Reagan MacroA.P. Macroeconomics Syllabus

Text: Krugman’s Economics for AP by Margaret Ray & David Anderson (2011), Seventh printing. ISBN-13: 978-1-4641-2218-7

Unit I: Basic Economic Concepts Modules 1-8 (8-12%) 12 daysA. Scarcity, Choice & Opportunity CostsB. Production Possibilities CurveC. Comparative Advantage, absolute advantage, specialization and exchangeD. Macroeconomic issues: business cycle, unemployment, inflation, and growthE. Demand, supply, and market equilibrium

Key Concepts: Introduction to the language of economics micro vs. macropositive vs. normative economics price controlsscarcity price floors/ceilingsopportunity cost production possibilities absolute advantage comparative advantage specialization terms of trade demand schedule determinants of demand individual and market demand curves supply schedule determinants of supply market equilibrium shifts in supply and demand with effects on equilibrium prices & quantity

Graphs: Production Possibilities Curve/Frontier

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Demand & Supply curves Demand & Supply curve shiftsshowing equilibrium

Terms:Factors of Production Microeconomics Deadweight lossMacroeconomics Positive Economics Normative EconomicsCeteris Paribus Fallacy of Composition ScarcityOpportunity Cost Production Possibilities Law of Increasing Opportunity CostAbsolute Advantage Comparative Advantage SpecializationTerms of Trade Demand Law of DemandQuantity Demanded Market Demand SubstitutesComplements Normal Goods Inferior GoodsSupply Law of Supply Quantity SuppliedMarket Equilibrium Equilibrium Price Equilibrium QuantityBusiness Cycle Recession RecoveryUnemployment Inflation Economic Growth

Unit II: Measurement of Economic Performance Modules 10-15 (12-16%) (14 days)A. National Income AccountsB. UnemploymentC. Inflation measurement and adjustment

Key Concepts:Circular Flow of Economic Activity Inclusions and Exclusions in GDPExpenditure Approach to GDP Income Approach to GDPNominal GDP vs. Real GDP Phases of the Business CycleTypes of Unemployment Full EmploymentMeasures of Inflation Types of InflationEffects of Inflation

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Graphs:Circular Flow Model Phases of the Business Cycle

Terms:Gross Domestic Product Intermediate GoodsFinal Goods Multiple CountingExpenditure Approach Income ApproachPersonal Consumption Expenditures Gross Private Domestic InvestmentNet Private Domestic Investment Government PurchasesNet Exports National IncomeConsumption of Fixed Capital DepreciationPersonal Income Nominal GDPReal GDP GDP DeflatorPeak RecessionTrough Recovery Labor Force Unemployment RateFrictional Unemployment Structural UnemploymentCyclical Unemployment Full-Employment Rate of UnemploymentNatural Rate of Unemployment InflationConsumer Price Index Demand-Pull InflationCost-Push Inflation Nominal IncomeReal Income Deflation

Unit III: National Income & Price Determination Modules 16-21 (11 days) (10-15%)A. Aggregate DemandB. Aggregate SupplyC. Macroeconomic equilibrium

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Key Concepts: Marginal Propensity to Consume The Multiplier EffectDeterminants of Aggregate Demand Sticky Versus Flexible Prices and WagesActual Versus Full Employment Utilization of ResourcesAggregate Supply in both Short & Long RunDetermination of Equilibrium Output & Price LevelReasons for a Downward Sloping Aggregate Demand Curve

Graphs: Investment Demand Curve

Short-run/Long-run Aggregate Supply & Demand curves

Terms:Marginal Propensity to Consume Marginal Propensity to SaveInvestment MultiplierInvestment Schedule LeakageInjection Real Balances EffectInterest-rate Effect Foreign Purchases EffectAggregate Demand Short-run Aggregate SupplyEquilibrium Price Level Equilibrium Real Output

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Unit IV: Financial Sector Modules 22-29 (16 days) (15%-20%)A. Money, banking, and financial marketsB. Central bank and control of the money supply

Key Concepts: Functions of Money Characteristics of MoneyMeasures of Money Money DemandMoney Market The Creation of MoneyLoanable Funds Market Organization of the Federal ReserveTools of Monetary Policy Responsibilities of the FedQuantity Theory of Money

Graphs: Money Market Loanable Funds Market

Terms:Medium of Exchange Store of Value Standard of ValueM1 M2 M3Checkable Deposits Demand Deposits Time DepositsLegal Tender Asset Demand Transaction DemandBalance Sheet T - account Fractional Reserve Banking SystemRequired Reserves Excess Reserves Actual ReservesFederal Funds Rate Prime Interest Rate Discount RateOpen-market Operations Money Multiplier Nominal Interest RateReal Interest Rate FDIC Velocity of Money

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Unit V: Inflation, Unemployment & Stabilization Policies Modules 30-36 (20-30%) (7 days)A. Fiscal and monetary policiesB. Inflation and unemployment

Key Concepts:Fiscal Policy and the Aggregate Demand/Aggregate Supply ModelMonetary Policy and the Aggregate Demand/Aggregate Supply ModelCombinations of the Policies and Their EffectsInternational Considerations with Monetary and Fiscal policyGovernment Deficits and DebtsLong-run Aggregate SupplyDemand-Pull and Cost-Push InflationThe Inflation-Unemployment Relationship

Graphs:Aggregate Demand/Aggregate Supply Model

Phillips Curve

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Terms:Expansionary fiscal policy Contractionary Fiscal PolicyBudget Deficit Budget SurplusBuilt-in Stabilizer Discretionary PolicyProgressive Tax System Regressive Tax SystemProportional Tax System Crowding-out EffectNet Export Effect Federal Reserve Board of GovernorsOpen-market Operations Discount RateReserve Requirement Short RunLong Run Phillips CurveStagflation Aggregate Supply ShocksLabor-force Participation Rate

Economic Growth & Productivity Modules 37-40 (5%-10%) (2 days)A. Long-run economic growthB. Productivity & growthC. Growth policy: why economic growth rates differD. Economic growth in macroeconomic models

Key Concepts:Ingredients of Economic Growth Technological AdvanceProduction Possibilities Analysis Labor and ProductivityGrowth in the AD/AS Model Long- and Short-run Analysis

Terms:Economic Growth Human CapitalSupply-side economics Labor ProductivityEconomies of Scale InfrastructureEfficiency Long-run Vertical Supply Curve

Unit VI: Open Economy: International Trade & Finance Modules 41-45 (10-15%) (5 days)A. Capital Flows & the Balance of PaymentsB. The Foreign Exchange MarketC. Exchange rate policyD. Exchange rates & macroeconomic policyE. Putting it all together

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Key Concepts:The United States & World Trade Absolute & Comparative AdvantageBalance of Payments Foreign Exchange MarketsForeign Exchange Markets Implications of Foreign TradeEffects of Domestic Fiscal & Monetary Policies on Capital FlowsDecision and Policy Making

Graphs:Production Possibilities Foreign Exchange Market

Terms:Tariffs Quotas SubsidiesAbsolute Advantage Comparative Advantage Terms of TradeWorld Price Domestic Price Current AccountTrade Deficit Trade Surplus Capital AccountOfficial Reserves Flexible Exchange Rates Fixed Exchange RatesDepreciation Appreciation World Trade Organization (WTO)North American Free Trade Agreement (NAFTA) General Agreement on Tariffs and Trade (GATT)

“No nation was ever ruined by trade, even seemingly the most disadvantageous.”

-- Ben Franklin

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Cool Stuff for Real World Economics (not the AP exam)

When Economics goes wrong, it is usually due to:(categories by Peter Boettke, Ph.D., explanations by Mr. Harris)

1. A denial of rationality. Rationality in economics assumes that individuals always make logical decisions that provide them with the greatest satisfaction (utility). “If a man drinks wine and not water I cannot say he is acting irrationally,” wrote Ludwig von Mises, “At most I can say that in his place I would not do so. But his pursuit of happiness is his own business, not mine.” Did anyone give you grief for taking AP-Macro? Remember, utility is subjective.

2. A denial of scarcity. Scarcity is the result of unlimited wants and limited resources. The trade-off is called “opportunity cost.” Opportunity cost is the value of what we forgo to obtain something else. Always trade-offs, never “solutions” (only politicians use that term). Whether it is health care, funding college, or sending more generators to hurricane-stricken areas, we can arrange only for better trade-offs through opportunity cost. This means that the price on some things is going to go up, reflecting their scarcity! Politicians don’t like this, apparently expecting generators to transport themselves to without any increase in price.

3. A denial of how the price system works in helping us cope with scarcity. Pricing sends signals to consumers and producers about the value of scarce resources. As prices rise, the quantity in demand goes down; as prices fall, the quantity in demand goes up. For example, when gas prices rise, you conserve fuel (you don’t quit driving). When a sale is “buy one, get one free,” you demand one more than you normally would have.

Says one author: “Unfortunately, while there will always be plenty of Natural non-renewables in the ground, there are not enough economically viable NNRs in the ground to perpetuate our industrial lifestyle paradigm going forward.” Such predictions began shortly after oil was discovered in 1859. “Humans,” noted economist Julian Simon, “are the ultimate resource.” We constantly find ways to get more efficient use of resources or others to replace them. As the cost of copper rose dramatically,the high price provided incentive for replacements. Fiber optic, whose primary ingredient is sand, can carry near-infinite more data than copper. When “easy oil” began to decline, we invented fracking, sideways drilling, etc. We now have more known reserves in the United States than Saudi Arabia. With tar sands now becoming profitable and the discovery of methane hydrates, carbon based fuels are now being discussed in the trillions of barrels/cubic meters. We will never run out of oil and gas.

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Wait Mr. Harris, didn’t you just deny scarcity! No, because time is a factor. When politicians and (bad) economists deny scarcity, it is because they have looked at everything from a static viewpoint. We will switch from oil and gas as cost increase or technology will make new sources of energy a better opportunity cost.

Alfred Marshall (1842-1924), the preeminent economist of the late nineteenth century and a mathematician (he’s the one who invented the graphs you love so much), gives this advice:1. Use mathematics as a shorthand language, rather than as an engine of inquiry.2. Keep to them until you have done.3. Translate into English.4. Then illustrate by examples that are important in real life.5. Burn the mathematics.

* Peter Boettke (1960 - ): “I am a verbal economist who relies on natural language primarily in exposition as opposed to formulas, graphs, etc.”

Milton Friedman’s (1912-2006) “Four Ways to Spend Money”1. Spend your money on yourself.2. Spend your money on other people.3. Spend other people’s money on yourself.4. Spend other people’s money on other people.

James Buchannan’s (1919-2013) “Choice-bound Conception of Cost”1.  Cost must be borne exclusively by the decision-maker; it is not possible for cost to be shifted to or imposed on others. 2.  Cost is subjective; it exists in the mind of the decision-maker and nowhere else. 3.  Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept. 4.  Cost can never be realized because of the fact of choice itself: that which is given up cannot be enjoyed. 5.  Cost cannot be measured by someone other than the decision-maker because there is no way that subjective experience can be directly observed. 6.  Finally, cost can be dated at the moment of decision or choice.

Hayek-Buchanan Principle (Boettke):Adopt no policy which benefits some without benefitting all.

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AntiFragility by Nassim Nicholas Taleb (1960-- ) Fragile: vulnerable to unforeseen shocks.Robust: indifferent to shocks.AntiFragile: thrive on shocks (up to a point).

3 tips to make AntiFragile:1. Decentralization

a. Spreads mistakes.b. Makes smaller mistakes (fail early).c. If you don’t let things fail you have a concentration of risk.

2. Low Debt a. Debt has systemic consequences; equity doesn’t. This has been true since

(at least) the Babylonians.b. Trained economists are not great at assessing risks.c. Industrial revolution was financed by equity, not debt.

3. Skin in the game a. Started with Hammurabi.b. Bureaucrats don’t have skin in the game, especially at the federal level.

Even local bureaucrats have some skin in the game.c. (see again Friedman’s “Four Ways” & Buchannan’s “Choice-bound/cost)

Only three ways Government can raise money:1. Taxing 2. Borrowing 3. Printing

Robust Political Economy (Boettke)1. “The economic way of thinking is neither left nor right, it is instead the science of choice

within constraints and the tracing out of the logical and empirical implication of that within a variety of institutional settings. Done right, the discipline provides the intellectual ride of a lifetime. Done wrong, it devolves into being a servant to left/right wing agendas. So, do economics right and illuminate the world around us – including our past, and our possible futures.”

2. “The goal of our political/legal institutions should not be to ensure that the best and brightest can govern, but instead that if the worst get in power, they can do little damage.”

Ronald Reagan High SchoolLearning for Life – Learning for Leadership

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