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Unit 4

Macro Economics

Introduction
Great depression of 1920-40 has brought the significance of creating Macro Economics. Macro Economics as a separate branch of Economics came in 1936 by John Keynes publications. It led for the emergence of Keynesian revolution to meet the need of modern day economies.

Keynesian Theory
It states that employment is a function of income. Employment & Income is determined by the level of effective demand, national income, interest rates, consumption etc But in a country, inflationary & deflationary gaps exists which prevents the growth of economy.

Inflationary & Deflationary Gap


Inflationary gap occurs when consumption & investment expenditures are greater than the full employment, this gap arises. Here consumer demand for goods & services are greater than its supply. Hence under this condition NI, output, employment cannot be increased further. Where as Deflationary Gap occurs when total demand fails to create full employment.

Macro Economics
Samuelson defines Macro Economics as the study of thee behaviour of the economy as a whole. It examines the overall level of a nations output, employment, prices and foreign trade. In simple words, Macro economics theory is the theory of income, employment, prices and money.

Static & Dynamic economies


In a Static economy, normal economic activities go on but there is no change in the size of economy, national output, stock of capital, prices, technology, population taste & preferences, nature of business & employment. In a Dynamic economy, the country will always be in motion, forces of change are instant & simultaneous.

Employment model
The classical employment model consists of two components. They are: 1. Aggregate production function 2. Labour supply & demand function These components display the real output & employment required to produce equilibrium level of national output under the given money supply.

Aggregates under Keynesian model


Aggregate supply function Aggregate demand function Aggregate consumption function Aggregate saving function Investment

Aggregate supply function is the total supply of goods in the economy. In SR, it is the function of number of labour reqd for prodn. Aggregate demand function depends on demand for consumer goods & investment goods in a two sector economy. Aggregate consumption function is the consumption expenditure of household depends upon the income of the household. Investment happens in the three sector economy.

Circular flow of money


Flow of money can happen in different sectors of the economy. They are: 1. Two sector economy consists of Firms & households. 2. Three sector economy consists of Firms, households & Government. 3. Four sector economy Firms, households, Government & International markets.

Theory of Interest
Interest is the opportunity cost of holding money. It is the premium which has to be offered to induce people to hold their wealth in some form other than hoarded (accumulated) money. Rate of interest is determined by demand for and supply of money. The desire of people to hold money is called liquidity preference. Money is held for meeting various transaction, precautionary and speculative motives.

Macro economic problems


Overall Growth rate of the economy Unemployed labour force People living below poverty line Inflation Balance of payment Fiscal & monetary policies Industrial development Balanced sectoral development etc..