Macro Economics- Mumbai University

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M.A.PART - I
ECONOMIC PAPER - I
MACRO ECONOMICS
1. Basic Macroeconomics
Income and spending – The consumption function – Savings and investment – The Keynesian Multiplier – The budget – Balanced budget : theorem and multipliers. Money, interest and income – The IS-LM model – adjustment towards equilibrium – Monetary policy, the transmission mechanism and the liquidity trap –

Basic elements of growth theory : Neoclassical and
endogenous.
2. Behavioural foundations of Macroeconomics
Consumption and savings – Consumption under certainty : The life-cycle and permanent income hypotheses – Consumption
under uncertainty : The random walk approach – Interest rate and savings. – Money stock determination - The money
multiplier – instruments of monetary control – Money stock and interest rate targeting.
3. Dynamic macroeconomics
The dynamic aggregate supply curve – The long-run supply
curve – short and long run Phillips curves – Strategies to reduce inflation, money, deficit and inflation – The Fisher equation – Deficits and money growth – The inflation tax, interest rates, deficit and debt – The instability of debt financing – Structuralist models of inflation and growth.

4. Open Economy Macroeconomics
The balance of payments and exchange rates – The current
account and market equilibrium – The Mundell-Fleming models : Fixed and flexible exchange rates. – The automatic adjustment process – Expenditure switching / reducing policies – Exchange rate changes and trade adjustments : Empirical issues – the monetary approach to the balance of payments – The PolakIMF model – Flexible exchange rates. Money and prices – exchange rate overshooting – Interest differentials and

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exchange rate expectations – Exchange rate fluctuations and policy intervention.
5. The New Macroeconomics
Rational expectations – anticipated and unanticipated shocks – Policy irrelevance : The Lucas Critique. Real business cycle theory – Propagation mechanism – The persistence of output fluctuations – The random walk of GDP : Nelson and Plosser. Microeconomic foundations of incomplete nominal adjustment – New Keynesian models of price stickiness : The Mankiw model

– Co-ordination failure models. – The efficiency-wage modelImplicit contracts-Insider – outsider models – Hysteresis 6. Macroeconomic Policy Issues
Specification of monetary policy – Guidelines for fiscal
adjustment. Fiscal policy rules – Exchange rate policies – Debt management policies – Policy coordination problems. Some
macroeconomic policy issues. Targets, indicators and
instruments – Activist policy. Lags in the effects of policy – Expectations, uncertainty and policy – Gradualism versus shock therapy. The role of credibility – Rules versus discretion – The dynamic inconsistency problem. The political economy of

stabilization and adjustment.


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Module 1
BASIC MACROECONOMICS
Unit Structure
1.0
1.1
1.2
1.3
1.4

Objectives
Introduction of consumption function
The concept of consumption function
Properties or technical attributes of consumption function
Introduction of savings and investment

1.5

Meaning of saving and saving function or propensity to save

1.6
1.7
1.8
1.9
1.10

Technical attributes of propensity to save
Meaning and importance of investment
Determinants of investment
The Keynesian multiplier
Questions

1.0 OBJECTIVES
After having studied this unit, you should be able
To Understand the fundamentals of Macro Economics
To Know the nature of Income and Spending
To understand the most basic model of aggregate demand,
spending determines - output and income, but output and
income also determine spending. In particular, consumption
depends on income, but increased consumption increases
aggregate demand and therefore output.
Increases in autonomous spending increase output more than
one for one. In other words, there is a multiplier effect. The size of the multiplier depends on the marginal propensity...
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