| ECO 202E Basic Macroeconomics
Spring 2006 |
Dr.
Robert Jantzen
Economics Department |
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Where and WhenIn the Spring of 2006, this course meets at 1 p.m.. on Mondays and Thursdays in Hagan 209, and on Wednesdays in Hagan 203. Classes begin on 1/23/06.Course DescriptionA study of how national economies function. An analysis of differing economic systems, the proper roles for government, modern capitalism, unemployment, inflation, business cycles, the determinants of national output, government demand and supply management, money and banking, international trade and finance, and economic development. Formerly ECO 205. Not open to students who have taken ECO 1101. Corequisite: college level mathematics course. 3 credits.Course ObjectivesThe primary objective of this course is to impart to students a working knowledge of how the national economy operates. Students will learn how critical national economic outcomes are determined, like the unemployment rate, inflation rate, the standard of living, interest rates, the dollar exchange rate, etc. Students will also analyze the ability/inability of government to influence national economic outcomes. Specific objectives for each topic are outlined below.Text
Course Requirements and GradingStudent grades for the course will be determined as follows:Exams (4 or 5)
= 93% of the course grade.
No extra credit work is available and no makeups will be given for any
of the exams or homework assignments. The lowest exam grade, however,
will be disregarded when the course grade is determined. Obviously,
neither plagiarism nor cheating is acceptable behavior, and will warrant
failure of the homework/exam involved. Being late for a class counts
as an absence. Any student who misses ten or more classes will be
assigned the FA (failed for absences) grade.
Contact InformationInstructor: Robert Jantzen, Ph.D.Office Location: 34 Hubert Place, 3rd floor Voice: (914) 637-2731 Fax: (914) 633-2511 Office Hours: M, W & TH at 11 a.m.- Noon, by appointment. E-mail: RJantzen@Iona.edu Web-Page: www.iona.edu/faculty/rjantzen/homepage.htm |
| I. Introduction
II. National Income, Production and Prices A. Gross Domestic Product B. Business Cycles, Unemployment & Inflation |
V. Macroeconomic Stabilization
A. Macro Theories and Policy B. The Phillips Tradeoff? C. Budget Deficits & the National Debt D. Economic Growth |
| III. Macroeconomic Analysis
A. Aggregrate Expenditures Model B. Aggregate Demand and Aggregate Supply |
VI. International Economics
A. International Trade B. Foreign Exchange C. Summary |
| IV. Monetary and Fiscal Policy
A. Money Creation and Banking B. The Federal Reserve C. Fiscal Policy |
| I. Introduction |
Chapters 1, 2, 4 and 23 (the latter
available at: http://www.mhhe.com/economics/mcconnellmacro15e/
student/olc/chap23bonuschapter.mhtml) |
| Objectives:
I.A What are the really big economic questions that every society has to answer? I.B Compare and contrast the four types of economic systems, i.e., Capitalism, Fascism, Socialism, and Communism. How do they each differ in terms of resource ownership and decisionmaking? I.C What are the relative merits and drawbacks of capitalism versus communism? Briefly review the collapse of communism in the Soviet Union and the resulting difficulties of the emerging capitalist economy in Russia. I.D Web-Based Question: The Moscow Times website (http://www.themoscowtimes.com) provides general and business news on Russia. Review the Russian news headlines that report on the economy and businesses. Which stories are typical stories relating to capitalist economies ( e.g., takeovers, profits, etc.)? Which stories are unusual for capitalist economies and are related to transition economic problems? |
II. National Income, Production and Prices
| A. Gross Domestic Product |
Chapter 7.
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| Objectives:
II.A.1 GDP is often used as a basis for judging the health of the economy. Explain how GDP is measured. What is included/excluded? What factors make nominal (current$) GDP a sometimes poor measure of production trends? What measures are better, and how so? Explain fully. II.A.2 Web-Based Question: The Bureau of Economic Analysis' (BEA's) website (http://www.bea.doc.gov/bea/rels.htm) provides the latest estimates for US Real GDP. Use the website to find the latest estimate for the past quarter's Real GDP growth rate. Is the estimate an "Advance," "Preliminary" or "Final" estimate. Also look at Tables 1 & 2 and describe the changes in Real GDP growth that have occurred in the past 4 quarters. Which components of GDP have been responsible for the recent trend in Real GDP? II.A.3 GDP is the broadest measure of economic activity. Is GDP a good measure of social welfare and happiness? Why or why not? II.A.4. Web-Based Question: According to Business Week (click here), in what way do the BEA GDP numbers understate the performance of the US economy? II.A.5 Web-Based Question: The CIA’s World Factbook website http://www.odci.gov/cia/publications/factbook)provides detailed economic and other information for almost all countries. Use the website to find the following information for the US, Japan, Germany, Mexico and Russia: GDP per capita, poverty rate, infant mortality rate, life expectancy (male & female), and current environmental issues. Do the GDP per capita (per person) numbers give you a good picture of the relative well-being of each country’s citizens? Why or why not? |
| B. Business Cycles, Unemployment & Inflation |
Chapters 7 & 8.
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| Objectives:
II.B.1 Market economies are characterized by wide, repeating swings up and down in economic activity, called business cycles. Discuss the four phases of the cycle. How are the turning points in the cycle determined? Why do business cycles happen? II.B.2 Web-Based Question: The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is the most cited source for dating cyclical turns in the US economy. The NBER website contains the information on the recent cycle turning dates and the latest report of the Committee. Since 1945, how many cycles has the US economy been through? How long was the average expansion? contraction? What's been happening to the length of the expansions and contractions in the past two decades? Looking at the latest report of the Committee, when did the most recent recession begin? When did the recovery begin? How does the commitee make its determination? What data does it rely on? What data does it not rely on? II.B.3 How is the unemployment rate computed, i.e., who's counted? Discuss the types of unemployment and their causes. Does the government index of unemployment provide a good "picture" of the lack of jobs in the economy? What are the costs/benefits of unemployment? If differing countries have the same annual unemployment rate are they likely to have the same kinds of problems? II.B.4 Web-Based Question: Each month the US Department of Labor website (http://stats.bls.gov/news.release/empsit.nr0.htm) reports the current employment situation in the US. Using the data contained in Table A, how much did the number employed and number unemployed change in the past quarter? Did they change by equal amounts? Why or why not? II.B.5 Web-Based Question: Business Week reports on recent labor market developments for young workers. Describe what has happened in their job market during the last recession (which spanned most of 2001). Does the change in unemployment accurately portray what's been happening to employment? Why or why not? II.B.6 What is inflation? How is inflation measured? What are the problems of measuring inflation? What are the major types/causes of inflation? What are the costs/benefits of inflation? II.B.7 Web-Based Question: Each month, the US Department of Labor website (http://stats.bls.gov/news.release/cpi.nr0.htm) reports the latest CPI figures. What are the current figures for the official CPI for a) the CPI -U index level; b) the 12-month percentage change; c) the one-month percentage change; and d) the annual percentage change so far this year. What does the CPI -U index measure? What sectors are making the index increase the most? What sectors have limited increases in the index? Also look at the 12 month percentage change in the C- CPI - U index. Is it the same as the CPI - U change? Why or why not? II.B.8 Web-Based Question: The OECD (Organization for Economic Cooperation and Development) website provides the latest information on the economic performance of most industrialized countries. Using the website's data for the period, rank the following six countries (US, France, Germany, Italy, Japan & the United Kingdom) from best to worst in the following categories: GDP % change, inflation and unemployment rate. Which economy has performed best overall? Worst? |
III. Macroeconomic Analysis
| A. Aggregrate Expenditures Model |
Chapters 9 & 10.
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| Objectives:
III.A.1 What are the major and minor determinants of consumption spending in the economy? III.A.2 Define Investment. What are the determinants of investment spending? Why is investment spending relatively unstable? III.A.3 Web-Based Question: The Bureau of Economic Analysis website (go to http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp?Selected=Y and click on Table 5.3.5) provides data for real private fixed investment (I) in the US. Looking at annual data over the last 8-10 quarters, what is the largest component of investment, structures or equipment? Have recent investment levels been fairly constant or volatile? Which subcomponents have been the most/least volatile? III.A.4 Is government spending for services and production contingent on the level of real GDP? III.A.5 What are the factors that influence the level of Exports and Imports? Does the US real GDP influence them, and if so how? III.A.6 Explain verbally how the equilibrium level of national output is determined, including consumption, investment, government purchases and production, exports and imports. III.A.7 What is the spending multiplier effect, verbally and algebraically? What is the marginal respending rate (MRR)? What factors effect the size of the spending multiplier. Be specific. How much of a change in nominal GDP will eventually occur if the spending multiplier is 2 and consumption increases today by $40. III.A.8 Web-Based Question: The US Census Bureau (http://www.census.gov/econ/www) tracks the latest economic indicators. Look at the charts contained in the Economic Briefing Room and describe what has happened to each of the indicators recently. Which ones are pointing to a more prosperous economy? Less prosperous? III.A.9 Web-Based Question: Check the latest monthly export/import figures at the Bureau of Economic Analysis’ webpage (http://www.census.gov/indicator/www/ustrade.html). Have the changes in exports and imports in the past month increased or decreased GDP? Why so? III.A.10 Web-Based Question: The Bureau of Economic Analysis website also (go to http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp?Selected=Y and click on Table 1.1.2) provides data on the contributions of the differing sectors to the overall level of Real GDP change. Looking at the last couple of quarters, what sectors (consumption, investment, government, export and imports) have been the major factors influencing the trend in real GDP? |
| B. Aggregate Demand and Aggregate Supply |
Chapter 11.
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| Objectives:
III.B.1 Explain what the aggregate supply line shows? Compare and contrast its three regions. Why do they occur? What happens to the price level as output changes in each region? Illustrate. III.B.2 Explain what the aggregate demand line shows? Why does it look the way it does? III.B.3 How does the national economy achieve an equilibrium price level and level of output? Illustrate. Why isn't the price level higher or lower? Why isn't the production level higher or lower? III.B.4 Explain what is meant by a change in aggregate demand. What could cause aggregate demand to increase or decrease? How so? What would happen to the nation's level of output and price level if aggregate demand changed? What does it depend on? III.B.5 Explain what is meant by a change in aggregate supply. What could cause aggregate supply to increase or decrease? How so? What would happen to the nation's level of output and price level if aggregate supply changed? III.B.6 Classical economists believed that the full employment level of output was the natural state of the economy in the long run. Why? Keynes argued that full employment was not guaranteed. Why? |
IV. MONETARY AND FISCAL POLICY
| A. Money Creation and Banking |
Chapters 13 & 14.
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| Objectives:
IV.A.1 What is money? How does the government define money? Why is money considered the most liquid asset? What kinds of assets make for a good money? IV.A.2 What are the functions of money? Why do people demand money? What major factors effect the demand for money? IV.A.3 What makes money valuable? IV.A.4 How does the banking system create money? Is the reserve requirement ratio important? Why? If bank reserves increase by $10, how much money ultimately could be created? IV.A.5 Why are US government bonds a close substitute for some of the assets in the money supply? How so? Why would the public want to hold more bonds and less money? more money and less bonds? Explain. |
| B. The Federal Reserve |
Chapter 15.
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| Objectives:
IV.B.1 What are the major parts of the Federal Reserve System? IV.B.2 What are the major functions of the Federal Reserve? IV.B.3 What are the major tools for implementing monetary policy? How do they each work to increase or decrease the money supply and interest rates? IV.B.4 How can monetary policy be utilized to fight a recession? An inflation? Be specific. IV.B.5. Web-Based Question: The Federal Open Market Committee (FOMC) of the Federal Reserve (FED) holds eight regularly scheduled meetings annually to direct the conduct of monetary policy. Go to the FOMC's web-site (http://www.federalreserve.gov/fomc/) and: (1) review how open market operations have been trying to influence the intended federal funds rate over the past year; and (2) review what the most recent meeting's statement says about the economy and monetary policy. IV.B.6 Web-Based Question: The FED makes a semiannual Monetary Policy Report to the US Congress (http://www.federalreserve.gov/boarddocs/hh/) on the conduct of monetary policy and the state of the US economy. Summarize the FED chairman's testimony to Congress on the performance of the US economy and the FED’s policy actions. IV.B.7 Web-Based Question: CNN Money contains a report comparing recent monetary policy and economic performance in the US and Japan. Based on the report, what are the similarities/dissimilarities between the US and Japan experiences, and what are the implications for monetary policy? |
| C. Fiscal Policy |
Chapter 12.
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| Objectives:
IV.C.1 What is fiscal policy? What is the appropriate demand-side fiscal policy to fight a recession? an inflation? IV.C.2 If government spending increases by $50, will the economy's spending level increase by more than $50? Why or why not? IV.C.3 Explain the functioning of the built-in automatic stabilizers. IV.C.4 What are the ways government can finance budget deficits? What are the implications for the economy of each? IV.C.5 Web-Based Question: Each year the President sends a proposed budget to Congress outlining spending and tax plans for the following year. However, the Republicans and Democrats in Congress usually have differing views about what the budget should be. Go to the Senate budget committee’s website (http://www.senate.gov/~budget/) and briefly review the Introduction and Overview sections of each party's analysis of President Bush's proposed FY2003 budget. Do you think that economic concerns and/or political concerns dominate the shaping of fiscal policy? |
V. Macroeconomic Stabilization
| A. Macro Theories and Policy |
Chapters 16 & 17.
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| Objectives:
V.A.1 What are the problems/limitations of discretionary monetary and fiscal policies? V.A.2 How do Supply-Siders differ in their view of fiscal and monetary policies' effects from Keynesians? What is the Laffer Curve? V.A.3 Explain how rational expectations may cause monetary policy intended to stimulate/contract the economy to backfire. Explain how rational expectations may cause fiscal policy designed to stimulate/contract the economy to backfire. How does this complicate efforts to manage the economy. V.A.4 Discuss the Equation of Exchange. What do Monetarists believe is the linkage between the money stock and GDP spending levels? Implications? What do Keynesians believe is the linkage between the money stock and GDP spending levels? Implications? V.A.5 Why might there be a conflict between a short run stabilization policy and a long run policy? |
| B. The Phillips Tradeoff? |
Chapter 16.
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| Objectives:
V.B.1 Is there a tradeoff between the rate of unemployment and the level of inflation? V.B.2 What are the alternative explanations for the tradeoff, i.e., the Keynesian, Natural Rate and Rational Expectations views? Policy differences? V.B.3 What is Stagflation? What are the various explanations for why the US had stagflation in the 1970s. |
| C. Budget Deficits and the National Debt |
Chapter 18.
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| Objectives:
V.C.1 What is a structural deficit? A cyclical deficit? Does the actual deficit show the effect of fiscal policy on the economy? V.C.2 What are the three views as to whether or not the Budget should be balanced? V.C.3 Web-Based Question: Visit the US Treasury’s Public Debt website http://www.publicdebt.treas.gov/opd/opdpenny.htm) for national debt data. How large is the present US National Debt? How large is it compared to the debt of 10 years ago? Last year’s debt? V.C.4 Is the US National Debt too large? What are the benefits and costs of running budget deficits and increasing the national Debt? Is a balanced budget amendment a good idea? V.C.5 Is the Social Security program going bankrupt? Does the program need reform, and if so, what kind of reform? Click here for a Business Week study of Social Security. V.C.6 Go to the The National Budget Simulation website and try to cut the projected budget deficit for the proposed 2006 budget in half (with the short version). What programs are you going to cut? What taxes are you going to raise? What tax breaks (i.e., called tax expenditures) are you going to curtail? What are the chances that voters will re-elect you to Congress? |
| D. Economic Growth |
Chapter 17.
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| Objectives:
V.D.1 Why is economic growth important? What are the major causes of economic growth? V.D.2 In recent decades, US economic growth first declined markedly and then rebounded in the 1990s? How come? Prospects for the future? |
VI. International Economics
| A. International Trade |
Chapters 6 & 20.
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| Objectives:
VI.A.1 Web-Based Question: The US Census Bureau (http://www.census.gov/foreign-trade/top/index.html#top_partners) ranks the top 10 trading partners of the US, as well as the top 10 countries with which the US has a trade surplus or a trade deficit. Using the current month's data, compare the top 10 deficit and surplus countries with the top 10 total (exports + imports) trading partners. Does the US have primarily surpluses or deficits with our top 10 trading partners? How dependent is the US economy on international trade? VI.A.2 Web-Based Question: The US Census Bureau (http://www.census.gov/indicator/www/ustrade.html) provides the latest data on US trade in goods and services. In the past year, has the US trade balance improved or deteriorated? Major US trade strength occurred in which category, goods or services? Major weaknesses? The largest increases in exports were in what products? Largest import increases were? VI.A.3 Why do countries trade? What is the economic basis for trade? What is comparative advantage and specialization? VI.A.4 Show why two countries with comparative advantage in differing products will jointly benefit from specialization and trade. VI.A.5 What are the economic effects of trade? Who gains/loses? VI.A.6 What forms of protection do countries use to limit imports? Why do countries adopt protectionist measures? What are the economic effects of such measures? Evaluate the case for/against protection. VI.A.7 Business Week has tracked the effect of the NAFTA trade agreement on the US and Mexico. How has the move to liberalize trade effected the economies of Mexico and the US? |
| B. Foreign Exchange |
Chapter 21.
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| Objectives:
VI.B.1 What is the Balance of Payments? How is it derived? What does it represent? VI.B.2 How are exchange rates determined under a floating exchange rate system? What factors will lead to changes in exchange rates? What are the problems of a floating exchange rate system? VI.B.3 What is meant by fixed exchange rates? How are fixed exchange rates maintained when Balance of Payment surpluses or shortages develop? VI.B.4 Web-Based Question: The Federal Reserve Board (http://www.federalreserve.gov/releases/H10/hist)provides historical foreign exchange rate data for a variety of currencies. Look at the data for the Japanese yen from 1990 to the present. If you were in Tokyo at the end of December every year since 1990, and bought lunch for 1000 yen, how much would you have had to pay in dollars for each year’s lunch? |
| C. Summary |
| Objectives:
VI.C.1 Devise and explain the purpose of an economic strategy utilizing fiscal and/or monetary policy to deal with each of the following economic problems. Be specific as to the actual mechanics of the strategy's implementation. Trace the strategy's likely effects on the money supply, the budget deficit, the type and level of spending occurring in the economy, interest rates, unemployment, inflation, the exchange rate, imports, exports, etc. Is the strategy primarily a demand-side or supply-side strategy? a. A recession with too
much unemployment.
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