Economics 201
Introduction to Macroeconomics

The aim of this course is to enable you to understand a few basic models of macroeconomics. While it is not expected that most of you will go on to make decisions of macroeconomic importance (although it would be nice if those who receive an "A" did), becoming prepared to make such decisions is nevertheless a valuable goal. Too often, we are subject to faulty macroeconomic analysis by semi-intelligent leaders who mistakenly believe they know what they are doing. Sadly, an ill-informed press and electorate often fail to challenge leaders' assumptions, knowledge, and intentions, and we are lead astray by some combination of well-meaning (yet dim) or opportunistic officials.

It is my hope that this course will enable you to separate reasonable economic analysis from primitive hucksterism as you watch the evening news or flip through your favorite periodical. It is my ultimate goal that you, like me, will regularly wake up screaming in anger about some bit of particularly faulty analysis thrown forth by an important political figure.

Course Goals and Objectives

By the end of this course you should be able to

• perform basic macroeconomic analyses of proposed policies;
• explain such concepts as economic growth, inflation, unemployment, business cycles, trade surpluses, and government debts;
• discern when these concepts are legitimate concerns and when they are of little importance;
• discuss the sources of these problems (when, in fact, they are problems) and critically analyze attempts to correct them;
• think in an organized manner about changes in public policy; and
• predict what effects public policy might have on important macroeconomic variables and understand what such impact may mean to you, your family, and your business.

This course provides an introduction to macroeconomics. We will be dealing with three major theories to explain macroeconomic growth and decline: the classical "quantity" theory, the Keynesian model and monetarism. (As interesting as its rise and fall may be, this course will not deal with communism.) The classical theory developed in response to the beginning of the Industrial Revolution and dates back to the eighteenth century, beginning with the work of Adam Smith. Besides communism, which first developed in the nineteenth century, the classical theory was for a century and a half the predominate explanation of economic phenomena, until the Great Depression. John Keynes developed his theory at this time in an attempt to explain how the Great Depression came about and hopefully prevent its reoccurrence. Monetarism developed in the 70s and 80s in response to the problem of "stagflation" (simultaneous high inflation and high unemployment).

Despite the title Economics Today: The Macro View, the Miller textbook contains six chapters in the beginning, the first of which serves as an introduction to macroeconomics, while the rest primarily discuss microeconomic principles. While an in-depth knowledge of microeconomics is not essential to the study of macroeconomics, a basic understanding of the subject is critical. For this purpose, the first four lessons in Economics 201 mirror the first four lessons in the University of Washington's Online Learning Economics 200 course. It is my way of ensuring that all students have a basic set of economic tools to use throughout the course. Previous experience through taking an economics course will definitely increase your success in this class.

Following your brief review of microeconomics in Lessons One through Four, the course continues with a discussion of the basic macroeconomic concepts of inflation, unemployment, business cycles, and long-term economic growth (Lessons Five to Seven). Two simple models are introduced to help you understand how these concepts are interrelated and to help explain how the economy may run smoothly—though we have to bear in mind that these are models and they make lots of assumptions. Some basic macroeconomic problems are then discussed (Lessons Eight to Ten). Thereafter, the discussion turns to considering how the government can influence both short-term and long-term economic conditions, and the merits of government interference in the economy (Lessons Eleven and Twelve). We will finish the course by discussing issues of money, its importance, and how best to control macroeconomic problems through manipulation of the money supply (Lessons Thirteen to Fifteen).

Reviewing the Course

In this course introduction, you will get an overview of the essential steps to completing the course and a detailed overview of the course format. Please take time now to review this information carefully. If, when you have finished reading this introduction, you have questions regarding your participation in the course, please consult the list of contacts at UW Educational Outreach provided in the Online Student Handbook. Both I and the staff at UW Distance Learning are eager to assist you in any way possible in order to make this course as satisfying and rewarding as possible.

About the Online Environment

Your online course offers several advantages to the traditional classroom, including the comprehensive Online Student Handbook, the ability to communicate electronically with other students and with your instructor, and links to a rich array of online resources.

Online Student Handbook

This handbook answers questions about your online learning course, such as how to purchase your text, schedule an exam, obtain a transcript, and get technical help if you need it. The handbook also provides additional resources, such as how to order books or journals from the library and how to study for an online course.

Communicating with Your Instructor and Student Peers

• Online Discussion Forums, designed by the University of Washington award winning Catalyst team, allow you to communicate with other currently enrolled students and with your instructor. We encourage you to use the forum to exchange ideas, resources, and comments about your course work with other students in this course. This unstructured forum is monitored by your instructor.
• You can use e-mail to ask me a question or preferably post your question on the discussion forum. I will reply on the same forum.

Online Resources

As an online student, you have access to a wealth of Web resources compiled to provide fast, easy access to information that supports your online learning experience. Organized by subjects, Online Resources link you to sites with help for writing and research, study skills, language learning, and library reference materials. All links have been assessed for credibility and reliability, and they are regularly monitored to ensure their usability.

Lesson Format

The course includes fifteen lessons organized into five units (Units Three and Seven are preparation for the exams). Each lesson has five parts:

1. reading assignment;
2. lesson objectives;
3. discussion of topics covered in the chapter; and
4. knowledge checks and practice exercises.

Units Three and Seven are preparation exam lessons. They will provide you with guidelines and tips for the exams along with complete practice exams so you can assess your readiness for taking the actual exam.

Course Materials

Required Textbooks

You may choose to purchase either of two sets of textbooks:

Miller, Roger LeRoy. Economics Today: the Macro View. Thirteenth Edition. New York: Pearson Addison Wesley, 2006. ISBN: 0321481879. (Hereafter referred to as "Miller"); and

• Miller, Roger LeRoy and David VanHoose. Study Guide to accompany Economics Today: the Macro View. Thirteenth Edition. New York: Pearson Addison Wesley, 2006. ISBN: 0321316789. (Hereafter referred to as "Study Guide").

or

• Miller, Roger LeRoy. Economics Today. Thirteenth Edition. New York: Pearson Addison Wesley, 2006. ISBN: 0321454626. (Hereafter referred to as "Miller"); and
• Miller, Roger LeRoy and David VanHoose. Study Guide to accompany Economics Today. Thirteenth Edition. New York: Pearson Addison Wesley, 2006. ISBN: 0321303954. (Hereafter referred to as "Study Guide").

Note that you have two options for text choice. Each has the same chapter and page numbering, but the full text also includes chapters pertaining to microeconomics, which are omitted from the Macro versions. If you have copies of the full versions from Econ 200, please feel free to use them.

Overall, online learning students have responded favorably to the Miller text. I have selected this text because the author centers on the basics of economic theory. Rather than filling the pages with all the theoretical nuances of microeconomics, he has presented the core concepts in a simple fashion. These concepts are illustrated with real-world examples that I hope will interest you and convince you of the relevance and applicability of what may seem at times rather dry.

The "Concepts in Brief" section in each chapter of Miller summarizes the most important ideas of the chapter, and describes how the chapter fits into the overall course. There is also a "Summary Discussion of Learning Objectives" at the end of each Miller chapter, and several similar sections in the Study Guide.

Miller provides a "Did You Know That" at the beginning of each chapter. These insights offer perspective and relevance to the topics discussed in the chapter. The author also offers a section titled "Issues and Applications" based on current economic issues in an attempt to tie the concepts of the chapter into the lives of students.

In addition to providing more depth and breadth, the supplementary texts offer you an alternative presentation of the same material.

I have made the Study Guide a requirement, because it provides additional opportunities for you to practice what you will learn in this course.

Recommended Textbooks

• Samuelson, Paul A. Economics. McGraw Hill/Irwin, 2004. ISBN: 0072872055  
• Yates, Michael. Naming the System. Monthly Review Press, 2003. ISBN: 1583670793

The Samuelson text is a classic textbook that may help you to narrow your search or be more selective. Additionally, the Yates text offers an alternative to the neoclassical text used in 98% of undergraduate principles of economics texts. These books may be available from your local library or a new or used bookstore.

Course Organization

The course organization follows that of the textbook, covering chapters 1–4 and 7–17. The material is divided into fifteen lessons, as follows:

• Unit One: Basic Economic Concepts
  • Lesson One: The Nature of Economics
  • Lesson Two: Scarcity and the world of Trade-offs
  • Lesson Three: Demand and Supply
  • Lesson Four: Extensions of Demand and Supply Analysis
• Unit Two: Introduction to Macroeconomics and Economic Growth
  • Lesson Five: The Macroeconomy: Unemployment, Inflation, and Deflation
  • Lesson Six: Measuring the Economy’s Performance
  • Lesson Seven: Global Economic Growth and Development
• Unit Three: Preparing for the Midterm Exam
• Unit Four: Real GDP Determination
  • Lesson Eight: Real GDP and the Price Level in the Long Run
  • Lesson Nine: Classical and Keynesian Macro Analysis
  • Lesson Ten: Consumption, Real GDP, and the Multiplier
• Unit Five: Fiscal Policy
  • Lesson Eleven: Fiscal Policy
  • Lesson Twelve: Deficit Spending and the Public Debt
• Unit Six: Money, Stabilization, and Growth
  • Lesson Thirteen: Money, Banking, and Central Banking
  • Lesson Fourteen: Money Creation and Deposit Insurance
  • Lesson Fifteen: Domestic and International Dimensions of Monetary Policy
• Unit Seven: Preparing for the Final Exam

Assignments and Exams

There are five written assignments, a midterm, and a final examination, for a total of seven graded course components.

Written Assignments

Each written assignment is worth ten points, and together they constitute 25 percent of your final grade. Points will be assigned on the basis of the accuracy and completeness of your answer. You must show all work, and all graphs must be carefully labeled. Each written assignment consists of five essay questions. Answers to each question should be approximately half a page.

Exams

Your midterm examination consists of multiple-choice, true/false, short-answer, and problem sections worth a total of 50 points, representing 25 percent of your grade. Partial credit on some questions is possible, but only if you show all your work and your answers are legible. The format of the final exam is similar to the midterm, except that each section is comprehensive; the exam is worth a total of 100 points, representing 50 percent of the course grade.

You can earn a total of 200 points, distributed as shown in table i.1, below.

Table i.1—Point Distribution

Course Components	Possible Points	Percent of Grade
Assignment 1	10	5
Assignment 2	10	5
Assignment 3	10	5
Midterm Exam	50	25
Assignment 5	10	5
Assignment 6	10	5
Final Exam	100	50
Total	200	100

Unit Four includes a practice exam for the midterm, and Unit Seven includes a practice exam for the final. Answer keys for each are provided.

Graphs and Algebra

Far too often, students get confounded by course material—not because they don't intuitively understand the economic theory, but because they get caught up in the graphs and simple algebra. The graphs we will use in this course are primarily linear (straight lines), but you should also be able to use nonlinear curves. You will be asked to perform some calculations with the simple linear functions. This is nothing other than high school math; although—in case you have effectively blocked it out of your mind—a little review may be in order. If you have been away from math for a while, or have a math phobia, an investment of time reviewing these concepts will pay off many times throughout the course. A review of graphing is provided in Appendix 1A of your textbook.

How to Approach Each Lesson

Each lesson begins by assuming you have read the relevant chapter in the textbook and gone through the Study Guide. The first item listed, therefore, is the assigned chapter from the text. You should read the appropriate Miller chapter before working through the rest of these online course materials. The text provides many examples of real problems so you have an opportunity to apply the economic principles being discussed. The text also provides key terms and learning objectives that will help guide your study in this course.

Understanding any discipline requires knowledge of its language. You should learn definitions for all the key terms listed—the key terms in these online course materials are the same as the ones in the textbook. The textbook's key terms are defined in the margins throughout the chapters, listed at the end of each chapter, and re-stated in a glossary at the end of the text. Be aware that although many of the terms, such as efficiency and cost, will seem familiar, they are used in a very precise and specific manner in economic analysis that may differ slightly from your current understanding of the term. I recommend you carefully read and think about each key word, and make sure you are comfortable with its use in economics.

Learning objectives begin each lesson, and brief answers or guidelines to the learning objectives are provided at the end of each lesson. If you write out your understanding of the learning objectives before reading my descriptions, you will see which parts of the material you have grasped and those with which you are still struggling. When you are satisfied that you have a basic understanding of the material covered in the chapter, you are ready to continue.

As you work through each lesson, think about the learning objectives for the content. These online course materials go over—in more depth—material that I feel is either particularly difficult or often misunderstood. In every course of macroeconomics I have taught in the past twelve years, the same questions and confusions appear. Some concepts seem particularly problematic. I have tried to anticipate those problems and the most commonly asked questions, and address them in the lessons.

Opportunities to Test Your Understanding

The only way to learn economics is to sit down and put the pencil to the page. Only by actually working out problems will you be able to realistically assess your understanding of the principles.

Therefore, each lesson includes Knowledge Checks as well as problems and questions from the text and the Study Guide.

Knowledge Checks

Throughout the commentary for each lesson, I have added some Knowledge Checks that are more representative of assignment and exam problems than those in the textbook or the Study Guide. Further, these will help you assess whether you are meeting the learning objectives. You should spend some time on these problems, as they will help you to internalize the material. The Knowledge Checks appear near the material from which they arise.

Answers are provided, but they will only help you if you work through each problem before checking your answer. Write down your answers for the questions in each lesson; if you have made a mistake in your reasoning, you can see where you have made it. Keeping a record of your answers will also help you when you are reviewing the material for exams and assignments. If you have difficulty, re-read the relevant sections in the textbook and working through some more problems. Supplementary resources are also suggested, where applicable. Many of these resources can be found on the Internet; use them.

Problems and Questions

Each lesson also includes a selection of "Problems and Questions" from the end of each chapter in Miller, and most or all of the chapter questions from the Study Guide. You will not submit these questions and problems for grading, but a selection of them will appear on the midterm and final examination. If you don't work them out in advance, you will be at a disadvantage. If you do work them out, however, even if the numbers change, the methodology will be familiar. Write out your answers to these questions, then check your answers. Re-read sections of the Miller chapter if necessary to help you fully understand the answers. Keep your corrected answers in your notebook for review and reference. If you have made any errors, read through the explanation given and review that section once more in Miller. After completing each lesson, go back to any questions you missed in the previous lesson and make sure you can answer before proceeding.

Note that the most important end-of-chapter problems from Miller are listed at the end of each lesson; to increase your learning, complete all the problems. Answers are provided in the lessons.

The Study Guide contains four kinds of questions to accompany each chapter of Miller: completion questions, true/false questions, multiple choice, and matching. A good strategy for the multiple choice and true/false questions is to first thoroughly review the Miller chapter. Then answer the questions in the Study Guide without looking at the text. Before checking your answers against those given, work through the questions a second time, this time verifying your answers by referring directly back to the Miller chapter. This will reinforce your mastery and allow you to discover your errors. Finally, after doing this, check your answers against the ones provided. Answers to the questions from the Study Guide are given at the end of each chapter in that study guide.

Other Opportunities to Test Your Understanding

For more practice on any or all of the topics covered throughout the course, I have included answers to the unassigned problems from your text, as well as answers for each "Issues and Applications" problem and "Questions for Critical Analysis." Although none of these are required, more practice is always better for your understanding of economics. Do as many of these questions as you have time for.

How to Succeed in This Course

I have never known a student who passed introductory economics without working through the questions and problems. Studying economics requires far more than memorizing terminology and retracing graphs. Exams don't ask you for definitions you have read from the book; the questions presume you know those definitions and can apply them analytically to work through problems. Studying the principles of economics without working through questions is analogous to reading a calculus text without doing problems: you can't appreciate the working of the theory. So it is essential that you carefully complete the knowledge checks, questions, and problems. Until you wrestle with these exercises, you will not know how well you have grasped the principles. This is the best method for you to test your own understanding of the material, and it is how most instructors will test your understanding. The goal is to learn an economic way of thinking and an analytical approach to problem solving. Studying the textbook can provide a framework within which this analysis can take place, but it cannot provide the techniques for problem solving. Continued practice answering different questions is the best method for training your mind to think analytically in order to solve economic problems.

Economics is a discipline that builds upon fundamental propositions. It is very important that you adequately grasp each concept before moving on to the next assignment. Again, how you do on the questions and problems is the best test of your mastery of the subject matter.

Finally, once you have carefully worked through the relevant chapters and feel comfortable with the Knowledge Checks, Miller's end-of-chapter questions, and the Study Guide questions and problems, you should try the appropriate practice exam (midterm or final). This gives you one final opportunity to assess your understanding of the material before you write the exam. The practice exam contains a selection of questions from all the chapters (six chapters for the midterm, fourteen chapters for the comprehensive final), in the same format and of approximately the same length as the real exam. You can simulate the exam conditions (that is, within the allowed time and with no supporting materials except for a calculator—but try not to simulate the stress or anxiety!), and then evaluate yourself with the answer key provided. After reviewing any problem areas, you should be ready for your exam. Relax and think of it as an opportunity to communicate everything you have learned.
In summary, I recommend you tackle each chapter in the following order:

1. Read the chapter overview from these online course materials.
2. Read the assigned chapter in Miller.
3. Read and work through the lesson commentary. Make sure you try to meet all the learning objectives and write down answers for problems and questions within this lesson.
4. Check your answers to both the learning objectives and the problems.
5. Review troublesome areas in the text and commentary in the lesson.
6. Work through all of the practice questions and check your answers.
7. Return to your text or the lesson, contact your instructor, or consult a supplementary text if problems remain.

A Message to You

This system is designed to allow you to teach yourself economics. All you need do is apply yourself and follow the directions. Economics is not easy, but it can be mastered with effort. When you successfully finish this course, you will not only grasp the principles of economics, but you also will have demonstrated that you can learn, and that you can learn by yourself. After all, life is a continual process of learning. In that process each of us has to rely on one main teacher—ourselves.

Final Note

In formatting this course to follow macro courses at the University of Washington, I have not assigned every chapter in Miller. Excellent discussions such as chapter 5, "The Public Sector and Public Choice," are not compulsory. One goal of this course is to induce you to study economics further, and you are encouraged to browse through the table of contents for chapters that may interest you.

About the Course Developer

My name is Shon Kraley. I received my Ph.D. in economics from the University of Washington in 2001. My undergraduate degree from Portland State University is also in economics. I began teaching economics at the UW in 1995. In 1999, I was presented the Langton Award for Outstanding Undergraduate Instruction. I am the head of Economics at Lower Columbia College and received the faculty of the year award in 2004.

As an undergraduate math major, I was confronted with a career as a math instructor. My roommate at the time was studying economics and suggested that I give it a try. A grad student taught my first economics course. The content was over his head and his teaching was unapproachable; it was a miserable experience. However, I gave it one more chance and as luck would have it I had a wonderful instructor for my second course. The rest, as they say, is history.

I particularly enjoy ECON 200 and 201 because for many students, it represents their first contact with economics. Having a good instructor will hopefully make students want to learn more. Also, this course offers the opportunity to relate these concepts to the real world before charging headlong into the mathematics of economics (in 300 and 301).

My professional interests focus on natural resources (particularly coastal resources and energy economics) and industrial organization (the study of competition).

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