Econ 100 b fall 2012 lecture 1 notes
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The document contains lecture notes from Economics 100B taught by Professor Steven Wood at UC Berkeley on 08/23/2012. The notes cover several topics: - The US economic recovery from the 2008 recession has been slow compared to previous recoveries, and there are ongoing issues like high unemployment, the upcoming "fiscal cliff", and the Federal Reserve's monetary policies. - The course will examine macroeconomic challenges facing the US and other countries, and evaluate the potential outcomes of different economic policies. - Key macroeconomic indicators like real GDP, unemployment, and inflation will be discussed in-depth, as well as factors that influence their levels such as recessions, government spending, and monetary policy. - The
Econ 100 b fall 2012 lecture 1 notes
- 1. Economics 100B Professor Steven Wood 08/23/2012 Lecture 1 ASUC Lecture Notes Online is the only authorized note-taking service at UC Berkeley. Do not share, copy, or illegally distribute (electronically or otherwise) these notes. Our student-run program depends on your individual subscription for its continued existence. These notes are copyrighted by the University of California and are for your personal use only. ANNOUNCEMENTS Text book: Frederic Mishkin, Macroeconomics: Policy and Practice. All students will need iClickers for there are iClicker questions on almost every non-exam day. All students will also need a set of colored pens or pencils. We will be drawing curves and shifting them, and different colors make it easier. Email Policy: first point of contact should be GSIs. Professor’s email: swood@haas.berkeley.edu, put ECON100B in the subject when emailing the professor Attendance is not required in lecture, however there are iClicker questions. Attendance is required in discussion sections for the first two weeks. For enrollment problems, email head GSI at headgsi@econ.berkeley.edu, and based on experience, 15-30 of the students on the waitlist might get into the course. LECTURE Course Description Econ 100B is a course in intermediate macroeconomics, based on Econ1. In this course we will look at many economic issues. DO The US economy suffered a significant recession in 2008 and 2009, a once in a lifetime event. The economic recovery in the past 3 years is the slowest recovery in the post WWII period. What has caused this nasty recession? How come the recovery is so sluggish? What in economic policies that can alter the outcome? What would speed it up or slow it down? These are things that we will be thinking abut and talking about in macroeconomics. It is also interesting, because we have a presidential election this year. The two candidates have very different economics policies. What are the likely outcomes are from adopting each set of policies? There is also the fiscal cliff. The tax cut is expiring at the end of this year. There will be significant fiscal cliffs. It will subtract 4% from economic growth. In the second quarter, the economy grew 2%. If we take 4% off, we could have negative growth. Do people and business start to change their behaviors? Do they predict the worst scenario or just pretend that everything is okay? We also have a Federal Reserve, and they are trying to figure out what they should be doing. The effective interest rate is 0 now and the Fed has put massive liquidity into the system because of the recession. NOT COPY Sharing or copying these notes is illegal and could end note taking for this course.
- 2. Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents The Fed has two objectives: low and stable inflation, and maximum sustainable employment. 8% unemployment is clearly not maximum sustainable employment. Do the Fed’s policies have bad side effects? currency d. become energy independent When we talk about macroeconomics, we are talking about national economics. Although it can be applied to smaller regions, we are typically talking about the national economy – how is it structured, how we could model the components of the economy. These are some of the concepts and issues that we will be talking about. We will be making reference to the US economy a lot, but most countries are equally applicable to the concepts. We will also be talking about dynamic adjustment of the economy, how do we go from one recession to a recovery, and what’s the adjustment process. We need to think about these types of things as well. iClicker Questions: Q1, Q2, Q3: Student demographic questions Policy and Practice of Macroeconomics What is the greatest macroeconomic challenge facing the US today? a. high unemployment b. rapidly rising tuition c. massive government budget deficit d. potential deflation We also need to discuss policies. Sometimes we do not implement the right policies. We can think about it as a multi-step process: First step is that we start with a macroeconomic theory. Think of what’s an interesting issue, what do I want to address, might be level of economic activity, employment rate, whatever it could be. What is the greatest macroeconomic challenge facing the US today? a. potential hyperinflation b. large trade deficits c. the high price of textbooks d. China’s trade policies Then we come up with a model; there are endogenous variables, where the explanation comes from inside the model. There also will be a lot of exogenous variables. For changes and factors that are completely outside the models. Take these changes as givens. For example, government spending policy is generally regarded as an exogenous variable. The congress decides; it might seem to be dependent on the economy. As in the election now, one party want to increase spending, and the other one want to decrease. Should macroeconomics policies be sued to affect macroeconomic outcomes? a. yes, market outcomes can be undesirable b. no, let the market determine the outcome How should the budget deficit be reduced? a. only cut government spending b. only raise tax rates c. cut government spending and raise tax rates d. ignore the problem and hope it will go away After we have a model, we need to identify a relationship between the endogenous and exogenous variable. For a model to make any sense, we need some real world data, to explain what is going on in the world. We have to test the hypothesis in the real world, to see if it actually makes sense. What should be done about the large trade deficit? a. nothing, it will take care of itself b. force the dollar to depreciate c. force the Chinese to appreciate their DO 08/23/12 2 NOT COPY Sharing or copying these notes is illegal and could end note taking for this course.
- 3. Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents 08/23/12 Last, we will be evaluating the outcomes. If they did not make sense, we need to go back to the model. If we have a model we can use the model for historical analysis purposes, for forecasting purpose, or for policy setting purposes. In macroeconomics there are three variables, 1. Real GDP 2. The unemployment rate 3. Inflation Inflation is the rate of change of weighted price level. What causes inflation? Makes it rise? Slow down? And there are extreme situations, like deflation, when inflation rate is negative. Generally, deflation is bad for macroeconomics. There are also hyperinflations, occurring when the inflation rate is exceptionally high. Hyperinflation is 50% or more per month. Zimbabwe’s economy collapsed because of its hyperinflation. Real GDP: total production Labor market: employment, we typically look at unemployment, it gives a sense of the imbalance of supply and demand Inflation: how are prices changing, and how fast? Real GDP is essentially a measure of how much production is happening in a economy over time, we are also interested in how it changes over time. There are ups and downs, and they are called business cycles. A lot of questions remain here. There are two characteristics of the GDP, the average growth rate is about 3%, and lots of volatility. Why these two? This is real GDP per person. Long-term trend is positive, why is that the case? This is not always true for every country in every period. If you look at Ghana or Egypt. For Egypt, this line is almost horizontal, for Ghana it is negative sloping. GDP per person has a tendency to fall in recession, because recessions are when GDP is falling, but populations are generally growing. DO Whenever we have a recession, we have strong recovery in history. But why not this time? 3 NOT COPY Sharing or copying these notes is illegal and could end note taking for this course.
- 4. Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents 08/23/12 Macroeconomic policies use economic models to determine how to produce better macroeconomic outcomes. Monetary and fiscal policies are what we get into. An example of an interesting question is that how can poor countries get rich? a. What determines why rich countries are rich and why poor countries are poor? b. Can government policies affect these outcomes? China, India and many other countries have demonstrated extremely high growth rate. Is there a set of policies the governments around the world can follow? Are there any set of policies many Latin American countries and African countries can learn from fast growing countries? What do we recommend to them? Another issue is that do government budget deficits matter? Greece, Italy, Spain all have big deficits, big economic problems. But on the other hand, the US and Japan have worse situations; US can borrow money for 10 years for 2%, Japan can borrow for 1%. Most people are risk averse, which means that fewer people will take economic action the more risk there is. Low and relatively stable inflation augments economic growth. There are benefits to having low and stable inflation What if you do not? We do know how to bring inflation down, but there are consequences in doing so. There are lots of trade-offs in life. Are they worth making? It is the primarily the responsibilities of the central banks. They have a great deal control of what the inflation rate will be, by setting their monetary policy. Are we saving too little? I am a member of the generation of baby boomers. We have an entire generation of people having the under-saving problems. Would we have a different outcome if the baby boomers had decided to save more? Is the amount of saving an economy undertakes important? DO 4 NOT COPY Sharing or copying these notes is illegal and could end note taking for this course.
- 5. Economics 100B ASUC Lecture Notes Online: Approved by the UC Board of Regents We know we can use government policies to affect economic outcomes. We want ask ourselves: should we do this, and to what extent? Should we affect economic outcomes? Given enough time, all economies will return to the stable, full-employment equilibrium. But what if it takes 10 years? Activists say what if you intervene you will misallocate resources. Should we be discretionary? Leave it to the Fed or congress or president to do it? Or should we be rules-based, giving a pre-set guidance. Trade imbalances are the differences between exports and imports of goods and services. Trade imbalances also reflect international borrowing and lending activity. Importing is buying, and exporting is selling. The US is buying more than it is selling. The borrowing makes up the differences can cause critical dislocations of resources. End of lecture. Notes prepared by Tony Sun. Edited by Genevieve Ang. DO 5 NOT COPY Sharing or copying these notes is illegal and could end note taking for this course. 08/23/12