Chapter 1: Economics: The Core Issues - WHAT IS THIS CHAPTER ALL ABOUT?

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1 Principles of Economics ECON 2301/2302 Schiller, 14th Edition Chapter Learning Objectives Chapter 1: Economics: The Core Issues - The chapter introduces students to the basic building blocks of economics and the operation of markets. It presents the vocabulary, graphs, and key concepts essential for the study of economics. This chapter also establishes the central theme of market reliance vs. government direction. Current public opinion and a brief historical view of how the balance has shifted in world economies are illustrated by references to Adam Smith, Karl Marx and John Maynard Keynes. The first chapter focuses student attention on the core problem of scarcity. The four factors of production are limited, requiring choices to be made, illustrated with a production possibilities curve. Students should compare different economies according to how they answer the three fundamental questions of economics: 1. WHAT to produce with our limited resources. 2. HOW to produce the goods and services we select. FOR WHOM goods and services are produced that is, who should get them. Chapter 2: The U.S. Economy: A Global View - WHAT IS THIS CHAPTER ALL ABOUT? All nations confront the central economic questions: What to produce, How to produce; and For Whom to produce. However, the nations of the world approach these issues with very different production possibilities. The objective of this chapter is to assess how the U.S. economy stacks up. Specifically, this chapter address these three questions: WHAT goods and services does the United States produce? HOW is that output produced? FOR WHOM is the output produced?

2 Chapter 2 Learning Objectives, continued LEARNING OBJECTIVES: After reading this chapter, the students should know: 1. The relative size of the U.S. economy. 2. How the U.S. output mix has changed over time. 3. How/why the U.S. is able to produce so much output. 4. How incomes are distributed in the United States and elsewhere. Chapter 3: Supply and Demand - This chapter is students' first introduction to market behavior and the intricacies of the market mechanism. It is helpful to continue to answer the basic questions of WHAT, HOW, and FOR WHOM and to briefly outline how the market system answers them. The chapter has an explicit focus on the allocative and distributive functions of the price system. The section on disequilibrium pricing -- price ceilings and floors -- provides an opportunity to illustrate the implications of interference with market pricing mechanisms. This introduction sets the general direction of this chapter, which is to look at how the market system answers the following questions: 1. What determines the price of a good or service? 2. How does the price of a product affect its production and consumption? 3. Why do prices and production levels often change? LEARNING OBJECTIVES: After completing this chapter, the student should know: 1. The nature of Demand and its non-price determinants 2. The graphic illustrations of changes in demand 3. The nature of Supply and its non-price determinants of 4. The graphic illustrations of changes in supply 5. How market prices and quantities are established (equilibrium analysis) 6. What causes market prices to change (how changes in demand and supply exert specific upward and downward pressures on equilibrium prices) 7. The mechanics of govt. price ceilings and floors/supports and how they affect market outcomes.(including graphic analyses) 8. The conditions that exist when shortages and surpluses exist in a market and how govt. interference can create shortages and surpluses.

3 Chapter 4: The Role of Government pp This chapter examines the role of government in altering market outcomes. Circumstances that prevent the market from offering the optimal mix of output dictate the need for government intervention. This chapter identifies the circumstances when government intervention is desirable. The following questions will be answered: 1. Under what circumstances do markets fail? 2. How can government intervention help? 3. How much government intervention is desirable? LEARNING OBJECTIVES: After reading this chapter, the students should know: 1. The nature and causes of market failure.( four examples in text discussion) 2. How the public sector has grown. 3. Which taxes finance state, local, and federal governments. 4. The meaning of government failure. Chapter 5 National Income Accounting pp 93-6; pp ; This chapter introduces national-income accounting. The data generated by nationalincome accounting is used to track the economy s performance. This chapter provides a framework on which future chapters will build. The three questions that are to be kept in mind while reviewing the chapter are: 1. How much output is being produced? What is it being used for? 2. How much income is being generated in the marketplace? 3. What s happening to prices and wages? LEARNING OBJECTIVES: After reading the chapter students should know: 1. What GDP measures and what it doesn t. 2. How GDP is used to measure economic growth 3. The relationships between/among GDP, incomes, and employment 4. The difference between real and nominal GDP. 5. The mechanics of the so-called expenditures approach used to calculate GDP 6. Whether GDP should be used as a measure of economic welfare or the quality of life

4 Chapter 6 Unemployment pp ; pp ; This chapter takes a close look at the problem of unemployment. The focus is on the following questions: 1. When is a person unemployed? 2. What are the costs of unemployment? 3. What s an appropriate policy goal for full employment? LEARNING OBJECTIVES: After reading this chapter students should know: 1. How unemployment is measured. 2. The socio-economic costs of unemployment. 3. The major types of unemployment.(frictional, structural, and cyclical) The meaning of full employment. Chapter 7 Inflation pp The chapter provides an introduction to the concept of inflation. The chapter defines inflation, gives examples of inflation, outlines major problems associated with inflation, and provides a detailed approach to measuring inflation. The goal is to give students a solid framework for understanding and measuring inflation. The three questions below are to be kept in mind while reviewing the chapter: 1. What kind of price increases are referred to as inflation? 2. Who is hurt (or helped) by inflation? 3. What is an appropriate goal for price stability? LEARNING OBJECTIVES: After reading this chapter the students should know: 1. The mechanics of a price index 2. The definition of the economy s price level 3. The technical definition of inflation 4. How inflation is measured.using the price index concept 5. The definition of the inflation rate 6. Why inflation is a socioeconomic problem. 7. The meaning of price stability. (the U.S. economy s long-run/average experience with inflation 8. The broad causes of inflation.

5 Chapter 8 The Business Cycle pp ; pp A central concern of macroeconomics is the business cycle recurrent bouts of expansion and contraction of the nation s output. The Great Depression gave impetus to the study of macroeconomics, in particular the business cycle and policies that may alter the business cycle. This chapter investigates historical cycles in our nation s economy and the consequences of these fluctuations. The important questions to keep in mind while reviewing this chapter are: 1. How stable is a market-driven economy? 2. What forces cause instability? 3. What, if anything, can the government do to promote steady economic growth? LEARNING OBJECTIVES: After this chapter, the students should know: 1. The major macro outcomes and their determinants. 2. The four stages of the business cycle 3. The technical definition of the recession 4. Why the debate over macro stability is important. 5. The nature of aggregate demand (AD) and aggregate supply (AS). 6. What the Aggregate Demand and Aggregate Supply curves attempt to illustrate 7. How changes in AD and AS affect macro outcomes. Chapter 9 Aggregate Demand pp This chapter provides a close look into the demand side of product markets. Using the aggregate supply/aggregate demand analysis, the chapter investigates the market forces on the aggregate demand curve. The components of aggregate demand are identified and each component is investigated in detail. Keynes focused on aggregate demand for solutions to macro failures. This chapter focuses on three questions: 1. What are the components of aggregate demand? 2. What determines the level of spending for each component? 3. Will there be enough demand to maintain full employment? LEARNING OBJECTIVES: After reading this chapter, the students should know:

6 1. What the major components of aggregate demand are.(i.e. the Keynesian Focus on economy-wide expenditure) 2. What the consumption function tells us and the mechanics of the so-called non-income determinants of Consumption) 3. The definition and calculation of a household s average propensity to consume ( and average propensity to save) AND a household s marginal propensity to consume and marginal propensity to save. 3. The determinants of investment spending.(the definition of investment and the factors that impact investment expenditures by firms) 4. How and why AD shifts occur. 5. How and when macro failure occurs. Chapter 10 Self Adjustment or Instability; pp Macro failure is likely to occur in a market-driven economy and if it occurs, macro failure is likely to persist. This chapter looks closely at the adjustment process of the macroeconomy using an AS/AD framework. The chapter examines the economy s response to imbalances between desired spending and output. The following questions are addressed: 1. Why does anyone think the market might self-adjust (returning to a desired equilibrium)? 2. Why might markets not self-adjust? 3. Could market responses actually worsen macro outcomes? LEARNING OBJECTIVES: After reading this chapter, students should know: 1. The sources of circular flow leakages and injections. 2. The mechanics of the expenditure multiplier process and what it attempts to illustrate 3. How recessionary and inflationary GDP gaps arise.

7 Chapter 11 Fiscal Policy pp This chapter focuses on the Keynesian solution to economic stability: fiscal policy. From the Keynesian perspective, too little aggregate demand causes unemployment and too much aggregate demand causes inflation. Since the economy doesn t selfcorrect, the federal government must step in to achieve stability. This chapter examines some of the tools the federal government can use to alter macroeconomic outcomes. Questions to be kept in mind while reviewing this chapter are: 1. The definition of fiscal policy 2. The tools of fiscal policy 3. Can government spending and tax policies ensure full employment? 4. What policy actions will help fight inflation? 5. What are the risks of government intervention? CHAPTER 11 LEARNING OBJECTIVES: After reading the chapter, the students should know: 1. What real GDP gap and the AD shortfall measures. 2. The desired scope and the tools of fiscal stimulus. 3. What AD excess measures and the desired scope and tools of fiscal restraint. 4. How the multiplier affects fiscal policy. Chapter 12: Deficits and Debt This chapter looks at the surpluses, deficits, and debt and their impact on the economy. The focus of this chapter is on the following questions: 1. How do deficits arise? 2. What harm, if any, do deficits cause? 3. Who will pay off the accumulated national debt? LEARNING OBJECTIVES: After reading this chapter, the students should know: 1. The origins of cyclical and structural deficits. 2. How the national debt has accumulated. 3. How and when crowding out occurs. 4. What the real burden of the national debt is.

8 Chapter 13 Money and Banks pp This chapter begins by defining money and then establishes the roles of money and how money interacts with banks. The chapter provides numerous examples of definitions of money, including e-cash. In addition, the complicated process of money creation is developed in a step-by step process which students will be able to understand. Questions to keep in mind while reviewing this chapter are: 1. What is money? ( i.e. the so-called Functions of Money ) 2. How is money created? 3. What role do banks play in the circular flow of income and spending? LEARNING OBJECTIVES: After reading this chapter, the student should know: 1. What money is.(the components of the M1 and M2 money supply measures) 2. What a bank s assets and liabilities are. 3. How banks create money.(i.e. the mechanics of the money creation process) 4. How the money multiplier works. Chapter 14 The Federal Reserve System pp This chapter examines the mechanics of government actions to limit creation of money. It describes the structure of the Fed and the tools the Fed uses to control the money supply, focusing on the following questions: 1. Which agency is responsible for controlling the money supply? (i.e. The Fed ) 2. What policy tools are used to control the amount of money in the economy? (and the definition/mechanics/calculation of a bank s excess reserves) 3. How are banks and bond markets affected by Fed policies? LEARNING OBJECTIVES: After reading this chapter, the student should know:

9 1. How the Federal Reserve is organized and the characteristics of The Fed Organization Chart 2. The Fed s major policy tools.(i.e. the mechanics of: 1) Reserve Requirements; 2) The Discount Rate; 3) The Federal Funds Rate and 4) Open Market Operations 3. How each of the Fed s tools affect excess reserves and the potential volume of loan activity. More to follow.. Chapter 15 Monetary Policy This chapter examines the relative effectiveness of monetary policy. The Federal Reserve controls the nation s money supply in an attempt to affect macroeconomic outcomes. The chapter describes the mechanisms by which Fed policies affect aggregate demand. Three questions should be considered: 1. What s the relationship between the money supply, interest rates, and aggregate demand? 2. How can the Fed use its control of the money supply or interest rates to alter macro outcomes? 3. How effective is monetary policy, compared to fiscal policy? LEARNING OBJECTIVES: After reading this chapter, the student should know: 1. How interest rates are set in the money market. 2. How monetary policy affects macro outcomes. 3. The constraints on monetary policy impact. 4. The differences between Keynesian and monetarist monetary theories.

10 Chapter 16: Supply-Side Policy: Short-Run Options This chapter identifies supply-side policies and how they impact the economy. The chapter compares the Keynesian and monetarist views of the aggregate supply curve and relative effectiveness of macro policies. The chapter introduces the Phillips curve tradeoff between inflation and unemployment. Finally, several supply-side policy levers are identified and examined. The focus is on two questions: 1. How does the aggregate supply curve affect macro outcomes? 2. How can the aggregate supply curve be shifted? LEARNING OBJECTIVES: After reading this chapter, the student should know: 1. Why the short-run AS curve slopes upward. 2. How an unemployment-inflation trade-off arises. 3. The tools of supply-side policy. Chapter 17: Growth and Productivity: Long-Run Possibilities Economic growth has the potential to raise living standards. In this chapter, the nature of growth and possible limits to growth are discussed. The following questions are presented: 1. How important is economic growth? 2. How does an economy grow? 3. Is continued economic growth possible? Is it desirable? LEARNING OBJECTIVES: After reading this chapter, the student should know: 1. The principal sources of economic growth. 2. The policy tools for accelerating growth. 3. The pros and cons of continued growth.

11 Chapter 18: Theory vs. Reality What accounts for the discrepancy between economic theory and economic performance? Are our theories no good? Or, is sound economic advice being ignored? These questions about applying economic theory to the real world are the focus of the chapter. The chapter specifically tries to answer: 1. What s the ideal package of macro policies? 2. How well does our macro performance live up to the promises of that package? 3. What kinds of obstacles prevent us from doing better? LEARNING OBJECTIVES: After reading this chapter, the student should know: 1. The tools of macro policy. 2. How macro tools should work. 3. The constraints on policy effectiveness. Chapter 35: International Trade This chapter looks at the nature of international trade patterns -- what goods and services are traded, and with whom. The following questions are addressed: 1. What benefit, if any, do we get from international trade? 2. How much harm do imports cause, and to whom? 3. Should we protect ourselves from unfair trade by limiting imports? LEARNING OBJECTIVES: After reading this chapter, the students should know: 1. What comparative advantage is. 2. What the gains from trade are. 3. How trade barriers affect prices, output, and incomes. Chapter 36 International Finance Each country creates and maintains its own money. The problem is that one country s money may not be acceptable as a standard of value in another country. There is, therefore, a fundamental need to have an internationally acceptable standard of value or to have a mechanism for converting one country s currency into that of another. This chapter addresses several questions related to the international financing of transactions. The goal is to answer the following questions:

12 1. What determines the value of one country s money as compared to the value of another s? 2. What causes the international value of currencies to change? 3. Should governments intervene to limit currency fluctuations? LEARNING OBJECTIVES: After reading this chapter, the students should know: End. 1. The sources of foreign-exchange demand and supply. 2. How exchange rates are established. 3. How changes in exchange rates affect prices, output, and trade flows.