Principles Of Macroeconomics - Lyryx Learning
with Open TextsPrinciples ofMACROECONOMICSan Open Textby Douglas Curtis and Ian IrvineVERSION 2017 – REVISION BADAPTABLE ACCESSIBLE AFFORDABLECreative Commons License (CC BY-NC-SA)
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adv anc ingle ar ningPrinciples of Macroeconomicsan Open Text by Douglas Curtis and Ian IrvineVersion 2017 — Revision BBE A CHAMPION OF OER!Contribute suggestions for improvements, new content, or errata:A new topicA new exampleAn interesting new questionAny other suggestions to improve the materialContact Lyryx at info@lyryx.com with your ideas.Lyryx Learning TeamBruce BauslaughPeter ChowNathan FriessStephanie KeyowskiClaude LaflammeMartha LaflammeJennifer MacKenzieTamsyn MurnaghanBogdan SavaRyan YeeLICENSECreative Commons License (CC BY-NC-SA): This text, including the art and illustrations, areavailable under the Creative Commons license (CC BY-NC-SA), allowing anyone to reuse, revise,remix and redistribute the text.To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-sa/3.0/
adv anc ingle ar ningPrinciples of Macroeconomicsan Open Text by Douglas Curtis and Ian IrvineBase Text Revision HistoryCurrent Revision: Version 2017 — Revision BEdits 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. Data, tables, and figures have been updated to the latest available data. Example calculations ofindicators of economic conditions and performance, such as growth rates, inflation rates, unemployment rates, and interest rates are now based on current data. Applications and discussionshave 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, andFintech.2017 B Chapters 4, 7, & 11: Discussions of fiscal and monetary policy have been revised to take accountof changes in energy and commodity prices, and the change in the federal government budgetarypolicy 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 emphasize the importance of the primary budget balance, the interest rate on the public debt andthe growth rate of GDP. The importance of the shift from a balanced budget target to a debt ratioconstraint for evaluating federal government budget policy is noted. Chapter 13: Includes a new discussion of the structural changes in output and employment thatare integral to economic growth and the effects of growth on per capita real GDP. Employmentby 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.
Table of ContentsTable of ContentsiiiAbout the Authors1Part One: The Building Blocks51 Introduction to key ideas71.1What’s it all about? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71.2Understanding through the use of models . . . . . . . . . . . . . . . . . . . . . . 111.3Opportunity cost and the market . . . . . . . . . . . . . . . . . . . . . . . . . . . 121.4A model of exchange and specialization . . . . . . . . . . . . . . . . . . . . . . . 131.5Economy-wide production possibilities . . . . . . . . . . . . . . . . . . . . . . . 171.6Aggregate output, growth and business cycles . . . . . . . . . . . . . . . . . . . . 19Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Exercises for Chapter 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 Theories, data and beliefs2.129Data analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29iii
ivTable of Contents2.2Data, theory and economic models . . . . . . . . . . . . . . . . . . . . . . . . . . 352.3Ethics, efficiency and beliefs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Exercises for Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 433 The classical marketplace – demand and supply453.1The marketplace – trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453.2The market’s building blocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 463.3Demand and supply curves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503.4Non-price influences on demand . . . . . . . . . . . . . . . . . . . . . . . . . . . 513.5Non-price influences on supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553.6Simultaneous supply and demand impacts . . . . . . . . . . . . . . . . . . . . . . 583.7Market interventions – governments and interest groups . . . . . . . . . . . . . . . 593.8Individual and market functions . . . . . . . . . . . . . . . . . . . . . . . . . . . 653.9Useful techniques – demand and supply equations . . . . . . . . . . . . . . . . . . 66Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68Exercises for Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70Part Two: Introduction to Macroeconomics734 Economic activity & performance754.1Macroeconomic performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764.2Canadian economic performance . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
v4.3National accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 854.4Measuring GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 874.5Nominal GDP, real GDP & the GDP deflator . . . . . . . . . . . . . . . . . . . . . 914.6Per capita real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98Exercises for Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 995 Output, business cycles, growth & employment1035.1Aggregate demand & aggregate supply . . . . . . . . . . . . . . . . . . . . . . . . 1035.2Equilibrium output and potential output . . . . . . . . . . . . . . . . . . . . . . . 1105.3Growth in potential output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1115.4Business cycles and output gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . 1125.5Output gaps and unemployment rates . . . . . . . . . . . . . . . . . . . . . . . . . 1155.6Adjustments to output gaps? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1165.7The role of macroeconomic policy . . . . . . . . . . . . . . . . . . . . . . . . . . 117Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119Exercises for Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1206 Aggregate expenditure & aggregate demand1236.1Short-run aggregate demand and output . . . . . . . . . . . . . . . . . . . . . . . 1246.2Aggregate expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1266.3Aggregate expenditure and equilibrium output in the short run . . . . . . . . . . . 1336.4The multiplier: Changes in aggregate expenditure and equilibrium output . . . . . 137
viTable of Contents6.5Equilibrium output and the AD curve . . . . . . . . . . . . . . . . . . . . . . . . 141Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146Exercises for Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1477 The government sector1517.1Government in Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1527.2Government expenditure & taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 1547.3The government’s budget function . . . . . . . . . . . . . . . . . . . . . . . . . . 1607.4Fiscal policy & government budget balances . . . . . . . . . . . . . . . . . . . . . 1637.5Automatic and discretionary fiscal policy . . . . . . . . . . . . . . . . . . . . . . 1687.6The public debt and the budget balance . . . . . . . . . . . . . . . . . . . . . . . . 1717.7Aggregate demand & equilibrium output . . . . . . . . . . . . . . . . . . . . . . . 174Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177Exercises for Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179Part Three: Financial Markets & Economic Activity8 Money, banking & money supply1831858.1Money and the functions of money . . . . . . . . . . . . . . . . . . . . . . . . . . 1858.2Measures of the Canadian money supply . . . . . . . . . . . . . . . . . . . . . . . 1898.3Banking in Canada today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1918.4Money created by banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1968.5The monetary base and the money supply . . . . . . . . . . . . . . . . . . . . . . 200Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
viiExercises for Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2089 Financial markets, interest rates, foreign exchange rates & AD2099.1Portfolio choices between money and other assets . . . . . . . . . . . . . . . . . . 2109.2The demand for money balances . . . . . . . . . . . . . . . . . . . . . . . . . . . 2139.3Financial market equilibrium & interest rates . . . . . . . . . . . . . . . . . . . . 2179.4Interest rates and foreign exchange rates . . . . . . . . . . . . . . . . . . . . . . . 2209.5Interest rates, exchange rates, and aggregate demand . . . . . . . . . . . . . . . . 2219.6The transmission mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235Exercises for Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23610 Central banking and monetary policy23910.1 Central banking and the Bank of Canada . . . . . . . . . . . . . . . . . . . . . . . 23910.2 Central bank operating techniques . . . . . . . . . . . . . . . . . . . . . . . . . . 24110.3 Monetary policy objectives & instruments targets . . . . . . . . . . . . . . . . . . 24810.4 Monetary policy rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25610.5 Monetary policy indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265Exercises for Chapter 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267Part Four: Real GDP, Business Cycles, Policy and Growth11 Inflation, real GDP, monetary policy & fiscal policy269271
viiiTable of Contents11.1 Inflation and aggregate demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27111.2 Aggregate supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27511.3 The equilibrium inflation rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27911.4 Adjustments to output gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28011.5 Monetary and fiscal policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28311.6 Recession, disinflation and deflation . . . . . . . . . . . . . . . . . . . . . . . . . 293Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299Exercises for Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30112 Exchange rates, monetary policy, and fiscal policy30312.1 The balance of payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30312.2 The foreign exchange market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30912.3 Flexible exchange rates and fixed exchange rates . . . . . . . . . . . . . . . . . . 31512.4 Monetary and fiscal policy with flexible exchange rates . . . . . . . . . . . . . . . 31812.5 Monetary and fiscal policy with fixed exchange rates . . . . . . . . . . . . . . . . 322Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324Exercises for Chapter 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32613 Economic growth32913.1 Patterns of economic growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32913.2 Growth in potential output . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33313.3 Growth in per capita GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33713.4 Technology & growth in per capita output . . . . . . . . . . . . . . . . . . . . . . 34213.5 Recent growth studies and policy issues . . . . . . . . . . . . . . . . . . . . . . . 343
ixConclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347Key Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 348Exercises for Chapter 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349Glossary351Solutions To Exercises363Chapter 1 Solutions363Chapter 2 Solutions366Chapter 3 Solutions368Chapter 4 Solutions374Chapter 5 Solutions376Chapter 6 Solutions381Chapter 7 Solutions386Chapter 8 Solutions391Chapter 9 Solutions394Chapter 10 Solutions398Chapter 11 Solutions402
xTable of ContentsChapter 12 Solutions407Chapter 13 Solutions411
About the AuthorsDoug Curtis is a specialist in macroeconomics. He is the author of numerous research papers onfiscal policy, monetary policy, and economic growth and structural change. He has also preparedresearch reports for Canadian industry and government agencies and authored numerous workingpapers. He completed his PhD at McGill University, and has held visiting appointments at theUniversity of Cambridge and the University of York in the United Kingdom. His current researchinterests are monetary and fiscal policy rules, and the relationship between economic growth andstructural 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 Economics at Queen’s University in Kingston, Ontario from 2003 until 2013.Ian Irvine is a specialist in microeconomics, public economics, economic inequality and healtheconomics. He is the author of numerous research papers in these fields. He completed his PhDat the University of Western Ontario, has been a visitor at the London School of Economics, theUniversity of Sydney, the University of Colorado, University College Dublin and the Economicand Social Research Institute. His current research interests are in tobacco use and taxation, andCanada’s Employment Insurance and Welfare systems. He has done numerous studies for theGovernment of Canada, and is currently a Professor of Economics at Concordia University inMontreal.Our PhilosophyPrinciples of Macroeconomics is focused on the material that students need to cover in a firstintroductory course. It is slightly more compact than the majority of introductory macroeconomicsbooks in the Canadian marketplace. Decades of teaching experience and textbook writing has ledthe 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 importantmaterial is challenging then it is still included in the main body of the text; it is not relegatedelsewhere for a limited audience; the text makes choices on what issues and topics are importantin an introductory course. This philosophy has resulted in a Macro book of just 13 chapters, withthree introductory chapters common to both our Principles of Microeconomics and Principles ofMacroeconomics books.Examples are domestic and international in their subject matter and are of the modern era – financial markets, monetary and fiscal policies aimed at inflation and debt control, globalization and theimportance of trade flows in economic structure and concerns about slow growth and the risk ofdeflation are included.1
2About the AuthorsThe 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 calculusand uses algebra sparingly, it still aims to be rigorous. In contrast to many books on the marketthat simply insert diagrams and discuss concepts in a diagrammatic framework, our books developand analyze key concepts and relations by introducing numerical and empirical examples at theoutset. Students are introduced immediately to the practice of taking a set of data, examining itnumerically, plotting it and thinking about how it illustrates a concept or relationship. The processis not difficult but it is rigorous and stresses the link between empirical observation, economictheory, models and policy. Hence numerical examples, diagrams, and straight line equations andare introduced early and are used throughout.Structure of the TextPrinciples of Macroeconomics provides complete, concise coverage of introductory macroeconomic theory and policy. It examines the Canadian economy as an economic system, and embeds current Canadian institutions and approaches to monetary policy and fiscal policy within thatsystem. Particular attention is given to the recent structure, performance, and evolution of theCanadian economy, and to the current targets and instruments of Canadian monetary and fiscalpolicy.These are exciting and challenging times in which to study macroeconomics. We focus on shortrun macroeconomic performance, analysis, and policy motivated by the recessions of the early1980s and 1990s, the financial crisis and recession of 2008-2009, and the prolonged recoverythat is still incomplete in several industrial countries in 2017. To that end, the text examinesmacroeconomic institutions, performance, and policies in ways that help students understand andevaluate critically the news media coverage and broader public discussion of: Recessions and recoveries, unemployment, inflation, deflation and conditions in financialmarkets—topics of ongoing reporting, discussion, and debate. Monetary and fiscal policy announcemen
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 Universityin Kingston, Ontario from 2003 until 2013. Ian Irvine is a specialist in microeconomics, public economics, economic inequality and health economics.
MassBay EC 201 Principles of Macroeconomics 3 -- Bridgewater ECON 102 Principles of Macroeconomics 3 MassBay EC 201 Principles of Macroeconomics 3 -- Fitchburg ECON 1100 Principles of Economics: Macroeconomics 3 MassBay EC 201 Principles of Macroeconomics 3 -- Framingham ECON 101 Principles of Macroeconomics 3
slides and lecture notes, solutions manuals, and multiple choice question banks with an exam building tool. Contact Lyryx Today! info@lyryx.com. advancing learning . Ian Irvine is a specialist in microeconomics, public economics, economic inequality and health economics. He
1.1Dominican University Course Description 102 Principles of Macroeconomics (3 hours) An introduction to economic theory and economic analysis of the American economy with emphasis on macroeconomics { national income analysis, scal and monetary policy. 1.2Course Description Principles of Macroeconomics is
1.1Dominican University Course Description 191 Principles of Macroeconomics (3 hours) An introduction to economic theory and economic analysis of the American economy with emphasis on macroeconomics { national income analysis, scal and monetary policy. 1.2Course Description Principles of Macroeconomics is
36) Macroeconomics differs from microeconomics in that A) macroeconomics studies the decisions of individuals. B) microeconomics looks at the economy as a whole. C) macroeconomics studies the behavior of government while microeconomics looks at private corporations. D) macroeconomics focuses on the national economy and the global economy. Answer: D
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 institutionsand approaches to monetary policy and fiscal policy within that system.
about macroeconomics. Secondly, the study of macroeconomics improves our cultural literacy. Learning about macroeconomics can help us to better un-derstand our world. Thirdly, as a group of people, common welfare is an important concern. Caring about macroeconomics is essential for policymak-ers in order to create good policy.
student has taken in Business and/or Economics prior to taking Principles of Macroeconomics. Most of the classes students have taken before enrolling in Principles of Macroeconomics are Journal of Economics and Economic Education Research, Volume 14, Number 1, 2013
