Week 8 — Lecture Outline · Midterm Review & Exam

Course: Principles of Macroeconomics (ECON 2) · Silver Oak University (fictional sample) · Prof. Ashford
Objectives covered: cumulative — Objectives 1–6 (Weeks 1–7)
Obj 1 — the macro perspective, scarcity, the PPF & positive vs. normative · Obj 2 — GDP & the expenditure approach; real vs. nominal; the GDP deflator · Obj 3 — the CPI, the inflation rate & real vs. nominal values; the unemployment rate & LFPR · Obj 4 — growth rates & the rule of 70 · Obj 5 — the AD–AS model, comparative statics & output gaps · Obj 6 — fiscal policy, the spending multiplier & deficits/debt
SLOs touched: A (quantitative/graphical analysis — compute GDP, the deflator, the CPI, the unemployment rate, a growth rate, a multiplier; shift the right AD–AS curve and read the new P & Y) · B (macroeconomic reasoning applied to real policy, positive vs. normative, evenhandedness)
Meeting pattern: 2 sessions × 75 min = 150 min. Segment minutes below total ~150; scale to your own section.

This is a review-and-exam week — no new content. Each segment briskly re-teaches one objective's highest-yield ideas, one signature worked example with every number shown, and the single misconception most likely to cost points on the midterm, then the final segment frames the exam itself. Built to run from cold as a review — an instructor can teach from this without notes from the first seven weeks, because every definition, worked example, and cure travels with the segment. Every number below is pre-computed and independently verified (see _build/NUMBERS_PACK.md and _build/logs/week-08-numbers.txt).

---

Week at a Glance

The week's big question	"Across the whole first half — measuring the economy, modeling its short-run swings, and using fiscal policy to respond — what is the one honest move each topic demands of us, and where does everyone slip?"
By the end of the week, students can…	(1) compute an opportunity cost and read the macro meaning of a PPF's interior point; (2) compute GDP via C+I+G+NX and the GDP deflator, and know what's counted; (3) compute the CPI, the inflation rate, the unemployment rate, and the LFPR; (4) compute a growth rate and apply the rule of 70; (5) read an AD–AS comparative-statics outcome and diagnose a recessionary or inflationary gap; (6) apply the spending multiplier and distinguish the deficit from the debt; (7) walk into the Midterm knowing its format, weight (20%), and a concrete prep plan.
Key vocabulary (all review)	scarcity, opportunity cost, PPF (efficient/inefficient/unattainable), positive/normative; GDP, expenditure approach (C+I+G+NX), what's counted vs. not, real vs. nominal, GDP deflator; CPI, inflation rate, real vs. nominal wage, unemployment rate, LFPR, frictional/structural/cyclical unemployment; growth rate, rule of 70, per-capita growth; AD, SRAS, LRAS, movement-along vs. shift, comparative statics; recessionary gap, inflationary gap, expansion/peak/recession/trough; expansionary/contractionary fiscal policy, the spending multiplier 1/(1−MPC), automatic stabilizers, deficit (flow) vs. debt (stock)
Materials	slides (Deck 8 — the review deck); Study Guide (M); Exam-Prep Tutorial (N); Practice Exam (O); approved chatbot for the audit-the-AI moment
Timing note	8 segments, ~150 min total. Session 1 (Tue) = Segments 1–4 (~75 min): Objectives 1, 2, and 3. Session 2 (Thu) = Segments 5–8 (~75 min): Objectives 4, 5, and 6 + the midterm frame.

---

Segment 1 — Hook & the Map of the First Half (8 min) · Session 1 opens

Hook. Write one sentence on the board with no comment: "An economy inside its own production frontier is not failing to try — it's sitting on resources it isn't using." Let the room debate for 90 seconds — most students will assume "inefficient" means something is being done wrong. Reveal: an interior PPF point is exactly what a recession looks like in miniature — the capacity exists, but for reasons the AD–AS model explains starting in Week 5, it isn't being used. That's the magic trick of the first half: careful measurement and modeling explain swings that feel chaotic from the outside.

• "That instinct — 'wait, is this economy underperforming its own potential?' — is exactly what the first half of this course trained you to ask, and to answer with numbers. Today we walk the whole arc once, fast, and find the exact spot where points get lost on each topic."

The map (one slide, say it aloud):

Obj 1 — THE MACRO PERSPECTIVE: scarcity, opportunity cost, the PPF, positive vs. normative. Obj 2 — MEASURING OUTPUT: GDP, the expenditure approach, real vs. nominal, the deflator. Obj 3 — MEASURING PRICES & THE LABOR MARKET: the CPI, inflation, unemployment, the LFPR. Obj 4 — GROWTH: growth rates, the rule of 70. Obj 5 — AD–AS & THE BUSINESS CYCLE: comparative statics, output gaps. Obj 6 — FISCAL POLICY: the multiplier, deficits & debt.

Why it matters line: "These six objectives are one sentence: we measure the whole economy honestly, we model why it swings above and below its potential, and we ask what — if anything — government spending and taxes should do about it."

---

Segment 2 — Objective 1 Review: The Macro Perspective, the PPF & Positive vs. Normative (14 min)

Re-teach in plain language. Macroeconomics studies the whole economy — growth, inflation, unemployment, and policy — not one household or firm (that's microeconomics). Opportunity cost is the value of the next-best alternative given up, at any scale. The PPF makes scarcity graphical for an entire economy: points on the frontier are efficient; points inside are inefficient — and at the scale of a whole economy, an interior point means idle labor and capital: the macro preview of unemployment/recession; points outside are unattainable. Positive economics states testable facts ("unemployment is 5%"); normative economics states value judgments ("unemployment is too high"). Neither is "better" — mixing them up is the error.

One worked example (do every step on the board — the Week-1 verified numbers):

Isla Verde's PPF: 24 million labor-hours; consumer goods take 3 hrs each, capital goods take 6 hrs each → frontier 3x + 6y = 24 → intercepts (8, 0) and (0, 4).
Opportunity cost of 1 capital good = 8 ÷ 4 = 2 consumer goods. Test (2, 2): 3(2) + 6(2) = 18 < 24 → inside the frontier → idle resources (the recession preview).

Highest-cost misconception + cure:
- ❌ "A point inside the PPF is unattainable." → ✅ Inside = attainable but inefficient/idle (unemployment, in the macro reading). Outside = unattainable.
- ❌ "Positive = a good claim; normative = a bad claim." → ✅ Positive = testable; normative = value-laden.
- ❌ Flipping the opportunity-cost ratio. → ✅ Always state the cost in the OTHER good — divide (max of the OTHER good) by (max of THIS good).

---

Segment 3 — Objective 2 Review: Measuring Output — GDP, Real vs. Nominal & the Deflator (20 min)

Re-teach in plain language. GDP is the market value of all final goods and services produced within a country in a period. The expenditure approach: GDP = C + I + G + NX, where NX = exports − imports. Not counted: used goods, purely financial trades, transfer payments (Social Security, unemployment benefits), and intermediate goods (already counted inside the final good). Real GDP strips out price changes so we compare actual output across time; nominal GDP uses current prices. The GDP deflator = nominal GDP ÷ real GDP × 100 — it tells you how much of a nominal change was pure price inflation versus real output growth.

One worked example (pre-verified, every number on the board — Week-2 numbers):

Meadowland: C = 500, I = 200, G = 150, X = 100, M = 50 (billions) → NX = 100 − 50 = 50 → GDP = 500 + 200 + 150 + 50 = 900.
Deflator check: nominal 900, real 750 → deflator = 900 ÷ 750 × 100 = 120.
Two-good economy: base year 40 pizzas @ $5 + 100 coffees @ $1 = $300 (nominal = real in the base year). Year 2: 44 pizzas @ $6 + 110 coffees @ $1.20 → nominal = $396; at BASE-YEAR prices, real = 44×5 + 110×1 = $330; deflator = 396 ÷ 330 × 100 = 120; real growth = 10%, nominal growth = 32% (1.10 × 1.20 = 1.32 — real growth × inflation = nominal growth).

Highest-cost misconception + cure:
- ❌ "Using this year's prices tells us how much MORE the economy actually produced." → ✅ That's nominal — it blends real output change with price change. Real GDP strips prices out; only real GDP tells you the actual production change.
- ❌ "Transfer payments and used-good sales count toward GDP." → ✅ Transfers are not payment for current production; used goods were already counted the year they were made. Neither counts.
- ❌ "The deflator formula is real/nominal." → ✅ Deflator = nominal ÷ real × 100 — flipping it gives a number below 100 when prices actually rose.

---

Segment 4 — Objective 3 Review: The CPI, Inflation & Unemployment (24 min) · Session 1 closes (~75 min)

Re-teach in plain language. The CPI tracks the cost of a fixed basket of goods over time; CPI = (cost of basket this year ÷ cost of basket in the base year) × 100. The inflation rate is the percentage change in the CPI between two periods. A raise that doesn't keep pace with inflation is a real wage cut even though the nominal number went up. The unemployment rate = unemployed (searching for work) ÷ labor force × 100; the labor-force participation rate (LFPR) = labor force ÷ adult population × 100. Discouraged workers (who've stopped searching) are NOT counted in the labor force — which is why the official rate can understate joblessness. Three types: frictional (between jobs, normal churn), structural (skills mismatch), cyclical (tied to the business cycle — the one policy targets).

One worked example (pre-verified, every step — Week-3 numbers):

CPI basket: 10 pizzas @ $8 + 20 coffees @ $3 + 4 books @ $15 = $200 (base year, CPI = 100). Year 2: pizzas $9, coffee $3.30, books $15 → $216 → CPI = 216 ÷ 200 × 100 = 108 → inflation = 8%.
Labor market: adult population 200M; employed 114M; unemployed (searching) 6M → labor force = 120M; unemployment rate = 6 ÷ 120 × 100 = 5%; LFPR = 120 ÷ 200 × 100 = 60%.
Real vs. nominal wage: a 4% raise with 5% inflation ⇒ real wage change ≈ 4% − 5% = −1% — a pay cut in real terms, even with a nominal raise.

Interaction — rapid classify (think-pair-share, ~5 min): "A worker just left one job to look for a better one" → frictional. "Automation eliminated an entire occupation and workers need retraining" → structural. "A recession hit and factories laid off workers" → cyclical.

Highest-cost misconception + cure:
- ❌ "CPI = the inflation rate." → ✅ CPI is the index level (e.g., 108); the inflation rate is the percentage CHANGE between two CPI readings.
- ❌ "Discouraged workers count as unemployed." → ✅ To be counted unemployed you must be actively searching. Discouraged workers are out of the labor force entirely — which is exactly why LFPR matters alongside the unemployment rate.
- ❌ "A 4% raise is always a real gain." → ✅ Compare it to inflation — a 4% raise with 5% inflation is a real pay cut (≈ −1%).

---

Segment 5 — Objective 4 Review: Growth Rates & the Rule of 70 (14 min) · Session 2 opens

Hook back in: "Session 1 — how we measure the size of the economy and its prices and jobs at a point in time. Now: how fast is it actually growing, and how long until living standards double?"

Re-teach in plain language. A growth rate is simply percentage change: (new − old) ÷ old × 100. The rule of 70 estimates years to double at a given percentage growth rate: years ≈ 70 ÷ growth rate. Per-capita growth ≈ total growth − population growth (a rough approximation). Sources of long-run growth: physical capital, human capital, and technology (the Solow growth model is named factually as the field's workhorse framework for long-run growth, not derived at this level).

One worked example (pre-verified, every step — Week-4 numbers):

Real GDP 800 → 840: growth rate = (840 − 800) ÷ 800 × 100 = 5%.
Rule of 70 at that rate: 70 ÷ 5 = 14 years to double. (Check other rates: 2% → 35 yrs; 7% → 10 yrs; 10% → 7 yrs — all pre-verified: 1.02³⁵ ≈ 2.0.)
Per-capita approximation: 3% GDP growth − 1% population growth ≈ 2% per-capita growth.

Highest-cost misconception + cure:
- ❌ "Rule of 70: multiply the rate by 70." → ✅ DIVIDE 70 by the growth rate (70 ÷ 5 = 14, not 70 × 5).
- ❌ "5% total GDP growth means every person is 5% richer." → ✅ Subtract population growth to get the per-capita figure — the number that actually tracks living standards.

---

Segment 6 — Objective 5 Review: The AD–AS Model, Comparative Statics & Output Gaps (24 min)

Re-teach in plain language. Aggregate demand (AD) slopes down (via the wealth effect, the interest-rate effect, and the exchange-rate effect — named in one line each). SRAS slopes up in the short run (sticky wages/prices); LRAS is vertical at the economy's potential output. Comparative statics: AD shifts right (C↑, I↑, G↑, NX↑, or expansionary fiscal/monetary policy) ⇒ P↑, Y↑; AD left ⇒ P↓, Y↓. SRAS shifts left (input/oil price ↑, expected inflation ↑) ⇒ P↑, Y↓ (stagflation); SRAS right ⇒ P↓, Y↑. A recessionary gap = actual Y below potential; an inflationary gap = actual Y above potential.

One worked example (pre-verified — the Week-5 AD–AS anchor):

AD: P = 20 − Y/100 · SRAS: P = 4 + Y/100 → equilibrium Y* = 800, P* = 12.
Government spending rises → AD shifts right to P = 22 − Y/100 → new Y* = 900, P* = 13 (P↑, Y↑ ✓ — the textbook expansionary-fiscal-policy outcome).

One worked example — output gaps (pre-verified — Week-6 numbers):

Potential output Y* = 1000. Actual Y = 950 → recessionary gap of 50 = 5% of potential. Actual Y = 1040 → inflationary gap of 40 = 4% of potential.

Highest-cost misconception + cure:
- ❌ "A change in the price level shifts AD." → ✅ The price level is AD's OWN axis variable — a price-level change is a movement along AD, not a shift. Only a change in C, I, G, NX (or a policy move) shifts AD.
- ❌ "SRAS and LRAS shift the same way for the same event." → ✅ SRAS shifts with input-price/expectation shocks; LRAS shifts only with a change in the economy's actual productive capacity (more capital, labor, or technology) — a long-run growth event, not a short-run shock.
- ❌ "A recessionary gap needs contractionary policy." → ✅ Backwards — a recessionary gap (Y below potential) calls for EXPANSIONARY policy (AD needs to shift right); an inflationary gap calls for contractionary policy.

---

Segment 7 — Objective 6 Review: Fiscal Policy, the Multiplier & Deficits vs. Debt (18 min)

Re-teach in plain language. Fiscal policy is the government's tool (Congress: spending and taxes) — do not confuse it with monetary policy (the Fed's tool, starting Week 9–11). Expansionary fiscal policy (G↑ or T↓) aims to close a recessionary gap; contractionary (G↓ or T↑) aims to close an inflationary gap. The spending multiplier = 1/(1 − MPC) — a dollar of new spending re-spends through the economy in rounds. Automatic stabilizers (like unemployment benefits and progressive taxes) work without new legislation. The deficit is a flow — this year's shortfall (spending minus revenue); the debt is a stock — the accumulated total of all past deficits (minus any surpluses).

One worked example (pre-verified, every step — Week-7 numbers):

Multiplier at MPC = 0.8: 1 ÷ (1 − 0.8) = 5. ΔG = +20 → ΔY = 20 × 5 = 100.
Deficit vs. debt: revenue 400, spending 450 → deficit = 450 − 400 = 50 (a flow, this year only). Debt was 1,000 → new debt = 1,000 + 50 = 1,050 (the accumulated stock).

Interaction — audit the AI (the course's recurring habit, ~5 min):

Paste to an approved chatbot: "In an economy with MPC = 0.8, if government spending rises by $20 billion, what is the total change in GDP? Also, if this year's deficit was $50 billion, does that mean the national debt fell by $50 billion?"
Check it. Common errors: (1) using the WRONG multiplier formula (confusing it with the money multiplier, 1/RR, which comes in Week 9); (2) claiming a deficit "reduces" the debt (a deficit adds to the debt — only a surplus reduces it). If you can catch those two, you are ready for the midterm.

Highest-cost misconception + cure:
- ❌ "The multiplier is 1/RR." → ✅ That's the money multiplier (banking, Week 9). The spending multiplier is 1/(1 − MPC).
- ❌ "A deficit and the debt are the same thing." → ✅ Deficit = this year's flow (spending − revenue); debt = the accumulated stock of all past deficits. A deficit adds to the debt every year it occurs.
- ❌ "Fiscal policy is the Fed's job." → ✅ Fiscal policy = Congress (spending & taxes). Monetary policy = the Fed (money supply & interest rates) — coming in Weeks 9–11.

---

Segment 8 — The Midterm Frame: Format, Coverage & Prep (10 min) · Session 2 closes (~75 min)

What's on the Midterm (state it plainly — put it on the closing slide):
- Coverage: cumulative, Weeks 1–7, Objectives 1–6 (everything above). It does not reach money & banking, the Fed, monetary policy, the Phillips curve, or the open economy (Weeks 9–15).
- Format & weight: 20 items, 100 points (5 each) — mixed item types: single-answer MC, matching (one-to-one), true/false, and multiple-answer (select all that apply). No free-response. The midterm is 20% of the course grade. Window opens Mon Oct 19; due Sun Oct 25, 11:59 p.m.; one attempt; AI not permitted.

The preparation plan (point to each artifact by name):
1. Study Guide (M) — work it first; topic-by-topic review of all six objectives with worked examples and fresh practice items with vetted answers.
2. Exam-Prep Tutorial (N) — run with an approved chatbot and submit the share link; it diagnoses and drills your weak spots adaptively.
3. Practice Exam (O) — sit it timed, cold, like the real thing; score it; use the Study Guide to patch gaps.
4. Midterm (L) — one attempt; AI not permitted. Bring your understanding.
5. Discussion 8 — the debrief happens after the exam; reflect on the process and make a plan for the back half.

Callback + tease:
- Callback: "Every item on the midterm is a move you have already made in Weeks 1–7. Today we just named it out loud and found where it slips."
- Tease next: "After the midterm, Week 9 opens money and banking — how a single new deposit can expand into a much larger money supply through fractional-reserve lending, and why that process has a real-world upper bound. The measurement and modeling tools you built this half are the scaffolding for everything that follows, right up through the Fed's own toolkit."

---

Instructor FAQ — Common Stumbles (Review Week)

Student says / does	Quick cure
Calls an interior PPF point "unattainable."	Interior = attainable but inefficient/idle — the macro read is unemployment. Unattainable is OUTSIDE the frontier.
Counts a used-car sale or a Social Security check in GDP.	Neither counts — used goods aren't current production; transfers aren't payment for production. Only NEW, FINAL goods/services count.
Uses nominal GDP to claim "the economy produced more."	Only real GDP (prices stripped out) tells you the actual production change; nominal blends price change with real change.
Confuses the CPI level with the inflation rate.	CPI = the index number (e.g., 108). Inflation rate = the % change between two CPI readings.
Thinks discouraged workers count as unemployed.	You must be actively searching to be counted unemployed. Discouraged workers are out of the labor force — a real blind spot in the official rate.
Multiplies the rate by 70 instead of dividing.	Rule of 70 = 70 ÷ growth rate, not growth rate × 70.
Says a price-level change shifts AD.	Price level is AD's own axis — that's a movement along, not a shift. Only C, I, G, NX, or policy shifts AD.
Prescribes contractionary policy for a recessionary gap.	Backwards — a recessionary gap (Y below potential) needs expansionary policy to shift AD right.
Uses 1/RR for the spending multiplier.	1/RR is the money multiplier (Week 9 — banking). The spending multiplier is 1/(1 − MPC).
Says a deficit reduces the debt.	A deficit is a flow that adds to the debt (the stock) every year it occurs. Only a surplus reduces the debt.
Panics that the exam is "everything."	It is Objectives 1–6 only (Weeks 1–7). Money & banking, the Fed, the Phillips curve, and the open economy (Weeks 9–15) are not on the midterm.

---

Scope flag

This outline is pure review of Objectives 1–6 — no new content. Named laws, models, and concepts (the expenditure approach, the rule of 70, the AD–AS model, the spending multiplier, the Solow growth model) are used factually as the discipline's content; no quotes or statistics are attributed to real economists. Contested policy points (the proper size of fiscal response, etc.) are not raised here — this is a computational/graphical review; the midterm and its bundle (Study Guide, Exam-Prep Tutorial, Practice Exam) are built separately and only referenced here by name.