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Econ 208
Marek KapickaLecture 1
Introduction
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What is this course about? Analysis of macroeconomic policies
Government Spending Taxation and government debt Monetary policy Banking and financial intermediation
We will use micro-founded macroeconomic models to study those issues
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Administration
Classes: MW 9:30-10:45 My email:
[email protected] Office hours: TTh 10:30-11:30, NH
3052 Course homepage:
http://econ.ucsb.edu/~mkapicka/E208.html
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Administration
TAXintong Yang ([email protected])TA sessions: Thursdays 3:00-3:50 & 4:00-
4:50 GIRV 1116
TextbookMacroeconomics, by Matthias Doepke,
Andreas Lehnert, and Andrew Sellgren
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Administration 5 problem sets
4 best ones count25 % of the final grade
Midterm (May 6, in class)No make-up25 % of the final gradeClosed book, closed notes
Final (June 12, 9-11)50 % of the final gradeClosed book, closed notes
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Outline of the course
1. Introduction: A basic framework2. Government Policies
1. The Effects of Government Spending2. Government Taxation and
Government Debt3. Monetary Policy4. Banking and Financial
Intermediation
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Per Capita Real GDP (in 2000 dollars) for the United States, 1900-2008
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Growth rates
If gt is small,
11
t
tt y
yg
1lnln)1ln( tttt yygg
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Natural Logarithm of Per Capita Real GDP
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The Great Recession
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1981-1982 Recession
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1. US GDP, Consumption, and Government Expenditures
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2. Total Taxes (black line) and Total Government Spending (colored line) in the United States, as Percentages of GDP
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2. Recent Recession: Fiscal Policy
2009 Fiscal Stimulus: $787 billion (~5.5% of GDP)
Tax cuts: $288 billion Spending on
Healthcare & Education: $238 billion Infrastructure: $81 billion
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4. US History of banking crises
Before 1914: Crises were a frequent phenomenon in the U.S.
National banking era 1863-1913 They have occurred at about 10
year intervals 1873,1884,1890,1893,1896,1907,191
4
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U.S. National Banking Era Panics
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2. How do we study macro? We cannot run experiments in
macroeconomics, so we need to construct models to be used as laboratories
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Prague
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A map of Prague
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A map of Prague subway
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How do we study macro? A good model:
Simplified, abstract, representation of reality
Omits many details, represents only essential features needed to answer a specific question
helpful to make predictions should be simple, but they need not
be realistic.
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2.1 Structure of a typical model
HouseholdsChoose consumption,saving, labor supply
FirmsChoose production,
investment, labor demand
MarketsPrices such that
Supply = demand
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2.1 Structure of a typical model
1. Description of goods in the economy
2. Consumers preferences over goods
3. Firms technology available to produce the
goods
4. The resources available
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2.2 Prediction of a Model
Individual behavior people behave rationally (optimize) firms maximize profits
Equilibrium behavior competitive equilibrium
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2.3 Microeconomic Foundations
The Approach1. Start with consumers and firms
making decisions at individual level2. Aggregate them up
Representative Consumer Assumption
Example: Benefits of this Approach
1. Monetary Policy
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A Basic Intertemporal Model
A simple model where people
choose how much to consume and
how much to save A) Consumer Optimization B) Market Clearing C) Adding capital stock D) Welfare Theorems E) Infinite horizon
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A Basic Intertemporal Model
First period = current period Second period = future period
To simplify, abstract from labor/leisure decision
Our interest: borrowing and saving by consumers
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A Basic Intertemporal Model Preferences of consumers
U(c) is increasing, differentiable and concave
Discount factor β<1 measures how much future utility matters relative to current utility
)()( 21 cUcU
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A Basic Intertemporal Model Budget Constraints:
y1, y2 are exogenous incomes b1 are savings from period 1 to period
2 r is the interest rate
)1(122
111
rbyc
ybc
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Consumer’s optimization Consumers maximize utility subject to
budget constraints
Lagrangean)1(
. )()(max
122
11121,, 121
rbyc
ybctscUcUbcc
))1((
) (
)()(max),,,,(
2122
1111
21,,
21121121
crby
bcy
cUcUbccLbcc
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Consumer’s optimization First order conditions
Euler Equation
)1(
)(
)(
21
22
11
r
cU
cU
)()1()( 21 cUrcU
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A) Consumer’s optimization Log utility:
Solution:
)1(1
2 rc
c
*11
*1
21
*1 1
1
cyb
ry
yc
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Where are we?
A Basic Intertemporal Model A) Consumer Optimization B) Market Equilibrium C) Adding capital stock D) Welfare Theorems E) Infinite horizon
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B) Market Equilibrium
Suppose that there is N identical agents Market clearing condition is
Log utility:
0)( **1 rNb
1
2*
21
1
1
11
y
yr
r
yy
y