Module Code and Title:        CET206          Intermediate Macroeconomics

Programme:                         BA in Development Economics

Credit Value:                         12

Module Tutor:                       Sanjeev Mehta

General Objective: This module introduces formal and more advanced macroeconomics with analytical tools. It aims to equip students with the basic tools of short, medium and long-term macroeconomic analysis, both in autarchic and open economy frameworks. It aims to foster greater understanding of the processes, systems and institutions of that affect macroeconomic policies.

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

1. Discuss and compare different macroeconomic policies.
2. Review policy effectiveness with the use of macroeconomic models.
3. Compare the impact of macroeconomic policies in the short and long run.
4. Analyse the relevance and importance of each assumption in a macroeconomic model.
5. Identify major policy trade-offs.
6. Describe micro foundations of macroeconomic models.
7. Describe major lags in macroeconomic policies.
8. Relate and apply macroeconomic theories to a local perspective.
9. Describe a data set for problem solving.
10. Delineate and analyse the channels of transmission of monetary and fiscal policies.

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 the 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: 25%

Assignments will be based on analyses and comparison of alternative macroeconomic policies and relates them to the Bhutanese economy. Each assignment (12.5%) should have a maximum limit of 400 words.

• 3%       Identification explicit and implicit assumptions
• 5.5%    Clear distinction between different macroeconomic policies
• 3%       Analytical discussion
• 1%       Proper structure of the assignment

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

Based on the use of a data set (on five key macroeconomic variables) supplied by the tutor, students will analyse the status of a macro economy.

• 3%       Relevance of analytical methods used
• 6%       Effective analysis
• 1%       Time management

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

Students will take problem solving test on the topics covered in last two weeks, answering four questions- two on problem solving skills, one defining a model or its specific property, and one on graphical presentation of a situation. 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: CET103 Introductory Macroeconomics, CET205 Monetary Economics

Subject matter:

1. Aggregate Demand and Aggregate Supply Curves
   • Derivation of aggregate demand (AD) and aggregate and supply curves (AS)
   • Keynesian and Classical version of AS
   • Three models of AS
   • Interaction of AD and AS
   • Measuring crowding out using AD and AS framework
2. Policy ineffectiveness debate
   • Relation between Inflation and unemployment
   • Short and long run Philip curve
   • Expectations Augmented Phillips curve
   • Adaptive and rational expectations
3. Open Economy Models
   • Short-run open economy models
   • Exchange rate determination
   • Mundell-Fleming model
   • Purchasing power parity
   • Asset market approach
   • Dornbusch's overshooting model
   • Monetary approach to balance of payments
   • International financial markets
4. Micro Foundations
   • Keynesian consumption function
   • Fisher’s theory of optimal inter-temporal choice
   • Life-cycle and permanent income hypotheses
   • Rational expectations and random-walk of consumption expenditure
   • Fixed business investment- desired and actual stock of capital and accelerator model, Discounted cash flow approach, Tobin’s Q theory
   • Residential investment
   • Inventory investment
5. Policy Analysis
   • Fiscal Policy and Monetary Policy
   • Expectations and policy, politics and policy
   • Active or passive approaches
   • Monetary policy- instruments, objectives and targets, policy implementation
   • Rules versus discretion and time consistency
   • Government budget constraint
   • Government debt, arithmetic of deficit and debt, evolution of debt to GDP ratio
   • Ricardian equivalence

Reading List:

1. Essential Reading
   • Blanchard, O. (2009). Macroeconomics. Pearson Education, Inc.
   • Mankiw, N.G. (2007). Worth Publishers.
2. Additional Reading
   • Abel, A.B. & Bernanke, B.S. (2011). Macroeconomics. Pearson Education, Inc.
   • D’Souza, E. (2009). Macroeconomics. Pearson Education. .
   • Dornbusch, R., Fischer, S. & Startz, R. (2013). Macroeconomics, 12^th McGraw Hill.
   • Krugman, P.R., Obstfeld, M & Melitz, M. (2012). International Economics. Pearson Education Asia.
   • Sheffrin, S.M. (1996). Rational Expectations. Cambridge University Press.

Date: January 15, 2016