Introduction to Macroeconomics

Difference between Microeconomics and Macroeconomics:

 Microeconomics: study the economic units (consumers and producers).
 Macroeconomics: study the economy as a whole. Topics like inflation, deflation,
economic growth, unemployment.

Aims of Macroeconomics:
1. Economic growth: increase in the aggregate output.
2. Unemployment
3. Inflation.

Role of the Government (Policymakers):

1. Increase the rates of economic growth
2. Decrease the level of unemployment
3. Decrease the level of inflation (the price levels).

Sectors of the economy:

1. Households sectors: consists of all consumers, families, persons in the economy.
 Households own the factors of production which are:
 Land  Rent
 Capital  Interest
 Labor  Wages and Salaries
 Entrepreneur  Profits
The sum of these incomes (Rent, Interest, Wages, and Profits) is the Aggregate
income or Total income.
 Households supply factors of production, and demand goods and services.
2. Firms (producers): use the factors of production obtained from households to
produce and sell goods and services.
 Producers supply goods and services, and demand factors of production.
3. Government:
 Impose and collect taxes from households and firms
 Provide goods and service to households and firms
 Provide subsidies to firms
 Provide transfer payments to households.
4. The rest of world (Foreign Sector):
 Provide foreign goods and services (Imports)
 Get domestic goods and services, and factors (exports)
 Capital flow

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Circular Flow Diagram:
 It is called circular because it has no beginning and no ending.
 Circular flow diagram can be:
 Simple (only households and firms)
 Closed economy (only households, firms, and government)
 Open economy (all four sectors – households, firms, government, and foreign).
 In the simple circular flow diagram there are 2 types of flows:
 Real flow: refers to the flow of goods and services, and services of factors of
production. (2 arrows)
 Money flow: refers to the flow of dollars as an expenditure of households to
firms (value of goods and service), and as an income to households from firms
(value of factors of production). (2 arrows).
 Note that: in simple circular flow diagram, income is equal to expenditure. So,
there is no Savings. (Not Real)

Difference between Flow and Stock:

 Stock: measured at a point of time.
 Flow: measured during a period of time.

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 Chapter (1) Questions
Essay Questions:
1. With examples, what is the difference between Microeconomics and Macroeconomics?
2. What are the aims of Macroeconomics?
3. What are the roles of policymakers?
4. What are the sectors of the economy?
5. List the factors of production and the income of each factor.
6. Using appropriate graph, show the simple circular flow diagram.
7. Using appropriate graph, show the circular flow diagram for closed economy.
8. Using appropriate graph, show the four-sector circular flow diagram.
9. What are the flows in the simple circular flow diagram?
10. What is the difference between flow and stock? Give an example of each.

Complete Questions:
1. ……………………. studies the economic units.
2. …………………….. studies the economy as a whole.
3. Demand for beverages is …………………. topic while inflation is …………………. topic.
4. …………………… is the increase in the output.
5. The roles of the government is to ……………….. economic growth, ………………….. level of
unemployment, and …………………….. price levels.
6. There are ………………… sectors in the economy.
7. …………………… own the factors of production.
8. Factors of production are ……………., …………………., …………………, and ………………….
9. The income that households get from supplying land is ……………………
10. The income that households get from supplying …………………. is profit.
11. The sum of wages, interest, rent, and profit is ………………………
12. Households .................... factors of production, and …………………….. goods and services.
13. Firms .................... factors of production, and …………………….. goods and services.
14. The government impose taxes on ……………….
15. The government provide transfer payments to ………………………
16. Simple circular flow diagram has sectors of ………………………..
17. Circular flow diagram for open economy has sectors of ……………………………….
18. ………………….. flow refers to the flow of goods and services, and services of factors of
production.
19. In simple circular flow diagram, income is ………………… expenditure.
20. …………. is measured at a point of time while …….. is measured during a period of time
# Answer # Answer
1 Microeconomics 11 Total Income
2 Macroeconomics 12 Supply - Demand
3 Microeconomics - Macroeconomics 13 Demand - Supply
4 Economic Growth 14 Households and Firms
5 Increase - Decrease - Decrease 15 Households
6 Four 16 Households and Firms
7 Households 17 Households, Firms, Government, and
Rest of world
8 Land - Labor - Capital - Entrepreneur 18 Real
9 Rent 19 Equal to
10 Entrepreneur 20 Stock - Flow

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True and False Questions:
1. Aggregate demand is a microeconomic topic
2. Macroeconomics studies the economic units.
3. The government aims to eliminate inflation.
4. The income that the households get from supplying capital is profits.
5. Firms own factors of production.
6. Producers demand goods and services, and supply factors of production.
7. Government impose and collect taxes only from firms.
8. Government provide transfer payments to firms.
9. Firms are the only exporter and households are the only importers.
10. Circular flow diagram has a determined beginning but has no ending.
11. Circular flow diagram for closed economy has only households and firms sectors.
12. Money flow refers to the flow of dollars as an expenditure of households to firms (value
of factors of production), and as an income to households from firms (value of goods and
services).
13. In simple circular flow diagram, there is few savings.
14. Business sector supply manpower to the foreign sector.
15. Money is a flow while income is a stock.
16. Microeconomics study the economic variables of an economy in aggregated behavior
17. Macroeconomics study the structure of economy and how the government policies will
affect the performance of economy.
18. Macroeconomics study the behavior of the entire economy and the economic aggregate
like household income.
19. Microeconomics is concerned with inflation or deflation, output growth and
unemployment
20. Microeconomics is concerned with the market price and equilibrium quantity of each good
or service
21. Microeconomic behavior is the sum of all the microeconomic decisions made by individual
households and firms.
22. The interaction between different sectors in macroeconomic could be represented by the
circular flow diagram.
23. Circular flow shows the short term ups and downs in the economy.
24. In the circular flow diagram everyone's expenditure is someone else's cost.
25. A transfer payment is the revenue one receives when filing for a tax refund.
26. Transfer payments, is cash payments made by the government to people who don’t
supply goods and services in exchange.
27. “Two-sector” Circular flow diagram is also known as simple circular flow diagram
28. Households is paid for supplying factors of production
29. Direct and indirect tax is paid by households to government
30. Simple circular flow diagram is realistic

# Ans. # Ans. # Ans. # Ans. # Ans.

1 F 7 F 13 F 19 F 25 F
2 F 8 F 14 F 20 T 26 T
3 F 9 F 15 F 21 F 27 T
4 F 10 F 16 f 22 T 28 T
5 F 11 F 17 T 23 F 29 F
6 F 12 F 18 T 24 F 30 F

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Multiple Choice Questions:
1. ……………………. Studies the consumers and producers.
a. Microeconomics
b. Macroeconomics
c. International economics
d. None of the above
2. …………………….. studies inflation and unemployment.
a. Microeconomics
b. Macroeconomics
c. International economics
d. None of the above
3. Which of the following is studied in microeconomics?
a. Recession
b. Total output
c. Supply of shoes
d. All of the above
4. Which of the following is studied in macroeconomics?
a. Costs of producers
b. Consumer behavior
c. Exchange rates
d. All of the above
5. Government aims to ……………… inflation rate
a. Increase
b. Decrease
c. Eliminate
d. None of the above
6. ………………. own factors of production
a. Households
b. Firms
c. Government
d. None of the above
7. The return for working as a labor is
a. Interest
b. Salary
c. Profit
d. All of the above
8. ……………………. supply goods and services, and demand factors of production.
a. Households
b. Firms
c. Government
d. None of the above
9. Government provide subsidies to
a. Households
b. Firms
c. Government
d. None of the above
10. ………………… flow refers to the flow of dollars between households and firms.
a. Real
b. Money
c. Hypothetical
d. None of the above

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11. Microeconomics deals with:
a. The working of the entire economy or large sectors of it
b. Economic growth
c. Individual decision makers in the economy
d. Gross domestic product
12. Which of the following is not a microeconomics issue:
a. How a rise in price of sugar affect the market of sodas.
b. How federal government budget deficit affects interest rates.
c. What determines the amount a firm will produce.
d. The cause of a decline in the price of peanut butter.
13. Macroeconomics
a. Studies the behavior of individual consumers, firms and markets.
b. Involves the interaction between different countries in specific markets.
c. Studies the behavior of the economy as a whole.
d. Deals with both individual decisions and the sum of those individual decisions.
14. Macroeconomics is best described as the study of
a. The relationship between inflation and wage inequality.
b. Very large issues.
c. The choices made by individual households, firms, and governments.
d. The nation's economy as a whole.
15. Microeconomics is concerned with
a. Price level stability
b. Economic growth
c. Unemployment.
d. Individual prices.
16. The income received and payments made by each sector of the economy are represented
by a(n)
a. Aggregate demand-aggregate supply diagram.
b. Income-production diagram.
c. Income flow diagram.
d. Circular flow diagram.
17. In the circular flow diagram, the different payments made by ________ to
________ include wages, rent and profits.
a. Households; firms
b. Firms; the government.
c. The government; households
d. Firms; households
18. In the circular flow diagram, ________ demand labor and ________ demand goods
and services.
a. Firms; firms
b. Households; firms
c. Firms; households
d. Households; households
19. In the circular flow diagram, households ______ goods and services and ______
labor.
a. Demand; demand
b. Supply; demand
c. Demand; supply
d. Supply; supply
20. Welfare payments are an example of
a. A tax.
b. Wages.
c. Transfer payments.
d. Interest payments.

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21. A cash payment made by the government to people who do not supply goods, services or
labor in exchange for the payment is a(n)
a. Budget deficit
b. Transfer payment
c. "in kind" payment
d. Dividend payment
22. In the goods-and-services market, ________ only demand(s).
a. Firms
b. Households
c. The rest of the world
d. The Federal Reserve
23. The suppliers in the goods-and-services market are
a. Households and business firms
b. Households, the government, and the rest of the world.
c. The government and business firms.
d. Business firms and the rest of the world.
24. In which basic market would MP3 players be traded?
a. The labor market
b. The money market
c. The goods and services market
d. The capital market
25. We can use macroeconomic analysis to
a. Understand marginal changes in the macroeconomic
b. Understand why economies grow
c. Learn how to balance a checkbook
d. Study the choices made by households
26. The behavior of all households and firms together is known as
a. Synchronized behavior
b. Aggregate behavior
c. Synergy behavior
d. Conglomerate behavior
27. The major lesson of the circular flow diagram is that total ___ must equal total ____.
a. Wages; income
b. Income; spending
c. Surplus; shortage
d. Spending; saving

# Ans. # Ans. # Ans. # Ans. # Ans.

1 A 7 B 13 C 19 C 25 B
2 B 8 B 14 D 20 C 26 B
3 C 9 B 15 D 21 B 27 B
4 C 10 B 16 D 22 B
5 B 11 C 17 D 23 D
6 A 12 B 18 C 24 C

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