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Principles of MACROECONOMICS an Open Text by Douglas Curtis and Ian Irvine with Open Texts Principles of MACROECONOMICS an Open Text by Douglas Curtis and Ian Irvine VERSION 2017 – REVISION B ADAPTABLE | ACCESSIBLE | AFFORDABLE Creative Commons License (CC BY-NC-SA) advancing learning Champions of Access to Knowledge OPEN TEXT ONLINE ASSESSMENT All digital forms of access to our high- We have been developing superior on- quality open texts are entirely FREE! All line formative assessment for more than content is reviewed for excellence and is 15 years. Our questions are continuously wholly adaptable; custom editions are pro- adapted with the content and reviewed for duced by Lyryx for those adopting Lyryx as- quality and sound pedagogy. To enhance sessment. Access to the original source files learning, students receive immediate per- is also open to anyone! sonalized feedback. Student grade reports and performance statistics are also provided. SUPPORT INSTRUCTOR SUPPLEMENTS Access to our in-house support team is avail- Additional instructor resources are also able 7 days/week to provide prompt resolu- freely accessible. Product dependent, these tion to both student and instructor inquiries. supplements include: full sets of adaptable In addition, we work one-on-one with in- slides and lecture notes, solutions manuals, structors to provide a comprehensive sys- and multiple choice question banks with an tem, customized for their course. This can exam building tool. include adapting the text, managing multi- ple sections, and more! Contact Lyryx Today! [email protected] advancing learning Principles of Macroeconomics an Open Text by Douglas Curtis and Ian Irvine Version 2017 — Revision B BE A CHAMPION OF OER! Contribute suggestions for improvements, new content, or errata: A new topic A new example An interesting new question Any other suggestions to improve the material Contact Lyryx at [email protected] with your ideas. Lyryx Learning Team Bruce Bauslaugh Martha Laflamme Peter Chow Jennifer MacKenzie Nathan Friess Tamsyn Murnaghan Stephanie Keyowski Bogdan Sava Claude Laflamme Ryan Yee LICENSE Creative Commons License (CC BY-NC-SA): This text, including the art and illustrations, are available 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/ advancing learning Principles of Macroeconomics an Open Text by Douglas Curtis and Ian Irvine Base Text Revision History Current Revision: Version2017 — RevisionB 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. • 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 2017 B 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. Table of Contents Table of Contents iii About the Authors 1 Part One: The Building Blocks 5 1 Introduction to key ideas 7 1.1 What’s it all about? .................................. 7 1.2 Understanding through the use of models ...................... 11 1.3 Opportunity cost and the market ........................... 12 1.4 A model of exchange and specialization ....................... 13 1.5 Economy-wide production possibilities ....................... 17 1.6 Aggregate output, growth and business cycles .................... 19 Conclusion ......................................... 24 Key Concepts ........................................ 25 Exercises for Chapter 1 ................................... 26 2 Theories, data and beliefs 29 2.1 Data analysis ..................................... 29 iii iv Table of Contents 2.2 Data, theory and economic models .......................... 35 2.3 Ethics, efficiency and beliefs ............................. 38 Key Concepts ........................................ 42 Exercises for Chapter 2 ................................... 43 3 The classical marketplace – demand and supply 45 3.1 The marketplace – trading .............................. 45 3.2 The market’s building blocks ............................. 46 3.3 Demand and supply curves .............................. 50 3.4 Non-price influences on demand ........................... 51 3.5 Non-price influences on supply ............................ 55 3.6 Simultaneous supply and demand impacts ...................... 58 3.7 Market interventions – governments and interest groups ............... 59 3.8 Individual and market functions ........................... 65 3.9 Useful techniques – demand and supply equations .................. 66 Conclusion ......................................... 67 Key Concepts ........................................ 68 Exercises for Chapter 3 ................................... 70 Part Two: Introduction to Macroeconomics 73 4 Economic activity & performance 75 4.1 Macroeconomic performance ............................. 76 4.2 Canadian economic performance ........................... 82 v 4.3 National accounts ................................... 85 4.4 Measuring GDP .................................... 87 4.5 Nominal GDP, real GDP & the GDP deflator ..................... 91 4.6 Per capita real GDP .................................. 94 Conclusion ......................................... 97 Key Concepts ........................................ 98 Exercises for Chapter 4 ................................... 99 5 Output, business cycles, growth & employment 103 5.1 Aggregate demand & aggregate supply ........................103 5.2 Equilibrium output and potential output .......................110 5.3 Growth in potential output ..............................111 5.4 Business cycles and output gaps ...........................112 5.5 Output gaps and unemployment rates .........................115 5.6 Adjustments to output gaps? .............................116 5.7 The role of macroeconomic policy ..........................117 Key Concepts ........................................119 Exercises for Chapter 5 ...................................120 6 Aggregate expenditure & aggregate demand 123 6.1 Short-run aggregate demand and output .......................124 6.2 Aggregate expenditure ................................126 6.3 Aggregate expenditure and equilibrium output in the short run ...........133 6.4 The multiplier: Changes in aggregate expenditure and equilibrium output . .137 vi Table of Contents 6.5 Equilibrium output and the AD curve ........................141 Key Concepts ........................................146 Exercises for Chapter 6 ...................................147 7 The government sector 151 7.1 Government in Canada ................................152 7.2 Government expenditure & taxes ...........................154 7.3 The government’s budget function ..........................160 7.4 Fiscal policy & government budget balances .....................163 7.5 Automatic and discretionary fiscal policy ......................168 7.6 The public debt and the budget balance ........................171 7.7 Aggregate demand & equilibrium output .......................174 Key Concepts ........................................177 Exercises for Chapter 7 ...................................179 Part Three: Financial Markets & Economic Activity 183 8 Money, banking & money supply 185 8.1 Money and the functions of money ..........................185 8.2 Measures of the Canadian money supply .......................189 8.3 Banking in Canada today ...............................191 8.4 Money created by banks ...............................196 8.5 The monetary base and the money supply ......................200 Key Concepts ........................................206 vii Exercises for Chapter 8 ...................................208 9 Financial markets, interest rates, foreign exchange rates&AD 209 9.1 Portfolio choices between money and other assets ..................210 9.2 The demand for money balances ...........................213 9.3 Financial market equilibrium & interest rates ....................217 9.4 Interest rates and foreign exchange rates .......................220 9.5 Interest rates, exchange rates, and aggregate demand ................221 9.6 The transmission mechanism .............................227
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