Macro Econ

Review: objectives
§ Remind you of the main theories. § Overview of how parts of the course all
fit together.

Macroeconomic model with Three Markets & Three agents
work

Labor Market Financial Market

hiring

§ Draw the most important and general

saving

borrowing

borrowing

lessons to remember from the course.

Households
consumption

Government
government spending

Firms
production investment

Goods Market
CHAPTER 2

The Data of Macroeconomics

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CHAPTER 2

The Data of Macroeconomics

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Building blocks of theories
§ Production: depends on factors capital and labor

Building blocks continued
§ Investment behavior: responds to the interest rate

Y

s

= F ( K , L)

I = I − rY
§ Money demand behavior: responds to both the
interest rate and income, as well as proportional to price level.

§ Demand for goods comes from C + I + G § Consumption behavior: responds to current
income by a MPC:

C = C + bY
§ Fisher model suggests should include future
income and the interest rate also.

M    = eY − fr P 
§ These building blocks summarize our assumptions
about how people behavior, and can be combined in different ways.
The Data of Macroeconomics
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CHAPTER 2

The Data of Macroeconomics

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CHAPTER 2

1

Equilibrium in the Long Run
§ Key assumption: Prices are flexible to clear
markets (Supply=demand)

Equilibrium in the Long Run
Big Lesson #1: In the long run, the level of GDP is determined by the supply side of economy (available factors and technology).

§ This is assumed by the Neoclassical model. § Equilibrium condition:
or equivalently:

Y

s

=C + I +G

S =I

§ So § And

Y = Y = F ( K , L) Y = C (Y )+ I (r ) + G

the interest rate adjusts to make investment equal available saving in the economy.
CHAPTER 2

The Data of Macroeconomics

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CHAPTER 2

The Data of Macroeconomics

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Equilibrium in the Long Run...