The principles of macroeconomics is the study of how economies operate in terms of money, production and consumption. Microeconomics is all about the internal processes that influence the decisions of people as to the best ways of producing goods and services.
In a sense, there are two theories of money: the theory of fiat money, which hold that the government can create money when it wants, and the theory of fractional reserve banking, which believe that banks have the right to create money at will. There is no definitive answer to whether or not it makes any difference whether money is fiat or fractional, since both theories are based on the same fundamental principles.
When dealing with the relationship between money and production, the question of who decides what quantity of money to print is often ignored. It is generally assumed that the central bank sets the interest rates. However, the reality is that it is a group of financial institutions and banks that determine interest rates. The Federal Reserve System is primarily responsible for deciding which rates of interest are applied to loans.
It is well-known that interest rates affect the supply of money. When interest rates are low, people save more money and this increase in savings leads to lower demand for money, which causes the interest rate to drop. This reduction in supply of money causes the price of money to go up, which is why interest rates are called money's “supply curve.”
A high interest rate may also indicate an underutilization of capital. If a firm or business has not been able to realize the profits that it should be earning, it can lose its ability to borrow money to invest in business activities. Conversely, a low interest rate can indicate an abundance of capital that a company should utilize.
The principles of microeconomics are essential to a person who wishes to understand and manipulate the workings of the economy. People who don't know enough about the dynamics of the money system to use it effectively will usually end up in a cycle of inflation and deflation. In short, understanding the principles of microeconomics is key to the proper management of the economy and the pursuit of prosperity.
The principles of microeconomics also provide a framework in which economic thinkers and strategists can arrive at their decisions. In order to get a true picture of how an economy functions, it is important to understand both the supply and demand side of the economy.
Monetary theorists can also use the principles of microeconomics to make predictions and guide their actions. They can make accurate predictions about what will happen to a country, a nation's economy and money if certain conditions occur. They can make predictions about what will happen when different policies are adopted.