Introduction to macroeconomics Microeconomics Examines the functioning of firms and households. Macroeconomics Analyzes economy aggregates (such as national income, consumption, investment, overall level of prices) and aggregate behavior (all households and firms together). Relies on microeconomic foundations.

The roots of macroeconomics Before the great depression (1929) the profession was “dominated” by classical models (“market clearing” models). As a result recessions were considered self-correcting. During the great depression unemployment remain close to 20% for nearly 10 years! Classical models failure. The Keynesian revolution: John Keynes suggested that there were times in which the aggregate demand shifted inward. Importance of government action.

Reminder: Macroeconomic concerns Inflation: increase in the overall price level. Output trend and business cycle. Unemployment rate: percentage of labor force that is unemployed.

Typical government policies and tools Fiscal policy: Taxes and expenditures. Monetary policy: Central bank tools that affect quantity of money.

Components of macroeconomics: Agents in macroeconomics Firms Households Government Rest of the world

Components of macroeconomics: The three market arenas Goods-and-services market: Supply: firms and rest of the world. Demand: households, government, firms and rest of the world. Labor market: Supply: Households. Demand: Government and firms. Money market.