effects of changes in federal budget • Gov budget deficit is the excess of gov spending over tax revenues for a particular year • Monetary Policy growth of money supply (management of the money supply and interest rates) • Determined by central bank; the Fed in US • A financial crisis is a largescale disruption in financial markets characterized by sharp declines in the prices of assets (property that includes bonds, stocks, art, land) and business failures • 2007 US and other countries experienced a financial crisis • Develop models to determine what policies can produce better macroeconomic outcomes • Positive analysis: examines the economic consequences of a policy (Factbased, data, etc.) • Normative statements determines whether a policy should be used • The classical approach: economy works well on its own • The “invisible hand”: the idea that if there are free markets and individuals conduct their economic affairs in their own best interest, the overall economy will work well • Wages and prices adjust rapidly to get to equilibrium (demand and supply are =) • Result: Gov should have a limited role in the economy • The Keynesian approach: classical theory failed in the Great Depression because high unemployment was persistent • Persistent unemployment occurs because wages and prices adjust slowly, so markets remain out of equilibrium for long periods • Conclusion: Gov. should intervene to restore full employment • Stabilization policy is macroeconomic policy that aims at minimizing business cycle fluctuation and stabilizing economic activity • Activists advocate the use of policies to eliminate excessive unemployment whenever it develops • Nonactivists argue against the use of stabilization policies because the economy has a selfcorrecting mechanism
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