Fundamentals of Macroeconomics
In this lesson, you’re expected to learn:
– how macroeconomics is related to microeconomics
– the major components and concerns of the macroeconomy
– the aggregate demand and supply model
What is Macroeconomics?
Macroeconomics describes and explains economic processes that concern aggregates, i.e. it is concerned with the condition of the economy taken as a whole.
In particular, macroeconomics is concerned with the price level and output of the entire economy, and with the total income of all the factors of production in the economy.
Relation to Microeconomics
Of course, the entire economy consists of the aggregate of all the individual outputs and inputs which are dealt with in microeconomics, and therefore there are close connections between macroeconomics and microeconomics.
However, somewhat different perspectives and methods are required to view matters at the level of the entire economy than when considering individual products and inputs that make up the economy.
Macroeconomic events and performance arise from many microeconomic transactions, so macroeconomics uses many of the tools of microeconomics.
Why Study Macroeconomics?
The whole is more complex than the sum of independent parts. It is not possible to describe an economy by forming models for all firms and persons and all their cross-effects.
• The macroeconomy affects society’s well-being.
• The macroeconomy affects your well-being.
• The macroeconomy affects politics.
These are some of the questions that can be answered:
• Why does the cost of living keep rising?
• Why are millions of people unemployed, even when the economy is booming?
• What causes business cycles?
• What is responsible for long-run economic growth?
• Should the exchange rate of a currency be kept at a fixed level?
• Can one decrease unemployment, if one accepts an increase in inflation?
Three of the major concerns of macroeconomics are:
• Output Growth
Enlarged version: http://bit.ly/2lY692p
Households, firms, the government, and the rest of the world all interact in three different market arenas:
1) Goods & Services Market
2) Labor Market
3) Money (Financial) Market
Households and the government purchase goods and services (demand) from firms in the goods-and-services market, and firms supply to this market.
• In the labor 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.
• In the money market—also 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.
• Aggregate Supply is the total supply of goods and services in an economy.
Aggregate Demand (AD) is a similar concept, but has some important distinctions.
AD is the demand for all final domestic production in a country. Instead of just households, AD comes from all sectors of the economy. Furthermore, AD relates the price level to the amount of real GDP instead of price to quantity.
Like an individual firm, an economy has a production function that relates the amount of labor employed with the amount of output or real GDP that the economy can produce with some fixed level of capital.
In the short run, the amount of real GDP supplied is directly related to the price level. However, in the long run, the amount of real GDP producers collectively supply is independent of the price level.
• Fiscal Policy
• Monetary Policy
• Growth or Supply-Side Policies
• Monetary Policy consists of tools used by the central bank to control the quantity of money in the economy.
• Growth Policies are government policies that focus on stimulating aggregate supply instead of aggregate demand.
Link to the video: https://www.youtube.com/watch?v=TL95p1m-0Z4