MACROECONOMIC THEORY AND POLICY
Christof Ruhl
Fall, 1994
Department of Economics
CENTRAL EUROPEAN UNIVERSITY


Course Description

Macroeconomics is usually referred to as economics, concerning the economy as a whole. It tries to explain the coordination of market-based economies: Why these appear to function rather well sometimes and not so well at other times - exhibiting inflation, unemployment, or lack of growth - and what should or should not be done to improve the system's performance. Macroeconomists concentrate on the interaction of aggregates; often, they derive conclusions aimed at economic policy.

Positive and normative aspects of macroeconomic analysis are closely related: Explanations of inflation, unemployment or lack of growth carry conclusions which, if often only implicitly, are relevant for economic policy. The "Coordination-question" and the way it is answered matters.

The task requires a high degree of abstraction: In addition to the "usual" assumptions (for example about people's behavior) making economist's life easier, macroeconomists face the aggregation problem. It may include the discovery of un-pleasantries, such as the "fallacy of composition" (where the interaction of perfectly rational people, pursuing economic goals, creates irrational outcomes in the aggregate); or just amazement on how millions of selfish individuals can possibly produce anything but sheer chaos - but choosing the right level of aggregation often matters for the kind of answer one may expect.

The task to explain the coordination of a complicated system then can be approached from two different angles. One possibility is to extend the micro-world of general equilibrium theory to macro-problems. In principle, the economy should work smoothly, as suggested by this particular branch of theory; this line of thought will make it likely to explain illcoordinated behavior by pointing out what blocks the market mechanism (and how to remove it). On the other end of the specter, one might assume that markets tend to produce unwarranted outcomes under many, plausible circumstances; this obviously would entail the temptation of trying to improve upon the market outcome.

The role of economic policy is a good example to see how both work out in practice: Followers of the first approach will tend to limit the range of governmental activities beyond a well defined scope; while the others may argue that these activities have a place in improving the system's performance. And in fact, most of the frequently cited differences of opinion for which macroeconomists have acquired so much fame, can be reduced to differences in this basic respect.

The question whether a market-coordinated economy is "self-adjusting" or not, or only sometimes, or ..., thus is central to many disputes. Though we won't find an answer to this big question in a few weeks, to define instances when it is and when it isn't, is vital for our subject.

The book we use, quite in line with (current) mainstream opinion, follows essentially the first approach and explains failures in terms of "imperfections". To keep the account balanced and the course interesting, we will supplement it with additional readings where appropriate. In general, we follow the book's basic outline and proceed in the steps proposed there: First the long run "classical", and second the short run "Keynesian" analysis; third, (we deviate a little) an extended discussion of economic policy issues.

Teaching Assistant/ Discussion Sections

Patricia Bartholomew will by the Teaching Assistant for this course. That means, she will help with grading, hold office hours, and also teach the discussion section. Her office is room 421, office hours are Tuesdays, 1:45-3:45 and Thursdays, 3:00-4:00, and her lectures are Friday mornings, 9:00-10:00 and 10:15 to 11:15.

Readings

The basic textbook for this class is Macroeconomics by Gregory Mankiw. However, I will supplement articles for some of the topics which we discuss in more detail. They will be copied and handed out on a case-by case basis.

Office hours

My office hours are Tuesdays and Thursdays, 2:00-3:00, room # 416, or by appointment (phone 670 92 415).

Grading

The final exam, scheduled to take place on Tuesday, Dec. 13, 9:00-12:00, will be worth 408 of your final course grade.

The midterm, scheduled for Thursday, November 10 (in class) will account for 30% of the total.

As discussed in class, we also will have a total of five short essays (homework) and quizzes (in class). The essays (2) will be one to two pages in length, the quizzes (3) 20 minutes. Counting 68 each, this makes up the remaining 308.

Course Outline

This is very tentative: We may slow down or speed up, depending on how difficult the material turns out to be. However, dates for exams and make-up classes should be considered fixed. Makeup classes are always on Wednesdays, 1:30-3:00. (Week I is the week October 3-7, week X the week December 5-9).

Chapters 1-2 in week 0, and a little bit during week I

Week I:
Chapter 3
Week II:
Chapter 4 Make-up class Quiz (Oct. 13)
Week III:
Chapter 4 and 5
Week IV:
Chapter 6 Essay (due Oct. 25)
Week V:
Chapter 7 and 8
Week VI:
Chapter 8 (and 14) Make-up class Essay (due Nov. 8)
MIDTERM
Week VII:
Chapter 9
Week VIII:
Chapter 10 Essay (due Nov. 22)
Week IX:
Chapter 11 (and 18)
Week X:
Chapter 12 (and 16) Make-up class Quiz (Dec. 7)
FINAL



CRC-Curriculum Resource Center
CEU Budapest, Hungary
Modified: May, 1996

Ruh_Macroecn.F94Econ.v3

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