Applied Macroeconomics Research Paper Starter

Applied Macroeconomics

Macroeconomics is a branch of economics created by John Maynard Keynes, a British economist. Macroeconomics looks at the economy on a large scale either nationally, regionally or between countries. Keynes' view differed from the Classical approach to macroeconomics. The classical view held that there should be no government interference in the economy because it is always in equilibrium or adjusts to put itself in equilibrium. Keynes' view was that certain circumstances, such as a depression, would not improve through self-regulation of the economy and required government intervention. For example, during a depression, unemployment may not automatically improve and often requires government intervention to create jobs. Large scale macroeconomic indicators can measure the health of the economy and compare the current state of the economy to other periods in time. These measures can also predict what policies and actions will benefit the economy. Applied macroeconomics is applying assumptions about large scale economic measures to real world economic problems. Macroeconomic indicators include the unemployment rate, Gross Domestic Product, interest rates, money collected in taxes compared to spending, and the inflation rate.

Keywords: Consumer Price Index (CPI); Debt; Economic Policy; Economics; Fiscal Policy; Gross Domestic Product; Inflation; Macroeconomics; Microeconomics; Monetary Policy; Supply and Demand

Applied Macroeconomics


Applied macroeconomics is taking aggregate theories and applying them to real world scenarios. Aggregate theories are assumptions about aggregate (total or sums) measures in the economy. For example, aggregate supply is the sum of goods and services produced in an economy; it also serves as a measure of how strong the economy is. Applied macroeconomics can be used as a tool to create an accurate picture of current economic events and to suggest approaches for improvement or correcting mistakes. Economists, governments, companies and individuals have an interest in looking at the economy as a whole because all are affected by changes in the economy. Economists may look at a problem in macroeconomics as an opportunity to predict or design a better future economic state or further the development of the field of economics. Governments may look at macroeconomics to define new policies that address economic issues and support the economy. Companies and individuals may be interested because information about the broad tendencies of the economy can guide decision making such as looking for a new job or hiring workers and buying equipment.

Some of the big problems and concerns of macroeconomics are based on indicators of the economy. These can include unemployment, inflation, interest rates, and supply and demand. In the United States and other countries including Japan, the economy is based on the free market or capitalist system where people may engage in the business of producing and selling goods and services competitively. The government influences business activity by controlling monetary policy and possibly with regulations governing certain aspects of business. Countries take different approaches to creating a healthy and growing economy. These approaches can include how productive resources are used by the producers of goods and the level of government involvement to support and encourage growth. If the economy is healthy, there is the potential to improve the standard of living of the people in that country. A decline in business activity can create a recession and negatively impact spending and incomes. In countries like China, the government exerts additional control over businesses by owning the businesses and deciding how they will be run. Also, in countries where governments control business, they also guarantee full employment by employing all who can work.

A History of Macroeconomics

John Maynard Keynes "was a British economist… who created macroeconomics, the study of economics on a large scale" (Gilman, 2006, p. 41). Macroeconomics asks a number of questions such as

  • What is the unemployment rate How easy or difficult is it to find work
  • What is the strength of the dollar relative to other forms of currency around the world
  • What is the level of prices Are they rising, falling, staying the same How does this period of pricing compare to prices in another period
  • What revenue is the government collecting in taxes and how does that compare to government spending
  • What is the level of indebtedness to other countries
  • What is the production rate of the country and is the overall income level growing or falling
  • How easy or difficult is it to borrow money based on interest rates

Schools of Macroeconomic Thought

There are many different versions or flavors of macroeconomics beyond what Keynes studied. Some simply disagree with his views while others build on his ideas. Gottheil (2007, p. 546) lists the following schools of macroeconomic theory and thought

  • Classical;
  • Keynesian;
  • Neo-Keynesian;
  • Rational expectations;
  • Supply side economics.

Gottheil cautions that within each school of thought there can be differences of opinion. Gottheil discusses the schools of thought with respect to unemployment and inflation about which economists desire to uncover the causes and cures. As one example, Gottheil states that classical economists think unemployment is temporary and a condition that will be corrected by the market. Similarly, classical economists believe that prices will eventually move to where they should be. Keynesian economists think that unemployment can go on indefinitely with prices remaining at high levels and that inflation can have many causes. De Rooy (1995, p. 143) describes a phenomenon called demand-pull inflation in which a country's income is growing so fast that it cannot produce goods and services fast enough. The growth comes from an increase in the "supply of money and credit in the economy." Demand-pull inflation can be compared to cost-push inflation which occurs when there are shortages of certain goods and services. Another scenario is stagflation when prices are high, inflation is high and the economy gets progressively worse. Stagflation (stagnation and inflation) was termed in the 1970s and 80s when unemployment and inflation were simultaneously high. At this time, the economy did not react the way Keynesian economist expected and led to a new movement of neo-Keynesians.

Applied macroeconomics seeks to understand or explain fluctuations in the economy and to determine what actions make sense to respond to the fluctuations (Australian Graduate School of Management, 1997).

Economic Indicators

Moffatt (2009) describes an economic indicator as a statistic about the economy. Examples of economic indicators are unemployment levels and the Gross Domestic Product (GDP). Every economic indicator has three characteristics

  • Relationship to the business cycleeconomy;
  • Frequency;

• Timing.

There are three possible relationships to the economy

  • Procyclic;
  • Countercyclic;
  • Acyclic.

Procyclic indicators move with the economy while countercyclic indicators move against the economy. Acyclic indicators do not have an observable relationship with the movement of the economy.


The frequency of an economic indicator refers to how often the indicator is tracked or measured. Some are measured monthly, others quarterly and still others annually. Economic indicator timing shows the relationship between the appearance of the indicator and the same trend being present in the economy. Economic indicators can be leading, lagging or coincident. A leading indicator is one that shows up before the economy follows suit. A lagging indicator is "a measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend. Lagging indicators confirm long-term trends, but they do not predict them" ("Lagging indicator," 2009). While leading indicators give an indication of future events, coincident indicators have a direct relationship with the economy and move at the same time as the economy.

Business Cycles

De Rooy discusses business cycles as events that happen in the economy without a single way to measure them all. Indicators could move slowly or quickly in any direction possible. Even in a recession, which is commonly thought of as a downturn, there are parts of the economy that may flourish. People may pay to repair items instead of purchasing new ones. People may take care of some tasks themselves instead of availing themselves of service providers such as beauty or barber professionals. De Rooy (1995, p. 41) lists GDP, business profits, "big-ticket consumer items called durable goods" and short term interest rates as measures that move with the business cycle. Nondurable goods like food are not as affected by the economy because they are always needed in good times and bad.

The Issues Considered in Macroeconomics

Macroeconomics looks at the economy as whole instead of individual consumer behavior (microeconomics). Macroeconomics studies the decisions that businesses and households make to lead to specific results such as the unemployment rate or inflation. There are two major problems considered in macroeconomics Long term growth and economic fluctuations. Macroeconomic analysis looks at aggregates or...

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