Principles of macroeconomics for ap® courses

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0.1 About openstax

0.2 About openstax’s resources

0.3 Customization

0.6 About Principles of Macroeconomics for AP ® Courses

0.7 Coverage and scope

0.8 Pedagogical foundation

0.9 Questions for each level of learning

0.10 Updated art

0.11 About our team

0.12 Senior contributing author

0.13 Senior content expert

0.14 Senior contributors

0.16 Ancillaries

1 The use of mathematics in principles of economics

1.1 Algebraic models

1.2 Growth rates

1.3 Displaying data graphically and interpreting the graph

1.4 Key concepts and summary

1.5 Review questions

2 Indifference curves

2.1 What is an indifference curve?

2.2 Utility-maximizing with indifference curves

2.3 Changes in income

2.4 Responses to price changes: substitution and income effects

2.5 Indifference curves with labor-leisure and intertemporal choices

2.6 Sketching substitution and income effects

2.7 Key concepts and summary

2.8 Review questions

3 Present discounted value

3.1 Applying present discounted value to a stock

3.2 Applying present discounted value to a bond

3.3 Other applications

Welcome to economics!

1 What is economics, and why is it important?

1.1 The problem of scarcity

1.2 The division of and specialization of labor

1.3 Why the division of labor increases production

1.4 Trade and markets

1.5 Why study economics?

1.6 Key concepts and summary

2 Microeconomics and macroeconomics

2.1 Microeconomics

2.2 Macroeconomics

2.3 Key concepts and summary

3 How economists use theories and models to understand economic issues

3.1 Key concepts and summary

4 How economies can be organized: an overview of economic systems

4.1 Regulations: the rules of the game

4.2 The rise of globalization

4.3 Key concepts and summary

Choice in a world of scarcity

Introduction to choice in a world of scarcity

1 How individuals make choices based on their budget constraint

1.1 The concept of opportunity cost

1.2 Identifying opportunity cost

1.3 Marginal decision-making and diminishing marginal utility

1.5 From a model with two goods to one of many goods

1.6 Key concepts and summary

2 The production possibilities frontier and social choices

2.1 The shape of the ppf and the law of diminishing returns

2.2 Productive efficiency and allocative efficiency

2.3 Why society must choose

2.4 The ppf and comparative advantage

2.5 Key concepts and summary

3 Confronting objections to the economic approach

3.1 First objection: people, firms, and society do not act like this

3.2 Second objection: people, firms, and society should not act this way

3.3 Key concepts and summary

Demand and supply

Introduction to demand and supply

1 Demand, supply, and equilibrium in markets for goods and services

1.1 Demand for goods and services

1.2 Supply of goods and services

1.3 Equilibrium—where demand and supply intersect

1.4 Key concepts and summary

2 Shifts in demand and supply for goods and services

2.1 What factors affect demand?

2.2 The Ceteris Paribus Assumption

2.3 How does income affect demand?

2.4 Other factors that shift demand curves

2.5 Summing up factors that change demand

2.6 How production costs affect supply

2.7 Other factors that affect supply

2.8 Summing up factors that change supply

2.9 Key concepts and summary

2.11 References

3 Changes in equilibrium price and quantity: the four-step process

3.1 Good weather for salmon fishing

3.2 Newspapers and the internet

3.3 The interconnections and speed of adjustment in real markets

3.4 A combined example

3.5 Key concepts and summary

4 Price ceilings and price floors

4.1 Price ceilings

4.2 Price floors

4.3 Key concepts and summary

5 Demand, supply and efficiency

5.1 Consumer surplus, producer surplus, social surplus

5.2 Inefficiency of price floors and price ceilings

5.3 Key concepts and summary

Labor and financial markets

Introduction to labor and financial markets

1 Demand and supply at work in labor markets

1.1 Equilibrium in the labor market

1.2 Shifts in labor demand

1.3 Shifts in labor supply

1.4 Technology and wage inequality: the four-step process

1.5 Price floors in the labor market: living wages and minimum wages

1.6 The minimum wage as an example of a price floor

1.7 Concepts and summary

2 Demand and supply in financial markets

2.1 Who demands and who supplies in financial markets?

2.2 Equilibrium in financial markets

2.3 Shifts in demand and supply in financial markets

2.4 The united states as a global borrower

2.5 Price ceilings in financial markets: usury laws

2.6 Key concepts and summary

3 The market system as an efficient mechanism for information

3.1 Key concepts and summary

The macroeconomic perspective

Introduction to the macroeconomic perspective

0.3 Policy tools

1 Measuring the size of the economy: gross domestic product

1.1 Gdp measured by components of demand

1.2 Gdp measured by what is produced

1.3 The problem of double counting

1.4 Other ways to measure the economy

1.5 Key concepts and summary

2 Adjusting nominal values to real values

2.1 Converting nominal to real gdp

2.2 Key concepts and summary

3 Tracking real gdp over time

3.1 Key concepts and summary

4 Comparing gdp among countries

4.1 Converting currencies with exchange rates

4.2 Gdp per capita

4.3 Key concepts and summary

5 How well gdp measures the well-being of society

5.1 Limitations of gdp as a measure of the standard of living

5.2 Does a rise in gdp overstate or understate the rise in the standard of

5.3 Gdp is rough, but useful

5.4 Key concepts and summary

Economic growth

Introduction to economic growth

1 The relatively recent arrival of economic growth

1.1 Rule of law and economic growth

1.2 Key concepts and summary

2 Labor productivity and economic growth

2.1 Sources of economic growth: the aggregate production function

2.2 Components of the aggregate production function

2.3 Measuring productivity

2.4 The “new economy” controversy

2.5 The power of sustained economic growth

2.6 Key concepts and summary

3 Components of economic growth

3.1 Capital deepening

3.2 Growth accounting studies

3.3 A healthy climate for economic growth

3.4 Key concepts and summary

4 Economic convergence

4.1 Arguments favoring convergence

4.2 Arguments that convergence is neither inevitable nor likely

4.3 The slowness of convergence

4.4 Key concepts and summary

Introduction to unemployment

1 How the unemployment rate is defined and computed

1.1 Who’s in or out of the labor force?

1.2 Calculating the unemployment rate

1.3 Hidden unemployment

1.4 Labor force participation rate

1.5 The establishment payroll survey

1.6 How is the u.s. unemployment data collected?

1.7 Criticisms of measuring unemployment

1.8 Key concepts and summary

2 Patterns of unemployment

3 What causes changes in unemployment over the short run

3.1 Cyclical unemployment

3.2 Why wages might be sticky downward

3.3 Key concepts and summary

4 What causes changes in unemployment over the long run

4.1 The long run: the natural rate of unemployment

4.2 Frictional unemployment

4.3 Structural unemployment

4.4 Natural unemployment and potential real gdp

4.5 Productivity shifts and the natural rate of unemployment

4.6 Public policy and the natural rate of unemployment

4.7 The natural rate of unemployment in recent years

4.8 The natural rate of unemployment in europe

4.9 A preview of policies to fight unemployment

4.10 Key concepts and summary

4.12 References

Introduction to inflation

1 Tracking inflation

1.1 The price of a basket of goods

1.2 Index numbers

1.3 Key concepts and summary

2 How changes in the cost of living are measured

2.1 The cpi and core inflation index

2.2 Practical solutions for the substitution and the quality/new goods

2.3 Additional price indices: ppi, gdp deflator, and more

2.4 Key concepts and summary

3 How the u.s. and other countries experience inflation

3.1 Historical inflation in the u.s. economy

3.2 Inflation around the world

3.3 Key concepts and summary

4 The confusion over inflation

4.1 The land of funny money

4.2 Unintended redistributions of purchasing power

4.3 Blurred price signals

4.4 Problems of long-term planning

4.5 Any benefits of inflation?

4.6 Key concepts and summary

5 Indexing and its limitations

5.1 Indexing in private markets

5.2 Indexing in government programs

5.3 Might indexing reduce concern over inflation?

5.4 A preview of policy discussions of inflation

5.5 Key concepts and summary

The international trade and capital flows

Introduction to the international trade and capital flows

1 Measuring trade balances

2 Trade balances in historical and international context

3 Trade balances and flows of financial capital

4 The national saving and investment identity

4.1 Understanding the determinants of the trade and current account balance

4.2 Domestic saving and investment determine the trade balance

4.3 Exploring trade balances one factor at a time

4.4 Short-term movements in the business cycle and the trade balance

4.5 Key concepts and summary

5 The pros and cons of trade deficits and surpluses

5.1 Key concepts and summary

6 The difference between level of trade and the trade balance

The aggregate demand/aggregate supply model

Introduction to the aggregate demand/aggregate supply model

1 Macroeconomic perspectives on demand and supply

1.1 Say’s law and the macroeconomics of supply

1.2 Keynes’ law and the macroeconomics of demand

1.3 Combining supply and demand in macroeconomics

1.4 Key concepts and summary

2 Building a model of aggregate demand and aggregate supply

2.1 The aggregate supply curve and potential gdp

2.2 The aggregate demand curve

2.3 Equilibrium in the aggregate demand/aggregate supply model

2.4 Defining sras and lras

2.5 Key concepts and summary

3 Shifts in aggregate supply

3.1 How productivity growth shifts the as curve

3.2 How changes in input prices shift the as curve

3.3 Other supply shocks

3.4 Key concepts and summary

4 Shifts in aggregate demand

4.1 How changes by consumers and firms can affect ad

4.2 How government macroeconomic policy choices can shift ad

4.3 Key concepts and summary

5 How the ad/as model incorporates growth, unemployment, and inflation

5.1 Growth and recession in the ad/as diagram

5.2 Unemployment in the ad/as diagram

5.3 Inflationary pressures in the ad/as diagram

5.4 Importance of the aggregate demand/aggregate supply model

5.5 Key concepts and summary

6 Keynes’ law and say’s law in the ad/as model

6.1 Key concepts and summary

The keynesian perspective

Introduction to the keynesian perspective

1 Aggregate demand in keynesian analysis

1.1 What determines consumption expenditure?

1.2 What determines investment expenditure?

1.3 What determines government spending?

1.4 What determines net exports?

1.5 Key concepts and summary

2 The building blocks of keynesian analysis

2.1 Wage and price stickiness

2.2 The two keynesian assumptions in the ad/as model

2.3 The expenditure multiplier

2.4 Key concepts and summary

3 The expenditure-output (or keynesian cross) model

3.1 The axes of the expenditure-output diagram

3.2 The potential gdp line and the 45-degree line

3.3 The aggregate expenditure schedule

3.4 Building the aggregate expenditure schedule

3.5 Consumption as a function of national income

3.6 Investment as a function of national income

3.7 Government spending and taxes as a function of national income

3.8 Exports and imports as a function of national income

3.9 Building the combined aggregate expenditure function

3.10 Equilibrium in the keynesian cross model

3.11 Where equilibrium occurs

3.12 Recessionary and inflationary gaps

3.13 The multiplier effect

3.14 How does the multiplier work?

3.15 Calculating the multiplier

3.16 Calculating keynesian policy interventions

3.17 Multiplier tradeoffs: stability versus the power of macroeconomic policy

3.18 Key concepts and summary

4 The phillips curve

4.1 The discovery of the phillips curve

4.2 The instability of the phillips curve

4.3 Keynesian policy for fighting unemployment and inflation

4.4 Key concepts and summary

5 The keynesian perspective on market forces

5.1 Key concepts and summary

The neoclassical perspective

Introduction to the neoclassical perspective

1 The building blocks of neoclassical analysis

1.1 The importance of potential gdp in the long run

1.2 The role of flexible prices

1.3 How fast is the speed of macroeconomic adjustment?

1.4 Key concepts and summary

2 The policy implications of the neoclassical perspective

2.1 The neoclassical phillips curve tradeoff

2.2 Fighting unemployment or inflation?

2.3 Fighting recession or encouraging long-term growth?

2.4 Summary of neoclassical macroeconomic policy recommendations

2.5 Summary of neoclassical economics versus keynesian economics

2.6 Key concepts and summary

3 Balancing keynesian and neoclassical models

3.1 Key concepts and summary

Money and banking

Introduction to money and banking

1 Defining money by its functions

1.1 Barter and the double coincidence of wants

1.2 Functions for money

1.3 Commodity versus fiat money

1.4 Key concepts and summary

2 Measuring money: currency, m1, and m2

2.1 Key concepts and summary

3 The role of banks

3.1 Banks as financial intermediaries

3.2 A bank’s balance sheet

3.3 How banks go bankrupt

3.4 Key concepts and summary

4 How banks create money

4.1 Money creation by a single bank

4.2 The money multiplier and a multi-bank system

4.3 Cautions about the money multiplier

4.4 Money and banks—benefits and dangers

4.5 Key concepts and summary

Monetary policy and bank regulation

Introduction to monetary policy and bank regulation

1 The federal reserve banking system and central banks

1.1 Structure/organization of the federal reserve

1.2 What does a central bank do?

1.3 Key concepts and summary

2 Bank regulation

2.1 Bank supervision

2.3 Deposit insurance

2.4 Lender of last resort

2.5 Key concepts and summary

3 How a central bank executes monetary policy

3.1 Open market operations

3.2 Changing reserve requirements

3.3 Changing the discount rate

3.4 Key concepts and summary

4 Monetary policy and economic outcomes

4.1 The effect of monetary policy on interest rates

4.2 The effect of monetary policy on aggregate demand

4.3 Federal reserve actions over last four decades

4.4 Quantitative easing

4.5 Key concepts and summary

5 Pitfalls for monetary policy

5.1 Excess reserves

5.2 Unpredictable movements of velocity

5.3 Unemployment and inflation

5.4 Asset bubbles and leverage cycles

5.5 Key concepts and summary

Exchange rates and international capital flows

Introduction to exchange rates and international capital flows

1 How the foreign exchange market works

1.1 The extraordinary size of the foreign exchange markets

1.2 Demanders and suppliers of currency in foreign exchange markets

1.3 Participants in the exchange rate market

1.4 Strengthening and weakening currency

1.5 Key concepts and summary

2 Demand and supply shifts in foreign exchange markets

2.1 Expectations about future exchange rates

2.2 Differences across countries in rates of return

2.3 Relative inflation

2.4 Purchasing power parity

2.5 Key concepts and summary

3 Macroeconomic effects of exchange rates

3.1 Exchange rates, aggregate demand, and aggregate supply

3.2 Fluctuations in exchange rates

3.3 Summing up public policy and exchange rates

3.4 Key concepts and summary

4 Exchange rate policies

4.1 Floating exchange rates

4.2 Using soft pegs and hard pegs

4.3 Tradeoffs of soft pegs and hard pegs

4.4 A merged currency

4.5 Key concepts and summary

Government budgets and fiscal policy

Introduction to government budgets and fiscal policy

1 Government spending

1.1 Total u.s. government spending

1.2 State and local government spending

1.3 Key concepts and summary

2.1 Federal taxes

2.2 State and local taxes

2.3 Key concepts and summary

3 Federal deficits and the national debt

3.1 Debt/gdp ratio

3.2 The path from deficits to surpluses to deficits

3.3 Key concepts and summary

4 Using fiscal policy to fight recession, unemployment, and inflation

5 Automatic stabilizers

6 Practical problems with discretionary fiscal policy

7 The question of a balanced budget

7.1 Key concepts and summary

The impacts of government borrowing

Introduction to the impacts of government borrowing

1 How government borrowing affects investment and the trade balance

1.1 The national saving and investment identity

1.2 What about budget surpluses and trade surpluses?

1.3 Key concepts and summary

2 Fiscal policy, investment, and economic growth

2.1 Crowding out physical capital investment

2.2 The interest rate connection

2.3 Public investment in physical capital

2.4 Public investment in human capital

2.5 How fiscal policy can improve technology

2.6 Summary of fiscal policy, investment, and economic growth

2.7 Key concepts and summary

3 How government borrowing affects private saving

3.1 Key concepts and summary

4 Fiscal policy and the trade balance

4.1 Twin deficits?

4.2 Budget deficits and exchange rates

4.3 From budget deficits to international economic crisis

4.4 Using fiscal policy to address trade imbalances

4.5 Key concepts and summary

Macroeconomic policy around the world

Introduction to macroeconomic policy around the world

1 The diversity of countries and economies across the world

1.1 Key concepts and summary

2 Improving countries’ standards of living

2.1 Growth policies for the high-income countries

2.2 Growth policies for the middle-income economies

2.3 Growth policies for economically-challenged countries

2.4 Key concepts and summary

3 Causes of unemployment around the world

3.1 Unemployment from a recession

3.2 The natural rate of unemployment

3.3 Undeveloped labor markets

3.4 Key concepts and summary

4 Causes of inflation in various countries and regions

4.1 Concepts and summary

5 Balance of trade concerns

5.1 Concerns over international trade in goods and services

5.2 Concerns over international flows of capital

5.3 Market-oriented economic reforms

5.4 Key concepts and summary

Source: OpenStax, Principles of macroeconomics for ap® courses. OpenStax CNX. Aug 24, 2015 Download for free at http://legacy.cnx.org/content/col11864/1.2

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