Course info

Sec5202 MACROECONOMICS AND ECONOMIC ENVIRONMENT

BACKGROUND AND RATIONALE
Understanding the working of the economy is important as it facilitates improved decision–making. Thus, managers should understand the nature of the economic environment and how it acts as an external constraint on the decision-making process.

Macroeconomic conditions set the environment within which a business operates. Because of this, decision-makers should keep abreast with developments in the macroeconomic environment to enable them to make informed decisions. This course is designed to equip students with a working knowledge of the key macroeconomic issues which confront managers. It also intends to provide tools to deepen the student’s analytical ability.

LEARNING OUTCOMES
By the end of the course, students should be able to:

1. Analyze the effects of the economic environment on business.
2. evaluate how any change in the variables and the parameters of the IS-LM model alters the equilibrium levels of output and the interest rate.
3. explain the mechanism underlying the determination of the equilibrium real wage and unemployment rate in the labour market.
4. assess the determinants of output, the price level and interest rate over the business cycle using the AD–AS model.
5. appraise how monetary and fiscal policy can be used as stabilisation.
tools in response to demand and supply shocks
6. describe the short- and long-run implications for the macroeconomic
the policy of inflation expectations
CONTENT
Part A: The Basic Concepts
1. Aggregate output
2. The unemployment rate
3. The inflation rate
4. Output, unemployment and the inflation rate: Okun’s Law and the Phillips curve
5. The short run, the medium run, the long run

Part B: The Goods Market
1. The composition of GDP
2. The demand for goods
3. The determination of equilibrium output
4. Investment equals savings
5. Is the government omnipotent?

Part C: Financial Markets
1. The demand for money
2. Determining the interest rate I
3. Determining the interest rate II
4. Two alternative ways of looking at the equilibrium

Part D: Goods and Financial markets: The IS – LM Model
1. The goods market and the IS relation
2. Financial markets and the LM relation
3. Putting the IS and the LM relations together
4. Using a policy mix
5. How does the IS – LM model fit the facts

Part E: The labour market
1. The large flows of workers
2. Movements in unemployment
3. Wage determination
4. Price determination
5. The natural rate of unemployment

Part F: Putting all markets together: The AS - AD
1. Aggregate supply
2. Aggregate demand
3. Equilibrium in the short run and in the medium run
4. The effects of a monetary expansion
5. A decrease in the budget deficit
6. An increase in the price of oil

Part G: The Phillips curve, the natural rate of unemployment and inflation
1. Inflation, expected inflation and unemployment
2. The Phillips curve

Part H: The crisis
1. From a housing problem to a financial crisis
2. The use and limits of policy
3. The slow recovery

Part I: Expectations, Output and policy
1. Expectations and decisions: Taking stock
2. Monetary policy, expectations and output
3. Deficit reduction, expectations and output

Part J: Openness in goods and financial markets
1. Openness in goods markets
2. Openness in financial markets
3. Conclusions and a look ahead

Part K: The goods market in an open economy
1. The IS relation in the open economy
2. Equilibrium output and the trade balance
3. Increases in demand, domestic or foreign
4. Depreciation, the trade balance and output
5. Looking at dynamics: J - Curve
6. Saving, Investment and the current account balance

Part L: Output, the interest rate and the exchange rate
1. Equilibrium in the goods market
2. Equilibrium in financial market
3. Putting goods and financial markets together
4. The effects of policy in an open economy
5. Fixed exchange rates


METHOD OF TEACHING

One hour of lecture and one-hour tutorial per week.

ASSESSMENT
Continuous assessment 60%
2 Presentations 20%
1 Assignment 20% 1 Test 20%
Final examination 40%
Total 100%


PRESCRIBED READING

1. Blanchard, O. and Johnson, D. R. (2012) Macroeconomics, 6th edition. Upper Saddle River, NJ: Prentice Hall.

2. Mankiw, N.G. (2013) Macroeconomics, 8th edition. Cambridge Massachusetts: Worth Publishers

RECOMMENDED READING
1. Dornbusch, R., Fischer, S. and Startz, R. (2011) Macroeconomics, 11th edition. New York: McGraw-Hill.
2. Rode, S. (2012) Advanced Macroeconomics. Sanjay Rode and Bookboon.com.