Macroeconomics Chapter 1: The Science of Macroeconomics What is Economics? Normative Definition: Economics is the science that studies how to efficiently allocate economic resources Positive Definition: Economics is the science that studies how an economy operates or how economic variables are determined under the given economic system. The System of an Economy: The economic system can briefly be distinguished in terms of The ownership: private ownership and public ownership The mechanism of resource allocation: planning mechanism and market mechanism What we shall study in Macroeconomics? How are the macroeconomic variables determined? How can we explain unemployment and inflation? What are the affects of a macroeconomic policy? What determine economic growth? Debates in Macroeconomics New Classical Macroeconomics: Representative Agent’s optimization Rational Expectation Market Clearing New Keynesian Macroeconomics No Representative Agent’s optimization No Rational Expectation No Market Clearing