From Paul Krugman's MasterClass

Understanding Macroeconomics: The Fed and IS-LM (Wonkish)

Learn how the Federal Reserve works to keep the economy healthy, and about the theoretical framework it uses to inform its decisions.

Topics include: The Fed Is Magic • How the Fed Thinks: IS-LM • Finding the Right Inflation Rate • What the IS-LM Curve Really Looks Like


Learn how the Federal Reserve works to keep the economy healthy, and about the theoretical framework it uses to inform its decisions.

Topics include: The Fed Is Magic • How the Fed Thinks: IS-LM • Finding the Right Inflation Rate • What the IS-LM Curve Really Looks Like

Paul Krugman

Teaches Economics and Society

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What Is Macroeconomics? Macroeconomics is the study of economies as a whole. This means interrelatedness of multiple industries, markets, the unemployment rate, inflation, and general economic output of an entire economy, such as that of a country or of the globe as a whole. (“Macro” comes from the Greek prefix meaning “large.”) The History of Macroeconomics The study of macroeconomics is not new, but most modern interpretations are heavily influenced by the British economist John Maynard Keynes and his book The General Theory of Employment, Interest, and Money (1936). During the 1930s, the Great Depression hit the United States. Many economists believed that the market would provide full employment if workers were desperate to work and therefore flexible in their wages; the same economists also believed that goods would sell—as long as the market drove down the down the price. None of this was indeed happening and it left many economists perplexed by the situation. Keynes explained that the prosperity of whole economies could decline even if their capacity to produce was undiminished. Even productive economies could get caught in a trap where a lack of spending could cause businesses to cut back on production. The cuts in production would then lead businesses to reduce the number of workers they employed. The reduction in employment opportunities would then lead families to cut back on spending, worsening the original problem. Keynes postured that aggregate demand, which is the overall total demand for goods and services in an economy, would dictate overall economic activity, and if an economy did not create enough demand it would lead to high levels of unemployment and inflation. Keynes argued that during times of recession or depression, certain governmental measures could increase demand and help fuel the overall economy. This came to be known as Keynesian economics. Macroeconomics vs. Microeconomics Macroeconomics focuses on the overall quilt of an economy—how various industries, markets, and businesses are affected and shaped by overarching economic, fiscal, and monetary policies. On the other side of the spectrum is microeconomics, which focuses on the behaviours of businesses and individuals within a specific market. Microeconomics are often affected by governmental policies, which are influenced by macroeconomics. The 4 Main Principles of Macroeconomics Macroeconomists—the people who study macroeconomics—look at a variety of broad economic factors in order to determine how the economy is performing as a whole. Four of these factors stick out as the most important: 1) Unemployment The unemployment rate is the percentage of people who are willing and able to work but who cannot find gainful employment. People who are unemployed are not actively contributing to the economy and, if the unemployment rate is high enough, this can cause an economic slowdown. Some macroeconomists include people who have given up lo...

Think like an economist

For Nobel Prize-winner Paul Krugman, economics is not a set of answers—it’s a way of understanding the world. In his economics MasterClass, Paul teaches you the principles that shape political and social issues, including access to health care, the tax debate, globalization, and political polarization. Heighten your ability to read between the lines and decipher the underlying economics at play.


Students give MasterClass an average rating of 4.7 out of 5 stars.

College taught me a lot of false things about economics, and the world only made those false teachings worse. Thank you so much for sharing the truth about how the world truly is! I plan to use this information to get more involved in politics now that I feel like it is easier for me to talk about this subject!

Brilliant. Great mind pulling it all together so it makes sense.

This has been an excellent class so far, I've already seen 19 classes; the explanations and opinions that Mr. Krugman shares in these are magnificent

Thank you for offering this opportunity to listen to Paul's views and ideas on the subject of Economics. The class was clear, enjoyable, insightful, and the workbook is an excellent resource too.


A fellow student

I have a master in Econ. Already know this stuff inside out (graduate macro 101). But may I say that his teaching makes me grateful for the (shi***y) prof I had.

Martin M.

It is not clear to me why a country like NZ with many sheep and few people should not have a valuable idea, like the 2% rule? My experience (coming from a small country myself which is surrounded by three large countries (from our perspective) or mid-size countries (from an US perspecitve), we do often much better in producing applied economic policy rules. But this may be my perception bias. Nevertheless, P Krugman seems to disagree with the 2% rule - unfortunately, he does not elaborate why. This would be of interest.

melissa L.

we found it disappointing, in that he did not start with the basics and build the lesson step by step. It was somewhat hard to follow as I do not have a background in economics.


In the material, it says "Higher inflation causes the IS curve to shift inwards. This causes interest rates to rise again and the economy to slow." Why inflation influences the IS curve? And if the IS curve shifts inwards (leftwards), won't the interest rate decline further?


Does any of your comments have been deleted? I posted one comment after each lesson n they dissappeared... Aren't we allowed 2 express freely here, is there any kind of censorship of ideas? Or simply it's a platform malfuntion?

Graeme R.

The confident assertions of economists in the media seem foolish (and possibly irresponsible) given all the "it turns out that" statements Mr. Krugman is making as he states "principles" that are constantly evolving.

A fellow student

Ok, I'm a beginner. Interest rate he talks about. I don't see where GDP is defined. Not sure about how LM (Liquidity/Money) is defined. Not sure about the definition of IS (Investment/savings).

A fellow student

Hummmm...this class may take a while. My background is in electrical systems design and implementation. Seems like I had a course in economics but I am now at ground zero.

Gregory A.

The Swiss National Bank as negative interest rate for years now. Why do you say that it is not possible for the Fed to have negative interest rate ?

Kara M.

Excuse me, but the population of New Zealand is 4.794 million, and we have about 30million sheep ok.