Understanding Crises

HKAL Macroeconomics:
The Syllabus, The Exam, and
The Reality
Chi-Wa Yuen
University of Hong Kong
The seminar will focus on the connections
The syllabus (what the teachers/students are supposed
to teach/learn),
The exam (where the students are supposed to
demonstrate what they have learned and understood),
The macro reality (what it is about the real-world
macroeconomy that economists would like to
understand and predict).
The HKAL macro syllabus (1)
Three major macro frameworks
Plus a bunch of
45°cross (partial equilibrium model).
IS-LM (general equilibrium model).
Quantity theory of money.
definitions (e.g., GNP, the price level, M1, …);
concepts (e.g., paradox of thrift, natural unemployment,
crowding out, liquidity trap, …);
laws/principles (e.g., comparative advantage, multiple
deposit creation, …); and
And their interrelations.
The HKAL macro syllabus (2)
Short-run Keynesian macro models of income
(and interest)
– 2 frameworks: 45°cross and IS-LM.
– Static and deterministic.
– Price rigidity  equilibrium is demand-determined 
possible existence of output gaps => inefficiency in
resource allocations & other kinds of imbalances.
– Macro policies as aggregate-demand management tools
to close the gaps.
The HKAL macro syllabus (3)
Quantity-theoretic explanation of the price level
and inflation
– An identity (QEM) turned into a theory (QTM) to
provide a causal link between money and prices.
– More a classical (long-run) than a Keynesian (short-run)
approach—inconsistent with complete price rigidity in
the Keynesian frameworks—under the assumptions of
constant output and velocity of money, hence, monetary
– The general version also allows for variability of output
and velocity of money, hence, monetary non-neutrality.
The HKAL macro syllabus (4)
Other sections of the syllabus (e.g., banking
and financial intermediation, international
finance) contain more descriptive material
and require less rigorous theorizing.
 What is required is a good understanding of
basic definitions, concepts, principles, and
their interrelations.
The HKAL macro exam (1)
3 sections
– Section A: multiple choice.
– Section B: concepts and theories.
– Section C: applications.
3 kinds of skills are tested
– Verbal explanation.
– Graphical analysis.
– Numerical/algebraic computations.
The HKAL macro exam (2)
Topic-wise, the exam is meant to be wellbalanced.
 Section A is mostly straightforward, but
sometimes tricky.
 Section B is generally OK for the wellprepared.
 Section C usually presents the biggest
The HKAL macro exam (3)
A few examples to illustrate where
students are found to be weakest.
Basic definitions—such as interest rate,
price level.
Basic concepts—such as saving and
investment in closed and open economies,
nominal vs. real objects (e.g., interest rates,
money balances), unemployment.
The HKAL macro exam (4)
More examples.
Connection between micro and macro
concepts—such as relative prices and the general
price level, utility and welfare.
Logic behind theoretical constructs—such as
derivation of IS and LM curves.
Most importantly, applications of theories to
analysis of current affairs, policy issues, and
hypothetical cases.
The HKAL macro exam (5)
The last point is most probably a reflection of their
– unfamiliarity with this kind of questions;
– lack of common sense;
– weak analytical ability; and/or
– poor English.
Their performance will hopefully improve over
time if both the teachers and the students work
hard enough to tackle the problems identified
above (How?).
The macro reality (1)
What we’d like to do with our macro theories
is to explain (and predict) the (yet-to-be)
observed time-series and cross-sectional
behavior of macro aggregates.
Short-run fluctuations (business cycles:
deviations from trend).
Long-run growth (trend).
Macro policies (remedial/stimulative tools or
The macro reality (2)
Growth and fluctuations can be viewed as
equilibrium outcome from the real-world
macroeconomy that operates as an
– Optimization-based (solid microeconomic foundations)
– Dynamic (the past, the present, and the future)
– Stochastic (bombarded by shocks from time to time 
importance of information processing and expectations
– General equilibrium (everything depends on everything
else), where
The macro reality (3)
the short and long runs are not two mutually
exclusive entities;
 the supply side is no less important than the
demand side; and
 government policies may or may not be able
to stabilize the economy and stimulate
Gap between current syllabus
and the reality
Can’t sensibly address such questions as
How will the cut in government spending on
education affect productivity, investment,
employment, and welfare in the short run and in
the long run?
How much of the slowdown in HK’s
productivity growth in recent years is due to
structural changes? Cyclical fluctuations?
Suggested references
Abel and Bernanke, “Macroeconomics,” 5/e,
Addison-Wesley, 2004. (Intermediate level)
 Bade and Parkin, “Foundations of
Macroeconomics,” Addison-Wesley, 2002.
(Introductory level)