LESSON 1 Macro

Topics: Inflation, Macroeconomics, Keynesian economics Pages: 31 (2530 words) Published: February 14, 2015
MACROECONOMICSLESSON 1
WHAT IS MACROECONOMICS

DR. TULSI JAYAKUMAR

1

LEARNING OBJECTIVES
 Introduction

to Macro economics –
 Key concepts- Growth, Inflation and
unemployment, objectives and
instruments/policies
  Circular Flow of economic activity.

DR. TULSI JAYAKUMAR

2

An Intro to Macro
What

is Macroeconomics
Two central themes of macroA) The short-term fluctuations in output, employment, financial
conditions and prices that we call
the Business Cycle.
B) The longer term trends in
output and living standards
known as economic growth
DR. TULSI JAYAKUMAR

3

An Intro to Macro- The story of
Macroeconomics: A Walk Through
Origins

of Economic Theory can be
traced to Adam Smith- a proponent of
Laissez faire capitalism.
2 critical assumptions- i) that there is
perfect information
And ii) There are a large number of
players.
These led to a situation where markets
clear all the time at a single price.
Thus demand = supply and no possibility
of overproduction.
DR. TULSI JAYAKUMAR

4

CLASSICAL
SCHOOL
KEY INSIGHTS
The economy will always be at full employment equilibrium.
So no government intervention required.
Money is only a facilitator of transactions.
Any change in the money supply will simply increase the price level without affecting output.
Hence no role for monetary or fiscal policy.
 Supply

creates its own demand in the goods market.
 So all that is produced will be demanded.
 In the labor market, there is perfect wage flexibility.
 So, there would be no situation of either Excess demand or Excess supply of labor. That is no involuntary unemployment.
 There is a division between the real and the monetary sector.  The real variables, namely output, employment and real wages determined in the real sector (based on labor productivity and technology), while monetary variables – money wages, prices and nominal interest rates- are determined in the monetary sector.  Examine the Chinese model of growth. Do you see any similarities with the Classical School of thought?

DR. TULSI JAYAKUMAR

5

Classical

economists recognised the human cost of
unemployment.
Acc to Marshall, “Forced interruption to labor is a grievous evil. Those whose livelihood is secure, gain physical and mental health from happy and well-spent holidays. But want of work, with long continued anxiety, consumes a man’s strength without any

return. His wife becomes thin; and his children get, as it were, a nasty notch in their lives, which is perhaps never outgrown”. But he had nothing to say about the causes of unemployment. He said it existed from early times and argued that knowledge was the cure, since it wd increase the skills of L and also keep laborers and firms from making poor economic decisions that would result in business failures and unemployment.

DR. TULSI JAYAKUMAR

6

What

were his suggestions to diminish flucns in
employment?
“ Those causes of discontinuity which lie within
our scope and are remediable are chiefly
connected in some way or the other with the want
of knowledge, but there is one which is willful: It is
fashion. Until a little while ago, only the rich could
change their clothing at the capricious order of
their dressmakers, but now all classes do it. The
histories of the alpaca trade, the ribbon trade, the
lace trade, the straw hat trade and a multitude of
others, tell of bursts of feverish activity
alternating with deadening idleness.”
DR. TULSI JAYAKUMAR

7

DOES

ALL THIS SOUND QUAINT
TO YOU?
However, Marshall and other
classical economists relying on
the classical theory had little to
offer.

DR. TULSI JAYAKUMAR

8

What was the response to the
Depression in Britain?
Keynes

prescribed expansionary fiscal policy to
increase output and employment both directly
and indirectly.
The classical theory was the basis for the
official position of the Conservative Party in...
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