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Macroecnomic Policy Introduction
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Concise summary of year 2 (sophomore) Macroeconomics week 1 introduction concepts.
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ECON2040 MacroeconomicsPolicy
Introducti on and macro measurement 1
Definitions:
Short run: price level constant, aggregate demand generates changes in output.
Medium run/ Long run: productive capacity is constant, and prices depend on
aggregate supply and demand.
Very long run: growth theory, focusing on the growth of productive capacity.
Methodology:
Models – mathematical representation of a theory.
Experimentation to quantify causal effect is difficult, models are easier to
understand.
Micro-founded macroeconomics - Mainstream
Study of collective behaviour of economic individuals.
Appropriate model requires theory of the behaviour of economic individuals.
Therefore, Macroeconomics policy is Micro-founded.
Macro-behaviour: Sum of micro-decisions of economic individuals.
Aggregate Savings = Sum of Individual Savings
Individual savings is the product of optimal decisions of households.
Usually,
Aggregate Savings = s × GDP
s = parameter estimation from historical data.
Typical model for Micro-founded macroeconomics
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