Macroeconomics: Theory and Policy

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Cover Contents Part 1 Introduction 1. INTRODUCTION TO MACROECONOMICS Introduction 1.1 What is Economics? 1.2 What is Macroeconomics? 1.3 Macroeconomics is both a Theoretical and a Policy Science 1.4 Microeconomics vs. Macroeconomics 1.5 Origin and Growth of Macroeconomics 1.6 Importance of Macroeconomics 1.7 Limitations of Macroeconomics Suggested Readings Questions for Review 2. MACROECONOMIC ISSUES, CONCEPTS AND MODEL BUILDING Introduction 2.1 Macroeconomic Issues 2.2 Some Concepts used in Macroeconomic Analysis 2.3 Macroeconomic Model Building Questions for Review 3. THE CIRCULAR FLOW MODELS OF ECONOMY Introduction 3.1 Circular Flows in a Two-Sector Model 3.2 Circular Flows in Three-Sector Model: A Model with Government Income and Expenditure 3.3 Circular Flows in a Four-Sector Model: A Model with the Foreign Sector Suggested Readings Questions for Review 4. MEASUREMENT OF NATIONAL INCOME Introduction 4.1 Some Concepts Related to National Income 4.2 National Income Measures 4.3 Nominal and Real GNP 4.4 Met~ods of Measuring National Income 4.5 Treatment of Net Income from Abroad 4.6 Double Entry System of Accounting 4.7 Measurement of National Income in India Suggested Readings Questions for Review Part 2 Product Market Analysis: Theory of National Income Determination 5. THE CLASSICAL THEORY OF OUTPUT AND EMPLOYMENT Introduction 5.1 The Classical Postulates 5.2 Say's Law: The Foundation of Classical Macroeconomics 5.3 Classical Theory of Employment: A Formal Model of Say's Law Suggested Readings Questions for Review 6. KEYNESIAN THEORY OF INCOME DETERMINATION: ASIMPLE ECONOMY MODEL Introduction 6.1 The Concepts and Functions 6.2 Income Determination in Simple Economy Model 6.3 The Change in Aggregate Demand and the Multiplier 6.4 A Simple Model of Investment Multiplier 6.5 Static and Dynamic Multiplier 6.6 The Uses and Limitations of Multiplier 6.7 Applicability of Multiplier Theory to LDCs 6.8 The Paradox of Thrift and the Multiplier Suggested Readings Questions for Review 7. INCOME DETERMINATION IN A CLOSED ECONOMY MODEL: A MODEL WITH GOVERNMENTSECTOR Introduction 7.1 Income Determination with the Government Sector 7.2 The Fiscal Multipliers Suggested Readings Questions for Review 8. INCOME DETERMINATION IN OPEN ECONOMY MODEL: A MODEL WITH THE FOREIGN SECTOR Introduction 8.1 Exports, Imports and the Aggregate Demand 8.2 National Income Equilibrium in a Four-Sector Model 8.3 A Complete Four-Sector Model of Income Determination Suggested Readings Questions for Review Part 3 Theories of Consumption and Investment 9. THEORIES OF AGGREGATE CONSUMPTION Introduction 9.1 The Absolute Income Hypothesis: Keynesian Theory of Consumption 9.2 The Relative Income Hypothesis: Duesenberry's Theory 9.3 The Permanent Income Hypothesis: Friedman's Theory of Consumption 9.4 The Life-Cycle Theory of Consumption: The Life-cycle Hypothesis 9.5 Consumption Under Uncertainty: Robert Hall's Random-Walk Theory 9.6 Concluding Remarks on Consumption Theories 9.7 Non-Income Factors Affecting Consumption Suggested Readings Questions for Review 10. THEORY OF INVESTMENT AND CAPITAL ACCUMULATION Introduction 10.1 Some Basic Concepts 10.2 Methods of Investment Decision 10.3 The Marginal Efficiency of Investment (MEl) and Aggregate Demand for Capital 10.4 The Theory of Capital Accumulation 10.5 Income and Investment: The Accelerator Theory of Investment 10.6 The Rental Cost of Capital and Investment 10.7 Tobin's q Theory of Investment: Stock Market and Investment Suggested Readings Questions for Review Part 4 Money Market Analysis: Theory of Money and Interest 11. MONEY: DEFINITION, KINDS AND FUNCTIONS Introduction 11.1 Definition of Money 11.2 The Kinds of Money 11.3 The Functions of Money 11.4 The Significance of Money in Modern Economy Suggested Readings Questions for Review 12. THESUPPLYOF MONEY Introduction 12.1 The Sources of Money Supply 12.2 The Measures of Money Supply in India 12.3 The Theory of Money Supply 12.4 Monetary Expansion and the Money Multiplier: A Simplified Model 12.5 Monetary Expansion, Currency Drain and Deposit Multiplier Suggested Readings Questions for Review 13. THE CLASSICAL THEORY OF MONEY AND INTEREST' Introduction 13.1 The Classical Quantity Theory of Money 13.2 The Cambridge Version of Quantity Theory of Money 13.3 The Classical Theory of Interest 13.4 Keynes's Criticism of Classical Theory of Interest Suggested Readings Questions for Review 14. THE KEYNESIAN THEORY OF MONEY AND INTEREST Introduction 14.1 The Classical and Neoclassical Views on Holding Money: A Precursor 14.2 The Keynesian Theory of Demand for Money 14.3 The Keynesian Theory of Interest and Money Market Equilibrium 14.4 Changes in the Money Market and the Interest Rate 14.5 Criticism of the Keynesian Theory of Interest Suggested Readings Questions for Review 15. THE POST -KEYNESIAN THEORIES OF DEMAND FOR MONEY 15.1 An Overview 15.2 Portfolio Theories of Demand for Money 15.3 Baumol-Tobin Approach to Transaction Demand for Money 15.4 Tobin's Theory of Speculative Demand for Money: the Portfolio Optimisation Approach 15.5 Friedman's Quantity Theory of Money Suggested Readings Questions for Review Part 5 Integration of Product and Money Market Equilibrium 16. THE IS-LM MODEL IN TWO-SECTOR ECONOMY Introduction 16.1 The Interdependence of Product and Money Markets 16.2 The IS-LM Model: An Elementary Exposition 16.3 Algebraic Version of the IS-LM Model 16.4 From Disequilibrium to EqUilibrium-The Dynamics of Adjustment 16.5 Shift in IS and LM Curves and the General Equilibrium Suggested Readings Questions for Review 17. THE IS-LMMODEL WITH THE GOVERNMENT SECTOR Introduction 17.1 IS-Curve with the Government Sector 17.2 Monetary Changes and Money-Market Equilibrium 17.3 The Product and money Market Equilibrium in Three-Sector IS-LM Model 17.4 Fiscal and Monetary Changes and General Equilibrium 17.5 Application of the Three-Sector Model Suggested Readings Questions for Review Appendix to Chapter 17 18. THE IS-LMMODEL WITH FOREIGN SECTOR Introduction 18.1 The Product-Market Equilibrium with Foreign Trade 18.2 Derivation of the IS Curve 18.3 Derivation olthe IS Curve: An Alternative Method 18.4 The Four-Sector IS-LM Model 18.5 The Shift in the IS Curve and the General Equilibrium 18.6 The IS-LM Model with the Balance of Payments Suggested Readings Questions for Review 19. DETERMINATION OF OUTPUT, PRICES AND EMPLOYMENT: A KEYNESIAN-CLASSICAL SYNTHESIS Introduction 19.1 Determination of Aggregate Price and Output: A Preview 19.2 Derivation of Aggregate Demand Curve 19.3 The Classical and Keynesian Approaches to Aggregate Supply Curve 19.4 The Aggregate Demand-5upply Model: The Final View 19.5 Achieving Full Employment: Policy Options Under the Keynesian System 19.6 Supply Shocks and Policy Dilemma Suggested Readings Questions for Review 20. POST-KEYNESIAN MACROECONOMICS Introduction 20.1 The Modern Monetarism: A Counter-Revolution 20.2 The Keynesian vs. Monetarist Debate: Does Money Matter? 20.3 The Reconciliation of Keynesian and Monetarist Controversy 20.4 The New Classical Macroeconomics: The Radicalism 20.5 The Supply-Side Economics Suggested Readings Questions for Review Part 6 Economic Growth and Business Cycles 21. THEORIES OF ECONOMIC GROWTH Introduction 21.1 The Meaning of Economic Growth 21.2 Factors in Economic Growth 21.3 Production Function and Growth Accounting 21.4 Theories of Economic Growth: An Overview 21.5 Harrod-Damar Model of Growth 21.6 The Neo-Classical Theory of Growth 21.7 Endogenous Growth Theory Suggested Readings Questions for Review Appendix to Chapter 21 22. BUSINESS CYCLE THEORIES AND GLOBAL RECESSION Introduction 22.1 What is Business Cycle? 22.2 Phases of Business Cycles 22.3 Theories of Business Cycle 22.4 What Theory of Trade Cycle? 22.5 The Global Recession-The Business Cycle of 2008-09 22.6 Need for Controlling Business Cycles 22.7 Policy Measures to Control BUsiness Cycle Suggested Readings Questions for Review Part 7 Inflatin and Unemployment 23. INFLATION: MEANING, MEASUREAND EFFECTS Introduction 23.1 What is Inflation? 23.2 Methods of Measuring Inflation 23.3 Types of Inflation 23.4 inflation, Disinflation and Deflation 23.5 Inflation in India: A Long-Term View 23.6 Economic Effects of Inflation Suggested Readings Questions for Review Appendix to Chapter 23 24. THEORIES OF INFLATION AND CONTROL MEASURES Introduction 24.1 The Classical and Neo-classical Theories of Inflation 24.2 The Keynesian Theory of Inflation 24.3 The Monetarist View on Inflation 24.4 Modern Theories of Infiation 24.5 Interaction between Demand-Pull and Cost-Push Infiation 24.6 Infiation in Less Developed Countries (LDCs) 24.7 Measures to Control Infiation Suggested Readings Questions for Review 25. INFLATION AND UNEMPLOYMENT Introduction 25.1 The Meaning, Measurement and the Kinds of Unemployment 25.2 Infiation and the Rate of Unemployment 25.3 Modifications in Phillips Curve 25.4 What Rate of Unemployment is the Natural Rate of Unemployment? 25.5 Policy Dilemma: What is Desirable-Infiation or Unemployment? Suggested Readings Questions for Review Part 8 International Aspects of Macroeconomics 26. INTERNATIONAL MONETARY ASPECT: THE FOREIGN EXCHANGE RATE Introduction 26.1 The Foreign Exchange Market 26.2 Determination of Exchange Rate in Free Exchange Market 26.3 The Fixed Exchange Rate and its Determination 26.4 The Controversy on Fixed vs. Flexible Exchange Rate Suggested Readings Questions for Review 27. BALANCE OF PAYMENTS: MEANING AND ASSESSMENT Introduction 27.1 The Balance of Payments: Meaning and Purpose 27.2 The Balance of Payments Accounts 27.3 India's Balance of Payments 27.4 Assessment of Balance of Payments 27.5 Causes and Kinds of BOP Disequilibrium Suggested Readings Questions for Review 28. BALANCE OF PAYMENTS: DISEQUILIBRIUM AND ADJUSTMENTS Introduction 28.1 The Classical Approach: The Automatic Adjustment Method 28.2 BOP Adjustment by Policy Measures: Mundell-Fleming Model 28.3 The Expenditure Changing Policies 28.4 The Expenditure Switching Policy: Devaluation 28.5 Monetary Approach to BOP Adjustments Suggested Readings Questions for Review Part 9 Macroeconomic Policies: Monetary and Fililcal Policies 29. MACROECONOMIC POLICY: MEANING, OBJECTIVES AND FORMULATION Introduction 29.1 Macroeconomic Policy: Meaning and Scope 29.2 The Need for and Advent of Macroeconomic Policies 29.3 Objectives of Macroeconomic Policies 29.4 Objectives of India's Macroeconomic Policy 29.5 Formulation of the Macroeconomic Policy Suggested Readings Questions for Review 30. MONETARY POLICY Introduction 30.1 Meaning and Scope of Monetary Policy 30.2 Instruments of Monetary Policy 30.3 Transmission Mechanism of Monetary Policy: The Portfolio Adjustment 30.4 The Limitations and Effectiveness of Monetary Policy 30.5 Monetary Policy of India Suggested Readings Questions for Review Appendix to Chapter 30 31. FISCAL POLICY Introduction 31.1 Meaning and Scope of Fiscal Policy 31.2 Fiscal Instruments and Target Variables 31.3 Kinds of Fiscal Policy 31.4 Fiscal Policy and Macroeconomic Goals 31.5 Limitations of Fiscal Policy 31.6 CroWding-out and Crowding-in Controversy 31.7 Fiscal Policy of India Suggested Readings Questions for Review Appendix to Chapter 31 APPENDIX: SOLUTION TO THE NUMERICAL QUESTIONS INDEX