Macroeconomics

Textbook Part I INTRODUCTION Chapter 1. The Science of Macroeconomics Chapter 2. The Data of Macroeconomics Chapter 3. National Income- Where It Comes From and Where It Goes Chapter 4. Money and Inflation Chapter 5. The Open Economy Chapter 6. Unemployment Chapter 7. Economic Growth I Chapter 8. Economic Growth II Chapter 9. Introduction to Economic Fluctuations Chapter 10. Aggregate Demand I Chapter 11. Aggregate Demand II Chapter 12. Aggregate Demand in the Open Economy Chapter 13. Aggregate Supply Chapter 14. Stabilization Policy Chapter 15. Goverment Debt Chapter 16. Consumption Answers to Textbook Questions and Problems chap01 chap02 chap03 chap04 chap05 chap06 chap07 chap08 chap09 chap10 chap11 chap12 chap13 chap14 chap15 chap16 chap17 chap18 chap19 PPT Chapter 01 Learning objectives Important issues in macroeconomics Important issues in macroeconomics U.S. Gross Domestic Product in billions of chained 1996 dollars U.S. Gross Domestic Product in billions of chained 1996 dollars Why learn macroeconomics? Unemployment and social problems Why learn macroeconomics? Unemployment and earnings growth Interest rates and mortgage payments Why learn macroeconomics? Inflation and Unemployment in Election Years Economic models Example of a model: The supply & demand for new cars The demand for cars Digression: Functional notation Digression: Functional notation The market for cars: demand The market for cars: supply The market for cars: equilibrium The effects of an increase in income: The effects of a steel price increase: Endogenous vs. exogenous variables: Now you try: A Multitude of Models A Multitude of Models Prices: Flexible Versus Sticky Prices: Flexible Versus Sticky Outline of this book: Outline of this book: Chapter summary Chapter summary Chapter 02 Learning objectives Gross Domestic Product Why expenditure = income The Circular Flow Value added Exercise: (Problem 2, p.38) Final goods, value added, and GDP The expenditure components of GDP Consumption (C) U.S. Consumption, 2001 Investment (I) U.S. Investment, 2001 Investment vs. Capital Investment vs. Capital Stocks vs. Flows Government spending (G) Government spending, 2001 Net exports (NX = EX - IM) An important identity A question for you: Why output = expenditure GDP: An important and versatile concept GNP vs. GDP Discussion Question: (GNP – GDP) as a percentage of GDP for selected countries, 1997. Real vs. Nominal GDP Real GDP controls for inflation Practice problem, part 1 Answers to practice problem, part 1 U.S. Real & Nominal GDP, 1967-2001 GDP Deflator Practice problem, part 2 Answers to practice problem, part 2 Working with percentage changes Working with percentage changes Chain-weighted Real GDP Consumer Price Index (CPI) How the BLS constructs the CPI Exercise: Compute the CPI answers: The composition of the CPI’s “basket” Reasons why the CPI may overstate inflation The CPI’s bias CPI vs. GDP deflator Two measures of inflation Categories of the population Two important labor force concepts Exercise: Compute labor force statistics Answers: Okun’s Law Chapter Summary Chapter Summary Chapter 03 In this chapter you will learn: Outline of model Factors of production The production function Returns to scale: a review Exercise: determine returns to scale Assumptions of the model Determining GDP The distribution of national income Notation How factor prices are determined Demand for labor Marginal product of labor (MPL) Exercise: compute & graph MPL answers: The MPL and the production function Diminishing marginal returns Check your understanding: Exercise (part 2) MPL and the demand for labor Determining the rental rate The Neoclassical Theory of Distribution How income is distributed: Outline of model Demand for goods & services Consumption, C The consumption function Investment, I The investment function Government spending, G The market for goods & services The loanable funds market Demand for funds: Investment Loanable funds demand curve Supply of funds: Saving Types of saving Notation:  = change in a variable EXERCISE: Calculate the change in saving Answers digression: Budget surpluses and deficits The U.S. Federal Government Budget The U.S. Federal Government Debt Loanable funds supply curve Loanable funds market equilibrium The special role of r Digression: mastering models Mastering the loanable funds model CASE STUDY The Reagan Deficits 1. The Reagan deficits, cont. Are the data consistent with these results? Now you try… Mastering the loanable funds model An increase in investment demand Chapter summary Chapter summary Chapter summary Chapter 04 In this chapter you will learn U.S. inflation & its trend, 1960-2001 U.S. inflation & its trend, 1960-2001 The connection between money and prices Money: definition Money: functions Money: types Discussion Question The money supply & monetary policy The central bank Money supply measures, April 2002 The Quantity Theory of Money Velocity Velocity, cont. Velocity, cont. The quantity equation Money demand and the quantity equation Money demand and the quantity equation back to the Quantity Theory of Money The Quantity Theory of Money, cont. The Quantity Theory of Money, cont. The Quantity Theory of Money, cont. The Quantity Theory of Money, cont. The Quantity Theory of Money, cont. International data on inflation and money growth U.S. Inflation & Money Growth, 1960-2001 U.S. Inflation & Money Growth, 1960-2001 U.S. Inflation & Money Growth, 1960-2001 U.S. Inflation & Money Growth, 1960-2001 Seigniorage Inflation and interest rates The Fisher Effect U.S. inflation and nominal interest rates, 1952-1998 Inflation and nominal interest rates across countries Exercise: Answers: Two real interest rates Money demand and the nominal interest rate The money demand function The money demand function Equilibrium What determines what How P responds to M What about expected inflation? How P responds to e Discussion Question A common misperception Average hourly earnings & the CPI The classical view of inflation The social costs of inflation The costs of expected inflation: 1. shoeleather cost The costs of expected inflation: 2. menu costs The costs of expected inflation: 3. relative price distortions The costs of expected inflation: 4. unfair tax treatment The costs of expected inflation: 4. General inconvenience Additional cost of unexpected inflation: arbitrary redistributions of purchasing power Additional cost of high inflation: increased uncertainty One benefit of inflation Hyperinflation What causes hyperinflation? Recent episodes of hyperinflation Why governments create hyperinflation The Classical Dichotomy The Classical Dichotomy Chapter summary Chapter summary Chapter summary Chapter summary Chapter summary ch05.ppt Chapter objectives Imports and Exports as a percentage of output: 2000 In an open economy, Preliminaries Preliminaries, cont. GDP = expenditure on domestically produced g & s The national income identity in an open economy International capital flows Another important identity Saving and Investment in a Small Open Economy National Saving: The Supply of Loanable Funds Assumptions re: capital flows Investment: The Demand for Loanable Funds If the economy were closed… But in a small open economy… Three experiments 1. Fiscal policy at home NX and the Government Budget Deficit 2. Fiscal policy abroad 3. An increase in investment demand 3. An increase in investment demand The nominal exchange rate Exchange rates as of June 6, 2002 The real exchange rate Understanding the units of ε ~ McZample ~ ε in the real world & our model How NX depends on ε U.S. Net Exports and the Real Exchange Rate, 1975-2002 The net exports function The NX curve for the U.S. The NX curve for the U.S. How ε is determined How ε is determined Interpretation: supply and demand in the foreign exchange market Four experiments 1. Fiscal policy at home 2. Fiscal policy abroad 3. An increase in investment demand 4. Trade policy to restrict imports 4. Trade policy to restrict imports The Determinants of the Nominal Exchange Rate The Determinants of the Nominal Exchange Rate The Determinants of the Nominal Exchange Rate Inflation and nominal exchange rates Purchasing Power Parity (PPP) Purchasing Power Parity (PPP) Purchasing Power Parity (PPP) Does PPP hold in the real world? CASE STUDY The Reagan Deficits revisited The U.S. as a large open economy A fiscal expansion in three models Chapter summary Chapter summary Chapter summary ch06.ppt Chapter objectives Natural Rate of Unemployment U.S. Unemployment, 1958-2002 A first model of the natural rate Assumptions: The transitions between employment and unemployment The steady state condition Solving for the “equilibrium” U rate Example: policy implication Why is there unemployment? Job Search & Frictional Unemployment Sectoral shifts Industry shares in U.S. GDP, 1960 Industry shares in U.S. GDP, 1997 Sectoral shifts abound Public Policy and Job Search Unemployment insurance (UI) Benefits of UI Why is there unemployment? Unemployment from real wage rigidity Unemployment from real wage rigidity Reasons for wage rigidity The minimum wage The minimum wage in the real world: Labor unions Union membership and wage ratios by industry, 2001 Efficiency Wage Theory Question for Discussion: The duration of U.S. unemployment, average over 1993-2002 The duration of unemployment Actual & natural rates of unemployment in the U.S. EXPLAINING THE TREND: The minimum wage EXPLAINING THE TREND: Union membership EXPLAINING THE TREND: Sectoral shifts EXPLAINING THE TREND: Demographics The rise in European Unemployment The rise in European Unemployment Chapter summary Chapter summary Chapter summary ch07.ppt Chapter 7 learning objectives The importance of economic growth selected poverty statistics selected poverty statistics Estimated effects of economic growth Income and poverty in the world selected countries, 2000 The importance of economic growth Huge effects from tiny differences Huge effects from tiny differences Huge effects from tiny differences The lessons of growth theory The Solow Model How Solow model is different from Chapter 3’s model How Solow model is different from Chapter 3’s model The production function The production function The national income identity The consumption function Saving and investment Output, consumption, and investment Depreciation Capital accumulation Capital accumulation The equation of motion for k The steady state The steady state Moving toward the steady state Moving toward the steady state Moving toward the steady state Moving toward the steady state Moving toward the steady state Now you try: A numerical example A numerical example, cont. Approaching the Steady State: A Numerical Example Approaching the Steady State: A Numerical Example Exercise: solve for the steady state Solution to exercise: An increase in the saving rate Prediction: International Evidence on Investment Rates and Income per Person The Golden Rule: introduction The Golden Rule Capital Stock The Golden Rule Capital Stock The Golden Rule Capital Stock The transition to the Golden Rule Steady State Starting with too much capital Starting with too little capital Population Growth Break-even investment The equation of motion for k The Solow Model diagram The impact of population growth Prediction: International Evidence on Population Growth and Income per Person The Golden Rule with Population Growth Chapter Summary Chapter Summary ch08.ppt Learning objectives Introduction Examples of technological progress Tech. progress in the Solow model Tech. progress in the Solow model Tech. progress in the Solow model Tech. progress in the Solow model Tech. progress in the Solow model Steady-State Growth Rates in the Solow Model with Tech. Progress The Golden Rule Policies to promote growth 1. Evaluating the Rate of Saving 1. Evaluating the Rate of Saving 1. Evaluating the Rate of Saving 1. Evaluating the Rate of Saving 1. Evaluating the Rate of Saving 2. Policies to increase the saving rate 3. Allocating the economy’s investment Allocating the economy’s investment: two viewpoints Possible problems with industrial policy 4. Encouraging technological progress CASE STUDY: The Productivity Slowdown Explanations? Explanations? The bottom line: CASE STUDY: I.T. and the “new economy” CASE STUDY: I.T. and the “new economy” Growth empirics: Confronting the Solow model with the facts Convergence Convergence Factor accumulation vs. Production efficiency Endogenous Growth Theory A basic model A basic model Does capital have diminishing returns or not? A two-sector model A two-sector model Three facts about R&D in the real world Is the private sector doing enough R&D? Chapter summary Chapter summary Chapter summary ch09.ppt Chapter objectives Real GDP Growth in the United States Time horizons In Classical Macroeconomic Theory, When prices are sticky The model of aggregate demand and supply Aggregate demand The Quantity Equation as Agg. Demand The downward-sloping AD curve Shifting the AD curve Aggregate Supply in the Long Run Aggregate Supply in the Long Run The long-run aggregate supply curve Long-run effects of an increase in M Aggregate Supply in the Short Run The short run aggregate supply curve Short-run effects of an increase in M From the short run to the long run The SR & LR effects of M > 0 How shocking!!! The effects of a negative demand shock Supply shocks CASE STUDY: The 1970s oil shocks CASE STUDY: The 1970s oil shocks CASE STUDY: The 1970s oil shocks CASE STUDY: The 1970s oil shocks CASE STUDY: The 1980s oil shocks Stabilization policy Stabilizing output with monetary policy Stabilizing output with monetary policy Chapter summary Chapter summary Chapter summary ch10.ppt Context Context The Keynesian Cross Elements of the Keynesian Cross Graphing planned expenditure Graphing the equilibrium condition The equilibrium value of income An increase in government purchases Solving for Y The government purchases multiplier The government purchases multiplier Why the multiplier is greater than 1 An increase in taxes Solving for Y The Tax Multiplier The Tax Multiplier The Tax Multiplier Exercise: The IS curve Deriving the IS curve Understanding the IS curve’s slope The IS curve and the Loanable Funds model Fiscal Policy and the IS curve Shifting the IS curve: G Exercise: Shifting the IS curve The Theory of Liquidity Preference Money Supply Money Demand Equilibrium How the Fed raises the interest rate CASE STUDY Volcker’s Monetary Tightening Volcker’s Monetary Tightening, cont. The LM curve Deriving the LM curve Understanding the LM curve’s slope How M shifts the LM curve Exercise: Shifting the LM curve The short-run equilibrium The Big Picture Chapter summary Chapter summary Chapter summary Preview of Chapter 11 ch11.ppt Context Equilibrium in the IS-LM Model Policy analysis with the IS-LM Model An increase in government purchases A tax cut Monetary Policy: an increase in M Interaction between monetary & fiscal policy The Fed’s response to G > 0 Response 1: hold M constant Response 2: hold r constant Response 3: hold Y constant Estimates of fiscal policy multipliers Shocks in the IS-LM Model Shocks in the IS-LM Model EXERCISE: Analyze shocks with the IS-LM model CASE STUDY The U.S. economic slowdown of 2001 CASE STUDY The U.S. economic slowdown of 2001 CASE STUDY The U.S. economic slowdown of 2001 CASE STUDY The U.S. economic slowdown of 2001 What is the Fed’s policy instrument? What is the Fed’s policy instrument? IS-LM and Aggregate Demand Deriving the AD curve Monetary policy and the AD curve Fiscal policy and the AD curve IS-LM and AD-AS in the short run & long run The SR and LR effects of an IS shock The SR and LR effects of an IS shock The SR and LR effects of an IS shock The SR and LR effects of an IS shock The SR and LR effects of an IS shock EXERCISE: Analyze SR & LR effects of M The Great Depression The Spending Hypothesis: Shocks to the IS Curve The Spending Hypothesis: Reasons for the IS shift The Money Hypothesis: A Shock to the LM Curve The Money Hypothesis Again: The Effects of Falling Prices The Money Hypothesis Again: The Effects of Falling Prices The Money Hypothesis Again: The Effects of Falling Prices The Money Hypothesis Again: The Effects of Falling Prices Why another Depression is unlikely Chapter summary Chapter summary Chapter 12 Learning objectives The Mundell-Fleming Model The IS* curve: Goods Market Eq’m The LM* curve: Money Market Eq’m Equilibrium in the Mundell-Fleming model Floating & fixed exchange rates Fiscal policy under floating exchange rates Lessons about fiscal policy Mon. policy under floating exchange rates Lessons about monetary policy Trade policy under floating exchange rates Lessons about trade policy Fixed exchange rates Fiscal policy under fixed exchange rates Mon. policy under fixed exchange rates Trade policy under fixed exchange rates M-F: summary of policy effects Interest-rate differentials Differentials in the M-F model The effects of an increase in  The effects of an increase in  Why income might not rise CASE STUDY: The Mexican Peso Crisis CASE STUDY: The Mexican Peso Crisis The Peso Crisis didn’t just hurt Mexico Understanding the crisis Understanding the crisis Dollar reserves of Mexico’s central bank  the disaster  The rescue package Floating vs. Fixed Exchange Rates Mundell-Fleming and the AD curve Deriving the AD curve From the short run to the long run Large: between small and closed Chapter summary Chapter summary Chapter summary ch13.ppt Learning objectives Three models of aggregate supply The sticky-wage model The sticky-wage model The sticky-wage model The cyclical behavior of the real wage The imperfect-information model The imperfect-information model The sticky-price model The sticky-price model The sticky-price model The sticky-price model The sticky-price model The sticky-price model The sticky-price model Summary & implications Summary & implications Inflation, Unemployment, and the Phillips Curve Deriving the Phillips Curve from SRAS The Phillips Curve and SRAS Adaptive expectations Inflation inertia Two causes of rising & falling inflation Graphing the Phillips curve Shifting the Phillips curve The sacrifice ratio The sacrifice ratio Rational expectations Painless disinflation? The sacrifice ratio for the Volcker disinflation The sacrifice ratio for the Volcker disinflation The natural rate hypothesis An alternative hypothesis: hysteresis Chapter summary Chapter summary Chapter summary Chapter summary ch14.ppt Learning objectives Question 1: U.S. Real GDP Growth Rate, 1960:1-2001:4 Arguments for active policy Change in unemployment during recessions Arguments against active policy Automatic stabilizers Forecasting the macroeconomy The LEI index and Real GDP, 1960s The LEI index and Real GDP, 1970s The LEI index and Real GDP, 1980s The LEI index and Real GDP, 1990s Mistakes Forecasting the Recession of 1982 Forecasting the macroeconomy The Lucas Critique An example of the Lucas Critique The Jury’s Out… Question 2: Rules and Discretion: basic concepts Arguments for Rules Arguments for Rules Examples of Time-Inconsistent Policies Examples of Time-Inconsistent Policies Examples of Time-Inconsistent Policies Monetary Policy Rules Monetary Policy Rules Monetary Policy Rules Monetary Policy Rules The Taylor Rule The Taylor Rule Does Greenspan follow the Taylor Rule? Central Bank Independence Inflation and Central Bank Independence Chapter summary Chapter summary ch15.ppt In this chapter you will learn about Indebtedness of the World’s Governments The U.S. Government Debt-GDP ratio The U.S. experience in recent years The Fiscal Future The Fiscal Future Problems Measuring the Deficit Measurement problem 1: Inflation Measurement problem 1: Inflation Measurement problem 2: Capital Assets Measurement problem 3: Uncounted liabilities Measurement problem 4: The business cycle The bottom line Is the govt debt really a problem? The traditional view of a tax cut & corresponding increase in govt debt The Ricardian View The logic of Ricardian Equivalence Problems with Ricardian Equivalence Evidence against Ricardian Equivalence? Evidence against Ricardian Equivalence? Other perspectives on govt debt Other perspectives on govt debt Other perspectives on govt debt Other perspectives on govt debt Chapter summary Chapter summary Chapter summary ch16.ppt Chapter overview Keynes’s Conjectures The Keynesian Consumption Function The Keynesian Consumption Function Early Empirical Successes: Results from Early Studies Problems for the Keynesian Consumption Function The Consumption Puzzle Irving Fisher and Intertemporal Choice The basic two-period model Deriving the intertemporal budget constraint The intertemporal budget constraint The intertemporal budget constraint The intertemporal budget constraint Consumer preferences Consumer preferences Optimization How C responds to changes in Y Keynes vs. Fisher How C responds to changes in r How C responds to changes in r Constraints on borrowing Constraints on borrowing Constraints on borrowing Consumer optimization when the borrowing constraint is not binding Consumer optimization when the borrowing constraint is binding The Life-Cycle Hypothesis The Life-Cycle Hypothesis The Life-Cycle Hypothesis Implications of the Life-Cycle Hypothesis Implications of the Life-Cycle Hypothesis The Permanent Income Hypothesis The Permanent Income Hypothesis The Permanent Income Hypothesis PIH vs. LCH The Random-Walk Hypothesis The Random-Walk Hypothesis Implication of the R-W Hypothesis The Psychology of Instant Gratification The Psychology of Instant Gratification Two Questions and Time Inconsistency Summing up Chapter summary Chapter summary Chapter summary Chapter summary ch17.ppt Learning objectives Types of Investment Understanding business fixed investment Two types of firms The capital rental market Factors that affect the rental price Rental firms’ investment decisions The cost of capital The cost of capital The cost of capital The rental firm’s profit rate Net investment & gross investment The investment function The investment function Taxes and Investment Corporate Income Tax: A tax on profits The investment tax credit (ITC) Tobin’s q Relation between q theory and neoclassical theory described above The stock market and GDP The stock market and GDP The stock market and GDP The stock market and GDP Financing constraints Residential investment How residential investment is determined How residential investment is determined How residential investment responds to a fall in interest rates The tax treatment of housing Inventory Investment Motives for holding inventories Motives for holding inventories Motives for holding inventories Motives for holding inventories The Accelerator Model The Accelerator Model The Accelerator Model Evidence for the Accelerator Model Inventories and the real interest rate Chapter summary Chapter summary ch18.ppt Chapter objectives Banks’ role in the money supply A few preliminaries SCENARIO 1: No Banks SCENARIO 2: 100 Percent Reserve Banking SCENARIO 3: Fractional-Reserve Banking SCENARIO 3: Fractional-Reserve Banking SCENARIO 3: Fractional-Reserve Banking SCENARIO 3: Fractional-Reserve Banking Finding the total amount of money: Money creation in the banking system A model of the money supply Solving for the money supply: The money multiplier Exercise Solution to exercise Three instruments of monetary policy Open market operations Reserve requirements The discount rate Which instrument is used most often? Why the Fed can’t precisely control M CASE STUDY: Bank failures in the 1930s Table 18-1: The Money Supply and its Determinants: 1929 and 1933 Table 18-1: The Money Supply and its Determinants: 1929 and 1933 Table 18-1: The Money Supply and its Determinants: 1929 and 1933 Could this happen again? Money Demand A simple portfolio theory The Baumol-Tobin Model Money holdings over the year Money holdings over the year Money holdings over the year The cost of holding money Finding the cost-minimizing N The money demand function The money demand function EXERCISE: The impact of ATMs on money demand Financial Innovation, Near Money, and the Demise of the Monetary Aggregates Financial Innovation, Near Money, and the Demise of the Monetary Aggregates Chapter summary Chapter summary ch19.ppt Learning objectives The Theory of Real Business Cycles The economics of Robinson Crusoe Shocks in the Crusoe island economy Economic fluctuations as optimal responses to shocks The debate over RBC theory The labor market The labor market Technology shocks The Solow residual and growth in output Technology shocks The neutrality of money The flexibility of wages and prices New Keynesian Economics Small menu costs and aggregate-demand externalities Recessions as coordination failure The staggering of wages and prices Top reasons for sticky prices: results from surveys of managers Conclusion: the frontiers of research Chapter summary Chapter summary