Macroeconomics

Contents CHAPTER I THE EMERGENCE OF MODERN MACROECONOMICS A. Basic Macro Models I. Mercantilism II. Physiocracy III. Classical Economics IV. Keynesian Approach V. Monetarist Approach B. New Macro Models I. New Classical Approach II. New Keynesian Approach III. Supply Side Approach IV. Real Business Cycle Approach CHAPTER 2 THE BASIC COMPONENTS OF MACROECONOMICS A. Macro Economic Concepts I. Economic Growth II. Unemployment III. Price Stability IV. Balance of Payments a. Current Account Balance b. Balance of Capital Account c. Balance of Financial Account V. Economic Fluctuation B. The Relationships Between Macroeconomic Quantities I. Economic Growth - Unemployment (Okun's Law) II. Inflation – Unemployment III. Inflation – Economic Growth CHAPTER 3 THE CONCEPT OF NATIONAL INCOME AND ITS MEASUREMENT METHODS A. The Concept and Measurement of Gross Domestic Product (GDP) I. The Elements of the Concept of Gross Domestic Product (GDP) a. Measurement of Gross Domestic Product (GDP) at Market Prices b. Measurement of Gross Domestic Product (GDP) by Final Goods and Services c. Measurement of GDP for the Goods and Services Produced in the Current Accounting Period d. Measurement of GDP for Goods and Services Produced within the Borders of the Country e. Measurement of GDP for a Specific Period of Time II. Measurement of GDP a. The Output Method b. The Expenditure Method c. The Income Method B. Other National Income Quantities I. The Concept of Gross National Product (GNP) II. Net Domestic Product (NDP) III. Domestic Income (DI) IV. National Income (NI) V. Personal Income (PI) VI. Disposable Income (DI) C. The Concept of National Income Per Capita as a Welfare Measure I. Exchange Rate Approach II. Purchasing Power Parity Approach D. The Concepts of Nominal and Real GDP E. Need for Revision of National Income Figures I. Subsistence Economy (Self-Consumption, Auto-consumption) II. Unlawful and Unrecorded Economic Activities III. Negative Externalities and Cases Where National Income Does Not Volumetrically Represent Social Welfare IV. Work - Leisure Difference CHAPTER 4 MEASUREMENT OF THE GENERAL LEVEL OF PRICES: INFLATION A. Measurement of the General Level of Prices I. GDP Deflator (Implicit Deflator) II. Consumer Price Index (CPI) a. Differences between GDP Deflator and CP III. Producers Price Index (PPI) B. Types and Sources of Inflation I. Demand-Pull Inflation II. Cost-Push Inflation III. Structural Inflation IV. Asset Inflation V. Moderate Inflation VI. High Rate of Inflation VII. Hyperinflation (Galloping Inflation) VIII. Obsidional Inflation IX. Taxflation X. Stagflation XI. Slumpflation XII. Deflation XIII. Reflation XIV. Disinflation XV. Core Inflation (Customized Consumer Price Index) C. Disadvantages Arising from Inflation I. Divergence of Expected Inflation from Actual Inflation II. The Case of Actual Inflation Equal to Expected Inflation a. Menu Costs b. Shoe Leather Costs c. The Noise Effect on Price Mechanism d. Tax Distortions CHAPTER 5 EMPLOYMENT – UNEMPLOYMENT A. The Concept of Unemployment I. The Rate of Unemployment II. The Rate of Employment III. Labor Participation Force B. The Types of Unemployment I. Hidden Unemployment (Disguized Unemployment) II. Involuntary Unemployment III. Voluntary Unemployment IV. Frictional Unmployment V. Structural Unemployment VI. Seasonal Unemployment VII. The Natural Rate of Unemployment VIII. Cyclical Unemployment IX. Technological Unemployment C. Factors Determining the Length of Unemployment D. Hysteresis Hypothesis and Insider-Outsider Theories E. The Costs of Unemployment F. Economic Discomfort Index (EDI) G. Labor Market: Sticky Wage and Unemployment H. The Trade-off Between Unemployment and Inflation I. Initial Phillips Curve II. Phillips Curve with Expectations CHAPTER 6 DETERMINATION OF INTEREST RATE AND EXCHANGE RATE A. The Concept of Interest Rate I. Nominal Interest Rate a. Yield Curve II. Real Interest Rate III. The Concept of Present Value IV. Interest Rate for Fixed Payments V. Yield to Maturity B. Exchange Rate I. Nominal Exchange Rate a. Nominal Effective Exchange Rate Index II. Real Exchange Rate III. Determination of the Equilibrium Level of the Exchange Rate a. Providing Long-Term Equilibrium of the Exchange Rate 1. Changes in the Long Run Equilibrium of the Exchange Rate 2. Purchasing Power Parity b. Providing Short-Term Equilibrium of the Exchange Rate 1. Interest Rate Parity Approach IV. Exchange Rate Regimes a. Managed Floating Regime b. Floating Within a Band Regime c. Sliding Band Regime d. Crawling Band Regime e. Crawling Peg Regime f. Adjustable Peg Regime g. Currency Board Regime h. Full Dolarization Regime CHAPTER 7 NATIONAL INCOME IDENTITIES A. Consumption and The Consumption Function I. Determinants of Consumption II. Consumption Function a. Marginal Propensity to Consume (MPC) b. Average Propensity to Consume (APC) B. Saving and the Saving Function I. Marginal Propensity to Save (MPS) II. Average Propensity to Save (APS) C. Investment and Investment Function I. Investment Function a. Marginal Propensity to Invest b. Average Propensity to Invest (API) II. Evaluation of Investment Projects and Present Value Criterion III. The Concept of Marginal Efficiency of Capital IV. The Accelerator Model and Its Workings a. Criticisms of the Accelerator Hypothesis V. Tobin’s Q Ratio CHAPTER 8 DETERMINING THE EQUILIBRIUM LEVEL OF NATIONAL INCOME A. Determining the Equilibrium Level of National Income in a Closed Economic Model I. Obtaining the Aggregate Planned Expenditure Equation in a Closed Economy Through Keynesian Cross II. Determining the Equilibrium Level of National Income According to Aggregate Supply-Aggregate Demand III. Determining the Equilibrium Level of National Income According to the SSaving-Investment Equation IV. Multiplier Mechanism a. Simple Multiplier b. Super Multiplier c. Conclusions for the Multiplier Mechanism d. Government Purchases Multiplier e. Transfer Payment Multiplier f. Tax Multiplier g. Balanced Budget Multiplier (Haavelmo Theorem) V. Relationships between National Income Identities in a Closed Economy VI. Savings Paradox VII. Automatic Stabilizers VIII. Deviations of Real GDP from the Full Employment Output Rate in the Keynesian Model a. Inflationary Deficit b. Deflationary Gap CHAPTER 9 ESTABLISHMENT OF MONEY, INTEREST AND NATIONAL INCOME EQILIBRIUM IN GOODS AND MONEY MARKETS: IS - LM MODEL (HICKS - HANSEN MODEL) A. Establishment of Equilibrium in the Goods Market I. Derivation of the IS Curve II. Obtaining the Equation of IS Curve III. Slope of the IS Curve IV. Shifts in the IS Curve V. Disequilibrium in the Goods Market B. Establishment of Equilibrium in the Money Market I. Derivation of LM Curve II. Obtaining the Equation of LM Curve III. Slope of the LM Curve IV. Shifts in the LM Curve V. Measurement of the Effect of Change in Money Supply on National Income VI. Disequilibrium in the Money Market C. Simultaneous Equilibrium in Goods and Money Markets I. Disequilibrium in Goods and Money Markets II. Shifts of IS and LM Curves and Macroeconomic Equilibrium CHAPTER 10 THE FUNCTIONING OF MONETARY AND FISCAL POLICIES 183 A. Monetary Policy I. Expansionary Monetary Policy II. Contractionary Monetary Policy III. Effectiveness of Monetary Policy a. Effectiveness of Monetary Policy: Slope of the IS Curve b. Effectiveness of Monetary Policy: Slope of the LM Curve 1. Obtaining the Monetary Policy Multiplier IV. Exceptional Forms of the LM Curve a. Liquidity Trap (h=∞) b. Money Demand is Completely Insensitive to the Interest Rate (h=0) c. Investments Completely Insensitive to Interest Rate (b=0) B. Fiscal Policy I. Expansionary Fiscal Policy II. Contractionary Fiscal Policy III. Effectiveness of Fiscal Policy a. Effectiveness of Fiscal Policy: Slope of the IS Curve 1. Obtaining the Fiscal Policy Multiplier IV. Exceptional Forms of the IS Curve a. Liquidity Trap (h=∞) b. Money Demand is Completely Insensitive to the Interest Rate (h=0) c. Investments Completely Insensitive to Interest Rate (b=0) C. The Combination of Expansionary Monetary and Expansionary Fiscal Policies (Policy Mix) CHAPTER 11 AGGREGATE DEMAND – AGGREGATE SUPPLY MODEL A. Aggregate Demand (AD) I. Derivation of Aggregate Demand Curve (AD) a. Deriving the Aggregate Demand Curve (AD) from the Simultaneous Equilibrium in Goods and Money Markets b. Deriving the Aggregate Demand Curve (AD) from the Expenditure Principle in the Basic Keynesian Model II. The Slope of the Aggregate Demand Curve (AD) a. Obtaining the Equation of AD Curve III. Shifts in the Aggregate Demand AD Curve a. The Impact of the Shift in the IS Curve on the AD Curve b. The Impact of the Shift in the LM Curve on the AD Curve B. Aggregate Supply (AS) I. The Classical Aggregate Supply Curve II. The Keynesian Aggregate Supply Curve III. Short Run Aggregate Supply Curve a. Rigid (Sticky) Wage and Price Model b. Causes of Wage and Price Rigidities in the Short Run 1. Coordination Failures 2. Menu Costs and Externalities 3. Efficient Wage Theory 4. Long-term Contracts (Agreements) 5. Uncoordination in Prices 6. Insider - Outsider Model c. Misperception Models 1. Worker-Misperception Model 2. Imperfect Information Model d. Lucas Critique IV. Short and Long Run Aggregate Supply Curves V. Supply Shocks a. Negative Supply Shocks b. Positive Supply Shocks VI. Long Run Equilibrium in Aggregate Demand - Aggregate Supply Model CHAPTER 12 OTHER MODELS BASED ON CLASSICAL AND KEYNESIAN MACROECONOMIC MODELS A. The Monetarist Approach B. New Classical Approach C. New Keynesian Approach CHAPTER 13 AN OPEN ECONOMY MODEL A. Import B. Export C. Aggregate Planned Expenditure Equation in an Open Economy Model I. Aggregate Planned Expenditure Curve in an Open Economy Model II. National Income Equilibrium in an Open Economy III. National Income Equilibrium Level According to the Savings-Investment Equation IV. Relationships between National Income Identities in an Open Economy V. Multiplier Coefficient in an Open Economy VI. Devaluation (Depreciation of the National Currency) a. Marshall - Lerner Condition b. J Curve CHAPTER 14 SIMULTANEOUS EQUILIBRIUM IN COMMODITY, MONEY AND FOREIGN EXCHANGE MARKETS: MUNDELL – FLEMING MODEL (IS – LM – BP MODEL) A. Goods Market Equilibrium in an Open Economy Model I. Equilibrium in the Goods Market: Obtaining the IS Curve II. The Equation of the IS Curve III. Shifts in IS Curve B. Equilibrium in the Foreign Exchange Market I. Obtaining BP Curve II. Equation of BP Curve III. Slope of BP Curve IV. Shifts in BP Curve V. Changes in Real Exchange Rate and Real National Income VI. Disequilibrium in the Foreign Exchange Market C. Simultaneous Equilibrium in Goods, Money and Foreign Exchange Markets: Mundell-Fleming Model (IS - LM - BP Model) I. Equilibrium in the Goods-Money-Exchange Market under Perfect Capital Mobility (IS-LM-BP Model) a. Effectiveness of Fiscal Policy under Flexible Exchange Rate Regime b. Effectiveness of Fiscal Policy Under a Fixed Exchange Rate Regime c. Effectiveness of Monetary Policy Under Flexible Exchange Rate Regime d. Effectiveness of Monetary Policy Under a Fixed Exchange Rate Regime II. Equilibrium in the Goods-Money-Exchange Market under Partial Capital Mobility (IS-LM-BP Model) a. Effectiveness of Fiscal Policy under Flexible Exchange Rate Regime b. Effectiveness of Fiscal Policy Under a Fixed Exchange Rate Regime c. Effectiveness of Monetary Policy Under Flexible Exchange Rate Regime d. Effectiveness of Monetary Policy Under a Fixed Exchange Rate Regime III. Equilibrium in the Goods-Currency-Exchange Market under Zero Capital Mobility (IS-LM-BP Model) a. Effectiveness of Fiscal Policy under Flexible Exchange Rate Regime b. Effectiveness of Fiscal Policy Under a Fixed Exchange Rate Regime c. Effectiveness of Monetary Policy Under Flexible Exchange Rate Regime d. Effectiveness of Monetary Policy Under a Fixed Exchange Rate Regime D. The Impossible Trinity (Trilemma) E. Exchange Rate Overshooting CHAPTER 15 STRUCTURING THE MACROECONOMIC ARCHITECTURE ON MICROECONOMIC BASIS A. Absolute Income Hypothesis B. Relative Income Hypothesis C. Intertemporal Consumption Choice D. Life-Cycle Income Hypothesis E. Permanent Income Hypothesis F. Random Walk Model G. Instant Gratification CHAPTER 16 THE CONCEPT OF MONEY AND MONETARY POLICIES A. Basic Theoretical Monetary Concepts I. Functions of Money a. The Function of Money as a Medium of Exchange b. The Function of Money as a Common Value Measure (Unit of Account) c. The Function of Money as a Store of Value (Savings) d. The Function of Money as an Economic Policy Instrument II. Types of Money B. Money Aggregates and the Concept of Money Supply I. Money Supply Determination Process a. The Process of Creating Dematerialized Money (Bank Money) 1. How Banks Hold Reserves and Its Economic Impact 2. Cash Holding Preference of the Non-Banking Sector II. Monetary Base (Base Money) C. Monetary Policy I. Traditional Monetary Policy Instruments a. Open Market Operations 1. The Implications of Open Market Operations for the Economy 2. Classification of Open Market Operations i. Open Market Operations According to the Reasons for Its Emergence ii. Types of Open Market Operations 3. Advantages and Disadvantages of Open Market Operations b. Rediscount Policy 1. Types of Rediscount Transactions 2. Accounting of Rediscount Credits 3. The Impact of Changes in Rediscont Credits on the Economy 4. Advantages and Disadvantages of the Rediscount Policy 5. Reformist Approaches to Rediscount Policy 6. Required Reserve Ratios (Deposit Reserve Ratios) i. Impact of the Change in the Reserve Requirement Ratio on the Economy ii. Advantages and Disadvantages of the Reserve Requirement Policy II. Unconventional (Modern) Monetary Policy Instruments a. Quantitative Easing b. Credit Expansion c. Interest Commitment 1. Forward Guidence i. Open-ended Forward Guidance ii. Date-Contingent Guidance iii. State-Contingent Guidance d. Updated Restatement of the Reserve Requirement Ratio 1. A Flexible Monetary Policy Implementation: Reserve Options Mechanism (ROM) e. Interest Rate Corridor (IRC) D. Money Demand 381 I. Classical Money Demand Theory: Quantity Theory of Money a. Fisher's Quantity Theory of Money b. Quantity Theory of Money: Cambridge Approach c. Keynesian Theory of Money Demand 1. Theory of Liquidity Preference i. Transactions Demand For Money ii. Precautionary Demand for Money iii. Speculative Demand For Money 2. Baumol - Tobin Theory of Demand for Money 3. Tobin's Risk Money Demand Model d. Modern Quantity Theory of Money e. Overlapping Generations Model CHAPTER 17 PUBLIC DEBT AND BUDGET CONCEPT A. Budget Concept I. Concepts of Full Employment and Cyclical Budget Deficit II. Economic Dimension of Budget Deficit or Surplus a. Pessimistic - Traditional Approach b. Optimistic - Ricardian Equivalence Theorem B. Supply-Side Economic Approach I. Laffer Curve C. Financing Budget Deficits D. Inflation - Seigniorage and Budget Deficits References