Coursework: MEPP

IMT Ghaziabad
By
Dr. Manas Paul
Term I PGDM 2022-24

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 Some questions?
• What is macroeconomics?
• What are it’s objective?
• Is it important for managers?

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 What is macroeconomics
• Macroeconomics is the study of the behavior
of the economy as a whole and the policy
measures used to influence factors like
– total output, rates of unemployment, inflation,
and exchange rates, government deficit/debt etc

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 Macroeconomic objectives
• Major economic objectives
– Growth - expansion of national production and income is a
prerequisite for job creation, improved living standards
and economic development
– Combating unemployment - Pursuit of full employment
– Income inequality – how income is distributed
– Price stability - Low and stable inflation
– Sound Govt finances – Control over govt finances and
national debt
– External stability – international value of currency

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 Macroeconomics & Markets
Macroeconomic objectives relates to the outcomes of major macroeconomic markets
On a broad brush the following four markets are an intrinsic in visualizing an economy
Macroeconomic
Markets

Money/bond Foreign
Goods &
Labour Markets Exchange
Services Market Market Market

 Prices/Inflation  Unemployment  Interest Rate  Exchange Rate

 Output/Income  Wage Rate  Price of bonds  External Balance
 Other Fin. Assets

Variables in which both citizens and policy makes are most interested
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 Market Interactions:
Intriguing, interesting & challenging
• Analysis of one market can not be done in isolation from
analysis of other markets
Macroeconomic
Markets

Goods & Services Labour Markets: Money/bond Foreign Exchange

Market: Employment , Wage Market: Interest Rate, Market: Exchange
Output/Income, Prices Rate Asset Mkts Rate, External Balance

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What macroeconomics does?

Use the model for

policy purposes

Attempts to bind Fiscal policies

frameworks into Taxes
formal models Government spending
Monetary policies
Money supply targets, setting
… to explain behavior of
of interest rates
aggregate variables
Provides a Supply side policies
framework Better education and
Aggregate Output; training;
Employment; Aggregate
Measures to increase labor
Investments; General price
productivity
To study level; Trade flows; capital
flows Labour market flexibility
macroeconomic
Land acquisition policies
processes
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 Are these important for managers?
• Macroeconomics helps in filtering,
processing information that helps in forming
expectations about business environment
Macro
environment
– What are the growth paradoxes in post covid
world?
– Is it a good time to expand capacity?
– Should one expand in foreign markets?
Policy
– Is expansionary fiscal policy crowding out of Response
private investment?
Affect Expectations
– Can India cut policy rates further? of about macro
– Would Fed policy changes affect EM variables : Growth,
currencies? Interest, Exchange
– Would any dip in Chinese growth impact rate, Interest rates
etc
commodity markets?
– What does high oil prices mean for India?
– What does low oil prices imply for global oil
producers and their investments elsewhere?

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 Aggregate output & Prices
• Two most common variable of interest…

 Total output produced in the economy –

Important to ascertain growth

 Aggregate Price level – Important to ascertain

inflation

 But how does this get determined?

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 AD and AS schedules
• Agg Supply & Agg Demand curves jointly determine equlm
output and price

• Agg Demand curve – Negatively sloped

– Relationship between the nation’s overall price level and the
demand for the goods and services produced by the nation

• Agg Supply Curve – Positively Sloped

– shows the relationship between a nation's overall price level,
and the quantity of goods and services produces by that
nation's suppliers

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 AD curve is downward sloping:
But for different reasons
• Reason different from downward sloping
demand curve for individual goods and services
– For Individual goods and services: Change in relative
price as (prices of other goods and services remains
constant)
– and changes in buyers real income
• Agg demand is defined in terms of Aggregate
price level (not individual price)
• Hence the reasoning is different from downward
sloping individual product demand curve
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AD curve downward sloping: Reasons

• Wealth Effect
• Interest Rate Effect
• Net Exports effect

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 TIME HORIZONS IN STUDY OF MACROECONOMICS & AGG SS CURVES

VERY LONG MEDIUM

SHORT RUN
RUN RUN

VERTICAL SUPPLY SUPPLY

SUPPLY CURVE +VELY CURVE
CURVE SLOPED HORIZONTAL

AGGREGATE DEMAND CURVE IS –VELY SLOPED

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 Macroeconomics In Three Models
• Very Long Run Model: domain of growth theory  focuses on growth of
the production capacity of the economy
•In the long run, the AS curve is
vertical and pegged at the potential
level of output
–Output is determined by the supply side
of the economy and its productive
capacity
–The price level is determined by the
level of demand relative to the productive
capacity of the economy

IMPLICATION: high rates of

inflation are often due to changes
in AD in the long run unless
there is a –ve supply shock
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 Macroeconomics In Three Models
• Short Run Model: Short run fluctuations in output are largely due to
changes in AD
– The AS curve is flat in the short run due to fixed/rigid prices, so changes in output are
due to changes in AD

IMPLICATION: Changes in AD in
the short run constitute phases of
economic fluctuations
–In the short run, AD
determines output, and thus
unemployment
–Prices are unaffected by the
level of output

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Macroeconomics In Three Models
• The medium run AS curve
is tilting upwards towards
the long run AS curve
position

• How do we get from the

horizontal short run AS
curve to the +vely sloped
AS curve?
– When AD pushes output
above the sustainable
level, firms increase prices
– As prices increase, the AS
curve is no longer pegged
at a particular price level
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 Macroeconomic Thoughts:
Classical Vs Keynesian Economics
Classical
• Aggregate output would be defined by the
full employment level of supply
• i.e. changes in aggregate demand would have
no impact on real output or employment… but
only on inflation
• Individuals act according to their own self
interest regarding economic decisions. This
ensures economic resources are allocated
according to the desires of individuals and
businesses in the marketplace ensuring
output stabilising at the full employment
level… aggregate demand affects prices….
• It is rooted in the concept of a laissez-faire
economic market. A laissez-faire--also known
as free--market requires little to no
government intervention.
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Keynesian
• Keynesian economic theory relies on
spending and aggregate demand to
define the economic marketplace.
• Keynesian economists believe the
aggregate demand is often influenced by
public and private decisions.
• Keynesian economics relies on
government spending to jumpstart a
nation’s economic growth during sluggish
economic downturns when consumer
spending and business investment gets
affected.
• …i.e. it emphasizes the role of
government and policy on economic
processes
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 Economic/Business Cycles:
Need for policy intervention
 Potential Output (PO): Level of
output when all factors of
production are fully employed

 Actual output generally differs

from PO… leading to business
fluctuations/business cycles
 Actual output can fall short of
potential output
 Actual output may exceed
potential output (high
utilization rates)

 Output gap = Actual Output –

Potential Output
 Measure the magnitude of
cyclical deviation

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Strictly for use of students of IMT only and
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 Empirical Observations: Phillips Curve
 Negative Relationship between
unemployment & Inflation

 …observed by William Phillips a

New Zealand born Economist in a
1958 paper on long-run UK data
(1861-1957)

 Limits policy choice – to accept the

cost higher inflation for having
lower unemployment rate

• Cannot explain stagflation

 Since 1974 at least 07 Nobel Prizes

were given amongst other things
on work critical on variations of
Phillips curve

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 Empirical Observations: Okun’s law
 Empirical Relationship between US Data
 Aggregate Output (relative to this
potential trend) &
 Unemployment rate (relative to its
natural rate)

 Named after economist Aurthur Melvin

Okun

 Implication – Provides relationship to

ascertain how much a country’s GDP
may be lost when unemployment rate is
above its natural rate

 Suggests a GDP gap of -2% for every 1%

that unemployment exceeds its natural
rate

 Usage: Useful guide for monetary

policy as it suggests room for policy
makers to improve output by
reducing unemployment

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• Which of the following need NOT be a central issue in macroeconomics?

A) How should the central bank of a country fight inflation?

B) What is responsible for high and persistent unemployment?

C) How do tax changes influence consumers' choices of what to buy?

D) What factors determine economic growth?

E) What can or should the government do to stabilize the economy?

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• Macroeconomics does NOT focus on

A) policies that affect consumption and saving

B) policies that affect the performance of health care providers

C) the determination of changes in wages and prices

D) the determination of interest rates

E) none of the above, all of them are macroeconomic issues

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• Which of the economists below most likely advocated activist government
policies?

A) Milton Friedman

B) John Maynard Keynes

C) Robert Lucas

D) Thomas Sargent

E) Adam Smith

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Which of the following is a FALSE statement?

A) the very long run focuses on the growth of productive capacity

B) in the very long run, the productive capacity is assumed to be given

C) in the very short run, shifts in aggregate demand determine how much
output is produced

D) fluctuations in the rates of inflation and unemployment are important long-

run issues

E) Short-run level of output should be at or below the full-employment level of

output

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Government intervention into economic activity will NOT lead to a change in
the price level

A) in the very short-run model

B) in the medium-run model

C) in the very long-run model

D) in the classical model

E) in a macro-model that focuses on the growth of productive capacity

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• In the very long-run AD-AS model,

A) only fiscal policy can affect both output and prices

B) only monetary policy can affect both output and prices

C) monetary policy can affect output but not prices

D) active stabilization policy is ineffective in changing output

E) the unemployment rate is always assumed to be zero

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