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f. KIMBA #,214
MACROS
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the mandate of Marco Kruger.
22 March 2022
,CHAPTER 1: INTRODUCTION
Macroeconomics:
- Study of the aggregate behaviour of large collections of economic agents.
- Focuses on the aggregate behaviour of consumers and firms, governments, the overall level
of economic activity in individual nations, economic interactions between nations, and the
effects of fiscal and monetary policy.
Macroeconomics vs Microeconomics
- Macro and Micro differ on the basis that macroeconomics deals with overall effects of
choices made by individual economic agents.
- Macroeconomics focuses on long-run growth and business cycles.
Long-run growth = the increase in a nation s productivity and average standard of
=
living over a long period of time
Business cycles = short-run ups and downs, booms and recessions, in aggregate
=
economic activity
- Macro and micro are similar in that they both use economic models.
Macroeconomic models are built on microeconomic principles
Lucas Critique: the idea that macroeconomic policy analysis can be done in a
sensible way only if microeconomic behaviour is taken seriously
Macroeconomic models are used to explain long-run economic growth, why there
are business cycles, and what role economic policy should play in the
macroeconomy
Why is experimentation difficult in macroeconomics/Why are economic models used?
- It is costly or impossible to experiment with the real economy.
- Models simplify and enable macroeconomists to focus on a specific problem (when using the
appropriate variables)
- To build a working model, macroeconomists fit the model to fit the data in order to run
experiments on the model at low cost.
Five features a basic economic model must/should have?
1. Consumers have firms ( stakeholding)
2. The sets of goods that consumers consume
3. Consumers preferences
4. Production technology
5. Resources available
What do we learn from macroeconomic analysis/Basic insights? (These will become clearer
throughout the chapters to come)
- What is produced and consumed in an economy is determined jointly by the economy s
productive capacity and consumer preferences.
- In free market economies, there are strong forces that tend to produce socially efficient
economic outcomes.
- Unemployment is painful for individuals, but it is a necessary evil in modern economies.
- Improvements in a country s standard of living are brought about in the long-run by
technological progress.
, - A tax cut is not a free lunch.
- Credit markets and banks play key roles in the macroeconomy.
- What consumers and firms anticipate for the future has an important bearing on current
macroeconomic events.
- Money takes many forms and society is much better with it than without it. Once we have it,
however, changing its quantity ultimately does not matter.
- Business cycles are similar, but they can have many causes.
- Countries gain from trading goods and assets with each other, but trade is also a source of
shocks to the domestic economy.
- In the long-run, inflation is caused by growth in the money supply.
- If there is a short-run trade-off between output and inflation, that has very different
implications relative to the relationship between the nominal interest rate and inflation.
Real business cycle theory: government policy aimed at smoothing business cycles is at best
ineffective and at worst detrimental to the economy s performance.
- Business cycles are caused primarily by shocks to technology.
- Government should play a passive role over the business cycle.
Some other important things to note from this chapter:
- GDP = the quantity of final goods and services produced within the borders of a country
=
within a specified time frame
- Crowding out = government spending reduces private sector expenditure on investment and
=
consumption.
- Balanced budget = when government expenditure is equal to government revenue (G = T)
=
- Budget deficit = when government expenditure is greater than government revenue (G > T)
=
- Nominal interest rate = interest in money terms
=
- Real interest rate = nominal interest rate adjusted for expected inflation
=
- Ricardian equivalence theorem = government deficits do not matter under some conditions.
=
- Current account surplus = net exports + net factor payments to domestic residents abroad
=
(CA = NX + NFP)
• GB ; F- constant
MAB
How does a government deficit lead to a current account deficit?
MD
borrowing
to To finance CA ,
you must
. borrow
When government increases spending, and taxes are held constant, an increase in the government abroad
deficit needs to be financed by increased government borrowing. And to finance the current account
deficit, government must be borrowing abroad.
Why may it not be a bad thing for a country to have a current account deficit?
1. It allows a country to smooth its consumption relative to its income.
2. It can permit investment in plant and equipment that can be used to increase future
production.
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