Transcript Mankiw 6e PowerPoints - University of Maryland, College Park

Where You Are!
 Economics 305 – Macroeconomic Theory
 T and TH from 11:00am to 12:15pm
 Text: Gregory Mankiw: Macroeconomics, Worth,
8th, 7th edition, 6th editions.
 A used copy of 7th or 6th edition is good.
Course Webpage
 http://www.terpconnect.umd.edu/~jneri/Econ305

NOTE: upper-case E
Who am I ?
 Dr. John Neri
 Office: Morrill Hall, Room 1102B,
T and Th 3:30pm to 4:40pm
Some conclusions
 In the long-run, capacity to produce goods and
services (productive capacity) determines the
standard of living (GDP/person)
 GDP depends on factors of production: amount of
Labor (L) and capital (K) and technology used to turn K
and L into output.
 In the long-run, public policy can increase GDP only by
improving productive capacity of the economy
 Increase national saving leads to larger capital stock.
 Increase efficiency of labor (education and increase
technological progress)
Some conclusions
 In the short-run, aggregate demand influences
the amount of goods and services that a
country produces
 Chapter 10,11 and 14 (9,10 and 13 older ed.)
 Monetary policy, fiscal policy
 Shocks to the system
Some conclusions
 In the long-run, the rate of money growth
determines the rate of inflation, but it does not
affect the rate of unemployment
 Chapter 5 (4 older ed.)
 High inflation raises the nominal interest rate
(the real interest rate is not affected)
 There is no trade-off between inflation and
unemployment in the long run
Some conclusions
 There is a trade-off between inflation and
unemployment in the short-run
 Chapter 14, short-run Phillips curve (13 older)
 Expand Aggregate Demand => U↓ and π↑
 Contract Aggregate Demand => U↑ and π↓
Chapter 1 presents:
 Major concerns of macroeconomics
 Tools macroeconomists use
 Some important concepts in macroeconomic
analysis
Three major concerns of macroeconomics
 Growth
 http://www.bea.gov/newsreleases/glance.htm
 Unemployment
 http://www.bls.gov/news.release/pdf/empsit.pdf
 Inflation
 http://www.bls.gov/news.release/pdf/cpi.pdf
U.S. Real GDP per capita
(2000 dollars)
9/11/2001
First oil
price shock
long-run upward trend…
Great
Depression
Second oil
price shock
World War II
U.S. Inflation Rate
(% per year)
25
World
War I
20
Second
oil price
shock
First
oil price
shock
15
10
5
0
-5
Financial
crisis
Great
Depression
-10
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
-15
U.S. Unemployment Rate
(% of labor force)
30
World
War I
25
20
World
War I
15
Second
oil price
shock
Great
First
Depression
oil price
shock
Oil price
shocks
Financial
crisis
World
War II
10
5
Financial
crisis
Great
Depression
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
0
Actual and Potential Real GDP
Economic models
…are simplified versions of a more 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
Mankiw presents the supply & demand
for new cars a an example of a model:
 shows how various events affect price and
quantity of cars
 assumes the market is competitive: each buyer
and seller is too small to affect the market price
Variables
Qd = quantity of cars that buyers demand
Qs = quantity of cars that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)
The demand for cars
demand equation: Q d = D (P,Y )
 shows that the quantity of cars consumers
demand is related to the price of cars and
aggregate income
 Read as Quantity demanded depends upon price
of new cars and aggregate income.
Digression: functional notation
 General functional notation
shows only that the variables are related.
Q d = D (P,Y )
 A specific functional form shows the precise
quantitative relationship.
 Example:
D (P,Y ) = 60 – 10P + 2Y
The market for cars: Demand
demand equation:
Qd
= D (P,Y )
The demand curve
shows the relationship
between quantity
demanded and price,
other things equal.
P
Price
of cars
D
Q
Quantity
of cars
The market for cars: Supply
supply equation:
Qs
= S (P,PS )
The supply curve
shows the relationship
between quantity
supplied and price,
other things equal.
P
Price
of cars
S
D
Q
Quantity
of cars
The market for cars: Equilibrium
P
Price
of cars
S
equilibrium
price
D
Q
equilibrium
quantity
Quantity
of cars
The effects of an increase in income
demand equation:
Q d = D (P,Y )
An increase in income
increases the quantity
of cars consumers
demand at each price…
…which increases
the equilibrium price
and quantity.
P
Price
of cars
S
P2
P1
D1
Q1 Q2
D2
Q
Quantity
of cars
The effects of a steel price increase
supply equation:
Q s = S (P,PS )
P
S2
Price
of cars
An increase in Ps
reduces the quantity of
cars producers supply
at each price…
…which increases the
market price and
reduces the quantity.
S1
P2
P1
D
Q2 Q1
Q
Quantity
of cars
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 & behavior
as given.
 In the model of supply & demand for cars,
endogenous: P, Qd, Qs
exogenous:
Y , Ps
NOW YOU TRY:
Supply and Demand
1.
Market for Pizza
2.
Q  60 10P  2Y
3.
Qs  100  5P 15Pc
d
4. Solve for equilibrium P and Q
The use of multiple models
 No one model can address all the issues we
care about.
 E.g., our supply-demand model of the car
market…
 can tell us how a decrease in aggregate income
affects price & quantity of cars.
 cannot tell us why aggregate income falls.
The use of multiple 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 variables are endogenous,
which are exogenous
 the questions it can help us understand,
those it cannot
Prices: flexible vs. sticky
 Market clearing: An assumption that prices are
flexible, adjust to equate supply and demand.
 In the short run, many prices are sticky –
adjust sluggishly in response to changes in
supply or demand. For example:
 many labor contracts fix the nominal wage
for a year or longer
 many magazine publishers change prices
only once every 3-4 years
Prices: flexible vs. sticky
 The economy’s behavior depends partly on
whether prices are sticky or flexible:
 If prices sticky (short run),
demand may not equal supply, which explains:
 unemployment (excess supply of labor)
 why firms cannot always sell all the goods
they produce
 If prices flexible (long run), markets clear and
economy behaves very differently