Applied Macroeconomics: A Practical Introduction

Preface
Introduction
Contents
List of Abbreviations
1 Basics
2 Macoeconomic Accounting
	2.1	Circuits in the Macoeconomic Accounting
	2.2	Case Study: New GDP Calculation
	2.3	Terms of the Macoeconomic Accounting
	2.4	Output, expenditures and distribution approach
		2.4.1	The Output (or Value Added) approach
		2.4.2	Expenditures Approach
		2.4.3	The Distribution Approach of National Income
	2.5	Case Study: European Wealth and GDP
	References
3 Neoclassical Macroeconomic Model
	3.1	Marshall’s Supply and Demand Cross
	3.2	The Companies
		3.2.1	The Production Function
		3.2.2	Case Study: Supply-Oriented Employment Policy
		3.2.3	Case Study: Productivity in Germany
		3.2.4	Case Study: Development of Real Wages
		3.2.5	Case Study: The Plague and Factor Prices
	3.3	The Households
	3.4	Capital and Labor Market
	3.5	The Real Sector
	3.6	The Saysche Theorem
	3.7	The Money Market
	3.8	The Neoclassical Overall Model
	3.9	Economic Policy in the Neoclassical Model
	References
4 Inflation
	4.1	What is Inflation?
	4.2	Disadvantages of Inflation
	4.3	Case Study: Hyperinflation Germany
	References
5 Monetary Policy and its Implementation by the European Central Bank
	5.1	Advantages of a Unified European Currency Area
	5.2	The Founding of the ECB
	5.3	National Fiscal Policy
	5.4	Problems of a Unified Monetary Policy
	5.5	The Missing Political and Economic Agreement of Europe
	5.6	Organizations of the ECB
	5.7	Basics of European Central Bank Monetary Policy
		5.7.1	Political Independence
		5.7.2	Targets
		5.7.3	The Money Creation Process
		5.7.4	Process of Financial Intermediation by Commercial Banks
		5.7.5	The Monetary Policy Instruments of the ECB
	5.8	Open Market Operations (As Interest and Monetary Policy)
	5.9	Standing Facilities
	5.10	Minimum Reserve
	5.11	Quantitative Easing, the New Monetary Policy at the Capital Market
	References
6 Keynesian Theory
	6.1	Case Study: The World Economic Crisis
	6.2	Case Study: Keynes and the Relevance of His Theory Illustrated by the Financial Crisis
	6.3	The Consumption Function
	6.4	The Saving Function
	6.5	The Income-Expenditure Model
	6.6	Expenditure and Tax Multiplier
	6.7	Interpretation of Keynesian Demand-Oriented Policy
	6.8	The Investment Function
	6.9	Excursus: Interest Rates in Practice, the Yield Curve
	6.10	The Capital Market Equilibrium
	6.11	The Money Market Equilibrium
	6.12	The IS/LM Model
	6.13	A general Keynesian Aggregate Model (Neoclassical Synthesis)
	6.14	Keynesian Economic Policy in the Normal Situation
		6.14.1	Expansive Credit-Financed Fiscal Policy
		6.14.2	Expansive Tax-Financed Fiscal Policy
		6.14.3	Expansive Monetary Policy
	6.15	Keynesian Explanations of Depressions
		6.15.1	The Great Depression and the Financial Crisis
		6.15.2	The Investment Trap
		6.15.3	The Liquidity Trap
	6.16	Keynesian Economic Policy in the Depression
		6.16.1	Credit-Financed Expansionary Fiscal Policy in the Investment Trap
		6.16.2	Expansive Tax-Financed Fiscal Policy in the Investment Trap
		6.16.3	Credit-Financed Expansive Fiscal Policy in the Liquidity Trap
		6.16.4	Expansive Tax-Financed Fiscal Policy in the Liquidity Trap
	6.17	Keynesian Economic Policy
	6.18	Expansive Monetary Policy with Rigid Wages
	6.19	The Mundell-Flemming Model of the Open Economy
	References
7 Business Cycles in Theory and Practice
	7.1	The Economic Phenomenon of Business Cycles
	7.2	Dynamic Keynesian Approaches: The Hicks Supermultiplier
	7.3	Neoliberals Versus Keynesians, A Synthesis
	7.4	Growth Determinants as Business Cycle-Triggering Factors
		7.4.1	Technical Progress
		7.4.2	The New Growth Theory
	7.5	Overinvestment Theories and Experiments
	7.6	Distributional Conflicts to Explain Fluctuations in the Business Cycle: The GOODWIN Model
	7.7	Shocks and Price Rigidities: New Keynesian Macroeconomics and Neo-Keynesian Macroeconomics
	7.8	Political Business Cycles: Nordhaus’ Political Business Cycle Model
	7.9	Monetary Policy as a Cause of the Business Cycle
		7.9.1	The Interest Rate Spread Theorem By Knut Wicksell
		7.9.2	Hayek’s Perverse Elasticity of Credit Supply
		7.9.3	Case Study: US Monetary Policy in the Tension Field of Stock Market Development
		7.9.4	Review of Monetary Policy Goals
			7.9.4.1 Asset Bubbles as an Indicator of Invisible Inflation
			7.9.4.2 The Consequences of Asset Bubbles
			7.9.4.3 Conclusion
		7.9.5	Empirical Verification of the Effects of a Zero Interest Rate Policy On Risk Behavior
		7.9.6	The Effects of Money Supply and Interest Rates on Stock Prices, Evidence from Two Behavioral Experiments
		7.9.7	Monetary Policy Conclusion
	7.10	Psychological Factors as a Cause of the Business Cycle
		7.10.1	Adaptive Expectations in Monetarist Theories
		7.10.2	Fluctuations in Demand Due to Incorrect Adjustment Reactions: The Original Approach of New Classical Macroeconomics
		7.10.3	Disturbance of the Market Equilibrium By Real Exogenous Shocks: The Real Business Cycles Theories
		7.10.4	Sunspot Variables as Psychological Influences On Business Cycle Development
		7.10.5	Speculative Bubbles as Triggers of Economic Fluctuations
			7.10.5.1 The Efficient Market Hypothesis
			7.10.5.2 Testing the Efficient Market Hypothesis
			7.10.5.3 Noise Trading Approaches
			7.10.5.4 The New Behavioral Finance
			7.10.5.5 The Liquidity and Speculation Cycle
			7.10.5.6 Indicators of Asset Bubbles
	7.11	Final Assessment of the Theories of Economic Development
	References
8 International Financial Markets after the Financial Crisis
	8.1	The Financial Crisis and the Reforms to Stabilize the Financial Markets
		8.1.1	The Subprime Crisis, the Biggest Financial Crisis After 1929
		8.1.2	Some Causes of the Financial Crisis in the Light of Behavioral Theory
			8.1.2.1 Belief in the Self-correcting Power of the Market
			8.1.2.2 Exaggerated Belief in Figures
			8.1.2.3 Missing Moral Values
			8.1.2.4 The Importance of Risk Adequate Compensation
		8.1.3	The Reforms of the International Financial Market Order
			8.1.3.1 Risk and Non-transparency in Derivatives
			8.1.3.2 Weaknesses of Risk Indicators and Pricing Methods
			8.1.3.3 Introduction of a Separation System
			8.1.3.4 The Trade-off Between Yield and Risk and Unilaterally Constructed Incentive Schemes
			8.1.3.5 Fair Value Loan Valuation
			8.1.3.6 Conclusion
	8.2	Speculation in the International Financial Markets
		8.2.1	What Empirical Evidence do we Have About Speculation Influencing Markets?
		8.2.2	Critique of Methodology
		8.2.3	The Logic of Speculation
		8.2.4	Price Distortions and Price Manipulation
		8.2.5	Irrationality and Bubble Creation?
		8.2.6	Conclusion
	8.3	Conclusion International Financial Markets After the Financial Crisis
	References
9 Solutions to Exercise Questions
Appendix