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\title{\vspace{1.6cm} \\
	{\LARGE Lecture 11}\\[1ex]
{\LARGE Exam Review}\\
	\noindent \hspace{-0.3cm} \rule{12.8cm}{0.6pt} \vspace{-0.7cm}}
\author{Macroeconomics EC2B1\\[3ex]  Benjamin Moll \\\vspace{0.5cm}}
\institute{London School of Economics, Winter 2024}





\begin{document}

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{
\setbeamertemplate{footline}{} 
\begin{frame}[noframenumbering]
\titlepage
\end{frame}
}



\begin{frame}{Plan}
\be
\bigskip
\item Overview
\bigskip
\item Some specific exam guidance
\bigskip
\item Each lecture in one slide and one graph
\bigskip
\item Q \& A
\ee
\end{frame}

\begin{frame}{This Course: \tr{Modern} Macroeconomics}
\bi
\item Modern = as practiced in current academic research
\bi
\medskip
\item $\neq$ what's in standard textbooks
\ei
\bigskip
\item Macro with \tr{micro foundations}
\bi
\medskip
\item utility and profit maximization just like in EC1A1
\medskip
\item ... but general equilibrium (= prices endogenous, clear markets)
\ei
\bigskip
\item Thanks for the very useful feedback on teaching evaluations
\ei
\end{frame}



\begin{frame}{Topics we covered}
\begin{figure}[tph]
	\centering
\includegraphics[width=.95\textwidth]{figures/topics}
\end{figure}
\end{frame}


\begin{frame}{Some specific exam guidance}
\vspace{-3mm}
\bi
\item Format same as last year: 3 questions for my part
\bigskip
\item There will definitely be a question on the New Keynesian model
\bigskip
\item Common exam questions: repurposing / relabeling of theory from lecture notes for other application, changing functional forms, ...
\bigskip
\item Memorizing is often not best idea
\bigskip
\item We're testing for your ability as an economist (whether you understand logic), not ability to do algebra
\bi
\smallskip
\item partial marks for algebra mistakes
\smallskip
\item no marks for wrong logic
\ei
\medskip
\item Everything in lecture notes \tr{and supplements} is examinable except if specifically stated that it is not
\medskip
\item Will update list of material in lecture notes that is not examinable
\ei
\end{frame}




\begin{frame}{Lecture 1}
\bi
\item Thoughts on methodology: interplay of models and data
\bigskip
\item Modeling in (macro)economics
\bi
\medskip
\item ``the map is not the territory"
\medskip
\item idea of crucial assumptions
\ei
\bigskip
\item Toward a simple macro model
\bi
\medskip
\item labor demand
\medskip
\item labor supply
\medskip
\item income and substitution effects
\ei
\ei
\end{frame}


\begin{frame}{Lecture 1}
\begin{figure}[tph]
	\centering
\includegraphics[width=.5\textwidth]{figures/2.eps}\includegraphics[width=.5\textwidth]{figures/6.eps}
\end{figure}
\end{frame}



\begin{frame}{Lecture 1}
\bi
\item Thoughts on methodology: interplay of models and data
\bigskip
\item Modeling in (macro)economics
\bi
\medskip
\item ``the map is not the territory"
\medskip
\item idea of crucial assumptions
\ei
\bigskip
\item Toward a simple macro model
\bi
\medskip
\item labor demand
\medskip
\item labor supply
\medskip
\item income and substitution effects
\ei
\ei
\end{frame}


\begin{frame}{Lecture 2}
\vspace{-3mm}
\bi
\item Simple macro model
\medskip
\item Pareto efficiency (PE)
\bi
\smallskip
\item definition: there is no feasible allocation that makes one individual better off without making another worse off
\smallskip
\item limitations, e.g. distribution (one person consuming everything)
\smallskip
\item fictitious social planner's problem
\ei
\medskip
\item Competitive equilibria
\medskip
\item First and second welfare theorems
\bi
\smallskip
\item statement, assumptions
\smallskip
\item limitations, prevalence of ``frictions"
\smallskip
\item important use: force you to think about rationale for policy intervention
\ei
\medskip
\item Application of simple macro model: long-run trends in hours worked
\bi
\smallskip
\item need prefs such that income effect dominates substitution effect
\ei
\ei
\end{frame}




\begin{frame}{Lecture 2}
\vspace{-4mm}
\begin{figure}[tph]
	\centering
\includegraphics[width=.78\textwidth]{figures/11.eps}
\end{figure}
\end{frame}


\begin{frame}{Lecture 2: Equilibrium vs Planning Problem}
\bi
\item Even though the competitive equilibrium and planning problem may lead to the same allocation, they are very different animals
\bigskip
\item Some key differences to remember when you solve these in practice
\be
\medskip
\item equilibrium features \tr{prices}, the planning problem does not
\medskip
\item equation for resource constraint plays mathematically different roles:
\bi
\smallskip
\item in competitive equilibrium: market clearing condition
\smallskip
\item in planning problem: constraint on planner's maximization problem
\ei
\ee
\bigskip
\item A typical mistake that students make: write planning problem as planner maximizing utility subject to budget constraint (which features prices)
\bi
\medskip
\item Please don't do this. If in exam: zero points on that subquestion.
\ei
\ei
\end{frame}




\begin{frame}{Lecture 3}
\bi
\item The CES production function: complementarities and substitution in production
\bi
\medskip
\item elasticity of substitution
\medskip
\item le Chatelier principle
\ei
\bigskip
\item Example of what you can do with simple static macro models: Germany without Russian gas
\ei
\end{frame}

\begin{frame}{Lecture 3: Isoquants of the CES production function}
\vspace{-4mm}
\begin{center}
\includegraphics[width=.8\textwidth]{figures/13.eps}
\end{center}
\end{frame}


\begin{frame}{Lecture 4}
\be
\item The Keynesian view of consumption
\bigskip
\item A two-period model of consumption
\bigskip
\item The permanent income hypothesis
\bigskip
\item Consumption, saving and interest rates in general equilibrium
\ee
\end{frame}



\begin{frame}{Lecture 4}
\vspace{-4mm}
\begin{figure}[tph]
\centering
\includegraphics[width=.5\textwidth]{figures/kurlat_fig6_2_1.pdf}\includegraphics[width=.5\textwidth]{figures/Ganong_etal_fig6.pdf} 
\end{figure}
\end{frame}



\begin{frame}{Lecture 5}
\be
\item Investment and capital accumulation in partial equilibrium
\bigskip
\item Dynamic general equilibrium with capital accumulation
\bi
\medskip
\item baby RBC model
\medskip
\item later: New Keynesian model = same model with sticky prices
\ei
\ee
\end{frame}


\begin{frame}{Lecture 5}
\vspace{-4mm}
\begin{figure}[tph]
	\centering
\includegraphics[width=.49\textwidth]{figures/lec5_2.eps} \includegraphics[width=.49\textwidth]{figures/lec5_3.eps} 
\end{figure}
\end{frame}


\begin{frame}{Lecture 6}
\be
\bigskip
\item Very brief history of business cycle macro until the 1980s
\bigskip
\item A two-period real business cycle model = the model from lecture 5
\bi
\medskip
\item aggregate productivity shocks
\ei
\bigskip
\item The fully-fledged Real Business Cycle model
\bi
\medskip
\item logic of RBC model: impulse responses to TFP shocks
\ei
\bigskip
\item Criticisms of the RBC model
\ee
\end{frame}


\begin{frame}{Lecture 6: Room for policy in the RBC model?}
\bi
\item No, because 1st welfare theorem holds
\bigskip
\item Same logic as in baby RBC model
\bigskip
\item In RBC model, business cycles are efficient
\bi
\medskip
\item the optimal response to a changing environment
\medskip
\item  when productivity falls, it's a bad time to produce, so households \tr{should} work and invest less
\medskip
\item government intervention can only worsen the allocation
\ei
\bigskip
\item For more discussion, see Kurlat, chapter 13.5, section ``Policy Implications"
\bigskip
\item Come back to this at end of lecture
\ei
\end{frame}


\begin{frame}{Lecture 7}
\be
\item Introducing money and inflation into the two-period RBC model
\bigskip
\item Flexible prices: monetary neutrality
\bigskip
\item Sticky prices: monetary non-neutrality
\bi
\medskip
\item aggregate demand matters
\ei
\ee
\end{frame}



\begin{frame}{Flexible prices: summary and policy implications}
\vspace{-3mm}
\bi
\item Real variables are completely separate from nominal variables\\
(``monetary neutrality", ``classical dichotomy")
\bigskip
\item Corollary: monetary policy has no effect on any real variables
\bigskip
\item Monetary policy affects only price level and inflation
\bigskip
\item 1st welfare theorem still holds: policy intervention undesirable in first place
\bigskip
\item \tr{Stabilization policy?} When there is a recession (e.g. due to $A_1$ or $A_2 \downarrow$)
\bi
\medskip
\item stabilization via fiscal policy is undesirable
\medskip
\item stabilization via monetary policy is not possible (even if it were, it would be undesirable)
\ei
\medskip
\item \tr{Role of central bank?} It can manage price level and inflation but those do not matter so may as well close down central bank
\ei
\end{frame}




\begin{frame}{Lecture 7: sticky prices}
\vspace{-4mm}
\begin{figure}[tph]
	\centering
\includegraphics[width=.8\textwidth]{figures/lec7_5.eps} 
\end{figure}
\end{frame}

\begin{frame}{Lecture 8}
\vspace{-2mm}
\be
\item Monetary policy
\bi
\medskip
\item already part of model, can use as is
\ei
\bigskip
\item Fiscal policy
\bi
\medskip
\item not in model yet, will have to extend it
\ei
\bigskip
\item Pecking order of monetary and fiscal policy?
\ee
\bigskip
Key observation: \tr{sticky prices break first welfare theorem}
\bi
\medskip
\item sticky prices = ``friction"
\medskip
\item $\Rightarrow$ rationalizes some sort of \tr{policy intervention}
\ei
\end{frame}


\begin{frame}{Sticky prices: summary and policy implications }
\vspace{-3mm}
(Contrast with analogous slide for flexible prices from Lecture 7)
\bi
\medskip
\item Sticky prices break monetary neutrality and the classical dichotomy
\medskip
\item Corollary: monetary policy affects real variables
\medskip
\item 1st welfare theorem breaks: some policy intervention is desirable
\medskip
\item \tr{Stabilization policy?} When there is a recession due to shortfall in aggregate demand
\bi
\smallskip
\item stabilization via fiscal policy is both possible and desirable
\smallskip
\item stabilization via monetary policy is both possible and desirable unless ZLB binds
\smallskip
\item no clear pecking order, use both depending on circumstances
\ei
\medskip
\item \tr{Role of central bank?} control price level, stabilize recessions
\bi
\smallskip
\item see e.g. mandate of U.S. Fed (``dual mandate")
\ei
\ei
\end{frame}

\begin{frame}{Lecture 9}
\be
\bigskip
\item The 2008 financial crisis: some facts 
\bigskip
\item Asset bubbles 
\bigskip
\item Financial frictions and amplification 
\ee
\end{frame}



\begin{frame}{Lecture 9}
\vspace{-4mm}
\begin{figure}[tph]
	\centering
\includegraphics[width=.5\textwidth]{figures/lec9_1}\includegraphics[width=.5\textwidth]{figures/loop} 
\end{figure}
\end{frame}


\begin{frame}{Lecture 10}
\be
\bigskip
\item Measuring the labor market and unemployment
\bigskip
\item Unemployment: Diamond-Mortensen-Pissarides model
\bigskip
\item Inequality and heterogeneity in macro
\ee
\end{frame}

\begin{frame}{Lecture 10}
\vspace{-4mm}
\begin{figure}[tph]
	\centering
\includegraphics[width=.5\textwidth]{figures/lec10_6v2}\includegraphics[width=.5\textwidth]{figures/lec10_1} 
\end{figure}
\end{frame}





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\end{document}

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