1. MACROECONOMICS Chapter 1 The Science of Macroeconomics

2. 2 http://www.dallasfed.org/research/swe/2005/swe0502.pdf

3. 3 3 http://oregonstate.edu/Dept/pol_sci/fac/sahr/pc166514.htm

4. 4 4 http://oregonstate.edu/Dept/pol_sci/fac/sahr/pc1915ff.htm

5. 5 5 http://oregonstate.edu/Dept/pol_sci/fac/sahr/pl1665.htm

6. 6 Real Gross Domestic Product, Chained Dollars [Billions of chained (2000) dollars] http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=6&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES &Freq=Year&FirstYear=1929&LastYear=2008&3Place=N&AllYearsChk=YES&Update=Update&JavaBox=yes#Mid

7. 7 The Science of Economics The science of economics creates knowledge by first spelling out a hypothesis, then checking its reliability with the data at hand. The science of economics creates knowledge by first spelling out a hypothesis, then checking its reliability with the data at hand. The hypothesis is in the form of a mathematical model. The hypothesis is in the form of a mathematical model.

8. 8 Example of A Model Suppose we want to analyze the price of oil. Suppose we want to analyze the price of oil. We might start with a basic supply- demand model. We might start with a basic supply- demand model. Quantity demanded depends on the price of oil and income of the buyers. Quantity demanded depends on the price of oil and income of the buyers. Quantity supplied depends on the prices of inputs and price of oil. Quantity supplied depends on the prices of inputs and price of oil.

9. 9 Price of oil Quantity of oil Q d =Q s Price Increase in the incomes of the buyers Increase in the prices of inputs to the producers

10. 10 Use of Different Models Sometimes an ignored variable becomes important; new models have to be devised to explain the “world.” Sometimes an ignored variable becomes important; new models have to be devised to explain the “world.” If we look at the economy in large chunks of time, say 30, 50, 100 years, what we see is different than when we look at periods of 1 to 3 years. If we look at the economy in large chunks of time, say 30, 50, 100 years, what we see is different than when we look at periods of 1 to 3 years.

11. 11 Use of Different Models Long Run perspective uses flexible price approach. Flexible price approach is the basic S-D approach: prices adjust to clear the market. Long Run perspective uses flexible price approach. Flexible price approach is the basic S-D approach: prices adjust to clear the market. Short Run perspective uses sticky price approach. Markets don’t clear when prices are sticky creating unemployment, excess supply, excess demand. Short Run perspective uses sticky price approach. Markets don’t clear when prices are sticky creating unemployment, excess supply, excess demand.