Macroeconomics

Preface

In 1961, Pres. John F. Kennedy proposed substantial cuts in personal and corporate taxes. When a reporter asked why, he replied:

"To stimulate the economy. Don't you remember your Economics 101?"

His response was clever, but incomplete.

Most economists believe that tax cuts can temporarily provide a temporary stimulus to the economy in times of recession, but they also know that the living standards of future generations depend heavily on the rate at which an economy saves for investment in future productive capacity.

Empirical evidence has shown that certain forms of taxation discourage saving, but incessant tax cutting has created large budget deficits that have reduced gross saving from 21 percent of gross national income in 1961 (when Kennedy made his remark) to 14 percent in 2004.

Kennedy is not responsible for this sad state of affairs however. Our economics textbooks are.

In contrast to the modeling process that students learn when they study the business cycle, most introductory textbooks relegate economic growth to two dozen pages of text. Someone who only took the introductory course simply does not remember those vague pages on the determinants of output per worker as well as they remember the results that they had to derive algebraically.

It's no surprise therefore that many Americans believe that tax cuts are the cure for every economic ailment and it's no surprise that politicians unfurl the tax cut banner at the first opportunity. After all, tax cuts are the miracle cure that they learned about in their economics textbook.

Knowledge of growth theory is necessary to properly understand macroeconomic policy. Lacking that knowledge, the average person will not see how incessant tax-cutting reduces the national saving rate and deprives our children of a better standard of living.

In writing these notes, I have placed a strong emphasis on the trade-offs that economic policymakers face. Frequently, they must choose between stimulating the economy in the short run and making investments that increase worker productivity in the long run.

These notes first describe the goods, money and labor markets in the long run. They then discuss how those markets may deviate from long run equilibrium over short periods of time when prices are not completely flexible.

It's the same framework that N. Gregory Mankiw uses in his intermediate-level Macroeconomics textbook. A nice feature of that framework is that it enables me to provide microeconomic foundation to the models of the economy in the short run.

In these notes, I have not shied away from using mathematics to explain the models, but where I use math, I also provide intuitive explanations, so that you understand the mathematics.

As computer technology makes increasingly more data available to us, knowledge of mathematics and statistics will become increasingly more important. So the investment that you make in learning math today will make you better off in the long run.

And that's the theme of this course.

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