CHAPTER 5
INTRODUCTION TO MACROECONOMICS
In this chapter, you will find:
Learning Outcomes
Chapter Outline with PowerPoint Script
Chapter Summary
Teaching Points (as on Prep Card)
Solutions to Problems Appendix
Experiential Assignments
INTRODUCTION
To introduce students to macroeconomics in a natural and familiar way, the economy is compared to the
LEARNING OUTCOMES
5-1 Explain what’s special about a national economy compared to regional, state, or local economies.
5-2 Describe the phases of the business cycle.
The economy fluctuates between two phases: periods of expansion and periods of contraction. See the
5-3 Explain the shapes of the aggregate demand curve and the aggregate supply curve, and how they
interact to determine real GDP and the price level for a nation.
5-4 Identify the five eras of the U.S economy, and describe briefly what went on during each.
1) The Great Depression and Before: The Great Depression and earlier depressions prompted John
Maynard Keynes to argue that the economy is unstable, largely because business investment is
erratic. Keynes did not believe that contractions were self- correcting. 2) The Age of Keynes: His
Chapter 5 Introduction to Macroeconomics 68
CHAPTER OUTLINE WITH POWERPOINT SCRIPT
USE POWERPOINT SLIDES 2-8 FOR THE FOLLOWING SECTION
The National Economy:
• Economy: the structure of economic life, or economic activity, in a community, a region, a country, a
group of countries, or the world.
• GDP (gross domestic product): The market value of all final goods and services produced in the U.S.
during a given period, usually a year.
What’s Special about the National Economy? Each country has its own “rules of the game” (laws,
USE POWERPOINT SLIDES 9-14 FOR THE FOLLOWING SECTION
Economic Fluctuations and Growth
Economic fluctuations (business cycles): The rise and fall of economic activity relative to the long-term
growth trend of the economy.
U.S. Economic Fluctuations: Two phases: periods of expansion and contraction
USE POWERPOINT SLIDE 15 FOR THE FOLLOWING SECTION
Leading Economic Indicators: Foreshadow a turning point in economic activity
USE POWERPOINT SLIDES 16-17 FOR THE FOLLOWING SECTION
Aggregate Demand and Aggregate Supply
Aggregate Output and the Price Level
Chapter 5 Introduction to Macroeconomics 69
USE POWERPOINT SLIDES 18-23 FOR THE FOLLOWING SECTION
Aggregate Demand Curve: Shows the relationship between the economy’s price level and real GDP
demanded
Aggregate Supply Curve: Shows how much producers in an economy are willing and able to supply at
each price level.
• Factors held constant along an aggregate supply curve:
USE POWERPOINT SLIDES 24-28 FOR THE FOLLOWING SECTION
A Short History of the U.S. Economy
USE POWERPOINT SLIDES 29-34 FOR THE FOLLOWING SECTION
The Age of Keynes: After the Great Depression to the Early 1970s
• Demand-side economics: Focused on how changes in aggregate demand could promote full
employment.
USE POWERPOINT SLIDES 35-37 FOR THE FOLLOWING SECTION
Stagflation: 1973 to 1980
• Stagflation: A contraction in the economy’s aggregate output, along with inflation, or a rise in the
economy’s price level.
USE POWERPOINT SLIDES 38-42 FOR THE FOLLOWING SECTION
Relatively Normal Times: 1980 to 2007
• Supply-side economics: Theorizes that lowering federal tax rates would increase after-tax wages,
USE POWERPOINT SLIDES 43-49 FOR THE FOLLOWING SECTIONS
The Recession of 2008-2009 and Beyond
• The economy went in recession in early 2008 because of falling home prices and rising foreclosure
USE POWERPOINT SLIDES 50-52 FOR THE FOLLOWING SECTION
Eight Decades of Real GDP and Price Levels
Chapter 5 Introduction to Macroeconomics 70
CHAPTER SUMMARY
Macroeconomics focuses on the national economy. A standard measure of performance is the growth of
real gross domestic product, or real GDP, the value of all final goods and services produced in the nation
during the year.
The Great Depression and earlier depressions prompted John Maynard Keynes to argue that the economy
is unstable, largely because business investment is erratic. Keynes did not believe that contractions were
self-correcting. He argued that whenever aggregate demand sagged, the federal government should spend
more or tax less to stimulate aggregate demand. His demand-side policies dominated macroeconomic
thinking between World War II and the later 1960s.
Supply-side tax cuts in the early 1980s were aimed at increasing aggregate supply, thereby increasing
output while dampening inflation. Some hoped that the added tax revenue from a stronger economy would
offset the loss in tax revenue from cuts in tax rates. But federal spending increased faster than federal tax
revenue, resulting in budget deficits that grew into the 1990s. Tax increases, a slower growth in
government spending, and an expanding economy all helped erase budget deficits by 1998, creating a
federal budget surplus. But after the longest expansion on record, the economy experienced an eight–
Chapter 5 Introduction to Macroeconomics 71
TEACHING POINTS
1. It may be useful to point out to students here that the reasons for the negative and positive slopes of
the demand and supply curves of individual goods do not apply in dealing with the AS and AD
2. A short time series (projected roughly on the screen) will show that the U.S. economy did not
really have a serious fall in income until 1931. The low point was reached in 1933 during a period of
terrific monetary contraction. Many people mistakenly believe that the economy rose continually after
4. The purpose of introducing AS-AD in this chapter is to provide the student with a sense of the two
sides to macroeconomics: supply and demand. It capsulizes national income determination and the
5. You may wish to ask the students how the AS and AD curves would shift in each of the following
SOLUTIONS TO PROBLEMS APPENDIX
1. (The National Economy) Why do economists pay more attention to national economies (for
example, the U.S. or Canadian economies) than to state or provincial economies (such as
California or Ontario)?
Each national economy has its own “rules of the game,” that is, its own laws, regulations,
2. (Economic Fluctuations) Describe the various components of fluctuations in economy activity
over time. Because economic activity fluctuates, how is long-term growth possible?
The economy moves through periods of expansion and periods of contraction. Contractions
Chapter 5 Introduction to Macroeconomics 72
3. (Aggregate Demand and Supply) Review the information on demand and supply curves in
Chapter 4. How do the aggregate demand and aggregate supply curves presented in this chapter
differ from the market curves of Chapter 4?
The demand and supply curves in Chapter 4 describe the relationship between the price of an
4. (Aggregate Demand and Supply) Determine whether each of the following would cause a shift
of the aggregate demand curve, a shift of the aggregate supply curve, neither, or both. Which
curve shifts, and in which direction? What happens to aggregate output and the price level in
each case?
a. The price level changes.
b. Consumer confidence declines.
c. The supply of resources increases.
d. The wage rate increases.
a. Neither curve would shift. A change in the price level would cause a movement along the
curves.
5. (Five Eras of U.S. Economy) Identify the five eras of the U.S. economy beginning with the
great Depression and before.
1) The Great Depression and Before: The Great Depression and earlier depressions
prompted John Maynard Keynes to argue that the economy is unstable, largely because
Chapter 5 Introduction to Macroeconomics 73
6. (Supply-Side Economics) One supply-side measure introduced by the Reagan administration
was a cut in income tax rates. Use an aggregate demand/aggregate supply diagram to show
what effect was intended. What might happen if such a tax cut also shifted the aggregate
demand curve?
Lower tax rates were intended to increase after-tax earnings and thus increase incentives for
Experiential Assignments
1. The National Bureau of Economic Research maintains a Web page devoted to business cycle
expansions and contractions at http://www.nber.org/cycles.html. Have students take a look at this
page to see if they can determine how the business cycle has been changing in recent decades. Has the
overall length of cycles been changing? Have recessions been getting longer or shorter?
2. Ask students to review the Summary of Commentary on Current Economic Conditions by Federal
3. This chapter introduced the tools of aggregate demand and supply. Test your students’
understanding by having them find an article in today’s Wall Street Journal describing an event that