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.Day 2: 1. Differentiate between the short-run and long-run Phillips Curves.
    

Unit III: Financial Sector- 3 weeks - 15–20% A. Money, banking, and financial markets 1. Definition of financial assets: money, stocks, bonds 2. Time value of money (present and future value) 3. Measures of money supply 4. Banks and creation of money 5. Money demand 6. Money market 7. Loanable funds market B. Central bank and control of the money supply 1. Tools of central bank policy 2. Quantity theory of money 3. Real versus nominal interest ratesDay 1:Day 7: Unit III TestUnit IV: Inflation, Unemployment, and Stabilization Policies- 4 ½ weeks - 20–30% A. Fiscal and monetary policies 1. Demand-side effects 2. Supply-side effects 3. Policy mix 4. Government deficits and debt B. Inflation and unemployment 1. Types of inflation a. Demand-pull inflation b. Cost-push inflation 2. The Phillips curve: short run versus long run 3. Role of expectationsUnit V: Economic Growth and Productivity- 1 ½ weeks - 5–10% A. Investment in human capital B. Investment in physical capital C. Research and development, and technological progress D. Growth policyDay 1:2. Identify the supply‑side shocks to the U.S. economy in the 1970s and 1980s.3. Use an aggregate demand‑aggregate supply graph to show how supply‑side shocks led to stagflation in the 1970s and 1980s.4. Explain why demand‑management policies cannot eliminate stagflation. o Ch. 16Day 3: 1. Explain two possible effects of taxation on aggregate supply.2. Explain the Laffer Curve concept and list three criticisms of this theory.o Ch. 16Day 4: 1Day 6:1. Differentiate between deficit and debt.2. Explain each of the three budget philosophies.3. Identify three principal causes of the public debt.4. State the absolute size of the debt and the relative size as a percentage of GDP.5. Describe the annual interest charges on the debt, who holds the debt, and the impact of inflation on the debt.o Ch. 18Day 7:1. Explain why the debt can also be considered public credit.2. Identify and discuss two widely held myths about the public debt.3. Explain the real or potential effect of the debt on income distribution, economic incentives, fiscal policy, and private investment.4. State how debt plays a positive role in society.5. Explain the four policy options for the current and future surpluses.6. Describe how budget deficits are related to trade deficits.o Ch. 18Day 8:1. Contrast the classical and Keynesian views of the aggregate supply curve.2. Compare the classical and Keynesian views of the stability of the aggregate demand curve.3. Give two reasons for macroeconomic instability according to mainstream economists.4. Explain the equation of exchange.5. Identify the single most important cause of macroeconomic instability according to the monetarists.6. Explain the main reasons for macro economic instability according to the real-business-cycle theory.o Ch. 19Day 9:1. Explain the view of self-correction held by mainstream economists.2. List three reasons why a higher wage could result in greater efficiency.3. Explain how insider-outsider relationships contribute to downward wage inflexibility.4. Describe the monetary rule and explain why monetarists prefer it to discretionary monetary policy.o Ch. 19Day 10: Unit IV TestUnit VI. Open Economy: International Trade and Finance- 2 weeks -10–15% A. Balance of payments accounts 1. Balance of trade 2. Current account 3. Capital account B. Foreign exchange market 1. Demand for and supply of foreign exchange 2. Exchange rate determination 3. Currency appreciation and depreciation C. Net exports and capital flows 1. Links to financial and goods markets Day 1: 1. Summarize the importance of international trade to the U.S. in terms of overall volume.2. List the major imports and exports of the United States.3. State two economic points that explain why nations trade.4. Compute, when given appropriate data, the relative costs of producing two commodities in two countries and determine which nation has the comparative advantage in each good.5. Compute, when given appropriate data, the range for the terms of trade.6. Calculate the potential gains from trade and specialization for each nation and the world when given appropriate data.7. State the economist’s case for free trade.o Ch. 37Day 2:1. Explain the relationship between world prices and American export supply curve, and the relationship between world prices and American import demand curve.2. Explain international equilibrium price and quantity using a two-nation market model for import demand and export supply.3. Identify four types of trade barriers.4. Describe the economic impact of tariffs, including both direct and indirect effects.5. Contrast the economic impact of a quota with that of a tariff.6. List seven arguments in favor of protectionist barriers, and critically evaluate each.7. Identify the costs of protectionist policies and their effects on income distribution.8. Describe the major provisions of the WTO.o Ch. 37Day 3:1. Explain how U.S. exports create a demand for dollars and a supply of foreign exchange; and how U.S. imports create a demand for foreign exchange and a supply of dollars.2. Explain and identify the various components of the balance of payments.3. Identify trade and balance of payments deficits or surpluses when given appropriate data.4. Explain how a nation finances a “deficit” and what it does with a “surplus.”5. Explain how exchange rates are determined in a flexible system.o Ch. 38Day 4: 1. Explain how flexible exchange rates eliminate balance of payments disequilibria.2. List five determinants of exchange rates.3. List three disadvantages of flexible exchange rates.4. List three ways a nation could control exchange rates under a fixed‑rate system.5. Describe a system based on the gold standard, the Bretton Woods system, and a managed float exchange rate system.6. Describe two effects of a trade deficit.o Ch. 38Day 5: Unit VI TestReview Days: The above syllabus allows for four review days before the AP Examination. Two of these days will be spent reviewing Microeconomics and one will be spent reviewing Macroeconomics.