Core Course 6: Intermediate Macroeconomics-I

This course delves deeper into the determination of national income, interest rates, and exchange rates, analyzing both closed and open economies.

Course Content Details

1. Aggregate Demand and Aggregate Supply

This unit introduces the primary framework for analyzing short-run economic fluctuations. The Aggregate Demand (AD) curve shows the relationship between the price level and the quantity of output demanded. The Aggregate Supply (AS) curve shows the relationship between the price level and the quantity of output supplied. Their interaction determines the equilibrium price level and output (real GDP) in the economy.

Key Topics:

  • Deriving the Aggregate Demand Curve from the IS-LM model
  • The Short-Run Aggregate Supply Curve (Sticky-Wage and Sticky-Price Models)
  • The Long-Run Aggregate Supply Curve (Vertical AS)
  • Short-Run and Long-Run Equilibrium
  • Analyzing Macroeconomic Shocks with the AD-AS Model

2. The IS-LM Model in Detail

This unit provides a rigorous mathematical and graphical derivation of the IS-LM model, the cornerstone of Keynesian macroeconomics for a closed economy. We will analyze the factors that cause shifts in the IS and LM curves and use the model to determine the effectiveness of fiscal and monetary policy in influencing national income and interest rates.

Key Topics:

  • Algebraic Derivation of the IS and LM Curves
  • The Government Spending and Tax Multipliers
  • Analysis of Fiscal Policy (Expansionary and Contractionary)
  • Analysis of Monetary Policy (Expansionary and Contractionary)
  • The "Liquidity Trap" Scenario

3. The Open Economy: Mundell-Fleming Model

This unit extends the IS-LM framework to an open economy that trades goods and assets with the rest of the world. The Mundell-Fleming model incorporates international trade (net exports) and international capital flows. A key assumption is that of a small open economy with perfect capital mobility, which implies that the domestic interest rate is determined by the world interest rate.

Key Topics:

  • The IS* and LM* Curves for a Small Open Economy
  • Balance of Payments and Exchange Rate Determination
  • Perfect vs. Imperfect Capital Mobility
  • The Role of the Real Exchange Rate

4. Policy Effects with Fixed and Flexible Exchange Rates

Using the Mundell-Fleming model, this unit analyzes the effectiveness of fiscal and monetary policy under two different exchange rate regimes. We will see that under a floating (flexible) exchange rate system, monetary policy is highly effective while fiscal policy is not. Conversely, under a fixed exchange rate system, fiscal policy is effective, but monetary policy is constrained by the need to maintain the peg.

Key Topics:

  • Fiscal and Monetary Policy under Flexible Exchange Rates
  • Fiscal and Monetary Policy under Fixed Exchange Rates
  • The "Impossible Trinity" (Trilemma) of International Finance
  • Devaluation and Revaluation of a Currency

Disclaimer

The content provided on this website is for informational and educational purposes only. It is based on the curriculum for an Economics Honors course but should not be considered a substitute for formal academic instruction, textbooks, or guidance from qualified faculty. The authors and publishers of this site are not responsible for any errors or omissions, or for any outcomes related to the use of this information.