Macroeconomics

Cover......Page 1
Title......Page 2
Contents......Page 6
 When You Enter the Job Market can Matter a Lot......Page 36
  Macroeconomics in the Short Run and in the Long Run......Page 37
  Long-Run Growth in the United States......Page 38
  Some Countries Have Not Experienced Significant Long-Run Growth......Page 40
  Aging Populations Pose a Challenge to Governments Around the World......Page 41
  Unemployment in the United States......Page 43
  Inflation Rates Fluctuate Over Time and Across Countries......Page 44
  Economic Policy Can Help Stabilize the Economy......Page 45
  International Factors Have Become Increasingly Important in Explaining Macroeconomic Events......Page 47
  What Is the Best Way to Analyze Macroeconomic Issues?......Page 49
  Macroeconomic Models......Page 50
  Solved Problem 1.2: Do Rising Imports Lead to a Permanent Reduction in U.S. Employment?......Page 51
  Forming and Testing Hypotheses in Economic Models......Page 52
  Making the Connection: Why Should the United States Worry About the “Euro Crisis”?......Page 53
 1.3 Key Issues and Questions of Macroeconomics......Page 54
 Problems and Applications, Data Exercise......Page 56
 Key Issue and Question......Page 60
  How the Government Calculates GDP......Page 62
  The Circular Flow of Income......Page 64
  National Income Identities and the Components of GDP......Page 66
  The Relationship Between GDP and GNP......Page 69
  GDP Versus GDI......Page 70
  GDP and National Income......Page 71
 2.2 Real GDP, Nominal GDP, and the GDP Deflator......Page 72
  Solved Problem 2.2A: Calculating Real GDP......Page 73
  Solved Problem 2.2B: Calculating the Inflation Rate......Page 75
  The Chain-Weighted Measure of Real GDP......Page 76
  Making the Connection: Trying to Hit a Moving Target: Forecasting with “Real-Time Data”......Page 77
  Comparing GDP Across Countries......Page 78
 2.3 Inflation Rates and Interest Rates......Page 79
  The Consumer Price Index......Page 80
  Making the Connection: Does the CPI Provide a Good Measure of Inflation for a Family with College Students?......Page 81
  How Accurate Is the CPI?......Page 82
  The Way the Federal Reserve Measures Inflation......Page 83
  Interest Rates......Page 84
 2.4 Measuring Employment and Unemployment......Page 86
 Answering the Key Question......Page 88
 Problems and Applications, Data Exercise......Page 89
 Key Issue and Question......Page 99
 3.1 An Overview of the Financial System......Page 100
  Financial Markets and Financial Intermediaries......Page 101
  Making the Connection: The Controversial World of Subprime Lending......Page 103
  Making the Connection: Investing in the Worldwide Stock Market......Page 106
  Asymmetric Information and Principal–Agent Problems in Financial Markets......Page 108
 3.2 Financial Crises, Government Policy, and the Financial System......Page 109
  Financial Intermediaries and Leverage......Page 110
  Bank Panics......Page 112
  The Financial Crisis of 2007–2009......Page 114
  The Mortgage Market and the Subprime Lending Disaster......Page 115
  Runs on the Shadow Banking System......Page 117
  Government Policies to Deal with the Financial Crisis of 2007–2009......Page 118
  Making the Connection: Fed Policy During Panics, Then and Now: The Collapse of the Bank of United States in 1930 and the Collapse of Lehman Brothers in 2008......Page 119
  The Demand and Supply of Money......Page 122
  Shifts in the Money Demand Curve......Page 123
  Equilibrium in the Money Market......Page 124
  Calculating Bond Interest Rates and the Concept of Present Value......Page 125
  Present Value and the Prices of Stocks and Bonds......Page 127
  The Economy’s Many Interest Rates......Page 130
 Answering the Key Question......Page 134
 Appendix: More on the Term Structure of Interest Rates......Page 141
 Problems and Applications, Data Exercise......Page 135
 Key Issue and Question......Page 143
 4.1 The Balance of Payments......Page 144
  The Current Account......Page 147
  The Financial Account......Page 148
  The Capital Account......Page 149
  Nominal Exchange Rates......Page 150
  Real Exchange Rates......Page 152
  The Foreign-Exchange Market......Page 153
  Exchange Rate Policy......Page 154
  Policy Choices and the Current Exchange Rate Systems......Page 155
  Making the Connection: Greece Experiences a “Bank Jog”......Page 156
  Purchasing Power Parity......Page 159
  Why Purchasing Power Parity Doesn’t Hold Exactly......Page 160
  The Interest Parity Condition......Page 161
  Solved Problem 4.3: Making a Financial Killing by Buying Brazilian Bonds?......Page 162
  Making the Connection: Brazilian Firms Grapple with an Unstable Exchange Rate......Page 164
 4.4 The Loanable Funds Model and the International Capital Market......Page 165
  Saving and Supply in the Loanable Funds Market......Page 166
  Investment and the Demand for Loanable Funds......Page 167
  Explaining Movements in Saving, Investment, and the Real Interest Rate......Page 168
  Small Open Economy......Page 170
  Large Open Economy......Page 173
 Answering the Key Question......Page 174
 Problems and Applications, Data Exercise......Page 175
 Key Issue and Question......Page 182
 5.1 The Aggregate Production Function......Page 183
  The Cobb–Douglas Production Function......Page 184
  The Demand for Labor and the Demand for Capital......Page 187
  Changes in Capital, Labor, and Total Factor Productivity......Page 188
  Making the Connection: Foreign Direct Investment Increases Real GDP in China......Page 189
 5.2 A Model of Real GDP in the Long Run......Page 190
  The Markets for Capital and Labor......Page 191
  The Division of Total Income......Page 193
  Solved Problem 5.2: Calculating the Marginal Product of Labor and the Marginal Product of Capital......Page 195
 5.3 Why Real GDP per Worker Varies Among Countries......Page 196
  The per Worker Production Function......Page 197
  Macro Data: How Well do International Capital Markets Allocate Capital?......Page 198
  What Explains Total Factor Productivity?......Page 199
  Making the Connection: Comparing Research and Development Spending and Labor Productivity in China and the United States......Page 200
  Making the Connection: How Important Were the Chinese Economic Reforms of 1978?......Page 203
 Answering the Key Question......Page 205
 Problems and Applications, Data Exercise......Page 206
 Key Issue and Question......Page 211
 6.1 The Solow Growth Model......Page 212
  Capital Accumulation......Page 213
  The Steady State......Page 215
  Transition to the Steady State......Page 217
  Saving Rates and Growth Rates......Page 219
  Macro Data: Do High Rates of Saving and Investment Lead to High Levels of Income?......Page 220
  Labor Force Growth and the Steady State......Page 221
  The Effect of an Increase in the Labor Force Growth Rate......Page 222
  Solved Problem 6.2: The Effect of a Decrease in the Labor Force Growth Rate on Real GDP per Worker......Page 223
  Technological Change......Page 225
  Steady-State Growth Rates......Page 226
  Convergence to the Balanced Growth Path......Page 228
  Making the Connection: Will China’s Standard of Living Ever Exceed that of the United States?......Page 230
  Do All Countries Converge to the Same Steady State?......Page 231
 6.5 Endogenous Growth Theory......Page 232
  AK Growth Models: Reconsidering Diminishing Returns......Page 233
  Two-Sector Growth Model: The Production of Knowledge......Page 235
  Making the Connection: What Explains Recent Economic Growth in India?......Page 236
  Making the Connection: Should the Federal Government Invest in Green Energy?......Page 238
 Problems and Applications, Data Exercise......Page 241
  The Growth Accounting Equation for Real GDP......Page 247
  Total Factor Productivity as the Ultimate Source of Growth......Page 248
 Key Issue and Question......Page 251
 7.1 What Is Money, and Why Do We Need It?......Page 252
  The Functions of Money......Page 253
  Commodity Money Versus Fiat Money......Page 254
  Making the Connection: When Money Is No Longer Money: Hyperinflation in Zimbabwe......Page 255
  How Is Money Measured?......Page 257
  Which Measure of the Money Supply Should We Use?......Page 258
  How the Fed Changes the Monetary Base......Page 259
  The Process of Money Creation......Page 260
 7.3 The Quantity Theory of Money and Inflation......Page 262
  The Quantity Theory Explanation of Inflation......Page 263
  Making the Connection Is the Inflation Rate Around the World Going to Increase in the Near Future?......Page 264
  Solved Problem 7.3: The Effect of a Decrease in the Growth Rate of the Money Supply......Page 265
  Can the Quantity Theory Accurately Predict the Inflation Rate?......Page 266
 7.4 The Relationships Among the Growth Rate of Money, Inflation, and the Nominal Interest Rate......Page 267
  Real Interest Rates and Expected Real Interest Rates......Page 268
  The Fisher Effect......Page 269
  Money Growth and the Nominal Interest Rate......Page 270
  Costs of Expected Inflation......Page 271
  How Large Are the Costs of Expected Inflation?......Page 273
  Macro Data: What Is the Expected Inflation Rate?......Page 274
  Making the Connection: Did the Fed’s Actions During the Financial Crisis of 2007–2009 Increase the Expected Inflation Rate?......Page 275
  Inflation Uncertainty......Page 276
  Benefits of Inflation......Page 277
  Causes of Hyperinflation......Page 278
  German Hyperinflation After World War I......Page 279
 Problems and Applications, Data Exercise......Page 280
  Open Market Operations......Page 290
  The Simple Deposit Multiplier......Page 291
  A More Realistic Money Multiplier......Page 294
 Key Issue and Question......Page 295
  Shifting the Demand Curve......Page 297
  Factors That Shift the Labor Supply Curve......Page 299
  The Effect of Technological Change......Page 301
  Solved Problem 8.1: Why Don’t People Work as Much as They Did Decades Ago?......Page 302
  Frictional Unemployment and Job Search......Page 304
  Structural Unemployment......Page 305
  Cyclical Unemployment......Page 306
  Making the Connection: Did the Structural Unemployment Rate Rise During the Recession of 2007–2009?......Page 307
  Unemployment Around the World......Page 309
 8.3 The Natural Rate of Unemployment......Page 310
  Solved Problem 8.3: How Many Jobs Does the U.S. Economy Create Every Month?......Page 311
  What Determines the Natural Rate of Unemployment?......Page 314
  Making the Connection: Are Strict Labor Laws to Blame for Unemployment in France?......Page 317
  Equilibrium Real Wages and Unemployment......Page 319
  Efficiency Wages......Page 320
  Minimum Wage Laws......Page 321
 Problems and Applications, Data Exercise......Page 322
 Key Issue and Question......Page 329
  The Keynesian and Classical Approaches......Page 331
  Macroeconomic Shocks and Price Flexibility......Page 332
  Why Are Prices Sticky in the Short Run?......Page 333
  Making the Connection: The Curious Case of the 5-Cent Bottle of Coke......Page 335
 9.2 What Happens During a Business Cycle?......Page 336
  The Changing Severity of the U.S. Business Cycle......Page 337
  Measuring Business Cycles......Page 340
  Solved Problem 9.2: Dating U.S. Recessions......Page 341
  Costs of the Business Cycle......Page 343
  Making the Connection: Did the 2007–2009 Recession Break Okun’s Law?......Page 344
  Movements of Economic Variables During the Business Cycle......Page 348
  The Global Business Cycle......Page 349
 9.3 Shocks and Business Cycles......Page 350
  Multiplier Effects......Page 351
  An Example of a Shock with Multiplier Effects: The Bursting of the Housing Bubble......Page 353
  Aggregate Demand and Aggregate Supply: An Introduction......Page 354
  Aggregate Supply Shocks and the Business Cycle......Page 356
  Should Policy Try to Offset Shocks?......Page 357
  Making the Connection: How Important Is Housing in the Business Cycle?......Page 358
 Answering the Key Question......Page 359
 Problems and Applications, Data Exercise......Page 360
 Appendix: The Formula for the Expenditure Multiplier......Page 366
 Key Issue and Question......Page 367
  Equilibrium in the Goods Market......Page 369
  The Multiplier Effect......Page 372
  The Government Purchases and Tax Multipliers......Page 374
  Solved Problem 10.1: Calculating Equilibrium Real GDP......Page 375
  Constructing the IS Curve......Page 378
  The IS Curve and the Output Gap......Page 379
  The Link Between the Short-Term Nominal Interest Rate and the Long-Term Real Interest Rate......Page 381
  Macro Data Box: Real Interest Rates and the Global Savings Glut......Page 384
  Deriving the MP Curve Using the Money Market Model......Page 385
  Shifts of the MP Curve......Page 386
  Demand Shocks and Fluctuations in Output......Page 388
  Making the Connection: Will the European Financial Crisis Cause a Recession in the United States?......Page 391
  Monetary Policy and Fluctuations in Real GDP......Page 392
  Solved Problem 10.3: Using the IS–MP Model to Analyze the 2001 Tax Cut......Page 395
  IS–MP and Aggregate Demand......Page 396
 Problems and Applications, Data Exercise......Page 399
 Asset Market Equilibrium......Page 405
 Deriving the LM Curve......Page 406
 Shifting the LM Curve......Page 407
 Equilibrium in the IS–LM Model......Page 408
 Solved Problem 10A.1: Monetary Policy During the Great Depression......Page 410
 An Alternative Derivation of the MP Curve......Page 412
 Problems and Applications, Data Exercise......Page 413
 Key Issue and Question......Page 415
 11.1 The IS–MP Model and the Phillips Curve......Page 416
  Okun’s Law, the Output Gap, and the Phillips Curve......Page 420
  Movement Along an Existing Phillips Curve......Page 423
  Shifts of the Phillips Curve......Page 424
  Making the Connection: Lots of Money but Not Much Inflation Following the Recession of 2007–2009......Page 425
  Using Monetary Policy to Fight a Recession......Page 427
  Solved Problem 11.1: Fed Policy to Keep Inflation from Increasing......Page 428
  Using the IS–MP Model to Analyze the Financial Crisis and the Housing Crash......Page 431
  The IS Curve with a Floating Exchange Rate......Page 433
  Monetary Policy with a Floating Exchange Rate......Page 435
  The IS–MP Model with a Fixed Exchange Rate......Page 436
  The MP Curve with a Fixed Exchange Rate......Page 437
  Macro Data: Did the Gold Standard Make the Great Depression Worse?......Page 438
  Making the Connection: Can the Euro Survive?......Page 439
 Problems and Applications, Data Exercise......Page 442
 Key Issue and Question......Page 447
  Creation of the Federal Reserve System......Page 449
  The Structure of the Federal Reserve System......Page 450
 12.2 The Goals of Monetary Policy......Page 451
  Financial Market Stability......Page 452
  Open Market Operations......Page 453
  Discount Loans and the Lender of Last Resort......Page 454
  Reserve Requirements......Page 455
  New Monetary Policy Tools in Response to the 2007–2009 Financial Crisis......Page 456
  Making the Connection: On the Board of Governors, Four Can Be a Crowd......Page 458
  Monetary Policy and Aggregate Expenditure......Page 459
  Using Monetary Policy to Fight a Recession......Page 460
  Using Monetary Policy to Deal with a Supply Shock......Page 462
  Solved Problem 12.4: Did the Federal Reserve Make the Great Depression Worse?......Page 464
  The Liquidity Trap, the Zero Lower Bound, and Alternative Channels of Monetary Policy......Page 466
  Policy Lags......Page 470
  Economic Forecasts......Page 471
  Model Uncertainty......Page 472
  Consequences of Policy Limitations......Page 473
  Solved Problem 12.5: Did the Fed Help Cause the 2001 Recession?......Page 474
  Making the Connection: “Too Big to Fail”—The Legacy of Continental Illinois......Page 478
 12.6 Central Bank Independence......Page 479
  The Independence of the U.S. Federal Reserve......Page 480
  Monetary Policy with Floating Exchange Rates......Page 482
  Monetary Policy with a Fixed Exchange Rate......Page 483
  The Policy Trilemma for Economic Policy......Page 484
  Problems and Applications, Data Exercise......Page 488
 Key Issue and Question......Page 496
  Who Conducts Fiscal Policy?......Page 498
  Traditional Tools of Fiscal Policy......Page 499
  Making the Connection: Why Was the Severity of the 2007–2009 Recession So Difficult to Predict?......Page 501
  The Budget Deficit and the Budget Surplus......Page 503
  Making the Connection: How Did the Federal Government Run a Budget Surplus in the Late 1990s and Early 2000s?......Page 505
  Macro Data: Did Fiscal Policy Fail During the Great Depression?......Page 508
  The Deficit and the Debt......Page 509
  Is the Federal Debt a Problem?......Page 510
  Fiscal Policy and the IS Curve......Page 511
  Using Discretionary Fiscal Policy to Fight a Recession......Page 512
  Automatic Stabilizers......Page 514
  Solved Problem 13.3A: Should the Federal Government Eliminate the Budget Deficit?......Page 516
  Making the Connection: State and Local Government Spending During the 2007–2009 Recession......Page 518
  Personal Income Tax Rates and the Multiplier......Page 519
  Solved Problem 13.3B: Calculating Equilibrium Real GDP and the Expenditure Multiplier with Income Taxes......Page 520
  The Effects of Changes in Tax Rates on Potential GDP......Page 521
  Policy Lags......Page 523
  The Uncertainty of Economic Models......Page 524
  When Will Fiscal Multipliers Be Large?......Page 526
  Consequences of Policy Limitations......Page 527
  Evaluating the American Recovery and Reinvestment Act......Page 528
  Fiscal Policy with Floating Exchange Rates......Page 529
  Fiscal Policy with a Fixed Exchange Rate......Page 530
 Problems and Applications, Data Exercise......Page 531
 Key Issue and Question......Page 539
 14.1 Aggregate Demand Revisited......Page 541
  The Aggregate Demand Curve......Page 542
  Shifts of the Aggregate Demand Curve......Page 543
  When Are Shifts to the Aggregate Demand Curve Permanent?......Page 546
 14.2 Aggregate Supply and the Phillips Curve......Page 547
  Shifts in the Aggregate Supply Curve......Page 549
  Equilibrium in the AD–AS Model......Page 550
  The Effects of a Supply Shock......Page 551
  Permanent Demand Shocks: Changes in the Central Bank Reaction Function......Page 553
  Macro Data: Are Oil Supply Shocks Really That Important?......Page 554
  Making the Connection: The End of Stagflation and the Volcker Recession......Page 556
  Temporary Demand Shocks: Changes in Aggregate Expenditure......Page 557
  Solved Problem 14.3: Applying the AD–AS Model to an Increase in Housing Construction......Page 559
 14.4 Rational Expectations and Policy Ineffectiveness......Page 561
  Rational Expectations and Anticipated Policy Changes......Page 562
  Rational Expectations and Demand Shocks......Page 563
  Are Anticipated and Credible Policy Changes Actually Ineffective?......Page 564
  The Taylor Rule......Page 565
  The Case for Discretion......Page 568
  The Case for Rules......Page 569
  Making the Connection: Central Banks Around the World Try Inflation Targeting......Page 570
 Problems and Applications, Data Exercise......Page 571
 Key Issue and Question......Page 578
 15.1 Debt and Deficits in Historical Perspective......Page 579
  The Government Budget Constraint......Page 580
  The Relationship Between the Deficit and the National Debt......Page 581
  Gross Federal Debt Versus Debt Held by the Public......Page 582
  The Debt-to-GDP Ratio......Page 583
  Composition of Federal Government Revenue and Expenditure......Page 584
  Federal Government Expenditure......Page 585
  Expressing the Deficit as a Percentage of GDP......Page 586
  Making the Connection: The European Debt Crisis......Page 587
  When Is Fiscal Policy Sustainable?......Page 588
  Solved Problem 15.2: Can Japan Grow Its Way Out of Debt?......Page 589
  The Conventional View: Crowding Out Private Investment......Page 591
  Macro Data: Do Government Deficits Increase Real Interest Rates?......Page 592
  Projections of Federal Government Revenue and Expenditure......Page 594
  Making the Connection: Many Proposals but Not Much Progress on the Deficit......Page 595
  Will the United States Pay Off Its Debt?......Page 596
  Policy Options......Page 598
 Key Terms and Concepts, Review Questions......Page 601
 Appendix A: Showing the Conditions for a Sustainable Fiscal Policy......Page 606
 Appendix B: Showing the Relationship between Budget Deficits and Private Expenditure......Page 607
 Key Issue and Question......Page 608
  Households and Firms are Forward Thinking......Page 609
  An Important Difference Between Consumption and Investment......Page 610
  Consumption and GDP......Page 611
  The Intertemporal Budget Constraint and Consumption Smoothing......Page 612
  Two Theories of Consumption Smoothing......Page 613
  Permanent Versus Transitory Changes in Income......Page 616
  Consumption and the Real Interest Rate......Page 617
  Housing Wealth and Consumption......Page 618
  How Policy Affects Consumption......Page 619
  Solved Problem 16.2: Effects of a Temporary Tax Cut on Your Consumption......Page 620
  Credit Rationing of Households......Page 621
  Making the Connection: The Temporary Cut in Payroll Taxes......Page 623
  Precautionary Saving......Page 624
  Tax Incentives and Saving......Page 625
 16.3 Factors That Determine Private Investment......Page 626
  The Investment Decisions of Firms......Page 627
  Corporate Taxes and the Desired Capital Stock......Page 630
  Macro Data: How Important Are Corporate Taxes for Investment?......Page 631
  Making the Connection: From Transitory Tax Cuts to Tax Reform......Page 633
  Solved Problem 16.3: Depreciation, Taxes, and Investment Spending......Page 634
  Credit Rationing and the Financial Accelerator......Page 636
 Answering the Key Question......Page 638
 Problems and Applications, Data Exercise......Page 639
Glossary......Page 644
Index......Page 649