Macroeconomic Activity in Context

Transcription

1 Macroeconomic Activity in Context by Neva Goodwin, Julie A. Nelson, Frank Ackerman and Thomas Weisskopf INSTRUCTOR'S NOTES FOR TEACHING MODULE GDAE Teaching Modules on Social and Environmental Issues in Economics Global Development And Environment Institute Tufts University Medford, MA

2 This module is based on the Instructors Resource Manual for Macroeconomics in Context (copyright M.E. Sharpe, 2008). This was compiled by Brian Roach, with Julie Nelson and Neva Goodwin. Additional materials generously contributed by James Devine and Marjolein van der Veen. See or for more information about the textbook and instructor resources. Reproduced by permission. Copyright release is hereby granted for instructors to copy this module for instructional purposes. Students may also download the reading directly from Comments and feedback from course use are welcomed: Tufts University Global Development and Environment Institute 44 Teele Ave., Tufts University Medford, MA

3 Answer Notes for GDAE Teaching Module MACROECONOMIC ACTIVITY IN CONTEXT Contents: Note to the Instructor... 2 Outline of the Student Reading... 2 Notes on Discussion Questions... 3 Answers to Review Questions... 4 Answers to Exercises... 5 Web Resources... 6 Note to the Instructor This module is designed for use when macroeconomics is first being introduced in a macro or combined micro-macro course. We present standard macroeconomic topics such as the macroeconomic goals of growth and stability and a basic roadmap of the most significant events and theories of the last century. We place these subjects, however, into a broader context of concern for well-being. Many texts define economics as the study of choice in the face of scarcity, and focus on economic growth as a (if not the) goal of macroeconomic policy. In this module, however, we take the view that growth in GDP, while important to understand for the study of macroeconomics, may or may not contribute to the general goal of human well-being. We define the well-being goals of macroeconomics as (1) living standards growth, (2) stability and security, and (3) financial, social, and ecological sustainability. Outline of the Student Reading 1. What is Macroeconomics About? Discussion Questions 2. Macroeconomic Goals 2.1 Living Standards 2.2 Stability and Security 2.3 Sustainability Discussion Questions 3. Macroeconomics in Context 3.1 The Classical Period 3.2 The Great Depression, Keynes, and Monetarism 3.3 Synthesizing Classical and Keynesian Economics 3.4 Subsequent Challenges 3.5 Macroeconomics for the 21st Century Discussion Questions Review Questions Exercises 2

4 Notes on Discussion Questions 1.1 The purpose of this question is to help engage students by linking the subject matter of the course to their personal goals. Making more money and satisfying my parents by staying in school are a couple goals that will likely show up, if students are honest. But becoming an informed citizen and voter, learning things that can be put to use in fighting poverty or environmental degradation, or just getting intellectual stimulation might also be mentioned. If they aren t mentioned spontaneously, you might ask students if they have ever considered such goals. 1.2 This is a good question for gauging the overall level of preparation of your students. You might have them write down their answers (anonymously) and turn them in, or have them discuss this question in small groups. Sooner or later you will probably need to stress to students that economists tend to use certain terms in a very different way than they are used in popular conversation, and you might consider using this question as an occasion to that sooner, or at least to raise the issue. Money is the stock of very liquid assets in an economy, not the same thing as income. Investment means investing in non-financial assets (such as business spending on structures and equipment), not buying a stock or bond. 2.1 This question is designed to just let students pause and reflect on the goals, their connection to their lives, and the rationales they might give for their concerns. Regarding missing goals, you might be able to help the class decide whether they are potentially within the realm of macroeconomics or not. This discussion might also help you discover if you don t know already how many people in your class take a rather conventional macroeconomic view (growth and stability) versus a view that includes broader social and environmental concerns. 2.2 This question could lead to hot debate, if you have both conventional macroeconomic thinkers and, say, environmentalists, in the same class. Try to encourage them to go beyond just accusing each other of stupidity, and stress that this class will be informative about the way that both types of views have come about. 3.1 Historical events named should include the Industrial Revolution, the booms ( and 1920 s) and bank panics (1907 and ) of the early 20 th century, the Great Depression, World War II, simultaneous inflation and unemployment (also called stagflation though this term is not used in the book) of the early 1970 s, and the oil crises of Scientific findings about global climate change might also be included. The second part of the question is open ended. Perhaps some students will say things like the power of multinational corporations, excessive regulatory burdens on business, or rising health care costs. Knowing that these are their top concerns may help you tailor the course to take advantage of their motivation to learn more about these issues. 3.2 Whether this question is a good one for your class depends on their level of ability in critical thinking. To intellectually sophisticated students, the idea that there are controversies is no surprise. They may find this question to be a no brainer. But many young college students are used to a more passive learning style--just learning an accepted set of facts --and these may find controversy unsettling. They need to 3

5 know that they are learning the right thing, or they will become frustrated with the class and with you. You may be able to assuage this emotional discomfort while still presenting a range of views by aiming to confidently present a relatively authoritative account of the controversies! That is, teaching macro as a sort of history of thought course can give the students a sense of confidence and continuity in what they are learning--in spite of the fact that the theory they learn one week may contradict the theory they learned the week before. Answers to Review Questions 1. Economics is the study of the way people organize themselves to sustain life and enhance its quality. 2. Macroeconomics is the study of how economic activity at all levels create a national (and global) economic environment, while microeconomics deals with the economic activities and interactions of individuals, households, businesses, and other groups at the sub-national level. 3. Positive questions concern issues of fact (how things are, while normative questions deal with goals and values (how things should be). 4. Living standards growth means improvements in people s diet, housing, medical attention, education, working conditions and access to care, transportation communication entertainment and the like, that can allow people to have long and enjoyable lives and have the opportunity to accomplish the things that give their life meaning. It is not the same as economic growth, which refers only to growth in production (gross domestic product). 5. Economic development is the process of moving from a situation of poverty and deprivation to a situation of increased production and plenty, through investments and changes in the organization of work. To benefit the population of a country as a whole, economic development must keep pace with population growth, produce goods that increase well-being (the what? question), use methods of production that increase well-being (the how? question), and the gains must be distributed across the population (the for whom question). 6. Economic fluctuations make it hard for people to plan for the future. High unemployment is associated with many signs of social stress, including suicide, domestic violence, stress-related illnesses and crime. 7. Financial sustainability has become a concern in poor countries due to the debt crisis, and in rich countries due to fears about future tax burdens. Social sustainability has become a concern, as people have come to question whether traditional development will ever solve the problem of global disparities in living standards, and whether more-is-better values are good for people. Environmental sustainability has become a concern as scientists have pointed out the effects of economic activities on global climate and other natural systems. 8. The classical economists were motivated by observing the Industrial Revolution, and believed that the division of labor, specialization, capital accumulation and self-interested actions in markets led to the creation of wealth. They also assumed that monetary issues affected only prices. John Maynard Keynes was motivated 4

6 by observing the Great Depression, and believed that the key to getting out of slumps was to raise aggregate demand through government control of investment. Keynesian economists followed J.M. Keynes, but believed that fiscal policy (not government control of investment) should be used to get an economy out of a slump. The monetarists were also motivated by observing the Great Depression, but believed that it was caused by bad government monetary policies. The synthesizers of the classical and Keynesian schools were motivated by observing the combination of rising unemployment and rising inflation that occurred in the early 1970s. They believed that Keynesian theory explained the short run (the course of the economy before markets have time to adjust) while classical theory explained the long run (after the economy has had time to adjust). 9. In the economy experienced an oil crisis created when OPEC countries cut production and raised prices. This brought economists attention to international linkages and to the supply side of the economy. 10. The recognition of the environmental impact of fossil-fuel based economic growth (particularly global warming) and of the persistence of global poverty will likely shape the development of macroeconomics in the 21 st century. Answers to Exercises 1. Students should be able to easily come up with an article that mentions GDP, the Federal Reserve, unemployment, etc. You should also accept articles that look at sustainability, such as articles on international debt issues, education spending, or environmental damage. 2. a. positive b. normative c. positive d. normative e. normative 3. Examples of correct answers: a. False. Macroeconomics is about the national or global economic environment created by all actors, including but not limited to government agencies. b. False. Economic growth may not lead to living standards growth if the questions of what, how and for whom are not well-addressed. c. False..financial, social, and ecological d. True. e. False : now many of them face a debt crisis and pay more in interest than they receive in grants and loans. 4. Examples of correct answers: a. False. Monetary policy b. True. c. False. Keynesian economists d. True e. False. Classical economists or Keynesian economists believe that an economy that experiences a high rate of unemployment requires fiscal policy (and perhaps monetary policy) actions to recover. 5. a v; b viii; c vi; d i; e ix; f vii;g xi; h ii; i iii; j x; k iv 5

7 Web Resources The calculation in the reading that output per person increased tenfold between 1840 and 1970 is based on: Louis Johnston and Samuel H. Williamson, The Annual Real and Nominal GDP for the United States, Present. Economic History Services, March 2004, URL : A useful timeline of major macroeconomic events, including the bank panics mentioned in the reading, can be found at: 6