Lesson 1, Topic 4
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How Macroeconomics Studies Key Questions

Abdulaziz July 22, 2020
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  • Macroeconomists have a general approach to study questions of interest:
    • Document the facts
    • Develop a model
    • Compare predictions of the model with original facts
    • Use the model to make other predictions that will eventually be tested


  • Models simplify the complicated real world into its most relevant elements.
  • A model is useful if it has good predictive power.
  • Economic models often involve systems of multiple equations.

Parts of an economic model

  • Parameter
    • an input that is fixed over time, except when the model builder changes it for an experiment.
  • Exogenous variable
    • an input that can change over time, but determined ahead of time by the model builder.
    • exogenous = “outside of the model”
  • Endogenous variable
    • an outcome of the model—something that is explained by the model.
    • endogenous = “within the model”