3. Introduction..
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Macroeconomics analyses economic growth
and fluctuations
⚫Long run economic growth
⚫Short run fluctuations
⚫Business cycles
Macroeconomics analyses impact of policies
⚫Consumption and investment policies
⚫Changes in wages and prices
⚫Monetary and fiscal policies
⚫Money stock, government budget, interest rates
and national debt
⚫Trade balance
4. Division of macroeconomic issues:
⚫Making understand macroeconomic issues are
reduce to the following essentials
⚫Goods market, labor market, and financial
markets of the economy
⚫Macroeconomics deals with each market as a
whole
For example
⚫It studies markets for different goods as a
single market
⚫Markets for agricultural products
⚫Markets for medical services
⚫It studies labor market as a whole
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5. Benefits of Abstraction
⚫Facilitates understandingof interactionsamong goods, labor
and financial markets
Objective of macroeconomic study
⚫To understand how the macro-economy works
⚫And how to make it perform better
⚫Economists recommendingintervention in the economy
⚫Great macroeconomists had keen interest in macroeconomic
theory and policy
For instance
⚫John MaynardKeynes
⚫Milton Friedman (University of Chicago)
⚫Franco Modiglianiand Robert Solow (MIT)
⚫James Tobin of Yale University
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6. Economist skeptical about intervention
⚫N. Gregory Mankiw, Thomas Sargent, Robert Lucas,
Olivier Blanchard
⚫They doubt about the wisdom of active government
policies
Features of Macroeconomics
⚫Macroeconomics related to economic problems of the
day
⚫Illuminates economic depression
⚫Refers to real word events to explain meaning and
relevance of the theory
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8. Medium term models
Mediumtermmodels
⚫Inmediumtermproductivecapacityisgiven
⚫Itstudieshoweconomygrowsfromshortruntolongrun
Shortrunmodels
⚫Fluctuationindemanddetermineshowmuchcapacityis
used
⚫Itanalyzeslevelofoutputandemployment
Justificationofthedivision
⚫Nearly all economists accept these models
⚫There is different opinion in respect of time frame
of models
⚫There is less agreement about time frame for short
and medium term models
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9. Long run model
⚫Longrun behaviourof the economyis domain of growththeory
⚫It analyses howinvestment in technologyleads to increase living
standards
⚫However,long rungrowthmodel ignorerecessions, boomsand
shortrun fluctuations
⚫It is assumed that labor, capital, raw materials are fully employed
Supply(Output)in thelong run model
⚫Level ofoutputis determined solely bysupply side
considerations
⚫Supplyof outputis determined byproductivecapacity of the
economy
⚫Price level is determined by level ofdemand
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10. Supply (Output) in the long run model
⚫Aggregatesupply andaggregatedemand determine
relationship betweenprice andoutput
⚫Supplycurve(AS) gives quantityof outputthe firms are
willing to supplyat a price
⚫Position of the aggregatesupplycurvedependson
productivecapacity of economy
Demandin the long runmodel
⚫Aggregate demand curve (AD) gives level of output
at which goods markets and money markets are in
equilibrium at a price level
⚫Position of aggregate demand curve depends on
monetary and fiscal policy and the level of consumer
confidence
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11. Demand in the long run model
⚫Intersectionof aggregatesupplyand demand determines
priceand quantity
⚫In thelongrun growthmodel thesupplycurveis vertical
⚫Supplycan not beincreasedin thelongrun
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