Macroeconomic Theories and Factors - Summary

In this session, you learnt about some of the theories in macroeconomics and also learnt about the various macroeconomic factors. Now, let's quickly summarise all that you learnt in this session.
 

1. First, you got an overview of economic theory over the years, starting from the Classical approach, which began in the 1800s, to Say’s Law of Markets, which was proposed by Jean-Baptiste Say, to the Keynesian theory, which was propagated by John Maynard Keynes, who argued that demand drives production in an economy. You also learnt how the views of Classical theorists and Keynesian theorists differed based on their interpretation of how an economy functions. 
 

2. Next, you learnt about the Consumption function, which is important since household consumption is the biggest component of GDP for most countries. You learnt how this function can be used to model consumption to gauge the total consumption in an economy:
 

C = A + M * D, where,

C = Consumption,

A =  Autonomous spending (fixed spending irrespective of income),

M = Marginal propensity to consume (percentage of disposable income being spent) and

D = Disposable income (income left to spend after deducting tax) 

A major learning was that people’s marginal propensity to consume decreases with an increase in disposable income. You also understood how governments could use the consumption function to make macroeconomic policy decisions.
 

3. You learnt about the multiplier effect which indicates the changes in national income or national output (also called GDP), that is caused due to changes in government spending.

4. Next, you were familiarised with the concept of interest, which is basically the amount that you receive for saving or loaning out money, OR the amount that you pay for borrowing money.
 

You learnt that with an increase in the money supply in the economy, interest rates decrease, and vice versa. Through the example of the yield curve, you learnt which types of investments attract higher or lower interest rates. 
 

5. Further, you learnt about unemployment and inflation.
 

Under unemployment, you learnt what leads to this situation in an economy and what are the different types of unemployment: Frictional, Structural, Cyclical and Seasonal. 
 

Then, you learnt what inflation means: Inflation refers to a general increase in the prices of good and services over an extended period of time. 

Next, you learnt about the cost-push and demand-pull theories of inflation. You also learnt about the relation between inflation and unemployment through the Phillips Curve.

The summary of the session is provided below for your reference.