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ECON 3010
Intermediate Macroeconomics
Chapter 1
The 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
$50,000
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Great
Depression
World War II
First
oil price
shock
Second oilprice shock
9/11/2001
WorldWar 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
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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
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
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 economys behavior
devise policies to improve economic performance
The market for UW mens BB tickets: Demand
QQuantityof tickets
PPrice
of tickets
D
The demand curve
shows the relationship
between quantitydemanded and price,
other things equal.
demand equation:
Qd= D(P,W)
The market for UW mens BB tickets: Supply
QQuantityof tickets
PPrice
of tickets
D
S
The supply curve
shows the relationship
between quantitysupplied and price,
other things equal.
supply equation:
Qs= S(P,PH)
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The market for tickets: Equilibrium
QQuantityof tickets
PPrice
of tickets S
D
equilibrium
price
equilibrium
quantity
The effects of an increase in wins
QQuantityof tickets
PPrice
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
QQuantityof tickets
PPrice
of tickets S1
D
Q1
P1
An increase in PHreduces 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 ofendogenous variablesare determined in the model.
The values ofexogenous variablesare determined outside the model:the model takes their values and behavioras given.
In the model of supply & demand for tickets,
endogenous: P,Qd,Qs
exogenous: W,PH