Foundations of Economics

Cover......Page 1
Title......Page 7
Copyright......Page 8
Contents......Page 9
  Chapter Checklist......Page 41
   Economics Defined......Page 42
   What, How, and For Whom?......Page 43
   Can the Pursuit of Self-Interest Be in the Social Interest?......Page 44
   Checkpoint 1.1......Page 47
   Cost: What You Must Give Up......Page 48
   Rational Choice......Page 49
   How Much? Choosing at the Margin......Page 50
   Choices Respond to Incentives......Page 51
   Economics as Social Science......Page 52
   Economics as Policy Tool......Page 54
   Checkpoint 1.2......Page 56
  Chapter Summary......Page 57
  Chapter Checkpoint......Page 58
   Basic Idea......Page 61
   Interpreting Data Graphs......Page 62
   Interpreting Graphs Used in Economic Models......Page 64
   The Slope of a Relationship......Page 67
   Relationships Among More Than Two Variables......Page 68
   Apendix Checkpoint......Page 70
  Eye on the Past: Adam Smith and the Birth of Economics as a Social Science......Page 53
  Eye on the Benefit and Cost of School: Did You Make the Right Decision?......Page 55
  Chapter Checklist......Page 71
   What Do We Produce?......Page 72
  Eye on the Past: Changes in What We Produce......Page 74
   For Whom Do We Produce?......Page 77
   Checkpoint 2.1......Page 78
   The Economies......Page 79
   What in the Global Economy?......Page 80
   For Whom in the Global Economy?......Page 82
  Eye on Your Life: The U.S. and Global Economies in Your Life......Page 85
   Real Flows and Money Flows......Page 86
   Governments......Page 88
   Governments in the Circular Flow......Page 89
  Eye on the Past: Growing Government......Page 90
  Eye on the Global Economy: The Ups and Downs in International Trade......Page 92
  Chapter Summary......Page 93
  Chapter Checkpoint......Page 94
  Eye on the U.S. Economy: What We Produce......Page 73
  Eye on the U.S. Economy: Changes in How We Produce in the Information Economy ......Page 76
  Eye on the Dreamliner: Who Makes the Dreamliner?......Page 81
  Eye on the Global Economy: Differences in How We Produce......Page 83
  Chapter Checklist......Page 97
   Production Possibilities Frontier......Page 98
   Checkpoint 3.1......Page 103
   The Opportunity Cost of a Cell Phone......Page 104
   Opportunity Cost Is a Ratio......Page 105
  Eye on the Environment: Is Wind Power Free?......Page 106
   Checkpoint 3.2......Page 107
  3.3 Economic Growth......Page 108
  Eye on the Global Economy: Hong Kong’s Rapid Economic Growth......Page 110
  Eye on the U.S. Economy: No One Knows How to Make a Pencil......Page 111
   Comparative Advantage: An Example......Page 112
  Eye on Your Life: Your Comparative Advantage......Page 114
   Checkpoint 3.4......Page 116
  Chapter Summary......Page 117
  Chapter Checkpoint......Page 118
  Eye on Your Life: Your Production Possibilities Frontier......Page 102
  Eye on the U.S. Economy: Expanding Our Production Possibilities......Page 109
  Chapter Checklist......Page 121
  Competitive Markets......Page 122
   Demand Schedule and Demand Curve......Page 123
   Individual Demand and Market Demand......Page 125
   Changes in Demand......Page 126
   Change in Quantity Demanded Versus Change in Demand......Page 128
   Checkpoint 4.1......Page 129
   Supply Schedule and Supply Curve......Page 130
   Individual Supply and Market Supply......Page 132
   Changes in Supply......Page 133
   Change in Quantity Supplied Versus Change in Supply......Page 135
   Checkpoint 4.2......Page 137
   Price: A Market’s Automatic Regulator......Page 138
   Predicting Price Changes: Three Questions......Page 139
   Effects of Changes in Demand......Page 140
   Effects of Changes in Supply......Page 142
   Effects of Changes in Both Demand and Supply......Page 144
   Checkpoint 4.3......Page 146
  Chapter Summary......Page 147
  Chapter Checkpoint......Page 148
  Eye on Your Life: Understanding and Using Demand and Supply......Page 136
  Eye on Tuition: Why Does Tuition Keep Rising?......Page 141
  Eye on the Global Economy: The Market for Solar Panels......Page 143
  Chapter Checklist......Page 151
   Percentage Change in Price......Page 152
   Comparing the Percentage Changes in Price and Quantity......Page 153
   Influences on the Price Elasticity of Demand......Page 154
   Computing the Price Elasticity of Demand......Page 156
   Interpreting the Price Elasticity of Demand Number......Page 157
   Elasticity Along a Linear Demand Curve......Page 158
   Total Revenue and the Price Elasticity of Demand......Page 160
   Applications of the Price Elasticity of Demand......Page 162
   Checkpoint 5.1......Page 163
   Influences on the Price Elasticity of Supply......Page 164
   Computing the Price Elasticity of Supply......Page 166
   Checkpoint 5.2......Page 168
   Cross Elasticity of Demand......Page 169
   Income Elasticity of Demand......Page 170
   Checkpoint 5.3......Page 172
  Chapter Summary......Page 173
  Chapter Checkpoint......Page 174
  Eye on the Global Economy: Price Elasticities of Demand......Page 159
  Eye on the Price of Gasoline: What Do You Do When the Price of Gasoline Rises?......Page 161
  Eye on Your Life: Your Price Elasticities of Demand......Page 171
  Chapter Checklist......Page 177
   Resource Allocation Methods......Page 178
   Using Resources Efficiently......Page 181
   Checkpoint 6.1......Page 185
   Demand and Marginal Benefit......Page 186
   Consumer Surplus......Page 187
   Checkpoint 6.2......Page 188
   Supply and Marginal Cost......Page 189
   Producer Surplus......Page 190
   Checkpoint 6.3......Page 191
   Marginal Benefit Equals Marginal Cost......Page 192
   The Invisible Hand......Page 193
   Market Failure......Page 195
   Sources of Market Failure......Page 196
   Alternatives to the Market......Page 197
   Checkpoint 6.4......Page 198
   It’s Not Fair If the Result Isn’t Fair......Page 199
  Eye on Your Life: Allocation Methods, Efficiency, and Fairness......Page 201
   Checkpoint 6.5......Page 202
  Chapter Summary......Page 203
  Chapter Checkpoint......Page 204
  Eye on the U.S. Economy: The Invisible Hand and e-Commerce......Page 194
  Eye on Price Gouging: Should Price Gouging Be Illegal?......Page 200
  Chapter Checklist......Page 207
   A Rent Ceiling......Page 208
   Are Rent Ceilings Efficient?......Page 211
   If Rent Ceilings Are So Bad, Why Do We Have Them?......Page 212
   Checkpoint 7.1......Page 213
  7.2 Price Floors......Page 214
   The Minimum Wage......Page 215
   Is the Minimum Wage Efficient?......Page 218
  Eye on Price Regulation: Can the President Repeal the Laws of Supply and Demand?......Page 219
   Checkpoint 7.2......Page 220
   Price Support: An Illustration......Page 221
   Checkpoint 7.3......Page 224
  Chapter Summary......Page 225
  Chapter Checkpoint......Page 226
  Eye on the U.S. Economy: The Federal Minimum Wage......Page 217
  Eye on Your Life: Price Ceilings and Price Floors......Page 223
  Chapter Checklist......Page 229
   Tax Incidence......Page 230
   Taxes and Efficiency......Page 231
   Incidence, Inefficiency, and Elasticity......Page 232
   Incidence, Inefficiency, and the Elasticity of Demand......Page 233
   Incidence, Inefficiency, and the Elasticity of Supply......Page 234
   Checkpoint 8.1......Page 235
  Eye on the U.S. Economy: Taxes in the United States Today......Page 236
   The Effects of the Income Tax......Page 238
   The Social Security Tax......Page 242
   Checkpoint 8.2......Page 245
   The Ability-to-Pay Principle......Page 246
   The Marriage Tax Problem......Page 247
   Checkpoint 8.3......Page 248
  Chapter Summary......Page 249
  Chapter Checkpoint......Page 250
  Eye on Congres: Does Congress Decide Who Pays the Taxes?......Page 240
  Eye on Your Life: Tax Freedom Day......Page 244
  Chapter Checklist......Page 253
   What Drives International Trade?......Page 254
   Why the United States Imports T-Shirts......Page 256
   Why the United States Exports Airplanes......Page 257
   Checkpoint 9.1......Page 258
  Eye on Globalization: Who Wins and Who Loses from Globalization?......Page 259
   Gains and Losses from Imports......Page 260
   Gains and Losses from Exports......Page 261
   Checkpoint 9.2......Page 262
  Eye on the Past: The History of U.S. Tariffs......Page 263
   Import Quotas......Page 267
   Export Subsidies......Page 269
   Checkpoint 9.3......Page 270
   Three Traditional Arguments for Protection......Page 271
   Four Newer Arguments for Protection......Page 273
   Why Is International Trade Restricted?......Page 274
   Checkpoint 9.4......Page 276
  Chapter Summary......Page 277
  Chapter Checkpoint......Page 278
  Eye on the U.S. Economy: U.S. Exports and Imports......Page 255
  Eye on Your Life: International Trade......Page 275
  Chapter Checklist......Page 281
  Positive Production Externalities......Page 282
  Positive Consumption Externalities......Page 283
   Private Costs and Social Costs......Page 284
   Production and Pollution: How Much?......Page 286
   Establish Property Rights......Page 287
   Tax or Cap and Price Pollution......Page 289
   Checkpoint 10.1......Page 293
   Private Benefits and Social Benefits......Page 294
   Government Actions in the Face of External Benefits......Page 296
   Checkpoint 10.2......Page 300
  Chapter Summary......Page 301
  Chapter Checkpoint......Page 302
  Eye on the U.S. Economy: U.S. Air Pollution Trends......Page 291
  Eye on Climate Change: How Can We Limit Climate Change?......Page 292
  Eye on Your Life: Externalities in Your Life......Page 299
  Chapter Checklist......Page 305
   A Fourfold Classification......Page 306
  Eye on the Past: Is a Lighthouse a Public Good?......Page 308
   The Free-Rider Problem......Page 309
   The Marginal Cost of a Public Good......Page 310
   Private Provision: Underproduction......Page 312
   Public Provision: Efficient Production......Page 313
   Public Provision: Overproduction......Page 314
   Why Government Is Large and Growing......Page 315
   Checkpoint 11.2......Page 317
  Eye on the Past: The Commons of England’s Middle Ages......Page 318
   Inefficient Use of a Common Resource......Page 319
   Using the Commons Efficiently......Page 322
   Checkpoint 11.3......Page 326
  Chapter Summary......Page 327
  Chapter Checkpoint......Page 328
  Eye on Your Life: A Student’s Free-Rider Problem......Page 316
  Eye on the Global Economy: The North Atlantic Cod Tragedy of the Commons......Page 320
  Eye on the Global Economy: ITQs Work......Page 325
  Chapter Checklist......Page 331
   A Market for Used Cars with a Lemons Problem......Page 332
  Eye on the Market for Used Cars: How Do You Avoid Buying a Lemon?......Page 336
   Checkpoint 12.1......Page 338
  Eye on the U.S. Economy: Insurance in the United States......Page 339
   Asymmetric Information in Insurance......Page 340
   Separating Equilibrium with Screening......Page 342
   Checkpoint 12.2......Page 344
   Economic Problems in Health-Care Markets......Page 345
   Health-Care Systems in Other Countries......Page 346
  Eye on Your Life: Signaling Your Ability ......Page 349
   Checkpoint 12.3......Page 350
  Chapter Summary......Page 351
  Chapter Checkpoint......Page 352
  Eye on the U.S. Economy: Health Care in the United States: A Snapshot......Page 347
  Eye on the Global Economy: Health-Care Expenditures and Health Outcomes......Page 348
  Chapter Checklist......Page 355
   The Budget Line......Page 356
   A Change in the Budget......Page 357
   Changes in Prices......Page 358
   Prices and the Slope of the Budget Line......Page 359
   Checkpoint 13.1......Page 361
   Marginal Utility......Page 362
   Maximizing Total Utility......Page 364
   Finding an Individual Demand Curve......Page 366
   Checkpoint 13.2......Page 368
   The Paradox of Value......Page 369
  Eye on Your Life: Do You Maximize Your Utility?......Page 372
  Chapter Summary......Page 373
  Chapter Checkpoint......Page 374
   An Indifference Curve......Page 377
   Marginal Rate of Substitution......Page 378
   Consumer Equilibrium......Page 379
   Deriving the Demand Curve......Page 380
  Apendix Checkpoint......Page 382
  Eye on the U.S. Economy: Relative Prices on the Move......Page 360
  Eye on the Past: Jeremy Bentham, William Stanley Jevons, and the Birth of Utility......Page 363
  Eye on Song Downloads: How Much Would You Pay for a Song?......Page 370
  Chapter Checklist......Page 383
   Opportunity Cost......Page 384
   Economic Profit......Page 385
   Checkpoint 14.1......Page 387
  Short Run and Long Run......Page 388
   Total Product......Page 389
   Marginal Product......Page 390
   Average Product......Page 392
   Checkpoint 14.2......Page 394
   Total Cost......Page 395
   Marginal Cost......Page 396
   Average Cost......Page 397
   Why the Average Total Cost Curve Is U-Shaped......Page 399
   Shifts in the Cost Curves......Page 400
   Checkpoint 14.3......Page 402
   Plant Size and Cost......Page 403
   The Long-Run Average Cost Curve......Page 404
   Checkpoint 14.4......Page 406
  Chapter Summary......Page 407
  Chapter Checkpoint......Page 408
  Eye on Your Life: Your Average and Marginal Grades......Page 393
  Eye on Retailers’ Costs: Which Store Has the Lower Costs: Wal-Mart or 7-Eleven?......Page 405
  Chapter Checklist......Page 411
  Other Market Types......Page 412
   Revenue Concepts......Page 413
   Profit-Maximizing Output......Page 414
   Marginal Analysis and the Supply Decision......Page 416
   Temporary Shutdown Decision......Page 417
   The Firm’s Short-Run Supply Curve......Page 418
   Checkpoint 15.1......Page 420
   Market Supply in the Short Run......Page 421
   Short-Run Equilibrium in Normal Times......Page 422
   Short-Run Equilibrium in Good Times......Page 423
   Short-Run Equilibrium in Bad Times......Page 424
   Checkpoint 15.2......Page 425
  15.3 Output, Price, and Profit in the Long Run......Page 426
   Entry and Exit......Page 427
   The Effects of Exit......Page 428
   Technological Change......Page 429
   Is Perfect Competition Efficient?......Page 432
  Eye on Your Life: The Perfect Competition that You Encounter......Page 433
   Checkpoint 15.3......Page 434
  Chapter Summary......Page 435
  Chapter Checkpoint......Page 436
  Eye on Record Stores: Where Have All the Record Stores Gone?......Page 430
  Chapter Checklist......Page 439
   How Monopoly Arises......Page 440
   Monopoly Price-Setting Strategies......Page 442
   Checkpoint 16.1......Page 443
   Price and Marginal Revenue......Page 444
   Marginal Revenue and Elasticity......Page 445
   Output and Price Decision......Page 446
   Checkpoint 16.2......Page 448
   Output and Price......Page 449
   Is Monopoly Efficient?......Page 450
   Rent Seeking......Page 451
   Checkpoint 16.3......Page 453
   Price Discrimination and Consumer Surplus......Page 454
   Profiting by Price Discriminating......Page 455
   Perfect Price Discrimination......Page 456
  Eye on the U.S. Economy: Airline Price Discrimination......Page 458
   Checkpoint 16.4......Page 459
   Efficient Regulation of a Natural Monopoly......Page 460
   Second-Best Regulation of a Natural Monopoly......Page 461
   Checkpoint 16.5......Page 466
  Chapter Summary......Page 467
  Chapter Checkpoint......Page 468
  Eye on Microsoft: Are Microsoft’s Prices Too High?......Page 463
  Eye on Your Life: Monopoly in Your Everyday Life......Page 464
  Chapter Checklist......Page 471
   Competing on Quality, Price, and Marketing......Page 472
   Identifying Monopolistic Competition......Page 473
   Checkpoint 17.1......Page 477
   The Firm’s Profit-Maximizing Decision......Page 478
   Profit Maximizing Might Be Loss Minimizing......Page 479
   Long Run: Zero Economic Profit......Page 480
   Monopolistic Competition and Perfect Competition......Page 481
   Is Monopolistic Competition Efficient?......Page 482
   Checkpoint 17.2......Page 483
   Product Development......Page 484
  Eye on Cell Phones: Which Cell Phone? ......Page 485
  Eye on Your Life: Some Selling Costs You Pay......Page 488
   Efficiency of Advertising and Brand Names......Page 489
   Checkpoint 17.3......Page 490
  Chapter Summary......Page 491
  Chapter Checkpoint......Page 492
  Eye on the U.S. Economy: Examples of Monopolistic Competition......Page 476
  Chapter Checklist......Page 495
   Barriers to Entry......Page 496
  Eye on the U.S. Economy: Examples of Oligopoly......Page 498
   Checkpoint 18.1......Page 499
   Monopoly Outcome......Page 500
   Other Possible Cartel Breakdowns......Page 501
   The Oligopoly Cartel Dilemma......Page 502
   Checkpoint 18.2......Page 504
   The Prisoners’ Dilemma......Page 505
   The Payoff Matrix......Page 507
   Advertising and Research Games in Oligopoly......Page 508
  Eye on Your Life: A Game You Might Play......Page 510
  Eye on the Cell-Phone Oligopoly: Is Two Too Few?......Page 511
   Checkpoint 18.3......Page 512
   Three Antitrust Policy Debates......Page 513
   Recent Antitrust Showcase: The United States Versus Microsoft......Page 515
   Merger Rules......Page 516
   Checkpoint 18.4......Page 518
  Chapter Summary......Page 519
  Chapter Checkpoint......Page 520
  Eye on the Global Economy: The OPEC Global Oil Cartel......Page 503
  Eye on the U.S. Economy: No Cell-Phone Service Merger......Page 517
  Chapter Checklist......Page 523
  The Anatomy of Factor Markets......Page 524
   Value of Marginal Product......Page 525
   A Firm’s Demand for Labor......Page 526
   A Firm’s Demand for Labor Curve......Page 527
   Changes in the Demand for Labor......Page 528
   Checkpoint 19.1......Page 529
   The Supply of Labor......Page 530
   Influences on the Supply of Labor......Page 531
   Competitive Labor Market Equilibrium......Page 532
   Labor Unions......Page 534
   Checkpoint 19.2......Page 536
   Capital Markets......Page 537
   Land Markets......Page 538
  Eye on Your Life: Job Choice and Income Prospects ......Page 539
   Checkpoint 19.3......Page 542
  Chapter Summary......Page 543
  Chapter Checkpoint......Page 544
  Eye on the Coach: Why Is a Coach Worth $5.5 Million?......Page 533
  Eye on the Global Economy: Oil and Metal Prices ......Page 541
  Chapter Checklist......Page 547
  20.1 Measuring Economic Inequality......Page 548
   Lorenz Curves......Page 549
   Economic Mobility......Page 550
   Poverty......Page 553
   Checkpoint 20.1......Page 555
   Human Capital......Page 556
  Eye on the U.S. Economy: Sex and Race Earnings Differences......Page 559
   Personal and Family Characteristics......Page 560
   Checkpoint 20.2......Page 561
   How Governments Redistribute Income......Page 562
   The Scale of Income Redistribution......Page 563
   Why We Redistribute Income......Page 565
   The Major Welfare Challenge......Page 566
   Checkpoint 20.3......Page 568
  Chapter Summary......Page 569
  Chapter Checkpoint......Page 570
  Eye on the Global Economy: Global Inequality......Page 551
  Eye on Inequality: Who Are the Rich and the Poor?......Page 552
  Eye on the U.S. Economy: Does Education Pay?......Page 558
  Eye on Your Life: What You Pay and Gain Through Redistribution......Page 567
  Chapter Checklist......Page 573
   GDP Defined......Page 574
   Circular Flows in the U.S. Economy......Page 575
   Expenditure Equals Income......Page 576
   Checkpoint 21.1......Page 578
   The Expenditure Approach......Page 579
   The Income Approach......Page 581
   GDP and Related Measures of Production and Income......Page 583
   Calculating Real GDP......Page 584
   Using the Real GDP Numbers......Page 585
   Checkpoint 21.2......Page 586
   The Standard of Living Over Time......Page 587
   Tracking the Course of the Business Cycle......Page 588
  Eye on the Booms and Busts: How Do We Track the Booms and Busts of our Economy?......Page 590
   Goods and Services Omitted from GDP......Page 591
  Eye on Your Life: Making GDP Personal......Page 592
   Checkpoint 21.3......Page 594
  Chapter Summary......Page 595
  Chapter Checkpoint......Page 596
   Value Production in the Prices of Adjacent Years......Page 599
  Apendix Checkpoint......Page 602
  Eye on the U.S. Economy: Is a Computer Program an Intermediate Good or a Final Good?......Page 580
  Eye on the Global Economy: Which Country Has the Highest Standard of Living?......Page 593
  Chapter Checklist......Page 603
   Population Survey Criteria......Page 604
   Two Main Labor Market Indicators......Page 605
   Alternative Measures of Unemployment......Page 606
   Checkpoint 22.1......Page 608
   Unemployment Rate......Page 609
  Eye on the Global Economy: Unemployment Around the World......Page 610
   Alternative Measures of Unemployment......Page 612
   A Closer Look at Part-Time Employment......Page 613
   Checkpoint 22.2......Page 614
   Structural Unemployment......Page 615
  Eye on the Unemployed: How Long Does it Take to Find a Job?......Page 616
   Unemployment and Real GDP......Page 617
   Checkpoint 22.3......Page 620
  Chapter Summary......Page 621
  Chapter Checkpoint......Page 622
  Eye on the U.S. Economy: The Current Population Survey......Page 607
  Eye on the Global Economy: Women in the Labor Force......Page 611
  Eye on Your Life: Your Labor Market Status and Activity......Page 618
  Chapter Checklist......Page 625
   The CPI Market Basket......Page 626
   The Monthly Price Survey......Page 627
   Calculating the CPI......Page 628
   Measuring Inflation and Deflation......Page 629
   Checkpoint 23.1......Page 631
   Sources of Bias in the CPI......Page 632
   The Magnitude of the Bias......Page 633
   Two Consequences of the CPI Bias......Page 634
   Alternative Measures of the Price Level and Inflation Rate......Page 635
   Checkpoint 23.2......Page 637
   Dollars and Cents at Different Dates......Page 638
  Eye on the U.S. Economy: Deflating the GDP Balloon......Page 639
   Nominal Wage Rate and Real Wage Rate......Page 640
  Eye on Box Office Hits: Which Movie Really Was the Biggest Box Office Hit?......Page 642
   Checkpoint 23.3......Page 644
  Chapter Summary......Page 645
  Chapter Checkpoint......Page 646
  Eye on the Past: 700 Years of Inflation and Deflation......Page 630
  Eye on the Past: The Nominal and Real Wage Rates of Presidents of the United States......Page 641
  Eye on Your Life: A Student’s CPI ......Page 643
  Chapter Checklist......Page 649
  The Three Main Schools of Thought......Page 650
  Today’s Consensus......Page 651
  Eye on the U.S. Economy: The Lucas Wedge and the Okun Gap......Page 652
  Eye on the Global Economy: Potential GDP in the United States and European Union......Page 653
   The Production Function......Page 654
   The Labor Market......Page 655
   Checkpoint 24.1......Page 661
  Eye on the Past: Average Unemployment Rates over Six Decades......Page 662
   Job Search......Page 663
  Eye on the Global Economy: Unemployment Benefits and the Natural Unemployment Rate......Page 664
   Checkpoint 24.2......Page 668
  Chapter Summary......Page 669
  Chapter Checkpoint......Page 670
  Eye on U.S. Potential GDP: Why Do Americans Earn More and Produce More Than Europeans?......Page 660
  Eye on Your Life: Natural Unemployment......Page 667
  Chapter Checklist......Page 673
   Calculating Growth Rates......Page 674
   The Magic of Sustained Growth......Page 675
   Checkpoint 25.1......Page 677
   Saving and Investment in Physical Capital......Page 678
   Expansion of Human Capital and Discovery of New Technologies......Page 680
   Combined Influences Bring Labor Productivity Growth......Page 682
   Checkpoint 25.2......Page 685
   New Growth Theory......Page 686
   Checkpoint 25.3......Page 689
   Preconditions for Economic Growth......Page 690
   Policies to Achieve Faster Growth......Page 691
   How Much Difference Can Policy Make?......Page 692
   Checkpoint 25.4......Page 694
  Chapter Summary......Page 695
  Chapter Checkpoint......Page 696
  Eye on the Past: How Fast Has Real GDP per Person Grown?......Page 676
  Eye on the U.S. Economy: U.S. Labor Productivity Growth Since 1960......Page 684
  Eye on Your Life: How You Influence and Are Influenced by Economic Growth ......Page 688
  Eye on Rich and Poor Nations: Why Are Some Nations Rich and Others Poor? ......Page 693
  Chapter Checklist......Page 699
   Some Finance Definitions......Page 700
   Markets for Financial Capital......Page 701
   Financial Institutions......Page 703
   Interest Rates and Asset Prices......Page 704
   Checkpoint 26.1......Page 705
   The Demand for Loanable Funds......Page 706
   The Supply of Loanable Funds......Page 709
   Equilibrium in the Loanable Funds Market......Page 712
   Changes in Demand and Supply......Page 713
   Checkpoint 26.2......Page 715
   A Government Budget Surplus......Page 716
   A Government Budget Deficit......Page 717
   Checkpoint 26.3......Page 720
  Chapter Summary......Page 721
  Chapter Checkpoint......Page 722
  Eye on the U.S. Economy: The Loanable Funds Market in a Financial Crisis......Page 714
  Eye on Your Life: Your Participation in the Loanable Funds Market ......Page 718
  Eye on Financial Markets: Why Have Interest Rates Been So Low?......Page 719
  Chapter Checklist......Page 725
   The Functions of Money......Page 726
   Official Measures of Money: M1 and M2......Page 728
   Checks, Credit Cards, Debit Cards, and E-Checks......Page 729
   An Embryonic New Money: E-Cash......Page 730
   Checkpoint 27.1......Page 731
   Commercial Banks......Page 732
  Eye on the U.S. Economy: Commercial Banks Under Stress in the Financial Crisis ......Page 735
   Checkpoint 27.2......Page 736
   The Structure of the Federal Reserve......Page 737
   The Fed’s Policy Tools......Page 738
   How the Fed’s Policy Tools Work......Page 739
   Checkpoint 27.3......Page 740
  Eye on Your Life: Money and Your Role in Its Creation......Page 741
   How Open Market Operations Change the Monetary Base......Page 743
   The Multiplier Effect of an Open Market Operation......Page 746
   The Money Multiplier......Page 747
   Checkpoint 27.4......Page 750
  Chapter Summary......Page 751
  Chapter Checkpoint......Page 752
  Eye on the Past: The “Invention” of Banking......Page 733
  Eye on Creating Money: How Does the Fed Create Money and Regulate Its Quantity?......Page 748
  Chapter Checklist......Page 755
  Real and Money Interactions and Policy......Page 756
   The Demand for Money......Page 757
   Changes in the Demand for Money......Page 759
   The Nominal Interest Rate......Page 760
  Eye on the U.S. Economy: Credit Cards and Money......Page 762
   Checkpoint 28.1......Page 764
   The Money Market in the Long Run......Page 765
   A Change in the Quantity of Money......Page 767
   The Quantity Theory of Money......Page 768
   Inflation and the Quantity Theory of Money......Page 770
  Eye on the Past: Hyperinflation in Germany in the 1920s......Page 772
   Checkpoint 28.2......Page 774
   Tax Costs......Page 775
   Confusion Costs......Page 776
   How Big Is the Cost of Inflation?......Page 777
   Checkpoint 28.3......Page 778
  Chapter Summary......Page 779
  Chapter Checkpoint......Page 780
  Eye on Your Life: Money Holding and Fed Watching......Page 763
  Eye on Inflation: What Causes Inflation?......Page 773
  Chapter Checklist......Page 783
   Aggregate Supply Basics......Page 784
   Changes in Aggregate Supply......Page 787
   Checkpoint 29.1......Page 789
   Aggregate Demand Basics......Page 790
   Changes in Aggregate Demand......Page 792
   The Aggregate Demand Multiplier......Page 794
   Checkpoint 29.2......Page 795
   Macroeconomic Equilibrium......Page 796
   Three Types of Macroeconomic Equilibrium......Page 797
  Eye on the U.S. Economy: U.S. Economic Growth, Inflation, and the Business Cycle ......Page 798
   The Business Cycle......Page 799
   Inflation Cycles......Page 800
  Eye on Your Life: Using the AS-AD Model......Page 802
   Checkpoint 29.3......Page 804
  Chapter Summary......Page 805
  Chapter Checkpoint......Page 806
  Eye on the Business Cycle: Why Did the U.S. Economy Go into Recession in 2008? ......Page 803
  Chapter Checklist......Page 809
   The Consumption Function......Page 810
  Eye on the U.S. Economy: The U.S. Consumption Function......Page 814
   Checkpoint 30.1......Page 815
   Aggregate Planned Expenditure and Real GDP......Page 816
   Equilibrium Expenditure......Page 818
   Convergence to Equilibrium......Page 819
   Checkpoint 30.2......Page 821
   The Basic Idea of the Multiplier......Page 822
   The Multiplier and the MPC......Page 823
   The Multiplier, Imports, and Income Taxes......Page 824
  Eye on the Multiplier: How Big Is the Government Expenditure Multiplier?......Page 826
   Checkpoint 30.3......Page 827
   Deriving the AD Curve from Equilibrium Expenditure......Page 828
   Checkpoint 30.4......Page 830
  Chapter Summary......Page 831
  Chapter Checkpoint......Page 832
  Eye on the Past: Say’s Law and Keynes’ Principle of Effective Demand......Page 820
  Eye on Your Life: Looking for Multipliers......Page 825
  Chapter Checklist......Page 835
  31.1 The Short-Run Phillips Curve......Page 836
   Aggregate Supply and the Short-Run Phillips Curve......Page 837
  Eye on the Global Economy: Inflation and Unemployment......Page 839
  Eye on the Past: The U.S. Phillips Curve......Page 840
   Checkpoint 31.1......Page 841
   The Long-Run Phillips Curve......Page 842
   Expected Inflation......Page 843
   The Natural Rate Hypothesis......Page 844
  Eye on the Past: A Live Test of the Natural Rate Hypothesis......Page 845
   Have Changes in the Natural Unemployment Rate Changed the Tradeoff?......Page 846
   Checkpoint 31.2......Page 848
   Influencing the Expected Inflation Rate......Page 849
   Targeting the Unemployment Rate......Page 850
   Checkpoint 31.3......Page 852
  Chapter Summary......Page 853
  Chapter Checkpoint......Page 854
  Eye on the Tradeof: Can We Have Low Unemployment and Low Inflation?......Page 847
  Eye on Your Life: The Short-Run Tradeoff in Your Life......Page 851
  Chapter Checklist......Page 857
   Budget Balance and Debt......Page 858
   The Federal Budget in Fiscal 2014......Page 859
   A Social Security and Medicare Time Bomb......Page 860
  Eye on the Global Economy: The U.S. Budget in Global Perspective......Page 862
   Schools of Thought and Cracks in Today’s Consensus......Page 863
   Automatic Fiscal Policy......Page 864
  Eye on the U.S. Economy: The U.S. Structural and Cyclical Budget Balances......Page 865
   Discretionary Fiscal Policy......Page 866
   A Successful Fiscal Stimulus......Page 867
   Limitations of Discretionary Fiscal Policy......Page 868
   Checkpoint 32.2......Page 869
   Fiscal Policy, Employment, and Potential GDP......Page 870
   Fiscal Policy and Potential GDP: A Graphical Analysis......Page 872
   Taxes, Deficits, and Economic Growth......Page 873
   The Supply-Side Debate......Page 874
   Combined Demand-Side and Supply-Side Effects......Page 876
  Eye on Your Life: Your Views on Fiscal Policy and How Fiscal Policy Affects You......Page 877
   Checkpoint 32.3......Page 878
  Chapter Summary......Page 879
  Chapter Checkpoint......Page 880
  Eye on the Past: Federal Tax Revenues, Outlays, Deficits, and Debt......Page 861
  Eye on the Global Economy: Some Real-World Tax Wedges......Page 871
  Eye on Fiscal Stimulus: Can Fiscal Stimulus End a Recession?......Page 875
  Chapter Checklist......Page 883
   Monetary Policy Objectives......Page 884
   Operational “Stable Prices” Goal......Page 885
   The Federal Funds Rate......Page 886
   The Fed’s Decision-Making Strategy......Page 887
   Hitting the Federal Funds Rate Target......Page 889
   Restoring Financial Stability in a Financial Crisis......Page 890
   Checkpoint 33.1......Page 891
   Interest Rate Changes......Page 892
   Money and Bank Loans......Page 894
   Expenditure Plans......Page 895
   The Fed Fights Recession......Page 896
   The Fed Fights Inflation......Page 898
   A Final Reality Check......Page 900
   Checkpoint 33.2......Page 901
   Inflation Targeting Rule......Page 902
  Eye on the Global Economy: Inflation Targeting Around the World......Page 903
  Eye on Your Life: Your Views on Monetary Policy and How Monetary Policy Affects You......Page 905
   Checkpoint 33.3......Page 906
  Chapter Summary......Page 907
  Chapter Checkpoint......Page 908
  Eye on the U.S. Economy: The Fed’s Interest Rate Decisions and the Taylor Rule ......Page 888
  Eye on the Fed in a Crisis: Did the Fed Save Us From Another Great Depression?......Page 904
  Chapter Checklist......Page 911
   Balance of Payments Accounts......Page 912
   Borrowers and Lenders, Debtors and Creditors......Page 914
   Net Exports......Page 915
   Checkpoint 34.1......Page 918
  34.2 The Exchange Rate......Page 919
   The Law of Demand for Foreign Exchange......Page 920
   Changes in the Demand for Dollars......Page 921
   The Law of Supply of Foreign Exchange......Page 923
   Changes in the Supply of Dollars......Page 924
   Market Equilibrium......Page 926
   Purchasing Power Parity......Page 928
   Pegging the Exchange Rate......Page 930
   The People’s Bank of China in the Foreign Exchange Market......Page 931
   Checkpoint 34.2......Page 934
  Chapter Summary......Page 935
  Chapter Checkpoint......Page 936
  Eye on the U.S. Economy: The U.S. Balance of Payments......Page 913
  Eye on the Global Economy: Current Account Balances Around the World......Page 917
  Eye on the Dollar: Why Does Our Dollar Fluctuate?......Page 927
  Eye on the Global Economy: Purchasing Power Parity......Page 929
  Eye on Your Life: Your Foreign Exchange Transactions......Page 933
Glossary......Page 939
Index......Page 953
Credits......Page 975