After taking Boal's section of Econ 1, students will be able to do the following.

Part 1: Introduction to Economics

A. Introduction

- Recognize the economic definition of "rational behavior."

- Distinguish normative from positive economic statements.

- Apply approximation rules for percent changes of products or ratios.

B. Production and trade

- Compute average product and marginal product from a table of output and input levels, and recognize diminishing returns.

- Construct a production possibility curve using data on production functions and available inputs.

- Recognize the tradeoff between consumption and economic growth using a production-possibility framework.

- Compute opportunity cost from a linear production-possibility curve, or from a table of alternative output levels.

- Identify comparative advantage using opportunity costs of two producers.

- Apply comparative advantage to find a trade that will put both producers outside their individual production-possibility curves.

C. Supply and demand

- Identify the advantage of monetary trade over barter.

- Distinguish normal goods from inferior goods, and substitutes from complements.

- Find market equilibrium from graphs of supply and demand, or from lists of demanders and suppliers and their values and costs.

- Recognize factors which shift demand curves (income, prices of related goods, tastes) and the direction of shift.

- Recognize factors which shift supply curves (input prices, technology, government regulation) and the direction of shift.

- Find the changes on equilibrium price and quantity caused by shifts in demand or supply curves.

- Conversely, find the shift in demand or supply curves that could explain a given change in equilibrium price and quantity.

- Given graphs of supply and demand, compute the quantity traded when the market is subjected to a price ceiling or a price floor.

Part 2: National Income and Product Accounts

A. Overview of macroeconomics

- Recognize long run pattern of growth, with short-run fluctuations around the long run trend, in GDP and employment.

- Recognize parts of a business cycle: boom, peak, recession, trough, recovery, and expansion.

- Recognize lack of long-run growth trend in inflation and interest rates.

- Identify two historically important periods: the Great Depression of the 1930s and the Great Inflation of the 1970s.

- Distinguish fiscal policy from monetary policy.

B. Gross domestic product and its components

- Identify what items are included in GDP by definition.

- Apply the spending approach to computing GDP.

- Distinguish government purchases from transfers.

- Distinguish the economic definition of "investment" from other definitions.

- Apply the value-added or production approach to computing GDP.

- Apply the income approach to computing GDP.

- Recognize the relationship between national saving, investment, and net exports.

C. The price level and inflation

- Recognize the difference between real and nominal GDP.

- Compute the growth rate of real GDP by holding prices constant in simplified numerical examples.

- Compute the GDP price index or deflator as the ratio of nominal GDP to real GDP.

- Use a price index to compute the annual rate of inflation, and to convert an old price into today's dollars.

- Convert GDP data in other countries to US dollars using exchange rates, and distinguish market exchange rates from PPP exchange rates.

Part 3: Long-Run Economic Growth and Inflation

A. The spending allocation model

- Identify arguments of the aggregate production function: labor capital, and technology.

- Distinguish net investment from gross investment, and the role of investment in economic growth.

- Use the interest rate to compute the opportunity cost of consumption today in terms of foregone consumption next year.

- Recognize the negative effect of the interest rate on consumption and investment.

- Recognize the positive effect of the interest rate on the exchange rate (foreign currency per dollar) and the negative effect of the exchange rate on net exports.

- Use the spending allocation model to compute the shares of consumption, investment, and net exports, given government purchases.

- Use the spending allocation model to find the qualitative effect of increases in government purchases on investment and long-run growth (the "crowding out model").

- Use the spending allocation model to find the qualitative effect of changes in policies promoting savings or investment on investment and long-run growth.

B. Unemployment and employment

- Distinguish population categories: employed, unemployed, and out of the labor force.

- Compute the unemployment rate, the labor-force participation rate, and the employment-to-population ratio.

- Identify the Phillips curve and the Friedman-Phelps critique.

C. Productivity and economic growth

- Identify Malthusian equilibrium using a graph of the aggregate production function and the subsistance line.

- Compare long-run historical trends in output per worker with the predictions of the Malthusian model

- Use the growth accounting formula to identify the contributions of capital and technology to economic growth.

- Identify examples of "human capital."

- Recognize the nonrival and nonexludable qualities of technology.

D. Money and inflation

- Identify the three fundamental functions of money: medium of exchange, store of value, and unit of account.

- Recognize the advantages of paper currency and deposits over commodity money.

- Compute M1, M2, and the monetary base.

- Compute the money multiplier and use it to compute changes in the money supply given changes in the monetary base.

- Apply the quantity equation to predict the inflation rate, given the growth rates of money and real GDP.

- Recognize the costs of hyperinflation.

Part 4: Short-Run Business Cycles

A. Causes of economic fluctuations

- Recognize that inflation has "momentum" in the short run.

- Compute marginal propensity to consume (MPC), given a graph of the consumption function.

- Apply the Keynesian cross diagram to predict short-run changes in GDP given changes in government purchases.

B. Keynesian multipliers

- Compute the government-purchases multiplier and the tax-cut multiplier given the marginal propensity to consume (MPC) and the marginal propensity to import (MPI).

- Use multipliers to compute the effects of changes in government purchases or taxes on GDP in the short run.

- Recognize and apply the balanced-budget multiplier to compute the effects of balanced changes in government purchases and taxes.

- Identify the permanent income hypothesis and the impact of expectations on the marginal propensity to consume.

C. The economic fluctuations model

- Recognize the typical counterclockwise path of an economy over the business cycle, on a graph with the inflation rate on the vertical axis and real GDP on the horizontal axis.

- Interpret a Taylor rule for monetary policy, relating the inflation rate to the short-run real interest rate set by the Central Bank.

- Interpret the "aggregate demand curve" implied by the Taylor rule, on a graph with the inflation rate on the vertical axis and real GDP on the horizontal axis.

D. Using the economic fluctuations model

- Recognize the slow adjustment of inflation to booms or recessions, depicted in Taylor's textbook as a slow-moving "inflation adjustment line."

- Use the "aggregate demand curve" and "inflation adjustment line" on a graph with the inflation rate on the vertical axis and real GDP on the horizontal axis to show the path of the economy through a business cycle caused by

• a change in fiscal policy,
• a change in monetary policy (i.e., a shift in the Taylor rule),
• or a price shock (also called a supply shock or an inflation shock).

E. Fiscal policy

- Distinguish the deficit from the debt.

- Identify the effect of short-run business cycles on the deficit.

- Identify benefits and challenges of deficit reduction.

F. Monetary policy

- Identify the role of central banks in any country, and the parts of the Federal Reserve System in the U.S.

- Use the slope of the money demand function to compute the effect of changes in the money supply on the interest rate.

- Recognize how differences in the slope of the monetary policy rule curve affect the size and duration of business cycles.

Part 5: The International Economy

A. Growth around the world

- Recognize convergence in GDP per capita across U.S. states, across OECD countries, but not across all countries.

- Recognize economic pressures for migration of capital and technology to developing countries.

- Recognize the role of inefficient legal systems and country risk in slowing growth in developing countries.

B. Gains from international trade

- Recognize motivations for international trade, especially comparative advantage, economies of scale, and increased competition.

- Given initial domestic prices without international trade, predict likely winners and losers from international trade in a particular good.

- Given demand and supply schedules for a particular good in two countries, predict the effects of international trade on price, consumption, and production in both countries.

C. International finance and macroeconomic policy

- Identify components of the trade balance, the current account, and the capital account.

- Predict effects of differential inflation on market exchange rates in the long run.

- Predict effects of differential interest rates on market exchange rates in the short run.

- Identify pitfalls of government intervention in currency markets to support exchange rates.

- Identify advantage of fixed exchange rates (predictability) and disadvantage (loss of independent monetary policy).

D. International trade policy*

- Identify effects of tariff on market for imported good and on market for domestically produced substitute, including domestic winners and losers.

- Identify effects of quotas and voluntary export restraint agreements on market for imported good, including domestic winners and losers.

- Identify weaknesses in common arguments against trade barriers.

- Identify advantages and disadvantages of bilateral trade agreements versus multilateral trade agreements.

* These topics are covered only as time permits.

[end of learning objectives]