Course Introduction:

This is a second year course in macroeconomics and extends the discussion covered in the introductory course “Macroeconomics-I”. The course will offer both the classical and Keynesian points of view. The relationship between inflation and unemployment will also be covered. The focus will then shift to a major extension: the role of expectations in the short as well as the medium run. Another important part of the course will cover exchange rates and macroeconomic policies in open economy, and the analysis of the monetary and fiscal policies. Then, after devoting some time to the study of two major components of aggregate demand (consumption and investment), a final module looks at economic growth in the long run.

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Course Objectives & Learning Outcomes:

This course is an intermediate macroeconomics course. We will cover most topics by means of a graphical analysis, and integrate that with algebraic treatments whenever such integration is possible and useful. By the end of the course, students should be able to:

  • understand how to develop theoretical models that help to understand the workings of the macro economy;
  • study by means of such models how key economic variables in the economy are determined;
  • understand how different types of government policies work;
  • distinguish between the classical and the Keynesian approaches to the study of macroeconomics;
  • fine-tune the analysis to include the study of extensions such as the role of expectations and the open economy.

Course Pre-requisite:

Macroeconomics-I and Mathematics-I

Text and References:

  • Richard T. Froyen : Macroeconomics: Theories and Policies, 9th edition
  • Abel, Andrew B and Ben S. Bernanke (2004): Macroeconomics, 5th edition, Addison Wesley, 2005 (AB)
  • Oliver Blanchard (2006): Macroeconomics 4th edition, Prentice Hall, 2006 (Bl)
  • Gregory N. Mankiw: Macroeconomics, 5th edition, Worth Publishers. (Ma)


1 – Core concepts
Review of IS-LM/AD-AS model, macroeconomic analysis in the Classical model, Keynesianism, price and wage rigidity. The relation between unemployment and inflation, the expectations-augmented Phillips curve
2 – The role of expectations in macroeconomic analysis
The role of expectations in macroeconomic analysis; basic concepts, the role of expectations in the determination of bond prices and stock prices; expectations, consumption and investment; changes in the IS-LM model due to expectations, role of expectations in policy and output determination.
3 – Open economy macroeconomics
Open economy macroeconomics. Exchange rates, basic concepts and determination; various exchange rate regimes. The IS-LM model in an open economy. Macroeconomic policy in an open economy with flexible exchange rates, and with fixed exchange rates.
4 – Policy
A closer look at monetary policy; principles of money supply determination, channels of monetary policy; the conduct of monetary policy: rules versus discretion. Government spending and its financing; government deficits and debt, Ricardian equivalence; Deficits and inflation.
5 – Consumption and investment
Consumption: Keynes and the consumption function; Fisher and intertemporal choice;
Modigliani and the life-cycle hypothesis; Friedman and the permanent-income hypothesis.
Investment: business fixed investment; residential investment; inventory investment.
6 – Economic growth in the long run
Facts of growth; capital accumulation and growth; technological progress and growth.