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Principles of Macroeconomics

Table of contents
Chapter One. Introduction to key ideas
1.1 - What’s it all about?
1.2 - Understanding through the use of models
1.3 - Opportunity cost and the market
1.4 - A model of exchange and specialization
1.5 - Economy-wide production possibilities
1.6 - Aggregate output, growth and business cycles
Chapter Two. Theories, models and data
2.1 - Data analysis
2.2 - Data, theory and economic models
2.3 - Ethics, efficiency and beliefs
Chapter Three. The classical marketplace – demand and supply
3.1 - The marketplace – trading
3.2 - The market’s building blocks
3.3 - Demand and supply curves
3.4 - Non-price influences on supply
3.5 - Non-price determinants of supply
3.6 - Simultaneous supply and demand impacts
3.7 - Market interventions – governments and interest groups
3.8 - Individual and market functions
3.9 - Useful techniques – demand and supply equations
Chapter Four. Economic activity & performance
4.1 - Macroeconomic performance
4.2 - Canadian economic performance
4.3 - National accounts
4.4 - Measuring GDP
4.5 - Nominal GDP, real GDP & the GDP deflator
4.6 - Per capita real GDP
Chapter Five. Output, business cycles, growth & employment
5.1 - Aggregate demand & aggregate supply
5.2 - Equilibrium output and potential output
5.3 - Growth in potential output
5.4 - Business cycles and output gaps
5.5 - Output gaps and unemployment rates
5.6 - Adjustments to output gaps?
5.7 - The role of macroeconomic policy
Chapter Six. Aggregate expenditure & aggregate demand
6.1 - Short-run aggregate demand and output
6.2 - Aggregate expenditure
6.3 - Aggregate expenditure and equilibrium output in the short run
6.4 - The multiplier: Changes in aggregate expenditure and equilibrium output
6.5 - Equilibrium output and the AD curve
Chapter Seven. The government sector
7.1 - Government in Canada
7.2 - Government expenditure & taxes
7.3 - The government’s budget function
7.4 - Fiscal policy & government budget balances
7.5 - Automatic and discretionary fiscal policy
7.6 - The public debt and the budget balance
7.7 - Aggregate demand & equilibrium output
Chapter Eight. Money, banking & money supply
8.1 - Money and the functions of money
8.2 - Measures of the Canadian money supply
8.3 - Banking in Canada today
8.4 - Money created by banks
8.5 - The monetary base and the money supply
Chapter Nine. Financial markets, interest rates, foreign exchange rates & AD
9.1 - Portfolio choices between money and other assets
9.2 - The demand for money balances
9.3 - Financial market equilibrium and interest rates
9.4 - Interest rates and foreign exchange rates
9.5 - Interest rates, exchange rates, and aggregate demand
9.6 - The transmission mechanism
Chapter Ten. Central banking and monetary policy
10.1 - Central banking and the Bank of Canada
10.2 - Central bank operating techniques
10.3 - Monetary policy objectives & instruments targets
10.4 - Monetary policy rules
10.5 - Monetary policy indicators
Chapter Eleven. Inflation, real GDP, monetary policy & fiscal policy
11.1 - Inflation and aggregate demand
11.2 - Aggregate supply
11.3 - The equilibrium inflation rate
11.4 - Adjustment to output gaps
11.5 - Monetary & fiscal policy
11.6 - Recession, disinflation and deflation
Chapter Twelve. Exchange rates, monetary policy, and fiscal policy
12.1 - The balance of payments
12.2 - The foreign exchange market
12.3 - Flexible exchange rates and fixed exchange rates
12.4 - Monetary and fiscal policy under flexible exchange rates
12.5 - Monetary and fiscal policy under fixed exchange rates
Chapter Thirteen. Economic growth
13.1 - Patterns of economic growth
13.2 - Growth in potential output
13.3 - Growth in per capita GDP
13.4 - Technology & growth in per capita output
13.5 - Recent growth studies and policy issues
Chapter Fourteen. Glossary
Chapter Fifteen. Solutions To Exercises
15.1 - Chapter 1 Solutions
15.2 - Chapter 2 Solutions
15.3 - Chapter 3 Solutions
15.4 - Chapter 4 Solutions
15.5 - Chapter 5 Solutions
15.6 - Chapter 6 Solutions
15.7 - Chapter 7 Solutions
15.8 - Chapter 8 Solutions
15.9 - Chapter 9 Solutions
15.10 - Chapter 10 Solutions
15.11 - Chapter 11 Solutions
15.12 - Chapter 12 Solutions
15.13 - Chapter 13 Solutions
Principles of Macroeconomics
1st Edition
Douglas Curtis, Ian Irvine
Creative Commons License (CC BY-NC-SA 3.0)
Table Of Contents
  • Introduction - Principles of Macroeconomics
  • Chapter One - Introduction to key ideas
    • 1.1 - What’s it all about?
    • 1.2 - Understanding through the use of models
    • 1.3 - Opportunity cost and the market
    • 1.4 - A model of exchange and specialization
    • 1.5 - Economy-wide production possibilities
    • 1.6 - Aggregate output, growth and business cycles
  • Chapter Two - Theories, models and data
    • 2.1 - Data analysis
    • 2.2 - Data, theory and economic models
    • 2.3 - Ethics, efficiency and beliefs
  • Chapter Three - The classical marketplace – demand and supply
    • 3.1 - The marketplace – trading
    • 3.2 - The market’s building blocks
    • 3.3 - Demand and supply curves
    • 3.4 - Non-price influences on supply
    • 3.5 - Non-price determinants of supply
    • 3.6 - Simultaneous supply and demand impacts
    • 3.7 - Market interventions – governments and interest groups
    • 3.8 - Individual and market functions
    • 3.9 - Useful techniques – demand and supply equations
  • Chapter Four - Economic activity & performance
    • 4.1 - Macroeconomic performance
    • 4.2 - Canadian economic performance
    • 4.3 - National accounts
    • 4.4 - Measuring GDP
    • 4.5 - Nominal GDP, real GDP & the GDP deflator
    • 4.6 - Per capita real GDP
  • Chapter Five - Output, business cycles, growth & employment
    • 5.1 - Aggregate demand & aggregate supply
    • 5.2 - Equilibrium output and potential output
    • 5.3 - Growth in potential output
    • 5.4 - Business cycles and output gaps
    • 5.5 - Output gaps and unemployment rates
    • 5.6 - Adjustments to output gaps?
    • 5.7 - The role of macroeconomic policy
  • Chapter Six - Aggregate expenditure & aggregate demand
    • 6.1 - Short-run aggregate demand and output
    • 6.2 - Aggregate expenditure
    • 6.3 - Aggregate expenditure and equilibrium output in the short run
    • 6.4 - The multiplier: Changes in aggregate expenditure and equilibrium output
    • 6.5 - Equilibrium output and the AD curve
  • Chapter Seven - The government sector
    • 7.1 - Government in Canada
    • 7.2 - Government expenditure & taxes
    • 7.3 - The government’s budget function
    • 7.4 - Fiscal policy & government budget balances
    • 7.5 - Automatic and discretionary fiscal policy
    • 7.6 - The public debt and the budget balance
    • 7.7 - Aggregate demand & equilibrium output
  • Chapter Eight - Money, banking & money supply
    • 8.1 - Money and the functions of money
    • 8.2 - Measures of the Canadian money supply
    • 8.3 - Banking in Canada today
    • 8.4 - Money created by banks
    • 8.5 - The monetary base and the money supply
  • Chapter Nine - Financial markets, interest rates, foreign exchange rates & AD
    • 9.1 - Portfolio choices between money and other assets
    • 9.2 - The demand for money balances
    • 9.3 - Financial market equilibrium and interest rates
    • 9.4 - Interest rates and foreign exchange rates
    • 9.5 - Interest rates, exchange rates, and aggregate demand
    • 9.6 - The transmission mechanism
  • Chapter Ten - Central banking and monetary policy
    • 10.1 - Central banking and the Bank of Canada
    • 10.2 - Central bank operating techniques
    • 10.3 - Monetary policy objectives & instruments targets
    • 10.4 - Monetary policy rules
    • 10.5 - Monetary policy indicators
  • Chapter Eleven - Inflation, real GDP, monetary policy & fiscal policy
    • 11.1 - Inflation and aggregate demand
    • 11.2 - Aggregate supply
    • 11.3 - The equilibrium inflation rate
    • 11.4 - Adjustment to output gaps
    • 11.5 - Monetary & fiscal policy
    • 11.6 - Recession, disinflation and deflation
  • Chapter Twelve - Exchange rates, monetary policy, and fiscal policy
    • 12.1 - The balance of payments
    • 12.2 - The foreign exchange market
    • 12.3 - Flexible exchange rates and fixed exchange rates
    • 12.4 - Monetary and fiscal policy under flexible exchange rates
    • 12.5 - Monetary and fiscal policy under fixed exchange rates
  • Chapter Thirteen - Economic growth
    • 13.1 - Patterns of economic growth
    • 13.2 - Growth in potential output
    • 13.3 - Growth in per capita GDP
    • 13.4 - Technology & growth in per capita output
    • 13.5 - Recent growth studies and policy issues
  • Chapter Fourteen - Glossary
  • Chapter Fifteen - Solutions To Exercises
    • 15.1 - Chapter 1 Solutions
    • 15.2 - Chapter 2 Solutions
    • 15.3 - Chapter 3 Solutions
    • 15.4 - Chapter 4 Solutions
    • 15.5 - Chapter 5 Solutions
    • 15.6 - Chapter 6 Solutions
    • 15.7 - Chapter 7 Solutions
    • 15.8 - Chapter 8 Solutions
    • 15.9 - Chapter 9 Solutions
    • 15.10 - Chapter 10 Solutions
    • 15.11 - Chapter 11 Solutions
    • 15.12 - Chapter 12 Solutions
    • 15.13 - Chapter 13 Solutions
Introduction
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Principles of Macroeconomics

an Open Text by Douglas Curtis and Ian Irvine

 

Base Text Revision History

Current Revision: Version 2017 — Revision B

 

Edits and revisions have been completed by the authors together with the editorial staff at Lyryx Learning.

All new content (text and images) is released under the same license as noted above.

2017 B
  • Data, tables, and figures have been updated to the latest available data. Example calculations of indicators of economic conditions and performance, such as growth rates, inflation rates, unem- ployment rates, and interest rates are now based on current data. Applications and discussions have been edited to discuss and comment on these current observations.
  • New content is added, including zero-sum games and market design, E-payments, E-money, and Fintech.
  • Chapters 4, 7, & 11: Discussions of fiscal and monetary policy have been revised to take account of changes in energy and commodity prices, and the change in the federal government budgetary policy as these are reflected in the updated data on both economic activity and policy indicators.
  • Chapter 11: The explanation of the control of the public debt ratio has been simplified to em- phasize the importance of the primary budget balance, the interest rate on the public debt and the growth rate of GDP. The importance of the shift from a balanced budget target to a debt ratio constraint for evaluating federal government budget policy is noted.
  • Chapter 13: Includes a new discussion of the structural changes in output and employment that are integral to economic growth and the effects of growth on per capita real GDP. Employment by sector data illustrate the recent pattern of change in goods sector-service sector employment.
2017 A  
  • Front matter has been updated including cover, copyright, and revision pages.
Introduction.1. About the Authors

Doug Curtis is a specialist in macroeconomics. He is the author of numerous research papers on fiscal policy, monetary policy, and economic growth and structural change. He has also prepared research reports for Canadian industry and government agencies and authored numerous working papers. He completed his PhD at McGill University, and has held visiting appointments at the University of Cambridge and the University of York in the United Kingdom. His current research interests are monetary and fiscal policy rules, and the relationship between economic growth and structural change. He is Professor Emeritus of Economics at Trent University in Peterborough, Ontario, and also held an appointment as Sessional Adjunct Professor in the Department of Eco- nomics at Queen’s University in Kingston, Ontario from 2003 until 2013.

Ian Irvine is a specialist in microeconomics, public economics, economic inequality and health economics. He is the author of numerous research papers in these fields. He completed his PhD at the University of Western Ontario, has been a visitor at the London School of Economics, the University of Sydney, the University of Colorado, University College Dublin and the Economic and Social Research Institute. His current research interests are in tobacco use and taxation, and Canada’s Employment Insurance and Welfare systems. He has done numerous studies for the Government of Canada, and is currently a Professor of Economics at Concordia University in Montreal.

Our Philosophy

Principles of Macroeconomics is focused on the material that students need to cover in a first introductory course. It is slightly more compact than the majority of introductory macroeconomics books in the Canadian marketplace. Decades of teaching experience and textbook writing has led the authors to avoid the encyclopedic approach that characterizes the recent trends in textbooks.

Consistent with this approach, there are no appendices or ‘afterthought’ chapters. If important material is challenging then it is still included in the main body of the text; it is not relegated elsewhere for a limited audience; the text makes choices on what issues and topics are important in an introductory course. This philosophy has resulted in a Macro book of just 13 chapters, with three introductory chapters common to both our Principles of Microeconomics and Principles of Macroeconomics books.

Examples are domestic and international in their subject matter and are of the modern era – finan- cial markets, monetary and fiscal policies aimed at inflation and debt control, globalization and the importance of trade flows in economic structure and concerns about slow growth and the risk of deflation are included.

The title is intended to be informative. Students are introduced to the concepts of models early, and the working of such models is illustrated in every chapter. While this book avoids calculus and uses algebra sparingly, it still aims to be rigorous. In contrast to many books on the market that simply insert diagrams and discuss concepts in a diagrammatic framework, our books develop and analyze key concepts and relations by introducing numerical and empirical examples at the outset. Students are introduced immediately to the practice of taking a set of data, examining it numerically, plotting it and thinking about how it illustrates a concept or relationship. The process is not difficult but it is rigorous and stresses the link between empirical observation, economic theory, models and policy. Hence numerical examples, diagrams, and straight line equations and are introduced early and are used throughout.

Structure of the Text

Principles of Macroeconomics provides complete, concise coverage of introductory macroeco- nomic theory and policy. It examines the Canadian economy as an economic system, and em- beds current Canadian institutions and approaches to monetary policy and fiscal policy within that system. Particular attention is given to the recent structure, performance, and evolution of the Canadian economy, and to the current targets and instruments of Canadian monetary and fiscal policy.

These are exciting and challenging times in which to study macroeconomics. We focus on short- run macroeconomic performance, analysis, and policy motivated by the recessions of the early 1980s and 1990s, the financial crisis and recession of 2008-2009, and the prolonged recovery that is still incomplete in several industrial countries in 2017. To that end, the text examines macroeconomic institutions, performance, and policies in ways that help students understand and evaluate critically the news media coverage and broader public discussion of:

  • Recessions and recoveries, unemployment, inflation, deflation and conditions in financial markets—topics of ongoing reporting, discussion, and debate.
  • Monetary and fiscal policy announcements and discussions focused on inflation targets, in- terest rate settings, budget balances, tax rates, expenditures, and public debt targets as these affect economic performance.
  • Exports, imports, international capital flows, foreign exchange rates, commodity prices and the importance of the international sector of the Canadian economy.
  • Economic growth, productivity growth, and the importance of productivity growth for stan- dards of living in Canada and other countries.

A basic modern Aggregate Demand and Supply model of real GDP and the inflation rate is devel- oped based on:

  • Expenditure decisions by households and businesses in an open economy.
  • Government sector expenditures, taxes and budgets.
    • Current Canadian monetary policy based on inflation targets, interest rate policy instruments, and current Bank of Canada operating techniques, including the potential for quantitative or credit easing.
    • Current Canadian fiscal policy based on deficit and debt control targets, the govern- ment’s budget function, the temporary shift to fiscal stimulus in 2009, the subsequent fiscal austerity designed to achieve a balanced budget by 2015 and the implications for economic performance and the public debt.

Numerical examples, diagrams, and basic arithmetic are used in combination to illustrate and ex- plain economic relationships. Students learn about: The importance of consumption, capital ex- penditures, and government budgets; money supply; financial asset prices, yields, and interest rates; employment and unemployment; and other key relationships in the economy. Canadian and selected international data are used to provide real world examples and comparisons.

Part One

The Building Blocks

 

1. Introduction to key ideas

2. Theories, models and data

3. The classical marketplace – demand and supply

 

Economics is a social science; it analyzes human interactions in a scientific manner. We begin  by defining the central aspects of this social science – trading, the marketplace, opportunity cost and resources. We explore how producers and consumers interact in society. Trade is central to improving the living standards of individuals. This material forms the subject matter of Chapter 1.

Methods of analysis are central to any science. Consequently we explore how data can be displayed and analyzed in order to better understand the economy around us in Chapter 2. Understanding the world is facilitated by the development of theories and models and then testing such theories with the use of data-driven models.

Trade is critical to individual well-being, whether domestically or internationally. To understand this trading process we analyze the behaviour of suppliers and buyers in the marketplace. Markets are formed by suppliers and demanders coming together for the purpose of trading. Thus, demand and supply are examined in Chapter 3 in tabular, graphical and mathematical form.

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