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Western University
Economics 2152A/B
Jennifer Mori

INTRODUCTION Macroeconomics is primarily concerned with aggregate economic variables Examples would include the level of output GDP the level of employment the inflation rate interest rates and the exchange rateAggregate variables are determined largely by individual economic agents such as individuals and firms and also by how these agents respond to government policies and international shocks Because of the importance of economic agents behavior the difference between microeconomics and macroeconomics boils down to the questions being asked rather than the methods used This is why microeconomics is used to model the behavior of economics agents The result can then be used to determine macroeconomic variables For example if we can model how individuals will supply their labour to the economy we should be able to determine given a level of capital and technology how much the economy could potentially produce Therefore our task will be to construct a model based on microeconomic foundations that will allow us to describe an economy Our model must be simple so that it can clearly outline a complex entity like the economy To achieve this we abstract away from details and try to get down to basic or the core relationships between economic variables Simple though it may be our model must also be realistic This means that it should not attempt to explain extraordinary circumstances but it should be able to explain or at least replicate the facts of the economyEssentially the procedure could be outlined as follows1 Observe the data ie the facts2 Construct the model using theory3 Plug the data into the modelDoes the model replicate what actually occurred in the economyYESTHEN WE MAY HAVE A GOOD MODELNoStart overOf course we can not do any of this before we get the basics covered Therefore in our course we will concentrate on building a model from standard economic theory We will also use the model to do experiments These experiments are designed to analyze simple policy initiatives For example what happens when the government increases spending or what effect does an increase in the growth rate of money have on the economyOur model needs to be constructed ONE STEP AT A TIME This is just like building a house You cant paint the walls your favorite colour before you have built the house Likewise you cant build the house until you have laid down a foundation and built a framework We do exactly the same thing when constructing a model
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