Macroeconomic models, Macroeconomics

Now we will analyse how macroeconomic variables fit together and present models which explain the main macroeconomic variables. 

Using these models we can, for instance, analyse what happens when government increases consumption, when central bank increases the target interest rate and when domestically produced goods do well in foreign markets. We can also understand significant observations of the economy like cyclical fluctuations in growth, correlation between unemployment and inflation and the relationship between interest rates and foreign exchange rates. 

Macroeconomics isn't an exact science like physics. No one knows exactly how the macroeconomic variables are related. In its place, there exist some models which try to explain various observations and relationships between macroeconomic variables. Unfortunately, not all of these models consistent - one model may predict that unemployment would fall if the central bank lowers target interest rate whereas another may claim that such a change won't affect unemployment. 

This type of problem is something you have to get used to and accept. Economics isn't a subject where you can perform an experiment to find out what is really 'true'. Observed phenomena may have different explanations in different models and different models will result in different predictions of macroeconomic variables. If you determine that 'An increase in x will lead to an increase in y' you really must not think of this as a property of the real world though rather as the property of a particular model. 

One model which is very popular in virtually all basic courses in macroeconomics all over the world is the so-called neo-classical synthesis. As the name suggests, this is a combination or a synthesis of two models, namely classical model and Keynesian model. In brief, the neo-classical synthesis claims that Keynesian model is correct in the short term whereas the classical model is correct in the long run.

Posted Date: 8/14/2013 1:27:13 AM | Location : United States

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