class diary

Before Midterm

Tu, 01/21/14

Welcome to 3102!

We introduced each other. We then checked the syllabus quickly. Please read it carefully again if necessary. In what follows I'll try to be more precise about problem sets (PS).

We will have 4 PS. A PS will have two parts. The first part will cover math/intuitive questions and the second part will consist on working with data, reading papers, articles, etc. While the first part can be handwritten the second part must be typed. The first part will worth 70% of the grade. The first part is individual although discussion with other students is allowed and encouraged. However, the second part is not. Each group (composed of at most 5 people) must submit a single report on the second part of each problem set. This report must be handed in separately from the first part.

The due date is the the day of presentations. The groups that present that day will be chosen randomly. In order to increase the chance of being selected, two groups will be selected that day instead of one as I said today in class. The second part of the PS will be designed accordingly. Each presentation will last 15 minutes.

The person who is selected to present is left to the group's decision. During presentation the other members can help the presenter if necessary. Discussion in class is encouraged. I'll ask questions and students are also encouraged to do so.

For those who present the final grade on the second part will be an "average" between the grade in the report and the grade in the presentation. Of course, I will value the chance of being selected as well as the quality of the presentation.

Please start reading Chapters 1-3 from the textbook (4th edition). If you have a different edition, please let me know.

For those who have a different edition than the 4th. Here are the list of chapters you are expected to read for the semester.

Chapter 1: Introduction

Chapter 2: Measurement

Chapter 3: Business Cycle Measurement

Chapter 4: Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization

Chapter 5: A Closed-Economy One-Period Macroeconomic Model

Typically the midterm comes here.

Chapter 8: A Two-Period Model: The Consumption-Savings Decision and Credit Markets

Chapter 10: A Real Intertemporal Model with Investment

Chapter 17: Unemployment: Search and Efficiency Wages: Only the following sections:

* The Behavior of the Unemployment Rate, the Participation Rate,and the Employment/Population Ratio in the United States

* A Search Model of Unemployment

* Hojun Lim let me know that Chapter 17 is not in the 5th edition of the book. I'll make a decision about it after the Midterm.

Th, 01/23/14

We discussed what is macroeconomics about and made a list of topics that you related with the word 'macroeconomics'. We chose GDP to learn something about trends and cycles for the case of the US economy.

We then talked about business cycles in the US. We said that in this course our main goal will be to understand what is behind business cycles. You guessed that "animal spirits", policy mistakes (fiscal or monetary) could be good candidates to explain why the economy fluctuates around a trend.

The sources of the data we used today are the following:

GDP from BEA's website

To complement what we discussed today and will discuss later 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!

Finally, please submit the list of the members of your group as soon as possible.

Tu, 01/28/14

Office hours after class in Hanson Hall 3-109

Class was cancelled due to weather conditions.

Th, 01/30/14

We used the U.S. real GDP to talk about cycles and trends. We talked about their meaning and relevance to address some issues such as economic fluctuations (recessions and booms) and economic growth. We then spent the second half of the lecture to learn something about labor market variables. We defined unemployment rate, employment to population ratio, and labor force participation rate. We used this nice website to take a look at the unemployment rate and the female and male labor force participation rates.

For next class please start reading Chapter 4 from the textbook.

Tu, 02/04/14

We defined economic model and claimed that it is a tool that we economist may use to understand real-world phenomena. It is important to remember that our subject of study is not the model itself but human behavior and choice at reallocating scarce resources.

We then made a refresher tour around the consumer choice model you are familiar with since Econ 3101. We then posted the consumer's problem mathematically. Ian helped us to remember how to set up the Lagrangian and derive the first order conditions of the problem. Thanks Ian. We must be careful with taking into account all the constraints of the optimization problem, including the non-negativity constraints. Sometimes we will disregard corner solutions and therefore we won't be worry about these constraints.

We spent the last 10 minutes by discussing the intuition behind the first order conditions. Please think about the presence of the Lagrange multiplier in the marginal cost side of the equation for the next class.

Those who earned points today for the PS1 are the following:

Ian (4)

Ruben (2)

Jiaqi (2)

Brady (2)

Lance (2)

Taylor (2)

Thanks all for your participation and insights!

Th, 02/06/14

We highlighted the relevance of the Lagrange multiplier as the marginal utility of income and as the shadow price of an additional unit of income (which relaxes the constraint and allow the consumer to enjoy extra happiness). We then arrived at the key optimality condition which states that the marginal rate of substitution between x and y must be equal to the relative prices. We then argued that what matters is the relative price (the ratio between prices of goods x and y). This relative price works as a signal of the relative scarcity of resources and serves as a guide to the consumer's decisions.

Please keep reading Chapter 4 from the textbook.

Those who earned points today for the PS1 are the following:

Baxter (3)

Emily (1)

Martin (3)

Thanks all for your participation!

Tu, 02/11/14

PS1 is posted

We finished our quick review of the consumer choice model that you saw in Econ-3101. We then talked again about the purpose of part of this course. We want to understand why an economy experiences business cycles. We provided more precise definitions of a recession and a recovery. If you are interested on how the recent recovery looks like see this nice video. You mentioned a list of candidates that may be plausible drivers of business cycles fluctuations. We will pick productivity shocks as the only source of those movements and study they role in a very simple model.

Please keep reading Chapter 4 from the textbook.

Th, 02/13/14

Office hours after class in Hanson Hall 3-109

From now on we will focus on the role of productivity shocks as the main drivers behind business cycles fluctuations. We will study a model, called a real business cycle (RBC), and we will assume that these shocks are the only shocks hitting the economy. At the end, we would like to answer the following question: If productivity shocks were the only shock hitting the economy what would be the fraction of the real-world business cycles fluctuations accounted for by the model? Of course the answer ranges from nothing (0%), all (100%) or something in between. We said the Kydland and Prescott were the first researchers to answer that question. They found that the answer is 70%.

We then used data on real GDP, real stock of capital and total hours worked to compute a productivity measure. We did this by assuming that output in the U.S is produced according to the Cobb-Douglas technology. We assume that A is accompanying L. Ian made a point about it, on the reason to do so. We will discuss this issue later when we study firms.

We then started the discussion of consumer's problem. A representative consumer values consumption and leisure time. Time endowment is fixed and she has to allocate time in two activities: leisure and working. We set the consumer's problem and set the Lagrangian function. Then we derived the FOCs and got, as usual, two equations: the first one is MRS=w and the second one is the budget constraint.

Next class we will finish this discussion.

Please keep reading Chapter 4 from the textbook.

Those who earned points today for the PS1 are the following:

Yingqian (2)

Tu, 02/18/14

We discussed the consumer's problem in some detail. Again, the consumer has two decisions. The first one is how much consume and the other one is allocating time in either leisure time or working time. We provided an example using the Cobb-Douglas utility function. We also assumes that the only source of income is labor income. After setting up the Lagrangian and deriving the first order conditions of the maximization problem we obtained two equations: the first one for the optimal consumption and the other one of the optimal amount of time spent in leisure activities. We saw that in this simple example the latter equation of optimal leisure time does not depend on the real wage. What is that? We know that when the real wage changes there are two possible effects: the substitution effect and the income effect. First, when the real wage increases leisure becomes expensive (since the real wage is the relative price of leisure) so the consumer would be willing to substitute leisure time for working time (she is willing to spend more time working). Second, when the real wage increases the consumer will be willing to consume more of leisure time since leisure is considered a normal good. The same logic applies when the real wage decreases.

Please keep reading Chapter 3 from the textbook and Handout #2 (posted in the material link). Some of you may want to study the math refreshers posted in the material link.

Th, 02/20/14

We started with your presentations. Thanks Martin and Taylor for your nice presentations. I've learned a lot about them.

PS1 is due

Stats are (/100):

Mean: 86

Median: 87

Standard deviation: 8

Max: 98

Min: 64

Tu, 02/25/14

Office hours after class in Hanson Hall 3-109

We discussed another example in the consumer's problem set up. We assumed everything equal to the previous example except for the fact that now she (the consumer) has to pay a consumption tax for every unit of good purchased. We derived the key algebraic expressions for optimal consumption and leisure. We then talked about the intuition behind these equations. We then started to discuss the new topic: the firm's problem.

Please read Chapter 3 from the textbook and study Handout #2 and #3.

Th, 02/27/14

PS2 is posted

We continued the discussion from the last lecture about the firm's problem. We then made a short digression to talk about the properties of a production function. We stressed the following properties: 1) it exhibits constant return to scale, 2) it has decreasing marginal returns for both inputs (capital and hours worked), and 3) it satisfy the so-called Inada conditions. We also talked in detail about the meaning of those properties. Next class we will focus on the firm's problem and how to solve it.

Tu, 03/04/14

Office hours after class in Hanson Hall 3-109

Today, we spent a lot of time taking about the firm's problem, the first order condition of the optimization problem ad the intuition behind the optimality condition (marginal product equal to the wage). We stressed the difference of first and second order conditions and said that in this simple model the second order condition is usually met since the profits function is strictly concave in the hours worked. Next time we will talk about market equilibrium.

Th, 03/06/14

We started to discuss the concept of market equilibrium. This simple model has 2 markets: the market for consumption goods and the market of hours worked (or labor market). We focused on the labor market. The demand of hours worked is, under the assumptions discussed before in class, downward sloping. However, the slope of the labor supply is ambiguous and depends on the tension between the substitution and income effects. In the example provided in class the first effect beats the second one and therefore the labor supply schedule is upward sloping.

We also derived algebraic equations for both labor and demand supply schedules. Please study the intuition of each variable in those equations. Next class we will continue to talk about market equilibrium.

For the midterm please study the following:

1. Handouts 1-3

2. PS1 and PS2 (although the midterm is not expected to be math intensive as in PS1 you are expected to be ready to deal with those utility function listed in PS1 and general concepts like elasticity )

3. Spring 2013/Fall 2013 Midterms (I will upload the answer key of the Fall 13 Midterm on Tuesday)

4. Textbook, Chapters 1-4 (please read the book wisely. Do not focus on things that were not covered in class or presentations. However, you must be familiar with Econ-1102 concepts like GDP, inflation, and labor market variables like unemployment, labor force, etc)

5. Practice exercises

6. Presentations (general -no specific numbers- questions may be included in the short questions section of the midterm)

Tu, 03/11/14

We had the two presentations about the second part of the homework. The spent a lot of time taking about the intuition of each equation. Unfortunately, the second presentation did not allow us to learn more. We then cover some questions about the midterm.

PS2 is due

Stats are (/100):

Mean: 85

Median: 87

Standard deviation: 7

Max: 96

Min: 68

Th, 03/13/14

Midterm

Time: 8:15am-9:30am

Location: in classroom

Stats are (/100):

Mean: 79

Median: 80

Standard deviation: 9

Max: 101

Min: 60

After Midterm

Tu, 03/25/14

Office hours after class in Hanson Hall 3-109

We discussed the answer key of the midterm.

Th, 03/27/14

Jackie helped us to understand presentation 2 in the homework. I used this as an excuse to review some economic concepts you are suppose to know from Econ 3101.

Tu, 04/01/14

We continued taking about (labor) market equilibrium. We derived equations for the equilibrium market wage and the equilibrium number of hours-worked. We also discussed the intuition behind those two equations. Next class we will extend the model to two periods.

Please read Handout #5 and Chapter 8.

Th, 04/03/14

We finished the discussion of the one-period model. We pointed out some failures of this model when we compared its prediction with what we observe in the data. We will use these failures as a motivation to introduce some extensions. In particular, we will study a two-period model. Please read Handout #5 and Chapter 8.

Tu, 04/08/14

Office hours after class in Hanson Hall 3-109

PS3 is posted

We started to discuss the extension of the one-period model. Now the consumer lives two periods. We saw that in the absence of a saving technology the solution of the problem is straightforward. In this case the consumer will choose the consume the endowment in each period. We then focused on the more interesting case in which the consumer could use a saving technology . You may think of it as a bank. We posted the problem and characterized the solution. By using the usual techniques we arrived at two equations: (1) the Euler equation for consumption and (2) the intertemporal budget constraint. Next class we will talk about equilibrium in this simple model.

Th, 04/10/14

Office hours after class in Hanson Hall 3-109

We introduced the market of fund diagram to study the market equilibrium in the two-period model. We then covered one example in which the representative consumer suddenly becomes more patient. Next class we will add a second agent: the government.

Tu, 04/15/14

We extended the model to include the role of the government. We said that all what government has to do is to obey a intertemporal budget constraint. The interpretation of this constraint is similar than the interpretation we used to understand the consumer's intertemporal constraint. We then modified the market of funds diagram. We saw that now government is the agent who demand funds. Hence the demand schedule is still vertical but not necessarily at zero funds. Demand for funds is insensitive to the interest rate because by definition B=G-T and both G and T are given.

PS3 is due

Stats are (/100):

Mean: 91

Median: 91

Standard deviation: 7

Max: 104

Min: 72

Th, 04/17/14

We finished the discussion of the 2-period model with government. We then compared the two models: with and without a government. In particular, we talked about how to find the competitive equilibrium in the market of funds in each case.

Tu, 04/22/14

Office hours after class in Hanson Hall 3-109

We introduced the intuition behind the Ricardian Equivalence.

Th, 04/24/14

PS4 is posted

We motivated the concept of competitive equilibrium. We argued that a model is like a story or fable. One may regard a story as a good one if it has a beginning where the plot is set and the main characters defined and an end. Similarly, a model is well defined if the agents and their set of actions is well described and if the solution of the model is achieved. The bridge between the beginning of a model and its end is a solution concept. We claimed that the concept of competitive equilibrium is a solution concept. We have tried to tell the story behind each model we have discussed so far.

Please read Chapter 10 from the textbook and Handout # 7.

Tu, 04/29/14

Office hours after class in Hanson Hall 3-109

We talked about the 2-period production economy. We claimed that this topic is intended to give us a summary of all the economics we have discussed so far. This model encompasses the economics of the 1-period model and the 2-period endowment economy. Please read Chapter 10 from the textbook.

Th, 05/01/14

PS4 is due

Stats are (/100):

Mean: 92

Median: 90

Standard deviation: 7

Max: 106

Min: 81

Tu, 05/06/14

Office hours after class in Hanson Hall 3-109

Last time we covered the consumer's problem. Today we discussed the firm's problem. We said firms seek to maximize the discounted sum of future profits. In the first period, firms are given a stock of capital. But firms have to invest in the stock of capital for tomorrow. We assumed firms do so in the first period in preparation for production taking place in the second period. So we also talked about investment. We finally talked about market equilibrium in this economy.

Th, 05/08/14

This was a review session

Tu, 05/13/14

Finals week

The study material for the final is cumulative. So in addition to the material for the midterm listed above, please study the following:

1. Handouts 4, 5 and 7

2. PS3 and PS4

3. Spring 2013/Fall 2013 Final Exams

4. Textbook, Chapters 5, 8 and 10 (please read the book wisely. Do not focus on things that were not covered in class or presentations)

5. Practice exercises

6. Presentations (general -no specific numbers- questions may be included in the short questions section of the final)

Th, 05/15/14

Final

Time: 8:15am-9:30am

Location: in classroom

Stats are (/100):

Mean

Median

Standard deviation

Max

Min