In this course, you will build on and apply what you learned in ECON102: Principles of Macroeconomics. You will use the concepts of output, unemployment, inflation, consumption, and investment to study the dynamics of an economy at a more advanced level. For example, now that you understand the relationship between supply and demand in general terms, you will be asked to examine the effects that short-run and long-run price changes have on full employment and output. As the course progresses, you will gain a better appreciation for how policy shifts and changes in one sector impact the rest of the macroeconomy (whether the impacts are intended or unintended). You will also examine the causes of inflation and depression, and discuss various approaches to responding to them. By the end of this course, you should be able to think critically about the economy and develop your own unique perspective on various issues.
Remember that macroeconomics attempts to explain the role of government and the scope of total production in a national economy. Economists use abstract quantitative tools to develop concepts about how markets and systems work; basic assumptions are made and then relaxed to create more flexible and realistic models. This course will use a variety of mathematical techniques to describe how the macroeconomy changes over time.
Gross Domestic Product (GDP) is the main measure economists use to explain how much an economy produces at any given time. Over time, trends can be identified and patterns of growth and contraction can be seen. Inflation, or the general rise of prices, affects how GDP is measured, and economists have to account for variations in measurement tools and approaches. No one measurement system or technique is most accurate all of the time. Different schools of thought consider how to calculate and interpret GDP from their own perspectives.
Decisions are often made with incomplete knowledge under shifting economic, political, and social conditions. Determining how best to estimate and compensate for uncertainty is a complex process; macroeconomists use mathematical techniques to approximate real-world choices and outcomes. Decisions under uncertainty draw on a variety of techniques, including game theory, statistical analysis, and calculus.
Individuals must make a choice between spending their time working or pursuing other activities like raising a family, leisure, or enhancing health and wellness. When individuals offer their services for work, they receive a wage in exchange for giving up alternative choices. Commensurate with the individual's choice, firms must also demand labor for an employment market to exist. When the wage individuals demand equals the wage offered by firms, equilibrium exists.
The government is very active in most labor arrangements. Aside from regulating the work environment, government typically provides minimum guarantees of wage, unemployment insurance, and a system of income in retirement. Macroeconomists have various ways of modeling the trends, effects, and causes of unemployment. Sustained high levels of unemployment may lead to societal difficulties.
Households are generally defined as the owners of all factors of production in an economy. Since households provide the factor services of labor, land, capital, and ownership to businesses, they receive payment in the form of wages, rent, interest, and profits. When we talk about "household behavior” in this unit, we mean the decisions that households make in various contexts--such as decisions concerning consumption, savings, investments in education and training.
"Firm behavior” is primarily concerned with boosting efficiency and productivity in the production of goods and services. The firm's decision-making processes center upon technology, entrepreneurship, innovation, employment relations, outsourcing, and competition policy. The interplay of decisions between households and firms is critical to maintaining a flow of goods, services, and incomes in a complex economy. This unit focuses on the decisions made by households and firms, the factors the influence those decisions (such as the trade balance, and interest rates faced by firms), and their effects on the macroeconomy.
Most of us are familiar with the interest paid on deposits or the interest paid on a mortgage. This unit will discuss this concept in macroeconomic terms. It will explain that individuals and firms need money in the present in order to operate, so when money is borrowed for use, a payment is made for its use over a period of time. We call these payments interest rates. As with the price of anything, if demand increases for the use of money, then its price (the interest rate) also rises.
Fiscal policy describes the government's spending and taxing decisions. The economic objective of government is to maximize social well-being while operating within a budget. The government's role in the economy is complex, and economic models attempt to account for the far-reaching effects of policy decisions. Simple one-period or static models lay the foundation for analyzing short-term effects of taxing and spending decisions. Dynamic multiperiod models are then constructed to better explain the ripple effects of government policies.
Every government faces the choice to either raise revenue through taxes or borrow funds by issuing bonds. There is no one correct decision, and tradeoffs must be considered. A well-thought-out policy will incorporate external factors like the current business cycle, international developments, and demographic changes. For example, increased taxation tends to slow economic activity yet limits the amount of debt. Aside from economic considerations, optimal tax and borrowing policies must factor in the political process. A final policy is a compromise among many stakeholders, and good fiscal policy analysis is framed by political forces.
This unit will teach you how economists think about money. For economists, money is something that produces money services--in other words, any commodity, document, token, or claim that can be used as a medium of exchange and that people demand for that purpose. If the value of a given asset rises because people demand its services, we call that asset "money” or "money assets.” Over time, as different demands for money services arise, new instruments emerge to supply those services. This unit looks at the different motives for demanding money and different forms used to supply the demand. We also explore the role of institutions in regulating money.
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