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Fundamentals of Macroeconomics

May 8, 2025

Macroeconomics and Related Concepts

Class 01: Macroeconomics vs Microeconomics

  • Macroeconomics: Studies the economy as a whole, focusing on aggregate phenomena, performance, and policy influence.
  • Microeconomics: Focuses on individual and business choices in specific markets, and government policy influence.

Key Terms:

  • Ceteris Paribus: All things being equal.
  • Positive Analysis: Descriptive, claims about how the world works (testable).
  • Normative Analysis: Prescriptive, claims about how the world should be (opinion-based).

Production Possibilities Frontier (PPF)

  • Represents combinations of outputs of two products using all inputs.
  • Concave shape indicates increasing opportunity cost (marginal cost).

Market Concepts

  • Market: Arrangements for buyers and sellers to exchange information and do business.
  • Law of Demand: Higher price = lower quantity demanded (inverse relationship).
  • Law of Supply: Higher price = greater quantity supplied (direct relationship).

Circular-Flow Diagram

  • Illustrates interaction between households (consumers) and firms (suppliers).
  • Factors of production: Labor, Capital, Land, Entrepreneurship.

Class 02: Gross Domestic Product (GDP)

  • Definition: GDP is the market value of all final goods/services produced in a country.
  • Approaches:
    • Output Approach: Sum of value added across production.
    • Income Approach: Sum of income paid (wages, rents, etc.).
    • Expenditure Approach: Sum of spending (Consumption, Investment).

Gross vs Net

  • Gross: Before depreciation of capital.
  • Net: After depreciation of capital.

Class 03: Nominal vs Real GDP

  • Nominal GDP: Current year prices.
  • Real GDP: Prices of a reference base year (reflects actual production change).

Inflation and Measures

  • GDP Deflator: Average price level of the economy.
  • Consumer Price Index (CPI): Measures consumer price level.

Class 04: Business Cycles

  • Expansion: Economy recovering from recession.
  • Economic Growth: Sustained long-term performance (increase in real GDP).
  • Solow Model: Focuses on capital accumulation and technological progress.

Class 05: Savings and Investment

  • Savings: Income not spent on consumption.
  • Investment: Spending on capital goods.

Macro Fundamental Identities

  • Closed Economy: Domestic Saving = Investment.
  • Open Economy: Accounts for international transactions.

Class 06: Loanable Funds Market

  • Summarizes supply (savers) and demand (borrowers) for funds.
  • Interest Rate: Price of money over time.

Class 07: Inflation

  • Defined: Increase in average price level.
  • Price Index Examples: CPI, GDP Deflator.

Class 08: Quantity Theory of Money

  • Long-term increase in money supply leads to price level increase.
  • Equation: MV = PY (Money Supply, Velocity, Price Level, Real GDP).

Class 09: Potential GDP

  • Potential GDP: Real GDP at full employment.
  • Output Gap: Difference between observed and potential GDP.

Class 10: Keynesian Model

  • Describes economy in short-run where prices are sticky.
  • Multiplier: Change in equilibrium expenditure over change in autonomous expenditure.

Class 11: Fiscal Policy

  • Expansionary Policy: Increases G or reduces T to boost GDP.
  • Contractionary Policy: Reduces G or increases T to lower GDP.
  • Counter-Cyclical Policy: Government actions against economic cycles.

Class 12: Monetary Policy

  • Central Bank: Regulates national banks, controls money supply.
  • Policy Tools: Open market operations, interest rates, reserve ratios.
  • Liquidity Trap: Interest rates at 0, limiting monetary policy effectiveness.