25.01.2023 Lecture Notes
The Policy and Practice of Microeconomics
microeconomics - study of the behaviour of individual firms, households, or markets
Macroeconomists explain how the economy works by using an economic theory, and
this involves developing an economic model, a simplified representation of the
economic phenomenon that takes a mathematical or graphical form.
Development of an economic theory:
1. identify an interesting economic question
2. specify the variables to be explained by the model (endogenous variables) and
the variables that explain them (exogenous variables)
3. posit a set of equations or graphical analysis to connect movements in the
exogenous variables to the endogenous variables
4. compare the conclusions of the model with what actually happens
5. use the model to make further predictions
Macroeconomists focus in particular on 3 economic data series:
real GDP
25.01.2023 Lecture Notes 1
, measures the output of actual goods and services produced in an economy
over a fixed period, usually a year
unemployment rate
measures the percentage of workers looking for work, but do not have jobs,
at a point in time
inflation rate
tells us how rapidly the overall level of prices is rising
deflation - occurs when the inflation rate is negative
hyperinflation - refers to the situation of super high inflation
Business Cycle
BC - recurrent up and down movements in economic activity that differ in how
regular they are
recession - occurs when economic activity declines and real GDP per person falls
depression - occurs when the decline in real GDP is severe
The goal of developing models is to the underlying goal is to determine what policies
can produce better macroeconomic outcomes.
Fiscal and Monetary Policy
fiscal policy - deals with government spending and taxation
government budget deficit is the excess of government spending over tax
revenues for a particular year
monetary policy - the management of the money supply and interest rates
conducted by central banks
Financial Crises
25.01.2023 Lecture Notes 2
The Policy and Practice of Microeconomics
microeconomics - study of the behaviour of individual firms, households, or markets
Macroeconomists explain how the economy works by using an economic theory, and
this involves developing an economic model, a simplified representation of the
economic phenomenon that takes a mathematical or graphical form.
Development of an economic theory:
1. identify an interesting economic question
2. specify the variables to be explained by the model (endogenous variables) and
the variables that explain them (exogenous variables)
3. posit a set of equations or graphical analysis to connect movements in the
exogenous variables to the endogenous variables
4. compare the conclusions of the model with what actually happens
5. use the model to make further predictions
Macroeconomists focus in particular on 3 economic data series:
real GDP
25.01.2023 Lecture Notes 1
, measures the output of actual goods and services produced in an economy
over a fixed period, usually a year
unemployment rate
measures the percentage of workers looking for work, but do not have jobs,
at a point in time
inflation rate
tells us how rapidly the overall level of prices is rising
deflation - occurs when the inflation rate is negative
hyperinflation - refers to the situation of super high inflation
Business Cycle
BC - recurrent up and down movements in economic activity that differ in how
regular they are
recession - occurs when economic activity declines and real GDP per person falls
depression - occurs when the decline in real GDP is severe
The goal of developing models is to the underlying goal is to determine what policies
can produce better macroeconomic outcomes.
Fiscal and Monetary Policy
fiscal policy - deals with government spending and taxation
government budget deficit is the excess of government spending over tax
revenues for a particular year
monetary policy - the management of the money supply and interest rates
conducted by central banks
Financial Crises
25.01.2023 Lecture Notes 2
