Fast Download speed and ads Free! Revised topics in this textbook cover immigrants' wages, geography affecting income, cyclical income changes, credit limits and borrowing. Dozens of models help to illustrate numerous disagreements over answers to research questions. Introducing Advanced Macroeconomics: Growth and Business Cycles, 2nd edition provides students with a thorough understanding of fundamental models in macroeconomics and introduces them to methods of formal macroeconomic analysis.
Split into two sections, the first half of the book focuses on macroeconomics for the long run, introducing and developing basic models of growth and structural unemployment.
The second half of the book deals with the economy in the short run, focusing on the explanation of business fluctuations. This new edition retains the popular pitch and level established in the 1st edition and continues to bridge the gap between intermediate macroeconomics texts and more advanced textbooks.
This is a newly revised second edition of a key macroeconomic textbook. After explaining the historical development of the subject, they show how rational expectations are handled in macro models. The importance of structural micro-founded models is explained, with key examples of such structural models examined in detail and with extensions to the open economy; policy implications are highlighted throughout. Methods for testing these models against macro data behaviour are explained, detailing the latest evidence on these models' success.
This evaluation report assesses research produced at the IMF between and , focusing on the relevance and utilization of research to member country authorities, IMF staff, and other stakeholders. The report also examines the technical quality and management of research and offers recommendations for enhancing the relevance of research, improving the technical quality of analytical work, promoting openness to alternative perspectives, and improving the management of research.
Since the rational expectations revolution in macroeconomics, the subject has evolved in a major way, adopting the principles behind the revolution and building on them in spectacular fashion. In this thoroughly revised and updated second edition, the authors provide a complete and up-to-date textbook designed to guide students through the mathematical and conceptual maze of modern macroeconomics.
By explaining the basics of each topic, and providing the solid grounding for students to tackle more complex and detailed material, this textbook will be an invaluable resource for both postgraduate and upper level undergraduate students of macroeconomics alike. Trying to summarize the essentials of macroeconomic theory in the wake of the financial crisis that has shaken not only Western economies but also the macroeconomic profession is no easy task.
In particular, the notion that markets are self-correcting and always in equilibrium appears to have taken a heavy blow. However, the jury is still out on which areas should be considered as failures and what which constitute the future of research. The overall aim of this text is to provide a compact overview of the contributions that are currently regarded as the most important for macroeconomic analysis and to equip the reader with the essential theoretical knowledge that all advanced students in macroeconomics should be acquainted with.
The result is a compact text that should act as the perfect complement to further study of macroeconomics: an introduction to the key concepts discussed in the journal literature and suitable for students from upper undergraduate level through to PhD courses. Foreword by Guido Cozzi University of St. Gallen, Switzerland Advanced Macroeconomics covers selected topics in advanced macroeconomics at undergraduate level and bridges the gap between intermediate macroeconomics for undergraduates and advanced macroeconomics for postgraduates.
By building on materials in intermediate macroeconomics textbooks and covering the mathematics of some classic dynamic general-equilibrium models, this book will give undergraduate students a firm appreciation of modern developments in macroeconomics.
This book examines the implications of government policies such as fiscal policy, monetary policy and innovation policy and devotes several chapters to economic growth, covering the ideas for which Paul Romer was awarded the Nobel Memorial Prize in Economic Sciences in Dynamic general equilibrium is the foundation of modern macroeconomics. Chapter 1 begins with a simple static model to demonstrate the concept of general equilibrium. Chapters 2 to 4 cover the neoclassical growth model, exploring the effects of exogenous changes in technology: an important source of business cycle fluctuations.
Chapters 5 to 7 use the neoclassical growth model to explore the effects of fiscal policy instruments such as government spending, labour income tax and capital income tax. Chapter 8 develops a simple New Keynesian model to analyse the effects of monetary policy.
It means that money can be converted into different forms of notes. A five-hundred-rupee note is easily exchanged for fifty ten-rupee notes. It can be used to pay an actual amount for goods and services purchased.
Such divisibility facilitates commerce and trade. Easy divisibility of money is an important feature of money. Uniformity Money is uniform in that it has a consistent shape, size, color, etc. Money can be used in all transactions because it is uniform.
Money in the form of currency is available to all the people. Uniform money helps people identify money within a short period of time. The money printed in the past and present are in the same form.
If old coins or notes are going out of circulation, or undergo any change in size or shape, the people will be so informed in the newspapers and other media in a timely manner. Recognizability People can easily recognize and identify money and use money when needed. Even small children recognize money. Money is used in regular transactions all over the world. Scarcity Money is scarce and not easily available.
In order to get money, a person has to take on debt, borrow or work for it. Farmers have to produce commodities in their farms. Industries must produce goods. Money cannot be transferred easily from one person to another. The scarcity factor forces money to be used wisely because it has alternative uses. If money were cheap and too easily available, the monetary authority will decide to reduce its supply through monetary policies and instruments.
Stability Money provides stability for individuals as well as economies. Scarce money can be saved and used when required. During economic crises and recessions, money needs to be used wisely so the crisis can be converted into an opportunity.
More stability is expected with more money. Therefore, all people like to earn money and store it for future needs. Medium of exchange Money is used in all transactions. The value of all commodities and services are converted into money. These days, commodities are no longer exchanged for commodities but money is paid for each commodity. All human beings carry cash and pay for the commodity with money. Money is used as a medium of exchange. Unit of account Money is used as a medium of exchange.
It is a scarce commodity. Therefore, money has to be accountable. A detail record is kept of moneys paid and moneys received. Receipts of money are added into the credit account while payments are added into the debit account. The account summary of debit and credit is regularly available for all transactions. The debits are paid from the credits and the balance is maintained. Money is used for accounting purposes. How much your employer will pay you in wages, how much you owe the bank, how much a firm has earned and how much a bond is worth are all recorded in some unit of account Gordon Store of value Money, as a medium of exchange, is stored to pay for goods and services.
Money is easily stored either in the house or in the bank. The value of money stored may change with inflation. If an interest rate adjustment does not take place, then the money value remains the same for a long period. Most of the time, money is stored in the form of savings or wealth. Such wealth is often used in the future. Standard of deferred payment Money has an important feature that it is a standard of deferred payment.
Money can be paid in the future. A lot of people buy goods and services now but pay for them in the future. The demand for money is a function of price, interest rates, and monetary base. But money demanded for transaction purposes is interest inelastic. The demand for money approaches are divided into the following: 1.
The classical approach The classical economists have given their views on the demand for money. Both the demand for money and the velocity of circulation of money decide the price level and volume of transactions. If the price level is higher than the volume of transactions, the stock of money and the velocity of circulation decline. The supply of money and the velocity of circulation of money decide the price and volume of transaction.
But this is not always true. The demand for money is decided by the people. People use money as a precaution. We will turn your CV into an opportunity of a lifetime Do you like cars?
The Cambridge approach The demand for money is decided by the price level and the actual holding of cash balances and nominal money. High powered money is defined as the currency and bank reserves. The money supply influences the currency and the bank reserves. A contractionary monetary policy affects how much money is made available to the people. Money multiplier is therefore defined as the ratio of the stock of money to high powered money.
It is presented in Figure 2. The money stock is a broad concept and it consists of currency and reserves. It also includes the deposits. The monetary authority regularly decides on the total money supply in economy. The traditional view favors transaction theories; it ultimately leads to a narrow measure of the money stock. Therefore, money has no fixed measure and is measured as a matter of judgment or preference.
There are different financial and real assets which can be arranged in descending order with reference to liquidity. The currency and demand deposits are the most liquid of assets, and make up money.
Time deposits and government bonds are liquid assets but they cannot be converted into money without incurring some costs. At the bottom of the liquidity continuum lie automobiles, real estate and the like; these can be liquidated at short notice only at a substantial cost. The monetary authorities all over the world provide alternative measures of money, leaving the choice to individual researchers and to the dictates of specific situations.
At present, most of the central banks classify the monetary aggregates which are the functional characteristics of monetary assets.
The major difference between M1, M2, M3 and M4 is based on the institutional differentiation between banks and the post office savings organization. These liabilities are created in the process of generating matching assets by the central bank. Liabilities Assets 1. Currency with general public 1. Net RBI credit to government centre to states 2. Bank reserves 2.
Net non-monetary liabilities 3. RBI credit to commercial sector 4. Net foreign exchange assets of RBI 5. But money supply should be in proportion to the price level.
The interest rate and the money supply target It depends on the monetary authority to target the money supply or the interest rate. If we assume that the money supply is a target variable then figure 2. The figure also explains the money stock equilibrium with the interest rate.
An increase in the stock of money will reduce the interest rate. The money supply curve shifts to MS1 from MS. The new equilibrium is adjusted at E1. The interest rate falls from i to i1. This is the money supply change effect on the interest rate.
This is known as growth targeting and national income forecasting. In order to increase the output, the interest rate is kept constant or a different alternative output is managed by the government. Gross domestic product GDP forecasts and a fixed interest rate policy are used. A monetary authority deciding on a monetary policy for today, needs to be able to forecast how variables such as inflation and output will behave now and in the future, which means that it must be able to forecast private behavior in the future.
The decision of private actors depends on their expectations about future monetary policy Chari and Kohoe The level of output or GDP is forecasted at different levels. The money supply in any particular level of interest rate is provided. This is the only output which is allowed to become flexible.
Therefore, interest rate targeting is sometimes very ineffective in the long run. There is a perfect relationship between the demand for money and the interest rate. Interest rate targeting is widely used in an economy. Explain the Friedman and Ando-Modigliani theories of consumption. Critically evaluate the Ando-Modigliani approach of the life cycle hypothesis. What is the Duesenberry approach of relative income? Explain the various types of money. What are the characteristics of money?
What are the functions of money? What are the approaches to the demand for money? How is money measured? Explain the monetary aggregates in detail. What are the sources of change in reserve money? Explain equilibrium in the money market. How does expansionary monetary policy affect equilibrium? Credit to the commercial banks is an asset for the monetary authority. More money supply in the economy leads to an increase in the prices.
Expansionary fiscal policy helps to keep the interest rate stagnant in the economy. Critically examine the effect of monetary policy on income. Write a note on: a The consumption function b Permanent income c The life cycle hypothesis Explain the lifespan income and consumption of an individual. Also, price levels rise with a rise in wages. There is a difference in the full employment and natural rate of employment in the economy. In this paper, he showed the relationship between unemployment and the rate of change in money wage rates in the United Kingdom between and His paper was published in the quarterly journal, Economica.
According to Philips, there is an inverse relationship between the rate of unemployment and the rate of increase in money wages. If there is a high rate of unemployment then the rate of wage inflation is lower. In other words, there is a tradeoff between wage inflation and unemployment. The Philips curve shows that the rate of wage inflation decreases with the unemployment rate.
Thus, w is defined as the wage in the current period. The Philips curve implies that wages and prices adjust slowly to changes in aggregate demand. This also shows the level of wage today relative to the past level for wages to rise above their previous level of unemployment. Unemployment may fall below the natural rate. The Philips curve rapidly became a cornerstone of macroeconomic policy analysis.
It suggests that policy makers could choose different combinations of unemployment rates of inflation. The Friedman-Phelps amendment The Friedman-Phelps proposition states that in the long run, the economy will move to the natural rate of unemployment whatever the rate of the change in wages and the inflation rate.
There is no tradeoff in the long run. It is a counter argument to the Philips curve. The notion of a stable relationship between inflation and unemployment was challenged by Friedman and Phelps who both denied the existence of a permanent tradeoff between inflation and unemployment Snowdon and Vane The shift in demand is essential to our derivation of an aggregate supply AS curve.
Wages are sticky or wage adjustments sluggish when wages move slowly over time rather than being fully and immediately flexible so as to assure full employment at every point in time. We translate the Philips curve in 3. The Philips curve shows the relationship between the wages during this period and the wages during the last period and the actual level of employment. If we draw the diagram of wages during the last period and actual level of employment, we come up with the following.
Wages show an upward line. The WN line shows the wage during this period is equal to the wage that prevailed during the last period, with an adjustment for the level of employment. Equation 3. The wage and employment relationship changes with time. The WN curve shifts over time if employment differs from full employment. Therefore, if there is overemployment in the current period then the curve shifts upwards.
We relate output to employment; 2. We also relate the prices that firms charge to their costs; 3. We use the Philips curve relationship between wages and employment. If we put all three components together, we can derive the dynamic aggregate supply curve. The level of outcome produced is related to the amount of labor input used. In the above equation, a is a co-efficient in the production function. Therefore, firms set price as markup Z on labor costs. Similarly, wage rates rise with price levels.
The markup over labor costs covers the costs of other factors of production that firms use such as capital and raw materials. The supply curve is upward sloping. Prices increase with the level of output because increased output implies an increase in employment, therefore, an increase in labor costs. The fact that prices rise with output is entirely a reflection of an adjustment in the labor market, in which higher employment pushes wages upwards.
Firms pass on these wage increases by raising prices and for that reason, prices rise with the higher level of output. The aggregate supply curve is flatter, the smaller the impact of output on employment changes and current wages. The position of the aggregate supply curve depends on the past level of prices. Over time, wages continue to rise and the wage increases are passed on as higher prices. All these three conditions make up the dynamic aggregate supply curve.
Due to a rise in the money supply, wages increase; output and prices also increase. Short run effects In figure 3. It is drawn for a given past price level P At the price level P-1 output is at the full employment level.
There is no tendency for wages to change. Hence, costs and prices are constant from period to period. The aggregate supply curve has been drawn to be relatively flat. This suggests a small effect on output. This shifts the aggregate demand curve from AD0 to AD1. Beyond this point, both the price level and output increase. Prices are higher because the output expansion has caused an increase in wages. The aggregate supply curve is drawn quite flat. This reflects the assumption that wages are quite sticky.
Suppose nominal money stock is increasing at each price level, real balances are then higher. The interest rate is lower, hence, the demand for output rises. A monetary expansion has led to a short-run increase in output. Put simply, AD0 shifts to AD1. The output increases to Y1. The prices increase from P0 to P1. The medium term adjustment The next point comes as the medium term adjustments in the aggregate demand and supply curves. At point E, output is normal. The supply curve passes through the full employment output level, where the price level is equal to P1.
We show that by shifting the aggregate supply curve up to AS1 to AS2. If we compare E1 to E2 then output falls and price level increases. In short, the aggregate supply increases from AS0 to AS1. Output decreases from Y1 to Y2. The price level increases from P1 to P2. But the aggregate supply curve shifts back and income declines from Y2 to Y1. This is a new equilibrium adjustment. The long term adjustment In the long run, prices increase but output remains constant. As long as output is above normal employment, wages continue to rise.
Because wages are rising, the firm experiences an increase in costs. These are passed on at each output level. In the short, medium, and long term, equilibrium shifts from E to E1 to E2. As a result, output will be declining and the level of prices will keep rising. There is no change in output and the price increases from P0 to P1. The wage inflation and the aggregate supply curve are related to output. The Philips curve and the aggregate supply curve are directly related to the level of employment in the economy.
There are three foundations on which the aggregate supply curve is built, namely; 1. The Philips curve shows that the wage increases more rapidly than it lowers the level of unemployment. There is a relationship between the unemployment rate and the level of output.
They are higher because wages are higher. Therefore, we develop the aggregate supply curve into two directions. First, we modify the aggregate supply curve to include inflation. Secondly, we transform the aggregate supply curve into a relationship between output and the inflation rate rather than output with price level.
It ignores the effect of expected inflation on wage setting. Workers are interested in real wages, not nominal wages. The above equation is called the augmented wage Philips curve. It is the original Philips curve augmented or adjusted to take account of expected inflation.
At any given level of output, wages and prices increase more. This means there is a higher expected rate of inflation. The assumption is that the nominal wage rises one percent faster for each extra one percent of expected inflation.
The augmented wage Philips curve shows the relationship between the inflation rate and the rate of output on which the expected rate of inflation is based. There are assumptions for the aggregate supply curve which are as follows: The first assumption is that firms maintain constant markup prices over wages.
This is the expected augmented aggregate supply curve. Given the expected inflation rate, the aggregated supply curve shows the inflation rate rising with the level of output, that is, the higher the level of output, the higher is the rate of inflation.
For any expected inflation rate, there is a corresponding short run aggregate supply curve. Each short run ASC is shown to be quite flat, reflecting the fact that in the short run, it takes a large change in output to generate a certain change in inflation.
The short run aggregate supply curve shifts with the expected rate of inflation. The inflation rate corresponds to any given level of output.
The expected inflation rate will become equal to the actual rate. The long run aggregate supply curve describes the relationship between inflation and output when actual and expected inflation is equal.
In figure 3. The long run curve is thus a vertical line. The short run aggregate supply curve shows point A where 5 percent inflation is observed.
The inflation rate is equivalent to the growth of the wage rate. In the extension of equation 3. It suggests that there is a concrete tradeoff. The more rapid the reduction in unemployment, the fewer disinflations are achieved at each unemployment level. If a monetary policy tolerates a somewhat higher inflation as a means to sustain higher growth momentum, it may at some stage just become a sure path to sacrificing both inflation and growth objectives.
The justification for inflation tolerance is often based on the perception of a positive relationship which invariably turns negative after a threshold level of inflation is reached.
The mainstream monetary policy emphasis on low and stable inflation reflects this realization; a central bank can best contribute to the growth objective by ensuring a low and stable inflation regime Pattanaik and Nadhanael Explain the Philips curve in detail.
Explain the dynamic aggregate supply curve. What are the properties of the aggregate supply curve? Explain the effects of monetary and fiscal policy on the aggregate supply curve. Explain the long term adjustments in the aggregate supply curve. Explain briefly the inflation expectation and the aggregate supply curve. What is the modified Philips curve?
Why is the Philips curve criticized? Explain the Friedman-Phelps amendment on the Philips curve. Explain the relationship between wages and employment.
They are integrated in terms of finance, trade and culture. The foreign exchange market, equity and commodity markets are aligned with each other on the national as well as at the global level. Domestic and international trading of equities, shares and commodities are allowed in almost all countries. Due to the free flow of capital, the exchange rate appreciates or depreciates, affecting the domestic and international price levels on the IS-LM framework.
Export promotion yields more foreign exchange when there is an exchange rate depreciation. The monetary policy of the reserve bank affects the supply of money. A higher money supply leads to a rise in prices while lowering the interest rate. When domestic interest rates are low, international investors withdraw their money, and invest it where higher returns can be had. The supply of money, the interest rate, and the exchange rate policies decide the volume of capital inflow and outflow.
The balance of payments is a record of all the monetary transactions a country has with the rest of the world. The balance of payments is mainly divided into current and capital accounts. The current account is influenced by the exports and imports of a country and includes the transfer of payments.
Services as freight, royalty payments and interest payments are also included, as well as net investment income and the interest and profits on assets.
Transfer payments mainly consist of remittances, gifts and grants. The trade balance consists of the trade in services and the net transfers. Such imports increase the current account deficit. Similarly, if net transfers exceed net payments, then there is a capital account surplus. If the current account along with the capital account are in surplus, then the country can have a surplus in its balance of payments.
Purchases, and the sale of assets are recorded in the current account, which also consists of stocks and bonds. When the receipts from the sale of stocks, bonds, bank deposits and other assets exceed payments for purchases of the foreign assets, the net capital flow is positive. The deficit needs to be financed by the country selling assets or borrowing from abroad. The sale of assets means a country runs into a capital account deficit but a current account deficit can be financed by more capital inflow.
Not all countries promote exports. Sometimes, emphasis is given to the inflow of capital. The capital account is important in the present globalization trend. The capital account is mainly divided into two parts: transactions of the private sector and the official reserves.
In India, the current account deficit is financed by the Government of India and the Reserve Bank of India, the latter of which maintains the reserves in the form of foreign currency. The central bank also holds foreign currency, and buys the foreign currency which is earned by the private sector to augment its reserves of foreign currency.
On the other hand, the reserve bank sells foreign currency when there is a decline in the value of the domestic currency. The foreign exchange market can be highly volatile. The domestic value of currency may decline or increase.
Consequently, the reserve bank monitors the market situation very carefully rather than intervening immediately. The surplus or deficit in the balance of payments is equal to any increase or decrease in the foreign exchange reserves. If both current and capital accounts are in deficit, then the balance of payments is in deficit. The reserve bank has to sell gold or foreign currency. If the current account is in surplus while the capital account is in deficit, the balance of payments may also be in deficit.
The central bank buys and sells any amount of currency at a given price. To be able to correct the balance of payments, the central bank intervenes in the foreign exchange market, mainly by buying or selling foreign currency.
In order to insure the price, the excess supply is taken away at a fixed price while excess demand is filled at the same price. Such practice exists in agricultural commodity markets.
The government ensures the prices with the available supply of and demand for the commodities. The government purchases the agricultural commodities from farmers at fixed prices but sells the same commodities at a higher price.
In India, this is called the minimum support price for crops. The reserve bank holds the necessary reserves to maintain the currency at a fixed rate. Doing so helps keep the economy stable. But a fixed exchange rate suffers from a number of limitations. It does not represent the true picture of the economy. Sometimes, the currency is overregulated. Most economies are open to trade with all countries. The domestic currency is freely allowed to flow with other currencies.
The exchange rate is flexible and more dependent on the current and capital accounts. Such demand for and supply of foreign currency decide the value of the domestic currency. The study of Nicolas Magud et. Most of the time, the exchange rate is allowed to freely determine the value of the domestic currency in the foreign exchange market. The central bank does not intervene in the foreign exchange market. The official reserves of foreign currency are kept at zero.
The current account, along with the capital account, is freely adjusted. Such clean floating of the exchange rate does not exist in the modern world. Most of the exchange rates are managed. Such practices are regularly observed in the foreign exchange market. Under floating exchange rates, the exchange rate is determined together with the interest rate in the financial sector.
This reflects the importance of international financial capital flows relative to flows in goods and services which in the modern world are very small in comparison.
Thus, the most important factors determining exchange rates are not the competitiveness of goods and services, but the stock of money and the stock of bonds outstanding and the level of income Pentecost India moved away from a pegged exchange rate to the liberalized exchange rate management system in Coupled with the market determined exchange rate regime in , this was considered an important structural change in the exchange rate market.
With increasing volatility in exchange rates and to mitigate the risk arising out of excess volatility, currency futures were introduced in India in , making this the second most important structural change. It is believed that the currency futures will help in hedging the exposures of the exchange rate to unfavorable movements.
The role of derivatives in risk taking and risk management cannot be understood by any means and derivatives trading has increased significantly in recent times.
The research also supports a two-way causality between the volatility in the spot exchange rate and the trading activity in the currency future market Sharma The spending on domestic goods decides the domestic outcome. NX means the net exports and imports: what domestic residents spent on foreign goods and any trade surplus. Domestic spending depends on income and the interest rate.
The real exchange rate remains fixed. The rise in the real exchange rate, that is, real depreciation, improves the trade balance. The demand for domestic goods will increase. If foreign income increases, then the demand for domestic goods will rise.
The balance of trade could have a surplus. A real depreciation of the domestic currency will improve the trade balance. A rise in income increases import spending, and worsens the trade balance. If the money is spent on foreign goods, then the IS curve will be steeper.
If the interest rate is reduced, there will be a small rise in income and output. This book gives two distinct parts. The first part provides the fundamentals of basic macroeconomic identities. The second part explains about the open economy and macro economy issues. In our global era, all economies are subjected to fluctuation of external factors.
They are affected by exchange rates, balances of payment, income and inflation. Such indicators are more visible in the money, capital, equity and commodity markets. This book explains different issues and provides macroeconomic solutions at national and global levels. Therefore, this book especially helps postgraduate students to understand the subject in greater depth.
His area of research interest is Development Economics.
0コメント