Princeton University

Department of Economics

Undergraduate Program



Spring Term 2005

Tuesday and Thursday, 1:30 – 2:50 pm

Room: Computer Science 104




Fabio Ghironi


Contact Information


Office: 312 Fisher Hall

Office Hours: Tuesday, 11:00 am – 12:15 pm and 3:00 – 4:15 pm

Phone: 609-258-0047

E-mail: or




Nicolas Depetris and Rujikorn Pavasuthipaisit


Office: TBA

Phone: TBA

E-mail: and

Precepts: TBA


Purpose of the Course, Prerequisites, Course Materials, Requirements and Grading, Course Outline



Purpose of the Course:


This course covers the theory of modern macroeconomics in detail.  We will focus on the determination of macroeconomic variables – such as output, employment, prices, and the interest rate – in the short, medium, and long run, and we will address a number of policy issues.  We will discuss several examples of macroeconomic phenomena in the real world.  A central theme will be to understand the powers and limitations of macroeconomic policy in stabilizing the business cycle and promoting growth.




The prerequisites for this course are ECO 100 and ECO 101.



Course Materials:


The textbook for the course is Macroeconomics, by Olivier Blanchard, Prentice Hall, Third Edition, 2003. The Study Guide by David Findlay is also required.  Some additional readings are listed in the Course Outline section of the syllabus, including links to downloadable versions when available.  These readings are also available on reserve.  In addition, you should also follow current economic events by reading newspapers (Financial Times, The New York Times, The Wall Street Journal, The Washington Post) and magazines (Business Week, The Economist, Fortune).  Textbook and study guide can be bundled in a "value pack" including also an Interactive CD and a subscription to the online version of The Economist.  Alternatively, you can subscribe to The Economist at  The IMF’s World Economic Outlook is a good source of information on recent economic developments (and you can also download figures and data).  Other course materials – such as my lecture notes, homework, and homework solutions – will be posted in the course web site on Blackboard.



Requirements and Grading:


Your grade for the course will be based on a combination of requirements:


- (Approximately) Weekly Homework Assignments
- A Midterm Exam
- A Final Exam


Active class participation is not a formal requirement, but I encourage you to ask questions at any time during lectures.


I want you to learn how to think about macroeconomic issues and to interpret phenomena that you are exposed to in the media.  Homework Assignments will help you to develop this ability.  The harder you work on the assignments, the more likely it is that you will do well in the exams, since these will consist mostly of homework-type questions.  I encourage you to form groups to discuss the homework, but each member of a group must turn in her/his own answers.  Your homework answers will be graded by the Preceptors, Nicolas Depetris and Rujikorn Pavasuthipaisit.  Grades will be on a scale from 0 to 100.  Nicolas and Rujikorn will prepare homework answers that will be distributed and reviewed in precept meetings.  (Precept meetings will also be occasions to discuss the additional readings mentioned in the Course Outline section of the syllabus.)


The Midterm Exam will take place in class, at our usual meeting time on Tuesday, March 8.  For this exam, you will be responsible for the material covered up to and including the last lecture before the exam.  You should use the exercises in the textbook’s Study Guide to practice for the midterm and final exams.


The Final Exam will take place on DATE, TIME, AND ROOM TBA.  The exam will again consist of homework-type questions.  It will cover material from the entire course.


The weights of the various requirements in your final grade will be as follows:


- Homework Assignments: 20 percent
- Midterm Exam: 30 percent
- Final Exam: 50 percent


Important:  At the end of the Course Outline, I describe an exercise that will allow those of you who participate to receive extra credit.



Course Outline:


Following is a list of the topics we will cover, along with the references to textbook and additional readings.

Part I. Introduction


- The Vocabulary of Macroeconomics, Blanchard, Chapter 2. (Read chapters 2 and 1 in advance – in that order.)
- Macroeconomics in the Real World, Blanchard, Chapter 1.


Additional Reading:

- IMF, World Economic Outlook, September 2004, Chapter 1.

Part II. The Core


The Short Run

- The Goods Market, Blanchard, Chapter 3.
- Financial Markets, Blanchard, Chapter 4.
- Goods and Financial Markets: The IS-LM Model, Blanchard, Chapter 5.


The Medium Run

- The Labor Market, Blanchard, Chapter 6.
- Putting All Markets Together: The AS-AD Model, Blanchard, Chapter 7.
- The Natural Rate of Unemployment and the Phillips Curve, Blanchard, Chapter 8.
- Inflation, Activity, and Nominal Money Growth, Blanchard, Chapter 9.


Additional Readings:

- Ball, Laurence, and N. Gregory Mankiw (2002): “The NAIRU in Theory and Practice,” Journal of Economic Perspectives 16(4): 115-136.  (Link: NBER Working Paper version.)

- Romer, David (2000): “Keynesian Macroeconomics without the LM Curve,” Journal of Economic Perspectives 14(2): 149-169. (Link: JSTOR.)

- Taylor, John B. (2000): “Reassessing Discretionary Fiscal Policy,” Journal of Economic Perspectives 14(3): 21-36. (Link: JSTOR.)


The Long Run

- The Facts of Growth, Blanchard, Chapter 10.
- Saving, Capital Accumulation, and Output, Blanchard, Chapter 11.
- Technological Progress and Growth, Blanchard, Chapter 12.
- Technological Progress, Wages, and Unemployment, Blanchard, Chapter 13.

Additional Readings:

- Ball, Laurence, and Robert Moffitt (2001): “Productivity Growth and the Phillips Curve,” NBER Working Paper 8421.

- Oliner, Stephen D., and Daniel E. Sichel (2000): “The Resurgence of Growth in the Late 1990s: Is Information Technology the Story?Journal of Economic Perspectives 14(4): 3-22. (Link: JSTOR.)



Part III. The Role of Expectations


- Basic Tools, Blanchard, Chapter 14.
- Financial Markets and Expectations, Blanchard, Chapter 15.
- Expectations, Consumption, and Investment, Blanchard, Chapter 16.
- Expectations, Output, and Policy, Blanchard, Chapter 17.


Time permitting, we will cover some material from the following parts:


Part IV. The Open Economy


- Openness in Goods and Financial Markets, Blanchard, Chapter 18.
- The Goods Market in an Open Economy, Blanchard, Chapter 19.
- Output, the Interest Rate, and the Exchange Rate, Blanchard, Chapter 20.
- Exchange Rate Regimes, Blanchard, Chapter 21.


Part V. Policy


- Should Policy Makers Be Restrained? Blanchard, Chapter 24.
- Monetary Policy, Blanchard, Chapter 25.
- Fiscal Policy, Blanchard, Chapter 26.


Focus: Monetary Policy (Extra Credit)


Throughout the class, we will often talk about the conduct of macroeconomic policy in the U.S.  In particular, we will often discuss the conduct of monetary policy by the Federal Reserve.  A good exercise for you is to ask yourself the following question at various points in the course:  Should the Federal Reserve raise, lower, or leave the Federal Funds Rate unchanged in its next FOMC meeting?  You should try to think about the case you would make for your answer based on what you learn in class, in the media, and by gathering data on the U.S. economy.  (Useful data sources are the Bureau of Economic Analysis and the FRED database of the Federal Reserve Bank of St. Louis.)  You should collaborate with classmates on this exercise.  Toward the end of the semester, some precept time will be devoted to discussing this exercise with you.  Students who demonstrate that they worked on the exercise by giving group presentations on their policy recommendation and the case for it and by answering questions that the preceptor(s) may ask will receive extra credit.  (Groups must consist of three to five students.)  Following is a list of readings that will help you develop a deeper understanding of issues in monetary policymaking in the U.S. and elsewhere.  (The bold number after each reference indicates a suggested order in which to do these readings.)


- Ball, Laurence, and Niamh Sheridan (2003): “Does Inflation Targeting Matter?” NBER Working Paper 9577. 8

- Ball, Laurence, and Robert Tchaidze (2002): “The Fed and the New Economy,” NBER Working Paper 8785. 9

- Blinder, Alan S. (2000): Central Banking in Theory and Practice, Cambridge: MIT Press. 2

- Friedman, Benjamin M. (2004): "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance 7(1): 129:136. 7

- Friedman, Milton (1968): "The Role of Monetary Policy," American Economic Review 58(1): 1-17. (Link: JSTOR.) 1

- King, Mervyn (1999): "Challenges for Monetary Policy: New and Old," in New Challenges for Monetary Policy, proceedings of a symposium organized by the Federal Reserve Bank of Kansas City. 3

- Mishkin, Frederic S. (2002): “The Role of Output Stabilization in the Conduct of Monetary Policy,” NBER Working Paper 9291. 5

- Mishkin, Frederic S. (2004): "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance 7(1): 117-127. 6

- Taylor, John B. (1993): "Discretion vs. Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy 39: 195-214. (Link: Princeton e-reserves.) 4



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