The field of macroeconomic theory has evolved rapidly over the last quarter century. A quick glance at the discipline’s leading journals reveals that virtually the entire academic profession has turned to interpreting macroeconomic data with models that are based on microeconomic foundations. Unfortunately, these models often require a relatively high degree of mathematical sophistication, leaving them largely inaccessible to the interested lay person (students, newspaper columnists, business economists, and policy makers). For this reason, most public commentary continues to be cast in terms of a language that is based on simpler ‘old generation’ models learned by policymakers in undergraduate classes attended long ago | Macroeconomic Theory and Policy Preliminary Draft David Andolfatto Simon Fraser University dandolfa@ August 2005 ii Contents Preface ix I Macroeconomic Theory Basics 1 1 The Gross Domestic Product 3 Introduction. 3 How GDP is Calculated. 5 The Income Approach. 5 The Expenditure Approach. 6 The Income-Expenditure Identity. 7 What GDP Does Not Measure . 8 Nominal versus Real GDP. 9 Real GDP Across Time . 12 Schools of Thought. 14 Problems . 16 References. 17 Measured GDP Some Caveats . 18 2 Basic Neoclassical Theory 21 Introduction. 21 The Basic Model. 22 The Household Sector. 23 The Business Sector. 30 General Equilibrium. 31 Real Business Cycles. 35 The Wage Composition Bias . 38 Policy Implications. 39 Uncertainty and Rational Expectations. 41 Animal Spirits . 42 Irrational Expectations . 43 Self-Fulfilling Prophesies. 44 Summary. 47 Problems . 49 .
