Reading Guide Textbook 2ed

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Textbook Reading Guide – Unit 1

There’s no real reading assignment for Unit 1 in the textbook. All unit 1 reading is here on this website and in the syllabus.  But, you should familiarize yourself with the textbook, the various options you have for it (free online, buy a print copy, download PDF, etc), and choose which option(s) you’ll most likely use.


Textbook Reading Guide – Unit 2 Circular Flow

Jim’s comments:  Read Chapter 1 in the textbook. The table of contents for this chapter is shown below.  In section 1.2, pay particular attention to the types of policy we analyze in macroeconomics. Section 1.3 is very important, especially the portion about circular flow model.  The circular flow model shown in the textbook is very, very simple. You should read and study it as an intro to the concept of the model. Then follow up on that by reading my tutorial on the circular flow in the Closer Look Tutorials for Unit 2 page on this website.  You’ll need that more in-depth model to be able to complete the worksheet for Unit 2. 

Chapters 2, 3, 4, and 5 in the textbook really won’t be a part of this course, so they’re totally optional.  You’ll study those topics in microeconomics. If you don’t have any background in economics and have never had a course in econ, you may want to read chapters 2, 3, and 4 to gather a bit more background about how we think in economics. If you do read them, just read the narrative. I wouldn’t spend a lot of time on the problems or analytical boxes or math in those chapters.  Chapter 5 on elasticity isn’t really needed at all in this course.

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 3 GDP and Growth

Jim’s comments:  Read Chapter 6 and 7 in the textbook. The table of contents for this chapter is shown below.  The most important sections are the chapter introduction, 6.1, and 6.2  

Section 6.3 and 6.4 can be skimmed at this time.  We’ll get into these two topics in more detail in a later unit. Don’t spend a lot of time on the statistics or calculations in these two sections now.

Read Chapter 7 as if it’s a story about how economies grow and people become better off (it is).  This chapter presents a fair amount of graphs and statistics.  You won’t need to memorize or know the stats. Rather, look a them and attempt to imagine them as telling a story: who’s rich and who’s not, what it takes for an economy to grow, etc. This chapter helps to illustrate why you need to understand the calculation of real growth that happens in chapter 6.

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 4 Inflation

Jim’s comments:  Read Chapter 9 in the textbook.  Make note that we’re skipping chapter 8 at this time and will come back to it in the next unit. This whole chapter does a pretty good job. The one thing I would say is there’s a sub-section in 9.2 on how a price index itself is calculated using a “market basket of goods”, etc.  It’s important to understand what goes into the calculation of a price index and the potential for misleading or imprecise changes in the index, but you don’t need to focus on being able to actually calculate a price index from the prices of a bunch of goods.  Rather, I would hope you can use the price index to calculate the real value of something from the nominal value.  Pay close attention to the Closer Look and Tutorials on this website for what you do need to be able to calculate.   It would be useful after reading this chapter to go back and re-read Chapter 6, section 6.2. It may make even more sense now.

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 5 Unemployment

Jim’s comments:  Read Chapter 8.  Again, another pretty solid chapter.  Pay particular attention to terms and their definitions. When discussing employment and unemployment, our terms in economics have rather precise definitions and meanings, even though to outsiders (non-economists) the terms may seem to mean roughly the same thing. They don’t. Pay attention to both how to define and calculate unemployment rate and the types/causes of unemployment.

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 6 Business Cycle

Jim’s comments:  Back in an earlier Unit we skipped section 6.3 in Chapter 6. It’s time to go back and read that section closely.  Then, go back and do at least a skimming re-read of chapters 8 and 9 dealing with unemployment and inflation. Yes, you read those earlier but in this Unit we focus on the business cycle and the very beginning of policy to stabilize the business cycle (avoid recessions).  Stabilizing the business cycle is largely a question of balancing objectives between full employment and inflation because there’s a bit of a trade-off between them.  Policies to make the economy grow very fast and therefore reduce unemployment are very do-able. But if those growth policies are pushed too far, then inflation rises and create a problem.  And the reverse is true. It’s not that hard to stop inflation, but it happens at the risk of making unemployment worse.  Thus, you might gain some new insight by re-reading those two chapters with the lens of business cycle policy.

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 7 AD-AS Model

Jim’s comments:  

This is a critical Unit and chapter. After spending quite a bit of time in the past few units looking at how to measure the economy and whether or not the economy is achieving our major goals, it’s now time to look at the two major theories, classical/neoclassical and Keynesian, and the policy recommendations they espouse for managing the economy.

Chapter 11 presents the AD-AS model, or as I prefer to think of it, the AD-SRAS-LRAS model.  This analytical model is the foundation for understanding how these two theories view the economy. Understanding this model now will greatly help in the next few units when we examine the two theories closer.

Read the entire chapter and pay particular attention to the Introduction and sections 11.1 through 11.5.  Pay very close attention. Read and study the “side boxes” too, such as the one labeled “Clear It Up” in section 11.2.

A final comment: The neoclassical/classical theory and the Keynesian theory are pretty much fundamentally at odds with each other.  This book tends to try to bridge that gap between the two theories by saying “Keynesian theory is a short-run” thing and “neoclassical describes the long-run”.  This is a compromise I don’t agree with. There is fundamentally no empirical or institutional evidence that Say’s law holds true or that the economy truly functions in a neoclassical fashion, even in the long-run.  However, very large numbers of economists, some for ideological reasons and some for methodological reasons, continue to espouse the neoclassical theory.  Thus, I present the neoclassical theory in this course.

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 8 Classical/Neoclassical

Jim’s comments:  

Read Chapter 13. The textbook goes from the AD-AS model introduction (the last unit) to the Keynesian Model, and then to the Neoclassical model.  I, however, think this is a backwards way of dealing with it.  So we’re going to skip chapter 12 for the moment (we’ll go it next unit) and read Chapter 13 on Neoclassical theory.

A note on Phillips curve and expectations:
In section 13.1, the author spends some time explaining how “expectations of inflation” affect the Phillips curve. We haven’t really studied the Phillips Curve yet since it is introduced in the chapter on Keynesian theory.  The short version of the Phillips curve is the idea that there is trade-off between inflation (rising prices) and growth/employment. In essence, when an economy grows so much or so fast that it’s at full employment or “capacity”, meaning everybody who can be employed  is employed, attempts to stimulate more buying or more demand will only result in rising prices (inflation).  A major implication of a Phillips curve-type trade-off between inflation and employment/spending, is that when there is high unemployment (low employment with many unemployed workers), then increased government spending will not be inflationary. Increased government deficit spending won’t increase inflation until capacity (LRAS)/ full employment is reached.

The behavior of real economies in the 2oth and early 21st centuries have behaved a lot like the Phillips curve illustrates. This was devastating to Classical theory. Many economists, for ideological and methodological reasons, refused to abandon Classical theory.  Instead they evolved an idea of “expectations of inflation” as a way to negate the power of the Phillips curve trade-off. This resulted in Neoclassical theory, which as it’s name implies, is an “updated” or “newer” version of the older Classical theory.  Don’t be too concerned with the portion of section 11.1 that explain the “expectations-augmented” Phillips curve.

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 9 Keynesian

Jim’s comments:  

Read Chapter 12.  As you read it, I suggest you get some scratch paper and sketch out some AD-AS diagrams.  As the book describes phenomena such as people-getting-pessimistic-about-their future and thus cutting their spending, sketch out the changes in the AD-AS diagram.  (that pessimistic scenario is a shift of the AD curve to the left).  Then consider how that causes the equilibrium point (AD=SRAS) to shift. Where is it now compared to where it was? Has the price level gone up or done? Employment/GDP up or down?

Table of Contents from Principles of Macroeconomics, 2e 


Textbook Reading Guide – Unit 10 Federal Budget & Fiscal Policy

Jim’s comments:  Read Chapter 17 in it’s entirety. 

Table of Contents from Principles of Macroeconomics, 2e 


Textbook Reading Guide – Unit 11 Money and Banking

Jim’s comments:   Read all of Chapter 14. Section 14.4 is particularly important. Be sure to not just read 14.4, but study it. Work through the example given and be sure you follow the math and accounting closely. This is the essence of money and banking.

Table of Contents from Principles of Macroeconomics, 2e 


Textbook Reading Guide – Unit 12 Federal Reserve/Central Banking

Jim’s comments:  I’ve split our discussion of the central bank (Federal Reserve in the U.S.) and monetary policy into two different units, but the textbook deals with them together in one chapter. As a resulty, I suggest reading Chapter 15 now. Read all of it, but pay close attention to the Introduction, 15.1, 15.2, and 15.3.   These parts describe the central bank and its “tools” and function.

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 13 Monetary Policy

Jim’s comments:  I’ve split our discussion of the central bank (Federal Reserve in the U.S.) and monetary policy into two different units, but the textbook deals with them together in one chapter. Now we focus on monetary policy. Re-read Chapter 15 again, but pay close attention this time to sections 15.3 and 15.4. I might be a good idea to do a refresh and re-read the portion of chapter 14.4 on money creation that discusses the “money multiplier”.  

Table of Contents from Principles of Macroeconomics, 2e  


Textbook Reading Guide – Unit 14 Open Economy, Balance of Payments, Foreign Exchange

Jim’s comments:  Read chapters 10 and 16.  You can skip section 10.4.

Table of Contents from Principles of Macroeconomics, 2e