1. EC 122: Introductory
Macroeconomics
Macroeconomic Models
June, 2023

2. 1. Introduction
2
⚫Macroeconomics isconcernedwiththebehaviourofthe
economyasawhole
 Macroeconomicsstudies:
⚫Boomsandrecessions
⚫Economy’s total output of goods and services
⚫Growth of output
⚫Rates of inflation and unemployment
⚫Balance of payments and
⚫Exchange rates

3. Introduction..
3
 Macroeconomics analyses economic growth
and fluctuations
⚫Long run economic growth
⚫Short run fluctuations
⚫Business cycles
 Macroeconomics analyses impact of policies
⚫Consumption and investment policies
⚫Changes in wages and prices
⚫Monetary and fiscal policies
⚫Money stock, government budget, interest rates
and national debt
⚫Trade balance

4. Division of macroeconomic issues:
⚫Making understand macroeconomic issues are
reduce to the following essentials
⚫Goods market, labor market, and financial
markets of the economy
⚫Macroeconomics deals with each market as a
whole
 For example
⚫It studies markets for different goods as a
single market
⚫Markets for agricultural products
⚫Markets for medical services
⚫It studies labor market as a whole
4

5. Benefits of Abstraction
⚫Facilitates understandingof interactionsamong goods, labor
and financial markets
 Objective of macroeconomic study
⚫To understand how the macro-economy works
⚫And how to make it perform better
⚫Economists recommendingintervention in the economy
⚫Great macroeconomists had keen interest in macroeconomic
theory and policy
 For instance
⚫John MaynardKeynes
⚫Milton Friedman (University of Chicago)
⚫Franco Modiglianiand Robert Solow (MIT)
⚫James Tobin of Yale University
5

6. Economist skeptical about intervention
⚫N. Gregory Mankiw, Thomas Sargent, Robert Lucas,
Olivier Blanchard
⚫They doubt about the wisdom of active government
policies
 Features of Macroeconomics
⚫Macroeconomics related to economic problems of the
day
⚫Illuminates economic depression
⚫Refers to real word events to explain meaning and
relevance of the theory
6

7. Macroeconomic models
 Macroeconomicsisorganizedinthreemodels
⚫Eachofthesemodelshavedifferenttimeframes
⚫Longrunmodelsstudieslongrunbehaviouroftheeconomy
⚫Mediumtermmodels
⚫Shortrunmodelsstudiesshortrunbehaviouroftheeconomy
 Longrunmodels
⚫Longrunmodeldiscussesgrowththeory
⚫Itfocusesongrowthofproductivecapacity
⚫Inlongrunmodellevelofproductivitydetermines:Output,
fluctuationindemandthatdeterminespricesandinflation
7

8. Medium term models
 Mediumtermmodels
⚫Inmediumtermproductivecapacityisgiven
⚫Itstudieshoweconomygrowsfromshortruntolongrun
 Shortrunmodels
⚫Fluctuationindemanddetermineshowmuchcapacityis
used
⚫Itanalyzeslevelofoutputandemployment
 Justificationofthedivision
⚫Nearly all economists accept these models
⚫There is different opinion in respect of time frame
of models
⚫There is less agreement about time frame for short
and medium term models
8

9. Long run model
⚫Longrun behaviourof the economyis domain of growththeory
⚫It analyses howinvestment in technologyleads to increase living
standards
⚫However,long rungrowthmodel ignorerecessions, boomsand
shortrun fluctuations
⚫It is assumed that labor, capital, raw materials are fully employed
 Supply(Output)in thelong run model
⚫Level ofoutputis determined solely bysupply side
considerations
⚫Supplyof outputis determined byproductivecapacity of the
economy
⚫Price level is determined by level ofdemand
9

10. Supply (Output) in the long run model
⚫Aggregatesupply andaggregatedemand determine
relationship betweenprice andoutput
⚫Supplycurve(AS) gives quantityof outputthe firms are
willing to supplyat a price
⚫Position of the aggregatesupplycurvedependson
productivecapacity of economy
 Demandin the long runmodel
⚫Aggregate demand curve (AD) gives level of output
at which goods markets and money markets are in
equilibrium at a price level
⚫Position of aggregate demand curve depends on
monetary and fiscal policy and the level of consumer
confidence
10

11. Demand in the long run model
⚫Intersectionof aggregatesupplyand demand determines
priceand quantity
⚫In thelongrun growthmodel thesupplycurveis vertical
⚫Supplycan not beincreasedin thelongrun
11

12. END
12