Econ 100B  Intermediate Macroeconomics Fall 2012 Tues & Thurs  46PM  J. Baskin Auditorium (map) Course Website  Syllabus Lecture Slides: eCommons >> resources
Lecture 1  Sept. 27  Macroeconomics: Outline of the Macrotheory
Motivation of study  Traditional division of Macro Theory:
 Growth Theory (e.g. Solow model)
 Business cycle theory. Shortrun vs. longrun. (e.g. ISLM and ADAS models)
 Models based on microeconomic foundations.
 Innovations of macro policy. Emphasis toward stabilization on growth (no prediction and control).
 Growth. Theories of longrun economic growth.
 Things Macroeconomist Care About:
 Economic variables: Growth and Real GDP. Unemployment. Recessions and depressions. Prices, inflation and deflation.
 Models: Endogenous vs exogenous variable. Equilibrium price and quantity. How changes to exogenous variables affects the endogenous variables. Diagram, shifts to curve, changes to equilibrium. Using multiple models. Flexible vs. sticky price models.
 Production Function:
 Factors of production,
 Marginal product of labor, marginal product of other factors, diminishing marginal returns,
 Returns to scale, (constant, increasing and decreasing, why do we prefer CRS?).
 Factor prices: Determination of factor prices (equilibrium nominal and real wages & rental rate of capital),
 Distribution of income to factors (e.g. labor share of income).
 Labor productivity and wages
 CobbDouglas production function. (Our preferred production function).
 Small Closed Economy Model
 Demand for Goods and Services:
AE=C+I+G (Consumption, investment and government spending).  Investment as a function of the interest rate
 The market for Loanable Funds. Savings, private, public and national savings. . Determination of the equilibrium real interest rate (borrowing cost, opportunity cost of holding holding savings).
 Example: the Reagan deficits.
Lecture 2  Oct. 2  Balance of Payments  The Open Economy
 Current Real GDP and Real GDP Growth.
 Model of small open economy (SOE Model).
 Demand for Goods and Services,
Y=C+I+G+NX  Output Absorption
NX = EX  IM = Y  (C + I + G)  Net exports as net capital outflows (trade balance).
NX= S  I = (Y  C  G)  I  Savings, investment & trade balance since 1960.
 (Given a country is too small to influence the world real interest rate r*, which dictates investment)
 The market for loanable funds determining Trade and capital flows (net exports),
 Exmaples:
1) Domestic fiscal policy shifting the S line. 2) Foreign fiscal policy shifting the world real interest rate r*  What "price" was equilibrating the loanable funds market? The exchange rate.
 Model of the exchange rate.
 Nominal (e) vs. real exchange rate (\epsilon).
 NX: S  I(r*) = NX(ϵ)
 Determinants (in this model) of the real and nominal exchange rates.
 Demand for dollars influenced by net exports, supply and dollars influenced by the difference between savings & investment.
Diagram
 Example: effect of fiscal expansion (S↓, net capital outflows↓, ϵ↑, equilibrating net exports & net capital outflows), show this with a diagram.
Nominal exchange rate model. A long run model.
Lecture 3  Oct 4  Money & inflation
 Inflation since 1960, the 70's, 80's, 90's and more recent inflation trends.
 Quantity Theory of Money. Money supply, velocity, price level, and output. In simple version of model V, Y, and M are exogenous, P endogenous.
Inflation (percent change in prices) and growth of money. MV = PY  The Fisher Effect  how changes to P may influence investment. i = r + \pi
 Money demand. M=kPY. Know equation and rationale. Inflation, the growth of money and the growth of output, leading to the Fisher equation.
 Money Demand Function  The demand for real money balances. (M/P) = L(Y,i+E\pi)
 Money supply  nominal money supply set by central bank.
 Inflation expectations. Seigniorage. Hyperinflation.
Lecture 4  Oct 9  Unemployment (chapter 7).
 The Unemployment Rate historically.
 Initial model of the natural rate of unemployment. Finding the "equilibrium" unemployment rate. Job search and frictional unemployment (sectoral search) as an explanation for the existence of unemployment.
 Wage rigidity. minimum wages, labor unions, efficiency wages.
Lecture 5  Oct 11  Angelina Jolie and J. Sachs in Africa.
 Economics Growth I
 Our old model and long run growth (the production function, Y=F(K,L), just increase K and L, right?).
 Why do we care about growth?
Solow growth model  A model that puts an economy into a longterm balanced growth path.  Production function, output per worker, capital per worker (the need for constant returns to scale of the production function). Capital, k, no longer fixed.
 Savings equals the savings rate times total income. Investment will equal savings (with no government and no taxes).
 Output, consumption and investment (solow diagram)
 Capital accumulation and depreciation. The law of motion for capital (this equation is pretty central to the model).
 Calculating the steady state level of capital.
 Forces that tend the economy to converge toward equilibrium capital, k*.
 Golden Rule capital stock, steady state level of capital that maximizes consumption.
 Solow model diagram.
 Given shocks to this model, what prediction can we make? What dynamics follow? How does y, c and i change over time back toward equilibrium?
Lecture 6  Oct 16  Solow Model Continued.
 Example: numerical example calculating the steady state level of capital. Working with the Solow model diagram to discover effect of change in s, \delta, productivity or shock off k*.
 Relationship between savings and output?
 Solow with growth
 Population growth, n
 Technology growth, g. The effective worker.
 Determinants of growth rate of y, y\hat, k, k\hat, etc.
 Which shocks effect 'levels' and which effect growth paths of y, y\hat, k, k\hat?
Lecture 7  Oct 18  Finishing up Solow growth model
 MidTerm One Review
Lecture 8  Oct 23
Lecture 9  Oct 25  Introduction to Economic Fluctuations
 Growth of GDP compared to investment and consumption. Unemployment cycles.
 We have a model of long term economics growth, inflation, employment and other parts of the economy. Now let's talk about the business cycle; recessions, depressions, booms etc. all in the short run.
 Time Horizons  shortrun vs. longrun
 SR: sticky prices.
 vs. LR: flexible prices, firms can respond to changes in supply and demand
 Aggregate Demand and Supply Introduction
 AD curve from quantity theory of money equation, P=MV/Y
 AS: long run aggregate supply (LRAS, a verticle line) and shortrun aggregate supply (SRAS a horizontal line).
 Exogenous shocks, supply and demand shocks introduction. Shifts to the ADAS curves.
 Example: Supply shock, 70's oil prices. Stabilization policy, monetary policy.
 Okun's Law  Changes in unemployment and changes in GDP.
Lecture 10  Oct 30  Aggregate Demand, Goods Market: Building the ISLM Model.
 IS Curve: (investment savings) the Goods market. All combinations of the interest rate and the level of income that are consistent with equilibrium in the market for goods and services.
 Deriving the IS curve via the Keynesian Cross. Income/Output vs. planned expenditure.
 The government purchases multiplier (holding r constant).
 The tax multiplier (holding r constant). Using Keynesian Cross to map value of the interest rate, r, to value of income/output.
 Deriving the IS curve via the market for loanable funds.
 What shifts the IS Curve?
 Fiscal policy (changes in G and T) and the IS Curve. Fiscal policy (G & T) are taken as exogenous.
 LM Curve: (Liquidity preferences and Money balances), the market for real money balances. All combinations of the interest rate and the level of income that are consistent with equilibrium in the market for real money balances.
 Money demand. (M/P)^d=L(Y,i)=...
The theory of liquidity preferences.  Money supply. M and P.
 What shifts the LM curve?
 Monetary policy (M) and the LM curve. Real money balances (M/P) is taken as exogenous.
Lecture 11  Nov 1st  Building the ISLM Model continued.
Lecture 12  Nov 6th  Applying the ISLM Model.
 Equilibrium in the IS and LM model.
 Finding equilibrium interest rate, r*, and equilibrium output/income, Y*.
 Intuition for convergence to r* and Y*
 Shifts to ISLM model, and effects on economy.
 Fiscal Policy  fiscal expansion and contraction.
 G  change in government purchases shifts the IS curve. Shifts IS by the government purchases multiplier.
 T  change in taxes shifts the IS curve. It shifts the IS curve by the tax multiplier.
 Monetary Policy  contraction and expansion.
M  a change in the nominal money supply shifts the LM curve.  Intuition  think about the equations, diagram and economic intuition of the following:
 What happens if IS curve is shifted and we hold M constant?
 What happens if IS curve is shifted and we hold r constant?
 What happens if LM curve is shifted and we hold M constant?
 Aggregate Demand  the the real goods and services market. A change in income in the ISLM model for a given price level represents a shift in the aggregate demand curve.
 Deriving the AD curve from the IS and LM equations. Y as a function of P.
 (for now, aggregate supply is either the LRAS vertical line, or the SRAS flat line)
 Monetary policy and the AD curve, (shifts in LM and shifts in AD) and new r*, P* and Y*.
 Fiscal policy and the AD curve, (shifts in IS and shifts to AD) and new r*, P* and Y*.
 Shortrun vs Long run  shifts to the IS and LM curves have SR effects, and long run results.
 Discussion  the Great Depression.
Lecture 13  Nov 8th  Consumer behavior (Chapter 16).
 Keynes
 Average Propensity to Consume (APC).
 Marginal propensity to consume (MPC), how Y (output/income) responds to changes in disposable income.
 Puzzles  secular stagnation, consumption puzzle.
 The twoperiod consumption model  Irving Fisher and Intertemporal Choice.
 Interpemporal budget constraint, discounting, and indifference curves (marginal rate of substitution).
 The optimal consumption bundle.
 Changes in income, Y, and the effect on the optimal consumption bundle. The income effect.
 Changes in r, (slope of the intertemporal budget constraint), and the effect of the optimal consumption bundle. The substitution effect and income effect.
 Borrowing constraints, and how this changes the interpemporal budget constraint, and the optimal consumption bundle.
 Keynes vs. Fisher models.
 Life cycle hypothesis (model and applications).
 Permanent income hypothesis (model and applications).
 LCH vs. PIH
Lecture 14  Nov 13th  Investment  types of investment: business fixed investment, residential investment, inventory investment.
 Neoclassical theory of investment (the purchase of capital goods)
 Capital rental market, the equilibrium real rate of capital, and the MPK.
 Cost of capital.
 The Investment Function.
 Taxes and investment.
 Efficient Markets hypothesis.
MidTerm II Review Business Cycles
 Facts
 AD Curve
 AS Curve in SR and LR
 Shocks to AD, AS
 Goods Market  IS Curve
 Derivation based on Keynesian Cross. Derivation based on Loanable Funds market.
 Money market  LM Curve
 Money demand and money supply
 How monetary policy shifts the LM curve
 How fiscal policy shifts the IS Curve
 Equilibrium in IS/LM Model
 Deriving the AD curve from the IS/LM Model
 Application of IS/LM model to The Great Depression.
 Consumption
 Keynesian consumption function
 Intertemporal choice across two periods
 Lifecycle hypothesis (LCH)
 Permanent income hypothesis (PIH)
 Random walk hypothesis.
 Irrational behavior.
 Investment
 Cost of capital to renting firm
 Decision to invest in more capital by owning firm.
 Housing investment
 Inventory investment
 Efficient market hypothesis.
Nov 15  Nov 18  MidTerm 2
Lecture 15  Nov 20
Nov 22  Thanksgiving
Lecture 16  Nov 27  Aggregate Supply, and the Tradeoff Between Inflation and Unemployment (Chapter 14)
 Aggregate Supply: Output varies with deviations of the price level from the expected price level.
 The sticky price model as shortrun aggregate supply.
 's' the portion of firms with sticky prices (and the derivation of \alpha).
 EP, prices set by sticky priced firms.
 P, flexibly set prices
 Imperfect Information Model. An alternative explanation for the aggregate supply curve.
 Shocks to AD and AS, and their effect on an economy.
 Deriving the Phillips Curve from SRAS (sticky price model)  SRAS curve, Phillips curve, NAIRU.
 Adaptive expectations  inflation inertia.
 Rise and Falling inflation  demand pull and costpush inflation.
 Sacrifice Ratio
 Rational Expectations  adaptive expectations vs rational expectations.
 Hysteresis  natural rate hypothesis vs hysteresis. History dependence or path dependence.
Lecture 17  Nov 29  Dynamic model of aggregate demand and aggregate supply (Chapter 15)
 Dynamic Aggregate Demand and Aggregate Supply Model
 Discussion of "big five" equations, and intuition.
 Output, the demand for goods and services
 The real interest rate, the fisher equation,
 Inflation, the Phillips curve,
 Expected inflation, adaptive expectations, and
 The nominal interest rate, the monetarypolicy rule (Taylor rule).
 Variables and Parameters:
 Endogenous Variables: output, inflation, real interest rate, nominal interest rate, expected inflation.
 Exogenous variables: natural level of output, central bank's target inflation rate, demand shock, supply shock.
 Predetermined variable: previous period's inflation.
 Parameters:
 Longrun equilibrium.
 Shockrun equilibrium.
 Shocks to the model, and dynamic response.
 Shifts to 'theta' parameters, and the affect on the DAD curve (slope of DAD).
Lecture 18  Dec 4  Dynamic AD/AS Model continued.
 Monetary policy discussed.
Lecture 19  Dec 6  Government Debt and Budget Deficits
 Problems with measurement of government debt.
 Cyclically adjusted budget deficit, and the business cycle.
 Crowding out.
 Traditional view vs. Ricardian view of government debt.
 Balanced budgets vs. Optimal fiscal policy: stabilization, tax smoothing and intergenerational redistribution.
 Myopia, borrowing constraints, length of life, altruistically linked generations.
 Office Hours
Professor's Office Hours Tue 1:003:00PM at E2 469
Curtis' Office Hours When: Monday 8:3010:30AM Where: E2, Room 403 (map) I might also be in 491 or maybe 416. See sign posted at 403
Other TAs' Office Hours
Mon 9:3011:30 AM E2 403 (Jeff) Wed 8:309:30 E2 403F (Yabin) Wed 10:0012:00 PM E2 403 (David) Thu 9:0010:00 E2 403F (Yabin)
Sections
Mon 1112:10AM at Kresge 327 (Curtis) Mon 12:301:40PM at J Baskin 156 (Curtis) Wed 8:009:10AM at E2 194 (David)
Wed 3:304:40PM at J Baskin 156 (David) Wed 6:307:40PM at Steve's Acd 175 (Yabin) Thur 1011:10AM at E2 194 (Yabin)
Fri 9:3010:40AM at Nat Sci Annex 101 (Jeffery) Fri 3:30ish at E2 192 (Jeffery) Instruction to set up eduroam wireless.
MSI Meeting Times
Wed 1112:10 PM at ARC 221 Thurs 22:35 PM at ARC 221 Where's the ARC Center? (map) with Jen
Tentative Exam & Problem Set Due Dates
Exams  No calculators.  Midterm 1: Tuesday Oct. 23
The first midterm will cover chapters 3, 4, 5, 6, 7, 8 and 9, focusing on the topics we covered in class, but it might include definitions and statistics from the textbook that we didn't discuss in class. ~A: 6256, A: 5553, B+: 5248, B: 4743, B: 4238, C+: 3733, C: 3230, C: 2926, D/F<26  Midterm 2: Thursday Nov. 15
Chapter 10, 11, 12, 16 and 17 (from the 8th ed.) Short questions are a mix on PSs and lecture material. Krugman's RofDE chapters 1 & 9. Priority of Study: problem sets, review slide material, review book chapters, Krugman. Be ready to give all diagrams correctly. ~A: 5763, A: 5556, B+: 5254, B: 48.551.5, B: 4448, C+: 3943, C: 37.538.5, C: 30.537.  Final: Dec 11, 8:00AM  11:00AM
Problem Sets  Due at beginning of class. Print your name and your TA's name and section time. Don't do Chapter 14 questions in PS4


