ECON102: Principles of Macroeconomics « Saylor.org – Free Online Courses Built by Professors

Principles of Macroeconomics

Purpose of Course show close

Economics is traditionally divided into two parts: microeconomics and macroeconomics. The purpose of this course is to provide you with a fundamental understanding of the principles of macroeconomics. Macroeconomists study how a country’s economy works and try to determine the best choices to improve the overall wellbeing of a nation. Typical topics include inflation (the overall level of prices), employment, fiscal policy (government taxing and spending), and money and banking (interest rates and lending policies). Individuals and firms need to consider how macroeconomic events will affect their own prosperity. To better define macroeconomics, consider its distinction from microeconomics. Imagine you are attempting to figure out how the price of a certain good has been determined. Microeconomics would focus on how supply and demand determine prices, while macroeconomics would study the determination of prices at all levels. To test particular policies and ideas, or to find out the causes of good macroeconomic performance, we need to have some measure of overall economic activity. For this reason, macroeconomics uses aggregates (totals) to measure key concepts such as national income, output, unemployment, inflation, and business cycles (periodic expansions and contractions of economic activity). By studying macroeconomics and understanding the critical ideas and tools used to measure economic data, you will have a better perspective on the issues and problems discussed in contemporary economics. This course will ask you to think critically about the national and global issues we currently face. It will also introduce the tools and principles you need to draw your own conclusions in an informed manner.

Course Information show close

Welcome to ECON102. General information about this course and its requirements can be found below.

This course uses a variety of tools to explain how the economy works. Pay close attention to the definitions of key words and take note of how they are used in an economic context. Graphs and charts explain trends and present complex sets of information in a visual format. Math is used to develop models, measure the effect of policies, and help make decisions. This combination of words, graphs, and math to explain the same concept can make economics a challenging area of study. As you work through the course, think about how you perceive the information and other possible ways to explain ideas.

Course Designers: Jubeet Kaur, Robert (Bob) McKizzie, EdD, and Tony Pizur

Peer Reviewers: Heather Luea, Edward Hoang, and Robert (Bob) McKizzie

Primary Resources: This course is comprised of a range of different, free online materials. The course makes primary use of the following materials:

Principles of Macroeconomics
University of Wisconsin-Madison: Robert Schenk, PhD’s “CyberEconomics”
SUNY-Oswego: Professor John Kane’s “Principles of Macroeconomics”
PEOI.org: Professor John Petroff’s Macroeconomics

Requirements for Completion: To complete this course, students will need to read the information in each unit. Students will gain knowledge and reinforcement of course concepts by completing the assessments, quizzes, and tests that accompany the assigned reading material. You will notice that most of the assessments are listed in Unit 1. Careful attention to Unit 1 is important, because it establishes the basis for latter units. You will need to complete the following:

Sub-subunit 1.1.1 Quiz
Sub-subunit 1.1.2 Test 1 and Test 2
Sub-subunit 1.3.2 Test 1 and Test 2
Subunit 1.4 Quiz
Sub-subunit 1.4.2 Quiz
Sub-subunit 2.2.5 Homework 1
Sub-subunit 3.1 Review Questions
Sub-subunit 3.1.4 Quiz
Sub-subunit 3.3 Test
Subunit 4.1 Quiz
Sub-subunit 4.2.4 Quiz
Subunit 5.2 Assessment
Sub-subunit 5.3.3 Test 1 and Test 2
Subunit 6.2 Quiz 1 and Quiz 2
Subunit 8.4 Quiz
Sub-subunit 10.4.2 Quiz and Test
The Final Exam

Note that you will only receive an official grade on your Final Exam. The assessments, quizzes, and tests will help you to prepare for the Final Exam. Final Exam scores will be tabulated upon completion. If you do not pass the exam, you may take it again.

Time Commitment: This course should take you a total of 94.25 hours to complete. Each unit contains a “time advisory” that lists the amount of time you are expected to spend on each subunit. These should help you to plan your time accordingly. It may be useful to take a look at these time advisories and to determine how much time you have over the next few weeks to complete each unit, and then to set goals for yourself. For example, Unit 1 should take you 10.75 hours. Perhaps you can sit down with your calendar and decide to complete subunit 1.1 (a total of 5 hours) on Monday and Tuesday; subunit 1.2 (a total of 2.25 hours) on Wednesday, etc.

Tips/Suggestions: As you complete the readings, it is advised that you take careful notes related to the main concepts. You may also consider creating a glossary of the different economic terms used in this course. The notes and glossary will be useful to you as you study for your Final Exam.

This course features a number of Khan Academy™ videos. Khan Academy™ has a library of over 3,000 videos covering a range of topics (math, physics, chemistry, finance, history and more), plus over 300 practice exercises. All Khan Academy™ materials are available for free at www.khanacademy.org.

A version of this course is also available in iTunes U.
Preview the course in your browser or view our entire suite of iTunes U courses.

Learning Outcomes show close

Upon successful completion of this course, the student will be able to:

Discuss key macroeconomic concerns, including national income accounting, saving and investment, and market forces.
Describe the determinants of total output and the ways to measure nominal Gross Domestic Product (GDP) as well as real GDP.
Compare and contrast definitions of total employment and unemployment, the three forms of unemployment, and inflation.
Explain different ways of computing the general movement in prices, and define the relationship between inflation and unemployment.
Explain the model of aggregate demand and aggregate supply.
Analyze the government’s role in the economy and examine how it uses its fiscal policy and monetary policy to influence macroeconomic variables in order to enable macro and micro economic stability.
Describe the mechanics of money supply in detail. Specifically, the student will be able to identify different types of money; explain the money creation process, the money multiplier, and the process of interest rate determination; and discuss the role of the Federal Reserve System and its tools of monetary policy.
Identify and analyze major theories of economic growth.
Analyze various strategies for developing of less-developed nations.
Present the concepts behind international trade.

Course Requirements show close

In order to take this course, you must:

√ Have access to a computer.

√ Have continuous broadband internet access.

√ Have the ability/permission to install plug-ins or software (e.g. Adobe Reader or Flash).

√ Have the ability to download and save files and documents to a computer.

√ Have the ability to open Microsoft files and documents (.doc, .ppt, .xls, etc.).

√ Have competency in the English language.

√ Have read the Saylor Student Handbook.

√ Have completed ECON101: Principles of Microeconomics from the Core Program of the Economics discipline.

Preliminary Information

Principles of Macroeconomics

You will be prompted to read sections of this book throughout the course. You may choose to download the text in full now and skip to the appropriate section as prompted by the resource boxes below, or you can simply download the specific sections of the text assigned as you progress through each resource box below.

Reading: Principles of Macroeconomics (PDF)

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

Unit Outline show close

1 Introduction to Macroeconomics
1.1 Introduction to Macroeconomics
1.1.1 Aggregation in Macroeconomics
1.1.2 Microeconomic Connections and Foundations
1.2 Macroeconomic Concerns
1.2.1 Real Gross Domestic Product (or Aggregate Output)
1.2.2 Inflation and the Price Level
1.2.3 Unemployment
1.3 Government and the Economy
1.3.1 Fiscal Policy
1.3.2 Monetary Policy
1.3.3 Macroeconomic Goals
1.4 Components of the Macroeconomy
1.4.1 Resource (or Factor) Markets, Financial Markets, and Product Markets
1.4.2 Circular Flow Diagram
1.5 Unit 1 Assessment

2 Measuring Aggregate Output
2.1 National Income Accounting
2.2 Measuring Total Ouput
2.3 Gross Domestic Product (GDP)
2.4 Final Goods and Services
2.5 Gross Domestic Product (GDP) vs. Gross National Product (GNP)
2.6 Calculating GDP
2.6.1 Expenditure
2.6.2 Income
2.6.3 Calculating Nominal GDP vs. Real GDP
2.6.4 Problems Using GDP as a Measure of Well-being
2.7 Unit 2 Review

3 Unemployment and Inflation
3.1 Defining and Measuring Unemployment
3.1.1 The Unemployment Rate
3.1.2 Three Forms of Unemployment
3.1.3 Natural Rate of Unemployment
3.1.4 Problems with the Unemployment Rate
3.2 Inflation
3.2.1 Inflation Defined
3.2.2 Measuring Changes in the Price Level
3.2.3 Consumer Price Index (CPI)
3.2.4 Problems with the CPI
3.2.5 Costs of Inflation
3.3 Inflation and Unemployment

4 Aggregate Demand and Supply
4.1 Aggregate Demand and Aggregate Supply
4.1.1 Components of Aggregate Expenditure (Consumption, Investment, Government Purchases, and Net Exports)
4.1.2 Slope of the Aggregate Demand Curve
4.1.3 Shifts of the Aggregate Demand Curve
4.1.4 Aggregate Supply in the Short- and Long-Run
4.1.5 Shifts in the Aggregate Supply Curve
4.1.6 Macroeconomic Equilibrium
4.2 Income-Expenditure Model
4.2.1 Planned Aggregate Expenditure
4.2.2 Adjustment to Equilibrium
4.2.3 The Multiplier
4.2.4 Saving-Investment Approach to Equilibrium GDP

5 Government and Fiscal Policy
5.1 Government in the Economy
5.2 Fiscal Policy
5.2.1 Government Spending Multiplier
5.2.2 Tax Multiplier
5.2.3 Balanced Budget Multiplier
5.3 Stabilizing the Business Cycle
5.3.1 Automatic Stabilizers
5.3.2 Discretionary Fiscal Policy
5.3.3 Fiscal Policy Concerns
5.4 Unit 5 Assessment

6 The Money Supply and the Monetary Policy
6.1 What Is Money?
6.1.1 The Three Functions of Money
6.1.2 Two Types of Money
6.1.3 Measuring Money: M1 and M2
6.1.4 Commercial Banking
6.2 Money Creation
6.2.1 Defining Total, Required, and Excess Reserves
6.2.2 Money Creation Process, Required Reserve, and T-Accounts
6.2.3 Money Creation Process and the Money Multiplier
6.3 The Federal Reserve System
6.3.1 Origins of the Fed
6.3.2 Components and Functions of the Federal Reserve System
6.3.3 The Federal Reserve Balance Sheet
6.4 Three Tools of Monetary Policy
6.4.1 Required Reserve Ratio
6.4.2 Discount Rate
6.4.3 Open Market Operations
6.4.4 The Money Supply Curve and Shifting Factors
6.5 The Interest Rate
6.5.1 The Money Demand Curve and Shifting Factors
6.5.2 The Money Market (A Graphical Representation)
6.5.3 The Equilibrium Interest Rate
6.5.4 Money Supply and Demand Shifts and the Equilibrium Interest Rate
6.6 Notes on the 2008 Financial Crisis
6.6.1 The Economic Meltdown
6.6.2 Government Policies to Stabilize the Economy

7 Labor Market
7.1 Labor Market
7.1.1 Labor Demand and Supply Curves
7.1.2 The Labor Market (Graphical Representation)
7.2 Macroeconomic Models
7.2.1 Classical Views
7.2.2 Keynesian View
7.2.3 “Sticky Wages” Defined and Explained
7.3 The Relationship between Unemployment and Inflation
7.3.1 The Philips Curve Defined
7.3.2 The Philips Curve Breakdown and Stagflation

8 Economic Growth
8.1 Introduction to Economic Growth
8.2 Sources of Economic Growth
8.2.1 Labor
8.2.2 Capital
8.2.3 Human Capital (or Entrepreneurial Talent)
8.2.4 Productivity
8.3 Growth Theories
8.4 US Economic Growth
8.5 Unit 8 Assessment

9 The Developing World
9.1 Less Developed Countries (LDCs)
9.1.1 Definition of LDC
9.1.2 Characteristics of LDCs
9.1.3 Vicious Circle of Poverty Argument
9.2 The Obstacles to Development
9.3 Four Strategies for Economic Development
9.3.1 Industry versus Agriculture
9.3.2 Import Substitution
9.3.3 Export Promotion
9.3.4 Market-Based Solutions

10 International Trade
10.1 Introduction to Trade
10.2 Adam Smith and Absolute Advantage
10.3 David Ricardo and Comparative Advantage
10.4 Heckscher-Ohlin-Samuelson trade theory
10.5 Commercial Policy
10.5.1 Tariffs
10.5.2 Quotas

11 Final Exam

Expand All Resources Collapse All Resources

Unit 1: Introduction to Macroeconomics

To build a solid house, one needs a solid foundation. In macroeconomics, this foundation centers on a few key questions: How do we measure overall economic activity? What are the relevant aggregates (totals) needed to measure overall economic activity? What role do governmental and other institutional policies play in an economy? What are some important components that affect the whole economy? Because macroeconomics concerns itself with so many different parts of the economy, it is critical to focus on these key questions and ideas before moving on to the parts themselves.

This first unit outlines important concepts and relates them to the economy as a whole. We will first address growth, unemployment, and inflation as the three central concerns of macroeconomics. Next, we will identify critical public policies, such as money creation (monetary policy) and taxes and spending (fiscal policy), exploring their respective effects on an economy. Finally, we will take a look at a diagram that shows the circular flow of the resource market (income) and the product market (goods and services).

In this unit, you will also learn how macroeconomics developed in the 1930s as a result of a debate between economists, who believed that market and price mechanisms should be able to adjust in order to resolve economic downturns and depressions, and others, who believed periodic economic dislocations could be managed through the use of public policies and government intervention. This debate is as relevant today as it was in the 1930s.

Time Advisory show close

Learning Outcomes show close

1.1 Introduction to Macroeconomics

1.1.1 Aggregation in Macroeconomics

Reading: Professor Robert Schenk’s CyberEconomics: “Overview: Introduction to Macro”
Link: Professor Robert Schenk’s CyberEconomics: “Overview: Introduction to Macro” (HTML)

Instructions: Read the introduction and then select “Different Tools” on the left-hand tab to read about the difference between microeconomics and macroeconomics. After reading the article click on the “Review” tab to assess yourself.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 7: Classical-Keynesian Controversy”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 7: Classical-Keynesian Controversy” (PDF)

Instructions: Read the entire chapter. At the bottom of the page, click on “Assignments” and complete assignments 1-8.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike Generic License 2.5. You can find the original version of this article here.
See a broken link? Please let us know!

1.1.2 Microeconomic Connections and Foundations

Note: This sub-subunit will revisit concepts you learned in ECON101: Principles of Microeconomics. This section will review the basic model of demand and supply, the concept of equilibrium, and the way markets operate in an economy. Do not rush through these readings; it is important to fully understand these topics. It may also be helpful to practice sketching demand and supply graphs on your own in order to see how equilibrium values change with curve shifts.

Reading: Principles of Macroeconomics: “Chapter 3: Demand and Supply” and “Chapter 4: Applications of Demand and Supply”
Link: Principles of Macroeconomics: “Chapter 3: Demand and Supply” (PDF) and “Chapter 4: Applications of Demand and Supply” (PDF)

Instructions: Read these two chapters in their entirety to learn about demand and supply concepts.

Terms of Use: The text was adapted by The Saylor Foundation under a CreativeCommons-Attribution-NonCommercial-ShareAlike 3.0 License without attribution as requested by the work's original creator or licensee.

See a broken link? Please let us know!
Assessment: Cengage Learning: William Boyes and Michael Melvin’s Economics: “Chapter 3: Markets, Demand and Supply and the Price System – Test 1 and Test 2”
Link: Cengage Learning: William Boyes and Michael Melvin’s Economics: “Chapter 3: Markets, Demand and Supply and the Price System – Test 1 and Test 2” (Flash)

Instructions: Click on the hyperlinks for Test 1 and Test 2 beneath Chapter 3 and complete each assessment. Once you have selected an answer choice, a note at the bottom of the screen will indicate whether or not your choice was correct.

Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.
See a broken link? Please let us know!
Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 3: Demand and Supply”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 3: Demand and Supply ” (PDF)

Instructions: Read the entire chapter. At the bottom of the page, click on the “Assignments” link, and complete assignments 1-4.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike Generic License 2.5. You can find the original version of this article here.
See a broken link? Please let us know!

1.2 Macroeconomic Concerns

1.2.1 Real Gross Domestic Product (or Aggregate Output)

Reading: Principles of Macroeconomics: "Chapter 5, Section 1: Growth of Real GDP and Business Cycles"
Link: Principles of Macroeconomics: “Chapter 5, Section 1: Growth of Real GDP and Business Cycles” (PDF)

Instructions: Read the introduction and then read the first section in its entirety. This material will provide you with a general understanding of how the present financial crisis can be contextualized by studying macroeconomics, which is the analysis of aggregate values of economic variables.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!
Web Media: YouTube: The Saylor Foundation’s “Real GDP”
Link: YouTube: The Saylor Foundation’s “Real GDP” (YouTube)

Instructions: Watch this brief video.

Watching this video should take approximately 3 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 Unported United States License. It is attributed to Dr. Mary J. McGlasson and the original version can be found here.
See a broken link? Please let us know!
Web Media: Khan Academy’s “The Business Cycle”
Link: Khan Academy’s “The Business Cycle” (YouTube)

Instructions: Watch the entire video, which is about the business cycle.

Watching this video should take approximately 12 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

1.2.2 Inflation and the Price Level

Reading: Principles of Macroeconomics: “Chapter 5, Section 2: Price-Level Changes”
Link: Principles of Macroeconomics: “Chapter 5, Section 2: Price-Level Changes” (PDF)

Instructions: Read the second section, which serves as an introduction to price-level changes. We will study it in depth later in this course.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!
Web Media: YouTube: NTDTelevision’s “High Inflation Sends China Food Prices Soaring”
Link: YouTube: NTDTelevision’s “High Inflation Sends China Food Prices Soaring” (YouTube)

Instructions: Watch this brief video.

Watching this video should take approximately 2 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

1.2.3 Unemployment

Reading: Principles of Macroeconomics: “Chapter 5, Section 3: Unemployment”
Link: Principles of Macroeconomics: “Chapter 5, Section 3: Unemployment” (PDF)

Instructions: Read the third section, which serves as an introduction to unemployment. We will study it in depth later in this course.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!
Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 6: Business Cycle”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 6: Business Cycle” (PDF)

Instructions: Read this material fo an overview of the concepts that are associated with the business cycle. The business cycle provides information on the causes and characteristics of the economic problems associated with unemployment and inflation.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike Generic License 2.5. You can find the original version of this article here.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Unemployment Rate Primer”
Link: Khan Academy’s “Unemployment Rate Primer” (YouTube)

Instructions: Watch the entire video.

Watching this video should take approximately 10 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike United States License 3.0. It is attributed to the Khan Academy.
See a broken link? Please let us know!

1.3 Government and the Economy

1.3.1 Fiscal Policy

Reading: biz/ed’s Economics Glossary: “Fiscal Policy”
Link: biz/ed’s Economics Glossary: “Fiscal Policy” (HTML)

Instructions: Read the definition of fiscal policy on this page to familiarize yourself with the basic objectives of fiscal policy. We will study this topic in detail later in the course.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 9: Fiscal Policy”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 9: Fiscal Policy” (PDF)

Instructions: Read this chapter, which identifies the policies needed when inflation and recession are present.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike Generic License 2.5. You can find the original version of this article here.
See a broken link? Please let us know!
Web Media: YouTube: Paj Holden’s “Fiscal Policy and Automatic Stabilizers”
Link: YouTube: Paj Holden’s “Fiscal Policy and Automatic Stabilizers” (YouTube)

Instructions: Watch the entire video clip. Please note that the topic of automatic stabilizers will be explored in the resources in subunit 5.3 and sub-subunit 5.3.1.

Watching this video should take approximately 9 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

1.3.2 Monetary Policy

Reading: biz/ed’s Economics Glossary: “Monetary Policy”
Link: biz/ed’s Economics Glossary: “Monetary Policy” (HTML)

Instructions: Read the definition of monetary policy presented on this page to familiarize yourself with the basic objectives of monetary policy. Click on the “History” icon on the left-hand side to see how monetary policy has developed over time.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: U.S. Department of State: Christopher Conte and Albert R Karr’s An Outline of the U.S. Economy: “Chapter 7: Monetary and Fiscal Policy”
Link: U.S. Department of State: Christopher Conte and Albert R Karr’s An Outline of the U.S. Economy: “Chapter 7: Monetary and Fiscal Policy” (PDF)

Instructions: Read this article by Christopher Conte, a former editor and reporter for the Wall Street Journal, and Albert R. Karr, a former Wall Street Journal reporter. This article provides an overview of the fiscal and monetary policy of the United States. Reflect on how these policies might be coordinated to achieve macroeconomic objectives.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Web Media: YouTube: ACDC Leadership’s “Inflationary and Recessionary Gaps: Fiscal and Monetary Policy Overview”
Link: YouTube: ACDC Leadership’s “Inflationary and Recessionary Gaps: Fiscal and Monetary Policy Overview” (YouTube)

Instructions: Watch this brief video.

Watching this video should take approximately 4 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

1.3.3 Macroeconomic Goals

Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 15: Economic Growth”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 15: Economic Growth” (PDF)

Instructions: Read this chapter on economic growth, which explains why it is important for the government to define an appropriate growth policy and sustain it over time.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike Generic License 2.5. You can find the original version of this article here.
See a broken link? Please let us know!
Lecture: YouTube: University of Lawrence: Paj Holden’s “Macroeconomic Goals of the Government”
Link: YouTube: University of Lawrence: Paj Holden’s “Macroeconomic Goals of the Government” (YouTube)

Instructions: Watch this short video, which identifies the government’s main macroeconomic objectives. Although this lecture does not focus on how these goals are met, as we advance through the course we will how the government does this through the implementation of fiscal, monetary, and growth policies.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

1.4 Components of the Macroeconomy

1.4.1 Resource (or Factor) Markets, Financial Markets, and Product Markets

Reading: AmosWeb’s Encyclonomic Webpedia: “Resource Markets”
Link: AmosWeb’s Encyclonomic Webpedia: “Resource Markets” (HTML)

Instructions: This page highlights the characteristics that define resource, product, and financial markets. It shows how they are interconnected using the circular flow diagram, which we will study in detail next. Ignore the last two subheadings (“Spotlight on Labor” and “Natural Unemployment”), which will be covered later in the course.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Assessment: AmosWeb’s “Resource Markets Quiz”
Link: AmosWeb’s “Resource Markets Quiz” (HTML)

Instructions: From the “Select a topic” option, choose “Resource Markets,” and then click on “Retrieve Test” to get to the test page.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

1.4.2 Circular Flow Diagram

Lecture: YouTube: University of Lawrence: Paj Holden’s “The Circular Flow of Income – Macroeconomics”
Link: YouTube: University of Lawrence: Paj Holden’s “Circular Flow of Income – Macroeconomics” (YouTube)

Instructions: Watch this video to see how the circular flow diagram is generated. For practice, draw the diagram on your own and test yourself to see if you remember all the points that appear in the diagram. Understanding the processes in the circular flow diagram will be crucial for the understanding of future topics.

Watching this video should take approximately 9 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Web Media: Flashecon.org: Living Economics’ Macroeconomic Lectures: “Circular Flow”
Link: Flashecon.org: Living Economics’ Macroeconomic Lectures: “Circular Flow” (Flash)

Instructions: Watch this video, which is about the circular flow diagram.

Watching this video should take approximately 4 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Circular Flow of Income and Expenditures”
Khan Academy’s “Circular Flow of Income and Expenditures” (YouTube)

Instructions: Watch this video, which is about the circular flow of income and expenditures and fiscal policy cycle.

Watching this video should take approximately 9 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

Unit 1 Assessment

Assessment: Econ100’s “Chapter 4: Demand and Supply” and “Chapter 5: A First Look at Macroeconomics”
Link: Econ100’s “Chapter 4: Demand and Supply” and “Chapter 5: A First Look at Macroeconomics” (HTML)

Instructions: Click on the “Quiz” tab on the left hand side menu and then go to Chapters 4 and 5 to take the test. Please attempt all four levels of the quiz for a thorough assessment of the material covered in this unit.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Unit 2: Measuring Aggregate Output

One of the major focuses of macroeconomics is the total output generated by an economy by looking at Gross Domestic Product (GDP), or the total value of all final goods and services produced within a nation’s borders, even if produced by foreign companies. It also examines Gross National Product (GNP), which measures all the final goods and services produced by a country’s citizens, even if produced in other countries. Over time, two important instruments have been developed to calculate GDP and GNP: expenditure and income. We will examine both of these in this unit.

Macroeconomics also focuses on the difference between nominal GDP (i.e. GDP calculated according to today’s prices, and ignoring inflation) and real GDP (i.e. GDP calculated in actual purchasing power). This is an important distinction, because an economy might be growing in nominal terms while its real GDP (what people can actually purchase domestically or in imports) is declining because of inflation. In this unit, we will discuss these scenarios and participate in the debate over whether the GDP is an accurate measure of well-being.

Time Advisory show close

Learning Outcomes show close

2.1 National Income Accounting

Reading: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “National Income Accounting”
Link: State University of New York at Oswego: Professor John Kane’s Lecture Notes on Principles of Macroeconomics: “National Income Accounting” (HTML)

Instructions: Read these lecture notes in their entirety for a summary of how aggregate output is measured using the Gross Domestic Product (GDP) and other related macroeconomic variables. Note that national income accounting is the process of counting a country’s expenditures versus its income.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Investment and Consumption”
Khan Academy’s “Investment and Consumption” (YouTube)

Instructions: Watch this video, which is about the investment and consumption.

Watching this video should take approximately 8 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Income and Expenditure Views of GDP”
Khan Academy’s “Income and Expenditure Views of GDP” (YouTube)

Instructions: Watch this video, which is about the income and expenditure views of the GDP cycle.

Watching this video should take approximately 5 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

2.2 Measuring Total Ouput

Reading: Principles of Macroeconomics: “Chapter 6, Section 1: Measuring Total Output”
Link: Principles of Macroeconomics: “Chapter 6, Section 1: Measuring Total Output” (PDF)

Instructions: This section describes the Gross Domestic Product (GDP) as a measure of final goods and services using expenditure. It also distinguishes the GDP from the Gross National Product (GNP). Note that total output (also referred to as aggregate output) is the amount of production that the economy has generated in a given period of time.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

2.3 Gross Domestic Product (GDP)

Reading: Principles of Macroeconomics: “Chapter 6: Measuring Total Output and Income”
Link: Principles of Macroeconomics: “Chapter 6: Measuring Total Output and Income” (PDF)

Instructions: Read this chapter, which is about measuring total output and income. This material concentrates on the purpose and function of GDP.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Parsing Gross Domestic Product”
Khan Academy’s “Parsing Gross Domestic Product” (YouTube)

Instructions: Watch this video, which is about parsing gross domestic product.

Watching this video should take approximately 12 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

2.4 Final Goods and Services

Reading: Principles of Macroeconomics: “Chapter 6: Measuring Total Output and Income”
Link: Principles of Macroeconomics: “Chapter 6: Measuring Total Output and Income” (PDF)

Instructions: Scroll down to and read the section entitled “Final Goods and Value Added.” Final goods and services are finished products that are produced in a given year. For example, a fully manufactured automobile is a final good. The products that are used to manufacture final goods are called intermediate parts or inputs and are not “counted”: all of the resources or inputs that are used to manufacture an automobile are only counted as one completed product. If the intermediate parts are counted as well as the final good, it is known as “double counting”; this can diminish the accuracy of the GDP measurement.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

2.5 Gross Domestic Product (GDP) vs. Gross National Product (GNP)

Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 5: National Income Accounting”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 5: National Income Accounting” (PDF)

Instructions: Scroll down to and read the information on Gross National Product and Gross Domestic Product. Gross Domestic Product refers to production counted within a country’s borders, whereas Gross National Product refers to production by domestic factors both inside and outside of a country’s borders. In modern times, the Group of Seven (G7), Group of Eight (G8), and the Group of 20 (G20) use the GDP formula in measuring GDP growth, so the global economy uses the same formula to measure each country’s economic welfare or well-being. This ensures that countries are on the same accounting page. Note that some countries use GNP as a metric, but GDP is the standard accounting system.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike License 2.5 Generic. You can find the original version of this article here.
See a broken link? Please let us know!
Web Media: Khan Academy’s “More on Final and Intermediate GDP Contributions”
Khan Academy’s “More on Final and Intermediate GDP Contributions” (YouTube)

Instructions: The above link will bring you to a video lecture about final and intermediate GDP contributions. The video is approximately 3 minutes long.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

2.6 Calculating GDP

2.6.1 Expenditure

Note: This topic is covered in the reading for sub-subunit 2.6.2.

2.6.2 Income

Reading: Principles of Macroeconomics: “Chapter 6, Section 2: Measuring Total Income”
Link: Principles of Macroeconomics: “Chapter 6, Section 2: Measuring Total Income” (PDF)

Instructions: This section details the computational method for calculating total output in the economy using income. Please attempt the “Try It” problems at the end of the chapter and review the correct answers.

Income is the other side of the national income accounting process. For a country (or household) to be efficient, it must be able to detail the sources of its income. The point of the national income accounting system is to determine efficiency of a country, much like one would do in one’s own household. Economists seek data about income as well as expenditure; ideally, the two should be in balance (that is, they should be the same amount). When income and expenditure are balanced, the country (or the household) is said to have a balanced budget.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!
Web Media: Khan Academy’s “Components of GDP”
Khan Academy’s “Components of GDP” (YouTube)

Instructions: Watch this short video, which is about the components of GDP.

Watching this video should take approximately 5 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Examples of Accounting for GDP”
Khan Academy’s “Examples of Accounting for GDP” (YouTube)

Instructions: Watch this short video, which reviews examples of accounting for GDP.

Watching this video should take approximately 6 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Real GDP and Nominal GDP”
Khan Academy’s “Real GDP and Nominal GDP” (YouTube)

Instructions: Watch this video, which is about real and nominal GDP.

Watching this video should take approximately 8 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

2.6.3 Calculating Nominal GDP vs. Real GDP

Web Media: Thinkwell: Steven Tomlinson’s Macroeconomics: “The New BEA Procedure for Calculating Real GDP”
Link: Thinkwell: Steven Tomlinson’s Macroeconomics: “The New BEA Procedure for Calculating Real GDP” (Flash)

Instructions: Click on “Sample Video Lessons” on the right side, which will display links to four video lectures. Click on the third video clip, entitled “The New BEA Procedure for Calculating Real GDP,” to watch this video.

Watching this video should take approximately 8 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Professor Robert Schenk’s CyberEconomics: “Gross Domestic Product”
Link: Professor Robert Schenk’s CyberEconomics: “Gross Domestic Product” (PDF)

Instructions: Read this chapter to review the distinction between real GDP and nominal GDP. Click on the “Review” tab at the bottom of the page to test yourself on these concepts. Finally, click on the “Explore” tab at the bottom of the page to deepen your understanding of these topics. Complete the problems presented in this section, as well.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Web Media: Khan Academy’s “GDP Deflator”
Khan Academy’s “GDP Deflator” (YouTube)

Instructions: Watch this video, which is about the GDP deflator.

Watching this video should take approximately 7 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Example Calculating Real GDP with a Deflator”
Khan Academy’s “Example Calculating Real GDP with a Deflator” (YouTube)

Instructions: Watch this video, which is about calculating real GDP with a deflator.

Watching this video should take approximately 6 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

2.6.4 Problems Using GDP as a Measure of Well-being

Reading: Principles of Macroeconomics: “Chapter 6, Section 3: GDP and Economic Well Being”
Link: Principles of Macroeconomics: “Chapter 6, Section 3: GDP and Economic Well Being” (PDF)

Instructions: Read this section to learn about the limitations of the GDP statistics. Since GDP exclusively measures the expenditures and income of an country, the measurement of that country's economic welfare does not always take into account all of the components of the country’s well-being. There are several criticisms regarding using GDP as a measure of economic well-being. Some of the criticisms are that the GDP does not take into account non-market activities, leisure time, product quality, the underground economy, the environment, the composition and distribution of output, or any non-economic sources of well-being.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!
Web Media: YouTube: Simpleshow: Morten Sondergaard’s “What Is Gross National Happiness?”
Link: YouTube: Simpleshow: Morten Sondergaard’s “What Is Gross National Happiness?” (YouTube)

Instructions: Watch this video, which explains GPI (Genuine Progress Index) and GNH (Gross National Happiness).

When watching the video, keep in mind that within the framework of the economy, GPI and GNH are generally thought of as a holistic tool that governments and communities use to measure the real costs and benefits of economic activity. The GPI and GNH count beneficial activities as positive and harmful activities as negative, and provide us with a means to combine economic issues with environmental and social concerns. The GPI and GNH are synonymous terms. Economics has loaded terminology; there are a number of different terms that have identical meanings. GPI and GNH are also referred to as Measurements of Economic Welfare (MEW).

Watching this video should take approximately 4 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Unit 2 Review

Reading: Massachusetts Institute of Technology’s OpenCourseWare: Principles of Macroeconomics Lecture Notes: “L2 (Measuring macroeconomic variables)” and “L3-L4 (Production and the labor market)”
Link: Massachusetts Institute of Technology’s OpenCourseWare: Principles of Macroeconomics Lecture Notes: “L2 (Measuring macroeconomic variables)” and “L3-L4 (Production and the labor market)” (PDF)

Instructions: This is an optional reading. Read through the notes in these links for a review of the material covered in units 1 and 2.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Unit 3: Unemployment and Inflation

The average person understands the economic concepts of unemployment and inflation: unemployment reflects number of people out of work, and inflation indicates a rising price level of goods and services. Macroeconomics, however, distinguishes between the labor force, which includes both employed and unemployed (those able and willing to work but not currently working), and those not in the labor force (full time students, nonworking spouses, and retirees). It also differentiates between frictional unemployment (or temporary unemployment), structural unemployment (affecting whole sectors of the economy), and cyclical unemployment (caused by downturns in the economy).

Inflation, or a rise in the general level of prices of goods and services, causes the purchasing power of the dollar (or any other monetary unit, like the euro, yen, or pound) to decline. By distinguishing between nominal income (the actual amount of money) and real income (the amount of goods and services it can buy), macroeconomics helps measure the effects that inflation has on an economy and on its constituents’ standards of living.

Time Advisory show close

Learning Outcomes show close

3.1 Defining and Measuring Unemployment

3.1.1 The Unemployment Rate

Reading: Professor Robert Schenk’s CyberEconomics: “The Unemployment Rate”
Link: Professor Robert Schenk’s CyberEconomics: “The Unemployment Rate” (PDF)

Instructions: Read this note on the unemployment rate. Click the “Review” link and answer two questions and assess your understanding of the unemployment rate.

Terms of Use: The linked material above has been reposted by the kind permission of Robert Schenk, and can be viewed in its original form here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.
See a broken link? Please let us know!
Activity: Professor Robert Schenk’s CyberEconomics: “Exploring Unemployment”
Link: Professor Robert Schenk’s CyberEconomics: “Exploring Unemployment” (PDF)

Instructions: This is an optional exercise, but you will likely find it rewarding as you further explore this topic. Click on the links mentioned in the assignment, keeping in mind the answers you need to seek while reading the data.

Terms of Use: The linked material above has been reposted by the kind permission of Robert Schenk, and can be viewed in its original form here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Unemployment”
Khan Academy’s “Unemployment” (YouTube)

Instructions: Watch this lecture, which is about unemployment.

Watching this video should take approximately 13 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

3.1.2 Three Forms of Unemployment

Reading: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 8: Unemployment and Inflation”
Link: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 8: Unemployment and Inflation” (HTML)

Instructions: Scroll down to the “Types of Unemployment” section and read up to “The Record of Unemployment.”

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

3.1.3 Natural Rate of Unemployment

Web Media: YouTube: ACDC Leadership’s “Types of Unemployment and the Natural Rate of Unemployment”
Link: YouTube: ACDC Leadership’s “Types of Unemployment and the Natural Rate of Unemployment” (YouTube)

Instructions: Watch this video, which is about the types of unemployment and the natural rate of employment.

Watching this video should take approximately 2 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: U.S. Bureau of Labor Statistics: “Unemployment Statistics” and “News Release: Employment Situation Monthly”
Link: U.S. Bureau of Labor Statistics: “Unemployment Statistics” (PDF) and “News Release: Employment Situation Monthly” (PDF).

Instructions: Read the paragraph under “Unemployment” on this page. Make sure to read each section in its entirety. You may also consider viewing the original webpage to explore some of the other hyperlinks for statistics on unemployment. It is important to understand the mechanism of how unemployment is determined and how economists measure unemployment.

Terms of Use: This work is in the public domain.
See a broken link? Please let us know!
Reading: The Saylor Foundation’s “Unemployment Rate”
Link: The Saylor Foundation’s “Unemployment Rate” (PDF)

Instructions: Read this text, which includes statistics from the Bureau of Labor Statistics, in order to get a better understanding of how the unemployment rate is calculated.
See a broken link? Please let us know!

3.1.4 Problems with the Unemployment Rate

Reading: Professor Robert Schenk’s CyberEconomics: “Weaknesses of Unemployment Statistics”
Link: Professor Robert Schenk’s CyberEconomics: “Weaknesses of Unemployment Statistics” (PDF)

Instructions: This reading explains the shortcomings of unemployment statistics. Read it in entirety to learn about the problems associated with the unemployment rate and then work on the questions presented in the “Review” section and the “Explore” section.

Terms of Use: The linked material above has been reposted by the kind permission of Robert Schenk, and can be viewed in its original form here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.
See a broken link? Please let us know!
Assessment: Econ100’s “Chapter 7: Measuring Employment and Unemployment”
Link: Econ100’s “Chapter 7: Measuring Employment and Unemployment” (HTML)

Instructions: Click on the “Quiz” tab on the left-hand menu and then go to “Chapter 7” to take the test. Attempt all three levels of the quiz for a thorough assessment of your understanding of the material covered in this unit.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

3.2 Inflation

Reading: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 8: Unemployment and Inflation”
Link: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 8: Unemployment and Inflation” (HTML)

Instructions: Scroll down to the heading entitled “Inflation” to read about the types of inflation, the costs of inflation, and hyperinflation. Note that this resource covers the topics in sub-subunit 3.2.1.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Principles of Macroeconomics: “Chapter 5, Section 2: Price-Level Changes”
Link: Principles of Macroeconomics: “Chapter 5, Section 2: Price-Level Changes” (PDF)

Instructions: Read the section entitled “Price Indexes” to learn how to compute some price indices. This section focuses on the consumer price index (CPI), the rate of inflation or deflation, and the biases associated with the CPI. Note that this resource covers the topics in sub-subunits 3.2.2 and 3.2.3.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!
Web Media: Khan Academy’s “Introduction to Inflation”
Khan Academy’s “Introduction to Inflation” (YouTube)

Instructions: Watch this video, which serves as an introduction to inflation.

Watching this video should take approximately 8 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Breakdown of Gas Prices”
Khan Academy’s “Breakdown of Gas Prices” (YouTube)

Instructions: Watch this video, which is about the breakdown of gas prices.

Watching this video should take approximately 13 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Short-Run Oil Prices”
Link: Khan Academy’s “Short-Run Oil Prices” (YouTube)

Instructions: Watch this video, which is about short-run oil prices.

Watching this video should take approximately 12 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

3.2.1 Inflation Defined

Note: Inflation is determined by increases in the general prices of an economy. Inflation does not take into account the core rate, which is essentially the costs of food, gasoline, or insurance. Please note that this topic is covered in the readings for subunit 3.2.

3.2.2 Measuring Changes in the Price Level

Note: This topic is also covered in the materials under subunit 3.2 and sub-subunit 3.2.3.

Web Media: Khan Academy’s “Inflation Data”
Khan Academy’s “Inflation Data” (YouTube)

Instructions: Watch this video, which is about inflation data.

Watching this video should take approximately 4 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Moderate Inflation in a Good Economy”
Khan Academy’s “Moderate Inflation in a Good Economy” (YouTube)

Instructions: Watch this video, which discusses moderate inflation in a good economy.

Watching this video should take approximately 3 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Real and Nominal Return”
Khan Academy’s “Real and Nominal Return” (YouTube)

Instructions: Watch this video, which explains real and nominal return.

Watching this video should take approximately 4 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Calculating Real Return in Last Year Dollars”
Khan Academy’s “Calculating Real Return in Last Year Dollars” (YouTube)

Instructions: Watch this video, which explains how to calculate real return in last year dollars.

Watching this video should take approximately 3 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Relation between Nominal and Real Returns and Inflation”
Khan Academy’s “Relation Between Nominal and Real Returns and Inflation” (YouTube)

Instructions: Watch this video, which discusses the relationship between nominal and real returns and inflation.

Watching this video should take approximately 4 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

3.2.3 Consumer Price Index (CPI)

Note: This topic is also covered under subunit 3.2 and sub-subunit 3.2.4.

Reading: Australian Bureau of Statistics: Consumer Price Index Concepts, Sources, and Methods: “Chapter 4: Price Index Theory”
Link: Australian Bureau of Statistics: Consumer Price Index: Concepts, Sources, and Methods: “Chapter 4: Price Index Theory” (PDF)

Instructions: Click on the link above, and read Chapter 4 in its entirety.

Terms of Use: Please respect the copyright and terms of use displayed on the web pages above.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Actual CPI-U Basket of Goods”
Khan Academy’s “Actual CPI-U Basket of Goods” (YouTube)

Instructions: Watch this video, which discusses an actual CPI-U basket of goods.

Watching this video should take approximately 8 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

3.2.4 Problems with the CPI

Note: This information also touches on the topic outlined for sub-subunit 3.2.3. Consumer Price Index (CPI) calculations are restricted to the consumers’ purchasing behavior only in the context of price increases of goods and services from one period of time to another. CPI does not take into account the producer price index, or PPI. The PPI is a measure of the average change over time in the selling prices received by domestic producers for their output.

An upside having so many indices to measure inflation is that each one of the GDP deflator (GDP price index), CPI, and PPI serves as a measure of the same inflationary tendencies, but measures it in a slightly different way.

3.2.5 Costs of Inflation

Reading: Research Department of the Federal Reserve Bank of Cleveland: Economic Commentary: “On the Costs of Inflation”
Link: Research Department of the Federal Reserve Bank of Cleveland: Economic Commentary: “On the Costs of Inflation” (PDF)

Instructions: Read the entire article, which discusses how inflation can distort the allocation of resources and adversely affect economic efficiency.

Terms of Use: The material above is reposted from the website of The Federal Reserve Bank of Cleveland. The original version can be found here. The Federal Reserve Bank of Cleveland has stipulated that users may reproduce this content and/or portions thereof without limitation provided that users comply with the terms of use posted here.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Deflation”
Khan Academy’s “Deflation” (YouTube)

Instructions: Watch this video, which discuesses deflation.

Watching this video should take approximately 4 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Velocity of Money Rather than Quantity Driving Prices”
Khan Academy’s “Velocity of Money Rather than Quantity Driving Prices” (YouTube)

Instructions: Watch this video, which explains the concept of velocity of money rather than quantity driving prices.

Watching this video should take approximately 4 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Deflation Despite Increases in Money Supply”
Khan Academy’s “Deflation Despite Increases in Money Supply” (YouTube)

Instructions: Watch this video, which explains how deflation can occur despite increases in money supply.

Watching this video should take approximately 4 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Deflationary Spiral”
Khan Academy’s “Deflationary Spiral” (YouTube)

Instructions: Watch this video, which is about deflationary spirals.

Watching this video should take approximately 4 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Hyperinflation”
Khan Academy’s “Hyperinflation” (YouTube)

Instructions: Watch this video, which discusses hyperinflation.

Watching this video should take approximately 4 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

3.3 Inflation and Unemployment

Reading: Principles of Macroeconomics: “Chapter 16, Section 1: Relating Inflation and Unemployment”
Link: Principles of Macroeconomics: “Chapter 16, Section 1: Relating Inflation and Unemployment” (PDF)

Instructions: Read this section for a discussion of inflation and unemployment. The relationship between inflation and unemployment will be explained in detail later in the course.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!
Assessment: Econ100’s “Chapter 6: Measuring GDP, Economic Growth and Inflation”
Link: Econ100’s “Chapter 6: Measuring GDP, Economic Growth and Inflation” (HTML)

Instructions: Click on the “Quiz” tab on the left-hand menu and take each of the four quizzes under the “Chapter 6” link. Note that some of the questions pertain to measuring GDP, a subject covered in the previous unit. Please attempt the questions in all four levels of the quiz for a thorough assessment of your understanding of the material covered in this unit.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Unit 4: Aggregate Demand and Supply

Since macroeconomics studies the whole economy, it looks at the main forces affecting growth, inflation, and unemployment by aggregating, or totaling, output (via the GDP) and prices (via a price index). Unlike microeconomics, which studies the demand and supply of individual goods and services, macroeconomics considers demand and supply for all goods and services in a national economy.

In macroeconomics, aggregate demand is the total amount of goods and services people want to buy – in other words, it measures what people wish to purchase rather than what is actually produced. The aggregate demand is the sum of consumption, investment, government expenses, and net exports. Aggregate supply, on the other hand, is the total output an economy produces at a given price level. As you learned in microeconomics, firms achieve equilibrium when they produce the quantity of goods and services consumers want to buy, that is, when aggregate supply equals aggregate demand. This unit examines shifts in aggregate supply and aggregate demand and their short-term and long-term effects for the whole economy.

Time Advisory show close

Learning Outcomes show close

4.1 Aggregate Demand and Aggregate Supply

Reading: State University of New York at Oswego: Professor John Kane’s Lecture notes on Principles of Macroeconomics: “Chapter 9: Aggregate Demand and Supply”
Link: State University of New York at Oswego: Professor John Kane’s Lecture Notes on Principles of Macroeconomics: “Chapter 9: Aggregate Demand and Supply” (HTML)

Instructions: These are introductory notes about aggregate demand and supply. Read this entire set of lecture notes for an overview of the demand and supply model in the macroeconomic context. For Aggregate Demand (AD), please pay special attention to the components that constitute aggregate demand and the factors that affect each of these components resulting in shifts of the AD curve. These lecture notes also explain why the AD curve is negatively-sloped. (For those who have studied Microeconomics, note that the reason for the negative slope of the AD curve is different than what it was for the individual/market demand curve.) For Aggregate Supply (AS), please be aware of the distinction between the Short-Run AS curve and the Long-Run AS curve and the factors that lead to shifts or changes in the two curves respectively. Finally, look at how the AD and the AS interact to reach equilibrium. This material also covers sub-subunits 4.1.1-4.1.6.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Prentice Hall Companion Website: Karl E. Case and Ray C. Fair’s Principles of Macroeconomics “Chapter 13: Aggregate Demand, Aggregate Supply, and Monetary and Fiscal Policy”
Link: Prentice Hall Companion Website: Karl E. Case and Ray C. Fair’s Principles of Macroeconomics: “Chapter 13: Aggregate Demand, Aggregate Supply, and Monetary and Fiscal Policy” (HTML)

Instructions: Read the entire chapter and work with the interactive active graphs to develop an understanding of the concepts covered in this chapter.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Web Media: YouTube: econsteve12’s “AS AD Aggregate Supply and Aggregate Demand”
Link: YouTube: econsteve12’s “AS AD Aggregate Supply and Aggregate Demand” (YouTube)

Instructions: Watch this video, which discusses aggregate supply and aggregate demand.

Watching this video should take approximately 6 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Principles of Macroeconomics: “Chapter 7: Aggregate Demand and Aggregate Supply”
Link: Principles of Macroeconomics: “Chapter 7: Aggregate Demand and Aggregate Supply” (PDF)

Instructions: This reading will provide you with the details and examples needed to master aggregate demand and aggregate supply. Read the entire chapter and then answer the questions in the “Try It” box at the end of each section before reviewing the correct answers.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!
Reading: Bureau of Economic Analysis: “Table 1.1.5: Gross Domestic Product”
Link: Bureau of Economic Analysis: “Table 1.1.5: Gross Domestic Product” (PDF)

Instructions: This table contains statistics on various components of the GDP from 2010 to 2012. Observe how the United States has gone through growth and contraction at various points during this time period. The data is correlated to the changes in the United States’ aggregate demand.

Terms of Use: This work is in the Public Domain.
See a broken link? Please let us know!
Assessment: Cengage Learning: William Boyes and Michael Melvin’s Economics: “Chapter 9: Macroeconomics Equilibrium: Aggregate Demand and Supply – Test 1 and Test 2”
Link: Cengage Learning: Boyes/Melvin’s Economics: “Chapter 9: Macroeconomics Equilibrium: Aggregate Demand and Supply – Test 1 and Test 2” (Flash)

Instructions: Click on the hyperlinks for Test 1 and Test 2 beneath Chapter 9 on the linked paged, and complete each assessment. Once you have selected an answer choice, a note at the bottom of the screen will indicate whether your choice was correct or incorrect. Please note that this material also covers subunits 4.1.1-4.1.6.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Aggregate Demand”
Khan Academy’s “Aggregate Demand”(YouTube)

Instructions: The above link will bring you to a video lecture about aggregate demand.

The video is approximately 14 minutes long.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Reading: YouTube: ACDC Leadership’s “Inflationary and Recessionary Gaps: Fiscal and Monetary Policy Overview”
Link: YouTube: ACDC Leadership’s “Inflationary and Recessionary Gaps: Fiscal and Monetary Policy Overview” (YouTube)

Instructions: Watch this brief video.

Watching this video should take approximately 4 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: The Federal Reserve Board’s The Federal Reserve System: Purposes and Functions: “Chapter 2, Monetary Policy and the Economy”
Link: The Federal Reserve Board’s The Federal Reserve System: Purposes and Functions: “Chapter 2, Monetary Policy and the Economy” (PDF)

Instructions: Click the link above, and then click on and download the PDF for Chapter 2. Read this chapter for a brief overview of how monetary policy is conducted in the United States.

Reading this chapter should take approximately 30 minutes.

Terms of Use: This material is in the public domain.
See a broken link? Please let us know!

4.1.1 Components of Aggregate Expenditure (Consumption, Investment, Government Purchases, and Net Exports)

Note: The four components of the GDP (consumption, investment, government purchases, and net exports) contribute to the aggregate demand for goods and services.

4.1.2 Slope of the Aggregate Demand Curve

Note: The aggregate demand curve slopes downward due to the price level and consumption (the wealth effect), the price level and investment (the interest rate effect), and the price level and net exports (the exchange rate effect). Economists refer to each of these effects as independent variables (or causes). Economists refer to outcomes as the effects. Consequently, cause and effect is the reason that the aggregate demand curve has a downward slope.

4.1.3 Shifts of the Aggregate Demand Curve

Note: There are numerous factors that affect the quantity of goods and services demanded at a given price level. When a factor changes, the aggregate demand curve shifts left or right.

Web Media: Khan Academy’s “Shifts in Aggregate Demand”
Khan Academy’s “Shifts in Aggregate Demand” (YouTube)

Instructions: Watch this video, which discusses shifts in aggregate demand.

Watching this video should take approximately 5 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

4.1.4 Aggregate Supply in the Short- and Long-Run

Note: The short-run aggregate supply curve slopes upward due to the lag between product prices and resource prices that makes it profitable for firms to increase output when the price level rises. The long-run aggregate supply curve is vertical when a country is at full employment. The long-run aggregate supply curve is vertical because in the long run resource prices adjust to changes at the price level, which leaves no incentive for firms to change their output. In the long run, prices and wages have no effect on the aggregate supply curve.

Web Media: Khan Academy’s “Long-Run Aggregate Supply”
Khan Academy’s “Long-Run Aggregate Supply” (YouTube)

Instructions: Watch this lecture, which discusses long-run aggregate supply.

Watching this video should take approximately 5 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Short-Run Aggregate Supply”
Khan Academy’s “Short-Run Aggregate Supply” (YouTube)

Instructions: Watch this video, which explains short-run aggregate supply.

Watching this video should take approximately 13 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

4.1.5 Shifts in the Aggregate Supply Curve

Note: Price levels can cause changes or shifts in the aggregate supply curve. Determinants (domestic prices, prices of imported resources, or market power in certain industries) also cause shifts in the aggregate supply curve (moving left or right).

4.1.6 Macroeconomic Equilibrium

Note: Macroeconomic equilibrium is determined when a country’s data indicates that its GDP is equal to its aggregate expenditures and when its savings is equal to its investments.

4.2 Income-Expenditure Model

Reading: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Aggregate Demand”
Link: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Aggregate Demand” (HTML)

Instructions: This material will cover subunits 4.2.1-4.2.4. It covers macroeconomic theory and the Income-Expenditure model. Important concepts to master in this section are “planned” levels of expenditure, marginal propensity to consume, marginal propensity to save, the multiplier, and the equilibration process. Please read through section 1.10 (“The Multiplier”).

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Principles of Macroeconomics: “Chapter 13: Consumption and the Aggregate Expenditures Model”
Link: Principles of Macroeconomics: “Chapter 13: Consumption and the Aggregate Expenditures Model” (PDF)

Instructions: This chapter will cover subunits 4.2.1 and 4.2.2 and will show you how the aggregate demand curve can be derived from the aggregate expenditures model. Note that aggregate expenditures relate to the summation of “planned” levels of consumption, investment, government purchases, and net exports at a given price level. Also notice how the slope of the aggregate expenditures curve relates to the multiplier.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

4.2.1 Planned Aggregate Expenditure

Note: Planned aggregate expenditure occurs when a country adds its consumption to its investments.

Web Media: Khan Academy’s “Demand-Pull Inflation under Johnson”
Khan Academy’s “Demand-Pull Inflation under Johnson” (YouTube)

Instructions: Watch this video, which discusses demand-pull inflation under Johnson.

Watching this video should take approximately 10 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Cost Push Inflation”
Khan Academy’s “Cost Push Inflation” (YouTube)

Instructions: Watch this video, which examines cost push inflation.

Watching this video should take approximately 6 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

4.2.2 Adjustment to Equilibrium

Note: Adjustment to equilibrium occurs when a country’s consumption equals its investments and its savings equals its investments. Consequently, the country has zero unplanned changes in inventory and its GDP equals its aggregate expenditure.

Web Media: Khan Academy’s “Real GDP Driving Price”
Khan Academy’s “Real GDP Driving Price” (YouTube)

Instructions: Watch this video, which discusses real GDP driving price.

Watching this video should take approximately 7 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

4.2.3 The Multiplier

Web Media: YouTube: Living Economics’ Macroeconomic Lectures: “Spending Multiplier”
Link: YouTube: Living Economics’ Macroeconomic Lectures: “Spending Multiplier” (YouTube)

Instructions: Watch this brief video, which discusses the spending multiplier (also known as the expenditure multiplier).

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Assessment: Econ100’s “Chapter 12: Expenditure Multipliers Quiz”
Link: Econ100’s “Chapter 12: Expenditure Multipliers Quiz” (HTML)

Instructions: Click on the “Quiz” tab on the left-hand menu, and then go to “Chapter 12” to take the quiz.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

4.2.4 Saving-Investment Approach to Equilibrium GDP

Assessment: International Excellence Business School: Javier Carrillo’s Multimedia Documentation: “Interactive Graph of the Aggregate Demand” and “Interactive Graph of the Aggregate Supply and Demand Model” (Flash)
Link: International Excellence Business School: Javier Carrillo’s Multimedia Documentation: “Interactive Graph of the Aggregate Demand” and “Interactive Graph of the Aggregate Supply and Demand Model” (Flash)

Instructions: Follow the instructions on the linked sites to use these interactive modules.

After you have familiarized yourself with the graphs, proceed to the exercises on the bottom right of the page. Check your answers and review the explanations for each answer provided.

Terms of Use: The materials above are released under a Creative Commons Attribution-NonCommercial-NoDerivatives License 3.0. You can find the original International Excellence Business School version of these materials here.

See a broken link? Please let us know!

Unit 5: Government and Fiscal Policy

What effect does a government have on an economy? Through its ability to tax, a government takes away a proportion of its people’s income, but it also injects money into the economy by printing currency and purchasing public goods. What are the consequences of these actions? Clearly, government spending and taxing will have an effect on the equilibrium GDP, but by what magnitude? How do those policies affect inflation, unemployment, and economic growth? Macroeconomics studies these and other questions pertaining to the relationship between a government and an economy. In doing so, it often uses the concept of the multiplier, which, as you learned in the previous unit, refers to the relationship between a change in spending and the impact that change has on the entire economy. In this unit, we will explore these issues and examine other government policies, such as budgets, debts, and deficits, discussing their respective effects on the economy as a whole.

Time Advisory show close

Learning Outcomes show close

5.1 Government in the Economy

Reading: Principles of Macroeconomics: “Chapter 12, Section 1: Government and the Economy”
Link: Principles of Macroeconomics: “Chapter 12, Section 1: Government and the Economy” (PDF)

Instructions: This material elaborates on the major components of government spending and the sources of government revenue. You will also about the terms budget surplus, budget deficit, balanced budget, and national debt. Read the section in its entirety, including the introduction, noting trends in the U.S. government’s budget over time. Lastly, try to answer the questions in the “Try It” box at the end of each section before reviewing the solutions that follow.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

5.2 Fiscal Policy

Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 9: Fiscal Policy”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 9: Fiscal Policy” (PDF)

Instructions: On the right side of the navigation bar, click on “Chapter 9: Fiscal Policy.” This chapter discusses the concepts associated with fiscal policy, and contains an answer key to assess understanding of the material. Note that this material also covers the topics outlined in subunits 5.2.1-5.2.3.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike License. You can find the original version of this article here.
See a broken link? Please let us know!

5.2.1 Government Spending Multiplier

Note: The government spending multiplier is a tool used to manipulate the economy and mitigate inflation or recession that goes beyond the ordinary uses of taxes. In this process, the government spending multiplier deploys additional monies or restricts monies to assist in economic stability.

5.2.2 Tax Multiplier

Note: The tax multiplier is a tool used to manipulate the economy and mitigate inflation or recession that goes beyond the ordinary uses of taxes. In this process, the tax multiplier uses the manipulation of taxes, which is known as fiscal policy.

5.2.3 Balanced Budget Multiplier

Note: The balanced budget multiplier operates within the context of aggressively reducing a deficit by collecting more taxes to enable the government’s revenue to match its expenses.

5.3 Stabilizing the Business Cycle

Reading: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Aggregate Demand”
Link: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Aggregate Demand” (HTML)

Instructions: This material covers subunits 5.3.1-5.3.3. Scroll through these lecture notes to section 1.12, “Counter Cyclical and Pro-cyclical Policies,” and read all the way up to section 1.15, “Further Notes.” The government’s fiscal actions can stabilize the business cycle by changing aggregate demand. This can be done either by an act of Congress requiring a change in a spending program or in a tax law (which are both examples of discretionary fiscal policy), or it can be triggered by the state of the economy (which is known as automatic fiscal policy). The readings in this subunit will elaborate on the mechanisms of both kinds of policies and will also touch upon the problems that arise when managing fiscal policy. The following resources will elaborate on the concepts that are presented in this material.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Principles of Macroeconomics: “Chapter 12, Section 2: The Use of Fiscal Policy to Stabilize the Economy”
Link: Principles of Macroeconomics: “Chapter 12, Section 2: The Use of Fiscal Policy to Stabilize the Economy” (PDF)

Instructions: This material will cover subunits 5.3.1 and 5.3.2. Read all of section 2 to learn about how the government’s fiscal actions influence aggregate demand. This section first discusses automatic stabilizers and how they function. The chapter then covers discretionary fiscal policy, which are changes in aggregate demand resulting from changes in government purchases, income taxes, and transfer payments.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

5.3.1 Automatic Stabilizers

Note: Automatic stabilizers are the non-discretionary occurrences that mitigate fluctuations in GDP. When that happens, the government non-discretionally receives taxes or revenue from its citizenry rather than making a discretionary decision. This topic was briefly introduced in Paj Holden’s YouTube video listed under 1.3.1.

5.3.2 Discretionary Fiscal Policy

Note: Discretionary fiscal policy is how the executive and legislative branches exercise their choice of increasing or decreasing taxes to attain economic stability.

Web Media: Khan Academy’s “Tax Lever of Fiscal Policy”
Khan Academy’s “Tax Lever of Fiscal Policy” (YouTube)

Instructions: Watch this video, which discusses the tax lever of fiscal policy.

Watching this video should take approximately 3 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

5.3.3 Fiscal Policy Concerns

Reading: Principles of Macroeconomics: “Chapter 12, Section 3: Issues in Fiscal Policy”
Link: Principles of Macroeconomics: “Chapter 12, Section 3: Issues in Fiscal Policy” (PDF)

Instructions: Read all of this section, which will outline the problems that can arise in fiscal policy. This section will also provide you with a brief look at the debate surrounding supply-side economics.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

Unit 5 Assessment

Assessment: Econ100’s “Chapter 13: Fiscal Policy Quiz”
Link: Econ100’s “Chaper 13: Fiscal Policy Quiz” (HTML)

Instructions: Click on the “Quiz” tab on the left-hand menu and then go to “Chapter 13” to take the quiz.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Assessment: Cengage Learning: William Boyes and Michael Melvin’s Economics: “Chapter 12: Fiscal Policy, Test 1 and Test 2”
Link: Cengage Learning: William Boyes Michael Melvin’s Economics: “Chapter 12: Fiscal Policy, Test 1 and Test 2” (Flash)

Instructions: Click on the links for “Test 1” and “Test 2” beneath “Chapter 12”on the linked page, and complete each assessment. Once you have selected an answer choice, a note at the bottom of the screen will indicate whether or not your choice was correct.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Unit 6: The Money Supply and the Monetary Policy

What is money? Most people probably think of bills and coins, but in this course, we will define it as the asset most commonly used to buy things, or the medium of exchange commonly used by buyers and sellers. In today’s economy, money can take many forms, from checks to electronic payments to e-money and a variety of other instruments that facilitate production and trade. Money is also a unit of account; it helps us measure value in an economy and is a store of purchasing power over time. The ways in which we define and measure money, in addition to the institutions we have built around it, help us understand the role of money and its importance in a well-functioning economic system. Interest rates, or the prices that coordinate economic activity over time, also play a significant role in the supply and demand of money as a form of savings and investment.

As an economy grows, financial innovations develop new assets measured as money while central banks develop appropriate aggregates to measure them. These measures include M1 (currency, checking account deposits, and travelers checks) and M2 (money market accounts and other assets such as savings accounts and repurchasable agreements). Of course, because our behavior and beliefs determine what we will accept as money, money measurement is an ever-expanding subject in macroeconomics.

Time Advisory show close

Learning Outcomes show close

6.1 What Is Money?

Reading: Principles of Macroeconomics: “Chapter 9, Sections 1-2: Nature and Creation of Money”
Link: Principles of Macroeconomics: “Chapter 9, Sections 1-2: Nature and Creation of Money” (PDF)

Instructions: Read sections 1 and 2 of chapter 9, including the introduction. This material will cover subunits 6.1, 6.2, and all inclusive sub-subunits.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

6.1.1 The Three Functions of Money

Note: The three functions of money are acting as a medium of change (that is, a means of payment), a store of value (that is, a “safe” or “vault,” for assets) and a unit of account (that is,the total cost of an item).

6.1.2 Two Types of Money

Note: The two types of money are currency (paper money) and checkable deposits (checks).

6.1.3 Measuring Money: M1 and M2

Note: M1 money involves checkable deposits. M2 money involves M1 (checkable deposits), small time deposits, money market mutual funds, and funds held by individuals.

6.1.4 Commercial Banking

Note: Commercial banking includes the financial intermediaries that buy, sell, invest, and save money for businesses and the public.

6.2 Money Creation

6.2.1 Defining Total, Required, and Excess Reserves

Note: Total reserves are the checkable deposits that the public has placed in a commercial bank. Required reserves are a percentage of the checkable deposits that must remain in a commercial bank as required by the Federal Reserve. Required reserves are set by the Federal Reserve to protect banks from customers “running” on the bank, i.e., reserves protects a bank from customer panic. Excess reserves are a percentage of checkable deposits that a bank is authorized by the Federal Bank to lend out. Consequently, required reserves are deposits that the banks actually earn a profit from.

Web Media: Khan Academy’s “Overview of Fractional Reserve Banking”
Khan Academy’s “Overview of Fractional Reserve Banking” (YouTube)

Instructions: Watch this video, which explains fractional reserve banking.

Waching this video should take approximately 9 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Weaknesses of Fractional Reserve Lending”
Khan Academy’s “Weaknesses of Fractional Reserve Lending” (YouTube)

Instructions: Watch this video, which discusses the weaknesses of fractional reserve lending.

Watching this video should take approximately 8 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Full Reserve Banking”
Khan Academy’s “Full Reserve Banking” (YouTube)

Instructions: Watch this video, which discusses full reserve banking.

Watching this video should take approximately 8 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Simple Fractional Reserve Accounting (part 1)”
Khan Academy’s “Simple Fractional Reserve Accounting (part 1)” (YouTube)

Instructions: Watch this video, which explains simple fractional reserve accounting.

Watching this video should take approximately 9 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Simple Fractional Reserve Accounting (part 2)”
Khan Academy’s “Simple Fractional Reserve Accounting (part 2)” (YouTube)

Instructions: Watch this video, which discusses simple fractional reserve accounting.

Watching this video should take approximately 7 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

6.2.2 Money Creation Process, Required Reserve, and T-Accounts

Reading: The Federal Reserve’s “Statistical Release H6: Money Stock Measures of Money Supply of M1 and M2 for the Year 2011”
Link: The Federal Reserve’s “Statistical Release H6: Money Stock Measures of Money Supply of M1 and M2 for the Year 2011” (PDF)

Instructions: This report by the Federal Reserve differentiates between the various levels of the money supply from one period of time to another in order to learn about the growth and wealth of the United States’ economy.

Terms of Use: This work is in the Public Domain.
See a broken link? Please let us know!
Reading: Professor Robert Schenk’s CyberEconomics: “Monetary Policy and Balance Sheets”
Link: Professor Robert Schenk’s CyberEconomics: “Monetary Policy and Balance Sheets” (HTML)

Instructions: This material explains the money creation process in the economy.

Terms of Use: The linked material above has been reposted by the kind permission of Robert Schenk, and can be viewed in its original form here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.
See a broken link? Please let us know!
Web Media: YouTube: Money and Markets’ “Soft Commodities Discussion”
Link: YouTube: Money and Markets’ “Soft Commodities Discussion” (YouTube)

Instructions: Watch the entire video, which discusses soft commodities.

Watching this video should take approximately 13 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Cengage Learning: William Boyes and Michael Melvin’s Economics: “Chapter 7: Foreign Exchange Market and the Balance of Payments Interactive Quiz”
Link: Cengage Learning: William Boyes and Michael Melvin’s Economics: “Chapter 7: Foreign Exchange Market and the Balance of Payments Interactive Quiz” (Flash)

Instructions: Click on the links for “Test 1” and “Test 2” beneath Chapter 7 and complete each assessment. Once you have selected an answer choice, a note at the bottom of the screen will indicate whether or not your choice was correct.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Money Supply – M0, M1, and M2”
Khan Academy’s “Money Supply – M0, M1, and M2” (YouTube)

Instructions: The above link will bring you to a video lecture about the money supply – M0, M1, and M2.

Watching this video should take approximately 10 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

6.2.3 Money Creation Process and the Money Multiplier

Lecture: Living Economics’ Macroeconomic Lectures: “Money Multiplier”
Link: Living Economics’ Macroeconomic Lectures: “Money Multiplier” (Flash)

Instructions: Watch the entire lecture, which discusses the multiplier.

Watching this lecture should take approximately 10 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
The Saylor Foundation does not yet have materials for this portion of the course. If you are interested in contributing your content to fill this gap or aware of a resource that could be used here, please submit it here.
Submit Materials

6.3 The Federal Reserve System

6.3.1 Origins of the Fed

Reading: Federalreserveeducation.org’s “History of the Federal Reserve”
Link: Federalreserveeducation.org’s“History of the Federal Reserve” (PDF)

Instructions: Read this article for a chronological study of how the Federal Reserve System came into being.

Terms of Use: The above material is reposted from federalreserveeducation.org. The original version can be found here. The content owners have stipulated that this material can be freely used and shared for the purpose of education, provided that users comply with the terms of use outlined here.
See a broken link? Please let us know!

6.3.2 Components and Functions of the Federal Reserve System

Reading: Principles of Macroeconomics: “Chapter 9, Section 3: The Federal Reserve System”
Link: Principles of Macroeconomics: “Chapter 9, Section 3: The Federal Reserve System” (PDF)

Instructions: Read section 3 of chapter 9, which will cover subunits 6.3.2 and 6.3.3.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

6.3.3 The Federal Reserve Balance Sheet

Assessment: PEOI.org: John Petroff’s Macroeconomics: “Chapter 10: Money”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 10: Money” (PDF) and “Chapter 10 Quiz” (PDF)

Instructions: Review the material in the above section and then take the quiz .

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike License. You can find the original version of this article here.
See a broken link? Please let us know!

6.4 Three Tools of Monetary Policy

Reading: Federal Reserve Bank of New York's “Monetary Policy”
Link: Federal Reserve Bank of New York’s “Monetary Policy” (PDF)

Instructions: Read the section entitled “How does the Federal Reserve implement monetary policy?” This material will cover subunits 6.4.1-6.4.3.

Terms of Use: The above material is reposted from http://www.federalreserve.gov. The content owners have stipulated that this material can be freely used and shared for the purpose of education, provided that users comply with the terms of use outlined here.
See a broken link? Please let us know!

6.4.1 Required Reserve Ratio

Note: The required reserve ratio is set by the Federal Reserve to encourage full employment, economic growth, and price stability by controlling the money supply. Typically, the required reserve ratio is between 1 and 3 percent; it may even increase to ten percent based on the Federal Reserve’s desire to minimize recessionary or inflationary gaps.

6.4.2 Discount Rate

Note: The discount rate is the rate at which the twelve district Federal Reserve Banks charge other banks to borrow money.

6.4.3 Open Market Operations

Assessment: PEOI.org: John Petroff’s Macroeconomics: “Chapter 12: Monetary Policy”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 12: Monetary Policy” (PDF) and “Chapter 12 Review Quiz” (HTML)

Instructions: Review the material in this chapter and then take the review quiz.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike License. You can find the original version of this article here.
See a broken link? Please let us know!
Reading: Principles of Macroeconomics: “Chapter 10: Financial Markets and the Economy”
Link: Principles of Macroeconomics: “Chapter 10: Financial Markets and the Economy” (PDF)

Instructions: Read this chapter its entirety to learn how financial markets fit into the model of aggregate demand and aggregate supply and how they relate to the real GDP level as well as the price level. The money market model explains the determination of equilibrium rate of interest. This reading will cover subunits 6.4.4-6.5 and all inclusive sub-subunits.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

6.4.4 The Money Supply Curve and Shifting Factors

Note: This topic is covered in the reading under sub-subunit 6.4.3.

6.5 The Interest Rate

6.5.1 The Money Demand Curve and Shifting Factors

Note: One of the interpretations of the money demand curves is based on an economy’s interest rate. This interpretation rests on the position of the supply of money and the interest rates on money. Regarding shifting factors, the money supply can increase based on lower interest rates or decrease based on higher interest rates.

Web Media: Khan Academy’s “Interest as Rent for Money”
Khan Academy’s “Interest as Rent for Money” (YouTube)

Instructions: Watch this lecture, which discusses interest as rent for money.

Watching this video should take approximately 10 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

6.5.2 The Money Market (A Graphical Representation)

Note: Graphical representations of money markets are visualizations of a combination of an economy’s transactional demands plus an economy’s asset demands.

6.5.3 The Equilibrium Interest Rate

Note: Equilibrium interest rates are the balance or combination of the market for money plus the investment demand for money. Consequently, equilibrium real GDP and the price level will determine the equilibrium based on transactional demand and investment demand.

Assessment: Cengage Learning: William Boyes and Michael Melvin’s Economics: “Chapter 14 Review” and “Chapter 14: Monetary Policy – Test 1 and Test 2”
Link: Cengage Learning: William Boyes and Michael Melvin’s Economics: “Chapter 14 Review” (Flash) and “Chapter 14: Monetary Policy – Test 1 and Test 2” (Flash)

Instructions: Click on “Chapter 14 Review” and read the brief overview of topics in Boyes and Melvin’s Chapter 14 on monetary policy. Then, click on “Chapter 14: Monetary Policy – Test 1 and Test 2.” In this application, click on the links for tests 1 and 2 under Chapter 14 and complete the questions for each test. Once you have selected an answer choice, a note at the bottom of the screen will indicate whether or not your choice was correct.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

6.5.4 Money Supply and Demand Shifts and the Equilibrium Interest Rate

Web Media: Khan Academy’s “Money Supply and Demand Impacting Interest Rates”
Khan Academy’s “Money Supply and Demand Impacting Interest Rates” (YouTube)

Instructions: The above link will bring you to a video lecture about money supply and demand impacting interest rates.

The video is approximately 8 minutes long.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Assessment: International Excellence Business School: Javier Carrillo’s Multimedia Documentation: “Interactive Graph of Aggregate Demand Policies”
Link: International Excellence Business School's Multimedia Documentation by Javier Carrillo: “Interactive Graph of Aggregate Demand Policies” (Flash Activity)

Instructions: Click “Enter” on the web page to access the interactive graph and the exercises.

Note that on the left hand side, the graphs show how expansionary or restrictive fiscal and monetary policies affect the monetary sector and the real sector. On the right-hand side are ten exercises that will test your understanding of the topic. Review the material on the left thoroughly with the help of interactive graphs before attempting the exercises.

Terms of Use: The materials above are released under a Creative Commons Attribution-NonCommercial-NoDerivatives License 3.0. You can find the original International Excellence Business School version of these materials here.
See a broken link? Please let us know!

6.6 Notes on the 2008 Financial Crisis

6.6.1 The Economic Meltdown

Web Media: PBS: Frontline’s “The Economic Meltdown”
Link: PBS: Frontline’s “The Economic Meltdown” (HTML and Flash)

Instructions: Scroll down and read the article in its entirety to learn about one of the unconventional policies that the government can adopt to stabilize the financial system in the economy. Then, watch the video to understand the current state of the macroeconomy and the government’s role in it.

Reading this article and watching the video should take approximately 1 hour.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above
See a broken link? Please let us know!

6.6.2 Government Policies to Stabilize the Economy

Web Media: Adam Davidson and Alex Blumberg’s “Quantitative Easing, Explained”
Link: NPR: Adam Davidson and Alex Blumberg’s “Quantitative Easing, Explained” (HTML)

Instructions: Read this article to learn about one of the unconventional policies that the government can adopt to attempt to stabilize the financial system.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Massachusetts Institute of Technology News: Peter Dizike’s “Explained: Quantitative Easing”
Link: Massachusetts Institute of Technology News: Peter Dizike’s “Explained: Quantitative Easing” (PDF)

Instructions: Read the entire article to learn one of the unconventional policies that the government can adopt to stabilize the financial system in the economy.

Terms of Use: Terms of Use: The above material is reposted from MIT News. The original version can be found here. The content owners have stipulated that this material may be republished provided that users comply with the terms outlined here. Reprinted with permission of MIT News (http://web.mit.edu/newsoffice/).
See a broken link? Please let us know!
Assessment: International Excellence Business School: Javier Carrillo’s Multimedia Documentation: “Interactive Graph of Aggregate Demand Policies”
Link: International Excellence Business School: Javier Carrillo’s Multimedia Documentation: “Interactive Graph of Aggregate Demand Policies” (Flash)

Instructions: Click on “Economic Environment” on the left-hand tab and scroll down to “Interactive Graph of Aggregate Demand” and “Interactive Graph of the Aggregate Supply and Demand Model.” Follow the instructions on the linked sites to use these interactive modules.

Note that on the left-hand side the graphs show how expansionary or restrictive fiscal and monetary policies affect the monetary sector and the real sector. On the right-hand side are ten exercises that will test your understanding of the topic. Review the material on the left thoroughly with the help of interactive graphs before attempting the exercises.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Assessment: Econ100’s “Chapter 14: Money Quiz” and “Chapter 15: Monetary Policy Quiz”
Link: Econ100’s “Chapter 14: Money Quiz” and “Chapter 15: Monetary Policy Quiz” (HTML)

Instructions: Click on the “Quiz” tab on the left hand side menu and then go to chapters 14 and 15 to take the quizzes. Attempt each portion of both quizzes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Unit 7: Labor Market

In microeconomics, the four factors of production are usually identified as land, capital, entrepreneurial talent, and labor. Using macroeconomics, we will now examine the labor factor, asking how wages affect the economy and how activities such as investment, consumption, and inflation impact the real wages of labor. In an ideal world, economies would make full use of available material and human resources. This unit explores how certain policies and practices often prevent the full employment of capital, land, and labor. In this unit, macroeconomics will help you study labor markets in order to determine optimum levels of employment and identify the strategies that make the best use of all available resources.

Time Advisory show close

Learning Outcomes show close

7.1 Labor Market

Reading: Professor Tancred Lidderdale’s Introduction to Macroeconomics: “Chapter 6: Unemployment and the Labor Market”
Link: Professor Tancred Lidderdale’s Introduction to Macroeconomics: “Chapter 6: Unemployment and the Labor Market” (HTML)

Instructions: Click on “Introduction to Macroeconomics” and then on the “Lecture Notes” link for Chapter 6. Scroll down to section 2A to read the relevant material for this topic. This reading covers section 7.1.1 and 7.1.2.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

7.1.1 Labor Demand and Supply Curves

Note: Labor demand is based occurs when marginal resource product is greater than the marginal resource costs; it is based on a calculation of derived demand or a need for supply. In regards to supply curves, if wages are high, then the supply curve slopes upward. If wages are low, then the supply curve’s slope is less steep. This is correlated to the laborer’s incentive to work; however, regarding employer incentives, the supply curve will demonstrate an incentive at the bottom of the upward slope for more labor at a lower wage and incentive for less labor at a higher wage.

7.1.2 The Labor Market (Graphical Representation)

Note: This topic is covered in subunit 7.1.

7.2 Macroeconomic Models

Reading: The University of North Carolina at Chapel Hill: Professor William R. Parke’s “Macroeconomics Models and Issues”
Link: The University of North Carolina at Chapel Hill: Professor William R. Parke’s “Macroeconomics Models and Issues” (HTML)

Instructions: Click on the “Classical Models” and the “Keynesian Models” to learn how macroeconomic models have changed over time. Read “Classical Models” in its entirety, and read the “Overview,” “The Simple Keynesian Model,” and “The IS/LM Model” sections in “Keynesian Models.”

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 7: Classical – Keynesian Controversy”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 7: Classical – Keynesian Controversy” (PDF)

Instructions: Read this chapter in its entirety. This chapter also covers the topics outlined in sub-subunits 7.2.1 and 7.2.2.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike License. You can find the original version of this article here.
See a broken link? Please let us know!

7.2.1 Classical Views

Note: The classical view of unemployment is that if the wage is higher, more people will want to work, and if the wage is lower, fewer people will want to work. If the employer needs or wants more workers, it will increase wages to act as an incentive. If there is a great supply of workers, employers will reduce wages.

7.2.2 Keynesian View

Note: The Keynesian view of unemployment is that unemployment is a result of inadequacies in an economy and differences in aggregate supply and aggregate demand.

Web Media: Khan Academy’s “Keynesian Economics”
Khan Academy’s “Keynesian Economics” (YouTube)

Instructions: Watch this video, which discusses Keynesian economics.

Watching this video should take approximately 12 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Risks of Keynesian Thinking”
Khan Academy’s “Risks of Keynesian Thinking” (YouTube)

Instructions: Watch this video, which discusses the risks of Keynesian thinking.

Watching this video should take approximately 9 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

7.2.3 “Sticky Wages” Defined and Explained

Reading: Professor Robert Schenk’s CyberEconomics: “Resource Markets”
Link: Professor Robert Schenk’s CyberEconomics: “Resource Markets” (HTML)

Instructions: Read the “Sticky Wages” article. Be sure to click on “Review” to answer two questions that will test your understanding of the concept.

Terms of Use: The linked material above has been reposted by the kind permission of Robert Schenk, and can be viewed in its original form here. Please note that this material is under copyright and cannot be reproduced in any capacity without explicit permission from the copyright holder.
See a broken link? Please let us know!

7.3 The Relationship between Unemployment and Inflation

Reading: Principles of Macroeconomics: Chapter 16: "Inflation and Unemployment", Sections 2-3
Link: Principles of Macroeconomics: “Chapter 16, Sections 2-3: Inflation and Unemployment” (PDF)

Instructions: Read Chapter 16, which will teach you about the Phillips curve, a short-run tradeoff between inflation and unemployment. This reading covers sections 7.3.1 and 7.3.2.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

7.3.1 The Philips Curve Defined

Note: This topic is covered in the material for subunit 7.3.

7.3.2 The Philips Curve Breakdown and Stagflation

Note: The Phillips curve demonstrates that there is a trade-off between inflation and unemployment. According to the curve, when inflation is higher than expected, people will work at a lower real wage. Employers will in turn hire more workers at the lower real wage, increasing output and reducing unemployment. In the 1970s and 1980s, when both inflation and unemployment were continually rising (a phenomenon known as “stagflation”), many economists questioned the soundness of the Phillips curve.

Assessment: PEOI.org: John Petroff’s Macroeconomics: “Chapter 14: Unemployment vs. Inflation” and “Review Quiz”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 14: Unemployment vs. Inflation” (PDF) and “Review Quiz” (HTML)

Instructions: Review the material in chapter 14, and then scroll down to the bottom of the original webpageand click on the “Review Quiz” link to take the quiz.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike License. You can find the original version of this article here.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Stagflation”
Khan Academy’s “Stagflation” (YouTube)

Instructions: Watch this video, which examines stagflation.

Watching this video should take approximately 3 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!
Web Media: Khan Academy’s “Phillips Curve”
Khan Academy’s “Phillips Curve” (YouTube)

Instructions: Watch this video, which is about the Phillips curve.

Watching this video should take approximately 9 minutes.

Terms of Use: This video is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 United States License. It is attributed to the Khan Academy.
See a broken link? Please let us know!

Unit 8: Economic Growth

What determines economic growth? Is it an increase in land use or capital? What role does productivity play in economic growth? What public policies are best for promoting economic growth – and which are worst? This is the stuff of newspaper headlines and public policy debates. In this unit, we will address these and other issues pertaining to economic growth.

According to macroeconomics, an economic system refers to the process by which inputs (capital, land, and labor) are transformed into certain outputs (the goods and services people wish to purchase). The political and legal environment under which economic activity takes place largely determines whether or not the economy expands and grows. Unstable political climates, confiscatory taxation or burdensome regulations will tend to restrict production and trade. In a situation where property and contracts are respected, specializations and innovations in technology are occurring, and investment spending is rising, the economy grows and both investment goods and consumption goods increase.

Time Advisory show close

Learning Outcomes show close

8.1 Introduction to Economic Growth

Reading: State University of New York at Oswego: Professor John Kane’s Lecture Notes on Principles of Macroeconomics: “Economic Growth”
Link: State University of New York at Oswego: Professor John Kane’s Lecture Notes on Principles of Macroeconomics: “Economic Growth” (HTML)

Instructions: Read this material in its entirety to for a summary of how aggregate output is measured using GDP and other related macroeconomic variables.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: PEOI.org: John Petroff’s Macroeconomics: “Chapter 15: Economic Growth”
Link: PEOI.org: John Petroff’s Macroeconomics: “Chapter 15: Economic Growth” (PDF)

Instructions: Complete the linked reading, keeping in mind that economic growth is the sum total of all the components of exploring, discovering, solving problems, sharing ideas, and solving problems of a macroeconomic system. The author’s presentation of economic growth will serve as a nice wrap-up of the various components studied in macroeconomics.

Terms of Use: The article above is released under a Creative Commons Attribution-NonCommercial-Share-Alike License. You can find the original version of this article here.
See a broken link? Please let us know!
Reading: biz/ed’s Virtual Worlds: “Costs of Growth - Who Pays?”
Link: biz/ed’s Virtual Worlds: “Costs of Growth - Who Pays?” (HTML)

Instructions: Read this article to learn about the costs associated with growth.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

8.2 Sources of Economic Growth

Reading: biz/ed’s Virtual Worlds: “Sources of Growth - Where Does It Come From?”
Link: biz/ed’s Virtual Worlds: “Sources of Growth - Where Does It Come From?” (HTML)

Instructions: Read this article to learn about the conditions needed for economic growth.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Principles of Macroeconomics: “Chapter 2, Section 1: Factors of Production”
Link: Principles of Macroeconomics: “Chapter 2, Section 1: Factors of Production” (PDF)

Instructions: Read this section to learn about the conditions needed for economic growth. This reading covers subunits 8.2.1-8.2.4.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

8.2.1 Labor

Note: Labor can be defined as a resource of physical talents, intellectual talents, and efforts used to produce goods and services.

8.2.2 Capital

Note: Capital can be defined as resources, such as buildings, machinery, and equipment that are used to produce goods and services. Capital goods are non-labor intensive.

8.2.3 Human Capital (or Entrepreneurial Talent)

Note: Human capital or entrepreneurial talent are the intellectual properties and intellectual training that enables a person to be more productive.

8.2.4 Productivity

Note: Productivity involves the lowest production cost of a good or service. In other words, the productivity of labor is determined by dividing total output by the costs of the input (labor resource).

8.3 Growth Theories

Reading: Bookboon: Peter Jochumzen’s Essentials of Macroeconomics
Link: Bookboon: Peter Jochumzen’s Essentials of Macroeconomics (PDF)

Instructions: Download this free textbook. Scroll down to “Chapter 9” on page 59 to learn about theories pertaining to Economic Growth.

This chapter covers the definition of economic growth, the relationship between production function and growth and the subsequent models of growth-the classical model, the neo-classical model and the endogenous growth model.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Worth Publishers: N. Gregory Mankiw’s Macroeconomics, 5th ed.: “Student Tutorial: Chapters 7 and 8”
Link: Worth Publishers: N. Gregory Mankiw’s Macroeconomics, 5th ed.: “Student Tutorial: Chapters 7 and 8” (PowerPoint)

Instructions: Click on “Chapter 7: Economic Growth I” and “Chapter 8: Economic Growth II” to study the theory of economic growth, paying particular attention to the Solow model.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

8.4 US Economic Growth

Reading: The Saylor Foundation: EconomyWatch’s “U.S. Economic Profile”
Link: The Saylor Foundation: EconomyWatch’s “U.S. Economic Profile” (PDF)

Instructions: Please read this article on the trend of real GDP growth rate in the United States.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Reading: Board of Governors of the Federal Reserve System: Chairman Ben S. Bernanke’s “Speech Transcript: U.S. Economic Growth Outlook”
Link: Board of Governors of the Federal Reserve System: Chairman Ben S. Bernanke’s “Speech Transcript: U.S. Economic Growth Outlook” (PDF)

Instructions: Read the transcript of Federal Reserve Chairman Ben S. Bernanke’s speech from the International Monetary Conference in Atlanta, Georgia in 2011. It provides an excellent illustration of the ways in which the economies of the world are linked. In his speech, Bernanke shares views on macroeconomic indicators including aggregate output, GDP, unemployment, and inflation. He also discusses the ways in which economic growth in the U.S. is affected.

Terms of Use: This work is in the public domain.
See a broken link? Please let us know!

Unit 8 Assessment

Assessment: Econ100’s “Chapter 11: Economic Growth Quiz”
Link: Econ100’s “Chapter 11: Economic Growth Quiz” (HTML)

Instructions: Click on the “Quiz” tab on the left hand side menu and then go to “Chapter 11” to take the quiz.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Unit 9: The Developing World

Less developed countries (LDCs) face a number of obstacles both in obtaining needed resources and in making better use of their current available resources. If a country is to improve the lot of its citizens, what is the best way to do it? Are the policies used by developed nations appropriate for LDCs? Because each country is different in size, natural endowments, history, and other critical factors, one set of policies may not fit all. But are there common indicators and approaches pointing a nation towards the improvement of the quality of life for its inhabitants? Is the government a better promoter of development than the marketplace? Should agriculture be given priority or should resources be used to build up industry? To quote Nobel Laureate Robert Lucas, “The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.” ^[1] Economic development is one of the most diverse topics in contemporary economics and provides us with a variety of ways to both identify problems and offer fundamental solutions.
_________________________
^[1]Lucas, R. E. “On the Mechanics of Economic Development.” Journal of Monetary Economics, February 1998: 3(42), 5.

Time Advisory show close

Learning Outcomes show close

9.1 Less Developed Countries (LDCs)

Reading: Principles of Macroeconomics: “Chapter 19, Sections 1-2: Economic Development”
Link: Principles of Macroeconomics: “Chapter 19, Sections 1-2: Economic Development” (PDF)

Instructions: Read this chapter to learn about the definition and characteristics of less developed countries and the Malthusian theory of population growth. This reading will cover subunits 9.1.1-9.1.3.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

9.1.1 Definition of LDC

Note: Economists define lesser developed countries (LDCs) as being poor (as measured by per capita GDP) and as being un-modern.

9.1.2 Characteristics of LDCs

Note: LDCs are primarily agricultural producers; industrial production accounts for less than 10% of GDP.

9.1.3 Vicious Circle of Poverty Argument

Note: The vicious circle of poverty argument centers around the theory that one problem causes another problem that then causes the initial problem again (i.e. post hoc ergo propter hoc, or after this, therefore because of this). For example, if an individual has a limited education, or if an individual has no special job skill sets and is also unemployed, then the theory supposes that the person will always be unemployed or the individual will always be a low wage earner.

9.2 The Obstacles to Development

Reading: The World Bank’s Beyond Economic Growth: “Chapter XVII: Development Goals and Strategies”
Link: The World Bank’s Beyond Economic Growth: “Chapter XVII: Development Goals and Strategies” (HTML)

Instructions: Read this chapter in its entirety; it explains what the United Nations has planned for combating poverty around the world as part of its Millennium Development Goals. Use the in-text links to view the definitions of any terms or concepts that you do not understand.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Lecture: YouTube: Wellesley College: Dr. Esther Duflo’s “Poor Economics”
Link: YouTube: Wellesley College: Dr. Esther Duflo’s “Poor Economics” (YouTube)

Instructions: In this lecture, Dr. Esther Duflo explains the results and effectiveness of several policy changes that attmept to alleviate poverty around world.

Watching this lecture should take approximately 1 hour and 20 minutes.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

9.3 Four Strategies for Economic Development

Reading: Principles of Macroeconomics: “Chapter 19, Section 3: Keys to Economic Development”
Link: Principles of Macroeconomics: “Chapter 19, Section 3: Keys to Economic Development” (PDF)

Instructions: Read this section to study how an economy can progress towards economic development. This reading covers sub-subunits 9.3.1-9.3.4.

Terms of Use: This text was adapted by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-Share-Alike 3.0 License without attribution as requested by the work’s original creator or licensee.

See a broken link? Please let us know!

9.3.1 Industry versus Agriculture

Note: Industry and agriculture are equally important. The theory is that without agriculture, a country cannot exist, but without industry, a country also cannot exist. In other words, a country needs both industry and agriculture as a functioning part of its economy.

9.3.2 Import Substitution

Note: Economists find value in engaging in import substitution based on the theory of comparative advantage, which means that respective country’s seek goods that have a lower opportunity cost. Consequently, import substitutes may enable greater domestic purchases within its borders.

9.3.3 Export Promotion

Note: Export promotion centers on the idea of attracting more firms to export their products by providing assistance in product and market identification and development, training trade fairs, and foreign representation. In other words, firms explore opportunities to sell more products abroad, consequently enabling more revenue funds as well as GDP growth.

9.3.4 Market-Based Solutions

Note: A number of industries (food, energy, communication, environmental, etc.) engage in market-based solutions in order to drive change for economic growth. A market-based solution is one that is brought about when a philanthropist, such as Michael Saylor of the Saylor Foundation or Bill and Melinda Gates of the Bill & Melinda Gates Foundation, enables innovation in a facet of industry to expand and be productive for the workforce and consumers.

Unit 10: International Trade

Why do nations trade goods and services with each other? How do they decide what to export and what to import? Should nations protect their industries from foreign competition by using tariffs and quotas? In this unit, we will take a look at some of these questions.

The concept of “trade” is an important element in economics. As workers, we trade our time and effort for the goods and services our wages will buy. When we study international trade, the same logic applies: two people will not trade unless they both expect to gain; both sides must see profit, or they will refuse trade. Finally, people will not sell goods unless they want to buy other goods. This is true at an individual level and, more generally, for every nation. By trading with each other, trading partners benefit if they can buy a good or service more cheaply than they can produce it domestically.

Macroeconomics uses accounting and other tools to measure trade and determine the effect that certain changes have on economic activity. By looking at a country’s trade balance and the rate at which its currency trades, we can begin to understand why the economy is doing what it is doing at a particular point in time.

Time Advisory show close

Learning Outcomes show close

10.1 Introduction to Trade

Reading: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Introduction to Trade Theory”
Link: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Introduction to Trade Theory” (HTML)

Instructions: Read these lecture notes to get a brief overview on trade theory.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

10.2 Adam Smith and Absolute Advantage

Reading: The Saylor Foundation: Wikipedia’s “Absolute Advantage”
Link: The Saylor Foundation: Wikipedia’s “Absolute Advantage” (PDF)

Instructions: Read this article, which examines Adam Smith’s theory of absolute advantage.

Terms of Use: The article above is released under a Creative Commons Attribution-Share-Alike License 3.0. You can find the original Wikipedia version of this article here.
See a broken link? Please let us know!

10.3 David Ricardo and Comparative Advantage

Reading: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Ricardian Trade Theory”
Link: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Ricardian Trade Theory” (HTML)

Instructions: Read these lecture notes to learn about Ricardian trade theory.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

10.4 Heckscher-Ohlin-Samuelson trade theory

Reading: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Heckscher-Ohlin-Samuelson Trade Theory”
Link: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Heckscher-Ohlin-Samuelson Trade Theory” (HTML)

Instructions: Read these lecture notes to learn about Heckscher-Ohlin-Samuelson trade theory.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

10.5 Commercial Policy

10.5.1 Tariffs

Reading: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Tariffs”
Link: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Tariffs” (HTML)

Instructions: Read these lecture notes to learn about tariffs in trade theory.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

10.5.2 Quotas

Reading: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Quotas”
Link: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Quotas” (HTML)

Instructions: Read these lecture notes to learn about quotas in trade theory.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!
Assessment: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Trade Quiz”
Link: University of Washington: Professor Colin Danby’s Macroeconomics Teaching Notes: “Trade Quiz” (HTML)

Instructions: Complete these interactive practice quizzes to review the material you have learned in this section.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above
See a broken link? Please let us know!
Assessment: Cengage Learning: William Boyes and Michael Melvin’s Macroeconomics: “Chapter 36: International Trade Restrictions”
Link: Cengage Learning: William Boyes and Michael Melvin’s Macroeconomics: “Chapter 36: International Trade Restrictions” (Flash)

Instructions: Click on the links for “Test 1” and “Test 2” beneath “Chapter 36” on the linked page and complete each assessment. Once you have selected an answer choice, a note at the bottom of the screen will indicate whether or not your choice was correct.

Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.
See a broken link? Please let us know!

Final Exam

Final Exam: The Saylor Foundation’s “ECON102 Final Exam”
Link: The Saylor Foundation’s “ECON102 Final Exam”

Instructions: You must be logged into your Saylor Foundation School account in order to access this exam. If you do not yet have an account, you will be able to create one, free of charge, after clicking the link.
See a broken link? Please let us know!

« Previous Unit Next Unit » Back to Top

Saylor.org

Resource Center

We still need...

Legend

Discuss ECON102 with other Saylor Students here!

Principles of Macroeconomics

Purpose of Course show close

Course Information show close

Learning Outcomes show close

Course Requirements show close

Preliminary Information

Unit Outline show close

Saylor.org

Resource Center

We still need...

Legend

Discuss ECON102 with other Saylor Students here!

Principles of Macroeconomics

Purpose of Course showclose

Course Information showclose

Learning Outcomes showclose

Course Requirements showclose

Preliminary Information

Unit Outline show close

Purpose of Course show close

Course Information show close

Learning Outcomes show close

Course Requirements show close