Macroeconomics fifth edition(Mankiw)macroeconomicsfifth editionN. Gregory Mankiw?PowerPointSlides by Ron Cronovich?a name=baidusnap78 2003 Worth Publishers, all rights reservedEcon 101: Intermediate Macro TheoryLecture notesProfessor CetorelliUC DavisFall 2003Has the standard of living in the U.S. improved over time?Difficult question. How do we measure such a thing?In economics we look at aggregate income, the value of goods and services produced in a country, as a good indicator of standard of living.How do you answer the question? CHAPTER 1The Science of Macroeconomicsslide 2U.S. Gross Domestic Productin billions of chained 1996 dollars (it takes care of inflation)10,0009,0008,0007,0006,000dnert drawp5,000u nur-gnol4,0003,0001970197519801985199019952000CHAPTER 1The Science of Macroeconomicsslide 3U.S. Gross Domestic Productin billions of chained 1996 dollars10,000longest economic 9,000expansion on record8,0007,000Recessions6,0005,0004,0003,00019701975198019e. Income per Capita?Are people “better off” today than they were, say, 1 or 2 generations ago? CHAPTER 1The Science of Macroeconomicsslide 6Real GDP per personCHAPTER 1The Science of Macroeconomicsslide 7Inflation ?Whats happened to the price of goods and services?Inflationmeasures the changein prices over time. Example: price today = 110price a year ago = 100Inflation = (110 100) / 100 = 0.10 or10%We say prices went up by 10 % in the last year.(well study inflation more in depth later on)CHAPTER 1The Science of Macroeconomicsslide 8A century of inflation CHAPTER 1The Science of Macroeconomicsslide 9Unemployment?The unemployment rate measures the fraction of people in the labor force without a job.How does the unemployment rate for the U.S. look like over the past century? Has the U.S. ever been in full employment? CHAPTER 1The Science of Macroeconomicsslide 10A century of unemploymentCHAPTER 1The Science of Macroeconomicsslide 11Important issues in macroeconomics?Why does the cost of living keep rising?Why are millions of people unemployed, even when the economy is booming?Why are there recessions? Can the government do anything to combat recessions? Should it?CHAPTER 1The Science of Macroeconomicsslide 12Important issues in macroeconomics?What is the government budget deficit? How does it affect the economy?Why does the U.S. have such a huge trade deficit? ?Why are so many countries poor? What policies might help them grow out of poverty?CHAPTER 1The Science of Macroeconomicsslide 13Why learn macroeconomics?1.The macroeconomyaffects societys well-being.?example:Unemployment and social problemsEach one-point increase in the u-rate is associated ith:Each one-point increase in the u-rate is associated with:?920 ore suicides?920 more suicides?650 ore hoicides?650 more homicides?4000 ore people aditted to state ental ?4000 more people admitted to state mental institutionsinstitutions?3300 ore people sent to state prisons?3300 more people sent to state prisons?37, 000 ore deaths?37, 000 more deaths?increases in doestic violence and hoelessness?increases in domestic violence and homelessnessCHAPTER 1The Science of Macroeconomicsslide 14Why learn macroeconomics?2.The macroeconomyaffects yourwell-being.?Unemployment and earnings growth543210-1-2-3-4-519651970197519801985199019952000growth rate of inflation-adjusted hourly earningschange in Unemployment rateCHAPTER 1The Science of Macroeconomicsslide 15%Why learn macroeconomics?2.The macroeconomyaffects yourwell-being.?Interest rates and mortgage paymentsFor a $150,000 30-year mortgage: actual rate monthly annual dateon 30-year paymentpaymentmortgage6/21/026.63%$960$11,5206/20/035.21%$824$9,888CHAPTER 1The Science of Macroeconomicsslide 16Why learn macroeconomics?3.The macroeconomyaffects politics & current events.?Inflation and unemployment in election yearsyear U rate inflation rate elec. outcoeyear U rate inflation rate elec. outcome19767.75.8Carter (D)19767.7%5.8%Carter (D)19807.113.5Reagan (R)19807.1%13.5%Reagan (R)19847.54.3Reagan (R)19847.5%4.3%Reagan (R)19885.54.1Bush I (R)19885.5%4.1%Bush I (R)19927.53.0Clinton (D)19927.5%3.0%Clinton (D)19965.43.3Clinton (D)19965.4%3.3%Clinton (D)20004.03.4Bush II (R)20004.0%3.4%Bush II (R)CHAPTER 1The Science of Macroeconomicsslide 17?.internetMaybe its not the economy, stupid -Sep_ 26, 2003.htmCHAPTER 1The Science of Macroeconomicsslide 18Economic modelsare simplified versions of a more complex reality?irrelevant details are stripped awayUsed to ?show the relationships between economic variables?explain the economys behavior?devise policies to improve economic perfor