ECON10003 Introductory Macroeconomics - Department of Economics

ECON10003 Introductory Macroeconomics Subject OutlineCode of ConductCODE OF CONDUCT – LECTURES AND TUTORIALSLectures and tutorials are an integral part of ECON10003 Introductory Macroeconomics.In is in the lectures that I will guide you through the material and give you a range ofperspectives on macroeconomics and macroeconomic issues. In the tutorials you willwork with your peers under the supervision of your tutor to broaden and deepen yourknowledge through the practical application of macroeconomic concepts and theories.There is a strong correlation between attentiveness in lectures, participation in tutorialsand success in this subject.My commitment to you is to:• Deliver well structured, prepared lectures that will assist you in mastering thematerial• Be responsive to your learning needs• Provide appropriate and timely lecture and support materials.What I expect of you:• Be attentive in lectures and tutorials.• Do not disrupt others in lectures or tutorials in any way. Lectures and tutorials arenot appropriate places for conversation, or any other activity that may preventothers from learning. If you feel that you are unable to attend and be quiet, pleasedo not come. Lecture theatres have wonderful acoustic properties. If you whispersomething in the back row, I will hear it, as will others.• Arrive on time. Coming into a lecture or tutorial late is very disruptive. If, forexample, you are running late for a lecture, perhaps come to one of the laterstreams. Likewise, do not leave early. Again, this is very disruptive.• Switch mobile phones off.If you have any concerns about any aspect of this subject, please let me know straightaway.Nilss OlekalnsHead, Department of Economics3

ECON10003 Introductory Macroeconomics Subject OutlineIntroductionWelcome to ECON10003 Introductory Macroeconomics. The discipline ofMacroeconomics is an important, vibrant and exciting area of study; all of us are affectedon a day-by-day basis by macroeconomic forces – they shape the very world we live in.And governments all around the world try to shape those forces in ways that (hopefully)improve lives. Understanding macroeconomics and how it impacts on people is not aneasy task. But the reality is that macroeconomic forces these forces have real impacts onpeoples’ daily lives. For that reason, the systematic study of macroeconomics is one ofthe most worthwhile pursuits open to you whilst at the University of Melbourne.It is a privilege for me to be able to teach in this wonderful subject. I wish you everysuccess in your studies.Nilss Olekalns4

ECON10003 Introductory Macroeconomics Subject OutlineSubject AimsThe overall aim of this subject is to provide an introduction to macroeconomictheory and policy, economic aggregates such as aggregate production and employment,the general level of prices and inflation, the exchange rate, the volume of money and thebalance of payments. Analysis is particularly directed to models of an open economy andto current economic problems and policy issues.PrerequisiteEON10004 Introductory MicroeconomicsTextbookBen Bernanke, Nilss Olekalns and Robert Frank, Principles of Macroeconomics,McGraw-Hill, third editionThis is a new edition (published in May 2011).http://comics-stripovi-exyu.blogspot.com/2008/11/cartoon-global-crisis-benjaminheine.html5

ECON10003 Introductory Macroeconomics Subject OutlineLearning OutcomesSubject ObjectivesOn successful completion of this subject you should be able to:• explain the importance of the circular flow of income to macroeconomics• interpret the meaning and measurement of macroeconomic aggregates such asGross Domestic Product• explain and use the short and long run national income determination• describe the roles of money and the financial system in the macroeconomy• critically analyse macroeconomic policies appropriate to the achievement ofmacroeconomic objectives and to evaluate those policies• explain and apply the aggregate demand/aggregate supply model• explain and use the Solow-Swam model of economic growth• analyse the factors influencing the balance of payments and the exchange rateGeneric SkillsIn this subject you will have the opportunity to develop important generic skills.These include:• written communication; collaborative learning; critical thinking; synthesis of dataand other information.• oral communication; problem solving; team work; application of theory topractice; interpretation and analysis; evaluation of data and other information;accessing data and other information from a range of sources; receptiveness toalternative ideas.• statistical reasoning.Awareness IssuesAt a broader level, studying this subject will increase your awareness of issues suchas:• macroeconomic arguments and theories and how they can be used to understandthe current state of the economy both in Australia and internationally• the nature of competing macroeconomic theories• how macroeconomics enables the assessment of government policies• the disparity in living standards across countries• the effects of globalisation on economic welfare6

ECON10003 Introductory Macroeconomics Subject OutlineContact DetailsLecturer Contact DetailsThe coordinator for Introductory Macroeconomics is Professor Nilss Olekalns.Email:fbe-IntroMacro@unimelb.edu.auRoom: 505 (Arts West – formerly Economics and Commerce Building, MainCampus))Phone: 8344 5300 1Homepage: http://www.economics.unimelb.edu.au/SITE/staffprofile/nolekalns.shtmlConsultation Hours: Wednesday 10.00 – 12.00Tutor Coordinator DetailsNahid Khan (Room 606, sixth floor, Economics and Commerce Building, tel. 83443621. Ms. Khan can also be reached by E-mail: n.khan@unimelb.edu.au.Consultation Hours: Tuesday and Thursday 11-12pmEmail ProtocolPlease note that I am only able to respond to student emails coming from a Universityemail address. Do not use personal email addresses such as Yahoo, Hotmail or evenbusiness email addresses. Emails from non-University email addresses may befiltered by the University’s spam filter, which means that I may not receive youremail. All correspondence relating to this subject will only be sent to your Universityemail address. Note that you must first activate your University email address beforeyou can send or receive emails at that address. You can activate your email account atthis link: http://accounts.unimelb.edu.au/.1 Please note that I am currently Head of Department. This phone number will put you in touch withKathryn Perez who will be able to arrange an appointment.7

ECON10003 Introductory Macroeconomics Subject OutlineLectures and TutorialsLecture TimesTuesday:9.00 – 10.00; 11.00 – 12.00; 2.15 – 3.15; 4.15 – 5.15Thursday:9.00 – 10.00; 11.00 – 12.00; 2.15 – 3.15; 4.15 – 5.15All lectures are in the Copland Lecture Theatre (Economics and Commerce Building– Main Campus)Using LectopiaAn audio recording of lectures delivered in this subject will be made available forreview in the days following each lecture. Audio recordings of lectures allow you torevise lectures during the semester, or to review lectures in preparation for the end ofsemester exam.You can access recorded lectures by clicking on the Lectopia menu item in the LMSpage for this subject.To listen to Lectopia recordings, you must install QuickTime 7 (or a later version) onyour computer.Please note that Lectopia recordings are not a substitute for attendance; rather they’redesigned for revision. On occasion a Lectopia recording can fail, usually due totechnical reasons. In such cases, the lecture recording will not be made available.8

ECON10003 Introductory Macroeconomics Subject OutlineLecture OutlinesBOF refers to the textbook, Bernanke, Olekalns and Frank, Principles ofMacroeconomics, third edition (McGraw-Hill). I have also included relevant pagesfrom the first and second editions where possible. 2Week 1/Lecture 1 (July 26)An introduction to macroeconomics and some preliminary work on the concept of GrossDomestic ProductWhat are the mainissues to be exploredin this lecture?Required textbookreadingRelevant textbookproblemsOther requiredreadingFurther resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?An introduction to the subject; we begin with one of the keyperformance indicators of the economy, Gross Domestic Product (GDP)First edition Second edition Third editionPrefacePages 70 - 78PrefacePages 65 - 78PrefacePages 2 – 17Page 106Page 100Page 38Q 1 and 2Q 1 and 2Q 1 and 2ECON10003 Introductory Macroeconomics Subject GuideFor a biography of John Maynard Keynes, the founder of modernmacroeconomics, seehttp://www.econlib.org/library/Enc/bios/Keynes.html. You might liketo dip into John Maynard Keynes 1883-1946: Economist, Philosopher,and Statesman by Robert Skidelsky. For a good overview of the currentstate of the Australian economy (and an indication of what are perhapssome important emerging issues), see the most recent Reserve BankStatement on Monetary Policy available athttp://www.rba.gov.au/monetary-policy/index.htmlWhat material is in is contained in the document SUBJECT OUTLINE?What is meant by GDP?How is GDP calculated?Why do the income, production and expenditure approaches give thesame value for GDP?2 Please note that the third edition of the text is very different from the first and second editions in a numberof ways. Material from the earlier editions will not always be sufficient to cover everything that is in thethird edition..9

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to be explored inthis lecture?Required textbookreadingRelevant textbookproblemsWeek 2 /Lecture 3 (August 2)Inflation and Interest RatesInflation is a key performance indicator for the economy. Low inflation isan important aim of current government policy. In this lecture, weconsider two broad questions. Why is high inflation viewed asproblematic? What is the relation between inflation and interest rates?First edition Second edition Third editionPages 91 – 100 Pages 85 – 95 Pages 23 - 31Pages 106-107 Pages 100-101Pages 38 – 39Q 5 , 7, 8 ,9Q 5, 7, 8, 9Q 6,8,9, 10The Australian Bureau of Statistics publishes a very detailed guide to theconsumer price index athttp://www.abs.gov.au/AUSSTATS/abs@.nsf/PrimaryMainFeatures/6461.0?OpenDocument.Further resources todeepen students’understandingThere is much more information here than you need for the subject, butif you have questions about the construction or interpretation of CPIfigures, then this is the place to go.There is some additional, and detailed, information about the FisherEquation here:http://www.google.com.au/url?sa=t&source=web&cd=3&ved=0CDUQFjAC&url=http%3A%2F%2Fuwf.edu%2Frconstand%2FFIN3244web%2FA-2%2520InterestRates%2FFisher%25202.DOC&ei=zebiTfmjEoakuAOL2O2dBw&usg=AFQjCNGkMbRMl_uiUx3QnglQpTBOV3-GuQAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?What does the CPI measure?How is the CPI calculated?How is the inflation rate calculated?What has been Australia’s inflation experience?What are the economic costs of inflation?What is the distinction between the nominal and real rate of interest?11

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to be exploredin this lecture?Required textbookreadingRelevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbookand tutorials, whatquestions shouldstudents be able toanswer?Week 2 /Lecture 4 (August 4)Saving, Wealth and InvestmentThe real interest rate is an important influence on saving andinvestment decisions and, by implication, on wealth. In this lecture, weexamine the role played by the real interest rate in allocating savingand investment and how this affects wealth. The concept of nationalsaving is also introduced.First edition Second edition Third editionPages 99-100,108-130 Pages 94-95, 102-124 Pages 31 – 33, 40-62Pages 136-137 Pages 129-131Pages 67-68Q 1 – 3, 5Q 1 – 3, 5Q 1 – 3, 5A media report on the implications of Australia’s mining boom fornational saving and wealth ishttp://www.abc.net.au/pm/content/2011/s3138648.htmWhy do some economists worry about the possible effect of deflationon the real interest rate?What is the relationship between saving and wealth?What has happened to the household saving ratio in Australia?What is national saving?What is the relationship between national saving and investment?What sectors in the economy contribute to national saving?12

ECON10003 Introductory Macroeconomics Subject OutlineWhat are themain issues to beexplored in thislecture?Requiredtextbook readingRelevanttextbookproblemsFurtherresources todeepen students’understandingAfter reviewingthe lecture,textbook andtutorials, whatquestions shouldstudents be ableto answer?Week 3/Lecture 5 (August 9)Two Applications of Supply and Demand Analysis(1) national saving, (2) the labour marketThe tools developed in microeconomics can often be applied to understandmacroeconomic issues. Two cases in point; the real interest rate as a means ofcoordinating saving and investment decisions and the role of the real wage ininfluencing labour market outcomes.First edition Second edition Third editionPages 130 – 134, 138 Pages 124 – 127, 133-142, Pages 62 – 65, 70 – 82, 90– 148, 156 – 165150 – 160– 98Pages 130 – 131Q 7Pages 161-162Q1 – Q5Page 137Q 7Pages 166-167Q 1 – 5Page 68Q 6Pages 100-101Q 1 - 5A useful summary of trends in Australia’s labour market ishttp://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/1301.0Chapter8012009%E2%80%9310A discussion of how wealth is distributed in Australia can be found herehttp://evatt.labor.net.au/publications/papers/226.htmlWhat is the relationship between national saving and investment?What sectors in the economy contribute to national savings?Explain the demand and supply analysis of savings and investment?What factors influence the demand for labour?Why does the labour demand curve slope downwards?What factors influence the supply of labour?Why does the labour supply curve slope upwards?What is meant by equilibrium employment?How is the equilibrium achieved?How might that equilibrium change?13

ECON10003 Introductory Macroeconomics Subject OutlineWeek 3/Lecture 6 (August 11)An Introduction to Short-Term Economic Fluctuations and the Basic Keynesian ModelSince the Great Depression of the 1930s, a great deal ofmacroeconomics has been concerned with understanding howeconomic fluctuations (expansions and contractions) occur. This is anWhat are the mainissues to be exploredin this lecture?immensely complex topic and there are a wide range of views amongstmacroeconomists concerning the primary causes of economicfluctuations. Over the next few weeks, we will be looking at some ofthe main theories in macroeconomics designed to answer the questionas to why the economy might experience bouts of expansion andcontraction.First edition* Second edition* Third edition*Required textbookreadingPages 170 – 173, 177-185, 188 – 197Pages 166 – 170, 174-182, 186 – 195Pages 106 – 110, 117-124, 130 – 136Relevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?Page 184Q 1 – 4Page 226-227Q2Page 184Q 1 – 4Page 216Q2Page 127Q 1 – 4Page 162Q 2A brief description of Australia’s experiences during the GreatDepression can be found herehttp://australia.gov.au/about-australia/australian-story/greatdepressionHow do macroeconomists define contractions?What are output gaps?What are the implications of Okun’s Law?What assumptions do macroeconomists make about price adjustmentsin the SR and in the LR?Why is this distinction important?What is meant by planned aggregate expenditure?When is planned aggregate expenditure different from actualexpenditure?What is the consumption function?What is meant by (i) exogenous consumption, (ii) induced consumptionand (iii) the marginal propensity to consume?*The exposition for this topic in the third edition is different from that in the first andsecond editions. It is important that even if you are working off the earlier editions, youare familiar with the approach taken in the third edition. Copies of the third edition areon reserve in the Giblin Library.14

ECON10003 Introductory Macroeconomics Subject OutlineWeek 4 /Lecture 7 (August 16)Macroeconomics in the Short Run: The Basic Keynesian Model (2 sectors)The basic Keynesian model of short run economic fluctuations is anWhat are the mainanalytical representation of the economy. Its purpose is to examine theissues to beeffect of exogenous changes in planned aggregate expenditure onexplored in thismacroeconomic outcomes. This lecture introduces the simplest versionlecture?of the model, the two-sector version.Required textbookreadingFirst edition* Second edition* Third edition*Pages 197 - 211 Pages 195 - 208 Pages 137 – 148Relevant exerciseConsider a simple two sector economy in which C = 1800 + 0.6(Y – T), I P =900 and T is a fixed amount equal to 1500. (i) Find a numerical equationlinking planned aggregate expenditure to output. (ii) What is theeconomy’s equilibrium level of GDP? How much of that GDP isexogenous expenditure? How much is induced expenditure? (iii) Repeatthese calculations if planned investment expenditure falls to 800. (iv)Notice anything interesting?Further resourcesto deepen students’understandingAfter reviewing thelecture, textbookand tutorials, whatquestions shouldstudents be able toanswer?Nobel Laureate Paul Krugman has written a very informative introductionto a recent edition of The General Theory, highlighting the importance ofKeynes’ book to modern macroeconomics:http://delong.typepad.com/sdj/2006/03/krugmans_intro_.html#moreIn the context of a two sector model:• How can an expression relating planned aggregate expenditureto aggregate output be derived?• What are the conditions that define a short run equilibrium?• How does the economy adjust in the short run if it is not inequilibrium?• How is equilibrium illustrated on a diagram?• How is the process of moving to equilibrium illustrated on adiagram?*The exposition for this topic in the third edition is different from that in the first andsecond editions. It is important that even if you are working off the earlier editions, youare familiar with the approach taken in the third edition. Copies of the third edition areon reserve in the Giblin Library.15

ECON10003 Introductory Macroeconomics Subject OutlineWeek 4/Lecture 8 (August 18)Macroeconomics in the Short Run: The Basic Keynesian Model (4 sectors)What are the mainissues to be exploredin this lecture?The government and overseas sectors are brought into the model. Thisachieves greater realism (and complexity), allowing analysis of realworld macroeconomic events.First edition* Second edition* Third edition*Required textbookreadingNot suitablePages 208 – 215(probably notsuitable, best to referto the third edition)Pages 149 - 161Relevant exerciseConsider a four sector economy in which C d = 1800 + 0.6(Y – T), I P = 900,G = 1500, T = 1500 + 0.02Y and X = 100. (i) Find a numerical equationlinking planned aggregate expenditure to output. (ii) What is theeconomy’s equilibrium level of GDP? How much of that GDP isexogenous expenditure? How much is induced expenditure? (iii) Repeatthese calculations if planned investment expenditure falls to 800. (iv)Notice anything interesting?Further resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?There is a fascinating account of the intellectual development of themultiplier at http://epress.anu.edu.au/gp/mobile_devices/ch05.html.This article highlights the role played by a very famous Professor ofEconomics at the University of Melbourne, L. F. Giblin. In 1930, Giblingave a lecture in the Public Lecture Theatre (Old Arts Building) in whichhe articulated the concept of the multiplier, well before the publicationof the General Theory.In the context of a four sector model:• How can an expression relating planned aggregate expenditureto aggregate output be derived?• What are the conditions that define a short run equilibrium?• How does the economy adjust in the short run if it is not inequilibrium?• How is equilibrium illustrated on a diagram?• How is the process of moving to equilibrium illustrated on adiagram?• What are the effects of a change in exogenous expenditure*The exposition for this topic in the third edition is different from that in the first andsecond editions. It is important that even if you are working off the earlier editions, youare familiar with the approach taken in the third edition. Copies of the third edition areon reserve in the Giblin Library.16

ECON10003 Introductory Macroeconomics Subject OutlineWhat are themain issues to beexplored in thislecture?Requiredtextbook readingRelevanttextbookproblemsFurtherresources todeepen students’understandingAfter reviewingthe lecture,textbook andtutorials, whatquestions shouldstudents be ableto answer?Week 5/Lecture 9 (August 23)Fiscal PolicyFiscal policy played a key role in governments’ responses to the Global FinancialCrisis. The four sector model provides a rationale for why this was the case.However, these policies have implications for public debt that are not capturedby the model and we will explore these in this lecture.First edition* Second edition* Third edition*Not suitable Pages 220 – 230, 237 - 240 Pages 164 – 177, 184 - 187Pages 227-228Q 7 - 10Pages 241 – 242Q 1 – 5Pages 188 – 189Q 1 - 5A host of interesting issues are raised in this article which discusses a decisiontaken to legislate for a balanced budget in Germany:http://www.eurointelligence.com/article/browse/1/article/the-nightmare-ofa-balancedbudget.html?tx_ttnews%5BbackPid%5D=1038&cHash=be4122322aaf4f3339a4f3b06d50040fSee also W. Max Corden’s article The theory of the fiscal stimulus:How will a debt-financed stimulus affect the future?http://www.cepr.org/pubs/PolicyInsights/PolicyInsight34.pdfCan Fiscal policy be used to eliminate an output gap?What are the potential problems associated with using fiscal policy as a tool ofmacroeconomic stabilisation?*The exposition for this topic in the third edition is different from that in the first andsecond editions. It is important that even if you are working off the earlier editions, youare familiar with the approach taken in the third edition. Copies of the third edition areon reserve in the Giblin Library.17

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to be exploredin this lecture?Required textbookreadingRelevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?Week 5/Lecture 10 (August 25)Money, Inflation and the Central BankIn this lecture, the analysis is shifted away from the short run, thusallowing the analysis to deal with changing prices. In this environment,inflation is an important macroeconomic consideration. We considerfirst a long run theory of inflation, the quantity theory. Attention isthen turned to the role of the Reserve Bank and its setting of a targetinterest rateFirst edition* Second edition* Third edition*Pages 252 – 259, 272Pages 242 – 249, 264Pages 199 – 204, 208– 277, (bottom of)– 270– 217 – 217, 210 - 211278 – 279Page 252Page 262Page 207Q 6, 7Q 6, 7Q 6, 7A more in depth treatment of how the Reserve Bank sets the cashrate is Coombs, T., and D. Reimers, “Lifting the Cloud of Confusionover Monetary Policy”, Economic Papers, Volume 28, Issue 2, June2009, pp130-138. This Is available from our LMS page.What are the implications of the Quantity Theory of Money?What are exchange settlement accounts?What is the overnight cash rate?On any given day, how does the Reserve Bank ensure the overnightcash rate is at its target?How does the Reserve Bank change the cash rate?*The exposition for this topic in the third edition is different from that in the first andsecond editions. It is important that even if you are working off the earlier editions, youare familiar with the approach taken in the third edition. Copies of the third edition areon reserve in the Giblin Library.18

ECON10003 Introductory Macroeconomics Subject OutlineWeek 6/Lecture 11 (August 30)Monetary Policy and the Aggregate Demand CurveThe ability of the Reserve Bank to affect interest rates in the economy isWhat are the main central to an analytical device much used by macroeconomists, theissues to be explored aggregate demand curve. This is a very simple concept. Yet, it isin this lecture? extraordinarily powerful, enabling informed discussion of a host ofimportant real world macroeconomic issues.Required textbookreadingRelevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?First edition Second edition Third editionPages 275 – 277, 278 Pages (bottom of )Pages 266 – 270, 278– 279, 287-290, 300 – 211 – 213, 216 – 217,– 281, 294 - 299306226 – 228, 234 - 240Page 322Page 332Page 257Q 1,2Q 1,2Q 1,2An interesting view about monetary policy, inflation targeting and theglobal Financial Crisis can be found herehttp://www.bis.org/review/r100216d.pdf?noframes=1How does a change in the target cash rate influence other interest ratesin the economy?To what extent does the Reserve Bank influence real interest rates?What does a policy reaction function describe?What does the aggregate demand curve show?Why does the aggregate demand curve slope downwards?Under what circumstances does the aggregate demand curve shift?Under what circumstances is there a movement along the aggregatedemand curve?19

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to be exploredin this lecture?Required textbookreadingRelevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?Week 6/Lecture 12 (September 1)The Aggregate Demand/Aggregate Supply ModelA complete description of the macroeconomy requires not justaggregate demand but also aggregate supply. Aggregate supply hastwo dimensions, short run and long run. Understanding this distinctionallows one to explore the self correcting nature of the economy.First edition* Second edition* Third edition*300 - 316Pages 306 – 322, 327 Pages 241 – 253, 262– 329– 264Pages 322 – 223 Pages 332-222 Page 267 – 268Q 3, 4, 5, 7, 8Q 3, 4, 5, 7, 8Q 3, 4, 5, 7, 8The Assistant Governor of the Reserve Bank, Guy DeBelle, has a goodpiece on inflation targeting:http://www.rba.gov.au/speeches/2009/sp-ag-150509.htmlWhat is inflation inertia? Why does it occur?How is inflation inertia represented (i) algebraically and (ii)diagrammatically?Under what circumstances will the short run aggregate supply curveshift?When is the economy in short-run equilibrium?When is the economy in long-run equilibrium?How does the economy transition from a short run equilibrium to along run equilibrium?How does inflation targeting work?*The exposition for this topic in the third edition is different from that in the first andsecond editions. It is important that even if you are working off the earlier editions, youare familiar with the approach taken in the third edition. Copies of the third edition areon reserve in the Giblin Library.20

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to be exploredin this lecture?Required textbookreadingRelevant exerciseFurther resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?Week 7 /Lecture 13 (September 6)Aggregate Demand and Supply in PracticeOne of my favourite economics quotes is by the famous Englisheconomist Joan Robinson 3 ; “To construct models that cannot beapplied is merely an idle amusement. It is only by interpreting history,including the present in history, that economics can aspire to be aserious subject.” (Joan Robinson, What Are the Questions? And OtherEssays, Armonk, NY: Sharpe.1980, p. 90). In this lecture, we take upJoan Robinson’s challenge to avoid “idle amusement”; we will use theAD/AS model to tell the story of some key aspects of recentmacroeconomic performanceFirst edition* Second edition* Third edition*Pages 253 – 256, 259,Not suitableNot suitable 154 – 157, 168 – 170,260 - 262Consider an economy in which c d = 1800 + 0.6(y – T) – 10000r, i P = 900-10000r, g = 1500, T = 1500 + 0.02y, x = 100, y* = 4900 and the ReserveBank’s policy reaction function is. Assume the rate ofinflation is currently 5% (0.05). (i) Find a numerical equation linkingplanned aggregate demand to inflation. (ii) What is the economy’sshort run equilibrium level of inflation and output? (iii) What is theeconomy’s long run equilibrium level of inflation and output?Whilst he was prime Minister, Kevin Rudd wrote a famous articlediscussing the implications of the Global Financial Crisis. You can findit herehttp://www.themonthly.com.au/monthly-essays-kevin-rudd-globalfinancial-crisis--1421How can aggregate demand/aggregate supply analysis be used tounderstand the origins of the Great Inflation?How can aggregate demand/aggregate supply analysis be used toexplain the policy responses to the Global Financial Crisis?*The exposition for this topic in the third edition is different from that in the first andsecond editions. It is important that even if you are working off the earlier editions, youare familiar with the approach taken in the third edition. Copies of the third edition areon reserve in the Giblin Library.3 See http://www.economyprofessor.com/theorists/joanrobinson.php for more information about thisremarkable woman.21

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to be exploredin this lecture?Required textbookreadingRelevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?Week 7 /Lecture 14 (September 8)An Introduction to the Economics of GrowthSince the time of Adam Smith, economists have been trying tounderstand the factors that contribute to the “Wealth of Nations”, whyare some countries poor and other rich and what can be done about it?As Nobel Laureate Robert E. Lucas Jr. once wrote, “The consequencesfor human welfare involved in questions like these are staggering; onceone starts to think about them, it is hard to think about anything else.”This lecture canvases some of the basic issues concerning economicgrowth introduces a key theme, the role of productivity improvementsin promoting growth; and develops an important building block ofeconomists’ analytical approach to understanding economics growth,the production function.First edition* Second edition* Third edition*Pages 336 – 338, 366 342 – 348, 351 – 353, Pages 280 – 285, 288– 380 (369 – 374 will 376 – 390 (379 – 384 – 290, 310 – 323 (313be revision) will be revision) – 317 will be revision)Page 361Q 1 – 3Page 388Q1 – 5Page 371Q 1 – 3Page 398Q 1 – 5Page 305Q 1 – 3Page 330Q 1 - 5There is a useful 3-D interactive guide to the Cobb-Douglas productionfunction at http://www.fgn.unisg.ch/eurmacro/tutor/cobbdouglas.html.Make sure you click the forward arrow on top to start theself guided exercise.How is LR growth illustrated in the AD/AS model?What are the two basic factors that determine a nation’s real per capitaGDP?What is the difference between the primary and secondary factors ofproduction?Show how the Cobb-Douglas production function has (i) constantreturns to scale and (ii) diminishing marginal productivity of each of theprimary factors of production.*Note that the notation differs in the third edition.22

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to be exploredin this lecture?Required textbookreadingRelevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbook andtutorials, whatquestions shouldstudents be able toanswer?Week 9/Lecture 18 (October 6)International Trade IIThis lecture focuses on the adjustments an economy may have toundertake when it moves to free trade. This is an important issue. Feweconomists dispute the notion that international trade produceseconomic gains. But these gains are not necessarily shared equallyacross the economy. Moving to free trade invariably causes a change tothe structure of an economy; some sectors grow, others shrink. Movingto free trade is a particularly painful process for those employed inindustries that contract. Understanding this is an essential part inevaluating the debates about free trade and globalisation.First edition* Second edition* Third edition*Page 365 (from themiddle) – 371Page 384Q 6Sections 1 to 3 of this paper from the OECD explain the nature of theadjustment costs faced by many countries when moving to free trade:http://www.oecd.org/dataoecd/54/37/48133815.pdfConsider a two-good open economy with many workers that movesfrom autarky to free trade.What determines the combination of goods that is produced underfree trade?In each country, which good is imported and which is exported?When each country moves to free trade, what adjustments takeplace in the way production is organised?*The exposition for this topic in the third edition is very different from that in the firstand second editions. Copies of the third edition are on reserve in the Giblin Library.26

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to beexplored in thislecture?Required textbookreadingRelevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbookand tutorials, whatquestions shouldstudents be able toanswer?Week 11 /Lecture 22 (October 20)The Balance of Payments IThe Balance of Payments is a set of accounts that record all transactionsbetween a country and the rest of the world. These transactions can be bothin terms of goods, services and income flows (the current account) andborrowing and lending (the capital account). In this lecture, we will explorethe way in which these two accounts are linked.First edition* Second edition* Third edition*Pages 479 - 486 Pages 485 – 493 Pages 419 - 428Page 495Page 502Page 436Q 1, 2Q 1, 2Q 1, 2A recent article produced by economists at the Australian Treasury providesa comprehensive analysis of Australia’s current account balance; you canaccess the article here:http://www.treasury.gov.au/documents/1783/PDF/03_Australias_Current_Account_Deficit_in_a_global.pdfWhat is the distinction between the capital account and the current account?Is it true that the balances on the current account and on the capital accountalways sum to zero? Explain.*The exposition for this topic in the third edition is slightly different from that in the firstand second editions. Copies of the third edition are on reserve in the Giblin Library.30

ECON10003 Introductory Macroeconomics Subject OutlineWhat are the mainissues to beexplored in thislecture?Required textbookreadingRelevant textbookproblemsFurther resources todeepen students’understandingAfter reviewing thelecture, textbookand tutorials, whatquestions shouldstudents be able toanswer?Week 12 /Lecture 23 (October25)The Balance of Payments IIIn this lecture, we focus on the capital account. We consider therelation between capital flows and relative interest rates as well as thelink between the capital and current accounts and imbalances betweennational saving and investment.First edition Second edition Third editionPages 487 - 494 Pages 494 - 501 Pages 429 - 436Page 495Page 502Page 436Q 3,4Q 3, 4Q 3 - 5An idea widely debated at the moment is the Tobin tax – a tax oninternational capital flows. A quick summary of the debate can be foundhere http://www.abc.net.au/news/stories/2010/03/30/2860705.htmWhat is the relationship between capital flows and the interest rate?How does risk affect this relationship?How is the domestic interest rate for a small open economy influencedby the world interest rate?What is the relationship between national saving, investment and thetrade deficit?31

ECON10003 Introductory Macroeconomics Subject OutlineWeek 12/Lecture 24 (October 27)SummaryWhat are the mainissues to be exploredin this lecture?32

ECON10003 Introductory Macroeconomics Subject OutlineTutorialsThere will be weekly tutorials starting in the week beginning Monday August 1st.Allocation to tutorials is determined by the student system ISIS. You must enroll in atutorial via ISIS as soon as possible. You access ISIS through the Student Portal.If you have any problems regarding tutorials contact Ms. Nahid Khan. Note thattutors are not permitted to authorise a transfer from one tutorial to another, not even fromone of their own tutorials to another of their own tutorials.Nor are tutors permitted (with one exception) to allow a student, without anofficial authorisation, to `sit in' on one of their tutorials. The exceptional case is where astudent, because of illness, has missed his/her allocated tutorials in a particular week. Inthat case, a tutor may permit that student to ‘sit in’ for that week only and on nosubsequent occasion during the semester. Any student who ‘sits in’ in this way must askthe tutor for a note confirming the student's attendance. The student must give this note tohis/her regular tutor.Tutorials in this subject will be conducted under a collaborative learningformat. This means that the tutor will not stand in front of the tutorial giving a minilectureeach week. The emphasis will be on student participation through discussingmacroeconomic problems and issues in small groups.Each week, you will receive two handouts: a pre-tutorial guide and a tutorial taskslist. The pre-tutorial guide will tell you what to read, learn and do to prepare for the nextweek's tutorial. It is essential that you prepare for each week's tutorial by workingthrough the pre-tutorial guide for that tutorial. It is not long or difficult and it directlyreinforces what you have learned in lectures. The second handout is the tutorial tasks listthat will be distributed to you at the beginning of the class. It contains the exercises youwill have to address in that tutorial. Note that you will not be told beforehand whatquestions you will have to answer in tutorials. It is therefore important that you prepareusing the pre-tutorial guide.The format of the tutorials will be as follows:• each tutorial class will be split into groups of 4-5 students. The groups need not bethe same every week but should not be larger than 5.• some weeks all groups will do the same questions, while in other weeks, eachgroup will attempt a different question.• after the questions have been answered, there will be a short presentation timewhere a spokesperson for each group will report back to the tutorial class.• students are expected to comment on other groups' presentations.You will be assessed on the extent of your participation (remember, 10% of your finalgrade for this course is based on your tutorial work). Tutors will be instructed to allocate33

ECON10003 Introductory Macroeconomics Subject Outlinemarks according to certain criteria. From this total, your tutor will subtract ½ apercentage point for each tutorial missed during the semester without a valid reason. Incases of illness, this will require a medical certificate. Other reasons must also bedocumented.The criteria that will be used by your tutor in awarding your mark areEvidence of preparation for the tutorialFrequency of participation in discussionRelevance and logic in discussionEvidence of active listening to the contributions of othersPlease note: each week you will be asked to provide evidence of preparation for thetutorial in the form of notes or written answers to the pre-tutorial questions. If youare unable to provide this evidence of preparation, you will receive half theparticipation marks you would otherwise have received for that tutorial.All of this means that you are expected to work actively in tutorials. Your tutor, asalways, will be more than willing to help you with individual questions, but rememberthe basis of tutorials will be your group-based discussions.Past experience in 316-101 Introductory Macroeconomics has shown thatstudents who actively participate in tutorials have a better understanding ofthe material and perform at a higher level.The marks for tutorial participation (including attendance) will only be allotted by thestudent’s regular (official) tutor. It is important that you:• check with your tutor that your name is on the tutor’s official tutorial roll,• ensure that any note issued to you for attendance at another tutorial is given toyour regular tutor• check that if you transfer from one tutorial to another during the semester thatyour ‘old’ tutor has made arrangements for your tutorial mark (to the time oftransfer) has been transferred to your new tutor.34

ECON10003 Introductory Macroeconomics Subject Outline• go to any other tutorial during the week if you miss your regular tutorial forillness and collect an irregular attendance form from that tutor. However you canonly do this twice in the whole semester.AssessmentAssessment OverviewYour assessment for this subject comprises the following:Assessment Task Due WeightingMacroeconomics Feedback Assessment Task I(FAT online test)Assignment 1 (maximum 1250 words)Assignment 2 (maximum 1250 words)Macroeconomics Feedback Assessment Task II(FAT online test)August 15th 9am toAugust, 17th, 2pmSeptember 5 th10.00amOctober 5th10.00amOctober 17th 9am toOctober 19th, 2pm5%10%10%5%Participation in tutorials Weekly 10%End-of-semester exam Assessment period 60%Macroeconomics Feedback Assessment TasksThese are multiple choice test administered online through the LMS. You need to logon to the FAT site sometime during the period August 15th to August 17 th tocomplete the first task and between October 17 th and October 19 th to complete thesecond task. There is a thirty minute time period for each task; you will be asked tocomplete fifteen questions.Assignments 1 and 2These will be individual essay or short answer style tasks. More detailed criteriaregarding our expectations will be released along with the assignments themselves.35

ECON10003 Introductory Macroeconomics Subject OutlineUsing the Assignment ToolDuring the course of the semester, you’ll be asked to submit your assignments inelectronic format to the Commerce Students Centre via the Assignment SubmissionTool. You can access the Assignment Submission Tool by clicking on AssignmentTool in the navigation menu from the LMS page for this subject.Please note that you will be required to submit these in electronic form via theassignment submission system by 4pm on the due date. The following details are veryimportant:o It is important that you keep a copy of your assignmento Plagiarism or other forms of academic dishonesty will result in disciplineproceedings being brought against you.Plagiarism and CollusionPresenting material from other sources without full acknowledgement (referred to asplagiarism) is heavily penalised. Penalties for plagiarism can include a mark of zerofor the piece of assessment or a fail grade for the subject.Plagiarism is the presentation by a student of an assignment identified as his or herown work even though it has been copied in whole or in part from another student’swork, or from any other source (eg. published books, web-based materials orperiodicals), without due acknowledgement in the text.Collusion is the presentation by a student of an assignment as his or her own workwhen it is, in fact, the result (in whole or in part) of unauthorised collaboration withanother person or persons. Both the student presenting the assignment and thestudent(s) willingly supplying unauthorised material are considered participants in theact of academic misconduct.See http://www.services.unimelb.edu.au/plagiarism/plagiarism.html for moreinformation.The Teaching and Learning Unit has developed a web-based ‘Academic HonestyModule’ that allows you to learn more about and test your knowledge of plagiarismand collusion. You are strongly encouraged to complete this module, which can beaccessed at:http://tlu.ecom.unimelb.edu.au/AcademicHonestyTest/index.cfm36

ECON10003 Introductory Macroeconomics Subject OutlineLate SubmissionLate submissions must be accompanied by a completed Request for SpecialConsideration form. The form must be handed to the Undergraduate Student Centre.Late assignments, where approval for late submission has not been given, will bepenalised at the rate of 10% of the total mark per day, for up to 5 days, at which timea mark of zero will be given.Special ConsiderationStudents who have been significantly affected by illness or other seriouscircumstances during the semester may be eligible to apply for Special Consideration.The following website contains detailed information relating to who can apply forSpecial Consideration and the process for making an application:http://www.ecom.unimelb.edu.au/students/special/ReferencingAll sources used for a written piece of assessment must be referenced. This is toacknowledge that your material is not based entirely on your own ideas, but is based,in part, on the ideas, information, and evidence of others. This is desirable as you areattending University in order to learn from others.You will be required to use the APA system or Harvard System of referencing. TheTLU has prepared a booklet for each system specifically to assist students toreference correctly. Each booklet contains many examples that will help you whenpreparing your assignments. The booklets can be found here:http://tlu.ecom.unimelb.edu.au/pdfs/apastyle.pdf andhttp://tlu.ecom.unimelb.edu.au/pdfs/The_Harvard_System.pdfIt is important that all material you present for assessment is referenced correctly.Material that has not been referenced correctly may be considered to be plagiarised,and as such may be penalised. We will also look for evidence that material includedin the bibliography has been used in the assignment. Including references that havenot been used may also result in your assignment being penalised.37

ECON10003 Introductory Macroeconomics Subject OutlineFurther AssistanceIf you need assistance during the semester, you have several options:Lecturer ConsultationWednesday 10.00 – 12.00 or by appointment (8344 5300), Room 505 Arts West(Formerly Economics and Commerce Building (main campus)Tutor ConsultationThese times are to be confirmed. Your tutor will provide you with details of his/herconsultation hours.Pit-Stop TutorialsIn addition to the regular Tutorial time to which you will have been allocated, therewill be a number of Pit Stop Tutorials which will be held from the week beginning1 st August at the following days and times: (venues will be available from the subjectpage on LMS)Tuesday – 5.15-6.15pmWednesday – 3.15-4.15pm.Thursday – 1.00-2.00pmOnline TutorThe Online Tutor allows you to direct questions to your tutor/lecturer via the LMS. TheOnline Tutor can be accessed 24 hours a day, 7 days a week. Tutors will attempt toanswer your question within 24 hours (weekdays only).Your questions and the tutor’s answers can be accessed by all students in thesubject, allowing everyone to benefit from the question and answer. Importantly, youridentity will not be revealed to other students. Even if you don’t want to ask a question,you can still view existing questions and answers.Note that the Online Tutor is not designed to replace attendance at tutorials, butrather to complement the tutorial process. Also, simple questions that can be answered byreferring to the prescribed readings will not usually be answered. You can access theOnline Tutor via the Online Tutor link, located in the navigation menu of this subject’sLMS page.Teaching & Learning Unit38

ECON10003 Introductory Macroeconomics Subject OutlineThe Teaching and Learning Unit (TLU) offers a wide range of support services tostudents. If you are having any difficulty in studying for this subject you could arrangea consultation with the Unit’s learning skills specialist. The learning skills specialistcan review your current approaches to study and offer advice on how to adjust to thedemands of tertiary study. If you are a student from a non-English speakingbackground there is an English as a Second Language specialist who is available tohelp with your written work.The TLU’s web page http://tlu.ecom.unimelb.edu.au/ also contains a wide variety ofstudy skills topics and information sheets for students, and a timetable of up-comingevents, including focussed workshops, designed to support Economics and Commercestudents in their study.The Teaching and Learning Unit is located on the Level 6, 198 Berkeley Street (TheSpot).Make use of the Teaching and Learning Unit. It is there to help.39

ECON10003 Introductory Macroeconomics Subject OutlineAppendicesAppendix A(see next page)40

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ECON10003 Introductory Macroeconomics Subject OutlineSource: The Economist (June 18 th 2009). Downloaded fromhttp://www.economist.com/businessfinance/displaystory.cfm?story_id=1385617642

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ECON10003 Introductory Macroeconomics Subject OutlineSource: The Financial Times. Downloaded from http://www.ft.com/cms/s/be2dbf2c-d113-11dd-8cc3-000077b07658,dwp_uuid=236ce648-33fa-11da-adae-00000e2511c8,print=yes.html#44