In the last few lectures, we've looked at growth theory and the stakes involved in getting the basics wrong. We saw the Solow model's predictions about sustained capital accumulation ($\Delta k/k$): keep population growth low, keep savings ($s$) and therefore investment($I$) rather high, and try to curb depreciation on assets. Technical progress and human capital move the economy forward, potentially stimulating convergence of growth rates.

Now we'll move onto a micro-founded macro model developed in the later chapters of the Barro book. The basic idea is to specify four markets inside the economy: the products market, the bond market, the money market, and the labour market. We'll build our macroeconomic equilibria from behavioural assumptions about the actors in the model: households and firms. Households are assumed to want to maximise their incomes from all of these markets, subject to a budget constraint. Firms want to maximise profits. Their interactions, along with the usual macroeconomic accounting identities, such as $Y=C+I+G$, give us the macroeconomic equilibrium, called a general equilibrium.