Unit 3 Macroeconomics
The purpose of this unit is to provide students with the opportunity for a detailed examination of the major macroeconomic issues facing countries' economic growth, economic development, unemployment, inflation and income distribution.

The economic strategies available to governments - demand side policies, supply-side policies, direct intervention - are introduced and evaluated. These policies are applicable to almost all areas of macroeconomics, international economics and development economics.

3.1 Measuring national income

• Circular flow of income
• Methods of measurement - income, expenditure and output
• Distinction between
• gross and net
• national and domestic
• nominal and real
• total and per capita

3.2 Introduction to development

• Definitions of economic growth and economic development
• Differences in the definitions of the two concepts
• Gross Domestic Product (GDP) vs. Gross National Product (GNP) as measures of growth
• Limitations of using GDP as a measure to compare welfare between countries
  
• Allowance for differences in purchasing power when comparing welfare between countries
• Alternative methods of measurement
• Problems of measuring development

3.3 Macroeconomic models

• Aggregate demand - components
• Aggregate supply
• short-run
• long-run (Keynesian vs. neo-classical approach)
• Full employment level of national income
• Equilibrium level of national income
• Inflationary gap
• Deflationary gap
• Diagram illustrating trade/business cycle

3.4 Demand-side and supply-side policies

• Shifts in the AD curve / demand-side policies
• fiscal policy
• interest rates as a tool of monetary policy
• Shifts in the AS curve / supply-side policies
• Strengths and weaknesses of these policies

Higher level only:

• Multiplier
• calculation of multiplier
• Accelerator
• "Crowding out"

3.5 Unemployment and inflation

Unemployment

• Full employment and underemployment
• Unemployment rate
• Costs of unemployment
• Types of unemployment
• structural
  
• frictional
• seasonal
• cyclical/demand-deficient
• real wage
• Measures to deal with unemployment

Inflation

• Definitions of inflation and deflation
• Costs of inflation and deflation
• Causes of inflation
• cost push
• demand pull
• excess monetary growth

Higher level only:

• Methods of measuring inflation
• Problems of the methods of measuring inflation
• Phillips curve
  
• short-run
• long-run
• Natural rate of unemployment (NRU)
  
• Non-Accelerating Inflation Rate of Unemployment (NAIRU)

3.6 Distribution of income

• Direct taxation
• Indirect taxation
• Progressive taxation
• Proportional taxation
• Regressive taxation
• Transfer payments

Higher level only:

• Laffer curve
  
• Lorenz curve and Gini coefficient

Unit 3.1 Measuring national income: Performance Objectives

1. State the purposes of national income accounting.
2. List the components of GDP in the expenditures approach and in the income approach.
3. Compute GDP using either the expenditure or income approach when given national income data.
4. Differentiate between gross and net investment
5. Explain why changes in inventories are investments.
6. Discuss the relationship between net investment and economic growth
7. Define GDP verbally and in written format; learn and use the formula for deriving GDP.
8. Given data on nominal GDP, calculate the real GDP using the price deflator/price index.
9. Discuss the limitations of GDP as a measurement of economic well-being.

Unit 3.2 Intro to growth and development: Performance Objectives

1. Explain how economists define economic growth and economic development, how often growth and development are measured.
   
2. Learn how different countries’ economies have grown historically and learn how the business cycle contributes to these variations in economic growth.
3. Define two measures of economic growth.
4. Explain why growth is a desirable goal.
5. Distinguish between economic growth and economic development
6. Identify and explain two main sources of growth.
7. Identify and explain two measures of economic development.
8. Explain the “rule of 70.”
9. Explain what is meant by a business cycle.
10. Identify two types of non-cyclical fluctuations in business activity.
11. Explain why business cycles affect capital and consumer durable goods industries more than non-durable goods industries.

Unit 3.3 Macroeconomic Models: Performance Objectives

1. Examine the relationships between several economic aggregates.
2. Recognize, construct, and explain the consumption, saving, and investment schedules.
3. Identify the determinants of the location of the consumption and saving schedules.
4. Differentiate between the average and marginal propensities to consume (and save).
5. Identify the immediate determinants of investment and construct an investment demand curve.
6. Identify the factors that may cause a shift in the investment-demand curve or schedule.
7. Define aggregate demand and aggregate supply
8. Give three reasons why the aggregate demand curve slopes downward.
9. Illustrate, label, and explain the three ranges of the aggregate supply curve.
10. State the determinants of the aggregate demand curve’s location.
11. Explain the shape of the aggregate supply curve.
12. Contrast the classical and Keynesian views of the aggregate supply curve.
13. Compare the classical and Keynesian views of the stability of the aggregate demand curve.
14. Indicate the determinants of the supply curve’s location.
15. Explain how a market economy moves to equilibrium price and output level.
16. Predict effects of an increase in aggregate demand when economy is in (a) horizontal range, (b) intermediate range, and (c) vertical range.
17. Explain how the multiplier is weakened in the intermediate or vertical range of aggregate supply.
18. State three basic causes of changes in aggregate supply differentiating between leftward and rightward shifts of the curve.

Unit 3.4 Demand and supply side policies: Performance Objectives
Fiscal Policy

1. Distinguish between discretionary and nondiscretionary fiscal policy.
2. Differentiate between expansionary and contractionary fiscal policy.
3. Recognize the conditions for recommending an expansionary or contractionary fiscal policy.
4. Explain expansionary fiscal policy and its effects on the economy and Federal budget.
5. Explain contractionary fiscal policy and its effects on the economy and Federal budget.
6. Describe the two ways to finance a government budget deficit and how each affects the economy.
7. Describe the two ways to handle a government budget surplus and how each affects the economy.
8. Give two examples of how built‑in stabilizers help eliminate recession or inflation.
9. Explain the differential impacts of progressive, proportional, and regressive taxes in terms of stabilization policy.
10. List three timing problems encountered with fiscal policy.
11. State political problems that limit effective fiscal policy.
12. Explain and recognize graphically how crowding out and inflation can reduce the effectiveness of fiscal policy.
13. Give two examples of complications that may arise when fiscal policy interacts with international trade.
14. Give an example of supply‑side fiscal policy and three possible positive effects from it.
15. Explain and recognize graphically how crowding out and inflation can reduce the effectiveness of fiscal policy.
16. Give two examples of complications that may arise when fiscal policy interacts with international trade.

Monetary Policy

1. List and explain the three functions of money.
2. Define the money supply.
3. Identify two types of demand for money and the main determinant of each.
4. Describe the relationship between GDP and the interest rate and each type of money demand.
5. Explain what is meant by equilibrium in the money market and the equilibrium rate of interest.
6. Explain the relationship between bond prices and the money market.
7. Explain why Federal Reserve Banks are central, quasi‑public, and bankers’ banks.
8. Explain why a commercial bank is required to maintain a reserve and why it isn’t sufficient to cover deposits.
9. Explain how it is possible for the banking system to create an amount of money that is a multiple of its excess reserves when no single bank ever creates money greater than its excess reserves.
10. Compute the size of the monetary multiplier and the money‑creating potential of the banking system when provided with appropriate data.
11. State the two leakages that reduce the money‑creating potential of the banking system.
12. Identify the goals of monetary policy.
13. Describe three monetary policies a central bank could use to reduce unemployment.
14. Describe three monetary policies a central bank could use to reduce inflationary pressures in the economy.
15. Explain the cause‑effect chain between monetary policy and changes in equilibrium GDP.
16. Demonstrate graphically the money market and how a change in the money supply will affect the interest rate.
17. Show the effects of interest rate changes on investment spending.
18. Describe the impact of changes in investment on aggregate demand and equilibrium GDP.
19. Contrast the effects of an easy money policy with the effects of a tight money policy.
20. List four shortcomings and three strengths of monetary policy.
21. Explain the net export effect of an expansionary and a contractionary monetary policy.

Unit 3.5 Unemployment and Inflation: Performance Objectives

1. State causes of frictional, cyclical, and structural unemployment.
2. Identify the full employment or natural rate of unemployment.
3. Identify the economic costs of unemployment and the groups that bear unusually heavy unemployment burdens.
4. State causes of frictional, cyclical, and structural unemployment.
5. Identify the full employment or natural rate of unemployment.
6. Identify the economic costs of unemployment and the groups that bear unusually heavy unemployment burdens.
7. Define inflation and the states the different stages/measurements of inflation
8. Identify the causes for demand pull and cost-push inflation
9. Identify the losers and the winners during times of inflation
10. Explain how inflation affects economic growth and other economic goals, ( price stability, economic security)
11. Explain the difference between the short-run and long-run aggregate supply curves and their significance for economic policy.
12. Distinguish between demand-pull and cost-push inflation using the aggregate demand-aggregate supply model.
13. Explain and construct a traditional short-run Phillips Curve using the aggregate demand-aggregate supply model.