MACROECONOMIC MODELS Introduction There are various types of macroeconomic models. The first one is the simple theoretical models that include neoclassical growth theory, Solow model, Keynesian macroeconomics, Mundell – Flemming and IS-LM Model. They use various diagrams that help explain equations with different variables (Fisher, 2011, p. 210). Most of the models are not dynamic but static. Most of the equations use aggregates such as total employment or GDP, and they do not use concrete variables in the economy. The models are not useful for policy evaluation, testing and forecasting quantitatively. Empirical forecasting macro models describe how various macroeconomic variables relate to each other.
They went further to explain the different variables and how they related. As a result, more equations relating the different quantities were formed which were lengthy and found their application in computers as it would be tedious for an individual to work out the equations. The selection of the variable followed the economic theory, and most of the variables in the equation were based on the empirical viewpoints. Empirical macroeconomic models hold the view that raising inflation would help in decreasing unemployment.
Wharton model is an example of an empirical model that has been used in the United Kingdom and the United States. Lucas analyzed the model in that it based its evaluation on previous information and not on the current data. Macroeconomic models include dynamic stochastic general equilibrium models (DSGE). The models use the various agents in the economies that include governments, firms, and households while focusing on the budget constraint, technology and preferences in particular countries Balke et al. , 2012, p. 2). The model focuses on the prices affecting the various variables both at present and in future.
It focuses on demand and supply taking into consideration their prices and the various factors influencing the markets. The new Keynesian and business cycle model have arisen due to the various improvements using the agents. The DSGE models help in determining economic policy and social welfare impact. Another category of macroeconomic models is the Agent-based computational macroeconomic models (ACE). The model focuses on various agents. The model concentrates on splitting the different macroeconomic aggregates relationships into particular macroeconomic agent decisions.
The macroeconomic model can analyze the totals by using computer simulations. The models provide strategies. The tax rebates would help more people spend more since most of them may not have the disposable income now. The people will tend to spend more because it is a consumerist society. The increased spending would help stimulate the economy as a result and would contribute to creating more employment opportunities thus reducing unemployment. The spending will thus assist the economy in that three will be more circulation of money and spending. Paying debts would mean that there would be minimal spending, and this would not assist the economy very much.
The economy grows due to healthy spending, and it enables reduce unemployment. Reduced spending increases unemployment which affects the economic negatively. ReferencesFisher, P. (2011). Rational expectations in macroeconomic models. Dordrecht: Springer. Balke, N. S., Canova, F., Milani, F., & Wynne, M. A. (2012). DSGE models in macroeconomics: Estimation, evaluation, and new developments. Bingley, U.K: Emerald.