ECO202Y1 Lecture Notes - Fiscal Policy, Exogeny, Business Cycle
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ECO202Y - Lecture 1!
✤Macroeconomics is the study of economics at the national level!
✤Macroeconomics = aggregate economic activity, what is happening to the change of
prices in the aggregate economy!
✤Macro is the study of the structure of the economy - how things are actually
interrelated with one another, the dynamic adjustments of the economy**!
✤Dynamic adjustments - how does the economy move from equilibrium position to
another, what are the economic forces that are causing that movement to take
✤Macro - performance of the economy - good or bad? Government policies related to
how that national economic performance is unfolding - kinds of government policies!
✤Endogenous variables - dependent variables - this what the model is going to try to
✤Exogenous variables - independent variables - explanatory variables!
✤Exogenous variables explain endogenous variables!
✤We also have constants and parameters - the coefﬁcients that are in the equation
✤If you cannot get any data on your exogenous variable, you need to eliminate it!
✤In Macro, there are three very important variables: GDP (or aggregate economic
activity), unemployment, and inﬂation!
✤Real GDP = measure of the quantity of production taking place in the economy!
✤Real GDP ﬂuctuates around its long term trend - the ﬂuctuations are called business
✤When the economy is growing = expansion!
✤When the economy is shrinking = contraction!
✤Unemployment rate = % of the labour force who is out of work and is actively
seeking to ﬁnd work!
✤Recession = unemployment rate increases!
✤Expansion = unemployment rate decreases (but it decreases at a much lower rate
than it increased)!
✤Inﬂation = measure of how rapidly is the overall price changing!
✤Two things are related to infation = deﬂation & hyperinﬂation!
✤Deﬂation = when prices are dropping (deﬂation is not a good thing)!
✤Hyperinﬂation = when prices are rising very rapidly (about 50% per month)!
✤Our models should be able to explain the three important variables!
✤Macroeconomic policies = use the economic models that we develop to try to use
government policies to help to produce better economic outcomes!
✤When we think about macroeconomic policies affecting better outcomes, the
✤Why are richer countries richer and poor countries poorer and how can macro help?!
✤How has China managed been able to grow so rapidly and can their policies be
applied to other developing countries?!
✤How much do savings matter? Short-run saving and long-run savings!
✤Do budget deﬁcits matter? => How and how much budget deﬁcit matter?!
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