Summary of all the lectures + literature that are required for the exam. The course is an elective in the third year of Business Administration at the Rotterdam School of Management (EUR).
,Contents
Chapter 1: Course introduction & Schools of Thought in Macroeconomics ...........................................................................................................3
1.1 Introduction ..............................................................................................................................................................................................................................3
1.2 What is Macroeconomics?...................................................................................................................................................................................................5
1.3 Macroeconomics Schools of Thought ..............................................................................................................................................................................8
Chapter 2 The Goods Market & The Financial Market ....................................................................................................................................................14
2.1 Key Concepts ..........................................................................................................................................................................................................................14
2.2 The Goods Market .............................................................................................................................................................................................................. 22
2.3 The Financial Market ......................................................................................................................................................................................................... 32
Chapter 3 IS-LM - Bringing the Goods & Financial Markets together & Extension ............................................................................................41
3.1 Introduction ..................................................................................................................................................................................................................................41
3.2 Financial Markets & the LM Relation..............................................................................................................................................................................47
3.3 IS-LM Relations .................................................................................................................................................................................................................. 48
3.4 Using a Policy Mix .............................................................................................................................................................................................................. 50
3.5 Extension of the IS-LM model ......................................................................................................................................................................................... 53
Chapter 4 The Labor Market & From IS/LM to the AS/AD model ........................................................................................................................... 63
4.1 The Labor Market ................................................................................................................................................................................................................ 63
4.2 Movements in unemployment ......................................................................................................................................................................................... 64
4.3 Wage determination .......................................................................................................................................................................................................... 67
4.4 Natural rate of unemployment ....................................................................................................................................................................................... 69
Chapter 5 Global Instabilities.................................................................................................................................................................................................. 73
5.1 Global instabilities and their effects on Macroeconomics...................................................................................................................................... 73
5.2 Focus on oil prices ............................................................................................................................................................................................................ 73
5.3 Current events data .......................................................................................................................................................................................................... 77
5.4 The Great Depression............................................................................................................................................................................................. 81
Chapter 6 Recap of all the chapters .................................................................................................................................................................................... 86
6.1 The Goods Market ............................................................................................................................................................................................................... 86
6.2 The Financial Market ......................................................................................................................................................................................................... 89
6.3 The IS-LM model.................................................................................................................................................................................................................. 91
6.4 The IS-LM model extended .............................................................................................................................................................................................. 92
6.5 The Labor Market ............................................................................................................................................................................................................... 93
Formula Sheet ............................................................................................................................................................................................................................... 95
,Chapter 1: Course introduction & Schools of Thought in
Macroeconomics
1.1 Introduction
Why Macroeconomics? (I)
❑ Business managers need a more comprehensive view of the market conditions ➔better
equipped to respond to major macroeconomic events (e.g., sudden increases in interest rates,
or inflation, sudden resource scarcity - see war-related disruptions) ➔ avoid costly errors
and/or seize new opportunities.
❑ Individuals care about how inflation affects their abilities to pay for goods and services, how
interest rates influence their access to financial resources, or how labor market conditions or
technological developments affect their abilities to obtain specific jobs.
Why Macroeconomics? (II)
From The Economist (November 3, 2022):
“The Bank of England gives a grim assessment. Taming inflation is an unpleasant task. On November
3rd Britain's monetary policymakers increased interest rates by three-quarters of a percentage point,
the sharpest rise in more than 30 years. They delivered a grim warning about the economic outlook: if
interest rates go as high as investors were expecting, unemployment would rise to just under 6.5% and
the economy would shrink for eight quarters in a row. The recession would be shallower than those of
the 1980s, 1990s or 2000s. But it would be the longest since records began in the 1920s.
Much will depend on what the government does. The bank is assuming that the government will
approximately halve its support for households' energy bills from April, but Rishi Sunak, the prime
minister, could cut it by more. That would dampen demand as households cut back on non-energy
spending. And the bank's forecasts do not incorporate the tax increases and spending cuts the
government is preparing to unveil on November 17th. Come what may, it seems a lengthy recession, if
not a particularly deep one, is looming.”
Goal 1: help you gain the knowledge that will enable you to understand the content/topics = e.g., why
would interest rates increases lead to unemployment and a shrinking economy
Goal 2: critically assess information; take the facts at face value and be able to assess yourself the
implications of these facts (that is not to say you should reject others’, but rather be independent of
others’ interpretations)
, Why Macroeconomics? (III)
From The Economist (February 26, 2022):
“The economic fallout; Russia invades Ukraine. Expect inflation, lower growth and disruption to
financial markets. […] The immediate global implications will be higher inflation, lower growth and
some disruption to financial markets as deeper sanctions take hold. The longer-term fallout will be a
further debilitation of the system of globalised supply chains and integrated financial markets that has
dominated the world economy since the Soviet Union collapsed in 1991. […] Start with the commodity
shock. […] The second shock relates to tech and the global financial system. […] What does all this mean
for the global economy? Russia faces a serious but not fatal economic shock as its financial system is
isolated. For the global economy the prospect is of higher inflation as natural-resource prices rise,
intensifying the dilemma that central banks face, and a possible muting of corporate investment as
jittery markets dampen confidence.”
Related to Goal 2, previously expressed: what are the facts and what is someone’s
opinion/interpretation. Sure, this war certainly causes problems to inflation, growth rates, financial
markets, etc. (needless to mention the obvious and most important losses – lives), but the issues caused
by the war do not come on a “blank canvas”… there were many measures taken during covid that were
only leading to a bubble. (E.g., many countries issuing financial aid to their population to compensate for
the loss of economic activity…source of money: PRINTING! )
What (within) Macroeconomics?
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