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Textbook
Macroeconomics
Macroeconomics
(9th Edition)
Introduction
The science of Macroeconomics
by N. Gregory Mankiw
Worth Publishers， 2016
(ISBN-978-1-4641-8289-1)
CHAPTER 1
Course Arrangement
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About 16 weeks in this semester
Classical theory: The Economy in the Long
run
Growth Theory: The Economy in Very Long
Run
Business Cycle Theory: The Economy in the
Short Run
Macroeconomic Policy Debates
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The Science of Macroeconomics
Exercises and marks
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Home work:
Quizzes and attendance
Mid test:
Final exam:
CHAPTER 1
15%
15%
30%
40%
The Science of Macroeconomics
IN THIS CHAPTER, YOU WILL LEARN:

Instructor:
 Zhang Deyuan
 Business School, SHUFE
 Phone: 65907563
 Email: zhangdy@mail.shufe.edu.cn
TA:
 Lili（李立）
 Phone: 13127692317
 Email: lili17hao@sina.com
Home work each week, hand in at next lecture.
Marks include:

Contact with us
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The Science of Macroeconomics
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about the issues macroeconomists study
about the tools macroeconomists use
some important concepts in macroeconomic
analysis
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Important issues in macroeconomics
Important issues in macroeconomics
Macroeconomics, the study of the economy as
a whole, addresses many topical issues, e.g.:
Macroeconomics, the study of the economy as
a whole, addresses many topical issues, e.g.:
What causes recessions? What is
“government stimulus” and why might it help?
How can problems in the housing market spread to
the rest of the economy?
What is the government budget deficit?
How does it affect workers, consumers, businesses,
and taxpayers?
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Why does the cost of living keep rising?
Why are so many countries poor? What policies
might help them grow out of poverty?
What is the trade deficit? How does it affect the
country’s well-being?
The Science of Macroeconomics
CHAPTER 1
U.S. Inflation Rate
U.S. Real GDP per capita
(2005 dollars)
(% per year)
$50,000
25
9/11/2001
0
-5
U.S. Unemployment Rate
World
War I
15
Second
oil price
shock
Great
First
Depression
oil price
shock
20

Financial
crisis
World
War II
5

2010
1990
irrelevant details are stripped away
…are used to
Oil price
shocks
10
1980
…are simplified versions of a more complex
reality
30
World
War I
1970
Economic models
(% of labor force)
25
1960
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
-15
1920
World War II
$0
Financial
crisis
Great
Depression
-10
2000
Second oil
price shock
$10,000
1900
5
1910
World
War I
10
1900
$20,000
Financial
crisis
Second
oil price
shock
First
oil price
shock
15
First
oil price
shock
Great
Depression
$30,000
World
War I
20
$40,000
1950
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
1940
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
1930
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

Financial
crisis
Great
Depression
show relationships between variables
explain the economy’s behavior
devise policies to improve economic
performance
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
0
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Example of a model:
Supply & demand for new cars
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shows how various events affect price and
quantity of cars
assumes the market is competitive: each buyer
and seller is too small to affect the market price
Variables
The demand for cars
demand equation: Q d = D (P,Y )
 shows that the quantity of cars consumers
demand is related to the price of cars and
aggregate income
Qd = quantity of cars that buyers demand
Qs = quantity that producers supply
P = price of new cars
Y = aggregate income
Ps = price of steel (an input)
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Digression: functional notation

General functional notation
shows only that the variables are related.
The Science of Macroeconomics
The market for cars: Demand
demand equation:
Q d = D (P,Y )
P
Price
of cars
Q d = D (P,Y )
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The demand curve
shows the relationship
between quantity
demanded and price,
other things equal.
A specific functional form shows
A list
of the
the precise
quantitative
relationship.
variables

Example:
that affect Q d
D (P,Y ) = 60 – 10P + 2Y
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CHAPTER 1
The market for cars: Supply
supply equation:
Q s = S (P,PS )
The supply curve
shows the relationship
between quantity
supplied and price,
other things equal.
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Q
Quantity
of cars
The Science of Macroeconomics
The market for cars: Equilibrium
P
Price
of cars
D
P
Price
of cars
S
S
equilibrium
price
D
D
Q
Q
Quantity
of cars
equilibrium
quantity
CHAPTER 1
Quantity
of cars
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The effects of an increase in income
demand equation:
Q d = D (P,Y )
supply equation:
P
Price
of cars
An increase in income
increases the quantity
of cars consumers
demand at each price…
Q s = S (P,PS )
S
P2
P1
…which increases
the equilibrium price
and quantity.
D2
D1
Q1 Q2
Q
Quantity
of cars
The Science of Macroeconomics
CHAPTER 1
Endogenous vs. exogenous variables
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The effects of a steel price increase
P
S2
Price
of cars
An increase in Ps
reduces the quantity of
cars producers supply
at each price…
S1
P2
P1
…which increases the
market price and
reduces the quantity.
D
Q2 Q1
Q
Quantity
of cars
The Science of Macroeconomics
CHAPTER 1
NOW YOU TRY
Supply and Demand
The values of endogenous variables
are determined in the model.
1. Write down demand and supply equations for
The values of exogenous variables
are determined outside the model:
the model takes their values and behavior
as given.
2. Draw a supply-demand graph for smartphones.
In the model of supply & demand for cars,
endogenous:
exogenous:
smartphones; include two exogenous variables
in each equation.
3. Use your graph to show how a change in one
of your exogenous variables affects the
model’s endogenous variables.
P , Q d, Q s
Y , Ps
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CHAPTER 1
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The use of multiple models
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No one model can address all the issues we
care about.
E.g., our supply-demand model of the car
market…
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
can tell us how a fall in aggregate income affects
price & quantity of cars.
The use of multiple models
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So we will learn different models for
studying different issues (e.g.,
unemployment, inflation, long-run growth).
For each new model, you should keep track
of
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cannot tell us why aggregate income falls.
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its assumptions
which variables are endogenous,
which are exogenous
the questions it can help us understand,
those it cannot
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Prices: flexible vs. sticky
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Prices: flexible vs. sticky
Market clearing: An assumption that
prices are flexible, adjust to equate supply
and demand.
In the short run, many prices are sticky –
adjust sluggishly in response to changes in
supply or demand. For example:
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The Science of Macroeconomics
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unemployment (excess supply of labor)
why firms cannot always sell all the goods
they produce
If prices flexible (long run), markets clear and
economy behaves very differently
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CHAPTER SUMMARY
CHAPTER SUMMARY
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If prices sticky (short run),
demand may not equal supply, which explains:
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many labor contracts fix the nominal wage
for a year or longer
many magazine publishers change prices
only once every 3 to 4 years
CHAPTER 1
The economy’s behavior depends partly on
whether prices are sticky or flexible:
 Economists use different models to examine
Macroeconomics is the study of the economy as a
whole, including
 growth in incomes
 changes in the overall level of prices
 the unemployment rate
Macroeconomists attempt to explain the economy
and to devise policies to improve its performance.
different issues.
 Models with flexible prices describe the economy
in the long run; models with sticky prices describe
the economy in the short run.
 Macroeconomic events and performance arise
from many microeconomic transactions, so
macroeconomics uses many of the tools of
microeconomics.
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