MBA Macroeconomics UEBS, Jonathan Crook

MACROECONOMICS
Course Booklet
Semester 1
2011/2012
FTMBAMBAIB – Core Course

Contents Page Number

Course Details .................................................................................................... 3
Course Description and Objectives .................................................................... 3
Learning Outcomes ............................................................................................ 3
Planned Student Learning Experiences ............................................................. 4
Teaching Approach............................................................................................. 4
Assessment ........................................................................................................ 4
Feedback ............................................................................................................ 5
Failure to Attempt or Complete Assessed Coursework or an Examination ........ 5
Exam Arrangements for Disabled Students........................................................ 5
Plagiarism Statement.......................................................................................... 6
Appeals............................................................................................................... 6
Consultation........................................................................................................ 6
Course Monitoring Surveys ................................................................................ 6
Required Text(s) ................................................................................................. 6
Course Website .................................................................................................. 7
Advised Preparatory Work.................................................................................. 8
Course Lecturer(s).............................................................................................. 8
Study Programme............................................................................................... 9
Lecture Outlines and Readings ........................................................................ 11
Exam Papers .................................................................................................... 11
Appendix 1: Further Reading............................................................................ 11
Appendix 2: Workshops.................................................................................... 12
Tutorials ............................................................................................................ 13

Putting you at the heart of business 2 FTMBA/MBAIB - Macroeconomics

Course Details
Course Code: BUST11208
Title: Macroeconomics
College: Humanities and Social Science
School: University of Edinburgh Business School
Course Organiser: Professor Jonathan N. Crook
Contact Hours: 24
Semester: 1a
Lectures: N/A
Tutorials:

This is a 10-credit course. As per the Scottish Credit Qualifications Framework (SCQF), this means
that it should entail 100 hours of student effort. For example:

Contact hours 8 x 2 hour lectures 16
8 x 1 hour tutorials 8
Preparatory reading 8 x 4 hours in advance of 32
lecture
Tutorial work 8 x 2 hours in advance of 16
tutorial
Examination Writing exam and revision 28
Total 100 student effort hours

Course Description and Objectives
This course is designed to provide a sufficient understanding of macroeconomics to allow an
understanding of relevant articles in the Financial Times, Economist, etc and reports by government
agencies, the World Bank, or consultants. This is seen as essential to an understanding of business
because:
Macroeconomics affects all companies by
(a) level of demand for products;
(b) interest rates - with their effect on the costs of the firm;
(c) the exchange rate - which tends to intensify or reduce competition even for firms not overtly
engaged in trade;
(d) and each of these elements interact both with themselves and with other factors, such as
government policy.

Learning Outcomes
Knowledge and Understanding:
• The elements measured by GNP, GDP and National Income
• The role of savings and investment - and more generally the role of leakages (savings, taxation
and imports) and injections (Investment, Government expenditure and Exports) in determining the
level of GDP
• The implications of rising GNP for tax revenues and the current account of the balance of
payments
• The role of government in expanding aggregate demand through fiscal policy
• The creation of money by the banking system and the limits due to reserve requirements
• The role of the interest rate in affecting the demand for money
• The role of money supply in inflation
• The use of monetary policy to control inflation and the role of the central bank
• The determinants of changes in the current and capital accounts of the balance of payments – and
their impact on exchange rates


This course complements other courses in the Programme as follows:
(a) Finance courses - by providing an understanding of the determinants of interest and exchange
rates in the economy.
(b) Strategic Management - by providing the analysis of demand, interest rates, inflation, and foreign
exchange rates which influence many strategic decisions.

More widely, macroeconomics is probably the clearest example of systems thinking and as such
provides many students with a new approach to analysis.

Cognitive Skills:

This course is principally geared to providing an understanding of the macro-economy. Skills
training is not explicitly part of the course. However, developing this understanding inevitably
develops and exercises the following important skills:

(a) Logical thought in analysing cause and effect in the presence of interdependence
(b) Clarity of exposition in explaining complex systems
(c) The use of symbols and simple equations to model real-world phenomena
(d) Understanding data in the presence of multi-causal phenomena (in which it complements the
course on statistical analysis)

Subject Specific Skills:

N/A

Planned Student Learning Experiences
Lectures provide the framework and agenda and motivate private study by providing the
structure of the argument.

These are supported by weekly workshops, which both clarify understanding and, by providing a
forum for discussion, encourage the students to take an active role in working with the concepts
and to develop the ability to explain how the different factors work.

Note that the workshops are voluntary. Those who do not wish to attend are, however, advised to
check the workshops and answers as they may be used as the basis for exam questions.

Teaching Approach
Feedback and Consultation

The workshops will provide a forum for feedback on understanding of concepts, clarity of problem
solving, analytical skills and reasoning. Further details will be given to students by the lecturer.

Assessment
Form of Assessment:

The examination is designed to test the students' understanding of the macroeconomic system. The
examination will consist of six questions from which you will be required to answer any two. The
examination will last one hour and thirty minutes.


Assessment Criteria:

Rationale for 100% examination based assessment

Since Macroeconomics is much more useful when understood as a system, an examination
motivates students to revise the course as a whole. With the intensity of the course, it is a severe
extra burden on the students to produce essays, and in view of the short time over which the course
runs, it would be difficult to set essays which covered enough of the course to be useful. An early
essay would not pick up the systems flavour, and a late one comes too near the exam to provide
feedback

Dates of Assessment:

17th-21st October is the exam period.

Feedback
Students will gain feedback on their understanding of the material when they discuss their answers to
the tutorial questions in the tutorials. Students may also ask questions in Lectures to assess tehir
knowledge.

Generic feedback will be given on the performance of the class in the Exam.

Failure to Attempt or Complete Assessed Coursework or an Examination
Where a student fails to attempt or fails to complete assessed coursework or an examination, the
course organiser will seek to establish from the student whether the failure is legitimate (i.e.
supported by appropriate documentary evidence) or not. A failure to attempt assessed coursework or
an examination without good reason will result in a zero mark being awarded for that element of
assessment. In the case of a legitimate failure to attempt or complete assessed coursework, the
course organiser may decide to offer an extended submission deadline (without marks deduction for
late submission). Where a student is able to produce evidence of legitimate reasons for failure to
attempt or complete an examination, and where it has not been possible to offer an extended
submission deadline for a legitimate failure to attempt or complete assessed coursework, the course
organiser will refer the case to the Special Circumstances Committee.

Groupwork Issues
Where group work is involved, should there be any problems with the group dynamic, these should
be raised by two concurring members of the team with the course organiser before the Reading
Week.

Exam Arrangements for Disabled Students
If required, specific reasonable adjustments will be made to enable disabled students to sit
examinations, including any written, practice or oral examination, continuously assessed coursework
or dissertation which counts towards the final assessment. For more information about the support
disabled students can receive and the approval process for making reasonable adjustments visit
http://www.ed.ac.uk/schools-departments/disability-office/students/support-we-offer. Arrangements
for degree examinations must be approved in advance by the Registry (650 2214), and the Disability
Office (650 6828) for dyslexic students, and reported to the examiners. The Registry requires
notification of specific examination arrangements for dyslexic students well in advance of examination
weeks and specific deadlines apply (see http://www.ed.ac.uk/schools-departments/registry/other-


info/dyslexia). For all other disabled students the Registry must see and accept a medical certificate
or similar documentation relating to the student or be satisfied that an acceptable certificate will be
produced. Such students should discuss their requirements with their Programme Director and/or the
Disability Office at the earliest opportunity.

Plagiarism Statement
Plagiarism and cheating are offences against the University discipline. The full text of the University’s
regulation on plagiarism and cheating can be found on the University’s website at
http://www.docs.sasg.ed.ac.uk/AcademicServices/Discipline/StudentGuidanceUGPGT.pdf

Appeals
The process for students appealing against the assessment of grades is described in the Code of
Practice for Taught Postgraduate Programmes.

Consultation
Students are encouraged to raise any concerns of a subject specific nature with the relevant course
organiser. All but the simplest issues take time to resolve, and so please raise the issues as soon as
you are aware of them.

In the event that your course organiser cannot assist you, please contact your Programme Director.

Course Monitoring Surveys
Because the PGT programmes are constantly being streamlined to remain progressive and
contemporary, it is essential that you provide feedback on the courses you undertake so that the
academic and administrative staff can be aware of your needs and the needs of your peers; the only
way we can do this is if you let us know our strengths and what can be improved to make your
learning experience with us as relevant and fulfilling as possible.

At the conclusion of every semester you will be asked to complete anonymous online course
monitoring surveys. You will be notified when the surveys relevant to your programme become live.
The results of these surveys will then be collated and distributed to the course lecturer(s) who will in
turn provide feedback on the course.

All information provided by students and course lecturer(s) will be taken into consideration by
decision makers within the Business School – and may alter the way that future courses are
administered. We are providing you with an outlet to voice your opinions and it is very important for
the current state and the future of the Business School and its students that you do so.

Required Text(s)
Students will need to collect the following text from Blackwells:

D Begg, G Vernasca, S Fischer & R Dornbusch, Economics, 10th edition, McGraw Hill, 2001.

Those who find the course very difficult may find the following useful;

D Begg, S. Fischer and R. Dornbusch, Foundations of Economics, 3rd Edition McGraw Hill, 2006.
D Begg and D Ward Economics for Business, 3rd Edition McGraw Hill, 2009.
While these are useful sources of orientation, they are at a lower level of detail than desirable.


Because of the international nature of the MBA, the empirical details are not useful to many of the
group. For an understanding of the recent developments of the UK economy and amplification of
your theoretical understanding by empirical example, see:

Griffiths, Alan and Wall, Stuart, Applied Economics, 11th Edition Prentice Hall, 2007

For alternative explanations of the same concepts see:
J Sloman and A. Wride, Economics, 7th Edition Prentice Hall, 2009.

Web Sites

A review of the UK Economic Situation is to be found in the Chancellor's Budget speech. It is
reproduced in full with explanatory appendices on:
UK: HM Treasury, home page with access to Budget Reports and other publications:
http://www.hm-treasury.gov.uk/

UK Monetary Policy is explained on:
http://www.bankofengland.co.uk/

European Monetary Policy: Euro Area: European Central Bank:
http://www.ecb.int/

IMF (International Monetary Fund): World Economic Outlook
http://www.imf.org/external/ns/cs.aspx?id=29

OECD (Organisation for Economic Cooperation and Development)
http://www.oecd.org/

USA: Monetary Policy, The Federal Reserve
http://www.federalreserve.gov/monetarypolicy/default.htm

SA: Federal Reserve Bank of San Francisco: US Monetary Policy: an Introduction
http://www.frbsf.org/publications/federalreserve/monetary/index.html

USA : Economic Report of the President
http://www.gpoaccess.gov/eop/index.html

Course Website
Lecture materials will be made available online via WebCT, which is accessible from the “quick links”
area on MyBiz http://www.business-school.ed.ac.uk/mybiz/home

On the course website you will be able to find a copy of this booklet, course handouts,
announcements and other facilities. It is important that you regularly check the WebCT system in
order to keep up to date with the course. You should be automatically registered for all your courses;
if you are not please consult the Stuart Mallen, the programme secretary (email
office+mba@business-school.ed.ac.uk) to ensure that your records are in order. A user guide and full
details of how to logon and use the system are available on the website. N.B. It is vitally important
that you check your WebCT mailbox regularly OR set it up so that it forwards messages automatically
to your regular e-mail account.


Advised Preparatory Work
N/A

Course Lecturer(s)
Professor Jonathan N. Crook - BA (Lancaster); MSc (Wales)
Tel: 0131 650 3802
Office: Room 3.27, Business School, 29 Buccleuch Place, Edinburgh, EH8 9JS
Email: Jonathan.Crook @ed.ac.uk

Read Economics at Lancaster. Visiting Fulbright Postdoctoral Research Scholar, McIntyre School of
Commerce, University of Virginia, USA, Visiting Fellow, University of Warwick, UK and Visiting
Fellow, European University Institute, Florence. Currently Fellow of the Financial Institutions Centre,
Wharton School, University of Pennsylvania and of the Centre for Finance and Credit Markets,
University of Nottingham, UK. Elected Fellow of the Royal Society of Edinburgh. Director of the Credit
Research Centre.


Study Programme
Course Outline
References to BFD are to the recommended text, the 10th Edition of Begg, Vernasca, Fischer
and Dornbusch Economics

Demand, Supply and the Market 19 Sept
The "Market"; demand and supply curves; behind the demand curve; Tastes, Prices and Incomes;
behind the supply curve: technology, input costs and government regulations.

Reference: BFD Chapter 3, pp42-60
Multiple choice exercises:
http://highered.mcgraw-
hill.com/sites/0077117875/student_view0/chapter3/multiple_choice_quiz.html

MACROECONOMICS

The Determination of National Income 23 Sept

The circular flow of income; actual values of consumption, investment, saving, government
expenditure, and foreign payments. Components of aggregate demand: planned amounts of
consumption, planned investment spending; aggregate demand; equilibrium output; the equality of
planned savings and planned investment expenditures.

Reference: BFD Chapter 15, Sections 15-3 to 15-4 only, pp362-373 and Chapter 16, sections
16-1 to 16-5, pp383-392.

Self test questions to question 16( further questions refer to the next session):

The Multiplier, Fiscal Policy and Foreign Trade 26Sept

a) The Multiplier
The multiplier; the paradox of thrift.

Reference: BFD Chapter 16, sections 16-6 and 16-7, pp392-395

Self test questions on Chapter 20 (Question 17 onwards):

b) Fiscal Policy and Foreign Trade
The government and aggregate demand; the balanced budget multiplier; the government
budget; deficits and the fiscal stance; automatic stabilisers; the limitations on active fiscal policy;
The National Debt and the deficit; foreign trade and income determination.

Reference: BFD Chapter 17, pp398-417.

Self test questions:


Money and Modern Banking 30 Sept
Money and its functions; commercial banks and the money supply; the money multiplier;
competition between banks. The demand for money.

Reference: BFD Chapter 18 pp420-438

http://highered.mcgraw-hill.com/sites/0077107756/student_view0/chapter22/student_self-
test_questions.html

Interest Rates and Monetary Transmission 3 Oct
The Bank and the money supply; reserve requirements; the discount rate; open market
operations; the repo market; the lender of the last resort. Equilibrium in financial markets.

Monetary control; the targets and instruments of monetary policy; the transmission mechanism:
wealth effects and the credit channel.

Reference: BFD Chapter 19 pp441-460

Bank of England Quarterly Bulletin, (1997) “Comparing the monetary transmission
mechanisms in France, Germany and the United Kingdom: Some issues and results” May, pp
152-161.


Aggregate Supply and Inflation 7 Oct

Aggregate demand; aggregate supply; equilibrium inflation. Labour market and wages. Short run
aggregate supply. Adjustment to equilibrium, supply and demand shocks.


Reference: Bank of England, Minutes of the Monetary Policy Committee Meeting 2nd and 3rd
August 2006, Published 16th August
http://www.bankofengland.co.uk/publications/minutes/mpc/pdf/2006/mpc0608.pdf

Inflation 10 Oct

Definition of inflation. The Phillips curve in the long run and in the short run, supply shocks.
Costs of inflation; controlling inflation.


Exchange Rates and the Balance of Payments 14 Oct

The Forex market; Exchange rate regimes; the balance of payments, determinants of the
current account; the capital account; speculation and interest rate parity; internal and external


balance. Long run equilibrium, the role of foreign debt or assets.
Reference: BFD Chapter 24, pp549-568


Lecture Outlines and Readings
As above

Exam Papers
Where applicable all available exam papers can be found on the University of Edinburgh website at:
http://www.exampapers.lib.ed.ac.uk/

Appendix 1: Further Reading
N/A


Appendix 2: Workshops
FTMBA AND MBAIB
MACROECONOMICS WORKSHOPS

To check your understanding of Macroeconomics, you should use three elements:

1. The self-test questions on the website as indicated in the course booklet. They
provide an excellent way of reviewing your understanding of the building blocks of the
subject.
2. The questions at the back of each chapter are well worth answering, and you can
check your answers against those provided in the book. Bring any difficulties you
experience to the Workshops.
3. Try to answer the questions below. These provide you with a test of your
understanding of how the building blocks fit together, and you will need to ensure that
you have this as well as the detail.

You will be provided with answers to these questions. If you are satisfied that you have understood
the material, it is unlikely that the workshop will be of significant benefit. Otherwise, please come to
the workshop to sort out any difficulties.


Tutorials

Week 1 – 23 September: Supply and demand

1. The car manufacturing industry in Europe and the USA has seen a dramatic decrease in demand
over the last 12 months. For example, GM was forced into bankruptcy earlier this year.

Consider the market for new cars. Explain the effects of each of the following changes on the
equilibrium price charged and quantity sold of new cars:

a) a decrease in consumer incomes;
b) a decrease in bus fares;
c) an decrease in the wage rate paid to workers in car plants;
d) an increase in the price of petrol;
e) a decrease in the price of second hand cars.

2. If incomes were growing, consider how prices and quantities might change for the two products
featured in the supply and demand diagrams below.

Price Demand
Price Demand
Supply

Supply

Quantity
Quantity
Cars
Housing

a) Why might the supply curve for housing be very steep as drawn in the left hand diagram?
b) Could the Supply curve for Cars be even flatter? For example what would it mean if it
were horizontal? Is a horizontal supply curve possible in reality? What would its
implications be for prices if incomes rose?
c) What might cause the whole supply curve to shift down?
d) Suppose there was an increase in the number of people who defaulted on their mortgages
and found that their house was re-possessed by their bank. What would be the effects (if
any) on the supply and demand for houses?


Week 2 – 26 September: The circular flow of income

1. Write down an identity that shows the items in the macroeconomic accounts that need to be
added together to equal GDP.

2. Write down the condition necessary for the economy to be at an equilibrium level of output.

3. What would cause a rise in GDP in the following simple Keynesian models?
i. A closed economy with no government.
ii. A closed economy with a government sector.
In each case give an example from recent news events.

4. Flooding is apparently becoming a feature of winters in the UK. What elements of the impacts of
flooding in the UK might be expected to cause UK GDP to rise, and conversely, what elements
would be likely to cause it to fall? Do you think on balance GDP will increase as a result? (A
good approach would be to list the elements in the circular flow of income, probably using the
categories of Leakages and Injections, and suggest how each item will be affected.)

Week 2 – 30 September: The Multiplier

1. What would cause a rise in GDP in a simple Keynesian model of an open economy with a
government sector.

2. What is the multiplier?
Define it.
Explain why it occurs.

3. If GDP falls, what would be the effect on Tax income for the government, - express this as an
equation. How would this affect the balance of the government budget? Would there be other
factors also affecting it?

4. For the US and UK governments, are an decrease in expenditures on the war in Afganistan
likely to decrease their GDPs, and would GDP fall if the expenditures on the war were exactly
matched by reduced taxation (i.e. maintaining a balanced budget!)?

5. What do you expect to be the effects on aggregate demand and on GDP of the recent fall in
US house prices?


Week 3 - 3 October: Fiscal Policy and Foreign Trade and Money and Banking

1. What makes the size of the multiplier smaller in an open economy with a government sector
compared to that in a closed economy? (Use the equation for the multiplier to show this).

2. If GDP rose in an open economy, what would be the effect on Imports – express as an equation,
and explain.

3. In 2008 the Bank of England and the Federal Reserve Board of the US increased the money
supplies of their economies. Many commentators think the Bank of England will shortly
substantially increase the money supply again. Suppose the Bank of England, by open market
operations, does increase the money supply in the UK. Explain how, by increasing the monetary
base, the supply of money measured by M4 would increase. Is this what has actually happened?

4. In 2007-08 the world’s financial markets were in turmoil because of defaults in the US ‘subprime’
mortgage markets. Explain how this would affect bank reserves, as opposed to just the mortgage
lender’s reserves.

5 How have banks adapted to the fall in their reserves, and with what consequences?

6. Write short notes on: the opportunity cost of money and the demand for money.

Week 3 – 7 October: Interest Rates and Monetary Transmission

1. Write short notes on:
a) The repo market and monetary control
b) The impact of rising interest rates on consumption
c) The impact of rising interest rates on investment

2. What is meant by ‘Quantitative Easing’? Can the Fed in the US achieve quantitative easing
a) By using the repo market – explain the mechanisms
b) Through its role as banker to the US government
c) Through its role of lender of the last resort?
d) Is quantitative easing likely to have increased the money supply as compared to
pre-crisis levels?


Week 4 – 10 October: Aggregate Supply and Prices

1. Write short notes on :
a) How we calculate real wages;
b) How we calculate real interest rates;
c) The aggregate demand curve;
d) The long run aggregate supply curve.

2. Suppose that the political changes in Libya result in more oil being available on world markets
and the world price of crude oil decreases. If the UK government has a given inflation target,
explain what you would expect to happen to aggregate demand, long run aggregate supply,
output and the rate of inflation in the UK economy.

3. Why does the long run aggregate supply curve differ from the short run aggregate supply
curve?

4. Suppose the Bank of England tightens monetary policy. Explain the effect on UK output and
employment.

5. Suppose opportunities for investing in high tech companies increases aggregate demand in
the short term but aggregate supply in the long run. Using AD and AS curves, show why
output might rise without inflation increasing.

6. Will the recession affect the US (or UK) or any other individual country’s Aggregate Supply
schedule or does it just move the short term equilibrium down the schedule?

Week 4 – 14 October: Inflation

1. What is the Quantity Theory of Money?

2. What is the natural rate of unemployment ?

3. Why, all things constant, is the long run Phillips curve vertical at a specific unemployment
rate?

4. Why does the short-run Phillps curve slope downwards?

5. Suppose a new UK government announces it wishes to cut the inflation target from 2.5% to
1%. Explain why the succes go the Government’s new policy depends on whether workers
believe the policy of not.

6. Why is inflation a problem? Who suffers most from inflation?

7. How can a government control inflation?


Student Feedback from 2010/2011

Number of respondents: 37
Expected number of respondents: 40
Response rate: 92.5%

Macroeconomics with Jonathan Crook
Please state your level of agreement with the following:
The course met the stated objectives
Strongly agree: 35.1% 13
Agree: 56.8% 21
Neither agree nor disagree: 8.1% 3
Disagree: 0.0% 0
Strongly disagree: 0.0% 0
The course was well organised
Strongly agree: 34.3% 12
Agree: 51.4% 18
Neither agree nor disagree: 14.3% 5
Disagree: 0.0% 0
Strongly disagree: 0.0% 0
Were your expectations met by the course?
Yes: 91.9% 34
No: 8.1% 3
What overall rating would you give this course?
Rating
Excellent: 24.3% 9
Above average: 51.4% 19
Average: 24.3% 9
Below average: 0.0% 0
Poor: 0.0% 0


MBA Macroeconomics UEBS, Jonathan Crook

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