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Macro Ii

In: Business and Management

Submitted By snowstorm
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The Mathematics of Simple
Macroeconomic Models

There are several advantages in presenting economic models in the form of equations. Equations are very concise; they readily give quantitative answers; and they are the language of most practising economics.

Unfortunately, for a large proportion of students beginning the study of macroeconomics, the first sight of equations in the course is a traumatic experience. Old fears about their mathematical ability can make them doubt their capacity to cope with macroeconomics. It may even result in their premature withdrawal from the subject.

Fortunately, in the vast majority of cases such doubts are unfounded. Consequently, once fears are removed, these students cope quite happily with the equations in macroeconomics.

This chapter is designed to allay these old fears about mathematics. It does this by means of a step-by-step examination and manipulation of the equations that a student first meets in macroeconomics. Once the student has mastered these equations, the new-found confidence should enable him or her to tackle most of the elementary mathematics that macroeconomics requires.

THE FIRST MODEL

The first model in equation form seen by macroeconomics students is usually:

Y = C + 1 (16-1) C = Co + cY (16-2) I = Io (16-3)
It is convenient to think of the symbols in these equations as words, and the equations themselves as sentences. Thus it is possible to translate an English sentence into an equation or an equation into an English sentence.

First consider the symbols in this model. Y translated into English is the equilibrium level of income, C is planned consumption; I is planned investment; c is the marginal propensity to consume; Co is autonomous consumption, meaning that it is a fixed amount of consumption that occurs no matter what the level of income; and Io is autonomous…...

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