EC Lecture 1-09/02/15

Transcription

1 EC Lecture 1-09/02/15 MACROECONOMICS I Part 1: Introduction 1

2 Logistics of the Course Instructor: Murat Koyuncu Office: NB214, Phone: (212) Lectures: Section 01: Mondays 56, 13:00-14:50 at NH 305 Wednesdays 5, 13:00-13:50 at NH 301 Office Hours: Mondays 15:00-17:00, and by appointment 2

3 Logistics of the Course Weekly Problem Sessions: Times To Be Announced Teaching Assistants: Oğuz Bayraktar, Kübra Toka, Uğur Yeşilbayraktar, Course Webpage: Accessible via the Economics department website by clicking on the Courses tab. 3

4 Logistics of the Course Description EC 205 is an intermediate course on macroeconomics. The aim of the course is to introduce the concepts that are used to analyze macroeconomic problems and policies. The focus will be on theory with some applications. Specifically, we will focus on the short run and long run macroeconomic behavior of a closed economy as well as the role of expectations and policy making. Textbook (Required): Macroeconomics by N. Gregory Mankiw, Worth Publishers (2012), 8 th Edition 7 th or 6 th Editions might work, but students should keep track of the changes in the newest edition Additional required readings will be posted on the course website. 4

5 Assessment Two Midterm Exams: 30% each Final Exam (Cumulative): 40% 1 st Midterm Exam Tentative Date: March 13 th Friday, 17:00 2 nd Midterm Exam Tentative Date: April 16 th Thursday, 17:00 Problem Sessions/Recitations: There will be weekly recitation sections held by your teaching assistants (date and time will be announced). Attendance is not required but strongly recommended NOTE: These are not going to substitute the lecture, but rather complement them. 5

6 Miscellaneous Final Exam Requirement: In order to be able to enter the final exam, a student must have earned at least 40 percent of the available points on the midterms. Students with midterm grades below this limit will be announced on the course website prior to the final exam date and will not be allowed to take the final exam. Make-up Exam Policy: If you miss the midterm exam for any reason, you must PERSONALLY bring a written statement of details of your excuse for missing the midterm to my office within 1 week of the exam. Makeup exam will be held exactly one week after the exam. Documentation brought in later will NOT be accepted. Make-up exam will be given on a day in the week following this period. I reserve the right to refuse to give a make-up exam. 6

7 Miscellaneous There will be no early exams and no re-writes. Regular attendance is expected. Exam grades may be scaled up or down depending on the average and standard deviation of the grades. Last date for withdrawal with a W instead of an F on your transcript: April 9, Thursday. addresses will be used extensively to communicate with the students throughout the session. Please make sure that the address you have with the Registrar s Office is up-to-date so that you will not miss any announcements. 7

8 Miscellaneous Exam Regrading Policy: You will be able to see your exams and the answer key on preannounced dates and times. You may request that your exam be regraded after you see your answers and the answer key. However, you will have to write a substantive explanation as to why you would like to have your exam regraded. It is not sufficient to write statements like I believe I have to be awarded more points for this question. You can only ask for an exam regrade on the preannounced dates and times on which you are supposed to see your exams and the answer key. Any communication (via or otherwise) after the final exam regarding your grades might affect your overall grade negatively. 8

9 WEEK Week 1: Introduction and Ch. 1 and Ch. 2 Week 2: Week 3: Week 4: Week 5: Week 6: Week 7: Week 8: Week 9: Week 10: Week 11: TOPIC - Ch. 3: National Income: Where It Comes From and Where It Goes - Ch. 8: Economic Growth I: Capital Accumulation and Population Growth - Ch. 9: Economic Growth II: Technology, Empirics, and Policy - Ch. 9 Continued - Midterm 1: March 13 th Friday, 17:00 - Ch.s 4 & 5: Monetary Policy and Inflation - Ch. 7: Unemployment - Ch. 7 Continued - Ch. 10: Introduction to Economic Fluctuations - Ch. 11: Aggregate Demand I: Building the IS-LM Model - Ch. 12: Aggregate Demand II: Applying the IS-LM Model - Ch. 12 Continued - Ch. 14: Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment - Midterm 2: April 16 th Thursday, 17:00 -SPRING BREAK Week 12: Week 13: Week 14: Ch.s 6 & 13: Open Economy Macroeconomics - Ch.s 6 & 13 Continued - Real Business Cycle Theory (Based on Lecture Noes) - RBC Theory Continued

10 Part 2: What is macro about? Important issues in macroeconomics Why learn macroeconomics Economic Models Flexible vs. Sticky Prices 10

11 Important issues in macroeconomics Macroeconomics, the study of the economy as a whole, addresses many topical issues, e.g.: What causes recessions? What is government stimulus and quantitative easing? Why might they help? How can problems in the housing market spread to the rest of the economy? What is the government budget deficit? How does it affect workers, consumers, businesses, and taxpayers? 11

12 Important issues in macroeconomics Macroeconomics, the study of the economy as a whole, addresses many topical issues, e.g.: Why does the cost of living keep rising? Why are so many countries poor? What policies might help them grow out of poverty? What is the trade deficit? How does it affect the country s well-being? 12

13 U.S. Real GDP per capita (2000 dollars) long-run upward trend

14 U.S. Real GDP per capita (2009 dollars) $50,000 9/11/2001 $40,000 $30,000 Great Depression First oil price shock Financial crisis $20,000 $10,000 World War I Second oil price shock $0 World War II

15 U.S. Inflation Rate (% per year) World War I First oil price shock Second oil price shock Great Depression Financial crisis

16 U.S. Unemployment Rate (% of labor force) Great Depression World War I World War II Oil price shocks Financial crisis

17 Now think about Turkey Which one of the following is the most important economic problem of Turkey right now? a. Inflation b. Unemployment c. Slow output growth Economic slow-down in EU d. Volatility of the exchange rate e. Political uncertainty Might lead to a, b, c Read the newspaper columns for the most recent discussions around economic policy 17

18 Why learn macroeconomics? percent of labor force 1. The macroeconomy affects society s well-being. U.S. Unemployment and Property Crime Rates Unemployment (left scale) Property crimes (right scale) crimes per 100,000 population Social problems like homelessness, domestic violence, crime, and poverty are linked to the economy.

19 Why learn macroeconomics? 2. The macroeconomy affects your well-being. change from 12 mos earlier In most years, wage growth falls when unemployment is rising percent change from 12 mos earlier unemployment rate inflation-adjusted mean wage (right scale)

20 Why learn macroeconomics? 3. The macroeconomy affects election outcomes. US Unemployment & inflation in election years year U rate inflation rate elec. outcome % 5.8% Carter (D) % 13.5% Reagan (R) % 4.3% Reagan (R) % 4.1% Bush I (R) % 3.0% Clinton (D) % 3.3% Clinton (D) % 3.4% Bush II (R) % 3.3% Bush II (R) % 3.8% Obama (D) * Turkey: 1994 Crisis RP got the most votes in 1995 elections 2001 Crisis AKP got the most votes in 2002 * SYRIZA! 20

21 Economic models are simplified versions of a more complex reality irrelevant details are stripped away are used to show relationships between variables explain the economy s behavior devise policies to improve economic performance 21

22 Example of a model: Supply & demand for new cars shows how various events affect price and quantity of cars assumes the market is competitive: each buyer and seller is too small to affect the market price Variables Q d = quantity of cars that buyers demand Q s = quantity that producers supply P = price of new cars Y = aggregate income P s = price of steel (an input) 22

23 The demand for cars demand equation: Q d = D (P,Y ) shows that the quantity of cars consumers demand is related to the price of cars and aggregate income 23

24 Digression: functional notation General functional notation shows only that the variables are related. Q d = D (P,Y ) A specific functional form shows the precise A list of quantitative the relationship. Example: variables D (P,Y that affect ) = 60 Q d 10P + 2Y 24

25 The market for cars: Demand demand equation: Q d = D (P,Y ) P Price of cars The demand curve shows the relationship between quantity demanded and price, other things equal. D Q Quantity of cars 25

26 The market for cars: Supply supply equation: Q s = S (P,P S ) P Price of cars S The supply curve shows the relationship between quantity supplied and price, other things equal. D Q Quantity of cars 26

27 The market for cars: Equilibrium P Price of cars S equilibrium price equilibrium quantity D Q Quantity of cars 27

28 The effects of an increase in income demand equation: Q d = D (P,Y ) P Price of cars S An increase in income increases the quantity of cars consumers demand at each price P 2 P 1 D 1 D 2 which increases the equilibrium price and quantity. Q 1 Q 2 Q Quantity of cars 28

29 The effects of a steel price increase supply equation: Q s = S (P,P S ) P S 2 Price of cars S 1 An increase in P s reduces the quantity of cars producers supply at each price P 2 P 1 D which increases the market price and reduces the quantity. Q 2 Q 1 Q Quantity of cars 29

30 Endogenous vs. exogenous variables The values of endogenous variables are determined in the model. The values of exogenous variables are determined outside the model: the model takes their values & behavior as given. In the model of supply & demand for cars, endogenous: P, Q d, Q s exogenous: Y, P s 30

31 The use of multiple models No one model can address all the issues we care about. E.g., our supply-demand model of the car market can tell us how a fall in aggregate income affects price & quantity of cars. cannot tell us why aggregate income falls. 31

32 The use of multiple models So we will learn different models for studying different issues (e.g., unemployment, inflation, long-run growth). For each new model, you should keep track of its assumptions which variables are endogenous, which are exogenous the questions it can help us understand, those it cannot 32

33 Prices: flexible vs. sticky Market clearing: An assumption that prices are flexible, and adjust to equate supply and demand. In the short run, many prices are sticky adjust sluggishly in response to changes in supply or demand. For example: many labor contracts fix the nominal wage for a year or longer many magazine publishers change prices only once every 3-4 years 33

34 Prices: flexible vs. sticky The economy s behavior depends partly on whether prices are sticky or flexible: If prices sticky (short run), demand may not equal supply, which explains: unemployment (excess supply of labor) why firms cannot always sell all the goods they produce If prices flexible (long run), markets clear and economy behaves very differently 34