The primary outcomes of the macro economy are output, prices, jobs, and international balances. These outcomes result from the interplay of internal market forces, external shocks, and policy levers.
All of the influences on macro outcomes are transmitted through aggregate supply or aggregate demand. Aggregate supply and demand determine the equilibrium rate of output and prices. The economy will gravitate to that unique combination of output and price levels.
The market's macro equilibrium may not be consistent with our nation's employment or price goals. Macro failure occurs when the economy's equilibrium is not optimal.
Macro equilibrium may be disturbed by changes in aggregate supply (AS) or aggregate demand (AD). Such changes are illustrated by shifts of the AS and AD curves, and they lead to a new equilibrium. Recurring AS and AD shifts cause business cycles.
Competing economic theories try to explain the shape and shifts of the aggregate supply and demand curves, thereby explaining the business cycle. Specific theories tend to emphasize demand or supply influences.
Macro policy options range from doing nothing (the classical approach) to various strategies for shifting either the aggregate demand curve or the aggregate supply curve.
Fiscal policy uses government tax and spending powers to alter aggregate demand. Monetary policy uses money and credit availability for the same purpose.
Supply-side policies include all interventions that shift the aggregate supply curve. Examples include tax incentives, (de)regulation immigration, and resource development.
