Econ 102 Fall 2006

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Econ 102 Fall 2006

• Lecture 1.1 Introduction

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Course outline

• The course has four modules
• Each module consists of 4 lectures
• After the first two modules there will be a
  review
• After the review there will be an in-class
  midterm exam
• There are 20 classes in total 16 lectures 2
  reviews 1 midterm exam 1 lecture reviewing
  the midterm

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Grading policy

• Grading
• Participation
• Midterm exam Tuesday October 31st
• Final exam Wednesday December 13th
• Participation 10
• Midterm 30 Final 60
• OR
• 100 Final (whichever is higher)

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Organization

• Office hours Friday 9-11 Bunche Hall 8345
• Email rfarmer_at_econ.ucla.edu
• Cell phones
• Turn them off!
• Reading
• Macroeconomics, Text by Farmer, Southwestern
• Addition reading available on the class website

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Math requirements

• You are expected to know
• Simultaneous equations, Cartesian coordinates,
  the real number line, multivariate calculus,
  functions of several variables, statistics (means
  and standard deviations), logarithms, exponential
  functions

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Part 1 Classical model of a real economy

• Why some countries are rich and others are not
• How to measure wealth and income
• How to use models
• to explain growth
• To explain recessions

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Part 2 Classical model of a monetary economy

• How intertemporal markets work
• Real and nominal interest rates
• Borrowing and lending
• Prices and inflation
• Steady state and inflation
• Complete classical model

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Part 3 Keynesian theory of unemployment

• What Happened in the Great Depression
• Unemployment
• Models with sticky prices
• Keynesian theory of aggregate supply

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Part 4 Managing the economy

• Keynesian theory of aggregate demand
• Alternative theories of recessions
• Using fiscal and monetary policy to manage
  business cycles
• Role of the Federal Reserve

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What does it mean to study macroeconomics as a
science?

• We will learn how to measure the economy
• We will learn how to document the regularities in
  the variables we measure
• We will exploit these regularities to control
  economic variables

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How do we explain economic data?

• We build models
• A model is an artificial world
• We calibrate the artificial world so that it
  behaves as much as possible like the real world
• We study the model and find out how to make the
  things we are interested in behave better

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Can we ever succeed?

• Maybe

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Models have variables

• Endogenous variables
• (things to be explained)
• Exogenous variables
• (things that do the explaining)
• Exogenous random shocks
• (things that keep the world in motion)

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Models have parameters

• Parameters are fixed (or infrequently changing)
  numbers
• Parameters describe the content of economic
  theory

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Models have equations

• One equation for each endogenous variables
• Economists write down equations based on economic
  theory

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Models have solutions

• We solve the models by rearranging the equations
• A solution is a set of equations one for each
  endogenous variable
• In the solution, all right hand side variables
  are exogenous

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Example of a model
are endogenous variables
are exogenous variables
are exogenous shocks
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Example- continued
are parameters
The first subscript indexes the equation The
second subscript indexes the variable
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Solving the model
Rearranging terms gives
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The solution
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A tidier way of writing the solution
The Reduced form of the model
(The original model is sometimes called the
structural form)
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Example from microeconomics

• Equation 1 is a demand curve for oranges
• Equation 2 is a supply curve for oranges
• is the quantity traded of oranges
• is the price of orange juice
• is a measure of per capita income
• is an index of the weather in Florida
• is everything else (unobservable)

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An example from Keynesian macroeconomics

• Keynes argued that business cycles are
  predominantly caused by fluctuations in aggregate
  demand. (This is in contrast to the classical
  theory that we will study in the next three
  lectures)
• The following Keynesian model provides an example
  of the techniques we have been studying.

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The variables of the Keynesian model
GDP Consumption expenditure Government
expenditure Investment expenditure
Endogenous
Exogenous
Exogenous random
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The parameters of the Keynesian model
Autonomous consumption Marginal propensity to
consume
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The equations of the Keynesian model
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The reduced form of the Keynesian model
Or alternatively
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The Keynesian model in action
CIG
abYI2G
abYI1G
aI2G
aI1G
Y
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Four steps in economic science

• Formulate a model
• Estimate the parameters of the model
• Solve the model
• Use the model to
• Make conditional predictions
• Make suggestions to policy makers

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Why study simultaneous equations with random
shocks?

• Every economic model we will study in the course
  has this structure
• Endogenous variables
• Exogenous variables
• Parameters
• Shocks

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How is this related to macroeconomics?

• The endogenous variables depend on the exogenous
  variables and on the shocks
• The endogenous variables influence economic
  welfare (e.g. gdp, inflation, unemployment)
• The exogenous variables represent things that we
  can control (e.g. the interest rate, government
  spending, tax rates)

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Reading

• Reading for Lecture 1
• Chapter 1 of Macroeconomics
• Problems for week 1
• Page 22-23 s 4,5,6