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   Course Title    Macroeconomics I
Lecturer    Alvar Kangur
Institution    Tallin Technical University
Country    Estonia

I Introduction

Economics is about allocation of resources. It is a study of scarcity and of choices we have to make. Every day we would like to consume more and more, our needs are virtually unlimited, but normally this is just not possible to satisfy all our desires. Such everyday problems can be relatively easily understood when confronting a single household or firm. But what about all firms or households put together? What about a country, a nation, or even the whole World?

Well, that’s what macroeconomics is about. Macroeconomics focuses mainly on national economy as a whole by exploring aggregate indicators, such as inflation, unemployment, in explanation of economic phenomenon. It can be as fascinating as anything else you will ever study, helping you to understand national policies as well as events and problems on international arena.

Macroeconomics I is basic theoretical course following Microeconomics I. It is essential that a student taking that course have some prior knowledge of economic processes on micro level. Any special mathematical knowledge is not necessary to follow that course. The course consists of 16 lectures (a 3 academic hours), each followed by a seminar (a 2 academic hours).

II Objectives of the course

  1. Academic Aims

    The purpose of this course is to explain aggregate indicators used in macroeconomics, to give students basic knowledge of general principles and mechanisms of national economy, to demonstrate basic macromodels, to explain possible alternative choices and their policy implications. Where possible, real-world events are discussed in the light of presented theories. During this course students deal mostly with short-term problems using economic models mainly in their verbal or graphical representation. Mathematical methods are more deeply presented in subsequent courses.

  2. Learning Outcomes

    After completing this course students should be able to explain basic principles and mechanisms in national economy, and to analyze the impacts of different policy decisions on economy/aggregate indicators.

III Course Detail

a. Lecture Synopsis

Lecture I. Introduction to macroeconomics. National accounting.

  • Short overview of economic schools.
  • Gross Domestic Product (GDP): production, expenditure and income approach.
  • National, personal and disposable income.

Lecture II. National accounting (cont’d). Long term economic growth and development.

  • Limitations of GDP accounting.
  • Production possibilities frontier.
  • Sources of economic growth.
  • Saving, investment and capital formation.
  • Production function.

Lecture III. Business cycles, models of aggregate demand and supply.

  • Explaining business cycles, business cycle theories.
  • AD and AS.
  • Macroeconomic equilibrium.

Lecture IV. Consumption, saving and investment.

  • Classical theory. Say’s law; flexible wages, prices and interest.
  • Keynesian aggregate demand.
  • Autonomous and induced consumption and saving. MPS and MPC.
  • Types of investment, diminishing returns to investment.

Lecture V. Keynesian equilibrium model.

  • Aggregate expenditures and equilibrium.
  • Planned and actual saving and investment.
  • The multiplier effect; paradox of thrift; investment accelerator.

Lecture VI. Keynesian equilibrium model (cont’d). Costs and benefits of public sector, public debt.

  • Potential GDP. GDP gaps: inflationary and recessionary.
  • Private versus public finance.
  • Functional finance versus balanced budget.
  • Crowding out.
  • Deficit and debt.

Lecture VII. Fiscal policy.

  • Discretionary spending, taxes and equilibrium.
  • Automatic stabilizers.
  • Laffer curve, marginal tax rates, government purchases and transfers.
  • Autonomous spending, tax and balanced budget multipliers.

Lecture VIII. Mid-exam I (lectures I – VII).

Lecture IX. Money and banking.

  • Functions and types of money.
  • Supply of money.
  • Fractional reserve banking, potential and actual money multipliers, money destruction process.
  • Financial institutions.

Lecture X. Inflation.

  • What is inflation? Price indices and problems in measuring.
  • Types of inflation.
  • Costs and benefits of inflation.

Lecture XI. Monetary theory and policy.

  • Demand for money: transactions, precautionary and asset demands. Costs for holding money.
  • Classical and Keynesian monetary theory, monetarism.
  • Monetary policy versus fiscal policy.

Lecture XII. Employment and unemployment.

  • Supply of and demand for labor.
  • Concept and sources of unemployment; measuring unemployment.
  • Costs and benefits of unemployment.

Lecture XIII. Classical and neoclassical analysis of business cycles.

  • AS and AD shifts and shocks.
  • Trade-offs between unemployment and inflation.
  • Keynesian Phillips curves.
  • The New Classical natural rate theory.
  • The natural rate of interest.

Lecture XIV. International trade.

  • Concepts of absolute advantage, specialization and comparative advantage.
  • Gains from trade and specialization. Arguments against free trade.
  • Trade barriers: tariff and non-tariff.

Lecture XV. International Finance.

  • Balance of payments: current and capital accounts.
  • Exchange rates: nominal versus real, currency appreciation and depreciation, revaluation and devaluation.
  • Fixed and flexible exchange rates.
  • Exchange controls.

Lecture XVI. Mid-exam II (lectures IX – XV).

b. Seminar Synopsis.

Each lecture is accompanied by a seminar on the same topic where students mainly solve exercises to back up freshly obtained knowledge. In the seminars students still must take two tests, both on a specific topic (e.g. national accounting and money and banking). In order to connect theoretical economics also with real-world events various actual situations are also discussed and students are encouraged to make a presentation on specific topic. This presentation can then be substituted with one of the tests.

IV Assessment

As it follows, students must take two tests and two mid-exams during this course (all closed-book). The best test (7,5%) and the best mid-exam (22,5%) will then be taken into account in final grade along with final exam (70%). The final grade thus depends crucially on the final exam, but to qualify for the final-exam at least one test and one mid-exam must be positively graded (>50%). This clause serves as a mean of compulsion. To maintain discipline tests and mid-exams are not usually given on any other dates than scheduled. If a student has been very active during seminars and has done his tests/mid-exams/homework very well, then the final grade can also be given based on results of both tests and mid-exam. This clause is to encourage students to participate actively on seminars and also to reward top students.

V Reading list

Required Readings

  1. Byrns, R.T. and G.W. Stone (1995). Macroeconomics. Sixth edition. HarperCollins Publisher.
  2. Kerem, K., Listra, E., Luiker, L. and K. Põder (1998). Makroökonoomika teooriad ja mudelid. Tln. (Theories and Models of Macroeconomics.)
  3. Org, A. and M. Sults (1999). Makroökonoomika ülesannete ja harjutuste kogu. Tallinn. (Exercises in Macroeconomics.)

    Complementary Readings

  4. Arrak, A., Eamets, R. and A. Viiol (1992). Rahvamajandus economicsi alusel (makrotasand I), Tartu. (National Economics (Macro-level I).)
  5. Arrak, A., Eamets, R., Trasberg, V. and U. Varblane (1996). Rahvamajandus (makrotasand II), Tartu. (National Economics (Macro-level II).)
  6. Blanchard, O. (2000). Macroeconomics. Second eddition.
  7. Brown, W.S. (1997). Makroökonoomika baasteooria. Tallinn, Külim. (Basic Theory of Macroeconomics).
  8. Pekkarinen, J. and P. Sutela (1993). Mikro- ja makroökonoomika IV. TTÜ kirjastus. (Micro- and Macroeconomics).
  9. Kerem, K. and M. Randveer (1998). Mikro- ja makroökonoomika põhikursus. Balti Majandusjuhtide Koolitusprogramm, Tallinn. (Basic Course of Micro- and Macroeconomics).
  10. Samuelson, P.A. and W.D. Nordhaus (1992). Economics. - 14th ed. McCraw-Hill, Inc.

Bulletins of Bank of Estonia (

Publications of Statistical Office of Estonia (

Economic Reviews of Ministries of Estonia:

Ministry of Economic Affairs (

Ministry of Finance (

Ministry of Foreign Affairs (

VI Teaching Methodology

Standard lecture-seminar approach is used as teaching methodology. When possible, graphical presentations are also used in seminars.

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