Detailed Outline of the Course

On Reading and Learning

This is a tough course, but you can learn a lot if you study smart as well as hard.

Growth Rates and Percentage Changes Using Logarithms

Macoeconomists use logarithms all the time because they make it easier to understand things quantitatively. Talking about percent changes without using logarithms is a pale shadow of talking about percent changes with logarithms.

Chapter 1—The Science of Macroeconomics

What happens in the long run is very different from what happens in the short run.

Chapter 2—The Data of Macroeconomics

What happens with things that are a big share of people’s budgets, such as housing, matters a lot for economic welfare.

Chapter 3—National Income: Where It Comes From and Where It Goes

In the long run, extra government purchases comes at the expense of consumption or investment (or net exports in an open economy). Also, in the long run, increasing government transfers or cutting taxes leads to extra consumption that crowds out investment or government purchases. Finally, efforts to avoid taxes (which are often exacerbated by unfortunate ways in which real-world taxes are designed) can cause people to make decisions that are often not in the national interest. Hence, we should think carefully about government purchases, government transfers and how the government raises revenue.

Imperfect Competition and Increasing Returns to Scale as Foundations of Macroeconomics

Sticky prices don’t make sense without imperfect competition, and imperfect competition doesn’t make sense without increasing returns to scale. Hence, imperfection competition and increasing returns are central to macroeconomics. They are true of very large chunks of the real world.

Chapter 4—The Monetary System: What It Is and How It Works

The Fed is moving to a system where the nominal interest rate in the economy is essentially determined by the interest rate on reserves. The smooth running of this system requires the Fed to keep the monetary base quite large.

Monetary Policy

The Fed and other central banks have the power to choose the level of aggregate demand. They should use this power to choose aggregate demand at a level that keeps inflation steady—the “natural” or “neutral” level of output and employment (and unemployment).

Chapter 5—Inflation: Its Causes, Effects and Social Costs

Inflation has important costs. Some of the most important costs of inflation are cognitive costs. The costs of inflation can be lowered by reducing inflation, but reducing inflation safely requires a willingness to use negative interest rates.

Chapter 6—The Open Economy

Net exports—also called the balance of trade or the the trade surplus/trade deficit—is determined by international capital flows—the international flow of funds for portfolio investment.

Chapter 7—Unemployment and the Labor Market

Output and employment are below their frictionless optimum because of three “wedges”: (1) imperfect competition, which puts price above marginal cost; (2) marginal tax rates, which put the amount a firm pays workers above what the workers receive in their paycheck, and (3) labor market distortions that for many people put the amount they would receive in their paycheck if they could get a job above the value of their leisure time.

Chapter 10—Introduction to Economic Fluctuations

Different dimensions of macroeconomic policy to affect aggregate demand are substitutes, so whatever the other dimensions of macroeconomic policy, monetary policy can choose the level of aggregate demand. (This may sometimes require negative interest rates.) It is important to get the level of aggregate demand right: if aggregate demand is too high, it will cause a boom that leads to inflation; if aggregate demand is too low, it will cause a recession.

Chapter 8—Economic Growth I: Capital Accumulation and Population Growth

In the long run (in this case, over the course of decades), saving supports investment that can have a big effect on the level of consumption an economy can deliver.

Chapter 9—Economic Growth II: Technology, Empirics and Policy

Technology—thought of broadly as anything that helps produce a large amount of output from a small amount of input—is the Big Kahuna of economic growth once a government is governing an economy reasonably well. However, it is also possible for economies—or parts of economies—to govern an economy so badly that it gets in the way of economic growth. In the area of technology, for many countries, the key is copying technology developed elsewhere. For the US, the key is developing new technology.

Negative Interest Rate Policy

Positive interest rates are when a borrower pays a lender for the privilege of using funds. Negative interest rates are when a lender pays a borrower to store funds. Negative nominal interest rates are important for enabling monetary policy to do its job of keeping the economy at the natural level of output and employment. Several central banks have begun using negative interest rates. Deeper negative rates are possible if a central bank is careful to deal with the bank profits problem and the paper currency problem. Central banks worry about political flak from using negative interest rates.