1Econ 101 M. SalemiEcon 101 M. SalemiA Macroeconomic ModelA Macroeconomic ModelNewsNewsReview: The Effect of the real rate of Review: The Effect of the real rate of interest on investment.interest on investment.What is a Macroeconomic Model?What is a Macroeconomic Model?The Aggregate Demand ScheduleThe Aggregate Demand ScheduleThe Potential Output ScheduleThe Potential Output ScheduleUsing the Model to Predict Unemployment Using the Model to Predict Unemployment and Inflation.and Inflation.Mixed Spending News (New York Times)Mixed Spending News (New York Times)Econ 101 M. SalemiEcon 101 M. SalemiAnnouncementsAnnouncementsTurn in your course journal at your Turn in your course journal at your recitation this week.recitation this week.We will assess only the five journal We will assess only the five journal assignments listed on the web page. assignments listed on the web page. Each requires you to find an article and to Each requires you to find an article and to write a short essay about it.write a short essay about it.The recitation assignment for this week is The recitation assignment for this week is posted on the web page.posted on the web page.Investment is inversely related to the real rate of interest.Michele is building a new cinema called Cinema Paradiso and must decide how many screens to install.Each screen costs $1,000,000 but the Cinema will hold its value over the coming year.2Econ 101 M. SalemiEcon 101 M. SalemiCinema Cinema ParadisoParadisoAfter paying the movie distributor and meeting non-interest expenses, Michele expects to net $2.00 per ticket.Screens cost $1,000,000 each.How many screens should Michele build?Number of Number of Screens Screens Number of Number of PatronsPatrons1140,00040,0002275,00075,00033105,000105,00044130,000130,00055150,000150,000Econ 101 M. SalemiEcon 101 M. SalemiUse Your Clicker Use Your Clicker To Answer To Answer The Following The Following Graded QuestionGraded QuestionEcon 101 M. SalemiEcon 101 M. SalemiIf he nets $2.00 per patron, the price of a If he nets $2.00 per patron, the price of a screen is $1,000,000 and the real rate is 7.5% screen is $1,000,000 and the real rate is 7.5% how many screens should Michele build?how many screens should Michele build?A. 1B. 2C. 3D. 4 E. 5Number of Number of Screens Screens Number of Number of PatronsPatrons1140,00040,0002275,00075,00033105,000105,00044130,000130,00055150,000150,000Econ 101 M. SalemiEcon 101 M. SalemiCinema Cinema ParadisoParadisoCosts and BenefitsCosts and Benefits$100,000$100,000$75,000$75,000$55,000$55,000$40,000$40,000150,000150,00055$100,000$100,000$75,000$75,000$55,000$55,000$50,000$50,000130,000130,00044$100,000$100,000$75,000$75,000$55,000$55,000$60,000$60,000105,000105,00033$100,000$100,000$75,000$75,000$55,000$55,000$70,000$70,00075,00075,00022$100,000$100,000$75,000$75,000$55,000$55,000$80,000$80,00040,00040,0001110.0%10.0%7.5%7.5%5.5%5.5%Marginal CostMarginal CostMarginal Marginal BenefitBenefitPatronsPatronsScreensScreens3Econ 101 M. SalemiEcon 101 M. SalemiWhat is a Macroeconomic Model?What is a Macroeconomic Model?A model is a simplified description that A model is a simplified description that captures the essential elements of a captures the essential elements of a situation and allows us to analyze them in situation and allows us to analyze them in a logical way.a logical way.A macro model is a simplified description of A macro model is a simplified description of the forces that determine equilibrium the forces that determine equilibrium levels of national output, inflation, levels of national output, inflation, unemployment and the real rate of unemployment and the real rate of interest.interest.Econ 101 M. SalemiEcon 101 M. SalemiWhat is a Macroeconomic Model?What is a Macroeconomic Model?A Macroeconomic model may be A Macroeconomic model may be represented by a system of equations. represented by a system of equations. The equations are solved simultaneously to The equations are solved simultaneously to predict equilibrium values for output, predict equilibrium values for output, inflation, and other macro variables.inflation, and other macro variables.The model is used to predict the effects on The model is used to predict the effects on the economy of different shocks and the economy of different shocks and changes in monetary and fiscal policy.changes in monetary and fiscal policy.Econ 101 M. SalemiEcon 101 M. SalemiWhat is a Macroeconomic Model?What is a Macroeconomic Model?There are lots of different macroeconomic There are lots of different macroeconomic models because models because ……Economists disagree about the relative Economists disagree about the relative importance of forces at work on the importance of forces at work on the economy.economy.Economists disagree about the Economists disagree about the ““mechanismsmechanisms””through which those forces through which those forces affect output, inflation, unemployment, affect output, inflation, unemployment, and the real interest rate.and the real interest rate.Econ 101 M. SalemiEcon 101 M. SalemiWhat is a Macroeconomic Model?What is a Macroeconomic Model?We will adopt a very simple model that can We will adopt a very simple model that can be represented by two schedules be represented by two schedules presented in a single diagram.presented in a single diagram.The model represents mainstream thinking.The model represents mainstream thinking.The model is designed to help us think The model is designed to help us think about monetary policy in a logical way.about monetary policy in a logical way.If you undertake further study in economics, If you undertake further study in economics, you will learn models that are more you will learn models that are more detailed.detailed.4Econ 101 M. SalemiEcon 101 M. SalemiAggregate Demand ScheduleAggregate Demand ScheduleAggregate Demand is measured in constant Aggregate Demand is measured in constant dollars and equals C + I + G + NXdollars and equals C + I + G + NX,Where Where C C = Household Consumption= Household ConsumptionI I = Investment= InvestmentG G = Government Spending= Government SpendingNXNX= Net Exports = Net Exports Econ 101 M. SalemiEcon 101 M. SalemiAggregate Demand is inversely related Aggregate Demand is inversely related to the real rate of interest (to the real rate of interest (r r ) because:) because:Consumption falls when r r rises because a higher real rate implies a higher cost of financing consumer durable