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EC250 (77)
Karen Huff (16)
Chapter 1

Chapter 1 - Science of Macroeconomics.docx

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Department
Economics
Course
EC250
Professor
Karen Huff
Semester
Fall

Description
Chapter 1 – Science of Macroeconomics 1.1: What Macroeconomists Study  Macroeconomics: study of the economy as a whole; how variables are determined and interact - Uses scientific method: forms and tests (empirical testing) the hypothesis (which sets the existence of a cause & effect relationship between independent variables & 1 dependent variable)  Understanding past & present performance, forecasts of future, evaluating the effects of policies  Note: must use given historical data to develop theories (unlike scientists, who can experiment)  basic principles of macroeconomics don’t change; principles must be applied with flexibility  Real GDP: measures total income of economy, adjusted for price level - Grows (unsteadily), implying a higher standard of living  11x higher in 2009 then 1900 - Business cycle: periods of unsteady growth are recessions if mild, and depressions if severe  Inflation rate: measures how quickly prices are rising as % change in P from year before  Unemployment rate: measures fraction of labour force that’s out of work and looking for jobs - Natural unemployment: there is always some unemployment, and this amount varies with time.  interest rate: cost of borrowing, and rate of return to saving  exchange rate: rate at which one country’s currency trades for the currency of another country 1.2: How Economists Think: Theory as Model Building  Macroeconomic model: simplified, conceptual description of economy which provides logical and consistent framework for understanding how the economy works  dispense irrelevant details to focus on connections between variables  using mathematical terms  Endogenous variables: those that a model tries to explain (model’s output; determined by model)  Exogenous variables: those that a model takes as given (model’s input; no control over these)  Purpose of a model is to show how exogenous variables affect endogenous variables  art of economics = judging
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