course notes on macroeconomics
Overview
Chapter 1: Shocks and Economic Policies in the Closed Economy
1. Supply side: The functioning of the labor market (classic case / case
Keynesian)
2. Demand side.
-components of demand (determination of consumption and
investment)
IS / LM
3. Study of shocks and economic policies
-Iidentifie the market (noted Ma) that shock or policy a¤ecte directly
: Is it that of goods and services (IS), that of money
(LM) or the labor market?
- study the reactions of IS / LM or the labor market
- to study the effects of Ma modifications on aggregate demand (if
Ma is IS or LM) or on the global o¤re (if Ma is the job market)
: which moves
- at the initial price level, there is an imbalance between demand
and o¤re: prices then adjust to restore balance; it results
a new level, Y ', of GDP balance. We get there the total e¤et
shock or economic policy on GDP and prices.
- One can then study the e¤et in return of the variation of prices on the
different markets (the money market and the
which explains how one attains Y 'following the adjustment of
price (this corresponds to the displacement along Ys and Yd when the
prices vary).
Example: Expansionary monetary policy
-it mainly affects the money market
LM goes down to LM '; this pulls the interest rate down
Chapter 2: Shocks and Economic Policies in the Open Economy
1. Goods market in open economy (balance of payments, PPP, condition
from Marshall-Lerner)
2. nancial markets in the open economy (condition of leaving uncovered
interest rates)
3. Study of shocks and economic policies in the framework of the model of
Mundell-Fleming (ie we do not know the o'er side of the economy;
prices do not adjust)
² identi ... er the market (noted Ma) that shock or policy a¤ecte directly
: Is it that of goods and services (IS), that of money
(LM), or the parity constraint?
2 to study the reactions of IS / LM / CP: in exchange ‡ exible, the adjustment
is done by the nominal exchange rate, so it is IS that moves
until we find the intersection IS / LM / CP; in exchange ... xe,
monetary authorities defend parity by buying currencies
against the national currency if the latter tends to appreciate
(respectively by buying national currency against foreign currencies
if the national currency tends to depreciate), it is therefore LM that
moves until we find the intersection IS / LM / CP
4. Study of shocks and economic policies by integrating an o¤re side
(This is very similar to what is happening in a closed economy;
are italicized)
² identi ... er the market (noted Ma) that shock or policy a¤ecte directly
: Is it that of goods and services (IS), that of money
(LM), the gender constraint or the labor market?
² to study the reactions of IS / LM / CP (cf the Mundell-Fleming model)
or the labor market
² to study the effects of Ma modifications on aggregate demand (if
Ma is IS or LM or CP) or on the global o¤re (if Ma is the market
of work): which moves
² at the initial price level, there is an imbalance between demand
and o¤re: prices then adjust to restore balance; it results
a new level, Y ', of GDP balance. We get there the total e¤et
shock or economic policy on GDP and prices.
² One can then study the e¤et in return for the variation of price on
the various market sectors (the currency market, the
of labor, and also IS through the real exchange rate), which
explains how one attains Y 'following the price adjustment (this corresponds
moving along Ys and Yd when prices vary).
Note: understand what is happening at the level of the trade balance
which increases the investment; the demand side of the economy is found
... nally at the intersection between IS and LM '
as the previous reasoning was done for an initial price level
constant, the global demand curve Yd moves to the right jusuq'en
Yd '
then there is an excess of demand compared to the oere that pulls the prices towards
high; the economy is ... nally at the intersection of Ys and Yd ',
that is to say, to a new (superior if oëre Keynesian, identical if o¤re
classic) level of GDP, Y ', and a new price level (higher), P'.
Here we have the total e¤ect of economic policy on GDP and prices.
as the prices have gone up, it's okay LM getting back to the top
(not enough to regain his initial level in the Keynesian affair;
suicidally to regain its initial level in the classical case); he
also affects the labor market (in the classical case, the increase
the price is passed on the nominal salary without change of the level of employment
; In the Keynesian case, the price increase reduces the real wage,
promotes employment)
2. The Phillips Curve
² The initial Phillips curve: ¼t = (¹ + z) ¡®ut
² The increased phillips curve (or "Phillips curve"): if ¼
Observations of inaction and unemployment can be interpreted in
70s as an increase in the value of μ; hence, in
the 60s, worth 0 to reach a value close to
unity in the 70's. While μ has increased, the simple relationship
Between Inaction and Unemployment Disappeared to Make Room for a Relationship
between unemployment and variation in use.
3. Arbitration between inaction and short-term unemployment: if economic policy
is that once wages are paid, prices rise more than
which had been anticipated, the use of work is cheaper (in terms of
real) than what was anticipated. For example decrease in growth rate
of the money supply:
² the overall demand relationship
- the overall demand relationship indicates that, at the given rate, the rate
growth in production decreases
-Okun's law implies that the unemployment rate is increasing
4 The Phillips curve indicates that there is a decrease
Arbitration between inaction and unemployment in the longer term: in the long term,
the arbitrage between inaction and unemployment disappears.
-The sacrificial ratio
- Production, unemployment, inaction and monetary policy: variations
of the GROWTH RATE of the money supply are also
neutral in the medium term.
5. Phillips curve and rational expectations: the mechanism at the base of
the arbitrage between inaction and unemployment disappears
-Credibility of monetary policy
-Nominal Rigidity and Contracts
-the cost of disinflation