Macroeconomic Theory

Outline (see Syllabus)

Main Topic	Subtopic	Summary
Classical Theory	Labor Demand and Labor Supply
	Money Market: Demand and Supply
	Goods Market
	Summary of Classical Model
Keynesian Theory	IE, The Income Expenditure Model
	$\overline{Y}$ Equilibrium Level of Income
	Derivation of Expenditure Multiplier
IS-LM Framework	IS - Product Market - Goods Market
	LM - Money Market
	ISLM - Joint Equilibrium
Monetarist School of Economic Thought	Natural Rate Theory
Expectations	Adaptive Expectations	$P_{t - 1}^{e} + λ (P_{t - 1} - P_{t - 1}^{e})$ and different $λ$ values.
	Rational Expectations	Tomatoes example (limitations of adaptive). Assumptions (3)
Growth Theories & Models	Simple Growth Model	Depends on $s$ and $\frac{1}{v}$ (where $v$ is `ICOR`) $g^{*} = \frac{s}{v}$
	Solow’s Growth Model	$L$ in the picture, diminishing returns of $L$ and $K$ and technical productivity $A$ is worshipped. CRS
	Steady State - Balanced Growth Model	Steady state means, $y$ , $k$ and $L$ are growing at the same rate. $k \to k^{*}$ (left: deepening, right: widening). $A$ ’s effect.
	Endogenous Growth Model	$A$ and $K$ (knowledge) - Criticism of Neo-c, 2 from Govt, Inv on humans, $K$ and its spillover
Business Cycles	Kaldor’s Business Cycle	Linear: $S$ and $I$ curves (S over I, stable); Non-linear: income (in)elasticity (MPI,MPS) for various incomes. Decumulation $\to$ and Accumulation $\leftarrow$
	Real Business Cycles	optimize & mar. clear; $U_{t}$ (Lab. Leisure), Shocks, Differences (2), $K_{t + 1}$ , $Y = C + S$ , Graph choices
Neo Keynesian Economics	Sticky Price Model	In imperfect competition, perceived costs to change price outweighs potential benefit.
	Efficiency Wage Model	More the wage, better they perform. - 3 rationales: shrinking, turn-over, gift exchange
	Insider Outsider Model	Unemployment persists. Harder to replace union members. Bargaining power. Firm won’t take once-upon-a-time insiders (already many are there inside)
Consumption¹	Absolute Income Hypothesis (It depends only on your income)	Aggr. $C$ is func. of aggr. $Y - t (Y)$ . 3 properties: - APC falls. - MPC < 1. - APC > MPC (short run). But long run (APC = MPC) = Kuznet Paradox (as overall economy gets wealthier, LR savings ==)
	Relative Income Hypothesis (It depends on the income around you)	- Compare to others in social group (Sharmaji ka beta) - irreversibility of consumption habits (own past income) ==Ratchet effect (mechanism, graph peak)
	Life Cycle Hypothesis (we bring age into the picture)	Aim to maintain stable consumption pattern, aim to consumer entire lifetime earnings (no inheritance). - don’t mirror income variations - dis-, savings (peak earning yr.), dis- - APC (high income indiv.) < lower-income indiv. / retirees Criticisms (unreal, - behavioral factors)
	Permanent Income Hypothesis	Perception (long-term income) Stable anticipated vs fluctuations (unexpected / cyclical) - perm. income: curr inc. + asset/ skills/ economic prosp. permanent consumption - transitory inc. (adjust savings) Criticisms: trans. $≁$ cons., APC same (income groups) empirically wrong
Investments¹	Accelerator Model	Maintain stable $v$ (capital-output ratio) - If output (increases: add cap) (constant: replace worn-out cap. zero net) (decline: reduce investment) - $I_{t} = v (Y_{t} - Y_{t - 1})$ - simple example (maintain ratio of $v = 2$ ) - multiplier-accelerator interaction Limitations: Assumes Const $v$ , ignore other determinants of inv, focuses only on induced investment.
	MEC & MEI	- MEC (discount rate PV of expected future returns to cost, diminishing w/ cap stock, MEC = market interest rate is optimal cap stock) - MEI (profitability of the investment excluding the interest rate, so that we can compare the investment to other investment opportunities)
	Tobin’s Q

Guidelines to writing answers

For 5 mark answers, just give the most important essence: Draw the diagram (something that he is expecting to see) [1.5 sides]
For 10 mark answers, along with the diagram give some explanation and additional details mentioned in the class [3 sides]
For 20 mark answers, give an introduction to the topic (as it was given in class)
Don’t write more than necessary. Attempt everything. Don’t overemphasize on anything. [6 sides]²
Garnish your answer with equations (block your paragraphs, graphs and equations)
Diagrams. Don’t mug up.
- write axes
- write the nomenclature
- name every line/schedule
- don’t make silly mistakes (don’t mix up IS and LM curves)
Use some professional examples. Don’t use the lay-man examples used in class. Very awkward.

Only the gist is important ↩ ↩²
So for a 100 mark paper, there are $20 \times 1.5 = 30$ sides, i.e. 15 sheets. (take them beforehand) ↩

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Macroeconomic Theory

Outline (see Syllabus)

Guidelines to writing answers

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