Skip the By the Numbers box on page 23 and table 2.7 on page 24. These are state figures, which are not tested on the final exam.

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1 Macro Module 1 Readings (2009 text) Chapter 2: National Income Accounting (Module 1) Chapter 1 is an introduction to the textbook. It says what the book covers, and it is worth reading, but it has no equations or facts that are tested on final exam. The material in this chapter is repeated in more depth in later chapters, and the final exam problems refer to these later chapters. This chapter tells you what the course is about. The mathematics in this textbook is simple, since the book is geared to college students, not to actuarial candidates. The book derives the equations at length, and it repeats the equations several times. You can skim many of these derivations. Focus your study on which variables are dependent variables and which are independent variables. Read Chapter 2, pages Focus on Table 2.1 on page 13 and the calculation of chainweighted real GDP. The final exam may give other goods and prices, and real GDP calculated as in this exhibit. Read Real GDP as a Measure of Welfare on page 15. GDP does not always measure social welfare. The Communist countries of Eastern Europe and Asia destroyed their environments, but Western European countries enforced strict air and water codes. GDP alone does not measure full social welfare. Read pages Know the three ways to computing GDP, and know how to convert one measure (such as GDP) to another measure (such as GNP). Many final exam problems on this module come from this section. Skip table 2.6 on page 22. This table shows GDP by sector. The production of goods (agriculture, mining, construction, manufacturing, etc.) are about 45% of GDP; the rest is professional services (finance, health care, etc.). Skip the By the Numbers box on page 23 and table 2.7 on page 24. These are state figures, which are not tested on the final exam. Read Back to Reality on pages The final exam tests why the consumer price index was misleading (until it was changed). Know all the reasons listed in the textbook. Review Question A.1 on page 26; know the difference between a stock and a flow. The final exam may ask which items are stocks and which are flows.

2 Macro Module Readings (2009 text) Chapter 3: Introduction to Economic Growth (Modules 2 and 3) Read the introduction on pages Skim facts about economic growth on pages This is background to the theory. You are tested on the principles, not on the figures for each country. Read pages 31-34: World Poverty and Income Inequality. Income inequality has become a political byword. The textbook shows that slow economic growth, not income inequality, is keeping people poor. The final exam does not test the historical details in Long-term Growth in the United States and Other Rich Countries on page 34. Read Patterns of Economic Growth on pages to know what this chapter deals with. Read pages Focus on the production function and the Solow growth model, which is used in several modules and heavily tested on the final exam. Know the diminishing marginal product of labor and marginal product of capital. Understand the difference between the transition period and the steady state. Skip appendices A and B on page Read Parts A and C of the appendix: growth accounting and the Cobb-Douglas production function on pages The final exam does not test the Solow residual (Part B). Review Questions B.7, B.8, and B.9 on pages The final exam asks similar questions.

3 Macro Module 4 Readings (2009 text) Chapter 4: Working with the Solow Growth Model (Module 4) Read pages 51-59; skip Extending the Model on page 55. Know the effects of changes in the savings rate, technology level, labor, and population growth on steady state output and capital. Convergence: read pages Skim Extending the Model on page 62. Know the last two paragraphs in the box on page 62, and the effect of the declining population growth rate in European countries on their capital and real GDP per worker. Skim Facts about Convergence on pages The final exam does not test historical details, but the theory of conditional convergence was developed to explain the difference between Figure 4.9 on page 63 (upward sloping curve) and Figures 4.10 and 4.11 on pages 64 and 65 (downward sloping curves). Read Conditional Convergence in the Solow Growth Model from bottom of page 64 to page 68. Review Questions B.5.b and c and B.6.b and c on page 69, which deal with variations in the savings rate and population growth rate. The final exam may ask one of these scenarios, such as if population growth rate declines, what happens to real GDP per worker? Skip the appendix on the rate of convergence on pages The homework assignment for this module has a final (non-required) part that asks about the rate of convergence. This topic is not tested on the final exam and is not required for the homework assignment.

4 Macro Module 5 Readings (2009 text) Chapter 5: Conditional Convergence and Long-run Economic Growth (Module 5) Read pages 73-74, and know key equation 5.1 on page 73. The addition and subtraction signs (plus and minus signs) under the independent variables give the sign of the partial derivative: if the independent variable increases, does the dependent variable increase or decrease? Read Recent Research on the Determinants of Economic Growth on pages and Examples of Conditional Convergence on pages Much of the recent research has been done by Barro, which is why Bono wanted to speak to him (see the Back to Reality box). The final exam may ask which characteristics raise the steady state level. Read Long-run Economic Growth on pages Focus on the mathematics of steady state growth and the concepts of endogenous growth theory. Know key equations 5.9 and 5.10 on page 80. Skip Back to Reality on page 86, and skip Back to Reality on page 88. Many economists believe research and development have strong effects on long-term economic growth, and this topic is hotly debated for generic drugs, drug imports from Canada, AIDS medications in Asia and Africa, and various anti-trust cases, such as Microsoft in Europe. Economists say that intellectual property rights are essential for strong economic growth. The Back to Reality boxes are fascinating, but they are not tested on the final exam. Question B.3 on page 89 is reviewed in the homework assignment.

5 Macro Module Readings (2009 text) Chapter 6: Markets, Prices, Supply, and Demand (Modules 6 and 7) If you have taken the microeconomics on-line course (or any good college course), you know these concepts. You may skim this chapter. The discussion of supply and demand curves is the same as in the microeconomic on-line course. If you have not taken microeconomics, spend more time on the basic concepts of supply and demand, which are used throughout this textbook. Note the following items: Microeconomics courses deal with the goods market. Barro s textbook has four markets: goods (prices), labor (real wage rates), capital (rental market and interest rates), and bonds. Skip the Back to Reality on page 95; it is interesting but not tested on the final exam. Know key equation 6.6, which links the rental market (capital) to the bond market. Understand the difference between real and nominal prices and returns. Many equations in the textbook convert nominal prices (or rates) to real prices (or rates). See key equation 6.11 on page 101 and key equation 6.12 on page 102. Skip Extending the Model on page 135; this is covered in the corporate finance course. Read Clearing of the Markets for Labor and Capital Services on pages This section is written in detail. The formulas for the two markets are similar. Both assume an inelastic (vertical) supply curve. Focus on equation 6.14 on page 105 and equation 6.16 on page 108. These equations use the marginal product of labor and capital. Note that depreciation enters the equation for the marginal product of capital. Skip Back to Reality on page 108. This topic is covered in the corporate finance course. Review Questions A.4 and A.5 on page 109. Distinguish between a change in the demand curve and a change in the quantity demanded. Review Question B.7.a and B.7.b on page 110. Skip the appendix on pages 111.

6 Macro Module 8 Readings (2009 text) Chapter 7: Consumption, Saving, and Investment (Module 8) Read pages , and know key equation 7.9 on page 118.Focus on the income effect on pages and the intertemporal substitution effect on pages Skip By the Numbers sections on pages 119. Read pages Figure 7.4 shows the basic effects. The multi-year model is an extension of the two year model. Key equation 7.12 on page 121 extends the two year budget constraint to a multi-year budget constraint. Understand the meaning of permanent income on page 164 and the propensities to save and consume on pages Skip By the Numbers on page 123. Read By the Numbers on page 124. Read pages Know especially equation 7.13 on page 125. The mathematics in this chapter derives the key equations; the final exam does not test the derivations. Review Questions A.4 and B.6 on page 126. Skip the appendix on pages

7 Macro Module Readings (2009 text) Chapter 8: An Equilibrium Business-Cycle Model (Modules 9 and 10) Business cycles are explained two ways: real business cycles and IS-LM curve analysis. This course covers the real business cycle interpretation. Pages explain trend and standard deviation. You know these terms, and the final exam does not test them. But know how they are used in Barro s analysis. Skip By the Numbers on page 177. Understand the model on page From the section on Matching the Theory with the Facts on pages , know which items are pro-cyclical and which are contra-cyclical. Barro verifies the macroeconomic model with empirical evidence from recessions. The relation of theory with facts is not perfect; know the conclusions that Barro draws. Chapters 15 and 16 use pro- and contra-cyclicality to test models. When you study Modules (chapters 15 and 16), you will come back and review the cyclicality relations in Modules 9 and 10, Pages deal with changes in technology. Focus on Barro s conclusions in the last two paragraphs in this section on page 142. Most technological changes are long-lasting, not temporary, but they are not permanent. Read pages , which deal with changes in the labor supply and labor productivity. Skip By the Numbers on page 144. Know the three effects: income effect, substitution effect, and intertemporal substitution effect, and know how they relate to temporary vs permanent changes in the real wage rate. Focus on the conclusions on pages Review Question A.1 on page 148. This topic is covered in the text. Review Questions B.3 and B.4 on page 148. These topics are covered in the homework assignments. Review Questions B.5 and B.6 on page 148. These questions change a parameter in the equations.

8 Macro Module 11 Readings (2009 text) Chapter 9: Capital Utilization and Unemployment (Module 11) Read pages Focus on key equation 9.4 on page 151 and equations 6.6 and 9.5 on page 155. Read pages The final exam tests the model for unemployment. Pages describe the empirical data. Some results are obvious: for example, Figure 9.8 on page 158 shows that when employment is high, real GDP is high (a correlation of 88%). Pages is model of unemployment. Unemployment is a contentious topic. You hear about voluntary unemployment, involuntary unemployment, structural unemployment, natural unemployment, and other varieties. But it is hard to distinguish voluntary from involuntary unemployment, and the model in this textbook does not try to do so. Focus on the job finding rate, the job separation rate, and the effects of unemployment insurance. The homework assignment deals with seasonal fluctuations, as discussed in Back to Reality on page 165. Review Question B7 on page 170. The final exam tests how various government programs, such as unemployment insurance, affects the natural unemployment rate. Politicians once denied that these programs have the effects described in this chapter. Now France and Germany are trying to reform their social programs and unemployment benefits to reduce their unemployment rates. Review Question B.8. The homework assignment considers seasonal unemployment, by algebra and by Excel s solver built-in function.

9 Macro Module Readings (2009 text) Chapter 10: The Demand for Money and the Price Level (Modules 12 and 13) Read pages Skip the Back to Reality boxes on pages 172 and 173 and the tables on pages 174 and 175. Focus on the monetary base, M 1 and M 2 (pages ). Know what fiat money, commodity money, and legal tender mean, but the specific examples are not tested on the final exam. Read The Demand for Money on pages ; skip the sub-section on the empirical evidence on the demand for money on pages The homework assignment deals with the effects of interest rates and transaction costs. Know how interest rates, real GDP, transaction costs, and other items affect the demand for money. Key equation 10.2 on the bottom of page 177 gives the nominal demand for money. This equation uses the nominal interest rate, not the real interest rate, so it differs from other equations in the textbook. Read pages Focus on the subsections regarding the neutrality of money, a change in the nominal quantity of money (i.e., in the supply of money), and a change in the demand for money. Skip Back to Reality on page 184. Key equation 10.5 on page 179 looks like key equation 10.2 on page 177.! For equation 10.2, the real demand for money changes to satisfy the relation.! For equation 10.5, the price level changes to satisfy the relation. The homework assignment covers the seasonal fluctuation in the price level caused by changes in the demand for money. Understand the concept of general equilibrium. Know how changes in various input variables affect the price level, inflation, nominal wage rates, and nominal interest rates. Focus on the subsections regarding cyclical behavior of money and seasonal variations in money. The homework assignment covers the seasonal fluctuation in the price level caused by changes in the demand for money. The FED varies the money supply to offset this seasonal fluctuation, so you don t notice it. Review Question A.2 on pages 188. Explain how each of these variables affects the real demand for money. Part A.2.e refers to the price level, not the inflation rate. The inflation rate affects the nominal interest rate (in Part A.2.a); the price level does not. Review Question A.3 on page 188. This question says that money is neutral. Review Questions B8, B9, B10, B11, B12, and B13 on pages The homework assignments and the final exam problems cover these topics.

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11 Macro Module Readings (2009 text) Chapter 11: Inflation, Money Growth, and Interest Rates (Modules 14 and 15) Read the introduction on pages Skim the section on cross-country data on inflation and money growth on pages The homework assignment uses the data in Table For two decades, economists made the error highlighted in the homework assignment. Milton Friedman put forth the theory in this textbook. Know well the last bullet point on pages 195, which is tested on the final exam. Read the section on Inflation and Interest rates on pages Focus on the differences between actual and expected inflation and between the real and nominal interest rates. Skip the sections on Measuring Expected Inflation on page 199, U.S. Expected Inflation and Interest Rates since World War II, on pages , and Indexed Bonds, Real Interest Rates, and Expected Inflation Rates on pages Know the sub-section Interest Rates on Money on page The real interest rate on money is the negative of the inflation rate. Read Inflation in the Equilibrium Business Cycle Model on pages Focus on key equation on page 203, which is repeated throughout the textbook. The rental market and the bond market determine the same item: the real interest rate. Know the key equation on page 206, which says that the price level is the dependent variable, or the balancing item that equates money supply and the demand for money. Barro summarizes the conclusions in five bullet points on page 206. These are tested on the final exam. Skip the section A Shift in the Money Growth Rate on pages Barro shows a discontinuity in the price level. The final exam does not test this. Read Government Revenue from Printing Money on pages ; skip By the Numbers on page 211; skip Table 11.3 on page 212. The By the Numbers box is fascinating, and it recurs time and again. Zimbabwe now has hyper-inflation, with similar problems. But the final exam does not test these historical facts, so you can skip the box. Review Question A.1 on page 212. Distinguish between a rise in the price level and a rise in the inflation rate (or nominal interest rate). Review Question A.5 on page 212. Which affects the value of bonds vs money: the real interest rate or the nominal interest rate?

12 The homework assignment covers Question B.7 on page 213. Review Question B.8 on page 213. The text discusses this, and the final exam covers it. Question B.9 on page 213 is covered in a homework assignment.

13 Macro Module Readings (2009 text) Chapter 12: Government Expenditure (Modules 16 and 17) Skip pages These pages show the size of government expenditure in the United States. Skip Figures 12.1 to 12.4 on pages and Table 12.1 on page 218. The final exam does not test the historical facts. Read pages Know Equation 12.1 on page 219 (the government budget constraint), and focus on equation 12.4 on page 221, which adds government transfers and taxes to the household budget constraint. The macroeconomic model assumes that people anticipate future transfers and taxes. Key equation 12.6 at the bottom of page 21 is a multi-year version, with present values. Read pages The conclusions in italics at end of the paragraphs show that a permanent change in government expenditures has little or no effect on GDP. Read Extending the Model on pages ; focus on the last paragraph on page 225. The final exam does not test the derivation (Equation 12.10), but it tests the conclusion. Read pages , which has different results for temporary changes in government expenditures. It is hard to test this result in peace-time, since even temporary government programs are renewed each year and may never end. Barro uses wartime expenditures to test the model, but even war expenditures seem to drag on year after year. Vietnam lasted decades. Afghanistan and Iraq were short bombing expeditions that still continue. You might find Extending the Model on page 229 to be interesting, which suggest that government spending patterns affect the term structure of interest rates. This is Barro s idea; financial theory does not assume that government spending affects the terms structure. No final exam problems are asked on this box. Skim pages Barro s model predicts the effects of wars on the labor supply, the real wage rate, and the interest rate. The facts don t fit the simple model. Barro suggests various reasons for the discrepancy. This is speculation; the final exam does not test it. The exam problems focus on accepted macroeconomic theory. Many non-standard ideas in the textbook are excellent, but they are not required for the on-line course. Review Question B.3.a on page 233. Review the discussion of National Income Accounting in the first module of this course. Review Question B.7.a on page 234. The homework assignment asks how the usefulness of government services varies among groups of citizens (wealthy vs poor).

14 Macro Module 18 Readings (2009 text) Chapter 13: Taxes (Module 18) Skip pages Barro shows the types of taxes and their sizes in the United States. The final exam does not test any of the details in the textbook. As actuaries, you will pay the highest tax rates for most of your careers. The high tax rates after 1945 are depressing. The economic problems of some states (California) and countries (Greece) create calls for higher taxes, which will further depress their economies. The silver lining is that other countries have higher taxes. Only Hong Kong, Bermuda, Singapore, Eastern Europe, and a few other places avoid high taxes. Read pages The homework assignment computes actual tax rates and marginal tax rates for three tax systems. Flat tax rates over large deductibles are perhaps the best way to combine social policy (low taxes for the poor) with economic efficiency (low marginal tax rates). The final exam tests marginal tax rates and their effects on labor supply. Read Taxes in the Model on pages , including Extending the Model on page 245. Focus on the after-tax real wage rate on page 242, and implications for the macroeconomic model. Know Figures 13.5 and13.6 on pages 243 and 244. The tax on labor income affects the rental market as well. The decline in labor and capital reduces real GDP. The box Extending the Model on page 245 examines a consumption tax, like the value added tax in Europe or state sales taxes in the United States. A goal of macroeconomics is to identify the optimal tax system which least hinders the economy. Some tax reformers want to switch to a consumption tax instead of a labor tax, assuming that a consumption tax does not diminish the labor supply. Barro shows this is not true. A flat consumption tax is like a flat income tax, and a consumption tax that depends on the type of good bought (higher for luxury items, lower for essentials) is like a progressive income tax. Read An Increase in Government Purchases Financed by a Labor Income Tax on pages 247, including Back to Reality on pages The Laffer curve was ridiculed when it was introduced in the early 1980 s. It is now accepted by many economists and governments, especially in the nearly emerging economies of Asia and Eastern Europe. Some Western European countries have marginal tax rates so high that reducing the tax rate would increase total tax revenue. One wonders: why don t these countries reduce the high marginal tax rates for the wealthy so that total tax revenue increases? The answer is that people compare themselves with their neighbors. Many people feel better if their wealthier neighbors have their high incomes taxed away, regardless of its effect on the economy. Read Transfer Payments on page 337. This section has only three paragraphs, and Barro does not discuss the details of Social security or other transfer payments. Focus on the first line of the second paragraph. Many transfer programs have the same effect as high marginal tax rates. Welfare discourages work, since $100 dollars of work income may reduce welfare

15 benefits by $100. The reduction of the U.S. welfare system in the 1990 s was probably the best way to help poor people re-join American society. Review Questions A.1 and A.2 on page 250. For Question A.1, consider a flat tax of 20% on income above $10,000 a year and a flat tax of zero on income below $10,000 a year. For Question A.2, what if the government increases the tax rate to 100%? What would the total tax revenue be? Marginal tax rates above 100% are clearly detrimental to the economy, but occur every so often. Review questions B.4 on page 250 and B.8 on pages What is the effect of a tax on nominal interest income on the propensity to save? Life insurance is one of the most tax advantaged assets in the United States. How might the demand for permanent life insurance change in the marginal tax rate on asset income increases?

16 Macro Module Readings (2009 text) Chapter 14: Public Debt (Modules 19 and 20) Skip pages , which gives a brief history of government debt. The U..S. government was not always as profligate as it is now, but this fact is not tested on the final exam.! The United States began as a reaction to high British taxes on the colonies. From its th inception until the early 20 century, Americans were wary of government taxes. The American pioneers valued frugality, and they did not like debt. Statesmen were proud if the government ran a surplus. th! In the mid-20 century, economists believes that government spending could lift the economy out of a recession. The government had a rationale for spending more than it takes in, so spending rose and the deficit increased. Politicians ran a deficit to help the American people. Barro shows that a permanent rise in government spending has little or no effect on GDP. The economic rationale from previous generations was an error. The section on characteristics of government bonds is not tested on the final exam, but the g notation in the middle of page 255 is used in later sections. The superscript g on bonds, B, means government bonds. Read pages Know key equation 14.1 on page 256. Skip figure 14.3 on page 257. Understand the meaning of real national saving on page 258. If government savings increases, private savings decreases, and national savings tends to remain the same. Skim pages Know the second column of page 259, In our simple example to does not affect real national saving. Barro s textbook uses the Ricardian Equivalence Theorem. Other economists do not agree with this theorem in the strict form that Barro presents. Know the general result, which is used in the macroeconomic model, but the mathematics is not tested on the final exam. Skip page 261. This section generalizes the Ricardian Equivalence Theorem, and it is not tested on the final exam. Read Economic Effects of a Budget Deficit on pages , including the Back to Reality box on page 265. The effect of a budget deficit is much debated. Newspapers and magazines say that the profligacy of our generation must be paid by our children, and that we are enslaving our children to pay our debts. Economists debate the true effects of a budget deficit. Note the discussion of strategic budget deficits on pages

17 Read The Standard View of a Budget Deficit on pages For the public as a whole, Barro does not presume that finite lifetimes affect optimal decisions. The homework assignment examines the relative preferences of families with many or few children. Skip Imperfect Credit Markets on page 268. Barro rejects this hypothesis, and you are unlikely to encounter it elsewhere. Read Social Security on page 269, skipping the By the Numbers box on page 270. Read open market operations on pages , along with Table 14.2 at the bottom of page 271. Focus on the last paragraph on page 271, which summarizes the conclusions. Raising or lowering the money supply affect inflation and the price level, not real variables. The textbook focuses on macroeconomic theory, not on the specifics of monetary policy. Other textbooks often devote a whole chapter to open market operations and other ways that the Federal Reserve Board changes the money supply. You may read in the papers that the FED met yesterday and increased interest rates a quarter of a point to (i) forestall inflation, (ii) stimulate the economy, (iii) reduce unemployment, or some other policy goal. Barro concludes that monetary policy does not change real economic variables. It changes the price level, the nominal wage rate, and nominal prices, and it may change expected inflation and the nominal interest rate. (Be sure you can explain these effects.) But it does not accomplish the goals it seeks. The Wall Street Journal and other newspapers mention the response of financial markets to the FED actions. If the FED action raises the price level, bond values fall, since the fixed dollar returns are worth less. The FED action cause immediate changes in the bond and stock markets, even if they do not affect the real economy. Review Question B.4.a,b,c, and d on page 272. For part (b) of this question, Barro assumes people are rational, so people without children may differ from people with children. Part (e) uses a section that is skipped in this course.

18 Macro Module Readings (2009 text) Chapter 15: Price Mis-perceptions model (Modules 21 and 22) Chapters 15 and 16 present several alternatives to Barro s macroeconomic model. Barro says: Many economists believe that monetary shocks have been a principal cause of economic fluctuations in the U.S. and other economies. Other macroeconomics textbooks explain how expansion or contraction of the monetary base affects GDP, unemployment, and interest rates. Barro does not agree with these analyses, and his last two chapters compare the pros and cons of various models. One might wonder: Economists have studied monetary policy for years. Don t they know how it affects the economy? Follow the reasoning in these chapters. Each macroeconomic model implies pro- or contra-cyclical relations for various economic items. These relations can be compared to the empirical evidence. But the theoretical relations are affected by numerous secondary factors. Several models can agree with the empirical evidence. Module 21: read pages The price-misperceptions model says that people are fooled by government policies. At first, this seems reasonable: non-economists do not understand the effects of fiscal and monetary policies. The rational expectations school of thought says that expectations of inflation are (on average) unbiased. People get estimates of future inflation in newspapers and magazines. It is unclear if people can be fooled. Know the rational expectations implications for the final exam, as well as the differences in the price-mis-perceptions model. Module 22: read pages Focus the section Rules vs Discretion on pages Politicians, including economists serving on the Federal Reserve Board, don t want strict rules. They say they want the discretion to adjust their policies to the perceived needs of the economy. But some politicians want to spread the wealth to their constituents before elections. The U.S. has an independent FED, to curb this populism. Other economists, as Milton Friedman, believe central banks do more harm than good with their discretionary policies. They want central banks bound by rules relating the money supply to population growth and real GDP. Some countries now set explicit rules for the central bank, directing it to target low and stable inflation. Countries that had high inflation in past years are especially likely to set strict rules for the central bank.

19 Macro Module Readings (2009 text) Chapter 16: Sticky prices and nominal wage rates (Modules 23 and 24) Module 23: Read pages The empirical evidence in By the Numbers on pages is not tested on the final exam. Sticky prices made more sense in pre-internet days, when consumers did not always know the prices charged by other firms. Now the prices of different firms are easier to compare. Similarly, stock wage rates made more sense when multi-year union contracts set wages for a large proportion of workers (as is still true in some European countries). Module 24: Read pages Read Back to Reality on pages 302 and 303. The accepted wisdom in the United States after the New Deal was that the prescient economic policies of Roosevelt saved the populace from the Great Depression. Many economists now say that mis-guided monetary policy aggravated the Great Depression. Barro explains both sides of the debate. The empirical evidence in the By the Numbers box on page 305 is not tested on the final exam.