Indian Institute of Foreign Trade, Delhi/Kolkata

MBA (IB) 2020-22 Batch

Macroeconomics
Course Coordinators: DR. JAYDEEP MUKHERJEE (JM) & DR. A.K.S. CHAND (AKSC)
Email: [email protected] & [email protected]

Term: II Credits: 3

Course Introduction

The course on Macroeconomics is designed to make a systematic coverage of

fundamental concepts and relationships among various macroeconomic entities. The
course provides a basic understanding of the theories and principles relating to the
macroeconomic policy and debates concerning the behavior of output, employment,
money supply, interest rate, exchange rate, capital inflows and other economic aggregates
that affect business environment. The focus lies primarily in understanding how an
economy functions, the reasons for macroeconomic fluctuations and the corrective
measures taken from various spheres such as monetary, fiscal and international trade.

Course Objectives

(a) How Macro Economic Problems inflation, unemployment influence business

environment
(b) Fundamentals of Macro Economic Theory that determine Government, Revenue
Expenditure policies & Policies on Investment, Savings & Consumption

Programme Learning Goals covered through this Course

LG 2.1: Able to apply knowledge of business management concepts to analyze business

problems critically and suggest innovative solutions
 Pedagogy

The course is designed around interactive class lectures, assigned readings from text book(s) and
various articles, case studies, current news analysis and assignments. The students are expected
to be well-versed with the assigned readings before they come to each class. The class lectures
serve as complements to textbook readings and in many cases may overlap the materials covered
in textbook(s). In some cases lecture notes and subsequent discussions may cover some issues
not explicitly found in prescribed textbook(s) or reading materials. However students must be
well-prepared with all assigned course materials. Study in macroeconomics become more
exciting when it is applied to understanding real issues. Therefore, the numerous case studies are
an important learning tool.

Linkages with Other Courses

Pre-requisites and Inter Linkages

• Knowledge of Microeconomics
• Basic Calculas and coordinate geometry

Linkage with the Follow-up Courses

• International Economics
• India and the World Economy
• Electives in the Finance Domain

Evaluation Components

The evaluation process is divided into three components:

(a) Quizzes: 30 %

During the entire course, there will be three quizzes (each carrying 15% weightage). The marks
of the two best quizzes will be taken into consideration for final evaluation. The quizzes will be
MCQ type (with five alternatives) based on relevant course materials and class discussions. Each
correct answer shall fetch you 1.5 marks; however there is a negative 0.5 mark for each wrong
answer. Under no circumstances there will be any make-up on quizzes.

Evaluation Plan for Quiz:

After Session Component

8 Quiz - 1
15 Quiz - 2
20 Quiz - 3
(b) Project Report: 30 %

Groups will be formed with a maximum of six students who will select a particular country and
make a diagnostic of its macroeconomic fundamentals. The country choice is to be assigned to
each group by the instructor to avoid any overlapping. Each group is expected

(i) to study the macroeconomic performance of the (assigned) country in the fiscal year
(FY) 2015-2020;
(ii) to identify two to three core macroeconomic problems facing that country in the current
FY and potential macroeconomic crisis the country is likely to experience in the
coming FYs; and
(iii) to suggest some possible remedial measures, as a policy analyst.

The project report must be restricted to a maximum of 15 pages. It must be written in own
words and to be strictly submitted within due date to avoid any undesirable penalty. Further
details on the Project shall be uploaded in due time.

(c) End Term: 40%

The end term examination will be based on topics covered in the class.

Text Book / Reference Text

Text Book:

Macroeconomics: Mankiw and Taylor (latest edition): Cengage Publications

References:

(a) Macroeconomics: Dornbusch, Fischer, and Startz (Ninth Edition), 2004. Tata McGraw-Hill
(b) Macroeconomics: Hubbard and O' Brien (First Edition), 2007. Pearson Education
(c) Macroeconomics: Errol D' Souza (First Edition), 2008. Pearson Education
(d) Essentials of Economics: Brue and Mcconnell (First Edition), 2007. Tata McGraw-Hill
(e) Macroeconomics: Olivier Blanchard (Latest Edition) Pearson Education
 Session Plan: Total 20 Sessions (Each Session of One Hour and 30 Minutes Duration)

Sessions Themes Readings Contents

1 (JM) Orientation to the (a) Mankiw (2006), Why Study Macroeconomics?
Course on Macroeconomics Key Macroeconomic Variables:
Macroeconomics Chapter 1: The Science of a) Aggregate Output
Macroeconomics • Real and Nominal GDP
• Levels of GDP and Growth of GDP
• Per capita GDP
b) Unemployment Rate
• The Case Study: High Unemployment in Spain
during 1990s
• Okun's Law
c) Inflation Rate
• Why do economists care about inflation?
The Case Study: Historical Performance of the U.S.
Economy
2 – 4 (JM) Measuring a (a) Mankiw (2006), Treating GDP both as Income and Expenditure
Nation’s Income Macroeconomics • The Circular Flow of Diagram
Chapter 2: The Data of Gross Domestic Product (GDP)
Macroeconomics • Interpretation of the Definition
• Significance of Each Term in the Definition
(b) Dornbusch, Fischer, and • The Concept of Imputed Value
Startz (2004), Gross National Product (GNP)
Macroeconomics • The Difference Between GDP and GNP
Chapter 2: National Income Net National Product
Accounting National Income
• Difference Between Factor Cost and Market Price
• Personal Income
• Personal Disposable Income
Components of GDP
• Consumption
• Investment: Concept of Capital Formation &
Inventories
• Government Purchases: Concept of Transfer
Payments
• Net Exports
Real and Nominal GDP
• GDP Deflator
• Consumer Price Index
• Wholesale Price Index
• Case Study: Does the CPI Overstate the Inflation?
Is GDP a Good Measure of Economic Progress?
5 – 10 Aggregate Demand (a) Mankiw (2006), Difference Between Planned and Realized Investment
(JM) – The Goods Macroeconomics • The Role of Unplanned Changes in Inventories
Market and Money Chapter 10: Aggregate Planned Aggregate Expenditure in a Closed Economy
Market and the Demand I: Building the IS- • Consumption Expenditure
Influence of LM Model • Planned Investment Expenditure
Monetary and Chapter 11: Aggregate • Government Purchases
Fiscal Policy on Demand II: Applying the IS- Macroeconomic Equilibrium and Stability Analysis
Aggregate Demand LM Model The Multiplier Analysis
Chapter 14: Stabilization a) With Lumpsum Tax
Policy b) With a Proportional Income Tax
Chapter 15: Government • The Case Study: Tax Cut to Stimulate US
Debt Economy During 1960s and 2001
The Fiscal Policy
(b) Dornbusch, Fischer, and • Expansionary Fiscal Policy
Startz (2004),
• Tight Fiscal Policy
Macroeconomics The Budget
• The Budget Surplus / Deficit
Chapter 9: Income and
• Fiscal Policy and Budgetary Surplus / Deficit
Spending
Chapter 10: Money, Interest • Full-employment Budget Surplus / Deficit
and Income The IS Curve and Goods Market Equilibrium
Chapter 11: Monetary and • Derivation and Interpretation of Slope
Fiscal Policy The IS Curve and Fiscal Policy
Financing of Government Debt
• The Arithmetic of Deficit and Debt
• Debt Repayment and Debt Stabilization
• The Concept of Twin Deficit
• Ricardian Equivalence of Debt and Taxes
• The Case Study: The Sovereign Debt Crisis in
Greece and other EU Countries since 2009
Alternative Formulation of Goods Market Equilibrium:
Savings-Investment Equality
The Money Market
• The bond price and interest rate - inverse relation
• Money Supply Control by RBI (preliminary)
The Demand for Money
• The Liquidity Preference Theory - Speculative
Demand
• Determination of Interest Rate
• Transaction Demand for Money
Money Market and LM Curve - Derivation and Shifts
IS-LM Model Combined / Interaction
Fiscal Policy in IS-LM Model : Changes in G, Changes in
Taxes
• The Crowding-out effect
Monetary Policy
 • Expansionary & Contractionary
• Monetary Transmission Mechanism
Interaction Between Monetary and Fiscal Policy
• The Case Study: The U.S. Slowdown of 2001
• The Case Study: The Financial Crisis and
Economic Downturn of 2008 and 2009
Derivation of Aggregate Demand
• Fiscal policy and AD
• Monetary Policy and AD
The Liquidity Trap
• The Case Study: The Japanese Slump during
1990s.
11-15 (JM) Open Economy (a) Mankiw (2006), The International Flows of Capital and Goods
Macroeconomy Macroeconomics • The Flow of Goods: Exports, Imports and Net
Chapter 5: The Open Exports
Economy • The Flow of financial Resources: Net Capital
Chapter 12: The Open • The Equality of Net Exports and Net Capital
Economy Revisited: The Outflow
Mundell-Fleming Model and Saving and Investment in a Small Open Economy
the Exchange Rate Regime Exchange Rates
• Determination of Exchange Rate: The Demand-
Supply Approach
• Nominal and Real Exchange Rate
• Determinants of Real Exchange Rate
• How Policies Influence Real Exchange Rate
• The Case Study on Inflation and Nominal
Exchange Rate
Balance of Payments Accounting in India
• The Case Study on Rupee Appreciation in 2007
and RBI's Policy Dilemma
The Mundell-Fleming Model
• Assumption of Small Open Economy With Perfect
Capital Mobility
Fixed versus Floating Exchange Rates
• Should Exchange Rates be Fixed or Floating?
• The Impossible Trinity
• The Case Study: The Chinese Currency
Controversy
Interest Rate Differentials in Mundell-Fleming Model
• The Case Study: International Financial Crisis:
Mexico 1994-1995
16 – 17 Unemployment (a) Mankiw (2006), Defining and Identifying Unemployment
(AKSC) Macroeconomics Natural Rate of Unemployment
Chapter 6: Unemployment b) Job Search and Frictional Unemployment
• The Case Study on Unemployment Insurance and
the Rate of Job Finding
c) Real-Wage Rigidity and Structural Unemployment
• Minimum Wage Laws
• Unions and Collective Bargaining
• Efficiency Wages
• The Case Study: Unemployment Insurance and the
Rate of Job Finding
18 – 20 Money and (a) Mankiw (2006), What is Money?
(AKSC) Inflation Macroeconomics • Types and Functions of Money
Chapter 4: Money and Bank and Money Supply
Inflation • 100-Percent Reserve Banking
Chapter 13: Aggregate • Fractional Reserve Banking
Supply and the Short-run • The Money Multiplier
Tradeoff between Inflation The Three Instruments of Monetary Policy
and Unemployment • The Cash-Reserve Ratio (CRR)
Chapter 18: Money Supply • The Repo Rate
and Money Demand (Section • The Open Market Operations
18.1)
• The Monetary Policy by RBI to Control Recent
Inflation
Seigniorage: The Revenue From Printing Money
The Costs of Inflation
• Social Costs - A Fall in Purchasing Power
• Shoeleather Costs
• Menu Costs
• How to Protect Your Savings from Inflation?
• The Costs of Hyperinflation
• The Case Study: Hyperinflation in Zimbabwe
Inflation, Unemployment and the Phillips Curve
• The Concept of AS Curve
• Deriving the Phillips Curve from the AS Curve
• Two Causes of Rising and Falling Inflation
• The Short-Run Tradeoff Between Inflation and
Unemployment
The Cost of Reducing Inflation
• The Sacrifice Ratio
• Rational Expectations and the Possibility of
Costless Disinflation
• The Case Study: The Volcker Disinflation
• The Case Study: The Japanese Slump of 1990s
Revisited
Additional Readings

➢ www.helsinki.fi/WebEc/framee.html (World Wide Web Resources in Economics)

➢ www.repec.org (a decentralized free database of working papers and journal articles in
Economics)
➢ NetEc -- Network Economics project (BibEc (bibliography), WoPEc (working papers),
CodEc (code), WebEc)
➢ globalEdge (formerly International Business Resources on the WWW)
➢ www.economics.about.com (Resource for Economics information for Students)
➢ www.internationalecon.com/index.php (The International Economics Study Center)
➢ www.econlib.org/Library/links.html (The Library of Economics and Liberty)
➢ www.econ-datalinks.org (American Statistical Association Business and Economic
Statistics)
➢ www.economagic.com (Great resource for analyzing U.S. macro data)
➢ www.rgemonitor.com(Roubini Global Macro and Financial Policy Site)
➢ www.wachovia.com/corp_inst/page/0,,13_54,00.html (Free, valuable economic
information)
➢ www.research.stlouisfed.org/fred2/ (Site maintained by the Federal Reserve Bank of St.
Louis contains a large data base of monetary and other data)
➢ www.rbi.org.in (Reserve Bank of India)
➢ www.worldbank.org (World Bank)
➢ www.imf.org (International Monetary Fund)
➢ www.adb.org (Asian Development Bank)
➢ www.oecd.org (Organization for Economic Co-operation and Development countries)
➢ www.ilo.org (International Labour Organization)
➢ www.dipp.gov.in (Ministry of Commerce and Industry, Govt. of India)
➢ www.mospi.gov.in (Ministry of Statistics and Programme Implementation, Government
of India)
➢ World Economic Outlook 2006
➢ Penn World Tables (Macroeconomic Data for nearly 188 countries)
➢ Econostats.com (Useful Time-Series Data Source)
➢ Union Budget and Economic Survey (Ministry of Finance, Government of India. Pearson
Education
AOL Evaluation

Learning Goal No.: LG 2.1

Evaluation Component to be used for AOL: Individual Assignment - Question 1(carrying 10

marks) in End-term Examination

Rubrics to be used for evaluation

Objectives Excellent Good Fair Unsatisfactory

Able to apply Able to Able to Able to Unable to
knowledge demonstrate demonstrate demonstrate fair demonstrate
of business excellent ability good ability to ability to apply ability to apply
management to apply apply knowledge knowledge
concepts to knowledge of knowledge of of business of business
analyze business business management management
business management management concepts to concepts to
problems concepts to concepts analyze analyze
critically and analyze business to analyze business business
suggest problems business problems problems
innovative critically and problems critically and critically
solutions suggest critically and suggest and suggest
innovative suggest innovative innovative
solutions innovative solutions solutions
solutions