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Macroeconomics - MIT

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Macroeconomics

   Course Outline
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              Course Goals
   You, your teaching assistants and I will collaborate,
    seeking to make this the most thought-provoking
    and useful course you will take in economics or
    any social science.
   You will come to appreciate the science, the art, the
    politics of macroeconomics.
   You will laugh and groan at my occasional feeble
    humor.
Who Wants to be a     BRINNER
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  Millionaire?
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           Course Strategy

   Define the important concepts, magnitudes and
    questions in the real world
   Learn alternative theories suggesting answers and
    explaining behavior
   Evaluate data to test and then choose among
    theories
   Put you in position to have a serious opinion on
    important topics
           What is Macro &                                  BRINNER
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           What is Micro?
   Microeconomics examines the economic behavior of
    individuals--their responses to prices, income, tastes,
    opportunities.
   Macroeconomics examines the sum of microeconomic
    actions...
   ...and then adds the not-necessarily- economics-driven
    actions of government...
   ...to determine how the entire dynamic economic
    system operates.
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           What is Micro?
   Therefore Macro must be fully compatible with Micro in its
    explanations of behavior: to trust any Macro answer, you must
    be sure of each of its Micro roots. Usually, this requires common
    sense and introspection.
   The power and elegance of Macro is its ability to confront
    important questions, resolve paradoxes, and give needed
    information by creating an understanding of an integrated system
    of Micro behavior.
           What is Macro &                                            BRINNER
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           What is Micro?
   Why is there so much controversy about macro theory and
    policy and so little about micro?
     » Macro hits us in the pocketbook through its policy
        prescriptions so we may want certain answers to be true
        even if not.
     » Macro gets intimately involved in politically sensitive issues,
        and only religious arguments are more emotional than than
        political debates.
     » The media cares about these issues and wants to
        find/exaggerate controversy to sell itself.
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          What is Micro?
   Why is there so much controversy about macro theory and
    policy and so little about micro?
    » Most controversy does not really stem
      from an absence of testable data but
      from an absence of open-minded common
      sense. This as true in economics as in any
      science.
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        macroeconomics?

   Possible reasons:
     » It’s required for economics majors.
     » You’ve heard it’s as good a way as any to meet
       distribution requirements in the social sciences
       since this will at least involve mathematics.
     » Economist jokes are better than lawyer or
       computer nerd jokes.
     » You want to call in to talk-show radio hosts and
       sound important.
     Why do you care about                                   BRINNER
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      macroeconomics?

   Better reasons:
     » You know that, today or tomorrow, you will really
       need the information as:
        – an investor
        – a political animal
        – a manager or employee
        – an intellectually curious person.
     » You trust or hope that economics, and
       macroeconomics in particular, can give you this
       necessary information.
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The Issues of Macroeconomics

    For the investor:
      » Where are interest rates and profits headed?
      » Which sectors of the economy will do best and
        worst during the next quarter, year, and decade?
      » What will be the distinguishing differences across
        countries?
      » Can any of this be predicted with useful accuracy?
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The Issues of Macroeconomics
   For the political animal--the citizen and government policy
    maker:
    » What determines interest rates and what are
      appropriate monetary targets?
    » What are the appropriate taxes to raise or lower?
    » How will the level and composition of the budget
      affect family incomes?
    » How will international trade impact jobs, inflation,
      and credit?
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The Issues of Macroeconomics
   For the business manager:
    » What growth will my current markets
      provide if I maintain my share?
    » Can I raise my prices as rapidly as my
      costs?
    » What opportunities are emerging in the
      developing nations?
    » All of the questions posed by investors.
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The Issues of Macroeconomics
    For the intellectually curious person
     » Why do cycles exist/persist in all
       economies?
     » Are macro relationships stable?
     » Can nonlinear mathematics and chaos
       physics help to understand economics?
     » How can growth and environmental
       concerns be reconciled?
     The Central Model of a                               BRINNER
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        Macroeconomy

   A system of logical equations with behavioral
    (endogenous) and fixed (exogenous) variables
    producing a unique dynamic solution through time.
     » “N” equations for “N” behavioral variables.
     » As many exogenous variables as the modeler
       needs to adequately represent the external
       influences on behavior.
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         The Central Model

   The Key Behavioral Actors:
     » Domestic Households, buying consumer goods
       and housing
     » Domestic Businesses, buying machines or building
       factories & offices or stocking goods in inventory
     » Foreign buyers and suppliers
     » Some Government Agencies Whose Behavior is
       “Regular”
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         The Central Model

   The Key Exogenous Influences
     » Domestic Government tax, transfer and purchasing
       decisions (that change on an irregular basis)
     » Domestic Central Bank “control” of the money
       supply and interest rates
     » The International Counterparts to these
     » International Commodity Markets and Cartel
       Behavior
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              A First Model
   7 Endogenous/ Behavioral Variables (Including ID’s)
    and 7 Equations
     » Consumer Spending : C=f ( YD, i )
     » Business Spending : I = f ( d GNP, i)
     » Imports : M = f ( C, I , i )
     » Exports : X = f ( GNPW, i )
     » Total Output=Spending :
              GNP = C+I+X-M+G

     » After-tax Income : YD = GNP - T
     » Inflation : d P = f ( GNP )
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            A First Model

   4 Exogenous/Policy Variables
     » Government Purchases : G
     » Taxes (Net of Transfers) : T
     » Interest Rate : i
     » Rest-of-World Demand : GNPW
   Omitted Variables
     » Wealth
     » Supply Capacity
      A Pure “Forecaster’s “                               BRINNER
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        Use of the Model

   A “forecaster” hopes to be given or to be able to
    estimate the exogenous variable values in order to
    solve for the endogenous variables
   In a proper model, given values for each of the 4
    exogenous variables, there should be a unique
    solution for the 7 endogenous variables
      A Pure Policy-Maker’s                                             BRINNER
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         Use of the Model
   A policy-maker really wants to invert the model, to solve for the
    policy choices (exogenous variables) that will produce favored
    economy-wide (endogenous variable) outcomes
   Could an omniscient and omnipotent policy maker in control of all
    four policy variables hit targets for all seven behavioral
    variables? If he/she controlled only 2 policies, could he/she hit 2
    targets?

				
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