Macroeconomie

Content of the course*

Introduction to macroeconomics: the circular flow of income and national accounts

Economic growth

Saving and investment; Financial markets/capital markets

Labour market

Economic fluctuations

Aggregate demand and aggregate supply; the macroeconomic equilibrium

The keynesian macroeconomic equilibrium model

Fiscal policy

Monetary policy

Fiscal and monetary policy reflected by the IS – LM model

Inflation and unemployment

Open macroeconomics

Introduction to the European macroeconomics

*changes in the order of topics may appear

How people make decisions?

How people interact?

How the economy functions as a whole?

Fundamental questions:

What to produce? How? For whom?

Microeconomics – the study of how households and firms make decisions and how they interact in the markets.

Macroeconomics – the study of economy-wide phenomena, including inflation, unemployment and economic growth.

The Circular Flow of Income

5 agents: households, firms, state, financial institutions, foreign sector

Real & monetary flows

Injections

Leackages

Identities

10 Basic Principles (Mankiw)

1. People face trade-offs

2. The cost of something is what one gives up in order to get that something

3. Rational people think at the margin

4. People respond to incentives

5. Trade can make anyone better off

6. Markets are usually a good way to organize economic activity

7. Governments can sometime improve market outcomes

8. A country’s standard of living depends on its ability to produce goods and services

9. Prices rise when governments print too much money

10. Society faces a short-run trade off between inflation and unemployment

Keywords

Productivity = the amount of goods and services produced from each hour of worker’s time

Inflation = an increase in the overall level of prices in the economy

Phillips Curve = a curve showing the short-run trade-off between inflation and unemployment (because of the sticky prices)

Principle no. 8: A country’s standard of living depends on its ability to produce goods and services

Keyword: productivity

Implications for the public policies: How do public policies affect the abillity to produce goods and services?

A high education system

Ensuring access of enterpreneurs to necessary resources and to best technologies

BUT

Budget deficit has its secondary effects

Principle no. 9 : Prices rise when governments print too much money

Inflation: a steady rise in the overall level of prices

Lessons from past history:

When authorities print large amounts of money the value of money decreases (Germany, year 1920).

A high level of inflation is accompanied by a fast increase in the amount of money (Romania 1992-1993), whereas a low level of inflation is accompanied by a smaller increase of the amount of money (Romania today).

NOTE: INFLATION - DISINFLATION - DEFLATION

Principle nr. 10: Society faces a short-run trade off between inflation and unemployment 

Question: If inflation is so easy to explain, why is it so difficult for the governmental agencies to keep inflation down?

Phillips Curve

In an economy, not all prices instantly adjust when the amount of money diminishes (they are rigid on the short run).

When authorities diminish the money in cirulation, the volume of expenditure of the individuals diminishes. Lower expenditure together with prices that remain at a high level will diminish the total sales of companies. A loss in sales determinesc companies to fire workers.

Hence, the reduction of money termporarly increases unemployment – up to the moment when all prices adjust to this change.

Formulating economic policies

Stating objectives or goals:

Economic growth

Full employment

Economic efficiency

Price level stability

Economic freedom

An equitable distribution of income

Economic security

Balance of trade

Options /strategies

Assessment