Macroeconomics is the study of aggregate economic systems, most often the study of a nation’s economy. Macroeconomics includes analysis of an economy’s INCOME, output, EMPLOYMENT (and UNEMPLOYMENT), and INFLATION. Often economists use the CIRCULAR FLOW MODEL to portray the relationships among households, businesses, and government interacting in consumer, financial, and resource markets. Macroeconomists develop or study complex mathematical models constructed using past economic data to predict the impact of changing conditions in the economy. Macroeconomic analysis typically begins with estimation of an economy’s GROSS DOMESTIC PRODUCT (GDP), the value of final goods and SERVICES produced in the economy in a year. GDP can be estimated using either the income or expenditures approach. In the 1930s, President Franklin Roosevelt directed the future Nobel Prize economist Simon Kuznets to develop a system to measure changes in the economy. Kuznets’ NATIONAL INCOME ACCOUNTING system is the basis for macroeconomic analysis. Using the income approach, a nation’s output is equal (with adjustments) to the sum of wages, rents, PROFITs, and interest payments paid for the production of goods and services. Using the aggregate expenditures approach, a nation’s output is the sum of the CONSUMPTION, INVESTMENT, government, and net trade expenditures for the output in an economy. This results in the standard formula AE = C + I + G + (X–M), which all students learn in their first macroeconomics course. Macroeconomic models are used to assist in businessand government-policy decisions. Large CORPORATIONs often employ macroeconomists to develop models to predict the impact of changing market conditions on DEMAND for their products. For example, producers of durable goods (things like automobiles and washing machines) know that demand for their products is highly influenced by consumers’ income. Changes in national income result in changes in demand for their product, which in turn leads to a host of MANAGEMENT decisions including investment in new equipment, expansion into new markets, purchase of materials and hiring of workers. Government also uses macroeconomic analysis to support changes in fiscal and MONETARY POLICY. Alan Greenspan, chairman of the FEDERAL RESERVE SYSTEM, is famous for his in-depth analysis of the Fed’s “beige book,” a compilation of the latest statistics measuring the status of the country’s economy. In 2001, sensing a slowdown in the growth of GDP, Greenspan and the Federal Reserve lowered short-term INTEREST RATES, a common monetary policy prescription to stimulate investment and interest-rate-sensitive consumer spending. During the same period, President George W. Bush justified tax cuts, a common FISCAL POLICY option, in part by stating reduced taxation would increase consumers’ income and stimulate expenditures. Macroeconomic analysis is largely based on KEYNESIAN ECONOMICS, the ideas formulated by British economist John Maynard Keynes (1883–1946). Keynes challenged the existing macroeconomic doctrine, CLASSICAL ECONOMICS, emphasizing the importance of aggregate demand rather than aggregate SUPPLY in determining the level of aggregate output in an economy. Classical economists thought economies were self-adjusting, full-employment systems. In classical theory, unemployment and inflation were temporary phenomena, and changing prices would eliminate surpluses and shortages in an economy. Keynes, observing the GREAT DEPRESSION, argued that wages and prices were not as flexible as classical economists suggested. He argued in a time of prolonged economic decline there is a role for government to help an economy return to EQUILIBRIUM through management of aggregate demand. Many other economists have debated and expanded upon Lord Keynes’s work. Keynesians and monetarists continue to debate the role of government and the effectiveness of fiscal versus monetary policy in having the desired effect on the economy.