INTERMEDIATE MACROECONOMIC THEORY

Earlham College, January 2003

Jonathan Diskin, Bolling Center 331

Office Hours: Mon. 2:30- 3:30, Tues. 10-12, Wed. 2:30 – 3:30 Friday 2:30 – 3:30.

Macroeconomics is a language or a way of seeing the economy as a whole. In this course we will begin to learn this language and to use the concepts of macroeconomics to construct models of relationships among variables in order to represent a complete economy. In the longer run, issues of long term economic growth take center stage, while in the shorter term issues of stability – especially how the levels of unemployment, inflation, interest rate and national income vary over the business cycle predominate. While long term growth is important, and we will spend a few weeks considering it, most of this course will concentrate on the shorter term fluctuations in the macroeconomy and the Keynesian model that consists of theories about the determination and interaction of the level of national income, output, the price level, and the interest rate.

Our principle task, as befits a core theory course in the economics major, will be to construct, manipulate, and interpet formal economic models of the macroeconomy. At the same time, it is important to gain some familiarity with the data of macroeconomics and with current macroeconomic issues. For example, we will read some articles about the Bush administration tax and spending proposals and look at issues of instability in Argentina and the economic stagnation in Japan.

In order to foster our broader learning, I will assign or bring in newspaper articles for discussion periodically and also require each of you to do a relatively brief research project on a country or your choice. The assignment has two parts. The first is to create a macroeconomic profile of a country that captures the key variables over time and how they have changed. This can be done in a chart accompanied by a narrative explanation of key trends. The second part is to model (using the Keynesian IS-LM model that we will develop) the country’s economy over a 20 year period. More on this later.

TEXTS and Readings:

Macroeconomics, 9th ed., Robert Gordon.

You will need to consult online data sources periodically. These will include the BEA and the

Economic Report of the President, [ERP], http://w3.access.gpo.gov/usbudget/fy2000/pdf/erp.pdf

Handouts and Reserve readings are indicated thus: **

COURSE REQUIREMENTS AND GRADING:

The principle basis of grading will be 2 exams during the semester and a comprehensive final exam. In addition, there are 6 problem sets and and two short empirical exercises that are scattered throughout the semester – the second one, “modelling an economy” is substantial.

Midterms = 42% [best exam 25%, other one 17%]

Final = 35%.

Problem sets and Short exercises = 8%

“Modelling an Economy” Exercise counts for 15% of your grade

SYLLABUS OF READINGS AND ASSIGNMENTS

Week of Jan 15^th

Gordon, Chapter 1 – Friday.

Week of Jan 20^st

Gordon, Chapter 2, Measurement of Income, Prices, and Unemployment.

** “Is Personal Debt Sustainable?”, D.Papadimitriou, et. al., Levy Institute Strategic Analysis, Nov. 2002.

Problem Set #1: Due Monday, Jan 27^th .

Answers #1

Week of Jan 27^th

Gordon, Chapter 3, The Simple Keynesian Theory of Income Determination. Parts 3.1-3.5.

Chapter 15, pp. 471-485 on Consumption.

Problem Set #2: Due Wednesday Feb5^th.

Problem Set 2

Week of Feb 3^rd

Gordon, Chapter 3, Sections 3.6 and appendix.

Chapter 4, pp. 87-97.

Problem Set #3: Due Friday Feb. 14^th.

Week of Feb 10^th

Chapter 4: The LM Curve, 4-5 - 4-10.

** Keynes, The General Theory of Employment, Interest and Money. Chapter 13.

Problems 3

Answers to Problems 3

Week of Feb 17^th

NOTE: I will be out of town on Wed. the 19^th through Monday the 24^th. We will meet on Monday and then you will begin working on your “Modelling a Country” exercises while I’m out of town. See the guidelines for PART ONE of the exercise at the end of the syllabus.

Monday: Discussion of Chapter 5 on Policy.

MID-TERM BREAK, FRIDAY Feb. 21^st.

Problem Set #4: Due Friday February 28^th.

Week of February 24^th

Gordon, Chapter 5.

Articles on the Clinton and Bush Fiscal Policies.

FIRST EXAM: In class portion on Wednesday March 5^th . Take home portion due on Friday, March 7^th.

L Lindsey on Bush Tax Cuts

Stiglitz on Bush Tax Cuts

Week of February March 3^rd

Gordon, Chapter 5 – complete

Begin Chapter 6, Open Economy IS-LM

Week of March 11^th :

Gordon, Chapter 6, Open Economy IS-LM

Spring Break: Week of March 18th

Week of March 25^th:

Gordon, Chapter 6, con=t and

Chapter 7, AD and AS.

Problem Set #5 Due: March 29^th

Week of April 1^st:

Gordon, Chapter 8, Inflation.

** A. Glynn, “Internal and External Constraints on Egalitarian Policies”, pp. 391 – 408, and R. Blecker, “Comment on Glynn”, pp. 409 – 411, in Globalization and Progressive Economic Policy, ed. D. Baker, G. Epstein, R. Pollin, Cambridge University Press, 1998.

MODELLING AN ECONOMY Exercise due Friday 12^th

Week of April 8^th:

Gordon, Chapter 9, Growth.

Problem Set #6 Due: April 15^th.

Week of April 15^th :

Gordon, Chapter 9, con’t, and Chapter 10: Productivity.

Second Exam: Friday, April 19^th.

Week of April 22^nd and April 29^th:

Gordon, Chapters 11 and 12.

FINALS WEEK: May 6 -- 9.

Modelling an Economy Exercise:

You are to pick a country for which there is reasonably good macro data in the World Bank’s World Development Report and produce a three part report on the macroeconomic performance and structure of that economy. Your report should include some narrative text, statistical analysis, and a model of the economy and track your economy over a decade. In general, I’d like you to focus on the decade of the 1980s, that is, look at trends between 1980 and 1990. If you pick a country for which another decade or a longer time frame seems necessary to say anything useful about its macro performance, let me know.

1) The first part is to construct a basic chart of key macro indicators over at least a ten year period. Include data on both values and % change for following (at a minimum): GDP, trade balance, consumption, saving, interest rate, government spending and deficits, private investment (domestic and total), rate of inflation, money supply, level of unemployment.

2) In the second part of the assignment, you model the information you’ve collected in part 1. This will take some creastivity on your part. By modelling the data I mean that you should use the IS-LM apparatus and the balance of payments information to try and show, graphically, how this economy has changed over time. For example, you could show an economy at an internal and external equilibium to begin with in 1980 and show what happened between then and 1990. Can you show some policy or parametric changes within the IS-LM and AS-AD models that help explain the changes you see?

3) Once your presented information in a chart and then modelled it, you job is to interpret what you have done. Note any striking macro trends (hyperinflations, rates of growth in GDP, etc.) and draw some general conclusions about the economy in 1980 (was in a depression, e.g.). Comment on what forces may have caused the changes between 1980 and 1990, including those you modelled in part 2 and other possible explanations for the economic changes you observe. Note any policy or other changes you are aware of, and speculate about other possible causes for the statistical patterns.