Macroeconomics<br />Macroeconomics (from Greek prefix "macr(o)-" meaning "large" + "economics") is a branch of economics dealing with the performance, structure, behavior, and decision-making of the entire economy. This includes a national, regional, or global economy.<br />
Macroeconomics - is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income).<br />Macroeconomic models - and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.<br />
Legends of the flows:<br /><ul><li>L - stands for Labor.
S - stands for Savings made available in financial markets for investment.
I - stands for Investment from financial markets.
IM - stands for Import from foreign economies.
X - stands for export to foreign economies.</li></li></ul><li>Tools of Macroeconomics<br />Fiscal Policy - is the use of government expenditure and revenue collection (taxation) to influence the economy. <br />Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. <br />
Monetary theory - provides insight into how to craft optimal monetary policy.<br />Monetary policy - is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.<br />
Aggregate supply – refers to the total quantity of goods and services that the nation’s businesses willingly produce and sell in a given period<br /> p<br />200<br />150<br />100<br />50<br />AS<br /> 200 400 600 800 1000 Ou<br />
Aggregate demand – refers to the total amount that the different sectors in the economy is willingly to spend in the given period <br /> p<br />200<br />150<br />100<br />50<br />DS<br />100 200 300 400 500 Ou<br />
Keynesian Circular-Flow Analysis<br />The notion of a circular flow (of income and expenditures) is developed to illustrate the Keynesian vision of an inherently unstable market economy. Tracking income and expenditures graphically helps to conceptualize the (perverse) market mechanisms that take the economy from an initial state of full-employment into deep depression and back again---and then into an inflationary spiral. In Keynes's judgment, stability and prosperity require pro-active fiscal policy<br />
BUSINESS<br />ORGANIZATIONS<br />EXPENDITURES<br />LABOR <br />AND OTHER<br />FACTOR SERVICES<br />Let the speed of rotation indicate the strength (fast) or weakness (slow) of the economy.<br />GOODS AND<br />SERRVICESs<br />WORKERS<br />FACTOR<br />OWNERS<br />CONSUMERS<br />INCOME<br />
EXPENDITURES, which constitute the left half of the circular flow, is represented on the vertical axis.<br />EXPENDITURES<br />INCOME, which constitutes the right half of the circular flow, is represented on the horizontal axis. <br />E = Y<br />45o<br />INCOME<br />The circular character of the flow suggests an equality of left-half flow and right-half flow---as represented by a forty-five degree line passing through the origin. <br />
Hayekian Means-Ends Analysis<br />In the Hayekian vision, an explicit recognition of the time element in economic activity leads to a means-ends reckoning of production and consumption. The market rate of interest keeps production in line with people's willingness to save and allows for sustainable economic growth. Accordingly, overriding the market rate with a lower, growth-inducing rate steers the economy onto an unsustainable growth path. The unsustainability manifests itself as the boom and bust phases of the business cycle.<br />
C + I <br />EXPENDITURES<br />C = a + bY <br />CONSUMPTION<br />INCOME<br />INVESTMENT<br />Yfe<br />The nature of the Keynesian-styled spiraling associated with recession, depression and inflation becomes more transparent with the production possibility frontier in play. <br />Also, the PPF helps build a bridge from Keynes to Hayek.<br />W<br />S<br />D<br />N<br />
Comparative Macroeconomic Frameworks<br />The circular-flow framework and the means-ends framework are graphically juxtaposed to reveal the essential differences between Keynesian and Hayekian theorizing. For Keynes, saving (which is simply the absence of spending) dampens economic activity generally. For Hayek, saving (which can serve to finance investment) is a prerequisite to economic growth. Replacing Keynes's view of saving with Hayek's allows the whole Keynesian framework to morph into the Hayekian framework.<br />
Keynesian tradition<br />Keynesian economics - is an academic theory heavily influenced by the economist John Maynard Keynes. This school focuses on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy. Early Keynesian macroeconomics was "activist," calling for regular use of policy to stabilize the capitalist economy, while some Keynesians called for the use of incomes policies. Important early proponents included Robert Solow, Paul Samuelson, James Tobin, and Alvin Hansen.<br />
Neo-Keynesians - combined Keynes thought with some neoclassical elements in the neoclassical synthesis. Neo-Keynesianism waned and was replaced by a new generation of models that made up New Keynesian economics, which developed partly in response to new classical economics. New Keynesianism strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.<br />
Post-Keynesian economics - represents a dissent from mainstream Keynesian economics, emphasizing the importance of demand in the long run as well as the short, and the role of uncertainty.<br />
Neoclassical tradition<br />For decades Keynesians and classical economists split into autonomous areas, the former studying macroeconomics and the latter studying microeconomics. In the 1970s new classical macroeconomics challenged Keynesians to ground their macroeconomic theory in microeconomics. The main policy difference in this second stage of macroeconomics is an increased focus on monetary policy, such as interest rates and money supply. This school emerged during the 1970s with the Lucas critique. New classical macroeconomics based on rational expectations, which means that choices are made optimally considering time and uncertainty, and all markets are clearing. New classical macroeconomics is generally based on real business cycle models such as the work of Edward Prescott.<br />
Monetarism -led by Milton Friedman, holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to "crowding out" of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of monetary policy rules, such as keeping the rate of growth of the money supply constant over time.<br />Monetarism - is a tendency in economic thought that emphasizes the role of governments in controlling the amount of money in circulation.<br />