INTRODUCTION TO MACROECONOMICS ‘microeconomic theory, full employment of resources is generally sumed = analysis is on the determination of elatve prices and the allocation of ss== (On the other hand, macroeconomics Focuses on the level of wilization of reno ‘of employment-and the general level of prices. In addition, within macrooconomies we consider the! question of war damm She rate of sree of resourees-the growth of potential output-as wells the determinants of er ines fe cone time.that inflation has a negative effect upon economic growth as it savings, maintaining stable prices usually isa major objective oT OF MACROECONOMIC THEORY to the Great Depression -that's what the historians call it, even though one living then didnt think it was so 1930s, and withthe publication of Keynes, FY of employment, Interest and Money in 1936, modem microeconomics has analytical framework for understanding what causes large and sometimes inthe level of employment. ‘early 1970, post-Keynesian macroeconomic analy: fluctuations in employment that had their origins in fluctuations in in this demand-oriented analysis, and soon made explicit was the such fluctuations, that is, how to keep the economy operating near ‘understood, in the period from World War Il to 1972, the economy Focused almostattention to dynamic questions of growth the 1960s,and the medium-term ‘the economy from initial equilibrium towards a long-run growth path in the ‘work best left to themselves; tne oer believes that government inervention improve the operation ofthe economy. the debate on these questions involved ts, led by Milton Friedman, on one side, and including Franco Modigliani and James Tobin, on the other. _group- the new classical macroeconomists, who by and large replaced the ‘up the argument against using active government policies 10 try 10 'Keynesians; they may not share many of the detailed beliefs ago, except the belief that government policy can help theassumptions ofthe new classical school are three:" “agents maximize. Houscholds and firms make optimal decisions. This means that all available information in reaching decisions and that those decisions are the best in the circumstances in which they find themselves, are raonai, which means they are statistically the best predictions ofthe future ‘be made using the available information, ational expectations are only one pat of the theoretical approach of the new economists. ‘expectations imply that people will eventually come to understand whatever ‘There is mo reason why firms or workers would not adjust wages o prices if them beter off Accordingly prices and wages adjust in order to equate d; in other words, markets clear. Market clearing is a powerful assumption, as anempleyment. Any unemployed person who really wants a job age until the wage is low enough oatract an offer fom some with an excess supply of goods on the shelf will cut prices so as to sell. ces leaves all individuals all the time in a situation in whichcal group remains highly inlucotal in today's macroeconomics. But a new generation new Keynesian mostly trained in the Keynesian tradition but moving beyond it, 19806, among others George Akerlof and Janet Yellen and David Romer of the Olivier Blanchard of MIT, Grog Mankiw and Larry Summers of ke of Princeton University. They do not believe that markets clear all the ‘and explain exactly why markets can fail.” that markets sometimes do not clear even when individuals ae looking out witha poor quality labor force. reluctant to cut wages. firms to change the prices they charge and the wages they pay, the changes will but if al firms adjust prices and wages infrequently, the economy wide level of -may not be flexible enough to avoid occasional periods of even high that there are significant areas of agreement and that the different groups, ‘continually evolve new areas of consensus and a sharper idea of es lie. For instance, there is now a consensus emerging on the wage and price setting and economic fluctuations.it sa individual depositor withdraws is money trom the bank there is no dang, do this sisaltaneousl, there will be run on the banks nd the banking system will Use of macroeconomics in analyzing problems of the real world can often be ey measures needed to achieve and maintain full employment in the economy are ]unemployment in individual firms and industries, they become irrelevant.