HKAL Macroeconomics: The Syllabus, The Exam, and The Reality

1. HKAL Macroeconomics: The Syllabus, The Exam, and The Reality Chi-Wa Yuen University of Hong Kong

2. Objective • The seminar will focus on the connections among • The syllabus (what the teachers/students are supposed to teach/learn), • The exam (where the students are supposed to demonstrate what they have learned and understood), and • The macro reality (what it is about the real-world macroeconomy that economists would like to understand and predict).

3. The HKAL macro syllabus (1) • Three major macro frameworks • 45°cross (partial equilibrium model). • IS-LM (general equilibrium model). • Quantity theory of money. • Plus a bunch of • definitions (e.g., GNP, the price level, M1, …); • concepts (e.g., paradox of thrift, natural unemployment, crowding out, liquidity trap, …); • laws/principles (e.g., comparative advantage, multiple deposit creation, …); and • And their interrelations.

4. The HKAL macro syllabus (2) • Short-run Keynesian macro models of income (and interest) • 2 frameworks: 45°cross and IS-LM. • Static and deterministic. • Price rigidity  equilibrium is demand-determined  possible existence of output gaps => inefficiency in resource allocations & other kinds of imbalances. • Macro policies as aggregate-demand management tools to close the gaps.

5. The HKAL macro syllabus (3) • Quantity-theoretic explanation of the price level and inflation • An identity (QEM) turned into a theory (QTM) to provide a causal link between money and prices. • More a classical (long-run) than a Keynesian (short-run) approach—inconsistent with complete price rigidity in the Keynesian frameworks—under the assumptions of constant output and velocity of money, hence, monetary neutrality. • The general version also allows for variability of output and velocity of money, hence, monetary non-neutrality.

6. The HKAL macro syllabus (4) • Other sections of the syllabus (e.g., banking and financial intermediation, international finance) contain more descriptive material and require less rigorous theorizing. • What is required is a good understanding of basic definitions, concepts, principles, and their interrelations.

7. The HKAL macro exam (1) • 3 sections • Section A: multiple choice. • Section B: concepts and theories. • Section C: applications. • 3 kinds of skills are tested • Verbal explanation. • Graphical analysis. • Numerical/algebraic computations.

8. The HKAL macro exam (2) • Topic-wise, the exam is meant to be well-balanced. • Section A is mostly straightforward, but sometimes tricky. • Section B is generally OK for the well-prepared. • Section C usually presents the biggest problems.

9. The HKAL macro exam (3) • A few examples to illustrate where students are found to be weakest. • Basicdefinitions—such as interest rate, price level. • Basicconcepts—such as saving and investment in closed and open economies, nominal vs. real objects (e.g., interest rates, money balances), unemployment.

10. The HKAL macro exam (4) • More examples. • Connection between micro and macro concepts—such as relative prices and the general price level, utility and welfare. • Logic behind theoretical constructs—such as derivation of IS and LM curves. • Most importantly, applications of theories to analysis of current affairs, policy issues, and hypothetical cases.

11. The HKAL macro exam (5) • The last point is most probably a reflection of their • unfamiliarity with this kind of questions; • lack of common sense; • weak analytical ability; and/or • poor English. • Their performance will hopefully improve over time if both the teachers and the students work hard enough to tackle the problems identified above (How?).

12. The macro reality (1) • What we’d like to do with our macro theories is to explain (and predict) the (yet-to-be) observed time-series and cross-sectional behavior of macro aggregates. • Short-run fluctuations (business cycles: deviations from trend). • Long-run growth (trend). • Macro policies (remedial/stimulative tools or shocks?).

13. The macro reality (2) • Growth and fluctuations can be viewed as equilibrium outcome from the real-world macroeconomy that operates as an • Optimization-based (solid microeconomic foundations) • Dynamic (the past, the present, and the future) • Stochastic (bombarded by shocks from time to time  importance of information processing and expectations formation) • General equilibrium (everything depends on everything else), where

14. The macro reality (3) • the short and long runs are not two mutually exclusive entities; • the supply side is no less important than the demand side; and • government policies may or may not be able to stabilize the economy and stimulate growth.

15. Gap between current syllabus and the reality • Can’t sensibly address such questions as • How will the cut in government spending on education affect productivity, investment, employment, and welfare in the short run and in the long run? • How much of the slowdown in HK’s productivity growth in recent years is due to structural changes? Cyclical fluctuations?

16. Suggested references • Abel and Bernanke, “Macroeconomics,” 5/e, Addison-Wesley, 2004. (Intermediate level) • Bade and Parkin, “Foundations of Macroeconomics,” Addison-Wesley, 2002. (Introductory level)