Download ECON 121-Principles of Macroeconomics-Usman

Lahore University of Management Sciences
ECON 121 – Principles of Macroeconomics Spring 2012 Instructor Usman Khan Room No. 208‐Dean’s Wing Office Hours TBA Email [email protected] Telephone Secretary/TA TBA TA Office Hours TBA Course URL (if any) Course Basics Credit Hours 4 Lecture(s) Nbr of Lec(s) Per Week 2 Duration 100 minutes Tutorial (per week) Class tutorials will be arranged on the request of students Course Distribution Core Yes Elective Open for Student Category Freshmen/MSc 2‐year Close for Student Category COURSE DESCRIPTION Overall Theme To provide the students with an introduction to the basic macroeconomic principles; to enable students to appreciate the workings of real (labour and goods) and asset/money markets and the nature of equilibrium in each market; to emphasize the role of macroeconomic policies that affect internal and external deficits, inflation and growth of per capita income. Throughout the course a focus will be on ‘critical thinking’ to analyze macroeconomic problems. Focus areas The major areas of focus will be the inputs market, goods market, money/asset market, and economic growth. Business cycles will also be discussed and linked to macroeconomic policy debate issues of ‘active’ versus ‘passive’ and ‘rules’ versus discretion. The equilibrium IS‐LM, AD‐
AS model will be covered with some basic applications, providing a smooth transition to Intermediate Macroeconomics. The course is pitched at the core principles level so is based on the understanding that students have at least attained the some basic macroeconomics knowledge equivalent to that covered in any primary Economics course. Upon completion of the course it is expected that students should be able to: (a)
understand the structure of the economy and theories of macroeconomics at a level appropriate for a first year economics graduate; (b)
understand the key links between the goods market, input markets and money markets. (c)
understand the macroeconomic models underlying the goods, input and money market, as well as the IS‐LM, AD‐AS framework. COURSE PREREQUISITE(S) Principles of Economics 
Lahore University of Management Sciences
COURSE OBJECTIVES The purpose of this course is to provide students with a thorough understanding of core concepts and methods of macroeconomics as a foundation for subsequent study of macro economic topics within the degree programme, and as one of the key elements in the professional training of an economist. The techniques used will heavily rely on concept building and to ignite critical and analytical reasoning. The course will use microeconomic models of utility maximization, profit maximization and welfare maximization from an individual prospective and then build to develop macro‐models using the assumption of aggregation. Learning Outcomes Critical thinking – analyzes information; utilizes logic and microeconomic models; recognizes patterns and rationality to form 
optimizing conclusions; recognizes and evaluates assumptions, and support of arguments. Literature research skills – doing independent research / use of available literature to synthesize information into coherent 
whole. Global Awareness – understands the global environment in which economies operate. 
Grading Breakup and Policies 6 – Quizzes (5% each) 1 – Midterm (30 %) 1 – Final (40%) If one quiz is missed, the average grade of the remaining quizzes with a grade reduction will be awarded. If an additional quiz is missed, no marks will be awarded. There will be no retakes strictly. Examination Detail Yes/No: Yes Midterm Combine/Separate: Combine Exam Duration: 1 hour 30 minutes Preferred Date: TBA Exam Specifications: Closed books and closed notes; no help sheet allowed; no formula sheet allowed; calculators allowed. Yes/No: Yes Combine/Separate: Combine Final Exam Duration: In class Exam Specifications: Closed books and closed notes; no help sheet allowed; no formula sheet allowed; calculators allowed. COURSE OVERVIEW Recommended Week Topics Readings Chapter 1,2 (AB), Chapter 2 (MK), and Measurement and Structure of the National Economy section 10.1 (MK)
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Introduction 
National Income Accounting: The Measurement of Production, Income, and Expenditure 
Gross Domestic Product 1 
Detailed analysis of its components: Keynesian cross 
Saving and Wealth 
Multiplier and different taxes 
Real GDP, Chained DGP Price Indexes, and Inflation 
Interest Rates Lahore University of Management Sciences
2,3 4,5 6,7 8,9 10,11 11,12,
13 14 Productivity, Output, and Employment 
The Demand for Labour 
The Supply of Labour 
Labour Market Equilibrium 
Unemployment 
Okun’s Law Consumption, Saving, and Investment 
Consumption and Saving 
Two period life cycle model 
Consumption models (Franco Mod., Friedman Permanent Income, David Laibson and Random Walk) 
Investment 
Endogenous investment model and Tobins Q 
Goods Market Equilibrium Saving and Investment in the Open Economy 
Balance of Payments Accounting 
Goods Market Equilibrium in an Open Economy 
Saving and Investment in Large and Small Open Economies 
Fiscal Policy and the Current Account The Asset Market, Money, and Prices 
Definition of Money 
Portfolio Allocation and the Demand for Assets 
The Demand for Money 
Asset Market Equilibrium 
Walras Law 
Money Growth and Inflation 
Money multiplies and liquidity theories Business Cycles 
Introduction to Business Cycles 
Business Cycles and rational expectations 
Lucas critique and Policy ineffective proposition 
Active vs Passive Policy 
Rules vs Discretion Policy The IS‐LM/AD‐AS Models 
The FE Line: Equilibrium in the Labour Market 
The IS Curve: Equilibrium in the Goods Market 
The LM Curve: Asset Market Equilibrium 
General Equilibrium in the Complete IS‐LM Model 
Price Adjustment and the Attainment of General Equilibrium 
Aggregate Demand and Aggregate Supply 
Applications of AD/AS and IS‐LM models 
Aggregate supply models in the short run 
Phillips curve 
Deflation path 
Cost of deflation and inflation policy Economics of Growth 
Exogenous growth model: Solow Model 
Applications of Solow Chapter 3 (AB) and Chapter 6 (MK)
Chapter 4 (AB) and Chapter 16 (MK)
Chapter 5 (AB) Chapter 7 (AB) and Chapter 18 (MK)
Chapter 8 (AB) and Chapter 14 (MK) Chapter 9 (AB) and Chapter 10,11 & 13 (MK)
Chapter 6 (AB) and Class notes Lahore University of Management Sciences
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Relaxing the assumptions of Solow and introducing endogenous growth Lucas Model Textbook(s)/Supplementary Readings Abel Andrew B. & Bernanke Ben S, Macroeconomics, 5th Edition, Addison Wesley (AB) Mankiw N. G. , Macroeconomics, 5th Edition or earlier versions, Worth (MK)