Intermediate Macroeconomics

Units

1. 1

   National accounts and macro data

   4 lessons

   1. Three ways to measure GDPShow that the production, expenditure and income approaches give the same GDP, compute each from a small economy, and tell GDP from GNP and from net output.
   2. Saving, investment and the current accountCompute the current-account balance from saving and investment, and explain when a government deficit coincides with a current-account deficit.
   3. Price indexes and real variablesCalculate a two-year chained GDP deflator, fixed-basket CPI inflation, log growth, and a realized real interest rate; explain why the measures differ.
   4. The classical model of output and interestCalculate output, competitive factor payments, and the real interest rate that clears a closed economy’s goods market.
2. 2

   The Solow growth model

   4 lessons

   1. Capital accumulation and the steady stateWrite output per worker as y = f(k), derive Δk = s f(k) − δk, and solve for the steady state k* graphically and for Cobb-Douglas, k* = (s/δ)^(1/(1−α)).
   2. The golden rule level of capitalFind the saving rate that maximizes steady-state consumption per worker, state the condition MPK = δ, and compare transitions from too much and too little capital.
   3. Population growth and technological progressAdd population growth n and labor-augmenting technology g to the Solow model, write break-even investment (δ + n + g)k, solve the steady state, and show balanced growth with output per worker growing at g.
   4. Growth accounting and convergenceSplit output growth into capital, labor and total factor productivity with ΔY/Y = αΔK/K + (1−α)ΔL/L + ΔA/A, and use the Solow model to say when poor countries catch up (conditional versus absolute convergence).
3. 3

   Endogenous growth

   3 lessons

   1. The AK modelShows with Y = AK how constant returns to broad capital make the saving rate permanently affect growth, contrasting with Solow's diminishing returns.
   2. Ideas, research and Romer's modelPresents Romer's model of nonrival ideas, a research sector producing new technology, and why growth depends on research effort and scale.
   3. Institutions and long-run developmentDiscusses institutions, property rights and colonial origins (Acemoglu, Johnson and Robinson) as fundamental causes of income differences across countries.
4. 4

   Labor markets and unemployment

   3 lessons

   1. The natural rate and labor market flowsDerives the steady-state unemployment rate u = s/(s + f) from job separation and finding rates, with worked numbers.
   2. Job search and matchingIntroduces the Diamond-Mortensen-Pissarides search and matching framework, the Beveridge curve, and how unemployment benefits affect search duration.
   3. Wage rigidity and structural unemploymentExplains real wage rigidity from minimum wages, unions and insider-outsider theory, and efficiency wage models such as Shapiro-Stiglitz.
5. 5

   Short-run fluctuations: IS-LM

   4 lessons

   1. The Keynesian crossBuilds planned expenditure E = C(Y - T) + I + G, the Keynesian cross equilibrium, and the government purchases multiplier 1/(1 - MPC) and tax multiplier.
   2. The IS curveDerives the IS curve from the Keynesian cross and investment depending on the interest rate, showing why it slopes downward and what shifts it.
   3. The LM curveDerives the LM curve from the theory of liquidity preference M/P = L(r, Y), explaining its upward slope and shifts from money supply changes.
   4. Policy analysis with IS-LMUses IS-LM to analyze fiscal and monetary shocks, the policy mix, and the Great Depression with spending and money hypotheses and the liquidity trap.
6. 6

   The open economy in the short run

   4 lessons

   1. The small open economy in the long runModels a small open economy with a world interest rate, where net capital outflow S - I determines the trade balance and the real exchange rate adjusts.
   2. Mundell-Fleming with floating exchange ratesDraws IS* and LM* in exchange rate and income space, showing fiscal policy is ineffective and monetary policy effective under floating rates.
   3. Mundell-Fleming with fixed exchange ratesShows under fixed exchange rates fiscal policy is effective and monetary policy ineffective, with devaluation and the impossible trinity.
   4. Interest rate differentials and crisesExtends Mundell-Fleming with a risk premium, uncovered interest parity, and applies it to currency crises like Mexico 1994 and Asia 1997.
7. 7

   Aggregate supply and expectations

   4 lessons

   1. Aggregate demand from IS-LMDerives the AD curve from IS-LM as the price level varies, and shows how fiscal and monetary policy shift AD.
   2. Sticky prices and the SRAS curveDerives the short-run aggregate supply equation Y = Ybar + a(P - EP) from sticky prices, Lucas's imperfect information model, and sticky wages.
   3. The expectations-augmented Phillips curveWrites pi = E(pi) - b(u - un) + v, compares adaptive and rational expectations, and computes the sacrifice ratio and Okun's law.
   4. The dynamic AD-AS modelCombines output, real interest rate, Phillips curve and a monetary policy rule into a dynamic AD-AS model to trace responses to demand and supply shocks.
8. 8

   Consumption theory

   4 lessons

   1. The Keynesian consumption functionStates Keynes's consumption conjectures, the evidence from Kuznets showing a stable long-run average propensity to consume, and the consumption puzzle.
   2. Fisher's two-period modelUses intertemporal budget constraint and indifference curves to show consumption smoothing, the effect of interest rates via income and substitution effects, and borrowing constraints.
   3. Permanent income and life-cycle hypothesesPresents Friedman's permanent income hypothesis and Modigliani's life-cycle hypothesis, explaining why consumption responds weakly to transitory income.
   4. Random walk and behavioral consumptionCovers Hall's random walk hypothesis under rational expectations, and Laibson's present bias and hyperbolic discounting as behavioral departures.
9. 9

   Investment and intertemporal models

   4 lessons

   1. The neoclassical model of investmentDerives business fixed investment from the rental price of capital versus the cost of capital (P_K/P)(r + delta), and the effect of taxes on investment.
   2. Tobin's q and other investmentExplains Tobin's q as market value over replacement cost of capital, plus residential investment and inventory investment motives.
   3. A two-period general equilibrium modelBuilds a two-period economy with consumers and government, deriving Ricardian equivalence and the real interest rate from goods market clearing.
   4. The Ramsey-Cass-Koopmans modelIntroduces the Ramsey model with optimizing households, the Euler equation for consumption growth, the saddle path and modified golden rule steady state.
10. 10

    Monetary policy

    3 lessons

    1. Rules versus discretionExplains the time inconsistency problem of Kydland and Prescott and Barro-Gordon, central bank credibility and independence, and inflation targeting.
    2. The Taylor ruleWrites the Taylor rule i = pi + r* + 0.5(pi - pi*) + 0.5(output gap), the Taylor principle, and compares the rule with actual federal funds rate history.
    3. The zero lower bound and unconventional policyAnalyzes the zero lower bound on nominal rates, quantitative easing, forward guidance, and the 2008 financial crisis response.
11. 11

    Fiscal policy and government debt

    3 lessons

    1. The government budget constraintDerives the debt dynamics equation for the debt-to-GDP ratio, showing the role of the primary deficit and the gap between interest and growth rates (r - g).
    2. Ricardian equivalenceStates Barro's Ricardian equivalence that debt-financed tax cuts do not change consumption, and the arguments against it: myopia, borrowing constraints and future generations.
    3. Fiscal multipliers and austerityReviews empirical estimates of fiscal multipliers, how they vary at the zero lower bound, tax smoothing, and the debate over austerity after 2010.