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SYLLABUS FOR ADVANCED PLACEMENT MACROECONOMICS Submitted as partial fulfillment for the requirements of audit certification Prescribed by the College Board, New York, New York August, 2008 COURSE TITLE AP Macroeconomics SCHOOL ORGANIZATION Sioux Falls operates on a semester system. AP Macroeconomics is a semester class and will be taught second semester, until we add AP Microeconomics. TEXT Mankiw, N. Gregory. Principles of Economics. (4th Edition). Thomson, Southwestern, 2007. 22472-6. Readings and assignments are indicated in syllabus and are cited as Mankiw. ISBN: 0-324- ADDITIONAL INSTRUCTIONAL SOURCES Morton, John S. and Goodman, Rae Jean B. Advanced Placement Economics: Macroeconomics: Student Activities. (3rd Edition). National Council on Economic Education, 2003. ISBN: 1-56183-567-6 SYLLABUS FOR ADVANCED PLACEMENT MACROECONOMICS COURSE DESCRIPTION Macroeconomics is a one semester (18 week) study of how economic decision-makers affect the economy as a whole in terms of employment, price stability, and economic growth. After defining and analyzing tools and models that describe the conditions of our national economy, our fundamental purpose will be to analyze how fiscal and monetary policies may be used to promote full employment, price stability, and economic growth. Competing economic theories and models will be used to test the conventional Classical and Keynesian conclusions. Throughout the course, learning emphasis is placed on reasoned, logical argument. AP Outline I. Basic economic concepts (8-14%) Scarcity, choice and opportunity cost Production possibilities curve Comparative advantage, specialization, and trade Demand, supply and market equilibrium Macroeconomic issues; business cycle, unemployment, inflation, growth Mathematical/Graphical Skills Graph a production possibility model Explain the shapes of the production possibilities curves. Explain how the production possibilities model shows scarcity, choice, and cost. Interpret selected points on the production possibilities model. Explain and show economic growth on the production possibility models Explain and show the affects of trade on a production possibility model. Calculate opportunity cost Calculate terms of trade and gains from trade Specific Learning Tasks Sample Problems Use the production possibilities frontier to illustrate the economic problem. Topic: Production possibilities frontier Scarcity, choice, cost Free lunches vs. trade offs Calculate opportunity cost. Topic: Opportunity cost Increasing vs. constant cost Define efficiency and describe an efficient use of resources. Topic: Efficiency Technical or productive efficiency Allocative efficiency Explain how people gain from specialization and trade. Topic: Specialization Absolute vs. comparative advantage Gains from trade Explain how technological change and increases in capital and human capital expand production possibilities. Topic: Economic growth and the pff. Read: Mankiw Chapter 1-Ten Principles of Economics Chapter 2-Thinking Like an Economist Chapter 3-Interdependence and the Gains from Trade Chapter 4-The Market Forces of Supply and Demand Essential Questions 1. What are the economic goals of any society? 2. How does a production possibilities model illustrate the economic problem of scarcity, choice, and cost? 3. What are the guideposts to economic thinking? 4. Why do people trade? 5. Why is equilibrium important in a market economy? 6. How do government price ceilings, supports, and taxation affect equilibrium price and quantity? 7. What is marginal utility and how does in determine what consumers will buy? Sample Activities Morton, Unit I Sample AP Economics Test Question 2003 Interpret PP on two countries; determine absolute/comparative advantage and terms of trade; determine exports/imports and explain benefits of trade. AP Outline II. Measurement Economic Performance (1216%) Circular flow Gross domestic product; components of GDP, National income concepts. Real versus nominal gross GDP Inflation measurement and adjustment Price indices Nominal and real values Cost of inflation Unemployment Definition and measurement Types of unemployment Natural rate of unemployment Mathematical/Graphical Skills 1. Draw and explain circular flow models 2. Compute and interpret price indexes (CPI, and GDP deflators) 3. Convert nominal data to real data 4. Compute GDP and NNP given novel data 5. Calculate unemployment rates from labor force participation rates 6. Calculate rate of inflation between years Chief Reader Formative Signal: 1. Understand link between expenditures and income (circular flow model) Specific Learning Tasks Sample Problems Define GDP and explain why the value of production, income and expenditures are the same for an economy Expenditure Approach Income Approach Explain the circular flow model and use the model to explain how households, firms, government and international markets interact (to constitute GDP) Distinguish between nominal GDP and real GDP Explain and describe limitations of real GDP as a measure of economic well being. Explain what the consumer price index is and how it is calculated Explain limitations of the CPI Use the CPI to explain inflation and to calculate real values (wages, interest rates, prices) Define unemployment rate and its relationship with GDP Describe sources and types of unemployment. Read: Mankiw Chapter 23, Measuring a Nation’s Income Chapter 24, Measuring the Cost of Living Chapter 28, Unemployment Essential Questions: What are the measures of national economic performance? How can we measure the level of real performance? Who is helped and who is harmed by inflation? How does a circular flow describe the economy of the United States? What is meant by unemployment? Sample Activities Morton, Unit II Sample AP Economics Test Question 1997, draw and label circular flow diagram; identify components of AD and AS; 1997, identify two ways of calculating GDP (income vs. expenditure approach). 1999, identify method of calculating GDP; identify shortcomings of GDP figure; evaluate growth of GDP; show effects of investment on ppf AP Outline Specific Learning Tasks Sample Problems National Income and Price Determination (10-15%) A. Aggregate demand Determinants of aggregate demand Multiplier and crowding-out effects B. Aggregate Supply Short run and long run analyses Stick versus flexible wages and prices Determinants of aggregate supply C. Macro economic equilibrium Real output and price level Short and long run Actual versus full employment output Economic fluctuations Explain the factors that constitute a downward sloping Aggregate Demand (AD) Income, real interest rates, and net exports effects Explain the factor that influences the AD. Explain the factors that constitute an upward sloping Aggregate Supply (AS) curve Explain the factors that influence the aggregate supply curve Use the AS/AD model to explain fluctuations in the economy. Aqs=Aqd constitutes equilibrium in the economy (LR) Explain distinctions between potential GDP and actual GDP Relationship between potential GDP and investment and capital; labor markets Aqs=Aqd constitutes equilibrium in the economy and now compare/contrast with real GDP. (LR) Explain distinctions between natural rate of employment or full employment and actual rate of unemployment Relationship between AS/AD model and unemployment Introduce and explain aggregate expenditure model (Keynesian Income Expenditure Model) with fixed prices. Distinguish between autonomous expenditures and induced expenditures and how it influences GDP Explain how GDP adjust to equilibrium Describe and explain the expenditure multiplier Derive AD form the expenditure model Read: Mankiw Chapter 33, Aggregate Demand and Aggregate Supply Mathematical/Graphical Skills Draw and explain the components of a circular flow model; explain how the components are related to national income and GDP concepts (1997) Draw and explain an AS/AD model at various levels of unemployment. (1998) Graph the changes in the AS/AD model given changes in SRAS, AD, and LRAS. Graph an income expenditure model (Keynesian cross) and how it is related to AS/AS model Given a multiplier effect, show changes in the Keynesian and AS/AD model Compute multiplier given simple models, models with marginal tax rates, and in complete models. Chief Reader Formative Signal: differentiate secondary effects (increase in price levels in NNP which cause Md to increase) from the increase in demand for loanable securities Essential Questions What are the different models that explain the status of the national economy? How does each of the models suggest a method and strategy for dealing with national economic problems? How does the AS/AD model compare with the Aggregate Expenditure Model (Keynesian Model) as they attempt to explain the national economy How does the AS/AD model compare with the Keynesian model as they attempt to explain the national economy? Sample Activities Morton, Unit III Sample AP Economics Test Question 2005B Graphs a state of LRE, and then analyzes the impact of a decline in Xn (recognizing that recession in foreign country decreases demand for US products); shows impact on domestic market 1998, Use of AS/AD to show FE economy and impact of increase in AD ;graph AS/AD economy at FE AP Outline Specific Learning Tasks Sample Problems National Income and Price Determination (1015%)continued understand the multiplier effect and how it works differentiate between changes in SR and LR investment given fiscal/monetary changes. understand simultaneous shifts in AS and AD lead to indeterminate price levels Financial Sector (15-20%) Money, banking and financial markets Definition of financial assets: money, stocks, bonds Time value of money Measures of money supply Banks and creation of money Money demand Money market Loanable funds market Central Bank and control of the money supply Tools of central bank policy Quantity theory of money Real versus nominal interest rates Mathematical/Graphical Skills Chart and explain what happens to excess reserves, required reserves, and lending ability when demand deposits are made by individuals Graphically illustrate the effects on money supply and interest rate with an increase/decrease in the money supply Show transmission mechanism of monetary policy within a Keynesian model and within the monetarist model. 1. Define money and describe its functions 2. Describe the momentary system and explain the functions of banks Balance sheets Required and Excess Reserves Money creation and destruction through loans and repaying loans Deposit Money Multiplier effect Loanable fund market and LR interest rates Describe and explain the time value of money Bond market Money demand Money market and SR interest rates Describe the functions of the Federal Reserve System. Organization Tools of the FED; open market operations; required reserves; discount rates Creation of nominal interest rates by the FED Read: Mankiw Chapter 26, Savings, Investment, and the Financial System Chapter 27, The Basic Tools of Finance Chapter 29, The Monetary System Essential Questions: How do banks operate? How does the FED promote a fully employed economy? Sample Activities Morton, Unit IV Sample AP Economics Test Question 1996, explain impact of a deposit on bank reserves, loaning ability and total money supply 2006B Graphs loanable fund market given a changes in savings rate of consumers and impact on real interest rates; and impact on LRAS; (2) Explains impact on the MS given a new DD; explains leakages within the banking system and impact on loans and new MS created; explains impact on MS and MD with an increase in government spending financed by sale of bonds to the central bank AP Outline Financial Sector (15-20%) continued Chief Reader Formative Signal: differentiate secondary effects (increase in price levels in NNP which cause Md to increase) from the increase in demand for loanable securities understand the multiplier effect and how it works differentiate between changes in SR and LR investment given fiscal/monetary changes. V. Inflation, Unemployment, and Stabilization Policies (2030%) Fiscal and monetary policies Demand side effects Supply side effects Policy mix Government deficits and debt Inflation and unemployment Types of inflation Demand-pull inflation Cost push inflation The Phillips curve: short run and long run Role of expectations Mathematical/Graphical Skills the short run trade offs between inflation and unemployment (Phillips Curve) Use an AS/AD illustration with an increase in AD to explain the movements along a Phillips Curve. Using the Phillips Curve, graph how changes in the AS/AD model would appear on the Phillips Curve Model. Graphically illustrate, how expectations affects the Phillips Curve model Graph the affects of a combined monetary and fiscal policy. Specific Learning Tasks Sample Problems 1. Explain fiscal policy measures in response to (a) recessions; (b) inflationary periods; (c) stagflation Use AS/AD analysis Explain monetary policy measure in response to (a) recessions; (b) inflationary periods; (c) stagflation Use AS/AD analysis Show and explain the Keynesian transmission (interest rate changes to investment changes to changes in AD) Show how monetary policy can offset or complement fiscal policy goals. Using a SR Phillips Curve Analysis, describe the short run trade off of inflation and unemployment Distinguish between the sort run and the long run Phillips curve and describe the shifting tradeoff between inflation and unemployment Explain the role of expectations and how expected inflation influences the short run trade off. Compare and contrast the trade offs using the Phillips curve analysis with that of using the AS/AD model. Read: Mankiw Chapter 30, Money Growth and Inflation Chapter 34, The Influence of Monetary and Fiscal Policy on Aggregate Demand Chapter 35, The Shortrun Trade-off Between Inflation and Unemployment Essential Questions are the different combinations of fiscal and monetary policy? What are the affects of using monetary policy and/or fiscal policy on interest rates, price stability, and employment and national income? What are the various policies used to promote national output, employment and price stability? How do economists measure inflation? What causes (and does not cause) inflation? What is the trade off between unemployment and inflation? What is the role of expectations in accelerating (or decelerating) inflation? Sample Activities Morton, Unit III, Activities 3033. Morton, Unit IV, Activities 40 and 41 Morton Unit V AP Outline V. Inflation, Unemployment, and Stabilization Policies (2030%) continued Compare and contrast affects of monetary policy and/or fiscal policy given differing elasticity of demand for investment demand and/or demand for money Compare and contrast graphically the Keynesian and Monetarist controversies concerning the use of fiscal and monetary policy Chief Reader Formative Signal: explain expansionary fiscal policy that requires government to fund sale of securities which increase interest rates explain expansionary fiscal policy that requires government to fund sale of securities which increase interest rates understand simultaneous shifts in AS and AD lead to indeterminate price levels Specific Learning Tasks Sample Problems Sample AP Economics Test Question 1999, how changes in interest rate changes aggregate output and price levels; identify a fiscal policy to counter effects of inflation and effects of such policy on output, price level and nominal interest rates and price of bonds 2003, draw SRAS/AD graph showing recession with FE output, current and current price levels; graphs and explains impact of decrease in fiscal spending on output and price levels and affects on unemployment 2005B recommends an OMO given recession and graphically illustrates change in money market and interest rates and how it will affect AD, price levels and output 2005 ,draw a short run Phillips curve give novel data ; and the impact on the SRPC when there is a supply shock to the left. Analysis of long run Phillips curve given a novel natural rate of employment and the relationship between U and inflation in the long run. AP Outline VI. Economic growth and productivity (5-10%) Investment in human capital Investment in physical capital Research and development, and technological progress Growth policy Mathematical/Graphical Skills Graph affects on price stability, employment and growth given an increase in the long run aggregate supply. Show how increases in LRAS affect production possibilities model (1998) Show growth recessions using AS/AD models. Recognizes shifts in LRAS given novel changes in capital stock, technology, resources Chief Reader Formative Signal understand why and how economic growth occurs understand how GDP increases as a result of increases in AD and/or with economic growth (increases in LRAS) understand that growth occurs in the productive capacity recognize relationships between capital stock and growth distinguish between short run and long run facts that change economic growth Specific Learning Tasks Review the concept of potential output (LRAS) Explain the concept of economic growth Define and explain the relationship among capital, investment, saving and economic growth Reinforce how investment and savings decision are made to determine real interest rates Reinforce how government influences the real interest rate, investment and savings Explain how the labor market contributes to economic potential and growth Identify sources of economic growth and theories of economic growth Use AS/AD analysis to describe effects of economic growth. Describe policies that might promote economic growth Sample Problems Read: Mankiw Chapter 25, Production and Growth Essential Questions What is economic growth? What factors can result in economic growth? What government policies have been used (and can be used) to stimulate economic growth Sample Activities Morton, Unit VI Sample AP Economics Test Question 2002, can explain how LRAS changes or how increases in real GDP can be changed (e.g., labor force participation; increase in government deficits; decrease in inputs required to produced outputs; increase in educational; increase in rate of savings) AP Outline Open Economy: International Trade and Finance (10-15%) A. Balance of payments accounts Balance of trade Current account Capital account B. Foreign exchange market Demand for and supply of foreign exchange Exchange rate determination Currency appreciation and depreciation C. Next exports and capital flows D. Links to financial and goods market. E. International finance and exchange rates Specific Learning Tasks VII. Mathematical/Graphical Skills Graph demand and supply for US currency AND demand and supply for foreign currency. Graph the impact of an increase/decrease in net exports on AS/AD models. Graph impact of an appreciated dollar/depreciated dollar on AS/AD Graph the impact of tariffs Chief Reader Formative Signal students must be able to analyze effects of monetary/fiscal policies on exports, imports, and international value of the dollar. understand why demand for imports/exports occur understand link between capital flows and currency values; differentiates between money market and foreign markets; differentiates between money market and foreign market. link changes in international value of the dollar with changes in imports/exports 1. Explain why nations trade (distributive practice from beginning of course, emphasis on comparative advantage and terms of trade) Explain benefits of trade Explain trade barriers (tariffs and quotas) and how the reduce trade Give arguments for/against barriers. Explain the balance of trade and how the balance of trade determines the international borrowing and lending Explain exchange rates and how they are determined and why they fluctuate Explain and link foreign trade to the AS/AD model. Explain and link how monetary/fiscal policy affects international trade and the balance of payments. Sample Problems Read: Mankiw Chapter 31, Open-Economy Macroeconomics: Basic Concepts Chapter 32, A Macroeconomic Theory of the Open Economy Essential Questions Why do nations engage in international trade? Why do nations sometimes impose restrictions on international trade? How do exchange rates affect international trade? What is the affect of international markets on the US economy in terms of price stability, employment, and economic growth? What is a trade deficit? Sample AP Economics Test Question 2002, can use demand and supply analysis in foreign money market to show changing value of dollars v. the value of foreign currency; can show how a change international value of dollars changes imports and exports from a foreign country 2003, explain how changes in interest rates (decrease) affects international value of dollar; exports and imports AP Outline VII. Open Economy: International Trade and Finance (10-15%) continued explain changes in exports/imports due to relative price changes recognize and explain financial flows given changes in interest rates between countries Specific Learning Tasks Sample Problems