ECONOMICS 102

 

INTERMEDIATE MACROECONOMICS

 

 

Department of Economics

University of Pennsylvania

Spring 2006

 

 

 

Instructor: Guido Menzio, gmenzio@sas.upenn.edu

Teaching Assistant: Javier Gonzales, javiergz@ssc.upenn.edu

 

Office Hours: McNeil Building 467, Wednesday 10:00-12:00 (Instructor)

                        McNeil Building 539, Wednesday 17:00-19:00 (Teaching Assistant)

                        McNeil Building 539, Monday       11:00-12:00 (Teaching Assistant)

 

Prerequisites: Econ 101, Multivariate Calculus

Textbook: Williamson, S. D. 2005. Macroeconomics. Boston, MA: Pearson Education

Syllabus in PDF: [syl]

 

 

 

Objective and Content of the Course

 

The course introduces you to the methodology of modern macroeconomics and exposes you to some of the main findings developed in the literature over the past 35 years. The primary objective of the course is to enable you to analyse current macroeconomic phenomena and discuss policy issues in a rigorous and independent way. The secondary objective of the course is to prepare you (and make you ask) for more specialized macroeconomic classes (monetary economics, labor economics, international trade, growth theory).

 

The course begins with the mathematical description of the dynamic decision problems faced by households, firms and the government. In particular, we are interested in the consumption-saving and the work-leisure decisions of the households, in the hiring and investment decisions of the firms, in the consumption and taxing decisions of the government. From the solution of the decision problems of the economic actors, we derive the demand and supply of labor, private and public consumption goods and investment goods. Then, we introduce the definition of market equilibrium and use it to pin down the prices of labor, consumption goods and investment. This completes the characterization of the general equilibrium of the model economy.

 

In the second part of the course, we use the model to study three important macroeconomic topics. First, we want to understand the mechanisms through which public policy affects aggregate output, consumption, investment and ultimately social welfare: The model sheds light on why tax cuts are sometimes ineffective at increasing economic activity, on why temporary changes in government spending affect the economy differently than permanent changes, on whether the government can improve the well-being of the households with the appropriate mix of taxes and subsidies. 

Secondly, we want to understand the causes of fluctuations in aggregate economic activity. More specifically, we derive the empirical regularities of the US business cycle and contrast them with the implications of the model for different assumptions about the driving force of the cycle (demand shocks, productivity shocks, news shocks, animal spirits). We show that demand shocks and news shocks are unlikely to be the cause of booms and busts, while aggregate shocks to productivity and animal spirits are plausible driving forces.  

Finally, we want to identify the engines of economic growth. Using the model, we show that physical capital accumulation cannot explain why the US economy has been steadily growing since the 1800, nor why the US is so much richer than most Latin American countries. On the contrary, physical and human capital accumulation together can explain sustained growth and cross-country inequality. We then discuss the role of government in the provision of education.      

 

 

Course Calendar

 

 

January 10

Introduction

Chapter 1 + Intro_Slides

January 12-19

National Accounting

Ch 2,3, Nipa_Slides + Measurement_Slides

January 24-26

Households’ Problem

Chapters 4, 8 + Slides

January 31-February 2

Firms’ Problem

Chapters 4, 8 + Slides

February 7

Government

Chapter 8 + Slides

February 9

Midterm #1

 

February 14-21

Competitive Equilibrium

Chapters 5, 9 + Slides

February 23

Welfare Theorems

Chapter 5 + Slides

February 28

Fiscal Policy

Chapters 5, 9 + Slides

March 2

Business Cycle Theories

Chapters 9, 11 + Slides

March 16-21

Business Cycle Theories

Chapters 9, 11 + Slides

March 23

Midterm #2

 

March 28-30

Growth Facts and Accounting

Chapter 6 + Slides

April 4-6

Malthusian Growth Model

Chapter 6 + Slides

April 6-11

Solow Growth Model

Chapter 7 + Slides

April 13-18

Physical and Human Capital

Chapter 7 + Slides

April 20

Midterm #3

 

 

 

 

Exams and Grades

 

There are three midterms and a final examination. Your final grade is determined by the two highest scores on the midterms (25%, 25%) and by the score on the final (50%). If you miss the final examination for a valid and documented reason, you can sign-up for the make-up exam at the beginning of the next semester. If you miss two or more midterms, your grade is computed by putting appropriately more weight on the outcome of the final examination. According to recent departmental policies, all complaints concerning grades have to be put in writing and submitted to the instructor and the teaching assistant.

 

Throughout the semester, review questions are posted on the class website. You are not required to solve the review questions, but you are recommended to do so in order to verify your understanding of the material and to practice your exam-taking skills. Review questions are neither graded nor solved during lecture, but you can and should discuss them with the teaching assistant during office hours.

 

Homework 1: Problems 1, 2, 5, 7, 9 at the end of Chapter 2 in Williamson and problems 1, 8 at the end of Chapter 3.

Solution as a pdf file [sol1]