Macroeconomic Theory

Macroeconomics is the application of economic theory to the study of the economy’s growth, cycle and price-level determination. Macroeconomics takes account of stylized facts observed in the real world and builds theoretical frameworks to explain such facts. Economic growth is a stylized fact of market economies, since England’s nineteenth-century industrial revolution. Until then, poverty was a common good for humanity. Economic growth consists in the persistent, smooth and sustained increase of per-capita income. A market economy shows periods of expanding and contracting economic activity. This phenomenon is the economic cycle. The price of money is the amount of goods bought with one unit of money, in other words, the inverse of the price level. Determination of the price level, or the value of money, is a fascinating subject in a fiat money economy. The most important change in the second edition is Chapter 7, which presents six models of fluctuation, three from the Keynesian agenda and three from the Lucas agenda. The models of Lucas agenda have micro foundations but do not square with the facts. The models of the Keynesian agenda are consistent with data but do not endure Lucas’s critique. This chapter sketches a model that can solve this puzzle. There are also changes in the rest of the book: social security (Ch. 3); a Malthusian model (Ch. 4); increasing returns in growth models (Ch. 5); a natural rate of unemployment model ( Ch. 6); natural rates, for interest rate and exchange rate, in a small open economy (ch.8); tax smoothing model (Ch.10) and optimal monetary rules for the Keynesian and new Keynesian models (Ch. 11).