As pointed out above, classical and neo-classical economists, especially A.C. Pigou, contended that the cut in money wages at times of depression and unemployment would lead to the increase in employment and thereby eliminate unemployment and depression. His macroeconomic model reveals how consumption function, investment function, liquidity preference function, conceived in aggregate terms, interact to determine the level of national income and employment. Thus, macroeconomics studies how the large aggregates such as total employment, national product or national income of an economy and the general price level are determined. Another important issue in macroeconomics is to explain what determines economic growth in a country. Professor Gardner Ackley makes the distinction between macroeconomics and microeconomics more clearly when he says, “macroeconomics concerns itself with such variables as the aggregate volume of the output of an economy, with the extent to which its resources are employed, with the size of the national income, with the ‘general price level’. The scope of economics is very wide. Thus, Macro Economics is the study and analysis of an economy as a whole. We shall discuss various theories of business cycles and also monetary and fiscal policies to control business cycles and achieve economic stability. Classical economists held that prices, wages, and rates are flexible and markets tend to clear unless prevented from doing so by government policy, building on Adam Smith's original theories. By better understanding economics and the ramifications of economic decisions, investors can get at least a glimpse of the probable future and act accordingly with confidence. Besides, in the opinion of the supply-side economists the reduction in tax rates will increase income and output to such an extent that even with lower rates of taxes, the Government revenue will increase which would tend to reduce Government’s budget deficit. Because the demand for labour is a derived demand, i.e., derived from the demand for goods, the fall in aggregate demand for goods will result in the decline in demand for labour which will create more unemployment rather than reduce it. In the Keynesian theory deficit in Government budget leads to increase in aggregate demand and will therefore promote private investment. The fall in aggregate demand will tend to lower the level of employment rather than expand it. Thus, incomes earned become expenditure made on goods and services. Besides, Keynesian economists believe that expansion in money supply does not always cause inflation in the economy. Macroeconomics is a branch of the economics field that studies how the aggregate economy behaves. In other words, they always make correct predictions from the Government’s policies and changes in the economic environment. Professor Samuelson rightly says, “There is really no opposition between micro and macro-economics. The analysis of these six major issues describes the scope of macroeconomics. Monetarists led by Friedman believe that inflation is always and everywhere a monetary phenomenon. What is Macroeconomics?. Adam Smith's classic 18th-century work, An Inquiry into the Nature and Causes of the Wealth of Nations, which advocated free trade, laissez-faire economic policy, and expanding the division of labor, was arguably the first, and certainly one of the seminal works in this body of research. The aim to prepare such a record is to present an account of all receipts on account of goods exported, services rendered and capital received by the residents of a country and the payments made for goods imported, services received and capital transferred to other countries by residents of a country. On the basis of their rational expectations, they make quick adjustments in their behaviour. The decline in aggregate demand will cause national output and income to fall and unemployment to increase. It was Harrod and Domar who extended the Keynesian analysis to the long-run problem of growth with stability. These special growth theories relating to less developed countries (LDCs) are generally known as Economics of Development. Macroeconomics deals with the performance, structure, and behavior of the entire economy, in contrast to microeconomics, which is more focused on the choices made by individual actors in the economy (like people, households, industries, etc.). TOS4. The New Classical school, along with the New Keynsians, is built largely on the goal of integrating microeconomic foundations into macroeconomics in order to resolve the glaring theoretical contradictions between the two subjects. Macroeconomic analysis takes account of many relationships which are not applicable to individual parts at all. Prior to the popularization of Keynes' theories, economists did not generally differentiate between micro- and macroeconomics. During the two years 1997 and 1998, currencies of many South-East Asian Countries and Japan rapidly depreciated in terms of US dollar. They thus could not provide adequate explanation of the occurrence of huge unemployment that prevailed during depression of 1930s in the capitalist economies. According to them, it is very difficult to implement an activist policy successfully. Classical economics refers to a body of work on market theories and economic growth which emerged during the 18th and 19th centuries. Balance of payments is the record of economic transactions of the residents of a country with the rest of the world during a period. Aggregate demand is the total amount of goods and services demanded in the economy at a given overall price level at a given time. The belief of classical economists that full-employment of labour and capital stock will always exist was based on Say’s Law of Markets. According to Say’s Law, supply creates its own demand and therefore, the problem of lack of demand for supply of goods and services does not arise. Thus decision to save more will deepen the economic depression. Because of this "stickiness", the government can improve macroeconomic conditions through fiscal and monetary policy. Scope of Macroeconomics. After Keynes, theory of inflation has been further developed and many theories of inflation depending upon various causes have been put forward. Therefore, the application of micro-approach to generalise about the behaviour of the economic system as whole or macroeconomic aggregates is incorrect and may lead to misleading conclusions. We briefly explain below the following three main developments in macroeconomics after Keynes: American economist Milton Friedman, a Nobel Laureate in economics, criticised Keynes’ macroeconomics and put forward a new view or idea. Can’t we generalise about the behaviour of the economic system as a whole or about the behaviour of large aggregates such as aggregate consumption, aggregate saving, aggregate investment from the economic laws governing the behaviour patterns of the individual units found by microeconomics. Thus, macroeconomic models of Harrod and Domar have explained the rate of growth of income that must take place if the steady growth of the economy is to be achieved. The instability in exchange rate has been a major problem in recent years which has given rise to serious balance of payments problems. Properly applied, economic theories can offer illuminating insights on how economies function and the long-term consequences of particular policies and decisions. Therefore, a separate macro-analysis is needed to study the behaviour of the economic system as a whole in respect of various macroeconomic aggregates. He showed how the equilibrium level of national income and employment was determined by aggregate demand and aggregate supply and further that due to lack of aggregate effective demand equilibrium level of income and employment might well be established at far less than full-employment level in a free-market capitalist economy.
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