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ECO 317 Intermediate Macroeconomics

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Instructor Jing Li (sounds like Lee) 7-year experience of teaching at US colleges Second year at MU Married with two kids Teaching eco 311 as well

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Expectation Hard-working is expected Cramming for exam does not work Memorizing does not work Understanding is the key If you need A or B, earn it!

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Required Textbook

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Webpage http://www.fsb.muohio.edu/lij14/ I use Nihhka only when I need to send group email and post grade Google “jing li miami university”

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Grades Six homeworks, 10 points Term paper, 10 points Three midterm exams, 60 points Final exam, 20 points (bonus) Attendance, worth 3 points None of the exam is accumulative

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Hot Issues National Debt Income gap: 1% vs. 99% Globalization 2007-2009 Recession

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Review

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Two Properties of MPL

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Profit Maximizing

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Summary Output does not grow if input and technology remain constant Wage is determined by the marginal product.

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Discuss What is the long run prospect of Japanese economy, where both population and technology stagnate? Why does a doctor earn much more than a plumber?

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Cobb-Douglas Production Function

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Calculus

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Why Cobb-Douglas Function? It can explain the following two facts The shares of capital and labor incomes are constant Real wage grows at the same rate as average product

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The Demand Side The supply side is captured by production function We need to specify the demand side in order to find equilibrium Demand = consumption + government expenditure + investment

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Aggregate Demand

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Equilibrium

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Another Perspective

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Application 1.Why was interest rate high in early 1980? 2.Why was interest rate high in early 1990?

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Crowding Out Chapter 3 implies that expanding government expenditure will completely crowd out investment Fiscal policy is ineffective How about monetary policy?

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MVPY

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Monetarism In long run, price is mainly affected by money supply Inflation rate equals growth rate of money supply if assuming fixed income and constant velocity What if those two assumptions fails?

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Hyper-Inflation (to get Seigniorage)

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Quantitative Easing (as a Policy Tool) http://www.youtube.com/watch?v=PTUY16Ck S-k http://www.youtube.com/watch?v=PTUY16Ck S-k http://en.wikipedia.org/wiki/Quantitative_eas ing http://en.wikipedia.org/wiki/Quantitative_eas ing

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Classical Dichotomy According to the long run classical theory, money is neutral (monetary neutrality): the money supply does not affect real variables The theoretical separation of real and nominal variables is called classical dichotomy Real variables are studied in Chapter 3 Price is determined in Chapter 4 They jointly determine nominal variables

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Fisher Equation Application of Classical Dichotomy

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Proof

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How to Forecast Nominal Interest Rate in Long Run?

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A Short Run Theory

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Discuss Dear Professor Li, I am in your 317 class and had a question regarding interest rates. Prior to class today I was reading an article that stated that a main reason why our economy has not felt the same effects of having a 70% debt to GDP ratio is that we have lower interest rates compared to European countries who have similar debt-GDP ratios(but these countries have higher interest rates). If our economies are similar in terms of this ratio, how come we have such a lower interest rate in comparison to a country such as Spain? Also, thanks for an enjoyable class today. Stephen H.

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Answer US real interest rate is low because high (foreign) supply of loanable fund. Spain is opposite US nominal interest rate is low because of quantitative easing

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Review Nominal vs Real Y: Real GDPPY: Nominal GDP W/P: Real WageW: Nominal Wage r: Real Interest Ratei: Nominal Interest Rate

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Classical Dichotomy Money does not affect real variables Real variables are determined in Chapter 3 Price is determined in Chapter 4

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Review Long Run vs Short Run

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