Macquarie University - ECON2004: Macroeconomic Analysis and Applications

This intermediate-level unit studies the main macroeconomic models in use, keeping close contact with current macroeconomic events. The focus is on product, financial and labour markets in an open economy, examining their key features in short, medium and long run equilibrium. We study the link between macroeconomics and finance leading to a deep understanding of the drivers of bond, stock housing and exchange rate markets, as well as the sources of pathologies like financial crises and the emergence of cryptocurrencies. Monetary and fiscal policy design is analysed in depth, enabling students to evaluate current debates on macroeconomic policy in a real-world context. 

✔ Main topics to be covered:

• Introduction; a brief look at global conditions with a focus on Australia’s recent performance; output and business cycles, inflation, unemployment.
• The IS-LM model: Short-run goods market and money market equilibrium; monetary policy & fiscal policy; the policy mix – comparing a money supply rule with an interest rate rule.
• The labour market; wage and price setting in the medium run; the natural rate of unemployment; tax distortions and full employment.
• The AS-AD model: All markets together from the short run to the medium run; aggregate supply; aggregate demand with a fixed money supply and with an interest rate rule using a price level target; monetary, fiscal and oil price shocks in the AS-AD model.
• Evolution of the Phillips curve; theories of expected inflation; the sacrifice ratio.
• The macroeconomics of financial market crises.
• The Long run: Sources and theories of economic growth and productivity; convergence across countries - PPP comparisons; growth over 2000 years; savings and capital accumulation; the golden rule savings rate.
• Technology, population growth and the Solow model; institutions, technological progress and growth.
• Expectations - expected presented discounted value; nominal vs real interest rates; interest rates and monetary policy; the Fisher hypothesis; macroeconomic determinants of the yield curve or term structure; and of stock market prices; housing prices; expectations and consumption & investment; Tobin’s q; expectations and the IS-LM model.
• The exchange rate; nominal & real, bilateral & multilateral exchange rates; the balance of payments; interest parity condition; the goods market in an open economy; exchange rates and net exports; J-curve; saving, investment and the trade balance.
• The Mundell-Fleming model under floating exchange rates (with interest rate setting and inflation targeting); fixed exchange rates and exchange rate crises; exchange rate overshooting; choosing the exchange rate regime.
• Back to Policy: Uncertainty and macro policy; credibility of policy-makers; fiscal policy and government budget constraint, government debt; challenges from the crisis - the liquidity trap, macroprudential policy.