Inter Macroecon ECON 3010
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This 10 page Class Notes was uploaded by Hallie Kuphal on Wednesday October 28, 2015. The Class Notes belongs to ECON 3010 at University of Wyoming taught by Staff in Fall. Since its upload, it has received 9 views. For similar materials see /class/230362/econ-3010-university-of-wyoming in Economcs at University of Wyoming.
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Date Created: 10/28/15
Chapter 1 The Science of Macroeconomics I Why are there recession Can the government do recessions Should it Important issues in macroeconomics I Why does the cost of living keep rising e I Why are millions of peopl unemployed ev when the economy e is booming s anything to combat I What 39s the government budget deficit How does it affect the economy def c t Important issues in macroeconomics I Why are so many countries poor What policies mig39tt help them gow out of poverty I Why does the US have such a huge trade i i examp Unemployment and social problems Why learn macroeconomics 1 The macroeconomy affects society s wellsbeing n Why learn macroeconomics 391 re r oeconolnv n ets t a g F e i39s wellrbeiug n rnnloymcrrt and social nlrllilems 2 The macroeconomy affects you wellsbeing examp 1 Unemployment and earnings growth a Interest rams md mortgage payments Why learn macroeconomics r Thel oaonomy anemia s a e eramt Lirrernpleyrrrerri arrrl sor iai ploblenls 2 Tl39ie rrrenoecormmy affects your wellsbetng run me 139 pin I EXri mp lr e y en aul earnings glowth rest tales and mo tgage payments 3 The macroeoonomy affecE politics amp current evens sumpa Inflation md unemployment in election yeas Inflation and Unemployment in Election Years Fair s Presidential Election Model year UraDe in ation raDe elec outcome 1976 7397quot 53 carter D http fairmodelec yaleedu 1980 71 135 Reagan R 1984 75 43 Reagan R 1988 55 41 Bush I R 1992 75 30 Clinton D 1996 54 33 Clinton D 2000 40 34 Bush 11 R Economic models are simplied versions of a more complex reality I irrelevant details are stripped away Used to I show the relationships between economic variables I explain the economy39s behavior I devise policies to improve economic performance Example of a model The sugglx amp demand for new cars I explains the factors that determine the price of cars and the quantity sold I assumes the market is oompetitive buyers and sellers are too small to affect market price I Variables 91 quantity of cars that buyers demand or quantity that producers supply P price of new cars p price of steel an input The demand for cars demand equation 0quot 00 quot shows that the quantity of cars consumers demand is related to the price of cars and aggregate inoome Digression Functional notation I General functional notation shows only that the variables are relate 0quot 00 A list ofthe variables that aired Q Digression Functional notation 39 General functional notation shows only that the variables are related 0quot 00 I A spec c functional form shows the precise quantitative relationshi Exam e 39 p s 1 Qquot DPY 60710P 2y 03y 2 0 DPv The market for cars demand demand equation F 1 Woe 0 DPY ofcars utherthmgs equal 7 Quamty of cars The market for car supply supply equation Woe 0 5PP ofcars The supply cur 7 Quanuty of cars The market for cars equilibrium p Woe of cars equmbnum pnce The effects of an increase in income demand equauon p a DltPV We ofcars An nerease if neume p2 mers F at each price D D Z 7 which increases Q 02 Quanuty the equmbnum pnee fears an quantity The effects of a steel price increase supply equauon P as P PS We 0 7 Quarmty of cars Endogenous vs exogenous variables I The values of endogenous e variables are determined in the mod I The values of exogenous variables are determined oulside the model the model takes their values amp behavior as given I In the model of supply amp demand for cars endogenous P Q exogenous Y P Outline ofthis book I Introductory material chaps 1amp 2 Classical Theory chaps 375 How the economy works in the long run when prices are flexible rowth Theory chaps 778 e standard of living and ii growth rate over the very long run I Business Cyde Theory chaps 9 13 How the economy works in the short run when prices are sticky Outline of this book39 I Policydebabes Chaps 14715 Should the government try to smooth business cycle uctuations Is the governments debt a problem I Microeconomic foundations Chaps 16719 Insighls from looking at the behavior of consumers firms and other issues 39om a microeconomic perspective Chapter 3 National Income Where It Comes From and Where It Goes Outline of model A dosed economy marketdearlhg model Supply side factor markels supply demand price determination of outputincome Demand side determinanls of C I and E num goods market loanable funds market Factors of production K capital tools machines and structures used in production L labor the physical and mental efforls of workers The production function 39 denoted Y FIL 39 shows how much output Y the economy can produce from Kunits of capital and L units of labor 39 reflects the economy39s level of technology 39 exhibits constantreturns Doscale Assumptions of the model 1 Technology is fixed 2 The economy39s supplies of capital and labor are fixed at KI and Ll Determining GDP Output is determined by the fixed factor supplies and the fixed state of technology y FI L The distribution of national income I determined by factor prices the prices per unit that firms pay for the factors of production I The wage is the price of L the rental rate is the price of K Notation W nominal wage R ominal rental rate P prioe ofoutput WP real wa e measured in uniis of output RP real rental rate How factor prices are determined I Factor prices are determined by supply and demand in factor markeis I Recall Supply of each factor is fixed I What about demand Demand for labor IAssume markeis are competitive each firm takes W R and P as given I Basic idea A firm hires each unit of labor if the cost does not exceed the benefit cost real wage benefit marginalproductolabor Marginal product of labor MPL ef The extra output the firm can produce using an additional unit of labor holding other inpuis fixed MPL FIL1 FIL Dawn 2 m i i Diminishing marginal returns I As a factor input is increased iis marginal product falls other things equal I Intuition TL while holding K fixed 2 fewer machines per worker 2 lower productivity Exercise Suppose WP 6 a If L 3 should firm hire more or less labor Why a If L 7 should firm hire more or less labor Why ommummauNHoh a u o a HNuemauao MPL and the demand for labor Each firm h e5 labor up to the point where MPL WP Ui ilB oflabor L Determining the rental rate We have just seen that MPL WP The same logic shows that MPK RP I diminishing returns to capital MPKlr as KT I The MPKcurve is the firrn39s demand curve for renting capital I Firms maximize profits by choosing K such that MPK RP states that each factor input is paid its maiginal product accepted by most economists How income is distributed W a total laborlncome 31 MPLXL R total capital Income 3K MPKxK If production function has constant returns to scale then 7 MPLXI MPKx national labor capital income income incom Dawn 2 m i i Outline of model A closed ecunurrly marketeeariwg made Supply slde DONE factor markeE supply demand price DONE d determination of outputincome Demand side N xl 9 in determinanE of c I and s Eguillbrium in goods market in loanable funds market Demand for goods amp services Components of aggregate demand C consumer demand for g amp s I demand for investment goods 6 government demand for g amp s closed economy no NX Consumption C 39 def disposable income is total income minus tota taxes Y T 39 Consumption function I CY 739 Shows that T Y 739 2 TC 39 def The marginal propensity to consume is the increase in C caused by a oneunit increase in disposable income The consum ption function C CVrf The siope of in MJC consumption funcuon Investment 139 39 The investment function is I I r ere r denotes the real interest rate the nominal interest rate corrected for inflation nterest rate is e oost of borrowin o the opportunity cost of using one39s own unds 39 The real i o to finance investment spending So Tr gt 4 Mi ii The investment function Spending on 39nvestmentgoods is a downwardn sloping function of the real inmrestrate 1r ruann 1 m i i Government spending G 39 6 includes government spending on goods and serv39ces 39 E excludes transerpaymenl I Assume government spending and total taxes are exogenous GE and TT The market for goods amp services oAggdemand C777lra Agg supply 7 FWD 0 Equilibrium 7 C777lra 771e real interest rate adjust to equate demand W r suppy Supply of funds Saving The supply of loanable funds comes from saving Households use their saving to make bank deposiis purchase bonds and other asseis Thse funds beoome available to firms to borrow to finance invstment spending The government may also oontribute to saving if it does not spend all of the tax revenue it receives Types of saving I private saving Y T C I public saving T E I national saving 5 private saving public saving y r c 7 5 Y C E digression Budget surpluses and deficits When gt 6 budget surplus T E public saving When T lt 6 budget def and public saving When 739 budget is is negative 5 balanced and public saving 0 The US Federal Government Budget 2 19m 195m 195m 197m wan 199m zuuu ruann 1 m l l vertical W Loanable funds market equilibrium The 5P Clal r l 0 7 C 7 E r adjusts to equilibrate the goods market m 39 7 y 7 the loanable funds market simultaneously If LF market in equilibrium then E b Y C G I inllel eslllarllerea Add C G to both sides to get Y C I G goods marketeqin Ill Thus oods Equilibriumlevel 5 LE market lt3 of investment i um i i CASE STUDY The Reagan De cits 1 The Reagan deficits cont I Reagan policies during early 19805 i The increase in r 0 increases in defense the deficit Z 1 spending AG gt 0 reduces saVing 0 big tax cuts ATlt0 r 2 I According to our model both policies reduce 2 national saving rater m E 3 which reduces Il l thelevel of investment I 1 SI w WM Are the data consistent with these results variable 1970s 1980s 7 G 22 39 5 196 174 r 11 63 I 199 194 T4 S and l are exprexxed e a percent of GDP All gurex are average over the decade Shown
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