Overview about macro economics

1. The subject of Microeconomics
 Theoretical relationship between prices,
wages, interest
 Theory of the consumer behaviour
 Theory of the firm (costs, prices, structures)
 Monetary theory?

2. The subject of Macroeconomics
 „Index problems” – GDP, CPI,
Unemployment Rate
 Central macro institution; the government
(budget and the central bank)
 Relationship between various policies

3. Examples of macroeconomic problems
 What is the nature of inflation?
 What makes the GDP grow?
 How government spending affects
employment?
 How monetary policy affects the welfare of
citizens?
 Is macroeconomics separate from
microeconomics?

4. Macroeconomics and political
sciences
 Government as a central figure in
macroeconomics
 Also the central figure in political sciences,
ideology and politics
 Connection between those two

5. Positive Macroeconomics vs.
Normative Economic Policies
 Macro describes necessary connections
between the magnitudes
 Example: money printing leads to inflation
 Politics says what should be done.
 Example: we should print more money

6. Macroeconomics and macroeconomic
history
 Theory as set of economic laws describing
how the economy works
 Universal and applicable to different cases
 Macroeconomic history is a study of
particular time and place
 Complementary, but separate

7. Model building
 Models and causality
 Exogenous and endogenous variables
 Simple monetarist model of inflation
 More M leads to more CPI increase. What is
exogenous and endogenous?

8. Macroeconomics and the history of
thought
 The most common story – macroeconomics
started with Keynes’s treatise Theory of
Employment, Interest and Money.
 Before that „classical economics” dominated
and according to it no possible problems
could arise.
 Everything was to be solved by the
movement in prices

9. Macroeconomics and the history of
thought (continued)
 However, many economists did deal with
„macroeconomic problems”
 There were macro theories of macro
movements in aggregates.

10. Business cycle theory as the basic
element in Macroeconomics
 Theory of economic development (long run)
 Theory of economic fluctuations (short run
movements)
 Boom/expansion and bust/recession

11. Keynes’s story of macroeconomic
thought
 The ambition to be Einstein of economics
 Einstein’s division between specific theory
and general theory in physics.
 Keynes’s division between classical theory
(special circumstances) and his theory
(general one)

12. Great Depression of 1929
 Stock market crash
 Banking system collapses and with it the
investment activity
 Radical increase in unemployment rate
 Decrease in the standard of living

13. Supposed assumption of classical
economics
 Mechanism of supply and demand
 Equilibrium model
 Perfect adjustment of all prices to changing
circumstances
 No possibility of unemployment equilibrium

14. Keynes appears
 Sticky prices and wages – lack of
equilibration mechanism
 Reasons for those and „solutions” proposed
by the government

15. Facts about history of
macroeconomics
 Were there any competing theories or
Keynes was the only one to describe reality?
 Competing theories existed
 Example: monetarist theory of money supply,
or Hayek’s theory of cycles
 One of major sources of Keynes’s success:
well-thought marketing and great charisma

16. Different types of policies
 Monetary policy and central banking
 Fiscal policy, taxation and expenditures
 Income and price planning
 Trade policy
 Regulations upon business
 Industrial policy
 Education policy etc.
 Which are the most important ones for macro
models?

17. Different theories of business cycle
 Monetary theories
 Demand theories
 Supply theories
 Monetary versus Real
 Mixtures

18. Circular flow
 Households and firms
 Financial markets, the government, foreign
trade
 „Stocks” and „flows”