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.
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?
Price takers; looked only at beginning
Lucas critique: macroeconomic policy can be evaluated in a sensible way only if macroeconomic
behaviour is taken seriously.
Business cycles: controversy about how we should right/model the business cycles.
Theories of business cycle:
The real business cycle model
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…
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
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.
Utility Maximization U(C,e)
-Indiff. Curves (slope – mrs)
Budget – eC = wh-we + (pie) – T
Slope of the BC:
Dc/dl = w <0
Vertical intercept = wh + pie – t (pie = 0)
0= wh – wl +pie – T
Wl = wh + pie – T C
Pe of tangency
SlopeIC = slope BC –MRS, c – w
MRS > w
5 > 4
W = Price of leisure in terms of consumption
N + e = n – cst
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
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
C=wh – w (O /w ) + pie – T 1-1/a 1/a
C + w O C = wh +pie – T
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 )
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
• 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
N 2 1120 > N 1
Income – WN + pie – T
Increase in W produces an income effect => C increases, l increase (N decreases) b/c C, l, are both
W = relative of leisure in terms of co