Macroeconomics:

An Overview
 What is Macroeconomics?

 The study of the behaviour of the economy as a whole

 Examines the forces that affect different economic agents
simultaneously

Macro Vs. Micro

Macro deals with aggregates, Micro deals with specific
product or market or decision of a particular consumer or firm
 Why do we need Macro?

 What, how much and which way to be produced --- decided by

individuals and firms through the “circular flow of income”.
 Macroeconomic aggregates are the indicators of well being of
most of the people in the country

Two Central Themes

 Short term fluctuations in output, prices and employment
(Business Cycles)
 Long term trends in output and standard of living (Economic
Growth)
 Fundamental Concerns
 Growth in GDP/ National Income
 Unemployment
 Inflation
 Interest Rate
 Govt Budget Deficits

Objectives & Instruments

 To maintain a high level and increasing rate of growth in national income
along with stable prices and low unemployment

 Instruments are those by which the govt wants to achieve the aforesaid
objective. Three types of instruments are there: Fiscal Policy, Monetary
Policy and Trade Policy
Major Issues in Macroeconomics
 What determines the overall level of output and employment?
 How can Business Cycles be controlled?
 How can Inflation be controlled?
 International Interdependence
 What makes an economy grow over time?

What hinders Macroeconomic Stability?

 Excessive and Ill-designed government intervention
 High inflation
 Fiscal insolvency
 Financial fragility
 Exchange rate mismanagement
 Aggregate Supply & Aggregate Demand

 The economy has a demand and a supply curve for goods and
services

 At the equilibrium, we know the quantities and prices of the

goods and services produced. Corresponding to that price and
quantity we can have the labour used and thus, determine the
unemployment rate. Thus, Output, prices and unemployment
are decided by the interaction of aggregate demand and
aggregate supply.
 Major Schools of Thought
 Classical School:
Adam Smith (The Wealth of Nations, 1776) : the invisible hand
Followers : quick price adjustment
 Keynes (The General Theory of Employment, Interest and Money, 1936):
Prices and wages are sluggish at least in the short run
Discretionary fiscal and monetary policy
 Monetarists (1970s) :
Money does have a crucial role to play
 New Classicals:
Classical theory with rational expectations
General Consensus:
Keynesian approach is valid in the short-medium run while in the long run the
classical supply side forces come into operation

Ref: S.Sikdar : Principles of Macroeconomics