The Purpose of Macroeconomics

Macro – The Circular Flow of Income and the Multiplier Effect

In this course, Dr Paul Segal (King's College London) explores the concepts of the circular flow of income and the multiplier effect and how we can use these tools to interpret economic shocks and understand economic models. In the first module, we outline the goals of macroeconomics, both fiscal and monetary policy, as well as providing an introduction to the multiplier effect. After that, in the second module, we cover the system of national accounts and GDP – particularly the production, expenditure and income interpretations of GDP – along with its components. In the third module, we consider consumption, investment and exogenous shocks before turning – in the fourth module – to the determinants of net exports and the volatility of investment. In the fifth and final module, we reconsider - in more detail - the multiplier process.

The Purpose of Macroeconomics

In this module, we think about the purpose of macroeconomics and introduce a few key terms - the business cycle, recession, fiscal and monetary policy, and the multiplier effect. We focus in particular on: (i) the macroeconomic goals of keeping unemployment low (and output high) and keeping a low and stable rate of inflation; (ii) the difficulty of achieving this goals in the face of exogenous shocks; (iii) the need for models in order to approach and interpret exogenous shocks; (iv) fiscal and monetary policy; and (v) a basic introduction to the multiplier process.