Macroeconomics II

BA Economics
JSGP, O. P. Jindal Global University
Semester: Fall 2022
Title of the Course: Macroeconomics II

Instructor and Office Hours:

Instructor: Subaran Roy (Ph.D.)

Preferred Contact: subaran@jgu.edu.in

Office Hours: Tuesdays and Wednesdays 12 pm till 1 pm and by appointment. Cubicle#10,

Lal-Qila, Academic Block (Temporary Office)

Course Description:

This is the second macroeconomic course for BA(H) Economics at the School of Government
and Public Policy. First, we put the two parts together (IS-LM & PC) and use it to characterize the
behaviour of output, unemployment, and inflation, both in the short and the medium runs.
When confronted with a macroeconomic question about a particular shock or a particular
policy, this model, which we shall call the IS-LM-PC (PC for Phillips curve), is typically the
model we use, or we start from. Next, we talk about our perceptions of how the economy is doing
are often dominated by year-to-year fluctuations in economic activity. A recession leads to
gloom, and an expansion to optimism. But if we step back to get a look at activity over longer
periods—say over many decades—the picture changes. Fluctuation’s fade. Growth, which is the
steady increase in aggregate output over time, dominates the picture. We explore the facts of
growth.
In the following topic we talk about savings rate. Since 1970, the U.S. saving rate—the ratio of
saving to gross domestic product (GDP)—has averaged only 17%, compared to 22% in Germany
and 30% in Japan. Can this explain why the growth rate has been lower than in most OECD
countries in the last 40 years? Would increasing the U.S. saving rate lead to sustained higher U.S.
growth in the future? Over long periods—an important qualification to which we will return—
an economy’s growth rate does not depend on its saving rate. It does not appear that lower U.S.
growth in the last 50 years comes primarily from a low saving rate. Nor should we expect that an
increase in the saving rate will lead to sustained higher growth. This conclusion does not mean,
however, that we should not be concerned about the low saving rate. Even if the saving rate does
not permanently affect the growth rate, it does affect the level of output and the standard of
living. An increase in the saving rate would lead to higher growth for some time and eventually
to a higher standard of living in various countries. This topic focuses on the effects of the saving
rate on the level and the growth rate of output. In the next section, focus throughout will be on
the role expectations play in the determination of asset prices, from bonds, to stocks, to houses.
We discussed the role of expectations informally at various points in the core. It is now time to
do it more formally. As you will see, not only are these asset prices affected by current and
expected future activity, but they in turn affect decisions that influence current economic
activity. Understanding their determination is thus central to understanding fluctuations. We
now turn to the role expectations play in determining the two main components of spending—
consumption and investment. This description of consumption and investment will be the main
building block of the expanded IS–LM model we develop previously.
Finally (if time permits) we discuss about countries around the world which are worried about
the risk of a recession in the other countries. A deterioration of their trade position, and weaker
growth at home. Were their worries justified. For example, The U.S. recession clearly led to a
world recession. To understand what happened, we must expand the treatment of the goods

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market and account for openness in the analysis of goods markets. This is core what we do in
this topic.

Course Goals

At the end of this course, you should be able to:

1. Build a basic model and understand its main mechanisms of transmission of fluctuations.
Integrate IS-LM and our basic model as two methods of formulating a model economy.

2. Evaluate the process of growth of developed and developing economies using fundamental
growth models.

3. Explain the determination of stock prices and how stock prices depend on current and
expected future profits, as well as on current and expected future interest rates.

4. Judge the movements in consumption and investment over time and shows how to interpret
those movements.

5. Understand analyse the equilibrium in the goods market for an open economy.

Class Timings

Mondays 2.40 pm till 4.10 pm & Fridays 11.20 am till 12.50 pm

Pre-requisites

Principles of Economics, Macro Economics I

Readings

Lecture Notes [LN]: A synthesis of our topic of interest, drawing from various sources.
These would be posted on the course web page a week after the completion of the topic. Students
are expected to integrate their own lecture notes with these to complete the course notes.

Required Textbook

Macroeconomics
Olivier Blanchard [OB]
Pearson; Seventh Edition.
Print ISBN: 9780133780581, 0133780589

Suggested Textbook(s)

Macroeconomics
Erol D'Souza [ED]
Pearson Education India; 2 edition (2012)
ISBN 10 – 8131761010

Macroeconomics
Andrew B. Abel , Ben Bernanke, Dean Croushore [ABC]
Pearson; 8th ed. 2015 edition (11 March 2014)
ISBN-13: 978-0-13-299228-2

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Introduction to economic growth
Second edition
Charles I Jones [CJ]
ISBN: 978-81-309-2290-4

General Readings

Readings marked are required and go along with the lectures and the others are supplementary.
Additionally, you can read any of the newspapers in order to connect the class discussion to the
economic activity in our economy. Discussions pertaining to topics covered in class initiated by
students contribute to classroom participation. Chapter numbers are provided for both eighth
edition and ninth edition of the textbook.

Assessment

Assessments include internal evaluation and an external end term exam

1. Midterm: 50%

2. End Semester Examination: 50%

Plagiarism: in assignments will be heavily penalized. If the instructions are provided, then you
may collaborate with your colleagues, however you must submit your own copy.

Missed excusable reasons: Require prior or immediate communication with the instructor, cc-ed
to the academic dean and the vice dean of the school. The percentage grade would be proxied
with the percentage grade obtained in the remainder of the course, only to be assessed at the end
of the semester.

Mid-Semester Exam

You will be given an hour and fifteen minutes for the mid-semester exam and be notified of the
dates prior to the exam. However, you are expected to continuously work along the lectures.
There will be no changes to the schedule once it is decided in class. An email will be sent out
confirming the schedule after it is decided.

Classroom Policy

Attendance: will be strictly according to the university norms. I will take attendance at the end
of the class.

Classroom Decorum: Entry to the lectures is not allowed 10 minutes after the designated lecture
time. Please be courteous to your classmates and do not disrupt the class after the first 10
minutes.
Lecture Breaks: we will have one short break of 5 minutes (if the class is of 3 hours)

Course Contents

The course outline is tentative and subject to change.

Topic 1: From the Short to the Medium Run: The IS-LM-PC Model [OB Ch 9]

• The IS-LM-PC model

• Dynamics and the Medium Run Equilibrium
• The Role of Expectations
• The Zero Lower Bound and Debt Spirals
• Fiscal Consolidation Revisited

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 • The Effects of an Increase in the price of Oil
• Effects on the Natural Rate of Unemployment
• Conclusions
• The Short Run versus the Medium Run
• Shocks and Propagation

Topic 2: The Facts of Growth [OB Ch 10]

• Measuring the Standard of Living

• Growth in Rich Countries since 1950
• The Large Increase in the Standard of Living since 1950
• The Convergence of Output per Person
• A Broader Look across Time and Space
• Looking across Two Millennia
• Looking across Countries
• Thinking about Growth: A Primer
• The Aggregate Production Function
• Returns to Scale and Returns to Factors
• Output per Worker and Capital per Worker
• The Sources of Growth

Topic 3: Saving, Capital Accumulation and Output [OB Ch 11]

• Interactions between Output and Capital

• The Effects of Capital on Output
• The Effects of Output on Capital Accumulation
• Output and Investment
• Investment and Capital Accumulation
• The Implications of Alternative Saving Rates
• Dynamics of Capital and Output
• The Saving Rate and Output
• The Saving Rate and Consumption
• Getting a Sense of Magnitudes
• The Effects of the Saving Rate on Steady-State Output
• The Dynamic Effects of an Increase in the Saving Rate
• Physical versus Human Capital
• Extending the Production Function
• Human Capital, Physical Capital, and Output
• Endogenous Growth
• The Cobb-Douglas Production Function and the Steady State

Topic 4: Technological Progress and Growth [OB Ch 12]

• Technological Progress and Production Function

• Interaction between Capital and Output
• Dynamics of Capital and Output
• The Effects of Savings rate
• The Determinants of Technological Progress
• The Fertility of Research Process
• The Appropriability of Research Results
• Institutions, Technological Progress and Growth
• The Facts of Growth Revisited

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Topic 5: Financial Markets and Expectations [OB Ch 14]

• Expected Present Discounted Values

• Computing Expected Present Discounted Values
• Using Present Values: Examples
• Constant Interest Rates
• Constant Interest Rates and Payments
• Constant Interest Rates and Payments Forever
• Zero Interest Rates
• Nominal versus Real Interest Rates and Present Values
• Bond Prices and Bond Yields
• Bond Prices as Present Values
• Arbitrage and Bond Prices
• From Bond Prices to Bond Yields
• Reintroducing Risk
• Interpreting the Yield Curve
• The Stock Market and Movements in Stock Prices
• Stock Prices as Present Values
• The Stock Market and Economic Activity
• A Monetary Expansion and the Stock Market
• An Increase in Consumer Spending and the Stock Market
• Risk, Bubbles, Fads, and Asset Prices
• Stock Prices and Risk
• Asset Prices, Fundamentals, and Bubbles

Topic 6: Expectations, Consumption, and Investment [ OB Ch 15]

• Consumption
• The Very Foresighted Consumer
• Toward a More Realistic Description
• Putting Things Together: Current
• Income, Expectations, and Consumption
• Investment
• Investment and Expectations of Profit
• Depreciation
• The Present Value of Expected Profits
• The Investment Decision
• A Convenient Special Case
• Current versus Expected Profit
• Profit and Sales
• The Volatility of Consumption and Investment
• Derivation of the Expected Present Value of Profit under Static Expectations

Topic 7: The Goods Market in an Open Economy [OB Ch 18]

• The IS Relation in the Open Economy

• The Demand for Domestic Goods
• The Determinants of C, I, and G
• The Determinants of Imports
• The Determinants of Exports
• Putting the Components Together
• Equilibrium Output and the Trade Balance
• Increases in Demand—Domestic or Foreign
• Increases in Domestic Demand
• Increases in Foreign Demand

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 • Depreciation, the Trade Balance, and Output
• Depreciation and the Trade Balance: The Marshall-Lerner Condition
• The Effects of a Real Depreciation
• Combining Exchange Rate and Fiscal Policies
• Looking at Dynamics: The J-Curve
• Saving, Investment, and the Current Account Balance
• Derivation of the Marshall- Lerner Condition

Tentative Weekly Plan

This is contingent upon class participation, evaluations and other tutorials

_ Week 1: Topic 1
_ Week 2: Topic 1
_ Week 3: Topic 2
_ Week 4: Topic 2
_ Week 5: Topic 3
_ Week 6: Topic 3
_ Week 7: Midterm/Topic 4
_ Week 8: Mid Term/Topic 4
_ Week 9: Topic 4
_ Week 10: Topic 5
_ Week 11: Topic 5
_ Week 12: Topic 6
_ Week 13: Topic 6
_Week 14: Topic 7
_Week 15: Topic 7

Subaran Roy Macroeconomics II, Fall 2022

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