COURTESY OF BRIAN OKOTH
KENYATTA
UNIVERSITY
SCHOOL OF
ECONOMICS
DEPARTMENT OF ECONOMIC THEORY
LECTURER: MUTHUI J. N.
EET 201: MACROECONOMIC THEORY II
CHAPTER ONE
INTRODUCTION
The decade of 1970’s and the early 1980’s was marked by several macroeconomic
problems among which includes the oil shock as OPEC oil cartel raised prices,
leading to inflation around the world to intensify.
Several countries of the would, including USA suffered a recession as marked by
high unemployment.
Several theories have been advanced to try and provide answers to the basic
economic questions, which includes:
o Post Keynesian
o Monetarists
o Demand side
o Supply side views among others.
Courtesy of BRIAN OKOH
, Some of the views are contradictory while others are complementary. Our main aim
in this course is to explore the differ
rent economic ideas that have been developed in order to deal with and manipulate
problems affecting the economies of the would.
REVISION OF SOME BASIC CONCEPRTS
1. Question: how does microeconomics differ from
macroeconomics? Microeconomics theory:
Investigates how individuals in society choose to allocate scarce income or
resources among competing wants or production objectives.
It also studies factors affecting the relative prices of different goods and factors of
production in individual market (e.g. the supply and demand for milk or motor
vehicle).
Macroeconomic theory:
On the other hand is concerned with aggregate variables such as the aggregate
demand by all consumers for all goods and services produced in an economy over a
year or some other period.
Among the aggregate economic phenomena macroeconomic theory considers
include:
i) Inflation
ii) The interest rate
iii) The growth rate of income/output
iv) The rate of unemployment
v) Government spending
vi) Private domestic investment
vii) Aggregate disposable income
viii) The general price level.
Macroeconomic theory is the explanation of how the aggregate variables such as
national output, employment and prices interact and interconnect to produce the
state of our national economic situation.
,BUSINESS CYCLES / EQULIBRIUM
There exist two schools of thought when it comes to restoration of
equilibrium Automatic and discretionary measures
1 Automatic stabilization
2. Discretionary stabilization measures
The government is at liberty to use either of the two policies ie. Fiscal policy and
monetary policy
Fiscal policy and Goals
Is an attempt to manipulate government expenditure and taxation so as to affect
aggregate demand or aggregate supply in some manner that achieves desired
macrogoal such as full employment and price stability.
Monetary policy
Is a policy which affects money supply growth. It can be used to affect inflation and
employment.
Objectives of monetary policy
Is to achieve full employment and price stability.
We use the aggregate demand and aggregate supply framework to illustrate the
, concept of full employment and price stability.
Case 1:
When the economy is at full employment level, the aggregate supply of goods and
services would not be responsive to increase in the aggregate demand. The
aggregate supply curve would be vertical (perfectly inelastic)
As a result, an increase in the aggregate demand owing to expansionary fiscal or
monetary policy would be inflationary.
Long run
supply
Case 2:
In a case where the economy is responsive to increase in aggregate demand. In
other words, the economy is not at full employment level, and is responsive to policy
changes.
At the point of wide spread unemployment, increase in aggregate demand would
not only create additional to output but would cause inflation as well.
A trade off would exist, in other words, between changes in the level of
KENYATTA
UNIVERSITY
SCHOOL OF
ECONOMICS
DEPARTMENT OF ECONOMIC THEORY
LECTURER: MUTHUI J. N.
EET 201: MACROECONOMIC THEORY II
CHAPTER ONE
INTRODUCTION
The decade of 1970’s and the early 1980’s was marked by several macroeconomic
problems among which includes the oil shock as OPEC oil cartel raised prices,
leading to inflation around the world to intensify.
Several countries of the would, including USA suffered a recession as marked by
high unemployment.
Several theories have been advanced to try and provide answers to the basic
economic questions, which includes:
o Post Keynesian
o Monetarists
o Demand side
o Supply side views among others.
Courtesy of BRIAN OKOH
, Some of the views are contradictory while others are complementary. Our main aim
in this course is to explore the differ
rent economic ideas that have been developed in order to deal with and manipulate
problems affecting the economies of the would.
REVISION OF SOME BASIC CONCEPRTS
1. Question: how does microeconomics differ from
macroeconomics? Microeconomics theory:
Investigates how individuals in society choose to allocate scarce income or
resources among competing wants or production objectives.
It also studies factors affecting the relative prices of different goods and factors of
production in individual market (e.g. the supply and demand for milk or motor
vehicle).
Macroeconomic theory:
On the other hand is concerned with aggregate variables such as the aggregate
demand by all consumers for all goods and services produced in an economy over a
year or some other period.
Among the aggregate economic phenomena macroeconomic theory considers
include:
i) Inflation
ii) The interest rate
iii) The growth rate of income/output
iv) The rate of unemployment
v) Government spending
vi) Private domestic investment
vii) Aggregate disposable income
viii) The general price level.
Macroeconomic theory is the explanation of how the aggregate variables such as
national output, employment and prices interact and interconnect to produce the
state of our national economic situation.
,BUSINESS CYCLES / EQULIBRIUM
There exist two schools of thought when it comes to restoration of
equilibrium Automatic and discretionary measures
1 Automatic stabilization
2. Discretionary stabilization measures
The government is at liberty to use either of the two policies ie. Fiscal policy and
monetary policy
Fiscal policy and Goals
Is an attempt to manipulate government expenditure and taxation so as to affect
aggregate demand or aggregate supply in some manner that achieves desired
macrogoal such as full employment and price stability.
Monetary policy
Is a policy which affects money supply growth. It can be used to affect inflation and
employment.
Objectives of monetary policy
Is to achieve full employment and price stability.
We use the aggregate demand and aggregate supply framework to illustrate the
, concept of full employment and price stability.
Case 1:
When the economy is at full employment level, the aggregate supply of goods and
services would not be responsive to increase in the aggregate demand. The
aggregate supply curve would be vertical (perfectly inelastic)
As a result, an increase in the aggregate demand owing to expansionary fiscal or
monetary policy would be inflationary.
Long run
supply
Case 2:
In a case where the economy is responsive to increase in aggregate demand. In
other words, the economy is not at full employment level, and is responsive to policy
changes.
At the point of wide spread unemployment, increase in aggregate demand would
not only create additional to output but would cause inflation as well.
A trade off would exist, in other words, between changes in the level of
