Macroeconomics: Principles and Policy, 11th, 2010 update Edition

Cover Page......Page 1
Title Page......Page 2
Copyright Page......Page 3
Dedication......Page 4
BRIEF CONTENTS......Page 5
TABLE OF CONTENTS......Page 6
Preface......Page 17
About the Authors......Page 20
PART 1 GETTING ACQUAINTED WITH ECONOMICS......Page 22
CHAPTER 1 WHAT IS ECONOMICS?......Page 23
IDEAS FOR BEYOND THE FINAL EXAM......Page 24
INSIDE THE ECONOMIST’S TOOL KIT......Page 27
Discussion Questions......Page 32
APPENDIX  Using Graphs: A Review......Page 33
CHAPTER 2 THE ECONOMY: MYTH AND REALITY......Page 40
THE AMERICAN ECONOMY: A THUMBNAIL SKETCH......Page 41
THE INPUTS: LABOR AND CAPITAL......Page 45
THE OUTPUTS: WHAT DOES AMERICA PRODUCE?......Page 49
THE CENTRAL ROLE OF BUSINESS FIRMS......Page 50
WHAT’S MISSING FROM THE PICTURE? GOVERNMENT......Page 51
Key Terms......Page 55
Discussion Questions......Page 56
CHAPTER 3 THE FUNDAMENTAL ECONOMIC PROBLEM: SCARCITY AND CHOICE......Page 57
SCARCITY, CHOICE, AND OPPORTUNITY COST......Page 58
SCARCITY AND CHOICE FOR A SINGLE FIRM......Page 60
SCARCITY AND CHOICE FOR THE ENTIRE SOCIETY......Page 63
THE CONCEPT OF EFFICIENCY......Page 64
THE THREE COORDINATION TASKS OF ANY ECONOMY......Page 65
TASK 1. HOW THE MARKET FOSTERS EFFICIENT RESOURCE ALLOCATION......Page 66
TASK 3. HOW TO DISTRIBUTE THE ECONOMY’S OUTPUTS AMONG CONSUMERS......Page 68
Summary......Page 70
Discussion Questions......Page 71
CHAPTER 4 SUPPLY AND DEMAND: AN INITIAL LOOK......Page 72
THE INVISIBLE HAND......Page 73
DEMAND AND QUANTITY DEMANDED......Page 74
SUPPLY AND QUANTITY SUPPLIED......Page 78
SUPPLY AND DEMAND EQUILIBRIUM......Page 81
EFFECTS OF DEMAND SHIFTS ON SUPPLY-DEMAND EQUILIBRIUM......Page 83
SUPPLY SHIFTS AND SUPPLY-DEMAND EQUILIBRIUM......Page 84
BATTLING THE INVISIBLE HAND: THE MARKET FIGHTS BACK......Page 87
Summary......Page 93
Test Yourself......Page 94
Discussion Questions......Page 95
PART 2 THE MACROECONOMY: AGGREGATE SUPPLY AND DEMAND......Page 97
CHAPTER 5 AN INTRODUCTION TO MACROECONOMICS......Page 98
DRAWING A LINE BETWEEN MACROECONOMICS AND MICROECONOMICS......Page 99
SUPPLY AND DEMAND IN MACROECONOMICS......Page 100
GROSS DOMESTIC PRODUCT......Page 102
THE ECONOMY ON A ROLLER COASTER......Page 106
THE PROBLEM OF MACROECONOMIC STABILIZATION: A SNEAK PREVIEW......Page 114
Summary......Page 116
Test Yourself......Page 117
Discussion Questions......Page 118
CHAPTER 6 THE GOALS OF MACROECONOMIC POLICY......Page 119
PRODUCTIVITY GROWTH: FROM LITTLE ACORNS . . .......Page 120
THE CAPACITY TO PRODUCE: POTENTIAL GDP AND THE PRODUCTION FUNCTION......Page 122
THE GROWTH RATE OF POTENTIAL GDP......Page 123
PART 2: THE GOAL OF LOW UNEMPLOYMENT......Page 125
THE HUMAN COSTS OF HIGH UNEMPLOYMENT......Page 126
COUNTING THE UNEMPLOYED: THE OFFICIAL STATISTICS......Page 127
TYPES OF UNEMPLOYMENT......Page 128
UNEMPLOYMENT INSURANCE: THE INVALUABLE CUSHION......Page 129
PART 3: THE GOAL OF LOW INFLATION......Page 130
INFLATION: THE MYTH AND THE REALITY......Page 131
REAL VERSUS NOMINAL INTEREST RATES......Page 134
INFLATION DISTORTS MEASUREMENTS......Page 135
OTHER COSTS OF INFLATION......Page 136
THE COSTS OF LOW VERSUS HIGH INFLATION......Page 137
Summary......Page 139
Test Yourself......Page 140
| APPENDIX | How Statisticians Measure Inflation......Page 141
CHAPTER 7 ECONOMIC GROWTH: THEORY AND POLICY......Page 146
THE THREE PILLARS OF PRODUCTIVITY GROWTH......Page 147
LEVELS, GROWTH RATES, AND THE CONVERGENCE HYPOTHESIS......Page 149
GROWTH POLICY: ENCOURAGING CAPITAL FORMATION......Page 151
GROWTH POLICY: IMPROVING EDUCATION AND TRAINING......Page 153
GROWTH POLICY: SPURRING TECHNOLOGICAL CHANGE......Page 155
THE PRODUCTIVITY SLOWDOWN AND SPEED-UP IN THE UNITED STATES......Page 156
GROWTH IN THE DEVELOPING COUNTRIES......Page 160
Summary......Page 162
Test Yourself......Page 163
Discussion Questions......Page 164
CHAPTER 8 AGGREGATE DEMAND AND THE POWERFUL CONSUMER......Page 165
AGGREGATE DEMAND, DOMESTIC PRODUCT, AND NATIONAL INCOME......Page 166
THE CIRCULAR FLOW OF SPENDING, PRODUCTION, AND INCOME......Page 167
CONSUMER SPENDING AND INCOME: THE IMPORTANT RELATIONSHIP......Page 169
THE CONSUMPTION FUNCTION AND THE MARGINAL PROPENSITY TO CONSUME......Page 172
FACTORS THAT SHIFT THE CONSUMPTION FUNCTION......Page 173
THE EXTREME VARIABILITY OF INVESTMENT......Page 176
THE DETERMINANTS OF NET EXPORTS......Page 177
Summary......Page 178
Test Yourself......Page 179
| APPENDIX | National Income Accounting......Page 180
CHAPTER 9 DEMAND-SIDE EQUILIBRIUM: UNEMPLOYMENT OR INFLATION?......Page 187
THE MEANING OF EQUILIBRIUM GDP......Page 188
THE MECHANICS OF INCOME DETERMINATION......Page 190
THE AGGREGATE DEMAND CURVE......Page 192
DEMAND-SIDE EQUILIBRIUM AND FULL EMPLOYMENT......Page 194
THE COORDINATION OF SAVING AND INVESTMENT......Page 195
CHANGES ON THE DEMAND SIDE: MULTIPLIER ANALYSIS......Page 197
THE MULTIPLIER IS A GENERAL CONCEPT......Page 201
THE MULTIPLIER AND THE AGGREGATE DEMAND CURVE......Page 202
Summary......Page 203
Test Yourself......Page 204
APPENDIX A | The Simple Algebra of Income Determination and the Multiplier......Page 205
| APPENDIX B | The Multiplier with Variable Imports......Page 206
CHAPTER 10 BRINGING IN THE SUPPLY SIDE: UNEMPLOYMENT AND INFLATION?......Page 210
THE AGGREGATE SUPPLY CURVE......Page 211
EQUILIBRIUM OF AGGREGATE DEMAND AND SUPPLY......Page 214
INFLATION AND THE MULTIPLIER......Page 215
RECESSIONARY AND INFLATIONARY GAPS REVISITED......Page 216
ADJUSTING TO A RECESSIONARY GAP: DEFLATION OR UNEMPLOYMENT?......Page 218
ADJUSTING TO AN INFLATIONARY GAP: INFLATION......Page 220
STAGFLATION FROM A SUPPLY SHOCK......Page 222
APPLYING THE MODEL TO A GROWING ECONOMY......Page 223
Summary......Page 227
Test Yourself......Page 228
Discussion Questions......Page 229
PART 3 FISCAL AND MONETARY POLICY......Page 230
CHAPTER 11 MANAGING AGGREGATE DEMAND: FISCAL POLICY......Page 231
INCOME TAXES AND THE CONSUMPTION SCHEDULE......Page 232
THE MULTIPLIER REVISITED......Page 233
PLANNING EXPANSIONARY FISCAL POLICY......Page 236
THE CHOICE BETWEEN SPENDING POLICY AND TAX POLICY......Page 237
SOME HARSH REALITIES......Page 238
THE IDEA BEHIND SUPPLY-SIDE TAX CUTS......Page 239
Test Yourself......Page 243
| APPENDIX A | Graphical Treatment of Taxes Fiscal Policy......Page 244
| APPENDIX B | Algebraic Treatment of Taxes and Fiscal Policy......Page 248
CHAPTER 12 MONEY AND THE BANKING SYSTEM......Page 251
THE NATURE OF MONEY......Page 252
HOW THE QUANTITY OF MONEY IS MEASURED......Page 256
THE BANKING SYSTEM......Page 258
THE ORIGINS OF THE MONEY SUPPLY......Page 261
BANKS AND MONEY CREATION......Page 262
WHY THE MONEY-CREATION FORMULA IS OVERSIMPLIFIED......Page 268
Summary......Page 269
Discussion Questions......Page 270
CHAPTER 13 MANAGING AGGREGATE DEMAND: MONETARY POLICY......Page 271
MONEY AND INCOME: THE IMPORTANT DIFFERENCE......Page 272
AMERICA’S CENTRAL BANK: THE FEDERAL RESERVE SYSTEM......Page 273
IMPLEMENTING MONETARY POLICY: OPEN-MARKET OPERATIONS......Page 275
OTHER METHODS OF MONETARY CONTROL......Page 278
HOW MONETARY POLICY WORKS......Page 280
MONEY AND THE PRICE LEVEL IN THE KEYNESIAN MODEL......Page 282
FROM MODELS TO POLICY DEBATES......Page 284
Test Yourself......Page 285
Discussion Questions......Page 286
CHAPTER 14 THE DEBATE OVER MONETARY AND FISCAL POLICY......Page 287
VELOCITY AND THE QUANTITY THEORY OF MONEY......Page 288
FISCAL POLICY, INTEREST RATES, AND VELOCITY......Page 291
DEBATE: SHOULD WE RELY ON FISCAL OR MONETARY POLICY?......Page 293
DEBATE: SHOULD THE FED CONTROL THE MONEY SUPPLY OR INTEREST RATES?......Page 294
DEBATE: THE SHAPE OF THE AGGREGATE SUPPLY CURVE......Page 297
DEBATE: SHOULD THE GOVERNMENT INTERVENE?......Page 299
DIMENSIONS OF THE RULES-VERSUS-DISCRETION DEBATE......Page 301
Summary......Page 305
Test Yourself......Page 306
Discussion Questions......Page 307
CHAPTER 15 BUDGET DEFICITS IN THE SHORT AND LONG RUN......Page 308
SHOULD THE BUDGET ALWAYS BE BALANCED? THE SHORT RUN......Page 309
SURPLUSES AND DEFICITS: THE LONG RUN......Page 310
DEFICITS AND DEBT: TERMINOLOGY AND FACTS......Page 312
INTERPRETING THE BUDGET DEFICIT OR SURPLUS......Page 314
WHY IS THE NATIONAL DEBT CONSIDERED A BURDEN?......Page 316
BUDGET DEFICITS AND INFLATION......Page 317
DEBT, INTEREST RATES, AND CROWDING OUT......Page 319
THE MAIN BURDEN OF THE NATIONAL DEBT: SLOWER GROWTH......Page 320
THE ECONOMICS AND POLITICS OF THE U.S. BUDGET DEFICIT......Page 323
Test Yourself......Page 324
Discussion Questions......Page 325
CHAPTER 16 THE TRADE-OFF BETWEEN INFLATION AND UNEMPLOYMENT......Page 326
DEMAND-SIDE INFLATION VERSUS SUPPLY-SIDE INFLATION: A REVIEW......Page 327
ORIGINS OF THE PHILLIPS CURVE......Page 328
SUPPLY-SIDE INFLATION AND THE COLLAPSE OF THE PHILLIPS CURVE......Page 330
WHAT THE PHILLIPS CURVE IS NOT......Page 331
FIGHTING UNEMPLOYMENT WITH FISCAL AND MONETARY POLICY......Page 333
WHAT SHOULD BE DONE?......Page 334
INFLATIONARY EXPECTATIONS AND THE PHILLIPS CURVE......Page 335
THE THEORY OF RATIONAL EXPECTATIONS......Page 337
WHY ECONOMISTS (AND POLITICIANS) DISAGREE......Page 339
ATTEMPTS TO REDUCE THE NATURAL RATE OF UNEMPLOYMENT......Page 340
INDEXING......Page 341
Summary......Page 342
Discussion Questions......Page 343
PART 4 THE UNITED STATES IN THE WORLD ECONOMY......Page 345
CHAPTER 17 INTERNATIONAL TRADE AND COMPARATIVE ADVANTAGE......Page 346
WHY TRADE?......Page 348
INTERNATIONAL VERSUS INTRANATIONAL TRADE......Page 349
THE LAW OF COMPARATIVE ADVANTAGE......Page 350
TARIFFS, QUOTAS, AND OTHER INTERFERENCES WITH TRADE......Page 355
WHY INHIBIT TRADE?......Page 357
CAN CHEAP IMPORTS HURT A COUNTRY?......Page 360
Key Terms......Page 363
Discussion Questions......Page 364
| APPENDIX | Supply, Demand, and Pricing in World Trade......Page 365
CHAPTER 18 THE INTERNATIONAL MONETARY SYSTEM: ORDER OR DISORDER?......Page 368
WHAT ARE EXCHANGE RATES?......Page 369
EXCHANGE RATE DETERMINATION IN A FREE MARKET......Page 370
WHEN GOVERNMENTS FIX EXCHANGE RATES: THE BALANCE OF PAYMENTS......Page 376
A BIT OF HISTORY: THE GOLD STANDARD AND THE BRETTON WOODS SYSTEM......Page 377
WHY TRY TO FIX EXCHANGE RATES?......Page 379
THE CURRENT “NONSYSTEM”......Page 380
Key Terms......Page 384
Discussion Questions......Page 385
CHAPTER 19 EXCHANGE RATES AND THE MACROECONOMY......Page 386
INTERNATIONAL TRADE, EXCHANGE RATES, AND AGGREGATE DEMAND......Page 387
AGGREGATE SUPPLY IN AN OPEN ECONOMY......Page 389
THE MACROECONOMIC EFFECTS OF EXCHANGE RATES......Page 390
FISCAL AND MONETARY POLICIES IN AN OPEN ECONOMY......Page 391
INTERNATIONAL ASPECTS OF DEFICIT REDUCTION......Page 393
ON CURING THE TRADE DEFICIT......Page 395
CONCLUSION: NO NATION IS AN ISLAND......Page 397
Summary......Page 398
Discussion Questions......Page 399
PART 5 POSTSCRIPT: THE FINANCIAL CRISIS OF 2007–2009......Page 400
CHAPTER 20 THE FINANCIAL CRISIS AND THE GREAT RECESSION......Page 401
ROOTS OF THE CRISIS......Page 402
LEVERAGE, PROFITS, AND RISK......Page 404
THE HOUSING PRICE BUBBLE AND THE SUBPRIME MORTGAGE CRISIS......Page 406
FROM THE HOUSING BUBBLE TO THE FINANCIAL CRISIS......Page 408
FROM THE FINANCIAL CRISIS TO THE GREAT RECESSION......Page 410
HITTING BOTTOM AND RECOVERING......Page 413
LESSONS FROM THE FINANCIAL CRISIS......Page 414
Key Terms......Page 415
Discussion Questions......Page 416
| APPENDIX | Answers to Odd-Numbered Test Yourself Questions......Page 417
GLOSSARY......Page 429
INDEX......Page 437