Overview of

Macroeconomics
Objectives and Instruments of
Macroeconomics
• Objectives:
• 1. High Output
• 2. Low Employment
• 3. Stable Prices

How do we measure success in achieving this objectives?

Objectives and Instruments of
Macroeconomics
• Measure of Output and Output Growth
• Gross Domestic Product (GDP) final market value of goods and services
produced in an economy for a given period. Given GDP, we can calculate
growth of output or GDP growth rate
𝐺𝐷𝑃𝑡 − 𝐺𝐷𝑃𝑡−1
𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 𝑖𝑛 % = 100 ∗
𝐺𝐷𝑃𝑡−1
• Potential GDP maximum sustainable output an economy can produce given
its available inputs and technology. Note that actual GDP is not always equal
to the potential GDP.
• Nominal (Actual Prices) vs Real (Constant Prices), which is a better measure?
Objectives and Instruments of
Macroeconomics
• Measure of Employment
• Employment rate or the percentage of labor force that is employed. Labor
force is the part of population that is of working age and is looking for job.
Objectives and Instruments of
Macroeconomics
• Price Stability
• The primary measure of price stability is the rate of inflation which in turn is
measured via Consumer Price Index (CPI). CPI measures the average trend in
prices of goods typically consumed by consumers.
• Inflation formula
𝑃𝑡 −𝑃𝑡−1
• 𝐼𝑛𝑙𝑓𝑎𝑡𝑖𝑜𝑛 𝑖𝑛 % = 100 ∗
𝑃𝑡−1
• Deflation, Inflation, Hyperinflation
Objectives and Instruments of
Macroeconomics
• Stable Inflation
The Tools of Macroeconomic Policy
• The primary tools are
1. Fiscal Policy
2. Monetary Policy
The Tools of Macroeconomic Policy
• Fiscal Policy
• Involves the use of taxes and government expenditure.

a. Government Expenditure : Government purchases and transfers

b. Taxes: affects household disposable income and expenditure. Business
incentives as well as investment behaviors.
The Tools of Macroeconomic Policy
• Monetary Policy
• Involves Central Banks’ management of money supply, credit, banking system
and short-term interest rates and exchange rates.

• Example: lower interest rates  lower investment lower

output/employment
Aggregate Supply and Demand
Aggregate Supply and Demand
• Aggregate Supply
• Refers to the quantity of goods and services nation’s businesses willingly
supply. It depends on nations’ managerial and technical capacity, inputs and
costs. Price also determines aggregate supply levels.
Aggregate Supply and Demand
• Aggregate Demand
• Refers to different sectors’ spending for a given period
• It is composed of Consumption, Investment, Government Purchases, and net
exports.

• Diagram as board work (unintended inventory etc.)

Aggregate Supply and Demand