To: Students Wishing to Take Babson College S International Macroeconomics Waiver Examination

To: Students Wishing to Take Babson College’s International Macroeconomics Waiver Examination

From: The Economics Division at Babson College

Attached is the syllabus used at Babson in its first-year,international macroeconomics coursecalled Managing in a Global Economy (MGE). We hope that you find the syllabus useful in studying for the MGE waiver examination.

To prepare for this examination, you can use the textbook of your choice. If you have a favored textbook (perhaps the one you used as an undergraduate), just match the topics in Babson’s MGE syllabus with the appropriate sections of you textbook(s).

Currently, BabsonCollege’s Economics Division is using a textbook written by Professor John E. Marthinsen entitled Managing in a Global Economy: Demystifying International Macroeconomics.

This book will be published in late 2005 by Thompson/South-Western. Until then, it is available only through BabsonCollege. If you would like to use this book to study for the waiver examination, please contact Professor John Marthinsen in the Economics Division (Luksic Hall, Room 201), or contact Neely Steinberg in Babson College’s Office of Program Management (Olin Hall, Room 320).

Good luck in your studies and good luck with the waiver examination.

Economics Division

MGE1

TOPIC:Introduction to Country Analysisand Measures of Economic Health

READINGS:Managing in a Global Economy: Demystifying International Macroeconomics, John E. Marthinsen

Preface

Chapter 1, Introduction

Chapter 2, Understanding National Output and Income Flows

OBJECTIVES:By the end of this session, you should:

Be able to differentiate Gross Domestic Product and Gross National Product.
Understand the shortcomings of GDP and GNP as measures of economic health.
Understand the usefulness of the circular flow diagram.
Understand the major macroeconomic expenditures.
Understand macroeconomic equilibrium as it relates to desired supply and desired demand, as well as desired leakages and desired injections.
Be able to use the circular flow diagram to explain the economic effects of business-cycles.

ASSIGNMENT:

General questions on GNP and GDP.
If you marry your gardener, will GNP rise, fall, or stay the same? Explain.
How do improvements in product quality affect GDP? Explain.
Is it accurate to say that, if there are more stages of production (i.e., more steps between the production of raw materials and the production of a final product), GNP will be higher?

GDP versus GNP
Many Turkish citizens work in the European Union and send a portion of their paychecks back home each month. Assuming that Turkeyis a net exporter of such labor, should Turkey’s GNP be less than, equal to, or greater than its GDP?
Is it true that GDP is equal to GNP plus income from foreign sources minus income paid to foreigners? Explain.

Circular flow
If GDP is the market value of all final goods and services, then why are wages included in GDP? Isn’t it double counting to include both wages and the product price?
Is it true that a nation’s principal sources of demand/expenditures must be equal to the components of income, or can they diverge substantially? Explain.

Macroeconomic equilibrium
At the end of each accounting period (for example, at the end of each year), does actual macroeconomic demand always equalactual macroeconomic supply (i.e., income)? Explain.
Which of the following economic variables are stock variablesand which are flow variables?
GDP, GNP, saving, savings, wealth, investment, capital, money supply, exports, imports, government spending, consumption, income, earnings, assets, and liabilities.
Suppose gross private domestic investment equal $100 billion, government spending equals $250 billion, net exports equal - $60 billion, saving equals $70 billion, and government taxes equal $230 billion. Do you agree with this statement: “These economic forces should cause GDP to change so that business inventories fall, inflation falls, the government budget deficit falls, and the nation’s net exports increase.”
After each of the following items, indicate whether it is included in the United States GNP as: (C) personal consumption, (I) gross private domestic investment, (G) government spending, and (NE) net exports or (X) not included. After each entry, give a brief explanation why you chose your answer.
Aid to Iraq ______
Government welfare payments______
Razors produced this year but unsold______
The construction of a new home______
IBM shares issued this year ______
Colgate shares issued last year and bought this year ______
Stealth bomber research by the government ______
Apples used in Mrs. Smith's Apple Pies______
Avon bonds issued and purchased this year______
Vitamins sold this year, but produced last year______
GM trucks sold to Mexico ______

MGE2

TOPIC:Introduction to Country Analysis: Business Cycles, Interpreting Labor Market Conditions, Understanding Inflation, Real Versus Nominal GDP

READINGS:Managing in a Global Economy: Demystifying International Macroeconomics, John E. Marthinsen

Chapter 3, Interpreting Labor Market Conditions(You are not required to read Appendix 1)

Chapter 4, Understanding Inflation and Real GDP

OBJECTIVE:By the end of this session, you should:

Understand the major measures of labor market conditions, such as unemployment, underemployment, employment, and labor force participation.
Be able to calculate the unemployment rate and employment rate.
Understand the differences among frictional, structural, seasonal, & cyclical unemployment.
Understand inflation and the major price indices, such as the GDP price deflator,consumer price index, and producer price index.
Be able to calculate the inflation rate and understand what “price stability” means.
Understand the difference between and be able to calculate real and nominal GDP.
Understand what business cycles are and how major macroeconomic variables are influenced by them.

ASSIGNMENT:

Why don’t governments try to achieve 0% unemployment?
If you had to choose, is the “unemployment rate” or the “employment/population ratio” a better measure of economic health?
Explain how a forecasted rise in unemployment and fall in GDP might affect a company’s cash flow projections over a capital budgeting period (e.g. five years).
Refer to the sheet entitled Economic Information: Switzerland: 1990 – 1994. Looking at the unemployment rate, employment growth, and labor force growth, how healthy was the Swiss economy? Explain.
For macroeconomic analyses, which measure of inflation is best to use (i.e., IPI, CPI, or PPI)?
Calculate the annual inflation rate between 1991 and 1992 and between 1991 and 2001 (i.e., 10 years). (Calculate the rate using the compound formula.)

Year / GDP Price Deflator
1991 / 89.7
1992 / 91.8
2001 / 109.4

If the real GDP were $400 and the price index were 0.9, what would nominal GDP be?
Is this statement true or false? If Japanese prices decreasedeach year from 1990 to 2004, then Japan’s nominal GDP should have been less than real GDP in each year.” Explain.
Does a rise in inflation always mean a rise in nominal GDP? Explain.
What is a business cycle? How are business cycles measured? Are they short-term or long-term? Identify three variables that vary pro-cyclically and counter-cyclically.

Last Revised 11/05/18Subject to Change

Economic Information: Switzerland: 1990 - 1994

Year / Monetary Base / M1 / M2 / Discount Rate / GDP Deflator / CPI / Real GDP Growth / Nominal Exchange Rate SFr/$ / Effective Exchange Rate
(Trade-Weighted) (FX/SFr)
1990 / 28,934 / 111,570 / 227,520 / 6.00% / 5.7% / 5.4% / 2.3% / 1.389 / 101.4
1991 / 29,247 / 113,744 / 231,370 / 7.00% / 5.5% / 5.8% / 0% / 1.434 / 100.0
1992 / 29,056 / 116,011 / 237,861 / 6.00% / 2.6% / 4.0% / -0.3% / 1.404 / 97.0
1993 / 29,498 / 128,212 / 276,200 / 4.00% / 2.1% / 3.3% / -0.9% / 1.477 / 99.1
1994 / 30,070 / 135,395 / 303,518 / 3.50% / 1.7% / 0.8% / 2.1% / 1.367 / 106.1
Year / Employment Growth / Labor Force Growth / Unemployment
Rate / Deficit/GDP / Natural Rate of Unemployment / Real Exports of Goods & Services Growth / Real Imports of Goods & Services Growth / Business Sector Rates of Return
1990 / 1.3% / 1.3% / 0.5% / 0.0% / 1.2% / 3.0% / 2.9% / 9.7%
1991 / -0.1% / 0.5% / 1.1% / -2.1% / 1.7% / -0.7% / -1.7% / 9.0%
1992 / -2.2% / -0.8% / 2.5% / -3.5% / 2.2% / 3.4% / -3.8% / 8.5%
1993 / -2.6% / -0.6% / 4.5% / -3.9% / 2.8% / 1.3% / -1.0% / 8.7%
1994 / -1.4% / -1.2% / 4.7% / -3.1% / 3.4% / 3.9% / 8.8% / 9.5%
Year / Real Consumption Growth / Real Government Expenditure Growth / Gross Private Domestic Investment / Long Term Nominal Interest / Short Term Nominal Interest / Reserves & Related Items Account/Official Reserves / Current Account
1990 / 1.5% / 4.7% / 2.6% / 6.4% / 8.3% / -1,168 / 6,941
1991 / 1.5% / 1.5% / -2.5% / 6.2% / 7.6% / -973 / 10,374
1992 / -0.2% / -0.1% / -5.0% / 6.4% / 7.2% / -4,383 / 14,235
1993 / -0.8% / -0.7% / -3.1% / 4.6% / 4.3% / -401 / 17,908
1994 / 1.4% / 1.4% / 6.5% / 5.0% / 3.5% / -1,160 / 17,984
Components of GDP in 1995
(in Billions of Swiss Francs)
Consumption = SFr 210.2 / Investment = SFr 84.2 / Government Spending = SFr 50.7 / Net Exports = SFr 14.2

Last Revised 11/05/18Subject to Change

MGE3

TOPIC:Victims and Beneficiaries of Inflation

READINGS:Managing in a Global Economy: Demystifying International Macroeconomics, John E. Marthinsen

Chapter 5, Victims and Beneficiaries of Inflation

OBJECTIVE:Bythe end of this session, you should be able to:

Explain the effects of inflation on purchasing power, higher education costs, and property rights.
Frame the inflation issue in the context of the circular flow diagram.
Explain how inflation affects debtors and creditors, businesses and workers, governments and taxpayers, retired individuals, and whether inflation hurts the nation as a whole.
Explain the costs and benefits of indexation.

ASSIGNMENT:

“Lenders are always hurt by an increase in the inflation rate.” Comment on the validity of this statement.
“Wage earners are never helped by an increase in the inflation rate.” Comment on the validity of this statement.
“Fixed-income earners are always hurt by an increase in the inflation rate.” Comment on the validity of this statement.
“The government is always hurt by a decrease in the inflation rate.” Comment on the validity of this statement.
“If a nation has indexation, then the redistributive benefits and losses from inflation are eliminated.” Comment on the validity of this statement.
“Inflation reduces the entire nation’s standard of living.” Comment on the validity of this statement.
Is it correct to say that a -15% real interest rate can be either cheap or expensive depending on the situation? If so, what situation would cause a –15% real interest to be expensive? If not, give an example of how you could profit if you borrowed when the real rate of interest was -15%.
If the real interest rate were 3%, the past year's inflation rate were 30%, and the expected coming year's inflation rate were 40%, then what would the nominal rate of interest equal, using the approximation formula? What would the nominal interest rate equal, using the more precise formula for the nominal interest rate?
In many nations, nominal interest rates fall when the central bank reduces the money supply (or when it reduces the money supply growth rate). Explain why.

MGE4

TOPIC:Causes of Price Changes and Real GDP Movements

READINGS:Managing in a Global Economy: Demystifying International Macroeconomics, John E. Marthinsen

Chapter 6, Short & Medium-Term Price & Output Changes

OBJECTIVE: Bythe end of this session, you should be able to:

Explain aggregatesupply and the Keynesian, Classical, and Intermediate ranges of the aggregate supply curve.
Explain how close a nation is to the Keynesian or Classical range.
Explain the causes of shifts along versus movements of aggregate supply curve.
Explain the causes of shifts along versus movements of aggregate demand curve.
Explain why the aggregate-demand curve slopes downward.
Combine aggregate supply and aggregate demand to analyze demand-pull inflation, cost-push inflation, and spiral inflation.
Explain the Phillips Curve.
Combine aggregate supply and aggregate demand to determine changes in a nation’s price level and real GDP due to external economic shocks.

ASSIGNMENT:

General aggregate supply and aggregate demand questions
Can a downward sloping demand curve for a nation be explained in the same way as a downward sloping demand for a firm’s product? Explain why or why not.
What factors affect the steepness of the aggregate supply curve?
What factor(s) causes a nation to move along its aggregate supply curve?
What factor(s) causes a nation to move along its aggregate demand curve?
What economic factors cause the aggregate demand curve to shift?
What economic factors cause the aggregate supply curve to shift?
Determine whether the following statements are true, false, or uncertain. Explain why you chose your answer.
If the Bank of Mexico (i.e., the Mexican central bank) raised interest rates in an effort to decrease inflation, the policy would be more effective if the nation’s investment demand schedule was elastic than if it were inelastic.
In general, the Phillips Curve shows that when inflation rises, the unemployment rate must fall.
Refer to the sheet entitled Economic Information: Switzerland: 1990 – 1994. Does the source of Switzerland’s price changes appear to be demand-based or supply-based?
Using aggregate supply and demand analysis, explain what effects the following changes have on the identified nation’s price level and real GDP. Explain your answer and draw supply and demand graphs (properly labeled) to show the effect of these changes.
United States: A cold snap hits the southern part of the United Statesand destroys 25% of the crops.
China: The People’s Bank of China (i.e., the central bank) tightens monetary policy.
Japan: The yen appreciates relative to the British pound.
Greece: Greek government budget deficits are reduced drastically in order to meet the conditions of the European Monetary Union’s “Stability and Growth Pact.”
Brazil: Brazil’s saving rate falls due to optimistic expectations.
United States: Turmoil between Iraq and Iran causes a sharp increase in the price of oil.
United States: The U.S. stock market crashes causing wealth to fall for a strong cross section of the United States.
Mexico: The government increases its spending and cuts taxes to stimulate the economy.
China: Chinese government spending increases significantly and state banks make loans to inefficient state enterprises rather than to more qualified borrowers.

Last Revised 11/05/18Subject to Change

Economic Information: Switzerland: 1990 - 1994

Year / Monetary Base / M1 / M2 / Discount Rate / GDP Deflator / CPI / Real GDP Growth / Nominal Exchange Rate SFr/$ / Effective Exchange Rate
(Trade-Weighted) (FX/SFr)
1990 / 28,934 / 111,570 / 227,520 / 6.00% / 5.7% / 5.4% / 2.3% / 1.389 / 101.4
1991 / 29,247 / 113,744 / 231,370 / 7.00% / 5.5% / 5.8% / 0% / 1.434 / 100.0
1992 / 29,056 / 116,011 / 237,861 / 6.00% / 2.6% / 4.0% / -0.3% / 1.404 / 97.0
1993 / 29,498 / 128,212 / 276,200 / 4.00% / 2.1% / 3.3% / -0.9% / 1.477 / 99.1
1994 / 30,070 / 135,395 / 303,518 / 3.50% / 1.7% / 0.8% / 2.1% / 1.367 / 106.1
Year / Employment Growth / Labor Force Growth / Unemployment
Rate / Deficit/GDP / Natural Rate of Unemployment / Real Exports of Goods & Services Growth / Real Imports of Goods & Services Growth / Business Sector Rates of Return
1990 / 1.3% / 1.3% / 0.5% / 0.0% / 1.2% / 3.0% / 2.9% / 9.7%
1991 / -0.1% / 0.5% / 1.1% / -2.1% / 1.7% / -0.7% / -1.7% / 9.0%
1992 / -2.2% / -0.8% / 2.5% / -3.5% / 2.2% / 3.4% / -3.8% / 8.5%
1993 / -2.6% / -0.6% / 4.5% / -3.9% / 2.8% / 1.3% / -1.0% / 8.7%
1994 / -1.4% / -1.2% / 4.7% / -3.1% / 3.4% / 3.9% / 8.8% / 9.5%
Year / Real Consumption Growth / Real Government Expenditure Growth / Gross Private Domestic Investment / Long Term Nominal Interest / Short Term Nominal Interest / Reserves & Related Items Account/Official Reserves / Current Account
1990 / 1.5% / 4.7% / 2.6% / 6.4% / 8.3% / -1,168 / 6,941
1991 / 1.5% / 1.5% / -2.5% / 6.2% / 7.6% / -973 / 10,374
1992 / -0.2% / -0.1% / -5.0% / 6.4% / 7.2% / -4,383 / 14,235
1993 / -0.8% / -0.7% / -3.1% / 4.6% / 4.3% / -401 / 17,908
1994 / 1.4% / 1.4% / 6.5% / 5.0% / 3.5% / -1,160 / 17,984
Components of GDP in 1995
(in Billions of Swiss Francs)
Consumption = SFr 210.2 / Investment = SFr 84.2 / Government Spending = SFr 50.7 / Net Exports = SFr 14.2

Last Revised 11/05/18Subject to Change

MGE5

TOPIC:Monetary Aggregates, Financial Intermediaries, Banking, and Money Creation

READINGS:Managing in a Global Economy: Demystifying International Macroeconomics, John E. Marthinsen

Chapter 7, Understanding Money and Monetary Aggregates

Chapter 8, Financial Intermediaries, Banking, and Money Creation (Please read up to but not including the section entitled “Money Creation and the Banking System”)

OBJECTIVE:Bythe end of this session, you should:

Understand the functions of money and how inflation erodes these functions.
Understand the difference between commodity money and fiat money.

Understand the major monetary aggregates (M1, M2, reserves, and the monetary base).
Understand the advantages and disadvantages of financial intermediation.
Understand a typical bank’s balance sheet, check clearing, and the creation of money by a singlebank.

ASSIGNMENT:

In Hungary after World War II, goods and services were purchased with pengös (the domestic currency), but inflation was so high that prices were quoted in dollars. What functions of money were pengös fulfilling in Hungary? What functions were dollars fulfilling? Explain.
Why do nations measure their money supplies?
Suppose Linda Thomas deposits $400 cash into her checking account at Citizen’s Bank in Boston. As a result of this transaction, what happens to the size of M1 and M2?
Why do many nations have more than one money supply measure (e.g., M1 & M2)?
What are the advantages and disadvantages of using financial intermediaries? Why don’t borrowers and lenders interact directly?
If U.S. residents take money out of their checking accounts and put it into time deposits, what will happen to the size of M1, M2, and the monetary base? Please explain.
When Bank A clears a check written on Bank B, …”.
What happens to the banking system’s excess reserves and the total level of banking system reserves?
What happens to Bank B’s reserves and excess reserves?
What happens to Bank A’s reserves and its excess reserves?
Is it accurate to say that as banks lend money in the form of checking accounts, the M2 money supply rises when the loan is made and then falls when the loan is spent? Explain.
Is it accurate to say that as banks lend money in the form of checking accounts, that the M2 money supply rises when the loan is made and then falls when the loan is paid back? Explain.
Assume the required reserve ratio on all deposit liabilities is 20%. Calculate the level of excess reserves for Sovereign Bank.How much can Sovereign Bank safely lend in cash? How much can it safely lend in checking accounts?

Sovereign Bank

Assets / Liabilities
Reserves / 40,000 / Deposits / 300,000
Federal Funds loans / 20,000 / Borrowing from the central bank / 80,000
Loans / 250,000 / Federal Funds Borrowing / 100,000
Securities / 350,000 / Other Liabilities / 150,000
Other / 40,000 / Owners' Equity / 70,000

If the reserve requirement is 10% and a depositor withdraws $500 from her checking account, by how much will the bank's excess reserves change? Explain.
It is the end of the banking day. You are the money trader at a bank and the bank has excess reserves, but there are no customers walking through the doors to borrow. What do you do?

Last Revised 11/05/18Subject to Change

Economic Information: Switzerland: 1990 - 1994