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Macroeconomics (from prefix "macr(o)-" meaning "large" + "economics") is a branch of economics that deals with the performance, structure, behavior and decision-making of the entire economy, be that a national, regional, or the global economy.[1][2] Along with microeconomics, macroeconomics is one of the two most general fields in economics.

Macroeconomists study aggregated indicators such as GDP, unemployment rates, and price indices to understand how the whole economy functions. Macroeconomists develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance. In contrast, microeconomics is primarily focused on the actions of individual agents, such as firms and consumers, and how their behavior determines prices and quantities in specific markets.

While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income).

Macroeconomic models and their forecasts are used by both governments and large corporations to assist in the development and evaluation of economic policy and business strategy.


Development of macroeconomic theory

The term "macroeconomics" stems from a similar usage of the term "macrosystem" by the Norwegian economist Ragnar Frisch in 1933.[3] and there was a long existing effort to understand many of the broad elements of the field. It fused and extended the earlier study of business fluctuations and monetary economics.

Mark Blaug, a notable historian of economic thought, proclaimed in his "Great Economists before Keynes: 1986" that Swedish economist Knut Wicksell “more or less founded modern macroeconomics”.

Macroeconomic schools of thought

The traditional distinction is between three different approaches to economics: Keynesian economics, focusing on demand; neoclassical economics based on rational expectations and efficient markets, and innovation economics focused on long-run growth through innovation. Keynesian thinkers challenge the ability of markets to be completely efficient generally arguing that prices and wages do not adjust well to economic shocks. None of the views are typically endorsed to the complete exclusion of the others, but most schools do emphasize one or the other approach as a theoretical foundation.


Keynesian tradition

Keynesian economics was an academic theory heavily influenced by the economist John Maynard Keynes. This period focused on aggregate demand to explain levels of unemployment and the business cycle. That is, business cycle fluctuations should be reduced through fiscal policy (the government spends more or less depending on the situation) and monetary policy. Early Keynesian macroeconomics was "activist," calling for regular use of policy to stabilize the capitalist economy, while some Keynesians called for the use of incomes policies.

Neo-Keynesians combined Keynes thought with some neoclassical elements in the neoclassical synthesis. Neo-Keynesianism waned and was replaced by a new generation of models that made up New Keynesian economics, which developed partly in response to new classical economics. New Keynesianism strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management.

Post-Keynesian economics represents a dissent from mainstream Keynesian economics, emphasizing the importance of demand in the long run as well as the short, and the role of uncertainty, liquidity preference and the historical process in macroeconomics.

Neoclassical tradition

For decades Keynesians and classical economists split in to autonomous areas, the former studying macroeconomics and the latter studying microeconomics. In the 1970s new classical macroeconomics challenged Keynesians to ground their macroeconomic theory in microeconomics. The main policy difference in this second stage of macroeconomics is an increased focus on monetary policy, such as interest rates and money supply. This school emerged during the 1970s with the Lucas critique. New classical macroeconomics based on rational expectations, which means that choices are made optimally considering time and uncertainty, and all markets are clearing. New classical macroeconomics is generally based on real business cycle models.

Monetarism, led by Milton Friedman, holds that inflation is always and everywhere a monetary phenomenon. It rejects fiscal policy because it leads to "crowding out" of the private sector. Further, it does not wish to combat inflation or deflation by means of active demand management as in Keynesian economics, but by means of monetary policy rules, such as keeping the rate of growth of the money supply constant over time.

Macroeconomic policies

To try to avoid major economic shocks, such as The Great Depression, governments make adjustments through policy changes they hope will stabilize the economy. Governments believe the success of these adjustments is necessary to maintain stability and continue growth. This economic management is achieved through two types of strategies:

See also


  1. ^ Blaug, Mark (1985). Economic theory in retrospect. Cambridge, UK: Cambridge University Press. ISBN 0-521-31644-8. 
  2. ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 57. ISBN 0-13-063085-3. 
  3. ^ Frisch, Ragnar (1933). Propagation Problems and Impulse Problems in Dynamic Economics. London: Allen & Unwin. 


  • Blanchard, Olivier (2000), Macroeconomics, Prentice Hall, ISBN 013013306X .
  • Blaug, Mark (1986), Great Economists before Keynes , Brighton: Wheatsheaf.
  • Friedman, Milton (1953), Essays in Positive Economics, London: University of Chicago Press, ISBN 0-226-26403-3 .
  • Heijdra, B. J.; Ploeg, F. van der (2002), Foundations of Modern Macroeconomics, Oxford University Press, ISBN 0-19-877617-9 .
  • Mishkin, Frederic S. (2004), The Economics of Money, Banking, and Financial Markets, Boston: Addison-Wesley, p. 517 
  • Snowdon, Brian; Vane, Howard R. (2005), Modern Macroeconomics: Its Origins, Development And Current State, Edward Elgar Publishing, ISBN 1-84376-394-X .
  • Gärtner, Manfred (2006), Macroeconomics, Pearson Education Limited, ISBN 978-0-273-70460-7 .
  • Warsh, David (2006), Knowledge and the Wealth of Nations, Norton, ISBN 978-0393059960 .

Study guide

Up to date as of January 14, 2010
(Redirected to Introduction to Macroeconomics article)

From Wikiversity


Read the Wikibook on Macroeconomics. In particular, the inner workings of currencies, current account deficits, and the relationship between economic performance, monetary policy, and interest rates will be useful for finance and, ultimately, Capital Markets.

See also


Up to date as of January 23, 2010

From Wikibooks, the open-content textbooks collection


This textbook concerns the wonderful world of macroeconomics, or economics on a very large scale, concerning national and international systems. It is primarily aimed at students in their final few years of secondary education, though it could also be used by interested students younger or older than that. Having a background knowledge of economics would be useful, but grasping overall concepts should not require an in depth previous knowledge.

It is worth remembering that this textbook can be edited at any time, with the link at the top of this page. This is both good and bad - you yourself, having spotted a mistake or having noticed a poor definition, can correct it and should feel free to do so. The bad side is that anyone can edit it, so content may be inaccurate while the wikibook is in its infancy!


Section Article
Introduction Development stage: 75% (as of Feb 11, 2005) Macroeconomic Objectives Development stage: 75% (as of Feb 11, 2005)

Measuring Economic Activity Development stage: 100% (as of Feb 11, 2005)
Macroeconomic Equilibrium Development stage: 100% (as of Feb 11, 2005)
Role of Savings and Investment Development stage: 100% (as of Feb 11, 2005)

Macroeconomic Variables Development stage: 100% (as of Feb 11, 2005) Aggregate Demand

Aggregate Supply
Multiplier Process Development stage: 100% (as of Feb 11, 2005)

Money and Inflation Effects of Interest Rates on Real GDP


Economic Policy Development stage: 75% (as of April 17, 2005) Taxation Development stage: 75% (as of {{{2}}})

Fiscal Policy Development stage: 75% (as of March 19, 2005)
Monetary Policy Development stage: 75% (as of March 15, 2005)
Supply-side Policy Development stage: 00% (as of April 17, 2005)
Central Banks Development stage: 25% (as of {{{2}}})

Government Intervention Market Failure

Methods of Government Intervention
Government Failure

M/Employment and Unemployment/ Definitions of Unemployment Development stage: 75% (as of April 17, 2005)

Types and Causes of Unemployment Development stage: 100% (as of April 17, 2005)
Consequences of Unemployment Development stage: 75% (as of April 17, 2005)
Policies to Reduce Unemployment Development stage: 100% (as of April 17, 2005)

International Economics

Alternate Perspectives Radical Economics Development stage: 50% (as of Feb 11, 2005)
Advanced Topics Math Review Development stage: 25% (as of Jun 01, 2007)

Keynesian Demand-side Economics and Multipliers Development stage: 75% (as of Jun 01, 2007)
Optimal Growth Development stage: 25% (as of Jun 01, 2007)
Harrod-Johnson Diagram Development stage: 00% (as of Jun 01, 2007)

Glossary of Terms

Proposed change

  1. Economics - Introduction to economics
  2. Market Economics - Basics of market economics, resources, and production possibilities
  3. Supply and Demand - Supply and Demand for single products
  4. Measuring Domestic Output - Gross Domestic Product and other indicators
  5. Open Economies - International trade
  6. Business Cycle - Basics of unemployment, inflation, and economic growth
  7. Aggregate Expenditures - Consumption, Investment, Government spending, and Exports
  8. Aggregate Supply and Demand - Basics of how an entire economy functions
  9. Fiscal Policy
  10. Money - How money is created and why it works
  11. Monetary Policy
  12. Government Finances

Advanced topics

  1. Math Review
  2. Keynesian Demand-side Economics and Multipliers
  3. Optimal Growth
  4. Harrod-Johnson Diagram

Useful background reading

The following links will lead you to Wikipedia, the online encyclopedia similar in style to this site. The information in these articles may go above and beyond that which you need to know for this book, though they will undoubtedly prove useful to refer back to from time to time, and are good portals to more relevant articles.

External links

The following links take you to useful websites for learning, revising or expanding your knowledge:

For contributors

Any and all corrections, additions, alterations etc. are always welcome! If you wish some credit for your work, stick your name below :

Name Contribution Evgeniy Chernyshov Inflation, Fiscal Policy, Monetary Policy

Simple English

Macroeconomics studies the economic decisions of a large group of people; for example, a whole country's economy. Many governments use macroeconomics to decide how much tax to collect, and what interest rates should be.

Macroeconomics also looks at exchange rates. For example, if a country has a high exchange rate, not many people will want to buy its expensive products. So the demand will be lower, and so will the prices.

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