The Computer in the Teaching of Macroeconomics

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The Computer in the Teaching of MacroeconomicsAuthor(s): F. Gerard Adams and Eugene KrochSource: The Journal of Economic Education, Vol. 20, No. 3 (Summer, 1989), pp. 269-280Published by: Taylor & Francis, Ltd.Stable URL: http://www.jstor.org/stable/1182304 .

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E c o n o m i c Instruct ionInthissection, the Journalof EconomicEducationpublishesarticles,notes,and communications describing innovations in pedagogy, hardware,materials,and methodsfortreating raditionalubjectmatter.Issues involv-ing the way economics is taughtare emphasized.

MICHAELWATTS,Section Editor

T h e Compu t e r i n t h eT e a c h i n g o f MacroeconomicsF.GerardAdamsandEugeneKroch

The linkagebetweenalgebraic,numerical,andgraphicalpresentationsnspreadsheetprogramson the personalcomputer s a signaladvantage orthe teachingof macroeconomics.n thispaper,weconsideralternativewaysof using the microcomputern the intermediatemacroeconomics ourse.We presenta flexibleapproach o usingcomputer preadsheetso illustratethe principal lementsof macrotheory.POSSIBILITIES

Use of the computer o teacheconomicshas followed a numberof pat-terns. In approximateorder of sophistication, hese patterns ncludethefollowing:Computerized eviewand test questions.At its simplest, his is merelyawayto put questionson the computer nsteadof on the printedpage. Thestudentcan be testedin a morecomplexwaywhenthe computer'snstruc-tionalpath dependson the student'sgraspof the concepts.

F. Gerard Adams is a professor of economics and Eugene Kroch is a professor of economics,both at the University of Pennsylvania. This work was partially supported by the IBMThresholdProject at the Universityof Pennsylvania and by the UPS grant to the UniversityofPennsylvania.Summer989 269


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automatically,as new entries are introduced; or more complexmodels,calculations an be made n response o a manualcommand depressing 9,the Calckey). Graphsappear n response o F10,the Graphkey. Errorsareminimizedby protectingmost cells frominputand do not presenta seriousproblembecausethe studentalwayshas the option of recalling he initialspreadsheet.More sophisticated(and user-friendly) pplicationscan use keyboardmacrosto invokesequencesof operations hat demonstratepecificmodelproperties.A simplemacro s standardor all the applicationsn thispaper:depressingAlt-G generatesa menu of alternativegraphsto view. Suchmacros make these models suitable for classroompresentationsusing alargecomputerdisplay.The instructor an alsocustomizemenus o suit theteaching program.All instructions,explanations,comments,and reviewquestionsof a programmedearningsystemcan be built directly nto thespreadsheet.

ILLUSTRATIONSExercises have been prepared for most aspects of the typicalmacroeconomics ourse.In this section,we describe hree exercises.

KeynesianCrossThe simplest and perhaps most representative xercise describes theKeynesian ross and multiplier.Figure1 shows the essentialelements.Atthe top left of the spreadsheet re the six equationsof the system:a con-sumptionfunction, a tax function,an output response,and the three na-tional income identities.To the rightare the threeparametershat can bemodified: he marginalpropensityo consume,the tax rate,and the outputresponserate. Below the equationsare the autonomousvariables or con-sumption,investment,government pending,and government ransfers-the current aluesof which(Cbar,I, G, andTRbar) an be modified.Inthisexample,G has been increased rom 80 to 100.The solution and the multipliervalues are shown next. The readercanverifythat Y1 is above YOby just 2.3*(100 80) = 46. If, insteadof an in-crease n G, there had been a reduction n the taxrate,the threemultiplierswould havechanged.The last partof the spreadsheethows the multiplierprocessas an iterativesolution. Output (Y) responds o the aggregatede-mand(AD) shock with a lag, as the two increaseandconverge o the newequilibrium.The graphof this process,not includedhere,depictshow ag-gregatedemand eadsoutputas they converge o a newequilibrium.The studentcanpointto anycell to seethe formula hatgeneratedts con-tents. .Forexample, n the firstiteration, he consumption ell is F22(sixthcolumn,22d row), and the disposablencome(Yd)cell is E22. PointingtoF22 displays in the upper left window the formula (+ $CBAR+ $MPC*E22)that corresponds to the consumption equation at the top of the spreadsheet.Summer1989 271


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FIGURE1KeynesianCrossandMultiplier preadsheet

A B C D E F G1 Copyright 19872 E. Kroch Keynesiancross3 Government spending increase45 Equations Parametersettings6 Aggregate demand Ad = C + I + G current base7 Consumption C = Cbar + mpc*Yd mpc 0.80 0.808 Disposable income Yd = Y - T9 Net taxes T = - TRbar + tax*Y tax 0.30 0.3010 Output responses Y = q*Ad(- 1)+ (1 - q)*Ad11 Unintended inv Iu = Y - Ad q 0.80 0.801213 Autonomous variables:14 Cbar I G TRbar Abar15 current: 40 65 100 50 24516 base: 40 65 80 50 22517 Multipliers: Solution:18 G mult TR mult tx mult YO 51119 2.3 1.8 -1.8 Y1 5572021 Time Y AD T Yd C Iu22 1 515.9 533.9 104.8 411.1 368.9 -18.023 2 536.2 545.2 110.8 425.3 380.2 -9.124 3 546.4 551.0 113.9 432.5 386.0 -4.625 4 551.6 553.9 115.5 436.1 388.9 -2.326 5 554.2 555.3 116.2 437.9 390.3 -1.227 6 555.5 556.1 116.6 438.8 391.1 -0.628 7 556.1 556.4 116.8 439.3 391.4 -0.329 8 556.5 556.6 116.9 439.5 391.6 -0.130 9 556.6 556.7 117.0 439.7 391.7 -0.131 10 556.7 556.8 117.0 439.7 391.8 -0.032 11 556.8 556.8 117.0 439.7 391.8 -0.033 12 556.8 556.8 117.0 439.8 391.8 -0.034 13 556.8 556.8 117.0 439.8 391.8 -0.035 14 556.8 556.8 117.0 439.8 391.8 -0.036 15 556.8 556.8 117.0 439.8 391.8 -0.037 final 556.8 556.8 117.0 439.8 391.8 0.0383940

Otherformulascorrespond o cellsin the sameway. This featuremakes tpossiblefor the studentto see exactlyhow the modelholdstogether.Figures2 and 3 depictthe two standardgeometric epresentationsf thecomparative-statichift from the initial equilibriumGNP to the newequilibrium fter the shock. (Theycan be selectedfrom the Alt-G .menumentioned in the last section.) Figure 2 is the Keynesiancross, whereequilibriumGNP is given by the intersectionof the AD curve with the45-degreeine. In thisexample, he AD curvehas shiftedup by 20. Figure3272 JOURNAL OF ECONOMICEDUCATION


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illustrates the equilibrium as the intersection of the horizontal I+ G curvewith the rising S + T curve. Again, in this case, I + G has shifted up by 20.This Keynesian cross spreadsheet can easily be extended to introducemore complexity or to focus on other aspects of the economy. Greatercom-plexity could be introduced into the consumption function to illustrate theeffects of Friedman's permanent income theory or Duesenberry's relativeincome hypothesis. A foreign sector with endogenous importscould be addedto elucidate the foreign-trade multiplier.IS-LM

IS-LM extends the equation system to include equilibrium in both theproduct market and the money market, using the standard IS and LM curverepresentation. The spreadsheet is organized in the same way as the simple

FIGURE 2Keynesian Cross

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540-520 -500 -480 -460 -440 -420 -400I I I II 1 I I400 440 480 520 560 600 640 680

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FIGURE3Saving-Investmentross

230220 -210 -200 -190 -180 -+170 -160150 -140130120110-100 1400 440 480 520 560 600 640 680

GNPM 1+G_1 S+T_I O +G_01 S+T_0

Keynesiansystemof Figure 1, but with three additionalequations.Thenumberof parametershas increased o eight, and the money supplyhasbeen addedto the autonomousvariables.Investment s endogenous,andthe interestrate is determinedointly with GNP. Hence, I and r are nowpresentedn the iterative olutionsectionof the spreadsheet.Thesimulation f a two-prongedpolicy,such as a monetary ccommoda-tion of a fiscalexpansion, eachesnot only comparativetatics,butcompar-ative dynamicsas well. The standardstaticgraphshows the IS and LMcurvesshifting o the rightas theyestablisha newequilibrium.n addition,the dynamicpath for any endogenousvariable an be viewed.An interest-ingfeatureof this caseis that the pathfor the interest ate s not monotonic:r falls precipitously n the first period before graduallyarrivingat itsequilibriumalue.2Thisexample s an ideal introductiono timeprofilesofpolicyresponses n general,and to impactmultipliersn particular.As in the previous preadsheet,he benchmark ssumptions ndparame-ter settingscanbe altered o get differentsolutions o a givenpolicy option.These experimentsclarifythe role of key parametersand illustrate hat274 JOURNAL OF ECONOMIC EDUCATION


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when economistsdisagreeon the valuesof these parameters, hey will dis-agreeon the impactof economicpolicy.The easiestwayto see the effectofchangedassumptionss in the graphicpresentations,whichalways how thebenchmark olution lines as well as the modifications esulting rom alter-ing parameterettingsor levelsof exogenousvariables.After the instructor's initial explanationand demonstrationof thespreadsheet,he studentsare invited o experiment.Theyareassignedques-tionsthatrequiremanipulation f the spreadsheet,uch as:Whatis the im-pact of a changein the money supply?How does the impactdifferas theMPC is altered?Canyou attain a given policyobjective?PhillipsCurve

A supplyside can easilybe addedto the abovedemand-sidemodels.Aspreadsheetalled ASAD doesjust that. It parallelshe organization f thelast two spreadsheetsand presents aggregate-demand/aggregate-supplydiagramsto illustratehow prices can be endogenizedin an economicsystem.The core of the supplyside is based on a standardPhillipscurve,which can be manipulated n a separatespreadsheetbefore the studenttackles he complexityof an integratedASAD system.The Phillipscurve spreadsheet s in many ways the simplestof thosediscussedhere.It hasonlytwo equations:a wageequationbasedon the sen-sitivityof labor supplyto unemployment,and a pricemark-upequation.All variables are in rates of change, including productivitygrowth, asdenoted by a dot (.) followingthe symbol.The dominantfeatureof thesystem s that the curve s augmentedby inflationary xpectations.These ex-pectationsare built up in an iterativeprocessthat is presentedbelow thesimplePhillipscurve on the spreadsheet.These tableentriesare,of course,inflationratescorrespondingo various evelsof unemployment.In the example llustrated n Figures4 and 5, when the unemploymentrate s below the "natural" ate of 5 percent, nflationheatsup. Conversely,whenunemployments above the naturalrate, inflationfalls(andwe evenhavedeflation).In effect, the Phillipscurverotatesclockwise owarda ver-ticalposition.The speedof this rotationdependson the parameterettingschosenby the student. The figuresshow how increasinghe valuesof theseparametersncreases he speed in Figure5 relative o Figure4. A macroaltersthese key parameters nd generatesa set of thesegraphs o illustratethe properties f thismodel.

A COMPLETE REAL-TIME MODELThe MODELspreadsheet,Figure6, is a deliberately ifferentapproach.In place of showing the steps of the solution processand constructingequilibriumcurves, MODEL uses the spreadsheet's apacityto solve adynamic simultaneoussystem. It assemblesthe features of our earlierspreadsheets (and others not discussed here) into a complete model thatdemonstrates how the economy would evolve in real time. It is nevertheless

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FIGURE 4Phillips CurvesLag Adjustment Effects

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synthetic, because the equation parametersare assumed rather thaneconometricallystimated.The dynamicfeature makes this model fundamentallydifferent fromthose of the previoussection. In place of the comparative tatics of theusualtextbookexercises,MODEL ntroducesa simpledynamic elationshipin the capitalstock identity:this year'scapital s equalto the depreciatedvalue of last year'scapital plus investment the capitalstock equationinFigure6). Solving his simple,though clearlynonlinear, ystempresents it-tle difficulty.The solution has been set to twenty iterations whichtakeabout four seconds on an AT-modelcomputer),althoughten are oftenenoughto reachequilibrium.Convergence s a percentage f GNP is givenat thebottom of the spreadsheetn Figure6. If thesevaluesare too high,theF9 Calckey can be pressed o get anotherseriesof iterations.The spreadsheet s organizedalong the lines of the first two exercisesabove,withequationsat the upper eft andcorrespondingarameterst theupperright.Belowthem arethe two principalpolicyvariables, overnmentspendingand the money supply.Note that they must be specifiedfor allsevenyearsof the simulation. Thedefault s thatthe first-year,1991,valuewillbe used in the subsequent ears.)Below the exogenousvariables re thesimulation esultsfor the seven-yearorecast.The equilibrium ath for the276 JOURNAL OF ECONOMIC EDUCATION


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FIGURE5Phillips CurvesLag Adjustment Effects

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benchmarkmodel, or base solution, is followedby a policystatementandthe effects of the policyshock, whicharethe differencesbetween he policysimulationand the benchmark un. As in previousspreadsheets, ach cellshows the formulaused to generate he solution. The formulasmatch theequationlistingat the top left, exceptas normalizationwas needed to getuniqueendogenousvariables n the left-handside.In this example, two versions of the model are presentedon a singlespreadsheet.Thecrucialdifferencebetween hemis shown n the laborsup-ply equations. In the classicalversion, labor supplydependson the realwagerate, whereas n the Keynesian ersion,laborsupplydependson thenominalwage rate. Presentationof the two systemsside by side demon-strates he essentialdifferencesbetweenKeynesian nd classicalmodels. Inthe policyexercisepresented n Figure6, government xpansionstimulatesGNP in the Keynesian ase but crowdsout investmentn the classical ase.In both cases, growthis slowed as the crowdingout of private nvestmentreduces he rateof capitalaccumulation, o evenin the Keynesian ase after1994,GNP is below the benchmarkevel. Much of the response s in theform of higher prices.3These resultsand comparisonsare broughtintosharpreliefby accompanying omputergraphsof the equilibrium athsofeach of the endogenousvariables f the system.Summer 1989 277


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Classroomuse of this modelrequires, irst,a carefulpresentation f thecontentof the modeland, second,illustrations f how changes n theexoge-nous variablesaffect the solution. Severalmacros automatethese proce-duresby setting up standardpolicy scenarios,such as the one mentionedabove, and by takingthe studentthrougha seriesof graphsdepicting heresults.As with the otherspreadsheets, ll resultsare shown relative o thebenchmark.Another macro allowsthe studentor the instructor o updatethe benchmark alueswiththe current olution.Then,subsequent olutionsarecomparedwiththis new benchmark.A completemodeloffers innumer-ableopportunitiesor testingthe behaviorof the economyandthe compre-hensionof the students.

CONCLUSIONIn this paper,we have considereda computerized pproach o teachingmacroeconomic heory. In our judgment, the ability to fully integratealgebraic, numerical, and graphical presentationswith the electronicspreadsheet ddsa significantdimension o classroompresentations s wellas to student exercises.Unfortunately,one considerable ifficultyremains.Althoughthe macroeconomic extbooksagreeon contentto a remarkableextent,theyare not standardizedwithrespect o notation.4We have triedtouse typical notation, but, ideally, the program'snotation and contentshould be coordinatedwith the primaryextbook of the course. The dayisapproachingwhen macroeconomic extbooks will contain accompanyingcomputerpresentations f theirequationsystems.

NOTES1. The best-known software for the IBM PC is Lotus 1-2-3, which can be networked forteaching laboratories and comes in an inexpensivestudent version suitablefor our programs.2. The reason is that the money marketclears instantaneously, whereas the product market ad-

justs over time. Such a feature could be modified easily, if desired.3. To generate a more vivid contrast between the Keynesianand classicalsystems, just increasethe savings rate: the classical economy grows faster, but the Keynesianeconomy is plungedinto recession.4. Our model uses notation similar to that of Dornbusch and Fischer (1984). The notation inother current books, such as Branson and Litvak (1981) and Hall and Taylor (1986), issomewhat different, but the conceptual content is much the same. The instructorcan alwaysadapt these simulations to personal notational conventions.

REFERENCESBranson, W. H., and J. M. Litvak. 1981. Macroeconomics. 2d ed. New York: Harper andRow.Dornbusch R., and S. Fischer. 1984. Macroeconomics. 3d ed. New York: McGraw-Hill.Hall, R. E., and J. B. Taylor. 1986. Macroeconomics. New York: W. W. Norton.

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The Computer in the Teaching of Macroeconomics

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