Macroeconomic Theory and Policy

PART I
AN INTRODUCTION TO
MACROECONOMICS
ACTUAL AND POTENTIAL GNP:
FLUCTUATIONS AND GROWTH
The Development ofMacroeconomics, 4
Actual and Potential Output, 5
An Analytical Approach to Macroeconomics, 10
A REVIEW OF THE NATIONAL INCOME
AND PRODUCT ACCOUNTS 12
Some Principles Behind the Accounts, 14
The Circular Floic of Product and Income, 15
GNP on the Product Side, 17
GAT by Type ofIncome, and National Income, 20
The Disposition ofNational Income, 22
Summary of the GNP Identity, 24
The Government Sector in the Accounts, 26
GNP as a Welfare Measure, 30

3 INTRODUCTION TO INCOME DETERMINATION:
Contents THE MULTIPLIER 32
The Saving-Investment Balance, 34
Planned and Realized Investment, 34
The Tax, Consumption, and Saving Functions, 36
Determinatioti ofEquilibrium Income, 37
Derivation of the Expenditure Multiplier, 42
Conclusion to Part I, 48
PART II
NATIONAL INCOME DETERMINATION:
THE STATIC EQUILIBRIUM MODEL 51
DEMAND-SIDE EQUILIBRIUM: INCOME AND THE INTEREST RATE 53
Equilibrium Income and the Interest Rate
in the Product Market, 54
Equilibrium Income and the Interest Rate
in the Money Market, 60
Equilibrium in the Product and Money Markets, 66
Income and the Price Level on the Demand Side, 69
AN INTRODUCTION TO MONETARY
AND FISCAL POLICY 72
Fiscal Policy Effects on Demand, 74
Monetary Policy Effects on Demand, 84
The Interaction ofMonetary and Fiscal Policies, 89
EQUILIBRIUM OUTPUT AND THE
PRICE LEVEL: THE CLASSICAL CASE 94
The Simple Depression Model, 95
The Demandfor Labor, 97
The Supply ofLabor, 103
Equilibrium in the Labor Market, 106
The Classical Model, 107
OUTPUT AND THE PRICE LEVEL:
LABOR SUPPLY AND THE MONEY WAGE 113
Labor Supply as a Function of the Money Wage, 114
Equilibrium in the Labor Market, 116
The Aggregate Supply Curve, 117


Equilibrium in the Money Wage Model, 1 19 vii
Real Labor Income and Average Productivity, 122 Contents
The Effects ofMonetary and Fiscal Policy, 126
UNEMPLOYMENT AND WAGE RIGIDITY 133
Equilibrium Unemployment in the Real Wage
and Money Wage Models, 133
Wage Rigidity in the Aggregate Labor Market, 138
LocalWage Rigidities and Aggregate
Unemployment, 144
Summary: An Eclectic View of Unemployment, 146
EQUILIBRIUM IN THE BASIC STATIC MODEL 148
Labor Market Equilibrium and the Aggregate
Supply Function, 149
Monetary and Fiscal Policy in the Static Model, 155
Multipliers in the Static Model, 160
Conclusion to Part II, 166
PART III
SECTORAL DEMAND FUNCTIONS AND
EXTENSIONS OF THE BASIC MODEL 167
10 CONSUMPTION AND CONSUMER EXPENDITURE 169
Rackground: Cross Sections, Cycles,
and Trends, 170
Three Theories of the Consumption Function, 173
The FRR-MIT Model, 190
The Wealth Effect in the Static Model, 192
Conclusion: Some Implications for
Stabilization Policy, 196
11 INVESTMENT DEMAND 198
The Present Value Criterion for Investment, 199
The Marginal Efficiency of Investment, 203
Investment Demand and Output Growth, 208
The User Cost and Liquidity Effects, 214
Lags in Investment Demand, 217
Investment in the Static Model, 220
Stability and the Slope of the IS Curve, 222
Conclusion: Investment Demand and
Monetary and Fiscal Policy, 225

 THE DEMAND FOR MONEY 227
Contents , . . Tne Regressive Expectations Model, 228
TTie Portfolio Balance Approach, 235
T/ie Transactions Demandfor Money, 243
Money as a Consumer\'s and Producer\'s Good, 246
Empirical Estimates ofIncome and
Interest Elasticities, 249
13 THE SUPPLY OF MONEY 253
The Instruments ofMonetary Policy, 254
The Mechanism of Monetary Expansion, 256
The Determinants of the Money Supply, 258
Empirical Estimates of Interest Elasticity, 260
The Money Supply in the Static Model, 262
Conclusion: The Relevance of Interest Sensitivity
of the Money Supply, 265
14 MONETARY AND FISCAL POLICY
IN THE EXTENDED MODEL 267
The Static Model Extended, 268
The Effects ofFiscal Policy Changes, 278
The Effectiveness of Monetary and Fiscal Policy:
Monetarists and Fiscalists, 281
Tax Rate Changes and the Budget Deficit, 288
Fiscal Stimulus and Deficit Financing, 293
15 THE FOREIGN SECTOR AND
THE BALANCE OF PAYMENTS 297
The Current Account and Product Market
Equilibrium, 300
The Capital Account and Balance-of-Payments
Equilibriu?n, 303
Balance-of-Payments Adjustment and
the LM Curve, 308
Balance-of-Payments Adjustment Policy, 312
Exchange Rate Flexibility, 315
Conclusion to Part III: Toward More
Flexible Exchange Rates, 317
PART IV
GROWTH WITH FULL EMPLOYMENT:
AGGREGATE GROWTH MODELS

16 INFLATION, PRODUCTIVITY,

AND THE PHILLIPS CURVE
Inflation in the Static Model, 322
Wages, Prices, and Productivity, 327
The Wage-Price Guideposts, 332
The Relation ofWage Changes to Unemployment:
The Phillips Curve, 334
Empirical Estimates of the Phillips Curve
for the United States, 338
321
IX
Contents
Appendix to Chapter 16: THE USES OF LOGARITHMS 342
17 TREND GROWTH IN THE BASIC
STATIC MODEL 348
Assumptions Underlying Trend Growth, 350
Trend Growth of Output and Prices, 351
Trend Growth of the Money Supply, 353
Product Market Equilibrium and the Budget, 355
The Monetary-Fiscal Policy Mix Along Trend, 359
Fiscal Drag and the Full-Employment Surplus, 362
Public Debt with Trend Growth, 363
18 INTRODUCTION TO GROWTH MODELS
The Stylized Facts of Growth, 369
Basic Assumptions of One-Sector
Growth Models, 372
The Harrod-Domar Condition for
Equilibrium Growth, 375
366
19 THE BASIC NEOCLASSICAL GROWTH MODEL
The Constant Returns Production Function, 381
Equilibrium Growth in the Neoclassical Model, 383
The Neoclassical Model with Technical Progress, 391
Multiple Equilibria in the Neoclassical Model, 395
380
20 THE BASIC MODEL EXTExNDED:
VARYING SAVINGS ASSUMPTIONS
The Classical Saving Function, 402
The Characteristic Equations of a One-Sector
Growth Model, 405
The Kaldor Saving Function, 406
The Ando-Modigliani (A-M) Consumption
Function, 409

21 THE GOLDEN RULE AND AX INTRODUCTION
Contents TO OPTIMAL GROWTH MODELS 413
The Basic Neoclassical Model Once More, 414
Saving and Consumption in Growth Equilibrium, 417
Phelps\' Golden Rule ofAccumulation, 420
Optimal Growth Turnpikes, 424
22 MEDIUM-TERM GROWTH AND \"THE MEASURE
OF OUR IGNORANCE\" 430
Output Growth, Input Growth, and the
Const ant-Returns-to-Scale
Production Function, 433
Neutral Disembodied Technical Progress, 437
Labor-Augmenting Disembodied
Technical Progress, 439
Capital-Embodied Technical Progress, 440
INDEX