CHAPTER 1.

MACROECONOMICS

Q.1 DEFINES MACROECONOMICS. WHAT IS ITS SCOPE?

Answer:
Meaning of macroeconomics:
Macroeconomics studies how the large aggregates such as total employment, national product or
national income of an economy and the general price level are determined. Besides, macroeconomics
explains how the productive capacity and national income of the country increase over time in the long
run.
Scope of Macroeconomics
1. Determination of National Income: The main aim of macroeconomics is to study the variable
factors which determine a country's national output and income. These variables include
consumption, investment, government expenditure and net exports.
2. Economic fluctuations or Business Cycles: The main focus of macroeconomics is to study
the effects of economic fluctuations. A free market economy experience business cycles which
refers to fluctuations in national income and employment with changing periods of prosperity
and recession.
3. Aggregate Demand and Aggregate Supply: The theory of income and employment explains
the determination of equilibrium level of national income. The classical economists believed
that whatever is supplied will always be demanded (Say's Law) i.e., in the long run, the
economy will achieve full employment equilibrium. While modern economist, Keynes
explained that the level of national income and employment is determined by aggregate
demand. Aggregate supply can only be increased in the long run through increased in
production, investment and technology.
4. Employment and Unemployment: Macroeconomics studies the level of and nature of
employment in an economy. During recession, due to lack of aggregate demand, the economy
experiences large scale temporary unemployment. This is also called cyclical unemployment
which is experienced by developed countries. While the developing countries experienced
problem of disguised unemployment and underemployment, during recession.
Macroeconomics studies the causes of unemployment and suggests the policy measures to
improve employment situation.
5. Money and Price Level: Macroeconomics studies the role of money in an economy by
analysing the demand for and supply of money. Related to money is the general price level.
Classical economists believed that general price level is determined by the quantity of money
and price level rises in proportion with money supply. While modern economist, Keynes
explained that it is not quantity of money, but rise in aggregate demand that causes inflation i.e.
increase in the general price level.
6. Economic Growth and Development: The main areas of study of macroeconomics are
economic growth, economic development and structural changes in developing economies.
One of the first models to explain growth theory was the Harrod – Domar model.
7. Balance of Payments and Exchange Rate: Macroeconomics studies the impact of trade on
national income. It explains the factors which determine a country's balance of payments and
 identifies the causes of deficit. It suggests policy measures to correct such deficits. Exchange
rate between different currencies is one of the determinant of balance of payments position of
an economy. The central bank plays a major role in managing exchange rate.

Q2. DEFINE MACROECONOMICS AND EXPLAIN ITS IMPORTANCE.

(Importance of Macroeconomics)
Answer:
MEANING OF MACROECONOMICS:
Macroeconomics studies how the large aggregates such as total employment, national product or
national income of an economy and the general price lvel are determined. Besides, macroeconomics
explains how the productive capacity and national income of the country increase over time in the long
run.

IMPORTANCE OF MACROECONOMICS:
1. Understanding the functioning of an economy: Macroeconomics helps to study the
interaction between different sectors of an economy like, households, firm and government. It
also helps us to understand the different forms of economic system such as capitalism,
socialism and mixed economy.
2. Understanding and evaluating economic performance: The analysis of national and per
capita income are used for evaluating and comparing performance of different countries.
3. Formulating government policies: Macroeconomics theories and models used by government
to formulate their economic and social policies. Fiscal and monetary policies developed by
Keynes has been adopted by most developed countries to deal with the problems like recession,
unemployment and inflation. Development models adopted by developing countries to
formulate long term plans and policies to increase growth and development.
4. Understanding the economic environment of business: Business units are affected by the
macroeconomic environment. Rate of interest, inflation, business cycles, exchange rate,
investment expenditure all have major impact on the performance of business firms.
Understanding of macroeconomics is most important in taking effective business decisions.
5. Forecasting future trends: Macroeconomics help to forecast the future trends in different
economic indicators like interest rate, exchange rate, growth rate, price level, income and
employment levels. Such forecasts are used by government and businesses to formulate
policies.
6. Making political choices: Economics and politics have very strong inter-linkages. In most
cases, people make political choices on the basis of macroeconomic indicators and judge
government performance on the basis of their achievements in areas like employment
generation, control of inflation and welfare generation. One can make a good and wise political
choice if one has an understanding of the functioning of an economy.