Mankiw8e_Student_PPTs_Chapter 1.ppt

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1 Chapter One

CHAPTER

1

The Science of Macroeconomics

®

A PowerPointTutorial

To Accompany

MACROECONOMICS, 8th Edition

N. Gregory Mankiw

Tutorial written by:

Mannig J. Simidian

B.A. in Economics with Distinction, Duke University M.P.A., Harvard University Kennedy School of Government

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2 Chapter One

Mankiw’s Macroeconomics Modules for Macroeconomics 7th_ed._are

dedicated to the loving memory of my cherished father, best friend and mentor. Daddy– you are still my inspiration for making sure

these tutorials are the best they can be for students worldwide!

Ara Vahan Simidian

(June 24, 1928 - December 19, 2008)

May he continue to enjoy learning and loving economics from heaven above.

In Memoriam

Ara Vahan Simidian

with

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3 Chapter One

For over a decade, I have had the honor of participating in the educational supplements for Professor Mankiw’s Macroeconomics (eds. 5th- 8th). Each iteration of his

text becomes clearer, and more insightful! Professor Mankiw effortlessly finds a way to improve what is already perfect. He profoundly elucidates changes and illuminates the dynamics of the ever-changing ubiquitous collection of buyers and sellers which comprises the macroeconomy. In the most organized and articulate fashion, he demystifies the

financial good and evil that all humans face on a daily and long-term basis. To me, there is no other greater societal contribution to a globalizing marketplace in desperate need of education, answers, reformation and inspiration. Thank you Professor Mankiw for filling the world with hope through analytical awareness!

Mankiw’s Macroecoeconomics Modules act as a complimentary tool to Professor Mankiw’s text, and have been a benefit to students and teachers worldwide who have

wanted yet another way to experience the power and knowledge found in Macroeconomics 8th_{ed. My participation is an honor for which I am eternally grateful.}

I have had a profound support system throughout the years most notably my Father, Ara Simidian, who rests in heaven, my Mother, Jane Simidian, Dr. Lawrence Brockman, Dr. Russell & Dara Meetze, Professors Mike McElroy, Adrian Austin, David Denslow, Mark Rush, Ed Tower, Jeff Frankel, David Gergen, and friends Mark Hassan, Stephanie Taylor and artistlaureate Peter Max, among many others.

The 8th edition of Mankiw’s Macroeconomics Modules is dedicated to my eight year old daughter Elle, who is now old enough to understand the importance of the

economy. I owe it to her to disseminate macroeconomics education that will not leave her generation in economic turmoil. Mannig J. Simidian

July 2012

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Everyone has reason to think critically about macroeconomic issues. It is imperative that we seek to understand why some

countries are growing faster or slower than others or why some have greater fluctuations in inflation or

unemployment. The study of macroeconomics focuses on the forces that affect the economy as a whole! And, it affects everyone in so many ways. It plays a significant role in politics, while also affecting public policy and societal well-being, at national and global levels.

Macroeconomists use variables to measure the performance of the economy such as real GDP, the inflation rate, and the

unemployment rate many among others. They are also concerned

with matters such as monetary and fiscal policy—both of which, will be discussed at length in MACROECONOMICS, 8th ed.,

Mankiw’s Macroeconomics Modules, and in your macroeconomics course. Good luck and have fun using these tutorials to guide you when macroeconomics might be challenging you! Enjoy!!!

Welcome to

Macroeconomics!

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5 Chapter One

President Barack Obama

and the State of the

Economy

When President Obama moved into the White House in 2009, the economy was in a state of turmoil. Mortgage defaults

and a drop in housing prices were the major culprits, exacerbated by the bankruptcy or near bankruptcy of many financial institutions. In 2008 and 2009 the Treasury and the

Federal Reserve acted vigorously so as to avoid the

circumstances that characterized the Great Depression which occurred in the 1930’s. The recovery was slow and painful;

they eventually succeeded to some extent in that

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Economists use models to understand what goes on in the economy. Here are two important points about models: endogenous variables

and exogenous variables. Endogenous variables are those which the model tries to explain. Exogenous variables are those variables that a model takes as given. In short, endogenous are variables within a

model, and exogenous are the variables outside the model.

Price

Demand

Q

*

P

Supply

Quantity

*

This is the most famous economic model. It describes

the ubiquitous relationship between buyers and sellers in

the market. The point of intersection is called an

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7 Chapter One

Market clearing is an alignment process whereby decisions between suppliers and demanders reach an equilibrium. Here’s how it works.

Remember that the demand curve slopes downward meaning that as you increase the price (by moving along the demand curve), the quantity demanded decreases. Conversely, the supply curve slopes

upward implying that as the price increases (by moving along the supply curve), the amount supplied will increase.

Let’s say you begin with a demand and supply curve for CDs.

P

Q

D S

Now, suppose that there is a sudden increase in the demand for CDs.

Demand will shift from D to D´.

The center point A is where market decisions reach an equilibrium.

Q*

P* A

D´

Q´

P´ B

The increase in demand places upward pressure on the price to point B since the original price, P* no longer clears the market. Notice the “shortage.”

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8 Chapter One

SHIFTS IN DEMAND: Suppose your income rises? Your demand for a given product, for example, pizza, will also increase.

This translates into a rightward shift in the demand curve from D to D

'

. Result:Result:

both price and quantity are higher.

both price and quantity are higher.

P

D

S

Q

D

'

SHIFTS IN SUPPLY: A fall in the price of materials increases the supply of pizza; at any given price, pizzerias find that the sale of pizza is more profitable, and thus the supply of pizza rises.

This translates into a rightward shift in supply from S to S

'.

Result: price falls, quantity rises.Result: price falls, quantity rises.

P

D

S

Q

S

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Economists typically assume that the market will go into an equilibrium of supply and demand, which is called the

market clearing process. This assumption is central to the pizza example on the previous slide. But, assuming that markets clear continuously, is unrealistic. For markets to clear continuously, prices would have to adjust instantly to changes in supply and demand. But, evidence suggests that prices and wages often adjust slowly.

So, remember that although market clearing models assume that wages and prices are flexible, in actuality, some wages and prices are sticky. Market clearing models may not

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10 Chapter One

Microeconomics is the study of how households and firms make decisions and how these decision makers interact in the broader marketplace. In microeconomics, an individual chooses to

maximize his or her utility subject to his or her budget constraint.

Macroeconomic events arise from the interaction of many individuals trying to maximize their own welfare. Because aggregate variables are the sum of the variables describing

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11 Chapter One

The modules mirror the sequencing of the text, Macroeconomics, 8th ed. There are six parts and a total of nineteen chapters with a module

written for each chapter. Enjoy!

Introduction

Classical Theory, The Economy in the Long Run

Growth Theory, The Economy in the Very Long Run

Business Cycle Theory: The Economy in the Short Run Topics in Macroeconomic Theory

Topics in Macroeconomic Policy

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12 Chapter One

Macroeconomics Real GDP

Inflation and deflation Unemployment

Recession Depression Models

Endogenous variables Exogenous variables Market clearing

Flexible and sticky prices Microeconomics

Macroeconomics Real GDP

Inflation and deflation Unemployment

Recession Depression Models

Endogenous variables Exogenous variables Market clearing