Introduction to the Basics
An Introduction to Macroeconomics
 Basics of Macro
1. Macro matters
2. Macro measures?
3. Stable relationships?
4. Policy tools for management?
 Macro policy tools
o Fiscal policy
o Monetary policy
 Course themes
o Ideology matters – alternative ideologies
 Conservatives
 Liberals
o History matters
 History by the decade
 Ideological shifts
Data Analysis and Graphs
 Read and interpret graphs
o Scatter / Time-series / Line / …
 Real values
o Real wages / profits / sales…
o Interest rates
Possibility Curves and International Trade
o Evolution of international trade and trade policies
 Change in economic systems
 Mercantilism
 Capitalism
 Change in balance of power
 Traders v industrialists (industrial revolution)
 Europe v Rest (water route)
o International trade debate
 Arguments against international trade
 Arguments for international trade
 Theory of comparative advantage
o Possibility curves
 Construct and interpret curves
 Example: Alternative sources of "more"
 Resources
 Efficiency / productivity
 Trade
o Tools for managing trade
 Non trade policies (Ex. Energy)
 Trade policies
 Tariffs
 Nontariff (administrative rules / export subsidies / anti dumping
 Quotas
Exchange rates
Track record of US trade policy
 Revolutionary times
 Civil War times
 Great Depression & WWII
 Post WWII
 GATT / WTO
Track record of world trade policy
o Asian export-led growth
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o
o
Supply & Demand
 Cookbook approach
o Determinants of suppliers
o Determinants of demanders
 Translate words about markets into S&D graphs
o Change in quantity demanded / supplied (shift along curve)
o Change in demand & supply (shift of entire curve)
 Translate S&D graphs into words
o Comparative statics of S&D graphs –
 Single shifts
 Double shifts
 Forecasting / explaining prices and quantities
The Basics of Macroeconomics
Intro to Macroeconomics & Macro Models
 Circular flow model
 National Income Identity
o Aggregate Supply = Aggregate Demand
o Injections = Withdrawals
o Investment = Savings
 AS-AD model (NOT SAME AS S&D model)
o determinants of AS
 price and quantity of inputs
 productivity of inputs
o determinants of AD / (C+I+G+X-M)
 C
 I
 G
 X
 M
o Translate words into AS&AD graphs
o Translate AS&AD graphs into words
o Forecasting / explaining prices and quantities
 Single shifts
 Double shifts
Macroeconomic Measurement
o Measures of price, quantity, disequilibrium
o Track record ( US and international)
Labor Market
 Important relationships
o Civilian population 16+ = Labor Force + Not in Labor Force
o Labor Force = Employed + Unemployed
o Labor Force Participation Rate = Labor Force/Civilian Population 16+
o Unemployment Rate = Unemployed/Labor Force
o Employment population ratio = Employed / Population
 Track record of important variables
 Quantity - employment
o Demographic factors
 Immigration
 boomers
o Labor force participation rate
 Decomposition / trends
o Employment
 Decomposition (industry, occupations, education)
 Disequlibrium - Unemployment rate
o “missing” #s
o Alternative measures of unemployment
 Price - earnings
Real v nominal
Output Market
 Track record
o Domestic
o International
o Quantity - GDP
o Definition
o Decomposition of GDP
o International comparisons
 PPP
 Exchange rate
 Limitations of GDP
 Nonmarket activities
 Leisure
 Bads
 Illegal activities
 Inequality
 New goods & quality changes
 Alternatives to GDP
 Reforming GDP
 Refining GDP
o Price - CPI & inflation rate
 Costs of inflation
Evolution of Macroeconomic Theory
The 1930s: A Paradigm Shift
 Setting
o Themes
 Industrialization
 Urbanization
 Globalization
 Regionalization
 Concentration
o Drivers
 Demographics (immigration)
 Technology (communication, production, transportation, business)
 Public policies (immigration, anti trust, regulation, taxes, monetary (Fed)
o Great Depression
 Ideological shift (crowding out to multiplier)
 Theoretical - Keynes (multiplier)
 Practical - Roosevelt (New Deal legislation)

Classical Model (crowding out)
o Equation of balance (X-M) + (I - S) + (G - T) = 0
 Domestic balance (I – S) = 0?
 S&I graph
 International balance (X-M) = 0?
 Specie flow mechanism (Hume's law / Gold standard)
 Link between currency and gold
 Link between international trade balance and gold
 Link between gold and money supply
 Link between money supply and prices
 Quantity Theory V 1
MV = PY
 Quantity Theory V 2 m+v = y+p
 Link between prices and trade balance
o Labor market: Assumption of full employment
o Peculiarity of AS-AD model – vertical AS
o Macro policy in Classical world
 Crowding out
 Monetary policy (m+v = y+p)
 Fiscal policy (G – T) = ?

Keynesian Model (multiplier)
o Great Depression
o Alternative to Classical model
 Time frame / market efficiency
 Classical = long run / markets efficient
 Keynesian = short run / markets inefficient / sticky prices
 Focus of analysis
 Classical = AS
 Keynesian = AD
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o
o
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Impact of government policy
 Classical = Crowding out
 Keynesian = multiplier
Multiplier
 Marginal propensity to consume
 Formula
Peculiarity of AS-AD model – horizontal AS
Macro policy in Keynesian depression world
 Monetary policy – not good in depression
 Fiscal policy – best in Depression
The 1960s: Let the Good Times Roll
 Setting
o Themes
 Industrialization
 Urbanization
 Globalization
 Regionalization
 Concentration
o Drivers
 Demographics (immigration)
 Technology (communication, production, transportation, business)
 Public policies (immigration, anti trust, regulation, taxes, monetary (Fed)
 WW II
 Post WW II
 International
 Cold War
 Collapse of colonial empires
 National - ideological shift
 Extensions of Keynesian analysis
o Detailed AD
 Consumption
 Why important?
 Components of spending
 Alternative models of spending
 Investment
 Why important?
 Supply-side effect
 Volatility
 Sensitivity to policies
 Components of spending
o Forecasting
 time-series
 econometric
 barometric
o Timing
 Temporary v permanent policies
 Lags (monetary v fiscal policy)
 Recognition, Discussion, Action
o
o
Peculiarities of AS-AD graph
Inflation & Phillips Curve
 Efficiency of labor market
 Shift of the Phillips Curve
 Types of unemployment
 Phillips curve and AS-AD model
 Shift along Phillips Curve
 Inflationary expectations and modified Phillips Curve
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The 1970s: Paradise Lost
Setting
o Themes
 Industrialization
 Urbanization
 Globalization
 Regionalization
 Concentration
o Drivers
 Demographics (immigration)
 Technology (communication, production, transportation, business)
 Public policies (immigration, anti trust, regulation, taxes, monetary (Fed)
o Great Depression
 Ideological shift
Evolution of International Monetary Systems
 International accounting system BOPA
o Debits (imports,....what we buy and who we buy it from
o Credits (exports,...what we sell and who we sell it to
o International balances
 Current Account
 Capital Account
o Track record on trade patterns
 International monetary systems
o Trilemma – goals of international monetary system
 Stable exchange rates
 Freedom of capital movement
 Independent monetary policy
o Alternative systems
 Gold standard
 Flaw
 Example: UK
 Bretton Woods
 International agencies
 Flaw
 Nixon's dilemma
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Flexible exchange rates - Nixon's solution
 Translate words about markets into S&D graphs
 Supply of $s
 Demand for $s
 Translate S&D graphs into words
 Single shifts
 Double shifts
 Forecasting / explaining prices and quantities
Bretton Woods II – or MAD II
Evolution of Domestic Monetary System
 Evolution of money
o commodity money
o fiat money
 Measures of money
o M1
o M2
 Interest rates
o Decomposition of interest rates r = rr +ri + rd + rl + rm
o Real v Nominal (rr = r – i)
o Yield curve / term structure of interest rates
 Money market
o Money demand
 Classical
 transactions D (MV = PY)
 Keynesian
 Transactions Demand (income)
 Speculative Demand (interest rates)
 Money supply process
o Fractional reserve system (Robin Hood)
o Players
 Banks
 Fed (High powered money)
 Households & businesses
o Regulation?
 Great Depression
 Glass-Steagell Act
 FDIC
 Separation of banks
 1980-1990s
 Repeal of Glass-Steagell
o Structure
 T-accounts
o Fed's tools
 OMO
 Discount rate
 Required reserve rate
 Money market (Keynesian)
o Translate words about markets into S&D graphs


o
o

Supply of $s
Demand for $s
Translate S&D graphs into words
 Single shifts
 Double shifts
Forecasting / explaining interest rates and money supply
Money and economy
o Liberal (Keynesian Theory)
 Transmission mechanisms
 interest sensitivity of money demand
 interest sensitivity of AD
 price response to AD
 Fed's 1970s dilemma
 Fed induced nflation spiral
o Conservative (Quantity Theory)
 Monetarism definition
 Monetarism experiment
o Evidence of Fed's policies
o Differences between Keynesians and Monetarists
The 1980s: A Paradigm Reversal
 Setting
o Themes
 Industrialization
 Urbanization
 Globalization
 Regionalization
 Concentration
 Drivers
o Demographics
o Technology
o Public policies
 Reaganomics
o 1970s problem (Great Stagflation)
 Limitations of traditional AD policies
o Reagan's solution
 Expand K (make I more attractive)
 Investment tax credit
 Accelerated depreciation
 Corporate profit tax
 401 Ks
 Expand L
 Make work more attractive (tax cuts)
 Make not working less attractive (unemployment benefit & welfare
cuts
 Tax cuts and balanced budgets
 Laffer Curve
 Limited impact of disinflation
o
 Expectations
Reagan's record
 Growth
 Equity
Economic growth
o International track record
 Very long run
 Growth rates
 Differentials in growth rates - divergence
 Change in balance of power
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o
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Long run track record
 Transitional economies
 Africa
 Rise of Asia
 Slowdown in West
Models of growth
 Classical
 Neoclassical (productivity)
 Decomposition of growth
 Intensive growth
 Extensive growth
 US track record
Determinants of growth
 Location - yes
 Guns, germs, & steel
 Natural resources - maybe
 Structural change
 Cost-disease of the service sector
 Technological change
 Savings and investment
 Human capital
 Physical capital
 Public capital
 Institutions
 Business environment, Rule of law / culture / religion /
The 1990s: The Visible Hand
 Setting
o Demographics
o Technology
o Public policies
 Clinton, Greenspan & the New Economy
o New Economy
o AS – AD graphs
 Clinton the candidate

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Greenspan vision
Clinton the president
Federal government finances:
o Budget deficit
 Track record
 Clinton turnaround
 Does the deficit matter?
o National Debt
 Ownership of debt
 Burden of debt
o Social Security
 Relationship to federal budget
 Forecasts of balance
 Policy tools to ‘correct’ future imbalances