Macroeconomics: Dr. Ahmed Said Ahmed

Macroeconomics
Chapter ( 20 )
Introduction to Macroeconomics
Dr. Ahmed Said Ahmed

Lecturer of Macroeconomics
Alexandria University – Faculty of Commerce
Lecture (1)
Sunday, February 19, 2022
1
Definition of economics
Is a social science concerned with how
individuals & society use their scarce
resources to satisfy their unlimited human
wants.
 We distinguish between → Macroeconomics

& Microeconomics.
2
Microeconomics vs Macroeconomics
Microeconomics Macroeconomics
Is the study of individual Is the study of economics
economic units aggregates (the economy as
a whole)
Such as: such as:
individual consumer, producer, national output, national
individual firm, individual income, unemployment rate,
price, a market of a certain inflation rate, general price
good. level, economic growth,
performance of the government
policies.
3
Q1: MCQ:
1- Which of the following is not a macroeconomic

issue?
A) a rise in the consumer price index
B) changes in the unemployment rate
C) the change in the price of VCR tapes relative to the
price of movie theatre tickets.
D) historical trends in the growth of real per capita
national income.
4
Macroeconomics concerns
• 3 of the major concerns of macroeconomics are:

Output growth (or economic growth)
Unemployment
Inflation and depression
 The policy makers in any economy are

always trying to achieve a high economic
growth rate ,a low unemployment rate, and
a low inflation rate.
5
Some Macroeconomic Concerns
1-Economic growth versus Business Cycles:

Economic growth (output growth):- Is the
long –term increase in the capacity of the
economy to produce goods and services.
Business Cycles: are the short term ups &

downs in the performance of the economy. It
is shown as follows:
6
Output Growth
• -
7
 Expansion or boom: is the upward trend in the
cycle. During expansion both output and
employment increase.
 Recession (contraction, slump, stagnation): is the

downward trend in the cycle. during recession both
output and employment decrease.
 Depression: a prolonged and deep recession.
 Peak: is the top of the cycle.
 Trough: is the bottom of the cycle.
8
2- Employment & unemployment:
 Employment: persons 16 years old or older who are
working.
 Unemployment: persons 16 years old or older who are

not working but looking for work.
 unemployment rate: The percentage of the labor force

that is unemployed.
 unemployment rate = Number of unemployment / labor force.
 Labor force = Number of unemployment + Number of

employment
9
3- Inflation & Deflation:
inflation: An increase in the overall price
level.
hyperinflation: is the period of a very rapid

increases in the overall price level.
deflation: A decrease in the overall price

level.
10
Components of the Macroeconomy
 Understanding how the macroeconomics work can be

challenging because a great deal is going on at one time.
Everything seems to affect everything else.
 To see the big picture, it is helpful to divide the participants

in the economy into four broad groups:
(1) Households.
(2) Firms.
(3) The government.
(4) The rest of the world.

11
The Circular Flow Diagram in an open economy
 Definition of The Circular Flow Diagram: it shows the

income received and payments made by all sector of the
economy.
 note: the equilibrium condition in the open economy →

Withdrawals (leakages) = injections
S + T + IM = I + G + EX
 Withdrawals (the outflow of funds from the circular flow)

= saving + taxes + imports.
 Injections (the inflow of funds to the circular flow) =

investment + government expenditure + exports.
12
-
13
 Households receive income from firms and the
government, purchase goods and services from firms,
and firms pay taxes to the government.
 They also purchase foreign-made goods and services
(imports).
 Firms receive payments from households and from the
government for goods and services; they pay wages,
dividends, interest, and rents to households and taxes
to the government.
 The government receives taxes from firms and
households, pays firms and households for goods and
services—including wages to government workers—
and pays interest and transfers to households.
 Finally, people in other countries purchase goods and
services produced domestically (exports).
14
Exports Imports
Foreign sector
Investment Saving
Banks
G spending G spending
Government
T T
Consumption
Firms Households
Income
15
The Three Market Arenas
Types of markets:
1-Goods-and-Services Market:
Firms supply to the goods-and-services
market. Households, the government, and
firms demand from this market.
2-Labor Market:
In this market, households supply labor and
firms and the government demand labor.
16
3-Money Market:
Households supply funds to this market
because they expect to earn income in the
form of dividends on stocks and interest on
bonds.
Treasury bonds, notes, and bills: are issued

by the government to borrow money.
corporate bonds: are issued by firms to

borrow money.
17
shares of stocks: Financial instruments that
give to the holder a share in the firm’s
ownership and therefore the right to share in
the firm’s profits.
Dividends: The portion of profits that firms

pay to their shareholders.
18
Some economic concepts
 sticky prices: Prices that do not always adjust
rapidly to restore equilibrium between supply
and demand in the market.
 Stagflation: A situation of both high inflation and
high unemployment.
 aggregate behavior: The behavior of all
households and firms together.
 aggregate output: The total quantity of goods
and services produced in an economy in a given
period
19
transfer payments: Cash payments made by
the government to people who do not supply
goods, services, or labor. They include Social
Security benefits, veterans’ benefits, and
welfare payments.
Great Depression: The period of severe
economic contraction and high
unemployment that began in 1929 and
continued throughout the 1930s.
20
The Role of the Government in the
Macroeconomy
 The Government plays a major role in the economy by
adopting 2 main policies:
 fiscal policy: Government policies concerning:

a) Taxes
b) Government spending.
 monetary policy: The tools used by the central
bank to control:
a) the quantity of money in the economy (money
supply).
b) Interest rates.
21
Q1: True or False Giving Reasons:
1- The interaction between the different sectors in the economy

could be represented by the circular flow diagram.
2-Monetary policy is concerned with government spending and
taxes.
3-The short run ups and downs in the aggregate output could be
represented by the business cycle diagram in a given economy.
4- at equilibrium in an open economy with government, S should
equal I and T should equal G and EX should equal IM.
5- in an open economy with government, if budget surplus = 100,
net export = 200 & the economy is producing an equilibrium level
of output, then saving should exceed investment by 300.
6- the existence of a deficit in both the private sector and the
public sector requires the existence of a deficit in the foreign
sector to ensure equilibrium in an open economy with
government.
22
Answer of Q1
1- (√) because the The Circular Flow Diagram shows the income received
and payments made by all sector of the economy.
2- (X) Fiscal policy is concerned with government spending and taxes.
3- (√).
4- (X) at equilibrium in an open economy with government, the
equilibrium occurs if: Withdrawals (S + T + IM) = injections ( I + G + EX)
Even if S ≠ I and T ≠ G and EX ≠ IM.
5- (X) budget surplus = 100 → T > G by 100,
net export = 200 → EX > IM by 200 , then saving should exceed
investment by 100 because:Withdrawals (S + T + IM) = injections ( I + G +
EX)
S + 200 + 100 = I + 100 + 300 ( numbers are assumed)
S = I + 100 → so, S > I by 100
6- (√) deficit in private sector means that S < I
deficit in public sector means that T < G
So, to be in equilibrium IM must be > EX, which requires the existence
of a deficit in the foreign sector.
23
Q2: MCQ:
1- in an open economy with government, the circular flow entails:

a) Saving, imports and consumption as withdrawals from circulation.
b) Investments, consumption and government spending an injection
into circulation.
c) Imports, investments and savings as withdrawals from circulation.
d) Savings, imports and taxes as withdrawals from circulation.
2- the equilibrium condition in an open economy with government is:

a) S + T + G = I + EX + IM
b) S + EX + IM = I + T + G
c) S + T – G = I + EX – IM
d) None of the above.
24
3- (2021 midterm) Which of the following are considered as
injections to the circular flow?
A) Consumption, investment, and government spending
B) Taxes and government expenditure
C) consumption and saving
D) Investment and government spending
Answers
1- d 2- c 3- d
25

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Macroeconomics

Dr. Ahmed Said Ahmed

 We distinguish between → Macroeconomics

1- Which of the following is not a macroeconomic

• 3 of the major concerns of macroeconomics are:

Inflation and depression

 The policy makers in any economy are

1-Economic growth versus Business Cycles:

Business Cycles: are the short term ups &

 Recession (contraction, slump, stagnation): is the

 Depression: a prolonged and deep recession.

 Peak: is the top of the cycle.

 Trough: is the bottom of the cycle.

 Unemployment: persons 16 years old or older who are

 unemployment rate: The percentage of the labor force

 unemployment rate = Number of unemployment / labor force.

 Labor force = Number of unemployment + Number of

hyperinflation: is the period of a very rapid

deflation: A decrease in the overall price

 Understanding how the macroeconomics work can be

 To see the big picture, it is helpful to divide the participants

(3) The government.

(4) The rest of the world.

 Definition of The Circular Flow Diagram: it shows the

 note: the equilibrium condition in the open economy →

 Withdrawals (the outflow of funds from the circular flow)

 Injections (the inflow of funds to the circular flow) =

Treasury bonds, notes, and bills: are issued

corporate bonds: are issued by firms to

Dividends: The portion of profits that firms

 fiscal policy: Government policies concerning:

1- The interaction between the different sectors in the economy

1- in an open economy with government, the circular flow entails:

2- the equilibrium condition in an open economy with government is:

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