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(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 1
Economics 221
Macroeconomics in the World Economy: Theory and Applications
(CRN – 26153)
Syllabus – Spring 2014
Instructor Dennis Plott
Instructor E-Mail
Instructor Office Location
Instructor Office Hours: Days & Times
Teaching Assistant (TA)
TA E-Mail
TA Office Location
TA Office Hours: Days & Times
dplott2@uic.edu
University Hall (UH) 819
Monday, Wednesday, Friday 2:00 p.m. – 3:00 p.m.
Diana Salazar
dsalaz6@uic.edu
University Hall (UH) 702
Tuesday 2:00 p.m. – 3:00 p.m.
Class Location Burnham Hall (BH) 308
Class Meeting: Days Monday, Wednesday, Friday
Class Meeting: Time 1:00 p.m. – 1:50 p.m.
Website https://blackboard.uic.edu
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 2
University Course Description
3 hours. Determinants of the level of economic activity, inflation, unemployment, international
economics, impact of domestic and world economy on business decisions, applications of the
theory. Same as INST 221.1
Course Goals
This is a course in intermediate macroeconomics with an emphasis on real world applications.
There are two main objectives for this course.
To develop simple models that can be usefully applied to generate realistic explanations
about the behavior of important macroeconomic variables such as output and income,
employment and unemployment, interest rates, the government budget balance, exchange
rates and the current account balance, and inflation.
To apply these models to understand and interpret current and historical macroeconomic
developments – including monetary and fiscal policy choices – and to make predictions
about future macroeconomic events, primarily in industrialized countries.
Responsibilities and Expectations
As the instructor, my responsibilities are to come to class prepared to teach; to organize
and present the material in a manner that facilitates your learning; to respond to and
encourage questions; to oversee grading of assignments; to be available during office
hours and for scheduled appointments; and to stimulate an enthusiasm for economics and
for learning.
As a student, your responsibilities are to come to class prepared to learn and to participate
in lectures; to complete the assigned readings before class (allowing time to re–read
difficult material); to complete all assignments on time; and to take all exams.
Prerequisites
ECON 130, or both ECON 120 and ECON 121; and MATH 1602.
Required Textbook
Andrew B. Abel, Ben S. Bernanke, Dean Croushore, Macroeconomics (8th Edition3),
Prentice Hall, 2014; ISBN-10: 0132992280/ ISBN-13: 9780132992282
1 http://www.uic.edu/ucat/courses/ECON.html 2 http://www.uic.edu/ucat/courses/ 3 This is the textbook in the bookstore. If you wish to use a previous edition you are free to do so, but you alone are responsible for any and all differences.
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 3
Supplementary (Optional) Periodicals, News, and Internet Resources
Greg Mankiw’s Blog: Random Observations for Students of Economics4
The Becker-Posner Blog: A Blog by Gary Becker and Richard Posner5
Financial Times6
The Wall Street Journal7
The Economist8
Vox9
Journal of Economic Perspectives10
Basis for Final Grade
Assessment Percentage of Grade
Problem Sets 10%
Exam I 20%
Exam II 20%
Exam III 20%
Final Exam 30%
100%
Grading Scale (%)
90 – 100 A
80 – 89 B
70 – 79 C
60 – 69 D
0 – 59 F
4 http://gregmankiw.blogspot.com/ 5 http://www.becker-posner-blog.com/ 6 http://www.ft.com 7 http://online.wsj.com 8 http://www.economist.com/ 9 http://www.voxeu.org/ 10 http://www.aeaweb.org/jep/
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 4
Advice for Success in Intermediate Macroeconomics
Mostly what follows will be known to many of you and applies to most other courses as
well. Here are a few guidelines of tried and true methods to do well. At the very least skim the
relevant sections of the textbook and notes before that material is covered in class. Come to class
and take as good of notes as possible. If using traditional pen/pencil and paper, as most of you
will, I suggest having a ruler (or straight-edge of some sort) and a couple different colored
pens/pencils for graphs. At least once a week review or preferably rewrite your notes. After a
particular section of the book has been covered in class, read (or re-read) that section of the
book. It is absolutely imperative that you do not fall behind in this course. I know many of you
work, have families, commute, take other courses, have social lives, watch Jersey Shore
marathons, etc. However, economics is a deceiving social science in that it builds up like a math
course. Note: this does not mean we will use a lot of math (we will not). But it is similar in that if
you do not fully understand a topic early on, then when we build on that material later you will
find it incredibly difficult to catch-up.
Grading
Three exams will be given during the semester. Exams will include true/false with
explanation, graphing, short–answer (economic rationale), and problem solving (calculation)
questions. No exams are dropped or replaced. No make-up exams will be given. Any missed
exam’s percentage toward your final grade will be added to the final exam’s weight. For
example, if you miss the second exam, then your final exam counts for 50 percent (30% + 20%)
of your final grade. Caveat: no student may miss more than one exam. More than one exam
missed, without verifiable appropriate documentation, will be recorded as a zero. The final exam
must be taken to receive credit in the course. All exams will be returned and complete solutions
will be given in a timely manner. The final exam is cumulative. Method II: If, and only if, a
student takes all of the exams, then half of the lowest exam grade’s weight will be added to the
final; i.e. the lowest exam will be worth 10% and the final exam will be worth 40% of your final
grade. This is an alternative final grade measure that is automatically calculated. The maximum
of the two calculated final grades is given.
The required textbook for the course contains many exercises at the end of each chapter.
Note: although useful and recommended, these questions are entirely optional. The “Analytical
Problems” are most closely related to the exam questions, but the other problems may prove
beneficial in gaining insight and experience with the material. I have matched each problem with
its relevant section and provide a brief description; cf. below.
There will be ten problem sets (one per topic). No problem sets are dropped or replaced.
Problem sets may be selectively graded, but grading will be relatively lighter compared with the
exams. The problem sets are composed of calculation, graphical, and conceptual questions. Note:
questions from past exams will be made available to you through the problem sets.
Late work of any sort will not be accepted under any circumstance.
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 5
Grade Dissemination
All grades will be posted on Blackboard. Due to privacy concerns grades will only be
given through Blackboard or in person. Phone, email, and other postings of student’s grades will
not occur per university policy. No one else other than the student in question is able to collect
graded material for someone else.
Technology, Media, and Classroom Etiquette
For any email correspondence, please, type “ECON 221” in the subject line. This is for
your benefit. I will attempt to answer any and all questions asked through email promptly, but I
may suggest for some questions to speak with me before/after class or during office hours since
it may be difficult to illustrate a concept through email; e.g., problems that benefit from the use
of graphs.
Laptops and iPad type devices are permitted for note-taking and course related material
only. If I discover laptops (iPads, etc.) are being used for non-classroom activities, I will not
allow them in the class. Non-classroom activities include, but are not limited to, checking your
Facebook page, emailing, looking at Reddit, online banking, bidding on cigars, playing Tetris,
looking at Brad Paisley’s website, and watching anime. No, I did not simply list asinine
examples, but have actually witnessed all of these activities during a class.
Calculators may be permitted on some exams. However, only basic calculators up to
scientific calculators. All that is “needed” are basic addition, subtraction, multiplication, and
division functions. Fancy-pants gadgets such as graphing calculators, cell phones, iPads, or
anything that can store or reference information are absolutely not allowed at any time during an
exam.
Cell phones, noise makers, and anything that may disturb the class are to be turned off or
silenced. Please, use common sense and be respectful to your fellow classmates. If these devices
become a problem in class there will be a draconian policy implemented; any student’s noise
maker that goes off in class automatically loses one-percentage point of their final grade for each
infraction. If you wish to text in class be prepared to answer a barrage of questions on the most
recent material covered. If this occurs more than once, the entire class will be given a quiz.
Please, do not eat food in class. It is distracting to me and your fellow students. Bottled
water, coffee, tea, soft drinks, etc. are fine, but please be considerate and do not leave trash. If
you spill something clean it up.
Try to arrive to class on time. I understand you may be late from time to time. If this
occurs please enter the room quietly so as not to disturb the class. The same consideration
applies if you must leave early.
If you miss class it is solely your responsibility to obtain the notes and/or materials given
from a classmate. Office hours are not a substitute for class time, but you are encouraged to
utilize office hours to clarify concepts after you have put forth effort on the material covered.
Actions that have negative effects on others will not be tolerated in the classroom. In
consideration of your fellow students and the instructor, please refrain from talking with your
neighbors during class.
It is your responsibility to check Blackboard on a regular basis.
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 6
Students with Disabilities
Students with disabilities, access needs, and/or questions regarding these topics may
contact the Disability Resource Center at (312) 413-2183 (voice) or (312) 413-0123 (TYY only).
More information can be found at http://www.uic.edu/depts/oaa/disability_resources/index.html
UIC Academic Calendar11
Day Date Month Event
Monday 13th January Instruction begins.
Monday 20th January Martin Luther King, Jr., Day. No classes.
Friday 24th January
Last day to complete late registration; last day to add a course(s) or
make section changes; last day to drop individual courses without
receiving W (Withdrawn) grade on academic record via Student
Self-Service. Last day to submit Withdraw from Term request via
Student Self-Service and receive 100% cancellation of tuition and
fees.
Friday 31st March Last day to file for graduation this term.
Friday 21st March Last day for undergraduate students to withdraw from individual
courses via college office.
Monday
– Friday
24th –
28th March Spring vacation. No classes.
Friday 2nd May Instruction ends.
Monday
– Friday
5th –
9th May Final examinations.
(Tentative) Schedule
Day Date Month Topic
Monday 13th January Syllabus
Topic 0: Course Overview
Wednesday 15th January Topic 1: Macroeconomics – Principles & Extentions
Friday 17th January Topic 1: Macroeconomics – Principles & Extentions
Monday 20th January Labor Day holiday. No classes.
Wednesday 22nd January Topic 1: Macroeconomics – Principles & Extentions
Friday 24th January Topic 1: Macroeconomics – Principles & Extentions
Monday 27th January Topic 2: Production, the Labor Market and Economic
Growth
Wednesday 29th January Topic 2: Production, the Labor Market and Economic
Growth
Friday 31st January Topic 2: Production, the Labor Market and Economic
Growth
Monday 3rd February Topic 3: Consumption, Saving, and Investment
Wednesday 5th February Topic 3: Consumption, Saving, and Investment
11 http://www.uic.edu/depts/oar/current_students/calendars/admin_calendar.html#next_semester
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 7
Friday 7th February Topic 3: Consumption, Saving, and Investment
Monday 10th February Topic 4: Fiscal Policy
Wednesday 12th February Topic 4: Fiscal Policy
Friday 14th February Review for Exam I
Monday 17th February Exam I
Wednesday 19th February Topic 5: Money and the Federal Reserve Bank Policy
Friday 21st February Topic 5: Money and the Federal Reserve Bank Policy
Monday 24th February Topic 5: Money and the Federal Reserve Bank Policy
Wednesday 26th February Topic 6: Inflation and Unemployment in the Short Run
(Putting it All Together)
Friday 28th February Topic 6: Inflation and Unemployment in the Short Run
(Putting it All Together)
Monday 3rd March Topic 6: Inflation and Unemployment in the Short Run
(Putting it All Together)
Wednesday 5th March Topic 6: Inflation and Unemployment in the Short Run
(Putting it All Together)
Friday 7th March Topic 6: Inflation and Unemployment in the Short Run
(Putting it All Together)
Monday 10th March Topic 6: Inflation and Unemployment in the Short Run
(Putting it All Together)
Wednesday 12th March Topic 6: Inflation and Unemployment in the Short Run
(Putting it All Together)
Friday 14th March Review for Exam II
Monday 17th March Exam II
Wednesday 19th March Topic 7: A Deeper Look at Policy in Action
Friday 21st March Topic 7: A Deeper Look at Policy in Action
Monday 24th March Spring vacation. No classes.
Wednesday 26th March Spring vacation. No classes.
Friday 28th March Spring vacation. No classes.
Monday 31st March Topic 8: The International Economy
Wednesday 2nd April Topic 8: The International Economy
Friday 4th April Topic 8: The International Economy
Monday 7th April Topic 8: The International Economy
Wednesday 9th April Topic 8: The International Economy
Friday 11th April Topic 8: The International Economy
Monday 14th April Topic 8: The International Economy
Wednesday 16th April Topic 8: The International Economy
Friday 18th April Review for Exam III
Monday 21st April Exam III
Wednesday 23rd April Topic 9: Special Topics
Friday 25th April Topic 9: Special Topics
Monday 28th April Topic 9: Special Topics
Wednesday 30th April Review for Final Exam
Friday 2nd May Review for Final Exam
Monday 5th May Final Exam
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 8
1:00 p.m. – 3:00 p.m.
Academic Integrity
You are responsible for knowing and abiding by the policies contained in the University
of Illinois Student Disciplinary Policy12. Cheating, plagiarism, and academic dishonesty of any
sort are serious offenses. Anyone violating these or other standards of conduct will be subject to
the penalties discussed in the Student Disciplinary Policy. These penalties include, among others,
a failing grade on an assignment, a failing grade for the course, and dismissal from the
University.
Religious Holidays Observance Policy
In accordance to state laws, the faculty of the University of Illinois at Chicago shall make
every effort to avoid scheduling examinations or requiring student projects be turned in or
completed on religious holidays.
Students who wish to observe their religious holidays must notify the faculty member by
the tenth day of the term that they will be absent unless their religious holiday is observed on or
before the tenth day. In such cases, the student shall notify the faculty member at least five days
in advance of the date when he or she will be absent. The faculty member shall honor the
request and not penalize the student for missing class. If an examination or project is due during
the absence, the student shall be given an assignment equivalent to the one completed by those
students in attendance.
The following link (http://www.interfaithcalendar.org) lists religious holidays that can be
used as a reference guide for faculty and students for the coming academic year. The calendar is
meant only as a guideline and because of the diverse manners in which religious holidays are
observed, not every holiday constitutes an excused absence.
Course Flexibility
If it becomes necessary to add to, delete from, or otherwise alter this syllabus, then I
reserve the right to do as so as I deem fit. However, I will clearly communicate any and all
changes made to the class in a timely manner.
Course Outline and Suggested Problems
Topic 0: Getting in the Mood for Macro
Syllabus
Topic 1: Macroeconomics – Principles & Extentions
ABC 8e (2014): Chapters 1, 2, and 3.5
12 http://www.uic.edu/depts/dos/studentconduct.html
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 9
o 1.1 What Macroeconomics Is About
Analytical Problem 1 asks students to think about average labor
productivity and unemployment and their relationship to output.
Analytical Problem 2 asks students to think about the welfare
consequences of having a higher price level.
Numerical Problem 1 gives students practice calculating growth rates,
including the growth rate of average labor productivity and the inflation
rate.
Numerical Problem 2 serves two purposes: (1) to get students to look at
some real data on the economy and (2) to give them some idea how large
are the trade deficit and government budget deficit
o 1.2 What Macroeconomists Do
Analytical Problem 3 is an exercise in how to formulate and test a theory.
o 1.3 Why Macroeconomists Disagree
Analytical Problem 4 gives students practice in distinguishing positive
from normative analysis.
Analytical Problem 5 asks students to distinguish between how a classical
economist and a Keynesian economist would think about the same issue.
o 2.1 National Income Accounting: The Measurement of Production, Income, and
Expenditure
o 2.2 Gross Domestic Product
Analytical Problems 1 and 3 both discuss difficulties in counting
nonmarket items for GDP, including the important idea that GDP is not
the same as welfare.
Numerical Problems 1, 2, 3, 4, and 5 provide practice in working with the
national income and product accounts.
o 2.3 Saving and Wealth
Analytical Problem 4 has students examine how the uses-of-savings
identity would change if we redefined government saving so that
government investment was separate from government consumption
expenditures, so that 𝐺 = 𝐺𝐶𝐸 + 𝐺𝐼 and 𝑆𝑔𝑜𝑣𝑡 = (𝑇 − 𝑇𝑅 − 𝐼𝑁𝑇 ) −
𝐺𝐶𝐸.
o 2.4 Real GDP, Price Indexes, and Inflation
Numerical Problem 5 provides practice in calculating real and nominal
GDP and price indexes given several goods with different prices and
quantities in two years.
Numerical Problems 7 and 9 give practice in calculating inflation rates.
o 2.5 Interest Rates
Numerical Problem 8 provides practice in calculating real interest rates.
o 3.5 Unemployment
Analytical Problem 6 tests students’ ability to use these different
measures.
Numerical Problems 7 and 8 are quantitative exercises using the
unemployment and employment concepts.
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 10
Topic 2: Production, the Labor Market and Economic Growth
ABC 8e (2014): Chapters 3 and 6
o 3.1 How Much Does the Economy Produce? The Production Function
Numerical Problem 1 gives students practice working with a production
function.
Numerical Problem 2 gives students practice calculating the 𝑀𝑃𝐾 and
𝑀𝑃𝑁.
Analytical Problem 1 asks students to draw production functions and show
how they change when there are supply shocks.
o 3.2 The Demand for Labor
Numerical Problem 3 sets up an example in which students calculate 𝑀𝑃𝑁
and see what happens when the wage rate or price of the product change.
o 3.3 The Supply of Labor
Analytical Problem 7 examines how workers might change their labor
supply if there are changes in Social Security taxes.
Analytical problem 4 asks students to think about factors that shift an
individual’s labor supply curve.
o 3.4 Labor Market Equilibrium
Numerical Problems 4, 5, and 6 are exercises in which students are given
algebraic labor demand and supply curves and are asked to find the
equilibrium.
Analytical Problems 3 and 5 are comparative static exercises dealing with
labor market equilibrium.
Analytical Problem 2 asks students to show how different shocks to the
economy affect full-employment output.
o 3.5 Unemployment
Analytical Problem 6 tests students’ ability to use these different
measures.
Numerical Problems 7 and 8 are quantitative exercises using the
unemployment and employment concepts.
o 3.6 Relating Output and Unemployment: Okun's Law
Numerical Problems 9 and 10 are exercises dealing with Okun’s Law.
o 6.1 The Sources of Economic Growth
Numerical Problems 1 and 2 are growth accounting exercises.
o 6.2 Growth Dynamics: The Solow Model
Numerical Problem 3 and Analytical Problem 6 work with the per-worker
production function.
Numerical Problems 5, 6, and 7 look at equilibrium in the Solow model.
Analytical Problems 1, 2, 3, and 4 look at how changes in the
fundamentals affect an economy’s economic growth.
o 6.3 Government Policies to Raise Long-Run Living Standards
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 11
Topic 3: Consumption, Saving, and Investment
ABC 8e (2014): Chapters 4 including Appendix 4.A, 9.2
o 4.1 Consumption and Saving
Numerical Problem 1 explores how changes in income, future income,
wealth, and interest rates affect consumption.
o 4.2 Investment
Numerical Problems 2 and 4 give students practice in working with the
marginal product of capital and the user cost of capital.
Numerical Problem 3 applies the user-cost concept to the purchase or
rental of a home.
o 4.3 Goods Market Equilibrium
Numerical Problem 5 and 6 and Analytical Problem 5 examine what
happens when government spending changes.
Analytical Problems 1, 2, 3, and 4 all looks at shocks to the economy and
changes in variables needed to restore equilibrium.
o 4.Appendix A Formal Model of Consumption and Saving
Analytical Problem 7 looks at what happens to the budget line when the
interest rate on borrowing differs from the interest rate on lending.
Numerical Problem 8 deals with the income effect on consumption and
saving.
Numerical Problem 9 deals with borrowing constraints.
Analytical Problem 6 asks the student to show the income and substitution
effects for a borrower.
o 9.2 The IS Curve: Equilibrium in the Goods Market
Numerical Problem 1 asks students to find the IS curve, given equations
for consumption and investment, and looks at how a change in
government purchases shifts the curve.
Topic 4: Fiscal Policy
ABC 8e (2014): Chapter 15 (skip 15.4; potentially a special topic), 9.2
o 9.2 The IS Curve: Equilibrium in the Goods Market
Numerical Problem 1 asks students to find the IS curve, given equations
for consumption and investment, and looks at how a change in
government purchases shifts the curve.
o 15.1 The Government Budget: Some Facts and Figures
Analytical Problem 1 looks at the reasons for grants-in-aid.
Numerical Problems 1, 2, 6, and 7, and Analytical Problem 4 deal with
various aspects of the deficit and primary deficit.
Analytical Problem 2 asks students to look at actual data on the
government budget deficit and see whether the rise in deficits since 1979
was because of spending increases or revenue decreases.
o 15.2 Government Spending, Taxes, and the Macroeconomy
Numerical Problem 3 looks at how automatic stabilizers affect the budget
deficit over the business cycle.
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 12
Numerical Problem 4 and Analytical Problem 3 look at the effects of tax
rates on labor supply.
Numerical Problem 5 looks at tax smoothing and labor supply.
o 15.3 Government Deficits and Debt
o 15.4 Deficits and Inflation
Numerical Problems 8 and 9 look at seignorage.
********************************** Exam I ************************************
Topic 5: Money and the Federal Reserve Bank Polic
ABC 8e (2014): Chapters 7, 9.3, 14.1, and 14.2
o 7.1 What Is Money?
Analytical Problem 1 looks at portfolio changes and how they affect M1
and M2
o 7.2 Portfolio Allocation and the Demand for Assets
o 7.3 The Demand for Money
Numerical Problem 1 is an empirical exercise calculating velocity from a
money-demand equation.
Analytical Problem 2 asks for explanations for the upward trend in M1
velocity prior to the 1980s.
o 7.4 Asset Market Equilibrium
Numerical Problem 2 is an exercise in calculating the equilibrium interest
rate.
For exercises dealing with price level determination, see Numerical
Problem 3 and 5 and Analytical Problem 4.
o 7.5 Money Growth and Inflation
Numerical Problem 4 gives practice in using elasticities to predict
inflation.
Analytical Problem 3 shows how expected inflation depends on the money
supply.
o 9.3 The LM Curve: Asset Market Equilibrium
Numerical Problem 2 shows the derivation of the LM curve from a money
demand equation and looks at how changes in money demand and supply
shift the curve.
o 14.1 Principles of Money Supply Determination
Numerical Problem 1 gives students practice dealing with bank balance
sheets.
Numerical Problems 2 and 3 deal with the money multiplier.
o 14.2 Monetary Control in the United States
Analytical Problem 1 looks at various effects on the money supply, some
through changes in the Fed’s balance sheet.
Analytical Problem 3 examines how various shocks shift the LR curve and
how the economy responds.
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 13
Topic 6: Inflation and Unemployment in the Short Run (Putting it All Together)
ABC 8e (2014): Chapters 8-11
o 8.1 What Is a Business Cycle?
o 8.2 The American Business Cycle: The Historical Record
o 8.3 Business Cycle Facts
Analytical Problem 3 looks at whether output or total hours worked is
more volatile, given that average labor productivity is procyclical.
Analytical Problem 2 asks for an explanation of why expenditures on
durable goods are more volatile over the business cycle than expenditures
on nondurables and services.
o 8.4 Business Cycle Analysis: A Preview
o 9.1 The FE Line: Equilibrium in the Labor Market
o 9.2 The IS Curve: Equilibrium in the Goods Market
Numerical Problem 1 asks students to find the IS curve, given equations
for consumption and investment, and looks at how a change in
government purchases shifts the curve.
o 9.3 The LM Curve: Asset Market Equilibrium
Numerical Problem 2 shows the derivation of the LM curve from a money
demand equation and looks at how changes in money demand and supply
shift the curve.
o 9.4 General Equilibrium in the Complete IS-LM Model
Analytical Problem 2 examines the effect on the real interest rate of a
permanent oil price shock compared to a temporary oil price shock.
o 9.5 Price Adjustment and the Attainment of General Equilibrium
Analytical Problem 3 looks at this short-run equilibrium.
Numerical Problems 3 and 4 and Analytical Problem 1 look at the
complete 𝐼𝑆 − 𝐿𝑀 model, including adjustment of the price level to
restore equilibrium.
o 9.6 Aggregate Demand and Aggregate Supply
Numerical Problem 5 illustrates the effects of monetary and fiscal policy
using the model.
Numerical Problem 6 and Analytical Problems 4 and 5 deal with various
aspects of the algebraic version of the 𝐼𝑆 − 𝐿𝑀 model.
o 10.1 Business Cycles in the Classical Model
Numerical Problem 1 looks at the relationship between real wages and
employment over the business cycle and the issue of whether the labor-
supply curve should be flat or steep to be consistent with the data.
Numerical Problem 6 is a coin-flipping exercise to show that random
shocks can lead to big aggregate movements.
Analytical Problems 2, 3, and 5 deal with various aspects of the classical
𝐼𝑆 − 𝐿𝑀 model.
Numerical Problem 7 looks at the behavior of the unemployment rate due
to a temporary productivity shock when there are many people in
transition between being employed and unemployed.
o 10.2 Money in the Classical Model
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 14
Analytical Problem 4 works out another example of how reverse causation
could occur through firms’ demand for money for transactions and the
Fed’s money-supply response.
Numerical Problems 2 and 3 examine price level effects in the classical
model.
o 10.3 The Misperceptions Theory and the Nonneutrality of Money
Analytical Problem 1 contracts the effects of a change in the future
marginal product of capital in an RBC model to that in a misperceptions
model.
Numerical Problems 4 and 8 look at the misperceptions theory and
unanticipated compared to anticipated changes in the money supply.
o 11.1 Real-Wage Rigidity
Analytical Problem 5 takes a more sophisticated look at the labor market,
dividing it into one sector with an efficiency wage and another sector in
which the real wage equates labor demand and supply.
Numerical Problem 1 looks at the determination of the efficiency wage
and employment.
o 11.2 Price Stickiness
o 11.3 Monetary and Fiscal Policy in the Keynesian Model
Numerical Problem 2 and Analytical Problems 1 and 2 use the Keynesian
𝐼𝑆 − 𝐿𝑀 model.
Numerical Problem 4 uses the Keynesian 𝐴𝐷 − 𝐴𝑆 framework.
o 11.4 The Keynesian Theory of Business Cycles and Macroeconomic Stabilization
Analytical Problem 4 looks at the benefits of using government purchases
to combat recessions.
Analytical Problem 3 looks at how lags in the effect of policy can
influence decisions about how to use policy.
o 11.A
Numerical Problem 5 is an exercise dealing with the rigid nominal-wage
version of the Keynesian model.
********************************** Exam II ***********************************
Topic 7: A Deeper Look at Policy in Action
ABC 8e (2014): Chapter 12 and 14.3
o 12.1 Unemployment and Inflation: Is There a Trade-Off?
Analytical Problem 3 looks at similar analysis in a Keynesian model.
Numerical Problems 2 and 4 and Analytical Problem 2 look at the
misperceptions model and how it generates behavior like the Phillips
curve.
Numerical Problem 1 uses the expectations-augmented Phillips curve.
Analytical Problem 1 looks at possible ways to change the natural rate of
unemployment.
Numerical Problem 3 looks at the effects of an aggregate demand shock
and an aggregate supply shock on the Phillips curve.
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 15
o 12.2 The Problem of Unemployment
Analytical Problem 6 looks at events that change the natural rate of
unemployment.
o 12.3 The Problem of Inflation
Analytical Problem 4 looks at the costs of anticipated and unanticipated
inflation in a cashless society.
Analytical Problem 5 looks at what happens if the government uses wage
and price controls, but continues to use expansionary policies.
o 14.3 The Conduct of Monetary Policy: Rules Versus Discretion
Analytical Problem 4 looks at rules and commitment applied to a
noneconomic situation.
Analytical Problem 2 examines the ability of the Taylor rule to stabilize
the economy, while Numerical Problem 4 provides practice for students in
calculating the rule and how the target for the Fed funds rate changes in
response to a shock.
Topic 8: The International Economy
ABC 8e (2014): Chapter 5 and 13
o 5.1 Balance of Payments Accounting
Analytical Problem 1 gives students practice in making entries into a
balance of payments table.
Analytical Problem 2 gives students practice with offsetting transactions
in the balance of payments accounts, while Numerical Problem 1 has them
calculating various important balances.
Numerical Problem 6 looks at the balance of payments when there are
internationally traded assets.
o 5.2 Goods Market Equilibrium in an Open Economy
o 5.3 Saving and Investment in a Small Open Economy
Numerical Problems 2 and 3 look at saving and investment in small open
economies.
o 5.4 Saving and Investment in Large Open Economies
Numerical Problem 4 and Analytical Problems 3, 5, and 6 are all exercises
dealing with large open economies.
o 5.5 Fiscal Policy and the Current Account
Analytical Problem 4 asks students to work out the case of a large open
economy with an increase in the government budget deficit.
Analytical problem 4 looks at the relationship between government budget
deficits and the current account balance for a large open economy.
o 13.1 Exchange Rates
Numerical Problem 1 is a simple example of appreciation and
depreciation.
Numerical Problem 2 gives an example of how a real depreciation can
cause net exports to fall.
o 13.2 How Exchange Rates Are Determined: A Supply-and-Demand Analysis
Analytical Problem 4 looks at the effects of a supply shock on net exports.
(ECON 221) Macroeconomics in the World Economy: Theory and Applications (Spring 2014) - Plott Page 16
o 13.3 The IS-LM Model for an Open Economy
Analytical Problem 1 looks at the effect of trade barriers that reduce
imports.
o 13.4 Macroeconomic Policy in an Open Economy with Flexible Exchange Rates
Numerical Problems 3 and 4 illustrate the effects of an increase in
government purchases on the exchange rate and net exports.
Analytical Problem 2 uses a classical model to show what happens to
capital flows in a classical model with circumstances similar to those of
the United States in the 1980s.
o 13.5 Fixed Exchange Rates
Numerical Problem 5 is an exercise in finding the level of the nominal
money supply that fixes the exchange rate at a sustainable level.
Analytical Problem 3 looks at the effects of different macroeconomic
policies when exchange rates are fixed.
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