Dynamic Macroeconomics

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Introduction
Macroeconomics focuses on the analysis of economies in their entirety. It
seeks to provide answers to some of the most important economic and social
concerns, such as the ones relating to economic growth, fluctuations in
output, employment, and inflation, and the role of monetary and fiscal policy.
Why are some countries “rich” and others “poor”? What determines the
improvement of living standards and the process of economic growth? Why
are there recessions and upswings in economic activity? What are the causes
and consequences of inflation? What are the determinants and consequences
of unemployment and its fluctuations? What are the possibilities for
government policy to promote economic growth, counter recessions, and
maintain low inflation and unemployment?
These and a host of related questions have occupied social thinkers even
before economics was founded as a separate discipline, following the
publication of Adam Smith’s pathbreaking 1776 book, The Wealth of
Nations. Smith sought to systematically analyze the causes of differences in
wealth and living standards across countries. In the process, he founded
economics as an academic discipline that was separate from the other social
sciences. Following the publication in 1936 of The General Theory of
Employment, Interest and Money by John Maynard Keynes,
macroeconomics eventually emerged as a separate subdiscipline of
economics.
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Macroeconomics uses relatively simple, aggregate, general equilibrium
models that focus on the operation of three sets of markets. The first is the
market for goods and services. Such goods and services are typically

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assumed to consist of a homogeneous final output. The second is the set of
markets for factors of production, which are usually assumed to be mainly
capital and labor. The third is the set of markets for financial assets, such
as interest-yielding securities and money.
In the context of macroeconomic models, the main groups of agents
assumed to be making choices are households, firms, and the government, or
independent government agencies, such as a central bank.
Through their choices and their market interactions, economic agents
determine macroeconomic outcomes, such as the volume of production and
consumption, employment and unemployment, investment and capital
accumulation, real wages and real interest rates, taxes and government debt,
the price level and inflation, and nominal wages and interest rates.