MACROECONOMICS

PARTS
7 NOVEMBER 2022
Discuss TWO (2) differences between
microeconomics and macroeconomics.
PART A
INTRODUCTION TO MACROECONOMICS

• The branch of economies that studies

decision making by a single individual,
Microeconomics household, firm, industry or level of
government
• E.g. How much to produce?, How price
is determine?

• The branch of economies that studies

decision making for the economy as a
Macroeconomics whole.
• E.g. Inflation, unemployment, money
supply, and national income
 DIFFERENCES BETWEEN
MICROECONOMICS & MACROECONOMICS

MICROECONOMICS MACROECONOMICS
• Studies on individual income • Studies on national income
• Analyzes demand for and supply of • Analyzes total employment in the
labour economy
• Deals with household and firms decisions • Deals with aggregate decisions
• Studies on individual prices • Studies overall price level
• Analyzes demand and supply of goods • Analyzes aggregate demand and aggregate
supply
 Discuss THREE (3)
macroeconomics objectives.
PART B
 OBJECTIVES OF
MACROECONOMICS
Macroeconomic Objectives from the Conventional
Perspective
To achieve full employment

To achieve price stability

To achieve economic growth

To achieve an equitable distribution of income

To achieve equilibrium in the foreign sector

 OBJECTIVES OF
MACROECONOMICS (cont.)
(1) To Achieve Full Employment
• Full employment does not mean there is no unemployed or
jobless people in the economy.
• It is difficult to assume that full employment refers to 100%
of the labour force is being employed.
• The potential benefits of full employment in an economy are
that it can optimize the available resources efficiently.
• The crucial consequences of unemployment to the economy
are wastage of available resources and social problems.
 OBJECTIVES OF
MACROECONOMICS (cont.)
(2) To Achieve Price Stability
• A high degree of inflation rate that is associated with a
sustained increase in the general price level can be
disastrous to an economy.
• To the consumers, inflation directly influences their
purchasing power. The quantity of goods and services
purchased will be less if inflation is high.
• Maintaining price stability is beneficial because it means
uncertainty and disruptions in the economy are avoided. It
means consumers and businesses can safely pursue long-
term consumption and production plans.
 OBJECTIVES OF
MACROECONOMICS (cont.)
(3) To Achieve Economic Growth
• Economic growth can be described as expansion in national
output over a given period of time.
• As long as a nation achieves economic growth it tells us that
the economic performance is positive.
• However, an economy will not always encounter an upward
trend over time as economies tend to experience short-term
ups and downs in their performance. This is called a
business cycle.
 OBJECTIVES OF
MACROECONOMICS (cont.)
 OBJECTIVES OF
MACROECONOMICS (cont.)
(4) To Achieve an Equitable Distribution of Income
 It is necessary to ensure that the economic growth of a
nation is shared equally among the population
 Generally, policymakers try to ensure that there is no wide
gap between the rich and the poor.
 This is to ensure that all people are equal in terms of
standard of living.
 Disparities of income will create social friction and bring
out many problems.
 OBJECTIVES OF
MACROECONOMICS (cont.)
(5) To Achieve Equilibrium in the Foreign Sector
 Foreign sector means economic transactions or activities
that take place beyond the political boundaries.
 If a country faces balance of payment (BOP) deficit, it
means that the country will have to borrow from overseas
and leads to high debt problems whereas a prolonged BOP
surplus will lead to inflation.
 Thus it is important for a country to understand and
determine the favourable scale of their BOP.
FOUR MACROECONOMICS
PROBLEMS
PART C
 Macroeconomics problems arise when the
economy does not adequately achieve the
goals of full employment, stability, and
economic growth. As a result of which
there is a cascading effect that follows.
 1) INFLATION
• Defined as a persistent and sustained increase in the general
price level.
• Implies that there is an increase in the cost of living that causes
lower purchasing power.
• There is an inverse relationship between inflation and the value
of money. A rise in the general price means a drop in the value
of money.
• Measures of inflation:
• Inflation is measured by using the Consumer Price Index
(CPI).
 2) UNEMPLOYMENT
• Unemployment occurs when people who are in the working age
group, are able and willing to work, but are unable to find a suitable
job.
• Defined as a situation in the economy, where there are people
between the age 16 and 65 who are not working, but are actively
seeking jobs.

• Unemployment means the economy is not attaining the macroeconomic goal of full employment. Unemployment is a problem because:
• Less output is produced and thus arises the problem of scarcity in the economy.
• Due to this, the owners of unemployed resources receive less income. This gradually reduces the standard of living.
 3) INTEREST RATE
• Interest rates are the charges which are levied by the banks for lending a
loan. As businesses borrow money from the banks from time to time, an
increase in Interest rates will directly influence the business. 
 4) STAGNANT GROWTH 
• occurs when the Supply of products is not increasing or it is decreasing
below the benchmark. An increase in the total production of goods and
services is generally needed for the growth of the economy.
• This is required to keep pace with an increase in the population and
expectations of rising living standards. Stagnant growth exists if total
production does not keep pace with these expectations. 
 Define inflation.
Explain TWO (2) cause of inflation.
State TWO (2) effect of inflation.

PART D
 CAUSES OF INFLATION

Wage-push • Due to wage increases which will lead to increase in the

inflation cost of production and the output price.

Import-push • Due to increase in he prices of imported raw materials or

inflation finished goods.

• Occurs when firms gain more power and are able to push
up prices to make larger profits.
• Happened when markets move toward monopoly or
Profit-push oligopoly power.
inflation • Occurs when firms stock up on goods and create an
artificial shortage to increase the price of goods in order to
obtain higher profits.
 INFLATION (cont.)

Effects of Inflation
(i) Unequal income distribution and wealth
(ii) Reduce investment and production
(iii) The amount of saving will decrease
(iv) Deficit in the balance of trade
(v) Breakdown in functions of money
 Define unemployment.
Explain any THREE (3) types of
unemployment with examples
PART E
 DEFINITION OF UNEMPLOYMENT
I. Unemployment exists when there are people who are willing and
able to work but unable to find suitable jobs at certain level of
wage rate

II. A situation where labor force participants are available or willing to

work but are unable to find jobs
Defined as situation in the economy where there are people between
the age 16 and 65 who are not working but are actively seeking jobs

Unemployment Rate (%) = No of Unemployed  100%

Labor Force 23
 TYPES OF UNEMPLOYMENT

i) Frictional Unemployment

i. This is temporary unemployment.

ii. Those people whom just graduate and start searching for jobs and those quit from
jobs and looking for new jobs included in frictional unemployment.
iii. They need some time to search for new jobs that are suitable to their needs and
qualifications. So they are temporarily unemployed in the limited period of time.
iv. Frictional unemployment occurs when people are in between jobs, or are entering or
reentering the labor force
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 TYPES OF UNEMPLOYMENT cont..

ii) Structural Unemployment

i. This unemployment occurs when there is a change in the structure of an economy.
ii. Therefore the skills of workers are no longer suitable with the jobs available.
iii. Structural unemployment occurs because the composition of the labor force does not respond
quickly to meet changing demands, technological changes or competition from imported goods.
iv. The workers find that their skills and talent are obsolete and unwanted due to changes in
technology and consumer demand.
v. For example, in the agricultural sector, many unskilled and uneducated workers are laid off
because of modern mechanization. A structural unemployed person faced difficulties in finding
new job without undergoing training or having additional education.

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 TYPES OF UNEMPLOYMENT cont..

iii) Cyclical Unemployment

i. This unemployment is caused by a decrease in aggregate demand due to a change
in business cycle.

ii. When an economy is under recession, the demand for products decrease and
therefore the demand for workers are also decrease. Many people become
unemployed because of this economic condition.

iii. Cyclical unemployment is a matter of serious concern compared to frictional

unemployment because the latter in involuntarily and continues until the economy
comes out of the recession and takes several years to recover.
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 TYPES OF UNEMPLOYMENT cont..

iv. Seasonal Unemployment

v. Seasonal unemployment occurs when certain product cannot be produced
during a certain season.

vi. Therefore, many people are temporarily unemployed during this season. For
example, during monsoon season, fisherman, rubber-tapers and farmers will
be temporarily unemployed.

vii. Many people are also employed at tourist spots during peak periods such as
during festive periods, and are unemployed during off-peak periods.
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 GOVERNMENT POLICY

MONETARY FISCAL
POLICY POLICY
 Define fiscal policy.
Discuss TWO (2) to combat inflation.
PART F
 Fiscal policy is the means by which a government adjusts its
spending (G) levels and tax (T) rates to monitor and influence a
nation's economy
 Measures to Control Inflation

(1) Contractionary Fiscal Policy (Budget Surplus: T > G)

(i) Increase in Taxes (T)
• An increase in tax will reduce the disposable income of
individuals income and their consumption on goods and
services. This is turn will lead to a fall in prices.
(ii)Decrease in Government spending (G)
• A reduction in government spending will directly affect
aggregate demand. The government will cut the salary of its
civil servant and postpone development projects to reduce the
purchasing power of the public.
 Measures to Control Inflation

(2) Contractionary Monetary Policy

(i) Open Market Operations
• The central bank may sell government securities, short-term bonds or
treasury bills in the open market to the public to reduce bank deposits
and credit creation of commercial banks.
• Money supply will reduce, hence reducing aggregate demand and
price level.
(ii)Raising Required Reserve Ratio
• In the event of inflation, the central bank will increase the required
reserve ratio of all commercial banks.
 Define monetary policy.
Discuss FOUR (4) tools of monetary
policy
PART G
Monetary policy is a set of tools used by a nation's central
bank to control the overall money supply and promote
economic growth and employ strategies such as revising
interest rates and changing bank reserve requirements. I
 Achieve a balance of
payment equilibrium

Maintain Achieve full

domestic price employment of
stability resources
OBJECTIVE
OF MONETARY
POLICY

Maintain a continuously Achieve higher

low structure rate of
of interest rates economic growth
 EXPANSIONARY MONETARY POLICY
• Increasing money supply in the economy

TYPES OF MONETARY POLICY

CONTRACTIONARY MONETARY POLICY

• Decreasing money supply in the economy
INSTRUMENTS OF MONETARY POLICY

1.Open market operations- refer to the buying and selling of

financial instruments by central banks
2.Legal cash reserve requirement-This is a percentage each bank
must keep when loaning out depositor’s funds
3.Bank or discount rate- refers to the rate of interest the central
bank charges to private banks. 
4.Interest Rate
 Monetary Policy
Contractionary Expansionary
Aims To control inflation To control unemployment
To reduce money supply ( MS) To increase money supply( MS)
Tools
Open Market Operation (OMO) Government will sell securities, people will have Government will buy securities, people will have
less money to spend, Ms decrease, AD decrease, more money to spend, Ms increase, AD increase,
price decrease, inflation decrease production increase, unemployment decrease

Cash Ratio (CR)/Required BNM will increase CR, credit creation will BNM will decrease CR, credit creation will
Reserve Ratio (RRR) decrease, Ms decrease, AD decrease, price increase, Ms increase, AD increase, production
decrease, inflation decrease increase, unemployment decrease

Interest Rate (i) Raising interest rate, people will be attracted to Lowering interest rate, people will not save
save money, Ms decrease, AD decrease, price money, , Ms increase, AD increase, production
decrease, inflation decrease increase, unemployment decrease

Discount Rate/cost of borrowing Raising discount rate, cost of borrowing will Lowering discount rate, cost of borrowing will
increase, investment will decrease, Ms decrease, decrease, investment will increase, Ms increase, AD
AD decrease, price decrease, inflation decrease increase, production increase, unemployment
decrease
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 Fiscal Policy
Contractionary Expansionary

Aims To control inflation To control unemployment

Tools To reduce Aggregate Demand ( AD) To increase Aggregate Demand( AD)

Government decrease government Government increase government

Government Spending (Gs) spending, people will have less money to spending, people will have more money to
spend, AD decrease, price decrease, spend, AD increase, production increase,
inflation decrease unemployment decrease

Government will increase tax rate, Government will decrease tax rate,
Taxes (T) people will have less money to spend, people will have more money to spend,
AD decrease, price decrease, inflation AD increase, production increase,
decrease unemployment decrease

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