Notes for How the World Works

A Brief Course in Macroeconomics

The Framework.
Central Banking a trade-off between promoting low and stable inflation vs
low and stable unemployment.
The Federal Reserve has an explicit dual mandate, unemployment and
inflation are given equal weight. (for some other central banks inflation is
dominant)
But when financial crises occur, then central banks forget this and focus on
maintaining the integrity of the financial system.
Why worry about both? There are costs to high unemployment and high
inflation Both.
Five Costs of Inflation
1.
2.
3.
4.

Noise in the price system. Difficult to understand.

Distortions in the tax system.
Shoe-leather costs. People spend a lot of effort conserving cash.
Unexpected redistribution of wealth. It goes from savers to
borrowers. Undercuts savings
5. Interference with long-run planning. Makes it harder to plan future
costs and returns for companies and households.

Studies cannot tell how low inflation is good. Or low enough. Inflation
turning to deflation is not good.
Central Banks have inflation targets to keep inflation low and avoid the
slippery slope of letting small inflation turn into large inflation pickup.
The Synthesis
The Current Consensus emerged from two major economic disasters of the
last century. The Great Depression of the 1930s and the Great Inflation of
the 1970s.

The Depression spawned Keynesian economics. How frictions in the

economy prevent smooth adjustments to shocks. When there is high inflation or
unemployment, have to push the economy back on course.[good for short run]

The Great Inflation spawned a revival of classical economics. (Attempts to

stimulate an economy beyond its productive limits can lead to an ever
increasing spiral of inflation.) good for long run pushing too hard for too long would
generate out-of-control inflation.

So, the *Synthesis* is to accept elements of both theories. Fuck the labels.
Conventional model of inflation.
Potential output growth is the limit on how fast the economy can grow
without changing/affecting the unemployment rate. If the economy grows at
its potential or trend rate, then the unemployment rate stays constant. For
US 2.5 to 3 percent.
Okuns Law rate of unemployment rate falling if GDP growth exceeds
potential.
0.4% points, if GDP grows 1% above potential for a year.
Non accelerating inflation rate of unemployment (NAIRU) This is the limit
on how far the unemployment rate can fall before inflation picks up.
When unemployment is v. low, scramble for workers pushes wages up, and
so inflation.
NAIRUVANA.
The Phillips Curve The relation between unemployment and inflation. Bill
Phillips, New Zealand 1958. He discovered/observed that inflation tended
to be low during high unemployment and
High inflation during low unemployment.
Wages are about 70% of business costs.
-Bernanke a proponent of the financial accelerator model financial &
credit, strong economy create booms

external finance premiums higher interest rate for loans, because of

imperfect information about risk of borrowers and the cost of monitoring
borrowers.

Since credit is the grease of economic growth, these frictions are

important in forecasting the economy.

The World Owes You Nothing

You have nothing to look forward to in the world, that is because the world
owes your nothing.
For it to be interesting of any sort, the only person responsible for that, is
you.