Macroeconomics

Cover
Title Page
Copyright
About the Author
Dedication
Contents
Preface
Supplements and Media
Chapter 1: The Science of Macroeconomics
	1-1 What Macroeconomists Study
		CASE STUDY: The Historical Performance of the U.S. Economy
	1-2 How Economists Think
		Theory as Model Building
		FYI: Using Functions to Express Relationships Among Variables
		The Use of Multiple Models
		Prices: Flexible Versus Sticky
		Microeconomic Thinking and Macroeconomic Models
		FYI: Nobel Macroeconomists
	1-3 How This Book Proceeds
Chapter 2: The Data of Macroeconomics
	2-1 Measuring the Value of Economic Activity: Gross Domestic Product
		Income, Expenditure, and the Circular Flow
		FYI: Stocks and Flows
		Rules for Computing GDP
		Real GDP Versus Nominal GDP
		The GDP Deflator
		Chain-Weighted Measures of Real GDP
		FYI: Two Arithmetic Tricks for Working with Percentage Changes
		The Components of Expenditure
		FYI: What Is Investment?
		CASE STUDY: GDP and Its Components
		Other Measures of Income
		Seasonal Adjustment
		CASE STUDY: The New, Improved GDP of 2013
	2-2 Measuring the Cost of Living: The Consumer Price Index
		The Price of a Basket of Goods
		How the CPI Compares to the GDP and PCE Deflators
		Does the CPI Overstate Inflation?
	2-3 Measuring Joblessness: The Unemployment Rate
		The Household Survey
		CASE STUDY; Men, Women, and Labor-Force Participation
		The Establishment Survey
	2-4 Conclusion: From Economic Statistics to Economic Models
Chapter 3: National Income: Where It Comes From and Where It Goes
	3-1 What Determines the Total Productio nof Goods and Services?
		The Factors of Production
		The Production Function
		The Supply of Goods and Services
	3-2 How Is National Income Distributed to the Factors of Production?
		Factor Prices
		The Decisions Facing a Competitive Firm
		The Firm’s Demand for Factors
		The Division of National Income
		CASE STUDY: The Black Death and Factor Prices
		The Cobb–Douglas Production Function
		CASE STUDY: Labor Productivity as the Key Determinant of Real Wages
		The Growing Gap Between Rich and Poor
	3-3 What Determines the Demand for Goods and Services?
		Consumption
		Investment
		FYI: The Many Different Interest Rates
		Government Purchases
	3-4 What Brings the Supply and Demand for Goods and Services into Equilibrium?
		Equilibrium in the Market for Goods and Services: The Supply and Demand for the Economy’s Output
		Equilibrium in the Financial Markets: The Supply and Demand for Loanable Funds
		Changes in Saving: The Effects of Fiscal Policy
		Changes in Investment Demand
	3-5 Conclusion
Chapter 4: The Monetary System: What It Is and How It Works
	4-1 What Is Money?
		The Functions of Money
		The Types of Money
		CASE STUDY: Money in a POW Camp
		The Development of Fiat Money
		CASE STUDY: Money and Social Conventions on the Island of Yap
		FYI: Bitcoin: The Strange Case of a Virtual Money
		How the Quantity of Money Is Controlled
		How the Quantity of Money Is Measured
		FYI: How Do Credit Cards and Debit Cards Fit into the Monetary System?
	4-2 The Role of Banks in the Monetary System
		100–Percent–Reserve Banking
		Fractional–Reserve Banking
		Bank Capital, Leverage, and Capital Requirements
	4-3 How Central Banks Influence the Money Supply
		A Model of the Money Supply
		The Instruments of Monetary Policy
		CASE STUDY: Quantitative Easing and the Exploding Monetary Base
		Problems in Monetary Control
		CASE STUDY: Bank Failures and the Money Supply in the 1930s
	4-4 Conclusion
Chapter 5: Inflation: Its Causes, Effects, and Social Costs
	5-1 The Quantity Theory of Money
		Transactions and the Quantity Equation
		From Transactions to Income
		The Money Demand Function and the Quantity Equation
		The Assumption of Constant Velocity
		Money, Prices, and Inflation
		CASE STUDY: Inflation and Money Growth
	5-2 Seigniorage: The Revenue from Printing Money
		CASE STUDY: Paying for the American Revolution
	5-3 Inflation and Interest Rates
		Two Interest Rates: Real and Nominal
		The Fisher Effect
		CASE STUDY: Inflation and Nominal Interest Rates
		Two Real Interest Rates: Ex Ante and Ex Post
		CASE STUDY: Nominal Interest Rates in the Nineteenth Century
	5-4 The Nominal Interest Rate and the Demand for Money
		The Cost of Holding Money
		Future Money and Current Prices
	5-5 The Social Costs of Inflation
		The Layman’s View and the Classical Response
		CASE STUDY: What Economists and the Public Say About Inflation
		The Costs of Expected Inflation
		The Costs of Unexpected Inflation
		CASE STUDY: The Free Silver Movement, the Election of 1896, and The Wizard of Oz
		One Benefit of Inflation
	5-6 Hyperinflation
		The Costs of Hyperinflation
		The Causes of Hyperinflation
		CASE STUDY: Hyperinflation in Interwar Germany
		CASE STUDY: Hyperinflation in Zimbabwe
	5-7 Conclusion: The Classical Dichotomy
	Appendix: The Cagan Model: How Current and Future Money Affect the Price Level
Chapter 6: The Open Economy
	6-1 The International Flows of Capital and Goods
		The Role of Net Exports
		International Capital Flows and the Trade Balance
		International Flows of Goods and Capital: An Example
		The Irrelevance of Bilateral Trade Balances
	6-2 Saving and Investment in a Small Open Economy
		Capital Mobility and the World Interest Rate
		Why Assume a Small Open Economy?
		The Model
		How Policies Influence the Trade Balance
		Evaluating Economic Policy
		CASE STUDY: The U.S. Trade Deficit
		CASE STUDY: Why Doesn’t Capital Flow to Poor Countries?
	6-3 Exchange Rates
		Nominal and Real Exchange Rates
		The Real Exchange Rate and the Trade Balance
		The Determinants of the Real Exchange Rate
		How Policies Influence the Real Exchange Rate
		The Effects of Trade Policies
		The Determinants of the Nominal Exchange Rate
		CASE STUDY: Inflation and Nominal Exchange Rates
		The Special Case of Purchasing-Power Parity
		CASE STUDY: The Big Mac Around the World
	6-4 Conclusion: The United States as a Large Open Economy
	Appendix: The Large Open Economy
Chapter 7: Unemployment and the Labor Market
	7-1 Job Loss, Job Finding, and the Natural Rate of Unemployment
	7-2 Job Search and Frictional Unemployment
		Causes of Frictional Unemployment
		Public Policy and Frictional Unemployment
		CASE STUDY: Unemployment Insurance and the Rate of Job Finding
	7-3 Real-Wage Rigidity and Structural Unemployment
		Minimum-Wage Laws
		CASE STUDY: The Characteristics of Minimum-Wage Workers
		Unions and Collective Bargaining
		Efficiency Wages
		CASE STUDY: Henry Ford’s $5 Workday
	7-4 Labor-Market Experience: The United States
		The Duration of Unemployment
		CASE STUDY: The Increase in U.S. Long-Term Unemployment and the Debate Over Unemployment Insurance
		Variation in the Unemployment Rate Across Demographic Groups
		Transitions Into and Out of the Labor Force
		CASE STUDY: The Decline in Labor-Force Participation: 2007 to 2014
	7-5 Labor-Market Experience: Europe
		The Rise in European Unemployment
		Unemployment Variation Within Europe
		The Rise of European Leisure
	7-6 Conclusion
Chapter 8: Economic Growth I: Capital Accumulation and Population Growth
	8-1 The Accumulation of Capital
		The Supply and Demand for Goods
		Growth in the Capital Stock and the Steady State
		Approaching the Steady State: A Numerical Example
		CASE STUDY: The Miracle of Japanese and German Growth
		How Saving Affects Growth
		CASE STUDY: Saving and Investment Around the World
	8-2 The Golden Rule Level of Capital
		Comparing Steady States
		Finding the Golden Rule Steady State: A Numerical Example
		The Transition to the Golden Rule Steady State
	8-3 Population Growth
		The Steady State With Population Growth
		The Effects of Population Growth
		CASE STUDY: Population Growth Around the World
		Alternative Perspectives on Population Growth
	8-4 Conclusion
Chapter 9: Economic Growth II: Technology, Empirics, and Policy
	9-1 Technological Progress in the Solow Model
		The Efficiency of Labor
		The Steady State With Technological Progress
		The Effects of Technological Progress
	9-2 From Growth Theory to Growth Empirics
		Balanced Growth
		FYI: Economic Possibilities for Our Grandchildren
		Convergence
		Factor Accumulation Versus Production Efficiency
		CASE STUDY: Good Management as a Source of Productivity
	9-3 Policies to Promote Growth
		Evaluating the Rate of Saving
		Changing the Rate of Saving
		Allocating the Economy’s Investment
		CASE STUDY: Industrial Policy in Practice
		Establishing the Right Institutions
		CASE STUDY: The Colonial Origins of Modern Institutions
		Encouraging Technological Progress
		CASE STUDY: Is Free Trade Good for Economic Growth?
	9-4 Beyond the Solow Model: Endogenous Growth Theory
		The Basic Model
		A Two-Sector Model
		The Microeconomics of Research and Development
		The Process of Creative Destruction
	9-5 Conclusion
	Appendix: Accounting for the Sources of Economic Growth
Chapter 10: Introduction to Economic Fluctuations
	10-1 The Facts About the Business Cycle
		GDP and Its Components
		Unemployment and Okun’s Law
		Leading Economic Indicators
	10-2 Time Horizons in Macroeconomics
		How the Short Run and the Long Run Differ
		CASE STUDY: If You Want to Know Why Firms Have Sticky Prices, Ask Them
		The Model of Aggregate Supply and Aggregate Demand
	10-3 Aggregate Demand
		The Quantity Equation as Aggregate Demand
		Why the Aggregate Demand Curve Slopes Downward
		Shifts in the Aggregate Demand Curve
	10-4 Aggregate Supply
		The Long Run: The Vertical Aggregate Supply Curve
		The Short Run: The Horizontal Aggregate Supply Curve
		From the Short Run to the Long Run
		CASE STUDY: A Monetary Lesson From French History
		FYI: David Hume on the Real Effects of Money
	10-5 Stabilization Policy
		Shocks to Aggregate Demand
		Shocks to Aggregate Supply
		CASE STUDY: How OPEC Helped Cause Stagflation in the 1970s and Euphoria in the 1980s
	10-6 Conclusion
Chapter 11: Aggregate Demand I: Building the IS–LM Model
	11-1 The Goods Market and the IS Curve
		The Keynesian Cross
		CASE STUDY: Cutting Taxes to Stimulate the Economy: The Kennedy and Bush Tax Cuts
		CASE STUDY: Increasing Government Purchases to Stimulate the Economy: The Obama Stimulus
		CASE STUDY: Using Regional Data to Estimate Multipliers
		The Interest Rate, Investment, and the IS Curve
		How Fiscal Policy Shifts the IS Curve
	11-2 The Money Market and the LM Curve
		The Theory of Liquidity Preference
		CASE STUDY: Does a Monetary Tightening Raise or Lower Interest Rates?
		Income, Money Demand, and the LM Curve
		How Monetary Policy Shifts the LM Curve
	11-3 Conclusion: The Short-Run Equilibrium
Chapter 12: Aggregate Demand II: Applying the IS–LM Model
	12-1 Explaining Fluctuations With the IS–LM Model
		How Fiscal Policy Shifts the IS Curve and Changes the Short-Run Equilibrium
		How Monetary Policy Shifts the LM Curve and Changes the Short-Run Equilibrium
		The Interaction Between Monetary and Fiscal Policy
		Shocks in the IS–LM Model
		CASE STUDY: The U.S. Recession of 2001
		What Is the Fed’s Policy Instrument—The Money Supply or the Interest Rate?
	12-2 IS–LM as a Theory of Aggregate Demand
		From the IS–LM Model to the Aggregate Demand Curve
		The IS–LM Model in the Short Run and Long Run
	12-3 The Great Depression
		The Spending Hypothesis: Shocks to the IS Curve
		The Money Hypothesis: A Shock to the LM Curve
		The Money Hypothesis Again: The Effects of Falling Prices
		Could the Depression Happen Again?
		CASE STUDY: The Financial Crisis and Great Recession of 2008 and 2009
		The Liquidity Trap (Also Known as the Zero Lower Bound)
	12-4 Conclusion
Chapter 13: The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime
	13-1 The Mundell–Fleming Model
		The Key Assumption: Small Open Economy With Perfect Capital Mobility
		The Goods Market and the IS* Curve
		The Money Market and the LM* Curve
		Putting the Pieces Together
	13-2 The Small Open Economy Under Floating Exchange Rates
		Fiscal Policy
		Monetary Policy
		Trade Policy
	13-3 The Small Open Economy Under Fixed Exchange Rates
		How a Fixed-Exchange-Rate System Works
		CASE STUDY: The International Gold Standard
		Fiscal Policy
		Monetary Policy
		CASE STUDY: Devaluation and the Recovery from the Great Depression
		Trade Policy
		Policy in the Mundell–Fleming Model: A Summary
	13-4 Interest Rate Differentials
		Country Risk and Exchange-Rate Expectations
		Differentials in the Mundell–Fleming Model
		CASE STUDY: International Financial Crisis: Mexico 1994–1995
		CASE STUDY: International Financial Crisis: Asia 1997–1998
	13-5 Should Exchange Rates Be Floating or Fixed?
		Pros and Cons of Different Exchange-Rate Systems
		CASE STUDY: The Debate Over the Euro
		Speculative Attacks, Currency Boards, and Dollarization
		The Impossible Trinity
		CASE STUDY: The Chinese Currency Controversy
	13-6 From the Short Run to the Long Run: The Mundell–Fleming Model With a Changing Price Level
	13-7 A Concluding Reminder
	Appendix: A Short-Run Model of the Large Open Economy
Chapter 14: Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment
	14-1 The Basic Theory of Aggregate Supply
		The Sticky-Price Model
		An Alternative Theory: The Imperfect-Information Model
		CASE STUDY: International Differences in the Aggregate Supply Curve
		Implications
	14-2 Inflation, Unemployment, and the Phillips Curve
		Deriving the Phillips Curve From the Aggregate Supply Curve
		FYI: The History of the Modern Phillips Curve
		Adaptive Expectations and Inflation Inertia
		Two Causes of Rising and Falling Inflation
		CASE STUDY: Inflation and Unemployment in the United States
		The Short-Run Tradeoff Between Inflation and Unemployment
		FYI: How Precise Are Estimates of the Natural Rate of Unemployment?
		Disinflation and the Sacrifice Ratio
		Rational Expectations and the Possibility of Painless Disinflation
		CASE STUDY: The Sacrifice Ratio in Practice
		Hysteresis and the Challenge to the Natural-Rate Hypothesis
	14-3 Conclusion
	Appendix: The Mother of All Models
Chapter 15: A Dynamic Model of Economic Fluctuations
	15-1 Elements of the Model
		Output: The Demand for Goods and Services
		The Real Interest Rate: The Fisher Equation
		Inflation: The Phillips Curve
		Expected Inflation: Adaptive Expectations
		The Nominal Interest Rate: The Monetary-Policy Rule
		CASE STUDY: The Taylor Rule
	15-2 Solving the Model
		The Long-Run Equilibrium
		The Dynamic Aggregate Supply Curve
		The Dynamic Aggregate Demand Curve
		The Short-Run Equilibrium
	15-3 Using the Model
		Long-Run Growth
		A Shock to Aggregate Supply
		A Shock to Aggregate Demand
		FYI: The Numerical Calibration and Simulation
		A Shift in Monetary Policy
	15-4 Two Applications: Lessons for Monetary Policy
		The Tradeoff Between Output Variability and Inflation Variability
		CASE STUDY: Different Mandates, Different Realities: The Fed Versus the ECB
		The Taylor Principle
		CASE STUDY: What Caused the Great Inflation?
	15-5 Conclusion: Toward DSGE Models
Chapter 16: Understanding Consumer Behavior
	16-1 John Maynard Keynes and the Consumption Function
		Keynes’s Conjectures
		The Early Empirical Successes
		Secular Stagnation, Simon Kuznets, and the Consumption Puzzle
	16-2 Irving Fisher and Intertemporal Choice
		The Intertemporal Budget Constraint
		FYI: Present Value, or Why a $1,000,000 Prize Is Worth Only $623,000
		Consumer Preferences
		Optimization
		How Changes in Income Affect Consumption
		How Changes in the Real Interest Rate Affect Consumption
		Constraints on Borrowing
	16-3 Franco Modigliani and the Life-Cycle Hypothesis
		The Hypothesis
		Implications
		CASE STUDY: The Consumption and Saving of the Elderly
	16-4 Milton Friedman and the Permanent-Income Hypothesis
		The Hypothesis
		Implications
		CASE STUDY: The 1964 Tax Cut and the 1968 Tax Surcharge
		CASE STUDY: The Tax Rebates of 2008
	16-5 Robert Hall and the Random-Walk Hypothesis
		The Hypothesis
		Implications
		CASE STUDY: Do Predictable Changes in Income Lead to Predictable Changes in Consumption?
	16-6 David Laibson and the Pull of Instant Gratification
		CASE STUDY: How to Get People to Save More
	16-7 Conclusion
Chapter 17: The Theory of Investment
	17-1 Business Fixed Investment
		The Rental Price of Capital
		The Cost of Capital
		The Determinants of Investment
		Taxes and Investment
		CASE STUDY: Inversions and Corporate Tax Reform
		The Stock Market and Tobin’s q
		CASE STUDY: The Stock Market as an Economic Indicator
		Alternative Views of the Stock Market: The Efficient Markets Hypothesis Versus Keynes’s Beauty Contest
		Financing Constraints
	17-2 Residential Investment
		The Stock Equilibrium and the Flow Supply
		Changes in Housing Demand
	17-3 Inventory Investment
		Reasons for Holding Inventories
		How the Real Interest Rate and Credit Conditions Affect Inventory Investment
	17-4 Conclusion
Chapter 18: Alternative Perspectives on Stabilization Policy
	18-1 Should Policy Be Active or Passive?
		Lags in the Implementation and Effects of Policies
		The Difficult Job of Economic Forecasting
		CASE STUDY: Mistakes in Forecasting
		Ignorance, Expectations, and the Lucas Critique
		The Historical Record
		CASE STUDY: Is the Stabilization of the Economy a Figment of the Data?
		CASE STUDY: How Does Policy Uncertainty Affect the Economy?
	18-2 Should Policy Be Conducted by Rule or by Discretion?
		Distrust of Policymakers and the Political Process
		The Time Inconsistency of Discretionary Policy
		CASE STUDY: Alexander Hamilton Versus Time Inconsistency
		Rules for Monetary Policy
		CASE STUDY: Inflation Targeting: Rule or Constrained Discretion?
		CASE STUDY: Central-Bank Independence
	18-3 Conclusion: Making Policy in an Uncertain World
	Appendix: Time Inconsistency and the Tradeoff Between Inflation and Unemployment
Chapter 19: Government Debt and Budget Deficits
	19-1 The Size of the Government Debt
		CASE STUDY: The Troubling Long-Term Outlook for Fiscal Policy
	19-2 Problems in Measurement
		Measurement Problem 1: Inflation
		Measurement Problem 2: Capital Assets
		Measurement Problem 3: Uncounted Liabilities
		Measurement Problem 4: The Business Cycle
		Summing Up
	19-3 The Traditional View of Government Debt
		FYI: Taxes and Incentives
	19-4 The Ricardian View of Government Debt
		The Basic Logic of Ricardian Equivalence
		Consumers and Future Taxes
		CASE STUDY: George H. W. Bush’s Withholding Experiment
		CASE STUDY: Why Do Parents Leave Bequests?
		Making a Choice
		FYI: Ricardo on Ricardian Equivalence
	19-5 Other Perspectives on Government Debt
		Balanced Budgets Versus Optimal Fiscal Policy
		Fiscal Effects on Monetary Policy
		Debt and the Political Process
		International Dimensions
		CASE STUDY: The Benefits of Indexed Bonds
	19-6 Conclusion
Chapter 20: The Financial System: Opportunities and Dangers
	20-1 What Does the Financial System Do?
		Financing Investment
		Sharing Risk
		Dealing With Asymmetric Information
		Fostering Economic Growth
		CASE STUDY: Microfinance: Professor Yunus’s Profound Idea
	20-2 Financial Crises
		The Anatomy of a Crisis
		FYI: The TED Spread
		CASE STUDY: Who Should Be Blamed for the Financial Crisis of 2008–2009?
		Policy Responses to a Crisis
		Policies to Prevent Crises
		FYI: CoCo Bonds
		CASE STUDY: The European Sovereign Debt Crisis
	20-3 Conclusion
Epilogue: What We Know, What We Don’t
	The Four Most Important Lessons of Macroeconomics
		Lesson 1: In the long run, a country’s capacity to produce goods and services determines the standard of living of its citizens.
		Lesson 2: In the short run, aggregate demand influences the amount of goods and services that a country produces.
		Lesson 3: In the long run, the rate of money growth determines the rate of inflation, but it does not affect the rate of unemployment.
		Lesson 4: In the short run, policymakers who control monetary and fiscal policy face a tradeoff between inflation and unemployment.
	The Four Most Important Unresolved Questions of Macroeconomics
		Question 1: How should policymakers try to promote growth in the economy’s natural level of output?
		Question 2: Should policymakers try to stabilize the economy? If so, how?
		Question 3: How costly is inflation, and how costly isr educing inflation?
		Question 4: How big a problem are government budget deficits?
	Conclusion
Glossary
Index