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What is Macroeconomics.docx

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McMaster University
Marc- Andre Letendre

What is Macroeconomics? Study of the behaviour of large collection of economic agents. Long run growth is the increase in productive We will look at microeconomics to build up on macro models. Business cycles Important issues: Why some countries rich while others so poor? Why are there fluctuations in aggregate economic activity? Business cycles GDP, Economic Growth, and Business Cycles: Economy dipping below its trend; how do you explain this? Macroeconomic Models: Competitive equilibrium: Price takers; looked only at beginning Macroeconomic Principles: Lucas critique: macroeconomic policy can be evaluated in a sensible way only if macroeconomic behaviour is taken seriously. Disagreements: Business cycles: controversy about how we should right/model the business cycles. Theories of business cycle: The real business cycle model Market segmentation Keynesian coordination failure theory Lessons from Macroeconomic Analysis **ON TEST/EXAM CHAPTER 2-3 reminder of week. Chapter 2: Measurement: Just worry about slides for test. Chapter 3: Business Cycle Measurement: Link back to this chapter when look at future chapters about cyclical data. Regularities in GDP Fluctuations: Below trend; stays for a while; on trend, above and so on… Comovement: Figure 3.3: Suppose Y is output and X is consumption: then X is procyclical. They tend to move together. Negative correlation for right figure. Figure 3.5: Procyclical. Figure 3.6: Positive collertion Figure 3.5: Bluew line; higher vriance Nominal Variables-Price Level: Hard to tell by looking at it; this is where numbers are needed to calculate it. Employment: Lagging variable Chapter 4: Consumer & Firm Behaviour The representative consumer Assuming that each person’s tastes are the same; so knowing one persons; we know everyone’s More is always preferred to less The consumer likes diversity in their consumption bundle Consumption and leisure are normal goods. Pro-cyclical with income. Representative Consumer Preferences: Utility Maximization U(C,e) -Indiff. Curves (slope – mrs) Constraints: Time - Budget – eC = wh-we + (pie) – T Slope of the BC: Dc/dl = w <0 Vertical intercept = wh + pie – t (pie = 0) Horizontal intercepts 0= wh – wl +pie – T Wl = wh + pie – T C Pe of tangency SlopeIC = slope BC –MRS, c – w W= MRS E Point F: MRS > w 5 > 4 W = Price of leisure in terms of consumption s N + e = n – cst s L increases by 1, then N increases by 1 -> where income decreases by w. From my handout: U (C, e) = C 1 –/1-a + 0 (l /1-a) , 0>0 , a > 0 Maz U ( C, l) Subject to C = wh-wl + pie – T MRS, c = MU/MU l c 1-a-1 –a MU = LU (c, l) / 2l = O/1-a (1-a) l =Ol MRS = MU / Me e 1-a-1 a e -a MU = cU (c,e)/dC = 1/1-a (1-a) C + C MRS=Oe /C MRS = W in over example is w = OC /l a a Solve for C and l in terms of parameters and W, pie, T (1) W = OC /e => l = OC /w => (l ) = (OC /w) => l + O /W1/a d 1/aC (2) C=wh – we + pie – T 1/a 1/a C=wh – w (O /w ) + pie – T 1-1/a 1/a C + w O C = wh +pie – T 1-1/a1/a C[1+w O ] = wh + pie – T C = 1/1+w 1-1O (wh+pie – T) 1/a 1/a 1-h L = O /w (1/(1+U 0h) (wh+pie – T) N = h – O d [wh d 1/a 1-1/a W (1+O w ) Numerical example: O = 3, a = ½ h = 1456 (13 x 7 x 16) Plug these values in C demand and N functions/equations C= 1/1+9/w [1456w + pie – T] N = 1456 – 13 104/W+9 - 9(pie – T) / W + 9w Case 1: • Increase in pie – T • Suppose = w = 20 • Initially = pie – T = 700 • Then pie-T=800 +100 • Initial Values: o C1 = 20 565 o N1 = 993.28 • Now with pie – T = 800 o C2 = 20 634 > C1 o N =1991.72 C 1 s s N 2 1120 > N 1 s Income – WN + pie – T Increase in W produces an income effect => C increases, l increase (N decreases) b/c C, l, are both normal goods. Substitution effect: W = relative of leisure in terms of co
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