States, this is the Federal Reserve. A nation's legislative body determines fiscal policy, which involves

government spending and taxes. For the United States, this is the Congress and the executive branch, which

originates the federal budget. These are the government's main tools. Americans tend to expect that

government can fix whatever economic problems we encounter, but to what extent is that expectation

realistic? These are just some of the issues that we will explore in the macroeconomic chapters of this book.

1.3 How Economists Use Theories and Models to Understand Economic Issues

LEARNING OBJECTIVES

By the end of this section, you will be able to:

•

Interpret a circular flow diagram

• Explain the importance of economic theories and models

• Describe goods and services markets and labor markets

FIGURE 1.6 John Maynard Keynes One of the most influential economists in modern times was John Maynard
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