Download ECON 2020-300 Principles of Macroeconomics

http://www.Colorado.EDU/Economics/fall99-syllabi/fall99-2020-300syllabus.htm
2020syl
University of Colorado
Department of Economics
Fall 1999 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 produc.e? 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 six 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: Robert L. Sexton EXPLORING MACROECONOMICS, Dryden, 1999. (S)
Course Handout Package (comprehensive, brief, guide to most of the lectures posted on my website during
the semester, along with related course materials)
Office: Economics 223 Hours: 2:30-4:00 MW and by appointment
Phone: 492-7021 (message machine)
e-mail: gravesp @spot.colorado.edu (most preferred--! am on-line everyday and will get back to you fast)
I of 5
19-Aug-99 2: 14 PM
http://www.Colorado.EDU/Economics/fall99-syllabi/fall99-2020-300syllabus. htm
2020syl
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
laq~est number arising from the following alternative calculated scores:
· "Score l": .3(lst 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--1 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 TAs will be, by any system
they view as fair and appropriate, assigning one of three grades to your recitation performance in
roughly equal proportions: +, O, or-. If you are on the margin (see below) the+ moves you up, the
minus moves you down, and the Odoes 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:
2 of 5
19-Aug-99 2:14 PM
http://www.Colorado.EDU/Economics/fall99-syllabi/fall99-2020-300syllabus.htm
2020syl
Highest Average "Score"
100-92 = A (100-98 on 2 midterms, exempt from final)
92-88 =A, A-, B+, or B (depends on recitation grade)
88-82 = B
82-78 = B, B-, C+, or C (depends on recitation grade)
78-72 = C
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 COMPLETELY DETERMINES YOUR GRADE--THERE IS
NO "EXTRA CREDIT," ETC.)
Brief Course Outline and Reading Assignments (not a substitute for class notes!)
I. ECONOMIC WAY OF THINKING--HOW DOES THE WORLD "WORK?" (S Modules 1-3)
What is "economics?" How do people make the decisions made necessary by the fact of scarcity?
[people face tradeoffs, opportunity costs are the only relevant cost concept, rational people think "at
the margin," and people respond to incentives]. How do people interact? [trade can make everyone
better off, markets have desirable properties, government can sometimes improve on market
outcomes]. How does the economy as a whole work? [income and output are identical, too much
money causes inflation, unforeseen policies can affect the overall performance of the economy in the
short run, economic growth raises standards of living]. 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 turn, implies opportunity
costs--the Production Possibilities Curve. 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 to have, minimum wages, progressive income taxation,
trade. Graphs: production possibility frontier and circular flow. Philosophical issues (What is
"value?").
II. DEMAND AND SUPPLY--THE BASICS (S Modules 4-5)
Demand, Supply, and Market Equilibrium (maximizing and coordinating). The "shifts" versus
"movements along" confusion clarified. From individual to market demand. Price controls.
3 of 5
19-Aug-99 2: 14 PM
2020syl
http://www.Colorado.EDU/Economics/fall99-syllabi/fall99-2020-300syllabus.htm
'
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 (loanable funds and growth implications), compounding,
discounting and the role of entrepreneurs and speculators.
III. DEMAND AND SUPPLY--EFFICIENCY AND WELFARE (S Module 16-C; class notes)
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. GOVERNMENT AND THE ECONOMY (S Module 6)
The role of government: property rights protection & contract enforcement; externalities; public
goods; monopoly (the "rules of the game," more generally); income inequality. Public choice
theory--what are the incentives of government politicians and bureaucrats? Cost of government
(foregone benefits--expenditures and regulatory burden).
(first midterm--after this material--specific date to be voted on)
V. THE GOALS AND DATA OF MACROECONOMICS (S Modules 7,9)
Macroeconomic Goals: full employment, stable prices, growth, minimal fluctuations (not all without
controversy).
The economy's income and expenditure (the "circular flow")--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.
VI. THE REAL ECONOMY IN THE LONG RUN--GROWTH, AD & AS (S Module 8,10,11; class
notes)
NOTE: AS (think of the production possibilities curve) is shifting out--AD doesn't matter--affecting
only price level! (Markets clear at full employment, with no change in relative prices of inputs and
outputs). Production and growth around the world--the magic of compounding and the rule of 72.
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
again. Technological changes. The "natural" rate of unemployment and issues surrounding it; job
search.
VII. MONEY AND PRICES IN THE LONG RUN (Class notes--S Module 13, some of S Modules
11,15)
What is "money?" Money supplied to the economy and AD. How is money supplied?--The Federal
Reserve and how it, combined with commercial banks, alters the money supply. Money creation with
a fractional reserve banking system. The FED's tools of monetary control (we'll discuss how they
work in practice in detail in IX: open market operations, reserve requirements, and the discount
rate. What is inflation? What are the causes and costs of inflation?
4 of 5
19-Aug-99 2:1 4 PM
2020syl
http://www.Colorado.EDU/Economics/fall99-syllabi/fall99-2020-300syllabus.htm
..
(
(second midterm--rather late in course--after this material)
VIII. THE MACROECONOMICS OF OPEN ECONOMIES (Class notes--S Modules 16-17)
The increasing openness of world-wide trade and its implications for our macroeconomic variables.
Note that Net Foreign Investment must identically equal Net Exports. 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).
IX. SHORT-RUN FLUCTUATIONS: THE BUSINESS CYCLE (S Modules 12,14,15)
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.
X. 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 CHEM140--December 16th, 7:30-10:30PM--good luck!)
5 of 5
19-Aug-99 2:1 4 PM