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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
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


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; The AS-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


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 basic
macroeconomic 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 1–4 and 6–9) and
two of the lessons (5 and 10) offer preparation for the midterm and final
exams.

Required Materials

You will use the textbook Macroeconomics (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
textbook’s 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 textbook’s 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 textbook’s Web
site. If you have problems with the textbook’s 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. On
successfully completing this course, you’ll 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

You’ll 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 you’ve completed this course, you’ll be able to discuss


macroeconomic issues with ease. You’ll be familiar with a broad range of
topics, from unemployment and inflation to events such as the Great
Depression. You’ll 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 Parkin’s Macroeconomics and the Study


Guide for the textbook. You’ll 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 with
more 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 lesson’s 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, you’ll 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. It’s good practice to highlight important points
and make notes in the margins as you read.

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4. When you’ve 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 you’ve 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 you’ve finished one section of the
lesson, go to the next section and follow the same steps. When
you’ve finished all sections, submit your work.

Preparing Your Assignments


Please use a word processor to prepare your assignments. If you don’t 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 Sheet


After you’ve completed the assignments for all sections in a lesson, fill out
the assignment cover sheet. Provide all requested information and attach
the 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: 5–6 hours a week

! Preparing and writing answers to each lesson’s assignments: 4–5 hours

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Grades

Your final grade will be determined by your cumulative performance on


the 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 Scale
96.5–100% A+
91.5–96.4 A
87.5–91.4 A–
84.5–87.4 B+
80.5–84.4 B
76.5–80.4 B–
73.5–76.4 C+
69.5–73.4 C
66.5–69.4 C–
63.5–66.4 D+
59.5–63.4 D
54.5–59.4 D–
0.0–54.4 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 this
course 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 else’s work as your own is plagiarism. As stated in


Indiana University’s 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 person’s actual words, either oral or written;

b. paraphrases another person’s words, either oral or written;

c. uses another person’s 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 answer’s simple. Ask your
instructor. If you’re unsure whether you’ve cited your sources
appropriately, call or e-mail your instructor before you submit your
assignment. Not only will you get answers to your questions, you’ll reap
the 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 instructor’s
e-mail address and/or office hours, please refer to the contact information
on the back cover of this learning guide.