Hartmut Lehmann SID UNIVERSITY OF BOLOGNA – Forli campus Spring 2018 MACROECONOMICS Hartmut Lehmann SID UNIVERSITY OF BOLOGNA – Forli campus Spring 2018

Practical notes Lecturer: Hartmut Lehmann Office hour: Wednesday 14:-15:00 Room S3, Palazzo Morgagni, Forli Tutor: Beatrice Vitali Office hours – see contacts section of course web site

Textbook: Gregory Mankiw and Mark Taylor, Macroeconomics, 2° Edition, European Edition, Macmillan, 2014 Programme: Chapters 1,2,3,4,5,7; 8-9; 6,10-13; 15-17. Lecture notes at: http://www.macroeconomics-forli.weebly.com Password: macro2018

Written exams: Multiple choice and open questions 34 points available 3 partial exams (mid-terms) 1 final exam Rules regarding partial exams Partial exams cannot be repeated Partial exams can be made up only for “institutional reasons” (e.g. trip to Brussels with a course of the LT SID) Registration for written exams on Alma Esami is mandatory

Time schedule of exams Partial exams (mid-terms) 1st : April 4 2nd : April 19 3rd : May 15 Final Exam (on last part of the course or on the whole material) in the summer exams sessions (June and July 2016) – this exam CAN be repeated in the September session

Some useful links www.ilsole24ore.com www.economist.com http://www.voxeu.org/ www.lavoce.info www.noisefromamerika.org www.istat.it www.bancaditalia.it www.ecb.int www.oecd.org www.imf.org http://europa.eu www.iza.org

The Science of Macroeconomics Chapter 1 The Science of Macroeconomics

In this chapter, you will learn: about the issues macroeconomists study the tools macroeconomists use some important concepts in macroeconomic analysis 7

Important issues in macroeconomics Macroeconomics, the study of the economy as a whole, addresses many topical issues, e.g.: What causes recessions? What is “government stimulus” and why might it help? How can problems in the housing market spread to the rest of the economy? What is the government budget deficit? How does it affect workers, consumers, businesses, and taxpayers? 8

Important issues in macroeconomics Macroeconomics, the study of the economy as a whole, addresses many topical issues, e.g.: Why does the cost of living keep rising? Why are so many countries poor? What policies might help them grow out of poverty? What is the trade deficit? How does it affect a country’s well-being? What determines youth unemployment? Why are some Euro countries in trouble? 9

U.S. Real GDP per capita (2005 dollars) 9/11/2001 First oil price shock Great Depression Financial crisis World War I Second oil price shock World War II

Italian Real GDP, 1861-1991 (1985 million liras, log scale)

Italian Real GDP per capita, 1970-2012 (2005 USD) source: OECD, 2005 USD, PPP prices, chain rule

Real GDP per capita, 1970-2012 (2005 USD)

U.S. Inflation Rate (% per year) World War I Second oil price shock First oil price shock Financial crisis Great Depression

Italian Inflation Rate, 1862-1992 (% per year)

Italian Inflation Rate, 1970-2010 (% per year) source: OECD, CPI inflation

Inflation Rates, 1970-2010 (% per year) source: OECD, CPI inflation

U.S. Unemployment Rate (% of labor force) World War I Second oil price shock Great Depression First oil price shock World War I Oil price shocks Financial crisis World War II Interesting features: The unemployment rate is never zero. The most obvious feature is the 25% unemployment rate during the Great Depression. Also quite impressive is the huge drop coinciding with World War II. Unemployment often responds to shocks with a lag. For example, after each of the oil shocks (1973, 1979), it took a year or two before unemployment shot up. Although the most recent recession officially ended in June 2009, the unemployment rate remained abnormally high through the end of 2011. Source: same as textbook Financial crisis Great Depression

Italian Unemployment Rate, 1970-2012 (% of labor force)

Unemployment Rates, 1970-2012 (% of labor force) source: OECD, Annual labor force statistics

Economic models …are simplified versions of a more complex reality irrelevant details are stripped away …are used to show relationships between variables explain the economy’s behavior devise policies to improve economic performance 21

Example of a model: Supply & demand for new cars shows how various events affect price and quantity of cars assumes the market is competitive: each buyer and seller is too small to affect the market price Variables Qd = quantity of cars that buyers demand Qs = quantity that producers supply P = price of new cars Y = aggregate income Ps = price of steel (an input) 22

The demand for cars demand equation: Q d = D (P,Y ) shows that the quantity of cars consumers demand is related to the price of cars and aggregate income 23

Digression: functional notation General functional notation shows only that the variables are related. Q d = D (P,Y ) A specific functional form shows the precise quantitative relationship. Example: D (P,Y ) = 60 – 10P + 2Y A list of the variables that affect Q d We often aren’t concerned with the exact quantitative relationship between variables, so we will often just use the general functional notation. 24

The market for cars: Demand P Price of cars demand equation: Q d = D (P,Y ) D The demand curve shows the relationship between quantity demanded and price, other things equal. Q Quantity of cars 25

The market for cars: Supply Q Quantity of cars P Price of cars supply equation: Q s = S (P,PS ) S The supply curve shows the relationship between quantity supplied and price, other things equal. D 26

The market for cars: Equilibrium Q Quantity of cars P Price of cars S D equilibrium price equilibrium quantity 27

The effects of an increase in income demand equation: Q d = D (P,Y ) Q Quantity of cars P Price of cars S D1 Q1 P1 D2 An increase in income increases the quantity of cars consumers demand at each price… P2 Q2 …which increases the equilibrium price and quantity. 28

The effects of a steel price increase supply equation: Q s = S (P,PS ) Q Quantity of cars P Price of cars S1 D Q1 P1 S2 An increase in Ps reduces the quantity of cars producers supply at each price… P2 Q2 …which increases the market price and reduces the quantity. 29

Endogenous vs. exogenous variables The values of endogenous variables are determined in the model. The values of exogenous variables are determined outside the model: the model takes their values & behavior as given. In the model of supply & demand for cars, endogenous: P, Qd, Qs exogenous: Y, Ps 30

NOW YOU TRY AT HOME: Supply and Demand 1. Write down demand and supply equations for wireless phones; include two exogenous variables in each equation. 2. Draw a supply-demand graph for wireless phones. 3. Use your graph to show how a change in one of your exogenous variables affects the model’s endogenous variables. Endogenous variables: price of wireless phones, quantity of wireless phones Exogenous variables: consumer income price of wireless phone service (a complement) price of landline phones & landline phone service (a substitute) technology

The use of multiple models No one model can address all the issues we care about. E.g., our supply-demand model of the car market… can tell us how a fall in aggregate income affects price & quantity of cars. cannot tell us why aggregate income falls. 32

The use of multiple models So we will learn different models for studying different issues (e.g., unemployment, inflation, long-run growth). For each new model, you should keep track of its assumptions which variables are endogenous, which are exogenous the questions it can help us understand, those it cannot 33

Prices: flexible vs. sticky Market clearing: An assumption that prices are flexible, adjust to equate supply and demand. In the short run, many prices are sticky – adjust sluggishly in response to changes in supply or demand. For example: many labor contracts fix the nominal wage for a year or longer many magazine publishers change prices only once every 3-4 years 34

Prices: flexible vs. sticky The economy’s behavior depends partly on whether prices are sticky or flexible: If prices sticky (short run), demand may not equal supply, which explains: unemployment (excess supply of labor) why firms cannot always sell all the goods they produce If prices are flexible (long run), markets clear and economy behaves very differently 35

Chapter Summary Macroeconomics is the study of the economy as a whole, including growth in incomes changes in the overall level of prices the unemployment rate Macroeconomists attempt to explain the economy and to devise policies to improve its performance. 36

Chapter Summary Economists use different models to examine different issues. Models with flexible prices describe the economy in the long run; models with sticky prices describe the economy in the short run. Macroeconomic events and performance arise from many microeconomic transactions, so macroeconomics uses many of the tools of microeconomics. 37