Main ideas of Macroeconomics

3 main ideas, output, money and expectations. They have relationships between them. Macroeconomic theory provides us with a baseline against which to compare and assess reality and, more broadly, with a framework for understanding economic events. Introduction

The basic principles and relationships help to shed light on a surprisingly broad range of things, many of which shape the business environment and affect the relative risks and rewards of decisions that all of us make every day. Introduction

The goods and services produced in an economy. Determines a countries level of prosperity Gross domestic product. GDP = the total value of all final goods and services produced in a country in a given year Output

Money is critical for facilitating the exchange of goods and services within an economy. influences interest rates, exchange rates, and inflation An increase in money supply decreases interest rates, causes the exchange rate to depreciate, and increases inflation Money

Nominal values are measured in terms of current market prices, whereas real values are measured in terms of constant prices and thus reflect underlying quantities, after controlling for inflation. A 5 percent increase in real GDP, for example, means that output—the factor that macroeconomists most care about— has increased by 5 percent, regardless of the inflation rate. Money – Nominal and Real

A central bank's primary tools for influencing the money supply are the discount rate, the reserve requirement, and open market operations e.g. buying and selling government bonds on the open market. Inflation targeting Money Supply

Open market operations are the principal tool used by the Federal Reserve to implement monetary policy. They are a powerful and flexible means of fostering conditions in the federal funds market that are consistent with policy objectives. st_openmarketops.htmhttp:// st_openmarketops.htm nomia/html/index.en.htmlhttps:// nomia/html/index.en.html Tools of Central Banks

Expectations can literally drive reality— particularly in the short run. If individuals and firms expect inflation, they may actually create it by preemptively demanding wage and price increases. Negative expectations can prove particularly brutal when they relate to the economy as a whole. Expectations

If business managers suddenly become pessimistic about future demand, they might prepare for "bad times" by canceling investment projects and laying off workers. Many productive resources are thrown out of work Real GDP falls, unemployment rises, and prices tend to decline. Expectations

Great Depression, real GDP had fallen sharply and unemployment increased rapidly Keynes recommended aggressive deficit spending (expansionary fiscal policy) Large deficits would create new demand for goods and services and, as a result, would lead people to revise their expectations upward. As consumers and business managers became more confident, they would increase their own expenditures, helping the economy. Managing expectations

Another idea is that by cutting expenditures the government can create confidence in their economy and increase investment. By credibly committing to fight whenever it appears, central banks can help kill off inflationary expectations. Expectations

Economic relationships that seem perfectly compelling in theory do not always hold in practice. To give just two examples: interest rates do not always fall when money supply rises, and stagnant economies don't always improve in response to deficit spending. When interpreted well the basic principles of macroeconomics—which draw connections between output, money, and expectations—can prove enormously helpful Conclusion