Macroeconomic Theory

© 1999-2020, Douglas A.Ruby (06-02-2020)

Macroeconomics: This branch emerged in the 1930's in response to the challenges of the Great Depression and the consensus failure of economics/microeconomics to address these policy challenges. The goal of macroeconomics is about the development of data, tools and the determination of policy to guide aggregate economic activity. These tools, and the models behind them, are based on solid microeconomic understanding. In the absence of the need for this policy, there would be little use for the tools of macroeconomic analysis. This, of course, is not always the case. In my opinion, macroeconomic analysis is better treated as a field of economics (like: labor economics, international trade, urban economics, among others) rather than a branch equal-to, and separate from microeconomics.

Navigate via the: Glossary

1. Basics

0. Economics as a Social Science
1. Economics
2. Microeconomics, the Price System and Relative Prices
3. Markets and Prices
Practice: Markets and Prices
4. An Introduction to Macroeconomic Policy

2. Macroeconomic Measures

0. Measures of Economic Activity
1. Living Standards and Aggregation
2. Real GDP and Business Cycles
Practice: Aggregation, GDP and Business Cycles
3. Measures of Unemployment
4. Inflation and Inflationary Expectations
Practice: inflation and Unemployment
5. The Balance of Payments
6. Exchange Rates
Practice: International Linkages

3. Capital, Wealth and Living Standards

0. Capital and Wealth
1. Capital and Living Standards
2. Production Relationships and Output
3. the Accumulation of Capital
Practice: Living Standards and Capital Accumulation

4. The Ability to Spend

0. the Ability to Spend
1. Income Determination
2. Aggregate Demand
Practice: Aggregate Demand and the Ability to Spend

5. Aggregate Consumption

0. Consumption Decisions
1. the Permanent Income Hypothesis
2. Microfoundations: the Two-period Model of Consumption
3. the Life-Cycle Hypothesis
Practice: Consumption Expenditure

6. Investment Decisions

0. Investment Decisions
1. Microfoundations: Investment and Profit Maximizing Behavior
2. Other models: the Accelerator and Tobin's Q
Practice: Investment Expenditure

7. Interest Rate Determination

0. Nominal and Real Interest Rates
1. Real Interest Rates
Practice: Nominal and Real Interest Rates
2. the Flow of Funds and Interest Rate Determination
3. the Term and Risk Structure of Interest Rates
Practice: Interest Rate Determination

8. Financial Markets

0. Financial Markets
1. Asset Prices and Asset Yields
Practice: Financial Markets and Assets
2. Money as a Financial Asset
3. the Inventory-Theoretic Model
4. the Portfolio-Theoretic Model
Practice: Money Demand
5. Central Banking and Monetary Policy
Practice: Central Banking and the Money Supply

9. The Ability to Produce

0. The Abilty to Produce
1. Microfoundations: Labor Supply Decisions
Practice: The Ability to Produce
2. Price Level Determination
3. Price Level Determination and Aggregate Supply
Practice: Aggregate Supply and Price Level Determination
4. The Quantity Equation: Money Growth and Inflation
5. Rational Expectations

10. Economic Policy

0. Economic Policy
1. Demand-side Policy
2. Fiscal Policy
3. Monetary Policy
Practice: Fiscal and Monetary Policy
4. Deficits and the Federal Debt
5. Supply-side Policy

External Sites

A. The Federal Reserve System
B. Federal Reserve Economic Database (FRED)
C. Bureau of Economic Analysis (BEA)
D. Bureau of Labor Statistics (BLS)
E, Census Bureau (Population estimates)
F. National Bureau of Economic Research (NBER)

The Circular Flow of Expenditure

The circular flow diagram for a macroeconomy include four major players; households, business firms (producing private goods and services), government (providing public goods and services) and the international sector -- other nations that trade with the domestic economy.

Much of the trading activity takes place either in output markets -- where goods and services are bought and sold or in input markets -- where factor inputs (labor, capital, resources...) are bought and sold. Because we are measuring activity in the aggregate, the emphasis is on expenditure flows measured in currency terms -- expenditure can be aggregated where as quantities of different types of goods can not be lumped together.