OVERVIEW OF

MACROECONOMICS
PREPARED BY:
MD. SHARIF HASSAN
LECTURER, DBA, UAP
MACROECONOMICS

“The whole purpose of the economy is production of goods or services for

consumption now or in the future. I think the burden of proof should always be
on those who would produce less rather than more, on those who would leave
Idle people or machines or land that could be used. It is amazing how many
reasons can be found to justify such waste: fear of inflation, balance-of-
payments deficits, unbalanced budgets, excessive national debt, loss of
confidence in the dollar.” – James Tobin-National Economic Policy
MACROECONOMICS

• Macroeconomics is the study of the behavior of the economy as a whole. It

examines the forces that affect firms, consumers, and workers in the aggregate. It
contrasts with microeconomics , which studies individual prices, quantities, and
markets. Two central themes will run through our survey of macroeconomics:
• The short-term fluctuations in output, employment, financial conditions, and prices
that we call the business cycle
• The longer-term trends in output and living standards known as economic growth
 THE BIRTH OF MACROECONOMICS
The 1930s marked the first stirrings of the science of “The Congress hereby declares that it is
macroeconomics, founded by John Maynard Keynes
as he tried to understand the economic mechanism
the continuing policy and responsibility
that produced the Great Depression. After World War of the federal government to use all
II, reflecting both the increasing influence of practicable means consistent with its
Keynesian views and the fear of another depression,
needs and obligations . . . to promote
the U.S. Congress formally proclaimed federal
responsibility for macroeconomic performance. It maximum employment, production, and
enacted the landmark Employment Act of 1946, purchasing power.”
which stated:
THREE CENTRAL QUESTIONS OF
MACROECONOMICS:
Why do output and
employment sometimes fall,
and how can unemployment
be reduced? - Macroeconomics
studies the sources of persistent
unemployment and high inflation.
Having, considered the symptoms,
macroeconomists suggest possible
remedies, such as using monetary
policy to alter interest rates and credit
conditions or using fiscal instruments
such as taxes and spending. The lives
and fortunes of millions of people
depend upon whether economists find
correct diagnoses for major
macroeconomic ailments—and upon
whether governments apply the right
medicine at the right time.
What are the sources of price How can a nation increase
inflation, and how can it be kept
its rate of economic growth?
under control? - When prices are
- Economic historians have found
rising—a phenomenon we call inflation
—the price yardstick loses its value.
that the key factors in long-term
During periods of high inflation, people economic growth include reliance
may get confused about relative prices on well-regulated private markets
and make mistakes in their spending and for most economic activity, stable
investment decisions. Tax burdens may
macroeconomic policy, high rates
rise. Households on fixed incomes find
that inflation is eating away at their real
of saving and investment, openness
incomes. Macroeconomics can suggest to international trade, and
the proper role of monetary and fiscal accountable and non-corrupt
policies, of exchange rate systems, and of governing institutions.
an independent central bank in containing
inflation
OBJECTIVES OF MACROECONOMICS
Output: The ultimate objective of economic The growth rate is defined as % growth rate
activity is to provide the goods and services that the of real GDP in year t,
population desires. The most comprehensive
measure of the total output in an economy is the
gross domestic product (GDP). GDP is the
measure of the market value of all final goods and
Potential GDP represents the maximum
services produced in a country during a year. Two
types of GDP are- Nominal GDP and Real GDP. sustainable level of output that the economy
Nominal GDP is measured in actual market prices. can produce. When an economy is operating
Real GDP is calculated in constant or invariant at its potential, there are high levels of
prices. Real GDP is the most closely watched utilization of the labor force and the capital
measure of output; it serves as the carefully
stock.
monitored pulse of a nation’s economy.
OBJECTIVES OF MACROECONOMICS
High Employment, Low Unemployment: Of all the macroeconomic indicators,
employment and unemployment are most directly felt by individuals. People
want to be able to get high-paying jobs without searching or waiting too long,
and they want to have job security and good benefits. It excludes those without
work who are not looking for jobs. The unemployment rate tends to reflect the
state of the business cycle: when output is falling, the demand for labor falls
and the unemployment rate rises.
OBJECTIVE OF MACROECONOMICS
• Price Stability: The third macroeconomic objective is price stability. This is defined as a low and stable inflation
rate. To track prices, government statisticians construct price indexes, or measures of the overall price level. An
important example is the consumer price index (CPI), which measures the trend in the average price of goods and
services bought by consumers. Economists measure price stability by looking at inflation, or the rate of inflation.

• Price stability is important because a smoothly functioning market system requires that prices accurately convey
information about relative scarcities. History has shown that high inflation imposes many costs—some visible and
some hidden—on an economy. With high inflation, taxes become highly variable, the real values of people’s pensions
are eroded, and people spend real resources to avoid depreciating rubles or pesos. But declining prices (deflation) are
also costly. Hence, most nations seek the golden mean of slowly rising prices as the best way of encouraging the price
system to function efficiently.
THE GOALS OF MACROECONOMIC POLICY

• A high and growing level of national output

• High employment with low unemployment
• A stable or gently rising price level
THE TOOLS OF MACROECONOMIC POLICY
• A policy instrument is an economic variable under the control of government
that can affect one or more of the macroeconomic goals. By changing
monetary, fiscal, and other policies, governments can avoid the worst
excesses of the business cycle or increase the growth rate of potential output.
The major instruments of macroeconomic policy are:
• Fiscal Policy
• Monetary Policy
FISCAL POLICY
Fiscal policy denotes the use of taxes and government expenditures. Government expenditures
come in two distinct forms.
First there are government purchases. These comprise spending on goods and services—
purchases of tanks, construction of roads, salaries for judges, and so forth. In addition, there are
government transfer payments, which increase the incomes of targeted groups such as the
elderly or the unemployed. Government spending determines the relative size of the public and
private sectors, that is, how much of our GDP is consumed collectively rather than privately.
Taxation, affects the overall economy in two ways. By leaving households with more or less
disposable or spendable income, taxes affect the amount people spend on goods and services as
well as the amount of private saving. In addition, taxes affect the prices of goods and factors of
production and thereby affect incentives and behavior.
MONETARY POLICY
• The second major instrument of macroeconomic policy is monetary policy,
which the government conducts through managing the nation’s money,
credit, and banking system.
• Monetary policy, conducted by the central bank, determines short-run interest
rates. It thereby affects credit conditions, including asset prices such as stock
and bond prices and exchange rates. Changes in interest rates, along with
other financial conditions, affect spending in sectors such as business
investment, housing, and foreign trade. Monetary policy has an important
effect on both actual GDP and potential GDP.
INTERNATIONAL LINKAGES
• The international economy is an intricate web of trading and financial connections among
countries. When the international economic system runs smoothly, it contributes to rapid
economic growth; when trading systems break down, production and incomes suffer
throughout the world. Countries therefore consider the impacts of trade policies and
international financial policies on their domestic objectives of high output, high employment,
and price stability.
• Trade policies consist of tariffs, quotas, and other regulations that restrict or encourage imports
and exports.
• A second set of policies is international financial management . A country’s international trade
is influenced by its foreign exchange rate, which represents the price of its own currency in
terms of the currencies of other nations.
AGGREGATE SUPPLY AND DEMAND
• Aggregate supply refers to the total quantity of goods and services that the
nation’s businesses willingly produce and sell in a given period. Aggregate
supply (often written AS ) depends upon the price level, the productive
capacity of the economy, and the level of costs.
• Aggregate demand refers to the total amount that different sectors in the
economy willingly spend in a given period. Aggregate demand (often written
AD ) equals total spending on goods and services. It depends on the level of
prices, as well as on monetary policy, fiscal policy, and other factors.
AGGREGATE DEMAND AND AGGREGATE SUPPLY CURVES
MACROECONOMIC EQUILIBRIUM

A macroeconomic
equilibrium is a combination
of overall price and quantity at
which all buyers and sellers are
satisfied with their overall
purchases, sales, and prices.