Macro Unit 3:

Unit 3 Organizing Principles

In this unit you will learn how to draw, shift, and analyze the key graphs used to explain the macro economy. The most important graph is the aggregate demand and the aggregate supply model. This graph looks like the demand and supply curve that you learned (and loved) before but it applies to the entire economy and includes a vertical line called the long-run aggregate supply curve.

Make sure that you know the shifters (determinants) of each curve and what will happen to price level and real GDP when there is a change. Be sure to be able to use the graph to show long-run equilibrium, a recessionary gap, and an inflationary gap.

Another key graph that you will learn is called the Phillips curve. This curve shows an inverse relationship between price level and unemployment. The graph also has a long run curve. Make sure that you can show how a change in AD or AS affects the Phillips curve.

At this point you are going to start learning about government policies to fix the economy. First you will learn the difference between classical economists and Keynesian economists and their general attitude toward fiscal policy. Fiscal policy is when the government influences the economy through government spending or taxation. Make sure that you know the difference between expansionary and contractionary fiscal policy. Feel comfortable using the spending and tax multipliers to determine how much an initial change in spending will magnify in the economy.

While learning about the problems associated with fiscal policy, make sure that you understand the difference between the national debt and a budget deficit. Lastly, be able to identify government policies designed to achieve economic growth and explain situations that shift the long-run aggregate supply curve. The LRAS shifts when there are changes in productivity, technology, or the quantity of resources.