The Economy 2.0: Macroeconomics

Citation

The CORE Econ Team. (2026). The Economy 2.0: Macroeconomics (version 2.0). CORE Economics Education; distributed in print by Hackett Publishing Company. Free official edition: https://books.core-econ.org/the-economy/macroeconomics/

Chapter Summary

The book has ten units, which are listed here as chapters under their own titles. Units 1–5 build one connected model of the business cycle; Units 6–10 apply and extend it.

Chapter 1: The supply side of the macroeconomy: Unemployment and real wages

Through the story of an Australian mining family, the unit introduces macroeconomic measurement (employment, unemployment, participation and inactivity rates; nominal wages, the consumer price index and real wages) and then builds the book's supply-side model. A wage-setting (WS) curve, derived from a firm's need to recruit workers and to motivate them with a no-shirking wage, shows workers able to claim higher real wages when unemployment is low; a horizontal price-setting (PS) curve shows the real wage left after firms take their profit-maximising markup. Their intersection is a Nash equilibrium with involuntary unemployment, and the unit ends by contrasting partial and general equilibrium and the paradoxes of studying the economy as a whole.

Chapter 2: Unemployment, wages, and inequality: Supply-side policies and institutions

Starting from a young Spanish worker "scarred" by the post-2008 labour market, this unit uses the WS–PS model to study income distribution and policy. It shows how the equilibrium maps onto a Lorenz curve and Gini coefficient, and how education and training, wage subsidies, unemployment benefits, labour unions, segmented labour markets, taxes and the price of imported materials such as energy shift the WS or PS curves. Applications ask whether a decline in competition raised US inequality and examine Danish "flexicurity", and a comparison of Germany and Spain closes with a frank section on the model's limits.

Chapter 3: Aggregate demand and the multiplier model

The demand side begins with a family hit by the 2008 housing crash. The unit explains GDP and the national accounts (expenditure, value added and income), real versus nominal GDP, purchasing power parity, and measurement problems, and shows from data that investment is far more volatile than consumption. It then builds the multiplier model, adding government and net exports, and explains why consumption is smoothed (the life-cycle idea), why smoothing is limited by credit constraints, present bias and weak co-insurance, and why investment comes in clusters because of new technology, credit constraints and coordination problems. An application examines China's weak demand after it ended its zero-COVID policy.

Chapter 4: Inflation and unemployment

Opening with the 2022 cost-of-living crisis, the unit covers how inflation is measured (CPI and GDP deflator), who gains and loses from it, and why a little predictable inflation is preferred to deflation. Its central argument is that inflation comes from conflicting claims on output: when unemployment is below the WS–PS equilibrium, workers' wage claims exceed what firms' pricing leaves them, and this "bargaining gap" drives wage and price inflation, giving a Phillips curve. Expected inflation shifts that curve, and the supply-side, multiplier and Phillips curve diagrams are combined into a business cycle model used to analyse demand shocks, supply shocks and oil price shocks, with a review of cost-push, demand-pull, expectations-driven and profit-push inflation and an application to inflation after the pandemic.

Chapter 5: Macroeconomic policy: Inflation and unemployment

The unit introduces fiscal and monetary policy, the Fisher equation, and how policymakers respond to demand shocks, which can be offset without trading off inflation and output. It contrasts this with inflationary supply shocks, which force the central bank to accept lower output to bring inflation back to target. Further sections cover the division of labour between governments and independent central banks, automatic stabilisers, the size of the multiplier and crowding out (including a natural experiment based on Mafia-related cuts in Italian local spending), austerity and the paradox of thrift, inflation targeting, the zero lower bound and anchored expectations, present value and asset prices, and the domestic and exchange rate channels of monetary policy. Applications use CORE's interactive inflation tool on the Russia–Ukraine energy shock and trace UK policy from 1950 to 2023.

Chapter 6: The financial sector: Debt, money, and financial markets

Asking how people live when they do not work, the unit builds up the financial system step by step. Bilateral debt between Marco and Julia comes first, then a bank with its balance sheet, default and liquidity risk, then money as unit of account, means of exchange and store of value, and then the central bank, reserves and base money. It explains that banks create most money when they lend, how quantitative easing works through the central bank's balance sheet, and why currency is ultimately a form of government debt. The unit ends with financial markets, rates of return and risk premia, corporate leverage and limited liability, and evidence on household assets such as housing.

Chapter 7: Macroeconomic policy in the global economy

Opening with Argentina's chronic inflation, the unit compares three stylised monetary regimes: a flexible exchange rate with a credible inflation target (FlexIT), a flexible rate with no stable target (FlexNIT), and a fixed rate, taken to its limit as membership of a currency union such as the eurozone (Fix). It traces how each responds to shocks through real exchange rates, uses Spain before and after the euro as an example, surveys dollarisation and managed regimes worldwide, and introduces uncovered interest parity to show how global capital mobility constrains policy interest rates. The final sections argue that persistent high inflation often reflects monetary finance of government deficits and weak governance, tested against World Bank governance indicators.

Chapter 8: Economic dynamics: Financial and environmental crises

This unit introduces a new tool for disequilibrium: stable and unstable equilibria, positive and negative feedback, tipping points and lock-in. It applies the tool to a real-world poverty trap, to asset price bubbles through an S-shaped "price dynamics curve" for housing, and to the financial accelerator linking house prices, collateral, bank lending and consumption, with an application on inequality in the US housing boom and bust. It then explains banks' leverage and interconnection, capital requirements and resolution regimes, models the loss of Arctic sea ice as an environmental tipping point, argues for prudential policy under fundamental uncertainty, and shows how policy might tip transport out of a "carbon trap" towards electric vehicles.

Chapter 9: Uneven development on a global scale

Starting from China's transformation, the unit teaches ratio scales, compound growth rates and the rule of 70, then uses an aggregate production function to separate the roles of capital per worker and technological progress, with growth accounting in an extension. It discusses investment and saving, barriers to growth such as poor infrastructure, low education and coordination failures, and evidence that institutions matter. A "growth dynamics model", in which faster growth feeds back into higher investment, explains how countries get stuck or take off, illustrated by Botswana and Tanzania and an application comparing Bangladesh and Pakistan. The unit closes with falling global inequality and with planetary limits, degrowth versus green growth, and the energy transition.

Chapter 10: Government as economic actor: Economics, politics, and public policy

The final unit, opening with evidence that women's suffrage in the US reduced child mortality, treats government as an economic actor that can solve or cause problems. It introduces democracy as a political institution, the median voter model, the spread and recent stalling of democracy, and evidence that democracy shifts policy. A model of a rent-seeking elite choosing a tax rate, constrained by a "duration curve", shows how political competition limits rents, and the unit draws parallels with price-setting firms. It closes with why governments fail (economic infeasibility, special interests, limited capacity, principal–agent problems between citizens and leaders), examples of policies that worked, and an afterword on the role of economics.

Key Concepts

Chapter 1: The supply side of the macroeconomy: Unemployment and real wages

• Wage-setting (WS) curve: the real wage employers must pay to recruit and motivate workers at each level of employment, rising as unemployment falls.
• Price-setting (PS) curve: the real wage consistent with firms' profit-maximising markup, determined by productivity and the degree of competition.
• Involuntary unemployment in equilibrium: at the WS–PS intersection some people want work at the going wage but cannot find it.

Chapter 2: Unemployment, wages, and inequality: Supply-side policies and institutions

• Structural unemployment: the unemployment rate at the WS–PS equilibrium, shifted by institutions and policies.
• Lorenz curve: a picture of the whole income distribution, which the WS–PS outcome can be mapped onto.
• Flexicurity: Denmark's combination of easy hiring and firing with strong income security for workers.

Chapter 3: Aggregate demand and the multiplier model

• GDP: the market value of final goods and services produced, measurable as spending, value added or income.
• Multiplier: the factor by which a change in autonomous spending changes output, larger when the marginal propensity to consume is higher.
• Consumption smoothing and its limits: households try to keep spending steady, but credit constraints and present bias stop them doing so fully.

Chapter 4: Inflation and unemployment

• Bargaining gap: the difference between the real wage workers can claim (on the WS curve) and the real wage firms' pricing allows (on the PS curve).
• Phillips curve: the relationship between unemployment and inflation, where inflation equals the bargaining gap plus expected inflation.
• Inflation-stabilising rate of unemployment: the WS–PS equilibrium, where the bargaining gap is zero.

Chapter 5: Macroeconomic policy: Inflation and unemployment

• Inflation targeting: an independent central bank sets its policy rate to keep inflation close to a target set by government.
• Automatic stabilisers: taxes and transfers that rise and fall with the cycle and damp fluctuations without new decisions.
• Paradox of thrift: if everyone tries to save more in a downturn, total income falls and total saving may not rise.

Chapter 6: The financial sector: Debt, money, and financial markets

• Balance sheet and net worth: assets minus liabilities, used for households, banks and the central bank alike.
• Bank money and base money: deposits created by commercial banks when they lend, and currency plus reserves issued by the central bank.
• Leverage: financing assets with borrowed funds, which magnifies both returns and losses on equity.

Chapter 7: Macroeconomic policy in the global economy

• Real exchange rate: the relative price of foreign and domestic goods, which determines competitiveness.
• FlexIT, FlexNIT and Fix: the book's three benchmark combinations of exchange rate and monetary regime.
• Uncovered interest parity: global investors equalise expected returns across countries, linking interest rate differences to expected depreciation.

Chapter 8: Economic dynamics: Financial and environmental crises

• Tipping point: an unstable equilibrium; a small push beyond it sets off large changes that are hard to reverse.
• Positive feedback: a process in which a movement away from equilibrium causes further movement in the same direction, as in a price bubble.
• Financial accelerator: rising house prices raise collateral and borrowing, amplifying booms and busts.

Chapter 9: Uneven development on a global scale

• Rule of 70: a quantity growing at g per cent a year doubles in about 70/g years.
• Total factor productivity: the part of output growth not explained by growth in inputs, a measure of technological progress.
• Growth dynamics model: a model in which growth raises investment and investment raises growth, allowing low-growth traps and take-offs.

Chapter 10: Government as economic actor: Economics, politics, and public policy

• Median voter model: parties competing for votes converge on the policy preferred by the voter in the middle of the distribution.
• Political rent: the income a governing elite can extract above what it spends on citizens, limited by the threat of losing power.
• Government failure: policy that fails because it is economically or politically infeasible, captured by special interests, or beyond the state's capacity.

Critical Analysis

Strengths

• One model, built in steps. The WS–PS supply side (Unit 1), the multiplier (Unit 3) and the Phillips curve derived from the bargaining gap (Unit 4) are combined into a single business cycle model that Unit 5 uses for policy. Because the Phillips curve is derived from the same wage- and price-setting decisions as unemployment, students see why inflation arises rather than memorising a curve.
• Up to date and evidence-led. Units open with recent episodes (the 2008 crisis, post-pandemic inflation, the Russia–Ukraine energy shock, China after zero-COVID) and use many data figures. "How economists learn from facts" boxes show identification in practice, such as a natural experiment that uses Mafia-related dismissals to estimate fiscal multipliers.
• Money and finance treated seriously. Unit 6 builds banking from balance sheets, explains that banks create money by lending and shows what quantitative easing does to the central bank's balance sheet; Unit 8 then uses this to explain the financial crisis, which many introductory books treat only briefly.
• Wider scope than a standard course. Exchange rate regimes and high-inflation countries, environmental tipping points, global development and the political economy of government each receive a full unit, and a modest mathematical burden (about 18 optional extensions) keeps them accessible.

Limitations

• Not the standard intermediate toolkit. There is no IS–LM, AD–AS, Taylor-rule or Solow-model treatment as such (the Solow model is mentioned only in an extension note), and intertemporal optimisation and rational expectations models are absent. Students preparing for a conventional intermediate course or exam will need another text.
• Units 1–5 must be read in order. The instructor note states that this sequence builds the business cycle model, so the early units are dense and cumulative; dropping in mid-way is hard.
• Some reliance on the microeconomics volume. The WS curve rests on the wage-setting model from Microeconomics Unit 6, and several units link back to micro building blocks; readers without the companion volume will meet some ideas in condensed form.
• Interactive material matters. The inflation tool, stepwise figures and data links are part of the teaching, and the CC BY-NC-ND licence means the text can be shared but not adapted.

Where It Fits in the Course

In the course list for Intermediate Macroeconomics, CORE's volume and Krugman and Wells's Macroeconomics are the two introductory titles; Krugman and Wells is generally described as a principles-level book, while CORE is the free one with the stronger emphasis on institutions, finance and instability. CORE is best used before, or alongside, the intermediate texts. Carlin and Soskice's Macroeconomics: Institutions, Instability, and Inequality is the natural next step: the companion microeconomics volume's closing essay recommends it as the follow-up, and Wendy Carlin is among the authors named in this volume's citation guidance, so the WS–PS, Phillips curve and financial-instability ideas carry over. Mankiw's Macroeconomics is generally described as a conventional intermediate-macroeconomics text and fills the gaps listed above, such as the standard growth model and the usual aggregate-demand framework.

Romer's Advanced Macroeconomics and Ljungqvist and Sargent's Recursive Macroeconomic Theory, both graduate-level texts, assume mathematical tools that CORE deliberately avoids. CORE is not a substitute for them, but students who have worked through its units on finance, open-economy regimes and instability will have useful intuition and data context before tackling formal dynamic models.

How to Use This Book

The book is written for a first course in macroeconomics, and the instructor note describes the macroeconomics units as especially suitable for master's courses because of their use of data. No prior economics is strictly assumed: prerequisites are listed at the start of each unit with links to the needed building blocks, and it is possible to study macroeconomics before microeconomics. Basic algebra and graphs are enough for the main text; extensions use more algebra and some calculus.

Read Units 1–5 in order: they are the core and together give the business cycle model. Unit 2 depends on Unit 1, Unit 4 on Units 1–3, Unit 5 on Unit 4, and Unit 7 on Unit 5. After that, choose according to the course: Unit 6 for money and banking (needed for Unit 8), Unit 7 for open-economy policy, Units 8–10 for instability, development and political economy. The instructor note suggests that a course centred on inequality, institutions and instability use Units 2, 8, 9 and 10, and that a growth-first course could begin with Microeconomics Units 1–2 and then Macroeconomics Unit 9.

Work through the step-by-step figures online, answer the multiple-choice questions as you go, and try the exercises that send you to data sources such as FRED. Use the interactive inflation tool in Section 5.11 after studying Units 4 and 5. If you need conventional intermediate tools, pair the book with one of the intermediate texts from the course list.

Edition and Sources

This guide is based on The Economy 2.0: Macroeconomics, version 2.0.0 (© CORE Economics Education 2026; print ISBN 978-1-64792-248-1), read in the official EPUB from CORE Econ's site and checked against the online edition at https://books.core-econ.org/the-economy/macroeconomics/. It draws on the preface, the note to instructors, the full table of contents, and for all ten units the opening section, every section and subsection heading, the opening of every section and the full unit summary and concept list, with Sections 4.5, 5.7 (the multiplier evidence), 5.11 and 10.4 read in more detail.