SASHA-LEE NELSON ECON 612 0737692353
ECON 612
CHAPTER 1
What is Macroeconomics?
Macroeconomics is the field of economics that studies the behaviour of the aggregate economy.
Macroeconomics examines economy-wide phenomena such as changes in e.g. unemployment,
natural income and rate of growth.
Macroeconomics for the long-run and the short-run:
Long-run macroeconomics is about understanding the trends in the most important
macroeconomic series for e.g. GDP, consumption, investment and unemployment.
Thus, seeking explanations for long-run income levels, economic growth and structural
unemployment.
Short-run macroeconomics is about understanding the annual or quarterly fluctuations around
trend in the most important macroeconomic series, thus seeking explanations for business cycles.
Macroeconomic theory for the short-run:
Exogenous Shocks:
Sudden abrupt influences in the economy coming from changes in preferences, technology and
economic policies
There a positive exogenous shocks and negative exogenous shocks:
Positive exogenous shocks could either be a supply shock, like sudden increases in the
productivity of resources, or a demand shock like a sudden rise in domestic consumption.
Short-run nominal rigidity
Some period after the occurrence of a shock during which prices/wages are sticky.
In the case of rigid money wage, it is fixed in the short-run and in the long-run it falls away. E.g.
workers do not negotiate their wage rate every day as it is a time consuming process etc.
Expectational errors
Some period after the occurrence of the shock during which some prices are different from what
was expected before the shock.
Macroeconomic theory for the long-run:
Modelling assumptions of macroeconomics for the long-run:
In macroeconomic theory for the long-run, intended to explain trends of economic variables over
the long-run, the economy is analysed as if:
ECON 612
CHAPTER 1
What is Macroeconomics?
Macroeconomics is the field of economics that studies the behaviour of the aggregate economy.
Macroeconomics examines economy-wide phenomena such as changes in e.g. unemployment,
natural income and rate of growth.
Macroeconomics for the long-run and the short-run:
Long-run macroeconomics is about understanding the trends in the most important
macroeconomic series for e.g. GDP, consumption, investment and unemployment.
Thus, seeking explanations for long-run income levels, economic growth and structural
unemployment.
Short-run macroeconomics is about understanding the annual or quarterly fluctuations around
trend in the most important macroeconomic series, thus seeking explanations for business cycles.
Macroeconomic theory for the short-run:
Exogenous Shocks:
Sudden abrupt influences in the economy coming from changes in preferences, technology and
economic policies
There a positive exogenous shocks and negative exogenous shocks:
Positive exogenous shocks could either be a supply shock, like sudden increases in the
productivity of resources, or a demand shock like a sudden rise in domestic consumption.
Short-run nominal rigidity
Some period after the occurrence of a shock during which prices/wages are sticky.
In the case of rigid money wage, it is fixed in the short-run and in the long-run it falls away. E.g.
workers do not negotiate their wage rate every day as it is a time consuming process etc.
Expectational errors
Some period after the occurrence of the shock during which some prices are different from what
was expected before the shock.
Macroeconomic theory for the long-run:
Modelling assumptions of macroeconomics for the long-run:
In macroeconomic theory for the long-run, intended to explain trends of economic variables over
the long-run, the economy is analysed as if:
