Review. Macroeconomic Theory I. Copyright 2009 Pearson Education Canada

Review Macroeconomic Theory I Copyright 2009 Pearson Education Canada

Chapter 1:Introduction to Macroeconomics What is macroeconomics? Bunch of definitions Theory and Data Motivate Keynesian vs Classical Motivate Keynesian vs. Classical economists

Chapter 2: Measurement & Structure of the Economy National Income Accounting no model, just adding up Product, Income, Expenditure approach Savings and Investment private, public Current account Real vs. Nominal variables price indices and inflation nominal vs. real interest rates

Chapter 3: Productivity, Output, and Employment Productivity, Output and Employment start building a model see Y = AF(K,N) : Cobb-Douglas, CRS aggregate production function How the demand for labour is determined: MPN = w/p (figure)

Chapter 3 (continued) Labour Supply income (leisure) vs. substitution (make more money) effect with changes in real wage Put it all together: N S =N D determine full-employment output plug equilibrium N into Y = AF(K,N) (figure) Various issues related to unemployment

Chapter 4: Consumption, Saving, & Investment S d = Y C d G Individual's decision to borrow or invest (figure) PVLC=PVLR PVLR changes: current income, future income, wealth change in real interest rate: income vs. substitution effect borrower vs. saver

Chapter 4 (continued) Ricardian equivalence with tax cuts and cons/save decision Investment in detail (by firms) user cost of capital (uc) = MPK f (figure) (where expected profit is maximized) i * Gross Investment: I = K K + dk K* is optimal capital dk t is investment for depreciation t t t

Chapter 4 (continued) Finally goods market equilibrium! closed economy d Y = C + I + G S d = I d (figure) d

Chapter 5: Saving/Investment in an Open Economy Small economy open macro: can t influence world macro variables It's Ch.4, except now Y=C+I+G+NX Balance of payments accounts: CA/KA offsetting payments business Using S,Icurves curves, we don't have to have equilibrium at the S=I point (NX/CA) (figure)

Chapter 5 (continued) Large open economy us vs. them approach world interest rate set so that: borrowing country 1 = lending country 2 (figure)

Chapter 6: Long-Run Economic Growth It's a completely different model from everything else we ve done But important, that's why we covered ed it Growth rates, per worker terms Neoclassical growth theory 2 key figures Endogenous growth theory

Chapter 7: The Asset Market, Money, and Prices What is money and monetary aggregates Portfolio choice between M and NM based on: return, risk, liquidity Demand for money: M d = PL(Y, r + π e ) Or in real terms: M d /P= L(Y (, r + π e ) Elasticities of money demand Velocity: V=PY/M Quantity Theory of Money: M d /P = ky money demand is a constant proportion of income Aggregate demand for money, and supply of money: asset market equilibrium (M=M d )

Chapter 8: Business Cycles Business cycle facts Direction and timing of macroeconomic variables related to the business cycle Difference between Classical and Keynesian thought h on the matter An introduction to the AS-AD model to illustrate t these differences

Chapter 9: The IS LM/AD AS Model Put it all together closed economy General equilibrium analysis: IS-LM- (FE) model, takes into account production (and hence the labour market FE curve), the goods market (IS curve), and the asset market (LM curve) Policy implications

Chapter 9 (continued) Fiscal/Monetary expansions and contractions Other various factors that shift these curves Equivalent AD-AS model in (Y, P) Again: Classical v. Keynesian disagreements, implications for policy Money neutrality

Chapter 10: Exchange Rates & the Open Economy Derivation of the new IS curve (figure) LM, FE curves unchanged Exchange rates, PPP, interest rate parity Mundell-Fleming model: flexible v. fixed exchange rates Relative effectiveness of fiscal and monetary policy under each regime Open-economy trilemma Currency unions

What s Left Assignment 3: Due tomorrow by 3pm Assignment 4 (not to hand in) will be posted soon. It will cover Ch 10. Final review tutorial on Monday 5:00pm- 6:30pm in MCB201 Final Exam: June 18 th...check the web for time/location details Will be a series of short answer (part A) and long answer (part B) questions with math/theory mix with some choice between questions. More details will be posted soon.