Summary

1. Macroeconomics is the study of the economy as a whole, including growth in incomes, changes in prices, and the rate of unemployment. Macroeconomists attempt both to explain economic events and to devise policies to improve economic performance.

2. To understand the economy, economists use models—theories that simplify reality in order to reveal how exogenous variables influence endogenous variables. The art in the science of economics lies in judging whether a model captures the important economic relationships for the matter at hand. Because no single model can answer all questions, macroeconomists use different models to look at different issues.

3. A key feature of a macroeconomic model is whether it assumes that prices are flexible or sticky. According to most macroeconomists, models with flexible prices describe the economy in the long run, whereas models with sticky prices offer a better description of the economy in the short run.

4. Microeconomics is the study of how firms and individuals make decisions and how these decisionmakers interact. Because macroeconomic events arise from many microeconomic interactions, all macroeconomic models must be consistent with microeconomic foundations, even if those foundations are only implicit.