Macroeconomics (IAS-Economics)

In this introductory lecture, I will discuss the syllabus of Macroeconomics in detail, as given by UPSC. Macro is given in Topic 2 and Topic 4 (Part c) in Paper I. Broadly there are following topics :

Topic 2 : Advanced Macroeconomics 

  1. Approaches to income and employment and interest rate determination
  2. Classical and Keynes (IS-LM) curve
  3. Neo Classical synthesis and New classical
  4. Theories of interest rate determination and interest rate structure

Topic 4 : International Economics – Part c (i to vii)

 Balance of Payments Adjustments: Alternative Approaches.

  1. Price versus income, income adjustments under fixed exchange rates,
  2. Theories of Policy Mix
  3. Exchange rate adjustments under capital mobility
  4. Floating Rates and their Implications for Developing Countries: Currency Boards.
  5. Trade Policy and Developing Countries.
  6. BOP, adjustments and Policy Coordination in open economy macro-model.
  7. Speculative attacks

Many people would argue that why to discuss International Economics within Macro, I feel, this part of Topic 4, is purely macro oriented and can be dealt better here than anywhere else. The initial part of Topic 4, is pure International Eco, which should be dealt separately.Moreover, we did BOP, purely as a part of Macro in our undergrad years, though there was some spillover in International Trade as well, but I am more comfortable to discuss it as a part of Macro only.

Books to be read

I guess three books should be referred for Macro

  1. Oliver Blanchard, Macroeconomics (OB)
  2. Dornbusch, Fischer and Startz, Macroeconomics (DFS)
  3. DN Dwivedi, Macroeconomics Theory and Policy  (DND)

Note this very clearly, that these are books are in no way sufficient, they have to supplemented through other sources as well and neither these books have to be done completely. I am giving a very broad generalization of the syllabus, which could be or could not be covered from these references.In the latter case, you will have to turn first to the internet and then to any particular chapter from some book.

I have written questions which were asked in each of these sub-topics during several years. Note that, questions are rarely straightforward, they have always cut-crossed several topics and they can be framed from the topics which are not directly mentioned in the syllabus. UPSC syllabus is very general, you should be detailing it intelligently yourself or with the help of someone who can guide in this regard.

My other suggestion is, if possible, do past years papers of Indian Economic Services exam too, as the syllabus for both IAS-Economics and Indian Economic services is more or less the same, with the latter being on a heavier side. IES syllabus is much more well defined than IAS-Economics. I am not asking you to do, everything in the IES syllabus, but at least have a look at the kind of questions asked there, that will be a very good practice. Macroeconomics is asked in Paper II, IES exam – Topic 2, 3 and 7.

Now let us analyze the syllabus in detail:

  1. Approaches to income employment and interest rate determination 

In my view, these are two topics, instead of one and several sub topics within them. It should be cut down in two sub-topics

a. Approaches to income and employment

b.  Approaches to interest rate determination

For a) Approaches to income and employment, one has to look at both classical and keynesian versions, then other schools of thought should be done later. Read the following

  1. Chapter 5 : Classical Theory of Output and Employment (DND)
  2. Chapter 6 : Keynesian Theory of Income Determination : A simple Model (DND)
  3. Chapter 5: Aggregate Supply and Demand (DFS)

Questions 

1. In the Keynesian system, AD determines the conditions of labour market, whereas in the classical system, labour market takes care of itself. (2005)

For b) Approaches to interest rate determination

  1. Chapter 13 : The Classical theory of money and interest (DND)
  2. Chapter 14 : The Keynesian theory of money and interest (DND)
  3. Chapter 15 : The demand for Money (DFS)
  4. Chapter 4 : Financial Markets (OB)

Questions 

  1. Is the speculative demand for money responsible for the existence of involuntary unemployment in Keynesian system. Give reasons. (2010)
  2. Is Friedman’s quantity theory of money close to classical or keynesian approach to aggregate demand for money. Give justifications. (2011)
  3. Would the introduction of ATM, which allow people to withdraw cash from banks when needed, make deposits more inconvenient and affect the money supply?Elucidate. (2012)
  4. Why is under employment equilibrium possible in Keynesian economics but not in classical economics? Give reasons.(2012)
  5. Transaction demand for money  is interest rate inelastic. Explain with reference to post Keynesian theories of demand for money.(2012)
  6. An individual finds that all his receipts (including income ) and payment transactions are in the form of money that bears no interest.However, he can convert money into bonds and earn interest income but that involves a fixed cost of each conversion transaction. What are the determinants of the individual’s demand for holding money? (2013)
  7. Explain the determination of output and employment in Macroeconomy under the conditions when individuals are subject to a) No money illusion and b) Money illusion (2013)
  8. Differentiate between complete, partial or zero crowding out effect of a given increase in government expenditure in an economy (2014)
  9. Explain the paradox of thrift (2014)
  10. Compare the various instruments of monetary policy with respect to influencing the cost and availability of credit (2014)
  11. Discuss the classical dichotomy that money is neutral (2014)

2. Classical and Keynes (IS-LM curve)

  1. Chapter 9 : Income and Spending (DFS) + Chapter 3 : Goods Markets (OB)
  2. Chapter 10: Money, Interest and Income (DFS)
  3. Chapter 11 : Monetary and Fiscal Policy (DFS) + Goods and Financial Markets (The IS-LM Model (OB)
  4. Chapter 16 : IS -LM Model in Two-sector economy (DND)
  5. Chapter 17 : IS – LM Model with Government Sector (DND)

Questions 

  1. Describe fiscal and monetary policies of economic stabilization. Make a comparative analysis of their effectiveness in developed and developing economy. (2005)
  2. Why does point of intersection of IS and LM curves coincide with equilibrium of two markets ? (2010, 2012)
  3. What are fiscal and monetary implications of vertical IS and vertical LM curves? (2010, 2012)
  4. If public expenditure is financed by money creation, show diagrammatically, the short run and long run crowding out effect. (2010)
  5. What is liquidity trap? How does it occur? (2011)
  6. Explain with appropriate assumptions, the determination of equilibrium income and interest rate in a Keynesian  model of goods and money markets, through diagrams (2014)

3. Neo-Classical synthesis and New classical

We need to turn to internet and our libraries to get hold of this topic. These three books do not cover the material at all or in any depth,if at all. DND has dicussed one chapter on Keynsian-Classical synthesis, it is useful.

  1. Chapter 19 : A Keynesian-Classical Synthesis (DND)

In my notes, I will be discussing this topic from several other sources as well. Right now, I cant think of any good source, which is readily available too.

4. Theories of Interest Rate determination and Interest Rate structure

Here we have to broadly discuss following three theories of interest rate determination :

  1. Classical Theory of interest rate determination
  2. Loanable funds theory or Neo classical theory
  3. Keynes Liquidity preference theory

These topics are already discussed above but have to be supplemented with other sources as well, as we move on.

Questions 

  1. Outline Keynesian theory of money and interest. What is the role of expectation in the theory of interest rate determination? (2007)
  2. In Keynesian theory ” rate of interest is what it is because it is expected to become other than what it is. If it is not expected to become other than what it is, then there is nothing to tell us why it is what it is” Critically evaluate this comment and explain the role of rate of interest in determination of income.(2010)

For theories of Interest rate structure, we have to do the following :

  1. The Expectations Theory
  2. Segmented Markets Theory
  3. Liquidity Premium Theory

These are also not discussed in the above mentioned books. They have to be supplemented through other sources.

Some questions have been asked, which I can’t put according to the given syllabus anywhere. For example, a question about inflation is asked, a topic which is not mentioned in the syllabus, but that implies, should be done. In undergrad Macro, topics like inflation, investment, consumption and Phillips curve are also covered, hence should be done for UPSC too. You may not do it in much detail, but should be definitely read at least once.

  1. What is inflation? Is cost push an adequate explanation of inflation (2005)
  2. The Marginal efficiency of capital together with the current rate of interest determine the profitability of an investment project.  How does it help in the selection of investment project? (2010)

I am adding few more ancillary topics to the above syllabus :

  1. Inflation and Unemployment
  2. Phillips curve
  3. Investment
  4. Consumption

For Balance of payments part, I will write in the next post.

For IAS – Economics, Indian Economic Services and UGC-Net Economics, you can contact at the following number :

Nishant Mehra 99-99-88-66-29

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3 thoughts on “Macroeconomics (IAS-Economics)

  1. SUMIT VAISHNAV says:

    Few queries regarding IES ONLINE COURSE :
    1.Will u cover the course from sydsaeter and hammond (SH) for PAPER1 (B)-Mathematical methods in economics?
    2.Will u help the enrolled student if he asks doubt from SH at any time during the course?? or the book which u will follow apart from the solved problems in your online course???
    3. How can an enrolled student approach you if he is stuck in a maths problem from PAPER-I, PAPER-II, PAPER-III?? i.e by E-MAIL OR VIDEO CONFERENCING OR phone(preety difficult for enrolled student through phone )?? If by email, how much time would u take to reply us back??
    4.You will provide daily 45-55 minutes lecture for everyday except sundays for approx. 9 months?? Are u confident about this ??What if not??
    5.What will be the broad outline followed by you for covering the syllabus ? like Will you cover the syllabus of paper-1 first followed by paper-2 , etc or alternate days for 4 eco papers.
    6.Will you give assessment or tests every (sunday or any specified day )
    7. Will you provide your coaching material to an online enrolled student?? if yes, then by post or the individual has to collect from your institute??
    8. What if an online student wants to clear his few doubts personally coming to your institute once a month??Will this help be provided??
    9. Kindly provide the details of admission for IES COURSE , i.e. mode of payment (by cash or net banking ) and full payment at once or in instalments

    WILL WAIT FOR THE REPLY SOON..
    THANK YOU VERY MUCH NISHANT SIR

    • nishant says:

      1.Mathematical eco is a small part of the course, it will be covered as it is required, not necessarily the complete book

      2. You follow our course, whatever is required it will be done. If the ques pertains to the syllabus then definitely yes

      3. You will be given a forum where you can ask your doubts. Dont worry about that

      4. There are 9 subjects broadly in the course, it will take around 9 months to complete. I will try to give one video a day. I dont know what can be done if I am unable to do that once in a while, I hope this will not come in criminal offence category 🙂

      5. IAS and IES course will be done at the same pace. If I am picking up Macro in IAS then I will also cover macro in IES too

      6. I will be discussing past year papers in the lecture only. You guys can give your answers through mail if you want. My main focus is to make first class recordings, right now, I am not offering any test series separately

      7. You will be given videos, in which everything will be written. See the demo, most of your queries will be solved

      8. You can do that with the prior appointment

      9. I will be giving that very soon.

      • sumit vaishnav says:

        Good evening Nishant sir, First of all, Hats off to the speedy reply u gave. Thank u very much for solving all my doubts. I will be eagerly waiting to enrol for online course and thank u for being a trustworthy mentor. Apart from all these, u made me smile for the witty comment abt legal consequences. I know I trust u BT hope u understand being a non- delhite and new to online course, I better felt to put all my doubts across you. I am very happy with your responses. God bless and TC

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