
Contents
1. Introduction to Macro Economics 1-16
1.1 Introduction 2
1.2 Micro Economics 3
1.3 Meaning and Nature of Macro Economics 6
1.4 Scope of Macro Economics 7
1.5 Importance and Growth of Macro Economics 10
1.6 Micro versus Macro Economics
(Limitations of Micro and Macro Economics) 12
1.6 Conclusion 15
2. National Income Concepts 17-44
2.1 Introduction 18
2.2 Circular flow of Income 18
2.3 Circular flow of Income in two Sector Economy 19
2.4 Circular Flow of Income in three sector economy 21
2.5 Circular Flow of Income in Four Sector Economy 22
2.6 Relation between Leakages and Injections in
Circular flow 24
2.7 Concepts of National Income and Related Aggregates 24
2.8 Nominal and real Income 29
2.9 Measurement of National Income 30
2.10 Stock Variables and Flow Variables 43
3. Classical Theory of Output and Employment 45-62
3.1 Introdution 45
3.2 Full Employment 46
3.3 Classical System 46
4. Keynesian Theory of Employment 63-68
4.1 Keynesian System 63
4.2 Comparison of Classical and Keynesian Systems 73
5. Keynesian Theory of Income Determination 69-102
5.1 Actual GDP and Potential GDP 69
5.2 Two Sector Model 70
5.3 Three Sector Model (Fiscal Policy) 84
5.4 Four Sector Model (Open Economy) 91
5.5 Solved Problems 97
6. Consumption Function 103-124
6.1 Meaing of Consumption Function 103
6.2 Psychological Law of consumption 104
6.3 Propensity to Consume and Save 107
6.4 Determinants of Consumption Function 109
6.5 Determinants of Propensity to Save 113
6.6 Theories of Consumption Function 113
6.7 Forms of Consumption Function
(Properties of Keynesian Consumption Function) 115
6.8 Saving Function 120
6.9 Importance of Consumption and Saving Function 122
7. Theory of Investment 125-144
7.1 Meaning of Investment 125
7.2 Tyes of Investment 126
7.3 Marginal Efficiency of Capital
(Determinants of Investment) 132
7.4 MEC and Rate of Interest 137
7.5 Real Rate of Interest 142
8. Interest Rate Ctermination 145-190
8.1 Classical Theory of Interest Rate 145
8.2 Neo-Classical Theory of Interest Rate 152
8.3 Keynesian Theory of Interest Rate 161
9. Multiplier 191-220
9.1 Two Sector Model 191
9.2 Three sector model 205
9.3 Multipliear under Four Sector Model 210
9.4 Leakages from Multiplier 212
9.5 Importance of Multiplier 214
9.6 Limitations of Multiplier 215
9.7 Solved Problems 216
10. Inflation 221-236
10.1 Meaning of Inflation 221
10.2 Causes of Rising and Falling Inflation 221
10.4 Money Supply and Rate of Interest 227
10.5 Inflation and Interest Rates 230
10.6 Social Costs of Inflation 232
11. Inflation and Unemployment 237-252
11.1 Introduction 237
11.2 Meaning and Measurement of Unemployment 238
11.3 Types of Unemployment 239
11.4 Labour Market and Productive System 244
11.5 Inflation and Rate of Unemployment 246
12. Macroeconomic Policy in Open Economy 253-266
12.1 Introduction 253
12.2 Flow of Goods and Capital 255
12.3 Saving and Investment in a Small Open Economy 256
12.4 Saving and Investment in Large Open Economy 258
12.5 Exchange Rates 260
13. Mundell–Fleming Model 267-286
13.1 Introduction 267
13.2 Assumptions of Mundell–Fleming Model 268
13.3 IS Curve (Goods Market Equilibrium) 269
13.4 LM Curve (Money market Equilibrium) 271
13.5 Balance of Payments (BP) Curve 273
13.6 Equilibrium of IS, LM and BP curves 274
13.7 Fiscal and Monetary Policy 276
13.8 Interest Rate Differentials in a Large Economy 284
13.9 Criticism of Mundell–Fleming Model 285