MACROECONOMICS (IAS-ECONOMICS) – Nishant Mehra Classes

April 08, 2016
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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

Approaches to income and employment and interest rate determination
Classical and Keynes (IS-LM) curve
Neo Classical synthesis and New classical
Theories of interest rate determination and interest rate structure
Topic 4 : International Economics – Part c (i to vii)

Balance of Payments Adjustments: Alternative Approaches.

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

Oliver Blanchard, Macroeconomics (OB)
Dornbusch, Fischer and Startz, Macroeconomics (DFS)
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:

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

Chapter 5 : Classical Theory of Output and Employment (DND)
Chapter 6 : Keynesian Theory of Income Determination : A simple Model (DND)
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

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

Is the speculative demand for money responsible for the existence of involuntary unemployment in Keynesian system. Give reasons. (2010)
Is Friedman’s quantity theory of money close to classical or keynesian approach to aggregate demand for money. Give justifications. (2011)
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)
Why is under employment equilibrium possible in Keynesian economics but not in classical economics? Give reasons.(2012)
Transaction demand for money is interest rate inelastic. Explain with reference to post Keynesian theories of demand for money.(2012)
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)
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)
Differentiate between complete, partial or zero crowding out effect of a given increase in government expenditure in an economy (2014)
Explain the paradox of thrift (2014)
Compare the various instruments of monetary policy with respect to influencing the cost and availability of credit (2014)
Discuss the classical dichotomy that money is neutral (2014)
2. Classical and Keynes (IS-LM curve)

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

Describe fiscal and monetary policies of economic stabilization. Make a comparative analysis of their effectiveness in developed and developing economy. (2005)
Why does point of intersection of IS and LM curves coincide with equilibrium of two markets ? (2010, 2012)
What are fiscal and monetary implications of vertical IS and vertical LM curves? (2010, 2012)
If public expenditure is financed by money creation, show diagrammatically, the short run and long run crowding out effect. (2010)
What is liquidity trap? How does it occur? (2011)
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.

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 :

Classical Theory of interest rate determination
Loanable funds theory or Neo classical theory
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

Outline Keynesian theory of money and interest. What is the role of expectation in the theory of interest rate determination? (2007)
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 :

The Expectations Theory
Segmented Markets Theory
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.

What is inflation? Is cost push an adequate explanation of inflation (2005)
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 :