UNIT 7:MACROECONOMIC MODELS

INTRODUCTION

Effective macroeconomic policies aim to provide stable economic growth, low inflation, low
unemployment, a balanced budget and the maintenance of a balance of payments with the
rest of the world.
Macroeconomic policies can include government spending and borrowing, taxation and
monetary regulation.
It is unusual for a business to have control of macroeconomic policy. It is important to
understand the effects of these policies, so you will be asked to consider the impact of both
fiscal and monetary policy on a business you are familiar with.

Specific outcomes
You should be able to
• explain macroeconomic concepts, models and issues are explained in
the contemporary business environment
• explain the foundations of macroeconomic theory
• evaluate the important linkages between the goods market, money
market and the labour market
• analyse the impact of changes in exogenous economic variables on the
macroeconomy and business organisations
o Analyse the impact of changes in economic policy variables on
the macroeconomy and business organisations.

Key concepts

• The various economic indicators we studied in the previous sections

are not economics per se. Although they explain the composition of
the various indicators and the technical requirements to calculate
them, they do not explain the economic behaviour embedded in each
of those indicators. What, for example, determines the level of
consumption expenditure? How does a change in the interest rate
(repurchase rate) affect the various components of aggregate
expenditure and how does it ultimately impact on the equilibrium level
of income? How does it impact on inflation? What causes inflation?
What causes economic growth? Why does South Africa have such a
high level of unemployment? What causes unemployment? What is
the rationale behind monetary and fiscal policy and how do changes
in economic policy affect the economy in the short and long run? Can
the authorities stabilise the macroeconomy? To answer these
questions, we need to develop a suite of macroeconomic models. You
will learn that there are different views and consequently different
answers to these questions, depending on which school of thought
 (classical, monetarist, Keynesian, neoclassical or new-classical) you
apply. Although many of these models are elegant in their analytical
rigour, the focus for you should be on deciding which model (theory) is
most consistent with your experience of the real world that confronts
us. One can distinguish between short- and long-run macroeconomic
models and these are comprehensively discussed by Parkin et. al
(2013) in chapters 25 to 29. Of particular importance for this course
are
• Investment Schedule
• Phillips curve
• Aggregate Demand-Aggregate Supply Model

The AD-AS (aggregate demand/aggregate supply) model is critical because it

provides an extremely useful framework for analysing the impact of
exogenous shocks and changes in economic policy on real GDP (economic
growth), inflation, employment and wages. After studying chapter 23 of the
prescribed book, you should be able to
• distinguish between the short run and long macroeconomic policy
changes
• explain what determines aggregate supply and illustrate the aggregate
supply curve in the long and short run
• illustrate and discuss the factors that cause the aggregate supply
curve to shift
• explain what determines aggregate demand and illustrate the
aggregate demand curve
• illustrate and discuss the factors that cause the aggregate demand
curve to shift
• illustrate macroeconomic equilibrium in the short and long run
• discuss how real GDP and the price level are determined and how
changes in aggregate supply and aggregate demand bring economic
growth, inflation and the business cycle
• distinguish between demand-pull and cost-push inflation and illustrate
both graphically
• explain how demand-pull and cost-push forces bring about cycles in
inflation and output
• discuss the short- and long-run trade-off between inflation and
unemployment
• illustrate the Phillips curve in both the short and long run
• describe the main schools of thought in macroeconomics today
As you read to understand the economy, you are expected to:
• Distinguish between Fiscal Policies and Monetary policies.
• Distinguish between Expansionary and Contractionary policies!
prescribed material

The prescribed book for the module is:

Parkins, M., Baur, P., Bruce-Brand, J., Kohler, M., Neethling, L., Rhodes, B.,
Saayman, A., Schoer, V., Scholtz, D., Thompson, K and Van der Merwe, J.,
(2019). Economics: Global and Southern African Perspectives. 3rd Edition.
Pearson South Africa (Pty) Ltd.

RECOMMENDED material AND ADDITIONAL RESOURCES

Read

Some of the recommended readings are:

• Parkins et al (2013). Economics: Global and Southern African
Perspectives. Pearson South Africa (Pty) Ltd.
• Rubin, P. H. and Dnes, A. W. (2010) Managerial Economics: A
Forward-Looking Assessment. Editorial. Managerial and Decision
Economics, 31(8):497-501
• Barrows, D and Smithin, J (2009) Fundamentals of Economics for
Business. Captus Press Inc. and World Scientific Publishers. (Chapter 2 and
3)
• Farnham, P.G (2010). Economics for Managers. Pearson Education
Inc. New Jersey. 3rd Edition

Watch

Activity 1.1: Briefly answer the following questions:

Do some research on your own country and see if you can find the answers
to these questions. Make
notes in the answer boxes.
This information may be difficult to collate, but there are several websites
that may be of use:
https://www.focus-economics.com/countries/
https://tradingeconomics.com/

The results of these questions do not count towards the average test mark
on your Course Dashboard.
The feedback provided once you have saved your answer will help you to
see whether you have answered the question correctly.

• What is the monetary policy of your government.

• What is the monetary policy trying to achieve? Is it successful?
• Discuss how the various components of the AD-AS model are used to
stabilise the economy?
Reflection
Read the section, “Reading between the lines: Monetary Policy in Action” (Parkin et
al. 2019, chapter 31), and the analysis that follows (Parkin et al. 2019). Now visit
the South African Reserve Bank website and download the latest MPC statement.
https://www.resbank.co.za/Pages/default.aspx
Use the AD-AS model to do a similar analysis.