1

Chapter One
CHAPTER 1
The Science of Macroeconomics

A PowerPoint

Tutorial
To Accompany
MACROECONOMICS, 7th. Edition
N. Gregory Mankiw
Tutorial written by:
Mannig J. Simidian
B.A. in Economics with Distinction, Duke University
M.P.A., Harvard University Kennedy School of Government
M.B.A., Massachusetts Institute of Technology (MIT) Sloan School of Management
2
Chapter One

Mankiws Macroeconomics Modules for Macroeconomics 7
th
ed. are
dedicated to the loving memory of my cherished father, best friend and
mentor. Daddy you are still my inspiration for making sure
these tutorials are the best they can be for students worldwide!

Ara Vahan Simidian
(June 24, 1928 - December 19, 2008)
May he continue to enjoy learning and loving
economics from heaven above.
In Memoriam
Ara Vahan Simidian
with Mankiws Macroeconomics Modules author, Mannig J. Simidian, 2007.
3
Chapter One
Professor Greg Mankiw is not only a prolific, talented, and ingenious
economist, but humble and kind-hearted. His unique and extraordinary
creative ability to impart knowledge makes him both an economist and artist.
I am so honored and grateful again be a part of supplementing his
unprecedented craftsmanship.

My mentor, and friend for over a decade Professor Mike McElroy (North
Carolina State University) was the first to see the novelty in these tutorials
while I was an undergraduate student at Duke University. His contributions
and influence will be a part of my work indefinitely. My
gratitude is endless as well to Professors David Denslow, Mark Rush, Ed
Tower, and Jeff Frankel.

My love and gratitude goes to my dear friend and surrogate father Dr.
Lawrence Brockman, D.M.D, an endodontist but an economist in spirit who
has been my teacher, inspiration and dearest friend for over a decade.
I also want to thank the following special people in my life: my mother, Jane,
Michael Hill, Elle & Ava, Stephanie & Jack Taylor, Lara Kleinman & Eric
Wolf, Lula Peoples, GiGi and David Greene and Michele Rubino. Thank you
all for always loving me, believing in me and cheering me on!

Mannig J. Simidian
June 2009
Acknowledgements
4
Chapter One
Everyone has reason to think critically about macroeconomic
issues. It is imperative that we seek to understand why some
countries are growing faster or slower than others or
why some have greater fluctuations in inflation or
unemployment. The state of the macroeconomy
affects everyone in many ways (especially recently). It plays a
significant role in the political sphere while also affecting public
policy and societal well-being, at national and global levels.

Macroeconomists use variables to measure the performance
of the economy such as real GDP, the inflation rate, and the
unemployment rate among others. They are also concerned with
matters such as monetary and fiscal policyboth of which will be
discussed at length in MACROECONOMICS, 7th ed., Mankiws
Macroeconomics Modules, and in your macroeconomics course.
Good luck and have fun using these tutorials to guide you when
macroeconomics might be challenging you! Enjoy!!!

Welcome to Macroeconomics!
5
Chapter One
President Barack Obama
and the State of the Economy
When President Obama moved into the
White House in 2009, the economy was in
a state of turmoil. Mortgage defaults and
a drop in housing prices were the major
culprits. The crisis affected other sectors of
the economy, pushing the economy into
another recession. Some liken the
situation to that of the Great Depression
which occurred in the 1930s.

6
Chapter One
Economists use models to understand what goes on in the economy.
Here are two important points about models: endogenous variables
and exogenous variables. Endogenous variables are those which the
model tries to explain. Exogenous variables are those variables that a
model takes as given. In short, endogenous are variables within a
model, and exogenous are the variables outside the model.
Price
Demand

Q
*
P
Supply

Quantity
*
This is the most famous
economic model. It describes
the ubiquitous relationship
between buyers and sellers in
the market. The point of
intersection is called an
equilibrium.
7
Chapter One
Market clearing is an alignment process whereby decisions between
suppliers and demanders reach an equilibrium. Heres how it works.
Remember that the demand curve slopes downward meaning that
as you increase the price (by moving along the demand curve), the
quantity demanded decreases. Conversely, the supply curve slopes
upward implying that as the price increases (by moving along the
supply curve), the amount supplied will increase.
Lets say you begin with a demand and supply curve for CDs.
P
Q
D S
Now, suppose that there is a sudden
increase in the demand for CDs.
Demand will shift from D to D.
The center point A is where market
decisions reach an equilibrium.
Q*
P*
A
D
Q
P
B
The increase in demand places upward
pressure on the price to point B since the
original price, P* no longer clears the
market. Notice the shortage.
8
Chapter One
SHI FTS I N DEMAND: Suppose your income
rises? Your demand for a given product, for
example, pizza, will also increase.
This translates into a rightward shift in the
demand curve from D to D'. Result:
both price and quantity are higher.
P
D

S

Q
D'
SHI FTS I N SUPPLY: A fall in the price
of materials increases the supply of pizza; at
any given price, pizzerias find that the sale
of pizza is more profitable, and thus the
supply of pizza rises.
This translates into a rightward shift in supply
from S to S'. Result: price falls, quantity rises.
P
D

S

Q
S'
9
Chapter One
Economists typically assume that the market will go into an
equilibrium of supply and demand, which is called the
market clearing process. This assumption is central to the
pizza example on the previous slide. But, assuming that
markets clear continuously, is unrealistic. For markets to
clear continuously, prices would have to adjust instantly to
changes in supply and demand. But, evidence suggests that
prices and wages often adjust slowly.

So, remember that although market-clearing models assume
that wages and prices are flexible, in actuality, some wages
and prices are sticky. Market-clearing models may not
describe every instant in an economy, but they do depict the
equilibrium toward which the economy gravitates.

10
Chapter One
Microeconomics is the study of how households and firms
make decisions and how these decision makers interact in the
broader marketplace. In microeconomics, an individual chooses to
maximize his or her utility subject to his or her budget constraint.


Macroeconomic events arise from the interaction of many
individuals trying to maximize their own welfare. Because
aggregate variables are the sum of the variables describing
individuals decisions, the study of macroeconomics
is based on microeconomic foundations.
11
Chapter One
The modules mirror the sequencing of the text, Macroeconomics, 7
th
ed.
There are six parts and a total of nineteen chapters with a module
written for each chapter. Enjoy!
Introduction
Classical Theory, The Economy in the Long Run
Growth Theory, The Economy in the Very Long Run
Business Cycle Theory: The Economy in the Short Run
Macroeconomic Policy Debates
More on the Microeconomics Behind Macroeconomics

12
Chapter One
Macroeconomics
Real GDP
Inflation and deflation
Unemployment
Recession
Depression
Models
Endogenous variables
Exogenous variables
Market clearing
Flexible and sticky prices
Microeconomics