The Economy 2.0: Macroeconomics

Take a closer look at the units of the The Economy 2.0: Macroeconomics – what they’re about, what models they present, how they’re changing compared with The Economy 1.0.

 

Unit 5 — Macroeconomic policy: inflation and unemployment

Summary

This unit discusses the aims of macroeconomic policy, the nature of fiscal and monetary policy tools, and the division of decision-making authority between the two policy makers. The focus is on describing how these policies are applied in real economies (e.g., the role of central bank independence, fiscal deficits, and austerity policy). The context is economies with inflation-targeting central banks.

 

Models

Fiscal and monetary policy responses to demand shocks and supply shocks are modeled by bringing together the WS-PS model from Units 1 and 2, the multiplier model from Unit 3 and the Phillips curve model from Unit 4. The central bank’s inflation target determines the inflation rate at supply-side equilibrium. The transmission of monetary policy decisions to inflation through domestic and international channels when it deviates from target is modelled.

 

Applications

The model developed in Unit 5 is applied to understand:

  • Fiscal and monetary policy following the global financial crisis.
  • Inflation and the monetary policy response to the Russia-Ukraine war.
  • The backdrop to inflation targeting by following policy responses to supply shocks in the UK from 1950 to 2023.

 

Major changes

Fiscal and monetary policy were previously covered separately, in Units 14 and 15 of The Economy 1.0. They have been brought together in this unit which allows for a more unified treatment. Both topics have been substantially rewritten and this is essentially a new unit. 


← See how Unit 4 is changing Units 6-10 arrive in August.