<ul><li>Most of the economics that is usable for advising on public policy is at about the level of the introductory under...
<ul><li>Most of the economists who catch on do so long after graduate school, while teaching classes or advising governmen...
<ul><li>I have never known anyone skillful in economics who claimed to have acquired this skill solely through extensive s...
<ul><li>1. What are discouraged workers? </li></ul><ul><li>2. Explain what impact an increase in the number of discouraged...
<ul><li>A lady arrives at a river with a fox, a chicken and a bag of grain. There is a raft which can carry her and one of...
<ul><li>Week 1: Intro: Supply and Demand </li></ul><ul><li>1. What is economics? micro- versus macro- economics </li></ul>...
<ul><li>Week 2A: Measuring Output </li></ul><ul><li>1. National Income Accounts </li></ul><ul><li>GDP vs GNP </li></ul><ul...
<ul><li>Example Exam Questions for Week 2 </li></ul><ul><li>1. Explain the difference between the two different ways of ca...
<ul><li>Week 2B: Measuring the Price Level and Inflation </li></ul><ul><li>1. Nominal versus real variables </li></ul><ul>...
<ul><li>Week 2C: Measuring Unemployment </li></ul><ul><li>1. Definitions: Labor force </li></ul><ul><li>Participation rate...
<ul><li>Even More Example Exam Qs for Week 2 </li></ul><ul><li>1. What are &quot;discouraged workers&quot;? </li></ul><ul>...
<ul><li>Week 3: Demand Equilibrium and the Multiplier </li></ul><ul><li>1. Defining agg D for goods and services </li></ul...
<ul><li>Example Exam Questions for Week 3 </li></ul><ul><li>1. What is fiscal policy? </li></ul><ul><li>2. A stimulating d...
<ul><li>More Example Exam Qs for Week 3 </li></ul><ul><li>1. Define &quot;the&quot; multiplier. </li></ul><ul><li>2. Is it...
<ul><li>Week 4: The Supply Side </li></ul><ul><li>1. LR growth/productivity/standard of living </li></ul><ul><li>creative ...
<ul><li>Example Exam Questions for Week 4 </li></ul><ul><li>1. Explain why the aggregate demand curve is downward-sloping ...
<ul><li>Week 5: Money, Banking and Inflation </li></ul><ul><li>1. Crowding out </li></ul><ul><li>2. Defining money </li></...
<ul><li>Example Exam Questions for Week 5 </li></ul><ul><li>1. What is the monetarist rule? </li></ul><ul><li>2. Suppose t...
<ul><li>Week 6: Interest Rates and Monetary Policy </li></ul><ul><li>1. Interest rates and the price of bonds </li></ul><u...
<ul><li>The Many Roles of Real vs Nominal Interest Rates </li></ul><ul><li>1. The real i rate affects agg D for g&s </li><...
<ul><li>Example Exam Questions for Week 6 </li></ul><ul><li>1. Explain why the price of bonds falls when interest rates ri...
<ul><li>More Example Exam Qs for Week 6 </li></ul><ul><li>1. Explain the difference between real and nominal interest rate...
<ul><li>Week 7A: Policy Debates </li></ul><ul><li>1. Fiscal versus Monetary Policy </li></ul><ul><li>multiplier magnitudes...
<ul><li>Week 7B: Budget Deficits and the National Debt </li></ul><ul><li>1. The Keynesian legacy </li></ul><ul><ul><li>bal...
<ul><li>Example of Structural Deficit Calculation </li></ul><ul><li>current deficit: $40b real growth: 2%; inflation: 4% u...
<ul><li>Example Exam Questions for Week 7 </li></ul><ul><li>1. What is the structural deficit? </li></ul><ul><li>2. Suppos...
<ul><li>Week 9A: The Exchange Rate  </li></ul><ul><li>1. Definition of the exchange rate </li></ul><ul><li>2. Foreign exch...
<ul><li>Week 9B: Balance of Payments </li></ul><ul><li>1. Definition: demand for $ minus supply of $ on foreign exchange m...
<ul><li>Example Exam Questions for Week 9 </li></ul><ul><li>1. What is the balance of payments? </li></ul><ul><li>2. Suppo...
<ul><li>Week 10: Policy in an Open Economy </li></ul><ul><li>1. Fiscal policy, flexible exchange rate </li></ul><ul><ul><l...
<ul><li>Example Exam Questions for Week 10 </li></ul><ul><li>1. Explain why monetary policy is ineffective under fixed exc...
<ul><li>Week 11: PPP and IRP Purchasing Power Parity </li></ul><ul><li>1. Role of arbitrage </li></ul><ul><li>2. PPP in te...
<ul><li>US Can Can </li></ul><ul><li>real growth 2%   2%  2% </li></ul><ul><li>money supply growth 7%   7% 13% </li></ul><...
<ul><li>Sample Exam Questions for Week 11 </li></ul><ul><li>1. What is purchasing power parity? </li></ul><ul><li>2. In 19...
<ul><li>More Sample Exam Qs for Week 11 </li></ul><ul><li>1.  What is interest rate parity? </li></ul><ul><li>2.  Canada, ...
<ul><li>Week 12: Stagflation </li></ul><ul><li>1. The Phillips curve </li></ul><ul><li>historical development </li></ul><u...
<ul><li>Week 12: Stagflation (continued) </li></ul><ul><li>3. Policy implications </li></ul><ul><li>reducing the NRU </li>...
<ul><li>Sample Exam Questions for Week 12 </li></ul><ul><li>1. What is the Phillips curve? </li></ul><ul><li>2. Explain th...
<ul><li>Really-Important Macro Concepts   </li></ul><ul><ul><ul><li>1. The role of productivity.  </li></ul></ul></ul><ul>...
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Most Of The Economics That Is Usable For Advising On Public Policy Is At About The Level Of The Introductory Undergraduate Course

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Most Of The Economics That Is Usable For Advising On Public Policy Is At About The Level Of The Introductory Undergraduate Course

  1. 1. <ul><li>Most of the economics that is usable for advising on public policy is at about the level of the introductory undergraduate course. Unfortunately, however, economists don't know very much; </li></ul><ul><li>but </li></ul><ul><li>other people, including politicians who make economic policy, know even less about economics than economists do. </li></ul>
  2. 2. <ul><li>Most of the economists who catch on do so long after graduate school, while teaching classes or advising governments: that's when I learned to think like an economist. I think economics, like philosophy, cannot be taught to nineteen-year olds. It's an old man's field. Nineteen-year olds are, most of them, romantics, capable of memorizing and emoting, but not capable of thinking coldly in the cost-benefit way. A nineteen-year old has intimations of immortality, comes directly from a socialized economy (called a family), and has no feel on his pulse for those tragedies of life that economists call scarcity and choice. </li></ul>
  3. 3. <ul><li>I have never known anyone skillful in economics who claimed to have acquired this skill solely through extensive study of textbooks. Virtually unanimously, individuals report acquiring skill through practice. Even a diligent student, who has learned all the basic principles, when faced with his or her first problem has no meaningful way of deciding which of these principles would be most useful to apply. Perhaps it is not surprising, then, that students so often complain that although they study the text they are largely unable to solve problems. </li></ul>
  4. 4. <ul><li>1. What are discouraged workers? </li></ul><ul><li>2. Explain what impact an increase in the number of discouraged workers would have on the measured level of unemployment. </li></ul><ul><li>3. An increase in the number of discouraged workers will </li></ul><ul><ul><li>a) increase the labor force </li></ul></ul><ul><ul><li>b) raise the participation rate </li></ul></ul><ul><ul><li>c) decrease the number of jobs </li></ul></ul><ul><ul><li>d) lower the measured unemployment rate </li></ul></ul><ul><li>4. &quot;For example, Canada's jobless rate fell to 7% last month, the lowest number in 2 years. But if you think it's a sign that the economy is suddenly moving up, look again.&quot; </li></ul><ul><li>How could a fall in the unemployment rate not be a sign that the economy is moving up? </li></ul>
  5. 5. <ul><li>A lady arrives at a river with a fox, a chicken and a bag of grain. There is a raft which can carry her and one of her belongings. If she leaves the fox alone with the chicken, the fox will eat the chicken; if she leaves the chicken alone with the grain, the chicken will eat the grain. How does she cross the river? </li></ul>
  6. 6. <ul><li>Week 1: Intro: Supply and Demand </li></ul><ul><li>1. What is economics? micro- versus macro- economics </li></ul><ul><li>2. A microeconomic example why demand is downward-sloping </li></ul><ul><li>why supply is upward-sloping </li></ul><ul><li>equilibrium price and quantity </li></ul><ul><li>shifts in supply and demand curves </li></ul><ul><li>reaction to a shock </li></ul><ul><li>shifts in versus movements along </li></ul><ul><li>3. The Four Fundamental Macro Markets </li></ul><ul><li>Goods and Services Market </li></ul><ul><li>Determining GDP and the P level </li></ul><ul><li>Money Market </li></ul><ul><li> Determining the interest rate </li></ul><ul><li>Labor Market </li></ul><ul><li>Determining the wage rate </li></ul><ul><li>Foreign exchange market </li></ul><ul><li>Determining the exchange rate </li></ul><ul><li>4. The AS/AD diagram </li></ul>
  7. 7. <ul><li>Week 2A: Measuring Output </li></ul><ul><li>1. National Income Accounts </li></ul><ul><li>GDP vs GNP </li></ul><ul><li>national output, national income, aggregate supply, etc. </li></ul><ul><li>2. Adding Spending </li></ul><ul><li>(C + I + G + X - M) </li></ul><ul><li>role of imports, inventories </li></ul><ul><li>antiques, intermediate goods </li></ul><ul><li>3. Adding Incomes </li></ul><ul><li>(wages, profits, interest, rent) </li></ul><ul><li>role of indirect taxes, depreciation, subsidies, transfers, capital gains </li></ul><ul><li>4. Statistical discrepancy </li></ul><ul><li>5. Use as a welfare index: </li></ul><ul><li>exchange rates </li></ul><ul><li>illegal activities </li></ul><ul><li>market transactions, leisure </li></ul><ul><li>day-care, maids, etc. </li></ul><ul><li>pollution, police </li></ul><ul><li>war goods vs consumer goods </li></ul><ul><li>climate </li></ul><ul><li>distribution </li></ul>
  8. 8. <ul><li>Example Exam Questions for Week 2 </li></ul><ul><li>1. Explain the difference between the two different ways of calculating GDP. </li></ul><ul><li>2. From the data below, what is the official measure of GDP? </li></ul><ul><ul><ul><li>Personal Consumption Expenditures 62.0 </li></ul></ul></ul><ul><ul><ul><li>Depreciation 5.0 </li></ul></ul></ul><ul><ul><ul><li>Wages 80.0 </li></ul></ul></ul><ul><ul><ul><li>Indirect Business Taxes less Subsidies 1.0 </li></ul></ul></ul><ul><ul><ul><li>Interest and Rental Income 3.0 </li></ul></ul></ul><ul><ul><ul><li>Gross Private Domestic Investment 15.0 </li></ul></ul></ul><ul><ul><ul><li>Corporate Profits 7.0 </li></ul></ul></ul><ul><ul><ul><li>Net Exports 1.0 </li></ul></ul></ul><ul><ul><ul><li>Government Purchases of Goods and Services 20.0 </li></ul></ul></ul><ul><ul><ul><li>Government Transfer Payments 4.0 </li></ul></ul></ul><ul><li>3. Which of the following will be added to GDP as conventionally calculated? </li></ul><ul><ul><li>a) a welfare payment </li></ul></ul><ul><ul><li>b) the cost of cleaning up an oil spill </li></ul></ul><ul><ul><li>c) dividends earned by an American on shares in a British company </li></ul></ul><ul><ul><li>d) the value of work done by a parent staying home to care for children </li></ul></ul><ul><li>4. &quot;Almost all of the fourth quarter increase in GDP wound up as unsold inventory sitting on shelves.&quot; If it doesn't get sold, how could it get counted into GDP? </li></ul>
  9. 9. <ul><li>Week 2B: Measuring the Price Level and Inflation </li></ul><ul><li>1. Nominal versus real variables </li></ul><ul><li>2. Calculating the CPI </li></ul><ul><li>cost of a typical bundle of g&s measuring inflation: the rate of change of the CPI meaning of the base year problems: quality changes; new products; relative price changes </li></ul><ul><li>3. The GDP deflator </li></ul><ul><li>4. How to convert nominal to real </li></ul><ul><li>5. Costs of inflation </li></ul><ul><li>illusory costs income redistribution wealth redistribution tax increases resource misallocation/inefficiencies inflation avoidance unpredictability inconvenience (shoe-leather cost) </li></ul>
  10. 10. <ul><li>Week 2C: Measuring Unemployment </li></ul><ul><li>1. Definitions: Labor force </li></ul><ul><li>Participation rate Unemployment rate </li></ul><ul><li>2. A Paradox: High job creation but growing unemployment </li></ul><ul><li>2. Varieties: Frictional </li></ul><ul><li>Structural Institutionally-induced Cyclical </li></ul><ul><li>3. Full employment defined; the NRU </li></ul><ul><li>4. Cost of unemployment: output gap </li></ul><ul><li>5. Measurement problems </li></ul><ul><li>Underestimate: discouraged workers part-time jobs Overestimate: unemploy insurance underground economy </li></ul><ul><li>6. Use as a welfare index </li></ul><ul><li>composition of unemployed safety nets </li></ul>
  11. 11. <ul><li>Even More Example Exam Qs for Week 2 </li></ul><ul><li>1. What are &quot;discouraged workers&quot;? </li></ul><ul><li>2. Explain what impact an increase in the number of &quot;discouraged workers&quot; would have on the measured level of unemployment. </li></ul><ul><li>3. An increase in the number of &quot;discouraged workers&quot; will </li></ul><ul><ul><li>a) increase the labor force </li></ul></ul><ul><ul><li>b) raise the participation rate </li></ul></ul><ul><ul><li>c) decrease the number of jobs </li></ul></ul><ul><ul><li>d) lower the measured unemployment rate </li></ul></ul><ul><li>4. &quot;For example, Canada's jobless rate fell to 7% last month, the lowest number in 2 years. But if you think it's a sign that the economy is suddenly moving up, look again.&quot; </li></ul><ul><li>How could a fall in the unemployment rate not be a sign that the economy is moving up? </li></ul>
  12. 12. <ul><li>Week 3: Demand Equilibrium and the Multiplier </li></ul><ul><li>1. Defining agg D for goods and services </li></ul><ul><li>explaining consumption </li></ul><ul><li>explaining investment </li></ul><ul><li>2. Reaction to disequilibrium </li></ul><ul><li>inventory behavior </li></ul><ul><li>flowchart explanation </li></ul><ul><li>3. &quot;The&quot; multiplier </li></ul><ul><li>4. Graphical interpretation </li></ul><ul><li>45 o - line diagram </li></ul><ul><li>Agg S / agg D diagram </li></ul><ul><li>5. Using the multiplier </li></ul>
  13. 13. <ul><li>Example Exam Questions for Week 3 </li></ul><ul><li>1. What is fiscal policy? </li></ul><ul><li>2. A stimulating dose of fiscal policy can be applied either by increasing government spending or by decreasing taxes. What is the main reason why someone would prefer one to the other? </li></ul><ul><li>3. Which of the following will tend to increase the size of &quot;the&quot; multiplier? </li></ul><ul><ul><li>a) a higher marginal tax rate b) a higher marginal propensity to consume c) a higher marginal propensity to import d) a higher level of government spending </li></ul></ul><ul><li>4. &quot;For Canada, the demand pressures generated by the U.S. tax cuts and the spillover effects of increased U.S. defense spending will push the Canadian economy further into an excess demand situation.&quot; </li></ul><ul><ul><li>a) What kind of U.S. macroeconomic policy is referred to here? b) Why will this policy affect Canada? </li></ul></ul>
  14. 14. <ul><li>More Example Exam Qs for Week 3 </li></ul><ul><li>1. Define &quot;the&quot; multiplier. </li></ul><ul><li>2. Is it better for an economy to have a larger or a smaller multiplier? Explain. </li></ul><ul><li>3. If &quot;the&quot; multiplier is 5 and income increased by $65 billion, the increase in autonomous spending must have been </li></ul><ul><ul><li>a) $11 billion b) $13 billion </li></ul></ul><ul><ul><li>c) $325 billion d) $0.077 billion </li></ul></ul><ul><li>4. &quot;For the people around here this extra million dollars of government spending means 42 direct jobs and, depending on the employment multiplier you prefer, another 120 or 160 indirect jobs. In the bush. On the booming grounds. In the drugstore. </li></ul><ul><ul><li>a) What is meant by the &quot;employment multiplier&quot;? </li></ul></ul><ul><ul><li>b) What is the magnitude of the employment multiplier if 120 indirect jobs are created? </li></ul></ul>
  15. 15. <ul><li>Week 4: The Supply Side </li></ul><ul><li>1. LR growth/productivity/standard of living </li></ul><ul><li>creative destruction national saving </li></ul><ul><li>2. AS/AD model </li></ul><ul><li>rationale for AS curve; shifts modified multiplier long run vs short run </li></ul><ul><li>3. Reaction to shock at FE </li></ul><ul><li>inflationary gap recessionary gap fooling workers in the short run downward-sticky wages & prices information problems contracts contract obligations unemployment policy co-ordination problem efficiency wages </li></ul><ul><li>4. Implications from the theory </li></ul><ul><li>stagflation accelerating prices </li></ul><ul><li>5. Supply-side shock </li></ul><ul><li>6. Supply-side policy </li></ul>
  16. 16. <ul><li>Example Exam Questions for Week 4 </li></ul><ul><li>1. Explain why the aggregate demand curve is downward-sloping </li></ul><ul><li>2. Explain two different ways in which stagflation could come about. </li></ul><ul><li>3. The aggregate supply curve will shift up for all the following except </li></ul><ul><ul><li>a) an increase in wage rates </li></ul></ul><ul><ul><li>b) an increase in the price level </li></ul></ul><ul><ul><li>c) an increase in the price of raw materials </li></ul></ul><ul><ul><li>d) a decrease in productivity </li></ul></ul><ul><li>4. &quot;He favors a slow recovery, for example, partly because the 'natural rate of unemployment' may turn out to be higher than anyone thinks.&quot; </li></ul><ul><ul><li>a) What is the 'natural rate of unemployment'? </li></ul></ul><ul><ul><li>b) Explain the rationale behind the suggestion that policy should push the economy out of recession slowly rather than quickly. </li></ul></ul>
  17. 17. <ul><li>Week 5: Money, Banking and Inflation </li></ul><ul><li>1. Crowding out </li></ul><ul><li>2. Defining money </li></ul><ul><ul><li>M1 vs M2 </li></ul></ul><ul><ul><li>banking innovations </li></ul></ul><ul><li>3. Fractional reserve banking </li></ul><ul><ul><li>legal reserves/ money base </li></ul></ul><ul><ul><li>the money multiplier </li></ul></ul><ul><ul><li>open market operations </li></ul></ul><ul><li>4. The quantity theory: Mv = PQ </li></ul><ul><ul><li>velocity </li></ul></ul><ul><ul><li>the &quot;new&quot; quantity theory </li></ul></ul><ul><ul><li>a long-run rule for inflation </li></ul></ul><ul><li>5. The monetarist rule </li></ul><ul><ul><li>discretion vs rules debate </li></ul></ul><ul><li>6. What about the interest rate? </li></ul>
  18. 18. <ul><li>Example Exam Questions for Week 5 </li></ul><ul><li>1. What is the monetarist rule? </li></ul><ul><li>2. Suppose the economy is at full employment with a real rate of growth of 3%. If innovations in the banking system are reducing, ceteris paribus, the need for money at 1% per year, what rate of growth of the money supply would you recommend to achieve a long-run inflation rate of 4%? </li></ul><ul><li>3. Believers in the monetarist rule assert that </li></ul><ul><ul><li>a) lags are long and variable </li></ul></ul><ul><ul><li>b) the central bank should keep the money supply growth constant </li></ul></ul><ul><ul><li>c) the economy can be stabilized by automatic mechanisms </li></ul></ul><ul><ul><li>d) all of the above </li></ul></ul><ul><li>4. &quot;Far better for central bankers to get out of the fine tuning business. Instead they should try to keep .....&quot; </li></ul><ul><li>Finish this clipping. </li></ul>
  19. 19. <ul><li>Week 6: Interest Rates and Monetary Policy </li></ul><ul><li>1. Interest rates and the price of bonds </li></ul><ul><li>2. Treasury bills </li></ul><ul><li>calculating yields </li></ul><ul><li>the discount rate; federal funds rate </li></ul><ul><li>3. Real versus nominal interest rates </li></ul><ul><li>4. Monetary policy and interest rates </li></ul><ul><li>if at less than FE </li></ul><ul><li>if at FE </li></ul><ul><li>impact on bond market </li></ul><ul><li>5. interest rates and the quantity theory </li></ul><ul><li>6. international influences (reminder) </li></ul>
  20. 20. <ul><li>The Many Roles of Real vs Nominal Interest Rates </li></ul><ul><li>1. The real i rate affects agg D for g&s </li></ul><ul><li>2. Uncertain reaction of i rate to monetary policy </li></ul><ul><li>3. SR vs LR reaction to a rise in money growth </li></ul><ul><li>4. Forecasting i rate relies mainly on forecasting inflation and central bank reactions </li></ul><ul><li>5. Reduce i rate by reducing money growth </li></ul><ul><li>6. Beware using nominal i rate as a policy target </li></ul><ul><li>7. Bad economic news increases bond prices </li></ul><ul><li>8. International roles to be discussed later. </li></ul>
  21. 21. <ul><li>Example Exam Questions for Week 6 </li></ul><ul><li>1. Explain why the price of bonds falls when interest rates rise. </li></ul><ul><li>2. The current price of a Treasury bill due to pay $1000 in one year's time is $930. If the central bank announces that the money supply growth rate will jump from 6% to 8%, what should the interest rate become? </li></ul><ul><li>3. Suppose the interest rate is 8%, and a bond with an annual coupon of $75 matures in one year's time, paying its face value of $1000. This bond's current price should be </li></ul><ul><ul><li>a) below $1000 b) $1000 c) above $1000 d) not enough information to tell </li></ul></ul><ul><li>4. &quot;The principle power of the Bank to lower interest rates lies in its ability to contribute to a lower rate of inflation, and that takes time.&quot; </li></ul><ul><ul><li>a) How would the central bank contribute to a lower rate of inflation? </li></ul></ul><ul><ul><li>b) How would this lower interest rates? </li></ul></ul><ul><ul><li>c) Why would this take time? </li></ul></ul>
  22. 22. <ul><li>More Example Exam Qs for Week 6 </li></ul><ul><li>1. Explain the difference between real and nominal interest rates. </li></ul><ul><li>2. Explain how an increase in the money supply affects the interest rate. </li></ul><ul><li>3. Suppose interest income is taxed at 50%. If the real interest rate is 3%, how much extra tax is paid on interest earned from $10,000 if expected inflation were 6% rather than 2%? </li></ul><ul><ul><li>a) $150 b) $200 c) $250 d) $400 </li></ul></ul><ul><li>4. &quot;Capacity utilization, at 82.4%, was unchanged in January for mines, factories and utilities. Economists are worried that demands on industry may soon outstrip capacity, thereby encouraging producers to raise prices. Inflation, the undisputed Achilles heel of bonds, would result.&quot; </li></ul><ul><li>Explain why inflation is the Achilles heel (weak spot) of bonds. </li></ul>
  23. 23. <ul><li>Week 7A: Policy Debates </li></ul><ul><li>1. Fiscal versus Monetary Policy </li></ul><ul><li>multiplier magnitudes </li></ul><ul><li>increasing G vs decreasing taxes </li></ul><ul><li>policy vs expenditure lags </li></ul><ul><li>discrimination </li></ul><ul><li>monetarist view of fiscal policy </li></ul><ul><li>2. Rules vs discretion </li></ul><ul><li>3. Supply-side policy </li></ul><ul><li>4. International forces (reminder) </li></ul>
  24. 24. <ul><li>Week 7B: Budget Deficits and the National Debt </li></ul><ul><li>1. The Keynesian legacy </li></ul><ul><ul><li>balanced-budget multiplier </li></ul></ul><ul><li>2. The structural deficit </li></ul><ul><ul><li>definition: difference between actual deficit and deficit corresponding to zero change in long-run public debt/GDP ratio </li></ul></ul><ul><ul><li>adjustments to calculate structural deficit </li></ul></ul><ul><ul><li>cyclical effects </li></ul></ul><ul><ul><li>growth </li></ul></ul><ul><ul><li>seigniorage </li></ul></ul><ul><li>4. Burdening future generations </li></ul><ul><ul><li>purpose of borrowing </li></ul></ul><ul><ul><li>at full employment? </li></ul></ul><ul><li>5. Generational accounting </li></ul>
  25. 25. <ul><li>Example of Structural Deficit Calculation </li></ul><ul><li>current deficit: $40b real growth: 2%; inflation: 4% unemployment: 9% money supply: $500b publicly-held national debt: $400b money multiplier: 5 long run average unemployment rate: 7% change in deficit due to 1% pt. change in unemployment: $4b </li></ul><ul><li>Cyclical correction: 2*4 = $8b </li></ul><ul><li>Growth correction: (2+4)%*400 = $24b </li></ul><ul><li>Seigniorage correction: (2+4)%*500/5 = $6b </li></ul><ul><li>Structural deficit: 40 - 8 - 24 - 6 = $2b </li></ul>
  26. 26. <ul><li>Example Exam Questions for Week 7 </li></ul><ul><li>1. What is the structural deficit? </li></ul><ul><li>2. Suppose an economy is at its long-run average rate of unemployment, and has a nominal growth rate of 5%, a budget deficit of $30 billion, a money multiplier of 4, a publicly-held national debt of $400 billion and a money supply of $200 billion. </li></ul><ul><li>What is its structural deficit? </li></ul><ul><li>3. The cyclical correction makes the structural deficit bigger if </li></ul><ul><ul><li>a) inflation is zero </li></ul></ul><ul><ul><li>b) the economy is in a boom </li></ul></ul><ul><ul><li>c) the current budget is in surplus </li></ul></ul><ul><ul><li>d) real growth is less than nominal growth </li></ul></ul><ul><li>4. &quot;The arithmetic is straightforward. If growth falls one percentage point below the government's 3 per cent forecast, the deficit would widen by about $1.5 billion. </li></ul><ul><ul><li>a) How can growth affect the government's budget deficit? </li></ul></ul><ul><ul><li>b) How would the structural deficit be affected here? </li></ul></ul>
  27. 27. <ul><li>Week 9A: The Exchange Rate </li></ul><ul><li>1. Definition of the exchange rate </li></ul><ul><li>2. Foreign exchange market </li></ul><ul><ul><li>supply and demand curves for $ sources of demand: exports capital inflows sources of supply: imports capital outflows </li></ul></ul><ul><li>3. Other determinants (via shifting curves) </li></ul><ul><ul><li>income interest rate price level expectations </li></ul></ul><ul><li>4. Reaction to disequilibrium </li></ul><ul><ul><li>flexible exchange rate fixed exchange rate </li></ul></ul><ul><li>5. Government intervention </li></ul><ul><ul><li>direct intervention interest rates rationale (reduce volatility) </li></ul></ul>
  28. 28. <ul><li>Week 9B: Balance of Payments </li></ul><ul><li>1. Definition: demand for $ minus supply of $ on foreign exchange market </li></ul><ul><li>2. Influence of B of P imbalance </li></ul><ul><ul><li>flexible exchange rate </li></ul></ul><ul><ul><li>fixed exchange rate </li></ul></ul><ul><li>3. Components </li></ul><ul><ul><li>current account </li></ul></ul><ul><ul><li> balance of trade </li></ul></ul><ul><ul><li> invisibles </li></ul></ul><ul><ul><li>capital account </li></ul></ul><ul><li>4. The twin deficits </li></ul><ul><li>5. Law of comparative advantage </li></ul>
  29. 29. <ul><li>Example Exam Questions for Week 9 </li></ul><ul><li>1. What is the balance of payments? </li></ul><ul><li>2. Suppose the Fed has intervened in the foreign exchange market to fix the exchange rate by selling $4b. If the current account deficit is $10b, what is the capital account balance? </li></ul><ul><li>3. If the Fed is buying $ in the foreign exch. market to maintain the value of the $, then </li></ul><ul><ul><li>a) the U.S. has a B of P surplus </li></ul></ul><ul><ul><li>b) the U.S. dollar is undervalued </li></ul></ul><ul><ul><li>c) the U.S. money supply is shrinking </li></ul></ul><ul><ul><li>d) U.S. foreign exchange reserves are rising </li></ul></ul><ul><li>4. &quot;While some in the U.S. put the trade deficit down to failing U.S. competiveness, or protectionist policies abroad, he claims its genesis lies in the budget deficit, and the consequent shortfall in U.S. domestic saving relative to investment.&quot; </li></ul><ul><li>Explain how the U.S. budget deficit could be responsible for the U.S. trade deficit. </li></ul>
  30. 30. <ul><li>Week 10: Policy in an Open Economy </li></ul><ul><li>1. Fiscal policy, flexible exchange rate </li></ul><ul><ul><li>assume mobile international capital </li></ul></ul><ul><ul><li>weakened by   $C </li></ul></ul><ul><li>2. Fiscal policy, fixed exchange rate </li></ul><ul><ul><li>strengthened by  money supply </li></ul></ul><ul><li>3. Monetary policy, flexible exchange rate </li></ul><ul><ul><li>strengthened by  $C </li></ul></ul><ul><li>4. Monetary policy, fixed exchange rate </li></ul><ul><ul><li>fully (!) offset by  money supply </li></ul></ul><ul><li>5. Fixed exchange rate implies monetary policy determined by trading partners - used to fix exchange rate and so not available for other purposes </li></ul><ul><li>6. Sterilization policy </li></ul><ul><ul><li>purpose; drawback </li></ul></ul><ul><li>7. Fixed or flexible? </li></ul>
  31. 31. <ul><li>Example Exam Questions for Week 10 </li></ul><ul><li>1. Explain why monetary policy is ineffective under fixed exchange rates. </li></ul><ul><li>2. Why with a fixed exchange rate would the U.S. dictate Canadian monetary policy? </li></ul><ul><li>3. Expansionary monetary policy under fixed exchange rates in the short run tends to </li></ul><ul><ul><li>a) reduce an inflationary gap and reduce a trade surplus </li></ul></ul><ul><ul><li>b) reduce a recessionary gap and increase short-term capital outflows </li></ul></ul><ul><ul><li>c) lower the domestic rate of interest and increase a trade surplus </li></ul></ul><ul><ul><li>d) decrease a trade surplus and increase short-term capital inflows </li></ul></ul><ul><li>4. &quot;Finally, there is the question of monetary policy and imported inflation. Under a fixed exchange rate, Canadian inflation would be much more closely tied to that of the U.S. Given the experience of the last few years, that may not be a bad thing.&quot; </li></ul><ul><ul><li>a) Explain why inflation would be more closely tied to that of the U.S. </li></ul></ul><ul><ul><li>b) Would monetary policy ease or tighten here if a fixed exchange rate were adopted? </li></ul></ul>
  32. 32. <ul><li>Week 11: PPP and IRP Purchasing Power Parity </li></ul><ul><li>1. Role of arbitrage </li></ul><ul><li>2. PPP in terms of inflation differentials </li></ul><ul><ul><li>LR rule of thumb: </li></ul></ul><ul><ul><li>rate of change of ex rate = foreign inflation - domestic inflation </li></ul></ul><ul><ul><li>short-run failure (real ex rate changes) </li></ul></ul><ul><ul><li>real interest rate differences </li></ul></ul><ul><ul><li>trade barrier changes </li></ul></ul><ul><ul><li>productivity growth differences </li></ul></ul><ul><ul><li>natural resource discoveries </li></ul></ul><ul><ul><li>terms of trade changes </li></ul></ul><ul><li>3. Real versus nominal exchange rate </li></ul><ul><li>4. Calculating the PPP exchange rate and comparing standards of living </li></ul><ul><li>Interest Rate Parity </li></ul><ul><li>1. World real interest rate </li></ul><ul><ul><li>differentials for risk </li></ul></ul><ul><li>2. Why not equal nominal rates? </li></ul><ul><ul><li>exchange rate changes </li></ul></ul><ul><ul><li>hedging costs </li></ul></ul>
  33. 33. <ul><li>US Can Can </li></ul><ul><li>real growth 2% 2% 2% </li></ul><ul><li>money supply growth 7% 7% 13% </li></ul><ul><li>real interest rate 3% 4% 4% </li></ul><ul><li>inflation </li></ul><ul><li>nominal interest rate </li></ul><ul><li>rate of change of ex rate </li></ul><ul><li>net real return to an American investing </li></ul>
  34. 34. <ul><li>Sample Exam Questions for Week 11 </li></ul><ul><li>1. What is purchasing power parity? </li></ul><ul><li>2. In 1975 the Canada/US exchange rate was 0.95 (i.e., 1$C bought .95$US). The Canadian price level rose by 52% between 1975 and 1980, while the US price level rose by 41%. What does PPP predict is the 1980 exchange rate? </li></ul><ul><li>3. If the Canadian i rate is 10%, the U.S. rate is 15%, the risk differential is 2% and the two economies are in mutual equilibrium </li></ul><ul><ul><li>a) the $C is appreciating </li></ul></ul><ul><ul><li>b) the $C is depreciating </li></ul></ul><ul><ul><li>c) Can. exports are rising and imports falling </li></ul></ul><ul><ul><li>d) Can. exports are falling and imports rising </li></ul></ul><ul><ul><li>e) both a) and d) </li></ul></ul><ul><li>4.&quot;News that job creation in January was more robust than anticipated sent a signal to currency markets to expect a stepped-up fight against inflation, unleashing a bout of buying fervor for the dollar.&quot; </li></ul><ul><li>Why would a tougher expected fight against inflation cause people to buy the dollar? </li></ul>
  35. 35. <ul><li>More Sample Exam Qs for Week 11 </li></ul><ul><li>1. What is interest rate parity? </li></ul><ul><li>2. Canada, on a fixed exchange rate, has real growth of 2% and is in equilibrium with money growth of 10%. Changes cause the U.S. real i rate to rise by 1% pt., U.S. inflation to rise by 2% pts., and its risk differential with Canada to drop by 0.5% pt. When the Canadian economy has settled to its new equilibrium, what is its change in nominal interest rate? </li></ul><ul><li>3. If there is a risk differential of 1% pt. between countries A and B then their </li></ul><ul><ul><li>a) nominal i rates should differ by 1% pt. </li></ul></ul><ul><ul><li>b) real i rates should differ by 1% pt. </li></ul></ul><ul><ul><li>c) nominal i rates should differ by 1% pt. plus the difference in their real growth rates </li></ul></ul><ul><ul><li>d) real i rates should differ by 1% pt. plus the difference in their real growth rates </li></ul></ul><ul><li>4. &quot;He can't understand why Canadians would put their money in three-year paper at 9% when they can get double-A rated New Zealand bonds at 19%.&quot; </li></ul><ul><li>What explanation would you offer for this? </li></ul>
  36. 36. <ul><li>Week 12: Stagflation </li></ul><ul><li>1. The Phillips curve </li></ul><ul><li>historical development </li></ul><ul><li>modern interpretation </li></ul><ul><li> shifting curve </li></ul><ul><li> reversed causation </li></ul><ul><li> short-run vs long-run </li></ul><ul><li>2. Role of inflation expectations </li></ul><ul><li>the accelerationist hypothesis </li></ul><ul><li>the policy ineffectiveness debate </li></ul><ul><li> rational expectations </li></ul><ul><li> wage/price flexibility </li></ul><ul><li>asymmetric SR Phillips curve </li></ul>
  37. 37. <ul><li>Week 12: Stagflation (continued) </li></ul><ul><li>3. Policy implications </li></ul><ul><li>reducing the NRU </li></ul><ul><li>fighting inflation with recession </li></ul><ul><li> credibility effect </li></ul><ul><li> co-ordination problem </li></ul><ul><li>wage/price guidelines/controls </li></ul><ul><li> complementary monetary policy </li></ul><ul><li> costs vs benefits </li></ul><ul><li>4. The real cause of inflation: losing control of the money supply </li></ul><ul><li>underestimating the NRU </li></ul><ul><li>negative supply-side shock </li></ul><ul><li>fixing the interest rate </li></ul><ul><li>fixing the exchange rate </li></ul><ul><li>financing government spending </li></ul><ul><li>the political business cycle </li></ul>
  38. 38. <ul><li>Sample Exam Questions for Week 12 </li></ul><ul><li>1. What is the Phillips curve? </li></ul><ul><li>2. Explain the nature of the long-run trade-off of the accelerationist hypothesis and how it comes about. </li></ul><ul><li>3. An incomes policy is designed to </li></ul><ul><ul><li>a) increase everyone's real income </li></ul></ul><ul><ul><li>b) increase the income of the unemployed </li></ul></ul><ul><ul><li>c) redistribute income from rich to poor </li></ul></ul><ul><ul><li>d) curb inflation without reducing aggregate demand </li></ul></ul><ul><li>4. &quot;We're not likely to see a really tight monetary policy; he made clear that the Bank is following an 'intentionally moderate' monetary policy in order to 'minimize the strains involved in adjusting to a less inflationary economy.' He points to the 'awkward economic fact that in the short run anti-inflationary policies tend to restrain output more than prices'.&quot; </li></ul><ul><li>Explain the rationale behind all this. </li></ul>
  39. 39. <ul><li>Really-Important Macro Concepts </li></ul><ul><ul><ul><li>1. The role of productivity. </li></ul></ul></ul><ul><ul><ul><li>2. Gross deceptive product </li></ul></ul></ul><ul><ul><ul><li>3. Discouraged/encouraged workers. </li></ul></ul></ul><ul><ul><ul><li>4. The multiplier. </li></ul></ul></ul><ul><ul><ul><li>5. Inventories and forecasting </li></ul></ul></ul><ul><ul><ul><li>6. Crowding out. </li></ul></ul></ul><ul><ul><ul><li>7. The structural deficit. </li></ul></ul></ul><ul><ul><ul><li>8. Burdening future generations </li></ul></ul></ul><ul><ul><ul><li>9. Fractional reserve banking; money multiplier </li></ul></ul></ul><ul><ul><ul><li>10. Inflation and money supply growth. </li></ul></ul></ul><ul><ul><ul><li>11. The monetarist rule </li></ul></ul></ul><ul><ul><ul><li>12. Interest rates and bond prices. </li></ul></ul></ul><ul><ul><ul><li>13. Real versus nominal interest rates. </li></ul></ul></ul><ul><ul><ul><li>14. How bad news affects bond prices </li></ul></ul></ul><ul><ul><ul><li>15. The real cause of inflation </li></ul></ul></ul><ul><ul><ul><li>16. NRU and inflation/unemployment tradeoff </li></ul></ul></ul><ul><ul><ul><li>17. Inflation asymmetry. </li></ul></ul></ul><ul><ul><ul><li>18. Monetary policy lost under fixed exchange rates. </li></ul></ul></ul><ul><ul><ul><li>19. Purchasing power parity. </li></ul></ul></ul><ul><ul><ul><li>20. Interest rate parity. </li></ul></ul></ul>

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