Name : Jybell Anne Po Date Submitted: Score:

Student No: 2018-11328 March 12, 2021

Activity 1.1 Birth of Macroeconomics

1. From the reference(s) on the Great Depression, write your own narrative on how it paved the
way for Macroeconomics to exist by answering the following questions:

a. What were the significant economic observations (in chronological order) during the
severe economic downturn?

The recognition of Microeconomics as a distinct branch of economics happened during the

1930’s severe economic downturn, the Great Depression. After the WWI, countries started to
recover and economy began to prosper, the Roaring Twenties period. There were new inventions
and mass consumerism; due to the fact the people earn more salary. Eventually, people opted to
invest their wealth on stocks to earn resulting to rapid growth in stock market until 1929. By then,
consumer spending decreased, production slowed down, consumer debt and unemployment
increased. However, stock price continued to increase until the stock market reached its peak and
then the crash occurred. With all the massive selling, the market was not able to keep up. By 1930,
the economy worsened and there was agricultural recession due to Dust Bowl. In 1933, the lowest
point of Great Depression, over 15 million Americans were unemployed, interest rate increased and
almost half of American’s banks had closed. When Franklin D. Roosevelt took the presidential seat,
he acted immediately on reforming the financial system by creating Federal Deposit Insurance
Corporation (FDIC) and The Securities and Exchange Commission (SEC). The administration also
passed legislation that created employment, facilitated the economic recovery and stabilized the
industrial and agricultural sector. It was during WWII that America started to recover as business
reopened and more jobs were created [ CITATION His21 \l 1033 ].

b. How are these different from the “known” macroeconomic thoughts during that time?

The macroeconomic schools of thought present during the time of the great depression are
classical and Keynesian economics. Classical economics focused on the long-run and on the forces
that determine and produce growth in an economy’s potential output. It emphasized the ability of
flexible prices and wages to maintain the economy at or close to its natural level of employment.
Classical economists viewed the great depression as a short-run aberration. There could be
temporary periods in which employment would fall below the natural level but the economy would
right itself, in the long run, returning to its potential output and the natural level of employment
(Rittenberg & Tregarthen, 2009).

Meanwhile, Keynesian economics focuses on changes in aggregate demand and their ability to
create inflationary or recessionary gaps. It argued that the “temporary effects” could persist for a
long time, and at a terrible cost. The sticky prices and wages would make it difficult for the
economy to adjust to its potential output. For Keynesian economists, inflationary or recessionary
gaps can persist for long periods so they urge the use of fiscal and monetary policy to shift the
aggregate demand curve and to close these gaps (Rittenberg & Tregarthen, 2009).
Name : Jybell Anne Po Date Submitted: Score:
Student No: 2018-11328 March 12, 2021

Activity 1.2 Issues and Goals and Policy Instruments

1. How knowledge in macroeconomics can aid you in making better/informed choices?

Microeconomics is a branch of economics that studies the economic behaviors of individuals,

households, and companies. Macroeconomics, on the other hand, studies the behavior of a country
and how its policies impact the economy as a whole. Hence, if we tackle individual decision it’s
much easier to identify its impact when we look at in the perspective of microeconomics than
macroeconomics.

For one, prices of goods and services are highly observed in the household. The price changes
will influence the buying behavior, decision, and pattern of an individual. Wherein, the price
changes, as well as the quality, will determine whether it would be worth it for an individual to
purchase certain goods and/or services. Furthermore, macroeconomics personally influences my
career decision. As a student who doesn’t have a fixed profession in mind, I am keen on choosing a
career that would be profitable but at the same time flexible enough for me. Given these criteria, I
chose management because it satisfies all aspects I’m looking for a job.

2. Explain how the following is a major concern of macroeconomics:

a. Foreign currencies and remittances

Remittances are funds transferred from migrants’ private savings to their home country
(Radcliffe, 2019). Remittances have a visible macroeconomic impact on the economy. The inflows
link to higher prices which put added dependence on imports, instead of increasing the efficiency of
the export sector (World Bank, 2009).

According to Frankel and Jeffrey (2011), remittances are a more stable source of foreign
currency than FDI, FPI, and foreign aid. The inflow improves macroeconomic stability and helps in
reducing output volatility (Chami, Hakura and Montiel, 2011). However, the large inflows can also
cause the domestic currency or exchange rates to appreciate which we coined as Dutch disease and
negatively affects international competitiveness (Acosta et al., 2009).

b. Transfers and net investment income

In economics, net investment is utilized as a component to measure a region’s gross domestic

product (GDP). It includes domestic private investment established by companies and governments
and is the main indicator of overall economic growth (Picardo, 2020). Net investment income (NII)
is revenue acquired from investment assets (Chen, 2020). It reflects various factors such as the
country’s net international investment position (NIIP) as a creditor or debtor nation, the
composition of its external assets and liabilities, and their returns (Joyce, 2019). Forbes et al.
(2017) demonstrated how investment income flows affect a country’s current account. They point
out that a country’s NII will depend in part on the composition of its external assets and liabilities
along with its NIIP.

A transfer payment is a redistribution of income and wealth by means of the government

making a payment, without goods or services being received in return (Bishop, 2012). It is often
introduced or expanded during severe economic downturns or recessions. During economic
recessions, several countries provide direct cash assistance to people as a way to support those in
need and stimulate the economy (Segal, 2020). However many critics would argue that these
payments do not boost production or economic activity. Welfare programs, such as unemployment
benefits and social security, just reduce incentives to take paid work (Evans, 2014).

c. Government expenditure and budget deficits

Government expenditure includes all government consumption, investment, and transfer

payments. When government expenditure exceeds revenue over a particular period this will result
in a budget deficit (Barro & Grilli, 1994).

A change in government expenditure is a major component of fiscal policy used to stabilize the
macroeconomic business cycle. According to different macroeconomic schools of thought,
government expenditure and deficit budget affect macroeconomics in several ways. Keynesian
economics advocates deficit spending of the government as part of the fiscal policy response to an
economic contraction. It implicates that the rise in government spending increases aggregate
demand and consumption which results in increased production and faster recovery from
recessions. Classical economists, on the other hand, believe that a rise in government spending
exacerbates an economic contraction. The shifting of resources from the private sector is
considered productive while a shift to the public sector is considered unproductive (Irvin, 2012).

d. Savings and interest rates

Households manage their post-tax income either by spending or saving. Saving is a withdrawal
from the circular flow of income and it has a pivotal role in determining changes in national income
over time. Given that interest rates provide a reward for saving, an increase in interest rates will
provide an incentive to save. However, when mortgage rates increase, households may be coerced
to raise their monthly repayments, and this will leave homeowners less amount of income available
for saving (EconomicsOnline, N.D.).

On a larger scale, savings is the totality of the nation’s public and private savings. Growth
theories link that savings are a vital key to finance investment which would improve a nation's
productivity (El-Seoud, 2014). The economy’s interest rates directly affect economic growth. A low-
interest rate improves the government and public institutions financing capacity. Meanwhile, when
the central bank decides to increase interest rates, it intends to contain inflation and stabilize prices
(Marcos, 2019).
Name : Jybell Anne Po Date Submitted:
Student No: 2018-11328 March 12, 2021

Learning Log 1 Introduction to Macroeconomics

I used to think that macroeconomics is more complicated than microeconomics because it

studies the whole economy unlike the latter that studies firms, individuals, and the government. I
also think that I would have a hard time understanding the topic because I’m not inclined in
economics, politics, and the stock market and I,m quite unfamiliar with the terms used in these
specific fields.

Now I know that my gut feeling is right. The given books or articles are quite difficult to
understand because of the economic terms used. But somehow I get the idea from reading it again
and again and searching for other articles related to macroeconomics.

However, I am not sure if others have the same hardship, or is it just me? I’m honestly
quite disappointed that the policy instruments are not detailed enough or there is no specified
source for it. I have to thoroughly search for the said topic especially the questions in the activity.

I plan to survive this subject unscathed and I hope that the topics would help me easily
comprehend the economy and as well as the stock market. I wish that this subject would help me
enjoy reading political and economic articles but I think it’s just wishful thinking. I should be the
one to encourage myself to engage in such subjects, not the other way around.

Overall, I feel quite overloaded. I think that I didn’t comprehend the ideas behind the topic
especially the different fields in macroeconomics because I didn’t delve into it.

Finally, think of a song that best describes your level of learning in this topic:

I Will Survive!
 References

Acosta, P., L. E., & Mandelman, F. (2009). Remittances and the Dutch disease. Journal of
international economics, 102-116.

Barro, R., & Grilli, V. (1994). European Macroeconomics. Macmillan.

Bishop, M. (2012). Economics A–Z terms beginning with T –transfer. The Economist.

Chen, J. (2020, July 20). Net Investment Income (NII). Retrieved from Investopedia:
https://www.investopedia.com/terms/n/netinvestmentincome.asp

Chowdhury, M., & Rabbi, F. (2014). Workers' remittances and Dutch Disease in Bangladesh. The
Journal of International Trade & Economic Development, 455-475.

EconomicsOnline. (N.D.). Savings. Retrieved from Economics Online.

El-Seoud, M. S. (2014). THE EFFECT OF INTEREST RATE, INFLATION RATE AND GDP ON
NATIONAL. Global Journal of Commerce and Management Perspective, 3, 1-7.

Evans, K. M. (2014). Transfer Payments. Encyclopedia of Business and Finance.

Frankel, J. (2011). Are bilateral remittances countercyclical? Open Economies Review, 1-16.

History.com. (2021, March 12). Great Depression History. Retrieved from History:
https://www.history.com/topics/great-depression/great-depression-history?
fbclid=IwAR0qwpw9hLyxF9AtjyiOBxRfk0_iKL_qzHFAgHs0v4R-FZxMyln8JDyAz-4

Irvin, T. (2012). Macroeconomics for Today (8th edition ed.). Mason, OH: Cengage Learning.

Joyce, J. (2019). The Sources of International Investment Income inEmerging Market Economies.
Forthcoming in the Review of International Economic.

Marcos, A. (2019, September 30). How do interest rate cuts impact the economy? Retrieved from
BBVA: https://www.bbva.com/en/how-do-interest-rate-cuts-impact-the-economy/

Picardo, E. (2020, October 20). The Importance of GDP. Retrieved from Investopedia:
https://www.investopedia.com/articles/investing/121213/gdp-and-its-importance.asp

Radcliffe, B. (2019, June 25). Introduction To Remittances. Retrieved from Investopedia:

https://www.investopedia.com/articles/economics/10/introduction-
remittances.asp#:~:text=Remittances%20are%20funds%20transferred%20from
%20migrants%20to%20their,other%20expenditures,%20and%20which%20drive%20the
%20home%20economy.

Rittenberg, L., & Tregarthen, T. (2009). Macroeconomics Principles. North America: Flat World
Knowledge, Inc. . Retrieved from 2012books.lardbucket.org.
Segal, T. (2020, November 25). What Is a Transfer Payment? Retrieved from Investopedia:
https://www.investopedia.com/terms/t/transferpayment.asp