ECS2602-Macroeconomics II Latest Study Guide 2022.

ECS2602-Macroeconomics II Latest Study Guide 2022. Macroeconomics deals with the economy as a whole and not the behaviour and decisions of individual consumers, households and firms, as in microeconomics. Furthermore, macroeconomics involves determining and exploring the relationship between aggregate concepts (variables), and not determining the prices of individual goods and services through the interaction of demand and supply. In this module, the emphasis is mainly on developing your understanding of different theories on the determination of output and income (Y), the endogenous variable, and the impact of fiscal and monetary policy on the level of output and income. We concentrate on stabilisation policy as opposed to structural policies that deal with the important issue of economic growth. Keep this in mind as you work through the prescribed content. You will be exposed to the different assumptions that underlie the theoretical models, the interaction between the various macroeconomic variables, the different analytical tools that have been developed and the impact of economic policy measures. The module consists of three interrelated sections. In the first section, which consists of study units 1 to 4, we develop a model called the IS-LM model for a closed economy. It is through the IS-LM model that you will start to understand how the demand for goods determines the level of output and income and the role of fiscal and monetary policies in influencing the demand for goods and hence the level of output and income. In the IS-LM model, the focus is on the role of demand for goods. We assume that firms are willing to supply any quantity at a given price – in other words, we ignore supply constraints. Study unit 2 looks at the goods market. Study unit 3 focuses on the financial market and in study unit 43 we combine the goods market and the financial market in what is known as the IS-LM model. This is an extremely useful model for analysing the determination of output and the impact of fiscal and monetary policy on the level of output and income. It is also a vital building block for the rest of the module. This is the working horse of macroeconomics. It is therefore imperative that you make an effort to master this section before you move to the other study units. Failure to do this will result in a great deal of frustration when working through the remaining study units. A closed economy does not participate in any international trade, while an open economy has significant trade and financial relationships with other economies. In this section (study units 5–7) we extend the IS-LM model to deal with output and income determination in an open economy and consider the role of fiscal and monetary policy in such a model. In study unit 5, a number of key concepts and relationships are introduced. In study unit 6, with study 2 unit 2 as background, the focus is on the demand for goods in an open economy. Study unit 7 focuses on determining the level of output for an open economy using the IS-LM model. Note the importance of the IS-LM model (study unit 4) as a building block. In the next section (study units 8 and 9), the supply side of the economy is added and we return to a closed economy. In this section, you will learn how the level of output and income is determined by the interaction of the aggregate supply and aggregate demand for goods. And we will once again consider role of fiscal and monetary policy in such a world. We also look at what happens in this world if a supply shock occurs. In study unit 8, the labour market is introduced and in study unit 9 the goods market, the financial market and the labour market are combined in the AS-AD model. The IS-LM model (study unit 4) is a critical building block of this AS-AD model. The content is divided into nine study units. The various topics, study units and corresponding chapters in the prescribed book are indicated in the following table: Topic Study unit Chapter in prescribed book How to study macroeconomics and use the study guide An overview of the South African macroeconomic environment 1 The goods market 2 3 The financial market 3 4 Goods and financial markets: the IS-LM model 4 5 Openness in goods and financial markets 5 18 The goods market in an open economy 6 19 Output, the interest rate and exchange rate: the IS-LM model for an open economy 7 20 The labour market 8 6 The AS-AD model 9 7 Please note the following: Each level of study in economics builds on previous knowledge. You will find that the study material takes as its point of departure various concepts and analyses that you encountered in your first-level study of economics. We assume that you know and understand these concepts and analyses. If you are uncertain about them, it would be worthwhile to refer back to the relevant material to refresh your memory. THE FUNCTION OF THE STUDY GUIDE The study guide has been designed to lead you through the prescribed book in a systematic and informative way and to help you to become acquainted with and understand the material. You cannot therefore study the prescribed book without consulting the study guide. We have tried as far as possible to avoid any unnecessary duplication of the material in the prescribed book. We have, however, provided you with additional material and explanations to help you master the content. You will therefore have to study some parts of the study guide as well as the prescribed book. 3 ECS2602/1 The study material contains a mixture of verbal, graphical and mathematical explanations. Graphical material is an important aid in understanding arguments that may be complicated because of the sometimes intricate interaction between many economic variables. Bear in mind that graphs are not and should never be goals in their own right. Graphs must be used to complement your explanation. Hints on using diagrams (or figures/graphs) To be able to use a diagram (or figure/graph) correctly you must learn to read, draw and explain a diagram: Read. This entails understanding the determinants (or factors) of each curve and the way in which they affect the specific curve. Draw. All diagrams, axes and curves should be labelled. The initial point of equilibrium should be indicated and, if it changes, this should also be noted on the diagram. Explain. You should be able to explain the diagram in words. Unless indicated otherwise, mathematical material, such as the derivation of formulae, may be omitted. In some instances, however, you will be expected to apply the formulae to numerical examples. A useful teaching tool, which is used in this module, is the events chain (or chain of events). An events chain is used to highlight different steps in the economic process. As an example, consider the following familiar set of events comprising the impact of an increase in investment on the level of output and income: An increase in investment (I) causes an increase in the demand for goods (Z), because I is a component of Z. This leads to an increase in output and income (Y) (since firms respond to the increased demand for goods by producing more). In terms of an events chain, this is represented as follows: I↑ ⇒ Z↑ ⇒ Y↑ The study guide has the following functions: It specifies the outcomes of each study unit. It outlines the content of the module. In other words, it indicates which parts of the prescribed book are prescribed material. It indicates how you should approach each chapter and the main topics and diagrams (figures) that you have to master. It indicates which activities you must do in the workbook in order to assess your progress and prepare for the examination. HOW TO USE THE STUDY GUIDE At the beginning of each study unit, there is a study instruction that indicates where you will find the relevant study material in the prescribed book. This instruction is followed by the study unit outcomes. The study unit outcomes are the things you should be able to do once you have studied a particular study unit. The content you should master in the study unit is divided into subsections. Each subsection 4 has a heading (which in most cases corresponds to the heading in your prescribed book), followed by the section outcomes, which indicate the things you should be able to do once you have completed a particular subsection. In some instances, the section outcomes are followed by a prior knowledge section. The purpose of this section is to indicate the prior knowledge you require in order to understand this particular subsection of the study unit. Included in the prior knowledge section is a trueor-false activity you can use to test your prior knowledge. These activities you will find in the workbook. In the subsections, you will find references to activities in the workbook. An activity is a task that you must do. It can be in various forms such as answer true-or-false questions, choose the correct option, do calculations, draw a diagram, write down an equation or answer short or long questions.