ECON110 Chapter Notes - Chapter 1 - Macroeconomic Principles : Macroeconomics, Models 1, Business Cycle
ECON110
Macroeconomic Principles
Is the pursuit of self-interest good for the economy? How is self-interest managed in a
macroeconomy?
LO1: recognise pursuit of enlightened self-interest is the philosophical justification for the free-
market. Understand, despite this justification that market economies experience fluctuations
in GDP, unemployment, inflation.
• Philosophy of free market economics: pursuit of enlightened self-interest leads to
best outcome for group, society and the economy.
• Adam Smith – economic system that freed people from control of too much
government, oppressive tradition, vested interests, allowed people to pursue their
ambitions, was the force behind economic improvement.
• Keynes – households/firms pursued self-interest by increasing savings in expectation
of economic downturns caused problems for the macroeconomy.
• Increased savings = purchase less G/S = firms invest less
• Increased savings → firms fire people = lower incomes → spend less → firms cut
production = job losses
Pursuit of self-interest by economic players within a given set of incentives
→
Macroeconomic outcomes
→
Fiscal & monetary policy responses?
Macroeconomics studies behaviour of aggregates (actors)
• Policy making is controversial (monetary/fiscal policy)
• Sectors/institutions make choice → choices determine society’s use of resources →
societies decides allocation of resources at macroeconomic level = private
consumption/government expenditure on education, health, welfare, defence,
investment, distribution of income.
Concepts shared by macro/microeconomics: trade-offs, incentives, exchange, information
and distribution
1. Trade-offs: society deciding to spend more on one thing leaves less to spend on
something else.
2. Incentives: influence decisions of each player in the macroeconomic story that is
complicated than the story/model presented.
3. Economy is a market economy (based on exchange of G/S)
4. Players make decisions based on information, only as subset of information that
inform decisions (GDP, inflation, unemployment and BOP)
5. Choices societies make about how much resources to invest/spend on education,
health, private consumption and level of minimum wages determine economic
outcome.
Introduction: a brief history of macroeconomics and its fundamental goals
LO 2: Recognise that macroeconomics is two schools of thought that centre on the extent that
fiscal and monetary policy should be used to minimise fluctuations in GDP, unemployment
and inflation.
Document Summary
Lo1: recognise pursuit of enlightened self-interest is the philosophical justification for the free- market. Increased savings = purchase less g/s = firms invest less. Increased savings firms fire people = lower incomes spend less firms cut production = job losses. Pursuit of self-interest by economic players within a given set of incentives. Concepts shared by macro/microeconomics: trade-offs, incentives, exchange, information and distribution: trade-offs: society deciding to spend more on one thing leaves less to spend on something else. Introduction: a brief history of macroeconomics and its fundamental goals. Lo 2: recognise that macroeconomics is two schools of thought that centre on the extent that fiscal and monetary policy should be used to minimise fluctuations in gdp, unemployment and inflation. Classical economics: school of thought that advocates relying on markets with limited use of fiscal policy. Keynesian economics: school of thought that postulates markets can fail, fiscal and monetary policy can improve macroeconomic performance.
