Centre for Financial & Management Studies (CeFiMS) - University of London

Individual Professional Courses – IPC  

Macroeconomic Principles & Issues [EP102]

Introduction

Macroeconomic Principles and Issues is concerned with the economic principles used to model the economy as a whole. It is designed to teach the tools and techniques for analysing aggregate economic behaviour and policy formulation in a market economy.

Aims & Objectives

The types of questions students will consider are those relating to headline economic issues of inflation, unemployment, economic growth, money supply, government deficits and interest rates. The course teaches and analyses economic models designed to answer questions such as:

• how do we explain inflation?
• what determines economic growth?
• why are there periods of sustained unemployment?
• what determines the rate of interest?
• how do monetary and fiscal policies affect the economy?

Resources

Students receive a looseleaf binder containing eight ‘course units’; these texts are carefully structured to provide the main teaching and are equivalent to traditional course lectures, defining and exploring the main concepts and issues, locating these within current economics debate and introducing and linking the further assigned readings. Two assignments (which are counted towards the final course grade) marked by your CeFiMS tutors, and a specimen examination paper are also included within the student pack, along with the following:

Textbook:

Rudiger Dornbusch, Stanley Fischer and Richard Startz, Macroeconomics, Eighth Edition, 2001, McGraw-Hill International, New York, ISBN 0-07-118033-8.

Readings:

A compilation of further readings: recently published articles or seminal writings which augment and illustrate the main text.

Video Cassette:

The video lecture is intended to review and reinforce the teaching in the unit texts by discussing the same issues through a different medium.

Course Timetable:

This shows the linkage between the various components of the course and indicates the schedule for reading the texts, watching the video lecture, submitting assignments, etc.

Course Content

Unit 1 The Concepts of Macroeconomics

As well as reviewing the ideas of the market, demand, supply and equilibrium, this unit provides an overview of the different schools of thought within macroeconomics — the main theoretical approaches to macroeconomic modelling. It introduces the basic identities for income, expenditure and output and explains the key concepts of national income accounting, with some examples of how GDP is calculated.

Unit 2 The IS–LM Model

(1) The Goods Market in a Closed Economy

This unit is about the goods market and how the equilibrium level of income and output in the economy is determined. It looks at the determinants of aggregate planned expenditure and examines the relationship between this and income/output of the economy. The components of aggregate planned expenditure: consumption, investment, government spending and taxation are analysed; and the multiplier relationship between changes in autonomous spending and output is highlighted. The unit derives the relationships of a simple Keynesian model and the goods market equilibrium schedule, the IS curve, between output and interest rates.

Unit 3 The IS–LM Model

(2) Money, Interest and Income – The Aggregate Demand Curve

Unit 3 starts by examining the assets market and the demand and supply of money. It derives the LM curve, which is the money market equilibrium schedule, and then it examines equilibrium in the economy using the IS–LM model. From this model, the unit shows how the aggregate demand curve is derived.

Unit 4 Consumption, Investment and the Demand for Money

This unit is about the three underlying behavioural functions that underlie the IS–LM model. These are consumption, investment and money demand. The three major theories of consumption will be studied — the simple Keynesian model, the life-cycle hypothesis and the permanent income theory. The unit examines how these theories can be incorporated into the IS–LM model and their policy implications. Two theories of investment are also discussed — the capital stock adjustment model and the accelerator principle, and the unit also examines how firms determine their desired level of capital stock. Finally, the unit look at the factors which lie behind the demand for money functions.

Unit 5 Monetary and Fiscal Policy

The IS–LM model of a closed economy is used first to analyse the impact of monetary and fiscal policies which are the key instruments of government economic strategies. This unit looks then at the policy dilemmas of achieving both internal and external balance in an open economy, using the IS–LM–BP model, under regimes of fixed and floating exchange rates.

Unit 6 Aggregate Supply

Unemployment and Inflation

Unit 6 reintroduces the supply side of the economy in order to derive the aggregate supply curve. The aggregate supply and the demand model is used to show how a supply shock or a change in aggregate demand affects output and prices in the short and the long run. In the course of the unit, the concepts of the Phillips curve and of expectations, especially ‘rational expectations’, are introduced.

Unit 7 Aggregate Supply and the Labour Market

The different models of the demand and supply for labour underlying the aggregate supply curve are analysed in this unit. The classical model of the labour market is examined, and it is shown how the vertical aggregate supply curve is derived. The unit then considers why the Phillips curve relation between unemployment and wage inflation would result in an upward- sloping aggregate supply curve. This unit overall looks at four explanations of why the labour market can thus move away from the natural rate of unemployment in the short term. The unit concludes by returning to the long run vertical supply schedule to examine the long-run relation between money supply and inflation.

Unit 8 Long-run Aggregate Supply, Output and Economic Growth

Growth and the problems of implementing economic policy are covered in this unit. The unit looks at long-run growth of economic output and examines two models that have been developed to explain what determines long-term growth and why it can differ between countries. The last section considers the problems policymakers face in actually implementing the policy solutions derived from the economic models of IS–LM and AD–AS.

Tuition & Assessment

Macroeconomic Principles and Issues is assessed by two assignments, which are counted towards the final grade, and by a three-hour examination held in the autumn. Each assignment consists of compulsory questions or an essay topic, which should be answered, in total, in no more than 1500 words. The pass mark for each assignment is 40%; 70% or above is the equivalent of a distinction. Assignments count for 30% of the overall grade for this course, while the examination is worth 70% of the final assessment.