Macroeconomics

Based on Macroeconomics by
Dornbusch and Fischer and
Elements of Economics by Tullao
Definition
a social science that
deals with the efficient
allocation of scarce
resources among its
alternative uses to
satisfy unlimited
human wants and
needs
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Definition
As an allocation of wealth (arising
from the scarcity of resources)
As creation and consumption of
wealth (expansion of wealth)
As a science of choice
Definition
Looks at the
economy as a whole
Concerned with the
national
product/output (i.e.,
GNP/GDP)
Aggregate price level
Employment and
unemployment rates
in the economy
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The Economy as a System
Definition: a group of interrelated
parts that work to achieve a
particular objective
Elements:
Needs: articulated by means of a
problem that has to be answered in
different ways
Objective: elaboration on how the
needs or problems can be answered in
specific and measurable terms
Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics
The Economy as a System
continuation of Elements:
Limitations: constraints that may
prevent society in answering fully its
problems or needs
Alternative choices: list of alternative
programs, activities, and ways that
society may choose in addressing its
problems and needs

Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics
The Economy as a System
continuation of Elements:
Decision-making framework: basis that
will be used in making a choice from
among the alternative answers to the
problems or needs
Feedback mechanism: process of
evaluating the chosen alternative
pursued in responding to the social
problem and need
Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics
Primary Economic Goal: Material Survival
Two important tasks:
production activities that describe the
arrangements of humans and other
resources, institutions, and sectors in
creating goods, services, and resources
from the utilization of the wealth of the
economy
distribution activities that illustrate how
the allocation and division of the goods,
services, and resources to the members
of society are carried out for these
members to live and prosper materially
Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics
Macroeconomic Concerns
Aggregate Price level
increases in the overall price level
(inflation) are a great concern to
policymakers, to citizens at large as well
as to economists
Aggregate Output
a concern particularly when the
economy does not seem to be producing
as much as it is capable of producing
Macroeconomic Concerns
Total Employment
related to the previous concern, the
economy may not be producing as much
as it is capable of producing because it
is not employing all the people who
want jobs
The rest of the world (ROW) and its
relationship with the domestic
economy
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Circular Flow of Products, Income,
and Money in a Simple Economy
composed of the households (HH)
and the firms
linked by the market for factor inputs
and the market for final goods and
services
HHs own the factors of production;
primary consumers in the economy
firms are the primary producers in the
economy
Circular Flow of Products, Income,
and Money in a Simple Economy
Circular flows
flow of resources, goods and services
wherein HHs sell the services of their
resources in the factor markets
flow of money, income and expenditures
is the flow of payments in terms of rent,
wages, and interest as well as the flow
of payments for the purchase of final
goods and services
Circular Flow of Products, Income,
and Money in a Simple Economy
Assumptions
the economy is stationary or is not
growing
the expenditures of one sector is the
income of another sector
total income must equal total
expenditures to attain stability
savings and investments are equal in
equilibrium
Expanded Circular Flow of
Products, Income, and Money
composed of the households (HH),
the firms, government, and the
external sector
governments primary role is to provide
services for the public
external sector is a source of resources,
final goods and services, investment,
and tax revenues
Instruments of Macroeconomic Policy
Fiscal Policy
One of the major ways the government
affects the economy is through tax and
expenditure decisions. The government
collects taxes from the business and
household sectors. Both the magnitude
and composition of these taxes and
expenditures have major effects on the
economy.
Instruments of Macroeconomic Policy
Monetary Policy
The government can, likewise, affect
the economy by controlling the quantity
of money in the economy.
Income Policies
These are direct attempts of the
government to control prices and
wages. They generally take the form of
regulations specifying the maximum
amount by which prices or wages are
permitted to rise.
Instruments of Macroeconomic Policy
Supply-side Policies
Policies that focus on
aggregate supply and
increasing
production. In
practice, the main
instrument of supply-
side policy has been
the tax system (i.e.,
to increase labor
supply)
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Schools of Thought in
Macroeconomics: Neoclassical
Proponents include Milton Friedman,
Robert Lucas, and Thomas Sargent
Assumptions: 1) economic agents
maximize optimal decisions based on
available information; 2) expectations are
rational; and 3) markets clear
Asserts that markets work best if they are
left to themselves. Individuals act
rationally in their self-interest in markets
that adjust rapidly to changing decisions.

Schools of Thought in
Macroeconomics: New Keynesian
Proponents include Franco Modigliani,
James Tobin, and George Akerlof
Assumptions: markets do not clear even
when individuals look out for their own
interest because of imperfect information
and price rigidities
Asserts that government intervention can
significantly improve the operation of the
economy.