MACROECONOMIC THEORY
Ec 224
Spring 2002
Instructor:
Office Hours:
D. Findlay
MWF: 12:00-12:50 and 2:00-2:50
Office: ML 239
Extension: 3153
Description: The majority of this course will be devoted to the development and examination of a theoretical
framework to explain fluctuations in interest rates, output, exchange rates, unemployment, inflation, and economic
growth in a globally interdependent economy. Particular emphasis will be placed on the theoretical development of
the models and on the effectiveness and optimality of macroeconomic policy. We will also spend a significant
amount of time examining the importance of expectations, the determination of asset prices (e.g. stock prices), and
the relationship between financial markets and the macroeconomy. You will be expected to apply the concepts
presented in class and to understand the implications and limitations of the models and policies.
Prerequisite: Microeconomic Theory.
Texts: The required text is Macroeconomics by Olivier Blanchard (Prentice Hall Publishing, Second edition, 2000).
A number of additional readings have been placed on reserve in Miller Library (hard copies and electronic links to
the articles). I will expect you to read the assigned chapters and articles before class. An optional study guide which
accompanies Blanchard is also available.
Grading: Your grade will be determined by two examinations, a final exam, several quizzes, and assigned problem
sets. The first and second exams are worth 25% each; the final is worth 25%; the quizzes are worth a total of 12.5%;
and the problem sets are worth 12.5%. The first quiz is scheduled for Wednesday, February 27 from 4:00-4:40 and
the second quiz is scheduled for Thursday, April 4 from 4:00-4:40. The first exam is scheduled for Thursday, March
14 from 7:00 - 9:15 p.m. and the second exam is scheduled for Tuesday, April 16 from 7:00 - 9:15 p.m. Please
make note of these key dates and times.
Grading Philosophy: Grades in the A range reflect outstanding performance in the course. Students who receive
some type of A can answer virtually any type of question about the material. Most importantly, such a grade reflects
a complete grasp of the material and, just as importantly, an ability to apply the material to answer a variety of
questions. Grades in the B range reflect a solid understanding of the material. Students who receive some type of B
completely understand the basic concepts presented and have some success in applying the material. Grades in the C
range reflect an understanding of what has been presented and discussed in class. A grade in the C range also
indicates that the student has difficulty in applying the material to examine new situations, events and policies. As an
aside, I view a grade in the C range as a 'decent' grade. Grades in the D range reflect a weak understanding of the
basic material. A grade of F reflects little understanding of what has been discussed in class. This description of
grades, by the way, is similar to that found on the official Colby transcript (i.e., A = Excellent, B = Good, C =
Satisfactory, D = Passed, and F = Failed).
Attendance Policy: I do not 'take' attendance in any of my classes. However, students are expected to attend all
classes and scheduled course events during the semester and are responsible for any work missed. Unexcused
absences from either a quiz or an exam will result in a 0 for that assignment. Late problem sets will not be
accepted. Obviously, excuses may be granted for the following reasons: critical emergencies (normally verified by
Ec 224, Macroeconomic Theory - 2
the Dean of Students Office), athletic or organizational trips, or illness (normally verified by the College Health
Center).
Old exams: I have placed copies of past exams and quizzes on reserve in Miller Library (Personal Folder A23). Use
this material to provide yourself with information about the types of questions asked in this course.
E-mail policy: I have quickly discovered that e-mail is an inefficient method to dealing with questions about course
material. Therefore, if you have questions about the material, you can ask them during class, after class, during my
office hours, or at some other arranged time.
Comments: Success in this course depends on your ability to explain and to apply the concepts presented in class.
Specifically, you must be able to explain intuitively the underlying factors that determine the economic relationships
included in the models. Simply "memorizing" the material is most likely an inefficient allocation of your time. I
have several specific suggestions for you. First, during the first week of the semester, you should review your lecture
notes from your Macro Principles course because I will assume that you understand the basic concepts presented in
Macro Principles; you should also review the concept of present value. Second, during this semester you should
read the material carefully (and several times!) and constantly review your lecture notes. Third, when examples are
presented in class, make sure you can explain the opposite example (e.g. the exchange rate effects of a reduction
versus increase in the money supply). And finally, you should constantly ask yourself the following types of
questions during the semester. What does this curve represent? Why does it have its particular shape? What causes
the curve to shift? What causes the curve's shape/slope to change? If you can answer these types of questions, you
not only will understand the mechanics of the model, but also will be able to examine the implications of the model.
Final thoughts: If you have any questions about the material presented in class or the assigned readings, do not
hesitate to raise them in class or with me during office hours (or at some other time). In addition to the office hours
listed above, I have an open-door policy (i.e., if I am in the office, I am available to meet with you). I also encourage
you to work with fellow students because tremendous benefits can be obtained by working with others. All work
submitted to me, however, must be your own. You should become familiar with the College's policy on academic
dishonesty. Any instance of academic dishonesty in this course will result in a grade of 0 for that assignment. The
teaching assistants for this course are Jason Gimbel and Liza Schnitzer. If you have any questions about graded
problem sets, you are to direct them to me. Finally, if additional meetings are necessary, these classes will be
scheduled for Sunday afternoons or evenings and you will be given a one-week notice of these meetings. Note:
There will be no class on Friday, March 22.
Ec 224, Macroeconomic Theory - 3
Course Outline and Reading List
I.
Introduction: Macroeconomics and its Measurements
1.
2.
3.
4.
Ch. 1 and 2 in Blanchard
Appendix 1, An Introduction to National Income and Product Accounts, pp. A1-A5 in Blanchard
G. Becker, "Housework: The Missing Piece of the Economic Pie," Business Week, 10/16/95. [2188]
J. Madrick, "How Much Does Anyone Really Know About the Real Rate of Inflation," The New York
Times, 12/27/01. [24]
5. J. Schlesinger, "U.S. to Alter Calculations, Increasing Economic Growth, Productivity Levels," The Wall
Street Journal, 9/8/99. [2188]
II.
Financial Markets and Goods Market Equilibrium: The Basic IS-LM Model
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
III.
Ch. 3 in Blanchard
Ch. 3, question 6, p. 56 in Blanchard
Ch. 25, pp. 494-498 in Blanchard
Appendix 3, An Introduction to Econometrics, pp. A10-A14 in Blanchard
The Goods Market: Dynamics, Ch. 4 in Blanchard, First Edition, 1997. [2189]
Ch. 4 in Blanchard
G. Mankiw, "Wrong Time for Tax Cuts," The Wall Street Journal, 10/31/91. [2188]
"U.S. Monetary Policy: An Introduction," Weekly Letter, Federal Reserve Bank of San Francisco,
Number 99-01, January 1, 1999.*
Ch. 5 in Blanchard
J. Schlesinger and D. Hamilton, "Thrift Shift: The More the Japanese Save for a Rainy Day, the Gloomier
it Gets," The Wall Street Journal, 7/21/98. [2188]
C. Walsh, "The Science (and Art) of Monetary Policy," Economic Letter, Federal Reserve Bank of San
Francisco, Number 2001-13, May 4, 2001. *
M. Hutchinson, "Japan's Recession: Is the Liquidity Trap Back?," Weekly Letter, Federal Reserve Bank
of San Francisco, Number 2000-19, June 16, 2000.*
R. Rahn, "Defeating Deflation," The Wall Street Journal, 11/19/01. [24]
J. Schlesinger and P. Landers, "Parallel Woes: Is the U.S. Economy At Risk of Emulating Japan's
Swoon? ," The Wall Street Journal, 11/7/01. [24]
C. Walsh, "Transparency in Monetary Policy," Economic Letter, Federal Reserve Bank of San Francisco,
Number 2001-26, September 7, 2001.
R. Parry, "The U.S. Economy After September 11," Economic Letter, Federal Reserve Bank of San
Francisco, Number 2001-35, December 7, 2001. *
R. Hall, et al, "The Business Cycle Peak of March 2001," NBER Reporter, Fall 2001, pp. 1-6. *
M. Friedman, "The 1990s' Boom Went Bust. What's Next?," The Wall Street Journal, 1/22/02. [Personal
Folder: A23]
Expectations, Financial Markets, and Macroeconomic Policy
1.
2.
3.
4.
5.
6.
7.
8.
9.
Ch. 14 in Blanchard
Ch. 15 in Blanchard
Ch. 16 in Blanchard
D. Wessel, "Policy Makers' Big Job: Avoiding Errors of '20s," The Wall Street Journal, 8/3/98. [2188]
B. Malkiel, "Wall Street Moves Main Street," The Wall Street Journal, 6/23/98. [2188]
B. Wysocki, "'Wealth Effect' Tends to Linger On for Years," The Wall Street Journal, 8/10/98. [2188]
D. Wessel, "The Wealth Effect Goes into Reverse," The Wall Street Journal, 5/24/01. [2188]
Economics Focus, "Home Truths," The Economist, 11/10/01. [24]
J. Booth and L. Booth, "Does the Stock Market Prefer Republican Administrations?," Weekly Letter,
Federal Reserve Bank of San Francisco, Number 98-19, June 19, 1998.*
10. E. Browning, "Investors Focus Less on Fed, More on Economy," The Wall Street Journal, 6/27/01.
[2188]
11. E. Browning, "'Fed Effect' May Roil Sleepy Stocks this Week," The Wall Street Journal, 6/19/00. [2188]
12. G. Zuckerman, "Waiting for Greenspan: Fed Hopes Lift Stocks," The Wall Street Journal, 3/20/01.
[2188]
Ec 224, Macroeconomic Theory - 4
13. Ch. 17 in Blanchard
14. D. Wessel, "Stock Market Weighs Heavily Upon the Fed," The Wall Street Journal, 1/18/99. [2188]
15. J. Schlesinger, "Change Agent: How Alan Greenspan Finally Came to Grips with the Stock Market," The
Wall Street Journal, 5/8/00. [2188]
IV.
International Macroeconomic Issues
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
V.
Ch. 18 in Blanchard
Ch. 19 in Blanchard
Ch. 19, Appendix: Derivation of the Marshall-Lerner Condition, in Blanchard
M. Heinzl, "Canada Sees Exports as Path to Prosperity," The Wall Street Journal, 10/21/96. [2188]
Ch. 20 in Blanchard
Ch. 20, Appendix: Fixed Exchange Rates, Interest Rates, and Capital Mobility, in Blanchard
Ch. 21, pp. 406-413 in Blanchard
D. Wessel and C. Torres, "Hard Calls: Devalue? Cut Rates? While Brazil Agonizes, The U.S. Makes a
Move," The Wall Street Journal, 10/16/98. [2188]
B. Wysocki, "The Outlook: 'Race to Devalue' May Gain Currency," The Wall Street Journal, 12/3/01.
[24]
L. Ingrassia, "One Dollar is Worth One Dollar, but That Wasn't Always So," The Wall Street Journal,
1/13/98. [2188]
Euro Brief, "The Merits of One Money," The Economist, 10/24/98. [2188]
C. Nickerson, "Canadians Debate Banking Economy on the US Dollar," The Boston Globe, 6/28/99.
[2188]
G. Sims, "European Pockets, at Last, Jingle," The Wall Street Journal, 1/2/02. [24]
R. Guzman, "One Euro, Lots of Confusion," The Wall Street Journal, 12/28/01. [24]
W. Drozdiak, "Europe Braces for Euro-day," The Washington Post, 8/26/01. [24]
C. Rhoads and J. Carreyrou, "The Right Rate for Europe? Go Figure," The Wall Street Journal, 5/17/01.
[2188]
"Interview with Tommaso Padoa-Schioppa," The Region, Federal Reserve Bank of Minneapolis,
December 2001, pp. 28-43. *
A. Schwartz, "Assessing the Euro Three Years After Its Launch," The Region, Federal Reserve Bank of
Minneapolis, December 2001, pp. 14-16. *
The Determination of Unemployment, Wages, Output and Prices
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Ch. 6 in Blanchard
S. Rayfield, "Sign of Times on Coast: Help Wanted," Kennebec Journal, 6/4/98. [2188]
K. Chen, "Weak Economy Puts the Brakes on Job-Hopping," The Wall Street Journal, 3/27/01. [2188]
R. Berner, M. Arndt, A. Palmer, and T. Lowry, "Pink Slip Blues," Business Week, 12/25/00. [2188]
C. Whalen, "What's Lost Between Jobs," Business Week, 3/5/01. [2188]
J. Mehring, "Flexibility is No Key to Stability," Business Week, 3/5/01. [2188]
T. Aeppel, "Scaling the Ladder," The Wall Street Journal, 4/6/99. [2188]
D. Wessel, "Capital: The Hidden Cost of Labor Strife," The Wall Street Journal, 1/10/02. [24]
Ch. 7 in Blanchard
Ch. 13 in Blanchard, pp. 251-258
B. DeLong, "The Shadow of the Great Depression and the Inflation of the 1970s," Weekly Letter, Federal
Reserve Bank of San Francisco, Number 98-14, May 1, 1998.*
B. Trehan, "Supply Shocks and the Conduct of Monetary Policy," Weekly Letter, Federal Reserve Bank
of San Francisco, Number 99-21, July 2, 1999. *
S. Liesman and J. Schlesinger, "Blunted Spike: The Price of Oil has Doubled this Year; So, Where's the
Recession?," The Wall Street Journal, 12/15/99. [2188]
S. Liesman, "The Outlook: Oil Price Has Less Of a Ripple Effect," The Wall Street Journal, 3/20/00.
[2188]
Economic Focus, "Oil and the New Economy," The Economist, April 1, 2000. [2188]
R. Miller, "The 70's Specter That's Haunting Greenspan," Business Week, 7/31/00. [2188]
G. Ip, "Fed's Meyer Warns of Inflation, Joblessness," The Wall Street Journal, 6/7/01. [2188]
Ch. 28, pp. 541-544 in Blanchard
Ec 224, Macroeconomic Theory - 5
19. R. Maddock and M. Carter, "A Child's Guide to Rational Expectations," Journal of Economic Literature,
March 1982, pp. 39-51.*
20. A. Schwartz, "What Europe Can Learn from the Fed," The Wall Street Journal, 12/31/98. [2188]
21. Ch. 26, pp. 503-506 in Blanchard
22. G. Ip and J. Schlesinger, "Great Expectations: Did Greenspan Push High-Tech Optimism on Growth Too
Far? The Wall Street Journal, 12/28/01. [24]
23. J. Judd and G. Rudebusch, "The Goals of U.S. Monetary Policy," Economic Letter, Federal Reserve
Bank of San Francisco, Number 99-04, January 29, 1999.*
24. D. Wessel, "Getting Adjusted: With Inflation Tamed, America Confronts An Unsettling Uncertainty,"
The Wall Street Journal, 2/22/99. [2188]
25. P. Coy, S. Anderson, M. Arndt, and U. Patel, "Dark Days Ahead?," Business Week, 5/14/01. [2188]
26. K. Lansing, "Exploring the Causes of the Great Inflation," Economic Letter, Federal Reserve Bank of San
Francisco, Number 2000-21, July 7, 2000.*
27. G. Rudebusch, "How Fast Can the New Economy Grow?," Economic Letter, Federal Reserve Bank of
San Francisco, Number 2000-05, February 25, 2000.*
28. J. Schlesinger and Y. Dreazen, "What's Up: As Inflation Awakens, Forces that Muzzled It May Be on the
Wane," The Wall Street Journal, 4/17/00. [2188]
29. J. Schlesinger, "The Outlook: Fed On Inflation: Too Tough? Too Lax?," The Wall Street Journal,
5/15/00. [2188]
30. R. Parry, "Update on the Economy," Economic Letter, Federal Reserve Bank of San Francisco, Number
2001-19, July 6, 2001. *
31. N. Shirouzu and J. Hilsenrath, "Squeeze Play: As Debate on Deflation Simmers, Automakers Live the
Experience," The Wall Street Journal, 11/01. [24]
VI.
Inflation - Output Dynamics
1. Ch. 8 in Blanchard
2. E. Phelps, "Low Inflation. Low Unemployment. What Gives?," The Wall Street Journal, 4/7/00. [2188]
3. A. Bennett, "Business and Academia Class Over a Concept: 'Natural' Jobless Rate," The Wall Street
Journal, 1/24/95. [2188]
4. C. Shea, "Low Inflation and Low Unemployment Spur Economists to Debate 'Natural Rate' Theory," The
Faculty: Research, The Chronicle of Higher Education, October 24, 1997. [2188]
VII.
Productivity and Economic Growth
1. Ch. 10 in Blanchard
2. Ch. 11 in Blanchard
3. G. Mankiw, "The Golden Rule Level of Capital," in Macroeconomics, Worth Publishing, 2000, pp. 8997. [2189]
4. Ch. 12 in Blanchard
5. Ch. 13 in Blanchard
6. C. Jones, "The Future of the New Economy," Economic Letter, Federal Reserve Bank of San Francisco,
Number 2001-14, May 11, 2001. *
7. K. Kliesen and D. Wheelock, "The Microchip Flexes its Muscle: Can it Compete with History's Best?,"
The Regional Economist, Federal Reserve Bank of St. Louis, July 2001, pp. 4-9. *
8. B. Wysocki, "Low U.S. Savings: How Big a Problem?," The Wall Street Journal, 12/21/98. [2188]
9. H. Stein, "Growth Isn't Everything," The Wall Street Journal, 4/1/93. [2188]
10. R. Eisner, "Low U.S. Savings Rate: A Myth," The Wall Street Journal, 3/1/90. [2188]
11. L. Bryan and D. Farrell, "The Savings Surge," The Wall Street Journal, 11/7/94. [2188]
12. R. Barro, "Democracy: A Recipe for Growth?," The Wall Street Journal, 12/1/94. [2188]
13. M. Friedman, "Getting Back to Real Growth," The Wall Street Journal, 8/1/95. [2188]
14. S. Liesman, "Further Gains in Productivity Are Predicted," The Wall Street Journal, 8/1/00. [2188]
15. J. Miller, "Private R&D Spending Seen Rising 9.3%," The Wall Street Journal, 12/31/98. [2188]
16. C. Whalen, "Was Turbocharged Productivity a Fluke?," Business Week, 4/23/01. [2188]
17. D. Wessel, "The Long Run Arrives Early, The Wall Street Journal, 8/2/99. [2188]
18. J. Kaufman, "Technology and Time for the Poor," The Wall Street Journal, 8/16/01. [2188]
19. D. Wessel, "Capital: A Green(span) Light For Productivity? ," The Wall Street Journal, 11/8/01. [24]
Ec 224, Macroeconomic Theory - 6
VIII.
Summary
1. Ch. 28 in Blanchard
2. R. Froyen, "The Evolution of Macroeconomic Theory and the Implications for Teaching Intermediate
Macroeconomics," The Journal of Economic Education, Vol. 27, No. 2, Spring 1996, pp. 108-115.
[2189]
Note: Those articles followed by a number in brackets are on reserve in Miller Library; the number represents the
call number at the reserve desk. To save space, I have placed these articles in several binders; the order of the
articles is similar to that found in the reading list. Those articles followed by an asterisk (*) can be accessed
electronically via this course's reserve reading list. The link to the on-line version of each of these articles is
included in the list of reserve readings on the library's web site.