A.

KEY CONCEPTS OF MACROECONOMICS

◦ The central macroeconomics questions
◦ Objectives and instruments of
macroeconomics
◦ International linkages
B. AGGREGATE SUPPLY AND DEMAND

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 Microeconomics focuses on the individual
parts of the economy.
◦ How households and firms make decisions and how
they interact in specific markets
 Macroeconomics looks at the economy as a
whole.
◦ Economy-wide phenomena, including inflation,
unemployment, and economic growth
 Why do output and employment sometimes
fall, and how can unemployment be reduced?
 What are the sources of price inflation, and
how can it be kept under control?
 How can a nation increase its rate of
economic growth?

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Objectives Instruments

Output: Monetary Policy:

High level and rapid growth
of output
Employment:
High level of employment with
low involuntary unemployment
Price - level stability
Controlling the money supply
to determine interest rate
Fiscal Policy:
Government expenditure, and
taxation

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 Output
 The ultimate objective of macro activity is to provide
the goods and services that population desire.
 The most comprehensive measure of total output in
an economy is the Gross Domestic Product (GDP).
 There are two ways to measure GDP: Nominal GDP
and Real GDP.
 A steady long-term growth in real GDP and the
improvement in living standards is known as
economic growth.

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 High Employment, Low Unemployment
 Employment and unemployment are most directly
felt by individuals.
 Unemployment rate is the percentage of the labor
force that is unemployed
 Labor force includes all employed person and those
unemployed individuals who are seeking jobs.

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 Stable Price
 The most common price measure is the Consumer
Price Index (CPI).
 The CPI measures the cost of a basket of goods
(including item such as food, shelter, clothing, and
medical care) bought by average urban consumer.
 The rate of growth or decline of the price level from
one year to the next is known as the rate of inflation.
 Stable price mean slowly rising prices.

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 Fiscal Policy, tries to influence target
variables (objectives of macroeconomics)
by manipulating government expenditures
and tax rates.
 Government Expenditures
 Government spending on goods and services
 Government transfer payments which boost the incomes
of targeted groups
 Taxation, effects the overall economy in two ways:
 Taxes effect people’s incomes
 Taxes effect the prices of goods and factors of
production and thereby effect incentives and behavior.

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 Monetary Policy, tries to influence target
variables by changing the money supply or
interest rates or both.
 Central Bank can influence many financial and
economic variables, such as interest rates, stock
prices, housing prices, and foreign exchange rates by
controlling money supply.
 If the central bank is faced with a business downturn,
it can increase the money supply and lower interest
rates to stimulate economic activity.

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 All nations participate in the world economy and are
linked together trough trade and finance.
 As the cost of transportation and communication have
declined, international linkages have become tighter
than were a generation ago.
 As economies become more closely linked, policy
makers devote increasing attention to international
economic policy.
◦ Trade policies: tariffs, quota, and other regulations that
restrict or encourage imports and exports
◦ International financial management – adopt different
systems to regulate foreign exchange market.

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 Aggregate Supply (AS)
The total quantity of goods and services
that the nation’s business willingly
produce and sell in a given period.
 Aggregate Demand (AD)
The total amount that the different sector
in the economy willingly spend in a given
period.
Sum of spending by consumers, business,
government, and foreigner.

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AS and AD Determine the Major
Macroeconomic Variables

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A macroeconomic
equilibrium
is a combination of
overall price and quantity
at which all buyers and
sellers are satisfied with
their purchases, sales and
prices

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AD Shocks
Occur as consumers,
business, or
governments change
total spending relative
to the economy’s
productive capacity

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 Potential
P Output AS1

AS Shocks AS
is a sudden change in
input cost or
productivity which E1
P E
shifts AS sharply P*

AD

Q1 Q* Q

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1. Answer the questions for discussion at the
end of the chapter
2. Collect the major macroeconomic data (e.g.
nominal GDP, real GDP, unemployment
rate, CPI, inflation rate (CPI), Government
budget surplus/deficit, net export).
These data can be obtained from: www.bps.go.id
Or, www.bi.go.id

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