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Econ 208

Econ 208. Marek Kapicka Lecture 1 Introduction. What is this course about?. Analysis of macroeconomic policies Government Spending Taxation and government debt Monetary policy Banking and financial intermediation We will use micro-founded macroeconomic models to study those issues.

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Econ 208

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  1. Econ 208 MarekKapicka Lecture 1 Introduction

  2. What is this course about? • Analysis of macroeconomic policies • Government Spending • Taxation and government debt • Monetary policy • Banking and financial intermediation • We will use micro-founded macroeconomic models to study those issues

  3. Administration • Classes: MW 9:30-10:45 • My email: mkapicka@econ.ucsb.edu • Office hours: TTh 10:30-11:30, NH 3052 • Course homepage: http://econ.ucsb.edu/~mkapicka/E208.html

  4. Administration • TA XintongYang (lemon0215@gmail.com) TA sessions: Thursdays 3:00-3:50 & 4:00- 4:50 GIRV 1116 • Textbook Macroeconomics, by Matthias Doepke, Andreas Lehnert, and Andrew Sellgren

  5. Administration • 5 problem sets 4 best ones count 25 % of the final grade • Midterm (May 6, in class) No make-up 25 % of the final grade Closed book, closed notes • Final (June 12, 9-11) 50 % of the final grade Closed book, closed notes

  6. Outline of the course • Introduction: A basic framework • Government Policies • The Effects of Government Spending • Government Taxation and Government Debt • Monetary Policy • Banking and Financial Intermediation

  7. Per Capita Real GDP (in 2000 dollars) for the United States, 1900-2008

  8. Growth rates • If gt is small,

  9. Natural Logarithm of Per Capita Real GDP

  10. The Great Recession

  11. 1981-1982 Recession

  12. 1. US GDP, Consumption, and Government Expenditures

  13. 2. Total Taxes (black line) and Total Government Spending (colored line) in the United States, as Percentages of GDP

  14. 2. Recent Recession: Fiscal Policy • 2009 Fiscal Stimulus: • $787 billion (~5.5% of GDP) • Tax cuts: $288 billion • Spending on • Healthcare & Education: $238 billion • Infrastructure: $81 billion

  15. 4. US History of banking crises • Before 1914: Crises were a frequent phenomenon in the U.S. • National banking era 1863-1913 • They have occurred at about 10 year intervals • 1873,1884,1890,1893,1896,1907,1914

  16. U.S. National Banking Era Panics

  17. 2. How do we study macro? • We cannot run experiments in macroeconomics, so we need to construct models to be used as laboratories

  18. Prague

  19. A map of Prague

  20. A map of Prague subway

  21. How do we study macro? • A good model: • Simplified, abstract, representation of reality • Omits many details, represents only essential features needed to answer a specific question • helpful to make predictions • should be simple, but they need not be realistic.

  22. Households Choose consumption, saving, labor supply 2.1 Structure of a typical model Firms Choose production, investment, labor demand Markets Prices such that Supply = demand

  23. 2.1 Structure of a typical model • Description of goods in the economy • Consumers • preferences over goods • Firms • technology available to produce the goods • The resources available

  24. 2.2 Prediction of a Model • Individual behavior • people behave rationally (optimize) • firms maximize profits • Equilibrium behavior • competitive equilibrium

  25. 2.3 Microeconomic Foundations • The Approach • Start with consumers and firms making decisions at individual level • Aggregate them up Representative Consumer Assumption • Example: Benefits of this Approach • Monetary Policy

  26. A Basic Intertemporal Model • A simple model where people choose how much to consume and how much to save • A) Consumer Optimization • B) Market Clearing • C) Adding capital stock • D) Welfare Theorems • E) Infinite horizon

  27. A Basic Intertemporal Model • First period = current period • Second period = future period • To simplify, abstract from labor/leisure decision • Our interest: borrowing and saving by consumers

  28. A Basic Intertemporal Model • Preferences of consumers • U(c) is increasing, differentiable and concave • Discount factor β<1 measures how much future utility matters relative to current utility

  29. A Basic Intertemporal Model • Budget Constraints: • y1, y2 are exogenous incomes • b1 are savings from period 1 to period 2 • r is the interest rate

  30. Consumer’s optimization • Consumers maximize utility subject to budget constraints • Lagrangean

  31. Consumer’s optimization • First order conditions • Euler Equation

  32. A) Consumer’s optimization • Log utility: • Solution:

  33. Where are we? • A Basic Intertemporal Model • A) Consumer Optimization • B) Market Equilibrium • C) Adding capital stock • D) Welfare Theorems • E) Infinite horizon

  34. B) Market Equilibrium • Suppose that there is Nidentical agents • Market clearing condition is • Log utility:

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