Macroeconomic Theory for Policymakers: An Illustrated Guide

Macroeconomic Theory for Policymakers: An Illustrated Guide

September 10, 2024

Congressional Research Service

https://crsreports.congress.gov

R48173

Macroeconomic Theory for Policymakers: An Illustrated Guide

Contents

Introduction ..................................................................................................................................... 1 The Economy and Long-Term Growth ........................................................................................... 2 Short-Term Economic Growth ........................................................................................................ 4 Economy-Wide Supply and Demand .............................................................................................. 6 Fiscal Policy: Taxes ......................................................................................................................... 8 Monetary Policy: Federal Funds Rate ........................................................................................... 10 The Dollar and Exchange Rates .................................................................................................... 12 The Labor Market .......................................................................................................................... 14

Acronyms ...................................................................................................................................... 16 Glossary ......................................................................................................................................... 17

References ..................................................................................................................................... 19

Contacts

Author Information ........................................................................................................................ 21

Macroeconomic Theory for Policymakers: An Illustrated Guide

Congressional Research Service 1

Introduction

This report is an introductory guide to macroeconomic theory from a policymaking angle. Macroeconomics focuses on the structure and performance of the economy as a whole (as opposed to microeconomics, which focuses on decisions by consumers and firms). Economists and policymakers alike analyze the macroeconomy and its fluctuations, as the strength of the economy contributes to the well-being of individuals participating in it. This report covers the basics of economic theory as it relates to economic growth, supply and demand, fiscal and monetary policy, currency, and the labor market.

Caveats: While this report is a primer for selected economic topics for a policymaking audience, it does not serve as a replacement for other foundational materials. More specifically:

• The theories in this report have been simplified and stylized for a non-specialist

audience and, therefore, may not match other sources. The depictions of these theories are meant to provide some basic economic context for in-depth CRS products or other sources.

• This report does not cover all possible economic theories, nor does it provide

competing versions of the same topic. The depictions shown in this report do not purport to be more accurate than other versions.

• Theories do not always accurately predict outcomes.

• This report does not analyze or judge policies or policy outcomes. Economic theory is

only one of many ways in which to analyze policies and policy outcomes.

Organization: There are seven main sections in this report, each of which focuses on a particular economic concept. The report starts with the size and structure of the economy and then delves into how the overall economy functions and how policy, international markets, and the labor market affect the overall economy. Each section provides theory, explanation, and real-world context for a given topic and is organized in the same manner, with three main parts:

1. Theory: Each section contains an introduction on the theoretical underpinnings of

the topic in question, including illustrative graphics.

2. The Role of Congress: Each section contains a brief explanation of how the topic in

question relates to Congress and how Congress can act in relation to the topic. Of note, these sections do not explicitly discuss the role of Congress in the collection and dissemination of economic statistics.

3. Real World Data: Each section contains real world economic data that illustrates the

topic in question.

Additional Resources:

• An acronym section defines all acronyms used throughout the report. (Acronyms will

additionally be defined the first time they appear in the report.)

• A glossary section provides more in-depth definitions and explanations of terms in

the report that are not fully defined or discussed. Terms that appear in the glossary are italicized the first time they appear in the report.

• A references section provides selected further resources by topic, including brief

explanations of the resources and what they contain.

Macroeconomic Theory for Policymakers: An Illustrated Guide

Congressional Research Service 2

The Economy and Long-Term Growth

Macroeconomic Theory for Policymakers: An Illustrated Guide

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Macroeconomic Theory for Policymakers: An Illustrated Guide

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Short-Term Economic Growth

Macroeconomic Theory for Policymakers: An Illustrated Guide

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