Learning objectives,This chapter introduces you to the issues macroeconomists study the tools macroeconomists use some important concepts in macroeconomic analysis,Important 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?,Important 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?,U.S. Gross Domestic Product in billions of chained 1996 dollars,U.S. Gross Domestic Product in billions of chained 1996 dollars,Why learn macroeconomics?,The macroeconomy affects societys well-being. example: Unemployment and social problems,Unemployment and social problems,Each one-point increase in the unemployment rate is associated with: 920 more suicides（自杀） 650 more homicides（杀人） 4000 more people admitted to state mental institutions（精神病院） 3300 more people sent to state prisons 37,000 more deaths increases in domestic violence and homelessness,Why learn macroeconomics?,The macroeconomy affects societys well-being. example: Unemployment and social problems,The macroeconomy affects your well-being. example 1: Unemployment and earnings growth example 2: Interest rates and mortgage payments,Unemployment and earnings growth,Interest rates and mortgage payments,For a $150,000 30-year mortgage:,$11,782,$981,6.84%,Dec 2001,$12,771,$1064,7.65%,Why learn macroeconomics?,The macroeconomy affects societys well-being. example: Unemployment and social problems,The macroeconomy affects your well-being. example 1: Unemployment and earnings growth example 2: Interest rates and mortgage payments,The macroeconomy affects politics & current events. example: Inflation and unemployment in election years,Inflation and Unemployment in Election Years,year U rate inflation rate elec. outcome 1976 7.7% 5.8% Carter (D) 1980 7.1% 13.5% Reagan (R) 1984 7.5% 4.3% Reagan (R) 1988 5.5% 4.1% Bush I (R) 1992 7.5% 3.0% Clinton (D) 1996 5.4% 3.3% Clinton (D) 2000 4.0% 3.4% Bush II (R),Economic models,are simplied versions of a more complex reality irrelevant details are stripped away Used to show the relationships between economic variables explain the economys behavior devise policies to improve economic performance,Example of a model: The supply & demand for new cars,explains the factors that determine the price of cars and the quantity sold. assumes the market is competitive: each buyer and seller is too small to affect the market price Variables: Q d = quantity of cars that buyers demand Q s = quantity that producers supply P = price of new cars Y = aggregate income Ps = price of steel (an input),The demand for cars,shows that the quantity of cars consumers demand is related to the price of cars and aggregate income.,Digression: Functional notation,General functional notation shows only that the variables are related:,Digression(枝节话): Functional notation,General functional notation shows only that the variables are related:,A specific functional form shows the precise（准确地） quantitative relationship:,The market for cars: demand,Q Quantity of cars,P Price of cars,The demand curve shows the relationship between quantity demanded and price, other things equal.,The market for cars: supply,The market for cars: equilibrium,The effects of an increase in income:,An increase in income increases the quantity of cars consumers demand at each price,which increases the equilibrium price and quantity.,The effects of a steel price increase:,An increase in Ps reduces the quantity of cars producers supply at each price,which increases the market price and reduces the quantity.,Endogenous vs. exogenous variables:,The values of endogenous variables（内生变量） are determined in the model. The values of exogenous variables （外生变量） are determined outside the model: the model takes their values & behavior as given. In the model of supply & demand for cars,Now you try:,Write down demand and supply equations for wireless phones; include two exogenous variables in each equation. Draw a supply-demand graph for wireless phones. Use your graph to show how a change in one of your exogenous variables affects the models endogenous variables.,A Multitude（大量） of Models,No one model can address all the issues we care about. For example, If we want to know how a fall in aggregate income affects new car prices, we can use the S/D model for new cars. But if we want to know why aggregate income falls, we need a different model.,A Multitude of Models,So we will learn different models for studying different issues (e.g. unemployment, inflation, long-run growth). For each new model, you should keep track of its assumptions, which of its variables are endogenous and which are exogenous, the questions it can help us understan