What makes this book unique?

This text reverses the usual priorities in undergraduate macroeconomics instruction. The ultimate goal is not simply to teach macroeconomic theories, models and concepts, with real-world applications thrown in for motivation and excitement; rather, students work through this book towards an understanding of the macroeconomic issues and challenges facing the global economy and individual countries. Macroeconomic concepts and models are taught only as they serve this end.


The global financial crisis and the ensuing European sovereign debt crisis gave macroeconomics a rude awakening from a slumber of complacency. This poses challenges for research as well as teaching on all levels. Interestingly, though, many of the issues that dominated policy debates and concepts that proved useful during the crisis were taken from the undergraduate curriculum, not from cutting-edge research. Undergraduate teaching may, therefore, be less rattled by recent events than are graduate curriculums and research agendas. But the startling speed at which demand and employment receded, and the sheer magnitude at which incomes dropped, the stubbornness with which they resisted recovery, has tarnished belief in the self-healing powers of markets and the uniqueness of macroeconomic equilibria. This calls for a revitalized interest in what can go wrong in financial and goods markets, and when and how the government should step in to augment private demand when it is lacking.

Acknowledging this, the text's business cycle chapters use the events of 2008-2012 very much as a running theme that repeatedly features in Case Studies and Boxes. And the book places new emphasis on financial markets, on the possibility of instabilities and on multiple equilibria.

Chapters 1-9 are fairly conventional in content, amounting to a streamlined, no-frills introduction to the macroeconomic concepts that are useful for discussion of today's macroeconomic issues. Essential concepts are introduced in the context of the circular-flow-of-income model. Students are then led via the Keynesian cross, the IS-LM model, the Mundell-Fleming model and the aggregate demand-aggregate supply model to a fully dynamic aggregate demand-aggregate supply framework for analysing short- and medium-term macroeconomic issues. Chapters on the supply-side topics of unemployment and growth complete this predictable set of tools.

Chapters 10 and 11 extend the toolbox into areas that most intermediate macroeconomics textbooks barely mention in passing. The first one refines and extends the Solow growth model (introduced in Chapter 9) with discussions of human capital and poverty traps, and concludes with a first glimpse at endogenous growth. Under the heading 'Endogenous economic policy'. Chapter 11 shows that politicians may steer economies along paths not considered desirable from society's point of view, and discusses how institutions should be structured to reduce this risk.

Chapters 12-15 explore issues at the heart of European and global economic integration. Chapters 12 and 13 look at monetary integration, with a focus on the challenges posed by and benefits offered by a single currency shared by many countries. Chapter 14 explores debt dynamics and takes a closer look at the market for government bonds. In Chapter 15 economic crises take centre stage. Standard models are expended and refined to shed light on the consequences of oil price explosions, on the real estate and financial crisis, and on the sovereign debt crisis.

Chapters 16 and 17 offer a sneak preview of what macroeconomics courses at the Masters level have in store. They also make a serious effort to motivate students and explain why research had moved beyond the workhorse models of intermediate macroeconomics to study macroeconomics models with explicit microfoundations - of the real-business-cycle mould, or with sticky prices and information. To this end, students learn about the co-movement of macroeconomic variables, and why sticky prices or sticky information may perform better than sticky wages in explaining empirically observed patterns. They also grasp the intuition behind real-business-cycle dynamics, without the elaborate formal apparatus that usually comes with it.

What is new in the fourth edition?

Whenever possible, graphs, tables and information in general were updated. Many explanations have been improved, case studies brought up to date or replaced, and new exercises added.

Identifying equibria and exploring how these are affected by shocks and policy measures remains a key task of undergraduate macroeconomics. But recent crises triggered renewed interest in the conditions under which there may be different equilibria, good and bad ones, and in the factors that can cause prolonged deviations from existing equilibria. New topics and concepts that document this shifting emphasis are:

  • The macroeconomics of financial and debt crises This edition was prepared while there was still substantial fallout from this millennium's first global financial crisis, which had morphed into a sovereign debt crisis in most of Europe. In an effort to answer some of the key questions posed by these developments, coverage of the financial crisis has been increased and a closer look at debt crises is being offered. This is done with new case studies that make crisis economics a reoccurring theme throughout the book, and by adding new topics and putting greater emphasis on existing ones that have relevance for understanding the causes, mechanisms and policy options of major economic crises.
  • Bubbles and self-fulfilling prophecy These concepts help understand why prices, of assets and currencies in particular, may move even when this does not appear warranted by changes in fundamental market data.
  • Market psychology and risk premiums These open the way for discussions of mood swings and panic in the financial industry and how this affects the economy.
  • Multiple equilibria Their presence may cause shocks to trigger a permanent shift of economic conditions from some initial equilibrium to a new one.
  • Liquidity traps These define conditions under which conventional monetary policy does not work and unorthodox policy measures or mixtures are needed.
  • Multiple interest rates The distinction between short-run interest rates in the money market and long-run interest rates in the capital market is essential for understanding how quantitative easing works and fits into the workhorse models of undergraduate macroeconomics. Adding a third interest rate, for government bonds, permits discussions of debt crises and austerity packages.

Learning features

The book has a user-friendly design, featuring margin notes and definitions that emphasize important concepts. Exercises geared towards each chapter's central ideas consolidate the acquired knowledge. An extensive and innovative use of graphs facilitates access and enhances learning success. Every chapter contains one or more Case Studies that apply core concepts to recent or historic experiences in Europe and in other parts of the world. And all chapters feature links to elaborate online material that includes interactive graphical versions of the book's key models, guided exercises, an interactive road map, self-grading online tests, macroeconomic data, and much more. Suitable parts of this online material have been adapted for use on smart phones, with easy access provided by QR codes.

What courses does the book accommodate?

The organization of the book gives instructors various options:

  • Primarily, the text is designed for courses in undergraduate or intermediate macroeconomics that on the one hand insist on providing a sound theoretical foundation, but on the other also want to make a point of emphasizing applications in the form of Case Studies or even, if so desired, elementary statistical work.
  • The book's first half can also be used for a self-contained short course in macroeconomics whenever time does not permit working through a voluminous 600-900-page macroeconomics text which has become the standard.
  • Also, the book readily accommodates courses in Economic policy and Applied macroeconomics. Such courses may be organized around an appropriate selection from the several dozen Case Studies and empirical applications. As deemed necessary, students can be referred to the required theory tools in the same textbook.
  • Finally, the book accommodates European studies courses that can be organized around the applied topics discussed in Chapters 12-15. Here also, should it be necessary to freshen up or expand previously acquired theoretical knowledge, such material is readily available in the same textbook.


Ideally, students should approach this book with a Principles of economics course under their belt. The mathematical requirements are mild: anything close to the most basic mathematics training in high school should do. Most of the formal manipulations are optional and either shown in margin notes or in separate sections that supplement graphical arguments.

I am confident, though, that the book can also be used successfully if a principles course is missing and algebraic manipulations are avoided altogether. Dozens of Case Studies, some brief, some elaborate, provide ample ammunition for keeping up motivation, and the big payoff waits in the later chapters of the book.

Finally, and though it may sound frivolous: I believe that the book is even suited for self-study. The acquired knowledge will definitely be more fragile and lack depth compared with what can be achieved under the guidance of an experienced instructor. But it should provide an up-to-date first foundation for informed discussion of today's national and global macroeconomic issues.


This brings me to the people I want to thank for their contributions to whatever merits this text may have. In the very first place, these are my students, who amaze me time and again. Most of all, teaching teaches the teacher. Students' questions and curiosity constantly force me to refine explanations, and in the process very often make me understand things better myself.

It has been a joy to work with the professionals at Pearson Education, to whom I owe a big 'thank you'. They helped and guided me, with unmatched skill and great patience, accommodating last-minute ideas of mine, in preparing this thoroughly extended fourth edition, and brought the book into its final shape: Anita Atkinson (senior editor), Kate Brewin (commissioning editor), Robert Chaundy (copy editor), Linda Dhondy (proofreader), Gemma Doel (assistant editor).

This text would not even be close to what it is without the talents and the enthusiasm of the people working with me at the University of St. Gallen's Institute of Economics. Larissa Zierow played a key role in the preparation of this new edition. She updated graphs, tables and other empirical information, and suggested numerous improvements. In the course of joint teaching ventures based on this textbook, Björn Griesbach and Giulia Mennillo offered criticism and many constructive suggestions that improved this edition. They also accepted the responsibility for proofreading along with Iskra Pavlova, Lennart Scherp and Anna Zimmermann. I am deeply indebted to all of them.

I have also benefitted from the reviews commissioned by Pearson Education. Both those that offered applause and encouragement, and those that were more reserved, helped shape the book into a better teaching tool.

The mere writing of a textbook may mostly happen at the desk. But the enthusiasm, the creativity and the discipline that are essential for such a project come from beyond office doors. In this respect I owe much more to my family than they can possibly know.

Copyright 2013, Manfred Gärtner. All rights reserved.