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ECO202Y1 Lecture Notes - Fiscal Policy, Exogeny, Business Cycle

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Masoud Anjomshoa

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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
(not variables!)!
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
implications are:!
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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