Department of Economics

University of Pennsylvania

Spring 2006




Instructor: Guido Menzio,

Teaching Assistant: Roberto Benjamin Pinheiro


Time and Location of Class: Tuesday, Thursday 1:30-3:00, McNeil Building 286-7

Final Examination: TBD

Office Hours: McNeil Building 467, Friday         17:00-18:00 (Instructor)

                        McNeil Building 469, Monday       9:00-11:00 (Teaching Assistant)

                        McNeil Building 469, Wednesday  9:00-11:00 (Teaching Assistant)


Prerequisites: Econ 101, Multivariate Calculus

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

Recommended Readings: scholarly articles posted on the class website 

Class Website: and blackboard




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


As of early January, the calendar for class is the following. Most likely, this initial plan will be revised to respond to the students’ interests and needs. Such revisions will be posted on the class website, which should be visited regularly.


January 9


Chapter 1 + Slides

January 11-18

National Accounting

Chapters 2, 3 + NIPASlides + TreatmentSlides + Pics

January 22-30

Household’s Problem

Chapters 4, 8 + Slides

February 1

Midterm #1


February 6-8

Firms’ Problem

Chapters 4, 8 + Slides

February 13


Chapter 8 + Slides

February 15-20

Competitive Equilibrium

Chapters 5, 9 + Slides

February 22

Welfare Theorems

Chapter 5 + Slides

February 27

Business Cycle Measurements

Chapter 3 + Slides

March 1

Business Cycle Facts

Chapters 9, 11 + Slides

March 13-20

Business Cycle Theories

Chapters 9, 11 + Slides

March 22

Midterm #2


March 27-29

Growth Facts and Accounting

Chapter 6 + Slides

April 3

Malthusian Growth Model

Chapter 6 + Slides

April 5-10

Solow Growth Model

Chapter 7 + Slides

April 12-17

Physical and Human Capital

Chapter 7 + Slides

April 19

Midterm #3




Exams and Grades


In this class, grades are determined as follows. If a student takes at least two of the three midterms, her grade is determined as the average of the two best scores. If a student misses two or more midterms, her grade is determined exclusively by the score on the final exam. If a student misses two or more midterms and the final, she can sign-up for the make-up exam at the beginning of next semester.


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


Finally, according to recent departmental policies, all complaints concerning grades have to be put in writing and submitted to the instructor and the teaching assistant.