Intermediate Macroeconomics module.docx - Macroeconomics II...

Macroeconomics II
BCM-222
Mulungushi University
Institute of Distance Education
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©2010 Mulungushi University
©2010 Mulungushi University
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PREFACE
Macroeconomics II is an intermediate macroeconomics course that follows the first introductory
course, Macroeconomics I. The overall goal of this course is to provide methodological tools to
understand the workings of the overall economy through macroeconomic theories,
macroeconomic models, and macroeconomic policies. In this regard, the three major markets;
goods & services market, inputs (labor) market, and financial market are helpful to understand
the economy at its big picture. Macroeconomic theories from major economic school of thoughts
are the basis for this module. We will extensively use Classical Economic Theories and
Keynesian Economic Theories. We study the activities of the macroeconomy entirely on models
with microfoundations like consumer’s preference theory and firm’s production technology.
Macroeconomic studies emphasize decisions with time dimensions and we need to study the
economy in its short-run, medium-run, and long-run dimensions. Major macroeconomic policies
will be used throughout this material to see their impact on economic problems, economic
fluctuations, economic growth and so forth. Understanding the theoretical interface of policy
tools, policy targets, and policy goals are crucial in this course. In short, the concern in your first
macroeconomics course, macroeconomics I, was with what macroeconomic phenomenon but in
Macroeconomics II the emphasis will be on why.
Table of Contents
Unit One ............................................................................................................................................................. 5
Closed Economy Macroeconomics ............................................................................................................................. 5
1.1 Revision on Aggregate Demand (AD) and Aggregate Supply (AS) ................................................................... 5
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1.2 The Goods Market: The IS Curve .................................................................................................................... 9
1.3 The Money Market: The LM Curve ................................................................................................................ 19
1.4 The Goods and Money Markets: IS-LM Model .............................................................................................. 21
1.5 Monetary and Fiscal Policies in the IS – LM model ........................................................................................ 23
Unit Two ........................................................................................................................................................... 31
Open Economy Macroeconomics ............................................................................................................................. 31
2.1 International flows of Capital and Good ........................................................................................................ 31
2.2 Balance of Payments and Exchange Rates ..................................................................................................... 33
2.3 The Mundell – Fleming model: Perfect capital mobility with fixed exchange rate ........................................ 39
2.4 The Mundell – Fleming model: Perfect capital mobility with floating exchange rate ................................... 41
Unit Three ......................................................................................................................................................... 46
Labor Market ............................................................................................................................................................ 46
3.1 Supply and demand in the labor market ....................................................................................................... 46
3.2 Unemployment .............................................................................................................................................. 47
3.3 The Philips curve: The short-run trade-off between inflation and unemployment ....................................... 53
3.4 Wages, Prices and Unemployment ................................................................................................................ 55
Unit Four ........................................................................................................................................................... 61
Growth Models: The Economy in the Long-run ........................................................................................................ 61
4.1 Saving, Capital Accumulation and Output ..................................................................................................... 61
4.2 Growth in the Capital Stock and the Steady State .........................................................................................