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N. Gregory Mankiw
PowerPoint Slides by Ron Cronovich
CHAPTER
1
2010 UPDATE
SEVENTH EDITION
Why does the cost of living keep rising? Why are so many countries poor? What policies
might help them grow out of poverty?
CHAPTER 1
Great Depression
World War II
Social problems like homelessness, domestic violence, crime, and Property crimes (right scale) poverty are linked to the economy. For example
Unemployment (left scale)
unemployment rate
U rate
7.7%
7.1% 7.5%
inflation rate
5.8%
13.5% 4.3%
elec. outcome
Carter (D)
Reagan (R) Reagan (R)
1988
1992 1996
5.5%
7.5% 5.4%
4.1%
3.0% 3.3%
Bush I (R)
Clinton (D) Clinton (D)
2000
2004 2008
4.0%
5.5% 7.2%
3.4%
3.3% 3.8%
Bush II (R)
Bush II (R) Obama (D)
Economic models
are simplified versions of a more complex reality irrelevant details are stripped away
are used to show relationships between variables explain the economys behavior devise policies to improve economic performance
CHAPTER 1
10
Example of a model:
Supply & demand for new cars shows how various events affect price and
quantity of cars
11
CHAPTER 1
12
Q d = D (P,Y )
Example: variables
CHAPTER 1
13
Qd
= D (P,Y )
Price of cars
The demand curve shows the relationship between quantity demanded and price, other things equal.
D
Quantity of cars
CHAPTER 1
14
Qs
= S (P,PS )
Price of cars
The supply curve shows the relationship between quantity supplied and price, other things equal.
D
Quantity of cars
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15
Price of cars
equilibrium price
D
Quantity of cars
equilibrium quantity
CHAPTER 1
16
Q d = D (P,Y )
An increase in income increases the quantity of cars consumers demand at each price which increases the equilibrium price and quantity.
CHAPTER 1
Price of cars
P
S
P2
P1
D1 Q1 Q2
D2
Quantity of cars
17
Q s = S (P,PS )
An increase in Ps reduces the quantity of cars producers supply at each price
Price of cars
S2
S1
P2 P1 D Q2 Q1
Quantity of cars
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18
Y , Ps
19
phones.
3. Use your graph to show how a change in
CHAPTER 1
21
For each new model, you should keep track of its assumptions which variables are endogenous,
which are exogenous the questions it can help us understand, those it cannot
The Science of Macroeconomics
CHAPTER 1
22
23
why firms cannot always sell all the goods they produce
24
25
CHAPTER 1
26
Chapter Summary
Macroeconomics is the study of the economy
as a whole, including growth in incomes changes in the overall level of prices the unemployment rate
Chapter Summary
Economists use different models to examine
different issues.