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Macroeconomics precourse – Part 2Academic Year 2013-2014

Course PresentationThis course aims to prepare students for the Macroeconomics course of the MSc in BA. It provides the essential background in macroeconomics

PAOLO PAESANI Office: Room B6, 3RD floor, Building B Telephone: 06-72595701 E-mail: paolo.paesani@uniroma2.itOffice hours: to be agreed

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Macro

EMPLOYMENT AND UNEMPLOYMENT

POP = LF + NLFLF = Employed + Unemployed

Unemployed = Voluntary + Involuntary + FrictionalNLF = Young (< 15) + Old (> 70) + Others (15 << 70)

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Micro

Mankiw (2011)

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Macro

MONEY

Mankiw (2011)

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Macro

Money supply (M) = Currency (C) + bank deposits (D)

Bank deposits (D) = current account deposits D(1) + saving deposits D(2)

Monetary base (B) = Currency + Required Bank reserves (R1) + Voluntary reserves (R2)

Monetary aggregates

MONEY

Mankiw (2011)

GOVERNMENT

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Micro

1. M = C + D2. B = C + R3. C = c D c > 04. R = R1 + R2 = aD + bD = (a+b)D 0 < (a+b) < 1

M = [(1+c) / (a + b + c)] B

[(1+c) / (a + b + c)] = Money multiplier

MONEY

GOVERNMENT

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Macro

Every economic system is linked to the others through multiple channels:

1. International trade of goods and services (Exports and Imports);

2. International mobility of factors of production (migration, foreign direct investment);

3. Private international financial flows (portfolio investment, forex transactions)

4. Public international financial flows (management of official forex reserves, interntional aid, international transfers)

MONEY

GOVERNMENT

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Macro

Every economic system is linked to the others through multiple channels:

1. International trade of goods and services (Exports and Imports);

2. International mobility of factors of production (migration, foreign direct investment);

3. Private international financial flows (portfolio investment, forex transactions)

4. Public international financial flows (management of official forex reserves, interntional aid, international transfers)

MONEY

GOVERNMENT

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Macro

MONEY

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Macro

INTEREST RATE

Nominal interest rate = price of money over time = Additional sum of money the borrower agrees to pay, on top of the loaned amount, to the original lender or to the current owner of the loan.

Nominal interest rate = Real interest rate + Expected inflation + Credit risk premium + Liquidity premium + Other risk premiums Real interest rate (ex ante) = Nominal interest rate – Expected inflation

Real interest rate (ex post) = Nominal interest rate – Actual inflation

If current inflation exceeds (falls short) of expected inflation, the ex post real interest rate is higher than the ex ante real interest rate.

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Macro

INTEREST RATE

Mankiw (2011)

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Macro

EXCHANGE RATE

Nominal exchange rate = price of one currency in terms of another currency = Amount of foreign currency per unit of domestic currency

Real exchange rate = (Nominal interest rate *– Domestic price leve) / Foreign price level

Nominal and real exhange rate can be bilateral or multilateral (effective)

Appreciation = Nominal Exchange rate up (in nominal and real terms)

Depreciation = Nominal Exchange rate down (in nominal and real terms)

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Macro

REFERENCE

Mankiw, G.N. (2010) Brief Principles of Macroeconomics, 6° ed.,