LESSON 1 Macro
MACROECONOMICSLESSON 1
WHAT IS MACROECONOMICS
DR. TULSI JAYAKUMAR
1
LEARNING OBJECTIVES
Introduction
to Macro economics –
Key concepts- Growth, Inflation and unemployment, objectives and instruments/policies Circular Flow of economic activity.
DR. TULSI JAYAKUMAR
2
An Intro to Macro
What
is Macroeconomics
Two central themes of macroA) The short-term fluctuations in output, employment, financial conditions and prices that we call the Business Cycle.
B) The longer term trends in output and living standards known as economic growth
DR. TULSI JAYAKUMAR
3
An Intro to Macro- The story of
Macroeconomics: A Walk Through
Origins
of Economic Theory can be traced to Adam Smith- a proponent of
Laissez faire capitalism.
2 critical assumptions- i) that there is perfect information
And ii) There are a large number of players. These led to a situation where markets clear all the time at a single price.
Thus demand = supply and no possibility of overproduction.
DR. TULSI JAYAKUMAR
4
CLASSICAL
SCHOOL
KEY INSIGHTS
The economy will always be at full employment equilibrium.
So no government intervention required.
Money is only a facilitator of transactions.
Any change in the money supply will simply increase the price level without affecting output.
Hence no role for monetary or fiscal policy.
Supply
creates its own demand in the goods market.
So all that is produced will be demanded.
In the labor market, there is perfect wage flexibility.
So, there would be no situation of either Excess demand or Excess supply of labor. That is no involuntary unemployment.
There is a division between the real and the monetary sector.
The real variables, namely output, employment and real wages determined in the real sector (based on labor productivity and technology), while monetary variables – money wages, prices and nominal interest rates- are determined in the monetary sector.
Examine the Chinese model of growth. Do you see any similarities with
the
WHAT IS MACROECONOMICS
DR. TULSI JAYAKUMAR
1
LEARNING OBJECTIVES
Introduction
to Macro economics –
Key concepts- Growth, Inflation and unemployment, objectives and instruments/policies Circular Flow of economic activity.
DR. TULSI JAYAKUMAR
2
An Intro to Macro
What
is Macroeconomics
Two central themes of macroA) The short-term fluctuations in output, employment, financial conditions and prices that we call the Business Cycle.
B) The longer term trends in output and living standards known as economic growth
DR. TULSI JAYAKUMAR
3
An Intro to Macro- The story of
Macroeconomics: A Walk Through
Origins
of Economic Theory can be traced to Adam Smith- a proponent of
Laissez faire capitalism.
2 critical assumptions- i) that there is perfect information
And ii) There are a large number of players. These led to a situation where markets clear all the time at a single price.
Thus demand = supply and no possibility of overproduction.
DR. TULSI JAYAKUMAR
4
CLASSICAL
SCHOOL
KEY INSIGHTS
The economy will always be at full employment equilibrium.
So no government intervention required.
Money is only a facilitator of transactions.
Any change in the money supply will simply increase the price level without affecting output.
Hence no role for monetary or fiscal policy.
Supply
creates its own demand in the goods market.
So all that is produced will be demanded.
In the labor market, there is perfect wage flexibility.
So, there would be no situation of either Excess demand or Excess supply of labor. That is no involuntary unemployment.
There is a division between the real and the monetary sector.
The real variables, namely output, employment and real wages determined in the real sector (based on labor productivity and technology), while monetary variables – money wages, prices and nominal interest rates- are determined in the monetary sector.
Examine the Chinese model of growth. Do you see any similarities with
the