Introduction to

Macroeconomics
Dr. Mukta Mukherjee

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Reading
 1A.1.1. S_N_Chapter19
 1A.1.2. S_N_Chapter20

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Macroeconomics
 Macroeconomics is the study of the economy as a whole

 Central Themes of Macroeconomics

◦ Short-term fluctuations in output, employment, financial conditions and prices –
Business Cycles
◦ Longer term trends in output and living standards – Economic Growth

 Central Questions of Macroeconomics

◦ Short-term
 Why do output and employment sometimes fall, and how can unemployment be
reduced?
 What are sources of price inflation and how can prices be kept under control?
◦ Long-term
 How can the nation increase its rate of growth?

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Macroeconomic Objectives
“High level and rapid growth in Output”
 (Popular) Measure of Output:
◦ Gross Domestic Product (GDP) –
the market value of all final goods
and services produced within a
country during a given year
◦ Real GDP versus Nominal GDP
 Nominal GDP: Measured in
actual market prices
 Real GDP: Measured in constant
or invariant or base year prices
 Potential GDP:
◦ Maximum sustainable level of
output that can be produced without
fueling inflationary pressures
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Actual and Potential Output

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Macroeconomic Objectives
“High Employment and Low Unemployment”
 Seek high paying jobs without searching and waiting
too long
 Seek job security and good benefits
 Unemployment:
◦ “An individual is unemployed if the individual is seeking a job
at the prevailing market wage but is not able to avail one”

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Macroeconomic Objectives
“Price Stability: Low and Stable Inflation Rates”
 Inflation is a sustained rise in the overall price level.
 Measures of Overall Price Level
◦ Consumer Price Index
◦ Wholesale Price Index
◦ or

 Deflation is the decline in overall price level

 Policymakers desire a gentle rise in overall price level with low levels
of volatility
◦ Price stability is important as a smoothly functioning system requires that prices
accurately convey information about relative scarcity
◦ High inflation as well as deflation impose costs

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Macroeconomic Policy Instruments
 Policy instrument is an economic variable under the control of the
policymaker that can affect one or more macroeconomic
objective/goal
 Policy Instruments
◦ Fiscal Policy:
 Government Expenditure
 Government Purchases
 Transfer Payments
 Government Receipts
 Tax
 Non-Tax
◦ Monetary Policy:

◦ International Trade and Financial Policy:

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Aggregate Demand and Supply
 Aggregate demand refers to the total amount that different
sectors in the economy willingly spend in a given period.

 Aggregate demand is the sum of spending on Consumption

(C), Private Domestic Investment (I), Government
Expenditure (G) and Net Exports (NX), i.e. Exports minus
Imports

 Aggregate supply refers to the total quantity of goods and

services that the nation’s businesses willingly produce and
sell in a given period.

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Aggregate Demand and Supply

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Aggregate Demand and Supply

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Aggregate Demand and Supply:
Application: War Time Boom

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Aggregate Demand and Supply:
Application: Supply Shock
 What will happen to equilibrium Output and Price
Level if Supply of Oil is Cut? (Oil is a key input in
production process)

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