Lahore University of Management Sciences MECO 121 Principles of Macroeconomics

Spring 2012-13

Instructor Room No. Office Hours Email Telephone Secretary/TA TA Office Hours Course URL (if any)

Mr. Daud Ahmed Dard TBA TBA daud@lums.edu.pk TBA TBA TBA TBA

Course Basics Credit Hours Lecture(s) Recitation/Lab (per week) Tutorial (per week) Course Distribution Core Elective Open for Student Category Close for Student Category COURSE DESCRIPTION

4 Nbr of Lec(s) Per Week Nbr of Lec(s) Per Week Nbr of Lec(s) Per Week

2 TBA TBA

Duration Duration Duration

110 minutes TBA TBA

Yes

-This (newly designed) course provides a solid foundation in the fundamental principles of macroeconomics and prepares students for the application of the principles in understanding real world (local and global) macroeconomic performance, issues and policies. The course starts with a description of macroeconomic data and then goes on to present macroeconomic models of goods, money and input markets, discuss what light these models can shed on certain stylized facts of the macroeconomic data and evaluate the scope for policy to improve macroeconomic performance. Models for analyzing the long run performance of the economy are discussed before short run models. IS/LM AD/AS model will be derived for analyzing the economy in the short run and the business cycles, and also for understanding the adjustment process of the economy towards its long run path. Open economy is discussed both under the long run and the short run. Some microeconomic foundations are discussed in the later part of the course. A few lectures in the later part of the course are devoted to comprehensive analyses of selected contemporary macroeconomic issues in Pakistan and in the world. The course concludes with students group project presentations. -In order for the students to understand the causes of the recent Financial Crisis, features of the ensuing Great Recession and to understand (at times) unconventional policy response, some of the key issues related to banking, financial system and markets are also discussed in the course. Appropriate tools are introduced in the early part of the course for addressing these issues. The impact of these issues on macroeconomic models is also briefly analyzed. UPON COMPLETION OF THE COURSE, STUDENTS SHOULD BE ABLE TO: 1. Describe how to measure output, prices, unemployment, savings and wealth and evaluate any shortcomings associated with these measures, interpret the data for describing economic conditions. 2. Use macroeconomic models to explain the behavior of the economy and the relationships between macroeconomic variables such as inflation, aggregate demand, aggregate supply, investment etc. and analyze current macroeconomic issues and policy debates. 3. Explain how and why governments implement fiscal and monetary policies. FURTHER STUDY: This is a complete course in itself and a core course especially for Accounting and Finance, Management Science and Business related degrees. It provides foundations for studying such courses as Investments, Financial Institutions & Markets, International Finance, Commercial Banking and / or for taking intermediate level / advanced courses in Macroeconomics.

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COURSE PREREQUISITE(S) MECO 111, ECO111 Basic Algebra COURSE OBJECTIVES Thorough understanding of the basic analytical framework underlying macroeconomic thinking Application of the framework in understanding and explaining macroeconomic events, issues and policies both local and international

Grading Breakup and Policy

Assignment(s): 5 Assignments Quiz(s): 4 best 3 selected Class Participation & Attendance: Group Project: Midterm Examination: Final Examination: 5% 15% 10% 10% (guidelines will be circulated immediately after the mid-term exam) 30% 30%

-Constructive class participation is welcome and graded. However, your focus must be on the topic at hand. Please note that Negative CP can be marked if you speak before first getting Instructors permission. -Anybody missing more than 7 sessions will need to get approval from ACF Program director to continue in the course. -Coming to the class late and leaving the class without Instructors permission will lead to an absent mark.

Examination Detail
Yes/No: Yes Combine Separate: Combined Duration: 110 minutes Preferred Date: Exam Specifications: Closed Book/Closed Notes

Midterm Exam

Final Exam

Yes/No: Yes Combine Separate: Combined Duration: 110 minutes Exam Specifications: Closed Book / Closed Notes

Textbook(s)/Supplementary Readings Course Reading Pack consists of selected chapters from the following books: -Mankiw, Macroeconomics, 7th edition (M) - (This is Core Text but not all chapters) -Abel & Bernanke, Macroeconomics, 6th edition (AB) -Ball, Lawrance, Money, Banking and the Financial System, 2nd edition (MB & FS) -Mankiw, Principles of Economics, 6th edition (PE), (or identical chapters from Principles of Macroeconomics text by the same Author) Selected readings from the Economist Magazine, Financial Times newspaper, from the publications of the IMF, ADB and State Bank of Pakistan (SBP) will be identified during lectures.

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Course Schedule: Lecture # Topics 1 -Introduction to Macroeconomics Reading M1 Learning Objectives -Discuss the type of questions macroeconomists address -Explain the concept of an economic model -Explain the role of price flexibility and price stickiness in macroeconomic models. -Understand how the course will proceed -Explain why an economys total income, total expenditure and total production are equal: National Income Accounting -Define gross domestic product (GDP), describe its calculation, distinguish between GDP and GNP, Nominal and Real GDP, describe GDP Deflator, Chain-weighted Measures -Describe how related measures of income are calculated -Discuss whether GDP is a good measure of economic well-being -Define Consumer Price Index (CPI) and describe how to contruct CPI, and pitfalls -Compare CPI vs GDP Deflator -Describe how to calculate unemployment rate -Discuss some of the stylized facts of output, inflation, unemployment - Demonstrate using the basic model of the longrun behavior of a well functioning economy with fully flexible prices: a. the determinants of the level of output (income) b. how income is distributed c. how output is allocated among alternative uses i.e., Consumption, Investment etc. d. what ensures that the supply of and demand for goods are equal d. how the government policy may alter the outcome -Explain why productivity is the key determinant of a countrys standard of living, -Explain the factors that determine a countrys productivity -Discuss how a countrys policies influence its productivity growth - Differentiate between cyclical and the natural rate of unemployment - Explain structural unemployment and how unemployment can result from minimum-wage laws, bargaining between firms and unions, and also when firms choose to pay efficiency wages -Define a financial system, its role and functions in an economy -Discuss some of the important financial institutions and markets in the U.S. economy (and in the Pakistani economy). -Explain why and how asymmetric information may lead to market failure -Describe the issues of moral hazard and adverse selection in financial markets using numerical examples. -Explain signaling, screening and monitoring

-Introduction to the course THE DATA OF MACROECONOMICS -Measuring the Value of Economic Activity

M 2.1 AB 2.1, 2.2

-Measuring the Cost of Living -Measuring the Unemployment -Stylized Facts ECONOMY IN THE LONG-RUN -National Income: Where it comes from and Where it goes

M 2.2, AB 2.4

4, 5

M3

-Productivity and Long Run Economic Growth: Basics

PE 25

-Unemployment and its Natural Rate

PE 28

-Introduction to the Financial System

MB & FS 1 PE 26 (last 2 pages) MB & FS 7

-Asymmetric Information in the Financial System

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8 -Basics of Finance PE 27 -Explain the relationship between present value and future value, and the effects of compound growth - Analyze how risk-averse people reduce the risk they face - Explain how asset prices are determined -Describe what money is, what functions money has in the economy and how it is measured -Explain how the banking system determines the supply of money, role of the central bank -Discuss somewhat more realistic banking with bank capital, leverage and capital requirements -Discuss why banks are inherintly fragile -Instruments of the monetary policy -Explain the theories of money demand -Describe asset market equilibrium condition -Examine the effects of monetary policy when prices are flexible -Explain how the nominal interest rate responds to the inflation rate. -Define and discuss classical dichotomy and monetary neutrality in the long run -Define Inflation tax, discuss various costs that inflation imposes on society -Define the BOP accounting principles -Describe various components of BOP -Describe BOP identity -Develop a model of international flows of capital and goods, emphasizing that these ultimately depend upon the determinants of savings and investments -Develop a simple model of real exchange rate and showing its role in ensuring that the current account and the capital account sum to zero -Explain the determination of nominal exchange rate -Understand key stylized facts of the business cycle -Describe leading and lagging economic indicators -Describe how the short run and the long run differ (in macroeconomics) -Explain the Aggregate Demand (AD) & Aggregate Supply (AS) - Differentiate between individual demand and AD -Examine economic fluctuations by analyzing shocks to AD and AS -Define and discuss stabilization policy using AD and AS -Explain income/output determination in the short-run for given price level using simultaneous equilibrium in the goods market (IS) and the money market (LM) -Explain the concept of Multiplier -Derive the AD curve from the IS/LM model -Evaluate using IS/LM model the short-run consequences of exogenous shocks in the goods market and the money market -Analyze fiscal and monetary policy using IS/LM model -Describe how classical dichotomy may prevail in the long run using IS/LM AD/AS

Money, Money Supply and the Banking System

M 19 MB & FS 2

10

Money and Prices in the Long Run

M4

11

Balance of Payments Accounts (BOP): a record of a countrys international transactions

AB 5.1

12

Open Economy in the Long Run

M5

13

ECONOMY IN THE SHORT RUN Introduction to Short Run Economic Fluctuations

M9

14

Introduction to Short Run Economic Fluctuations..contd

M9

15 16, 17

MIDTERM EXAM Aggregate Demand 1: Building the IS / LM model

M 10

18

Aggregate Demand 2: Applying the IS / LM model

M 11

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19, 20 AD in Open Economy: Mundell-Fleming Model M 12 -Extend the IS/LM model to include the effects of international trade and finance -Monetary and Fiscal policies under fixed and floating exchange rates -Discuss speculative attacks -Explain The Impossible Trinity -Describe the three theories for an upward sloping short-run AS curve. -Demonstrate how output deviates from its natural rate when the actual price level deviates from the price level that people expected. - Explain why policymakers face a short-run tradeoff between inflation and unemployment -Explain why the inflation-unemployment tradeoff disappears in the long run - Describe how supply shocks can shift the inflation-unemployment trade-off -Discuss the implications of rational expectations for the trade-off between inflation and unemployment -Explain how policymakers credibility might affect the cost of reducing inflation -Explain different theories of Consumption -Formally derive the labor supply -Discuss the theories of Investment -Explain how this enhanced understanding of Consumption, Investment and Labor Market enriches the main macroeconomic models discussed in the course TBA

21

Aggregate Supply

PE 33

22

Short run Trade off between Inflation and Unemployment

PE 35

23 24

SOME MICROFOUNDATIONS: Consumption, Supply of Labor Investment, Revisiting Macroeconomic Models

M 17, Handout M 18, Handout

25, 26

SELECTED MACROECONOMIC ISSUES IN PAKISTAN AND IN THE WORLD

27, 28

GROUPS PROJECT PRESENTATIONS

-ADB, IMF, SBP -The Economist -Roubini, N N/A