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Economics E202

Introduction to

Macroeconomics

a learning guide

(3 credit hours)

Course designed by

Vandana Rao-Dev

Associate Professor of Economics

Division of Business and Economics

Indiana University East

Course revised by

Manoj Atolia and

James Self, Lecturer,

Department of Economics,Indiana University Bloomington

Indiana University

School of Continuing Studies

Independent Study Program

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Copyright 2002, 2005 by the Trustees of Indiana University

All rights reserved.

No parts of this guide may be reproduced in any form.

Editor: Millicent Elliott

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Table of Contents: Economics E202

Important Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Study Hints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

Study Materials Order Form

Lessons

1 What Is Economics? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2 Demand and Supply; Analyzing Markets . . . . . . . . . . . . . . . . . . . . 29

3 Monitoring the Economy; TheAS-AD Model . . . . . . . . . . . . . . . . . 55

4 Using Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

5 Tips for the Midterm Examination . . . . . . . . . . . . . . . . . . . . . . . . . 91

Application for the Midterm Examination

6 Economy at Full Employment; Economic Growth . . . . . . . . . . . . . 93

7 Money and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111

8 Economic Fluctuations and Stabilization Policy . . . . . . . . . . . . . . . 131

9 Using Economics to Analyze Macroeconomic Policy . . . . . . . . . . . 149

10 Tips for the Final Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167

Application for the Final Examination

Bulletin Request Form

Selling Your Textbooks

Appendix: Answers to Practice Problems . . . . . . . . . . . . . . . . . . . . 169

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v

Introduction

Economics E202

Introduction to

Macroeconomics

Welcome to Economics E202 Introduction to Macroeconomics. This is

your learning guide for the course. It will familiarize you with basicmacroeconomic concepts and indicators and guide you through

macroeconomic models and policy issues. This learning guide contains ten

lessons. Eight of the lessons are study lessons (lessons 14 and 69) and

two of the lessons (5 and 10) offer preparation for the midterm and final

exams.

Required Materials

You will use the textbookMacroeconomics (seventh edition) by Michael

Parkin and the Study Guide that accompanies the textbook by Mark Rush.A CD-ROM comes with the textbook as do instructions for accessing the

textbooks Web site. These useful resources will enhance your learning;

however, they are optional. You do not need Web access or the CD-

ROM to complete this course.

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If you would like, you may access the textbooks companion Web site at

http://www.myeconlab.com/parkin/parkinmacro.html . Please note that

your instructor will not be issuing a course ID for the Parkin Web site. See

the front of your textbook for more information about the textbooks Web

site. If you have problems with the textbooks Web site, please contact the

textbook publisher.

Purpose and Learning Outcomes

The purpose of this course is to provide you with a broad overview of

macroeconomics. This course focuses on macroeconomic concepts, tools

for measuring economic performance, basic macroeconomic models, and

the use of macroeconomic policy for economic stabilization. Onsuccessfully completing this course, youll be able to

! explain basic economic principles and concepts

! understand the analytical tools that measure national economic

performance

! critically evaluate the use of fiscal and monetary policies for economic

stabilization purposes

! recognize current economic issues at national and global levels

Youll be able to demonstrate

! improvement in your learning skills

! stronger communication skills

! more accurate or advanced computational skills

! better analytical, conceptual, and problem-solving skills

When youve completed this course, youll be able to discuss

macroeconomic issues with ease. Youll be familiar with a broad range of

topics, from unemployment and inflation to events such as the Great

Depression. Youll be able to discuss the effects of tax cuts and budget

deficits on the economy. This course will also provide you with a strong

set of analytical, conceptual, and computational skills that can be applied

to a variety of problems in the real world, in areas ranging from business

to personal decision making.

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Course Structure

The course relies on Michael ParkinsMacroeconomics and the StudyGuide for the textbook. Youll read from the textbook and study guide;

these will be the basic tools with which we will build your new knowledge

and skills. A typical lesson covers two or three textbook chapters. Lessons

1 through 3 introduce you to the topics of economics, macroeconomics,

demand and supply, the business cycle, and employment issues. Lesson 4

contains a review and an at home essay exam, requiring you to research

a current business article on a macroeconomic issue. Lesson 5 contains

tips for studying for and arranging for the in class (proctored) portion of

the midterm exam. This portion of the exam contains problems and short

answer questions. Lessons 6 through 8 cover such topics as capital,

investment, saving, fiscal policy, and inflation. Lesson 9 provides you withmore review and another at-home essay exam. Lesson 10 contains tips

for the final exam.

Guidelines for Completing the Lessons

Each lesson in this learning guide is made up of two or three sections.

Each section contains objectives, a reading assignment, a short discussion

of the lessons topics, an outline or self-test for you to complete, and a

written assignment. Follow these steps to complete each section of the

lesson:

1. First, review the objectives. They provide the focus for your learning.

2. Then read the discussion in this learning guide. The discussion

introduces topics and complements the textbook and study guide. In

some cases, youll get practical examples to help you understand the

more difficult or abstract concepts. In other instances, the discussion

may begin with a think-along exercise and end with a summary of

important concepts.

3. Next, read the assigned textbook chapters and work through the

study guide exercises. Its good practice to highlight important points

and make notes in the margins as you read.

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4. When youve finished your work in the textbook and study guide, go

to the chapter outline in the learning guide and use it to prepare your

class notes. This outline will create a summary of the chapter.

Sometimes, instead of an outline, you will find a self-test on the

material.

5. Finally, complete the written assignment for that section of the

lesson. The assignment consists of short questions and problems to

help you integrate the concepts youve learned and apply them to

real-life examples. Both the study guide and the textbook contain

exercises with answers so that you can check your understanding

before doing the assignment. After youve finished one section of the

lesson, go to the next section and follow the same steps. When

youve finished all sections, submit your work.

Preparing Your AssignmentsPlease use a word processor to prepare your assignments. If you dont have

access to a word processor or typewriter, submit answers that are neatly

and legibly handwritten. Use correct spelling, proper punctuation, and

correct grammar. Label your answers clearly: lesson #, section #, item #,

or other headings as given in the assignment.

Assignment Cover SheetAfter youve completed the assignments for all sections in a lesson, fill out

the assignment cover sheet. Provide all requested information and attachthe cover sheet to the front of your work.

How Much Time Should You Spend Studying?

! Studying the learning guide lesson, completing the assigned readings,

working with the study guide, preparing the outline: 56 hours a week

! Preparing and writing answers to each lessons assignments: 45 hours

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Grades

Your final grade will be determined by your cumulative performance onthe exams and the eight assignments. Each written assignment is worth 40

points, for a total of 320 points. Each exam is worth 160 points, for a total

of 320 points.

Grading Scale96.5100% A+

91.596.4 A

87.591.4 A

84.587.4 B+

80.584.4 B

76.580.4 B 73.576.4 C+

69.573.4 C

66.569.4 C

63.566.4 D+

59.563.4 D

54.559.4 D

0.054.4 F

Important: You must earn at least a D average on the exams to pass the

course. In other words, you must earn at least 174.4 points out of 320 total

exam points to pass the course. Even if your lesson grades are excellent,you will not pass the course unless you fulfill this requirement.

Plagiarism

As an educational institution, Indiana University puts learning first. We

want you to learn, and we think you value learning as well. We also value

honesty and trust. You have every right to expect fair exams, fair

assignments, and fair grades. By the same token, your instructor expects

the work you hand in to be your own. You are welcome to discuss thiscourse with other students and teachers, but when it comes to writing your

assignments, all the words should come straight from you, unless you are

supporting your assertions with a properly cited quote.

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Passing off someone elses work as your own is plagiarism. As stated in

Indiana Universitys Code of Student Rights, Responsibilities, and

Conduct(Art. III, A.3), A student must not adopt or reproduce ideas,

words, or statements of another person without an appropriate

acknowledgment. A student must give due credit to the originality of

others and acknowledge an indebtedness whenever he or she does any of

the following:

a. quotes another persons actual words, either oral or written;

b. paraphrases another persons words, either oral or written;

c. uses another persons idea, opinion, or theory; or

d. borrows facts, statistics, or other illustrative material, unless the

information is common knowledge.

We take plagiarism very seriously. If you are caught plagiarizing, you

could receive an F for the whole course.

So how can you avoid plagiarizing? When is it appropriate to cite your

sources, and how should you cite them? The answers simple. Ask your

instructor. If youre unsure whether youve cited your sources

appropriately, call or e-mail your instructor before you submit your

assignment. Not only will you get answers to your questions, youll reapthe fruit of honesty: trust.

Contacting Your Instructor

With each lesson you are required to submit an assignment cover sheet.

Every assignment cover sheet has a space for your questions and

comments; you are strongly encouraged to use this space. If problems arise

between assignments, you can write to your instructor at the Independent

Study Program. Many instructors can be contacted via e-mail or reached

by telephone during established office hours. To learn your instructors

e-mail address and/or office hours, please refer to the contact information

on the back cover of this learning guide.