Economics is traditionally divided into two parts: microeconomics and macroeconomics.

The main purpose of this course

is to introduce you to the principles of macroeconomics. Macroeconomics is the study of how a country's economy works
while trying to discern among good, better, and best choices for improving and/or maintaining a nation's standard of
living and level of economic and societal well-being. Historical and contemporary perspectives on the roles and policies
of government are part of the mix of interpretations and alternatives that surround questions of who or what gains and
loses the most or least within a relatively small set of key interdependent players. In the broadest view, that set consists
of households, consumers, savers, firm owners, investors, agency and elected officials, and global trading partners in
which some wear many hats and face price considerations at two levels.
Consider one distinction between macroeconomics and microeconomics through the way prices are taken into account in
both divisions. On one hand, microeconomics focuses on how supply and demand within a given market determine
prices. On the other hand, macroeconomics focuses on changes in the price level across all markets. Another distinction
resides within goals. A study of microeconomics orients itself toward firm profit maximization and output optimization as
well as consumer utility maximization and consumption optimization. In contrast, a study of macroeconomics situates
itself around a number of goals including economic growth, price stability, and full employment.
Macroeconomic performance relies on measures of economic activity, focusing on variables and data at the national
level within a specific period of time. Macroeconomics entails analyses of aggregate measures such as national income,
national output, unemployment and inflation rates, and business cycle fluctuations. This course will prompt you to think
critically about the national and global issues we currently face, to consider competing views that may agree or disagree
with your own, and to draw challenging conclusions from a vast array of perspectives, tools, and alternatives.

In short, microeconomics is the study of individual economic units of the economy, while macroeconomics is the study of the
economy as a whole and its totality. There are two main schools of economic thoughts. These schools are 1. Classical economics or
2. Keynesian economics.

Macroeconomics before Keynes is sometimes called “classical” economics. According to classical economics:

1. An economy as a whole always functions at a level of full employment, due to free play of market forces in a free economy.

2. Supply creates its own demand.

This classical doctrine of automatic full employment was largely accepted until the early 1930s, when the Great Depression
Occurred. The Great Depression of 1929-1933 exploded the myth that an automatic working of market mechanisms would ensure an
equilibrium level of income consistent with full employment of resources. There was a persistent fall in the level of output, income,
and employment during the Great Depression, even though the United States and other western countries were highly industrialised,
with well-developed basic industries, electric power, means of transport and communication, banks, and other financial institutions.
The Classicals failed to explain this situation during The Great Depression.

The Birth of Macroeconomics

In 1936, well-known British economist J. M. Keynes introduced his own theory and wrote his famous book The General Theory of
Employment, Interest and Money, which birthed the Keynesian revolution, the second primary school of economic thought. Keynes
criticised the Classical assumption of full employment and developed modern macroeconomics: economic theory that attempts to
connect money supply, employment, business cycles, and government policy.

The incentive for development of modern macroeconomics came from the Great Depression of the early 1930s. Macroeconomics
addresses

 the desire to control business cycles in advancing economies and

 the need to develop backward economies.

The Meaning of Macroeconomics

Macroeconomics is the study of the aggregates and averages of the entire economy. It's the part of economic theory which studies the
economy in its totality or as a whole.
In microeconomics, we study the individual economic units like a household, a firm, or an industry. However, in macroeconomics
we study the whole economic system like national income, total savings and investment, total employment, total demand, total
supply, general price level. We study how these aggregates and averages of economy as a whole are determined and what causes
fluctuations in them. The aim of the study is to understand the reason for the fluctuations and to ensure the maximum level of
employment and income in a country.

In other words: Microeconomics is the study of individual trees, whereas macroeconomics is the study of forest as a whole.

Macroeconomics is also known as the theory of income and employment, since the subject matter of macroeconomics revolves
around determination of the level of employment and income.

At the time of the Great Depression, government participation through monetary and fiscal measures in the economy increased
considerably. Since the study of millions of individual economic units is almost impossible, macroeconomics provided tools for the
assessment of economic policy. Macro policies make it possible to control inflation and deflation, and moderate violent booms and
recessions.

The main functions of macroeconomics are the collection, organising, and analysis of data; determining national income; and
formulating appropriate economic policies to maintain economic growth and full employment in a developing country.

The scope of macroeconomics include the following theories:

 National income
 Money
 Economic growth
 Employment
 Price levels
The studies of problem of balance of payment, unemployment, general price level are the parts of macroeconomics, as these relate to
the economy as a whole.

The Importance of Macroeconomics

Why is macroeconomics important? Here are a few crucial reasons:

 It helps us understand the functioning of a complicated modern economic system. It describes how the economy as a whole
functions and how the level of national income and employment is determined on the basis of aggregate demand and aggregate
supply.
 It helps to achieve the goal of economic growth, a higher GDP level, and higher level of employment. It analyses the forces
which determine economic growth of a country and explains how to reach the highest state of economic growth and sustain it.

 It helps to bring stability in price level and analyses fluctuations in business activities. It suggests policy measures to control
inflation and deflation.

 It explains factors which determine balance of payments. At the same time, it identifies causes of deficit in balance of
payments and suggests remedial measures.

 It helps to solve economic problems like poverty, unemployment, inflation, deflation etc., whose solution is possible at macro
level only (in other words, at the level of the whole economy).

 With a detailed knowledge of the functioning of an economy at macro level, it has been possible to formulate correct economic
policies and also coordinate international economic policies.

 Last but not least, macroeconomic theory has saved us from the dangers of application of microeconomic theory to the
problems that require us to look at the economy as a whole.

The Great Depression lasted from 1929 to 1939, and was the worst economic downturn in the history of the
industrialized world. It began after the stock market crash of October 1929, which sent Wall Street into a panic and
wiped out millions of investors. Over the next several years, consumer spending and investment dropped, causing
 steep declines in industrial output and employment as failing companies laid off workers. By 1933, when the Great
Depression reached its lowest point, some 15 million Americans were unemployed and nearly half the country’s
banks had failed.

CAUSES OF THE GREAT DEPRESSION

Throughout the 1920s, the U.S. economy expanded rapidly, and the nation’s total wealth more than doubled between
1920 and 1929, a period dubbed “the Roaring Twenties.” The stock market, centered at the New York Stock Exchange
on Wall Street in New York City, was the scene of reckless speculation, where everyone from millionaire tycoons to
cooks and janitors poured their savings into stocks. As a result, the stock market underwent rapid expansion, reaching
its peak in August 1929.

By then, production had already declined and unemployment had risen, leaving stock prices much higher than their
actual value. Additionally, wages at that time were low, consumer debt was proliferating, the agricultural sector of the
economy was struggling due to drought and falling food prices, and banks had an excess of large loans that could not
be liquidated. The American economy entered a mild recession during the summer of 1929, as consumer spending
slowed and unsold goods began to pile up, which in turn slowed factory production. Nonetheless, stock prices
continued to rise, and by the fall of that year had reached stratospheric levels that could not be justified by expected
future earnings.

THE STOCK MARKET CRASH OF 1929

On October 24, 1929, as nervous investors began selling overpriced shares en masse, the stock market crash that
some had feared happened at last. A record 12.9 million shares were traded that day, known as “Black Thursday.” Five
days later, on October 29 or “Black Tuesday,” some 16 million shares were traded after another wave of panic swept
Wall Street. Millions of shares ended up worthless, and those investors who had bought stocks “on margin” (with
borrowed money) were wiped out completely.

As consumer confidence vanished in the wake of the stock market crash, the downturn in spending and investment led
factories and other businesses to slow down production and begin firing their workers. For those who were lucky
enough to remain employed, wages fell and buying power decreased. Many Americans forced to buy on credit fell into
debt, and the number of foreclosures and repossessions climbed steadily. The global adherence to the gold standard,
which joined countries around the world in a fixed currency exchange, helped spread economic woes from the United
States throughout the world, especially Europe.

BANK RUNS AND THE HOOVER ADMINISTRATION

Despite assurances from President Herbert Hoover and other leaders that the crisis would run its course, matters
continued to get worse over the next three years. By 1930, 4 million Americans looking for work could not find it; that
number had risen to 6 million in 1931. Meanwhile, the country’s industrial production had dropped by half. Bread lines,
soup kitchens and rising numbers of homeless people became more and more common in America’s towns and cities.
Farmers couldn’t afford to harvest their crops, and were forced to leave them rotting in the fields while people
elsewhere starved.

In the fall of 1930, the first of four waves of banking panics began, as large numbers of investors lost confidence in the
solvency of their banks and demanded deposits in cash, forcing banks to liquidate loans in order to supplement their
insufficient cash reserves on hand. Bank runs swept the United States again in the spring and fall of 1931 and the fall of
1932, and by early 1933 thousands of banks had closed their doors.

In the face of this dire situation, Hoover’s administration tried supporting failing banks and other institutions with
government loans; the idea was that the banks in turn would loan to businesses, which would be able to hire back their
employees.

FDR AND THE NEW DEAL

Hoover, a Republican who had formerly served as U.S. secretary of commerce, believed that government should not
directly intervene in the economy, and that it did not have the responsibility to create jobs or provide economic relief for
its citizens. In 1932, however, with the country mired in the depths of the Great Depression and some 15 million people
(more than 20 percent of the U.S. population at the time) unemployed, Democrat Franklin D. Roosevelt won an
overwhelming victory in the presidential election.

By Inauguration Day (March 4, 1933), every U.S. state had ordered all remaining banks to close at the end of the fourth
wave of banking panics, and the U.S. Treasury didn’t have enough cash to pay all government workers. Nonetheless,
FDR (as he was known) projected a calm energy and optimism, famously declaring that “the only thing we have to fear
is fear itself.”

Roosevelt took immediate action to address the country’s economic woes, first announcing a four-day “bank holiday”
during which all banks would close so that Congress could pass reform legislation and reopen those banks determined
to be sound. He also began addressing the public directly over the radio in a series of talks, and these so-called
“fireside chats” went a long way towards restoring public confidence.

During Roosevelt’s first 100 days in office, his administration passed legislation that aimed to stabilize industrial and
agricultural production, create jobs and stimulate recovery. In addition, Roosevelt sought to reform the financial system,
creating the Federal Deposit Insurance Corporation (FDIC) to protect depositors’ accounts and the Securities and
Exchange Commission (SEC) to regulate the stock market and prevent abuses of the kind that led to the 1929 crash.

THE LONG, HARD ROAD TO RECOVERY

Among the programs and institutions of the New Deal that aided in recovery from the Great Depression were
the Tennessee Valley Authority (TVA), which built dams and hydroelectric projects to control flooding and provide
electric power to the impoverished Tennessee Valley region, and the Works Progress Administration (WPA), a
permanent jobs program that employed 8.5 million people from 1935 to 1943.

After showing early signs of recovery beginning in the spring of 1933, the economy continued to improve throughout the
next three years, during which real GDP (adjusted for inflation) grew at an average rate of 9 percent per year. A sharp
recession hit in 1937, caused in part by the Federal Reserve’s decision to increase its requirements for money in
reserve. Though the economy began improving again in 1938, this second severe contraction reversed many of the
gains in production and employment and prolonged the effects of the Great Depression through the end of the decade.

Depression-era hardships had fueled the rise of extremist political movements in various European countries, most
notably that of Adolf Hitler’s Nazi regime in Germany. German aggression led war to break out in Europe in 1939, and
the WPA turned its attention to strengthening the military infrastructure of the United States, even as the country
maintained its neutrality.

THE GREAT DEPRESSION ENDS AND WORLD WAR II BEGINS

With Roosevelt’s decision to support Britain and France in the struggle against Germany and the other Axis Powers,
defense manufacturing geared up, producing more and more private sector jobs. The Japanese attack on Pearl
Harbor in December 1941 led to America’s entry into World War II, and the nation’s factories went back in full
production mode.

This expanding industrial production, as well as widespread conscription beginning in 1942, reduced the unemployment
rate to below its pre-Depression level. When the Great Depression began, the United States was the only industrialized
country in the world without some form of unemployment insurance or social security. In 1935, Congress passed
the Social Security Act, which for the first time provided Americans with unemployment, disability and pensions for old
age.
The Great Depression was a worldwide economic depression that lasted 10 years. Its kickoff was “Black Thursday," October 24,
1929. That's when traders sold 12.9 million shares of stock in one day, triple the usual amount. Over the next four days, stock prices
fell 23 percent in the stock market crash of 1929. But the Great Depression really started in August when the economy contracted.

Unemployment Reached 25 Percent

The Great Depression affected all aspects of society.

By its height in 1933, unemployment had risen from 3 percent to 25 percent of the nation’s workforce. Wages for those who still had
jobs fell 42 percent. Gross domestic product was cut in half, from $103 billion to $55 billion. That was partly because of deflation.
Prices fell 10 percent each year. Panicked government leaders passed the Smoot-Hawley tariff to protect domestic industries and
jobs. As a result, world trade plummeted 65 percent as measured in U.S. dollars. It fell 25 percent in the total number of units.

Life During The Depression

The Depression caused many farmers to lose their farms. At the same time, years of overcultivation and a drought created the “Dust
Bowl” in the Midwest. It ended agriculture in a previously fertile region. Thousands of these farmers and other unemployed workers
looked for work in California. Many ended up living as homeless “hobos.” Others moved to shantytowns called “Hoovervilles,"
named after then-President Herbert Hoover.

What Caused It

According to Ben Bernanke, the past chairman of the Federal Reserve, the central bank helped create the Depression. It used tight
monetary policies when it should have done the opposite. Bernanke higlighted the Fed's five critical mistages.

1. The Fed began raising the fed funds rate in the spring of 1928. It kept increasing it through a recession that began August
1929. That's what caused the stock market crash in October 1929.

1. When the stock market crashed, investors turned to the currency markets. At that time, the gold standard supported the value
of the dollars held by the U.S. government. Speculators began trading in their dollars for gold September 1931. That created
a run on the dollar.
2. The Fed raised interest rates again to preserve the dollar's value. That further restricted the availability of money for
businesses. More bankruptcies followed.
3. The Fed did not increase the supply of money to combat deflation.
4. Investors withdrew all their deposits from banks. The failure of the banks created more panic. The Fed ignored the banks'
plight. This situation destroyed any of consumers’ remaining confidence in financial institutions. Most people withdrew
their cash and put it under their mattresses. That further decreased the money supply.

The Fed did not put enough money in circulation to get the economy going again. Instead, the Fed allowed total supply of U.S.
dollars to fall 30 percent.

What Ended the Great Depression

In 1932, the country elected Franklin D. Roosevelt as president. He promised to create federal government programs to end the Great
Depression. Within 100 days, he signed the New Deal into law. It created 42 new agencies. They were designed to create jobs, allow
unionization and provide unemployment insurance. Many of these programs still exist. They include Social Security, the Securities
and Exchange Commission, and the Federal Deposit Insurance Corporation. These programs help safeguard the economy and
prevent another depression.

Many argue that World War II, not the New Deal, ended the Depression. But if FDR had spent as much on the New Deal as he did
during the War, it would have ended the Depression. In the nine years between the launch of the New Deal and the attack on Pearl
Harbor, FDR increased the debt by $3 billion. In 1942, defense spending added $23 billion to the debt. In 1943, it added another $64
billion. In fact, WWII had its roots in the Depression.
Financial stress made Germans desperate enough to elect Adolf Hitler's Nazi party to a majority in 1933. If FDR had spent enough on
the New Deal to end the Depression before Hitler rose to power, World War II might never have happened.

Reasons a Great Depression Could Not Happen Again

A depression on the same scale could not happen the same way. Central banks around the world, including the U.S. Federal Reserve,
have learned from the past. They know how to use monetary policy to manage the economy.

But monetary policy can't offset fiscal policy. The sizes of the U.S. national debt and the current account deficit could trigger an
economic crisis. That would be difficult for monetary policy to fix. No one can be certain what will happen, since the current U.S.
debt level is unprecedented.