Principles of Macroeconomics Version 9.0

Brief Contents
Contents
About the Authors
Acknowledgments
Preface
Chapter 1: The Central Idea
	1.1: Scarcity and Choice for Individuals
		Consumer Decisions
			Opportunity Cost
			Gains from Trade: A Better Allocation
		Producer Decisions
			Gains from Trade: Greater Production
			Specialization, Division of Labor, and Comparative Advantage
		International Trade
	1.2: Scarcity and Choice for the Economy as a Whole
		Production Possibilities
		Increasing Opportunity Costs
		The Production Possibilities Curve
			Inefficient, Efficient, or Impossible?
			Shifts in the Production Possibilities Curve
			Scarcity, Choice, and Economic Progress
	1.3: Market Economies and the Price System
		Key Elements of a Market Economy
			Freely Determined Prices
			Property Rights and Incentives
			Freedom to Trade at Home and Abroad
			A Role For Government
			The Role of Private Organizations
		The Price System
			Signals
			Incentives
			Distribution
		Financial Crises and Recessions
		The Price System during National Disasters
		Artificial Intelligence, Economics, and the Price System
	1.4: End-of-Chapter Material
		Conclusion
Chapter 2: Observing and Explaining the Economy
	2.1: Why Has Driving Shifted into Reverse?
	2.2: Variables, Correlation, and Causation
		Correlation versus Causation
		The Lack of Controlled Experiments in Economics
		Economic Models
			Microeconomic versus Macroeconomic Models
			An Example: A Model with Two Variables
		The Ceteris Paribus Assumption
		The Use of Existing Models
		The Development of Models
	2.3: Recommending Appropriate Policies
		Positive versus Normative Economics
		Economics as a Science versus Partisan Policy Tool
		Economics Is Not the Only Factor in Policy Issues
		Disagreement between Economists
	2.4: End-of-Chapter Material
		Conclusion: A Reader’s Guide
	2.5: Appendix: Reading, Understanding, and Creating Graphs
		Visualizing Observations with Graphs
			Time-Series Graph
			Time-Series Graphs Showing Two or More Variables
			Scatter Plots
		Visualizing Models with Graphs
			Slopes of Curves
			Graphs of Models with More Than Two Variables
Chapter 3: The Supply and Demand Model
	3.1: Demand
		The Demand Curve
		Shifts in Demand
			Consumers’ Preferences
			Consumers’ Information
			Consumers’ Incomes
			Number of Consumers in the Market
			Consumers’ Expectations of Future Prices
			Prices of Closely Related Goods
		Movements Along versus Shifts of the Demand Curve
	3.2: Supply
		The Supply Curve
		Shifts in Supply
			Technology
			Weather Conditions
			The Price of Inputs Used in Production
			The Number of Firms in the Market
			Expectations of Future Prices
			Government Taxes, Subsidies, and Regulations
		Movements Along versus Shifts of the Supply Curve
	3.3: Market Equilibrium: Combining Supply and Demand
		Determination of the Market Price
			Finding the Market Price
			Two Predictions
		Finding the Equilibrium with a Supply and Demand Diagram
		Market Outcomes When Supply or Demand Changes
			Effects of a Change in Demand
			Effects of a Change in Supply
			When Both Curves Shift
	3.4: End-of-Chapter Material
		Conclusion
Chapter 4: Subtleties of the Supply and Demand Model
	4.1: Interference with Market Prices
		Price Ceilings and Price Floors
		Side Effects of Price Ceilings
			Dealing with Persistent Shortages
			Making Things Worse
		Side Effects of Price Floors
			Dealing with Persistent Surpluses
			Making Things Worse
	4.2: Elasticity of Demand
		Defining the Price Elasticity of Demand
		The Size of the Elasticity: High versus Low
		The Impact of a Change in Supply on the Price of Oil
	4.3: Working with Demand Elasticities
		The Advantage of a Unit-Free Measure
		Elasticity versus Slope
		Calculating the Elasticity with a Midpoint Formula
		Talking about Elasticities
			Elastic versus Inelastic Demand
			Perfectly Elastic versus Perfectly Inelastic Demand
		Revenue and the Price Elasticity of Demand
		What Determines the Size of the Price Elasticity of Demand?
			The Degree of Substitutability
			Big-Ticket versus Little-Ticket Items
			Temporary versus Permanent Price Changes
			Differences in Preferences
			Long-Run versus Short-Run Elasticity
		Income Elasticity and Cross-Price Elasticity of Demand
	4.4: Elasticity of Supply
		Working with Supply Elasticities
			Perfectly Elastic and Perfectly Inelastic Supply
			Why the Size of the Price Elasticity of Supply Is Important
	4.5: End-of-Chapter Material
		Conclusion
Chapter 5: Macroeconomics: The Big Picture
	5.1: Measuring the “Size” of an Economy
		Economic Growth: The Relentless Uphill Climb
		Economic Fluctuations: Temporary Setbacks and Recoveries
			A Recession’s Aftermath
			Recessions versus Depressions
	5.2: Unemployment, Inflation, and Interest Rates
		Unemployment during Recessions
		Inflation
		Interest Rates
			Different Types of Interest Rates and Their Behavior
			The Concept of the Real Interest Rate
	5.3: Macroeconomic Theory and Policy
		The Theory of Long-Term Economic Growth
			The Production Function
		Government Policy and Economic Growth
			Fiscal Policy
			Monetary Policy
		The Theory of Economic Fluctuations
			Aggregate Demand and Economic Fluctuations
		Macroeconomic Policy and Economic Fluctuations
			Fiscal Policy
			Monetary Policy
	5.4: End-of-Chapter Material
		Conclusion
	5.5: Appendix: The Miracle of Compound Growth
		How Compound Growth Works
		Exponential Effects
		Rule of 72
		Plotting Growing Variables
	Endnote
Chapter 6: Measuring the Production, Income, and Spending of Nations
	6.1: Measuring GDP
		A Precise Definition of GDP
			Prices Determine the Importance of Goods and Services in GDP
			Intermediate Goods versus Final Goods
			Stocks versus Flows
			Three Ways to Measure GDP
		The Spending Approach
			Consumption
			Investment
			Government Purchases
			Net Exports
			Algebraic Summary
		The Income Approach
			Labor Income
			Capital Income
			Depreciation
			Taxes, Subsidies, and Transfers
			Net Income of Foreigners
		The Production Approach
	6.2: Saving
		Individual Saving
		National Saving
	6.3: Measuring Real GDP
		Adjusting GDP for Inflation
			Calculating Real GDP Growth
			A Year-to-Year Chain
			Obtaining the Values of Real GDP
			Real GDP versus Nominal GDP over Time
		The GDP Deflator
		Alternative Inflation Measures
	6.4: Shortcomings of the GDP Measure
		Revisions to GDP
		Omissions from GDP
			Home Work and Production
			Leisure Activity
			The Underground Economy
			Quality Improvements
		Other Measures of Well-Being
	6.5: End-of-Chapter Material
		Conclusion
	Endnotes
Chapter 7: The Spending Allocation Model
	7.1: The Spending Shares
		Defining the Spending Shares
		If One Share Goes Up, Another Must Go Down
	7.2: The Effect of Interest Rates on Spending Shares
		Consumption
			Consumption and the Real Interest Rate
			Movements Along versus Shifts of the Consumption Share Line
		Investment
		Net Exports
			The Interest Rate and the Exchange Rate
			The Exchange Rate and Net Exports
			Combining the Two Relationships
		Putting the Three Shares Together
	7.3: Determining the Equilibrium Interest Rate
		The Nongovernment Share of GDP
		The Government’s Share of GDP and the Share of GDP Available for Nongovernment Use
		Finding the Equilibrium Interest Rate
			Analogy with Supply and Demand
			The Real Interest Rate in the Long Run
		Using the Spending Allocation Model to Analyze the Long-Run Implications of a Shift in Government Purchases
	7.4: The Relationship between Saving and Investment
	7.5: End-of-Chapter Material
		Conclusion
	Endnote
Chapter 8: Unemployment and Employment
	8.1: Unemployment and Other Labor Market Indicators
		How Is Unemployment Measured?
			Who Is Employed and Who Is Unemployed?
			The Labor Force and Discouraged Workers
			Part-Time Work
			Comparing Three Key Indicators
			Aggregate Hours of Labor Input
			Cyclical, Frictional, and Structural Unemployment
	8.2: The Nature of Unemployment
		Reasons People Are Unemployed
			Job Losers
			Job Leavers
			New Entrants and Re-entrants
		The Duration of Unemployment
		Unemployment for Different Groups
	8.3: Modeling the Labor Market
		Labor Demand and Labor Supply
		Explaining Labor Market Trends
		Why Is the Unemployment Rate Always Greater Than Zero?
			Job Rationing
			Job Search
			Policies to Reduce Unemployment
	8.4: End-of-Chapter Material
		Conclusion
	Endnotes
Chapter 9: Productivity and Economic Growth
	9.1: Labor and Capital without Technology
		Labor Alone and Capital without Technology
			Diminishing Returns to Labor
		Adding Capital
			Diminishing Returns to Capital
	9.2: Technology: The Engine of Growth
		What Is Technology?
			Invention, Innovation, and Diffusion
			Organization and Specialization
			Human Capital
		The Production of Technology: The Invention Factory
		Special Features of Technology
	9.3: Fundamental Causes of Economic Growth
	9.4: Measuring Technology
		The Formula
		Using the Formula
	9.5: Technology Policy
		Policy to Encourage Investment in Human Capital
		Policy to Encourage Research and Innovation
		Technology Embodied in New Capital
		Is Government Intervention Appropriate?
	9.6: End-of-Chapter Material
		Conclusion: The Importance of Productivity Growth
	9.7: Appendix: Deriving the Growth Accounting Formula
	Endnotes
Chapter 10: Money and Inflation
	10.1: What Is Money?
		Three Functions of Money
			Medium of Exchange
			Store of Value
			Unit of Account
		Commodity Money
		From Coins to Paper Money to Deposits
		Cryptocurrencies
		Measures of the Money Supply
	10.2: The Fed, the Banks, and the Link from Reserves to Deposits
		The Fed
			Board of Governors
			The District Federal Reserve Banks
			The Federal Open Market Committee
		The Banks
		The Link between Reserves and Deposits
			A Formula Linking Reserves to Deposits
			Bank-by-Bank Deposit Expansion
		The Explosion of Reserves and the Reserve Ratio in the Aftermath of the 2008–09 Recession
		How the Fed Controls the Money Supply: Currency plus Deposits
		How a Credit Crunch Affects Deposit Expansion
	10.3: Money Growth and Inflation
		The Quantity Equation of Money
		Evidence
			Worldwide Inflation in the 1970s and 1980s
			Hyperinflations
	10.4: End-of-Chapter Material
		Conclusion
Chapter 11: The Nature and Causes of Economic Fluctuations
	11.1: Changes in Aggregate Demand Lead to Changes in Production
		Production and Demand at Individual Firms
			The Unemployment Rate and the Deviations of Real GDP from Potential GDP
		Could Economic Fluctuations Also Be Due to Changes in Potential GDP?
	11.2: Forecasting Real GDP
		A Forecast for Next Year
		Impact of a Change in Government Purchases
	11.3: The Response of Consumption to Income
		The Consumption Function
			The Marginal Propensity to Consume
			Which Measure of Income
		What about Interest Rates and Other Influences on Consumption?
	11.4: Finding Real GDP When Consumption and Income Move Together
		The 45-Degree Line
		The Expenditure Line
			The Slope of the Expenditure Line
			Shifts in the Expenditure Line
		Determining Real GDP through Spending Balance
		A Better Forecast of Real GDP
	11.5: Spending Balance and Departures of Real GDP from Potential GDP
		Stepping Away from Potential GDP
	11.6: End-of-Chapter Material
		Conclusion
	11.7: Appendix: Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model
		The Keynesian Multiplier
			A Graphical Review
			The Algebraic Derivation
			Following the Multiplier through the Economy
			What if Net Exports Depend on Income?
		The Forward-Looking Consumption Model
			Forward-Looking People
			Tests and Applications of the Forward-Looking Model
			Permanent versus Temporary Tax Cuts
			Anticipating Future Tax Cuts or Increases
Chapter 12: The Economic Fluctuations Model
	12.1: The Aggregate Demand Curve
		Interest Rates and Real GDP
			Investment
			Net Exports
			Consumption
			The Overall Effect
		Interest Rates and Inflation
			Central Bank Interest Rate Policy
			How the Fed Changes the Interest Rate
			A Graph of the Response of the Interest Rate to Inflation
			A Good Simplifying Assumption
		Derivation of the Aggregate Demand Curve
			Movements along the Aggregate Demand Curve
			Shifts of the Aggregate Demand Curve
	12.2: The Inflation Adjustment Line
		The Inflation Adjustment Line Is Flat
			Expectations of Continuing Inflation
			Staggered Price and Wage Setting
		The Inflation Adjustment Line Shifts Gradually When Real GDP Departs from Potential GDP
		Changes in Expectations or Commodity Prices Shift the Inflation Adjustment Line
		Does the Inflation Adjustment Line Fit the Facts?
	12.3: Combining the Aggregate Demand Curve and the Inflation Adjustment Line
	12.4: End-of-Chapter Material
		Conclusion
	Endnote
Chapter 13: Using the Economic Fluctuations Model
	13.1: Changes in Government Purchases
		Real GDP and Inflation over Time
		Details on the Components of Spending
			Short Run
			Long Run
			A Higher Growth Path after a Recession
			The Return to Potential GDP after an Increase in Government Spending
	13.2: Changes in Monetary Policy
		The Volcker Disinflation
		Reinflation and the Great Inflation
	13.3: Price Shocks
		What Is a Price Shock?
		The Effect of Price Shocks
			Temporary Shifts in the Inflation Adjustment Line
			Stagflation
	13.4: Using the Economic Fluctuations Model to Understand the Great Recession
		What Caused the Recession?
		How to Recover from the Recession
	13.5: Using the Economic Fluctuations Model to Understand the Impact of the COVID-19 Pandemic on the Macroeconomy
		What Impact Has the COVID-19 Pandemic Had on the Economy?
		How to Recover from the Recession
	13.6: End-of-Chapter Material
		Conclusion
	Endnotes
Chapter 14: Fiscal Policy
	14.1: The Government Budget
		Setting the Annual Budget
			A Balanced Budget versus a Deficit or Surplus
			The Proposed Budget versus the Actual Budget
		A Look at the Federal Budget
			The Deficit
			Taxes and Spending
		The Federal Debt
			The Debt-to-GDP Ratio
		State and Local Government Budgets
	14.2: Countercyclical Fiscal Policy
		Impacts of the Instruments of Fiscal Policy
			Changes in Government Purchases
			Changes in Taxes
		Countercyclical Fiscal Policy
			Discretionary Change in the Instruments of Fiscal Policy
			Automatic Changes in the Instruments of Fiscal Policy
		The Discretion versus Rules Debate for Fiscal Policy
	14.3: The Structural versus the Cyclical Surplus
	14.4: End-of-Chapter Material
		Conclusion
	Endnotes
Chapter 15: Monetary Policy
	15.1: The Federal Reserve’s Balance Sheet
		The Federal Reserve’s Assets and Liabilities
		The Size of the Balance Sheet
	15.2: Money Demand and Zero Interest Rate
		The Money Demand Curve
			The Interest Rate and the Quantity of Money
			What about Focusing on the Money Supply?
	15.3: When the Interest Rate Hits Zero
		Quantitative Easing
		Unwinding Quantitative Easing
	15.4: The Economic Fluctuations Model
		Aggregate Demand: Just Right, Too Hot, or Too Cold?
			The Goldilocks Economy: Just Right
			Misalignment: Aggregate Demand Is Too High
			Another Type of Misalignment: Aggregate Demand Is Too Low
		The Inherent Uncertainty in Monetary Policy
		Increased Transparency and Predictability
	15.5: Central Bank Independence
		The Gain-Then-Pain Scenario
			The Phillips Curve
			The Political Business Cycle
			Time Inconsistency
		Potential Disadvantages of Central Bank Independence
	15.6: The Exchange Rate
		The Effects of a Fixed Exchange Rate System on Monetary Policy
			Interventions in the Exchange Market
		The Rationale for Fixed Exchange Rates
	15.7: End-of-Chapter Material
		Conclusion
	Endnotes
Chapter 16: Capital and Financial Markets
	16.1: The Distinction between Physical Capital and Financial Capital
	16.2: Markets for Physical Capital
		Rental Markets
			The Demand Curve for Capital
			Demand for Factors of Production in General
			The Market Demand and Supply
			The Case of Fixed Supply: Economic Rents
		The Ownership of Physical Capital
		The Housing Market
	16.3: Markets for Financial Capital
		Stock Prices and Rates of Return
		Bond Prices and Rates of Return
	16.4: The Trade-off between Risk and Returns
		Behavior under Uncertainty
			Risk and Rates of Return in Reality
			Risk and Rates of Return in Theory
			Diversification Reduces Risk
			Efficient Market Theory
	16.5: Corporate Governance Problems
		Asymmetric Information: Moral Hazard and Adverse Selection
		Incentives to Overcome Adverse Selection and Moral Hazard Problems
	16.6: The Role of Government in Financial Markets
		Examples from a Financial Crisis
		Government Regulation of Financial Institutions
	16.7: End-of-Chapter Material
		Conclusion
	16.8: Appendix: Present Discounted Value
		Discounting the Future
		Finding the Present Discounted Value
	Endnote
Chapter 17: Economic Growth Around the World
	17.1: Catching Up (or Not?)
		Catch-up within the United States
		Catch-up in the Industrial Countries
		Catch-up in East Asia
		Catch-up in the Whole World
	17.2: Economic Development
		Geographic Patterns
		Billions Still in Poverty
		Hope for the Future
	17.3: The Spread and Use of Technology
		Entrepreneurs in the Industrial Nations
		Remaining Problems in Developing Countries
			Regulation and Legal Rights
			Lack of Human Captial
	17.4: Increasing Capital per Worker
		Population Growth
		National Saving
		Foreign Investment from the Advanced Economies
		Borrowing from International Agencies
	17.5: End-of-Chapter Material
		Conclusion
	Endnotes
Chapter 18: International Trade
	18.1: Trends in International Trade
	18.2: Comparative Advantage
		Getting a Gut Feeling for Comparative Advantage
			Opportunity Cost, Relative Efficiency, and Comparative Advantage
			From People to Countries
		Productivity in Two Countries
			An American Worker’s View
			A Korean Worker’s View
		Finding the Relative Price
			Relative Price without Trade
			Relative Price with Trade
		Measuring the Gains from Trade
			One Country’s Gain
			The Other Country’s Gain
			Just Like a New Discovery
		A Graphic Measure of the Gains from Trade
			Production Possibilities Curves without Trade
			Production Possibilities Curves with Trade
			Increasing Opportunity Costs: Incomplete Specialization
	18.3: Reasons for Comparative Advantage
		Labor versus Capital Resources
		The Effect of Trade on Wages
	18.4: Gains from Expanded Markets
		An Example of Gains from Trade through Expanded Markets
			Effects of a Larger market
			Intra-industry Trade versus Inter-industry Trade
		Measuring the Gains from Expanded Markets
			A Relationship between Cost per Unit and the Number of Firms
			The Effect of the Size of the Market
			A Relationship between the Price and the Number of Firms
			Equilibrium Price and Number of Firms
			Increasing the Size of the Market
			The North American Automobile Market
	18.5: Tariffs and Quotas
		Tariffs
		Quotas
		The Cost of Trade Restrictions
	18.6: The History of Trade Restrictions
		U.S. Tariffs
			From the Tariff of Abominations to Smoot-Hawley
			From the Reciprocal Trade Agreement Act to the WTO
			The Tariffs of the 2000s
			Antidumping Duties
			The Rise of Nontariff Barriers
	18.7: Arguments for Trade Barriers
		High Transition Costs
			Phaseout of Trade Restrictions
			Trade Adjustment Assistance
		The Infant Industry Argument
		The National Security Argument
		The Retaliation Argument
		The Foreign Subsidies Argument
		Environment and Labor Standard Arguments
		The Public Health Argument
		The Political Economy of Protection
	18.8: How to Reduce Trade Barriers
		Unilateral Disarmament
		Multilateral Negotiations
			Most-Favored-Nation Policy
		Regional Trading Areas
			Trade Diversion versus Trade Creation
			Free Trade Areas versus Customs Unions
	18.9: End-of-Chapter Material
		Conclusion
Chapter 19: International Finance
	19.1: Exchange Rates
		Important Definitions
		Exchange Rates and Net Exports
	19.2: Exchange Rate Determination
		Interest Rate Differentials and Short-Run Exchange Rate Movements
		Price Differentials and Long-Run Exchange Rate Movements
	19.3: Fixed Exchange Rates
		The Role of Reserves
		Overvaluation and Undervaluation
		Consequences of Sustained Overvaluation
		Consequences of Sustained Undervaluation
	19.4: Currency Unions
	19.5: End-of-Chapter Material
Index