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Lecture 1 Introduction to Macroeconomics

Lecture 1 Introduction to Macroeconomics. Course Goals Learn some macro that may be useful to us as managers Separate economic myth from reality Learn where we can get economic information. Approach   1. There is a lot of material. 2. Go through it as one big lecture.

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Lecture 1 Introduction to Macroeconomics

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  1. Lecture 1 Introduction to Macroeconomics

  2. Course Goals • Learn some macro that may be useful to us as managers • Separate economic myth from reality • Learn where we can get economic information

  3. Approach   1. There is a lot of material. 2. Go through it as one big lecture. 3. Since some of you know all of this and some know none of this material, we will shoot for a middle ground. 4. Try to keep graphs/equations to a minimum because “economists use statistics like drunks use lamp posts…for support rather than illumination.” 5. Try not to get lost in all the details because “it is usually better to be roughly correct than precisely wrong.”

  4. Why Do We Care About Macroeconomics A) (i) B/S, I/S linked (ii) Capital structure determined by ● dividend policy (1 - ) ● profitability (ROA) ● economic growth (A/A)

  5. B) Price of Stock (i) economic conditions determine numerator (dividends, cash flow) (ii) economic forces (economy, markets) and institutions (Fed, Treas) determine interest rates

  6. C) You are local economist in residence – you better sound good

  7. D) Pricing Risk (i) Prime Rate payoff (1 + prime)(principal) = (1 + p) X Subprime Rate Payoff (1 + Risky Rate) (principal) prob = (1 + R) X Prob (ii) need prob which = f(economic conditions)

  8. Economic Myths and Realities • Pegging interest rates is stabilizing • Trade deficits are bad, surpluses are good. • Budget deficits are financed by printing money • Easy Money means lower interest rates • Deficits raise interest rates • All business cycles are the same • Easy to forecast inflation

  9. Amazing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics. John Maynard Keynes

  10. “Pegging” Interest Rates Stabilizes Interest Rates and the Economy • • “Pegging” means trying to keep interest rates constant • • Econ   Loan   i   Money   Econ  •  Great Depression •  Vietnam •  Late 70s

  11. C.Deficits are financed by printing money. • Illegal • Then why does money stock rise when deficits rise? Because Fed (historically) tried to peg rates. Deficit   interest rate   Money supply  • How does Fed “Monetize” debt created by deficit? By buying debt from the public with “cash”.

  12. D. More Money means lower Interest Rates

  13. E. Deficits raise Interest Rates Deficits smaller, rates higher. Deficits bigger, rates lower.

  14. All Business Cycles are the Same • “Still, the odds of a further slowing of economic activity outweigh the odds for a resurgence of growth, if for no other reason than the age of the current recover. Sanwa Securities in New York notes that December marked the 57th month of this economic expansion, compared with an average duration of 50 months for economic expansions in the postwar period.”

  15. The average recovery lasts 3 years give or take 2 years.

  16. It’s Easy To Forecast Inflation • Capacity • Utilization

  17. Different Now • Foreign trade keeps prices  • Less unionization to push wages  • Productivity rising • Fed not feeding cycle

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