Macro Economics

Chanderprabhu Jain College of Higher Studies & School of Law
Plot No. OCF, Sector A-8, Narela, New Delhi – 110040
(Affiliated to Guru Gobind Singh Indraprastha University and Approved by Govt of NCT of Delhi & Bar Council of India)
Semester: BCOM Second Semester
Name of the Subject:
Macro Economics
Unit-1

Definition of Macro Economics
Macroeconomics is the branch of economics
that studies the behavior and performance of
an economy as a whole. It focuses on the
aggregate changes in the economy such as
unemployment, growth rate, gross domestic
product and inflation.

Importance of Macro Economics
• It helps us understand the functioning of a complicated modern economic system.
It describes how the economy as a whole functions and how the level of national
income and employment is determined on the basis of aggregate demand and
aggregate supply.
• It helps to achieve the goal of economic growth, a higher GDP level, and higher
level of employment.
• It helps to bring stability in price level and analyses fluctuations in business
activities. It suggests policy measures to control inflation and deflation.
• It explains factors which determine balance of payments. At the same time, it
identifies causes of deficit in balance of payments and suggests remedial
measures.
• It helps to solve economic problems like poverty, unemployment, inflation,
deflation etc., whose solution is possible at macro level.
• With a detailed knowledge of the functioning of an economy at macro level, it has
been possible to formulate correct economic policies and also coordinate
international economic policies.

Limitations of Macro Economics
• Excessive Generalization
• Excessive Thinking in terms of Aggregates
• Differences within Aggregates
• Aggregates must be functionally related
• Limited Application

Circular Flow of Income in Two Sectors
without Saving and Investment

Leakages and Injection
• Injections: The three injections -- investment,
government purchases, and exports. They "inject"
revenue into the product markets that is used for
factor payments and becomes household income.
• Leakages: The three leakages -- saving, taxes, and
imports. They "leak" income away from the product
markets, making less available for factor payments
and household income.

National Income
• In the words of Pigou, “National income is that part
of objective income of the community, including of
course income derived from abroad which can be
measured in money.”
• Three methods of calculating GDP yield the same
result because National Product = National Income =
National Expenditure
– The Product Method
– The Income Method
– Expenditure Method

Precautions in Estimation of
National Income
• Non Monetary Transactions
• The Underground Economy
• Transfer Payments
• Capital Gains or Loss
• Illiteracy and Ignorance

Macro Economics
Unit-2

Classical Theory of Full
Employment and Income
According to the classical economists, the economy
normally operates at the level of full employment
without inflation in the long period. They assumed
that wages and prices of goods were flexible and the
competitive market existed in the economy (laisse-
fair economy). The classical model, however, did not
rule out the existence of over production and hence
temporary unemployment in the economy

Principles of Classical Theory of
Employment:
The classical theory of employment is based on the
following principles:
(1) Say's Law of Market.
(2) Equilibrium in the Labor Market.
(3) Classical Analysis of Price and Inflation.

Keynes Theory of Full Employment
and Income
The Keynes theory of employment was based on the
view of the short run. In the short run, he assumed
that the factors of production, such as capital goods,
supply of labor, technology, and efficiency of labor,
remain unchanged while determining the level of
employment. Therefore, according to Keynes, level of
employment is dependent on national income and
output.

Consumption function
Consumption function shows the relationship between consumption and
income.It depicts that the demand for consumption goods is not constant but
rather increases with income.
Consumption function is the relation between income and consumption.
• Initially when income is zero there is some amount of consumption.
• When income starts rising initially consumption is greater than income but
a point comes when income is equal to consumption.
• Again income increases and this time income is more than consumption
and the portion of income which consumer doesn't consumes goes to
savings.

Investment Function
In ordinary parlance, investment means to buy
shares, stocks, bonds and securities which
already exist in stock market. But this is not
real investment because it is simply a transfer
of existing assets.

National Income Determination
• Two Sector Model
• Three Sector Model
• Four Sector Model

Multiplier
• The multiplier effect refers to the increase in
final income arising from any new injection of
spending.
• The size of the multiplier depends upon
household’s marginal decisions to spend,
called the marginal propensity to consume or
to save , and called the marginal propensity to
save.

Macro Economics
Unit-3

Definition of Money
Money is an officially issued legal tender that
typically consists of notes and coins. Money is
the circulating medium of exchange as defined
by a government. Money is often synonymous
with cash and includes various instruments.
It is something generally accepted as a
medium of exchange, a measure of value, or a
means of payment.

Functions of Money
1. Primary Functions (Main or Basic Functions)
2. Secondary Functions (Subsidiary or Derivative
Functions)

Measures of Money Supply
(i) M1 = C + DD + OD
(ii) M2 = M1 (detailed above) + saving deposits
with Post Office Saving Banks
(ii) M3= M1 + Net Time-deposits of Banks
(iii) M4 = M3 + Total deposits with Post Office
Saving Organization (excluding NSC)

Demand for money
• Classical Demand for money
• Neo Classical Theory
• Keynes Version/ Liquidity Preference Theory
of Demand for Money
• Quantity Theory of Money

Monitory policy
Monitory policy is a policy that influences the economy through changes
in money supply and available credit. Monitory policy is adopted by
central bank of country. The various monitory measures which are used to
control inflation are grouped under heads.
a. Qualitative control.
b. Quantitative control.
There are:
1. Open market operations
2. Variation in bank rates
3. Credit rationing
4. Varying reserve requirements.

Fiscal policy
• Fiscal policy is the deliberate change in either
government pending or taxes to simulate or slow
down the economy. It is the budgetary policy of
government relating to taxes, public expenses, public
borrowing and deficit financing.
• Fiscal policy is based upon demand management
examples, raising or lowering the level of aggregate
demand by controlling various. Expenses,
government expenses, consumption expenses.

Macro Economics
Unit-4

Introduction to IS-LM Model
The IS curve is derived
from goods market
equilibrium. The IS curve
shows the combinations of
levels of income and
interest at which goods
market is in equilibrium,
that is, at which aggregate
demand equals income.

LM Curve

I
LM
• For the liquidity preference and money supply curve, the
independent variable is "income" and the dependent variable
is "the interest rate." The LM curve shows the combinations of
interest rates and levels of real income for which the money
market is in equilibrium. It is an upward-sloping curve
representing the role of finance and money.
• The LM function is the set of equilibrium points between
the liquidity preference (or demand for money) function and
the money supply function (as determined
by banks and central banks).

Equilibrium

Effects of Changes in Monetary and
Fiscal Policy

Expansionary Fiscal
Policy: Reduction in Taxes

Effect of Monetary Policy

Macro Economics

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