The first midterm is January 26. It will cover Chapters 1 – 5 in the text (not including sections 4.3, 4.4 . Here is a very quick summary of what I did in each lecture….

Lecture 1. Discussed data on inflation, output, exports, imports, current account that are on the website. Went into current account a lot and blamed deterioration here on rise in household consumption. Talked about role of models in macro.

Lecture 2. Spent more time on US current account. Started talking about Keynesian Cross (KC) model. Said KC gives us a good framework for thinking about 1990 and 2001 recessions. Circular Flow diagram. Multiplier, increase in autonomous component of consumption, unintended inventory accumulation, equilibrium, disequilibrium, distinction between actual and planned investment, national saving.

Lecture 3. More with Keynesian cross model. Analyzed effects of 'pessimism', i.e., fall in c0 for households or fall in I(bar) for business. Emphasized role of fall in I(bar) in US Great Depression and presented data on that episode. Talked about paradox of thrift....people's saving function shifts out but this creates a recession with the result that quantity saved does not change. Stock-Flow distinction. Demand for money, supply of money. Financial wealth....I discussed some of the numbers on financial wealth for the US (see website).

Lecture 4. LM curve, IS curve. Disequilibrium dynamics in financial markets (Md>Ms implies i rises quickly). Disequilibrium in goods markets: Z>Y implies output rises slowly. Experiments: G up, T down, Ms down. Model experiments are a key activity of this course: they involve using a model to determine the impact on the endogenous variables of a change in an exogenous variable. An experiment in the IS-LM model involves three basic steps: (1) figure out which curve shifts, IS or LM, and where it shifts to; (2) determine the location of the new equilibrium; (3) describe the movement of the economy from the old equilibrium to the new, using the disequilibrium dynamics assumed in the course. In my view, (3) is what model experiments are really about. However, to get it right it is crucial that you've done steps (1) and (2) carefully. Step (3) should be thought of through the eyes of a journalist who is observing and describing what is happening to the economy over time.

Lectures 5 and 6....more experiments in IS-LM model. I(bar) down, Ms down, Md up (I spent a lot of time explaining why money demand might jump....people think a stock market crash is coming up soon, so they get out of stock and into cash). Multiplier in IS-LM model smaller than in KC model. I talked about crowding out and the IMF report last year that complained the US government is swallowing up the world's saving, starving good investment opportunities of funding. The IMF view presumes the flow of saving is fixed. In contrast, in KC model a cut in taxes creates a rise in Y so great that saving increases by the cut in taxes and there is NO crowding out of investment. In IS-LM model there is some crowding out, but how much depends on the interest sensitivity of investment. If investment is not sensitive (as in KC) then there is no crowding out. If very sensitive then lot’s of crowding out in IS-LM model. I talked about the accelerator model of investment, in which investment is positively related to current output. This change increases the multiplier in the KC and IS-LM models. Crowding out is reduced in the IS-LM model if there is an accelerator effect on investment.

Recommended strategy for studying for midterm. First, study your lecture notes, and use the book to clarify things in lecture that were confusing. Second, make sure you understand the handouts and notes on the website, as well as the homework questions. You need not have read the articles I posted and summarized on the website when I taught the course in the past. At the moment, no articles have been posted for this course. Third, read through Chapters 1-5, to get a deeper understanding of the course material.

The exam will resemble what I’ve given in previous years.

Here is the midterm. Here are the answers.