Economics 122a
Yale University
Fall 2012
William Nordhaus
Today’s plan
1. Describe the course
2. Introduction and major questions of macro
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Course Syllabus
DESCRIPTION AND PREREQUISITES
• The course covers business cycles, economic growth, major macro
topics, and their application to fiscal and monetary policy and
history.
• This course is to be taken after completing both terms of
Introductory Economics. Exceptions will be rare. Calculus will be
used.
• Course web page is
http://www.econ.yale.edu/~nordhaus/homepage/Econ122_2012.htm
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Readings
TEXTBOOK.
Charles Jones, Macroeconomics, second edition, Norton, 2011.
For textbook options, see web page.
There are many supplemental readings, available online or on the
course web site.
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Schedule
We will generally meet M W 11:35-12:50
We will occasionally meet on Friday for optional special sessions.
Lectures will be posted after the class.
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Tests and Grading
There will be one mid-term examination, which will take place in
class on Wednesday, October 14. The final examination will
be three hours and is Dec 14.
There will be four graded problem sets, four ungraded but
required problem sets, and a short paper due at the end of the
semester.
The grade is based 45 percent on the final exam, 25 percent on
the hour tests, and 30 percent on the problems and paper.
Grade distribution (verbal description in class).
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Sections
There will be sections led by teaching fellows from Department of
Economics. Each student will be assigned to a section.
Sections will go over the analytical material from the course, cover
questions raised by students, and review problems and exams.
Tentative section times are:
Wednesday 7:00-7:50 and 8:00-8:50 pm
Thursday 4:00-4:50 and 5:00-5:50 pm
Thurs 7:00-7:50 and 8:00-8:50 pm
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Limited enrollment
Limit to 120 + ε students.
The following is the priority list:
All those who got bumped last year; all seniors and
juniors economics majors; other seniors and juniors;
sophomores who are declared economic majors.
The balance of shoppers will be selected by lottery.
Freshmen are not eligible.
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Alternative macroeconomics courses:
Econ 122b (?). Roughly the same with emphasis on labor
economics.
Econ 126b (Moscarini). Intensive version. More analytical
and mathematical.
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What is macroeconomics?
• Macroeconomics is the study of the overall behavior of
economies (output, inflation, unemployment, trade
balance, financial markets, …)
• The interesting point is that the total behaves differently
from simple adding up of the parts
– think of parties or bank runs
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Major themes
There are two major recurrent themes running through
macro:
i) Business cycles
ii) Economic growth
Virtually every macroeconomic issue revolves around
these issues, or a confusion concerning them.
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The muddle of macroeconomics
“The resources of nature and man’s devices are just as fertile and
productive as they were. The rate of our progress towards
solving the material problems of life is not less rapid. We are
as capable as before of affording for everyone a high standard
of life and will soon learn to afford a standard higher still.But
today we have involved ourselves in a colossal muddle,
having blundered in the control of a delicate machine, the
working of which we do not understand.”
[ J.M. Keynes, The Great Slump of 1930 ]
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Business cycles
One major set of issues involves the business cycle. These
are the short-run changes in output, employment, and
inflation.
Important business cycle questions:
1.What caused the global financial crisis of 2008? Why
did it lead to the Great Recession that is still going
on?
2.Why has unemployment rises so sharply and
remained so high?
3.Do government deficits increase or decrease growth?
4.How should we balance the needs of recovery today
and versus reducing government debt in the future?
5.How does the Fed affect output and inflation?
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Origins of the Great Recession (2007 - ???)
• Housing prices peaked in mid 2006 and have fallen about 40
percent.
• In 2007, investors suddenly discovered that subprime mortgages
were much riskier than had been supposed.
• This led to financial problems, especially for highly leveraged
financial intermediaries (banks, hedge funds, etc.).
• Risk premiums increased, credit was tightened, and there was a
financial panic in the fall of 2008. This led to bank runs and
multiple bankruptcies or near-ones in 2008.
• The Fed responded forcefully. The Congress passed a bailout bill
in 2008 and a major “stimulus package.”
• The federal deficit and debt shot up with recession and stimulus.
• But the economy is stuck at high unemployment and relative
stagnation. The end is not in sight….
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Real GDP over the cycle
15,000
Real GDP (billions of 2005 $)
14,500
Real GDP (Actual)
Real Potential GDP
14,000
13,500
Large
GDP “gap”
13,000
12,500
12,000
2004
2005
2006
2007
2008
2009
2010
2011
2012
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Losses per household by quarter
in current recession
2,500
2,000
1,500
1,000
500
0
-500
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total = $27,000 through June 2012.
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Unemployment rate over the cycle: 1960 - 2011
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10
9
8
7
6
5
4
3
1960
1970
1980
1990
2000
2010
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Shaded areas are NBER recessions.
The exploding government debt
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Today’s macro dilemma
• Monetary policy has “run out of bullets” and cannot by
itself restore full employment.
• This leaves fiscal policy (tax cuts and expenditure
increases).
• But fiscal expansion will increase the large and growing
government debt; and faces strong opposition from
conservatives and deficit hawks.
How should we balance the needs of recovery
today and versus reducing government debt in
the future?
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Economic growth
Economic growth concerns the trend in output over the
long run.
Important growth questions:
6. Why is average American 10x richer than Americans 100
years ago?
7. How will the growing government debt affect growth over
the medium term?
In macroeconomics, we use the neoclassical growth model
to understand economic growth.
Asia’s economic renaissance
Source: McKinsey (but not to be taken as good data).
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Per capita output 3 big regions
Per capita output (2005 US$)
40,000
United States
China
Sub-Saharan Africa
4,000
400
1980
1985
1990
1995
2000
2005
2010
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Per capita growth trends in 3 big regions
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International macro
In a world of rapid globalization, international macro
becomes increasingly important.
Role of exchange rates, international trade, currencies.
The biggest issues today are:
8. What are “global imbalances?” Why does the US have
such a huge current trade deficit while China has such a
large surplus? How will these resolve?
9. What is the reason for the Euro crisis? Will the
Eurozone fall apart, or evolve closer to a standard fiscal
union? Is disaster waiting around the corner?
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