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Macro economics

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Macroeconomics ECO 403
VU
LESSON 03
IMPORTANCE OF MACROECONOMICS
Why learn macroeconomics?
1. The macroeconomy affects society's well-being.
example:
Unemployment and social problems
Each one-point increase in the unemployment rate is associated with:
920 more suicides
650 more homicides
4000 more people admitted to state mental institutions
3300 more people sent to state prisons
37,000 more deaths
increases in domestic violence and homelessness
The macroeconomy affects your well-being.
example 1:
Unemployment and earnings growth
example 2:
Interest rates and mortgage payments
Unemployment Rate of Pakistan
9
8
7
6
5
4
3
2
1
0
Years
6
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Macroeconomics ECO 403
VU
Unemployment and Earnings Growth
5
4
3
2
1
0
-1
-2
-3
Inflation Growth rate
-4
-5
1965
1975
1985
1995
growth rate of inflation-adjusted hourly earnings
change in Unemployment rate
Interest rates and rental payments
For a Rs.320,000; 3-year mortgage
Date
actual rate on 3-
monthly payment
annual payment
year financing
May 2003
8.50%
Rs. 10,021
Rs. 120,252
May 2004
7.25%
Rs. 9,839
Rs. 118,068
Why learn macroeconomics?
3. The macroeconomy affects politics & current events.
·  example:
Inflation and unemployment in election years
Inflation and Unemployment in Election Years
Year
U rate
inflation rate
1976
7.7%
5.8%
1980
7.1%
13.5%
1984
7.5%
4.3%
1988
5.5%
4.1%
1992
7.5%
3.0%
1996
5.4%
3.3%
2000
4.0%
3.4%
Economic models
...are simplified versions of a more complex reality
·  irrelevant details are stripped away
Used to
·  show the relationships between economic variables
·  explain the economy's behavior
·  devise policies to improve economic performance
The supply & demand for new cars
7
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Macroeconomics ECO 403
VU
explains the factors that determine the price of cars and the quantity sold.
·
assumes the market is competitive: each buyer and seller is too small to affect the
·
market price
·  Variables:
Q d = quantity of cars that buyers demand
Q s = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)
The demand for cars
Demand Equation
Qd = D(P,Y)
shows that the quantity of cars consumers demand is related to the price of cars and
aggregate income.
·  General functional notation shows only that the variables are related:
Qd = D(P,Y)
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Table of Contents:
  1. INTRODUCTION:COURSE DESCRIPTION, TEN PRINCIPLES OF ECONOMICS
  2. PRINCIPLE OF MACROECONOMICS:People Face Tradeoffs
  3. IMPORTANCE OF MACROECONOMICS:Interest rates and rental payments
  4. THE DATA OF MACROECONOMICS:Rules for computing GDP
  5. THE DATA OF MACROECONOMICS (Continued…):Components of Expenditures
  6. THE DATA OF MACROECONOMICS (Continued…):How to construct the CPI
  7. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES
  8. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  9. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  10. NATIONAL INCOME: WHERE IT COMES FROM AND WHERE IT GOES (Continued…)
  11. MONEY AND INFLATION:The Quantity Equation, Inflation and interest rates
  12. MONEY AND INFLATION (Continued…):Money demand and the nominal interest rate
  13. MONEY AND INFLATION (Continued…):Costs of expected inflation:
  14. MONEY AND INFLATION (Continued…):The Classical Dichotomy
  15. OPEN ECONOMY:Three experiments, The nominal exchange rate
  16. OPEN ECONOMY (Continued…):The Determinants of the Nominal Exchange Rate
  17. OPEN ECONOMY (Continued…):A first model of the natural rate
  18. ISSUES IN UNEMPLOYMENT:Public Policy and Job Search
  19. ECONOMIC GROWTH:THE SOLOW MODEL, Saving and investment
  20. ECONOMIC GROWTH (Continued…):The Steady State
  21. ECONOMIC GROWTH (Continued…):The Golden Rule Capital Stock
  22. ECONOMIC GROWTH (Continued…):The Golden Rule, Policies to promote growth
  23. ECONOMIC GROWTH (Continued…):Possible problems with industrial policy
  24. AGGREGATE DEMAND AND AGGREGATE SUPPLY:When prices are sticky
  25. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…):
  26. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…):
  27. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  28. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  29. AGGREGATE DEMAND AND AGGREGATE SUPPLY (Continued…)
  30. AGGREGATE DEMAND IN THE OPEN ECONOMY:Lessons about fiscal policy
  31. AGGREGATE DEMAND IN THE OPEN ECONOMY(Continued…):Fixed exchange rates
  32. AGGREGATE DEMAND IN THE OPEN ECONOMY (Continued…):Why income might not rise
  33. AGGREGATE SUPPLY:The sticky-price model
  34. AGGREGATE SUPPLY (Continued…):Deriving the Phillips Curve from SRAS
  35. GOVERNMENT DEBT:Permanent Debt, Floating Debt, Unfunded Debts
  36. GOVERNMENT DEBT (Continued…):Starting with too little capital,
  37. CONSUMPTION:Secular Stagnation and Simon Kuznets
  38. CONSUMPTION (Continued…):Consumer Preferences, Constraints on Borrowings
  39. CONSUMPTION (Continued…):The Life-cycle Consumption Function
  40. INVESTMENT:The Rental Price of Capital, The Cost of Capital
  41. INVESTMENT (Continued…):The Determinants of Investment
  42. INVESTMENT (Continued…):Financing Constraints, Residential Investment
  43. INVESTMENT (Continued…):Inventories and the Real Interest Rate
  44. MONEY:Money Supply, Fractional Reserve Banking,
  45. MONEY (Continued…):Three Instruments of Money Supply, Money Demand