What Is Macroeconomics?

Macroeconomics is a branch of economics that studies how an overall

economy—the market or other systems that operate on a large scale—behaves.
Macroeconomics studies economy-wide phenomena such as inflation, price
levels, rate of economic growth, national income, gross domestic product (GDP),
and changes in unemployment.

Some of the key questions addressed by macroeconomics include: What causes

unemployment? What causes inflation? What creates or stimulates economic
growth? Macroeconomics attempts to measure how well an economy is
performing, to understand what forces drive it, and to project how performance
can improve.

Macroeconomics deals with the performance, structure, and behavior of the

entire economy, in contrast to microeconomics, which is more focused on the
choices made by individual actors in the economy (like people, households,
industries, etc.).

KEY TAKEAWAYS

 Macroeconomics is the branch of economics that deals with the structure,

performance, behavior, and decision-making of the whole, or aggregate,
economy.
 The two main areas of macroeconomic research are long-term economic
growth and shorter-term business cycles.
 Macroeconomics in its modern form is often defined as starting with John
Maynard Keynes and his theories about market behavior and
governmental policies in the 1930s; several schools of thought have
developed since.
 In contrast to macroeconomics, microeconomics is more focused on the
influences on and choices made by individual actors in the economy
(people, companies, industries, etc.).

Macroeconomics

Understanding Macroeconomics
There are two sides to the study of economics: macroeconomics and
microeconomics. As the term implies, macroeconomics looks at the overall, big-
picture scenario of the economy. Put simply, it focuses on the way the economy
performs as a whole and then analyzes how different sectors of the economy
relate to one another to understand how the aggregate functions. This includes
looking at variables like unemployment, GDP, and inflation. Macroeconomists
develop models explaining relationships between these factors. Such
macroeconomic models, and the forecasts they produce, are used by
government entities to aid in the construction and evaluation of economic,
monetary, and fiscal policy; by businesses to set strategy in domestic and global
markets; and by investors to predict and plan for movements in various asset
classes.

Given the enormous scale of government budgets and the impact of economic
policy on consumers and businesses, macroeconomics clearly concerns itself
with significant issues. Properly applied, economic theories can offer illuminating
insights on how economies function and the long-term consequences of
particular policies and decisions. Macroeconomic theory can also help individual
businesses and investors make better decisions through a more thorough
understanding of the effects of broad economic trends and policies on their own
industries.

Limits of Macroeconomics
It is also important to understand the limitations of economic theory. Theories are
often created in a vacuum and lack certain real-world details like taxation,
regulation, and transaction costs. The real world is also decidedly complicated
and includes matters of social preference and conscience that do not lend
themselves to mathematical analysis.

Even with the limits of economic theory, it is important and worthwhile to follow
the major macroeconomic indicators like GDP, inflation, and unemployment. The
performance of companies, and by extension their stocks, is significantly
influenced by the economic conditions in which the companies operate and the
study of macroeconomic statistics can help an investor make better decisions
and spot turning points.

Likewise, it can be invaluable to understand which theories are in favor and

influencing a particular government administration. The underlying economic
principles of a government will say much about how that government will
approach taxation, regulation, government spending, and similar policies. By
better understanding economics and the ramifications of economic decisions,
investors can get at least a glimpse of the probable future and act accordingly
with confidence.

Areas of Macroeconomic Research

Macroeconomics is a rather broad field, but two specific areas of research are
representative of this discipline. The first area is the factors that determine long-
term economic growth, or increases in the national income. The other involves
the causes and consequences of short-term fluctuations in national income and
employment, also known as the business cycle.

Economic Growth
Economic growth refers to an increase in aggregate production in an economy.
Macroeconomists try to understand the factors that either promote or retard
economic growth in order to support economic policies that will support
development, progress, and rising living standards.

Adam Smith's classic 18th-century work, An Inquiry into the Nature and Causes
of the Wealth of Nations, which advocated free trade, laissez-faire economic
policy, and expanding the division of labor, was arguably the first, and certainly
one of the seminal works in this body of research. By the 20th century,
macroeconomists began to study growth with more formal mathematical models.
Growth is commonly modeled as a function of physical capital, human capital,
labor force, and technology.

Business Cycles
Superimposed over long term macroeconomic growth trends, the levels and
rates-of-change of major macroeconomic variables such as employment and
national output go through occasional fluctuations up or down, expansions and
recessions, in a phenomenon known as the business cycle. The 2008 financial
crisis is a clear recent example, and the Great Depression of the 1930s was
actually the impetus for the development of most modern macroeconomic theory.

History of Macroeconomics
While the term "macroeconomics" is not all that old (going back to the 1940s),
many of the core concepts in macroeconomics have been the focus of study for
much longer. Topics like unemployment, prices, growth, and trade have
concerned economists almost from the very beginning of the discipline, though
their study has become much more focused and specialized through the 20th
and 21st centuries. Elements of earlier work from the likes of Adam Smith
and John Stuart Mill clearly addressed issues that would now be recognized as
the domain of macroeconomics.

Macroeconomics, as it is in its modern form, is often defined as starting with John

Maynard Keynes and the publication of his book The General Theory of
Employment, Interest, and Money in 1936. Keynes offered an explanation for the
fallout from the Great Depression, when goods remained unsold and workers
unemployed. Keynes's theory attempted to explain why markets may not clear.

Prior to the popularization of Keynes' theories, economists did not generally

differentiate between micro- and macroeconomics. The same microeconomic
laws of supply and demand that operate in individual goods markets were
understood to interact between individuals markets to bring the economy into
a general equilibrium, as described by Leon Walras. The link between goods
markets and large-scale financial variables such as price levels and interest rates
was explained through the unique role that money plays in the economy as a
medium of exchange by economists such as Knut Wicksell, Irving Fisher, and
Ludwig von Mises.

Throughout the 20th century, Keynesian economics, as Keynes' theories became

known, diverged into several other schools of thought.

Macroeconomic Schools of Thought

The field of macroeconomics is organized into many different schools of thought,
with differing views on how the markets and their participants operate.

Classical
Classical economists held that prices, wages, and rates are flexible and markets
tend to clear unless prevented from doing so by government policy, building on
Adam Smith's original theories. The term “classical economists” is not actually a
school of macroeconomic thought, but a label applied first by Karl Marx and later
by Keynes to denote previous economic thinkers with whom they respectively
disagreed, but who themselves did not actually differentiate macroeconomics
from microeconomics at all.

Keynesian
Keynesian economics was largely founded on the basis of the works of John
Maynard Keynes, and was the beginning of macroeconomics as a separate area
of study from microeconomics. Keynesians focus on aggregate demand as the
principal factor in issues like unemployment and the business cycle. Keynesian
economists believe that the business cycle can be managed by active
government intervention through fiscal policy (spending more in recessions to
stimulate demand) and monetary policy (stimulating demand with lower rates).
Keynesian economists also believe that there are certain rigidities in the system,
particularly sticky prices that prevent the proper clearing of supply and demand.

Monetarist
The Monetarist school is a branch of Keynesian economics largely credited to the
works of Milton Friedman. Working within and extending Keynesian models,
Monetarists argue that monetary policy is generally a more effective and more
desirable policy tool to manage aggregate demand than fiscal policy. Monetarists
also acknowledge limits to monetary policy that make fine tuning the economy ill
advised and instead tend to prefer adherence to policy rules that promote stable
rates of inflation.
New Classical
The New Classical school, along with the New Keynesians, is built largely on the
goal of integrating microeconomic foundations into macroeconomics in order to
resolve the glaring theoretical contradictions between the two subjects. The New
Classical school emphasizes the importance of microeconomics and models
based on that behavior. New Classical economists assume that all agents try to
maximize their utility and have rational expectations, which they incorporate into
macroeconomic models. New Classical economists believe that unemployment is
largely voluntary and that discretionary fiscal policy is destabilizing, while inflation
can be controlled with monetary policy.

New Keynesian
The New Keynesian school also attempts to add microeconomic foundations to
traditional Keynesian economic theories. While New Keynesians do accept that
households and firms operate on the basis of rational expectations, they still
maintain that there are a variety of market failures, including sticky prices and
wages. Because of this "stickiness", the government can improve
macroeconomic conditions through fiscal and monetary policy.

Austrian
The Austrian School is an older school of economics that is seeing some
resurgence in popularity. Austrian economic theories mostly apply to
microeconomic phenomena, but because they, like the so-called classical
economists never strictly separated micro- and macroeconomics, Austrian
theories also have important implications for what are otherwise considered
macroeconomic subjects. In particular the Austrian business cycle theory
explains broadly synchronized (macroeconomic) swings in economic activity
across markets as a result of monetary policy and the role that money and
banking play in linking (microeconomic) markets to each other and across time.

Macroeconomics vs. Microeconomics

Macroeconomics differs from microeconomics, which focuses on smaller factors
that affect choices made by individuals and companies. Factors studied in both
microeconomics and macroeconomics typically have an influence on one
another. For example, the unemployment level in the economy as a whole has
an effect on the supply of workers from which a company can hire.

A key distinction between micro- and macroeconomics is that macroeconomic

aggregates can sometimes behave in ways that are very different or even the
opposite of the way that analogous microeconomic variables do. For example,
Keynes referenced the so-called Paradox of Thrift, which argues that while for an
individual, saving money may be the key building wealth, when everyone tries to
 increase their savings at once it can contribute to a slowdown in the economy
and less wealth in the aggregate.

Meanwhile, microeconomics looks at economic tendencies, or what can happen

when individuals make certain choices. Individuals are typically classified into
subgroups, such as buyers, sellers, and business owners. These actors interact
with each other according to the laws of supply and demand for resources, using
money and interest rates as pricing mechanisms for coordination.

 Macroeconomic Objectives (2020 Update) | tutor2u

 Sustainable and balanced economic growth (real GDP)
 Control of cost and price inflation (e.g. via an inflation target)
 High employment rate, low unemployment, reduced inactivity in the labour market
 Improved productivity, international competitiveness
See full list on tutor2u.net
https://www.tutor2u.net/economics/reference/...

 Macroeconomic Policy: Objectives and Instruments

https://www.economicsdiscussion.net/microeconomics/...
 Estimated Reading Time: 8 mins

1. Full employment: Performance of any government is judged in terms of goals of achieving full
…
2. Price stability: No longer the attainment of full employment is considered as a macroeconomic
goal. …
3. Economic growth: Economic growth in a market economy is never steady. These economies
…
4. Balance of payments equilibrium and exchange rate stability: From a macro- economic point
of …
See full list on economicsdiscussion.net

acroeconomics:
Macroeconomics is a source of economic knowledge that enables economists and other specialists
to have a diverse understanding of activities carried out in a wider economic range. Besides, it
provides detailed information about key determinants of national income level and employment,
including aggregate demand and aggregate supply. Increased aggregate demand and supply leads
to the growth of Gross domestic product because it results from incrementing production activities
that make the total value of goods and services produced rise.
Answer and Explanation:
The main macroeconomic objectives include price stability, growth of the economy, and increment of
employment rates.
Price stability
Since macroeconomics involves the study of activities in the entire economy, price stability is one of
its main objectives because it determines the consumption rate. When prices are stable, the
economy is likely to increase the consumption rate of produced products making different industries
generate more profits to empower their development activities. Further, increased consumption
makes the government increase the amount of revenue acquired from different economic activities,
making it have enough money to finance development activities such as construction and
maintenance of infrastructure.
Growth of an economy
Growing an economy is a macroeconomic goal because it enables nations to penetrate international
markets. Therefore, macroeconomics provides governments and organizations with a better
understanding of the key factors that will help them grow their economies, such as increased labor
inputs, technology advancements, and capital stock accumulation.
Increment of employment rates
Increasing employment will lead to money supply efficiency within an economy because consumers
will have enough money in their hands which will stimulate their spending. Moreover, increased
money supply lowers interest cost, which motivates consumer spending to increase demand, making
production activities rise. Therefore, increasing job opportunities is a macroeconomic goal because it
is crucial for an economy's health.

Importance of Macroeconomics:
1. It helps to understand the functioning of a complicated modern
economic system. It describes how the economy as a whole functions
and how the level of national income and employment is determined
on the basis of aggregate demand and aggregate supply.

2. It helps to achieve the goal of economic growth, higher level of GDP

and higher level of employment. It analyses the forces which
determine economic growth of a country and explains how to reach
the highest state of economic growth and sustain it.

3. It helps to bring stability in price level and analyses fluctuations in

business activities. It suggests policy measures to control Inflation and
deflation.
4. It explains factors which determine balance of payment. At the
same time, it identifies causes of deficit in balance of payment and
suggests remedial measures.

5. It helps to solve economic problems like poverty, unemployment,

business cycles, etc., whose solution is possible at macro level only,
i.e., at the level of whole economy.

6. With detailed knowledge of functioning of an economy at macro

level, it has been possible to formulate correct economic policies and
also coordinate international economic policies.

7. Last but not the least, is that macroeconomic theory has saved us
from the dangers of application of microeconomic theory to the
problems of the economy as a whole

Importance of Macroeconomics:
1. It helps to understand the functioning of a complicated modern
economic system. It describes how the economy as a whole functions
and how the level of national income and employment is determined
on the basis of aggregate demand and aggregate supply.

2. It helps to achieve the goal of economic growth, higher level of GDP

and higher level of employment. It analyses the forces which
determine economic growth of a country and explains how to reach
the highest state of economic growth and sustain it.

3. It helps to bring stability in price level and analyses fluctuations in

business activities. It suggests policy measures to control Inflation and
deflation.

4. It explains factors which determine balance of payment. At the

same time, it identifies causes of deficit in balance of payment and
suggests remedial measures.
5. It helps to solve economic problems like poverty, unemployment,
business cycles, etc., whose solution is possible at macro level only,
i.e., at the level of whole economy.

6. With detailed knowledge of functioning of an economy at macro

level, it has been possible to formulate correct economic policies and
also coordinate international economic policies.

7. Last but not the least, is that macroeconomic theory has saved us
from the dangers of application of microeconomic theory to the
problems of the economy as a whole