1. Unit 4
Macro Economics

2. Introduction
• Great depression of 1920-40 has brought the
significance of creating Macro Economics.
• Macro Economics as a separate branch of
Economics came in 1936 by John Keynes
publications.
• It led for the emergence of Keynesian
revolution to meet the need of modern day
economies.

3. Keynesian Theory
• It states that employment is a function of
income.
• Employment & Income is determined by the
level of effective demand, national income,
interest rates, consumption etc…
• But in a country, inflationary & deflationary
gaps exists which prevents the growth of
economy.

4. Inflationary & Deflationary Gap
• Inflationary gap occurs when consumption &
investment expenditures are greater than the
full employment, this gap arises.
• Here consumer demand for goods & services
are greater than its supply.
• Hence under this condition NI, output,
employment cannot be increased further.
• Where as Deflationary Gap occurs when total
demand fails to create full employment.

5. Macro Economics
• Samuelson defines Macro Economics as “the
study of thee behaviour of the economy as a
whole. It examines the overall level of a
nation’s output, employment, prices and
foreign trade”.
• In simple words, Macro economics theory is
the theory of income, employment, prices and
money.

6. Static & Dynamic economies
• In a Static economy, normal economic activities
go on but there is no change in the size of
economy, national output, stock of capital,
prices, technology, population taste &
preferences, nature of business & employment.
• In a Dynamic economy, the country will always
be in motion, forces of change are instant &
simultaneous.

7. Employment model
• The classical employment model consists of
two components. They are:
1. Aggregate production function
2. Labour supply & demand function
• These components display the real output &
employment required to produce equilibrium
level of national output under the given
money supply.

8. Aggregates under Keynesian model
• Aggregate supply function
• Aggregate demand function
• Aggregate consumption function
• Aggregate saving function
• Investment

9. • Aggregate supply function is the total supply
of goods in the economy. In SR, it is the
function of number of labour reqd for prodn.
• Aggregate demand function depends on
demand for consumer goods & investment
goods in a two sector economy.
• Aggregate consumption function is the
consumption expenditure of household
depends upon the income of the household.
• Investment happens in the three sector
economy.

10. Circular flow of money
• Flow of money can happen in different sectors
of the economy. They are:
1. Two sector economy – consists of Firms &
households.
2. Three sector economy – consists of Firms,
households & Government.
3. Four sector economy – Firms, households,
Government & International markets.

11. Theory of Interest
• Interest is the opportunity cost of holding money.
• It is the premium which has to be offered to
induce people to hold their wealth in some form
other than hoarded (accumulated) money.
• Rate of interest is determined by demand for and
supply of money.
• The desire of people to hold money is called
liquidity preference.
• Money is held for meeting various transaction,
precautionary and speculative motives.

12. Macro economic problems
• Overall Growth rate of the economy
• Unemployed labour force
• People living below poverty line
• Inflation
• Balance of payment
• Fiscal & monetary policies
• Industrial development
• Balanced sectoral development etc..