National Income & Business Cycles 0 Ohio Wesleyan University Goran Skosples 1. The Science of Macroeconomics

1 Learning objectives  defining macroeconomics  the issues macroeconomists study  the tools macroeconomists use  some important concepts in macroeconomic analysis

2 Defining macroeconomics  Macroeconomics is the study of the economy as a whole – including growth in incomes, changes in prices, and the rate of unemployment.  Macroeconomists attempt both to explain economic events and to devise policies to improve economic performance.

3 Important issues in macroeconomics

4 Population: GDP: GDP per capita:

5 What do you observe here? U.S. Inflation Rate (% per year)

6 U.S. Unemployment Rate (% of labor force) Current rate? ___% (December 2015)

7 Why learn macroeconomics? 1. The macroeconomy affects society’s well-being. percent of labor force crimes per 100,000 population U.S. Unemployment and Property Crime Rates Unemployment (left scale) Property crimes (right scale)

8 Why learn macroeconomics? 2.The macroeconomy affects your well-being. Unemployment and earnings growth

9 Why learn macroeconomics? 2.The macroeconomy affects your well-being. Interest rates and mortgage payments For a $150, year mortgage: $10,959$ % $9,888$ % 6/20/03 annual payment monthly payment actual rate on 30-year mortgage date 6/17/04

10 Why learn macroeconomics? 3. The macroeconomy affects election outcomes. Unemployment & inflation in election years year U rate inflation rate elec. outcome %5.8%Carter (D) %13.5%Reagan (R) %4.3%Reagan (R) %4.1%Bush I (R) %3.0%Clinton (D) %3.3%Clinton (D) %3.4%Bush II (R) %3.3%Bush II (R) %3.8%Obama (D) %2.1%Obama (D)

11 Economic models …are simplified versions of a more complex reality irrelevant details are stripped away Used to show the relationships between econ variables explain the economy’s behavior devise policies to improve econ performance No one model can address all the issues we care about.

12 Prices: Flexible Versus Sticky  Market clearing: an assumption that prices are flexible and adjust to equate supply and demand.  In the short run, many prices are ______ - they adjust sluggishly in response to S/D imbalances.  If prices are sticky, then demand won’t always equal supply.  Long run: prices ______, markets clear, economy behaves very differently.