ECON204 Final Presentation Xinyi Shi, xs65

1. MACROECONOMICS:
HISTORY, PRESENT, AND
FUTURE
Xinyi Shi
2020/12/14

2. Preface

3. Xinyi Shi
Political Economy (Economics track)
Xinyi is a junior student at DKU. She majors in Political Economy with track in Economics, and her
academic interests include industry insights, financial markets, and statistics.
She is currently a student researcher at DKU Environmental Economics Center, conducting research
about fishery policies in China. She hopes to apply the economic concepts she learns to her analysis
of macro policies, deepens her understanding of concrete knowledge as well as better prepares her
for future career in the business and big-data world.
She has taken several leadership roles, including joining the Leadership Academy, presenting in the
inaugural humanities research conference, and organizing the first mass art participation project at
DKU. She has learned python and R in her classes, and is willing to explore a diverse range of tools
for economic and data analysis. In her free time, she enjoys independent music, films, and yoga.
About the author
LinkedIn:
linkedin.com/in/shi-xinyi-809551201/

4. Dedication and Acknowledgment
In preparing this book, the author has received help from many people.
The biggest inspiration is from Prof. Luyao (Sunshine) Zhang, who is the instructor
of the course ECON 204 Macroeconomics, and generously shares her
knowledge and codes with us and help us achieve this final product.
I also want to thank my groupmates and classmates for helping me and
discussing the course content with me.
My thanks also go to our guest speakers, Robert, Dr. Liu, and William Zhao. Their
sharing has inspired me to explore macroeconomic applications in the real
business world.

5. Logic Diagram by Lucid Chart

6. Table of
Contents
Part I: Macroeconomics Briefings
Part II: Addressing Economic Growth: An
Interdisciplinary Approach
Part III: Simulate Rational Expectation Theory:
Inflation and Interest Rate
Part IV: Macroeconomics in Business Practice: a
field trip to Liquity
Part VII: Future Perspective: Decentralized
Monetary Policy
Reference
Epilogue

7. Part I: Macroeconomics
Briefings

8. 1. What Is macroeconomics?
• Macroeconomists study income and output, unemployment, and inflation.
• Macroeconomists do not study the transaction in markets, for example, the price of
certain goods or the profit of a company.
Current problem: many macro models are too simple and idealistic, they cannot
capture current problems as the world develops; many concepts are also
interconnected, so the models may not be accurate enough.

9. 2. What are macro data?
https://ourworldindata.org/gr
apher/urbanization-vs-
gdp?time=2013

10. 2. What are macro data?
The data are percentage of urban
population and GDP per capita.
Dynamics: From the 1960s to 2016,
China and India are moving from the
bottom left to the middle of the figure,
which means that their share of urban
population and GDP per capita both
increase faster than the average.
Implication: China and India are
developing fast as two most populated
countries, and people are living far
more better lives now in general.

11. 3. What is a macro model?

12. 4. Why study macroeconomics?
• Making fiscal and monetary policies related to aggregated economic indicators.
• Understanding and solving social problems created by unemployment and
inflation.
• Improving my IQ.
• Solving current problems: adjusting some of the current models by applying
cutting-edge technology to better solve new problems and make predictions
more accurate.

13. Part II: Addressing Economic
Growth: An Interdisciplinary
Approach

14. 1. “Why care about GDP per capita? And what
are the limitations?”
Importance
• A country‘s overall economic performance
• Comparison between countries
Limitation
• Inequality within a country
• Negative externalities like pollution
• Equal weights of infrastructure, consumption, and so on

15. 2. “The Convergence of Short-Term Economic
Growth.”
• The initial variables K0 and L0 will not change the steady state.
• If the initial labor L0 or initial capital K0 increases, the economic growth
will converge faster.
Example: K0=100 K0=200

16. 3. “The Steady State Per Capital GDP”
(1) Saving rate(s)
Increasing saving rate increases steady state capital per worker.
s= 0.5 s=0.7

17. (2) Depreciation rate(delta)
Decreasing depreciation rate increases steady state capital per worker.
Delta= 0.1 Delta= 0.05

18. (3) Population growth rate(n)
Decreasing population growth rate increases steady state capital per worker.
n=2 n=0.1

19. 4. “The Drive for long-term economic growth”(a)
• Increasing
technological
level(a) increases
stead state GDP
per capita.
• Technological
revolution is the
drive for long-term
economic growth.

20. 5. Reflection: Economic Growth
• I learned the influential basic models in macroeconomics and understood
how changes in different variables (saving rate, population growth rate,
technology…) will influence the steady state capital per worker. The data
visualization makes it clearer and easier to understand.
• I learned about the opportunities to contribute to macroeconomics, for
example, refining the model by changing its assumptions, and comparing
different realities in countries with different levels of development.

21. Part III: Simulate Rational
Expectation Theory: Inflation and
Interest Rate

22. 1. Executive Summary of Rational Expectation Theory
• The supply of money is determined by the government, and the demand of money is on the
household which can be calculated.
• The equilibrium price level is determined by the law of monetary demand and supply.
• When the monetary supply increases with monetary demand fixed, the equilibrium price level
increases proportionally.
• When the monetary demand decreases with monetary supply fixed, the equilibrium price level
increases.
• The equilibrium price level is countercyclical. When GDP increases, the equilibrium price level
decreases.
• When targeting at a specific price level, the monetary supply is procyclical. When GDP increases,
the monetary supply increases.

23. 2. Simulate the equilibrium price level
In equilibrium, the price level P (10) is determined by the law of supply and demand.

24. 2.1 Change in Monetary Supply
An increase in monetary supply 𝑀𝑀𝑆𝑆(from 1000 to 2000) increases the price level P
proportionally (from 5 to 10).

25. 2.2 Change in Monetary Demand
When technological development reduces the demand of fiat money, for example
from 1 to 0.7, the price level P increases from 5 to 7.14.

26. 2.3 Change in
monetary demand
from Real GDP
The price level is counter-cyclical, because when GDP increases from 10 to 15, the
equilibrium price level decreases from 5 to 3.33. When GDP increases, the society
develops and productivity increases, with the amount of money fixed, we can buy more
things at a lower price.

27. 2.4 Price Level Targeting and Endogenous Money
When targeting at a price level at 3, the monetary supply is procyclical because when
GDP increases from 10 to 20, the monetary supply must increase from 600 to 1200.

28. 3. Simulate inflation and interest rate
The real interest rate (-0.0096) almost equal to interest rate minus inflation rate (-0.01).
Even the nominal interest rate is 0.03, the real asset decreases from 20 to 19.81,
because the inflation rate (0.04) is higher than the interest rate (0.03). When we make
investment, we must look at the inflation rate.

29. 4. Simulate Government revenue by printing more money
Government can generate revenue
from printing more money. We can
see that when government print 5%
more money, the government
revenue is 9.52, which is 95% of the
GDP.
If miu becomes larger, we can
expect the government revenue to
increase more and it accounts more
than 100% of the GDP. This means
that the revenue has exceeded this
year’s GDP or the country has
already collapsed.

30. 5. Limitations of the Rational Expectation Theory
• The reality may not always match people’s expectations. Many models are
wrong because we have not taken all variables into consideration.
• Money is not always neutral. Variations in the money supply affect relative
prices over long periods of time.
• An increase in money supply may affect consumption, production, and
employment. When the price level changes, individuals and businesses may
have different behaviors toward the changes, which cannot be predicted by
the Rational Expectation Theory.

31. Part IV: Macroeconomics in
Business Practice: a field trip to
Liquity

32. 1. Field Trip Summary
Company: Liquity
Founder and CEO: Robert Lauko
• After working on many layers of their Internet Computer
project, including consensus algorithms and incentive
mechanism design, Robert decided to revolutionize
decentralized borrowing and founded Liquity.
Content:
• As Decentralized Borrowing Protocol, Liquity offers interest-
free borrowing at a low collateral ratio. Liquity issues its own
LUSD and they can be redeemed at face value for the
underlying ETH collateral.

33. 2. Stablecoin and Liquity
Definition: Stablecoins are cryptocurrencies which are
designed to minimize price volatility and are backed
with real assets.
Different types of Stablecoins:
• Fiat-backed(Tether); Crypto-backed; Crypto-debt-
backed(Liquity); Algorithmic
Liquity is a stablecoin because borrower need to
deposit collateral. It has a novel redemption
mechanism that minimizes the need for governance.
LUSD can be redeemed at face value for the
underlying ETH collateral.

34. 3. Stablecoin and Monetary Policy
• Stablecoins are decentralized, which means no government or authority
has control over data processes.
• Referring to what we learned about Rules vs Discretion, stablecoins are
rule-base, which means they commit themselves to a designated mode of
automated set of rules.
• The benefits are transparency, efficiency, and an interest-free liquidity.
• It also includes rules to implement discretional policy. Often people can
vote to change the algorithm for stablecoins.

35. 4. Business Model of Liquity (1)
• Liquity issues LUSD tokens
• 1/3 of the tokens go to automated
issuance and 2/3 are sold or given
away to investors/ partners, etc
• The company then charges issuance
fees and redemption fees for profit
• The profits are reinvested into the
process to ensure the stability and
growth of the system

36. 4. Business Model of Liquity (2)
Satisfying needs:
• Its liquidation process is more efficient.
• It has a low collateral ratio of only 110%.
• Its stablecoins are redeemable at face
value against ETH.
Creating Values:
• Investors can have higher interest rates.
• Its decentralized nature makes it possible
for global usage.

37. 5. Reflection
and Takeaway
• First, this is a precious opportunity for me to learn
a cutting-edge business practice in
Macroeconomics, about stablecoin and
cryptocurrencies.
• Second, I learned that there are still many
problems need to be solved in the field of
macroeconomics, for example, how to reduce
transaction cost, how to increase the speed and
efficiency of monetary and fiscal policies.
• Third, I learned that nowadays, many
economics are also data scientists. So a possible
career path for me as an Economics student is
to learn about quantitative finance and business
computing.

38. Part VII: Future Perspective:
Decentralized Monetary Policy

39. 1. Dynamics of Monetary Policy and Products(1)
--Overview

40. 1. Dynamics of Monetary Policy and Products(2)
--Three Stages in Monetary Policies

41. 1. Dynamics of Monetary Policy and Products(3)
--How changes in monetary policies satisfied needs

42. 1. Dynamics of Monetary Policy and Products(4)
--Problems to be solved and a new research proposal1.

43. 2. Research Proposal(1) ——Question and Methodology
• Research question: How to increase the popularity of decentralized monetary
products?
• My proposal calls on companies to offer individual-based consulting services for
investors. By promoting a behavioral finance assessment along with the merits of
decentralized monetary products, people will be more likely to accept it.
• Problem it solves: User-adoption problem
• Methodology: Our company needs to recruit experts on cryptocurrency so that they
can create and simulate the behavioral experiment and help investors. Also, we
also need marketing experts to promote our service, the benefits of cryptocurrency
and UI designers to simply the user interface (maybe as handy as Alipay or WeChat
Payment).

44. Research
Proposal(2)
——Satisfying needs
and creating impacts
Satisfying needs: The public will better
understand the basics of cryptocurrencies and
their transaction will be more efficient, private,
and cheaper, so our product will gain its
popularity and make profit.
Intellectual Merits: We can publish papers in
scholarly journals and world conference to
present our practice on the behavioral
experiment.
Practical Impacts: For economic impacts, our
research improves efficiency of transactions, and
also make profits for us to reinvest. For social
values, it eases inflation and makes technology
more accessible to the public.

45. Research Proposal(3) ——Limitations
Potential Problems:
• Without considerable amount of data, we may not be able to create the most
reliable behavioral experiment.
• This proposal does not satisfy people’s need for a more secure system. The
code of smart contracts and virtual vault are vulnerable to hackers and they
may lose their wealth.
• The proposal does not satisfy the isolation problem of decentralized policy. We
need the privacy protection, but we also need to obey the law and
collaborate with traditional institutions and the monetary system.

46. Reference
GitHub URL: github.com/shixyqd/DKU_Econ204
Data Source: Our World in Data https://ourworldindata.org/grapher/urbanization-vs-gdp?time=2013, Accessed Dec.
6,2020
Liquity. liquity.org. Accessed Dec. 6, 2020
Pictures:
• https://ourworldindata.org/grapher/urbanization-vs-gdp?time=2013
• https://lookatthem.org/2020/01/07/top-20-economies-2020/
• https://lh3.googleusercontent.com/4BjZlAE9OBNmhZBsp0U87yOb5cesxSdzMB08Fd-
FJGnOS0ESv4y4Bb4lXc7lGothMWpe=s151

47. Epilogue

48. Useful Skills Acquired
Hard skills
• Python programming and
simulation
• Logic diagram by Lucid chart
• Microsoft software suite
Soft skills
• Attentive listening and
communication
• Teamwork and problem-solving
• Leadership and Creativity

49. Takeaway for Personal and Professional Growth

50. Thank you!