There are a lot of questions that we have in mind on why other countries experienced rapid growth in incomes over the past decades, while others are lagging behind and experienced severe poverty. There are other countries that have very high prices while others maintain stable prices. Why do we experience recessions and depressions—recurrent periods of falling incomes and rising unemployment—and how can government policy reduce the frequency and severity of these episodes? Macroeconomics, the study of the economy as a whole, attempts to answer these and many related questions.
Macroeconomics is an important branch in economics. Apart from studying the economy as a whole, it also analyzes how economic agents as a whole react to variations in the economic environment. It also studies how their action feedback on the economy. It focuses on the determinants of total national income, deals with aggregates, such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices. In a nutshell, macroeconomics deals with the key economic issues and problems of the day. In order to understand these issues, we have to reduce the complicated details of the economy to manageable essentials. Those essentials lie in the interactions among the goods, labor, and assets markets of the economy and in the interactions among national economies that trade with each other.
Balance in the macro economy is monitored through the three major concerns in the aggregate economy; inflation, output growth and unemployment. Inflation talks about the increase in the overall price level of goods and services in the economy. Inflation is a major concern in macroeconomic balance, since its erratic movement (rapid increase and decrease) affects consumption, savings, investment and aggregate demand. Output growth on the other hand, pertains to the total value of final goods and services produced in the domestic economy (Gross Domestic Product) and by the citizens of the country (Gross National Product). The analysis of output growth can be the expansion of output in the economy in the long-run (Economic Growth) or the cycle of short-term ups and downs in the economy (Business Cycle). Meanwhile, unemployment rate pertains to the large portion (percentage) of the labor force that is employed.
Macroeconomic balance as the basic concept of modern economics is the major basis for decision making of government policy makers who would like to have low inflation, high output growth and low unemployment rate. Government has a crucial and important role because they enact policies that used to influence the macro economy. They imposed government policies concerning taxes and expenditures (Fiscal Policy). Government can cut taxes and/or raise spending to get out of a slump (Expansionary Fiscal Policy) or they can raise taxes and/or decrease spending to bring the economy out of inflation. Central Banks can control the quantity of money in circulation (Monetary Policy). Meanwhile, contractionary monetary refers to the decrease in the quantity of money in circulation, with corresponding increases in interest rates, for the expressed purpose of putting the brakes on an overheated business cycle expansion and to address the problem of inflation. Finally, supply side policies are government policies that focus on stimulating aggregate supply instead of aggregate demand. Therefore, in order to attain the macroeconomic balance, government should lead the direction of growth in the economy. But this is not possible without the households (people who consume), firms (who invest) and the foreign sector (partners in foreign trade). The four sectors are very important in the circular flow of payments and income in the modern economy.
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