ECON 3010

Intermediate Macroeconomics

Chapter 1The Science of Macroeconomics

Macroeconomic Issues

Why does the cost of living keep rising?

Why are millions of people unemployed?

Why are there recessions? Can policymakers

do anything? Should they?

What is the government deficit? How does it

affect the economy?

Why does the U.S. have a large trade deficit?

U.S. Real GDP per capita (2005 dollars)

$0

$10,000

$20,000

$30,000

$40,000

$50,0001900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

Great

Depression

World War II

First

oil price

shock

Second oil

price shock

9/11/2001

World

War I

Financial

crisis

U.S. Inflation Rate(% per year)

-15

-10

-5

0

5

10

15

20

25

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

Great

Depression

First

oil price

shock

Second

oil price

shock

Financial

crisis

World

War I

U.S. Unemployment Rate(% of labor force)

Great

Depression

First

oil price

shock

Second

oil price

shock

Financial

crisis

World

War I

0

5

10

15

20

25

30

19

00

19

10

19

20

19

30

19

40

19

50

19

60

19

70

19

80

19

90

20

00

20

10

Great

Depression

Financial

crisisWorld

War II

World

War IOil price

shocks

Economic models

…are simplified versions of a complex reality

◦ irrelevant details are stripped away

…are used to

◦ show relationships between variables

◦ explain the economy’s behavior

◦ devise policies to improve economic performance

The market for UW men’s BB tickets: Demand

QQuantity of tickets

P Price

of tickets

D

The demand curve

shows the relationship

between quantity

demanded and price,

other things equal.

demand equation:

Qd = D(P,W )

The market for UW men’s BB tickets: Supply

QQuantity of tickets

P Price

of tickets

D

S

The supply curve

shows the relationship

between quantity

supplied and price,

other things equal.

supply equation:

Qs = S(P,PH )

The market for tickets: Equilibrium

QQuantity of tickets

P Price

of tickets S

D

equilibrium

price

equilibrium

quantity

The effects of an increase in wins

QQuantity of tickets

P Price

of tickets S

D1

Q1

P1

An increase in wins

increases the quantity

of tickets consumers

demand at each price…

…which increases

the equilibrium price

and quantity.

P2

Q2

D2

demand equation:

Qd = D(P,W )

The effects of heating price increase

QQuantity of tickets

P Price

of tickets S1

D

Q1

P1

An increase in PH

reduces the quantity of

tickets UW supplies at

each price…

…which increases the

market price and

reduces the quantity.

P2

Q2

S2

supply equation:

Qs = S(P,PH)

Endogenous vs. exogenous variables

The values of endogenous variables are determined in the model.

The values of exogenous variables are determined outside the model: the model takes their values and behavior as given.

In the model of supply & demand for tickets,

endogenous: P, Qd, Qs

exogenous: W, PH