Lahore University of Management Sciences

ECON 221 – Intermediate Macroeconomics

Spring 2022-23

Instructor Syed Zahid Ali

Room No. 247
Office Hours Ext. 8074
Email szahid@lums.edu.pk
Telephone
Secretary/TA Khalid Pervaiz
TA Office Hours
Course URL (if
any)

Course Teaching Methodology

 Teaching Methodology: In Person

Course Basics
Credit Hours 4
Lecture(s) Nbr of Lec(s) Per Week 2 Duration 110 minutes
MonWed
12- 1:50
Recitation/Lab (per week) Nbr of Lec(s) Per Week NA Duration
Tutorial (per week) Nbr of Lec(s) Per Week NA Duration

Course Distribution
Core
Elective
Open for Student Category
Close for Student Category
Yes
Any student other than freshmen
Freshmen and M.Sc. second year students

COURSE DESCRIPTION
This is a second-year course in macroeconomics and extends the discussion covered in the introductory course “Principles of
Macroeconomics”. The course will open with the study of economic growth. Next, we layout the components of aggregate demand
for goods. We pay special attention to the derivation of consumption and investment function using intertemporal maximization
problem. While assuming fixed price and wages, we solve the model for equilibrium output, fiscal policy, and government spending
multiplier. We will consider both balanced budget policy and balanced budget multiplier. Our third module is about financial
markets where we discuss demand for money (transaction, precautionary, and speculative) and financial assets. We also discuss
money supply and money multiplier in the same module. In our fourth module we integrate the goods market and money market and
derive both static and dynamic IS-LM model and discuss the effectiveness of both fiscal and monetary policies in normal time and
when the economy stuck in zero lower bound (ZLB) interest rate regime. In our fifth module, we relax the assumption of fixed price
and derive short-run and the long-run aggregate supply/Phillips curve. In this context, we will study the theory and implications of
static, adaptive, and rational expectations. Using the complete AD/AS model, we also discuss fiscal and monetary policies and
options available to fiscal and monetary authorities to deal with various shocks to the economy. Another important module that we
will cover in this course is about the determination of exchange rates and macroeconomic policies in the open economy.
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COURSE PREREQUISITE(S)

 Principles of Macroeconomics (ECON – 121)


COURSE OBJECTIVES
 This course is an intermediate macroeconomics course. We will cover most topics by means of a graphical
 analysis, and integrate that with algebraic treatments whenever such integration is possible and useful


Learning Outcomes
By the end of the course, students should be able to:

 understand how to develop theoretical models that help to understand the workings of the
macroeconomy;
 study by means of such models how key economic variables in the economy are determined;
 understand how different types of government policies work;
 distinguish between the classical and the Keynesian approaches to the study of macroeconomics;
 fine‐tune the analysis to include the study of extensions such as the role of expectations and the open
economy.
Grading Instruments

Assignment: 10%

4-Sessional Exams : 60%

Final Examination: 30%

Examination Detail

Yes/No NO
Midterm
Exam

Yes

Separate: NA
Final Exam
Duration: 100 minutes

Exam Specifications: MCQ

     
COURSE OVERVIEW
Week/
Recommended Objectives/
Lecture/ Topics
Readings Application
Module
1      Lon Run Growth Theories
Prosperity and growth, Wealth of a nation, Blanchard-Chap.-11-12
The world income distribution, Charles Jones: Chap. 4,5,6
Conditional and unconditional Sorensen and Jacobsen Understanding of growth models
 Lahore University of Management Sciences
convergence, Capital accumulation and Chapter 3, 5
growth (Basic Solow model), Steady state
equilibrium, Golden rule of consumption,
Dynamic analysis of various shocks to the
economy (changes in the saving rate,
changes in Physical vs Human capital
etc.,)
Goods Market

The Composition of GDP: Consumption Demand determined level of output.

(C), Government expenditure (G),
Investment (I), Exports (X), Imports (IM).
Blanchard –Chap. 3
2
Aggregate demand for goods and
Keynesian cross: Y = C+I+G+X-IM
Sorensen and Jacobsen
Equilibrium, Multiplier, Fiscal policy Chap.15, 16, 17

     
Financial Markets

Demand for money: Transaction demand

for money, Precautionary demand for
money, and speculative demand for money Blanchard – Chap. 4 Learning about money market and
Supply of money: Monetary base, M1, financial markets
3 M2, M3, Open market operation, Money Sorensen and Jacobsen
Multiplier. Chap.17

Money market equilibrium:

Determination of the rate of interest.

     
Goods and Financial Markets: The IS–
LM Model
How output and interest rate is
Derivation of the IS and the LM curve, Blanchard – Chap. 5, determined through real and
General Equilibrium with fixed and Handout monetary variables interactions
4
flexible prices, Fiscal and Monetary
policies with and without Taylor’s rule.
Neo-Classical and Keynesian synthesis.

     
Derivation of Aggregate Demand,
aggregate Supply, and Phillips curve Charles Jones-Chap. 7, Micro-foundation of aggregate
equations demand and supply functions.
Handout Understanding the role of
5
expectations
Sorensen and Jacobsen
Chap.18

6 Stabilization Policy and the AS/AD

Framework Short-run and long-run effects of
Charles Jones: Chap. 13, 14 monetary and fiscal policies and the
Aggregate Demand curve, Aggregate role of financial frictions
 Lahore University of Management Sciences
Supply curve/ Phillips curve, Monetary Sorensen and Jacobsen
Policy rule, Demand-side and supply-side Chap.20,21
shocks and stabilization policies,
Financial Frictions and recession

     
Open Economy
Handout Understanding of open economies
IS-LM-BOP model, Exchange rate and the importance of ToT and
determination, fixed vs flexible exchange exchange rate in the economy
7
rate, Monetary and Fiscal Policies in the
open economy with different degrees of
capital mobility.

Textbook(s)/Supplementary Readings
Macroeconomics Third Edition by Charles Jones
(https://doku.pub/download/charles-i-jones-macroeconomics-third-edition-w-w-norton-company-2013pdf-k0pzvokk3vl1)

Macroeconomics A European perspective by Olivier Blanchard, Alessia Amighini and Francesco Giavazzi
((PDF) Macroeconomics A European Perspective Blanchard2 | MºIsabel Ordoñez Reig - Academia.edu )
Introducing Advanced Macroeconomics by Peter Sorensen and Hans Whitta-Jacobsen (Introducing Advanced
Macroeconomics : Peter Sorensen : 9780077104252 (bookdepository.com))