Macroeconomic 1

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Prepared by: Fernando Quijano

and Yvonn Quijano

© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair

Introduction to

Macroeconomics



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© 2004 Prentice Hall Business Publishing Principles of Economics, 7/e Karl Case, Ray Fair 2 of 31

Introduction to Macroeconomic

• Is study of the aggregate behaviour

of the economy as a whole

• In short deals with the major economic issues problems & policies

of present time

• Problem such as growth of output &employment, national income, rates

of inflation, balance of payment,

trade cycle etc.



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Difference between Macro & Micro economics

• Microeconomics examines the behavior

of individual decision-making units—

business firms and households.

• Macroeconomics deals with the economy

as a whole; it examines the behavior of

economic aggregates such as aggregate

income, consumption, investment, and the

overall level of prices.• Aggregate behavior refers to the behavior of

all households and firms together.



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• Microeconomists generally conclude

that markets work well.

Macroeconomists, however, observe

that some important prices often

seem “sticky.”

• Stick y pr ices are prices that do not

always adjust rapidly to maintain theequality between quantity supplied

and quantity demanded.



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• Macroeconomists often reflect on the

microeconomic principles underlying

macroeconomic analysis, or the

m icroeconom ic foundat ions of

macroeconomics .



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Macroeconomic Concerns

• Three of the major concerns of

macroeconomics are:

• Inflation

• Output growth

• Unemployment



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Inflation and Deflation

• Inf lation is an increase in the overall price

level.

•Hyperinf lat ion

is a period of very rapidincreases in the overall price level.

Hyperinflations are rare, but have been

used to study the costs and consequences

of even moderate inflation.

• Deflation is a decrease in the overall price

level. Prolonged periods of deflation can be

just as damaging for the economy as

sustained inflation.



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Output Growth:

Short Run and Long Run

• The business cyc le is the cycle of

short-term ups and downs in the

economy.

• The main measure of how an

economy is doing is aggregate

output:

• Aggregate ou tput is the total quantity

of goods and services produced in an

economy in a given period.



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Output Growth:

Short Run and Long Run

• A recession is a period during which

aggregate output declines. Two

consecutive quarters of decrease in output

signal a recession.

• A prolonged and deep recession becomes

a depression .

• Policy makers attempt not only to smoothfluctuations in output during a business

cycle but also to increase the growth rate

of output in the long-run.



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Unemployment

• The unemploym ent rate is thepercentage of the labor force that isunemployed.

• The unemployment rate is a keyindicator of the economy’s health.

• The existence of unemploymentseems to imply that the aggregatelabor market is not in equilibrium.Why do labor markets not clear when other markets do?



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Government in the Macroeconomy

• There are three kinds of policy

that the government has used to

influence the macroeconomy:

1. Fiscal policy

2. Monetary policy

3. Growth or supply-side policies



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Government in the Macroeconomy

• Fiscal po l icy refers to government policies

concerning taxes and spending.

• Monetary po l icy consists of tools used by

the Federal Reserve to control the quantity

of money in the economy.

• Grow th pol ic ies are government policies

that focus on stimulating aggregate supplyinstead of aggregate demand.



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The Components of

the Macroeconomy

• The circu lar f low

diagram shows the

income received andpayments made by

each sector of the

economy.



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The Components of

the Macroeconomy

• Everyone’s

expenditure is

someone else’s

receipt. Every

transaction musthave two sides.



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The Three Market Areas

• Households, firms, the government,

and the rest of the world all interact

in three different market areas:

1. Goods-and-services market

2. Labor market

3. Money (financial) market



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The Three Market Areas

• Households and the government purchase

goods and services (demand ) from firms in

the goods-and serv ices market , and

firms supply to the goods and servicesmarket.

• In the labo r market , firms and government

purchase (demand) labor from households

(supply).

• The total supply of labor in the economy

depends on the sum of decisions made by

households.



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The Three Market Arenas

• In the money market —sometimes called

the financial market —households purchase

stocks and bonds from firms.

• Households supply funds to this market in the

expectation of earning income, and also demand

(borrow) funds from this market.

• Firms, government, and the rest of the world

also engage in borrowing and lending,coordinated by financial institutions.



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Financial Instruments

• Treasury bonds, no tes, and bi l ls

are promissory notes issued by the

federal government when it borrows

money.

• Corpo rate bonds are promissory

notes issued by corporations when

they borrow money.



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Financial Instruments

• Shares of s tock are financial

instruments that give to the holder a

share in the firm’s ownership and

therefore the right to share in the

firm’s profits.

• Div idends are the portion of a

corporation’s profits that the firm paysout each period to its shareholders.



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The Methodology of Macroeconomics

• Connections to microeconomics:

• Macroeconomic behavior is the

sum of all the microeconomicdecisions made by individual

households and firms. We cannot

understand the former without

some knowledge of the factors

that influence the latter.



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Aggregate Supply and

Aggregate Demand

• Aggregate demand is the

total demand for goods and

services in an economy.

• Aggregate supply is the

total supply of goods and

services in an economy.

• Aggregate supply and

demand curves are more

complex than simple

market supply and demand

curves.



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Expansion and Contraction:

The Business Cycle

• An expansion , or boom , is

the period in the business

cycle from a trough up to a

peak, during which outputand employment rise.

• A contract ion , recession ,

or slump is the period in

the business cycle from apeak down to a trough,

during which output and

employment fall.



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Nature & Scope of Macro-Economics

• Rates of Growth-

• Steadily rising incomes in period of high

rates of growth increase demand for various goods, but the rise in the

demand for consumer durables is most

notable. This naturally induces business

activity

• Inflation-

• Defined as a persistent & appreciable

rise in general level of prices.



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• Rates of Saving & investment-

• Determines country’s business potential

• High investment rate is sustained by anequally high domestic savings rate.

• Sometimes foreign capital is obtained in

large amount to boost up investment

rate & it is hoped & it would accelerate

both economic growth & business

activity.



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• Fiscal Imbalances-

• Balance of Payment deficits-

• Excessive current account deficit in a

country’s balance of payment is not

desirable for business activity. Such a

situation leads to a shortage of foreign

exchange which in turn forcesrestrictions on imports. This may have

serious implications for the efficiency in

production.



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Review Terms and Concepts

aggregate behavior

aggregate demand

aggregate output

aggregate supply

business cycle

circular flow

contraction, recession, or slump

corporate bonds

deflation

depression

microeconomics

monetary policy

recession

shares of stock

sticky prices

supply-side policies

transfer payments

Treasury bonds, notes,bills

unemployment rate

dividends

expansion or boom

fine tuning

fiscal policy

Great Depression

hyperinflation

inflation

macroeconomics

microeconomicfoundations of macroeconomics

Macroeconomic 1

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