Econ 100 b fall 2012 lecture 1 notes

Economics 100B

Professor Steven Wood

08/23/2012

Lecture 1

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ANNOUNCEMENTS

Text book: Frederic Mishkin,

Macroeconomics: Policy and Practice.

All students will need iClickers for there are

iClicker questions on almost every non-exam

day.

All students will also need a set of colored pens

or pencils. We will be drawing curves and

shifting them, and different colors make it

easier.

Email Policy: first point of contact should be

GSIs. Professor’s email:

[email protected], put ECON100B in

the subject when emailing the professor

Attendance is not required in lecture, however

there are iClicker questions. Attendance is

required in discussion sections for the first two

weeks.

For enrollment problems, email head GSI at

[email protected], and based on

experience, 15-30 of the students on the waitlist

might get into the course.

LECTURE

Course Description

Econ 100B is a course in intermediate

macroeconomics, based on Econ1. In this

course we will look at many economic issues.

The US economy suffered a significant

recession in 2008 and 2009, a once in a lifetime

event. The economic recovery in the past 3

years is the slowest recovery in the post WWII

period. What has caused this nasty recession?

How come the recovery is so sluggish?

What in economic policies that can alter the

outcome? What would speed it up or slow it

down? These are things that we will be

thinking abut and talking about in

macroeconomics.

It is also interesting, because we have a

presidential election this year. The two

candidates have very different economics

policies. What are the likely outcomes are from

adopting each set of policies?

There is also the fiscal cliff. The tax cut is

expiring at the end of this year. There will be

significant fiscal cliffs. It will subtract 4% from

economic growth. In the second quarter, the

economy grew 2%. If we take 4% off, we could

have negative growth.

Do people and business start to change their

behaviors? Do they predict the worst scenario

or just pretend that everything is okay?

We also have a Federal Reserve, and they are

trying to figure out what they should be doing.

The effective interest rate is 0 now and the Fed

has put massive liquidity into the system

because of the recession.

mailto:[email protected]

mailto:[email protected]

Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents 08/23/12


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The Fed has two objectives: low and stable

inflation, and maximum sustainable

employment. 8% unemployment is clearly not

maximum sustainable employment. Do the

Fed’s policies have bad side effects?

These are some of the concepts and issues that

we will be talking about. We will be making

reference to the US economy a lot, but most

countries are equally applicable to the concepts.

iClicker Questions:

Q1, Q2, Q3: Student demographic questions

Policy and Practice of Macroeconomics

What is the greatest macroeconomic challenge

facing the US today?

a. high unemployment

b. rapidly rising tuition

c. massive government budget deficit

d. potential deflation

What is the greatest macroeconomic challenge

facing the US today?

a. potential hyperinflation

b. large trade deficits

c. the high price of textbooks

d. China’s trade policies

Should macroeconomics policies be sued to

affect macroeconomic outcomes?

a. yes, market outcomes can be undesirable

b. no, let the market determine the outcome

How should the budget deficit be reduced?

a. only cut government spending

b. only raise tax rates

c. cut government spending and raise tax rates

d. ignore the problem and hope it will go away

What should be done about the large trade

deficit?

a. nothing, it will take care of itself

b. force the dollar to depreciate

c. force the Chinese to appreciate their

currency

d. become energy independent

When we talk about macroeconomics, we are

talking about national economics. Although it

can be applied to smaller regions, we are

typically talking about the national economy –

how is it structured, how we could model the

components of the economy.

We will also be talking about dynamic

adjustment of the economy, how do we go from

one recession to a recovery, and what’s the

adjustment process. We need to think about

these types of things as well.

We also need to discuss policies. Sometimes

we do not implement the right policies. We can

think about it as a multi-step process:

First step is that we start with a macroeconomic

theory. Think of what’s an interesting issue,

what do I want to address, might be level of

economic activity, employment rate, whatever

it could be.

Then we come up with a model; there are

endogenous variables, where the explanation

comes from inside the model. There also will

be a lot of exogenous variables. For changes

and factors that are completely outside the

models. Take these changes as givens.

For example, government spending policy is

generally regarded as an exogenous variable.

The congress decides; it might seem to be

dependent on the economy. As in the election

now, one party want to increase spending, and

the other one want to decrease.

After we have a model, we need to identify a

relationship between the endogenous and

exogenous variable. For a model to make any

sense, we need some real world data, to explain

what is going on in the world. We have to test

the hypothesis in the real world, to see if it

actually makes sense.



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Last, we will be evaluating the outcomes. If

they did not make sense, we need to go back to

the model. If we have a model we can use the

model for historical analysis purposes, for

forecasting purpose, or for policy setting

purposes.

In macroeconomics there are three variables,

1. Real GDP

2. The unemployment rate

3. Inflation

Real GDP: total production

Labor market: employment, we typically look

at unemployment, it gives a sense of the

imbalance of supply and demand

Inflation: how are prices changing, and how

fast?

Real GDP is essentially a measure of how

much production is happening in a economy

over time, we are also interested in how it

changes over time. There are ups and downs,

and they are called business cycles.

This is real GDP per person. Long-term trend is

positive, why is that the case? This is not

always true for every country in every period.

If you look at Ghana or Egypt. For Egypt, this

line is almost horizontal, for Ghana it is

negative sloping. GDP per person has a

tendency to fall in recession, because

recessions are when GDP is falling, but

populations are generally growing.

Inflation is the rate of change of weighted price

level. What causes inflation? Makes it rise?

Slow down? And there are extreme situations,

like deflation, when inflation rate is negative.

Generally, deflation is bad for

macroeconomics. There are also

hyperinflations, occurring when the inflation

rate is exceptionally high.

Hyperinflation is 50% or more per month.

Zimbabwe’s economy collapsed because of its

hyperinflation.

A lot of questions remain here. There are two

characteristics of the GDP, the average growth

rate is about 3%, and lots of volatility. Why

these two?

Whenever we have a recession, we have strong

recovery in history. But why not this time?



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Macroeconomic policies use economic models

to determine how to produce better

macroeconomic outcomes. Monetary and fiscal

policies are what we get into.

An example of an interesting question is that

how can poor countries get rich?

a. What determines why rich countries are

rich and why poor countries are poor?

b. Can government policies affect these

outcomes?

China, India and many other countries have

demonstrated extremely high growth rate. Is

there a set of policies the governments around

the world can follow? Are there any set of

policies many Latin American countries and

African countries can learn from fast growing

countries? What do we recommend to them?

Are we saving too little? I am a member of the

generation of baby boomers. We have an entire

generation of people having the under-saving

problems. Would we have a different outcome

if the baby boomers had decided to save more?

Is the amount of saving an economy undertakes

important?

Another issue is that do government budget

deficits matter? Greece, Italy, Spain all have

big deficits, big economic problems. But on the

other hand, the US and Japan have worse

situations; US can borrow money for 10 years

for 2%, Japan can borrow for 1%.

Most people are risk averse, which means that

fewer people will take economic action the

more risk there is. Low and relatively stable

inflation augments economic growth. There are

benefits to having low and stable inflation

What if you do not? We do know how to bring

inflation down, but there are consequences in

doing so. There are lots of trade-offs in life.

Are they worth making? It is the primarily the

responsibilities of the central banks. They have

a great deal control of what the inflation rate

will be, by setting their monetary policy.



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We know we can use government policies to

affect economic outcomes. We want ask

ourselves: should we do this, and to what

extent? Should we affect economic outcomes?

Given enough time, all economies will return to

the stable, full-employment equilibrium. But

what if it takes 10 years? Activists say what if

you intervene you will misallocate resources.

Should we be discretionary? Leave it to the Fed

or congress or president to do it? Or should we

be rules-based, giving a pre-set guidance.

Trade imbalances are the differences between

exports and imports of goods and services.

Trade imbalances also reflect international

borrowing and lending activity. Importing is

buying, and exporting is selling. The US is

buying more than it is selling. The borrowing

makes up the differences can cause critical

dislocations of resources.

End of lecture.

Notes prepared by Tony Sun.

Edited by Genevieve Ang.

Econ 100 b fall 2012 lecture 1 notes

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