Macroeconomic Theory and Policy (METP)

VEDICA

Faculty:

Dr. Vijay P. Ojha

Email : vpojha@gmail.com
mobile : 9871256407

Number of hours:
24 hours (12 sessions * 2 hours each)

Duration of the course:

Sep. 2019 – Oct. 2019

Course Background and Objectives:

It is well known that a business firm is a microeconomic agent placed in a macroeconomic

environment, and the two are in a perpetual interaction with each other. For a manager, it is imperative
that he develops an understanding of how the macro-economy functions and what bearing it has on
managerial decision-making.

With increasing globalization, the periodicity and unpredictability of business cycles has
increased many times. With increasing globalization, therefore, the managerial challenge has increased
manifold. The manager today cannot strategize merely on the basis of firm-specific parameters, but has
to always take into consideration the fluid situation the firm is placed in. The very concept of problems
faced by the firm is nowadays, a relative one. A problem faced by a firm during a recession, may turn
out to be an opportunity in times of inflation.

Most economies in the world today are market-driven economies. Even China, the erstwhile
bastion of communism is now a market-driven economy. However, all market driven economies, even
the most capitalist ones, have a large governmental presence, with the government’s macroeconomic

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policy impinging on all economic agents..

The course in macroeconomic theory and policies analyses the interdependence of the product
market and the money market, as also among other sectors of an economy, and more importantly, the
role of the government in reducing unemployment and increasing income of the nation through various
policy measures.
In this course, the objectives, therefore, are to :

(i) Inculcate in students an understanding of the fundamental concepts of macroeconomics

and sectoral inter-linkages in an economy,
(ii) Develop an understanding of the implications of government policies in terms of resulting
economic performances
(iii) Develop in students skills to analyze and apply the understanding of macroeconomic
linkages to real-life business conditions
(iv) Develop capacity in students to analyze and understand the macroeconomic environment
that impact upon businesses and accordingly identify growth opportunities.

Pedagogy:

Fundamental concepts of macroeconomic theories will be explained with the help of as many numerical
examples as possible. In order to establish the relevance of these theories and emphasize their
importance, examples of macroeconomic developmental processes of selected countries, as also certain
crisis situations in the world and their respective stabilization policies will be explained, and discussed.
Latest reading material including case studies for a fruitful discussion on global economic trends and
dimensions of the global economic crisis have been incorporated in the reading list. Cases, editorials and
opinion pieces of renowned authors will be selected from prestigious economic and business journals
and newspapers for a discussion to ensure that the acquired theoretical knowledge is eventually adapted
for practice.

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Learning Outcomes :

After the completion of the course, the management graduates would have:

(a) Capability to analyze and understand the macroeconomic inter-linkages and thereby apply such
conceptual knowledge to understand real-life economic conditions.

(b) Understanding of the macroeconomic environment, particularly, the government policies, faced by
businesses and the impact thereupon

(c) Demonstrative aptitude for innovation to overcome constraints in the way of growth opportunities

Evaluation :

The learning outcomes outlined above will be specifically evaluated through a three-component
evaluation scheme as follows :

(1) Quiz (best 2 out of 3 x 10 marks each)  = 20 marks

(2) End Term  Examination             = 60 marks
(4) Class Participation = 20 marks
Total                               = 100 marks

PREREQUISITE

The student for this course is expected to get familiar with the material covered in the following
book even before the course starts :

(1) Nattrass, Nicoli, and., G. Visakh Verma (2014) , Macroeconomics Simplified :

Understanding Neo-Classical and Macroeconomic Systems, Sage India , New Delhi

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Suggested Books :

Text Book:

(1) Dornbusch, R and Stanley Fischer and R Startz (DSFRS), (2015, eleventh edition) : “Macroeconomics”,

Tata McGraw-Hill,

Reference Books:

(2) Roy, Shyamal (2012, 2nd Edition), Macroeconomic Policy Environment, Tata McGraw Hill

(RS, 2012) : All Chapters, especially, Chapter 7 , section 7.2.1 : Global Economic Trends

(Pages 288 to 315.)

(3) Deodhar, Satish, Y (2012) , Day to Day Economics, IIM Ahmedabad Economics, Random
House, India

(4) Rakshit, Mihir (2010), Macroeconomics of Post-Reform India, Oxford University Press.

(5) Ray, Partha (2013), Monetary Policy, Oxford University Press.

(6) Sikdar, S. (2013) , Capital Flows and Exchange Rate Management, Oxford University Press.

(7) Reddy, Y.V., N. Valluri, & P. Ray (2014), Financial and Fiscal Policies : Crisis and New
Realities , Oxford University Press.

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Session Plan :

Sessio Broad Topics to be Covered Readings

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1 Concept & Measurement of GDP, Circular Flow of Income, DSFRS, Ch. 1

Basic Problems in Macroeconomics

2 Introduction; Utility of Macroeconomics for Business; Some DSFRS, Ch. 1

basic concepts like GDP, inflation, rate of interest, Phillips
Curve, Business Cycles, Fiscal & Monetary Policies, etc.

3 National Income Accounting; Three Approaches of Measuring DSFRS, Ch. 2

GDP; Numerical Examples

3 Three Identities: S = I, Y = C + I + G, and S = I + G + TR – DSFRS, Ch. 2

TA + NX,

4 Income and Spending: Multiplier; Incorporate Government;

DSFRS, Ch. 9
4 Income and Spending: Effects of Changes in Taxes;
DSFRS, Ch.9
Autonomous Spending on Equilibrium Income; Budget
Surplus (Deficit); Balanced Budget Multiplier; Numerical
Examples
5 Money, Interest and Income: Goods Market Equilibrium; DSFRS, Ch.
Deriving IS curve; Slope of IS curve; Position of IS curve; 10
Disequilibrium Position away from IS line

5 Asset Market: Derivation of LM curve; Slope of LM curve; DSFRS, Ch.10

Position of LM curve; Disequilibrium Positions away from
LM curve

5 IS-LM Framework: Super Imposition of IS and LM curve to DSFRS, Ch.10

derive equilibrium; Adjustments towards equilibrium;
Numerical Examples

6 Monetary and Fiscal Policies; Impacts of Shift of IS and LM DSFRS, Ch.11

on equilibrium income; Crowding-out effect; Liquidity Trap;
Numerical Examples

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6 Monetary and Fiscal Policies; Impacts of Shift of IS and LM DSFRS, Ch.11
on equilibrium income; Crowding-out effect; Liquidity Trap;
Numerical Examples

7 Numerical Examples
DSFRS,
Ch.,10, 11
8 International Linkages: Balance of Payments (BoP); Exchange DSFRS, Ch.12
Rate; Fixed vs. Flexible Exchange Rate policies and its
Implications; Nominal and Real Exchange Rate

9 International Linkages: Define Net Exports (NX); Goods

Market Equilibrium after incorporating NX; Policy Dilemma DSFRS, Ch.12
in case of Unemployment and Trade Deficit; International
Capital Market; Perfect Capital Mobility; BoPs equation and
graph
10 Mundell-Fleming Model and Beggar-Thy-Neighbour Policy; DSFRS, Ch.12
Numerical Examples

11 Define and derive aggregate (AD) curve in P-Y plane; DSFRS, Ch.5
The slope and position of the AD curve; Impact of Fiscal
Policy on AD curve; Impact of Monetary Policy on AD curve
11 Define and derive aggregate supply (AS) curve in P-Y plane;
The slope and position of the AS curve; Impact of favorable
and adverse supply shocks on the AS curve
12 Inflation Management
(RS, 2012)