ECONOMICS 100B Professor Steven Wood

08/25/11 Lecture 1
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ANNOUNCEMENTS All homework, lecture slides, and announcements will be posted on bSpace. The textbook for this course is Macroeconomics: Policy and Practice by Frederic S. Mishkin (Prentice-Hall, 2012). You will need a set of colored pens/pencils: black, red, blue, and green. You will also need an iClicker (for quizzes and attendance), which you must register at: http://www.iclicker.com/support/registeryourclic ker/ Office hours are Tuesdays and Thursdays from 2:15-3:15 in 520 Evans Hall, as well as by appointment. Professor Woods email address is: swood@haas.berkeley.edu The three exams will take place on October 4th, November 8th, and December 13th. The exams will NOT be cumulative. LECTURE Todays lecture is a general introduction to the Policy and Practice of Macroeconomics. iClicker Questions: 1. What is the greatest macroeconomic challenge facing the U.S. today? (Answer: High Unemployment)

2. What is the greatest macroeconomic challenge facing the U.S. today? (Answer: Potential Hyperinflation) Macroeconomics is the study of economic activity and dynamic adjustments at the national level. Macroeconomists explain economic changes through theories and models. Models are developed through 8 steps: 1.) Identify the question. 2.) Specify endogenous (dependent) variables. These are variables that the model will explain. 3.) Specify the exogenous (independent) variables. These are the variables that will explain the endogenous variables. a. Models also contain constants and parameters. These are the coefficients in equations. 4.) Hypothesize the relationship between endogenous and exogenous variables. 5.) Test the hypothesis. 6.) Evaluate the results. 7.) Use the model to make predictions and/or, 8.) Use it to make policies. Macroeconomics focuses on three economic indicators: real GDP, the unemployment rate, and inflation. Real GDP, or Real Gross Domestic Product, measures the output of goods and services in an economy over a period of time.

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ECONOMICS 100B

ASUC Lecture Notes Online: Approved by the UC Board of Regents

08/25/11

Business cycles are cyclical fluctuations in real GDP. In business cycles, economic activity grows during expansions and declines during recessions. Chart of per Capita GDP over time: gray areas indicate recessions.

Inflation measures how quickly the overall price level changes. When inflation is negative, it is called deflation (this is undesirable). When inflation is exceptionally high, it is hyperinflation (this is also undesirable). Chart of Inflation (as measured by the Consumer Price Index) over time.

Chart of Real GDP over time: gray areas indicate recessions. From 1960 to the 1980s, inflation trended upward. In the early 1980s, inflation dropped dramatically; since then, inflation has continued to trend lower. Macroeconomic policies use models to try to improve the economy. Questions macroeconomic policies try to address include: 1.) Why are rich countries rich and poor countries poor? 2.) Is savings too low? a. Savings is important in both the long and short run for the economy. Chart of the Personal Saving Rate over time.

The unemployment rate measures the percentage of the labor force looking for but unable to find work. Chart of Unemployment Rate over time: gray areas indicate recessions.

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ECONOMICS 100B

ASUC Lecture Notes Online: Approved by the UC Board of Regents

08/25/11

3.) How much do budget deficits matter? a. Budget deficits occur when the government spends more than it intakes from its tax revenues. b. Fiscal policy refers to the governments decisions on spending and taxing. Chart of the Federal budget over time, with a projection through 2020.

a. Activists advocate the use of policies to minimize unemployment when it develops, while nonactivists maintain that the selfcorrecting mechanism of the economy will return the economy to equilibrium. 7.) Should macroeconomic policy follow rules? a. Should stabilization be discretionary (formulated under specific conditions), or rules-based (formulated under set constraints). 8.) Are international trade imbalances dangerous? a. Trade imbalances are the difference between exports and imports, which reflect international borrowing and lending activity. Chart of the trade balance as a percentage of GDP.

4.) How costly is it to reduce inflation? a. The central bank of a country determines inflation through monetary policy, which determines short-term interest rates and the money supply. 5.) Can financial crises be made less likely? a. During financial crises, asset prices typically fall. Chart of stocks over time: stocks fell dramatically during the Great Recession. End of lecture. Notes prepared by Jingying Peng. Edited by Genevieve Ang.

6.) How active should stabilization policy be (government policies to decrease business cycle fluctuations)?

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