macroeconomics introduction (2)

8/3/2019 Macroeconomics Introduction (2)

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Introduction by Dr. R. JAYARAJ, M.A., PhD, Assistant Professor (SG), UPES


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Introduction

What is Macroeconomics?

WordReference.com state that "Macroeconomics is the branch of economics concernedwith aggregates, such as national income, consumption, and investment ".

The Economist's Dictionary of Economics defines Macroeconomics as the study of whole

economic systems aggregating over the functioning of individual economic units. It isprimarily concerned with variables which follow systematic and predictable paths of

behavior and can be analyzed independently of the decisions of the many agents whodetermine their level. More specifically, it is a study of national economies and the

determination of national income."


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Microeconomics examines the behavior ofindividual decision-making unitsbusinessfirms and households.

Macroeconomics deals with the economy as awhole; it examines the behavior of economicaggregates such as aggregate income,consumption, investment, and the overall

level of prices. Aggregate behaviorrefers to the behavior of all

households and firms together.


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Microeconomists generallyconclude that markets work well.

Macroeconomists, however,observe that some importantprices often seem sticky.

Sticky prices are prices that do notalways adjust rapidly to maintainthe equality between quantity

supplied and quantity demanded.


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Macroeconomists often reflect onthe microeconomic principles

underlying macroeconomicanalysis, or the microeconomic

foundations of macroeconomics.


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The Great Depressionwas a period of severeeconomic contractionand highunemployment thatbegan in 1929 andcontinued throughoutthe 1930s.


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Classical economists applied microeconomicmodels, or market clearing models, toeconomy-wide problems.

However, simple classical models failed toexplain the prolonged existence of highunemployment during the Great Depression.This provided the impetus for the

development of macroeconomics.


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In 1936, John Maynard Keynes published The General Theory

of Employment, Interest, and Money. Keynes believed governments could intervene in the

economy and affect the level of output and employment. During periods of low private demand, the government can

stimulate aggregate demand to lift the economy out of

recession.


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Fine-tuning was the phrase used by Walter

Heller to refer to the governments role in

regulating inflation and unemployment. The use of Keynesian policy to fine-tune the

economy in the 1960s, led to disillusionment(free from illusion) in the 1970s and early1980s.


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Stagflation occurs when the overall price

level rises rapidly (inflation) during periods of

recession or high and persistentunemployment (stagnation).


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Three of the major concerns of

macroeconomics are:

Inflation Output growth

Unemployment


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Inflation is an increase in the overall pricelevel.

Hyperinflation is a period of very rapid

increases in the overall price level.Hyperinflations are rare, but have been usedto study the costs and consequences of evenmoderate inflation.

Deflation is a decrease in the overall pricelevel. Prolonged periods of deflation can bejust as damaging for the economy assustained inflation.


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The business cycle is the cycle ofshort-term ups and downs in the

economy. The main measure of how an

economy is doing is aggregateoutput:

Aggregate outputis the totalquantity of goods and servicesproduced in an economy in a givenperiod.


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A recession is a period during whichaggregate output declines. Two consecutivequarters of decrease in output signal a

recession. A prolonged and deep recession becomes a

depression.

Policy makers attempt not only to smooth

fluctuations in output during a business cyclebut also to increase the growth rate of outputin the long-run.


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The unemployment rate is the percentage ofthe labor force that is unemployed.

The unemployment rate is a key indicator ofthe economys health. The existence of unemployment seems to

imply that the aggregate labor market is not

in equilibrium. Why do labor markets notclear when other markets do?


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There are three kinds of policy thatthe government has used to

influence the macroeconomy:1. Fiscal policy

2. Monetary policy

3. Growth or supply-side policies


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Fiscal policyrefers to government policiesconcerning taxes and spending.

Monetary policyconsists of tools used by the

Federal Reserve to control the quantity ofmoney in the economy.

Growth policies are government policies thatfocus on stimulating aggregate supply instead

of aggregate demand.


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The circular flowdiagram shows the

income received and

payments made byeach sector of the

economy.


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Everyonesexpenditure issomeone elses

receipt. Everytransaction musthave two sides.


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Transfer payments are paymentsmade by the government to people

who do not supply goods, services, orlabor in exchange for these payments.


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Households, firms, thegovernment, and the rest of the

world all interact in three differentmarket arenas:

1. Goods-and-services market

2. Labor market3. Money (financial) market


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Households and the government purchase goods and

services (demand) from firms in thegoods-and servicesmarket, and firms supplyto the goods and services market.

In the labor market, firms and government purchase(demand) labor from households (supply).

The total supply of labor in the economy depends on the sum ofdecisions made by households.


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In the money marketsometimes called thefinancial

markethouseholds purchase stocks and bonds from firms.

Households supplyfunds to this market in the expectation of earning

income, and also demand(borrow) funds from this market. Firms, government, and the rest of the world also engage in

borrowing and lending, coordinated by financial institutions.


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Treasury bonds, notes, and billsare promissory notes issued by the

federal government when itborrows money.

Corporate bonds are promissory

notes issued by corporations whenthey borrow money.


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Shares of stockare financialinstruments that give to the

holder a share in the firmsownership and therefore the rightto share in the firms profits.

Dividends are the portion of acorporations profits that the firmpays out each period to itsshareholders.


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Connections to microeconomics:

Macroeconomic behavior is the sum

of all the microeconomic decisionsmade by individual households andfirms. We cannot understand theformer without some knowledge of

the factors that influence the latter.


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Aggregate demandis thetotal demand for goods andservices in an economy.

Aggregate supplyis the total

supply of goods and services in an

economy.

Aggregate supply and demand

curves are more complex thansimple market supply and demand

curves.


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An expansion, or boom, isthe period in the businesscycle from a trough up to a

peak, during which outputand employment rise.

A contraction, recession, or slump

is the period in the business cycle

from a peak down to a trough, during

which output and employment fall.


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aggregate behavioraggregate behavior

aggregate demandaggregate demand

aggregate outputaggregate output

aggregate supplyaggregate supply

business cyclebusiness cycle

circular flowcircular flow

contraction, recession, orcontraction, recession, orslumpslump

corporate bondscorporate bonds

deflationdeflation

depressiondepression

microeconomicsmicroeconomics

monetary policymonetary policy

recessionrecession

shares of stockshares of stock

stagflationstagflation

sticky pricessticky prices

supplysupply--side policiesside policiestransfer paymentstransfer payments

Treasury bonds, notes,Treasury bonds, notes,billsbills

unemployment rateunemployment rate

dividendsdividends

expansion or boomexpansion or boom

fine tuningfine tuning

fiscal policyfiscal policy

Great DepressionGreat Depression

hyperinflationhyperinflation

inflationinflationmacroeconomicsmacroeconomics

microeconomicmicroeconomicfoundations offoundations ofmacroeconomicsmacroeconomics


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macroeconomics introduction (2)

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