Lahore University of Management Sciences ECON 221: Intermediate Macroeconomics

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1 Lahore University of Management Sciences : Intermediate Macroeconomics YEAR: SEMESTER: INSTRUCTOR: CONTACT DETAILS: CLASS HOURS: Fall Antonio Marasco Academic Block, Room 258 in the new Economics Wing (former ACF Wing) antonio@lums.edu.pk Tuesday, Thursday: 09:00-10:50, Sayed Saigol Auditorium, Academic Block TUTORIALS: Mehrunissa Shahid Khan, Wednesday, , A-5, Academic Block; Friday, , , SBASSE OFFICE HOURS: Mondays, Wednesdays, TEACHING ASSISTANTS: Syed Aamir Ali Shah ( @lums.edu.pk), Mehrunissa Shahin Khan ( @lums.edu.pk) PRE-REQUISITE: Principles of Macroeconomics (Econ 121) Course Description This is a second year course in macroeconomics and extends the discussion covered in the introductory course Principles of Macroeconomics. The course will open with the study of business cycles, and will offer both the classical and Keynesian points of view. The relationship between inflation and unemployment will also be covered. The focus will then shift to a major extension: the role of expectations in the short as well as the medium run. Another important part of the course will cover exchange rates and macroeconomic policies in open economy, and the analysis of the monetary and fiscal policies. Then, after devoting some time to the study of two major components of aggregate demand (consumption and investment), a final module looks at economic growth in the long run. Course Objectives This course is an intermediate macroeconomics course. We will cover most topics by means of a graphical analysis, and integrate that with algebraic treatments whenever such integration is possible and useful. By the end of the course, students should be able to: 1

2 understand how to develop theoretical models that help to understand the workings of the macroeconomy; study by means of such models how key economic variables in the economy are determined; understand how different types of government policies work; distinguish between the classical and the Keynesian approaches to the study of macroeconomics; fine-tune the analysis to include the study of extensions such as the role of expectations and the open economy. Readings: Abel, Andrew B and Ben S. Bernanke (2004): Macroeconomics, 5 th edition, Addison Wesley, 2005 (AB) Oliver Blanchard (2006): Macroeconomics 4 th edition, Prentice Hall, 2006 (Bl) Gregory N. Mankiw: Macroeconomics, 5 th edition, Worth Publishers. (Ma) Other readings that may be added later would be made available either online or during lectures Link for reading pack: Some additional tutorial sessions may be organized for students to go through some practice questions. Dates for these will be announced during lectures. Students are also advised to visit the following websites for useful exercises: &uid=0&rau=0 ASSESSMENT DETAILS: Class participation 5% Quizzes (4 out of five, drop one): 20% Midterm Exam: 35% Final Exam: 40% Attendance policy: Students are expected to attend classes. Absenteeism is not conducive to fruitful learning and you will have to put in a lot more effort to be successful in this course if you skip a large number of classes. Attendance enters your assessment directly (5%), as well as through increasing the likelihood of a better grade in the remaining instruments. 2

3 In extreme cases, absenteeism may lead to an F grade. It is also highly recommended that you come to class on time (it is very disruptive when students enter class late). Leaving the lecture early is allowed only if previously agreed with the instructor. Course structure: The course is split into two parts and will have two exams. The midterm Exam will be held during week 8, and will include topics covered in week 1-7 of the semester. The final exam will be comprehensive and will be held during the examination week at the end of the semester. There will also be five quizzes, out of which you can drop one. The remaining four quizzes will be worth 5 marks each (total: 20). If a quiz or Exam beyond the one you can drop is missed due to illness or other valid reasons (such as wedding, death or serious illness of a close family member) a medical certificate or other valid document must be submitted. If no documentation is forthcoming the quiz or exam will receive a mark of zero. Make-ups may be provided, depending on circumstances, for midterm and final exams. There are no make-up quizzes. 3

4 Course Outline and Tentative Class Schedule Week Topics Reference Chapters 1,2 An Overview of Macroeconomics I IS-LM model Bl: Ch. 5,7 AB: Ch. 9 Ma:9,10,11 3 Classical Business Cycle Analysis: Market Clearing Macroeconomics AB: Ch. 10 Quiz 1 during this week 4 Keynesianism: The Macroeconomics of Wage and Price Rigidity 5 Unemployment and Inflation Quiz 2 during this week 6 The role of expectations in economic decisions 7 The role of expectations in economic decisions Quiz 3 during this week 8 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy Midterm Exam during this week 9 Eid-ul-Azha 10 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy (cont.) 11 Monetary Policy and the Federal Reserve System Quiz 4 during this week 12 Government Spending and Its Financing 13 Consumption AB: Ch. 11 Bl: Ch. 8,9 AB: Ch. 12 Ma: Ch.13 Bl: 14,15,16,17 Ma: 16,17 Bl: 14,15,16,17 Ma: 16,17 Bl.: Ch AB: Ch. 13 Ma: 12 Bl.: Ch AB: Ch. 13 Ma: 12 Bl: Ch. 25 AB: Ch. 14 Ma: 14 Bl: Ch. 26 AB: Ch. 15 Ma: Ch. 15 Ma: Ch. 16 Quiz 5 during this week 14 Investment Ma: Ch Economic growth in the long run Ma: Ch.7,8; Bl: Ch.10,11,12 16 Economic growth in the long run (cont.) Ma: Ch.7,8; Bl: Ch.10,11,12 17 Final Exam 4

5 Detailed Course Content Module 1 Core concepts (weeks 1-5) Review of IS-LM/AD-AS model, macroeconomic analysis in the Classical model, Keynesianism, price and wage rigidity. The relation between unemployment and inflation, the expectations-augmented Phillips curve. Reading list: AB: Ch. 9,10,11,12; Bl: Ch. 8,9; Ma: Ch. 9,10,11,13 Module 2 - The role of expectations in macroeconomic analysis (weeks 6-7) The role of expectations in macroeconomic analysis; basic concepts, the role of expectations in the determination of bond prices and stock prices; expectations, consumption and investment; changes in the IS-LM model due to expectations, role of expectations in policy and output determination. Reading list: Bl: Ch.14,15,16,17; Ma: Ch. 16,17 Module 3 - Open economy macroeconomics (weeks 8-10) Open economy macroeconomics. Exchange rates, basic concepts and determination; various exchange rate regimes. The IS-LM model in an open economy. Macroeconomic policy in an open economy with flexible exchange rates, and with fixed exchange rates. Reading list: AB: Ch.13; Bl: Ch.18-21; Ma: Ch. 12 Module 4 Policy (weeks 11-12) A closer look at monetary policy; principles of money supply determination, channels of monetary policy; the conduct of monetary policy: rules versus discretion. Government spending and its financing; government deficits and debt, Ricardian equivalence; Deficits and inflation. Reading list: AB: Ch.,14,15;Bl: Ch. 24,25,26; Ma: Ch. 14,15 Module 5 Consumption and investment (weeks 13-14) Consumption: Keynes and the consumption function; Fisher and intertemporal choice; Modigliani and the life-cycle hypothesis; Friedman and the permanent-income hypothesis. Investment: business fixed investment; residential investment; inventory investment. Reading list: Ma:Ch. 16,17 Module 6 Economic growth in the long run (weeks 15-16) Facts of growth; capital accumulation and growth; technological progress and growth. Reading list: Bl: Ch.10,11,12; Ma: Ch.7,8 5