ECON 303Intermediate Macroeconomics

Instructor: Bernard Malamud

–Office: BEH 502

Phone (702) 895 –3294

Fax: 895 – 1354

»Email: bernard.malamud@unlv.edu

Website: www.unlv.edu/faculty/bmalamud

Office hours: TR 12-1 pm; 2:30 – 3:30pm; and by appointment

Macro News2007 CPI Inflation: 4.1 %, highest in 17 years!2007 CPI Inflation: 4.1 %, highest in 17 years!– Core CPI up only 2.4%.Core CPI up only 2.4%.

2007 Housing Construction: Down 25%2007 Housing Construction: Down 25%– Clark County Home Sales: New – 45% Existing – 40%Clark County Home Sales: New – 45% Existing – 40%

December Index of Industrial Production: No gainDecember Index of Industrial Production: No gain

December Index of Leading Indicators: Down 0.4%December Index of Leading Indicators: Down 0.4%

December Unemployment Rate: 5.0%, up from 4.7%December Unemployment Rate: 5.0%, up from 4.7%

December Retail Sales: Down 4%December Retail Sales: Down 4%

Index of Consumer Sentiment: Down 18%, Nov - NovIndex of Consumer Sentiment: Down 18%, Nov - Nov

S & P 500S & P 500– December 31, 2007 December 31, 2007 1468 1468– January 17, 2008 [January 17, 2008 [Philadelphia Beige BookPhiladelphia Beige Book] ] 1333 1333

January 22, 2008: 75 Basis Point Fed Funds Rate CutJanuary 22, 2008: 75 Basis Point Fed Funds Rate Cut

Macro News2008 CPI Inflation: ~1 %, lowest in 40 years!2008 CPI Inflation: ~1 %, lowest in 40 years!– Core CPI up 2.4%.Core CPI up 2.4%.

2007 Housing Construction: Down 25%2007 Housing Construction: Down 25%– Clark County Home Sales: New – 45% Existing – 40%Clark County Home Sales: New – 45% Existing – 40%

December Index of Industrial Production: - 5 ½ %December Index of Industrial Production: - 5 ½ %December Index of Leading Indicators: Down 0.4%December Index of Leading Indicators: Down 0.4%December Unemployment Rate:6.7%, 7.2% up from December Unemployment Rate:6.7%, 7.2% up from 5% last year5% last yearDecember Retail Sales: Down ~4%December Retail Sales: Down ~4%Index of Consumer Sentiment: Down ~30%,Nov - NovIndex of Consumer Sentiment: Down ~30%,Nov - NovS & P 500S & P 500– January 8, 2008 January 8, 2008 901 vs. December 31,2007 901 vs. December 31,2007 1468 1468January 22, 2008:75 Basis Point Fed Funds Rate Cut to 4%January 22, 2008:75 Basis Point Fed Funds Rate Cut to 4%Latest Target FFRATE: 0 - .25% Latest Target FFRATE: 0 - .25%

Today’s Headlines

Timely

Targeted

Temporary

R o b u s t

IMF: Global Stimulus Package•Timely (as there is an urgent need for action)· Large(because the drop in demand is large)· Lasting (as the recession will likely last for some time) · Diversified (as there is uncertainty regarding which measures will be most effective)· Contingent (to indicate that further action can be taken)· Collective (all countries that can should expand G-T given the severity and global nature of the downturn)· •Sustainable (to avoid debt explosion in the long run and adverse effects in the short run).

Stimulus Program Proposals:Stimulus Program Proposals:Re-emergence of Fiscal PolicyRe-emergence of Fiscal Policy

Grants/loans to statesGrants/loans to states

““Shovel-ready” infrastructureShovel-ready” infrastructure– Unintended consequence…hold backUnintended consequence…hold back

Military spendingMilitary spending

Green investmentGreen investment– Environment, energyEnvironment, energy

Tax cutsTax cuts– Investment tax creditInvestment tax credit– Sales tax rebateSales tax rebate

Automatic stabilizersAutomatic stabilizers– $Trillion deficits as far as eye can see$Trillion deficits as far as eye can see

Obama Speech: January 8, 2008Obama Speech: January 8, 2008““We could lose a generation of potential and promise, as more young We could lose a generation of potential and promise, as more young Americans are forced to forgo dreams of college or the chance to train for Americans are forced to forgo dreams of college or the chance to train for the jobs of the future,” Mr. Obama said. “And our nation could lose the the jobs of the future,” Mr. Obama said. “And our nation could lose the competitive edge that has served as a foundation for our strength and competitive edge that has served as a foundation for our strength and standing in the world. In short, a bad situation could become dramatically standing in the world. In short, a bad situation could become dramatically worse.”worse.”He said he aimed to He said he aimed to double the production of alternative energy within double the production of alternative energy within three years, a seemingly ambitious target; computerize all medical three years, a seemingly ambitious target; computerize all medical records in the country within five years, a move he said could save records in the country within five years, a move he said could save lives, money and jobs; modernize 75 percent of federal buildings and lives, money and jobs; modernize 75 percent of federal buildings and improve energy efficiency in 2 million homes; upgrade classrooms, improve energy efficiency in 2 million homes; upgrade classrooms, libraries and laboratories in thousands of schools, and expand libraries and laboratories in thousands of schools, and expand broadband access to rural areas .broadband access to rural areas .Mr. Obama blamed the current economic morass — in particularly stark Mr. Obama blamed the current economic morass — in particularly stark terms — on “an era of profound irresponsibility that stretched from corporate terms — on “an era of profound irresponsibility that stretched from corporate boardrooms to the halls of power in Washington.”boardrooms to the halls of power in Washington.”““I understand that some might be skeptical of this plan. Our government has I understand that some might be skeptical of this plan. Our government has already spent a good deal of money, but we haven’t yet seen that translate already spent a good deal of money, but we haven’t yet seen that translate into more jobs or higher incomes or renewed confidence.”into more jobs or higher incomes or renewed confidence.”He insisted that He insisted that only governmentonly government could “break the vicious cycles that could “break the vicious cycles that are crippling our economy,” prevent “the catastrophic failure of are crippling our economy,” prevent “the catastrophic failure of financial institutions,” restart the flow of credit and restore the financial institutions,” restart the flow of credit and restore the regulations needed to prevent such a crisis in the future.regulations needed to prevent such a crisis in the future.

Y = C + I + Y = C + I + GG + Ex - Im + Ex - Im

Course Objectives

Refresh your command of …

Macroeconomic terminology

eco-talk

Macro Facts

Schools of thought

Course ObjectivesCourse Objectives

Master MODELS– Demand Side Models AD

Multiplier

IS – LM

– Supply Side Models AS

Wage setting – Price setting

Phillips Curve– Role of Expectations … in theory and practice– Stabilizing an Unstable Economy

Understanding the current crisis

Macro - variablesOutput … Real GDP … Growth RateOutput … Real GDP … Growth Rate

UnemploymentUnemployment

Inflation … CPI, GDP DeflatorInflation … CPI, GDP Deflator

Macro Time FramesShort-run … sticky priceShort-run … sticky price

Medium-run … price adjustsMedium-run … price adjusts

Long-run … economic growthLong-run … economic growth

Where We’re HeadingWhere We’re Heading

Develop tools to address macro questions:Develop tools to address macro questions:

– What drives expansions and recessions?What drives expansions and recessions?

– What holds inflation in check?What holds inflation in check?

– Can the unemployment rate be too low?Can the unemployment rate be too low?What causes unemployment?What causes unemployment?

– Why do growth rates differ across Why do growth rates differ across countries?countries?

Where to Find the NumbersWhere to Find the Numbers

http://research.stlouisfed.org/fred2/http://research.stlouisfed.org/fred2/www.bls.govwww.bls.gov/data//data/www.economist.comwww.economist.comwww.bea.doc.govwww.bea.doc.govhttp://http://www.gpoaccess.gov/eopwww.gpoaccess.gov/eop//www.oecd.orgwww.oecd.org

The Federal Funds Rate and Its “Real” ValueThe Federal Funds Rate and Its “Real” Value

Real interest rateReal interest rate

= Nominal rate – Expected Inflation= Nominal rate – Expected Inflation

•CITI

Facilities: Primary dealers, commercial paperTermAssetBackedSecuritiesLoanFacility(TALF)

Financial crisis of 2007–2008Financial crisis of 2007–2008

Specific issuesSpecific issues United States housing market correctionUnited States housing market correction  ·  · World food price crisisWorld food price crisis ·  · Energy crisisEnergy crisis ( (Central AsiaCentral Asia) · ) · SubprimeSubprime mortgage crisis mortgage crisis ( (timelinetimeline, , List of List of writedownswritedowns) · ) · Global financial crisisGlobal financial crisis ·  · Automotive industry crisisAutomotive industry crisis ·  · List of entities involvedList of entities involved (Bankrupt or acquired banks, Bankrupt retailers) · 2008 East Asian  (Bankrupt or acquired banks, Bankrupt retailers) · 2008 East Asian meetingsmeetings

By countryBy country BelgiumBelgium ·  · IcelandIceland ·  · RussiaRussia

Legislation and policyLegislation and policy Banking (Special Provisions) Act 2008Banking (Special Provisions) Act 2008 ·  · Housing and Economic Recovery Act of 2008Housing and Economic Recovery Act of 2008  ·  · Economic Stimulus Act of 2008Economic Stimulus Act of 2008 ·  · Emergency Economic Stabilization Act of 2008Emergency Economic Stabilization Act of 2008  ·  · Troubled Assets Relief ProgramTroubled Assets Relief Program ·  · Term Asset-Backed Securities Loan FacilityTerm Asset-Backed Securities Loan Facility ·  · 2008 United Kingdom bank rescue package2008 United Kingdom bank rescue package  ·  · China Stimulus PlanChina Stimulus Plan ·  · ObamaObama stimulus plan stimulus plan

Company failuresCompany failures New Century Financial CorporationNew Century Financial Corporation ·  · American Freedom MortgageAmerican Freedom Mortgage ·  · American Home MortgageAmerican Home Mortgage ·  · Bernard L. Bernard L. MadoffMadoff Investment Securities LLC Investment Securities LLC ·  · Lehman BrothersLehman Brothers ( (bankruptcybankruptcy)) ·  · MervynsMervyns ·  · NetBankNetBank ·  · Terra SecuritiesTerra Securities ( (scandalscandal) · ) · Sentinel Management GroupSentinel Management Group ·  · Washington MutualWashington Mutual ·  · IcesaveIcesave ·  · KaupthingKaupthing Singer & Friedlander Singer & Friedlander ·  · Yamato LifeYamato Life

Government bailoutsGovernment bailoutsand takeoversand takeovers

Northern RockNorthern Rock ( (nationalisationnationalisation) · ) · IndyMacIndyMac Federal Bank Federal Bank ·  · Fannie MaeFannie Mae ( (takeovertakeover) · ) · Freddie MacFreddie Mac ( (takeovertakeover) · ) · AIGAIG ·  · Bradford & Bradford & BingleyBingley ·  · FortisFortis ·  · GlitnirGlitnir ·  · Hypo Real EstateHypo Real Estate ·  · DexiaDexia ·  · LandsbankiLandsbanki ·  · KaupthingKaupthing ·  · ING GroupING Group ·  · CitigroupCitigroup ·  · General MotorsGeneral Motors ·  · ChryslerChrysler

Company acquisitionsCompany acquisitions AmeriquestAmeriquest Mortgage Mortgage ·  · Countrywide FinancialCountrywide Financial ·  · Bear StearnsBear Stearns ·  · Alliance & LeicesterAlliance & Leicester ·  · Merrill LynchMerrill Lynch ·  · Washington MutualWashington Mutual ·  · Derbyshire Building SocietyDerbyshire Building Society ·  · Cheshire Building SocietyCheshire Building Society ·  · HBOSHBOS ·  · Lehman BrothersLehman Brothers ·  · WachoviaWachovia ·  · Sovereign BankSovereign Bank ·  · BarnsleyBarnsley Building Society Building Society  ·  · Scarborough Building SocietyScarborough Building Society ·  · National City Corp.National City Corp.

ReorganizationsReorganizations ACC Capital HoldingsACC Capital Holdings

Types of securities Types of securities involvedinvolved

Auction rate securitiesAuction rate securities ·  · Collateralized debt obligationsCollateralized debt obligations ·  · Collateralized mortgage obligationsCollateralized mortgage obligations ·  · Credit default swapsCredit default swaps ·  · Mortgage-backed securitiesMortgage-backed securities