1 ECONTWO Introduction

MACROECONOMICS
Based on Macroeconomics by
Dornbusch and Fischer and
Elements of Economics by Tullao
Definition
a social science that
deals with the efficient

allocation of scarce
resources among its
alternative uses to satisfy
unlimited human wants
and needs
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Definition
As an allocation of wealth (arising from the
scarcity of resources)
As creation and consumption of wealth
(expansion of wealth)
As a science of choice
Definition
Looks at the economy
as a whole
Concerned with the
national product/output
(i.e., GNP/GDP)
Aggregate price level
Employment and
unemployment rates in the
economy
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The Economy as a System

Definition: a group of interrelated parts that
work to achieve a particular objective

Elements:
Needs: articulated by means of a problem that has to
be answered in different ways

Objective: elaboration on how the needs or problems
can be answered in specific and measurable terms
Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics

continuation of Elements:
Limitations: constraints that may prevent society in
answering fully its problems or needs

Alternative choices: list of alternative programs,
activities, and ways that society may choose in
addressing its problems and needs

continuation of Elements:
Decision-making framework: basis that will be used in
making a choice from among the alternative answers to

the problems or needs
Feedback mechanism: process of evaluating the
chosen alternative pursued in responding to the social
problem and need
Primary Economic Goal: Material Survival

Two important tasks:
production activities that describe the arrangements of
humans and other resources, institutions, and sectors in

creating goods, services, and resources from the
utilization of the wealth of the economy
distribution activities that illustrate how the allocation
and division of the goods, services, and resources to
the members of society are carried out for these
members to live and prosper materially
Macroeconomic Concerns
Aggregate Price level
increases in the overall price level (inflation) are a great
concern to policymakers, to citizens at large as well as

to economists
Aggregate Output
a concern particularly when the economy does not
seem to be producing as much as it is capable of

producing
Macroeconomic Concerns
Total Employment
related to the previous concern, the economy may not
be producing as much as it is capable of producing

because it is not employing all the people who want
jobs
The rest of the world (ROW) and its
relationship with the domestic economy
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Circular Flow of Products, Income,

and Money in a Simple Economy
composed of the households (HH) and the
firms
linked by the market for factor inputs and the
market for final goods and services
HHs own the factors of production; primary consumers
in the economy
firms are the primary producers in the economy

Circular flows
flow of resources, goods and services wherein HHs sell
the services of their resources in the factor markets

flow of money, income and expenditures is the flow of
payments in terms of rent, wages, and interest as well
as the flow of payments for the purchase of final goods
and services

Assumptions
the economy is stationary or is not growing
the expenditures of one sector is the income of another
sector
total income must equal total expenditures to attain
stability
savings and investments are equal in equilibrium
Expanded Circular Flow of

Products, Income, and Money
composed of the households (HH), the firms,
government, and the external sector

governments primary role is to provide services for the
public
external sector is a source of resources, final goods and
services, investment, and tax revenues
Instruments of Macroeconomic Policy

Fiscal Policy
One of the major ways the government affects the
economy is through tax and expenditure decisions. The

government collects taxes from the business and
household sectors. Both the magnitude and
composition of these taxes and expenditures have
major effects on the economy.

Monetary Policy
The government can, likewise, affect the economy by
controlling the quantity of money in the economy.
Income Policies
These are direct attempts of the government to control
prices and wages. They generally take the form of

regulations specifying the maximum amount by which
prices or wages are permitted to rise.

Supply-side Policies
Policies that focus on
aggregate supply and

increasing production. In
practice, the main instrument
of supply-side policy has been
the tax system (i.e., to
increase labor supply)
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Schools of Thought in
Macroeconomics: Neoclassical
Proponents include Milton Friedman, Robert
Lucas, and Thomas Sargent

Assumptions: 1) economic agents maximize
optimal decisions based on available
information; 2) expectations are rational; and
3) markets clear
Asserts that markets work best if they are left
to themselves. Individuals act rationally in their
self-interest in markets that adjust rapidly to
changing decisions.
Schools of Thought in
Macroeconomics: New Keynesian
Proponents include Franco Modigliani, James
Tobin, and George Akerlof

Assumptions: markets do not clear even when
individuals look out for their own interest
because of imperfect information and price
rigidities
Asserts that government intervention can
significantly improve the operation of the
economy.

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MACROECONOMICS

deals with the efficient

The Economy as a System

work to achieve a particular objective

Needs: articulated by means of a problem that has to

be answered in different ways

Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics

The Economy as a System

answering fully its problems or needs

Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics

The Economy as a System

making a choice from among the alternative answers to

Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics

Primary Economic Goal: Material Survival

humans and other resources, institutions, and sectors in

Based on Dr. Tereso Tullaos textbook entitled, Elements of Economics

concern to policymakers, to citizens at large as well as

seem to be producing as much as it is capable of

be producing as much as it is capable of producing

The rest of the world (ROW) and its

relationship with the domestic economy

Circular Flow of Products, Income,

Circular Flow of Products, Income,

the services of their resources in the factor markets

Circular Flow of Products, Income,

Expanded Circular Flow of

government, and the external sector

Instruments of Macroeconomic Policy

economy is through tax and expenditure decisions. The

Instruments of Macroeconomic Policy

controlling the quantity of money in the economy.

prices and wages. They generally take the form of

Instruments of Macroeconomic Policy

aggregate supply and

Lucas, and Thomas Sargent

Tobin, and George Akerlof

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