Macroeconomics

Cover Page......Page 1
Title Page......Page 4
Copyright Page......Page 5
Preface to the Instructor......Page 6
Preface to the Student......Page 15
Contents in Brief......Page 17
Contents......Page 19
Introduction......Page 27
Agricultural Development......Page 28
The National Railroad Network......Page 30
The Age of the Industrial Capitalist......Page 31
The American Economy in the 20th Century......Page 32
The 1930s: The Great Depression......Page 33
The 1940s: World War II and Peacetime Prosperity......Page 36
The 1950s: The Eisenhower Years......Page 39
The Soaring Sixties: The Years of Kennedy and Johnson......Page 40
The 1980s: The Age of Reagan......Page 41
The State of American Agriculture......Page 42
The “New Economy” of the Nineties......Page 43
Current Issue: America’s Place in History......Page 44
Economics Defined......Page 51
The Four Economic Resources......Page 52
Opportunity Cost......Page 54
Full Employment and Full Production......Page 55
The Production Possibilities Curve......Page 58
Economic Growth......Page 63
Current Issue: Will You Be Underemployed When You Graduate?......Page 65
What Shall We Produce?......Page 75
For Whom Shall the Goods and Services Be Produced?......Page 76
The Invisible Hand......Page 77
Competition......Page 78
Equity and Efficiency......Page 79
The Circular Flow Model......Page 80
The Economic Role of Government......Page 81
Externalities......Page 82
Lack of Public Goods and Services......Page 84
Government Failure......Page 85
Capital......Page 87
The “Isms”: Capitalism, Communism, Fascism, and Socialism......Page 89
Transformation in China......Page 92
Current Issue: The Bridge to Nowhere......Page 94
Demand......Page 97
Supply......Page 98
Surpluses and Shortages......Page 100
Shifts in Demand and Supply......Page 101
Price Ceilings and Price Floors......Page 105
Interest Rate Determination......Page 110
The Rationing Function of the Price System......Page 111
Current Issue: High Gas Prices: Something Only an Economist Could Love......Page 112
GDP and Big Numbers......Page 121
Consumption......Page 122
Individual Saving......Page 123
Average Propensity to Save (APS)......Page 124
Marginal Propensity to Consume (MPC)......Page 126
Reading a Graph......Page 127
The Consumption Function......Page 128
The Saving Function......Page 130
Autonomous Consumption and Induced Consumption......Page 132
What the Consumer Buys......Page 133
Credit Availability......Page 135
Keeping Up with the Joneses......Page 136
The Permanent Income Hypothesis......Page 137
Is the Consumer Really King?......Page 138
Why Do We Spend So Much and Save So Little?......Page 139
Total Saving: Individual Saving + Business Saving + Government Saving......Page 140
Current Issue: The American Consumer: World-Class Shopper......Page 141
The Proprietorship......Page 147
The Corporation......Page 148
Capitalization and Control......Page 151
Investment......Page 152
Investment Defined......Page 154
Why Isn’t Education Spending Classified as Investment?......Page 156
How Does Savings Get Invested?......Page 157
Building Capital......Page 158
(2) Capacity Utilization Rate......Page 159
(3) The Interest Rate......Page 160
(4) The Expected Rate of Profit......Page 161
Graphing the C + I Line......Page 162
The Summing Up of Investment......Page 163
Current Issue: “Benedict Arnold Corporations”?......Page 165
Introduction: The Growing Economic Role of Government......Page 171
Federal Government Spending......Page 172
State and Local Government Spending......Page 174
Government Purchases versus Transfer Payments......Page 175
Taxes......Page 176
The Average Tax Rate and the Marginal Tax Rate......Page 177
Types of Taxes......Page 179
Sources of Federal Revenue......Page 181
Recent Tax Legislation......Page 185
The State and Local Fiscal Dilemma......Page 186
The Economic Role of Government......Page 188
(3) Stabilization......Page 189
Conclusion......Page 190
Current Issue: Will Social Security Be There for You?......Page 191
The Basis for International Trade......Page 197
Specialization and Exchange......Page 198
U.S. Exports and Imports......Page 199
Outsourcing and Offshoring......Page 201
World Trade Agreements and Free Trade Zones......Page 202
Free Trade Zones......Page 203
World Trade Agreements......Page 204
Current Issue: Is Your School Sweatshirt Sewn in a Sweatshop?......Page 208
What Is Gross Domestic Product?......Page 215
How GDP Is Measured......Page 217
Multiple Counting......Page 219
Treatment of Transfer Payments and Financial Transactions......Page 220
Nominal GDP versus Real GNP......Page 221
Per Capita Real GDP......Page 226
Production That Is Excluded......Page 229
Treatment of Leisure Time......Page 231
Human Costs and Benefits......Page 232
What Goes into GDP?......Page 233
Current Issue: GDP or GPI?......Page 234
Is There a Business Cycle?......Page 241
Cycle Turning Points: Peaks and Troughs......Page 242
The Conventional Three-Phase Business Cycle......Page 243
Business Cycle Theories......Page 244
Business Cycle Forecasting......Page 246
How the Unemployment Rate Is Computed......Page 248
How Accurate Is the Unemployment Rate?......Page 250
Types of Unemployment......Page 252
Natural Unemployment Rate......Page 254
Defining Inflation......Page 255
Deflation and Disinflation......Page 257
The Post–World War II History of Inflation......Page 258
Anticipated and Unanticipated Inflation: Who Is Hurt by Inflation and Who Is Helped?......Page 260
Theories of the Causes of Inflation......Page 263
Inflation as a Psychological Process......Page 265
Creeping Inflation and Hyperinflation......Page 266
The Misery Index......Page 267
Current Issue: Where Are All the Jobs?......Page 268
Say’s Law......Page 277
Supply and Demand Revisited......Page 279
The Aggregate Demand Curve......Page 281
The Long-Run Aggregate Supply Curve......Page 283
The Short-Run Aggregate Supply Curve......Page 284
Part II: The Keynesian Critique of the Classical System......Page 287
The Keynesian Aggregate Expenditure Model......Page 290
(1) Aggregate Demand Exceeds Aggregate Supply......Page 293
Keynesian Policy Prescriptions......Page 294
Current Issue: Keynes and Say in the 21st Century......Page 295
Putting Fiscal Policy into Perspective......Page 301
The Recessionary Gap......Page 302
The Inflationary Gap......Page 303
Part II: The Multiplier and Its Applications......Page 304
The Multiplier......Page 305
Applications of the Multiplier......Page 306
Part III: The Automatic Stabilizers......Page 308
Personal Income and Payroll Taxes......Page 309
Unemployment Compensation......Page 310
Making the Automatic Stabilizers More Effective......Page 311
Changes in Tax Rates......Page 312
Who Makes Fiscal Policy......Page 313
Defining the Lags......Page 314
Chronology of the Lags in 2008......Page 315
Deficits and Surpluses: The Record......Page 316
Why Are Large Deficits So Bad?......Page 317
Part VII: The Crowding-Out and Crowding-In Effects......Page 318
Part VIII: The Public Debt......Page 320
Current Issue: Deficits as Far as the Eye Can See......Page 323
The Three Jobs of Money......Page 331
Other Useful Properties of Money......Page 332
Money versus Barter......Page 333
Our Money Supply......Page 334
M1 and M2......Page 335
The Demand for Money......Page 337
A Short History of Banking......Page 339
Modern Banking......Page 341
Branch Banking and Bank Chartering......Page 346
The Savings and Loan Debacle......Page 347
Current Issue: Overdraft Privileges......Page 349
The Federal Reserve System......Page 355
The Board of Governors......Page 356
Legal Reserve Requirements......Page 358
Primary and Secondary Reserves......Page 360
The Destruction of Money......Page 361
The Deposit Expansion Multiplier......Page 362
Cash, Checks, and Electronic Money......Page 363
How Open-Market Operations Work......Page 366
The Federal Open-Market Committee......Page 368
Discount Rate and Federal Funds Rate Changes......Page 370
Changing Reserve Requirements......Page 371
A Summing Up: The Transmission Mechanism......Page 373
The Depository Institutions Deregulation and Monetary Control Act of 1980......Page 376
Monetary Policy Lags......Page 377
Fiscal and Monetary Policies Should Mesh......Page 378
Current Issue: The Housing Bubble and the Subprime Mortgage Mess......Page 379
The Equation of Exchange......Page 389
The Quantity Theory of Money......Page 391
Classical Economics......Page 392
Keynesian Economics......Page 394
The Importance of the Rate of Monetary Growth......Page 395
The Basic Propositions of Monetarism......Page 396
Supply-Side Economics......Page 398
The Elimination of Productive Market Exchanges......Page 399
Andrew Mellon: Our First Supply-Side Economist......Page 400
Rational Expectations Theory......Page 401
The Three Assumptions of Rational Expectations Theory......Page 402
Supply-Side Revival?......Page 404
Fighting Recessions......Page 405
Fighting Inflationary Recessions......Page 406
Conclusion......Page 407
Current Issue: Is George W. Bush a Supply-Sider ora Keynesian?......Page 408
The Industrial Revolution and American Economic Development......Page 415
The Record of Productivity Growth......Page 417
How Saving and Investment Affect Productivity Growth......Page 418
How Labor Force Changes Affect Productivity Growth......Page 420
(2) Our Declining Educational System......Page 421
(4) Restrictions on Immigration......Page 423
The Role of Technological Change......Page 425
Rising Health Care Costs and the Shift to a Service Economy......Page 426
Additional Factors Affecting Our Rate of Growth......Page 428
Summary......Page 430
Output per Employee: An International Comparison......Page 432
Economic Growth in the Less Developed Countries......Page 433
Current Issue: Health Care Costs in the Coming Decades......Page 435
The Poor, the Middle Class, and the Rich......Page 441
Distribution of Wealth in the United States......Page 446
Distribution of Income: Equity and Efficiency......Page 447
What Determines Income Distribution......Page 448
Poverty Defined......Page 449
Who Are the Poor?......Page 451
Child Poverty......Page 452
The Main Government Transfer Programs......Page 454
Theories of the Causes of Poverty......Page 457
The Conservative View versus the Liberal View......Page 459
Solutions......Page 461
Current Issue: Will You Ever Be Poor?......Page 465
18 International Trade......Page 473
U.S. Trade since 1975......Page 474
U.S. Government Trade Policy......Page 476
Absolute Advantage......Page 477
Comparative Advantage......Page 478
The Arguments for Protection......Page 481
Tariffs or Quotas......Page 485
Conclusion......Page 487
What Are the Causes of Our Trade Imbalance?......Page 488
Part IV: Our Trade Deficit with Japan and China......Page 490
Japanese Trading Practices......Page 491
Our Trade Deficit with China......Page 492
Trading with China and Japan: More Differences than Similarities......Page 493
Free Trade in Word and Deed......Page 494
Current Issue: Buy American?......Page 495
Financing International Trade......Page 501
The Balance of Payments......Page 502
The Gold Standard......Page 505
The Gold Exchange Standard, 1944–73......Page 506
The Freely Floating Exchange Rate System, 1973 to the Present......Page 507
The Euro......Page 511
The Yen and the Yuan......Page 512
The Falling Dollar and the U.S. Trade Deficit......Page 513
From Largest Creditor to Largest Debtor......Page 515
A Codependent Relationship......Page 518
Why We Need to Worry about the Current Account Deficit......Page 519
Current Issue: Editorial: American Exceptionality......Page 520
Glossary......Page 527
Photo Credits......Page 536
Index......Page 538