EC3102 Macroeconomics Analysis II
AY2013/2014, Semester 2, Lecturer: Ho Kong Weng
Course Coverage:
1. Wage & Price Determination
2. Output, Unemployment & Inflation
3. The Money Market
4. Expectations & Financial Markets
5. Consumption Theories
6. Investment Theories
7. Expectations, Output & Policies
8. Output & Exchange Rates
9. Exchange Rate Regimes
10. Macroeconomic Developments & Global Crisis
This intermediate level macroeconomic module delves into the micro-foundations of the closed economy examined in EC2102 in the first half, and introduces open economy analysis in the second half. The focus of the module is three-tiered, starting from the microeconomic analysis of individual economic variables of the AD-AS framework, then separating the interactions of the variables into the Investment-Saving(IS) relation in the output market (the real side), the Liquidity Preference-Money Supply(LM) relation in the asset/money market (the nominal side), the Wage-Setting(WS) and Price-Setting(PS) relations in the labour market. Finally, the IS-LM interaction will translate into the AD curve while the WS-PS interactions will yield the AS curve. Impact of changing fiscal policies and monetary policies will be examined in both AD-AS framework and IS-LM model, so the mechanism of change and the transmitting pathway within and between AD-AS and IS-LM short run, and the adjustment to its long run equilibrium are of utmost importance for the whole course.
The module opened with the mathematical derivation of the AS curve from interactions in the labour market. In the labour market, workers will bargain for highest possible wage, mathematically determined by the expected price level, unemployment rates and the catch-all ability variable; Firms, in turn, will set prices according to the market wage. The price setting relations take different forms depending on context and assumptions, but is often simplified a constant markup above the market wage. For example: P = (1+m)W, where P is the price of goods, m is the markup determined by the firm and W is the nominal market wage. The equilibria of the wage and price setting relations will yield a set of points that form the AS function, relating price and output positively. Intuitively, given constant markup, an increase in demand of goods leads to increased wage and hence higher price.
The AD curve can be derived differently depending on the micro-foundations it rely upon. In this module, we often use Y to represent the supply of goods and Z for the demand of goods, where Z = C+I+G in a closed economy. Consumption function may vary according to theories, but most commonly determined using Fisher's Intertemporal Model, which is the opening topic of EC3101. Sometimes, permanent income hypothesis or life cycle hypothesis are used instead. Investment theories can be based on the Neoclassical Model, Tobin's q or residential/inventory investments. Government expenditure and taxes are often exogenous, but effect of expectations of future government expenditure, taxes and interest rate movements will also shift the current AD curve.
The Phillips Curve can be derived from the AS relations and the Policy Curve can be derived from the AD relation and monetary growth equation. This will give the third and last macroeconomic analysis framework for EC3102, which focus on the tradeoff between unemployment and inflation rates as a consequence of change in policies.
The last part of the course will introduce exchange rate into the IS and LM relations, forming the new AD curve of the open economy. The effect of changes in fiscal and monetary polices will then be examined under two different exchange rate regimes: fixed and flexible. The module concludes with an overview of recent developments in macroeconomics and a brief touch on liquidity trap using the 2008 global crisis as case study.
On the whole, this module gives a complete picture of the circular flow of income and comprehensive theoretical framework of analysis from microeconomics to IS-LM to AD-AS, hence providing sound understanding of macroeconomics. However, time dimension of the analysis is still rather vague and will be more comprehensively analyzed in the honours macroeconomic module, EC4102. This module is offered closed-book basis this semester, so it's a little tougher for us than those who took it in the previous semester, so check and think twice before taking it.
Workload: Moderate
Difficulty: Moderate
Grade: B+
Course Coverage:
1. Wage & Price Determination
2. Output, Unemployment & Inflation
3. The Money Market
4. Expectations & Financial Markets
5. Consumption Theories
6. Investment Theories
7. Expectations, Output & Policies
8. Output & Exchange Rates
9. Exchange Rate Regimes
10. Macroeconomic Developments & Global Crisis
This intermediate level macroeconomic module delves into the micro-foundations of the closed economy examined in EC2102 in the first half, and introduces open economy analysis in the second half. The focus of the module is three-tiered, starting from the microeconomic analysis of individual economic variables of the AD-AS framework, then separating the interactions of the variables into the Investment-Saving(IS) relation in the output market (the real side), the Liquidity Preference-Money Supply(LM) relation in the asset/money market (the nominal side), the Wage-Setting(WS) and Price-Setting(PS) relations in the labour market. Finally, the IS-LM interaction will translate into the AD curve while the WS-PS interactions will yield the AS curve. Impact of changing fiscal policies and monetary policies will be examined in both AD-AS framework and IS-LM model, so the mechanism of change and the transmitting pathway within and between AD-AS and IS-LM short run, and the adjustment to its long run equilibrium are of utmost importance for the whole course.
The module opened with the mathematical derivation of the AS curve from interactions in the labour market. In the labour market, workers will bargain for highest possible wage, mathematically determined by the expected price level, unemployment rates and the catch-all ability variable; Firms, in turn, will set prices according to the market wage. The price setting relations take different forms depending on context and assumptions, but is often simplified a constant markup above the market wage. For example: P = (1+m)W, where P is the price of goods, m is the markup determined by the firm and W is the nominal market wage. The equilibria of the wage and price setting relations will yield a set of points that form the AS function, relating price and output positively. Intuitively, given constant markup, an increase in demand of goods leads to increased wage and hence higher price.
The AD curve can be derived differently depending on the micro-foundations it rely upon. In this module, we often use Y to represent the supply of goods and Z for the demand of goods, where Z = C+I+G in a closed economy. Consumption function may vary according to theories, but most commonly determined using Fisher's Intertemporal Model, which is the opening topic of EC3101. Sometimes, permanent income hypothesis or life cycle hypothesis are used instead. Investment theories can be based on the Neoclassical Model, Tobin's q or residential/inventory investments. Government expenditure and taxes are often exogenous, but effect of expectations of future government expenditure, taxes and interest rate movements will also shift the current AD curve.
The Phillips Curve can be derived from the AS relations and the Policy Curve can be derived from the AD relation and monetary growth equation. This will give the third and last macroeconomic analysis framework for EC3102, which focus on the tradeoff between unemployment and inflation rates as a consequence of change in policies.
The last part of the course will introduce exchange rate into the IS and LM relations, forming the new AD curve of the open economy. The effect of changes in fiscal and monetary polices will then be examined under two different exchange rate regimes: fixed and flexible. The module concludes with an overview of recent developments in macroeconomics and a brief touch on liquidity trap using the 2008 global crisis as case study.
On the whole, this module gives a complete picture of the circular flow of income and comprehensive theoretical framework of analysis from microeconomics to IS-LM to AD-AS, hence providing sound understanding of macroeconomics. However, time dimension of the analysis is still rather vague and will be more comprehensively analyzed in the honours macroeconomic module, EC4102. This module is offered closed-book basis this semester, so it's a little tougher for us than those who took it in the previous semester, so check and think twice before taking it.
Workload: Moderate
Difficulty: Moderate
Grade: B+