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 What is Macroeconomics?
‡ An analysis of the backdrop of economic
conditions against which firms and
consumers make decisions
‡ To analyze the economy in aggregate
 þoals
‡ Importance of Economic Policy Issues
‡ Significance of Firm-Specific and
Aggregate Risk
‡ Assessment of Long-Run Economic
Environment
Vonsumers and Workers
‡ How much to
work?
‡ How much and
what to buy?
‡ How much to
save?
Firms
‡ How many worker
to hire?
‡ How much capital
to purchase?
‡ Where to sell
products?
 Policy Makers
‡ Fiscal Authority
± Vontrols tax system
± Purchases goods and services
± Redistributes income
‡ Monetary authority
± Vontrols money supply
± Influences interest rates and exchange rates
‡ Variables - output aggregate, price level,
employment and unemployment, interest
rate, wage and exchange rate.
‡ To study factors that influence the
variables.
 


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‡ Model Vlassic (1776-1930an):

- Vompetitive market to solve economic
problem.
-Wages and price will determine
employment. Exp: if output decrease
demand for labor will decrease, wage fall,
and consequently firm increase demand
for labour.
-þ



during 1929-1932 ±
Vompetitive market failed to achieve high
economic growth and full employment.
‡ Model Keynes (1936):
-Theory as a bases for modern macroeconomic theory -
X






 
 







.
-He believed that price and wages are not determinant
for employment.
-Believe that aggregate demand/expenditure on goods
and services determine the economic level.
-Believe government interference is needed to achieve
full employment and sustainable economic growth.
 


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‡ Definition: A group of people who have capacity to work, willing to work and
agreed to accept salary and wages at market price but does have any job.
‡ Less AD/AE.
‡ Major indicator for an economy.
‡ High unemployment rate shows full employment/potential output is not
achieve.

  
 
 
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‡ Unemployment rate =

Labour ± employment x 100

Labour
‡ Natural rate of employment - 4% - 6.5% - considered
as full employment
‡ þovernment policy to ensure low unemployment rate or
full employment.
 


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‡ Definition: Increase in price continuously.

‡ Inflation rate = VPI current year ± VPI year before x
100
VPI year before
‡ Inflation rate < 4% low, 5%-10% - moderate, >10%
serious.
‡ Factors contributed to inflation : AD > capacity
production, increase in wages, increase in import price,
unstable politic and economy, Money supply increase
without follow by the increase in product supply.
‡ Normally during economic boom.
‡ Negative result ± decrease in real wages, society welfare
decline, less export, less investment, increase in import.
‡ þovernment to curb inflation at low rate.
‡ Negative relationship between inflation and employment:
-In economy usually when unemployment rate is low, inflation rate is
high and vice-versa.
-During high AD, inflation rate is also high while unemployment rate
is low.
‡ Philip curve ± Negative relationship between
inflation and unemployment rate.
 


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‡ Positive relationship between inflation and

unemployment:
-High inflation accompanied by high
unemployment rate - stagflation
- Factors that cause stagflation: Higher
unemployment rate is followed by higher
money supply by the Ventral bank and do
not accompanied by the high demand.
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‡ Economic level of a country measured by

the increase in output aggregate.
‡ r 

 



 .
þDP real
One business cycle
V Peak

A Peak D

Year
‡ Low level of output/AD/AE shows low standard of living.
‡ Decline in AD shows a


.
‡ Long and big recession called 


.
‡ Economic growth rate=

þDP real at current year ± þDP real at year before x 100

þDP real at year before

‡ þovernment policy to ensure sustainable and stable

economic growth.
 




 
 
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‡ Definition: records economic transactions

between Malaysia and foreign residents both in
goods and assets.
‡ þovernment policy to ensure this account
always in surplus positions ± Receive from other
countries is more than payments make to other
countries..
‡ Factors contributed to the surplus BP - exports
more than import, foreign direct investment etc.
 
   


‡ To achieve macroeconomic objective ± low unemployment rate,

stable price level, high economic growth and surplus in BP
‡ þovernment interfere through THREE major policies:

1) Fiskal policy
2) Monetary policy
3) þrowth policy @   

 (c


‡ Taxes (T) and government expenditure

(þ).
‡ During economy recession @ AD decline,
þovernment reduce T and increase þ to
stimulate economy (Expansionary fiscal
policy).
‡ During inflation, þovernment increase T
and reduce þ to curb inflation
(contractionary fiscal policy).
‡ The idea originated by Keynes (1936).
 
  


‡ þovernment (through Ventral Bank) control the

economy through money supply in the economy.
‡ Keynes ± Monetary policy to influence
aggregate expenditure through determining
interest rate.
‡ Economic recession VB increase money supply
through his financial instruments ± reduce
reserve requirement ratio, reduce discount rate
(expansionary monetary policy) ± to stimulate
household and firm expenditure (AD).
 
) 


‡ To stimulate aggregate supply (AS) to increase output aggregate

and national income.
‡ The policy to increase firm efficiency, increase labour productivity
and reduce cost of production.
‡ Exmp: to control increase in wages, and encourage R&D.
 




 

‡ 4 major sectors:
1) Household
2) Firm
3) þovernment
4) International
‡ Diagram: Flow of income in economic 4 sectors:

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(&$#'"&$%
& $.


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FIRM 
  
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‡ Flow of income in economic 4 sectors:

Malaysian International
Economy economy
 

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‡ Household:
-Owner of the labour (production factor) for firm
± earn income.
-Vonsumption goods and services produce by
firms.
-If consumption less than income - saving

‡ Firma:
-Sell goods and services to household,
government and export, and get income.
-Pay wages to household and paytaxes to
government.
-saving.
‡ þovernment:
- Revenues ± Taxes on household and firm.
-Purchase goods and services from firm and make transfer payment
to household (þ).

‡ International:
-Household purchase imported goods (M) and foreign residents
spends their income to purchase goods and services from this
country (X).
 


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‡ Product/goods and services markets:

-Firm supply goods and services to market.
-Household and government purchase goods and services from firm
at the product market. .
-Other countries buy and sell goods and services in this market.

‡ Labour market:
-þovernment and firm buy labour (pay wages) from household.
-household supply labour, while firm and government demand
labour.
-Laboor demand and supply from other countries.
‡ Financial market:
-Household buy stock and bond from firm.
-household get fund (borrow) from
financial market to finance their purchase.
-Firm get fund (borrow) from financial
market to finance their investment.
-þovernment borrow by issuing bond.
-International sector borrow and lend to
financial market.
  




‡ Ahli ekonomi cuba menerangkan gelagat agregat dengan melihat

faktor yang sama yang mempengaruhi gelagat individu (dari sudut
mikroekonomi).
‡ Alasan mereka ialah gelagat makro adalah jumlah kepada semua
keputusan gelagat mikro.
‡ Vthnya penggunaan model AD-AS untuk melihat perubahan
pembolehubah makroekonomi apabila berlaku perubahan dalam
faktor yang mempengaruhi pembolehubah tersebut.