Module Code and Title:        CET204 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 macroeconomic analysis, under autarchy and open economy frameworks. It fosters greater understanding of the processes and systems that shape macroeconomic policies. 

Learning outcomes – On completion of the module, students will be able to: 

1. Delineate the channels of transmission of monetary and fiscal 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 of each assumption in a macroeconomic model.
5. Identify major policy trade-offs.
6. Determine the size of current account balance using national account estimates.
7. Make effective arguments for and against exchange rate systems.
8. Describe micro foundations of macroeconomic models.
9. Examine major lags in macroeconomic policies.
10. Apply macroeconomic theories to a local perspective.
11. Apply a data set for problem solving.

Learning and Teaching Approach: 

Assessment Approach:

Each student will submit an assignment based on analysis and comparison of macroeconomic and its relation to the Bhutanese economy. Assignment should have a limit of 750-850 words. 

3    Identification explicit and implicit assumptions

5    Make clear distinction between different macroeconomic policies 

2    Analytical discussion

Based on the use of a data set (on five key macroeconomic variables) supplied by the tutor, each student will analyse the status of a macro economy, covering topics in the Unit III.

3    Relevance of analytical methods used

5    Effective analysis 

2    Presentation of main findings through appropriate graphs

Students will take problem solving test on the topics covered in Unit I and IV, 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.

In group of 4-6, students will provide an analytical macroeconomic analysis of the current year’s annual budget. The analysis should be within 1000-1200 words.

3    Identify and justify budget highlights 

8    Analysis of the possible macroeconomic impact of the budget

2    Use of two appropriate graphs to support analysis 

2    A subtle conclusion

Students will take a written exam of 1.5-hr duration covering topics up to the mid-point of the semester. The exam will comprise structured questions like MCQ, fill-in-the-blanks, matching, definition, as well as open-ended essay questions.

Students will take a written exam of 2.5-hr duration encompassing all the subject matter covered in the semester. This assessment is comprehensive and summative in nature, and will comprise structured questions like MCQ, fill-in-the-blanks, matching, definition, as well as open-ended essay questions.

Overview of assessment approaches and marks

Pre-requisites: CET102 Introductory Macroeconomics

Subject matter:

1. Unit I: Aggregate Demand and Aggregate Supply Curves
   1. Derivation of aggregate demand (AD) and aggregate supply curves (AS), Slope of AD curve, and shift in the AD curve
   2. Keynesian and Classical versions of AS
   3. Three models of AS- wage rigidity (integrated with the workers’ misconception model), imperfect information, price rigidity
   4. Interaction between AD and with short and long run AS, automatic adjustment mechanism, policy intervention 
   5. Measuring crowding out using AD and AS framework
2. Unit II: Policy ineffectiveness debate
   1. Relation between Inflation and unemployment
   2. Short and long run Philip curve, explanation for vertical Phillips curve
   3. Expectations Augmented Phillips curve, NAIRU, slope of AS curve and shifts in the AS curve
   4. Inflationary expectations: adaptive and rational expectations, Lucas’ critique
   5. Derivation of dynamic aggregate supply curve from Phillips curve, Dynamic aggregate demand curve, dynamic stochastic general equilibrium
   6. Classical dichotomy, stationary state equilibrium, and neutrality of money 
3. Unit III: Open Economy Models
   1. Short-run open economy models: Deriving current account deficit using national account
   2. Exchange rate determination: Spot and forward rates, spread, flexible and fixed exchange rate systems, exchange market interventions, clean and dirty floating, managed pegs, sterilising and non-sterilising interventions, depreciation and devaluation, Marshall-Learner condition, J curve effect, purchasing power parity, currency board system 
   3. Impossible trinity: Mundell-Fleming model only under perfect mobility of capital, with fixed and flexible exchange rate systems
   4. Purchasing power parity 
   5. Asset market approach
   6. Dornbusch's overshooting model
   7. Monetary approach to balance of payments
4. Unit IV: Micro Foundations
   1. Keynesian consumption function, trends in APC, Kuznets’ puzzle 
   2. Fisher’s theory of optimal inter-temporal choice of consumption
   3. Life-cycle theory and permanent income hypotheses, 
   4. Rational expectations and random-walk of consumption expenditure
   5. Fixed business investment- capital hiring decision of the firms, gap between desired and actual stock of capital, simple and dynamic accelerator models, discounted cash flow approach, Tobin’s Q theory
   6. Determinants of residential investment and Inventory investment
5. Unit V: Policy Analysis
   1. Fiscal Policy and Monetary Policy
   2. Expectations and policy, politics and policy
   3. Active or passive approaches to policy making, role of automatic stabilisers, lag effects in policy, 
   4. Rules versus discretion and time consistency, Taylor’s rule
   5. Monetary policy- instruments, objectives and targets, policy implementation

1. Government budget constraint
2. Government debt, arithmetic of deficit and debt, evolution of debt to GDP ratio
3. Ricardian equivalence

Reading List:

Essential Reading

Abel, A.B. & Bernanke, B.S. (2019). Macroeconomics. Pearson Education, Inc

Blanchard, O. (2021). Macroeconomics. Pearson Education, Inc. 

Dornbusch, R., Fischer, S. & Startz, R. (2018). Macroeconomics, 12^th Ed. McGraw Hill.

Mankiw, N.G. (2019). Macroeconomics. Worth Publishers.

Additional Reading

Sheffrin, S.M. (1996). Rational Expectations. Cambridge University Press. 

Taylor, J.B. (2012). Monetary Policy Rule Works and Discretion Doesn’t: A Tale of Two Eras. Journal of Money, Credit and Banking, 44(6). Pp 1017-1032. 

RGoB (recent years). National Budget Report. Ministry of Finance

RMA (2021). Monetary Policy Statement. Royal Monetary Authority. 

RMA (Latest). Annual Report. Royal Monetary Authority.

Date: June 2022