1. ASHESI UNIVERSITY MACROECONOMICS LECTURE B, DAY ONE. FALL, 2010.
EVOLUTION OF MACROECONOMICS AS A BRANCH OF ECONOMICS.

2. EVOLUTION OF MACROECONOMICS AS A BRANCH OF ECONOMICS
Macroeconomics originated in the 1930s
Alfred Marshall- Defined economics as the study of the ordinary business of life
Macroeconomics is the study of the “ordinary business of life” in the aggregate
It examines the economy as a whole
Key variables of macroeconomic interest.
Total output; employment & unemployment
aggregate price level
Interest rates, wage rates & foreign exchange rates

3. INTRODUCTION- MACROECONOMIC THEORIES
Classical Economics
Body of macroeconomic thought before the Keynesian revolution
Adam Smith, David Ricardo, J.S. Mill
Neoclassical economists- Alfred Marshall, A.C. Pigou
Equilibrium level of output at any point in time was a point of full employment
Importance of real as opposed to monetary factors in determining output
Self adjusting tendencies of the economy
Government intervention was unnecessary

4. INTRODUCTION- MACROECONOMIC THEORIES
Keynesian Economics
Started as an attack on classical economics
Developed against the background of the Great Depression of the 1930s
Emphases the role of aggregate demand (AD) in the determination of income and output
Changes in the autonomous elements of AD are key in explaining equilibrium income
Recognizes the role of fiscal stabilization policy in managing AD

5. INTRODUCTION- MACROECONOMIC THEORIES
Challenges to Keynesian Economics (Post Keynes)
Monetarism
Attempt to reassert the role of money and monetary policy
Milton Friedman
Supply of money has a dominant influence on nominal income
Noninterventionist policy conclusion
New Classical economics
Offer a more fundamental attack on Keynesian theory than monetarism
Stabilization of real variables, cannot be achieved by aggregate demand management
Two Recent theories
Real business cycle theory
New Keynesian theory
Keynesian response to new classical economics
Milton Friedman, who died at age 94 in November 2006 was the major intellectual force in the early development of monetarism
Other three propositions of monetarism:
In the LR, the influence of M is primarily on the price level and other nominal variables. In the LR, real variables, such as output and employment, are determined by real, not monetary factors
In the SR, the supply of money does influence real variables. Money is a dominant factor causing cyclical movements in output and employment
The private sector is inherently stable. Instability in the economy is primarily as a result of govt. policies
New classical economics- have not just the usefulness of Keynesian analysis for understanding economic events and designing useful policies but also its internal consistency
The SR and LR values of real variables such as output, employment are insensitive to systematic AD mgt policies
i.e, systematic monetary and fiscal policy actions that change AD will not affect output and employment.
Real business cycle theory
New Keynesian theory

6. DEFINITION OF MACROECONOMICS
Subject matter of macroeconomics
What factors determine the levels of macro variables like inflation, unemployment, the exchange rate and the Gross Domestic Product (GDP)?
How do these variables change over time?
Rate of growth of output
Inflation rate
Changing unemployment
In periods of expansion
In periods of contraction (recession)
Appreciation & Depreciation of FX rates 1.

7. POLICY QUESTIONS OF MACROECONOMICS
Policy Oriented Nature of Macroeconomics
How does govt. policies affect output & employment?
How is inflation influenced by govt. policies
What govt. policies are optimal in achieving the most desirable behavior of aggregate variables?
Should govt. policy be aimed at achieving a target level of FX rates?
Economists tend to disagree on policy issues
Disagreements stem from differing views on factors that determine key variables
READ MANKIW’S ARTICLE AND YOUR TEXTBOOK

8. APPLICATION: ECONOMIC PERFORMANCE of GHANA - OUTPUT

9. ECONOMIC PERFORMANCE- INFLATION

10. ECONOMIC PERFORMANCE- THE CEDI/DOLLAR EXCHANGE RATE

11. KEY QUESTIONS IN MACROECONOMICS
What determines the cyclical behavior of output & employment?
What causes recessions?
What determines the rate of growth of output over periods of time?
Why have some countries grown very rapidly and some more slowly?
What are the determinants of the rate of inflation?
What role does macroeconomic policies play in determining inflation?
What is the relationship between inflation and unemployment?