Question

Macroeconomics Functions

List multiple (up to five) macro-economic functions. Show what they are a function of. An example would be the production function; listed it as q = f(K,L) where K is capital and L is labor in microeconomics but these must be specific to macro.

Answer 1

(1) Estimation of (Gross Domestic Product) GDP using expenditure approach:

GDP at Market Price = f(Consumption expenditure, Capital formation, change in stock, export, import)

GDP at Market Price = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Fixed Capital Formation + Change in Stock + Exports - Imports

(2) Quantity theory of Money:

Money Supply = f(Price level, Quantity)

Money Supply = (Price level * Quantity of Goods & Services transaction )/ (Velocity of money in circulation)

(3) Okun's law: It states the relationship between change in unemployment and output growth

Unemployment rate - natural rate of unemployment =f(Output growth rate - potential output growth rate)

Unemployment rate - natural rate of unemployment = - constant * (Output growth rate - potential output growth rate)

(4) Fischer's equation: It establishes the relationship between the real interest rate and nominal interest rate

Real interest rate = f(nominal interest rate)

real interest rate = nominal interest rate - inflation rate

(5) Permanent Income theory of Consumption: According to this theory , consumption is considered proportional to the permanent income

Permanent Consumption = f(Permanent Income)

Permanent Consumption = Constant * Permanent Income