MACROECONOMICS
The study of the whole — output, prices, employment, money
"In the long run, we are all dead." — J.M. Keynes, 1923, on classical economists' insistence that markets self-correct given infinite time.
Macro asks four questions: What is produced? What does it cost? Who works? What is money?
Eighteen pages. Real frameworks. Representative numbers. No models without footnotes.
Illustrative placeholder image (picsum.photos), not Reuters or NYSE archive imagery
What is GDP?
Gross Domestic Product is the market value of all final goods and services produced within a country in a year. The accounting identity:
Y = C + I + G + (X − M)
U.S. 2024 Composition
Consumption dominates. The U.S. is, in macro terms, a giant shopping mall.
Three Ways to Measure
All three should give the same answer. They never quite do — the gap is the "statistical discrepancy."
Real vs. Nominal
Nominal GDP uses current prices. Real GDP holds prices constant to a base year, isolating volume change.
Inflation: When Money Loses
Inflation is the rate at which the general price level rises. The CPI tracks a basket of ~80,000 goods and services priced monthly by the BLS.
Too much money chasing too few goods. War spending, stimulus.
Inputs (oil, wages) rise. 1973 OPEC, 1979 Iran.
Wage-price spiral. Workers expect inflation, demand raises.
What is Money?
Money has three jobs: medium of exchange store of value unit of account. Failure at any one is monetary collapse (Weimar 1923, Zimbabwe 2008, Venezuela 2017).
Monetary Aggregates · U.S. 2024
| Aggregate | Includes | Approx ($T) |
|---|---|---|
| M0 | Physical currency + bank reserves at Fed | 5.4 |
| M1 | M0 + checking deposits + traveler's checks | 18.0 |
| M2 | M1 + savings + small time deposits + retail MMF | 21.0 |
The Quantity Theory
M · V = P · Y
Money supply × velocity = price level × real output. Milton Friedman's bumper sticker: "Inflation is always and everywhere a monetary phenomenon." The 2020–22 episode tested this — M2 jumped 26% in 2020, inflation followed in 2022.
Unemployment
The headline U-3 rate is the share of the labor force actively seeking work. The BLS publishes six measures (U-1 through U-6).
Types
NAIRU
Non-Accelerating Inflation Rate of Unemployment — the lowest jobless rate that doesn't trigger inflation. Estimated at 4.0–4.5% in the U.S.
Okun's Law
Each 1pp rise in unemployment ≈ 2pp loss in GDP. A rule, not a law.
The Business Cycle
NBER dates U.S. recessions. Since 1945, the average expansion lasted ~65 months; the average recession, ~11 months.
| Episode | Years | Trigger | Peak Unempl. |
|---|---|---|---|
| Great Depression | 1929–33 | Stock crash, banking panic, Smoot-Hawley | 25% |
| Volcker Recession | 1980–82 | Fed funds to 20% to crush inflation | 10.8% |
| Great Recession | 2007–09 | Subprime mortgage crisis, Lehman fall | 10.0% |
| COVID Recession | 2020 (Feb–Apr) | Pandemic shutdown | 14.7% |
Schools of Thought
Classical / Neoclassical
Smith, Ricardo, Marshall. Markets clear. Wages and prices flexible. Say's Law: supply creates its own demand. Government should stay out.
Keynesian
Keynes (1936). Aggregate demand drives output in the short run. Sticky wages. Spend in recessions; the multiplier amplifies effect.
Monetarist
Friedman, Schwartz. Money matters. The Fed caused the Depression by letting M2 fall a third. Rules over discretion.
New Classical / RBC
Lucas, Prescott. Rational expectations. Cycles are real shocks (productivity), not money illusions. Stimulus is futile.
New Keynesian
Mankiw, Romer, Woodford. Microfounded sticky prices, monopolistic competition. The synthesis behind every modern central bank model.
MMT
Wray, Kelton. Sovereigns issuing their own currency cannot involuntarily default. Tax policy, not bond markets, controls inflation. Heterodox.
The Federal Reserve
Founded 1913 after the Panic of 1907. Dual mandate (1977): maximum employment AND stable prices (interpreted as 2% PCE).
Tools
The Taylor Rule
i = r* + π + 0.5(π − π*) + 0.5(y − y*)
John Taylor's 1993 prescription. Most central banks track deviations from this benchmark even if they don't follow it mechanically.
Fiscal Policy
Government taxing and spending. Distinct from monetary policy, run by Treasury + Congress.
Multiplier
If MPC = 0.8, an extra $1 of spending → $1/(1−0.8) = $5 of GDP. In recessions, multipliers are larger; near full employment, they shrink toward zero.
Automatic Stabilizers
Unemployment insurance, progressive tax brackets — kick in without legislation.
U.S. Federal Outlays 2024
SS 22% · Medicare/Medicaid 25% · Defense 13% · Net Interest 13% · Other 27%
Net interest is the fastest-growing line item. CBO projects it overtakes defense in 2025 and Medicare by 2032.
Open Economy
Balance of Payments
The current account (trade in goods, services, income) plus the capital account must equal zero. The U.S. runs persistent current-account deficits (~3% of GDP); foreigners send capital back as Treasuries and stock.
Mundell-Fleming Trilemma
Pick two. You cannot have all three.
Long-Run Growth
Solow Model
Y = A · Kα · L1−α
Output depends on capital, labor, and total factor productivity (A). With diminishing returns to K, growth eventually slows — unless A keeps rising.
Endogenous Growth
Romer (1990): ideas don't run out. Investment in R&D, human capital, and institutions sustains A. Lucas: "Once you start thinking about growth, it's hard to think about anything else."
Case Study: Volcker Disinflation
August 1979. Paul Volcker becomes Fed Chair. CPI is at 11%, headed to 14%. Confidence in money is collapsing.
| Year | Fed Funds Peak | CPI | Unempl. | Note |
|---|---|---|---|---|
| 1979 | 15.5% | 11.3% | 5.9% | Volcker installed Aug |
| 1980 | 20.0% | 13.5% | 7.5% | Carter loses election |
| 1981 | 19.0% | 10.3% | 8.5% | Reagan begins |
| 1982 | 14.0% | 6.1% | 10.8% | Severe recession |
| 1983 | 9.6% | 3.2% | 9.6% | Inflation broken |
Lesson: anchoring expectations is everything. Volcker traded jobs for credibility — and a 30-year era of low inflation was born.
Case Study: 2008 Financial Crisis
Subprime mortgages packaged into MBS, sliced into CDOs, rated AAA. House prices fall ~30% from 2006 peak. Bear Stearns (Mar '08), Fannie/Freddie (Sep 7), Lehman (Sep 15), AIG (Sep 16).
Policy Response
TARP $700B Treasury equity injections Fed funds to 0–0.25% QE1 ($1.7T MBS+UST) ARRA $831B fiscal stimulus
Total bank losses globally: ~$2.8T (IMF). U.S. household wealth fell ~$16T peak-to-trough.
What we learned
Macroprudential matters. Basel III raised capital requirements; living wills; CCAR stress tests. The 2023 SVB run showed the work isn't done.
Case Study: Japan's Lost Decades
Nikkei peaked Dec 29, 1989 at 38,915. It would not see that level again for 34 years (Feb 2024). Nominal GDP in 2023 was below 1995.
Diagnosis
Asset-price collapse → balance-sheet recession (Koo). Firms paying down debt regardless of zero rates. BoJ tries every tool: ZIRP, QE, YCC, negative rates. Population aged faster than policy.
"Japan is the world's leading indicator." — Larry Summers, on secular stagnation
Common Errors
Confusing nominal with real
"Wages have never been higher." Sure — in dollars. Adjusted for CPI, U.S. real median wages have grown ~17% since 1979.
Government ≠ household
A sovereign that issues its own currency in floating-rate regime cannot be forced to default. Solvency constraint binds via inflation, not bond auction failure.
Fallacy of composition
If everyone saves more at once, aggregate demand falls and income drops. Prudent for one, paradox for all.
Lucas critique
Models estimated under one policy regime break down when policy changes — because expectations adapt.
Trade balance ≠ winning
A current-account deficit means more goods consumed than produced — paid for by exporting assets. It is not a P&L statement.
Money printer go brr
QE adds reserves, not deposits. Whether it raises CPI depends on bank lending and demand. 2009–2019 showed it can be deflationary.
Frameworks at a Glance
| Framework | Key Insight | Year |
|---|---|---|
| IS-LM | Goods and money markets jointly determine output and rates | Hicks 1937 |
| Phillips Curve | Short-run trade-off between unemployment and inflation | Phillips 1958 |
| AS-AD | Aggregate supply/demand framework for prices and output | 1970s |
| Solow-Swan | Capital accumulation drives growth, but A drives convergence | 1956 |
| Mundell-Fleming | Open-economy IS-LM; the trilemma | 1962-63 |
| RBC | Cycles from real productivity shocks | Kydland-Prescott 1982 |
| DSGE | Microfounded, stochastic, dynamic — modern central bank workhorse | 1990s– |
| Taylor Rule | Rate-setting reaction function | 1993 |
| MMT | Currency-issuer can spend without bond market consent | 1990s |
Recommended Reading & Watching
Books
Keynes — The General Theory (1936) Friedman & Schwartz — A Monetary History of the United States (1963) Reinhart & Rogoff — This Time Is Different (2009) Kindleberger — Manias, Panics & Crashes Krugman — The Return of Depression Economics Mankiw — Macroeconomics textbook
YouTube
Khan Academy — Macroeconomics full course
Bloomberg — Bloomberg Markets and Finance channel
CNBC — CNBC Money documentaries
Ray Dalio — "How the Economic Machine Works" (30 min)
Data sources to bookmark
FRED.stlouisfed.org · BEA.gov · BLS.gov · IMF.org/data · OECD.stat
End of Session
"It's tough to make predictions, especially about the future." — Yogi Berra (also attributed to Niels Bohr)
The economy is a 25-trillion-dollar weather system. The models are crude. The data is laggy and revised. The schools are loud. And yet — every two months we get a CPI print that moves a hundred million household decisions.
That's what makes macro the most fun and the most humbling field in social science.
EXIT TERMINAL · GMM<CANCEL>