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SABANCI UNIVERSITY ECON 202 – MACROECONOMICS Course Syllabus Semester / Section: Summer 2010 / A Instructor: Mehmet Tütüncü Office / Phone / e-mail: FASS 2025 / 9273 / mtutuncu@sabanciuniv.edu Teaching Assistants: (to be announced) Office Hours: Tuesdays and Thursdays 13:40-15:30, or by appointment Lectures: Tuesdays 08:40-11:30 at FASS 1103, Thursdays 08:40-11:30 at FENS G 035 Recitation: Group 1 – Fridays 12:40-14:30 at FENS L 045 Group 2 – Fridays 12:40-14:30 at FENS L 045 Contents/Description: This is a fundamental course in the curriculum of any economics program. It provides a survey of the main theories which try to explain what happens in an economy in general. In other words, macroeconomics takes an overall view of the economy. This means that, instead of looking at the production of hazelnuts, or of cars, or of health services, etc, we look at the total production of all goods and services; instead of looking at the price of hazelnuts, or of cars, or of health services, etc, we look at the average level of prices of all goods and services; instead of looking at the wages and salaries earned by farm workers, or by factory workers, or by doctors, etc, we look at the wages earned by all workers and employees in general, etc. Even though, in a typical economy, there are millions of different kinds of goods and services produced, thousands of different types of labor hired, and many different types of financial assets held, macroeconomics sees the economy as a system that consists of only four, instead of millions of, markets. These four markets are the so-called “goods”, “labor”, “money”, and “bond” markets. By studying the interactions between these four markets, we try to understand / explain how economic variables like the total production, the average level of prices, the unemployment rate, the wage rate, the interest rate, and the exchange rate are determined. Textbook: Andrew B. Abel and Ben S. Bernanke, Macroeconomics, Pearson Addison Wesley, 5th or 6th edition. Course web site: See the website for Econ202 in SUCourse, sections titled Problem Sets for Recitations and Sample Exams from Past Semesters and Additional Study Questions, both placed under Learning Modules. Evaluation: About 10 unannounced quizzes (10 %), one midterm exam (40 %), and one final exam (50 %). Attendance will not be graded but it is absolutely important to attend classes regularly because (a) lecture notes (which are currently under revision) will not be provided, (b) each quiz question will cover the material introduced in the lecture on the same day, (c) the answers to problem sets solved in recitation hours as well to the questions solved in class will not be provided outside the classroom. Midterm Date: (to be announced) Important Notice: Students are expected to know Sabancı University regulations about cheating in examinations. Violations will imply an “F” in this course and a disciplinary action according to the rules. COURSE OUTLINE (for those who have the 5th edition of the textbook) The chapters and sections and the page numbers in the outline below refer to chapters, sections, and pages in the textbook. Pages Chapters and sections Chapter 1 - Introduction to macroeconomics 2-11 Section 1.1 - What macroeconomics is about Long-run economic growth, Business cycles, Unemployment, Inflation, The international economy, Macroeconomic policy, Aggregation 12-15 Section 1.2 - What macroeconomists do Macroeconomic forecasting, Macroeconomic analysis, Macroeconomic research 16-20 Section 1.3 - Why macroeconomists disagree Classicals versus Keynesians, A unified approach to macroeconomics Chapter 2 - The measurement and structure of the national economy 24-27 Section 2.1 - National income accounting: The measurement of production, income, and expenditure Why the three approaches are equivalent 28-37 Section 2.2 - Gross Domestic Product The product approach to measuring GDP (market value, newly produced goods and services, final goods and services, GNP versus GDP), the expenditure approach to measuring GDP (consumption, investment, government purchases of goods and services, net exports), the income approach to measuring GDP (compensation of employees, proprietors’ income, rental income of persons, corporate profits, net interest, indirect business taxes, depreciation, net factor payments, private sector and government sector income) 37-41, 44-45 Section 2.3 - Saving and Wealth Measures of aggregate saving (private saving, government saving, national saving), the uses of private saving, relating saving and wealth (national wealth) 45-50 Section 2.4 - Real GDP, price indexes, and inflation 51-53 Section 2.5 - Interest rates Real versus nominal interest rates (the expected real interest rate) Chapter 3 - Productivity, output, and employment (skip Section 3.1 - The production function) 72-79 Section 3.2 - The demand for labor The marginal product of labor and labor demand, a change in the wage, the marginal product of labor and the labor demand curve, factors that shift the labor demand curve, aggregate labor demand 79-85 Section 3.3 - The supply of labor The income-leisure trade-off, Real wages and labor supply (A pure substitution effect: a one-day rise in the real wage, A pure income effect: winning the lottery, The substitution effect and income effect together: a long-term increase in the real wage, Empirical evidence on real wages and labor supply), The labor supply curve (Factors that shift the labor supply curve), Aggregate labor supply 88-93 Section 3.4 - Labor market equilibrium Full employment output 94-99 Section 3.5 - Unemployment Measuring unemployment, Changes in employment status, How long are people unemployed, Why there always are unemployed people (Frictional umemployment, structural unemployment, the natural rate of unemployment) 99-101 Section 3.6 - Relating output and unemployment: Okun’s law Chapter 4 - Consumption, Saving, and Investment 111-125 Section 4.1 - Consumption and saving The consumption and saving decision of an individual, Effect of changes in current income, Effect of changes in expected future income, Effect of changes in wealth, Effect of changes in the real interest rate (Taxes and the real return to saving), Fiscal policy (Government purchases, Taxes) 127-138 Section 4.2 - Investment The desired capital stock (The user cost of capital, Determining the desired capital stock), Changes in the desired capital stock (Taxes and the desired capital stock), From the desired capital stock to investment (Lags and investment), Investment in inventories and housing 138-144 Section 4.3 - Goods market equilibrium The saving-investment diagram (Shifts of the saving curve, shifts of the investment curve) Chapter 5 - Saving and investment in the open economy 175-182 Section 5.1 - Balance of payments accounting The current account (Net exports of goods and services, Net income from abroad, Net unilateral transfers, Current account balance), The capital and financial account (The official settlements balance), The relationship between the current account and the capital and financial account, Net foreign assets and the balance of payments accounts 184-185 Section 5.2 - Goods market equilibrium in an open economy 185-190 Section 5. 3 - Saving and investment in a small open economy The effects of economic shocks in a small open economy (A temporary adverse supply shock, an increase in the expected future marginal product of capital) (skip Section 5.4 - Saving and investment in large open economies) 198-200 Section 5.5 - Fiscal policy and the current account The critical factor: the response of national saving, The government budget deficit and national saving (A deficit caused by increased government purchases, A deficit resulting from a tax cut) (skip Chapter 6 - Long-run economic growth) Chapter 7 - The asset market, money, and prices 245-252 Section 7.1 - What is money? Functions of money (Medium of exchange, store of value, unit of account), Measuring money: the monetary aggregates (M1, M2, M3, weighted monetary aggregates), The money supply 252-253 Section 7.2 - Portfolio allocation and the demand for assets Expected return, Risk, Liquidity, Asset demands 253-261 Section 7.3 - The Demand for money The price level, Real income, Interest rates, The money demand function, Other factors affecting money demand (Wealth, Risk, Liquidity of alternative assets, Payment technologies), Elasticities of money demand, Velocity and the quantity theory of money 263-266 Section 7.4 - Asset market equilibrium Asset market equilibrium: an aggregation assumption, The asset market equilibrium condition 266-270 Section 7.5 - Money growth and inflation The expected inflation rate and the nominal interest rate Chapter 8 - Business cycles 276-279 Section 8.1 - What is a business cycle? 279-287 ??? Section 8.2 - The american business cycle: the historical record ??? The pre-world war I period, The great depression and world war II, Post-world war II period, The long boom, Dating the peak of the 2001 recession, Have american business cycles become less severe? 287-297 Section 8.3 - Business cycle facts The cyclical behavior of economic variables: direction and timing, Production, Expenditure, Employment and unemployment, Average labor productivity and the real wage, Money growth and inflation, Financial variables, International aspects of the business cycle 297-304 Section 8.4 - Business cycle analysis: a preview Aggregate demand and aggregate supply: a brief introduction (Aggregate demand shocks, Aggregate supply shocks) Chapter 9 - The IS-LM / AD-AS model: A general framework for macroeconomic analysis 308-310 Section 9.1 - The FE line: Equilibrium in the labor market Factors that shift the FE line 310-315 Section 9.2 - The IS curve: Equilibrium in the goods market Factors that shift the IS line 315-322 Section 9.3 - The LM curve: Equilibrium in the asset market The interest rate and the price of a nonmonetary asset, The equality of money demanded and money supplied, Factors that shift the LM line (Changes in the real money supply, Changes in the real money demand) 322-326 Section 9.4 - General equilibrium in the complete IS-LM model Applying the IS-LM framework: a temporary adverse supply shock 326-333 Section 9.5 - Price adjustment and the attainment of general equilibrium The effects of a monetary expansion (The adjustment of the price level, Trend money growth and inflation), Classical versus Keynesian versions of the IS- LM model (Price adjustment and the self-correcting economy, Monetary neutrality) 333-340 Section 9.6 - Aggregate demand and aggregate supply The aggregate demand curve (Factors that shift the AD curve), The aggregate supply curve (Factors that shift the aggregate supply curve), Equilibrium in the AD-AS model, Monetary neutrality in the AD-AS model Chapter 10 - Classical Business Cycle analysis: Market-clearing macroeconomics 355-358 Section 10.1 - Business cycles in the classical model The real business cycle theory, The recessionary impact of an adverse productivity shock, Real business cycle theory and the business cycle facts, 362 Are productivity shocks the only source of recessions? 366-372 Fiscal policy shocks in the classical model (Should fiscal policy be used to dampen the cycle?), Unemployment in the classical model 373-376 Section 10.2 - Money in the classical model Monetary policy and the economy, Monetary nonneutrality and reverse causation, The nonneutrality of money: additional evidence 376-384 Section 10.3 - The misperceptions theory and the nonneutrality of money Monetary policy and the misperceptions theory (Unanticipated changes in the money supply, anticipated changes in the money supply), Rational expectations and the role of monetary policy, Propagating the effects of unanticipated changes in the money supply Chapter 11 - Keynesianism: The macroeconomics of wage and price rigidity 393-400 Section 11.1 - Real-wage rigidity 400-406 Section 11.2 - Price stickiness 407-414 Section 11.3 - Monetary and Fiscal policy in the Keynesian model Monetary policy (Monetary policy in the Keynesian IS-LM model, Monetary policy in the Keynesian AD-AS model), Fiscal policy (The effect of increased government purchases, The effect of lower taxes) 414-422 Section 11.4 - The Keynesian theory of business cycles and macroeconomic stabilization Keynesian business cycle theory (Procyclical labor productivity and labor hoarding), Macroeconomic stabilization (Difficulties of macroeconomic stabilization), Supply shocks in the Keynesian model Chapter 12 - Unemployment and Inflation 434-447 Section 12.1 - Unemployment and Inflation: Is there a trade-off? The expectations-augmented Phillips curve, The shifting Phillips curve (Changes in the expected inflation, changes in the natural rate of unemployment, supply shocks and the Phillips curve, the shifting Phillips curve in practice), Macroeconomic policy and the Phillips curve, The long-run Phillips curve Section 12.2 - The Problem of Unemployment 449-452 The long-term behavior of the unemployment rate (The changing natural rate) 454-455 Policies to reduce the natural rate of unemployment Section 12.3 - The problem of inflation 459-462 Fighting inflation: the role of inflationary expectations (Rapid versus gradual disinflation, Wage and price controls, Credibility and reputation) Chapter 13 - Exchange rates, Business Cycles, and Macroeconomic policy in the open economy 468-476 Section 13.1 - Exchange rates Nominal exchange rates, Real exchange rates, Appreciation and depreciation, Purchasing power parity, The real exchange rate and net exports (The J curve) 478-483 Section 13.2 - How exchange rates are determined: A supply-and-demand analysis Macroeconomic determinants of the exchange rate and net export demand (Effects of changes in output (income), Effects of changes in real interest rates) 483-490 Section 13.3 - The IS-LM model for an open economy The open-economy IS curve, Factors that shift the open-economy IS curve (Effect of an increase in government purchases on the open-economy IS curve, Effect of an increase in net exports on the open-economy IS curve), The international transmission of business cycles 490-496 Section 13.4 - Macroeconomic Policy in an open economy with flexible exchange rates A fiscal expansion, A monetary contraction (Short-run effects on the domestic and foreign economies, Long-run effects on the domestic and foreign economies) 496-511 ??? Section 13.5 - Fixed exchange rates ??? Fixing the exchange rate, Monetary policy and the fixed exchange rate, Fixed versus flexible exchange rates, Currency unions COURSE OUTLINE (for those who have the 6th edition of the textbook) The chapters and sections and the page numbers in the outline below refer to chapters, sections, and pages in the textbook. Pages Chapters and sections Chapter 1 - Introduction to macroeconomics 2-11 Section 1.1 - What macroeconomics is about Long-run economic growth, Business cycles, Unemployment, Inflation, The international economy, Macroeconomic policy, Aggregation 11-15 Section 1.2 - What macroeconomists do Macroeconomic forecasting, Macroeconomic analysis, Macroeconomic research 15-19 Section 1.3 - Why macroeconomists disagree Classicals versus Keynesians, A unified approach to macroeconomics Chapter 2 - The measurement and structure of the national economy 23-26 Section 2.1 - National income accounting: The measurement of production, income, and expenditure Why the three approaches are equivalent 27-37 Section 2.2 - Gross Domestic Product The product approach to measuring GDP (market value, newly produced goods and services, final goods and services, GNP versus GDP), the expenditure approach to measuring GDP (consumption, investment, government purchases of goods and services, net exports), the income approach to measuring GDP (compensation of employees, proprietors’ income, rental income of persons, corporate profits, net interest, indirect business taxes, depreciation, net factor payments, private sector and government sector income) 37-40, 41-42 Section 2.3 - Saving and Wealth Measures of aggregate saving (private saving, government saving, national saving), the uses of private saving, relating saving and wealth (national wealth) 46-48, 50-52 Section 2.4 - Real GDP, price indexes, and inflation 52-54 Section 2.5 - Interest rates Real versus nominal interest rates (the expected real interest rate) Chapter 3 - Productivity, output, and employment (skip Section 3.1 - The production function) 72-79 Section 3.2 - The demand for labor The marginal product of labor and labor demand, a change in the wage, the marginal product of labor and the labor demand curve, factors that shift the labor demand curve, aggregate labor demand 79-85 Section 3.3 - The supply of labor The income-leisure trade-off, Real wages and labor supply (A pure substitution effect: a one-day rise in the real wage, A pure income effect: winning the lottery, The substitution effect and income effect together: a long-term increase in the real wage, Empirical evidence on real wages and labor supply), The labor supply curve (Factors that shift the labor supply curve), Aggregate labor supply 87-93 Section 3.4 - Labor market equilibrium Full employment output 93-98 Section 3.5 - Unemployment Measuring unemployment, Changes in employment status, How long are people unemployed, Why there always are unemployed people (Frictional umemployment, structural unemployment, the natural rate of unemployment) 99-100 Section 3.6 - Relating output and unemployment: Okun’s law Chapter 4 - Consumption, Saving, and Investment 110-125 Section 4.1 - Consumption and saving The consumption and saving decision of an individual, Effect of changes in current income, Effect of changes in expected future income, Effect of changes in wealth, Effect of changes in the real interest rate (Taxes and the real return to saving), Fiscal policy (Government purchases, Taxes) 127-138 Section 4.2 - Investment The desired capital stock (The user cost of capital, Determining the desired capital stock), Changes in the desired capital stock (Taxes and the desired capital stock), From the desired capital stock to investment (Lags and investment), Investment in inventories and housing 139-144 Section 4.3 - Goods market equilibrium The saving-investment diagram (Shifts of the saving curve, shifts of the investment curve) Chapter 5 - Saving and investment in the open economy 174-182 Section 5.1 - Balance of payments accounting The current account (Net exports of goods and services, Net income from abroad, Net unilateral transfers, Current account balance), The capital and financial account (The official settlements balance), The relationship between the current account and the capital and financial account, Net foreign assets and the balance of payments accounts 184-185 Section 5.2 - Goods market equilibrium in an open economy 185-190 Section 5.3 - Saving and investment in a small open economy The effects of economic shocks in a small open economy (A temporary adverse supply shock, an increase in the expected future marginal product of capital) (skip Section 5.4 - Saving and investment in large open economies) 199-202 Section 5.5 - Fiscal policy and the current account The critical factor: the response of national saving, The government budget deficit and national saving (A deficit caused by increased government purchases, A deficit resulting from a tax cut) (skip Chapter 6 - Long-run economic growth) Chapter 7 - The asset market, money, and prices 247-253 Section 7.1 - What is money? Functions of money (Medium of exchange, store of value, unit of account), Measuring money: the monetary aggregates (M1, M2, M3, weighted monetary aggregates), The money supply 253-256 Section 7.2 - Portfolio allocation and the demand for assets Expected return, Risk, Liquidity, Asset demands 256-264 Section 7.3 - The Demand for money The price level, Real income, Interest rates, The money demand function, Other factors affecting money demand (Wealth, Risk, Liquidity of alternative assets, Payment technologies), Elasticities of money demand, Velocity and the quantity theory of money 266-269 Section 7.4 - Asset market equilibrium Asset market equilibrium: an aggregation assumption, The asset market equilibrium condition 269-273 Section 7.5 - Money growth and inflation The expected inflation rate and the nominal interest rate Chapter 8 - Business cycles 282-285 Section 8.1 - What is a business cycle? 279-290 ??? Section 8.2 - The american business cycle: the historical record ??? The pre-world war I period, The great depression and world war II, Post-world war II period, The long boom, Dating the peak of the 2001 recession, Have american business cycles become less severe? 290-300 Section 8.3 - Business cycle facts The cyclical behavior of economic variables: direction and timing, Production, Expenditure, Employment and unemployment, Average labor productivity and the real wage, Money growth and inflation, Financial variables, International aspects of the business cycle 301-306 Section 8.4 - Business cycle analysis: a preview Aggregate demand and aggregate supply: a brief introduction (Aggregate demand shocks, Aggregate supply shocks) Chapter 9 - The IS-LM / AD-AS model: A general framework for macroeconomic analysis 310-312 Section 9.1 - The FE line: Equilibrium in the labor market Factors that shift the FE line 313-317 Section 9.2 - The IS curve: Equilibrium in the goods market Factors that shift the IS line 317-324 Section 9.3 - The LM curve: Equilibrium in the asset market The interest rate and the price of a nonmonetary asset, The equality of money demanded and money supplied, Factors that shift the LM line (Changes in the real money supply, Changes in the real money demand) 325-328 Section 9.4 - General equilibrium in the complete IS-LM model Applying the IS-LM framework: a temporary adverse supply shock 330-336 Section 9.5 - Price adjustment and the attainment of general equilibrium The effects of a monetary expansion (The adjustment of the price level, Trend money growth and inflation), Classical versus Keynesian versions of the IS- LM model (Price adjustment and the self-correcting economy, Monetary neutrality) 336-343 Section 9.6 - Aggregate demand and aggregate supply The aggregate demand curve (Factors that shift the AD curve), The aggregate supply curve (Factors that shift the aggregate supply curve), Equilibrium in the AD-AS model, Monetary neutrality in the AD-AS model Chapter 10 - Classical Business Cycle analysis: Market-clearing macroeconomics 360-364 Section 10.1 - Business cycles in the classical model The real business cycle theory, The recessionary impact of an adverse productivity shock, Real business cycle theory and the business cycle facts, 367 Are productivity shocks the only source of recessions? 371-376 Fiscal policy shocks in the classical model (Should fiscal policy be used to dampen the cycle?), Unemployment in the classical model 378-380 Section 10.2 - Money in the classical model Monetary policy and the economy, Monetary nonneutrality and reverse causation, The nonneutrality of money: additional evidence 380-388 Section 10.3 - The misperceptions theory and the nonneutrality of money Monetary policy and the misperceptions theory (Unanticipated changes in the money supply, anticipated changes in the money supply), Rational expectations and the role of monetary policy, Propagating the effects of unanticipated changes in the money supply Chapter 11 - Keynesianism: The macroeconomics of wage and price rigidity 398-405 Section 11.1 - Real-wage rigidity 406-411 Section 11.2 - Price stickiness 412-419 Section 11.3 - Monetary and Fiscal policy in the Keynesian model Monetary policy (Monetary policy in the Keynesian IS-LM model, Monetary policy in the Keynesian AD-AS model), Fiscal policy (The effect of increased government purchases, The effect of lower taxes) 419-430 Section 11.4 - The Keynesian theory of business cycles and macroeconomic stabilization Keynesian business cycle theory (Procyclical labor productivity and labor hoarding), Macroeconomic stabilization (Difficulties of macroeconomic stabilization), Supply shocks in the Keynesian model Chapter 12 - Unemployment and Inflation 444-457 Section 12.1 - Unemployment and Inflation: Is there a trade-off? The expectations-augmented Phillips curve, The shifting Phillips curve (Changes in the expected inflation, changes in the natural rate of unemployment, supply shocks and the Phillips curve, the shifting Phillips curve in practice), Macroeconomic policy and the Phillips curve, The long-run Phillips curve Section 12.2 - The Problem of Unemployment 459-461 The long-term behavior of the unemployment rate (The changing natural rate) Section 12.3 - The problem of inflation 466-469 Fighting inflation: the role of inflationary expectations (Rapid versus gradual disinflation, Wage and price controls, Credibility and reputation) Chapter 13 - Exchange rates, Business Cycles, and Macroeconomic policy in the open economy 476-485 Section 13.1 - Exchange rates Nominal exchange rates, Real exchange rates, Appreciation and depreciation, Purchasing power parity, The real exchange rate and net exports (The J curve) 487-492 Section 13.2 - How exchange rates are determined: A supply-and-demand analysis Macroeconomic determinants of the exchange rate and net export demand (Effects of changes in output (income), Effects of changes in real interest rates) 492-499 Section 13.3 - The IS-LM model for an open economy The open-economy IS curve, Factors that shift the open-economy IS curve (Effect of an increase in government purchases on the open-economy IS curve, Effect of an increase in net exports on the open-economy IS curve), The international transmission of business cycles 499-504 Section 13.4 - Macroeconomic Policy in an open economy with flexible exchange rates A fiscal expansion, A monetary contraction (Short-run effects on the domestic and foreign economies, Long-run effects on the domestic and foreign economies) 504-512 ??? Section 13.5 - Fixed exchange rates ??? Fixing the exchange rate, Monetary policy and the fixed exchange rate, Fixed versus flexible exchange rates, Currency unions