Macroeconomic Theory Basics
What is macroeconomics?
• the study of the economy as a whole, and the variables that control the macro-economy.
• the study of government policy meant to control and stabilize the economy over time, that is, to reduce fluctuations in the economy.
• the study of monetary policy, fiscal policy, and supply-side economics.
Is macroeconomics the same for all countries?
• the major variables describing the macro-economy are the same.
• the three major policy approaches are the same
• but the quality to which these policies are applied differ from one country to another; this because the political process from which these policies emerge are unique to each country.
What three main differences separate micro- and macroeconomics?
• First, microeconomics studies individual components, whereas macroeconomics studies the economy as a whole.
• microeconomics treats the economy as so many separate components, whereas macroeconomics treats the components of the economy as one unit, as one aggregate, that is looks for relationships between the various components.
• Second, controversy aside, government involvement in microeconomics is relatively small, and relegated to public goods, regulation, and welfare.
• But, controversy notwithstanding, government involvement in macroeconomics is rather substantial, nearly total; it is only government that makes and enforces monetary and fiscal policy.
• Third, whereas microeconomics has been around since the mid eighteenth century, macroeconomics began only as a reaction to the Great Depression of the 1930s.
Who introduced macroeconomics, and what was its major objective?
• John Maynard Keynes, an English economist, hence macroeconomics is also referred to as Keynesianism.
• Keynes argued that by itself the market is unable to generate enough savings (capital) to sustain investment at full employment levels; and that this could be achieved only with the periodic sharp increase in government spending.
Why is macroeconomics said to be a typical public good?
• a typical public good has the unique characteristic of nondivisibility and nonexclusive.
• a product is said to be nondivisible if a unit consumption of such a product does not diminish the quality nor quantity available for other consumers, e.g., air, defense, and stabilizing the market.
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