Understanding Macroeconomic Theory

Understanding Macroeconomic Theory

Understanding Macroeconomic Theory

Understanding Macroeconomic Theory

Synopsis

At each point in time, individuals make choices with respect to the acquisition, sale, and/or use of a variety of different goods. Such activity can be summarized by aggregate variables such as an economy's total production of various goods and services, the aggregate level of unemployment, the general level of interest rates, and the overall level of prices.

The focus of this book is on developing simple theoretical models that provide insight into the reasons for fluctuations in such aggregate variables. The models included explore how shocks or 'impulses' to the economy (e.g. changes to technology, the money supply, or government policy) impact individuals' behaviour in specific markets, and the resulting implications in terms of changes in aggregate variables.

This book provides the reader with an in-depth understanding of standard theoretical models: Walrasian, Keynesian and Neoclassical. Pedagogically sophisticated, it is theoretically based, rigorous and includes a host of real world case studies and exercises. Underpinned by solid microfoundations, it is written in a concise, accessible style and is an indispensable tool for all students who wish to a gain a firm grounding in the complexities of macroeconomic theories as well as government and private sector researchers of macroeconomics.

Excerpt

At each point in time, individuals in an economy are making choices with respect to the acquisition, sale, and/or use of a variety of different goods. Such activity can be summarized by aggregate variables such as an economy’s total production of various goods and services, the aggregate level of employment and unemployment, the general level of interest rates, and the overall level of prices. Macroeconomics is the study of movements in such economy-wide variables as output, employment, and prices.

The focus of this book will be on developing simple theoretical models that provide insight into the reasons for fluctuations in such aggregate variables. These models explore how shocks or “impulses” to the economy (e.g., changes to technology, the money supply, or government policy) impact individuals’ behavior in specific markets and the resulting implications in terms of changes in aggregate variables.

An overview of some facets of theoretical
macroeconomic analysis

Given the breadth of economic activity in an economy, the study of macroeconomics must involve an examination of a variety of different markets. For instance, it is common for macroeconomic analysis to consider exchanges of labor services in the labor markets, of consumption and capital goods in the output markets, and of financial assets in the financial markets. The fact that macroeconomics simultaneously analyses exchanges of different goods in different markets means that macroeconomic theory is a general equilibrium theory. That is, macroeconomic theory must by necessity incorporate the links across markets that are fundamental to general equilibrium analysis. As we will see throughout this book, a key reflection of the links across markets is Walras’ law, named in honor of the nineteenth-century French economist, Leon Walras. Simply put, Walras’ law notes that the budget constraints faced by individual agents in the economy suggest that if n − 1 of the n markets in the economy are in equilibrium, then the nth market must be in equilibrium. We will repeatedly rely on Walras’ law or variants of it to simplify macroeconomic analysis.

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