Economics

Cover
Title Page
Copyright Page
Dedication
About The Authors
List of Key Graphs
Preface
Acknowledgments
Contributors
Brief Contents
Contents
PART ONE Introduction to Economics and the Economy
Chapter 1 Limits, Alternatives, and Choices
The Economic Perspective
Scarcity and Choice
Purposeful Behavior
Marginal Analysis: Comparing Benefits and Costs
Consider This: Is Facebook Free?
Theories, Principles, and Models
Microeconomics and Macroeconomics
Microeconomics
Macroeconomics
Positive and Normative Economics
Individual’s Economizing Problem
Limited Income
Unlimited Wants
A Budget Line
Consider This: Did Zuckerberg, Seacrest, and Grande Make Bad Choices?
Society’s Economizing Problem
Scarce Resources
Resource Categories
Production Possibilities Model
Production Possibilities Table
Production Possibilities Curve
Law of Increasing Opportunity Costs
Optimal Allocation
Unemployment, Growth, and the Future
A Growing Economy
Present Choices and Future Possibilities
A Qualification: International Trade
Last Word: The Marginal Starbucks
Chapter 1 Appendix: Graphs and Their Meanings
Chapter 2 The Market System and the Circular Flow
Economic Systems
Laissez-Faire Capitalism
The Command System
The Market System
Characteristics of the Market System
Private Property
Freedom of Enterprise and Choice
Self-Interest
Competition
Markets and Prices
Technology and Capital Goods
Specialization
Use of Money
Active, but Limited, Government
Five Fundamental Questions
What Will Be Produced?
How Will the Goods and Services Be Produced?
Who Will Get the Output?
How Will the System Accommodate Change?
How Will the System Promote Progress?
Consider This: Bitcoin and Cheap Electrons
The “Invisible Hand”
The Demise of the Command Systems
Consider This: Korea by Night
The Circular Flow Model
Households
Businesses
Product Market
Resource Market
How the Market System Deals with Risk
The Profit System
Shielding Employees and Suppliers from Business Risk
Benefits of Restricting Business Risk to Owners
Consider This: Built on Sand
Last Word: Hasta La Vista, Venezuela
PART TWO Price, Quantity, and Efficiency
Chapter 3 Demand, Supply, and Market Equilibrium
Markets
Demand
Law of Demand
The Demand Curve
Market Demand
Changes in Demand
Changes in Quantity Demanded
Supply
Law of Supply
The Supply Curve
Market Supply
Determinants of Supply
Changes in Supply
Changes in Quantity Supplied
Market Equilibrium
Equilibrium Price and Quantity
Rationing Function of Prices
Efficient Allocation
Consider This: Emergent Equilibria
Changes in Supply, Demand, and Equilibrium
Changes in Demand
Changes in Supply
Complex Cases
Consider This: Salsa and Coffee Beans
Application: Government-Set Prices
Price Ceilings on Gasoline
Rent Controls
Price Floors on Wheat
Last Word: Student Loans and Tuition Costs
Chapter 3 Appendix: Additional Examples of Supply and Demand
Consider This: Uber and Dynamic Pricing
Chapter 4 Market Failures Caused by Externalities and Asymmetric Information
Efficiently Functioning Markets
Consumer Surplus
Producer Surplus
Total Surplus and Efficiency
Efficiency Losses (Deadweight Losses)
Positive and Negative Externalities
Negative Externalities
Positive Externalities
Government Intervention
Consider This: The Fable of the Bees
Society’s Optimal Amount of Externality Reduction
MC, MB, and Equilibrium Quantity
Shifts of MB and MC Curves
Government’s Role in the Economy
Consider This: Congestion Pricing
Asymmetric Information
Inadequate Buyer Information about Sellers
Inadequate Seller Information about Buyers
Qualification
Last Word: Visible Pollution, Hidden Costs
Chapter 5 Public Goods, Public Choice, and Government Failure
Public Goods
Characteristics of Private Goods
Public Goods Characteristics
Optimal Quantity of a Public Good
Demand for Public Goods
Comparing MB and MC
Cost-Benefit Analysis
Quasi-Public Goods
The Reallocation Process
Consider This: Street Entertainers
Public Choice Theory and Voting Paradoxes
Public Choice Theory
Revealing Preferences through Majority Voting
Paradox of Voting
Median-Voter Model
Alternative Voting Mechanisms
Government Failure
Representative Democracy and the Principal-Agent Problem
Limited and Bundled Choice
Bureaucracy and Inefficiency
Inefficient Regulation and Intervention
Corruption
Imperfect Institutions
Consider This: Getting Fleeced
Consider This: Government, Scofflaw
Last Word: Should Governments Subsidize Corporate Relocations?
PART THREE Consumer Behavior
Chapter 6 Elasticity
Price Elasticity of Demand
The Price-Elasticity Coefficient and Formula
Interpretations of Ed
The Total-Revenue Test
Elastic Demand
Inelastic Demand
Unit Elasticity
Price Elasticity along a Linear Demand Curve
Price Elasticity and the Total-Revenue Curve
Determinants of Price Elasticity of Demand
Applications of Price Elasticity of Demand
Consider This: The Southwest Effect
Price Elasticity of Supply
Price Elasticity of Supply: The Immediate Market Period
Price Elasticity of Supply: The Short Run
Price Elasticity of Supply: The Long Run
Applications of Price Elasticity of Supply
Cross Elasticity and Income Elasticity of Demand
Cross Elasticity of Demand
Income Elasticity of Demand
Last Word: Elasticity and Pricing Power: Why Different Consumers Pay Different Prices
Chapter 7 Utility Maximization
Law of Diminishing Marginal Utility
Terminology
Total Utility and Marginal Utility
Marginal Utility and Demand
Theory of Consumer Behavior
Consumer Choice and the Budget Constraint
Utility-Maximizing Rule
Numerical Example
Algebraic Generalization
Consider This: There’s No Accounting for Taste
Utility Maximization and the Demand Curve
Deriving the Demand Schedule and Curve
Income and Substitution Effects
Applications and Extensions
iPads
The Diamond-Water Paradox
Cash and Noncash Gifts
Last Word: Criminal Behavior
Chapter 7 Appendix: Indifference Curve Analysis
Consider This: Indifference Maps and Topographical Maps
Chapter 8 Behavioral Economics
Systematic Errors and the Origin of Behavioral Economics
Comparing Behavioral Economics with Neoclassical Economics
Our Efficient, Error-Prone Brains
Heuristics Are Energy Savers
Brain Modularity
Prospect Theory
Framing Effects and Advertising
Anchoring and Credit Card Bills
Mental Accounting and Overpriced Warranties
The Endowment Effect and Market Transactions
Status Quo Bias
Consider This: Rising Consumption and the Hedonic Treadmill
Myopia and Time Inconsistency
Myopia
Time Inconsistency
Consider This: A Bright Idea
Fairness and Self-Interest
Field Evidence for Fairness
Experimental Evidence for Fairness
Last Word: The Behavioral Insights Team
PART FOUR Microeconomics of Product Markets
Chapter 9 Businesses and the Costs of Production
Economic Costs
Explicit and Implicit Costs
Accounting Profit and Normal Profit
Economic Profit
Short Run and Long Run
Short-Run Production Relationships
Law of Diminishing Returns
Short-Run Production Costs
Fixed, Variable, and Total Costs
Per-Unit, or Average, Costs
Marginal Cost
Shifts of the Cost Curves
Consider This: Ignoring Sunk Costs
Long-Run Production Costs
Firm Size and Costs
The Long-Run Cost Curve
Economies and Diseconomies of Scale
Minimum Efficient Scale and Industry Structure
Applications and Illustrations
Rising Gasoline Prices
The Verson Stamping Machine
Successful Start-Up Firms
Aircraft and Concrete Plants
Last Word: 3-D Printers
Chapter 10 Pure Competition in the Short Run
Four Market Models
Pure Competition: Characteristics and Occurrence
Demand as Seen by a Purely Competitive Seller
Perfectly Elastic Demand
Average, Total, and Marginal Revenue
Profit Maximization in the Short Run: Total-Revenue-Total-Cost Approach
Profit Maximization in the Short Run: Marginal-Revenue-Marginal-Cost Approach
Profit-Maximizing Case
Loss-Minimizing Case
Shutdown Case
Marginal Cost and Short-Run Supply
Generalized Depiction
Changes in Supply
Firm and Industry: Equilibrium Price
Consider This: The “Still There” Motel
Last Word: Raiders of the Fixed Costs
Chapter 11 Pure Competition in the Long Run
The Long Run in Pure Competition
Profit Maximization in the Long Run
The Long-Run Adjustment Process in Pure Competition
Long-Run Equilibrium
Long-Run Supply Curves
Long-Run Supply for a Constant-Cost Industry
Long-Run Supply for an Increasing-Cost Industry
Long-Run Supply for a Decreasing-Cost Industry
Pure Competition and Efficiency
Productive Efficiency: P = Minimum ATC
Allocative Efficiency: P = MC
Maximum Consumer and Producer Surplus
Dynamic Adjustments
“Invisible Hand” Revisited
Technological Advance and Competition
Creative Destruction
Consider This: Running a Company Is Hard Business
Last Word: Elon Musk, Profit Engineer
Chapter 12 Pure Monopoly
An Introduction to Pure Monopoly
Examples of Monopoly
Barriers to Entry
Economies of Scale
Legal Barriers to Entry: Patents and Licenses
Ownership or Control of Essential Resources
Pricing and Other Strategic Barriers to Entry
Monopoly Demand
Marginal Revenue Is Less Than Price
The Monopolist Is a Price Maker
The Monopolist Sets Prices in the Elastic Region of Demand
Output and Price Determination
Cost Data
MR = MC Rule
No Monopoly Supply Curve
Misconceptions Concerning Monopoly Pricing
Possibility of Losses by Monopolist
Consider This: Salt Monopolies
Economic Effects of Monopoly
Price, Output, and Efficiency
Income Transfer
Cost Complications
Assessment and Policy Options
Price Discrimination
Conditions
Examples of Price Discrimination
Graphical Analysis
Regulated Monopoly
Socially Optimal Price: P = MC
Fair-Return Price: P = ATC
Dilemma of Regulation
Last Word: Personalized Pricing
Chapter 13 Monopolistic Competition
Monopolistic Competition
Relatively Large Number of Sellers
Differentiated Products
Easy Entry and Exit
Advertising
Monopolistically Competitive Industries
Price and Output in Monopolistic Competition
The Firm’s Demand Curve
The Short Run: Profit or Loss
The Long Run: Only a Normal Profit
Monopolistic Competition and Efficiency
Neither Productive nor Allocative Efficiency
Excess Capacity
Product Variety
Benefits of Product Variety
Further Complexity
Consider This: The Spice of Life
Last Word: Higher Wages, More McRestaurants
Chapter 14 Oligopoly and Strategic Behavior
Oligopoly
A Few Large Producers
Homogeneous or Differentiated Products
Control over Price, but Mutual Interdependence
Entry Barriers
Mergers
Oligopolistic Industries
Oligopoly Behavior: A Game-Theory Overview
Mutual Interdependence Revisited
Collusion
Incentive to Cheat
Three Oligopoly Models
Kinked-Demand Theory: Noncollusive Oligopoly
Cartels and Other Collusion
Price Leadership Model
Oligopoly and Advertising
Positive Effects of Advertising
Potential Negative Effects of Advertising
Oligopoly and Efficiency
Game Theory and Strategic Behavior
A One-Time Game: Strategies and Equilibrium
Credible and Empty Threats
Repeated Games and Reciprocity Strategies
First-Mover Advantages and Preemption of Entry
Last Word: Internet Oligopolies
Chapter 15 Technology, R&D, and Efficiency
Invention, Innovation, and Diffusion
Invention
Innovation
Diffusion
R&D Expenditures
Modern View of Technological Advance
Role of Entrepreneurs and Other Innovators
Forming Start-Ups
Innovating within Existing Firms
Anticipating the Future
Exploiting University and Government Scientific Research
A Firm’s Optimal Amount of R&D
Interest-Rate Cost of Funds
Expected Rate of Return
Optimal R&D Expenditures
Increased Profit via Innovation
Increased Revenue via Product Innovation
Reduced Costs via Process Innovation
Imitation and R&D Incentives
Benefits of Being First
Profitable Buyouts
Consider This : Trade Secrets
Role of Market Structure
Inverted-U Theory of R&D
Market Structure and Technological Advance: The Evidence
Technological Advance and Efficiency
Productive Efficiency
Allocative Efficiency
Last Word: A Patent Failure?
PART FIVE Microeconomics of Resource Markets and Government
Chapter 16 The Demand for Resources
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
Resource Demand as a Derived Demand
Marginal Revenue Product
Rule for Employing Resources: MRP = MRC
MRP as Resource Demand Schedule
Resource Demand under Imperfect Product Market Competition
Market Demand for a Resource
Determinants of Resource Demand
Changes in Product Demand
Changes in Productivity
Changes in the Prices of Other Resources
Occupational Employment Trends
Consider This: Superstars
Elasticity of Resource Demand
Optimal Combination of Resources*
The Least-Cost Rule
The Profit-Maximizing Rule
Numerical Illustration
Marginal Productivity Theory of Income Distribution
Last Word: Labor and Capital: Substitutes or Complements?
Chapter 17 Wage Determination
Labor, Wages, and Earnings
General Level of Wages
Role of Productivity
Real Wages and Productivity
Long-Run Trend of Real Wages
A Purely Competitive Labor Market
Market Demand for Labor
Market Supply of Labor
Labor Market Equilibrium
Consider This: Fringe Benefits vs. Take-Home Pay
Monopsony Model
Upward Sloping Labor Supply to Firm
MRC Higher Than the Wage Rate
Equilibrium Wage and Employment
Examples of Monopsony Power
Three Union Models
Demand-Enhancement Model
Exclusive or Craft Union Model
Inclusive or Industrial Union Model
Wage Increases and Job Loss
Bilateral Monopoly Model
Indeterminate Outcome of Bilateral Monopoly
Desirability of Bilateral Monopoly
The Minimum-Wage Controversy
Case against the Minimum Wage
Case for the Minimum Wage
Evidence and Conclusions
Wage Differentials
Marginal Revenue Productivity
Noncompeting Groups
Compensating Differences
Market Imperfections
Consider This: My Entire Life
Pay for Performance
The Principal-Agent Problem
Last Word: Occupational Licensing
Chapter 17 Appendix: Labor Unions and Their Impacts
Chapter 18 Rent, Interest, and Profit
Economic Rent
Perfectly Inelastic Supply
Equilibrium Rent and Changes in Demand
Productivity Differences and Rent Differences
Land Rent: A Surplus Payment
Land Ownership: Fairness versus Allocative Efficiency
Interest
Money Is Not a Resource
Interest Rates and Interest Income
Range of Interest Rates
Pure Rate of Interest
Loanable Funds Theory of Interest Rates
Supply of Loanable Funds
Demand for Loanable Funds
Extending the Model
Time-Value of Money
Compound Interest
Future Value and Present Value
Role of Interest Rates
Interest and Total Output
Interest and the Allocation of Capital
Interest and R&D Spending
Nominal and Real Interest Rates
Economic Profit
Entrepreneurship and Profit
Insurable and Uninsurable Risks
Sources of Uninsurable Risks
Profit as Compensation for Bearing Uninsurable Risks
Sources of Economic Profit
Entrepreneurs, Profits, and Corporate Stockholders
Consider This: Profits and Efficiency
Income Shares
Last Word: Determining the Price of Credit
Chapter 19 Natural Resource and Energy Economics
Resource Supplies: Doom or Boom?
Population Growth
Resource Consumption per Person
Consider This: I’ll Betcha
Energy Economics
Energy Efficiency Is Increasing
Efficient Electricity Use
Running Out of Energy?
Plunging Photovoltaic Prices
Limitations on Solar Electricity Production
Multiple Oil Substitutes
Consider This: Storage Wars
Natural Resource Economics
Renewables vs. Nonrenewables
Optimal Resource Management
Using Present Values to Evaluate Future Possibilities
Nonrenewable Resources
Incomplete Property Rights Lead to Excessive Present Use
Application: Conflict Diamonds
Renewable Resources
Elephant Preservation
Forest Management
Optimal Fisheries Management
Policies to Limit Catch Sizes
Consider This: The Tragedy of the Commons
Last Word: Is Economic Growth Bad for the Environment?
Chapter 20 Public Finance: Expenditures and Taxes
Government and the Circular Flow
Government Finance
Government Purchases and Transfers
Government Revenues, Including Borrowing
Federal Finance
Federal Expenditures
Federal Tax Revenues
State and Local Finance
State Finances
Local Finances
Consider This: State Lotteries: A Good Bet?
Local, State, and Federal Employment
Apportioning the Tax Burden
Benefits Received versus Ability to Pay
Progressive, Proportional, and Regressive Taxes
Tax Incidence and Efficiency Loss
Elasticity and Tax Incidence
Efficiency Loss of a Tax
Probable Incidence of U.S. Taxes
Personal Income Tax and Inheritance Tax
Payroll Taxes
Corporate Income Tax
Sales and Excise Taxes
Property Taxes
The U.S. Tax Structure
Last Word: Taxation and Spending: Redistribution Versus Recycling
PART SIX Microeconomic Issues and Policies
Chapter 21 Antitrust Policy and Regulation
The Antitrust Laws
Historical Background
Sherman Act of 1890
Clayton Act of 1914
Federal Trade Commission Act of 1914
Celler-Kefauver Act of 1950
Antitrust Policy: Issues and Impacts
Issues of Interpretation
Issues of Enforcement
Effectiveness of Antitrust Laws
Consider This: Of Sea Fish and eBooks (and Other Things in Common)
Industrial Regulation
Natural Monopoly
Problems with Industrial Regulation
Deregulation
Social Regulation
Distinguishing Features
The Optimal Level of Social Regulation
Two Reminders
Last Word: Antitrust Online
Chapter 22 Agriculture: Economics and Policy
Economics of Agriculture
The Short Run: Price and Income Instability
The Long Run: A Declining Industry
Technology and Supply Increases
Lagging Demand
Graphical Portrayal
Consequences
Farm-Household Income
Economics of Farm Policy
Rationale for Farm Subsidies
Background: The Parity Concept
Economics of Price Supports
Reduction of Surpluses
Consider This: Putting Corn in Your Gas Tank
Criticisms and Politics
Criticisms of the Parity Concept
Criticisms of the Price-Support System
Recent Farm Policies
Freedom to Farm Act of 1996
The Food, Conservation, and Energy Act of 2008
The Agricultural Act of 2014
The Agricultural Act of 2018
Last Word: Seeing the Forest for the Subsidies
Chapter 23 Income Inequality, Poverty, and Discrimination
Facts about Income Inequality
Distribution by Income Category
Distribution by Quintiles (Fifths)
The Lorenz Curve and Gini Ratio
Income Mobility: The Time Dimension
Effect of Government Redistribution
Causes of Income Inequality
Ability
Education and Training
Discrimination
Preferences and Risks
Unequal Distribution of Wealth
Market Power
Luck, Connections, and Misfortune
Income Inequality over Time
Rising Income Inequality since 1980
Causes of Growing Inequality
Equality versus Efficiency
The Case for Equality: Maximizing Total Utility
The Case for Inequality: Incentives and Efficiency
The Equality-Efficiency Trade-off
The Economics of Poverty
Definition of Poverty
Incidence of Poverty
Measurement Issues
The U.S. Income-Maintenance System
Social Insurance Programs
Public Assistance Programs
Economic Analysis of Discrimination
Taste-for-Discrimination Model
Statistical Discrimination
Occupational Segregation: The Crowding Model
Cost to Society as Well as to Individuals
Last Word: Debating Universal Basic Income
Chapter 24 Health Care
The Health Care Industry
The U.S. Emphasis on Private Health Insurance
Twin Problems: Costs and Access
High and Rising Health Care Costs
Quality of Care: Are We Healthier?
Economic Implications of Rising Costs
Reduced Access to Care
Labor Market Effects
Personal Bankruptcies
Impact on Government Budgets
Too Much Spending?
Limited Access
Why the Rapid Rise in Costs?
Peculiarities of the Health Care Market
The Increasing Demand for Health Care
Role of Health Insurance
Supply Factors in Rising Health Care Prices
Consider This: Why Do Hospitals Sometimes Charge $25 for an Aspirin?
Cost Containment: Altering Incentives
Deductibles and Copayments
Health Savings Accounts
Managed Care
Medicare and DRG
Limits on Malpractice Awards
The Patient Protection and Affordable Care Act
Major Provisions
Objections and Alternatives
Last Word: Singapore’s Efficient and Effective Health Care System
Chapter 25 Immigration
Number of Immigrants
Legal Immigrants
Illegal Immigrants
The Decision to Migrate
Earnings Opportunities
Moving Costs
Factors Affecting Costs and Benefits
Economic Effects of Immigration
Personal Gains
Impacts on Wage Rates, Efficiency, and Output
Income Shares
Complications and Modifications
Fiscal Impacts
Research Findings
Last Word: Immigration, Aussie Style
The Illegal Immigration Debate
Employment Effects
Wage Effects
Price Effects
Fiscal Impacts on Local and State Governments
Other Concerns
Conclusions
Last Word: Immigration, Aussie Style
PART SEVEN GDP, Growth, and Instability
Chapter 26 An Introduction to Macroeconomics
Performance and Policy
Real GDP
Unemployment
Inflation
Preview
The Miracle of Modern Economic Growth
Saving, Investment, and Choosing between Present and Future Consumption
Banks and Other Financial Institutions
Consider This: Economic versus Financial Investment
Uncertainty, Expectations, and Shocks
The Importance of Expectations and Shocks
Demand Shocks and Sticky Prices
Example: A Single Firm Dealing with Demand Shocks and Sticky Prices
Generalizing from a Single Firm to the Entire Economy
Consider This: The Great Recession
How Sticky Are Prices?
Categorizing Macroeconomic Models Using Price Stickiness
Last Word: The Behavioral Economics of Sticky Prices
Chapter 27 Measuring Domestic Output and National Income
Assessing the Economy’s Performance
Gross Domestic Product
Value Added
Gross Output and Multiple Counting
GDP Excludes Nonproduction Transactions
Two Ways of Looking at GDP: Spending and Income
The Expenditures Approach
Personal Consumption Expenditures (C)
Gross Private Domestic Investment (Ig)
Government Purchases (G)
Net Exports (Xn)
Putting It All Together: GDP = C + Ig + G + Xn
The Income Approach
Compensation of Employees
Rents
Interest
Proprietors’ Income
Corporate Profits
Taxes on Production and Imports
From National Income to GDP
Other National Accounts
Net Domestic Product
National Income
Personal Income
Disposable Income
The Circular Flow Revisited
Nominal GDP versus Real GDP
Adjustment Process in a One-Product Economy
An Alternative Method
Real-World Considerations and Data
Shortcomings of GDP
Nonmarket Activities
Leisure and Psychic Income
Improved Product Quality
The Underground Economy
GDP and the Environment
Composition and Distribution of Output
Noneconomic Sources of Well-Being
The Importance of Intermediate Output
Last Word: Measuring Quality to Price the Priceless
Chapter 28 Economic Growth
Economic Growth
Growth as a Goal
Arithmetic of Growth
Growth in the United States
Modern Economic Growth
The Uneven Distribution of Growth
Catching Up Is Possible
Institutional Structures That Promote Modern Economic Growth
Consider This: Patents and Innovation
Determinants of Growth
Supply Factors
Demand Factor
Efficiency Factor
Production Possibilities Analysis
Accounting for Growth
Labor Inputs versus Labor Productivity
Technological Advance
Quantity of Capital per Worker
Education and Training
Economies of Scale and Resource Allocation
Recent Fluctuations in Average Productivity Growth
Reasons for the Rise in Average Productivity Growth Between 1995 and 2010
Implications for Economic Growth
The Recent Productivity Slowdown
Is Growth Desirable and Sustainable?
The Antigrowth View
In Defense of Economic Growth
Last Word: Ladies First
Chapter 29 Business Cycles, Unemployment, and Inflation
The Business Cycle
Phases of the Business Cycle
Causation: A First Glance
Cyclical Impact: Durables and Nondurables
Unemployment
Measurement of Unemployment
Types of Unemployment
Definition of Full Employment
Economic Cost of Unemployment
Noneconomic Costs
Consider This: Downwardly Sticky Wages and Unemployment
Inflation
Measurement of Inflation
Facts of Inflation
Types of Inflation
Core Inflation
Redistribution Effects of Inflation
Nominal and Real Income
Anticipations
Who Is Hurt by Inflation?
Who Is Unaffected or Helped by Inflation?
Anticipated Inflation
Other Redistribution Issues
Does Inflation Affect Output?
Cost-Push Inflation and Real Output
Demand-Pull Inflation and Real Output
Hyperinflation
Last Word: The Great Skills Shortage
PART EIGHT Macroeconomic Models and Fiscal Policy
Chapter 30 Basic Macroeconomic Relationships
The Income-Consumption and Income-Saving Relationships
The Consumption Schedule
The Saving Schedule
Average and Marginal Propensities
Nonincome Determinants of Consumption and Saving
Other Important Considerations
Consider This: The Great Recession and the Paradox of Thrift
The Interest-Rate–Investment Relationship
Expected Rate of Return
The Real Interest Rate
Investment Demand Curve
Shifts of the Investment Demand Curve
Instability of Investment
The Multiplier Effect
Rationale
The Multiplier and the Marginal Propensities
How Large Is the Actual Multiplier?
Last Word: Toppling Dominoes
Chapter 31 The Aggregate Expenditures Model
Assumptions and Simplifications
A “Stuck Price” Model
Unplanned Inventory Adjustments
Current Relevance
A Preview
Consumption and Investment Schedules
Equilibrium GDP: C + Ig = GDP
Tabular Analysis
Graphical Analysis
Other Features of Equilibrium GDP
Saving Equals Planned Investment
No Unplanned Changes in Inventories
Changes in Equilibrium GDP and the Multiplier
Adding International Trade
Net Exports and Aggregate Expenditures
The Net Export Schedule
Net Exports and Equilibrium GDP
International Economic Linkages
Adding the Public Sector
Government Purchases and Equilibrium GDP
Taxation and Equilibrium GDP
Equilibrium versus Full-Employment GDP
Recessionary Expenditure Gap
Inflationary Expenditure Gap
Application: The Recession of 2007-2009
Last Word: Say’s Law, the Great Depression, and Keynes
Chapter 32 Aggregate Demand and Aggregate Supply
Aggregate Demand
Aggregate Demand Curve
Changes in Aggregate Demand
Consumer Spending
Investment Spending
Government Spending
Net Export Spending
Aggregate Supply
Aggregate Supply in the Immediate Short Run
Aggregate Supply in the Short Run
Aggregate Supply in the Long Run
Focusing on the Short Run
Changes in Aggregate Supply
Input Prices
Productivity
Legal-Institutional Environment
Equilibrium in the AD-AS Model
Changes in Equilibrium
Increases in AD: Demand-Pull Inflation
Decreases in AD: Recession and Cyclical Unemployment
Decreases in AS: Cost-Push Inflation
Increases in AS: Full Employment with Price-Level Stability
Last Word: Stimulus and the Great Recession
Chapter 32 Appendix: The Relationship of the AD Curve to the Aggregate Expenditures Model
Chapter 33 Fiscal Policy, Deficits, and Debt
Fiscal Policy and the AD-AS Model
Expansionary Fiscal Policy
Contractionary Fiscal Policy
Built-In Stability
Tax Collections and the Business Cycle
Automatic or Built-In Stabilizers
Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
Cyclically Adjusted Budget
Recent and Projected U.S. Fiscal Policy
Fiscal Policy from 2000 to 2007
Fiscal Policy During and After the Great Recession
Problems, Criticisms, and Complications of Implementing Fiscal Policy
Problems of Timing
Political Considerations
Future Policy Reversals
Offsetting State and Local Finance
Crowding-Out Effect
The U.S. Public Debt
Ownership
International Comparisons
Interest Charges
False Concerns
Bankruptcy
Burdening Future Generations
Substantive Issues
Income Distribution
Incentives
Foreign-Owned Public Debt
Crowding-Out Effect Revisited
Last Word: The Social Security and Medicare Time Bombs
PART NINE Money, Banking, and Monetary Policy
Chapter 34 Money, Banking, and Financial Institutions
The Functions of Money
The Components of the Money Supply
Money Definition M1
Money Definition M2
Consider This: Are Credit Cards Money?
What “Backs” the Money Supply?
Money as Debt
Value of Money
Money and Prices
Stabilizing Money’s Purchasing Power
The Federal Reserve and the Banking System
Historical Background
Board of Governors
The 12 Federal Reserve Banks
FOMC
Commercial Banks and Thrifts
Fed Functions, Responsibilities, and Independence
Federal Reserve Independence
The Financial Crisis of 2007 and 2008
Overview
Prelude
Causes
Crisis
Immediate Response
Post-Crisis Policy Changes
Last Word: Too Big to Fail. Too Big to Jail?
Chapter 35 Money Creation
The Fractional Reserve System
Illustrating the Idea: The Goldsmiths
Significant Characteristics of Fractional Reserve Banking
A Single Commercial Bank
Transaction 1: Creating a Bank
Transaction 2: Acquiring Property and Equipment
Transaction 3: Accepting Deposits
Transaction 4: Depositing Reserves in a Federal Reserve Bank
Transaction 5: Clearing a Check Drawn Against the Bank
Money-Creating Transactions of a Commercial Bank
Transaction 6: Granting a Loan
Transaction 7: Buying Government Securities
Profits, Liquidity, and the Federal Funds Market
The Banking System: Multiple-Deposit Expansion
The Banking System’s Lending Potential
The Monetary Multiplier
Reversibility: The Multiple Destruction of Money
Last Word: Banking, Leverage, and Financial Instability
Chapter 36 Interest Rates and Monetary Policy
Interest Rates
The Demand for Money
The Equilibrium Interest Rate
Interest Rates and Bond Prices
The Consolidated Balance Sheet of the Federal Reserve Banks
Assets
Liabilities
Tools of Monetary Policy
Open-Market Operations
The Reserve Ratio
The Discount Rate
Interest on Reserves
Relative Importance
Fed Targets and the Taylor Rule
The Fed’s Unemployment Target
The Fed’s Inflation Target
The Bullseye Chart
Using the Taylor Rule to Aim for the Bullseye
The Taylor Rule
Monetary Policy, Real GDP, and the Price Level
Cause-Effect Chain
Effects of an Expansionary Monetary Policy
Effects of a Restrictive Monetary Policy
Monetary Policy: Evaluation and Issues
Recent U.S. Monetary Policy
Problems and Complications
The “Big Picture”
Chapter 37 Financial Economics
Financial Investment
Present Value
Compound Interest
The Present Value Model
Applications
Some Popular Investments
Stocks
Bonds
Mutual Funds
Calculating Investment Returns
Percentage Rates of Return
The Inverse Relationship Between Asset Prices and Rates of Return
Consider This: Corporate Ownership
Arbitrage
Risk
Diversification
Comparing Risky Investments
Average Expected Rate of Return
Beta
Relationship Between Risk and Average Expected Rate of Return
The Risk-Free Rate of Return
The Security Market Line
Security Market Line: Applications
Last Word: Index Funds versus Actively Managed Funds
PART TEN Extensions and Issues
Chapter 38 Extending the Analysis of Aggregate Supply
From Short Run to Long Run
Short-Run Aggregate Supply
Long-Run Aggregate Supply
Long-Run Equilibrium in the AD-AS Model
Applying the Extended AD-AS Model
Demand-Pull Inflation in the Extended AD-AS Model
Cost-Push Inflation in the Extended AD-AS Model
A Controversy: Recessions and Stimulus in the Extended AD-AS Model
Economic Growth with Ongoing Inflation
The Inflation-Unemployment Relationship
The Phillips Curve
Aggregate Supply Shocks and the Phillips Curve
The Long-Run Phillips Curve
Short-Run Phillips Curve
Long-Run Vertical Phillips Curve
Disinflation
Taxation and Aggregate Supply
Taxes and Incentives to Work, Save, and Invest
The Laffer Curve
Criticisms of the Laffer Curve
Evaluation
Last Word: Do Tax Increases Reduce Real GDP?
Chapter 39 Current Issues in Macro Theory and Policy
What Causes Macro Instability?
Mainstream View
Monetarist View
Real-Business-Cycle View
Coordination Failures
Consider This: Too Much Money?
Does the Economy “Self-Correct”?
New Classical View of Self-Correction
Mainstream View of Self-Correction
Rules or Discretion?
In Support of Policy Rules
In Defense of Discretionary Stabilization Policy
Policy Successes
Summary of Alternative Views
Last Word: Market Monetarism
PART ELEVEN International Economics
Chapter 40 International Trade
Some Key Trade Facts
The Economic Basis for Trade
Comparative Advantage
Two Isolated Nations
Specializing Based on Comparative Advantage
Terms of Trade
Gains from Trade
Trade with Increasing Costs
The Case for Free Trade
Consider This: A CPA and a House Painter
Supply and Demand Analysis of Exports and Imports
Supply and Demand in the United States
Supply and Demand in Canada
Equilibrium World Price, Exports, and Imports
Trade Barriers and Export Subsidies
Economic Impact of Tariffs
Economic Impact of Quotas
Net Costs of Tariffs and Quotas
The Case for Protection: A Critical Review
Military Self-Sufficiency Argument
Diversification-for-Stability Argument
Infant Industry Argument
Protection-Against-Dumping Argument
Increased Domestic Employment Argument
Cheap Foreign Labor Argument
Multilateral Trade Agreements and Free-Trade Zones
General Agreement on Tariffs and Trade
World Trade Organization
The European Union
North American Free Trade Agreement
Trade Adjustment Assistance
Offshoring of Jobs
Last Word: Petition of the Candlemakers, 1845
Chapter 41 The Balance of Payments, Exchange Rates, and Trade Deficits
International Financial Transactions
The Balance of Payments
Current Account
Capital and Financial Account
Why the Balance?
Flexible Exchange Rates
Depreciation and Appreciation
Determinants of Flexible Exchange Rates
Disadvantages of Flexible Exchange Rates
Fixed Exchange Rates
Foreign Exchange Market Replaced by Government Peg
Official Reserves
Defending a Peg by Altering Demand or Supply
The Current Exchange Rate System: The Managed Float
Recent U.S. Trade Deficits
Causes of the Trade Deficits
Implications of U.S. Trade Deficits
Chapter 41 Appendix: Previous International Exchange-Rate Systems
Chapter 42 The Economics of Developing Countries
The Rich and the Poor
Classifications
Comparisons
Growth, Decline, and Income Gaps
The Human Realities of Poverty
Obstacles to Economic Development
Natural Resources
Human Resources
Capital Accumulation
Technological Advance
Sociocultural and Institutional Factors
Consider This: Faster, Please
The Vicious Circle
The Role of Government
A Positive Role
Public-Sector Problems
The Role of Advanced Nations
Expanding Trade
Admitting Temporary Workers
Discouraging Arms Sales
Foreign Aid: Public Loans and Grants
Flows of Private Capital
Last Word: Microfinance and Cash Transfers
Tables
Glossary
Index