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ECON 2000 Chapter Notes -Deflation

Course Code
ECON 2000
Mokhles Hossain

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ECON2000 Chapter 1 Jessica Gahtan
Chapter 1: The Science of Macroeconomics
Real GDP: Measures the total income of everyone in the economy (adjusted for the level
of prices)
- Grows over time, allows us to enjoy a higher standard of living
- Doesn’t grow steadily. When it falls, it’s called either a recession (if it’s mild) or a
depression (if it’s severe), and it results in economic hardships.
Inflation Rate: Measures how quickly prices are rising
Deflation (negative inflation rate): periods of falling prices (it used to be common, but
now inflation is the norm)
Inflation: measures the percentage change in the average level of prices from the year
- Before 1945, inflation averaged about zero
- In the mid-1970s, there was a severe inflation problem wherein inflation grew at
almost 10%/year
- In the 1990s, inflation returned to near zero
- In recent years it has started to go up
Unemployment Rate: Measures the fraction of the labour force that is out of work
- There is unavoidably SOME unemployment
- Recessions and depressions are typically associated with high levels of
- Great Depression of the 1930s had the highest rate of unemployment
- Since the Second World War theres been a gradual upward trend in
unemployment (but in the last 15 years the trend has began to reverse itself)
- Unemployment falls and inflation rises when total spending is high (e.g. WW2
and early 1960s)
- Unemployment rises when inflation is reduced by government policy that
decreases total spending (e.g. early 1980s and 1990s)
- Looking at how these three variables are measured, how they behave. Then, other
data like exchange rate, foreign trade and foreign debt.
Fiscal Policy: changes in government spending and taxing
Monetary policy: changes in the growth of the nations money supply
Model Building
- Models illustrate (in mathematical terms) the relationship between variables
- Models are useful because they aid us in focusing on the underlying connections-
rather than irrelevant details
Endogenous variables: those variables that a model tries to explain
Exogenous variables: those variables that a model takes as given
- A model shows how exogenous variables affect the endogenous variables
- Exogenous variables come from outside the model and are the model’s output
How should someone react to a model’s lack of realism? It depends on the purpose and
the model’s relevance/ ability to address the issue that we would want to explain.
- In economics, we want to judge whether a simplifying assumption clarifies our
thinking or misleads us.
- Simplification is necessary because an entirely realistic model would be too
complicated to understand
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