Preface
We have designed this book to be a supplement to Robert J. Barro’sMacroeconomics, which
is the textbook that is used in introductory macroeconomics courses at the University of
Chicago. In teaching these courses, we have found that Barro’s treatment of the subject
does not make use of the mathematical skills of our students. In particular, Barro relies
almost exclusively on economic intuition and graphs to elucidate his subject. Since our
students are familiar with calculus, we are able to work out formal models. This almost
always allows greater concreteness and concision.
We have attempted to align our chapters with those in Barro’s textbook. Sometimes our
chapters present mathematical versions of the models that Barro introduces in his corresponding
chapters (as in Chapters 2 and 19). Other times, our chapters contain material
that extends his work (as in Chapters 5 and 17). Throughout, we have tried to add value to
the treatment in Barro’s book and to minimize redundancy. For example, we have nothing
to add to Barro’s Chapters 7, 16, and 20, so we have not covered those chapters. Three
chapters deviate from this plan. Chapter 1 develops the mathematics of interest rates and
growth rates; Barro does not cover these topics, but they are behind the scenes in his Chapter
1 and throughout his book. Chapter 10, which covers unemployment, is completely
unrelated to Barro’s Chapter 10. It is intended as a companion to the book Job Creation and
Destruction by Davis, Haltiwanger, and Schuh. Chapter 18 covers the relationship between
the government budget constraint and inflation along the lines of the “Unpleasant Monetarist
Arithmetic” of Sargent and Wallace. Although Barro has a sidebar on this topic in
his Chapter 14, we feel that it is important enough to merit a chapter of its own. We chose
Chapter 18 since it is a natural point between fiscal policy (Chapters 12, 13, and 14) and
monetary policy (Chapter 19). Barro’s Chapter 18 is a review of the empirical evidence on
the effect of monetary shocks on the real economy, and is well worth covering.
There are exercises after each chapter, and we have provided complete solutions at the
end of this book. We believe that exercises are essential for students to learn this material.
They give students a sense of what they ought to know, since these exercises have been
drawn from several years of exams. Also, we often use exercises to introduce extensions
to the material in the text. We have attempted to estimate the difficulty of these exercises,
labeling them as “Easy,” “Moderate”, or “Hard”. An exercise with a “Hard” rating may
require a lot of algebra, or it may use unfamiliar concepts. Most other questions are rated
iv Preface
as “Moderate”, unless they have one-line solutions, in which case we usually rated them
as “Easy”.
We teach this material in two ten-week courses. In the first course we cover Chapters 1, 2,
3, 6, 4, 5, 7, 8, 9, and 11, in that order. This allows us to keep together all the material on
monetary economics (Chapters 4, 5, 7, and 8). In the second course, we cover Chapter 10
(unemployment); Chapters 12, 13, and 14 (fiscal policy); Chapters 15 and 16 (international
macro); and Chapters 17, 18 and 19 (money and banking). Since this is quite a lot to cover
in ten weeks, instructors of the second course have traditionally touched only briefly on
unemployment and international macro and concentrated instead on monetary and fiscal
policy. The second course can benefit substantially from outside readings, such as: Rational
Expectations and Inflation by Thomas Sargent; A Monetary History of the United States by Milton
Friedman and Anna Schwartz; and Job Creation and Destruction by Davis, Haltiwanger,
and Schuh.
This book would not have been possible without the support of the Department of Economics
at the University of Chicago and the encouragement of Grace Tsiang. We would
also like to thank the many students and faculty who have helped us to develop this material.
A number of exercises in the first half of the book were based on questions written
by Robert E. Lucas, Jr. The material in the second half of this book has benefited from several
generations of instructors of Economics 203. In particular, Alexander Reyfman wrote
a series of lectures which were the genesis of Chapters 12 through 19. Reyfman’s teaching
assistant Bill Dupor, and Lehnert’s teaching assistants Jerry Cubbin and Tom Miles,
all contributed valuable suggestions. During Cubbin’s tenure as TA, he wrote most of the
solutions to the problem sets, and several of these have found their way into this book. All
students subjected to early drafts of this material contributed to the book’s current form;
Shannon Thaden, Ben Ruff, and Calvin Chan deserve special mention.
In spite of all the comments and suggestions we have received, this book inevitably contains
errors and omissions. We would be grateful