This document provides an overview of macroeconomic models. It discusses that macroeconomics analyzes the behavior of the whole economy, including issues like economic growth, recessions, unemployment and inflation. It then summarizes three common macroeconomic models: long-run models focus on long-term economic growth and productivity; medium-term models look at how the economy transitions between the short and long-run; and short-run models analyze output and employment based on fluctuations in demand. The document also explains key aspects of the long-run model in more detail, noting that supply is determined by productive capacity while demand depends on policies and confidence, and their intersection determines price and quantity in the long-run.

1. EC 122: Introductory
Macroeconomics
Macroeconomic Models
June, 2023

2. 1. Introduction
2
⚫Macroeconomics isconcernedwiththebehaviourofthe
economyasawhole
 Macroeconomicsstudies:
⚫Boomsandrecessions
⚫Economy’s total output of goods and services
⚫Growth of output
⚫Rates of inflation and unemployment
⚫Balance of payments and
⚫Exchange rates

3. Introduction..
3
 Macroeconomics analyses economic growth
and fluctuations
⚫Long run economic growth
⚫Short run fluctuations
⚫Business cycles
 Macroeconomics analyses impact of policies
⚫Consumption and investment policies
⚫Changes in wages and prices
⚫Monetary and fiscal policies
⚫Money stock, government budget, interest rates
and national debt
⚫Trade balance

4. Division of macroeconomic issues:
⚫Making understand macroeconomic issues are
reduce to the following essentials
⚫Goods market, labor market, and financial
markets of the economy
⚫Macroeconomics deals with each market as a
whole
 For example
⚫It studies markets for different goods as a
single market
⚫Markets for agricultural products
⚫Markets for medical services
⚫It studies labor market as a whole
4

5. Benefits of Abstraction
⚫Facilitates understandingof interactionsamong goods, labor
and financial markets
 Objective of macroeconomic study
⚫To understand how the macro-economy works
⚫And how to make it perform better
⚫Economists recommendingintervention in the economy
⚫Great macroeconomists had keen interest in macroeconomic
theory and policy
 For instance
⚫John MaynardKeynes
⚫Milton Friedman (University of Chicago)
⚫Franco Modiglianiand Robert Solow (MIT)
⚫James Tobin of Yale University
5

6. Economist skeptical about intervention
⚫N. Gregory Mankiw, Thomas Sargent, Robert Lucas,
Olivier Blanchard
⚫They doubt about the wisdom of active government
policies
 Features of Macroeconomics
⚫Macroeconomics related to economic problems of the
day
⚫Illuminates economic depression
⚫Refers to real word events to explain meaning and
relevance of the theory
6

7. Macroeconomic models
 Macroeconomicsisorganizedinthreemodels
⚫Eachofthesemodelshavedifferenttimeframes
⚫Longrunmodelsstudieslongrunbehaviouroftheeconomy
⚫Mediumtermmodels
⚫Shortrunmodelsstudiesshortrunbehaviouroftheeconomy
 Longrunmodels
⚫Longrunmodeldiscussesgrowththeory
⚫Itfocusesongrowthofproductivecapacity
⚫Inlongrunmodellevelofproductivitydetermines:Output,
fluctuationindemandthatdeterminespricesandinflation
7

8. Medium term models
 Mediumtermmodels
⚫Inmediumtermproductivecapacityisgiven
⚫Itstudieshoweconomygrowsfromshortruntolongrun
 Shortrunmodels
⚫Fluctuationindemanddetermineshowmuchcapacityis
used
⚫Itanalyzeslevelofoutputandemployment
 Justificationofthedivision
⚫Nearly all economists accept these models
⚫There is different opinion in respect of time frame
of models
⚫There is less agreement about time frame for short
and medium term models
8

9. Long run model
⚫Longrun behaviourof the economyis domain of growththeory
⚫It analyses howinvestment in technologyleads to increase living
standards
⚫However,long rungrowthmodel ignorerecessions, boomsand
shortrun fluctuations
⚫It is assumed that labor, capital, raw materials are fully employed
 Supply(Output)in thelong run model
⚫Level ofoutputis determined solely bysupply side
considerations
⚫Supplyof outputis determined byproductivecapacity of the
economy
⚫Price level is determined by level ofdemand
9

10. Supply (Output) in the long run model
⚫Aggregatesupply andaggregatedemand determine
relationship betweenprice andoutput
⚫Supplycurve(AS) gives quantityof outputthe firms are
willing to supplyat a price
⚫Position of the aggregatesupplycurvedependson
productivecapacity of economy
 Demandin the long runmodel
⚫Aggregate demand curve (AD) gives level of output
at which goods markets and money markets are in
equilibrium at a price level
⚫Position of aggregate demand curve depends on
monetary and fiscal policy and the level of consumer
confidence
10

11. Demand in the long run model
⚫Intersectionof aggregatesupplyand demand determines
priceand quantity
⚫In thelongrun growthmodel thesupplycurveis vertical
⚫Supplycan not beincreasedin thelongrun
11

12. END
12