Download ECON 2020-300 Principles of Macroeconomics

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Fall 1998
University of Colorado
Department of Economics
Macroeconomic Principles 2020-300
P. Graves
Content:
Macroeconomic principles 2020 is a companion course with microeconomic principles
2010. Together the courses introduce you to the "economic way of thinking," in the context of
"mankind in the ordinary business of life" (microeconomics) and in the "big picture" of how the
economy as a whole works (macroeconomics). The central fact that underlies microeconomics is
the fact of "scarcity." By this it is meant that our wants exceed the goods freely available from
nature--hence choices must be made among the many things we want. This leads to the
fundamental economic questions, narrowly defined, which face all societies: What to produce?
How to produce? and For Whom to produce? But economics is really much broader in scope
than this; it is really the study of wise decision-making in all areas of life. To draw a biological
analogy: The "ecosystem" of microeconomics is competitive equilibrium, with supply and demand
determining prices and quantities exchanged in each of a plethora of individual markets
(interacting "forests"). The "trees" that make up each forest are the individual "optimizing''
economic agents (households and firms, but other collections of people as well). The first nine
chapters of your text are about microeconomics, for macroeconomics cannot be well-understood
without some grounding in microeconomics (in much the same way that knowing something
about cells makes the study of organisms easier).
The remainder of the text deals with questions of macroeconomics: How do we measure a
nation 's income? How do we know, when individual prices are going both up and down, if there
has been an increase in the "cost-of-living?" Why has economic growth characterized much of the
world? Why is the rate of growth in national income so variable among countries? What is
"money" and how is it created? What are the causes and costs of inflation? What role does
international trade play in the macroeconomic conditions of a country? Why do we have
"business cycles" (alternating periods of strong growth followed by periods of recession and
depressed conditions)? Are there policies that might reduce the "roller-coaster" nature of
fluctuations in the economy's growth rate? What are the controversies about such policies?
Macroeconomics is not as "settled" as microeconomics, so there will be fewer unchanging truths
than you may be used to from your study of microeconomics (if you took EC2010 prior to this
course, which is not necessary). However, the existence of the macroeconomic problems that we
observe around us implies that "something" must be wrong with certain of the microeconomic
assumptions--in particular, if all markets instantaneously cleared, there would be no
macroeconomic problems!
Administrative Details
Text: N. Gregory Mankiw MACROECONOMICS, Dryden, 1997. (M)
Course Guidline Package (comprehensive, brief, guide to most of the lectures will be
posted on my website during the semester, along with related course materials)
Office: Economics 223 Hours: 4 :00-5:30 MW and by appointment
Phone: 492-7021 (message machine)
e-mail: [email protected] (most preferred)
Grading:
I have an unusual and complicated (but extremely fair!) grading system. There will be two
midterms and a comprehensive final. On each multiple-choice exam enough points are added to
everyone's bring the median score up to 75 (e.g. if the median for a particular exam is 68, 7 points
will be added to each person's exam). Hence, doing well on a difficult exam, say getting a 96
when the median was 68 enables you to get over 100 points, in this example receiving a 103.
Should the median for an exam be above 75, I do not subtract (such an outcome indicates either
that you are part of an unusually smart or studious class or--more likely?--that I made the test too
easy, hence it is my problem). After these adjustment points are added, I will calculate your
course test grades as the largest number arising from the following alternative calculated scores:
"Score 1": .3(1st Mid Grade)+ .3(2nd Mid Grade)+ .4(Final Grade)
"Score 2":
.4(2nd Mid Grade)+ .6(Final Grade)
"Score 3": .4(1st Mid Grade)
+ .6(Final Grade)
Hence, if you "mess up" (or miss) either of the midterm exams (but not both), that test will
automatically be dropped; the comprehensive final is weighted more heavily in this case. There
will be no early exams or make-up exams, since they are difficult to make comparable and this
system does not penalize you for missing one exam in any event. Should you miss an exam, come
to my office and get a copy of it and take it under "test conditions," later comparing your answers
with those posted (you will know in this way how you would have done, aiding in your study for
the final). I will post the answers to midterm exams immediately after giving them, and you can
keep the midterm test booklet to get an immediate (though "lower bound") estimate as to how
you did. Bring a #2 pencil with you to exams!
The University of Colorado does not allow me to award even the best of you with an
"A+," hence there is (unfortunately) little incentive to really learn the material of any course, in
particular this one. To overcome this difficulty--since I believe in creating an incentive to really
excel--I let anyone with an adjusted 98 or higher average on the two midterms out of the final,
conditional on continued attendence! [Note: even if you personally do not get out of the final,
you should cheer for those that do, since the median will be lower on the final, causing more
points to get added to everyone's score on this important test!].
I view attendance at either my lectures or the recitation sections as highly desirable, but do
not believe in penalizing those who feel otherwise. Yet those who attend and perform well in
recitation always want to feel that they are rewarded for doing so. The way I handle this is to
make the TA portion of the grade determine the grades of those on the "margin." The T As will
be, by any system they view as fair and appropriate, assigning one of three grades to your
recitation performance in roughly equal proportions: +, 0, or-. If you are on the margin (see
below) the+ moves you up, the minus moves you down, and the O does neither. That is, you can
have an 89 (normally a B+) and get either an A-, a B, or stay at a B+; similarly, you could have a
91 (normally an A-) and get either an A, a B+, or stay at an A-. As you can see, there may be
substantial advantages to attending recitation and striving in it--however, if you are think you
know better how to allocate your time than I do (a reasonable proposition, incidentally), you can
be a risk-taker and "blow off" recitation entirely. If you get a 93 you get the A; an 87 gets you a
B; that is, you are not harmed, if you are not on the "margin," by deciding not to go to recitation.
Thus, we come to the final course grade calculation:
Highest Average "Score"
= A (100-98 on 2 midterms, exempt from final)
100-92
= A, A-, B+, or B (depends on recitation grade)
92-88
=B
88-82
82-78
= B, B-, C+, or C (depends on recitation grade)
=C
78-72
72-68
= C, C-, D+, or D (depends on recitation grade)
68-62
=D
62-58
=D, D-, F+, or F (depends on recitation grade)
(NOTE: THE PRECEDING COMPLETELYDETERMINES YOUR GRADE--THERE IS
NO "EXTRA CREDIT, ETC.)
II
Brief Course Outline and Reading Assignments (not a substitute for class notes!)
I.
ECONOMIC WAY OF THINKING--HOW DOES THE WORLD "WORK?" (M Chs. 1-3)
What is "economics?" How people make decisions made necessary by the fact of scarcity-Principles 1-4 (people face tradeoffs, opportunity costs are only relevant cost concept, rational
people think "at the margin," and people respond to incentives). How people interact--Principles
5-7 (trade can make everyone better off, markets have desirable properties, government can
sometimes improve on market outcomes). How the economy as a whole works--Principles 8-10
(income and output are identical, too much money causes inflation, unforeseen policies and events
can affect the economy in the short run). Science, "realism," and models. Logical pitfalls (fallacy
of composition, post hoc ergo propter hoc, wishful thinking and secondary effects or law of
unintended consequences). Scarcity implies choice which, in tum, implies opportunity costs. The
"market" as one means of solving problems stemming from scarcity (spontaneous order versus
hierarchy). What, How, For Whom, and When? Consumer and firm goals and the spontaneous
coordination provided by the competitive market. Property rights and incentives. Positive and
normative economics (benefits and costs and their distribution). Efficiency (Pareto, Kaldar) and
equity. Why economists disagree (theory, estimates, and values). The gains from trade and
comparative advantage. Introductory illustrations: Determinants of the number of children t.o
have, minimum wages, progressive income taxation, international trade. Graphs: production
possibility frontier and circular flow. Philosophical issues (What is "value?").
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II. DEMAND AND SUPPL Y--THE BASICS (M Chs. 4-6)
Demand, Supply, and Market Equilibrium (maximizing and coordinating). The "shifts"
versus "movements along" confusion clarified. From individual to market demand. Elasticity.
Price controls. Government policy applications (farm policy, rent controls, minimum wages, tax
incidence, prohibition of goods). One reason why some don't like supply and demand.
Intertemporal resource allocation and the price system: interest, compounding, discounting and
the role of entrepreneurs and speculators.
III. DEMAND AND SUPPLY--EFFICIENCY AND WELFARE (M Chs. 7-9)
Consumer surplus, producer surplus, and the gains from voluntary trade. Demand curve
as willingness-to-pay. Supply curve as marginal cost, hence willingness-to-sell. Consumer .
surplus and the paradox of value. A rationale for income transfers? Application: Costs of
taxation. Application: International trade. Theory of comparative advantage. S&D analysis of
trade and tariffs. Developing countries. Exchange rates and the international financial system.
IV. THE DATA OF MACROECONOMICS (M Chs. 10-11, class notes)
The economy's income and expenditure--what it is and what it isn't. Real versus nominal
GDP. International and intertemporal differences in GDP and the quality of life. Measuring the
cost-of-living and "correcting" for the effects of inflation to arrive at true values of variables.
Indexation. Real versus nominal interest rates.
(first midterm--after this material--specific date to be voted on)
V.
THE REAL ECONOMY IN THE LONG RUN (M Chs. 12- 14)
Production and growth around the world--the magic of compounding and the rule of 72
(not 70, as in book). Are natural resources (or pollution) a limit to growth? Growth of inputs
versus growth in quality of inputs. Saving, investment and the financial flows linking them--the
market for loanable funds. The "natural" rate of unemployment and issues surrounding it. Unions
and collective bargaining, the theory of "efficiency" wages, and job search.
VI. MONEY AND PRICES IN THE LONG RUN (M Chs. 15-16)
What is "money?" The Federal Reserve--how it, combined with commercial banks, alter
the money supply. Money creation with a fractional reserve banking system. The FED's tools of
monetary control: open market operations, reserve requirements, and the discount rate. What are
the causes and costs of inflation?
VII. THE MACROECONOMICS OF OPEN ECONOMIES (M Chs. 17-18)
The increasing openness of world-wide trade and its implications for our macroeconomic
variables. Real and nominal exchange rates in international transactions. Purchasing power parity
as a first theory of exchange-rate determination. Loanable funds revisited with an open economy.
How do policies and events affect an open economy (government deficits, trade deficits, capital
flight).
(second midterm--rather late in course--after this material)
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VIII. SHORT-RUN FLUCTUATIONS: THE BUSINESS CYCLE (M Chs. 19-22)
Aggregate demand and aggregate supply contribute to the explanation of short-run
fluctuations. Aggregate demand slopes down (not because of substitutes) because of the
Pigouvian wealth effect, Keyne's interest-rate effect, and Mundell-Fleming's exchange-rate effect.
Shifting AD. Aggregate supply in the long-run (vertical) and in the short-run (upward-sloping).
Temporarily upward-sloping due to New Classical misperceptions theory, Keynesian sticky-wage
theory, and New Keynesian sticky-price theory. Shifting AS. Recession can be due to either
shifts in AD or AS. The arguments regarding the influence of monetary and fiscal policy on
aggregate demand. The short-run trade-off between inflation and unemployment.
IX. FINAL THOUGHTS
Five debates over macroeconomic policy: Should policymakers attempt to stabilize the
economy? Should monetary policy be made by rule rather than by discretion? Should the Central
Bank aim for zero inflation? Should the government balance its budget? Should tax laws be
reformed to encourage saving? Other issues.
(final exam, in class December 12th, 3:30AM-6:30PM--good luck!}