Syllabus

Lecutres

Outlines

Assignments

Introduction

Macroeconomics: The study of the national economy's structure, performance, and government policies designed to improve economic performance.

1. Structure (Map): Divide the economy into three broad markets:

" Commodity Market: determines the demand and supply of goods and services, equilibrium output (short-run and long-run), the general price level, and inflation.

" Labor Market: determines the demand and supply of labor, equilibrium employment, real wages, unemployment, and unemployment rate.

" Money (Credit) Market: Determines the equilibrium level of interest rate.

Partial-Equilibrium versus General-Equilibrium Analysis:
" Partial Equilibrium Analysis: Analysis of an individual market in isolation.
" General Equilibrium Analysis: Analysis of the interaction among markets.

2. Economic Performance: Indicators:

" Long-Run Growth: Growth in output, growth in labor productivity (standard of living); Rule of 72.

" Short-Run Cycles: fluctuations in output, employment, and unemployment;

" Inflation: continuous increase in the general price level;

" The International Economy
- Flow of goods and services: trade deficit and trade surplus;
- Flow of funds and financial assets: capital account surplus and deficit.

3. Economic Policy: Government policies designed to improve economic performance

Fiscal Policy: Deliberate changes in expenditure (G) and net taxes (T).
- If G = T then balanced budget
- If G < T then budget surplus
- If G > T then budget deficit

Budget deficits are financed by (1) borrowing, (2) printing money.
Budget surpluses are used to (1) payoff national debt, (2) reduce taxes.

" Monetary Policy: Changes in money supply by the Fed.

4. What Do Macroeconomists Do?
a. Data Collection: Economists at the Fed, BLS, BEA collect data on macro-variables.

b. Forecasting: Forecasting future values of macroeconomic variables such as output growth, inflation, interest rate, and Fed's actions (Fed watching).

c. Economic Analysis: Monitoring the behavior of the economy and examining the implications of current economic events. Work in the private sector (financial institutions and markets), the public sector (executive, legislative), and at the Fed.

d. Macroeconomic Research: To improve our understanding of the economy's structure and performance. Most research conducted at universities, and non-profit organizations.

5. How to Conduct Economic Research:
a. Identify a problem
b. Formulate a theory
c. Identify its testable implications
d. Empirically test its implications
e. Verify (or refute) its empirical validity

o Economic Theory: A set of ideas about a particular aspect of the economy that are organized in a logical framework.

o Economic Model: A formal presentation of a theory using math, graphs, or verbal description.

6. How to Evaluate a Theory:
a. Does it have realistic assumptions?
b. Does it explain the problem?
c. Does it have testable implications?
d. Does real world data support its implications?

7. Why Do Economists Disagree?
a. Positive versus Normative Analysis:
" Positive Analysis: Examines the consequences of a policy without addressing their desirability (or lack of).

" Normative Analysis: addresses the desirability (or lack of) a policy, a whether it should be implemented.
Example: A 10% increase in the tax rate.
" Most disagreements in normative issues.

b. Different Schools of Thoughts:
" Classical Economists:
- Adam Smith (1776), An inquiry to the Wealth of Nations,
- Assumptions: perfect markets, flexible wages and price, rational economic agents, free markets.
- Result: (Invisible Hand): Individuals, while pursuing their own self-interest, maximize the general welfare of everyone in the economy.

- Policy Implications (Normative):
Hands-off economy - no need for government intervention,
Monetary and fiscal policies do not benefit the economy.
" Keynesian Economists:
- John Maynard Keynes (1936), The General Theory of Employment, Interest, and Money.
- Assumptions: Markets are not perfect, wages and prices are rigid, economic agents might have myopia.
- Results: Invisible hand does not work well. The economy goes through big cycles.

- Policy Implications (Normative):
Government should use monetary and fiscal policies to stabilize the economy and improve the performance of markets.

" Evolution of Classical/Keynesian Debate:
- Up to 1930: Classical theory dominant.
- 1930-1960: (great depression, WWII, Korean war) Keynesian theory dominated.
- 1960-1980: a resurgence of classical ideas in the form of monetarism, new-classical theorists, and real business cycle theorists.
- 1980-present: a resurgence of new-Keynesians.

" The Approach in this Course:
- A Unified Approach
- Uses the 3 main features of the both theories
- Economic agents (firms, households, and government) interact in three markets, commodity, labor, and money;
- The analysis begins at the micro (individual) level and is aggregated to the macro level;
- Individuals try to maximize an objective function (satisfaction, profits, …);
- Classical assumptions in the long-run and Keynesian assumptions in the short-run.