This document discusses macroeconomic models, including long-run, medium-run, and short-run models. The long-run model focuses on economic growth and productivity determining output. The medium-run model shows how the economy transitions from short-run to long-run. The short-run model analyzes how output and unemployment fluctuate with demand. Macroeconomics analyzes economic growth, fluctuations, and the impact of policies on goods, labor, and asset markets at an aggregate level.

1. Macroeconomic Models
MD Siyam HossainMD Siyam Hossain
Bangladesh Institute of Business & Technology.Bangladesh Institute of Business & Technology.
Narayangonj,DhakaNarayangonj,Dhaka
Dhaka,BangladeshDhaka,Bangladesh
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2.  Macroeconomics concerned with behaviour of the
economy as a whole
Macroeconomics studies:
 Booms and recessions
 Economy’s total output of goods and services
 Growth of output
 Rates of inflation and unemployment
 Balance of payments and
 Exchange rates

3. Macroeconomics analyses economic growth and fluctuation:
 Long-run economic growth
 Short-run fluctuations
 And business cycle
Macroeconomics analyses impact of policies:
 Consumption and investment policies
 Changes in wages and prices
 Monetary and fiscal policies
 Money stock, the federal budget, interest rates, and the
national debt
 Foreign exchange (Dollar) course and the trade balance

4. Division of macroeconomic issues:
 Making understand macroeconomic issues are reduce to
following essentials
 Goods markets, labour markets, and assets markets of the
economy
 Macroeconomics deals each market as a whole
As for example:
 It studies markets for different goods as a single market
 Markets for agricultural products
 Markets for medical services
 It studies labour market as a whole
 Makes no differences between markets for unskilled labour
and doctors
Benefit of abstraction:
 Facilitates understanding of interactions among goods, labour,
and assets markets

5. Objective of Macroeconomic study
 To understand how the macro-economy works
 And how to make it perform better
Economists recommending intervene in economy
 Great macroeconomists had keen interest in
macroeconomic theory and policy
As for example
 John Maynard Keynes, and Nobel laureate
economists -
 Milton Friedman of the University of Chicago and
the Hoover Institution
 Franco Modigliani and Robert Solow of M.I.T
 James Tobin of Yale University

6. Economists sceptical about intervene in economy
 Robert Barro, Martin Feldstein, and N. Gregory
Mankiw of Harvard University
 Nobel laureate Robert Lucas and Thomas Sargent of
the University of Chicago
 Olivier Blanchard of M.I. T., Robert Hall, and John
Taylor of Stanford University
 They doubt about the wisdom of active government
policies
Feature of Macroeconomics
 Macroeconomics related to economic problems of the
day
 Illuminates economic depression
 Refers to real-world events to explain meaning and
relevance of the theory

7. 2. MACROECONOMIC MODELS
Macroeconomics organised in three models
Each of these models have different time frame
Long run model studies long run behaviour of the
economy
Medium run model studies medium run behaviour of
the economy
Short run model studies short run behaviour of the
economy
Long run Model
Long run model discusses growth theory
It focuses on growth of productive capacity
In Long run model level of productivity determines:
Output, fluctuation in demand that determines price
and inflation

8. Medium run model
In medium run productive capacity is given
It studies how economy grows from short run
to long run
Short run model
Fluctuation in demand determines how much
capacity used
It analyses level of output and unemployment
Justification of the Division
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 run model

9. 3. Long run growth model
Long run behaviour of the economy is
the domain of growth theory
It analyses how investment in technology
leads to increase living standard
Long run growth model, however, ignore
recessions, booms and short run
fluctuation
It is assumed that labour, capitals, raw
materials and so on are fully employed

10. Supply (Output) in the long run model
 Level of output is determined solely by
supply side considerations
 Supply of output is determined by
productive capacity of the economy
 Price level is determined by level of demand
 Aggregate supply and aggregate demand
determine relation between price and output
 Supply curve (AS) gives quantity of output
the firms are willing to supply at a price
 Position of the aggregate supply curve
depends on productive capacity of economy

11. Demand in the long run model
 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
 Intersection of aggregate supply and
demand determines price and quantity
 In the long run growth model the supply
curve is vertical
 Supply cannot be increased in the long run

12. 4. The short run model
In short run model:
 Output fluctuates
 Aggregate supply curve is flat
 Output is determined by aggregate demand alone
 Price are unaffected by the level of output
1.2 The medium Run
Medium run model describes:
 Transition of economy from short run to long run
 How aggregate demand pushes output above
sustainable level
 How prices rise
 How aggregate supply curve begins to move upward