Introduction to

Macroeconomics
Lecture 1
Learning Objectives
• What is Macro Economics?
• How is Macro Economics evolved and what is its basic
history?
• What is its scope? & basic macro economics concerns for
economy?
1st Goal: Introduction to Macroeconomics
• Microeconomics examines the behavior of individual decision-making units—
business firms and households.

• Macroeconomics deals with the economy as a whole; it examines the behavior of

economic aggregates such as aggregate income, consumption, investment, and
the overall level of prices.

• Aggregate behavior refers to the behavior of all households and firms together.
Introduction to Macroeconomics
• Macroeconomists often reflect on the microeconomic principles
underlying macroeconomic analysis, or the microeconomic
foundations of macroeconomics.
• Macroeconomists generally conclude that markets work well.
Macroeconomists, however, observe that some important prices
often seem “sticky.”
• Sticky prices are prices that do not always adjust rapidly to maintain
the equality between quantity supplied and quantity demanded.
2nd Goal: The Roots of Macroeconomics
• The Great Depression was a period of severe economic
contraction and high unemployment that began in 1929 and
continued throughout the 1930s.
The Roots of Macroeconomics
• Classical economists applied microeconomic models, or
“market clearing” models, to economy-wide problems.
• However, simple classical models failed to explain the
prolonged existence of high unemployment during the Great
Depression. This provided the impetus for the development
of macroeconomics.
The Roots of Macroeconomics
• In 1936, John Maynard Keynes published The General Theory of
Employment, Interest, and Money.
• Keynes believed governments could intervene in the economy and
affect the level of output and employment.
• During periods of low private demand, the government can stimulate
aggregate demand to lift the economy out of recession.
 Classical Macroeconomics:
• Till 1930 the Great Depression regarding working of the
economy was presented by classical economists like
Smith, Ricardo, Say and Alfred Marshall. According to the
classical economists in the real sector of the economy
• “Supply creates its own demand”
Thus we see the classical economists on the basis of
• Flexibility of prices
• Flexibility of rate of interest
• Flexibility of wages
• Constancy of velocity of circulation of money proves
that there is always full employment in the economy
 J. M Keynes Macroeconomics:

• In 1936, Keynes rejected the classical theory of

full employment and he also presented his own
• Theory of income and employment
According to the Keynes
• “The level of income and employment is determined
where the aggregate demand is equal to
the aggregate output”
• Keynes also identified the inflation and
unemployment.
 John R. Hicks Macroeconomics:
• Keynes didn’t consider the role of rate of interest in the determination
of national income. So John Hicks presented the concept of
“IS Curve”“ In such curve he established the relationship
between rate of interest and national income through equality
of saving and investment.”
He also presented the concept of “LM Curve”
In such curve he established the relationship between the
rate of interest and national income through equality of demand for
money and supply of money.
Thus with the help of IS and LM Curves, Hicks presented the
stimulation equilibrium in goods and money markets.

• Modern Macroeconomics:
• In Keynes theory, the concept of AD and AS has been presented without
any relation to the level of prices . So Modern Macroeconomics
linked AD and AS to the level of prices.
Macroeconomics Theories

• In 1960 the major macroeconomic problem was that of inflation. Thus

following theories were presented regarding inflation

• Demand pull inflation

• Cost Push inflation
• Phillips curve approach to inflation
3rd Goal: Scope of Macroeconomics
The study of macroeconomic theory is important for several reasons.
1. It provides us with tools by which we can judge the performance of
an economy. It is judged by the Gross National Product (GNP) of the
economy.
2. It is generally assumed that the objective of the government in any
country is to raise the material well being of the country.
3. Macroeconomic theory is also useful to the government for
formulating appropriate policies such as monetary policy, fiscal
policy, income policy, etc.
Scope of Macroeconomics
4. In many developing countries the objective of the government is
to promote economic development. For this the government
should know the factors influencing the process of economic
development so that these factors can be manipulated. For this
reason the knowledge of macroeconomic theory is essential.
5. For any business firm the knowledge of macroeconomic theory is
required.
6. From the theoretical standpoint, the knowledge of macroeconomic
theory is necessary.
Macroeconomic Concerns
• Three of the major concerns of macroeconomics are:

• Inflation
• Output growth
• Unemployment
a. Inflation and Deflation
• Inflation is an increase in the overall price level.
• Hyperinflation is a period of very rapid increases in the overall price
level. Hyperinflations are rare, but have been used to study the costs
and consequences of even moderate inflation.
• Deflation is a decrease in the overall price level. Prolonged periods of
deflation can be just as damaging for the economy as sustained
inflation.
• Stagflation occurs when the overall price level rises rapidly (inflation)
during periods of recession or high and persistent unemployment
(stagnation).
b. Output Growth:
Short Run and Long Run
• The business cycle is the cycle of
short-term ups and downs in the
economy.
• The main measure of how an
economy is doing is aggregate
output:
• Aggregate output is the total quantity
of goods and services produced in an
economy in a given period.
Output Growth:
Short Run and Long Run
• A recession is a period during which
aggregate output declines. Two
consecutive quarters of decrease in
output signal a recession.
• A prolonged and deep recession becomes
a depression.
• Policy makers attempt not only to smooth
fluctuations in output during a business
cycle but also to increase the growth rate
of output in the long-run.
c. Unemployment
• The unemployment rate is the percentage of the labor force that is
unemployed.
• The unemployment rate is a key indicator of the economy’s health.
• The existence of unemployment seems to imply that the aggregate
labor market is not in equilibrium. Why do labor markets not clear
when other markets do?
Review
• Definition of Macroeconomics
• Classical Theory
• Keynes Theory
• Hicksian Theory
• Scope of Macroeconomics
• Inflation
• Output growth
• Unemployment
Review
1. We came to know about Macro Economics.
2. We come know that how Macro Economics evolved.
3. We came to know about basic economic concepts and
theory.
THANK YOU
Reference Books
1. Principles of Economics N.Gregory Mankiw, 4th Edition
2. Principles of Economics by Hamid Shahid,