Principals of Macroeconomics

Afnan Ghanayem 16/10/2022

2 Module Information
• Lecturer
– Dr Afnan Ghanayem
– [email protected]

• Classes
– Sunday, Tuesday 12:30- 2:00.

• Reading
– Lecture Notes
– Text book: Karl E. Case. Ray C. Fair, Sharon M. Oster ‘Principles of Macroeconomics’
eleventh edition.

• Assessment
– First exam 25%
– Second exam 25%
– 10% participation and attendance.
– 40% final exam.

Afnan Ghanayem 16/10/2022

3 Module Overview

Chapter 5: Introduction to Macroeconomics.

Chapter 6: Measuring National Output and National Income.
Chapter 7: Growth, Productivity, Unemployment and Inflation.
Chapter 8: Aggregate Expenditure and Equilibrium Output.
Chapter 9: The Government and Fiscal Policy.
Chapter 10: The Money Supply and The Federal Reserve System
Chapter 11: Money Demand, Interest Rate, and Monetary Policy
Chapter 12: Money, Interest Rate, and Output: Analysis and Policy
Chapter 13: Aggregate Demand, Aggregate Supply, and Inflation

Afnan Ghanayem 16/10/2022

4 Chapter 5: Introduction to Macroeconomics

Afnan Ghanayem 16/10/2022

5 Chapter “5” Overview

 The roots of macroeconomics

 Macroeconomics main concern, output, inflation and
unemployment.
 The role of Government in macro-economy, fiscal and
monetary policy.
 The component of macroeconomics, circular flow
diagram and the three market arena.

16/10/202
Afnan Ghanayem
2
6

Importance

Afnan Ghanayem 16/10/2022

7 Macroeconomic vs Microeconomic
 Microeconomics
- How markets work and how resources are allocated.
- The behavior of firms (maximize profits) and households
(maximize utility).

 Macroeconomics
- Focuses on the determinants of total national output.
- Studies not household income but national income, not individual
prices but the overall price level.
- It analyze the total employment in the economy instead of demand
for labor in the automobile industry.

Afnan Ghanayem 16/10/2022

8

 Aggregate is used in macroeconomics to refer to

‘sums’

- Aggregate behavior: the behavior of all households and

firms together.

- Aggregate consumption: total consumption in the

economy

- Aggregate investment: total investment in the

economy.
Afnan Ghanayem 16/10/2022
9 Macroeconomic Concerns

 Output growth

 Unemployment Rate

 Inflation and deflation

Afnan Ghanayem 16/10/2022

10
Output growth

 Business cycle: the cycle of short-term ups and downs in the

economy.

 Aggregate output: the total quantity of goods and services

produced in an economy in a given period.

 Contraction, Recession or Slump: a period during which

aggregate output declines.

 Depression: a prolonged and deep recession.

 Expansion or Boom: the period in the business cycle from a trough

up to a peak during which output and employment grow.

Afnan Ghanayem 16/10/2022

11 Business cycle

Afnan Ghanayem 16/10/2022

12 Unemployment Rate

 Unemployment rate: the percentage of the labor force that is

unemployed.

 The existence of unemployment seems to imply that the

aggregate labor market is not in equilibrium—that something
prevents the quantity supplied and the quantity demanded from
equating.

Afnan Ghanayem 16/10/2022

13 Inflation

 Inflation: an increase in the overall price level.

 Hyperinflation: a period of very rapid increases in

the overall price level.

 Deflation: a decrease in the overall price level.

Afnan Ghanayem 16/10/2022

14 The Components of the Macro-economy

 Households

 Firms

 Government

 The rest of the world

Afnan Ghanayem 16/10/2022

15 The Circular Flow

 Circular Flow: a diagram showing the income received and

payments made by each sector of the economy.

 Transfer payments: cash payments made by the government to

people who do not supply goods, services, or labor in exchange

for these payments. (Social Security benefits, and welfare

payments).

Afnan Ghanayem 16/10/2022

16 The Circular Flow Diagram

Afnan Ghanayem 16/10/2022

17 The Three Market Arenas

 The goods-and-services market where firms supply to the

goods-and-services market. Households, the government, and
firms demand from this market.

 The labor market: households supply labor and firms and the
government demand labor.

Afnan Ghanayem 16/10/2022

18 The Three Market Arenas

 The money (financial) market.

 Households supply funds to this market in the expectation of

earning income in the form of dividends on stocks and interest on
bonds. Also, they demand (borrow) funds from this market to
finance various purchases.

 Firms borrow to build new facilities in the hope of earning more in

the future.

 The government borrows by issuing bonds.

 The rest of the world borrows from and lends to the money market.
Afnan Ghanayem 16/10/2022
19 The Three Market Arenas

 The money (financial) market.

 Treasury bonds, notes, and bills: promissory notes issued by the federal
government when it borrows money.

 Corporate bonds: promissory notes issued by firms when they borrow

money.

 Shares of stock: financial instruments that give to the holder a share in the
firm’s ownership and therefore the right to share in the firm’s profits.

 Dividends: the portion of a firm’s profits that the firm pays out each
period to its shareholders.

Afnan Ghanayem
16/10/2022
20 The Role of the Government in the Macroeconomy
 Fiscal policy Government policies concerning taxes and spending.

 The government’s decisions about how much to tax and spend. The federal
government collects taxes from households and firms and spends those
funds on goods and services ranging from missiles to parks to Social
Security payments to interstate highways. Taxes take the form of personal
income taxes, Social Security taxes, and corporate profits taxes, among
others.

 An expansionary fiscal policy is a policy in which taxes are cut and/or

government spending increases.

 A contractionary fiscal policy is when taxes are increases and/or

government spending decreases.
Afnan Ghanayem 16/10/2022
21
The Role of the Government in the Macroeconomy

 Monetary policy the tools used by the Central banks to control the

quantity of money, which in turn affects interest rates.

 The central bank determines the quantity of money in the economy,

which in turn affects interest rates. The central banks decisions

have important effects on the economy.

Afnan Ghanayem 16/10/2022

 Chapter Summary
22

In this chapter we have discussed:

 The importance of macroeconomics

 Inflation, output, unemployment concepts.

 Fiscal and monetary policy.

 Circular flow diagram and the three market arena.

Afnan Ghanayem 16/10/2022