Download Unit 3 concept objectives outline

IB Unit 3: Macroeconomics Overview
The purpose of this unit is to provide students with the opportunity for a detailed
examination of the major macroeconomic issues facing countries' economic growth,
economic development, unemployment, inflation and income distribution.
The economic strategies available to governments - demand side policies, supply-side
policies, direct intervention - are introduced and evaluated. These policies are applicable
to almost all areas of macroeconomics, international economics and development
economics.
3.1 Measuring national income
Performance Objectives
State the purposes of national income accounting.
List the components of GDP in the expenditures approach and in the income approach.
Compute GDP using either the expenditure or income approach when given national
income data.
Differentiate between gross and net investment
Explain why changes in inventories are investments.
Discuss the relationship between net investment and economic growth
Define GDP verbally and in written format; learn and use the formula for deriving GDP.
Given data on nominal GDP, calculate the real GDP using the price deflator/price index.
Discuss the limitations of GDP as a measurement of economic well-being.
Topics/Concepts:
Circular flow of income
Methods of measurement - income, expenditure and output
Distinction between
gross and net
national and domestic
nominal and real
total and per capita
3.2 Introduction to development
Performance Objectives
Explain how economists define economic growth and economic development, how often
growth and development are measured.
Learn how different countries’ economies have grown historically and learn how the
business cycle contributes to these variations in economic growth.
Define two measures of economic growth.
Explain why growth is a desirable goal.
Distinguish between economic growth and economic development
Identify and explain two main sources of growth.
Identify and explain two measures of economic development.
Explain the “rule of 70.”
Explain what is meant by a business cycle.
Identify two types of non-cyclical fluctuations in business activity.
Explain why business cycles affect capital and consumer durable goods industries more
than non-durable goods industries.
Topics/Concepts:
Definitions of economic growth and economic development
Differences in the definitions of the two concepts
Gross Domestic Product (GDP) vs. Gross National Product (GNP) as measures of growth
Limitations of using GDP as a measure to compare welfare between countries
Allowance for differences in purchasing power when comparing welfare between
countries
Alternative methods of measurement
Problems of measuring development
3.3 Macroeconomic models
Performance Objectives
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.
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.
Explain the shape of the aggregate supply curve.
Contrast the classical and Keynesian views of the aggregate supply curve.
Compare the classical and Keynesian views of the stability of the aggregate demand
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.
Topics/Concepts
Aggregate demand - components
Aggregate supply
short-run
long-run (Keynesian vs. neo-classical approach)
Full employment level of national income
Equilibrium level of national income
Inflationary gap
Deflationary gap
Diagram illustrating trade/business cycle
3.4 Demand-side and supply-side policies
Performance Objectives
Fiscal Policy
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.
List three timing problems encountered with fiscal policy.
State political problems that limit effective fiscal policy.
Explain and recognize graphically how crowding out and inflation can reduce the
effectiveness of fiscal policy.
Give two examples of complications that may arise when fiscal policy interacts
with international trade.
Give an example of supply-side fiscal policy and three possible positive effects
from it.
Explain and recognize graphically how crowding out and inflation can reduce the
effectiveness of fiscal policy.
Give two examples of complications that may arise when fiscal policy interacts
with international trade.
Monetary Policy
List and explain the three functions of money.
Define the money supply.
Identify two types of demand for money and the main determinant of each.
Describe the relationship between GDP and the interest rate and each type of
money demand.
Explain what is meant by equilibrium in the money market and the equilibrium
rate of interest.
Explain the relationship between bond prices and the money market.
Explain why Federal Reserve Banks are central, quasi-public, and bankers’ banks.
Explain why a commercial bank is required to maintain a reserve and why it isn’t
sufficient to cover deposits.
Explain how it is possible for the banking system to create an amount of money
that is a multiple of its excess reserves when no single bank ever creates money
greater than its excess reserves.
Compute the size of the monetary multiplier and the money-creating potential of
the banking system when provided with appropriate data.
State the two leakages that reduce the money-creating potential of the banking
system.
Identify the goals of monetary policy.
Describe three monetary policies a central bank could use to reduce
unemployment.
Describe three monetary policies a central bank could use to reduce inflationary
pressures in the economy.
Explain the cause-effect chain between monetary policy and changes in
equilibrium GDP.
Demonstrate graphically the money market and how a change in the money
supply will affect the interest rate.
Show the effects of interest rate changes on investment spending.
Describe the impact of changes in investment on aggregate demand and
equilibrium GDP.
Contrast the effects of an easy money policy with the effects of a tight money
policy.
List four shortcomings and three strengths of monetary policy.
Explain the net export effect of an expansionary and a contractionary monetary
policy.
Topics/concepts
Shifts in the AD curve / demand-side policies
fiscal policy
interest rates as a tool of monetary policy
Shifts in the AS curve / supply-side policies
Strengths and weaknesses of these policies
3.5 Unemployment and inflation
Performance Objectives
State causes of frictional, cyclical, and structural unemployment.
Identify the full employment or natural rate of unemployment.
Identify the economic costs of unemployment and the groups that bear unusually
heavy unemployment burdens.
State causes of frictional, cyclical, and structural unemployment.
Identify the full employment or natural rate of unemployment.
Identify the economic costs of unemployment and the groups that bear unusually
heavy unemployment burdens.
Define inflation and the states the different stages/measurements of inflation
Identify the causes for demand pull and cost-push inflation
Identify the losers and the winners during times of inflation
Explain how inflation affects economic growth and other economic goals, ( price
stability, economic security)
Explain the difference between the short-run and long-run aggregate supply
curves and their significance for economic policy.
Distinguish between demand-pull and cost-push inflation using the aggregate
demand-aggregate supply model.
Explain and construct a traditional short-run Phillips Curve using the aggregate
demand-aggregate supply model.
Topics/Concepts:
Unemployment
Full employment and underemployment
Unemployment rate
Costs of unemployment
Types of unemployment
structural
frictional
seasonal
cyclical/demand-deficient
real wage
Measures to deal with unemployment
Inflation
Definitions of inflation and deflation
Costs of inflation and deflation
Causes of inflation
cost push
demand pull
excess monetary growth
Higher level only:
Methods of measuring inflation
Problems of the methods of measuring inflation
Phillips curve
short-run
long-run
Natural rate of unemployment (NRU)
Non-Accelerating Inflation Rate of Unemployment (NAIRU)
3.6 Distribution of income
Direct taxation
Indirect taxation
Progressive taxation
Proportional taxation
Regressive taxation
Transfer payments
Laffer curve
Lorenz curve and Gini coefficient