Macroeconomics precourse – Part 2 Academic Year Course Presentation This course aims to prepare students for the Macroeconomics course of the MSc in BA. It provides the essential background in macroeconomics 1 PAOLO PAESANI Office: Room B6, 3RD floor, Building B Telephone: Office hours: to be agreed

Macro 2 EMPLOYMENT AND UNEMPLOYMENT POP = LF + NLF LF = Employed + Unemployed Unemployed = Voluntary + Involuntary + Frictional NLF = Young ( 70) + Others (15 << 70)

Mic ro 3 Mankiw (2011)

Macro 4 MONEY Mankiw (2011)

Macro Money supply (M) = Currency (C) + bank deposits (D) Bank deposits (D) = current account deposits D(1) + saving deposits D(2) Monetary base (B) = Currency + Required Bank reserves (R1) + Voluntary reserves (R2) Monetary aggregates 5 MONEY Mankiw (2011) GOVERNMENT

Micro 1. M = C + D 2. B = C + R 3. C = c D c > 0 4. R = R1 + R2 = aD + bD = (a+b)D 0 < (a+b) < 1 M = [(1+c) / (a + b + c)] B [(1+c) / (a + b + c)] = Money multiplier 6 MONEY GOVERNMENT

Macro Every economic system is linked to the others through multiple channels: 1.International trade of goods and services (Exports and Imports); 2.International mobility of factors of production (migration, foreign direct investment); 3.Private international financial flows (portfolio investment, forex transactions) 4.Public international financial flows (management of official forex reserves, interntional aid, international transfers) 7 MONEY GOVERNMENT

Macro Every economic system is linked to the others through multiple channels: 1.International trade of goods and services (Exports and Imports); 2.International mobility of factors of production (migration, foreign direct investment); 3.Private international financial flows (portfolio investment, forex transactions) 4.Public international financial flows (management of official forex reserves, interntional aid, international transfers) 8 MONEY GOVERNMENT

Macro 9 MONEY

Macro 10 INTEREST RATE Nominal interest rate = price of money over time = Additional sum of money the borrower agrees to pay, on top of the loaned amount, to the original lender or to the current owner of the loan. Nominal interest rate = Real interest rate + Expected inflation + Credit risk premium + Liquidity premium + Other risk premiums Real interest rate (ex ante) = Nominal interest rate – Expected inflation Real interest rate (ex post) = Nominal interest rate – Actual inflation If current inflation exceeds (falls short) of expected inflation, the ex post real interest rate is higher than the ex ante real interest rate.

Macro 11 INTEREST RATE Mankiw (2011)

Macro 12 EXCHANGE RATE Nominal exchange rate = price of one currency in terms of another currency = Amount of foreign currency per unit of domestic currency Real exchange rate = (Nominal interest rate *– Domestic price leve) / Foreign price level Nominal and real exhange rate can be bilateral or multilateral (effective) Appreciation = Nominal Exchange rate up (in nominal and real terms) Depreciation = Nominal Exchange rate down (in nominal and real terms)

Macro 13 REFERENCE Mankiw, G.N. (2010) Brief Principles of Macroeconomics, 6° ed.,