N.gregory mankiw chapter 1

5/24/2018 N.gregory mankiw chapter 1

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1Chapter One

CHAPTER 1The Science of Macroeconomics

A PowerPointTutorial

To Accompany

MACROECONOMICS, 7th. EditionN. Gregory Mankiw

Tutorial written by:

Mannig J. SimidianB.A. in Economics with Distinction, Duke University

M.P.A., Harvard University Kennedy School of Government

M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management


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2Chapter One

Mankiws Macroeconomics Modulesfor Macroeconomics 7thed.are

dedicated to the loving memory of my cherished father, best friend and

mentor. Daddyyou are still my inspiration for making sure

these tutorials are the best they can be for students worldwide!

Ara Vahan Simidian(June 24, 1928 - December 19, 2008)

May he continue to enjoy learning and loving

economics from heaven above.

In Memoriam

Ara Vahan SimidianwithMankiws Macroeconomics Modulesauthor, Mannig J. Simidian, 2007.


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Professor Greg Mankiw is not only a prolific, talented, and ingenious

economist, but humble and kind-hearted. His unique and extraordinary

creative ability to impart knowledge makes him both an economist and artist.

I am so honored and grateful again be a part of supplementing hisunprecedented craftsmanship.

My mentor, and friend for over a decade Professor Mike McElroy (North

Carolina State University) was the first to see the novelty in these tutorials

while I was an undergraduate student at Duke University. His contributions

and influence will be a part of my work indefinitely. Mygratitude is endless as well to Professors David Denslow, Mark Rush, Ed

Tower, and Jeff Frankel.

My love and gratitude goes to my dear friend and surrogate father Dr.

Lawrence Brockman, D.M.D, an endodontist but an economist in spirit who

has been my teacher, inspiration and dearest friend for over a decade.I also want to thank the following special people in my life: my mother, Jane,

Michael Hill, Elle & Ava, Stephanie & Jack Taylor, Lara Kleinman & Eric

Wolf, Lula Peoples, GiGi and David Greene and Michele Rubino. Thank you

all for always loving me, believing in me and cheering me on!

Mannig J. SimidianJune 2009

Acknowledgements


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4Chapter One

Everyone has reason to think critically about macroeconomic

issues. It is imperative that we seek to understand why some

countries are growing faster or slower than others orwhy some have greater fluctuations in inflation or

unemployment. The state of the macroeconomy

affects everyonein many ways (especially recently). It plays a

significant role in the political sphere while also affecting public

policy and societal well-being, at national and global levels.

Macroeconomists use variables to measure the performance

of the economy such as real GDP, the inflation rate, and the

unemployment rate among others. They are also concerned withmatters such as monetary and fiscal policyboth of which will be

discussed at length in MACROECONOMICS, 7th ed., Mankiws

Macroeconomics Modules,and in your macroeconomics course.

Good luck and have fun using these tutorials to guide you when

macroeconomics might be challenging you! Enjoy!!!

Welcome to Macroeconomics


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5Chapter One

President Barack Obama

and the State of the Economy

When President Obama moved into the

White House in 2009, the economy was ina state of turmoil. Mortgage defaultsanda drop in housing priceswere the majorculprits. The crisis affected other sectors of

the economy, pushing the economy into

another recession. Some liken thesituation to that of the Great Depression

which occurred in the 1930s.


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6Chapter One

Economists use modelsto understand what goes on in the economy.

Here are two important points about models: endogenous variablesandexogenous variables. Endogenous variables are those which the

model tries to explain. Exogenous variables are those variables that a

model takes as given. In short, endogenous are variables within a

model, and exogenous are the variables outside the model.

Price

Demand

Q

*

P

Supply

Quantity

*

This is the most famous

economic model. It describes

the ubiquitous relationship

between buyers and sellers in

the market. The point of

intersection is called an

equilibrium.


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Market clearing is an alignment process whereby decisions betweensuppliers and demanders reach an equilibrium. Heres how it works.

Remember that the demand curve slopes downward meaning that

as you increase the price (by moving along the demand curve), the

quantity demanded decreases. Conversely, the supply curve slopes

upward implying that as the price increases (by moving along thesupply curve), the amount supplied will increase.

Lets say you begin with a demandand supplycurve for CDs.

P

Q

D S

Now, suppose that there is a sudden

increase in the demand for CDs.Demand will shift from DtoD.

The center point A is where market

decisions reach an equilibrium.

Q*

P* A

D

Q

P

B

The increase in demand places upward

pressure on the price to point B since the

original price, P* no longer clears themarket. Notice the shortage.


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SHIFTS IN DEMAND:Suppose your income

rises? Your demand for a given product, forexample, pizza, will also increase.

This translates into a rightward shift in the

demand curve from Dto D'. Result:

both price and quantity are higher.

P

D

S

Q

D'

SHIFTS IN SUPPLY:A fall in the price

of materials increases the supply of pizza; at

any given price, pizzerias find that the saleof pizza is more profitable, and thus the

supply of pizza rises.

This translates into a rightward shift in supply

from S to S'. Result: price falls, quantity rises.

P

D

S

Q

S'


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Economists typically assume that the market will go into an

equilibrium of supply and demand, which is called the

market clearing process. This assumption is central to the

pizza example on the previous slide. But, assuming that

markets clear continuously, is unrealistic. For markets to

clear continuously, prices would have to adjust instantly tochanges in supply and demand. But, evidence suggests that

prices and wages often adjust slowly.

So, remember that although market-clearing models assume

that wages and prices areflexible, in actuality, some wagesand prices aresticky. Market-clearing models may not

describe every instant in an economy, but they do depict the

equilibrium toward which the economy gravitates.


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Microeconomicsis the study of how households and firmsmake decisions and how these decision makers interact in the

broader marketplace. In microeconomics, an individual chooses to

maximize his or her utility subject to his or her budget constraint.

Macroeconomic events arise from the interaction of manyindividuals trying to maximize their own welfare. Because

aggregate variables are the sum of the variables describing

individuals decisions, the study of macroeconomics

is based on microeconomic foundations.


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The modules mirror the sequencing of the text,Macroeconomics, 7thed.There are six parts and a total of nineteen chapters with a module

written for each chapter. Enjoy!

Introduction

Classical Theory, The Economy in the Long Run

Growth Theory, The Economy in the Very Long Run

Business Cycle Theory: The Economy in the Short Run

Macroeconomic Policy Debates

More on the Microeconomics Behind Macroeconomics


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MacroeconomicsReal GDP

Inflation and deflation

Unemployment

Recession

Depression

Models

Endogenous variables

Exogenous variables

Market clearingFlexible and sticky prices

Microeconomics

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