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We had two primary goals when creating Fundamentals of Macroeconomics:
1. Make close contact with current macroeconomic events. What makes macroeconomics exciting is the light it sheds on what is happening around the world, from the major economic crisis which has engulfed the world since 2008, to monetary policy in the United States, to the problems of the Euro area, to growth in China. These events-and many more-are described in the guide, not in footnotes, but in the text or in detailed boxes. Each box shows how you can use what you have learned to get an understanding of these events. My belief is that these boxes not only convey the "life" of macroeconomics, but also reinforce the lessons from the models, making them more concrete and easier to grasp.
2. Provide an integrated view of macroeconomics. The guide is built on one underlying model, a model that draws the implications of equilibrium conditions in three sets of markets: the goods market, the financial markets, and the labor market. Depending on the issue at hand, the parts of the model relevant to the issue are developed in more detail while the other parts are simplified or lurk in the background. But the underlying model is always the same. This way, you will see macroeconomics as a coherent whole, not a collection of models. And you will be able to make sense not only of past macroeconomic events, but also of those that unfold in the future.
Organization of Fundamentals of Macroeconomics:
The guide is organized around two central parts: A core, and a set of two major extensions. An introduction precedes the core. The two extensions are followed by a review of the role of policy. The guide ends with an epilogue. A flowchart on the front endpaper makes it easy to see how the Sections are organized, and fit within the book's overall structure.
Sections 1 and 2 introduce the basic facts and issues of macroeconomics. Section 1 focuses first on the cri sis, and then takes a tour of the world, from the United States, to Europe, to China. Some instructors will prefer to cover Section 1 later, perhaps after Section 2, which introduces basic concepts, articulates the notions of short run, medium run, and long run, and gives the reader a quick tour of the book.
While Section 2 gives the basics of national income ac counting, I have put a detailed treatment of national income accounts to Super-Section 1 at the end of the guide.
This decreases the burden on the beginning reader, and allows for a more thorough treatment in the Super-Section.
Sections 3 through 13 constitute the core.
Sections 3 through 6 focus on the short run. These four Sections characterize equilibrium in the goods market and in the financial markets, and they derive the basic model used to study short-run movements in output, the IS-LM model. Section 6 is new, and extends the basic IS-LM model to take into account the role of the financial system. It then uses it to describe what happened during the initial phase of the crisis.
Sections 7 through 9 focus on the medium run.
Section 7 focuses on equilibrium in the labor market and introduces the notion of the natural rate of unemployment. Section 8 derives and discusses the relation between unemployment and inflation, known as the Phillips curve. Section 9 develops the IS-LM-PC (PC for Phillips curve) model which takes into account equilibrium in the goods market, in the financial markets, and in the labor market. It shows how this model can be used to understand movements in activity and movements in inflation, both in the short and in the medium run.
Sections 10 through 13 focus on the long run. Section 10 describes the facts, showing the evolution of output across countries and over long periods of time. Sections 11 and 12 develop a model of growth and describe how capital accumulation and technological progress deter mine growth. Section 13 focuses on the effects of technological progress on unemployment and on inequality, not only in the long run, but also in the short run and in the medium run.
Sections 14 through 20 cover the two major extensions.
Sections 14 through 16 focus on the role of expectations in the short run and in the medium run. Expectations play a major role in most economic decisions, and, by implication, play a major role in the determination of output.
Sections 17 through 20 focus on the implications of openness of modern economies. Section 20 focuses on the implications of different exchange rate regimes, from flexible exchange rates, to fixed exchange rates, currency boards, and dollarization.
Sections 21 through 23 return to macroeconomic policy. Although most of the first 20 Sections constantly discuss macroeconomic policy in one form or another, the purpose of Sections 21 through 23 is to tie the threads together. Section 21 looks at the role and the limits of macroeconomic policy in general. Sections 22 and 23 review fiscal and monetary policy. Some instructors may want to use parts of these Sections earlier. For example, it is easy to move forward the discussion of the government budget constraint in Section 22 or the discussion of inflation targeting in Section 23.
Section 24 serves as an epilogue; it puts macroeconomics in historical perspective by showing the evolution of macroeconomics in the last 70 years, discussing current directions of research, and the lessons of the crisis for macroeconomics.