Economics 102 - Principles of Macroeconomics

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1

Economics
102

-

Principles of Macroeconomics


Instructor: D. Vandegrift

Office: Business Building
--

Room 218

Office Hours:
Monday
10
-
11am, Tuesday 2
-
4pm
and Thursday
10
-
11am
, or by appointment

Telephone: (609) 771
-
2294

e
-
mail: vandedon@tcnj.e
du

homepage:
http://vandegrift.intrasun.tcnj.edu/


-----------------------------------------------------------------


Text:
Mankiw, N. Gregory
. 2007.
Principles of Macroeconomics, 4
th

ed
.

(
Thomson
-
Southwestern
,
Mason, OH
).


--------------------------------
---------------------------------



Course Objective:

In microeconomics, we studied the economic decisions of individuals and firms. Here, we will
analyze the whole (national) economy or large sectors of it. Just as in microeconomics, the ultimate aim of t
he course
is economic literacy. By the end of the course, most discussions of macroeconomic topics that appear in
The Wall
Street Journal

or
The New York Times
should be clear to you.


Economic literacy requires that we describe the measures of performance

(economic aggregates) for the
national economy and explain the ways in which the measures of performance are related. Finally, we must assess the
effects of government policy aimed at improving the performance of the national economy.


I know what you're

thinking. It does
sound

pretty difficult. But you shouldn't be intimidated.
T
his stuff
appears in
the
morning papers and
on
the
evening news every day. Economic aggregates (e.g., GDP, inflation,
unemployment) are the focus of a large amount of news covera
ge. Implicit in many of the discussions is the way that
the aggregates are related. For instance, rising levels of unemployment usually imply slower economic growth (i.e.,
GDP growth). But the relationships can, at times, be confusing. So to analyze the re
lationships, we will build
economic models of the macroeconomy.


The models are useful beyond simply understanding the relationships between economic aggregates. We
can use the economic models to understand what the government can do (if anything) to impr
ove the measures of
economic performance. This is critical. Election campaigns and important policy debates center on competing claims
about what the government ought to do to stabilize or stimulate the economy.



Exams and Grading:

The
re
will be two mid
term exams, a final, three problem sets
, and a paper
. The final is cumulative.
Because I distribute the answers on the date that the problem sets are due, I do not accept late problem sets. If you
have difficulty completing a problem set, see me before the

date on which the assignment is due. Weights for each
requirement and the grading scale are as follows:




Problem Sets:

10% 92
-
100
-

A 80
-
81
-

B
-

67
-
69
-

D+

Midte
rms:

40% 90
-
91
-

A
-

77
-
79
-


C+


62
-
66
-

D

Paper


15% 87
-
89
-

B+ 72
-
76
-

C 0
-
62
-

F

Final:


35%

82
-
86

-

B 70
-
71
-


C
-


100%












2


Paper

Guidelines



For the paper, you must read a book related to economics and write about it. The paper should be five or six
typed, double
-
spaced pages (excluding cover pa
ge, references, tables, charts, etc) and in the format of a book review.
I have attached a list of acceptable titles. If you want to use a book that is not on the list, you must clear it with me
in
advance
. I will not accept papers on unapproved titles. Th
e due date for the paper is

Thursday
,


March 6
.


Grading papers isn't much fun. So I wouldn't assign a paper unless I thought you would gain something by
completing one. In particular, I hope that the paper forces you to think a bit about economic issues b
eyond the
course. Maybe you'll even like the book. The paper also represents a chance to work on your writing skills. Writing
clearly about complex issues is an important skill. Because I take writing seriously, I also take plagiarism seriously. Do

not cla
im anyone else’s writing or ideas as your own. Violations of this rule will be prosecuted to the fullest extent of
the law.




In grading your paper, I will pay close attention to the clarity of your writing. The quality of your writing will
determine

a significant portion of your grade. Be sure that your sentences are coherent and that each paragraph
follows from the previous paragraph. A good way to avoid a poorly written paper is to take a look at a manual of
style. I recommend
The Elements of Style

by William Strunk and E. B. White or
The Elements of Business Writing

by
Gary Blake and Robert W. Bly.


In the paper, you must discuss the thesis of the book and analyze the argument.
Your
analysis
should
address three main questions:




Who cares? Good pa
pers are papers that others
want

to read. To motivate readers, your introduction must
explain why the topic you are about to address matters (or should matter) to them. Try to explain in a
paragraph or two the broader significance of the topic. For instanc
e, a paper on the economics of the
interstate highway system might begin by referring to the number of miles of interstate, the cost to build a
mile of highway, and the average number of cars that use the system every day.



What does the author contribute?

Explain the author’s argument in detail. If you aim to criticize the
argument, be sure to accurately and thoroughly report the argument (as well as key pieces of evidentiary
support). The argument should be understandable to someone who has not read the b
ook. Readers of your
review will not understand any critique or extension of the author’s argument if you have not explained the
argument in detail.



Are there noteworthy extensions, applications, or deficiencies in the author’s argument? This discussion
may be mixed with your explanation of the author’s argument or developed after you have fully explained
the author’s argument. Because you are not yet an expert on the topic, you should rely on outside sources
here. Be sure to cite at least two outside sou
rces. If you use another source to introduce an argument that
competes with the author’s, try to explain why the author’s argument is more (or less) convincing than the
critic’s. If you locate new evidence that bears directly on the author’s claim, be sure

to fully explain the
implications for the author’s argument.




To analyze the argument, you must consult and cite at least two other sources. You will find the best articles
in economics journals or newspapers. Consulting other sources will enable y
ou to comment on specific aspects of
the book or describe some of the strengths and weaknesses of the book's argument.





You may use the web to search for articles from journals, magazines and newspapers. But please do
not
cite
anything that was publishe
d
only
on the web. There are too many crackpots with web sites. If you use the
web to find articles, cite only the periodical in which it was published. You may follow the example set out
below in the Course Organization section. Do not cite web addresses.




To find articles, I suggest that you use Lexis
-
Nexis or Ebsco Host. Lexis
-
Nexis and Ebsco Host are
databases of newspaper and journal articles. They are available on the library's web page.






3



Do not cite book reviews of the particular book that you select.

Other reviewer’s opinions of the book tend
not to add much to the paper



Other things to remember:




Do not overuse quotations. I want to read
your
writing. Overuse of quotations will give your paper a cut
-
and
-
paste feel. This is something you always want

to avoid. Do not use a quote to convey portions of the
author’s argument that you find hard to explain. Instead, figure out how to explain the argument in your own
words. Of course, quotations are appropriate in some circumstances. For instance, the autho
r may supply
some particularly felicitous turn of phrase. Or, you may want to make the case that the author’s argument
suffers from internal contradictions. In this case, you may want to report verbatim key sentences that
support your claim.



For some idea
s on how to write a book review, you may want to read a few reviews of non
-
fiction books.
Finding a non
-
fiction book review isn’t hard. Nearly every journal publishes book reviews (e.g.,
Business
Week, The New Republic, etc
.).
The New York Times

publishes
an entire section of book reviews every
Sunday. Because you are only interested in the format and style of a book review, the reviews need not
consider the book or topic that you have chosen.



Eliminate all unnecessary words. If you can clearly express the

same idea in a sentence with 10 words or in a
sentence with 6 words, choose the shorter sentence. (This does not imply that all your sentences should be
short.)


Suggested Titles



Alesina, Alberto and Giavazzi, Francesco, 2006,
The Future of Europe: Re
form or Decline

(MIT Press, Cambridge).


Barro, Robert, 1996,
Getting It Right: Markets and Choices in a Free Society

(MIT Press, Cambridge).


Bhagwati, Jagdish, 2004,
In Defense of Globalization

(Oxford University Press, New York).


Brown, Clair, Haltiw
anger, John, and Lane, Julia, 2006,
Economic Turbulence: Is a Volatile Economy Good for
America?

(University of Chicago Press, Chicago).


Cahuc, Pierre and Zylberberg, Andre, 2006,
The Natural Survival of Work: Job Creation and Job Destruction in a
Growing

Economy

(MIT Press, Cambridge).


Easterly, William, 2001
, The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics


(MIT Press, Cambridge).


Easterly, William, 2006
, The
White Man’s Burden: Why the West’s Efforts to Aid the Re
st Have Done So Much Ill and
So Little Good
(The Penguin Press, New York).


Friedman, Milton, 1962,
Capitalism and Freedom

(University of Chicago Press, Chicago).


Kotlikoff, Laurence, and Burns, Scott, 2004,
The Coming Generational Storm: What You Need
to Know About
America’s Economic Future

(MIT Press, Cambridge).


Krugman, Paul, 1996,

Pop Internationalism

(MIT Press, Cambridge).







4

Stiglitz, Joseph, 2003,
Globalization and Its Discontents

(W. W. Norton, New York).


Wolf, Martin, 2004,
Why Globalization W
orks

(Yale University Press, New Haven).

Course Organization



I. National Income Accounting


a. GDP Characteristics
and Components
(pp.
203
-
211)


b. Real v. Nominal GDP (pp.
211
-
216
)


c.
Issues and
Problems with GDP (pp.
216
-
221
)

o

“Other Women’s Mo
vement: Wages for Housework”
The Trenton Times
, Jan. 2, 1998, p. A12.

o

G. Burkins and S. Lueck, “GDP Posted 4.8% Increase in 3
rd

Period”
The Wall Street Journal
, Oct. 29, 1999, p.

A2.

o

G. Ip, “Why Economists Track Firms R&D”
The Wall Street Journal
, Sept 29
, 2006, p. A2.

o

J. Spencer, “Why Beijing is Trying to Tally the Hidden Costs of Pollution”
The Wall Street Journal
, Oct. 2,
2006, p. A2.

o

“Womenomics Revisted”
The Economist
, Apr. 21, 2007, p. 88

o

E. Hadas and R. Beales, “Sarkozy Imagines: No GDP”

The Wall
Street Journal
, Jan. 10, 2008, p. C14.


II.
Income
Inequality: Trends and
Issues


a
.
Earnings and Discrimination (pp. 413
-
427, Mankiw, Microeconomics)


b. Income Inequality and Poverty (pp. 431
-
438, Mankiw, Microeconomics)


c
. Income Inequality Issu
es

o

F. Levy and R. Murnane, 2004, “How Computers Change Work and Pay” in
The New Division of Labor:
How Computers are Creating the Next Job Market
, (Princeton University Press, Princeton).

o

V. Postrel, “Economic Scene”

The New York Times
, Aug. 15, 200
2, p. C2.

o

V. Postrel, “Economic Scene”

The New York Times
, Nov. 7, 2002, p. C2.

o

D. Wessel, “The Future of Jobs: New Ones Arise, Wage Gap Widens”
The Wall Street Journal
, Apr. 2,
2004, p. A1.

o

D. Wessel, “The Rich
-
Poor Gap Widens in the U.S., Class Mobility

Stalls”
The Wall Street Journal
, May 13,
2005, p. A1.

o

J. Borgas, “For a Few Dollars Less,”
The Wall Street Journal
, Apr. 18, 2006, p. A18.

o

P. Orrenius, “The Impact of Immigration,”
The Wall Street Journal
, Apr. 25, 2006, p. A18.

o

D. Wessel, “Why It Takes a

Doctorate to Beat Inflation,”
The Wall Street Journal
, Oct. 19, 2006, p. A2.

o

“New Study Examines the Growth in High
-
Skill Manufacturing Jobs,”
Federal Reserve Bank of New York
Research Update
, Jan. 2006.

o

G. Ip and J. MacKinnon, “Bush Reorients Rhetoric, A
cknowledges Income Gap” Mar. 26, 2007, p. A2.

o

D. Wessel, “Lack of Educated Workers Has Lots of Roots, No Quick Fix”
The Wall Street Journal
, Apr. 19,
2007, p. A2.

o

D. Wessel, “One Pay Gap Shrinks and Another Grows”
The Wall Street Journal
, Nov. 1, 2007, p.

A2.

o

G. Ip, “Blacks Trail in Growth of Income”
The Wall Street Journal
,
Nov.

1
3
, 200
7
, p. A
4
.



III.
Production and Growth



a.

Economic
Growth
around the World
(pp.

245
-
250
)

o

Maddison, 2005, “Why and When Did the West Get Rich?” in
Growth and Interaction
in the World
Economy

(AEI Press, Washington, DC).



b. Productivity: Its Role and Determinants (pp. 250
-
254)


o

S. Leisman, “Further Gains in Productivity are Predicted”
The Wall Street Journal
, Aug. 1, 2000, p. A2.

o

G. Ip, “Fed Chief Is Encouraged by P
roductivity Growth”
The Wall Street Journal
, Oct. 24, 2002, p. A2.






5

o

M. Whitehouse and T. Aeppel, “Pause Stirs Concern That Growth in Productivity May Be Flattening”
The
Wall Street Journal
, Nov. 3, 2006, p. A1.

o

G. Ip, “Productivity Lull Might Signal That

Growth is Easing”
The Wall Street Journal
, Mar. 31, 2007, p. A1.


\



c. Economic Growth and Public Policy (pp. 254
-
267)

o

J. Slater, “India’s Land Market Impedes Growth,”
The Wall Street Journal
, May 15, 2002, p. B7C.

o

G. Chazen, “In Putin’s Russia, Busin
ess Struggles for a Foothold,”

The Wall Street Journal,

Apr. 27, 2005, p.
A1.

o

M. Moffett, “Barrio Study Links Land Ownership to a Better Life,”
The Wall Street Journal
, Nov. 9, 2005, p.
A1.


I
V
.
Measuring the Cost of Living


a. The Consumer Price Index (
pp. 225
-
228)


b. Problems Measuring the Cost of Living (pp. 228
-
232)


o

M. Boskin, “Prisoners of Faulty Statistics”
The Wall Street Journal
, Dec. 5, 1996, p. A18.

o

C. Duff, “Eyes on the Price: Is the CPI Accurate?”
The Wall Street Journal
, Jan. 16, 1997, p
. A1.


o

G. Ip, “Labor Department to Publish New Consumer Price Index”
The Wall Street Journal
, Feb. 21, 2002, p.
A2.

o

T. Appel, “An Inflation Debate Brews Over Intangibles at the Mall”
The Wall Street Journal
, May 9, 2005,
p. A1.


c. The GDP Deflator vers
us the CPI (pp. 232
-
234)


d. Correcting Economic Variables for Inflation (pp. 234
-
239)


Problem Set #1 Due (Thursday, Feb. 2
1
)


Midterm #1 (Monday, Feb. 2
5
)


V. Saving, Investment, and the Financial System


a. Financial Institutions in the US Economy

(pp. 271
-
277)


b. Saving and Investment in the National Income Accounts (pp. 277
-
280)


c. The Market for Loanable Funds (pp. 280
-
288)


VI. Unemployment


a. Measuring Unemployment (pp. 309
-
318)

o

J. Hilsenrath, “Labor Shifts May Slow Work Force Growth”

The Wall Street Journal
, Nov. 15 2004, p. A2.

o

K. Maher, “Labor Pains: Closing the Skills Gap”

The Wall Street Journal
, Nov. 22 2004, p. A2.


b. Job Search (pp. 319
-
323)



c. Minimum Wages, Unions, and Collective Bargaining (pp. 323
-
328)


d. Intern
ational Comparisons

o

E. Andrews, “With German Craft Rules, Its Hard Just to Get Work”
The New York Times
, Feb. 7, 1999, p. 16.

o

N. Boudette, “Searching for Solutions, Germany May Tackle Taboo”

The Wall Street Journal
, Feb. 28 2003,
p. A7.

o

J. W. Miller, “Empl
oyment Rules Hinder EU”
The Wall Street Journal
, Aug. 16 2004, p. A11.

o

G. T. Sims, “Germany Under a Microscope”
The Wall Street Journal
, Dec. 31 2004, p. A6.

o

K. Johnson and J. Carreyrou, “Amid Europe’s Gloom, Spain Blossom’s with Short
-
Term Jobs”
The Wall

Street

Journal,

Sept. 28, 2005
, p. A
1
.


o

M. Walker, “For the Danish, A Job Loss

Can Be a Learning Experience”
The Wall Street Journal
, March 21,
2006,

p. A1.



e. The Theory of Efficiency Wages (pp. 328
-
331)






6


f
. Unemployment and International Trade

o

M.

Prospero, “N.J. Delegates
M
ake
C
ase for China’s
E
xclusion from WTO”
The Trenton Times
, Dec. 9, 1999,
p. D1.

o

B. Davis, “Finding Lessons of Outsourcing in Four Historical Tales”

The Wall Street Journal
, Mar. 29 2004,
p. A1.

o

J. Rebello, “Job Losses From Out
sourcing Prove Hard for the U.S. to Quantify”
The Wall Street Journal
,
Nov. 22 2004, p. A2.


o

D. Solomon, “Federal Aid Does Little For Free Trade’s Losers”
The Wall Street Journal
, Mar. 1, 2007, p. A1.




VII. The Monetary System


a. The Meaning of Mon
ey (pp.
337
-
344
)

o

M. Gordon, “As Ruble Withers, Russians Survive on Barter,”
The New York Times
, Sept. 6, 1998, p. 6.


b
. The Federal Reserve System (pp.
344
-
346
)


c. Banks and the Money Supply (pp. 346
-
353)

o

J. Wilke, “Showing Its Age: Fed’s Huge Empire
, Set Up Years Ago, Is Costly and Inefficient”

The Wall
Street Journal
, Sept. 12, 1996, p. A1.

o

D. Lagomarsino, “Fed Moves to Make Discount Rate More Useful Tool in Bank System”
The Wall Street
Journal
, Nov. 1, 2002, p. C6.


VIII. Money Growth and Inflati
on


a. The Classical Theory of Inflation (pp. 357
-
371)


b. The Costs of Inflation (pp. 371
-
380)



Problem Set #2 (
Thursday
, April
3
)


Midterm #2 (
Monday,

April
7
)



IX. Open Economy Macroeconomics: Basic Concepts


a. The International Flows of Good
s and Capital (pp. 387
-
397)

o

D. Wessel, “Behind Big Drop in Currency: Imbalance in the Global Economy”
The Wall Street Journal
, Dec.
2, 2004, p. A1.

o

M. Whitehouse, “Why U.S. Should Root for Dollar to Weaken More”
The Wall Street Journal
, Jan. 8, 2007,
p. A
2.

o

C. Coughlin, M.

P
akko, and W. Poole, “How Dangerous Is the U.S. Current Account Deficit?”
The Regional

Economist
, Apr. 2006.

o

K. Kliesen, “Trading Barbs: A Primer on the Globalization Debate”

The Regional

Economist
, Oct. 2007.

o

M. Grynbaum, “Exports Help
Shrink the Trade Deficit to Lowest Level in Two Years”
The New York Times
,
Nov. 10, 2007.


b. The Prices for International Transactions (pp. 397
-
400)


c. Purchasing Power Parity (pp. 400
-
407)



X. Macroeconomic Theory of the Open Economy


a. Supply

and Demand for Loanable Funds and for Foreign Currency Exchange (pp. 411
-
416)


b. Equilibrium in the Open Economy (pp. 416
-
420)


c. How Policies and Events Affect an Open Economy (pp. 420
-
429)


XI. Aggregate Demand and Aggregate Supply






7


a. Three Key

Facts about Economic Fluctuations (pp. 435
-
438)

o

M.Phillips, “Make
-
Up of Leading Indicators May Shift”
The Wall Street Journal
, Aug. 12, 1996, p. A2.

o

M. Hudson, “Grading Bonds on Inverted Curve”
The Wall Street Journal
, Jan. 8, 2007, p. C1.


b. Explain
ing Short
-
Run Economic Fluctuations (pp. 438
-
442)


c. The Aggregate Demand Curve (pp. 442
-
446)

o

G. Ip, “The Wealth Effect is Back in Play”

The Wall Street Journal
, Aug. 25, 1997, p. A1.

o

M. Phillips, “Trade Gap Widened by 15% in September”

The Wall Street

Journal
, Nov. 22, 2000, p. A2.

o

M. Moffet, “As U.S. Sneezes, Neighbors Fear a Cold”
The Wall Street Journal
, Dec. 12, 2000, p. A21.


d. The Aggregate Supply Curve (pp. 446
-
456)


e. Two Causes of Economic Fluctuations (pp. 456
-
467)


XII. The
Influence of Monetary and Fiscal Policy on Aggregate Demand


a. How Monetary Policy Influences Aggregate Demand (pp. 473
-
482)


b.
How Fiscal Policy Influences Aggregate Demand (pp. 483
-
489)


c. Using Policy to Stabilize the Economy (pp. 489
-
493)

o

B.
Spindle, “Japan’s Massive Debt Bomb Ticks Ever Louder”

The Wall Street Journal
, Dec. 11, 2000, p. A27.

o

J. Hilsenrath, “History Casts Doubt on Efficacy of Tax Cuts”
The Wall Street Journal
, Nov. 11, 2002, p. A2.

o

B. Davis, “Deficit Takes a Partisan Edge”
The

Wall Street Journal
, Dec. 17, 2002, p. A4.

o

G. Ip, “
In Treating U.S. After Bubble, Fed Helped Create New Threats”

The Wall Street Journal,

June 9,
2005
, p. A
1
.

o

G. Ip and M. Whitehouse “Bernanke Expects Slowing Economy to Tame Inflation”
The Wall Street Jou
rnal
,
July 20, 2006, p. A1.

o

K. Evans,
“How Inflation Hobbles the Fed”
The Wall Street Journal
, Dec. 15, 2007, p. A3.


XIII. The Short
-
Run Trade
-
off Between Inflation and Unemployment


a.
The Phillips Curve (pp.
497
-
501
)


b. Shifts in the Phillips Curve
: The Role of Expectations

(pp. 501
-
510)

o

“Paradigm Lost”
The Economist,

Nov. 3, 1990, pp. 84
-
85.

o

M. Whitehouse, “Phelps’ Work on Inflation Wins Nobel”
The Wall Street Journal
, Oct. 10, 2006, p. A2.


c. Shifts in the Phillips Curve: The Role of Supply
S
h
ocks

(pp. 510
-
521)


Problem Set #3 Due (Monday,
May 1
)


Final Exam







Learning Goals


By the completion of the course, the student will be able to:


I. Measurement of Macroeconomic Performance

a. Understand the construction of the central measures of ma
croeconomic performance (real and nominal GDP,
inflation, unemployment) and describe the recent trends in these measures.

b. Describe the trend in income inequality, the measurement of income inequality.

c. Define productivity growth and explain its impor
tance.






8

d. Explain the determinants of the natural rate of unemployment and the importance of the natural rate in
macroeconomic policy decisions.


II. International Economic Interactions

a. Explain why net exports = net foreign investment,

b. Explain why

saving minus investment = net foreign investment

c. Explain the determination of exchange rates.


III. Modeling Macroeconomic Interactions

a. Understand the empirical foundations of the aggregate supply curve (i.e., the Phillips Curve) and the importance

of
expectations.

b. Explain the characteristics of aggregate demand and the nature of short
-
run and long
-
run macroeconomic
equilibrium.


IV. Fiscal Policy

a. Define fiscal policy (discretionary and non
-
discretionary) and explain the arguments for and a
gainst the
countercyclical use of fiscal policy.

b. Explain the impact of fiscal policy changes on interest rates and the trade deficit.


V. Monetary Policy

a. Understand the role of commercial banks and the Federal Reserve System in money creation.

b. Ex
plain the short
-
run and long
-
run impact of changes in the money supply on GDP, interest rates and inflation.

c. Use the above analytical tools to interpret economic debates on the macroeconomic consequences of fiscal and
monetary policies.