MACROECONOMICS: (PCE, PCEF, ESP, S+E)

Lecturer: Yunus Aksoy

Course Aims
Macroeconomics is the part of economics that studies the behaviour of the economic system as a whole. This
course aims to develop a macroeconomic framework, to provide microfoundations for macro relationships, to
emphasize interactions within economies, and to examine some topical issues in policy design.

Course Objectives
By the end of the course students will understand intertemporal budget constraints, determinants of long-run
growth of the economy, sources of business cycles and fluctuations in short run aggregate demand, the demand
for and supply of money, and the role of monetary and fiscal policy. Students are encouraged not merely to learn
theoretical models but to appreciate their relevance in practice, including in the design of economic policy.

Learning Outcomes
By the end of the academic year, you are expected to:

be able to form your own economic view on current macroeconomic problems;

understand the interrelationships between different macroeconomic policies;
be familiar with macroeconomic data and statistical relationships;
be able to present macroeconomic analysis both verbally and in written form;
be able to construct and write answers to macroeconomic analytical questions;
be able to undertake further study in the different areas of macroeconomics such as international
finance, monetary economics, growth theory, etc.

Organisation
During the course, there will be a weekly lecture combined with a class in which students present their solutions
to that week's problem set.

Assessment: Test (20%), Examination (80%)

Test: The test will take place during the lecture hour on the following date: Tuesday February 15, 2005. The test will
follow the approach of the seminar class worksheets. It will count for 20% of your final grade in this course, if this
improves your overall average. If the mark in your final examination is higher than the mark in the mid-term test, the
marks for the mid-term test will be discarded, and your final grade will come entirely from the final examination.

Examination: The three hour examination will take place on the following date: Tuesday, March 22, 2005. It counts
for 80% of the final grade in the course. The examination tests your ability to construct written answers to a
variety of macroeconomic questions and your ability to coherently use the analytical tools taught throughout the
term.

Required reading (course text)

Stephen D. Williamson, Macroeconomics, 2nd edition, Addison Wesley,

Web site for Williamson book http://wps.aw.com/aw_williamson_macroecon_1

Recommended Reading

N. Gregory Mankiw, Macroeconomics, 5th edition, Worth Publishers

Web site for Mankiw book: http://www.worthpublishers.com/mankiw/

Additional handouts and journal articles will also be provided.

Week 1: Introduction and Measurement Issues

Measurement: Measuring GDP; Nominal and Real GDP and Price Indices; Savings, Wealth and Capital;
Labour Market Measurement
Business Cycle Measurement: Stylised Facts; Comovements

*Williamson Ch.s 1, 2, 3

Week 2: Consumer and Firm Behaviour: The Work-Leisure Decision and Profit Maximization

The representative consumer; The representative firm

*Williamson Ch. 4

Williamson Mathematical Appendix Ch.4

Week 3: A Closed Economy One Period Macroeconomic Model

Government; Competitive Equilibrium; Optimality; Working with the Model

* Williamson Ch. 5

Williamson Mathematical Appendix Ch.5

Week 4: A Two-Period Model

The Consumption-Savings Decision and Ricardian Equivalence

* Williamson Ch. 8

Williamson Mathematical Appendix Ch.8

Week 5: A Monetary Intertemporal Model

The Neutrality of Money, Long Run Inflation and Money Demand

What is Money?; A Monetary Intertemporal Model; Money Demand & Supply

* Williamson Ch. 10

Williamson Mathematical Appendix Ch.10

Baumol, W., (1952), The Transactions Demand for Cash: An Inventory Theory Approach, Quarterly Journal of
Economics, Vol. 66, pp. 545-556.

*Bullard, J. (1999), Testing Long-Run Neutrality Propositions: Lessons from the Recent Research, Federal
Reserve Bank of St. Louis Review, November, pp. 57-78.

*Blinder, A., (1998), Central Banking in Theory and Practice, Cambridge: The MIT Press, chapters 1-2.

Laidler, D., (1969), The definition of money: theoretical and empirical problems, Journal of Money, Credit and
Banking, 1, 508-525.

*McCandless G., W. Weber (1995) Some Monetary Facts, Federal Reserve Bank of Minneapolis Quarterly Review,
Vol. 19, No. 3, pp. 211

*Mishkin, F. (1995), Symposium on the Monetary Transmission Mechanism, Journal of Economic Perspectives
9, no. 4, 3-10.

Week 6: Test (Tuesday February 15, 2004)

Week 6: Keynesian Business Cycle Theory

Aggregate Demand and Aggregate Supply

*Mankiw Ch. 9

*Williamson Ch. 12

Week 7: Keynesian Business Cycle Theory

IS & LM Curves and Policy Analysis

* Mankiw Ch.s 10, 11

* Williamson Ch. 12

Week 8: Keynesian Business Cycle Theory

Competing Explanations for Aggregate Supply

The Sticky Wage Model
The Sticky Price Model
Imperfect Information Model

* Mankiw Ch. 13

* Williamson Ch. 12

Week 9: Inflation, the Phillips Curve and the Central Bank Commitment

Inflation-Unemployment Trade Off; The Phillips Curve; The Friedman-Lucas Model Money Surprise
Model

* Williamson Ch. 17

Williamson Mathematical Appendix Ch.17

*Barro, R., and D. Gordon (1983) A Positive Theory of Monetary Policy in a Natural Rate Model, The
Journal of Political Economy, 91, pp. 589 -610.

*Blinder, A., (1998), Central Banking in Theory and Practice, Cambridge: The MIT Press, chapter 3.

Cukierman A, Miller, G. and B. Neyapti (2002) Central Bank reform, liberalization in transition economies-an
international perspective, Journal of Monetary Economics, pp.237-264

*Hayo, B. and C. Hefeker (2002), Reconsidering Central Bank Independence, European Journal of Political
Economy 18, pp. 653-674.

Week 10: Market-clearing Models of the Business Cycle

The Friedman-Lucas Money Surprise Model;

The Real Business Cycle Model

* Williamson Ch. 11