Topic Name Description
Course Syllabus Page Course Syllabus
1.1: The Economic Way of Thinking Page What Is Economics, and Why Is It Important?

Read this text on why we should study economics. Pay attention to the relationship between production and division of labor. In many ways, economics is the study of choice. Scarcity refers to our demand for goods, services, and resources that exceeds what is available. What is the economic significance of scarcity?

Page Microeconomics and Macroeconomics

Read this text comparing the micro and macroeconomics perspectives. What are the key factors and components of monetary policy and fiscal policy? Monetary policy is concerned with managing interest rates and the total supply of money in circulation. Central banks, such as the U.S. Federal Reserve, manage monetary policy. Fiscal policy is a collective term for the government's taxing and spending actions that directly impact the federal budget – causing a budget surplus, balanced budget, or deficit.

Page How Economists Use Theories and Models to Understand Economic Issues

Read this text on interpreting a circular flow diagram. It explains the basis of important economic theories and models we will explore in more detail. It is important to understand that a theory simply states how two variables are interlinked. For example, I believe the more you study, the higher your GPA. The majority of data demonstrates a theory. Pay attention to the goods and services market and the labor market.

Page How to Organize Economies: An Overview of Economic Systems

Read this text, which contrasts traditional, command, and market economies. What is gross domestic product (GDP)? How has the rise of globalization affected our economy? Throughout this course, we will explore the economic importance of these key macroeconomic concepts in further detail.

Page Hypotheses, Theories, and Models

Watch these videos on the tools macroeconomists use to measure the status and trends in the economy. McGlasson explains how economists test hypotheses, develop economic theories, and use models in their analysis.

1.2: Scarcity and Production Choices Page Choice in a World of Scarcity

Read this text, which introduces the concept of scarcity.

Page Resources, Scarcity, and Choice

Watch these videos on resources, scarcity, and how we make choices when resources are scarce. We know that satisfying unlimited wants is impossible. Finding ways to use scarce resources to optimize society's well-being is one of the most important tasks of the science of economics.

Page How Individuals Choose Based on Budget Constraints

Take some time to review this text, which explains how to calculate and graph budget constraints. Opportunity cost is the value of something you gave up to get what you want – the opportunity lost. In short, opportunity cost is the value of the next best alternative. Be sure you understand the concepts of opportunity sets and opportunity costs. Can you think of an example of a scenario that shows the law of diminishing marginal utility? How do marginal analysis and utility influence our choices? The law of diminishing marginal utility means that the more of an item you use or consume, the less satisfaction you get from each additional unit consumed or used. An example is consuming your favorite food, pizza, for the fifth night in a row.

1.3: The Production Possibilities Curve Page The Production Possibilities Frontier and Social Choices

Study this text on how to interpret graphs of the production possibilities frontier. What is the difference between a budget constraint and a production possibilities frontier? What is the relationship between a production possibilities frontier and the law of diminishing returns? What is the difference between productive and allocative efficiency? A country has a comparative advantage over another when it can produce a certain good at a lower opportunity cost. Can you think of an example?

Page Objections to the Economic Approach

Let's take a moment to analyze arguments against economic approaches to decision-making. This text shows how to interpret a tradeoff diagram. What are normative and positive statements?

Book The Production Possibilities Curve (PPC)

Watch these videos to learn how a production possibilities curve is constructed. Pay attention to how changes in resources affect the PPC curve. Some combinations of products may be unattainable, given the limited existing resources, whereas other combinations of products may be inefficient as they leave some resources unused. The PPC curve helps find levels of production that use all of the available resources in the economy.

1.4: Opportunity Cost Page Opportunity Cost

Watch this video for a graphical representation of opportunity cost on the production possibilities curve. As the video shows, a point inside the curve shows that resources are not being used efficiently. These are points of inefficiency. Any point outside the curve represents a point beyond our grasp but could be attained with more resources and technology.

Any point on the production possibilities curve is a point of efficiency; any movement up or down the curve represents changes in production. As you obtain more of one good, you have to give more of the other good, which is why opportunity cost is represented by moving along the curve itself.

1.5: Demand, Supply, and Market Equilibrium Page Demand, Supply, and Equilibrium in Markets for Goods and Services

Read this text on the basics of demand and supply. You should be able to list the factors that shift the demand curve and those that shift the supply curve. Be sure to study the difference between demand and quantity demanded (and between supply and quantity supplied).

Book More on Demand

Watch these videos for additional perspectives on demand, the Law of Demand, and the variables that shift the demand curve. Be sure you understand the difference between demand and quantity demanded. Knowing this difference will help you determine if a change in a specific variable causes a movement along the demand curve or a shift of the curve.

Book More on Supply

Watch these videos to learn about supply, the Law of Supply, and the variables that shift the supply curve. Like our discussion on the difference between demand and quantity demanded, we must distinguish between supply and quantity supplied. As you will see, a change in quantity supplied causes a movement along the supply curve, whereas a change in supply is a shift of the entire curve.

Page Market Equilibrium

Watch this video to put demand and supply on the same graph and determine equilibrium quantity and price. Learn how changes on the demand and supply side of the market affect the equilibrium outcome.

Page Shifts in Demand and Supply for Goods and Services

Read this text, which explains that prices are rarely at equilibrium. For example, the price of gas rises and falls throughout the year depending on whether their production supplies are limited. The price for roses before Valentine's Day leaps due to the rising demand to buy flowers for the holiday. The price plummets on February 15th when the demand has decreased. The main idea of this text is that something is perfectly priced when supply equals demand. But this rarely occurs because relevant factors are constantly changing.

1.6: Market Equilibrium Page Changes in Equilibrium Price and Quantity: The Four-Step Process

Read this section to see how demand can increase by shifting to the right when income rises, when the price of complementary goods falls, when tastes or preferences change to favor a particular good or service, and when the number of people or population rises. Conversely, demand can fall or shift to the left when income falls, when the price of complementary goods rises, when tastes or preferences change away from a particular good or service, and when the number of people or population falls.

Page The Circular Flow of Income and Expenditures

Watch this lecture on the circular flow of income and expenditures in a closed economy. Note that goods and services are exchanged in product markets, and factors of production are exchanged in factor markets.

1.7: Price Ceilings and Price Floors Page Price Ceilings and Price Floors

Read this text on price controls, price ceilings, and price floors.

Page More on Price Ceilings and Price Floors

The video presents real-world examples of price floors and ceilings.

Page Demand, Supply, and Efficiency

Read this text to learn about consumer, producer, and social surplus. Why are price floors and ceilings inefficient in terms of the market economy? How do politicians use them as a social adjustment mechanism?

1.8: Labor and Financial Markets Book Labor and Financial Markets

Read this text, which applies what we have learned about demand and supply to the labor market, including a discussion of the price of labor (wages or salaries), shifts in labor demand and supply, and price floors in the labor market (living and minimum wages).

Page Demand and Supply in Financial Markets

Read this text on how demand and supply work in financial markets. How does the interest rate affect supply and demand? The United States borrows money from foreign investors from other countries to finance its activities. How does the U.S. national debt affect domestic financial markets? What is the role of price ceilings and usury laws in the United States?

Page The Market System as an Efficient Mechanism for Information

This text demonstrates the efficiency of the market system in disseminating information about relative scarcities of goods, services, labor, and financial capital.

2.1: Defining GDP Page The Macroeconomic Perspective

Read this text, which introduces the macroeconomic perspective, the bird's eye overall view of how well or poorly the economy is going, based on three key measurements: the unemployment rate, inflation rate, and GDP.

Page Measuring the Size of the Economy: Gross Domestic Product

Read this text, which identifies the components of gross domestic product (GDP) on the demand and supply side. What do economists mean by investment or business spending? What is consumption? How do statisticians measure GDP? GDP measures what a country produces according to five categories: durable goods, nondurable goods, services, structures, and changes in inventories. GDP can be overvalued when double-counting, a common error, arises. GDP can also be undervalued.

In their calculation of GDP, economists include consumption, business investment, government spending on goods and services, and net exports. They do not include intermediate goods, transfer payments, non-market activities, used goods, or illegal goods. Be sure you can differentiate two other economic measures: gross national product (GNP) and net national product (NNP).

Book Gross Domestic Product

Watch these videos to analyze the definition of gross domestic product (GDP) and how this definition avoids double-counting and the effects of price changes.

Page Adjusting Nominal Values to Real Values

Study this text, which contrasts nominal and real GDP and reviews how to calculate real GDP based on nominal GDP values. What is the GDP deflator?

Page Tracking Real GDP over Time

GDP is the broadest measure of an economy's performance – it is central to macroeconomics. Read this text, which explains the four phases of the business cycle: recession, depression, peaks, and troughs. The economy goes through naturally alternating periods of economic growth and recession. Economies are naturally prone to cycles of boom and bust. Markets fluctuate, swinging from confidence to pessimism, as consumers shift from greed to fear and back again. Major swings in economic activity are inevitable.

Page Comparing GDP among Countries

Read this text on how to compare the economic welfare of different nations. It reviews how to convert GDP to a common currency using exchange rates and GDP per capita using population data.

Page How Well GDP Measures the Well-Being of Society

Read this text on how productivity influences the standard of living. What are the limitations of using GDP to measure the standard of living? What is the relationship between GDP data and fluctuations in the standard of living?

2.2: Defining Business Cycles Book Business Cycles

Watch these videos to explore the components of the business cycle. As you will see, the business cycle is largely driven by the emotions of the market participants. Optimism can spur demand and increase economic activity, whereas negative expectations can precipitate economic decline.

2.3: Economic Growth Page The Relatively Recent Arrival of Economic Growth

Read this text on the conditions that prompted economic growth during the past two centuries. Economists believe that the rule of law and contractual rights play a significant role in creating a functioning economic system. How have public policies influenced long-run economic growth?

Page Labor Productivity and Economic Growth

Labor productivity, the value each employed person creates per unit of their input, is another factor that promotes economic growth. "Human capital is the accumulated knowledge (from education and experience), skills, and expertise that the average worker in an economy possesses". Read this text, which explores the aggregate production function, how to measure an economy's rate of productivity growth, and the power of sustained growth.

Page Components of Economic Growth

Read this text on the factors that contribute to a healthy climate of economic growth, such as the deepening of physical capital (infrastructure), human capital, and technological improvements. What is capital deepening? To improve their economic outlook, many countries invest in education, savings and investment, infrastructure, special economic zones, and scientific research.

Page Economic Convergence

This text discusses arguments for and against economic convergence, when low- and middle-income economies grow faster than high-income countries.

Page Economic Growth Questions

Watch these videos, which discuss economic growth in more detail. The second video walks you through calculations of economic growth under different scenarios for growth rates.

2.4: Real GDP and Nominal GDP Page GDP Deflator

Watch these videos, which show the distinction between real GDP and nominal GDP, and introduce the GDP deflator, which is the price index calculated on all goods and services included in GDP.

Page Calculating Real GDP with a Deflator Example

Watch this lecture on calculating real GDP with a deflator. This is one among many approaches to removing the effect of inflation from nominal or current values. Watch for other approaches, some of which draw from a base broader or narrower relative to that under current consideration.

2.5: Defining Inflation Book Inflation

Review this section which defines and discusses the concept of inflation. A basket of goods and services includes the items individuals, businesses, and organizations typically buy. Pay attention to the steps followed to calculate the annual rate of inflation. What are index numbers? What is a price index, and how is it used to calculate inflation and its limitations?

Page More on Inflation

This video introduces inflation as an increase in the price level over time. It shows how we use the consumer price index (CPI) to calculate inflation.

Page Measuring Changes in the Cost of Living

The cost of living is a critical measurement of every economy. The U.S. Bureau of Labor Statistics calculates the consumer price index (CPI) based on a fixed basket of goods and services the average family of four purchases. The eight major categories of the CPI include food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services. What is substitution bias? Other price indices include the producer price index (PPI), GDP deflator, international price index, and employment cost index.

Page Inflation and Price Indexes

Watch these videos to review inflation, the price indexes, and how real variables such as real income and real GDP are derived. These three indices measure how well or poorly the economy performs: unemployment, inflation, and GDP.

Page How the United States and Other Countries Experience Inflation

Read this text on patterns of inflation using the CPI. What are deflation and hyperinflation?

Page Hyperinflation

Watch this lecture on hyperinflation, defined as inflation rates above 200 percent for one year or longer.

Page The Confusion Over Inflation

Read this text on economic problems inflation causes, redistributions of purchasing power, ways inflation can blur the perception of supply and demand, and the economic benefits and challenges of inflation.

Page Indexing and Its Limitations

Read this text on the relationship between indexing and inflation. What is a cost of living adjustment (COLA)?

Governments often use macroeconomic policy to control inflation: through taxes, spending, and regulating interest rates and credit.

Page Economic Commentary on the Costs of Inflation

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

2.6: Unemployment Book Unemployment

Read this text on how we define and calculate unemployment. Those who have left the workforce and not actively seeking employment are not considered unemployed. Examples include retired workers, full-time students, and stay-at-home parents. Hidden unemployment includes underemployed and discouraged workers.

Page Patterns of Unemployment

Read this text, which examines the historical unemployment rate in the United States. What are some unemployment trends based on demographic groups? Statisticians also examine new entrants, re-entrants, job leavers, and temporary and non-temporary job losers.

Page What Causes Changes in Unemployment over the Short Run

Read this text on cyclical unemployment, the variation in unemployment rates due to the business cycle – when the economy moves from expansion to recession and back again. Wages are not very flexible – although employees often receive salary increases, we rarely see decreases.

Economists describe this situation by saying wages are "sticky downward." There are many theories on why this occurs. It is illegal for employers to pay an hourly rate below the minimum wage; many employees have multi-year contracts, and employers offer wages higher than what market conditions would dictate to keep qualified workers. It is expensive to hire and train new workers. This reading offers additional arguments that explain the relationship between sticky wages and employment.

Page What Causes Changes in Unemployment over the Long Run

Read this text on frictional and structural employment. It also explores the relationship between the natural unemployment rate, potential GDP, productivity, and public policy.

Page More on Unemployment

Watch these videos for a different perspective on the meaning of unemployment and the main types of unemployment: frictional, structural, and cyclical.

Page The Natural Rate of Unemployment

Watch this video on the natural rate of unemployment. It argues that our goal is not to achieve zero percent unemployment – that is impossible. A certain low unemployment rate (the natural unemployment rate) is not only possible but desirable.

3.1: Aggregate Demand Book The Aggregate Supply–Aggregate Demand Model

Read this text, which compares Say's Law and Keynes' Law. Jean-Baptiste Say (1767–1832), the French economist, argued that supply creates its demand, but John Maynard Keynes (1883–1946), the English economist, countered that demand creates its supply. Today's economists believe neither side tells the whole story – demand and supply work together. They claim Say's Law works better in the long run, while Keynes' Law is more appropriate for the short run.

3.2: Aggregate Supply Page Building a Model of Aggregate Demand and Aggregate Supply

Read this text on how the aggregate supply curve relates to real and potential GDP and how price levels influence the aggregate demand curve. What is the point of equilibrium? Can you differentiate the short-run aggregate supply and the long-run aggregate supply?

Page Shifts in Aggregate Supply

This text discusses and graphically depicts how productivity growth and input prices change the aggregate supply curve. What is stagflation? What are examples of some other supply shocks?

Page Shifts in Aggregate Demand

Read this text on how imports, business and consumer confidence, and government policies can influence aggregate demand. Why do economists differ on the effect of tax cuts on the economy?

Book Aggregate Demand and Aggregate Supply

Watch these videos to understand the aggregate demand curve and the factors that shift it. Later we will put aggregate demand and supply together on the same graph to analyze the resulting equilibrium and its implications on the economy's health.

Page How the AD/AS Model Incorporates Growth, Unemployment, and Inflation

Read this text, which uses the aggregate demand/aggregate supply models to show periods of economic growth and recession. How do unemployment and inflation impact these models?

Page Keynes' Law and Say's Law in the AD/AS Model

Read this text illustrating the neoclassical, intermediate, and Keynesian zones in the aggregate demand/supply models. We will study these models in more detail in Unit 6.

3.3: Aggregate Supply in the Short-Run and the Long-Run Book Short- and Long-Run AD and AS

Watch these videos for definitions of short- and long-run aggregate supply. Pay attention to what distinguishes the short run from the long run. What causes price and wage stickiness in the short run, and what are the implications for the shape of the supply curves?

For example, the short-run aggregate supply curve slopes upward due to the lag between product and resource prices, making 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 do not affect the aggregate supply curve.

3.4: Short-Run and Long-Run Macroeconomic Equilibrium Book Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium

Review this text, which graphically displays recessionary and inflationary gaps and relates them to the labor market. The text also discusses policy choices that address economic issues resulting from these gaps.

Page Cyclical Unemployment

This video explores the labor market effects and role in creating short-run recessionary or inflationary gaps and re-establishing the economy's long-term equilibrium. We can define cyclical unemployment as unemployment due to recessionary events in an economy. A general economic downturn means less spending, which means more layoffs and an increased group of cyclically unemployed people.

Cyclical unemployment is the only type of unemployment of the three we discussed in Unit 2 (frictional, structural, and cyclical) that is avoidable and can be minimized – it is completely due to recessionary gaps.

Page Cost-Push Inflation

Watch these videos on how inflation occurs in the economy. They discuss the specific cases of cost-push inflation and demand-pull inflation. Note which of the two curves – aggregate demand or aggregate supply – causes the inflation problem in each case. The second video discusses a specific case from our history – the demand-pull inflation in the United States during the Lyndon Johnson administration (1963–1969).

Book Macroeconomic Viewpoints

Watch these videos, which examine different schools of economic thought about the shape of the aggregate supply curve. Is there a way to reconcile these beliefs with a unifying theory? John Meynard Keynes insisted on the need for government intervention when the economy was struggling from high unemployment during the Great Depression. The presentations offer perspectives on the challenges of explaining and addressing economic problems. We explore these theories in more detail in Unit 6.

4.1: Money Book Money and Banking

Read this text on the various functions of money. It describes how the barter system must rely on a double coincidence of wants. Money is a medium of exchange, a store of value, and a unit of account. It also serves as a standard of deferred payment. What is the difference between commodities and fiat money? What is a commodity-backed currency?

Page Measuring Money: Currency, M1, and M2

In this text, we compare the M1 and M2 money supply. In May 2020, the Federal Reserve changed the definition of M1 and M2. M1 money supply is more liquid and includes cash, checkable (demand) deposits, and savings. Demand deposits are the amounts held in checking accounts – the bank must give the deposit holder their money "on demand." M1 money includes coins and currency in circulation. The M2 money supply is less liquid and is measured as M1 plus time deposits, certificates of deposit, and money market funds. How does "plastic money" (debit cards, credit cards, and smart cards) fit into this scenario?

Page The Role of Banks

This text explains how banks serve as financial intermediaries between savers and borrowers. Individuals and companies go to a bank to borrow money. They do not have to find someone who has money to lend. Reserves are the money the U.S. Federal Reserve requires banks to keep on hand – they are not allowed to lend this money out or invest it in bonds.

4.2. Creation of Money Page How Banks Create Money

Read this text to learn how to formulate the money multiplier to see how banks create money. You should also be able to analyze and create a T-account balance sheet and evaluate the risks and benefits of money and banks.

Page What Is Money?

Watch these videos on the three definitions of money and the money-creation process in a fractional reserve banking system. The money creation process is key to understanding how the Federal Reserve Bank controls the economy via changes in the money supply.

Page Fractional Reserve Banking

Watch these videos, which offer another perspective on fractional reserve banking. Note that total reserves are the checkable deposits the public keeps in a commercial bank. Required reserves are a percentage of the checkable deposits commercial banks must keep on hand, as required by the Federal Reserve. These reserves protect banks if customers "run" the bank (show up to collect their deposits), such as during periods of financial instability and panic. Excess reserves are the percentage of checkable deposits the Federal Bank allows banks to lend to their customers.

Page Weaknesses of Fractional Reserve Lending

Since banks are only required to keep a fraction of their deposits as reserves, there is the risk that all of their depositors will show up simultaneously to withdraw their deposits, such as during unfavorable market conditions. This is called a "run" on the bank. How can banks assure their customers that they can withstand these pressures and fulfill their obligations? Watch this lecture on the concerns and weaknesses of fractional reserve lending.

4.3: Structure and Powers of the Federal Reserve System Book Monetary Policy and Bank Regulation

Read this text on the structure, functions, and goals of the Federal Reserve System. How do central banks affect monetary policy, promote financial stability and provide banking services?

Page Bank Regulation

Read this text on the relationship between bank regulation and monetary policy. How do central banks supervise individual banks throughout the country? Deposit insurance and lender of last resort are two strategies for protecting against bank runs.

Page How a Central Bank Executes Monetary Policy

Read this text, which describes the three traditional tools central banks have to implement monetary policy: open market operations, adjusting reserve requirements, and changing the discount rate.

Monetary policy is the critical macroeconomic policy created by the central bank. It involves managing the nation's money supply and interest rate. Governments use this demand-side economic policy to achieve macroeconomic objectives, such as inflation, consumption, growth, and liquidity. The Federal Reserve is the independent government agency in charge of monetary policy.

Page Monetary Policy

Watch this video for an overview of the three tools of monetary policy: open market operations (buying and selling government securities), changing the required reserve ratio, and manipulating the discount rate.

Page Monetary Policy and the Federal Reserve

Read this article for more on the three tools of monetary policy. Pay attention to the difference between the federal funds rate, which banks set, and the targeted federal fund rate. Some of the reading describes how the Fed provides signals to the market to stimulate economic activity and goal achievement.

Page Monetary Policy and Economic Outcomes

Read this text on the difference between expansionary and contractionary monetary policy. It describes how the Federal Reserve has used monetary policy to impact interest rates and aggregate demand during the past 40 years. Monetary policy should be countercyclical, which means it should counterbalance the business cycles or economic downturns and upswings. What is the significance of quantitative easing (QE)?

Page Pitfalls for Monetary Policy

The central bank significantly influences inflation, unemployment, asset bubbles, and leverage cycles. Do you think monetary policy should be more democratic? Pay attention to the formulas economists use to calculate the velocity of money to determine the effects of monetary stimulus.

Page The Federal Reserve System

Watch this video for another perspective on the Federal Reserve system of banks. As you learn about the Fed's structure, consider how the decision-making authority of this institution is insulated from the nation's political processes.

Page The Fed Today

This video discusses the history of the Federal Reserve from its creation through present-day banking. It explores the Fed's structure, its role in banking supervision and financial services, and its primary role in designing and carrying out monetary policy.

4.4: Financial Markets Book Exchange Rates and International Capital Flows

Read this text to understand foreign exchange markets and different types of investments, such as foreign direct investments (FDI), portfolio investments, and hedging. How do appreciating and depreciating currencies affect exchange rates? Who benefits when one currency is weaker or stronger than another?

Page Demand and Supply Shifts in Foreign Exchange Markets

Read this text on how supply and demand affect exchange rates. What is arbitrage? Why is purchasing power parity important when comparing the economies of different countries?

Page Macroeconomic Effects of Exchange Rates

Read this text on how shifting exchange rates affect aggregate supply and demand and how they affect banks and loans.

Page Exchange Rate Policies

Read this text to identify and compare the advantages and disadvantages of a floating exchange rate, a soft peg, a hard peg, and a merged currency.

Page More on Exchange Rates

Watch this video on the foreign exchange market and how we determine a currency's value through the demand and supply of currency. Be sure you can explain why countries manipulate the value of their currency. How do they do this?

Page Interest as Rent for Money

Watch this lecture, which explains that we can think of interest as a form of rent for money. Note that equilibrium interest rates are the balance or combination of the market for money plus the investment demand for money. Consequently, the equilibrium real GDP and the price level determine the equilibrium based on transactional demand and investment demand.

Page Money Supply, Money Demand, and Interest Rates

Watch this lecture on how money supply and demand impact interest rates. Note that the interest rate is the price of money (as it is money's opportunity cost). When individuals consider the interest rate when deciding how much income to save and how much to spend, they are choosing how much money to hold (for spending).

Page Bond Prices and Interest Rates

Watch this lecture on the relationship between bond prices and interest rates. Both corporations and governments buy and sell bonds depending on the market price. Understanding these transactions will help you with your own investing and provide a lens on the global economy.

Page Financial Speculation

Read this article on the stock market and how expectations affect the price of a stock. Speculators tend to focus on price changes and try to sell at a price higher than they bought the stock. A stock is a share of ownership in an organization – its price is largely determined by the supply and demand for the stock in the stock market.

5.1: Fiscal Policy Page Government Spending

Read this text on U.S. government spending. It discusses the U.S. budget deficit and surplus trends during the past five decades. What is the difference between the U.S. federal, state, and local government budgets?

Page Taxation

Americans pay two main categories of taxes to fund government spending initiatives: federal taxes and the taxes collected by state and local governments. The federal government collects individual income taxes, corporate income taxes, and social insurance and retirement receipts. State and local governments collect sales taxes, property taxes, and the revenue they receive from the federal government. Many state and local governments also levy personal and corporate income taxes and charge additional fees for certain services. Be sure you can explain the difference between regressive, proportional, and progressive taxes.

Economic growth and decline determine whether the government experiences a budget surplus or deficit.

Page Federal Deficits and the National Debt

Be sure you can explain the difference between the national debt and the budget deficit. The national debt refers to the total amount the government has borrowed over time, while the budget deficit refers to how much the government borrows in just one year.

Page Using Fiscal Policy to Fight Recession, Unemployment, and Inflation

Read this text, which offers a graphical depiction of how expansionary and contractionary fiscal policies shift aggregate demand.

Page Automatic Stabilizers

The U.S. Congress enacts discretionary fiscal policies to stabilize the economy. For example, in 2020, Congress issued stimulus checks to those affected by the Covid pandemic. Automatic stabilizers are programs, such as unemployment insurance and food stamps, that Congress designed in the 1930s to increase automatically according to the state of the economy. These programs stimulate aggregate demand during a recession by putting money in people's pockets to spend, and they help hold aggregate demand in check during inflationary periods.

Page Practical Problems with Discretionary Fiscal Policy

Read this text, which explains how fiscal and monetary policies are interconnected. Three types of delays often occur when governments try to implement fiscal policy: recognition, legislative, and implementation lag. Be sure you can define the reasons for each. What are some legal and political challenges governments face when trying to respond to economic problems?

Page The Question of a Balanced Budget

Economists and politicians often argue over the benefits of requiring the U.S. Congress and the President to pass a balanced every fiscal year. Some argue that we may need to invest more in programs and initiatives that will benefit everyone now and in the future. Others complain that borrowing money is reckless and saddles our children and future generations with huge deficits and interest payments for programs they never approved or benefited from. This text presents some of those arguments.

5.2: The Impact of Government Borrowing Page How Government Borrowing Affects Investment and the Trade Balance

Read this text on the national savings and investment identity concerning supply and demand. What role do budget surpluses and trade surpluses play? The United States has two main sources of financial capital: private savings (S) and public savings (T-G or taxes collected minus government spending). Foreign investment capital equals imports (M) minus exports (X).

Page Fiscal Policy and the Trade Balance

Read this text on twin deficits and the relationship between budget deficits, exchange rates, and inflation. What causes recessions?

Page How Government Borrowing Affects Private Saving

David Ricardo (1772–1823) was an English classical economist who created the concept of Ricardian equivalence, the theory that private households can shift their savings to offset government saving or borrowing. In other words, private savings in the microeconomic context can completely offset budget deficits and surpluses. Figure 18.6 offers a graphical depiction of this theory.

Page More on Government and Fiscal Policy

Watch these videos to review components of the government's budget – taxation (revenue) and government spending as tools of discretionary fiscal policy. Crowding out results from excessive government borrowing.

Page Fiscal Policy, Investment, and Economic Growth

Read this text on the effect crowding out has on physical capital investment, the relationship between budget deficits and interest rates, and why economic growth is tied to investments in physical and human capital and technology.

Page Tax Lever of Fiscal Policy

Watch this lecture on the tax level of fiscal policy and how governments can impact aggregate demand with taxation while keeping spending unchanged. We may see a budget surplus when governments collect more tax revenue from businesses, individuals, and other countries, a rare event for countries like the United States.

5.3: Inflation and Unemployment Page Phillips Curve

Watch this video on the Phillips Curve and the macroeconomic debates this concept has stirred over time.

Page Changes in the AD-AS Model and the Phillips Curve

Watch this video on the AD-AS Model we studied in Unit 3 and the Phillips curve. Sal Kahn examines the long-run Phillips curve and explains the links between changes in the AD-AS model and the Phillips curve model.

Page Comparing Monetary and Fiscal Policy

Watch this video which compares fiscal and monetary policy. Both policies have similar goals in trying to eliminate recessionary and inflationary gaps in the economy. Contractionary fiscal policy means the government spends less and taxes people and businesses more, so they also spend less. Contractionary spending creates a budget surplus and reduces inflationary pressures. Expansionary fiscal policy means the government spends more and taxes less, so people and businesses spend more to expand the economy and fend off a recessionary gap.

The Federal Reserve promotes expansionary monetary policy by decreasing interest rates to increase spending to eliminate a recession. The Federal Reserve promotes contractionary monetary policy by increasing interest rates to reduce spending and eliminate inflationary pressures. These two types of economic policy use different tools, implementation, and entities making policy decisions.

5.4: The Keynesian Perspective Book The Keynesian Perspective

Read this text, which explores the Keynesian perspective. What are the determining factors of consumption and investment expenditure? What factors promote government spending and net exports?

Page The Building Blocks of Keynesian Analysis

Read this text on the Keynesian understanding of recessions, sticky wages and prices, and aggregate demand. What is the coordination argument? Menu costs refer to how much it costs to change costs, such as how much it costs to print new menus in a restaurant. What is a macroeconomic externality? The expenditure multiplier refers to the Keynesian concept that changes in spending have a multiplied or more than proportional effect on GDP.

Page The Phillips Curve

Read this text on the Phillips Curve, which examines a tradeoff between unemployment and inflation from a Keynesian perspective. Keynes argued that governments should employ expansionary fiscal policy measures to shift aggregate demand to the right to end a recession by cutting taxes and increasing government spending. Governments should adopt a contractionary fiscal policy to shift aggregate demand to the left to alleviate inflationary periods by increasing taxes and cutting government spending.

Page The Keynesian Perspective on Market Forces

Read this text for examples of Keynesian perspective in government economic policy.

5.5: The Neoclassical Perspective Book The Neoclassical Perspective

Read this text, which explains this theory, the role of flexible prices, the neoclassical model of aggregate demand and aggregate supply, and different ways to measure the speed of macroeconomic adjustment. What are the theories of rational and adaptive expectations?

Page The Policy Implications of the Neoclassical Perspective

Read this text, which explores how economists measure inflation expectations, the impacts of fiscal and monetary policy on aggregate supply and aggregate demand, and the Neoclassical Phillips Curve. Be sure you can compare Neoclassical and Keynesian economics.

Page Balancing Keynesian and Neoclassical Models

Read this text on the interrelationship between Neoclassical and Keynesian models and how their economists react to recent recessions in the United States.

Page An Outline of the U.S. Economy: Monetary and Fiscal Policy

Read this chapter for a historical perspective on fiscal and monetary policy, its evolution, and its functionality.

6.1: International Trade and Capital Flows Book International Trade and Capital Flows

Read this text to learn about the merchandise trade balance, the components of the current account balance, and unilateral transfers, which are payments governments, charities, and individuals make to foreign countries without receiving goods or services in return.

Book International Capital Flows and Trade Balance

These videos show the connection between international capital flows and the trade balance. Pay attention to the discussion on savings and investment identity and how saving and investment are related to capital flows.

Page Trade Balances in Historical and International Context

Read this text for a brief overview of the U.S. current account and merchandise trade balance and to compare U.S. trade surpluses and deficits with other countries.

Page Trade Balances and Flows of Financial Capital

Read this text to explore the concept of comparative advantage and the connection between trade balances and financial capital flows.

Page The National Savings and Investment Identity

Read this text to learn how to calculate supply and demand for financial capital. What determines the trade and current account balance? How do domestic savings and investment determine the balance of trade? How can we use this information to predict rising and falling trade deficits?

Page Pros and Cons of Trade Deficits and Surpluses

Read this text for examples of how borrowing money and running a trade deficit can affect the economy's health.

Page The Difference between the Level of Trade and the Trade Balance

A high trade level means a country exports a significant portion of the items it produces as a percentage of GDP. Three factors influence a country's trade level: the size of its economy, geographic location, and trade history. Read this text for some final thoughts on trade balances.

Page Balance of Payments: Current Account

This video introduces components of the balance of payments and explores the connection between international capital flows and the trade balance.

6.2: Macroeconomic Policy around the World Book Macroeconomic Policy around the World

Geography, demographic, industry structure, and economic institutions impact the standard of living countries enjoy. What do we mean when we classify countries as low-income, lower-middle, upper-middle, and high-income? This reading also explains how we measure international living standards using GDP and gross national income (GNI).

Page Improving Countries' Standards of Living

Economic growth works best in a stable and market-oriented economic climate. Countries use fiscal and monetary policies to encourage economic growth. Fiscal policies include government investments in human capital (such as education and universal healthcare), technology, physical plant, and equipment. Monetary policies include keeping inflation low and stable, minimizing fluctuations in the exchange rate, and encouraging domestic and international competition. Political instability, high poverty rates, and inadequate infrastructure make this process challenging for many countries.

Page Causes of Global Unemployment

Read this text on the nature and causes of unemployment from a global perspective.

Page Causes of Global Inflation

Read this text on the causes and crippling effects of high inflation. What is a converging economy?

Page Balance of Trade Concerns

This text explores how the trade balance affects foreign exchange markets and the international flow of goods, services, and capital.

6.3: International Trade Book International Trade

Read this text, which compares the economies of the United States and Saudi Arabia to illustrate absolute and comparative advantage, mutually-beneficial trade, and opportunity costs.

Page When a Country Has an Absolute Advantage in All Goods

This text illustrates the relationship between production costs and comparative advantage. It shows how opportunity costs establish the boundaries for international trade.

Page Intra-industry Trade between Similar Economies

Read this text on the advantages of intra-industry trading – the international trade of goods within the same industry. Economists call this recent trend in international trade "splitting up the value chain" due to economies of scale, competition, and variety.

Page The Benefits of Reducing International Trade Barriers

This text explains why many economists view tariffs as trade barriers countries should try to eliminate.

6.4: Globalization and Protectionism Book Globalization and Protectionism

Read this text to learn about and compare the effects of three main forms of protectionism: tariffs, import quotas, and nontariff barriers.

Page How International Trade Affects Jobs, Wages, and Working Conditions

Read this text on how international trade affects the job market, labor standards, and working conditions. What is the opportunity cost of protectionism?

Page Arguments Supporting Restricting Imports

This text explores arguments supporting protectionist policies, such as protecting infant industries from foreign competition and supporting countries that promote anti-dumping legislation, environmental laws, and product safety standards. Lawmakers warn it is dangerous to become dependent on imports that could damage U.S. businesses and national security interests when restricted, such as foreign oil or other necessary raw materials. Others say Americans should protect trade secrets and avoid exporting high-technology goods (such as advanced weapons systems) that may compromise U.S. interests and our allies.

Page How Governments Enact Trade Policy: Globally, Regionally, and Nationally

Read this text on the history and goals of several key international trade agreements and organizations, such as the General Agreement on Tariffs and Trade (GATT) signed in 1947, the World Bank (1946), the International Monetary Fund (1946), and the World Trade Organization (1995). It also discusses free trade agreements, common markets, and economic unions.

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