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IntermedBook - Intermediate Macroeconomics Dirk Krueger1...

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Intermediate Macroeconomics Dirk Krueger 1 Department of Economics University of Pennsylvania April 2007 1 I would like to thank Charles Jones, Felix Kubler, Beatrix Pall and Tom Sargent for stimulating discussions about teaching modern macro. All remaining errors are mine.
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Contents 1 Introduction 1 1.1 The Scope of Macroeconomics . . . . . . . . . . . . . . . . . . . . 1 1.2 US Macroeconomic Data: A Helicopter Tour . . . . . . . . . . . 2 1.2.1 Real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2.2 Digression: The Rest of the Course . . . . . . . . . . . . . 3 1.2.3 Other Macroeconomic Aggregates . . . . . . . . . . . . . 6 2 National Income and Product Accounting (NIPA) 11 2.1 Gross Domestic Product (GDP) . . . . . . . . . . . . . . . . . . . 11 2.1.1 Computing GDP through Production . . . . . . . . . . . 12 2.1.2 Computing GDP through Spending . . . . . . . . . . . . 13 2.1.3 Computing GDP through Income . . . . . . . . . . . . . . 16 2.2 Price Indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 2.3 From Nominal to Real GDP . . . . . . . . . . . . . . . . . . . . . 20 2.4 Measuring In&ation . . . . . . . . . . . . . . . . . . . . . . . . . . 21 2.5 Measuring Unemployment . . . . . . . . . . . . . . . . . . . . . . 22 2.6 Measuring Transactions with the Rest of the World . . . . . . . . 23 2.7 Appendix A: More on Growth Rates . . . . . . . . . . . . . . . . 25 2.8 Appendix B: Chain-Weighted GDP . . . . . . . . . . . . . . . . . 27 3 Economic Growth 33 3.1 Mathematical Preliminaries . . . . . . . . . . . . . . . . . . . . . 33 3.1.1 Discrete vs. Continuous Time . . . . . . . . . . . . . . . . 33 3.1.2 Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . 33 3.1.3 Some Useful Facts about Logs . . . . . . . . . . . . . . . 34 3.1.4 Growth Rates (once again) . . . . . . . . . . . . . . . . . 35 3.1.5 Growth Rates of Functions . . . . . . . . . . . . . . . . . 35 3.1.6 Simple Di/erential Equations and Constant Growth Rates 36 3.2 Growth and Development Facts . . . . . . . . . . . . . . . . . . . 37 3.3 The Solow Model . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 3.3.1 Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 3.3.2 Setup of the Basic Model and Model Assumptions . . . . 43 3.3.3 Analysis of the Model . . . . . . . . . . . . . . . . . . . . 46 3.3.4 Introducing Growth . . . . . . . . . . . . . . . . . . . . . 51 iii
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iv CONTENTS 3.3.5 Analysis of the Extended Model . . . . . . . . . . . . . . 55 3.3.6 Evaluation of the Solow Model . . . . . . . . . . . . . . . 64 3.4 The Convergence Discussion . . . . . . . . . . . . . . . . . . . . . 67 3.5 Growth Accounting and the Productivity Slowdown . . . . . . . 72 3.6 Ideas as Engine of Growth . . . . . . . . . . . . . . . . . . . . . . 75 3.6.1 Technology . . . . . . . . . . . . . . . . . . . . . . . . . . 75 3.6.2 Ideas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 3.6.3 Data on Ideas . . . . . . . . . . . . . . . . . . . . . . . . . 79 3.7 Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3.7.1 Cost of Investment . . . . . . . . . . . . . . . . . . . . . . 80 3.7.2 Bene&ts of Investment . . . . . . . . . . . . . . . . . . . . 81 3.8 Endogenous Growth Models . . . . . . . . . . . . . . . . . . . . . 82 3.9 Neutrality of Money . . . . . . . . . . . . . . . . . . . . . . . . . 86 3.10 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 4 Business Cycle Fluctuations 89 4.1 Potential GDP and Aggregate Demand . . . . . . . . . . . . . . 89 4.2 The IS-LM Framework . . . . . . . . . . . . . . . . . . . . . . . . 92 4.2.1 The Balance of Income and Spending: Keynesian Cross and Multiplier . . . . . . . . . . . . . . . . . . . . . . . . 92 4.2.2 Investment, the Interest Rate and the IS Curve . . . . . . 105 4.2.3 The Demand for Money and the LM-Curve . . . . . . . . 109 4.2.4 Combination of IS-Curve and LM-Curve: Short-Run Equi- librium . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 4.2.5 Monetary and Fiscal Policy in the IS-LM Framework . . . 118 4.3 The Aggregate Demand Curve . . . . . . . . . . . . . . . . . . . 122 4.4 Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 4.4.1 Concepts and Facts . . . . . . . . . . . . . . . . . . . . . 124 4.4.2 Some Theory and the Natural Rate of Unemployment . . 126 4.4.3 Unemployment and the Business Cycle . . . . . . . . . . . 129 4.5 The Price Adjustment Process . . . . . . . . . . . . . . . . . . . 132 4.5.1 Aggregate Demand, Potential GDP and the Price Adjust- ment Process . . . . . . . . . . . . . . . . . . . . . . . . . 136 4.5.2 Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . 137 4.5.3 Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . 138 4.6 Stabilization Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 140 4.6.1 Aggregate Demand Shocks and Their Stabilization . . . . 141 4.6.2 Price Shocks and Their Stabilization . . . . . . . . . . . . 143 4.7 Real Business Cycle Theory . . . . . . . . . . . . . . . . . . . . . 146 5 Microeconomic Foundations of Macroeconomics 149 5.1 Consumption Demand . . . . . . . . . . . . . . . . . . . . . . . . 149 5.1.1 Data on Consumption . . . . . . . . . . . . . . . . . . . . 149 5.1.2 The Keynesian Aggregate Consumption Function and the Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 5.1.3 The Life Cycle/Permanent Income Model of Consumption 153
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CONTENTS v 5.2 Investment Demand . . . . . . . . . . . . . . . . . . . . . . . . . 168 5.2.1 Facts about Investment . . . . . . . . . . . . . . . . . . . 168 5.2.2 The Theory of Investment . . . . . . . . . . . . . . . . . . 171 6 Trade, Exchange Rates & International Financial Markets 177 6.1 Terms of Trade, the Nominal and the Real Exchange Rate . . . . 177 6.2 E/ects of the Real Exchange Rate on the Trade Balance .
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This note was uploaded on 09/27/2009 for the course ECON 101 taught by Professor Dannicatambay during the Spring '08 term at UPenn.

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IntermedBook - Intermediate Macroeconomics Dirk Krueger1...

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