Macroeconomics is the study of the broad range of economic activities and phenomena. It includes domestic as well as international economics and seeks to provide a background in which understanding of the global economy can be grounded. There are many theories associated with macroeconomics, including equilibrium, inflation, deflation, the business cycle, and the zero lower bound. The most well-known macroeconomic models are the theory of general equilibrium, the national income accounting model, the real business cycle, and the business cycle model with credit. More modern theories on macroeconomics include tools such as technical studies, microeconomic considerations, international trade, and money. A variety of approaches have been applied to understand macroeconomics, including traditional economic statistics, micro-economic calculations, and the use of technology in economic activity.
The methods and techniques that are used in macroeconomics are often referred to as macroeconomic models. These models are designed to capture the dynamic process that is characterized by the fluctuations in domestic and foreign monetary policies, employment, investment, production, consumption, and financial resources. The key elements of these models are the information about the macroeconomic indicators, such as nominal GDP, interest rates, unemployment rates, balance of payments, fiscal stimulus measures, and international trade flows. The elements of the models are then put into a consistent framework in order to generate predictions about future macroeconomic activities. The best models for macroeconomics are those with a wide enough scope to accurately predict the behavior of both the short-term and long-term aspects of a country's economy.
There are two main uses for models of macroeconomics: macroeconomic forecasting and policymaking. Forecasting involves forecasting the changes in domestic and foreign financial resources and interest rates over time. Policymaking involves deciding how to change the macroeconomic policies that have already been determined to be necessary for achieving a desired economic outcome. Policymakers also look at models to evaluate the effects of short-run fiscal stimulus programs on the national economy. Economic models can either be state-of-the-art large current run models, or more involved micro-economic models that focus on particular economies or countries. State-of-the-art micro models can incorporate a variety of complex elements, including complex pieces of public infrastructure, macroeconomic indicators from other countries, and input data from a variety of sources.
The models and methods used in macroeconomic forecasting and policymaking are developed based on research findings and are making available to a wide range of researchers, including members of the government. These models are then used to evaluate macroeconomic policies and to forecast the effects of those policies on the economy. For instance, a federal stimulus program that is implemented in the United States may affect state interest rates and the amount of money that states currently need to borrow. State fiscal stimulus programs also affect national interest rates. This form of foresight is valuable to businesses and other individuals who are planning to invest in the stock market, as well as to governments who are trying to plan for long-term economic growth.
There are several different . . . . . . areas of research that fall under the broader field of macroeconomics. Two of the most popular are microeconomics, which studies how individuals and businesses interact within a community, and macroeconomics, which looks at the macroeconomic environment. Micro-economic models are typically designed to be as simple as possible in order to allow for quick testing of hypothesis. For instance, a micro-economic model of consumer spending may be constructed to test the impact of a government tax cut on household income levels, while simultaneously analyzing the impact on total spending, production, and employment levels. A macro model, on the other hand, may be constructed to examine how different interest rates will impact inflationary or deflationary expectations.
The United States Government uses both types of macroeconomic models to evaluate national interest rate positions. The Department of the Treasury even creates a specialized micro blog, called the Federal Reserve Board's Monetary Forecasting and Policy Analysis blog, to provide monetary policy analysis and discuss the impacts of changes in the federal funds rate. Several researchers at the Federal Reserve have taken this same approach by building models that focus on both macro and micro aspects of the economy. This approach has provided an important advance towards a better understanding of long term trends in the economy. It is just a matter of applying the right method to the relevant model.