OVERVIEW

OF MACROECONOMICS
A. KEY CONCEPTS OF MACROECONOMICS
O The central macroeconomics questions
O Objectives and instruments of macroeconomics
O International linkages
B. AGGREGATE SUPPLY AND DEMAND

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 Microeconomics and
Macroeconomics
O Microeconomics focuses on the individual
parts of the economy.
O How households and firms make decisions and
how they interact in specific markets
O Macroeconomics looks at the economy as a
whole.
O Economy-wide phenomena, including inflation,
unemployment, and economic growth
 The central macroeconomic
questions:
O Why do output and employment sometimes fall,
and how can unemployment be reduced?
O What are the sources of price inflation, and how
can it be kept under control?
O How can a nation increase its rate of economic
growth?

O Trickle down effect

O Income inequality
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 Objectives and instruments of
macroeconomics

Objectives Instruments

Output: Monetary Policy:

High level and rapid growth Controlling the money
of output supply to determine interest
rate
Employment: Fiscal Policy:
High level of employment with Government expenditure,
low involuntary unemployment and taxation
Price - level stability
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 Objectives of Macroeconomics

 Output
 The ultimate objective of macro activity is to provide the goods
and services that population desire.
 The most comprehensive measure of total output in an economy
is the Gross Domestic Product (GDP).
 There are two ways to measure GDP: Nominal GDP and Real
GDP.
 A steady long-term growth in real GDP and the improvement in
living standards is known as economic growth.

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Objectives of Macroeconomics

 High Employment, Low Unemployment

 Employment and unemployment are most directly felt by
individuals.
 Unemployment rate is the percentage of the labor force that
is unemployed
 Labor force includes all employed person and those
unemployed individuals who are seeking jobs.

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Business Cycle
 Objectives of Macroeconomics

 Stable Price
 The most common price measure is the Consumer Price Index
(CPI).
 The CPI measures the cost of a basket of goods (including item
such as food, shelter, clothing, and medical care) bought by
average urban consumer.
 The rate of growth or decline of the price level from one year to
the next is known as the rate of inflation.
 Stable price mean slowly rising prices.
 Zimbabwe Inflation
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Objectives of Macroeconomics
O High level of economic Growth
O Why some countries high but not the others
O North America, West Europe, East Asia

O One of essential factor is Well regulated

private market

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 The Tools of macroeconomic
Policy
 Fiscal Policy, tries to influence target variables
(objectives of macroeconomics) by manipulating
government expenditures and tax rates.
 Government Expenditures
 Government spending on goods and services
 Government transfer payments which boost the incomes of targeted
groups
 Taxation, effects the overall economy in two ways:
 Taxes effect people’s incomes
 Taxes effect the prices of goods and factors of production and
thereby effect incentives and behavior.

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 The Tools of macroeconomic
Policy
tries to influence target variables by
 Monetary Policy,
changing the money supply or interest rates or both.
 Central Bank can influence many financial and economic
variables, such as interest rates, stock prices, housing prices, and
foreign exchange rates by controlling money supply.
 If the central bank is faced with a business downturn, it can
increase the money supply and lower interest rates to stimulate
economic activity.

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 International linkages
O All nations participate in the world economy and are linked together
trough trade and finance.
O As the cost of transportation and communication have declined,
international linkages have become tighter than were a generation
ago.
O As economies become more closely linked, policy makers devote
increasing attention to international economic policy.
O Trade policies: tariffs, quota, and other regulations that restrict or
encourage imports and exports
O International financial management – adopt different systems to
regulate foreign exchange market.

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 AGGREGATE SUPPLY AND DEMAND

 Aggregate Supply (AS)

The total quantity of goods and services that the
nation’s business willingly produce and sell in a
given period.
 Aggregate Demand (AD)
 The total amount that the different sector in the
economy willingly spend in a given period.
 Sum of spending by consumers, business,
government, and foreigner.

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AS and AD Determine the Major
Macroeconomic Variables

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 Macroeconomic Equilibrium

A macroeconomic
equilibrium
is a combination of
overall price and
quantity at which all
buyers and sellers are
satisfied with their
purchases, sales and
prices
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 AD & AS Shocks

AD Shocks
Occur as consumers,
business, or
governments change
total spending relative
to the economy’s
productive capacity

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 AD & AS Shocks
Potential
P Output
AS1

AS Shocks AS

is a sudden change
in input cost or
E1
productivity which P E
shifts AS sharply P*

AD

Q1 Q* Q
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