1. Macro Economic Concerns:
• Micro vs Macro Economics.
• Major Building Blocks of Macro Economics:
1) AD & AS
2) Four Sectors: HHS, BS, GS & FTS
3) Two Markets: Commodity Market and Money Market.
• Specific issues to be addressed in Macro Economics:
o Rising Prices
o Rising Unemployment
o Falling GDP
o Balance of Payments Crisis.
• Tools of Macro Economic Policy and Management:
o Fiscal Policy
o Monetary Policy
o Other Policies: Trade, Price and Labour Policies.
2. The Key Macro Economic Concepts:
• Aggregate Supply (AS) Curve:
o Describes, for each given price level, the quantity of output firms are willing to supply.
o AS: Upward Sloping ( Firms willing to supply more output at higher prices.
o ADC: Shows the combinations of the price level and level of output at which the goods and money markets are simultaneously in equilibrium.
o ADC: Downward Sloping ( At higher prices, reduction in the Value of money supply, demand for output is reduced.
o Equilibrium level of output and the equilibrium price level.
P0 = Equilibrium Price Level
Y0 = Equilibrium Level of Output.
o Shifts in ADC and ASC:
Case 1: A Rightward shift in ADC due to an increase in nominal money stock.
❖ Observe new point of equilibrium (E1) and new levels of equilibrium price (P1) and output (Y1). Case 2: A leftward shift in ASC due to oil price hike or due to drought.
❖ Observe an increase in P and decrease in output.
• The Keynesian and Classical ASC:
o Short run horizontal ASC (The Keynesian):
A Sof resources
• The Classical vertical ASC:
❖ ASC: Shifts right right due to growth of output overtime.
• Consider shifts in AD due to an increase in money supply (monetary expansion) and an increase in government expenditure (G) – fiscal expansion.
Case 1: The Keynesian Case:
( An increase in
E E1 output, but no
A S change in
AD1 price level
Y0 Y1 Output
Case 2: The Classical Case:
P1 E1( An increase in
P, but no
P0 E E11 change in AD1 output
( If prices fixed(P0)→horizontal supply curve, economy would move to E11→ The Keynesian Equilibrium.
• Long run, medium run...