Macroeconomic Models

MD Siyam HossainMD Siyam HossainBangladesh Institute of Business & Technology.Bangladesh Institute of Business & Technology.Narayangonj,DhakaNarayangonj,DhakaDhaka,BangladeshDhaka,Bangladeshwww.facebook.com/mdsiyamhossain

Macroeconomics concerned with behaviour of the economy as a whole

Macroeconomics studies:

Booms and recessions

Economy’s total output of goods and services

Growth of output

Rates of inflation and unemployment

Balance of payments and

Exchange rates

Macroeconomics analyses economic growth and fluctuation:

Long-run economic growth

Short-run fluctuations

And business cycle

Macroeconomics analyses impact of policies:

Consumption and investment policies

Changes in wages and prices

Monetary and fiscal policies

Money stock, the federal budget, interest rates, and the national debt

Foreign exchange (Dollar) course and the trade balance

Division of macroeconomic issues: Making understand macroeconomic issues are reduce to

following essentials Goods markets, labour markets, and assets markets of the

economy Macroeconomics deals each market as a whole

As for example: It studies markets for different goods as a single market Markets for agricultural products Markets for medical services It studies labour market as a whole Makes no differences between markets for unskilled labour

and doctors

Benefit of abstraction: Facilitates understanding of interactions among goods, labour,

and assets markets

Objective of Macroeconomic study To understand how the macro-economy works And how to make it perform better

Economists recommending intervene in economy Great macroeconomists had keen interest in

macroeconomic theory and policy

As for example John Maynard Keynes, and Nobel laureate

economists -

Milton Friedman of the University of Chicago and the Hoover Institution

Franco Modigliani and Robert Solow of M.I.T

James Tobin of Yale University

Economists sceptical about intervene in economy Robert Barro, Martin Feldstein, and N. Gregory

Mankiw of Harvard University Nobel laureate Robert Lucas and Thomas Sargent of

the University of Chicago Olivier Blanchard of M.I. T., Robert Hall, and John

Taylor of Stanford University They doubt about the wisdom of active government

policies

Feature of Macroeconomics Macroeconomics related to economic problems of the

day Illuminates economic depression Refers to real-world events to explain meaning and

relevance of the theory

2. MACROECONOMIC MODELS

Macroeconomics organised in three modelsEach of these models have different time frameLong run model studies long run behaviour of the

economyMedium run model studies medium run behaviour of

the economyShort run model studies short run behaviour of the

economy

Long run ModelLong run model discusses growth theoryIt focuses on growth of productive capacityIn Long run model level of productivity determines:

Output, fluctuation in demand that determines price and inflation

Medium run modelIn medium run productive capacity is givenIt studies how economy grows from short run

to long run Short run modelFluctuation in demand determines how much

capacity usedIt analyses level of output and unemploymentJustification of the DivisionNearly all economists accept these modelsThere is different opinion in respect of time

frame of modelsThere is less agreement about time frame for

short and medium run model

3. Long run growth model

Long run behaviour of the economy is the domain of growth theory

It analyses how investment in technology leads to increase living standard

Long run growth model, however, ignore recessions, booms and short run fluctuation

It is assumed that labour, capitals, raw materials and so on are fully employed

Supply (Output) in the long run model

Level of output is determined solely by supply side considerations

Supply of output is determined by productive capacity of the economy

Price level is determined by level of demand Aggregate supply and aggregate demand

determine relation between price and output Supply curve (AS) gives quantity of output

the firms are willing to supply at a price Position of the aggregate supply curve

depends on productive capacity of economy

Demand in the long run model 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

Intersection of aggregate supply and demand determines price and quantity

In the long run growth model the supply curve is vertical

Supply cannot be increased in the long run

4. The short run model

In short run model: Output fluctuates Aggregate supply curve is flat Output is determined by aggregate demand alone Price are unaffected by the level of output

1.2 The medium Run

Medium run model describes: Transition of economy from short run to long run How aggregate demand pushes output above

sustainable level How prices rise How aggregate supply curve begins to move upward