ECON-3020 Chapter Notes - Chapter 1: Nominal Rigidity, Market Clearing
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Chapter 1: The Science of Macroeconomics
1.1: What macroeconomists study
● Three macroeconomic variables are especially important
○ Real GDP: measures total income of everyone in the economy, adjusted for
the level of prices
○ The inflation rate measures how fast prices are rising
○ The unemployment rate measures the fraction of the labor force that is out
of work
● Two notable trends of GDP
○ Real GDP grows over time
○ Although real GDP rises in most years, this growth is not steady
■ Periods during which real GDP falls (most dramatically in the early
1930s) are called recessions if they are mild and depressions if they
are severe
● Inflation varies substantially over time, but has been the norm for at least 50 years
○ Most severe in the late 1970s
○ In recent years, it has risen about 2% each year
● There is always some unemployment in the economy
○ Recessions and depressions are associated with unusually high
unemployment
1.2: How economists think
● Models
○ Two kinds of variables
■ Endogenous variables (output): variables that the model tries to
explain
■ Exogenous variables (input): variables that a model takes as given
○ Purpose of the model is to show how the exogenous variables affect the
endogenous variables
○ Most famous model: supply and demand
■ Qd=D(P,Y) where D represents the demand function
● Quantity demanded depends on the price of the pizza P and
the aggregate income Y
■ Qs=S(P,Y) where S represents the supply function
● Quantity supplied depends on price of pizza and price of
materials pm (cheese, tomatoes, flour, etc.)
■ Qs=Qd
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Document Summary
Real gdp: measures total income of everyone in the economy, adjusted for the level of prices. The inflation rate measures how fast prices are rising. The unemployment rate measures the fraction of the labor force that is out of work. Although real gdp rises in most years, this growth is not steady. Periods during which real gdp falls (most dramatically in the early. 1930s) are called recessions if they are mild and depressions if they are severe. Inflation varies substantially over time, but has been the norm for at least 50 years. In recent years, it has risen about 2% each year. There is always some unemployment in the economy. Recessions and depressions are associated with unusually high unemployment. Endogenous variables (output): variables that the model tries to explain. Exogenous variables (input): variables that a model takes as given. Purpose of the model is to show how the exogenous variables affect the endogenous variables.
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