////EC210 Lent Term Revision Notes

EC210 Lent Term Revision Notes

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EC210 Macroeconomics Study Notes: Lent Term

1: Money and the price level
– Q: What is “money”, how is the price level determined?
– A: Economics in a POW camp and avoiding hyperinflation
– C: double coincidence of wants, quantity theory, seignorage, monetarism, expectations

2: Central banks and interest rates
– Q: What is a central bank, what pins down the interest rates?
– A: Modern time: forward guidance and cashless world (interest rates have been at ZLB)
– C: reserves, quantitative easing, corridor system, arbitrage, Fisher equation, Taylor rule, term structure, yield curve

3. Banks and the financial system
– Q: What is a bank and the role of the financial system? (value creation of the bank)
– A: Bear Sterns, Lehman, Northern Rock
– C: Diamond-Dybvig model, maturity transformation, bank runs, off-equilibrium threats, moral hazard

4. Exchange rates
– Q: What determines the exchange rate?
– A: The Euro (are currency union worth it?)
– C: Twin deficits, PPP, currency crashes, UIP, trilemma pegs and floats, currency unions, speculative attacks

5. Modern financial crises
– Q: Why are financial crises so violent?
– A: What happened to GIPS in the last 5 years? (Greece, Italy, Portugal, Spain)
– C: Default risk, modern banks, misallocation, amplification, multiplicity, debt, solvency vs. liquidity, diabolic loop

6. Measurement of business cycles
– Q: What is the business cycle?
– A: The Great Recession and Great Depression (similarities and differences)
– C: Great moderation, turning points, peak, troughs, booms, recessions, comovement, impulse responses, VARs

7. Keynesian business cycles
– Q: Should we have deficits or loose money in recessions?
– A: The austerity wars
– C: IS-LM model, aggregate demand, crowding out, multipliers, fiscalists, monetarists, automatic stabilisers

8: The Phillips curve and expectations
– Q: Why isn’t economic like engineering? (economic agents are reactive to your actions)
– A: Stagflation of the 1970s (IS-LM failed here)
– C: Aggregate supply, nominal rigidities, Phillips curve, sacrifice ratio, rational expectations, Lucas critique

9. The limits of Monetary Policy
– Q: Why isn’t discretion better than rules? Institutional design (pareto optimum)
– A: Raising a teenage child example
– C: Time inconsistency, Barro-Gorden model, inflation bias, central bank independence, contracts, inflation targeting

10. The limits of Fiscal Policy
– Q: How to finance a war, and how to prevent temptations?
– A: Obesity and the Greek crisis
– C: Tax smoothing, debt management, dynamic inconsistency, hyperbolic discounting, self-commitment, debt sustainability

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EC210 Macroeconomics Study Notes: Lent Term

1: Money and the price level
– Q: What is “money”, how is the price level determined?
– A: Economics in a POW camp and avoiding hyperinflation
– C: double coincidence of wants, quantity theory, seignorage, monetarism, expectations

2: Central banks and interest rates
– Q: What is a central bank, what pins down the interest rates?
– A: Modern time: forward guidance and cashless world (interest rates have been at ZLB)
– C: reserves, quantitative easing, corridor system, arbitrage, Fisher equation, Taylor rule, term structure, yield curve

3. Banks and the financial system
– Q: What is a bank and the role of the financial system? (value creation of the bank)
– A: Bear Sterns, Lehman, Northern Rock
– C: Diamond-Dybvig model, maturity transformation, bank runs, off-equilibrium threats, moral hazard

4. Exchange rates
– Q: What determines the exchange rate?
– A: The Euro (are currency union worth it?)
– C: Twin deficits, PPP, currency crashes, UIP, trilemma pegs and floats, currency unions, speculative attacks

5. Modern financial crises
– Q: Why are financial crises so violent?
– A: What happened to GIPS in the last 5 years? (Greece, Italy, Portugal, Spain)
– C: Default risk, modern banks, misallocation, amplification, multiplicity, debt, solvency vs. liquidity, diabolic loop

6. Measurement of business cycles
– Q: What is the business cycle?
– A: The Great Recession and Great Depression (similarities and differences)
– C: Great moderation, turning points, peak, troughs, booms, recessions, comovement, impulse responses, VARs

7. Keynesian business cycles
– Q: Should we have deficits or loose money in recessions?
– A: The austerity wars
– C: IS-LM model, aggregate demand, crowding out, multipliers, fiscalists, monetarists, automatic stabilisers

8: The Phillips curve and expectations
– Q: Why isn’t economic like engineering? (economic agents are reactive to your actions)
– A: Stagflation of the 1970s (IS-LM failed here)
– C: Aggregate supply, nominal rigidities, Phillips curve, sacrifice ratio, rational expectations, Lucas critique

9. The limits of Monetary Policy
– Q: Why isn’t discretion better than rules? Institutional design (pareto optimum)
– A: Raising a teenage child example
– C: Time inconsistency, Barro-Gorden model, inflation bias, central bank independence, contracts, inflation targeting

10. The limits of Fiscal Policy
– Q: How to finance a war, and how to prevent temptations?
– A: Obesity and the Greek crisis
– C: Tax smoothing, debt management, dynamic inconsistency, hyperbolic discounting, self-commitment, debt sustainability

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