Applied Macroeconomics: A Practical Introduction

408 Pages·2022·8.277 MB·English

by  Christian A. Conrad

Christian A. Conrad
Applied
Macroeconomics
A Practical Introduction
Applied Macroeconomics
Christian A. Conrad
Applied Macroeconomics
A Practical Introduction
Christian A. Conrad
htw Business School, University of Applied
Science, Hochschule für Technik und
Wirtschaft des Saarlandes
Saarbrücken, Germany
ISBN 978-3-658-39314-4 ISBN 978-3-658-39315-1 (eBook)
https://doi.org/10.1007/978-3-658-39315-1
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Fachmedien Wiesbaden
GmbH, part of Springer Nature 2022
This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the
whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustra-
tions, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or
information storage and retrieval, electronic adaptation, computer s oftware, or by similar or dissimilar method-
ology now known or hereafter developed.
The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does
not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective
laws and regulations and therefore free for general use.
The publisher, the authors, and the editors are safe to assume that the advice and information in this book
are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the
editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors
or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in
published maps and institutional affiliations.
Responsible Editor: Nora Valussi
This Springer imprint is published by the registered company Springer Fachmedien Wiesbaden GmbH, part of
Springer Nature.
The registered company address is: Abraham-Lincoln-Str. 46, 65189 Wiesbaden, Germany
Preface
This book is the result of my work as a scientific employee at the Eberhard Karls Uni-
versity of Tübingen and of more than twelve years of professional experience in a large
German bank, which repeatedly brought me into contact with the management of many
German companies as a corporate customer consultant. The period of my professional
experience also included the stock market boom and crash at the beginning of the new
millennium and the financial crisis. These practical experiences influenced the events
Macroeconomics at the Applied University of Applied Sciences (HTW) in Saarbrücken.
This teaching experience also flowed into this book, as did an extensive literature study.
In addition, numerous new findings fromexperimental studies were taken into account.
Finally, I would like to thank Professor Hartherz and the asset manager Mr. Dr.
Markus Stahl for their support of this book. I would like to thank Mr. Dr. Markus Stahl
in particular for many stimulating discussions.
Saarbrücken Christian A. Conrad
in September 2022
V
Introduction
The following textbook has the goal of explaining the overarching connections of an
economy in a way that they are immediately understood. Complicated connections are to
be made understandable through examples and exercises. Particular value is placed here
on an application-oriented approach and a detailed explanation, so that even non-econo-
mists can understand the connections. The topics were chosen so that they correspond to
the international standard of the Macroeconomics course. The target group of the book
are students of business administration at German universities. Towards this end, the eco-
nomic material was deliberately chosen so that it supplements business administration
studies in a meaningful way. The goal is that the reader is imparted economic knowledge
that they can apply in business practice. It is explained how different factors influence
the macroeconomic conditions of a company, what specifically determines aggregate
demand, how unemployment arises, what causes inflation, how growth can be promoted,
how the money, capital and goods markets function, how economic crises can occur and
what the state can do about it, among other things.
In this sense, the reader should be able to, after reading the book,
1. understand and explain macroeconomic variables such as “inflation”.
2. make individual economic decisions taking into account the macroeconomic back-
ground.
3. be able to think in macroeconomic terms in order to adapt creatively to new situa-
tions.
The chapters build on each other. After we have discussed the basics in Chap. 1 of
how macroeconomics fits into the field of economics, we want to deal with its con-
cepts and measurement concepts in Chap. 2 within the framework of what is known as
national accounting. This is the basis from which we will, in Chaps. 3 to 7, we work out
general theoretical explanations of the economic relationships.
In the context of the long-term perspective of the neoclassical model, we explain
in Chap. 3 the functions of macroeconomic markets and derive a model for the entire
economy. From the neoclassical general model, we will then derive specific implications
VII
VIII Introduction
for economic policy. How does wage and monetary policy affect employment? Can an
expansionary fiscal policy financed by credit increase employment? How does technical
progress affect employment?
In Chaps. 4 and 5 we then deal more closely with monetary policy. In Chap. 4 the
causes and effects of inflation are presented in order to be able to understand the ECB's
primary objective of ensuring price stability. Chap. 5 is dedicated to the euro. How did
the single currency come about and what are the advantages and disadvantages? An
introduction to the ECB's monetary policy rounds off the chapter.
The neoclassical perspective is supply-oriented and thus corresponds to the normal
state of the economy and the prevailing opinion until the world economic crisis of 1929.
This crisis showed that under certain circumstances there can be persistent unemploy-
ment situations. The neoclassics could not explain this and a new theory was needed.
The depression of the world economic crisis can be explained using Keynes by exam-
ining short-term disturbances of the long-term equilibrium. Keynes brought the
demand-oriented perspective into the economy. Since then, the demand-oriented and
supply-oriented perspectives have repeatedly competed in science and public discussion
for the right economic explanations and the appropriate means. This book tries to bring
this apparent competition to a synthesis. Rather, it differentiates between the supply-ori-
ented neoclassics for the normal economic situation and the Keynesian theory for the
depression as an economic exceptional situation.
In Chap. 6 The neoclassical synthesis is extended here to the Keynesian view as a
macroeconomic theory of depression within the framework of the neoclassical synthe-
sis. The essential theories of the business cycle are presented and critically questioned
in Chap. 7. Here, the new findings of behavioral economics are also included. In view of
the financial crisis, which almost caused a depression like 1929, the book ends with its
own chapter on financial markets.
Contents
1 Basics .......................................................... 1
2 Macoeconomic Accounting ......................................... 5
2.1 Circuits in the Macoeconomic Accounting ........................ 6
2.2 Case Study: New GDP Calculation .............................. 10
2.3 Terms of the Macoeconomic Accounting ......................... 17
2.4 Output, expenditures and distribution approach .................... 25
2.4.1 The Output (or Value Added) approach .................... 25
2.4.2 Expenditures Approach ................................ 26
2.4.3 The Distribution Approach of National Income ............. 27
2.5 Case Study: European Wealth and GDP .......................... 31
References ....................................................... 35
3 Neoclassical Macroeconomic Model ................................. 37
3.1 Marshall’s Supply and Demand Cross ............................ 37
3.2 The Companies ............................................. 43
3.2.1 The Production Function ............................... 43
3.2.2 Case Study: Supply-Oriented Employment Policy ........... 49
3.2.3 Case Study: Productivity in Germany ..................... 51
3.2.4 Case Study: Development of Real Wages .................. 52
3.2.5 Case Study: The Plague and Factor Prices ................. 53
3.3 The Households ............................................. 54
3.4 Capital and Labor Market ..................................... 57
3.5 The Real Sector ............................................. 59
3.6 The Saysche Theorem ........................................ 62
3.7 The Money Market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.8 The Neoclassical Overall Model ................................ 68
3.9 Economic Policy in the Neoclassical Model ....................... 70
References ....................................................... 79
IX
X Contents
4 Inflation ........................................................ 81
4.1 What is Inflation? ............................................ 81
4.2 Disadvantages of Inflation ..................................... 85
4.3 Case Study: Hyperinflation Germany ............................ 90
References ....................................................... 98
5 Monetary Policy and its Implementation by the European
Central Bank .................................................... 99
5.1 Advantages of a Unified European Currency Area .................. 99
5.2 The Founding of the ECB ..................................... 100
5.3 National Fiscal Policy ........................................ 101
5.4 Problems of a Unified Monetary Policy ........................... 104
5.5 The Missing Political and Economic Agreement of Europe ........... 106
5.6 Organizations of the ECB ..................................... 108
5.7 Basics of European Central Bank Monetary Policy. . . . . . . . . . . . . . . . . . 110
5.7.1 Political Independence ................................. 110
5.7.2 Targets ............................................. 111
5.7.3 The Money Creation Process ............................ 112
5.7.4 Process of Financial Intermediation by Commercial Banks .... 117
5.7.5 The Monetary Policy Instruments of the ECB. . . . . . . . . . . . . . . 119
5.8 Open Market Operations (As Interest and Monetary Policy) .......... 119
5.9 Standing Facilities ........................................... 120
5.10 Minimum Reserve ........................................... 121
5.11 Quantitative Easing, the New Monetary Policy at the Capital Market ... 124
References ....................................................... 129
6 Keynesian Theory ................................................ 131
6.1 Case Study: The World Economic Crisis .......................... 132
6.2 Case Study: Keynes and the Relevance of His Theory Illustrated
by the Financial Crisis ........................................ 135
6.3 The Consumption Function .................................... 138
6.4 The Saving Function ......................................... 139
6.5 The Income-Expenditure Model ................................ 141
6.6 Expenditure and Tax Multiplier ................................. 147
6.7 Interpretation of Keynesian Demand-Oriented Policy ................ 151
6.8 The Investment Function ...................................... 153
6.9 Excursus: Interest Rates in Practice, the Yield Curve ................ 155
6.10 The Capital Market Equilibrium ................................ 157
6.11 The Money Market Equilibrium ................................ 160
6.12 The IS/LM Model ........................................... 167
6.13 A general Keynesian Aggregate Model (Neoclassical Synthesis) ....... 171
6.14 Keynesian Economic Policy in the Normal Situation ................ 174
Contents XI
6.14.1 Expansive Credit-Financed Fiscal Policy .................. 174
6.14.2 Expansive Tax-Financed Fiscal Policy .................... 177
6.14.3 Expansive Monetary Policy ............................. 178
6.15 Keynesian Explanations of Depressions .......................... 179
6.15.1 The Great Depression and the Financial Crisis .............. 179
6.15.2 The Investment Trap .................................. 181
6.15.3 The Liquidity Trap .................................... 183
6.16 Keynesian Economic Policy in the Depression ..................... 186
6.16.1 Credit-Financed Expansionary Fiscal Policy in the
Investment Trap ...................................... 186
6.16.2 Expansive Tax-Financed Fiscal Policy in the
Investment Trap ...................................... 188
6.16.3 Credit-Financed Expansive Fiscal Policy in the
Liquidity Trap ....................................... 188
6.16.4 Expansive Tax-Financed Fiscal Policy in the
Liquidity Trap ....................................... 190
6.17 Keynesian Economic Policy ................................... 191
6.18 Expansive Monetary Policy with Rigid Wages ..................... 193
6.19 The Mundell-Flemming Model of the Open Economy ............... 195
References ....................................................... 199
7 Business Cycles in Theory and Practice .............................. 201
7.1 The Economic Phenomenon of Business Cycles .................... 201
7.2 Dynamic Keynesian Approaches: The Hicks Supermultiplier .......... 205
7.3 Neoliberals Versus Keynesians, A Synthesis ....................... 210
7.4 Growth Determinants as Business Cycle-Triggering Factors .......... 212
7.4.1 Technical Progress .................................... 212
7.4.2 The New Growth Theory ............................... 215
7.5 Overinvestment Theories and Experiments ........................ 216
7.6 Distributional Conflicts to Explain Fluctuations in the Business
Cycle: The GOODWIN Model ................................. 227
7.7 Shocks and Price Rigidities: New Keynesian Macroeconomics and
Neo-Keynesian Macroeconomics ............................... 232
7.8 Political Business Cycles: Nordhaus’ Political Business Cycle Model ... 237
7.9 Monetary Policy as a Cause of the Business Cycle .................. 241
7.9.1 The Interest Rate Spread Theorem By Knut Wicksell ......... 241
7.9.2 Hayek’s Perverse Elasticity of Credit Supply ............... 243
7.9.3 Case Study: US Monetary Policy in the Tension Field
of Stock Market Development ........................... 244
7.9.4 Review of Monetary Policy Goals ........................ 248
7.9.5 Empirical Verification of the Effects of a Zero
Interest Rate Policy On Risk Behavior .................... 256