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Shanghai American School
Mr. Welker/Ms. Close
AP Economics
LESSON PLAN
Macro Unit II lp 1
Date: January 31 / February 1, 2007
Unit/Lesson Topic: Macro Unit II: National Income and Price Determination. A.
Essential Question: --What is the relationship between Income and consumption and
income and saving? –How does the interest rate affect the level of saving and investment
in the economy? –How much impact will a change in household spending have on real
GDP, and how can the “multiplier” help us determine this impact?
Objectives/Learning Goals
--Examine the relationships between several economic aggregates.
--Recognize, construct, and explain the consumption, saving, and investment schedules.
--Identify the determinants of the location of the consumption and saving schedules.
--Differentiate between the average and marginal propensities to consume (and save).
--Identify the immediate determinants of investment and construct an investment demand
curve.
--Identify the factors that may cause a shift in the investment-demand curve or schedule.
Activities (including timings):
0-5 minutes: Quickwrite – “If you were given $100 right now what, exactly, would you
do with it? What if you were given $1000? $10,000? $100,000? What about
$1,000,000?”
Consumption
5-20 minutes: Discussion - $10,000 is disposable income (DI). Your two options are to
“consume” or “save”.
C = DI
--Have students draw a diagram like this: plot on the
diagram the level of consumption at each level of
disposable income. What do you notice?
>>The greater your disposable income, the less likely
you will be to consume all of it? In other words,
the more likely you will be to SAVE.
>>The line connecting the dots on your graph is called
Disposable Income
your ‘consumption schedule’. The relationship between
DI and consumption is summarized by: “households increase their spending as their
DI rises and spend a larger proportion of a small DI than of a large DI.”
--Ask students to create a “saving schedule” knowing that money not spent is saved.
>>The relationship between saving and DI: “there is a direct relationship between saving
and DI. Saving is a smaller proportion of a small DI than of a large DI.
20-25 minutes: APC and APS – The percentage of income that is consumed or saved.
-- APC = consumption / income
--APS = saving / income
>>Because DI is either consumed or saved, APC + APS must = 1
25-35 minutes: MPC and MPS – The proportion of any change in income consumed or
saved.
--MCP = ∆Consumption / ∆Income
--MPS = ∆Saving / ∆Income
>>Example: Imagine DI is $5000 and income rises by $20. How much of the $20 will
you spend vs. save? If you spend $15 and save $5, then:
MCP = 15/20 = .75
MPS = 5/20 = .25
NOTICE: MPC + MPS = 1, ALWAYS!
>>Note: The MPC is the value of the slope of the consumption schedule, and the MPS is
the value of the slope of the saving schedule.
35-45 minutes: Besides income level, what are the non-income determinants of
Consumption and Saving?
>>Wealth: When value of existing wealth (real assets and financial assets) increases,
households increase C and decrease S. Shifts C curve UP and S curve DOWN.
>>Expectations: of future prices and incomes. If households expect prices to rise
tomorrow, then today C will shift up, S down. If we expect lower income in the future,
then C will likely shift down and S shift up, as households choose to save more for the
hard times ahead.
>>Real Interest Rates: Lower real interest rates lead to more C, less S and vise versa.
>>Household Debt: When consumers increase their debt level, they can consume more at
each level of DI. But if Debt gets too high, C will have to shift down as households try
to pay off their loans.
>>Taxation: Increase in taxes shifts BOTH C and S curves downwards. Decrease in taxes
shifts both C and S curves upwards. This will be covered more when we discuss Fiscal
Policy.
--Shifts in C and S: caused by a change in any of the determinants of C and S.
--Movement along the C and S curves: caused by a change in DI. Represents a change
in the amount consumed.
45-70 minutes: PRACTICE with MPC and MPS – Rainbow book Activity 20.
70-80 minutes: Begin reading for HW.
Next Class: The Interest-rate / investment relationship, Investment Demand curve, noninterest rate determinants of investment Demand and the Multiplier Effect. Rainbow
book Activities 22 and 21.
Homework: Read from Ch. 9 (packets) pp. 159 – 167. Answer Key Questions #7, 8 and
9 from end of Ch. 9.
Unit II Calendar:
Day 1 (Jan 31/Feb 1): Consumption and Saving relation to DI, MPC and MPS (Ch.
9)
Day 2 (Feb 2/5): Interest rate/investment and the Multiplier (Ch. 9)
Day 3 (Feb 6/7): Aggregate Demand and Supply, Macroeconomic Equilibrium (Ch.
11)
Day 4 (Feb 8/9): Fiscal Policy and the AD-AS Model. (Ch. 12)
Day 5 (Feb 12/13): TEST on Unit II: National Income and Price Determination
Shanghai American School
Mr. Welker/Ms. Close
AP Economics
LESSON PLAN
Macro Unit II lp 2
Date: February 2/5, 2007
Unit/Lesson Topic: Macro Unit II: National Income and Price Determination. A.
Essential Question: --What is the relationship between Income and consumption and
income and saving? –How does the interest rate affect the level of saving and investment
in the economy? –How much impact will a change in household spending have on real
GDP, and how can the “multiplier” help us determine this impact?
Objectives/Learning Goals
--Examine the relationships between several economic aggregates.
--Recognize, construct, and explain the consumption, saving, and investment schedules.
--Identify the determinants of the location of the consumption and saving schedules.
--Differentiate between the average and marginal propensities to consume (and save).
--Identify the immediate determinants of investment and construct an investment demand
curve.
--Identify the factors that may cause a shift in the investment-demand curve or schedule.
Activities (including timings):
0-5 minutes: Quickwrite – “Who are investors in an economy? What does it mean to
invest? What factors must an investor take into account when making an investment
decision?”
5-10 minutes: Discussion – Typically, firms are investors, and they invest in things such
as new plants, capital equipment, machinery, inventories, etc…
>>The decision to invest is a MB/MC decision. >>MB is the expected return, MC is the
interest rate that must be paid for borrowed funds.
>>Investments will be made when the MB exceeds the MC.
10-20 minutes: Investment Demand – Work with partners on Rainbow book Activity
22.
20-30 minutes: After completing activity, ask pairs to answer each of the following using
an Investment Demand Diagram.
--How does each of the following affect the Investment Demand Curve?
>>A decrease in the real interest rate. An increase? Movement along D curve
>>Expected maintenance costs of new machinery increases. Inward shift
>>Government lowers the amount of business taxes firms pay for capital. Outward shift
>>A new high resolution screen technology is developed for the entertainment industry.
Outward shift
>>Inventories are abnormally high. Inward shift
>>A military coup to overthrow the business friendly dictatorship is expected in the near
future. Inward shift
30-35 minutes: Pairs share out answers to scenarios above.
35-45 minutes: Introduce The Multiplier – Measures the effect that any change in
expenditures (C, I, G, or Xn) will have on national income (GDP or Y).
--In other words, how MUCH will a change in expenditures affect the GDP?
∆GDP = Multiplier x ∆C (or ∆G, ∆I, or ∆Xn)
45-55 minutes: With partners, read and explain the handout “The Multiplier Principal”
using the example of the tourist industry in Zambia. Ask students to explain what are:
>>MPS, MRT, and MPM?
>>Explain the various alternatives to arriving at the Multiplier coefficient
55-80 minutes: Practice with the Multiplier – Complete Rainbow book Activity 21.
Next Class: Day 3 (Feb 6/7) - Aggregate Demand and Supply and Macroeconomic
Equilibrium (Ch. 11)
Homework: Read Ch. 11 pp. 193-206. Answer Key Questions #4, 5, 6, and 7
Resources:
Assessment:
Lesson evaluation/reflection
AP Economics
Shanghai American School
Mr. Welker/Ms. Close
LESSON PLAN
Macro Unit II lp 3
Date: Feb 6/7, Feb 7/8, 2007
Unit/Lesson Topics: Macro Unit II: National Income and Price Determination A. Aggregate
Demand, B. Aggregate Supply, C. Macroeconomic Equilibrium
Essential Questions: How are aggregate and aggregate supply different from demand and
supply? What three factors contribute to a downward sloping aggregate demand curve? What
are the determinants of aggregate supply? Why does the supply curve have the shape that it
does? What are the three ranges of an aggregate supply curve and what determines their
position?
Objectives/ Learning Goals:
--Define aggregate demand and aggregate supply
--Give three reasons why the aggregate demand curve slopes downward.
--Illustrate, label, and explain the three ranges of the aggregate supply curve.
--State the determinants of the aggregate demand curve’s location.
Activities:
0-30 minutes: Distribute and have students read article “Reading the tea leaves” about
economic growth in China vs. India.
--Students highlight concepts and terms from current chapter. Discuss connections to Macro
Unit II.
30-50 minutes Lecture - Introduction to AD-AS Model
--AD-AS model provides insights on inflation, unemployment and economic growth
>>Aggregate demand is a schedule that shows the various amounts of real domestic output that domestic
and foreign buyers will desire to purchase at each possible price level.
--The aggregate demand curve is shown in Figure 11-1.
>>AD curve shows an inverse relationship between price level and the amount domestic output
purchased.
--What is the explanation of inverse relationship between price level and real output in aggregate
demand?
>>Real balances effect (wealth effect): When price level falls, the purchasing power of existing
financial balances rises, which can increase spending.
>>Interest-rate effect: A decline in price level means lower interest rates which can increase levels of
certain types of spending.
>>Foreign purchases effect( net export effect): When price level falls, other things being equal, U.S.
prices will fall relative to foreign prices, which will tend to increase spending on U.S. exports and
also decrease import spending in favor of U.S. products that compete with imports
50-65 minutes: Determinants of aggregate demand - AD Shifters (non price) Two things are involved
with a change in AD:
--A change in one of the determinants directly changes the amount of real GDP demanded
--A multiplier effect that produces a greater ultimate change in AD than the initiating change in
spending
--Determinants of AD:
>>Changes in consumer spending:
a. Consumer wealth, b. Consumer expectations, c. Consumer indebtedness d. Taxes.
>>Changes in investment spending:
a. Interest rates, b. Profit expectations, c. Business taxes, d. Technology e. Amount of excess
capacity.
>>A change in government spending
>>Changes in net export spending: Change in exports may be caused by…
a. Income abroad, b .Exchange rates
65-80 minutes: Complete Activity 23 in the Rainbow book “Intro to AD”
Homework:
--Demonstrate your understanding of Macroeconomic Equilibrium. Answer the following
questions in a two paragraph essay:
1) Weigh the two arguments regarding unemployment in Europe. Is unemployment high
because of high natural rates of unemployment or because of deficient AD?
2) What allowed the US to experience over full employment AND high GDP growth yet avoid
high rates of inflation in the period between 1996 and 2000? What brought this so-called
“New Economy” to an end in 2001?
--Complete rainbow 25. Be prepared to discuss answers in next class.
Next class: Aggregate Supply and Macroeconomic Equilibrium
Shanghai American School
Mr. Welker/Ms. Close
AP Economics
LESSON PLAN
Macro Unit II – lp4
Date: February 8/9, 2007
Unit/Lesson Topic: Macro Unit II: National Income and Price Determination A.
Aggregate Demand, B. Aggregate Supply, C. Macroeconomic Equilibrium
Essential Question: --How does a market economy move to an equilibrium price and
output level? --What are the basic causes of changes in aggregate supply and how do
these shift the curve? --How is the multiplier weakened in the intermediate and vertical
ranges of aggregate supply?
Objectives/Learning Goals
--Explain the shape of the aggregate supply curve.
--Indicate the determinants of the supply curve’s location.
--Explain how a market economy moves to equilibrium price and output level.
--Predict effects of an increase in aggregate demand when economy is in (a) horizontal
range, (b) intermediate range, and (c) vertical range.
--Explain how the multiplier is weakened in the intermediate or vertical range of
aggregate supply.
--State three basic causes of changes in aggregate supply differentiating between leftward
and rightward shifts of the curve.
Activities (including timings):
0-20 minutes: Lecture - Aggregate Supply: a schedule showing level of real domestic
output available at each possible price level.
--Long Run Aggregate Supply : AS curve in the long is vertical at the economy’s full
employment output (or potential output).
>>When the economy is at full-employment, firms that want to increase output must
attract resources from other firms by raising wages and other input prices. Increases in
prices are therefore met with equal increases in resource costs, so real profit stays the
same. Aggregate supply is perfectly inelastic at the full-employment level in the LR..
Firms are unresponsive to changes in price.
--Short Run Aggregate supply: AS curve reflects a direct relationship b/w price level
and amount of real output. AS curve is highly elastic below the full-employment level,
and highly inelastic beyond the full-employment level.
>>In reality, nominal wages adjust slowly to changes in price level. So in the short run,
the AS schedule is upward-sloping because as rise in price levels increases real output,
a fall in price levels, reduces real output.
--Short Run AS curve has three distinct segments. (See Figure 11-4)
>>Horizontal range: where the price level remains constant with substantial output
variation. In this range substantial unemployment and excess capacity exist. Economy
is far below full-employment output level.
>>Intermediate (upsloping) range: where the expansion of real output is accompanied
by rising price level, near to where the full-employment level of output exists. Per unit
production costs rise in this stage because as resource markets near full employment
their prices will be bid up and, therefore, producer costs rise.
>>Vertical range: where absolute full capacity is assumed, and any attempt to increase
output will bid up resource and product prices. We assume full-employment occurs at
the “natural rate of unemployment.”
20-35 minutes: Lecture - Determinants of aggregate supply
--Determinants of AS:
>>A change in input prices, which can be caused by changes in several factors.
a. Availability of resources (land, labor, capital, entrepreneurial ability), b. Prices of
imported resources, c. Market power in certain industries.
>>Change in productivity: (productivity = real output / input) can cause changes in perunit production cost.
a. If productivity rises, unit production costs will fall. This can shift aggregate supply
to the right and lower prices.
b. The reverse is true when productivity falls. Productivity improvement is very
important in business efforts to reduce costs.
>>Change in legal-institutional environment, which can be caused by changes in other
factors:
a. Business taxes and/or subsidies, b. Government regulation.
35-50 minutes: Practice AS – Students complete Rainbow book Activity 34 “Intro to
SRAS”
50-80 minutes: Real Output and the Price Level – The intersection of the AD curve and
the AS curve establishes the economy’s equilibrium price level and equilibrium real
output.
--Practice with Macroeconomic Equilibrium by completing BizEd handout: “Aggregate
Demand and Supply – Activity”.
--Allow students to complete with a partner. Go over outcomes from different scenarios.
Equilibrium Lecture (alternative to group activity above):
Shifting AD when a determinant changes will change the equilibrium.
--Demand-pull inflation: Shifts in the intermediate and vertical ranges will cause
demand-pull inflation with an increase in aggregate demand (Figures 11.7).
>>Shifts in the horizontal range will cause quantity changes but only mild price level
changes
--Decreases in AD: If AD decreases, recession and cyclical unemployment may result.
Prices don’t fall easily. WHY??
>>Wage contracts are not flexible so businesses can’t afford to reduce prices.
>>Also, employers are reluctant to cut wages because of impact on employee effort, etc.
a. Minimum wage laws keep wages above that level.
b. So-called menu costs are difficult to change.
c. Fear of price wars keep prices from being reduced also
Shifting AS occurs when a supply determinant changes.
--Cost-push inflation: Results from a leftward shift in AS curve illustrates cost-push
inflation (see Figure 11.9)
--Increase in AS: Rightward shift in curve will cause a decline in price level (Figure
11.10)
Homework: Read pp. 214 – 220. Ch. 12 Key Questions 2 and 3.
Resources:
Assessment:
Lesson evaluation/reflection
Shanghai American School
Mr. Welker/Ms. Close
AP Economics
LESSON PLAN
Date: February 12/13, 2007
Unit/Lesson Topic: Macro Unit II: National Income and Price Determination. Fiscal
Policy
Essential Question: How do governments use their budgets to try to “stimulate the
economy” or “reign in inflation”? How do deliberate changes in government spending
and tax collections help the economy achieve full employment, control inflation and
encourage economic growth? What is the legal mandate for rascal policy in the US?
What is the logic behind such policy? Why do some economists question its
effectiveness?
Objectives/Learning Goals
-- Distinguish between discretionary and nondiscretionary fiscal policy.
--Differentiate between expansionary and contractionary fiscal policy.
--Recognize the conditions for recommending an expansionary or contractionary fiscal
policy.
--Explain expansionary fiscal policy and its effects on the economy and Federal budget.
--Explain contractionary fiscal policy and its effects on the economy and Federal budget.
--Describe the two ways to finance a government budget deficit and how each affects the
economy.
--Describe the two ways to handle a government budget surplus and how each affects the
economy.
--Give two examples of how built-in stabilizers help eliminate recession or inflation.
--Explain the differential impacts of progressive, proportional, and regressive taxes in
terms of stabilization policy.
Activities (including timings):
0-10 minutes: Quickwrite – Explain how a government’s decision to spend or tax can
help bring an economy in recession closer to full employment.
--Discussion: Through fiscal stimulus, changes in gov’t spending and taxes can shift the
AD curve in or out. To a degree, gov’t spending or tax collection can be applied to
stimulate the economy in times of recession or to reign in inflation in times of
expansion. Because of the multiplier principal, a particular decrease in taxes or increase
in gove’t spending can have an amplified effect on total GDP growth.
10-30 minutes: Introduction to Fiscal Policy
--Fiscal Policy and the AD/AS Model
>>Discretionary fiscal policy: refers to the deliberate manipulation of taxes and
government spending to alter real domestic output and employment, control inflation,
and stimulate economic growth.
Simplifying assumptions:
1. Assume initial government purchases don’t depress or stimulate private spending.
2. Assume fiscal policy affects only demand, not supply, side of the economy.
--Expansionary fiscal policy is used to combat a recession (see Figure 12-1).
>>Expansionary Policy needed: In Figure 12-1, a decline in investment has decreased
AD from AD1 to AD2 so real GDP has fallen and also employment declined. Possible
fiscal policy solutions follow:
a. An increase in government spending (shifts AD to right by more than change in G
due to multiplier),
b. A decrease in taxes (raises income, and consumption rises by MPC  change in
income; AD shifts to right by a multiple of the change in consumption).
c. A combination of increased spending and reduced taxes.
d. If the budget was initially balanced, expansionary fiscal policy creates a budget
deficit.
--Contractionary fiscal policy is used to restrict demand-pull inflation (see Fig. 12-2)
>>Contractionary fiscal policy needed: When demand-pull inflation occurs as illustrated
by a shift from AD3 to AD4 in the vertical range of aggregate supply in Figure 12-2.
Then contractionary policy is the remedy:
a. A decrease government spending shifts AD4 back to AD3 once the multiplier
process is complete. Here price level returns to its preinflationary level P3 but GDP
remains at full-employment level.
b. An increase in taxes will reduce income and then consumption at first by MPC 
fall in income, and then multiplier process leads AD to shift leftward still further.
In Figure 12-2 a tax increase of $6.67 billion decreases consumption by 5 and
multiplier causes eventual shift to AD3.
c. A combined spending decrease and tax increase could have the same effect with the
right combination ($2 billion decline in G and $4 billion rise in T will have this
effect).
30-40 minutes: Financing deficits or disposing of surpluses - The method used
influences fiscal policy effect.
--Financing deficits can be done in two ways.
>>Borrowing: The government competes with private borrowers for funds and could
drive up interest rates; the government may “crowd out” private borrowing, and this
offsets the government expansion.
>>Money creation: When the Federal Reserve loans directly to the government by
buying bonds, the expansionary effect is greater since private investors are not buying
bonds.
--Disposing of surpluses can be handled two ways.
>>Debt reduction is good but may cause interest rates to fall and stimulate spending.
This could be inflationary.
>>Impounding or letting the surplus funds remain idle would have greater
anti-inflationary impact. The government holds surplus tax revenues which keeps these
funds from being spent.
40-50 minutes: Lecture - Policy options - G or T?
--Economists tend to favor higher G during recessions and higher taxes during
inflationary times if they are concerned about unmet social needs or infrastructure.
--Others tend to favor lower T for recessions and lower G during inflationary periods
when they think government is too large and inefficient.
50-65 minutes: Lecture - Built-In Stability
--Built-in stability arises because net taxes (taxes minus transfers and subsidies) change
with GDP (recall that taxes reduce incomes and therefore, spending). It is desirable for
spending to rise when the economy is slumping and vice versa when the economy is
becoming inflationary. Figure 12-3 illustrates how the built-in stability system
behaves.
>>Taxes automatically rise with GDP because incomes rise and tax revenues fall when
GDP falls.
>>Transfers and subsidies rise when GDP falls; when these government payments
(welfare, unemployment, etc.) rise, net tax revenues fall along with GDP.
--The size of automatic stability depends on responsiveness of changes in taxes to
changes in GDP: The more progressive the tax system, the greater the economy’s
built-in stability. In Figure 12-3 line T is steepest with a progressive tax system.
>>A 1993 law increased the highest marginal tax rate on personal income from 31
percent to 39.6 percent and corporate income tax rate to 35% by 1 percentage. This
helped prevent demand-pull inflation.
>>Automatic stability reduces instability, but does not correct economic instability.
65-80 minutes: Practice with Fiscal Policy and the AD/AS model
--Complete Rainbow book Activities 25, 27, 28, 30 and 31
Homework: Complete above Rainbow book Activities. Review for Test on:
 Ch. 9: Income/saving relationship and schedules, determinants of consumption and
saving, MPC and MPS, Investment Demand, Determinants of Investment Demand,
The Multiplier Effect
 Ch. 11: AD, the AD Curve and rationale for downward slope (wealth effect, interest
–rate effect and export effect. Determinants of AD. AS, the AS curve in the LR and
the SR, three ranges of SRAS. Determinants of AS, Macroeconomic equilibrium,
Demand-pull inflation, recession and unemployment, Cost-push inflation.
 Ch. 12: Fiscal Policy and the AD/AS model. Expansionary vs. contractionary fiscal
policy. Impact of the multiplier on change in taxes vs change in G. Financing of
Deficits and disposing of surpluses. Built in stability, tax progressivity.