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,Contents
STUDY NOTES ................................................................................................................................................ 2
Introduction .............................................................................................................................................. 2
Measuring Performance of the economy ................................................................................................... 14
Income Determination: Keynesian Model .................................................................................................. 22
Budget deficits and surpluses ................................................................................................................. 31
Expansionary and contractionary fiscal policy ........................................................................................ 31
Combating a recession using expansionary fiscal policy ........................................................................ 32
Combating inflation using contractionary fiscal policy ........................................................................... 34
Secondary effects of fiscal policy ............................................................................................................ 35
.................................................................................................................................................................... 47
,STUDY NOTES
Introduction
Macroeconomics (Greek macro = ‘big’) describes and explains economic processes that
concern aggregates. An aggregate is a multitude of economic subjects that share some
common features. By contrast, microeconomics treats economic processes that concern
individuals.
Example: The decision of a firm to purchase a new office chair from company X is not a
macroeconomic problem. The reaction of Austrian households to an increased rate of capital
taxation is a macroeconomic problem. Why macroeconomics and not only microeconomics?
The whole is more complex than the sum of independent parts. It is not possible to describe an
economy by forming models for all firms and persons and all their cross-effects.
Macroeconomics investigates aggregate behavior by imposing simplifying assumptions
(“assume there are many identical firms that produce the same good”) but without abstracting
from the essential features.
These assumptions are used in order to build macroeconomic models. Typically, such models
have three aspects: the ‘story’, the mathematical model, and a graphical representation.
Macroeconomics is ‘non-experimental’: like, e.g., history, macroeconomics cannot conduct
controlled scientific experiments (people would complain about such experiments and with a
good reason) and focuses on pure observation. Because historical episodes allow diverse
interpretations, many conclusions of macroeconomics are not coercive.
, Monetary Sector
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