Module Code and Title:       CET103          Introductory Macroeconomics

Programme:                          BA in Development Economics

Credit Value:                         12

Module Tutor:                       Sanjeev Mehta

General objective: The principal objective of this module is to help students learn basic macroeconomic principles and apply them to a variety of economic questions and issues. It provides integrated insights on classical, Keynesian and monetarist approaches. This module discusses the preliminary concepts associated with the determination and measurement of aggregate macroeconomic variable like aggregate demand, GDP, employment and inflation.

Learning outcomes – On completion of this module, learners should be able to:

1. Interpret and measure the main macroeconomic categories.
2. Apply an existing macroeconomic economic model to a given situation.
3. Employ the basics of comparative statics analysis.
4. Apply simple mathematics tools for multiplier analysis.
5. Analyse inflationary situations.
6. Distinguish between short- and long-run analyses and models.
7. Analyse and apply an IS-LM model to judge policy efficacy.
8. Describe the effects of basic types of macroeconomic policies in the short run.
9. Relate the IS-LM analysis to the AD-AS framework.

Learning and Teaching Approach: Lectures, tutorials, classroom experiments, case studies, problem solving and group activity will be used as primary activities for teaching and learning. Classroom experiments differ from classroom demonstrations, because the students are involved in collecting data or observations. However, just as in an interactive classroom demonstration, students involved in classroom experiments can be asked to make predictions and to reflect upon their observations. The tutor will also relate the theories to Bhutanese economy. Students will be given assignments based on the application of macroeconomic models specifically to Bhutanese economy. 

Assessment Approach:

A. Individual Assignments (2): Portion of Final Marks: 20%

Students will write two assignments on application/analysis of an existing macroeconomic model/policy. Each assignment, worth 10%, should have a maximum limit of 250 words.

• 1%       Statement of a problem
• 2%       Analytical framework
• 5%       Critical review
• 2%       Conclusion

B. Classroom experiment: Portion of Final Marks: 10%

In groups of 4 students will conduct an experiment based on a database on balance of payment (such as to analyse long-term BOP trend), and simulate results with four alternative assumptions/scenarios.

• 1%       Identification of data needed
• 3%       Analytical Methods
• 2%       Identification of assumptions
• 4%       Simulation result analysis

C. Class test: Portion of Final Marks: 10%

Problem solving on the topics covered in the last two weeks. Time: 45 minutes

D. Midterm Examination: Portion of Final Mark: 20%

Students will take a written exam of 1.5 hr duration covering topics up to the mid-point of the semester.

Pre-requisites:

Subject matter:

1. Introduction to Macroeconomics
   • Building macroeconomic models
   • Concept of production boundary, circular flow of income
   • Concepts of stocks and flows
   • Measurement of gross domestic product; income and expenditure methods; real versus nominal GDP; price indices; GDP deflator
   • National income accounting for an open economy
   • Balance of payments: current and capital account
   • Natural rate of unemployment, Job search and frictional unemployment, wage rigidity and wait unemployment
   • Minimum wage, collective bargaining, efficiency wage, patterns of unemployment
   • Okun’s law
2. Business Cycles and Inflation
   • Understanding business cycles
   • Disinflation, deflation and liquidity trap
   • Great depression, Post World War II business cycles
   • Cyclical behaviour of economic variables: direction and timing
   • Leading indicators
   • High inflation, inflation and real money balances, seignorage
   • Inflation and interest rate, Fischer effect
   • Types of inflation: cost push inflation, demand pull inflation, hyperinflation
   • Structuralism versus monetarism
   • Costs of inflation; cost of expected and unexpected inflation
   • Anti-inflationary policies, disinflation and the sacrifice ratio
3. Keynesian Model of income determination
   • Classical and Keynesian systems; concept of equilibrium income
   • Keynesian theory of consumption, concepts of MPC and APC
   • Kuznet’s puzzle
   • Aggregate demand, Keynesian model of income determination
   • Role of multiplier, multiplier process
   • Introduction of the government, budget, balanced budget
   • Limitation of multiplier process
4. IS-LM Framework
   • Interaction between commodity and money market
   • Commodity market equilibrium and derivation of IS curve, properties of IS curve
   • Money market equilibrium and derivation of LM curve, properties of LM curve
   • Simultaneous equilibrium
   • Fiscal multiplier and monetary policy multiplier
   • Crowding out and policy mix
   • Monetary accommodation
   • Derivation of AD curve

Reading List:

1. Essential Reading
   • Blanchard, O. (2009). Macroeconomics. Pearson Education.
   • Dornbusch, R., Fischer, S. & Startz, R. (2013). Macroeconomics, 12^th McGraw Hill.
   • Mankiw, N.G. (2009). Macroeconomics. Worth Publishers.
2. Additional Reading
   • Abel, A.B. & Bernanke, B.S. (2011). Macroeconomics, Pearson Education, Inc.
   • D’Souza, E. (2009). Macroeconomics, Pearson Education.
   • Froyen, R.T. (2005). Macroeconomics. Pearson Education Asia.
   • Krugman, P., Obstfeld, M. & Melitz, M. (2012). International Economics. Pearson Education Asia.

Date: January 15, 2016