PRELIMS MACROECONOMICS

Transcription

1 PRELIMS MACROECONOMICS St Hilda s College Trinity 2006 Introduction Welcome to Trinity Macroeconomics! In addition to last term s two tutes, we will be having four macroeconomics sessions in weeks 2 to 6 this term. We will have an additional wrap-up/revision session thereafter. Before you know it, you ll be on holiday. Last term, we discussed the goods market (Keynesian Cross) and introduced the interactions between the money and money markets (IS-LM). This term, we do IS-LM in more detail before introducing prices. We derive the aggregate demand and aggregate supply curves in more detail than last term before rounding off with an introduction to open economy issues. Note we will be in smaller groups than last term, so you won t be able to hide if you haven t done the work. I expect you all to participate fully in the discussion. Tutorial times (all on a Friday): Safiyah, Anita, Ivy: 10:30-11:30 Dasha, Lydia, Elsa: 11:30-12:30 Anasuya, Katie, Assyl: 1:30-2:30 Hee-Jae, Young-Jae, Hester: 2:30-3:30 Nadja, Katharina: 4:00-5:00 Work requirements: References: You will encounter four different types of questions. 1. Make notes on the following questions. They need not be completed before tutorials, although this will often be an efficient way to work. 2. Short (true/false) questions. Please write a brief statement/summary as to why you answered the way you did for your own sake in the tutorial and for revision. 3. Discussion questions. These are open ended and you should feel free to put in as much detail as you want. 4. Essay questions. Unlike (3), you must make these exam essay length to practise your essay writing. Except for (1), all questions are compulsory. Please hand in your work to my pidge by 2pm each Thursday. Don t be late. 1

2 Your lecture slides are a good guide to the material, although we will be covering the work in a slightly different order. (Note we will not cover Growth at all.) The preferred textbooks are: Mankiw, G (2003); Macroeconomics 5 th edition; Worth Publishers, New York Burda, M & C Wyplosz (2002); Macroeconomics, a European text 3 rd edition; Oxford University Press Nattrass, N, J Wakeford & S Muradzikwa; Macroeconomics: Theory and Policy in South Africa 3 rd revised edition; David Philip (photocopies supplied) Given the sequencing of tutorials, notably leaving the open economy to the very end, Mankiw is preferable, but Burda & Wyplosz do have some other advantages. Nattrass et. al. explains the concepts very well, but is not as comprehensive. Contact details: I will be very strict on tutorial hand-in times and quality. However, I know this term can be a pressure period, so please feel free to chat to me about any stress-inducing issues, macro-related or otherwise. You are welcome to me (alberto.behar@nuf.ox.ac.uk) or phone me at (2) or Good luck! Alberto 2

3 Week 2 / tutorial 3: More IS-LM and introducing Aggregate Demand Lectures 5, 11, 12; Mankiw: 9.2, 9.4, 10, 11, 4.2; BW: 10, 11 (though they include the open economy); the Nattrass et.al reference is also very useful 1) Essay: Using the Keynesian (fixed price) IS-LM model, show the effect on national income and the interest rate of: [questions of this type turn up in the exam almost every year] a) an increase in money demand b) an increase in profits c) a fall in the marginal propensity to save d) an increase in government expenditure financed by an increase in the money supply (in detail) e) an increase in the volatility of stock market returns (in detail) 2) Briefly discuss how the answers to 1d) and 1e) differ in the neoclassical version of IS-LM, which allows prices to move. 3) Essay: The Aggregate Demand Curve is, as the name suggests, merely the aggregation of market demand curves. Derive the AD curve, explain its slope, and critically evaluate the statement. 5) Write additional notes on the following: Multipliers and the slope of the IS curve Advantages and disadvantages of monetary policy relative to fiscal policy Crowding out Liquidity trap 3

4 Week 3 / tutorial 4: Aggregate Supply Lectures 6 & 7; Mankiw: 6, 9.3, 13.1; BW: 4, 12 (although they combine Aggregate Supply with the Philips Curve) 1) Why might the aggregate supply curve have a different slope in the short run and in the long run? [2000 words] 2) Full employment is hindered by institutional interference in the labour market. Discuss [up to 800 words]. 3) Write additional notes on the following: Details of the labour and product market features in preparation for your essays above, including: o Labour market equilibrium o Product market rigidities o Labour market rigidities o Surprise supply functions Types of unemployment 4

5 Week 4 / tutorial 5: AS and AD Lectures 5, 8, 15; Mankiw: 9.4, 13.2, 14, ; BW: 12.2, 13 (especially 13.4); Nattrass et. al 1) Consider the diagram below: P LRAS SRAS F E B D A C G AD1 AD3 AD2 Y The economy is initially at A, but a negative demand shock initially moves the economy to B. Assume this economy has sticky wages and that there is no policy intervention. a) At B (true or false): i. the goods market is in equilibrium ii. the money market is in equilibrium iii. the labour market is in equilibrium iv. in the short run, prices fall because SRAS>AD v. in the short run, prices fall because LRAS>AD vi. in the short run, prices fall from B to C b) If the economy is at D (true or false): i. the labour market is in equilibrium ii. prices fall to C in the long run, but not the short run iii. in the long run, nominal wages fall, labour demanded rises and the SRAS shifts right iv. in the long run, nominal wages rise back to market-clearing levels, labour supply rises and the economy moves to A v. expansionary policy would move the economy to A by: a. increasing expenditure in the goods market 5

6 b. decreasing nominal wages c. increasing real wages d. decreasing real wages c) Again assume the economy is initially at A, but that the government is trying to expand output temporarily because it is election time. The economy no longer necessarily has sticky wages. i. Briefly explain how the economy might initially go to G (IS-LM would be helpful). ii. Explain why the economy might temporarily move to E. Why might this be a short run equilibrium? iii. Why does the economy eventually land up at F? How is it possible for it not to be on the SRAS and still be in equilibrium? Essays: 2) There is a limited role for stabilization policy if the short run is short Do you agree? 3) Discuss the following statement: While 40% of our people stand unemployed and hungry, Government panders to the inflation concerns of business. We call on Government to relax the inflation target and demonstrate its commitment to job creation instead paraphrasing of South African trade union leaders. 4) Write additional notes on the following: Costs of inflation Sacrifice ratio Naïve, adaptive and rational expectations Okun s Law 6

7 Week 5 / tutorial 6: Open Economy Macroeconomics Lectures 2, 4, 13, 14; Mankiw: 5, 12; BW: 2.4, 5.6, 7 (browse), , 13 1) Your lectures follow Mankiw and present the open economy IS-LM with the exchange rate on the vertical axis instead of the interest rate. While this has merits, Burda and Wyploz have the more conventional interest rate on the vertical axis. Please use the latter approach when answering the essay question, but let s try understand the two approaches with the following questions: i. Why is the small open economy IS curve drawn in exchange rate / output space downward sloping? ii. Why is the small open economy IS curve drawn in interest rate / output space downward sloping? iii. iv. What does it mean to be to the left/below the IS curves in each approach? Why is the LM curve vertical in exchange rate / output space? Does this depend on whether exchange rates are fixed or flexible? 2) Briefly answer the following questions: i. Why would a weaker dollar signify a higher gold price? ii. Why could one expect a fall in interest rates to lead to a depreciation of the domestic currency? iii. What is the relevance of the marginal propensity to import for the multiplier? iv. Ceteris Paribus, is the IS curve steeper or flatter in an open economy? v. Why can it be said that a country running a trade deficit is borrowing against future output? vi. What is the result of a balances of payments deficit if the exchange rate is (a) fixed and (b) floating? vii. In a small open economy, what are the effects on the interest rate of expansionary monetary policy? Essay: 3) Fiscal policy is more effective in an open economy than in a closed economy. Discuss using an IS-LM model. 4) Write additional notes on the following: Current account, capital account, balance of payments Fixed vs floating exchange rates Capital mobility Nominal vs real exchange rates 7