Before Midterm
Tu, 09/03/13
Welcome to 3102!
We introduced each other and then made a quick review of the syllabus.
We will have four problem sets (PS) and two exams (one midterm and one final). Please see the syllabus for details and below for the dates. You do not have to type your PS but a minimum of professionalism is required if you decide to submit a handwritten homework.
We then discussed what is macroeconomics about and made a list of topics that you related with the word 'macroeconomics'. We chose GDP, unemployment rate and employment to population variables to learn something about trends and cycles for the case of the US economy. In particular, we compared the performance of the US economy in two recessions: the 1981-1982 and the 2007-2009 recession episodes. We saw that although both share the intensity in the fall in the economic activity, the recovery periods following those episodes are quite different. There is a nice discussion on the possible explanations behind the sluggish recent recovery here. The sources of the data we used today are the following:
GDP from BEA's website
Labor market variables from FRED's database
To complement what we discussed today please read the following (slides here):
Chapter 1 from the textbook and Ch1 slides. Just to have a broader view of what is macroeconomics about.
Chapter 2 from the textbook and Ch2 slides. Put special focus on measurement of GDP, inflation and labor market variables. This is basically a review of what you learned in Econ 1102
Chapter 3 from the textbook and Ch3 slides. Put special focus on the definition of a business cycle and the notion of a countercyclical, procyclical and aclyclical variable.
Finally, if you think you need them, please take a look at the math refresher notes here.
Thank you all for your participation in class today!
For next class please start reading Chapter 4 from the textbook.
Tu, 09/10/13
We introduced a simple story of three people: a consumer, a producer (a firm), and a government. Our goal for the next two weeks will be studying the behavior of each of these agents. We started with the study of the consumer's behavior.
Please read Chapter 4 ('Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization') from the textbook and Handout #2.
Tu, 09/17/13
PS1 is posted
We continued to study the consumer's behavior through a long and nice exercise. Remember always to think about the economics behind each algebraic equation. We highlighted the intuition behind the marginal rate of substitution between consumption and leisure time (MRSc,l). We argued that we can view it as the asking price (wage) for accepting a job offer or as how much the worker values leisure time.
We also introduced the concept of characterization of a solution. Informally, this means to know all the necessary information (in form of equations) in order to solve the problem (in this case, the consumer's problem). We saw that there are 2 equations that fully characterize the solution of this problem. The first one is the optimality condition that states the equality of the MRS and the wage (when we have lump-sum taxes). The second equation is, of course, the budget constraint.
Next class we will finish this topic and start the discussion of the firm's problem.
Please read Chapter 4 ('Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization') from the textbook and Handout #3.
Tu, 09/24/13
PS1 is due
We finished the discussion of the consumer's and firm's problem. We saw that in order to characterize the firm's problem solution we only need one optimality condition: the one that establishes the equality between the marginal product of labor and the wage. Again, this optimality condition is problem-specific. So avoid memorizing this equation and try instead learning the steps toward it. We ended the discussion by talking briefly about the government's role in our story of three people. The government's role is quite boring. It only has to satisfy a budget constraint (i.e T=G, where T denotes lump-sum taxes and G denotes government expenditures).
Please read Chapter 5 ('A Closed-Economy One-Period Macroeconomic Model') from the textbook and Handout #4.
Stats are (/100):
Mean: 91.3
Median: 93.0
Standard deviation: 10.2
Max: 100.0
Min: 46.0
Notes: Grades take into account the points granted to those who participated in the Tu, 09/24/13 lecture. Remaining points (i.e. in case your grade was higher than 100 after taking these granted points into account) will be reflected in the grade of next problem sets.
Tu, 10/01/13
Sam, Sai, Ben, Philip and Jessica helped us with part of the solution of the PS1. By the way, the answer key is already posted in the class website. Thanks all.
We then continued with the lecture. We described in detail how the three agents/people in our simple economy are related. We highlighted those linkages in a simple diagram. We also discussed the concept of equilibrium informally. To see a more formal description of an equilibrium read Handout#4. We will discuss it next class. Equilibrium in this case means two things. First, it means that markets clear. Thus, demand and supply meet in both the labor and good markets. Second, all three agents play their respective role. The consumer maximizes utility subject to the budget constraint, the firm maximizes profits subject to the technology, and finally, the government satisfies a budget constraint.
Finally, we started to solve an exercise. Question 7 is for you. Try to find an algebraic expression for the equilibrium working hours N*.
Please study Handout #4
Tu, 10/08/13
PS2 is posted
We finished the exercise that we started in the previous class. We found an algebraic expression for the equilibrium number of working hours. Once we know how many hours the consumer is willing to work and the firm willing to hire it is straightforward to find the equilibrium expressions for the remaining endogenous variables in the model: wage, consumption, output, and profits (or dividends).
We then used this simple model to run an experiment: what happens to the endogenous variables in this model when the firm becomes more efficient (there is an increase in z)? We answered this question and Jenna, Sai, Ben and Robert helped us to discuss the intuition behind this result.
Next class we will talk about efficiency. Please study Handout #4
Tu, 10/15/13
PS2 is due
Ben, Sam and Phillip helped us to solve part of the PS2. Thanks.
We then talked about efficiency, Pareto Optimality and market failures.
We have the Midterm next week. Details below.
For the midterm please study the following:
1. Handouts 1-4
2. PS1 and PS2
3. Spring 2013 Midterm
4. Textbook, Chapters 1-5
5. Practice exercises
Stats are (/80):
Mean: 72.1
Median: 75.0
Standard deviation: 9.0
Max: 80.0
Min: 42.0
Your grade is expressed as x/80. Multiply this by 100 to get your grade in the 100 scale
Tu, 10/22/13
Midterm
Time: 17:30-19:30
Location: in classroom
Stats are (/100):
Mean: 82.0
Median: 81.0
Standard deviation: 12.9
Max: 100.0
Min: 53.0
After Midterm
Tu, 10/29/13
We solved the midterm. By the way, the answer key is already posted in the class website.
We used the last problem in the midterm as an excuse to mention something about the trends of real wages of high and low skill labor in the US. For more details see this nice paper by Daron Acemoglu and David Autor here. In particular, see the discussion about Figure 3 in page 439.
We then talked about business cycles in the US. We claimed that the interest to explain what is behind those fluctuations is part of an old question. You guessed that "animal spirits", policy mistakes and/or efficiency changes could be good candidates to explain why the economy fluctuates around a trend.
Please read Handout #5 and Chapter 8 from the textbook ("A Two-Period Model: The Consumption-Savings Decision and Credit Markets")
Thanks all for your participation and patience
Tu, 11/05/13
We used the one-period model to make some predictions on output (y), hours-worked (N), wage (w), and profits (pi) by changing the efficiency parameter z. We saw that when z is the only driver of business cycles the predictions of the model are somewhat consistent with the U.S. data. The model's predictions are:
1. (Real) wage is strongly procyclical
2. Consumption is procyclical
3. Hours-worked are acyclical
4. Consumption is as volatile as output
We then noted that (3) and (4) are at odds with the U.S. data. These two shortcomings of the model are the motivation to extend the model. From now on we will be discussing a model of 2 periods. We also guessed why this straightforward extension might help at solving those two failures of the model. Another shortcoming could be that in the U.S. data real wages are weakly, not strongly, procyclical.
But, do we have another candidate as a driver behind business cycles? We also considered changes in government expenditures as a candidate. The prediction of the one-period model with only changes in government expenditures (G) are:
1. Consumption is countercyclical
2. (Real) wages is countercyclical
3. Hours-worked are procyclical
We saw that even though (3) is now consistent with the U.S. data, we get this nice prediction at the expense of two awful predictions of the model, namely, (1) and (2). We then argued that changes in z are the more promissory factors to understand business cycle fluctuations in the U.S.
Next, we introduced a 2-period model. We made some simplifications such as:
1. No leisure-work decision. The representative consumer has to make decisions on how much to consume today and tomorrow. We assumed that he receives endowments in each period freely.
2. No firms. This is a consequence of (1).
3. No government. This is a simplifying assumption.
We then posed the consumer problem and solved it. We found that there are two equations characterizing the solution of this problem. Next week we will discuss the intuition behind these equations.
Please read Handout #5 and Chapter 8 from the textbook ("A Two-Period Model: The Consumption-Savings Decision and Credit Markets")
Tu, 11/12/13
PS3 is posted
We discussed the intuition behind the two equations that characterize the solution of the consumer's problem in a 2-period economy. We then discussed an example. In this example, consumer's preferences were logarithmic (u(C)=log(C) and u(C')=log(C')) and beta*(1+r)=1. We then found algebraic expressions for optimal consumption today and tomorrow. The expression for current consumption (today) we found is as follows:
C*=((1+r)/(2+r))*[y+y/(1+r)]=((1+r)/(2+r))*W
As we can see, in this simple example, consumption is a function of two variables: wealth, defined as the present value of the income, and the interest rate.
Consumption in both periods is a function of wealth, which is the present value of income (endowments). In particular, current consumption is only a function of current income to the extent that changes in current income reflect in changes in wealth. We showed an example in which we changed current income but not wealth. As the model predicts, consumption need not to change. This result is due to Friedman (1957) "A Theory of the Consumption Function". We argued that consumption is a function of wealth because in this model the representative consumer is able to borrow and lend money. This is the key assumption.
Consumption is also a function of the interest rate. An increase, for example, in the interest rate may affect current consumption in three different ways:
1. If the consumer is a borrower then an increase in the interest rate makes him poorer. Then C and C' decline. If the consumer is a lender then an increase in the interest rate makes him richer Then C and C' increase. This is the income effect whose impact depends on whether the consumer is a borrower or lender.
2. We claimed that the interest rate is the relative price of consumption today (relative to consumption tomorrow). Then an increase in the interest rate makes consuming today more expensive and therefore the demand for C will decrease (and the demand for C' will increase, because consuming tomorrow became relatively cheaper). This is the substitution effect.
3. Wealth effect. Notice that since wealth is, by definition, the present value of income (endowments) an increase in the interest rate will decrease wealth.
We then moved on and talked about general equilibrium. Since the interest rate is the key price in this economy we wanted to analyze why this prices may change. We introduced the market of funds whose price is the interest rate. We needed to define who are demanding and supplying funds in this market. We said that consumer can save and then they may be regarded as supplier of funds. But who demands funds? Since there are only consumers in this economy the answer is nobody. We then drew a diagram that represented the market of funds. The supply of funds (savings) are upward sloping while the demand is vertical at zero.
Tu, 11/19/13
PS3 is due
Cloe covered Handout #5
Stats are (/100):
Mean: 83.4
Median: 91.0
Standard deviation: 25.0
Max: 100.0
Min: 65.0
Tu, 11/26/13
We extended the 2-period model. In particular, we included the leisure decision in the consumer problem and included the labor decision in the firm problem. We also discussed the investment decision of the firms.
Please read Chapter 10 ('A Real Intertemporal Model with Investment') from the textbook and Handout #7.
Tu, 12/03/13
PS4 is posted
Class was cancelled
Tu, 12/10/13
PS4 is due
We have the Final next week. Details below.
For the final please study the following:
1. Handouts 1-5 and 7
2. All PS
3. Spring 2013 Midterm/Final
4. Textbook, Chapters 1-5, 8-10
5. Practice exercises (all)
Stats are (/100):
Mean: 85.6
Median: 91.0
Standard deviation: 19.0
Max: 100.0
Min: 0.0
Tu, 12/17/13
Final
Time: 17:30-19:30
Location: in classroom
Stats are:
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Median
Standard deviation
Max
Min