Prof. Bryan Caplan

http://www3.gmu.edu/departments/economics/bcaplan

Econ 311

Fall, 1999

Macroeconomics Syllabus

Course Focus:

The course provides a comprehensive survey of modern macroeconomics. It covers the determination of output and the price level, labor markets and unemployment, savings and investment, financial markets, monetary economics, the public sector, macroeconomic policy, and international economics. More generally, students will learn to extend simple supply-and-demand models to understand the history of the world, current global trends, and popular economic fallacies.

Prerequisites:

I assume that you are familiar with introductory economics, algebra, and very basic calculus.

Texts:

Most of the course material will consist in detailed notes that will be handed out in class. There will also be required readings in each of the following:

Julian Simon, ed., The State of Humanity

Frederic Bastiat, Economic Sophisms

Frederic Bastiat, Selected Essays on Political Economy

Steven Landsburg, The Armchair Economist

Steven Landsburg, Fair Play

Grading and Exams:

There will be one midterm and a final exam. The midterm counts 30%; the final exam is 45%; homework counts for the remaining 25%. These weights are fixed - improvement on later exams will not retroactively raise your grades on earlier exams.

There is no formal grade for participation, but if you are one of the students who (in my judgment) contributes most to the quality of class discussion your grade will be raised if you are on the borderline between two grades.

Homework:

There will be approximately six homework assignments during the semester. Depending upon how good a job you do, your homework will receive a check-plus (4 points), a check (3 points), or a check-minus (2 points) if you turn it in; otherwise you receive 0 points. Late homework loses one point. Late homework is no longer accepted after I pass out my suggested answers for a given assignment.

Office Hours

The best way to contact me is by email at bcaplan@gmu.edu. Many questions and requests can be satisfied by going to my homepage at http://www3.gmu.edu/departments/economics/bcaplan. My office is in 8 Carow Hall; my office number is 3-2324. My official office hours are MWF 2:30-3:30, but you can also schedule an appointment or just drop by and see if I’m available.

Tentative Schedule:

My proposed schedule for the semester follows. If it proves too ambitious, I will try to simply say less about each topic rather than cut the topics for the final weeks.

PART I: Classical Macroeconomics: The Long-Run

Weeks 1-3: Aggregate Demand and Aggregate Supply

The explosions of population and per-capita income
A short history of economic growth

Growth statistics: what they capture and what they don't; real versus nominal variables

Basics of aggregate demand and aggregate supply
Classical AS: why it's vertical and what this implies
Classical AS and the PPC
Basic determinants of AS: quantity and quality of labor, labor/leisure tradeoff, natural resources, prior investments, and the quality of the economic system
Basic determinants of AD: money supply and money demand
Fallacies: the broken window; buy-back-the-product...
Application: Comparative advantage, free trade, and free immigration

Readings:

Simon chapter 2: "Human Mortality Throughout History and Prehistory"

chapter 13: "The Standard of Living Through the Ages"

chapter 14: "Long-Term Trends in the US Standard of Living"

chapter 24: "How 'Poor' Are America's Poor?"

chapter 28: "Trends in the Price and Supply of Oil"

chapter 35: "Agricultural Productivity Before the Green Revolution"

Bastiat, Economic Sophisms, (First Series) chapters 1, 7, 17

Landsburg, The Armchair Economist, chapter 21: "The Iowa Car Crop"

Weeks 4-5: Labor and Unemployment

Real wages and the labor/leisure trade-off: the income and the substitution effects
Aggregate labor supply as approximately vertical
Aggregate labor demand and marginal productivity
Involuntary unemployment as a product of regulation
Voluntary unemployment as a process of search
The natural rate of unemployment
Fallacies: make-work; subsistence wages
Application: Labor income taxation; welfare and the negative income tax

Readings:

Simon, chapter 12: "Trends in the Agricultural Labor Force"

Bastiat, Economic Sophisms, (First Series) chapters 2, 3, 20

Week 6: Savings and Investment

Real interest rate determination in the market for loanable funds: The supply and demand for present goods vs. future goods
Consumption smoothing and the permanent income hypothesis
Present discounted values and investing
Investments in physical capital, human capital, and ideas; private vs. social returns
Basics of financial markets: return and risk; fundamentals and the random walk; diversification
Fallacies: Under-consumption, usury, financial journalism
Application: Is your portfolio optimal?

Readings:

Simon, chapter 21: "Trends in the Quantities of Education - USA and Elsewhere"

Landsburg, Fair Play

chapter 13: "People Wanted"

chapter 15: "The Arithmetic of Government Debt"

Landsburg, The Armchair Economist

chapter 14: "The Policy Vice: Do We Need More Illiterates?"

chapter 20: "Random Walks and Stock Market Prices: A Primer for Investors"

Week 7: Money Supply and Money Demand

Money supply as vertical
Nominal money demand and prices
Real money demand and nominal interest rates
Money substitutes; banking and financial market regulation
Inflation, nominal interest rates, and the market for loanable funds
Seigniorage
Inflationist fallacies
Application: Post-socialist hyperinflations

Readings:

Bastiat, Economic Sophisms, (First Series) chapter 11

Landsburg, The Armchair Economist, chapter 7: "Why Taxes are Bad: The Logic of Efficiency"

Week 8: Government Spending, Taxation, Levels, and Growth

Government spending, government regulation, taxation, and the Classical model

Deficit vs. tax finance of government expenditure, the market for loanable funds, and crowding out

The theory of public goods vs. the practice of government expenditure
The theory of market failure vs. the practice of government regulation
Government, the level of wealth, and the rate of growth
The fallacy of the multiplier

Readings:

Bastiat, Selected Essays on Political Economy, chapter 1: "What Is Seen and What Is Not Seen"

MIDTERM

PART II: Keynesian Macroeconomics: The Short-run

Week 9: Nominal Rigidities and Short-run Aggregate Supply

Involuntary unemployment without regulation?
Menu costs
Money illusion: the psychological evidence
How stubborn is money illusion?
Keynesian AS: why it's upward-sloping and what this implies
Keynesian AS and the PPC
Keynesian AS as Classical AS with price controls in the labor market
Interaction between short-run and long-run AS
How long is the long run?
Application: Do you have money illusion?

Readings:

Simon, chapter 19: "Trends in Unemployment in the United States"

Week 10: Monetary Policy, Fiscal Policy, and Aggregate Demand

Nominal rigidities and the market for loanable funds
Aggregate demand policy and lags
Monetary policy, interest rates, demand, and output
Fiscal policy, interest rates, demand, and output
Interest-rate targeting and the interaction of fiscal and monetary policy
Application: The U.S. experience in WWII

Readings:

None

Week 11: Aggregate Demand Policy and Expectations

Trying to push unemployment below its natural rate
Rational expectations
Time consistency
Switching from levels to rates of change
The simple vs. the expectations-augmented Phillips curve
Stagflation
Application: COLAs

Readings:

Landsburg, The Armchair Economist, chapter 23: "New, Improved Football: How Economists Go Wrong"

PART III: Topics

Week 12: The International Economy

Comparative advantage
Purchasing power parity
Current and capital accounts
Short-run exchange rate fluctuations
Fallacies of international trade

Readings:

Bastiat, Economic Sophisms, (First Series) chapters 4, 6, 12, 13, 18, 19; (Second Series) chapters 13, 14, 15

Week 13: The Macroeconomics of Laissez-Faire and Interventionism: The Great Depression and European Unemployment

The Great Depression: basic facts
Fixing blame: laissez-faire vs. intervention
The AD puzzle
The AS puzzle
European unemployment: basic facts
The obvious explanation
Objections to the obvious explanation; replies

Readings:

FDR's Fireside Chats, "Government and Modern Capitalism"

Week 14: The Macroeconomics of Socialism

Capitalism and socialism

A short history of the Soviet economy
Incentive vs. knowledge problems of socialism
Collectivization and famine
Industrialization, militarization, and the PPC
Slave labor and the socialist macroeconomy
State ownership and AS
Rationing and AS-AD
The black market

Readings:

Hedrick Smith, The Russians, chapter 9.

Week 15: The Future of Progress

Growth: post-war trends of developed and less-developed economies
Growth statistics revisited
Explaining the growth slowdown in the developed world
Explaining growth dispersion in the developing world
The decline of socialism and the rise of privatization and deregulation
The choice between laissez-faire and intervention
The future: what to expect for yourself and the world

Readings:

Bastiat, Economic Sophisms, (First Series) Conclusion

Landsburg, The Armchair Economist, chapter 24: "Why I Am Not an Environmentalist"

Simon chapter 9: "The History of Accident Rates in the United States"

chapter 53: "The Carcinogen or Toxin of the Week Phenomenon: The Facts Behind the Scares:

chapter 58: "What Does the Future Hold? The Forecast in a Nutshell"

FINAL EXAM