Chapter 1: Introduction

What is Macroeconomics?
1. Large questions + issues faced by many people and nations
2. Ues economic models
  1. based on microeconomic principles
3. focuses on long-run growth and business cycles
  1. Long-run growth is the increase in a nation's productive capacity and the average standard of living over a long time
  2. Business cycles are the short-run ups and downs/booms and recessions in aggregate economic activity
GDP, Economic Growth, Business Cycles
1. GDP is the quantity of goods and services produced within a country's borders during some specified period of time.
  1. quantity of income earned by those contributing to domestic output
2. fluctuations in economic growth are business cycles
3. Natural log is used to calculate growth rate
  1. 1. This is the slope of the graph AKA the growth rate of time series
  2. difference between ln real GDP/capita and ln of actual real GDP/capital is business cycle
4. economic models must be simple but useful
  1. structure of an economic model describes specific things
    1. consumers and firms interacting in economy
    2. set of goods consumers wish to consume
    3. consumers' preference over goods
    4. technology available to firms for producing goods
    5. resources available
  2. models must be used to make predictions
    1. consumers and firms goals? to optimize
    2. how is consistency achieved? equilibrium
      1. competitive equilibrium: goods are bought and sold in markets where consumers are price-takers
  3. run experiments to see if they are consistent and then use them for experiments
Microeconomic priniciples
1. macro behavior is the sum of micro decisions
  1. adding more micro to macro generally more agreed upon in 1970s
  2. rational expectations revolution / Lucas critique 1976
Disagreement in macroeconomicss
1. Solow and endogenous growth models generally accepted
2. Disagreement about business cycles + role of govt
  1. Keynesian
    1. Old Keynesian models
      1. wages/prices sticky in short run + do not change quickly enough for sufficient outcomes
      2. monetary and fiscal policy can fix inefficiencies in private markets
    2. coordination thought
      1. stuck in bad equilibrium because economic agents are self-fulfillingly pessimistic
    3. New Keynesian
      1. sticky wages/prices BUT use micro tools
  2. Non-Keynesian
    1. real business cycle theory brought by RER
      1. govt policy to smooth business cycles is ineffective/detrimental
what do we learn from macroeconomic analysis
1. what is produced and consumed is determined by both economic productive capacity and consumers' preferences
2. free market economies - strong forces that produce socially efficient economic outcomes
3. unemployment is painful but necessary for modern economy
4. improving standard of living is by long run tech advancement
5. tax cut is not a free lunch
  1. govt will have to borrow more to pay of debt to keep spending constant so taxes in future will be higher
6. credit markets/banks play key roles
7. consumers and firms' future anticipation affects current events
8. Society is better with money than without it,
  1. once we have money changing the quantity doesn't matter
9. business cycles are similar but can have many causes
10. trading can be good but also a shock to domestic economy
11. inflation is caused by growth in money supply
12. there is no long-run trade of between aggregate output and inflation
  1. Philips Curve
    1. Unstable + no long-run impact
Understanding recent and current macroeconomic events
1. Aggregate productivity
  1. average labor productivity
    1. {Y (aggregate output)/ N (employment)}
  2. determines growth in loving standards in long-run
  3. late 60s to early 80s = productivity slowdown
    1. two reasons for this
      1. measuring problem
      2. adjustment period for adoption of new technology
2. unemployment and vacancies
  1. socially useful search activity
    1. efficiently searching firms and workers are matched
  2. determined by productivity, govt provided unemployment insurance, matching efficiency
  3. Beveridge curve
3. Taxes, govt spending, govt deficit
  1. Increased govt spending = crowding out private economic activity
    1. govt competes for resources with rest of economy
    2. reduction in spending and consumption in private firms
  2. Difference between taxes and spending = total govt surplus/saving
    1. negative govt surplus = govt. deficit
      1. debt we owe ourselves
      2. redistribution of tax burden
      3. Ricardian equivalence theorem = no consequences to deficit
4. Inflation
  1. rate of change in the average level of prices
    1. explained in long run by growth supply of money
  2. long-run inflation is costly
    1. reduces employment, output, consumption
    2. controlled by central bank
5. Interest rates
  1. affect private economic decisions
    1. how much consumers borrow/lend
    2. how much firms invest
  2. nominal interest rate
    1. interest rate in money terms of 91-day US Treasury Bills
    2. rises and falls with inflation rate
  3. real interest rate
    1. = nominal interest rate - rate of inflation
    2. fluctuates a lot over time
6. Business cycles in the US
  1. deviations from trend in aggregate economic activity
  2. recessions have many reasons
    1. increase in price of energy
    2. depleting optimism
    3. monetary policy
7. Credit Markets and the Financial Crisis
  1. 2008 caused by credit marker "frictions"
    1. Asymmetric info
      1. good borrowers affected due to default premium
      2. should have checked credit-worthiness
    2. limited commitment
      1. borrower's lack of incentive to pay in credit market
      2. post collateral
8. current account surplus
  1. measure of balance of trade
    1. net exports of goods/services + net factor payments
  2. when negative = current account deficit
    1. goods/services bought from abroad by domestic > goods bought by domestic from domestic
    2. not necessarily bad
      1. smooth aggregate consumption
      2. finance additions to productive capacity for higher future standard of living
  3. influenced by govt spending, and domestic and foreign income

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