Illinois State
University
Department of Economics
Spring 2002
This syllabus contains important information
about this course. Please read it very carefully, and, preserve it for
reference during the rest of the semester.
Information about
the Course
Title: Intermediate Macroeconomics (ECO 241), Section 1
Class Time: 11:00-12:15 Tuesdays and Thursdays
Place: SCH 313
Catalog Description: "Theory
of income, employment, interest rate and price level determination.
The government's influence on these variables via monetary and fiscal
policy." Undergraduate Catalog, 2001-2002, P. 168.
Prerequisites: ECO 101 or 102 or
105; ECO/GEO/POS/PSY 138 or ECO131 or MQM 100; and MAT 121 or 145.
Information about
the Instructor
Name: Hassan Mohammadi
Office: 423 D Stevenson
Hours: T&R 10:00 -11:00, 2:00 - 3:00, or by appointment
Phone: 438-7777
E-Mail: hmohamma@ilstu.edu
Website: www.econ.ilstu.edu/hmohamma/
Course Objectives
This three credit-hour course provides a live and up-to-date coverage
of a broad spectrum of macroeconomic issues dealing with the long-run
and short-run performance of the economy. We begin by issues regarding
the construction and historical performance of several important macro
variables including output, labor productivity, employment, inflation,
and real wage. Our next task is to examine the long-run and short-run
behavior of these variables as well as the factors that contribute to
such performance. To do so, we construct a general equilibrium macro-model
consisting of three markets: the commodity market, the labor market,
and the money market.
Required Background
Students enrolled in this course are expected to have completed courses
in principles of economics, statistics, and mathematics, and have working
knowledge of a word-processing software (MS Word) and a spreadsheet
software (MS Excel).
Required Course
Materials
1. The required text for this course is Macroeconomics, by Andrew B.
Abel and Ben S. Bernanke, 2001,4th Edition, Addison-Wesley. This text
is the primary source for most of my lectures as well as the homework
assignments.
2. Macroeconomics is very dynamic. There
are day-to-day social, political and economic events that affect the
economy. I expect each of you to keep track of these events, and as
you develop your analytical skills, be able to analyze their economic
consequences. There are many good sources for current information, including
the Wall Street Journal, the Economist, and many online sources such
as CNBC.com.
3. You should become familiar with alternative
sources of time-series data on domestic and international macro variables.
Some good sources include Economic
Report of the President, World
Economic Outlook, NBER,
Federal Reserve regional banks, and International Financial Statistics
(IFS). A detailed list of online data sources is available at Economic
and Social Data.
Course Requirements
Your performance in this course is evaluated based on four exams, and
6-8 weekly homework assignments.
Exams
Exams are designed to help monitor your progress in understanding the
subject. They are also used as the primary criteria for your course
grade. They may consist of a combination of multiple-choice, essays,
and problems. The final exam is designed to evaluate your overall understanding
and retention of the core materials covered in this course.
Homework Assignments
As you know, the best way to master any subject is through practice
and problem solving. Such is also the case in economics. Primarily for
this reason, you will receive weekly homework assignments. For the most
part, assignments are selected from the end-of-chapter questions and
problems, and are related to the lecture. In organizing your homework,
you will follow a set of instructions that I will provide you at a later
date. For the benefit of cooperation, I encourage working on problems
through study teams.
Grading and Evaluation
The following table summarizes the information on points, weights, and
tentative dates for the exams and homework assignments:
| |
Points (%) |
Date |
| Exam 1 |
100 (20%) |
14 February |
| Exam 2 |
100 (20%) |
14 March |
| Exam 3 |
100 (20%) |
11 April |
| Exam 4 |
100 (20%) |
9 May |
| Homework |
100 (20%) |
Announced weekly |
| Total |
600 (100%) |
|
Your grade distribution is based on the following schedule:
| 500-440 (100%-88%) |
A
|
| 439-390 (87%-78%) |
B
|
| 389-340 (77%-68%) |
C
|
| 339-290 (68%-58%) |
D
|
| 289 and below (67% and below) |
F
|
Optional Research Project
Those of you who like to accumulate extra credits, may do so by completing
a 5-to-7 page research project for a maximum of 15 bonus points. The
project should address a macroeconomic issue, examine its history, and
explain it using existing theories. Some reasonable topics include inflation,
unemployment, interest rates, exchange rates, consumption spending,
investment spending, recessions, and the like. The paper should be typed,
have at least four references, and be written in your own words. Finally,
the paper should be organized into the following four sections:
A. Introduction
B. Main body of the text
C. Summary and Conclusions
D. References
Please plan to see me earlier in the semester if you plan to complete
the research project.
How to Get the
Most Out of This Course
1. Please keep up with your readings. We will cover a substantial amount
of new information in each lecture. It is fairly impossible to read
and understand the materials just before each exam. Also, since the
subjects are accumulative, difficulties with one might cause serious
hindrance in understanding other subjects. The followings are a few
common sense tips you may consider in preparing yourself prior to each
class:
a. Read the assigned chapter;
b. Read the chapter summary at the end of each chapter;
c. Print a copy of my lecture materials from my website, review it,
and bring it with you to the class. My address is www.econ.ilstu.edu/hmohamma.
d. Always ask clarifying questions if you feel the subject is still
ambiguous.
2. Please take your homework assignments
seriously. There are at least two benefits of doing so: They provide
valuable insights into fairly sophisticated materials, and are common
source of questions or the exams.
3. Please attend classes regularly. Please
inform me of scheduled absences, provide me with a schedule of all semester
absences, and arrange to complete missed class work in advance. Ultimately,
you are responsible for materials covered in class.
4. Please note that make-up examinations
will be given only for documented emergencies and sickness, and must
be scheduled prior to the examination date.
If You Need To
See Me
I encourage you to see me in my office if you have any questions about
the course materials. The best way to do that is by visiting me during
my posted office hours. If inconvenient, you may set up an appointment
by calling me at 438-7777 or contacting me via email at hmohamma@ilstu.edu.
Preparing for
an Exam
Being well prepared for an exam is an ongoing process rather than a
desperate bout of last minute cramming. Assimilating information at
a pace that is spread evenly throughout the semester usually leads to
better comprehension and longer retention. Therefore, in addition to
what has been suggested above, I recommend the followings:
(a) Review the material covered in class
that very day. If you get into the habit of rewriting your lecture notes
as has been suggested above, this will be sufficient review. If something
doesn't make sense, be sure to have me explain it to you again before
the end of the week.
(b) Do all the homework questions that
are assigned, whether they are for credit or not.
(c) Use the study guide (if available).
It is always a good idea to go through all the problems for any given
chapter. The best time to do that is when the class has just finished
with that chapter and is ready to move to the next.
(d) Use the author's website. The site
provides a summary list of concepts, multiple choice questions, exercises,
worked out questions, power point presentations, related links, the
Conference Board data set, glossary of main concepts, and many other
useful resources. The site's address is www.awlonline.com/abel_bernanke.
(e) Allocate sufficient time for studying.
Start studying specifically for the exam at least two or three days
prior to the exam. Be sure to give yourself enough time to go over all
the materials that will be on the exam. When doing a final review, go
over what you have previously highlighted in the text, your lecture
notes, and chapter summaries.
Taking a Test
If you have followed the recommendations above, this part is not going
to be very difficult.
(a) Be confident.
(b) Read the questions on the test carefully.
Try to understand what is being asked. It usually helps if you draw
a diagram as part of your answer or for yourself.
(c) Before handing in the test, check for
careless mistakes.
Course Outline
The textbook covers most of what you
will study in this class. There are some topics, however, where we need
to go beyond the text. In that case, you will need to depend upon your
lecture notes. Where appropriate, I will provide you with printed handouts
to supplement those lecture notes.
There are some sections
of your text that are relatively simple to comprehend. They will not
be covered in lectures, but may be part of your assigned readings. For
most (90%) of the course, the material covered in lectures correspond
to the reading assignments from your textbook as follow:
PART I. Introduction (Chapters
1 and 2)
Chapter 1. Introduction
to Macroeconomics
1.1. What Macroeconomics is about?
Long-Run Economic Growth
Business Cycles
Unemployment
Inflation
The International Economy
Macroeconomic Policy
Aggregation
1.2. What Macroeconomists Do?
Macroeconomic Forecasting
Macroeconomic Analysis
Macroeconomic Research
Data Development
Box 1.1 Developing and Testing an Economic
Theory
1.3. Why Macroeconomists Disagree
Positive Versus Normative Issues
Classical Versus Keynesian views
A Unified Approach to Macroeconomics
Chapter 2. The Measurement and Structure of the National Economy
2.1. National Income Accounting:
The measurement of Production, Income, and Expenditure
In Touch with the Macroeconomy
Why the Three Approaches Are Equivalent
2.2. Gross Domestic Product
The Product Approach to measuring GDP
The Expenditure Approach to Measuring GDP
The Income Approach to Measuring GDP
2.3. Saving and Wealth
Measures of Aggregate Saving
The Uses of Private Saving
Application: Saving and the Government Budget Deficit in the 1980s and
1990s
Relating Saving and Wealth
2.4. Price Indexes, Inflation, and Interest
Rates
Price Indexes
Inflation
Real Versus Nominal GDP
Real Versus Nominal Interest Rates
PART II. Long-Run Economic
Performance
Chapter 3. Productivity, Output, and Employment
3.1. How Much Does the Economy Produce?
The Production Function
Application: The production Function and U.S. Productivity Growth
The Shape of the Production Function
Supply Shocks
3.2. The Demand for Labor
The Marginal Product of Labor and Labor Demand: An Example
A Change in Wage
The marginal Product of labor and the Labor Demand Curve
Factors that Shift the Labor Demand Curve
Aggregate Labor Demand
3.3. The Supply of Labor
The Labor Supply Curve
Factors that Shift the Labor Supply Curve
Aggregate Labor Supply
3.4. Labor Market Equilibrium
Full-Employment Output
Application: Output, Employment, and the Real Wage During Oil Price
Shocks
3.5. Unemployment
Measuring Unemployment
Changes in Employment Status
How Long Are People Unemployed?
Why There Always Are Unemployed People?
- Frictional Unemployment
- Structural Unemployment
- The Natural Rate of Unemployment
3.6. Okun's Law: Relating Output and Unemployment
Chapter 4. Consumption, Saving, and Investment
4.1. Consumption and Saving
Desired Consumption and Desired Saving
Factors that Affect Desired Consumption and Saving
- Current Income
- Expected Future Income
- Wealth
- The Expected Real Interest Rate
- Fiscal Policy
Government Purchases
Taxes
Ricardian Equivalence Proposition
A Formal Model of Consumption and Saving (Appendix 4.A)
4.2. Private Investment
Importance of Investment
Types of Investment
Fixed investment
Inventory Investment (and Housing)
The Desired (Optimum) Capital Stock
Marginal Product of Capital
User Cost of Capital
Determining the Desired Capital Stock
Changes in the Desired Capital Stock
Taxes and the Desired Capital Stock
From the Desired Capital Stock to Desired
Fixed Investment
Gross investment, Net Investment, and depreciation
Lags and investment
Determinants of Desired Fixed Investment
4.3. Goods Market Equilibrium
Conditions for Equilibrium in Goods Market
Quantity supplied = Quantity demanded
Desired national Saving = Desired Investment
The Saving-Investment Diagram
Effects of a Shift in Desired Saving Curve
Effects of a Shift in Desired Investment Curve
Chapter 5. Saving and Investment in the
Open Economy
5.1. Balance of payments Accounting
The current account
The capital and financial account
The relation between the current and capital account
Net foreign assets and the balance of payments account
5.2. Goods Market Equilibrium in an Open Economy
5.3. Savings and Investment in a Small Open Economy
5.4. Saving and Investment in a Large Open Economy
5.5. Fiscal Policy and the Current Account
5.6. The Critical Factor: The response of National Saving
5.7. The Government Budget Deficit and National Saving
Chapter 6. Long-Run Economic Growth
6.1. The Sources of Economic Growth
Chapter 7. The Asset market, Money, and
Prices
7.1. What is Money?
Functions of Money
Medium of Exchange
Unit of Account
Store of Value
Measuring Money: The Monetary Aggregates
The M1 Monetary Aggregate
The M2 Monetary Aggregate
Other Monetary Aggregates
Weighted Monetary Aggregates
The Money Supply
The Fed's Open Market Operations
7.2. Portfolio Allocation and the Demand
for Assets
Determinants of Money Demand as an Asset
Expected Return
Risk
Liquidity
Wealth
7.3. Determinants of Demand for Money as
a Medium of Exchange
The Price Level
Real Income
Interest Rates
The Money Demand Function
Other Factors Affecting Money Demand
Wealth
Risk
Liquidity of Alternative Assets
Efficiency of the Payment system
Elasticities of Money Demand
Income Elasticity
Interest Rate Elasticity
Velocity and the Quantity Theory of Money
Velocity
Quantity Theory of Money
7.4. Asset Market Equilibrium
Aggregating Monetary and Non-Monetary Assets
The Asset Market Equilibrium Condition and Determinants of the Price
Level
Money Growth and Inflation
The Expected Inflation Rate and the Nominal Interest Rate
PART III. Business Cycles and Macroeconomic Policy
Chapter 8. Business Cycles
8.1. What is a business Cycle?
8.2. The American Business Cycle: The Historical
Record
The pre-World War I Period
The Great Depression and World War II
Post World War II
Have Business Cycles Become Less Severe?
8.3. Business Cycle Facts
The Cyclical Behavior of Economic Variables
Direction: Pro-cyclical, Counter-cyclical, and a-cyclical
Timing: Leading indicators, lagging indicators, and coincident indicators
Cyclical Behavior of Key Macroeconomic Variables
Production (Index of Industrial Production)
Expenditure (consumption, investment and government purchases)
Labor market variables (employment, unemployment, real wage, and productivity)
Money Growth and inflation
Financial variables (Stock prices, nominal and real interest rates)
International Aspects of the Business Cycles
8.4. Business Cycle Analysis: A Preview
Aggregate Demand and Aggregate Supply: An Introduction
Aggregate Demand Shocks
Aggregate Supply Shocks
Chapter 9. A General Framework for Macroeconomic
Analysis
(The IS-LM/AD-AS Model)
9.1. The FE Line: Equilibrium in the Labor
Market
Factors that shift the FE Line
(Supply shocks, changes in labor supply, and changes in capital stock)
9.2. The IS Curve: Equilibrium in the Goods
market
Factors that Shift the IS Curve
(Expected future output, wealth, government purchases, taxes, expected
future MPK, Effective tax rate on capital)
9.3. The LM Curve: Equilibrium in the Money
Market (or Asset Market)
The Interest Rate and the Price of Non-Monetary Asset (bond)
The Equality of Money Demanded and Money Supplied
Factors that Shift the LM Curve
(Changes in the nominal money supply, price level, expected inflation,
nominal interest rate, wealth, riskiness of alternative assets, payment
system)
9.4. General Equilibrium in the Complete
IS-LM Model
Applying the IS-LM Model
A temporary adverse supply shock
9.5. Price Adjustment and the Attainment
of General Equilibrium
The effect of a monetary expansion
The adjustment of the price level
Classical versus Keynesian Versions of the IS-LM Model
Price Adjustment and the self-correcting economy
Monetary neutrality
9.6. The Aggregate Demand-Aggregate Supply Model
The Aggregate Demand (AD) Curve
Factors that shift the AD Curve (any factor that shifts the IS or LM
with the exception of price level)
The Aggregate Supply Curve
Short-run AS curve
Long-run AS curve
Factors that shift the AS curve
Equilibrium in the AD-AS Model
Monetary Neutrality in the AD-AS Model
Chapter 10. Classical Business Cycle Analysis:
Market Clearing Macroeconomics
Business Cycles in the Classical Model
The real Business Cycle Theory
Fiscal policy shocks in the classical model
Monetary shocks in the classical model
Unemployment in the classical model
Chapter 11. Keynesianism: The Macroeconomics
of Wage and Price Rigidity
11.1. Real-Wage Rigidity
Reasons for Real Wage Rigidity
The efficiency wage theory
Wage determination in the efficiency wage model
Employment and unemployment in the efficiency wage model
11.2. Price Stickiness
Sources of price stickiness
Monopolistic Competition
Menu Costs and mark-up pricing
11.3. Monetary and Fiscal Policy in the Keynesian Model
Monetary Policy in the IS-LM model
Monetary policy in the AD-AS model
11.4. The Keynesian Theory of Business
Cycles and Macroeconomic Stabilization
Keynesian Business Cycle Theory
Macroeconomic stabilization
Difficulties of macroeconomic stabilization
Supply shocks in the Keynesian model
Chapter 12. Unemployment and Inflation
12.1. The Phillips Curve
The Original Phillips Curve
The Expectations Augmented Phillips Curve
The Shifting Phillips Curve
Changes in the expected rate of inflation,
Changes in the natural rate of unemployment,
Supply shocks and the Phillips Curve
Macroeconomic Policy and the Phillips Curve
The long-Run Phillips Curve