Macroeconomics in Modules

Title page......Page 9
Copyright page......Page 10
About the Authors......Page 13
Dedication......Page 14
Brief Contents......Page 15
Contents......Page 16
Preface......Page 24
Acknowledgments......Page 36
ANY GIVEN SUNDAY......Page 41
Individual Choice: The Core of Economics......Page 42
Resources Are Scarce......Page 43
Microeconomics versus Macroeconomics......Page 44
Macroeconomics: Theory and Policy......Page 45
The Use of Models in Economics......Page 46
Positive versus Normative Economics......Page 47
When and Why Economists Disagree......Page 48
Module 1: Review......Page 49
Trade-offs: The Production Possibility Frontier......Page 51
Efficiency......Page 53
Opportunity Cost......Page 54
Economic Growth......Page 55
Module 2: Review......Page 56
Gains from Trade......Page 58
Comparative Advantage and Gains from Trade......Page 59
ECONOMICS IN ACTION: RICH NATION, POOR NATION......Page 62
Sources of Comparative Advantage......Page 63
Module 3: Review......Page 64
Business Case: Efficiency, Opportunity Cost, and the Logic of Lean Production......Page 66
Section 1: Review......Page 67
BLUE JEAN BLUES......Page 71
Supply and Demand: A Model of a Competitive Market......Page 72
The Demand Schedule and the Demand Curve......Page 73
Shifts of the Demand Curve......Page 74
Understanding Shifts of the Demand Curve......Page 76
Module 4: Review......Page 81
The Supply Schedule and the Supply Curve......Page 83
Shifts of the Supply Curve......Page 84
Understanding Shifts of the Supply Curve......Page 86
Supply, Demand, and Equilibrium......Page 90
Finding the Equilibrium Price and Quantity......Page 91
Why Does the Market Price Rise if It Is Below the Equilibrium Price?......Page 92
What Happens When the Demand Curve Shifts......Page 96
Module 5: Review......Page 94
What Happens When the Supply Curve Shifts......Page 97
Simultaneous Shifts of Supply and Demand Curves......Page 98
Module 6: Review......Page 100
Price Ceilings......Page 103
How a Price Ceiling Causes Inefficiency......Page 104
So Why Are There Price Ceilings?......Page 106
Price Floors......Page 107
ECONOMICS IN ACTION: PRICE FLOORS AND SCHOOL LUNCHES......Page 108
How a Price Floor Causes Inefficiency......Page 109
Quantity Controls......Page 110
The Costs of Quantity Controls......Page 113
MODULE 7: Review......Page 114
International Trade and Globalization......Page 117
The Effects of Imports......Page 118
International Trade and Wages......Page 120
The Effects of Trade Protection......Page 122
The Effects of a Tariff......Page 123
Challenges to Globalization......Page 124
Module 8: Review......Page 125
Business Case: Li & Fung: From Guangzhou to You......Page 127
Section 2: Review......Page 128
THE NEW #2......Page 135
Module 9: Introduction to Macroeconomics......Page 136
The Pain of Recession......Page 137
ECONOMICS IN ACTION: DEFINING RECESSIONS AND EXPANSIONS......Page 138
ECONOMICS IN ACTION: COMPARING RECESSIONS......Page 139
Long-Run Economic Growth......Page 140
Inflation and Deflation......Page 141
International Imbalances......Page 142
Module 9: Review......Page 144
The Circular-Flow Diagram......Page 145
The Simple Circular-Flow Diagram......Page 146
The Expanded Circular-Flow Diagram......Page 147
ECONOMICS IN ACTION: CREATING THE NATIONAL ACCOUNTS......Page 149
Module 10: Review......Page 150
Calculating GDP......Page 151
The Components of GDP......Page 154
GDP: What’s In and What’s Out?......Page 155
Module 11: Review......Page 156
Real GDP: A Measure of Aggregate Output......Page 158
Calculating Real GDP......Page 159
What Real GDP Doesn’t Measure......Page 160
ECONOMICS IN ACTION: GDP AND THE MEANING OF LIFE......Page 161
Module 12: Review......Page 162
Section 3: Review......Page 165
A VERY BRITISH DILEMMA......Page 171
Defining and Measuring Unemployment......Page 172
The Significance of the Unemployment Rate......Page 173
Growth and Unemployment......Page 175
ECONOMICS IN ACTION: FAILURE TO LAUNCH......Page 177
Module 13: Review......Page 178
Job Creation and Job Destruction......Page 180
Frictional Unemployment......Page 181
Structural Unemployment......Page 182
Changes in the Natural Rate of Unemployment......Page 185
ECONOMICS IN ACTION: NATURAL UNEMPLOYMENT AROUND THE OECD......Page 187
Module 14: Review......Page 188
The Level of Prices Doesn’t Matter . . .......Page 189
. . . But the Rate of Change of Prices Does......Page 190
ECONOMICS IN ACTION: ISRAEL’S EXPERIENCE WITH INFLATION......Page 191
Winners and Losers from Inflation......Page 193
Inflation Is Easy; Disinflation Is Hard......Page 194
Module 15: Review......Page 195
Market Baskets and Price Indexes......Page 197
The Consumer Price Index......Page 199
Other Price Measures......Page 200
ECONOMICS IN ACTION: INDEXING TO THE CPI......Page 201
Module 16: Review......Page 202
Business Case: A Monster Slump......Page 204
Section 4: Review......Page 205
TALL TALES......Page 211
Real GDP per Capita......Page 212
Growth Rates......Page 214
ECONOMICS IN ACTION: INDIA TAKES OFF......Page 215
Explaining Growth in Productivity......Page 216
Module 17: Review......Page 217
The Aggregate Production Function......Page 219
Growth Accounting......Page 221
ECONOMICS IN ACTION: THE INFORMATION TECHNOLOGY PARADOX......Page 222
What About Natural Resources?......Page 223
Is World Growth Sustainable?......Page 224
Economic Growth and the Environment......Page 225
Module 18: Review......Page 227
Explaining Differences in Growth Rates......Page 229
The Role of Government in Promoting Economic Growth......Page 231
ECONOMICS IN ACTION: ARE ECONOMIES CONVERGING?......Page 236
ECONOMICS IN ACTION: THE BRAZILIAN BREADBASKET......Page 233
East Asia’s Miracle......Page 234
Africa’s Troubles and Promise......Page 235
Module 19: Review......Page 238
Business Case: Big Box Boom......Page 239
Section 5: Review......Page 240
FUNDS FOR FACEBOOK......Page 245
The Savings–Investment Spending Identity......Page 246
ECONOMICS IN ACTION: AMERICA’S LOW SAVINGS......Page 250
Module 20: Review......Page 251
The Role of the Loanable Funds Market......Page 252
The Demand for Loanable Funds......Page 253
The Supply of Loanable Funds......Page 254
The Equilibrium Interest Rate......Page 255
Shifts of the Demand for Loanable Funds......Page 256
Shifts of the Supply of Loanable Funds......Page 257
Inflation and Interest Rates......Page 258
ECONOMICS IN ACTION: FIFTY YEARS OF FLUCTUATIONS IN U.S. INTEREST RATES......Page 259
Module 21: Review......Page 260
The Concept of Present Value......Page 262
Defining Present Value......Page 263
Using Present Value......Page 265
ECONOMICS IN ACTION: HOW BIG IS THAT JACKPOT, ANYWAY?......Page 266
Module 22: Review......Page 267
Understanding the Financial System......Page 268
Three Tasks of a Financial System......Page 269
Types of Financial Assets......Page 270
Financial Intermediaries......Page 272
Financial Fluctuations and Macroeconomic Policy......Page 274
ECONOMICS IN ACTION: THE GREAT AMERICAN HOUSING BUBBLE......Page 275
Module 23: Review......Page 276
Section 6: Review......Page 277
FROM BOOM TO BUST......Page 281
The Multiplier: An Informal Introduction......Page 282
ECONOMICS IN ACTION: THE MULTIPLIER AND THE GREAT DEPRESSION......Page 286
Module 24: Review......Page 285
Current Disposable Income and Consumer Spending......Page 287
Shifts of the Aggregate Consumption Function......Page 291
Investment Spending......Page 292
Expected Future Real GDP, Production Capacity, and Investment Spending......Page 293
Inventories and Unplanned Investment Spending......Page 294
ECONOMICS IN ACTION: INTEREST RATES AND THE U.S. HOUSING BOOM......Page 295
Module 25: Review......Page 296
Using the Income–Expenditure Model......Page 298
Planned Aggregate Spending and Real GDP......Page 299
Income–Expenditure Equilibrium......Page 300
The Multiplier Process and Inventory Adjustment......Page 302
ECONOMICS IN ACTION: INVENTORIES AND THE END OF A RECESSION......Page 305
Module 26: Review......Page 306
Business Case: Making It Through in Muskegon......Page 307
Section 7: Review......Page 310
SHOCKS TO THE SYSTEM......Page 313
The Aggregate Demand Curve......Page 314
Why Is the Aggregate Demand Curve Downward Sloping?......Page 315
The Aggregate Demand Curve and the Income–ExpenditureModel......Page 316
Shifts of the Aggregate Demand Curve......Page 318
Module 27: Review......Page 322
The Short-Run Aggregate Supply Curve......Page 324
Shifts of the Short-Run Aggregate Supply Curve......Page 327
The Long-Run Aggregate Supply Curve......Page 329
From the Short Run to the Long Run......Page 332
ECONOMICS IN ACTION: PRICES AND OUTPUT DURING THE GREAT DEPRESSION......Page 333
Module 28: Review......Page 334
Short-Run Macroeconomic Equilibrium......Page 336
Shifts of Aggregate Demand: Short-Run Effects......Page 337
Shifts of the SRAS Curve......Page 339
Long-Run Macroeconomic Equilibrium......Page 340
Macroeconomic Policy......Page 343
Responding to Supply Shocks......Page 344
Module 29: Review......Page 345
Business Case: United in Pain......Page 347
Section 8: Review......Page 348
TO STIMULATE OR NOT TO STIMULATE?......Page 353
What Is Fiscal Policy?......Page 354
Taxes, Purchases of Goods and Services, Government Transfers, and Borrowing......Page 355
The Government Budget and Total Spending......Page 356
Expansionary and Contractionary Fiscal Policy......Page 357
Can Expansionary Fiscal Policy Actually Work?......Page 358
A Cautionary Note: Lags in Fiscal Policy......Page 362
Module 30: Review......Page 361
Multiplier Effects of an Increase in Government Purchases of Goods and Services......Page 363
Multiplier Effects of Changes inGovernment Transfers and Taxes......Page 364
How Taxes Affect the Multiplier......Page 365
ECONOMICS IN ACTION: MULTIPLIERS AND THE OBAMA STIMULUS......Page 366
Module 31: Review......Page 367
The Budget Balance as a Measure of Fiscal Policy......Page 368
The Business Cycle and the Cyclically Adjusted Budget Balance......Page 369
Should the Budget Be Balanced?......Page 371
Long-Run Implications of Fiscal Policy......Page 372
Deficits, Surpluses, and Debt......Page 373
Problems Posed by Rising Government Debt......Page 374
Deficits and Debt in Practice......Page 375
Implicit Liabilities......Page 376
Module 32: Review......Page 377
Business Case: Priming the Pumps......Page 379
Section 9: Review......Page 380
FUNNY MONEY......Page 385
What Is Money?......Page 386
Roles of Money......Page 387
Types of Money......Page 388
ECONOMICS IN ACTION: THE HISTORY OF THE DOLLAR......Page 389
Measuring the Money Supply......Page 390
Module 33: Review......Page 391
The Monetary Role of Banks......Page 393
ECONOMICS IN ACTION: IT’S A WONDERFUL BANKING SYSTEM......Page 395
The Problem of Bank Runs......Page 394
Determining the Money Supply......Page 396
How Banks Create Money......Page 397
Reserves, Bank Deposits, and the Money Multiplier......Page 398
The Money Multiplier in Reality......Page 399
Module 34: Review......Page 401
The Structure of the Fed......Page 402
The Evolution of the American Banking System......Page 403
The Crisis in American Banking at the Turn of the Twentieth Century......Page 404
Responding to Banking Crises: The Creation of the Federal Reserve......Page 405
Back to the Future: The Financial Crisis of 2008......Page 406
ECONOMICS IN ACTION: REGULATION AFTER THE 2008 CRISIS......Page 409
Module 35: Review......Page 410
Business Case: The Perfect Gift: Cash or a Gift Card?......Page 411
Section 10: Review......Page 413
PERSON OF THE YEAR......Page 417
Functions of the Federal Reserve System......Page 418
The Discount Rate......Page 419
Open-Market Operations......Page 420
ECONOMICS IN ACTION: WHO GETS THE INTEREST ON THE FED’S ASSETS?......Page 421
Module 36: Review......Page 422
The Opportunity Cost of Holding Money......Page 423
The Money Demand Curve......Page 425
Shifts of the Money Demand Curve......Page 426
The Equilibrium Interest Rate......Page 428
Module 37: Review......Page 430
The Fed, the Money Supply, and the Interest Rate......Page 432
Long-Term Interest Rates......Page 434
Expansionary and Contractionary Monetary Policy......Page 435
Monetary Policy in Practice......Page 436
The Taylor Rule Method of Setting Monetary Policy......Page 437
Inflation Targeting......Page 438
ECONOMICS IN ACTION: WHAT THE FED WANTS, THE FED GETS......Page 439
Module 38: Review......Page 440
Money, Output, and Prices......Page 442
Short-Runand Long-Run Effects of an Increase in the Money Supply......Page 443
Monetary Neutrality......Page 444
Changes in the Money Supply and the Interest Rate in the Long Run......Page 445
Business Case: PIMCO Bets on Cheap Money......Page 448
Module 39: Review......Page 446
Section 11: Review......Page 449
BRINGING A SUITCASE TO THE BANK......Page 453
The Classical Model of Money and Prices......Page 454
The Inflation Tax......Page 456
The Logic of Hyperinflation......Page 458
Moderate Inflation and Disinflation......Page 459
The Output Gap and the Unemployment Rate......Page 460
Module 40: Review......Page 462
The Short-RunPhillips Curve......Page 463
Inflation Expectations and the Short-Run Phillips Curve......Page 464
The Long-RunPhillips Curve......Page 466
ECONOMICS IN ACTION: THE GREAT DISINFLATION OF THE 1980s......Page 468
Deflation......Page 469
Effects of Expected Deflation......Page 470
ECONOMICS IN ACTION: THE DEFLATION SCARE OF 2010......Page 472
Module 41: Review......Page 473
The Purpose of Banking......Page 475
Banking Crises and Financial Panics......Page 476
ECONOMICS IN ACTION: LIGHTS OUT AT LEHMAN......Page 478
Banking Crises, Recessions, and Recovery......Page 479
Why Are Banking-Crisis Recessions So Bad?......Page 480
Governments Step In......Page 481
Severe Crisis, Slow Recovery......Page 482
The Stimulus–Austerity Debate......Page 484
Regulation in the Wake of the Crisis......Page 485
Module 42: Review......Page 487
Business Case: Licenses to Print Money......Page 488
Section 12: Review......Page 489
SWITZERLAND DOESN’T WANT YOUR MONEY......Page 493
Understanding the Balance of Payments......Page 494
ECONOMICS IN ACTION: GDP, GNP, AND THE CURRENT ACCOUNT......Page 498
Modeling the Financial Account......Page 499
Underlying Determinants of International Capital Flows......Page 501
Module 43: Review......Page 502
Understanding Exchange Rates......Page 504
The Equilibrium Exchange Rate......Page 505
Inflation and Real Exchange Rates......Page 508
Purchasing Power Parity......Page 510
Module 44: Review......Page 511
Fixed and Floating Exchange Rates......Page 513
How Can an Exchange Rate Be Held Fixed?......Page 514
The Exchange Rate Regime Dilemma......Page 515
ECONOMICS IN ACTION: CHINA PEGS THE YUAN......Page 516
Module 45: Review......Page 517
Module 46: Exchange Rates and Macroeconomic Policy......Page 519
Devaluation and Revaluation of Fixed Exchange Rates......Page 520
International Business Cycles......Page 522
Monetary Policy Under a Floating Exchange Rate Regime......Page 521
Module 46: Review......Page 523
Business Case: War of the Earthmovers......Page 524
Section 13: Review......Page 525
A TALE OF TWO SLUMPS......Page 529
The Business Cycle......Page 530
Keynes’s Theory......Page 531
ECONOMICS IN ACTION: THE END OF THE GREAT DEPRESSION......Page 533
Monetarism......Page 534
The Political Business Cycle......Page 537
Rational Expectations......Page 538
Real Business Cycles......Page 539
Module 47: Review......Page 540
Consensus and Conflict in Modern Macroeconomics......Page 542
QUESTION 3: CAN MONETARY AND/OR FISCAL POLICY REDUCE UNEMPLOYMENT IN THE LONG RUN?......Page 543
Crisis and Aftermath......Page 544
The Debate over Monetary Policy......Page 545
ECONOMICS IN ACTION: AN IRISH ROLE MODEL?......Page 546
Module 48: Review......Page 548
Appendix A: Graphs in Economics......Page 553
Appendix B: Macroeconomic Data......Page 563
Glossary......Page 577
Solutions to Module Review Questions......Page 585
Index......Page 613