This set of lecture slides presents the 'Introduction to Macroeconomics' for MSc Economics students, mainly taken from Richard T. Froyen's book of Macroeconomics.

1. Lecture 1
What is Macroeconomics and How
Macroeconomists Think?
Macroeconomic Theory-II (ECON-304)
MSc Economics, 2nd
Dr. Muhammad Ayyoub
Assistant Professor
Department of Economics
University of Sahiwal, Pakistan
June 26, 2020
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2. Overview
1 Learning requisites and outcomes
2 Macroeconomics and its key variables
3 How macroeconomists think?
4 Some basic concepts and definitions
5 Conclusion
6 Tasks for home
7 Readings and references
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3. Learning Outcomes
Some Learning Requisites
Learning Outcome
• The students are expected to learn about:
what is macroeconomics?
basic concepts and definitions of macroeconomics
the major schools of macroeconomics
hence, recapping the foundations of
Macroeconomics
Learning Requisites
• Introductory economics courses at Bachelor’s level
• Macroeconomic Theory-I course at semester 1 level of
MSc Economics
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4. Recap
Economics: Alfred Marshall’s Viewpoint
• Economics is the study of mankind in the
ordinary business of life.
• It examines that part of individual and social
actions which
is most closely connected with the attainment
and with the use of the material requisites of
well-being.
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5. Recap (Cont’d)
Major Branches of Economics
• Theoretical Economics
Microeconomics
Macroeconomics
• Applied Economics
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6. Macroeconomics?
Economics
• Economics is the study of mankind in the
ordinary business of life.
Macroeconomics
• “Ordinary business of life” in the aggregate.
• The behavior of the economy as a whole.
What are the key variables?
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7. Key Macroeconomic
Variables?
• total output in the economy (Y)
• the aggregate price level (P)
• interest rates (i, r)
• wage rates (w)
• employment and unemployment (N)
• foreign exchange rates (ex)
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8. Subject Matter of
Macroeconomics
The subject matter of macroeconomics includes:
• factors that determine the levels of
macroeconomic variables.
• factors that determine how these variables
change over time.
for example, the rate of growth of output, the inflation
rate,
changing unemployment in the periods of expansion.
• appreciation or depreciation in foreign
exchange rates.
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9. Key Questions in
Macroeconomics
• What determines the cyclical behavior of output
and employment? What causes recessions?
• What are the determinants of inflation? What role
do macroeconomic policies play in determining
inflation?
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10. Key Questions in
Macroeconomics (Cont’d)
• What relationship exists between inflation and
unemployment?
• What determines the growth rate over periods of
one or two decades? Over longer periods such
as a century?
• What are the effects of the deficits and debt on
the stability of exchange rates?
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11. Macroeconomics? (Cont’d)
Macroeconomics is policy oriented. It answers the
questions like:
• To what degree can government policies affect
output and employment?
• To what degree is inflation the result of
unfortunate government policies?
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12. Macroeconomics? (Cont’d)
Macroeconomics is policy oriented. It answers the
questions like:
• What government policies are optimal in the
sense of achieving the most desirable behavior
of aggregate variables?
• Should government policy attempt to achieve a
target level for foreign exchange rates?
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13. The Business of
Macroeconomists?
• To disagree on policy questions, and to provide a
plan for better future economic performance.
• There are fundamental differences among
schools of macroeconomics.
• To examine different macroeconomic theories
and the policy conclusions that follow from those
theories.
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14. The Business of
Macroeconomists? (Cont’d)
• To isolate key issues that divide
macroeconomists and to explain the theoretical
basis for each position.
• How each theory explains the macroeconomic
events?
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15. The Schools of
Macroeconomics1
• Classical economics
• Keynesian economics
• Monetarism
• New classical economics
• Real business cycle theory
• New Keynesian theory
1
Lecture 2 of this course explains the Schools of Macroeconomics in
detail.
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16. Some Definitions and Concepts
Output and Employment
• GDP (gross domestic product) is the measure of
all currently produced final goods and services.
• Unemployment rate is the number of
unemployed persons expressed as a
percentage of the labor force.
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17. Inflation & Deflation
• Inflation is the increase in the general level of
prices.
• Price index is a measure of the aggregate price
level relative to a chosen base year.
• CPIa
is the measure of the retail prices of a fixed
“market basket” of several thousand goods and
services purchased by households.
• PPIb
measures the wholesale prices of
approximately 3,000 items.
a
Consumer price index.
b
Producer price index.
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18. Deficits & Surpluses
• Federal budget deficit is the federal government
tax revenues (incomes) minus outlays
(expenditures).
• The excess of imports over exports is called trade
deficit.
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19. Aggregate Demand
• The sum of the demands for current output by
each buying sector of the economy:
households,
businesses,
the government,
and foreign purchasers of exports.
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20. Supply of Money and Monetary
Policy
• Monetary Policy is the central bank’s use of
control of:a
money supply
interest rates
to influence the level of economic activity.
• Money: whatever is commonly accepted as:
payment in exchange for goods and services
payment of debts and taxes
a
e.g. State Bank of Pakistan.
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21. Fiscal Policy
• Fiscal policy is the setting of the federal budget:
comprises decisions on government spending
and taxation.
• It is the use of government revenue collection
(e.g. taxes or tax cuts) and expenditure (e.g.
spending) to influence a country’s economy.
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22. Full Employment
• Full employment is a situation in which everyone
who wants a job can have work hours they need
on fair wages.
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23. Wage-Price Flexibility
& Vice Versa
• The classical theory proposes that all markets
re-equilibrate because of adjustments in prices
and wages which are flexible.
• For example, if an excess in the labor force or
products exist, the wage or price of these will
adjust to absorb the excess.
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24. Summary of Today’s Session
• The term macroeconomics was first used by the
Norwegian economist Ragnar Frisch in 1933.
• Macroeconomics is the younger sibling of the
economics family.
• Its subject matter is the behavior of the economy
as a whole.
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25. Summary of Today’s Session
(Cont’d)
• In this lecture, I have tried to introduce the
definition, variables and the challenges of
macroeconomics.
• Important concepts and related definitions are
introduced.
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26. Just Google It
Learn by Yourself
• What is Reaganomics (and Trumpnomics)?
• Is there any linkages between the Great
Depression of 1930s and the economics of
COVID-19?
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27. Suggested Reading Material
Chapter 1: Richard T. Froyen (8th Edition)
Macroeconomics: Theories and Policies
Pearson Education, Inc.
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28. Questions/Queries
You can send your questions at:
m.ayyoub@uosahaiwal.edu.pk
Your queries would be entertained
within one working day.
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29. Thank you for your attention!
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