3. MACRO ECONOMICS
• Macro economics concern with
the behavior of the aggregate
economy as a whole. Therefore it
deals inter related broad system.
4. Macroeconomics is a branch of
economics dealing with the
performance, structure, Behavior
and decision-making of the whole
economy. This includes a national,
regional or global economy.
8. Macroeconomic policy debates
inevitably revolve around discussion
of fluctuations in key aggregate
measures notably,
national income, interest rates, inflation,
unemployment, trade imbalances, exchange
rates and various wealth series,
4/19/2014 8
9. But here we only discuss
three things,
a.Un employment
b.Price stability
c.Exchange rate
4/19/2014 9
10. Macroeconomics emerged as a
separate subject within
economics in the 1930s, when
the U.S. economy fell into the
Great Depression.
4/19/2014 10
11. Before the 1930s, economics
was microeconomics (the
study of partial-equilibrium
supply and demand).
12. After the 1930s, the study of
the core of economic thinking
was broken into two discrete
areas: microeconomics, as
before, and macroeconomics
(the study of the economy in
the aggregate).
13. Macroeconomic policy debates
have centered on a struggle between
two groups: Keynesian economists
and Classical economists.
4/19/2014 13
15. Keynesians are more likely to
favor govern government
intervention in the economy.
They feel a laissez-faire policy
can sometimes lead to disaster.
Both views represent reasonable
economic positions.
16. MACROECONOMIC OBJECTIVES
We begin our discussion by focusing on the
objectives of macro-economic
policymaking. At the most general level, the
goal of economic policy is to maximize
long-run societal well-being in an equitable
and sustainable manner.
4/19/2014 16
17. Much of the recent discussion of
economic policy has focused on
intermediate variables, such as
price stability or the balance of
payments.
4/19/2014 17
18. Their importance derives largely
from their role as possible indicators
of economic performance in terms of
truly significant such as growth,
development and equity.
4/19/2014 18
19. The centre of attention of
macroeconomic policymaking should
be on ‘real macroeconomics’ and the
use of productive capacity—the
employment of capital and labour at
their highest potential level—and
improvements in that productivity.
4/19/2014 19
20. Macro economics policy
debates on Unemployment
Definition:
•Unemployment is inability for willing workers to find
gainful employment.
•Unemployment occurs when a person who is
actively searching for employment is unable to find
work.
•Unemployment occurs when people are without
work & actively seeking work.
4/19/2014 20
21. The Unemployment Rate:
Unemployment Rate= Unemployed x100
Labor Force
Types of unemployment:
•Frictional Unemployment
•Seasonal Unemployment
•Cyclical Unemployment
4/19/2014 21
22. Classical debates on unemployment:
•According to classical economists the labor &the
other resources are always fully employed.
•General unemployment is assumed to be
impossible.
•If there is any unemployment, it is assumed to be
temporary/ abnormal.
•In the long run the economy will have full
employment/natural rate of unemployment if
wages & prices are flexible.
4/19/2014 22
23. •Classical reasons for full employment:
1. Say’s law: Supply creates its own demand.
2. Abstinence theory of interest: Interest rate
influences people’s saving.
3. Classical theorists held that wages & prices would
change proportionally
•Graphically the pure classical theorists would have
a vertical AS curve. That shows the same GDP
associated with full employment, at each level in the
economy.
4/19/2014 23
25. •According to classical economists the
reasons for unemployment are:
1.Intervention by the
government/private monopoly.
2. Wrong calculation by
entrepreneurs & inaccurate
decisions
3.Artificial resistance
4/19/2014 25
26. •Classical unemployment occurs when
real wages are kept above the market
clearing wage rate, leading to a surplus
of labor supplied
•Classical unemployment sometimes
known as real wage unemployment.
Because it refers to real wages being
too high.
28. Keynesian debate on unemployment:
•The most forceful critic of the classical
model was John Maynard Keynes, a British
economist. His major work, entitled The
General Theory of Employment, Interest,
and Money, was first published in 1936.
4/19/2014 28
29. •Keynesian theory holds that
unemployment is the normal
state of the economy &
significant government
intervention is required if
employment/output targets are to
be reached.
33. EX: If wages are cut, it could
lead to further fall in AD, as
workers have lower wages. In
this case, cutting wages may
be ineffective in solving
classical unemployment.
34. •Keynesian critique of classical theories:
1. Say’s law:
Whereas the classical economists
believed that supply created its own
demand, Keynes argued that causation
ran the other Way —from demand to
supply.
There are many ways to increase
Demand more effectively than to push
for more output to be produced.
4/19/2014 34
36. 4/19/2014 36
•Central Keynesian conclusion:
1. AD determines real GDP
2. In short run, AD can be
adjusted to achieve target GDP
& unemployment levels with
prices not changing (fixed, flat
price)
37. PRICE STABILITY
• Keynesian different from classical.
• The classical assumed that full
employment of resources in the
economy.
• Keynesian assumed that there is
no full employment.
4/19/2014 37
38. According to them, if at anytime
there is deviation from this full
employment level, the wages,
interest and prices quickly and
automatically adjust/ change to
restore equilibrium at the full
employment level.
•
39. Thus ,in the classical theory the
as curve of output is perfectly
inelastic(vertical straight line)at
the output level corresponding
to full-employment level of
resources.
40. • It shown below the graph
AS
price level
Yf aggregate output
41. • Keynes consider the situation
of economic depression when
the economy was operating
before the level of full
employment of resources.
42. • He expressed the As curve as
horizontal line, it shown below,
43. • The classical says if the economy
prevails in fullemployment.there is
an increasing in AD. so the price
level is automatically change. it
will goes up. because cannot be
further increasing in output.
45. • But the Keynesian refused this. he
believed that there is no full
employment level. so to expand the
out put can utilized the more
resources. Therefore output level is
increased (o-y) without increasing
cost of production. So the price level
is not changed.
47. • The classical didn’t accepted
and they agree with flexible
prices. They said output and
employment are stable but
prices and wages will change.
48. Exchange Rate
• It is a one of the macro
Economics variables.
• It means the prices at which one
currency can purchased in terms
of some other currency is the
exchange rate between the two
countries.
49. • Macro economic variable
determines depends on the
choice of the underlying
macro Economic model
50. It has a two criteria
• 1. By recognizing that the existing
macro economic modal for open
economies are still rather simple
in comparison to those of a
closed economy.
51. • 2. One country model are used for
small open economies , Where
foreign variables are considered
as a given and two country model
are contracted. When domestic
and foreign macro economic
variable are interdependent.
52. • The open economy consist the
exchange rate model, include
the fixed and floating
exchange rates.
53. • Under the exchange rate we
observe the two approach.
1. Classical approach
2. Keynesian approach
54. Keynesian and classical frame works
are similar with respect to this
transmission mechanism.
Keynesian model consist
• The foreign country will realize a
decrease of it real national
income. There will be a rise in the
real exchange rate.
56. What factors effects the classical
and Keynesian exchange of
currency?
• Factors of classical exchange rate
of currency
• Own country want to import goods
from the abroad, they are
demanding foreign currency
• In order to get these foreign
currency , they have to sell own
currency
57. • Now the own country currency
value against the foreign currency
is low therefore . the imports will
be expensive ii. Investment in the
foreign country will be un
attractive iii. The demand for
foreign currency will be low and
will the supply of own country
58. • The exchange rate rises
imports will be more
attractive
59. • The own country will be
more interest rate in foreign
country investment
opportunities
60. • The quantity of foreign
currency demanded , thus the
quantity of own country
currency supplied will rise
61. Factors of Keynesian
exchange rate of currency
• The supply curve of own country
currency slopes upwards to the
right as do the supply curve for
most commodities. By similar
reasoning the demand curve for
own country currency slopes
down ward.
62. • As we said before, this is a simple
application of demand and supply
analysis. variations in exchange
rate are associated with variations
in quantity demanded and
supplied.
63. • There is an equilibrium
exchange rate at which the
quantity of a currency supplied
is equal to the quantity
demanded.
64. • One major cause of instability is a
divergence in monetary policy
between the countries
• The exchange rate often shows
periods of great instability with
large up and down movements.
65. • Above the situations are change
the exchange rate.
• The Keynesian two countries
model has been developed
mainly by Mundell (1968) and
popularized on a more
comprehensive level.
66. • He explained the exchange rate
according to the fiscal and monetary
policies.
• He explain through this instruments.
• When changing the government
expenditure ,changes in taxes and
changes in the interest rate are
changed the exchange rates
