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Johns Hopkins University

Carey School of Business

The Firm and the Macroeconomy

Course materials 

This material was prepared especially for the course entitled "The Firm and the Macroeconomy" offered at John Hopkins University, Carey School of Business. Students and professors alike should feel free to use these materials.

Mod 1 Sizing up the Macroeconomy

Supply and demand: An introduction or review of some basic micro-economic foundations for macroeconomics.

Part 1: Supply and demand

Part 2: Supply and demand

Memo assignment: interpreting the latest GDP release from the Bureau of Economic Analysis -- some pointers.

Part 1: Explanation of Memo Assignment

Part 2: Explanation of Memo Assignment

Mod 2 The Firm and the Macroeconomy in the Long-run

Our overall supply constraint:  What determines the size of our economic 'garden' and what makes our 'garden' grow? Introducing some basic tools to tell us about macroeconomic fundamentals in the long-run.

Part 1: The Production Function Approach (for General Review) *

Part 3: The Cobb-Douglas Production Function Approach (for General Review) *

Part 2: Total Factor Productivity (for General Review) *

Part 4: The Per-Capita Approach(for General Review) *

* These videos are taken from  Module 1 of the online course entitled Macroeconomic Diagnostics (MDSx) which was developed by the International Monetary Fund's Institute for Capacity Development and is available on the edX platform.The entire set of videos from this module are available as a page on this website.

Materials for synch session: I go through these spreadsheets in the first session.

Mod 3 Banks, Money, and Inflation

Using the equation of exchange or 'classical approach':  This useful framework helps us to understand the long-run relationship between money and prices.

Part 1: Quantity Theory / Equation of Exchange Approach (for General Review)

Part 2: Quantity Theory / Equation of Exchange Approach (for General Review)

A guide to your memo assignment:  How use equation of exchange approach to forecast money and prices -- application to an actual economy.

Part 1: A guide for your memo assignment.

Part 2: A guide for your memo assignment.

Mod 4 The Firm and the Macroeconomy over the Business Cycle:

The IS-LM Model

How economic shocks can be amplified:  The "Keynesian cross" shows one of the most important ideas in macroeconomics: how an economic event or 'shock' can be amplified as it ripples through the economy.

Part 2: Using the Keynesian cross to gauge the impact of an adjustment to fiscal policy (government spending, taxes).

The IS-LM puts it all together:  Show how output and the interest rate are jointly determined with equilibrium jointly holding in both the market for goods and services (the IS curve) and money markets (the LM curve).

Part 1: Spreadsheet-Based Introduction to IS-LM (for general review).

Part 2: Deriving the IS curve in a spreadsheet (for general review).

Part 3: Money market equilibrium (for general review).

Part 4: Deriving the LM curve (for general review).

Part 5: Shifts in the LM curve (for general review)

Part 6: Putting the IS-LM to work: A dropdown spreadsheet will examples (for general review)

Mod 5 The Aggregate Demand and its Management with Monetary and Fiscal Policy

Using the IS-LM to show how shocks and stabilization policies affect the economy. Large economic events -- shocks -- can shift the economy away from its long run equilibrium. Sometimes these events bring about highly adverse outcomes -- for example severe drops in output and employment. Demand management policies -- on both the fiscal (government) and monetary (central bank) sides can help smooth over some of these tough periods. The IS-LM is well-suited to help trace out bot shocks and stabilization policies.

Help for your memo: How to use the IS-LM spreadsheet to illustrate shocks and policies.

Mod 6 The Aggregate Supply and the Trade-off between Inflation and Unemployment

We now introduce flexible prices into our thinking. Until now, we've assumed that prices were fixed. This assumption was made mainly to keep things simple -- so we could focus on other things. But, in the real world, prices do move! To help us visualize such movements, we first introduce the short run aggregate supply (SRAS) function. Then, as an extension, we also introduce the Phillips Curve (PC). In its traditional form, the PC shows an inverse relationship between unemployment and inflation. The modern version of the PC, however, stresses a more general relationship between the output gap and inflation -- a very similar notion. 

Part 1: Introduction to the short run aggregate supply function (for general review).

Part 2: More advanced version of the SRAS (for general review)

Part 3: From SRAS to PC.

Forecasting economic activity, inflation, and monetary policy: the IS/RT/PC model. We will now introduce you to a more sophisticated cousin of the IS-LM. The IS/RT/PC model is closer to reality both because it incorporates flexible prices (inflation) and because it because it portrays central bank behavior in a more realistic way than in the IS-LM. The job of central bank is to stabilize both prices and output and the do so by setting interest rates -- not the money supply per se. This model will be helpful for your memo assignment.

Part 1: Introduction to the IS/RT/PC (for general background).

Part 3: Monetary policy -- discretionary tightening or loosening in the IS/RT/PC model (for general background).

All examples were performed in this spreadsheet (click to download).

Part 2: Aggregate demand shocks in the IS/RT/PC (for general background).

Part 4: Monetary accommodation in the IS/RT/PC (for general background).

A DEMO FOR YOUR MEMO: Use the model to do a forecast! The example of Fredonia should give you some indication as to how you can use the model for your own country/case study! Remember: forecasts are not just numbers -- they are narratives too. You must tell us why you think your forecast is a valid one.

Mod 7 The Firm in the Global Economy

Memo on China's Monetary and Exchange Rate Regime 1995-2005. As the Chinese economy grew over this period, the People's Bank of China faced several challenges. How did they meet those challenges? These videos should help you complete your memo assignment.

Video 1: An introduction to the memo assignment.

Video 3: The impossible trinity.

Video 5: International Reserves and the Exchange Rate

Video 2: Fixed exchange rates -- pros and cons.

Video 4: Financing a net export (current account) balance.

Video 6: Net exports, net capital flows, and money -- what are the links?

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