syllabus · goal 2: critical thinking: graduates of the bba program will be critical thinkers. ......

Syllabus ECON3394/01/Macroeconomics CC 214D Professor: Dr. Rex Pjesky Office Location: 214D CC Office Hours: T 8:30-11:00 W 3:30-6:00 Th 12:00-2:30 Office Phone: 651-2996 Cell Phone: E-Mail: [email protected] Homepage:

Last Updated: 01/13/2011 This Syllabus is a dynamic document. Elements of the course structure (e.g., dates and topics covered, but not policies) may be changed at the discretion of the professor.

COB Mission Statement

The mission of the College of Business is to provide high quality undergraduate and graduate business education with a global perspective and ethical awareness. We accomplish this through emphasis on excellence in teaching, which is strengthened by faculty scholarship and supported by professional service.

Learning Goals of the BBA Program The College of Business at West Texas A&M University seeks to prepare students in the BBA degree program for careers in business and to foster their professional growth and advancement via the key learning goals. Each learning goal is accompanied by an operational definition for the goal.

• Goal 1: Communication: Graduates of the BBA program will be effective communicators.

• Goal 2: Critical Thinking: Graduates of the BBA program will be critical thinkers.

• Goal 3: Business Environment: Graduates of the BBA program will be knowledgeable of ethical, global, and social environmental factors and how they relate to business decisions.

• Goal 4: Functional Business Analyses and Applications: Graduates of the BBA program will

be knowledgeable in the functional areas of business and their integration. Course Description

This class’ primary purpose is to build models of the U.S. economy that will help us describe and predict the performance of the economy. These models will explain and predict economic variables such as interest rates, output, growth, inflation, and unemployment.

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Course Objectives 1. Describe how economic output and growth are measured 2. Identify the causes for differing levels of output and growth among nations 3. Review how market supply and demand discover prices 4. Interpret current economic models of consumption, saving and investment 5. Categorize the causes of recessions and the business cycle 6. Assess the government’s and the Fed’s actions to stabilize the business cycle 7. Evaluate the effect government spending, taxation and debt has on economic activity 8. Examine the role money has in the economy 9. Identify ethical dilemmas in the area of macroeconomics

Map from COB Learning Goals to Objectives for this course

Each objective in Econ 3394 maps to COB Learning Goal 4: Functional Business Analyses and Applications: Graduates of the BBA program will be knowledgeable in the functional areas of business and their integration.

Measure: Performance will be assessed by grading a common course embedded multiple-choice and/or essay component on the final exam.

Goal: Seventy percent of the students in the course demonstrate characteristics of a competence level of three or higher. A minimum of seventy percent of the embedded questions should be answered correctly on the common set of questions in the discipline core component of the course final. Objective 9 of Econ 3394 maps to COB Learning Goal 3: Business Environment: Graduates of the BBA program will be knowledgeable of ethical, global, and social environmental factors and how they relate to business decisions. Measure: Performance will be assessed by grading the weekly assignments. Goal: Seventy percent of the students will demonstrate acceptable proficiency.

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Viewpoints Disclaimer The views expressed in this document, web-based course materials, and/or classroom presentations are those of the professor and do not necessarily represent the views of West Texas A&M University, its faculty and staff, or its students. Views expressed by students are likewise those of the person making such statements.

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Neither the professor, the College of Business, nor WTAMU are responsible for the content of external websites discussed in the classroom and/or linked to via online course materials, emails, message boards, or other means. Referred websites are for illustrative purposes only, and are neither warranted nor endorsed by the professor, College of Business, or WTAMU. Web pages change frequently, as does domain name ownership. While every effort is made to ensure proper referencing, it is possible that students may on occasion find materials to be objectionable for reasons beyond our control.

Copyright

All original content in this document, all web-based course materials (be they text, audio, and/or video), and/or classroom presentations are © by Rex Pjesky. No distribution without the express written consent of the author. Students are prohibited from selling (or being paid for taking) notes during this course to or by any person or commercial firm without the express written permission of the professor.

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Physical or Educational Access West Texas A&M University seeks to provide reasonable accommodations for all qualified persons with disabilities. This University will adhere to all applicable federal, state and local laws, regulations and guidelines with respect to providing reasonable accommodations as required to afford equal educational opportunity. It is the student's responsibility to register with Disability Support Services and to contact the faculty member in a timely fashion to arrange for suitable accommodations.

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Students will be unable to access any other part of this course until completing a one-question assessment in the Lessons area of this course.

Book

Robert Barro: Modern Macroeconomics

Class Format

Weekly assignments are to be obtained from WTClass. Students will complete the assignments and drop them in the appropriate drop box in WTClass. Grading

The course grad is determined by the student’s performance on the weekly assignments.

Weekly Assignments: 100 points Under no circumstances will extra credit be awarded, so make the most of these opportunities.

West Texas A&M Univ. Dr. Pjesky Macroeconomics Spring 2011

Week #1 assignment January 19, 2011

Skim through chapters one and two and answer the questions. Also, familiarize yourself with the list of key terms and concepts at the end of the chapters.

1) How do we use Mathematics to get the information in figure 1.2 from

figure 1.1? 2) What was the mean growth rate in Real Gross Domestic Product from

1870-2005? 3) What was the mean growth rate in Real Per Capita Gross Domestic Product

from 1870-2005? 4) Was every year’s growth rate equal to the average? Explain what this

means to economists. 5) How many recessions/depressions has the U.S. had since 1870? 6) Is there a relationship between the unemployment rate and economic

growth? 7) Have there been any significant changes in the growth rate, unemployment

rate, and the price level in the last 140 years or so? Is this remarkable? Explain.

8) What are endogenous variables? 9) What are exogenous variables? 10) What role do endogenous and exogenous variable play in economic

models? 11) What is the central idea in a macroeconomic model? 12) What are “microeconomic foundations?” 13) What do the terms “price taker,” “perfect competition,” and “demand

curve” mean? 14) In the supply and demand model of perfect competition, what are the

exogenous variables? What are the endogenous variables? 15) What does the term “market clearing” mean? 16) Is there a consensus among economists about the market clearing nature of

markets? 17) John Keynes thought that prices were “sticky.” What does this mean?

And what does it mean for macroeconomic models? 18) What is a flow variable? Come up with five examples. 19) Why is nominal GDP misleading? Understand table 2.1.

20) How does the calculation of real GDP make the GDP concept meaningful?

21) What are the weaknesses of GDP as a measure of welfare? 22) What are the three ways of measuring GDP? 23) In the end, does it matter what approach is taken? 24) When calculating GDP by expenditure, what are the four categories of

“spenders?” 25) Sometimes, a macro model will omit one of the four categories. Which is

omitted and why. 26) Is the CPI a good measure of how prices on average change over large time

periods? Why? 27) What is substitution bias? Give an example. 28) Does the CPI control for quality changes? Explain. 29) How does the introduction of new product cause an upward bias in the

CPI? Why is it a “bias?”


Week #2 assignment January 26, 2011

Skim through chapters three and four and answer the questions (skip the appendix for both chapters). Also, i) familiarize yourself with the list of key terms and concepts at the end of the chapters and ii) familiarize yourself with each number equation even if they are not the subject of a specific question.

1) Why is economic growth so important? 2) What is poverty? 3) What two factors determine the number of people living in poverty in a

society? 4) Summarize the information in figures 3.2 and 3.3. 5) Contrast “inequality” with “poverty.” 6) What is the story of economic growth since 1970? 7) Summarize the information in figure 3.4. 8) What part of the world is in the direst poverty? Why? 9) Explain why growth matters in rich countries. 10) What questions have been established in the first 46 pages of the text? 11) What is a production function? The simplified model of the production

has what two inputs? 12) What do the symbols “L,” “K,” and “A” mean? 13) How do we write the simplest production function? Explain what it tells

us. 14) How are the concepts MPK and MPL related to our model? 15) What is the diminishing marginal product of capital? Of Labor? 16) What is constant returns to scale? 17) What is “growth accounting?” 18) What do the parameters α and β mean? 19) Be able to derive equation 3.4 20) What are the simplifying assumptions of the Solow growth model? 21) In equation 3.4, why is the parameter on labor’s share of national income

1-α? 22) What is the key result in equation 3.8? 23) What does a change in the nation’s capital stock depend on? 24) True or False: in the Solow model, real saving = net investment. Derive. 25) Describe how equation 3.15 was obtained from equations 3.13, 3.14, and

3.7.

26) Derive equation 3.16 from equation 3.15. 27) According to equation 3.16, what does the growth in the capital stock per

worker depend on? 28) In the Solow model, are average and marginal products of capital

correlated? 29) (Begin chapter 4) How do differences in the saving rate affect economic

growth? 30) How does a change in the technology level affect economic growth? 31) How does a change in labor input and/or the population growth rate affect

economic growth? 32) What is convergence? 33) What effects k*? 34) Two economies with different initial GDP levels will converge if . 35) What is the problem with the convergence theory in the Solow model? 36) What is conditional convergence? 37) Explain conditional convergence in the Solow model. 38) Compare absolute convergence with conditional convergence. Do we see

absolute convergence when we look at a wide array of economies since 1960? Why?

39)What doesn’t the Solow model explain?


Week #3 assignment February 2, 2011

Listen to R uss R obert’s t alk wit h P aul R omer and be prepared to discuss in class. The following questions will help you:

The link to the podcast is: http://www.econtalk.org/archives/2007/08/romer_on_growth.html

1. Why is growth important? 2. Is there a “moral” component to growth? In other words, is growth “good”? 3. Why is China growing fast? 4. Why did (is) the US grow(ing) faster that the UK? 5. Do we “need” to be the leader in every (or any) technology? 6. Contrast what could be called the “economics of ideas” with the “economics of

physical stuff.” 7. Does Romer prefer the word “produce” or “rearrange?” Explain. 8. What did Romer say about the Soviet Union and diminishing returns? 9. Why are new ideas (and more people looking for new ideas) important? 10. Why do market economies outperform planned economies? 11. “Everyone favors growth but rejects change.” Comment 12. Why is there no “tragedy of the commons” in ideas? 13. What is the difference between property rights for an idea and property rights for, say,

land? 14. How do we provide both efficiency in the realm of ideas and give people an incentive

to create them? Why might there be a conflict? 15. Many people think that workers for multinational corporations in developing

countries are exploited. (The worker in a Nike shoe factory, for instance.) What does Romer say about this?

16. Many people think that a pair of 150 Nikes made by someone who is poor compared the buyer of the shoes represents a horrible immoral thing in our society. What does Romer say about this?

17. Do 200,000,000 Indian business people, scientists, and engineers threaten you? 18. Why is free trade so important? 19. Should we be optimistic?

http://www.econtalk.org/archives/2007/08/romer_on_growth.html

http://www.econtalk.org/archives/2007/08/romer_on_growth.html

Skim through chapter five and answer the questions (skip the appendix) Also, i) familiarize yourself with the list of key terms and concepts at the end of the chapters and ii) familiarize yourself with each numbered equation even if they are not the subject of a specific question.

20) Equation 4.9 sums up many issues concerning conditional convergence. Explain it in “real world” language. 21) Now, do the same for equation 5.1. 22) What is the “idea” of equation 5.1? In other words, how have economists used it? 23) What do we learn from figure 5.1? 24) What is head constant in figure 5.1? 25) Since 1990, what are some of the factors that have received attention as causes of convergence or growth? 26) Give some examples of conditional convergence. 27) How does the concept of conditional convergence explain how the poorest countries in the world (in sub Saharan Africa) have had the lowest rates of growth? 28) What doesn’t the Solow model explain (well, at least not yet in our text.) 29) Read pages 101-103 (no questions, though) 31) Is technical progress in Solow’s model exogenous or endogenous? Explain. 32) Why are Romer’s models called endogenous growth models? 33) These models typically focus on . 34) In Endogenous growth models, drives technical progress. 35) Although was study investments in R and D like investments in the physical capital stock, there are differences. Be able to discuss these differences and why they are important. Be sure you can define “rival good,” “non rival good,” “copyright,”, “patent,” and “intellectual property right.” 36) In Romer’s original 1990 paper, even with intellectual property rights, who gets most of the benefit from an important discovery? 37) Explain what determines the rewards from discoveries? How does an increase in reward increase growth? 38) Does the empirical literature on growth rates of different countries confirm Romer’s models? Explain. 39) Why, according to the green box on page 112, must drugs and music be priced at significantly more than marginal cost? 40) Why are drugs so cheap in Canada? 41) What is necessary for a smaller economy to be successful at innovation? 42) What are the two ways to raise A? 43) What does the term “diffusion of technology” mean? 44) Read the article found at: http://www.pittsburghlive.com/x/pittsburghtrib/s_376496.html

http://www.pittsburghlive.com/x/pittsburghtrib/s_376496.html

45) How, according to Boudreaux, are middle class citizens of any industrial economy super rich? 46) What is the source of wealth? 47) Boudreaux claims that technology isn’t the cause of wealth. Why? 48) How does Boudreaux define economic freedom? 49) What is the relationship between economic freedom and wealth? 50)What would Bourdreaux say about the diffusion of technology? 51) On page 116, there is a great summation for part 2 read it carefully.



Skim through chapter six and answer the questions (skip the appendix). Also, i) familiarize yourself with the list of key terms and concepts at the end of the chapters and ii) familiarize yourself with each numbered equation even if they are not the subject of a specific question.

1) What are some examples of microeconomic choices? 2) What is a key assumption of the model that we will develop in part 3? 3) How do the market demand and supply for labor behave as the real wage

rises? 4) The model assumes that price (that is, real wage) is . 5) What is the simplification of the model? Why does this simplification

make sense? 6) What are the two reasons a household would buy goods? 7) How do we measure labor? Is labor a flow? 8) What two hats do each household wear? 9) The third market we consider is the rental market. Briefly describe the

rental market. 10)The final market we consider is the bond market. Briefly describe the bond

market. 11)What are the characteristics of money in our model? 12)In the goods market, households exchange their finished goods for . 13)The price in the goods market, P, is our _ _. We assume that inflation

is . 14)Y equals . PY equals . 15)M/P equals . 16)If a variable is divided by P, then it is in _ terms. 17)If a household earns $200 and the price of the good it buys in $2, then the

real income of the households is _ . 18)If the dollar (nominal) wage is $5 and the price is $2, then the real wage

is . 19)Do household decisions depend on the wage or the real wage? Why? 20)If the dollar (nominal) rental price of capital is 500 and the price level is 50,

then the real price of capital is . 21)What is a bond in our model? 22)What are the assumptions we place on the bond market in our model?

23)How does an inflation rate of zero simplify the bond market in our model? 24)Another assumption is that all bonds are alike (that is, they pay the same

interest). Detail what differences must be ignored to make sure that all bonds would be alike.

25)A higher interest rate makes it easier for the (lender/borrower) to (lend/borrow).

26)A lower interest rate makes it easier for the (lender/borrower) to (lend/borrow).

27)What are the sources of funds for a household? 28)What are the uses of funds for a household? 29) What is the important point? 30) What are the four sources of income? 31) What is profit? 32) What is so useful about equation 6.2? 33) What is the nominal wage? 34) What is the rate of return on capital? 35) What is the total interest income for the economy? Why? 36) Household nominal consumption is ? 37) Key equation 6.6 tells us that the rate of return on bonds equals the rate of

return on ownership of capital. Why? 38) The result of equation 6.6 ignores risk (or stipulates that all risk is equal).

What happens if all risk is not equal? 39) Explain what point 1, 2 and 3 mean in figure 6.2. 40) Why is the slope of the budget line -1? 41) What are the two business decisions a household makes? 42) Therefore, the household will demand quantities

of . 43) Where does labor demand come from? 44) A household chooses to hire labor up to a point where equals

. 45) How will the labor market clear? 46) Where does the demand for capital come from? 47) How does the capital market clear? 48) Why are the supplies of labor and capital vertical lines? 49) Why is equation 6.16 a key equation? 50) In this model, real profit (equation 6.18) equals zero. Explain what this

means.



Read Chapter 7 and answer the questions.

1) Again, why is real profit zero? 2) If I were to say that there was a constraint in a household’s budget, what would I mean? 3) We think of a household’s choice as one between consuming and saving, but what choice does a household really face? 4) In words, what is the difference between 7.2 and 7.3? 5) Explain figure 7.2. 6) Explain figure 7.2 and 7.3 using terms “stock” and “flow.” 7) Explain the economic intuition in equations 7.4 and 7.5. 8) I’ll derive equations 7.6, 7.7, 7.8 and 7.9 in class, but spend about 15 minutes and try it yourself. 9) What is the concept of present value? 10) Why do you suppose that we need to talk about present value at this point in the class? 11) What is a discount factor? 12) If you did not care AT ALL about tomorrow (thus, you ONLY cared about today) what would your discount factor be? 13) If you did not care AT ALL about today (thus, you only cared about tomorrow) what would your discount factor be? 14) What is utility? What is a utility function? 15) What does “smooth consumption path” mean? 16) What are income effects? What happens to consumption in year C1, C2, C3, etc when V rises? 17) Explain how changes in the interest rate cause the intertemporal substitution effect. 18) Explain the effect of a change in the interest rate on saving. 19) Explain the two income effect of an increase in the interest rate. 20) If the interest rate increases in year 1, will consumption increase in year one? Explain. 21) The multiyear budget constraint is useful because it _ _. 22) What is “propensity to consume?” 23) What is Milton Friedman’s “permanent income?”

24) What would be the propensity to consume an increase in income if that increase in income was permanent (that is, you income is higher this year and will be at this new (higher) level forever)? Explain. 25) What would be the propensity to consume an increase in income if that increases in income was temporary? 26) What happens in year one if you expect an increase in income in year 2. 27) As of January 24th, it looks like that households will get a tax rebate of 300/person with a cap of 1200/household (other income and work status restrictions apply). If people believe this to be a one time thing, what will the propensity to consume of the tax rebate? 28) Summarize the finding on the “Empirical evidence on the propensity to consume” box on page 165. Does empirical evidence confirm the theory? 29) Do the same for the box on page 166. Does empirical evidence confirm the theory of how households respond to anticipated changes in income?

Read Chapter 8 and answer the questions.

30) We can think of real GDP as having two parts. What are they? 31) In the long run, economic is more important than economic _. 32) In the short run, economic are more important than economic . 33) Figure 8.3 gives us a clearer picture of economic fluctuations. Why. 34) Fluctuations reflect in the “ _ model.” 35) We call it the equilibrium business cycle (EBC) model because . 36) The most famous EBC is the . 37) Why is it called the real business cycle model (RBC)? 38) Fluctuations in the RBC depend on sudden increases or decreases in technology. It’s easy to think about learning new things, but how can we think about forgetting how to do something? 39) List some things that would behave like decreases in A. 40) In equation 8.3, how do we focus our attention on “A”? 41) What is the real challenge of this (and any other) macro model? 42) An increase in A will raise the demand for because it raises the marginal . 43) If the real wage were fixed, increases in technology would only increase the . 44) However, if the supply of labor were fixed (as it is in our model), increases in A increase the _. 45) So the first prediction is that an economic boom will create a relatively high . 46) An increase in A will raise the demand for because it raises the marginal _. 47) If the real rental price of capital were fixed, then increases in technology would only increase the .

48) However, if the supply of capital were fixed (as it is in our model), increases in A increase the _. 49) So, the second prediction is that an economic boom will create a relatively high . 50) Directly from what we learned in chapter 6, booms will interest rates. 51) An increase in A will real wage income. 52) An increase in A will real asset income. 53) An increase in A will leave income from bonds for the aggregate of society. 54) If the increase in A is permanent, then any increase in C should also be _. MPC from this increase in income should be nearly . 55) What is a procyclical variable? 56) What is a countercyclical variable? 57) What is an acyclical variable? 58) Is consumer spending procyclical like our model predicts? 59) Is investment spending procyclical like our model predicts? 60) Real investment fluctuates _ than GDP. 61) We see in figures 8.9 and 8.10 that investment fluctuates much, much more than consumption or GDP. Does our model predict this result? Explain. 62) Is the real wage rate procyclical? 63) Is the real rental price of capital procyclical? 64) If a change in A were temporary, would we expect to see the same strong procyclical pattern that we saw earlier? Think about the current (that is January 2008) stimulus package that reduces taxes and increases real incomes for one year only. Are we sure that spending will increase? Using the words “income effect” and “intertemporal substitution effect,” construct a statement that would describe a circumstance where consumption would go DOWN. 65) Our model is not truly powerful unless we can explain the cyclical nature of . 66) Describe the substitution effect for leisure and consumption. 67) For a given quantity of labor supplied, a higher real wage means a higher . 68) A permanent increase in the real wages results in a _ income effect. 69) A higher interest rate today means that consumption and leisure tomorrow are . Therefore, the household substitutes toward the cheaper things and and away from the more expensive ones and . 70) Does the empirical evidence confirm the theory? 71) Hours worked and total employment move almost in lock step with . 72) Because of these results, we can now drop the assumption of a supply curve. 73) The labor supply curve does not _ with changes in A, but the quantity of does move with A.

West Texas A&M Univ. Dr. Pjesky Advanced Macroeconomics Spring 2011


Read Chapter 9 up to page 219 and answer the questions. Skim pages 219-229. I’ll do a traditional lecture on that section.

1) What is the capital utilization rate? What have we assumed it to be so far? 2) Explain equation 6.13. 3) Explain equation 9.2. 4) How would an increase in A increase the demand for capital? 5) Who owns all the capital? 6) How do owners of capital choose the utilization rate of capital? 7) In words, explain what the net real income from supplying capital services is. 8) In words, explain the rate of return from owning capital. 9) In figure 9.3, the green line (R/P)*k is straight. Why? 10) In figure 9.3, the blue line d(k) is curved. Why? 11) Why does the green line go through the origin while the blue line does not? 12) The “cost” of using capital is _ . 13) Give the mathematical explanation for why the capital utilization rate increases with the real wage. 14) Explain why figure 9.4 yields the upward sloping supply of capital curve we see in figure 9.5. 15) Give three reasons why real GDP rises in a boom and falls in a recession. 16) Explain why the interest rate is procyclical. 17) Does empirical evidence confirm our theory that the capital utilization rate is procyclical? 18) Is L procyclical? 19) In simple economic terms (like in econ 101) explain how the labor market clears? 20) What is the cyclical behavior of the US labor force, the employment rate, and average weekly hours worked with real GDP? 21) In a model of job what determines the value of ω? 22) What might influence the reservation real wage? 23) Are ω and the real wage related? Explain. 24) How does ω influence the job finding rate and the duration of unemployment? 25) Considering the entire section (the last part of chapter 9), why do we have unemployment?

Listen to this and answer the questions: http://www.econtalk.org/archives/2009/12/kling_on_prospe.html

26) What is Econ 2.0? 27) What is the story of “traditional” econ texts? 28) What don’t we teach in economics? 29) and are very important in econ 2.0. 30) How was the dotcom bubble an econ 2.0 example? 31) Growth has been a story of . What is wrong with that model? 32) Can capital accumulation explain large difference across countries in intangible wealth? 33) How could someone have negative intangible wealth? 34) What is capital in econ 1.0? 35) What is capital in econ 2.0? 36) Why might it have taken 200 years to think about econ 2.0? 37) Do most people “make widgets?” What do most people do? What impact should this have on economic modeling? 38) What does econ 2.0 say about “We can’t get rich doing other people’s laundry?” 39) What does econ 2.0 say about laundry? 40) Econ 1.0 has a fear of perm. press. What is econ 2.0’s response to that fear? 41) People get replaced by machine. People get replaced by ideas. Contrast. 42) What is the problem with intellectual property rights in Econ 2.0. Why is this problem not a problem in econ 1.0? 43) Hardware/Software. Discuss. What “bugs” to societies put in their “operating systems”? 44) Is there an optimal institutional arrangement? 45) What policy(ies) should a “new” country copy from the US? 46) Can we really know if a certain policy helps or not? Explain. How could we really know? 47) How does the dynamic reality of the economy change the way we think of scarcity? How is the 2.0 concept of scarcity the same as 1.0’s view? 48) What have we learned in the last 50 years? 49) What do we need to learn in the next 50? 50) Searching vs. Planning in foreign aid. Explain. 51) What is microfinance? 52) What might have China, Russia, and India done right and wrong? 53) Why is China’s saving rate so high? 54) Does comparative advantage still apply in econ 2.0? 55) What is the big advantage of trade in econ 2.0? 56) Why is studying differences in incomes across countries more important than studying the business cycle in an individual country?

http://www.econtalk.org/archives/2009/12/kling_on_prospe.html


Week #7 assignment March 2, 2010

Read chapter 10 and answer the questions.

1) What is fiat money? 2) What is commodity money? 3) We use fiat money in our model. Why? Does this give you any insight as to why fiat money might be better than commodity money in the real world? 4) What is legal tender? What is its limitation(s)? 5) What happened to the ratio of currency to GDP in most countries from 1960- 2000? 6) In our model, what is the interest rate paid on money? 7) Why are bonds better stores of value than money? 8) In the budget constraint, a household uses money to buy and spend money on . 9) How would one maintain a low money balance? 10) Is it possible for society as a whole to lower or raise their money balance? 11) What does the household’s choice of a money balance entail? 12) What is the “demand for money?” 13) If a household’s income were to double, it would increase its money holdings by double. Why? 14) Money demand is a function of . 15) Why can we expect the nominal quantity of money supplied equal to nominal quantity of money demanded? 16) What is general equilibrium? In our current model, what three conditions must be met simultaneously? 17) Is there something goofy about figure 10.1? What in the world is going on????? 18) What is the effect on the price level of a one time, sudden doubling of the money supply? 19) What is the effect on the nominal wage and real wage of a one time, sudden doubling of the money supply? 20) What is the effect on the nominal and real rental price of capital level of a one time, sudden doubling of the money supply? 21) What is the effect on the interest rate of a one time, sudden doubling of the money supply? 22) To sum up, a doubling of the money supply _ .

23) What is the neutrality of money? 24) What might affect the real demand for money? 25) A decrease in the real demand for money is exactly like an increase in the nominal supply of money with one exception. Explain this exception. 26) The interest rate tends to fall in a recession. What effect does this have on the demand for money? Explain. 27) The GDP deflator (the best measure of prices) is and _ variable than Real GDP. 28) The first result in 27 is counterintuitive, especially given what you learned in econ 101. What feature of the EBC (or RBC) model makes this so? In other words, what is the difference between the Keysnian model and EBC model? According to empirical evidence in figure 10.4, which is the better model? 29) What is exogenous money? What is endogenous money? Does our economy have exogenous or endogenous money? Explain. 30) What’s the idea behind equation 10.8? 31) The long term (trend) growth in the money supply depends on growth in . (See equation 10.8) 32) According to the EBC, if the monetary authority wants to keep the price level constant, money should be a variable. (Pro/acyclical) Do you think this is good policy advice?

Read Chapter 11.

33) We assume that the money supply is set by the monetary authority. 34) What can cause a decline in the (real) demand for money? 35) “Declines in the real quantity of money can cause inflation.” True or False? Explain. 36) Did any country experience deflation from 1960 to 2000? 37) Did the (nominal) money supply grow for all countries during this time period? 38) What was the median inflation rate? What countries had the lowest? The highest? 39) For most countries, the nominal rate of increase in the money supply exceeded the growth rate of prices. So _ money balances . 40) A successful fight against inflation is a rare occurrence. What country(ies) have been successful in the last two generations? 41) What causes inflation? (Hint: Quote Milton Friedman.) 42) 11.3 and 11.4 are basic economic concepts. Make sure you get them. 43) Why must households forecast inflation? What are these forecasts called? 44) What are household forecast mistakes called? 45) What are rational expectations? 46) What is the nominal interest rate? Why don’t households care?

17) If inflation is 2% and the nominal interest rate is 7%, what is the real interest rate? 48) What is the expected real interest rate in mathematical terms? 49) What is the expected real interest rate in “real world” language? 50) What are the three ways of measuring expected inflation? 51) What are shortcomings of the first two? 52) What has happened to make the third approach so effective? 53) Are the opinions of economists useful in predicting inflation? 54) ALEGRBRA ALERT! Derive 11.9. 55) What are the two major objectives of extending the model (EBC) to include inflation? 56) For the rest of chapter 11, the expected inflation rate equals . 57) How do lump sum transfers affect how much people work and consume? 58) The expected real interest rate has intertemporal-substitution effects on _ and . 59) What is the real interest rate on money? 60) The real interest rate has the , but the nominal interest rate influences . 61) Your economist buddy says “Money is neutral.” What does that mean? 62) Why does a change in the inflation rate have an income effect? 63) ALEGRBRA ALERT! Derive 11.12 and 11.13. 64) When Mt grows at a steady rate, Pt will . 65) What two conditions does equilibrium require? 66) The price level equals . 67) What are the five results? Explain. 68) Why is the assumption of an unchanging money demand unrealistic? 69) What causes Mt/Pt to rise over time? 70) Does the data in figure 11.8 confirm our theory? 71) If we assume zero growth in RGDP/person, if the money supply has been growing at μ forever and everyone expects this to continue, then inflation will equal _. 72) If the monetary authority suddenly surprises everyone by increasing the rate of growth in the money supply, inflation will increase also. But in figure 11.9, there is a sudden jump in the price level. Why? 73) If households expect the change in monetary policy, then the jump will occur .



This week will briefly discuss the exams. Also, read chapter 12 and answer the questions.

1) What are the trends in US government total expenditures, total transfers, total purchases, and total interest payments? 2) What are the trends in state and local government purchases? 3) We had no questions about the government getting revenues from printing money, so review that part of chapter 11, please. 4) What is the government’s budget constraint? How does the government use money? How does it get money? 5) What is missing in the budget constraint? (We’ll add it later, I’d bet ;-)) 6) What kind of tax system does the government use? 7) In our simplified model that ignores a government production function, how does government behave? In other words, instead of producing anything the government just _ . 8) This assumption (in 7) is not realistic. But does it matter? When would it matter? 9) How are government purchases of public services related to the household’s production and utility? 10) What is the hypothetical case we begin with? 11) How does the household’s budget constraint change when we include government transfers and taxes? 12) Very simply, what have we done in equation 12.6 and 12.7? (Hint, look at the paragraph right after 12.7). 13) If government purchases increase by one, then household’s real income _. 14) And consumption will _ . 15) Do government purchases affect supply and demand for capital? Explain. 16) Does a permanent increase in government purchases affect real GDP? Explain. 17) Does a permanent increase in government purchases affect real wages? Explain. 18) Does a permanent increase in government purchases affect gross investment? Explain. 19) Does figure 12.7 provide confirmation to our theory? Explain.

20) If the increase in government purchases is temporary, what is the main result? Explain. 21) What are the ideas that have been advanced about the supply of labor during wartime? Explain each one. 22) We predict that real wages will fall during war. Has this been true? 23) Our model predicts that interest rates should rise during war. Has this been true?



Read Chapter 13. This chapter is difficult, so don’t let the scarcity of questions fool you.

1) What have been the trends in government revenues since 1930? 2) Is there anything interesting in figures 13.2 and 13.3? 3) What is the difference between the marginal tax rate and the average tax rate? 4) What is perhaps the key feature of the US’s income tax? 5) Why might the income tax in the US be less graduated that the rates suggest? 6) Other than the “traditional” income tax, what other type of tax is earned income subject to in the US? 7) What is a flat rate tax? 8) What is the trend in the average marginal income tax rate? 9) Why is this important? 10) In short, if our model had a varying income tax rate schedule that workers could anticipate, then what would be the affect on labor supply from year to year? 11) The real taxes paid equals the _ X . 12) What is the key force that determines labor supply? Explain. 13) What is now the new consideration? 14) So, the substitution effect on labor supply depends on . 15) So, an increase in marginal taxes will quantity of labor supplied, _ consumption, and leisure. 16) What is the income effect on an increase in marginal taxes? Explain. Is this somewhat surprising? (The stuff on page 328 and 329 is difficult and may not be intuitive for you. I’ll lecture about it in class.) 17) On page 330, what is the conclusion to all the stuff on page 328 and 329? 18) In our model, we assume that all forms of assets are taxed at the same . 19) When a household chooses between C1 and C2, what matters? 20) What is the short run effect on real GDP of an increase in the marginal tax rate on assets? What do you think the long run affect would be? Why is there a difference? 21) What is the key result of an increase in the marginal tax rate on assets? 22) What is the overall effect of a rise in G on the quantity of labor supplied? Explain.

Read Chapter 14. This chapter’s questions are harder than most…I expect you to do more than just repeat sections of the book.

1) What is a budget deficit? 2) Briefly describe the history of public debt in the US and UK. 3) What is new in equation 14.1? 4) What is real government expenditure? 5) Describe equation 14.3. 6) Real national saving equals . 7) How do we modify the results of chapter 12? 8) Any income effects in equation 14.7 must involve or . 9) What are the simple, unrealistic assumptions that lead us to Ricardian Equilivance? 10) Under the assumptions, what is the government’s budget constraint in year one? 11) What is the simple logic behind equation 14.10? 12) Explain why the government’s budget deficit does not affect the present value of real taxes? In other words, explain the simplest version of the Ricardian equivalence theorem. 13) Why doesn’t the deficit affect real national saving? 14) How does Barrow make the argument for Ricardian equivalence more general? 15) How do the results change? 16) How, then, does Barrow make the argument for Ricadian equivalence even more general? 17) How do the results change? 18) What is the really important assumption? 19) What is simulative fiscal policy? 20) Summarize the effect of simulative fiscal policy taken as a cut in lump sum taxes. 21) Summarize the effect of simulative fiscal policy taken as a cut in year 1’s labor income. 22) What about cutting the tax on asset income? 23) What exactly does fiscal policy do? 24) What do budget deficits and surpluses do? 25) What is tax rate smoothing? 26) When would a government have unusually high deficits? 27) Describe the view that economists have of the Regan budget deficits. 28) How can a politician use his/her ideology on the size of government to influence future politicians? 29) What is the opinion of economists that reject Ricardian equivalence on budget deficits? 30) Describe their assumptions/conclusions. 31) What is the theoretical link between the standard view of debt and a higher real interest rate? 32) Detail why finite lifetimes give credence to the standard view of public debt. 33) Detail why imperfect credit markets give credence to the standard view of the debt. 34) What is the empirical evidence on the macro economic effects of budget deficits (page 364?)

35) Read the section on social security. Given what this section discusses, in terms of macro economics, what is the biggest concern of the US social security system? 36) Compare and contrast “pay as you go” and “fully funded.” 37) How does the usual argument go? 38) In the EBC model, one would treat a pay as you go retirement program just like . 39) A big result of social security is the “strongly diminished...tendency of” . 40) Does social security affect savings and investment? 41) What are open market operations? 42) What do we know from chapter 10? (3 things) 43) Are open market operations like Milton Friedman’s helicopter?


Week #12 assignment April 6, 2011

Read Chapter 15. This chapter’s questions are harder than most…I expect you to do more than just repeat sections of the book.

1) What was the most important result from chapter 10? 2) What was the most important result from chapter 11? 3) In the EBC model, money demand . 4) According to the EBC, if the monetary authority wants to stabilize prices, it will adjust money . 5) While the EBC holds that money in neutral, empirical evidence suggests that money is only mostly neutral. What model explains this? 6) An increase in the real wage rate makes households want to work . 7) What is necessary for the labor supply curve to slope upward? 8) The price perceptions model is a model about information about prices. 9) Try to put the price perceptions (PPM) model in story form. 10) What is the difference between the long run and the short run in the PPM? 11) What is an important result of the PPM? 12) Why is systematic monetary policy difficult in the PPM model? Tell me a story. 13) Tell me a story about the Lucas hypothesis on monetary shocks. 14) What did we imagine in our EBC model? Then what did we do? 15) Be able to describe table 15.1, focusing on comparing and contrasting the EBC and PPM models. 16) The leaders of empirical studies in monetary policy are Milton Friedman and Anna Schwartz. What are their conclusions? 17) What is Barrow’s contribution to this question? 18) What is the main disturbance in the EBC model? 19) What is the impact of an increase in technology in the EBC model? 20) What is the impact of an increase in technology in the PPM? 21) How are they different? Explain. 22) Unanticipated money shocks can affect the real economy in the run. 23) Why is inflation high under discretionary policy? 24) What is absolutely essential for a policy rule to be effective at achieving low inflation? 25) What is arguably the most important feature that distinguishes the public institutions of successful economies from those of economies that are not successful?

Read Chapter 16. This chapter’s questions are harder than most…I expect you to do more than just repeat sections of the book. This chapter is somewhat dense—it tries to give you an entire semester of intuition in 17 pages. You may have to read it more slowly and carefully.

1) What, perhaps, is the most important common assumption of the EBC model and the PPM? 2) What, perhaps, is the greatest contribution of Keynes to macroeconomic modeling? 3) What are the two main ingredients for sticky prices? 4) Explain what a menu cost is. What are they important? 5) Explain what imperfect competition is. What is it important? 6) Skim through equations 16.1-16.7. Realize that this is the same process you learned (or will learn) in microeconomics. The exception to this similarity is that macro economists tend to think of a “markup ratio.” What is the markup ratio? 7) What is the important point? 8) If nominal prices are wages are fully flexible, then we would have money in a model characterized by imperfect competition. 9) But if prices are sticky, then we see quickly that money is not _. 10) Explain why, with sticky prices, an increase in the money supply increases labor demand by each firm? 11) This causes GDP to rise. Why? 12) The predictions of the New Keynesian model (NKM) are similar to the PPM. The major difference is the predictions of the real wage rate. The prediction concerning the real wage rate in the NKM is superior to the prediction in the PPM. What about the NKM drives this result? 13) What is labor hoarding? Why have NKMs included labor hoarding? 14) What about price adjustments in the long run? What do NKMs predict about the neutrality of money in the long run? 15) What is the significant difference between the long and short run in the NKM? 16) What is the significant difference between the long and short run in the PPM? 17) What is the significant difference between the long and short run in the EBC model? 18) Does the evidence support the NKM’s ability to explain economic fluctuations? Why? 19) Evaluate the NKM using table 16.1. 20) Typically, the NKM is not concerned with shocks to the money supply, but shocks to . 21) What is the concept of the multiplier? 22) What is the reasoning behind the multiplier? 23) What is the case against the multiplier? 24) How do central banks express monetary policy? 25) What are the two interest rates of interest to the Fed? 26) Carefully read the rest of the chapter….I’ll do my best to interpret it for you in class.

syllabus · goal 2: critical thinking: graduates of the bba program will be critical thinkers. ......

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