Macroeconomics Overview and Concepts

Macroeconomics Objectives

• Sustainable rates of growth
• Low level of unemployment
• Low level of inflation
• Equitable distribution of income

Macroeconomics

• Branch of economics focusing on the entire economy, not individual markets.
• Analyzes large-scale economic phenomena and aggregates.

Gross Domestic Product (GDP)

• Total value of goods and services produced in a country.

Unemployment Rates

• Percentage of people actively seeking employment but unable to find it.

Inflation & Deflation

• Prices of goods rising or falling.

Government Policies

• Fiscal policy: Government spending and taxation.
• Monetary policy: Controlling the money supply and interest rates.

Economic Growth

• Increase in a country's productive capacity.

Trade & Balance of Payments

• Flow of goods, services, and capital across borders.

Key Goals

• Economic stability (minimizing recessions and controlling inflation)
• Full employment
• Economic growth (nation's income and living standards)
• International trade equilibrium (balanced interactions)

Industrial Level

• Rationale for almost all business activities
• Good economic indicators encourage investment and expansion.
• Ominous indicators encourage stability or even retrenchment.
• Companies are aware of the link between the economic environment and their profitability.
• Risk sensitivity to macro events (e.g., oil prices, exchange rates)

Circular Flow of Income

• Money flows directly between households and firms.
• Money is a stock concept (amount at a given time); income is a flow concept (per time period).
• Velocity of circulation is the proportion between money and income.
• Aggregate demand (AD): Total spending on goods and services produced within a country over time.
• Injections (J): Consumer spending (Cd), Investment (I), Government spending (G), Export expenditure(X).
• Withdrawals (W or Leakages): Import expenditure (M), Net taxes (T), Savings (S)

Relationship between Injection and Withdrawal

• Direct link between Savings & Investment, Gov expenditure & Tax, Import & Export.
• Different decisions for spending and saving.
• Imports and exports will also differ.
• Budget surplus or deficit.

Measuring National Income (GDP)

• Product method, income method, expenditure method
• Each transaction equally contributes to the economy's income and expenditure.

Functions of Money

• Medium of exchange
• Means of storing wealth
• Means of evaluating future claims and payments
• Means of establishing value.

Attributes of Money

• Durability
• Divisibility
• Transferability
• Non-counterfeitability

Narrow and Broad Money

• Narrow money (M1): Most liquid forms of money. (Cash and other easily convertible money.)
• Broad money (M2, M3): Includes less liquid assets that can be converted to cash with effort (e.g., time deposits, savings, money market funds)

Fiat Money

• Modern economic systems
• Monetary value derived from government trust
• Accepted in exchange
• Not connected to any tangible asset.

Eurozone Monetary Aggregates

• Different classification of money supply based on their liquidity.
• Liquidity: How easily an asset can be converted to cash.
• M1, M2, M3 are monetary aggregates that are used in the ECB (European Central Bank) to calculate the size of the money supply.

Roles of the Central Bank

• Note issue
• Lender of last resort
• Liquidity provider to banks
• Oversee financial institutions
• Manage government borrowing
• Control inflation
• Exchange rate policy & reserve management

Bonds

• Fixed income instruments representing a loan.
• Typically provide a fixed or predictable income stream to investors.
• Primary market: Initial bond issue.
• Secondary market: Bonds traded by investors post-issue.
• Inverse relationship between bond prices and interest rates.

Treasury Bills

• Short-term debt securities issued by governments.
• Sold at discounted prices and redeemed at face value at maturity.
• Inverse relationship between the price of bonds and the interest rate.

Controlling Money Supply: Government Bonds

• Government's way of raising money through taxes and bond sales.
• Buying bonds increases money supply.
• Selling bonds decreases money supply.

Open Market Operations

• Selling Treasury bills (TBs) to reduce money supply
• Buying Treasury bills (TBs) to increase money supply

Bank Credit Creation

• Banks expand deposits through lending.
• Increase in deposits increase money supply.
• Banks create money through lending to people—who deposit it back into the bank.

Money Multiplier

• The number of times the initial injection of cash is multiplied in the money supply.
• Calculated using the required reserve ratio.

Capital Adequacy Ratio (CAR)

• Capital portion of deposits for banks
• Ensures bank stability
• Amount of capital relative to risk-weighted assets (RWA).

Aggregate Demand (AD)

• Total spending on goods and services in an economy.
• Downward sloping: as prices rise, people buy less.
• Shifts in AD: Consumption, Investment, Government spending and Net Exports (NX).

Factors influencing AD curve

• Wealth/income effect (P & C)
• Interest rate effect (P & I)
• Exchange rate effect (P & NX)

Supply-Side Policies

• Policies aimed at increasing the productive potential of an economy.
• Reducing barriers, enhancing market flexibility, raising productivity.
• Fiscal policies (e.g. tax cuts, government spending).
• Policies of deregulating and/or privatizing industries to encourage competition and lower costs.

New Classical Supply-Side Policies

• Reduce government expenditure
• More efficient use of resources
• Reduce the size of the public sector
• Crowding out (private sector investment).

This quiz explores the fundamental objectives and concepts of macroeconomics, including economic growth, unemployment, inflation, and government policies. Test your understanding of how these elements interact within the larger economy and their impact on public welfare.