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Description:

This course provides a critical introduction to the literature on the role of money and finance in the macroeconomy. It introduces the analytic, descriptive, and historical foundations necessary to understand the nature of the macroeconomic operations of the economy, with emphasis on the financial system. We build an open economy macroeconomic framework, incorporating the analytics of the goods market, money market, and foreign exchange market. This model, in conjunction with an extensive treatment of the banking sector, will serve as the basis for our analysis of contemporary economic problems besetting the global economy.

The course is designed under the guidelines of the revised evening MBA curriculum – It is shorter in delivery and more intense in its demands for class preparation. Managers, confronting growing volatility in the business environment, need a richer understanding of the key economic relationships that shape the arena of their decision-making. The present crisis of the global economy moves macroeconomics from the background to the foreground of business decision-making for the entire spectrum of enterprise – from the entrepreneurial startup to the multinational corporation. The simplified macroeconomic framework empowers students to develop a critical reading of the business and financial press, along with a “way of thinking’ about the challenges of the business environment, to navigate the controversies therein.

We begin examining the conceptual scope and limitations of the model. We identify the key variables, explore the various theoretical relationships between these variables postulated by various schools of economic thought, and proceed to relate these macro indicators to observed economic euphoria or dysfunction and the policy debates surrounding proposed cures. In sequential fashion we build the analytics of the goods, money, and foreign exchange markets and examine in detail the determination of employment, output, prices, interest rates, and exchange rates.

Special emphasis is dedicated to the role of the financial system in market economies. On the one hand, we examine arguments praising their efficient allocation of capital and contribution to the production of new wealth. On the other hand, we examine arguments disparaging the inherently destabilizing nature of the financial mechanism in monetary economies and the consequent destruction of wealth that comes with the financial fragility spawned by laissez faire finance. Construction of the model remains the mainstay of the course, however, to the extent time permits we examine questions related to these debates: How do you conduct monetary policy in a global economy? Is the financial mechanism in a monetary economy inherently stabilizing, or does it destabilize the operations of the economy as a whole? What constraint does financial fragility impose on macroeconomic adjustment and what are the implications for the domestic business environment? How did the 1980s international debt crisis generate banking instability in the US and hyperinflation in Latin America? What are the implications for the similarly high debt/income ratios in the world today? Are financial panics 'no worse than a bad cold?'

In the first half of the course, we focus on the generic ‘closed economy’ and we will conduct simulations of monetary and fiscal policy scenarios. The latter half examines the relation of this economy to the rest of the world. We examine the heightened complexity of policy scenarios in an global economic environment, as well as the exchange rate and financial turbulence associated with international capital markets. This theory will inform our understanding of recent emerging market crises, from ‘Tequila’ in Mexico, to the ‘Tigers’ in Asia, to the ‘Vodka’ meltdown in Russia, ‘Caipirinha’ in Brazil, and Argentina’s last ‘Tango’ with international creditors.

Utilizing the open economy macro model developed in class, we use economic theory to develop a richer understanding of how the macropolicy environment relates to managerial decision-making within the firm.