Study guide: Fundamentals of Macroeconomic Policy

📋 Course Outline

1. Market and market types
2. Economic circuit and flows
3. National accounts and aggregates
4. Market regulation and competition
5. Inflation and price dynamics
6. Unemployment and labor market
7. Exchange rates and external balance
8. Monetary policy instruments
9. Budget policy and state intervention

📖 1. Market and market types

🔑 Key Concepts & Definitions

• Market: A market is a place where sellers and buyers carry out exchanges at a given price, either physically or via communication without physical contact.
• Offer: Offer is the quantity of a good that sellers are willing to sell at a given price.
• Demand: Demand is the quantity of a good that buyers are willing to buy at a given price.
• Market price: Market price is the value of goods expressed in money.
• Market for labor: The market for labor is where the labor force is exchanged for a remuneration.

📝 Essential Points

• If demand exceeds offer (Offer < Demand), the market price increases.
• If offer exceeds demand (Offer > Demand), the market price decreases.
• Markets can be classified by the object exchanged: goods/services, labor, capital, and foreign exchange.
• In the money market (short term), interbank rates are set between banks and TCN circulates via certificates of deposit (banks), treasury bills (state), and commercial paper (companies).
• In the financial market (long term), shares trade in the primary and secondary markets, with investors and companies interacting through quoted assets.
• In the foreign exchange market, sellers of currencies and buyers of currencies meet to determine the exchange rate (course of exchange).

💡 Memory Hook

When Offer < Demand, Price ↑; when Offer > Demand, Price ↓.

📖 2. Economic circuit and flows

🔑 Key Concepts & Definitions

• Economic circuit: An economic circuit is the representation of how households, firms, public administrations, and the rest of the world interact through production, income distribution, and financing.
• Institutional sectors: Institutional sectors are groups of economic units that share similar behavior, identified by their main function and type of activity.
• Economic flows: Economic flows are movements of goods, services, or capital between economic agents that occur at the time of exchange.
• Resources-uses equilibrium: Resources-uses equilibrium states that all resources available to an economy during a period are fully employed in uses, giving Resources = Uses.

📝 Essential Points

• National accounts distinguish three categories of operations: transactions in goods and services, distribution transactions, and financial transactions.
• Physical flows are exchanges of goods and services measured in physical quantities, while monetary flows are the money counterpart of those physical exchanges.
• In the expanded circuit, resources and uses balance as $P+M=CI+CF+FBCF+S+ACOV+X$.
• The diagram components for uses include consumption (CI, CF), investment ($FBCF$), stocks change ($S$), net acquisitions of valuables ($ACOV$), and exports ($X$).
• The diagram components for resources include production ($P$) and imports ($M$).

💡 Memory Hook

Physical flows are in quantities; monetary flows are the money “receipt” for those quantities.

📖 3. National accounts and aggregates

🔑 Key Concepts & Definitions

• National accounts: National accounts are a statistical framework that records declared economic activity to compute key macro aggregates.
• GDP limits: GDP limits are the exclusions and blind spots that make GDP a partial measure of economic performance and well-being.
• National accounts aggregates: National accounts aggregates are summarized totals used to describe production, expenditure, saving, and external balances of resident agents.

📝 Essential Points

• GDP is calculated using national accounting based on what is declared to the state.
• GDP does not account for unpaid work such as domestic work, volunteering, and production for self-consumption.
• GDP also excludes undeclared cash production, undeclared work, illegal activities, and environmental damage or depletion of natural resources.
• GDP ignores qualitative aspects like well-being, leisure, security, education level, and freedom.
• National accounts aggregates can be read through components such as final consumption, investment in durable goods and stocks, storage versus de-stocking, and resident trade with non-residents (sales and purchases).

💡 Memory Hook

GDP counts what is declared, so if it’s unpaid, illegal, hidden, or qualitative, GDP tends to miss it.

📖 4. Market regulation and competition

🔑 Key Concepts & Definitions

• Market regulation by demand and supply: Market regulation is the idea that prices and activity adjust automatically through the interaction of offer and demand without needing state intervention.
• State regulation for market failures: State regulation is the idea that the government intervenes to correct dysfunctions that markets cannot resolve on their own, such as inflation and unemployment.
• Etat-gendarme: Etat-gendarme is the liberal view where the state limits itself to core sovereign functions rather than managing economic outcomes.
• Etat-providence: Etat-providence is the Keynesian view where the state actively manages the economy to fight market dysfuntions and stabilize activity.

📝 Essential Points

• In the liberal view, the state should not interfere in market outcomes and should restrict itself to sovereign functions like army, police, and justice, described as Etat-gendarme.
• In the Keynesian view, markets do not always self-correct and the state must intervene to address dysfunctions such as inflation and unemployment and to support growth.
• Liberal regulation links inflation to a purely monetary phenomenon, with the monetarist idea that excessive money relative to production raises prices.

💡 Memory Hook

Liberals: “Etat-gendarme” = government stays back; Keynesians: “Etat-providence” = government steps in when markets fail.

📖 5. Inflation and price dynamics

🔑 Key Concepts & Definitions

• Inflation rate: Inflation rate measures how fast the general level of prices changes over time.
• Price stability objective: Price stability objective targets controlling inflation so the general price level remains stable.
• Imported inflation: Imported inflation is price pressure that comes from movements in exchange rates affecting the cost of imported goods.

📝 Essential Points

• In the magic square, price stability is measured by the inflation rate, aiming for it to be as low as possible.
• A trade-off can occur because higher economic growth raises demand and increases the level of prices, generating inflation.
• A trade-off can occur because lower unemployment increases demand and contributes to higher prices, generating inflation.
• Devaluation or depreciation can reduce imported inflation because it lowers the exchange rate and changes the price of imported goods.
• Revaluation or appreciation can reduce inflation by lowering imported inflation when exchange-rate changes make imports cheaper.

💡 Memory Hook

Growth raises demand; demand raises prices: ↑Growth → ↑Inflation.

📖 6. Unemployment and labor market

🔑 Key Concepts & Definitions

• Employment objective: Final economic objective aiming to reduce unemployment by improving labor market outcomes.
• Effective demand: Macroeconomic demand that drives firms’ decisions, where higher demand can increase investment and hiring.

📝 Essential Points

• In the policy objectives, employment is part of the “magic square” and is achieved by lowering the unemployment rate.
• In the Keynesian approach, low interest rates support investment, which raises production and can stimulate job creation.
• In the Keynesian mechanism, higher effective demand comes with higher investment and leads to creation of employment.
• When unemployment is targeted as a final goal, intermediate channels used are money supply and interest rates rather than direct labor-market rules.

💡 Memory Hook

Low interest → more investment → higher production → more jobs (so unemployment falls).

📖 7. Exchange rates and external balance

🔑 Key Concepts & Definitions

• DH appreciation: Exchange-rate appreciation of the DH means the DH parity price rises, making foreign currency cheaper than before.
• Trade competitiveness: Competitiveness of domestic products depends on the DH value, so a lower DH makes exports relatively cheaper.
• Net claims on non-residents: Net claims on non-residents are a counterpart of the money supply, so improvements translate into money creation by banks.
• Foreign exchange swap: A foreign exchange swap is an operation through which bank liquidity with BAM is affected by changes in net claims on non-residents.

📝 Essential Points

• When the DH appreciates, domestic products become relatively expensive, which erodes their competitiveness versus competitors.
• DH appreciation reduces the external debt amount and can improve the ordinary budget balance.
• Net claims on non-residents act as a counterpart of the money supply, so an increase leads to monetary creation by banks.
• Higher net claims on non-residents improves bank liquidity with BAM during a foreign exchange swap operation.
• Improving net claims on non-residents lowers banks’ interest rates, which can stimulate consumption and then investment.
• Lower net saving reduces household deposits, which lowers bank liquidity and can reduce growth through higher lending rates.

💡 Memory Hook

Appreciation = DH dear → exports dear → competitiveness falls; Net claims rise → money creation → liquidity ↑ → rates ↓ → demand ↑.

📖 8. Monetary policy instruments

📖 9. Budget policy and state intervention

🔑 Key Concepts & Definitions

• Public powers engagement: A form of state intervention where policymakers act to strengthen national competitiveness and support economic outcomes.
• Export promotion: A state action aimed at increasing exports by targeting markets and activities that can generate better foreign demand.
• Research and training support: A public policy to raise productivity by encouraging scientific research and improving education and skills.

📝 Essential Points

• State intervention includes identifying priority activities and priority markets for export growth.
• State intervention includes dynamizing free-trade agreements to improve their practical benefits for the economy.
• State intervention includes engaging public powers to reinforce the competitiveness of the Moroccan economy.
• Competitiveness can be improved by encouraging scientific research and training to increase productivity.

💡 Memory Hook

Link the policy to the outcome: exports need targets; productivity needs R&D + training.

📅 Key Dates

1. 2019GDP measured at current prices example (PIB de 2019 mesuré à prix courants)
2. 2017IPC base 100: 2017 (base 2017 pour le Maroc)
3. 01/03/2000Entry into force: Free trade agreement Maroc - Etats de l’AELE
4. 01/01/2006Entry into force: Free trade agreement Maroc - Etats-Unis d’Amérique
5. 01/01/2006Entry into force: Free trade agreement Maroc - Turquie
6. 27/03/2007Entry into force: Accord d’Agadir

📊 Synthesis Tables

Liberal vs Keynesian (inflation & state regulation)

⚠️ Common Pitfalls & Confusions

1. Mixing up offer and demand effects: remembering “Offer < Demand → prices ↑” but reversing the inequality in calculations.
2. Confusing physical flows and monetary flows: treating physical quantities as the money counterpart, or vice-versa.
3. Believing GDP is a full measure of well-being: forgetting that GDP ignores unpaid work, hidden/illegal activities, and qualitative aspects.
4. Confusing chômage definitions: using the HCP notion (no activity + seeks job) while requiring BIT’s “available and seeking actively” details.
5. Swapping appreciation vs devaluation effects on competitiveness: remembering “DH dear → exports dear → competitiveness falls” in the wrong direction.
6. Mistaking fixed vs floating exchange regimes: thinking appreciation/depreciation is the fixed-regime tool (it is for floating in the course).
7. Using FOB/CAF incorrectly in the balance of payments: exporting as CAF (or importing as FOB) instead of the course rules.

✅ Exam Checklist

1. Explain a market in both senses (concrete physical place vs abstract communication without physical contact).
2. State the offer/demand law and the direction of price change for “Offre < Demande” and “Offre > Demande.”
3. Write the expanded circuit equilibrium and identify each component of Resources and Emplois (including the exact symbols used).
4. Define GDP measurement logic (territoriality; declared to the state) and list the main GDP exclusions (unpaid work, undeclared cash work, illegal activities, environmental damage/depletion, and qualitative aspects).
5. For market regulation/competition, distinguish Etat-gendarme vs Etat-providence and link the mechanism to inflation/unemployment self-correction vs state intervention.
6. Define inflation and state how the inflation rate is computed from CPI levels of two periods; also name the meanings of désinflation, déflation, and stagflation.
7. Define unemployment and the unemployment rate (as “share of the population without job but seeking work”); then distinguish the neoclassical vs Keynesian causes via the course assumptions.
8. For exchange rates/external balance, state how appreciation vs depreciation affects competitiveness and imported inflation, and identify net claims on non-residents as a counterpart of money supply (liquidity/rates).
9. List the main monetary policy objectives (final: price stability/growth/employment/external balance; intermediate: interest rate/money supply/exchange rate) and name at least two instruments used for internal and external objectives.
10. Compute or interpret key external-balance notions from the course: balance components (commercial goods with FOB/CAF; services; primary/secondary income), and compare TER vs TEN cases (TER=100, >100, <100; TEN=100, >100, <100).
11. For budget policy, distinguish policy de relance/expansionniste vs politique de rigueur/restrictive (go vs stop), and state the role of deficit/surplus plus key limits (inflation risk, constraint extérieure, éviction, boule de neige).
12. For development, distinguish growth (quantitative, PIB) from development (qualitative progress) and recall the IDH criteria and its classification thresholds (IDH <0,5 / 0,5–0,8 / >0,8).