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