1. Welcome to Macro 220 Lecturer: Rod Duncan Office:C2-G20 Contact: rduncan@csu.edu.au Lectures: C2-G2 1pm to 2:50pm Tutorials: C2-215 1pm to 1:50pm Consult:10am-12am, 3pm-5pm Tues 2pm-5pm Thurs

2. Forms of economics Microeconomics- the study of individual decision-making –“Should I go to college or find a job?” –“Should I rob this bank?” –“Why are there so many brands of margarine?” Macroeconomics- the study of the behaviour of large-scale economic variables –“What determines output in an economy?” –“What happens when the interest rate rises?”

3. Economics as story-telling In a story, we have X happens, then Y happens, then Z happens. In an economic story or model, we have X happens which causes Y to happen which causes Z to happen. There is still a sequence and a flow of events, but the causation is stricter in the economic story-telling.

4. Kobe, the naughty dog

5. Modelling Kobe Kobe likes to unmake the bed (Z). Kobe likes treats (X). We assume that more treats will lead to fewer unmade beds. (Not a very good) Model:X↑ → Z↓ We can use this model to explain the past or to predict the future.

6. Components of a model Variables- i.e. output of economy, inflation rate, interest rates, or the unemployment rate Relationships between the variables- i.e. when interest rates rise, investment falls or more complicated forms

7. Example: market for ice cream Variables: D is demand for ice cream, S is supply of ice cream, P is price of ice cream, Y is income of people who buy ice cream, T is average temperature and I is prices of all inputs to make ice cream. Relationships: Then we say D is falling in P, S rising in P, D rising in Y and in T and S falling in I. Equilibrium in ice cream market requires that quantity of ice cream sold is equal to quantity of ice cream bought.

8. Example: market for ice cream Equilibrium: D (P, Y, T) = S (P, I) Holding Y, T and I constant, we will then have our standard demand-supply model. Important! Nothing about the behaviour of the model depends on the meanings of the variables- what D is or what T is. We are free to re-label our model, as long as the relationships remain true.

9. Re-labelling We are free to re-label “D” and “S” as cars, books, electricity, illicit drugs or even marriage partners. We just have to also re-label P, Y, T and I and be sure that the relationships still hold true. Behaviour of the re-labelled model is exactly the same as for the ice cream market model.

10. Aggregate demand model Re-label D as demand for all goods and services, S as supply of all goods and services, P as the average price, T as net exports and I as government red tape. Be sure that the relationships still hold true! We now have a macro model! We will be re-labelling P as interest rates later on in this class and calling it the IS-LM model.

11. Questions to ask yourself? What are the variables in this model? What are the relationships between the variables? (Often in the form of an equation or a graph.)

12. Macroeconomic variables National output- gross domestic (or national) product (GDP) Interest rates- usually a Treasury bond of some fixed duration rate- there are lots of interest rates Unemployment rate Inflation rate Exports and imports Current account deficit/surplus Government budget deficit/surplus Household savings And many, many others.

13. Some Australian economic history

14. Australian Business Cycle

15. Unemployment

16. Inflation

17. Interest Rates

18. Current Account Deficit