Principles of Economics

Brief Contents ... 3
Contents ... 5
Preface ... 25
About the Author ... 27
Glossary ... 29
Chapter 01 The interconnected Economy ... 39
What Is an Economy? ... 40
Market-Oriented vs. Command Economies ... 40
The Interconnectedness of an Economy ... 40
The Division of Labor ... 41
Why the Division of Labor Increases Production ... 42
Trade and Markets ... 42
The Rise of Globalization ... 43
Microeconomics and Macroeconomics ... 44
Microeconomics: The Circular Flow Diagram ... 45
Macroeconomics: Goals, Frameworks, and Tools ... 47
Studying Economics Doesn’t Mean Worshiping the Economy ... 47
Key Concepts and Summary ... 48
Appendix to Chapter 01 ... 50
Pie Graphs ... 51
Bar Graphs ... 52
Line Graphs ... 52
Comparing Line Graphs with Pie Charts and Bar Graphs ... 57
Summary and Key Concepts ... 61
Chapter 02 Choice in a world of Scarcity ... 62
Choosing What to Consume ... 63
A Consumption Choice Budget Constraint ... 63
How Changes in Income and Prices Affect the Budget Constraint ... 63
Personal Preferences Determine Specific Choices ... 65
From a Model with Two Goods to the Real World of Many Goods ... 66
Choosing Between Labor and Leisure ... 66
An Example of a Labor-Leisure Budget Constraint ... 66
How a Change in Wages Affects the Labor-Leisure Budget Constraint ... 67
Making a Choice Along the Labor-Leisure Budget Constraint ... 67
Choosing Between Present and Future Consumption ... 68
Interest Rates: The Price of Intertemporal Choice ... 69
The Power of Compound Interest ... 70
An Example of Intertemporal Choice ... 71
Three Implications of Budget Constraints ... 72
Opportunity Cost ... 72
Marginal Decision-Making and Diminishing Marginal Utility ... 73
Sunk Costs ... 74
The Production Possibilities Frontier and Social Choices ... 74
The Shape of the Production Possibilities Frontier and Diminishing Marginal Returns ... 75
Productive Efficiency and Allocative Efficiency ... 77
Why Society Must Choose ... 78
Confronting Objections to the Economic Approach ... 78
A First Objection: People, Firms, and Society Don’t Act Like This ... 79
A Second Objection: People, Firms, and Society Shouldn’t Do This ... 79
Facing Scarcity and Making Trade-offs ... 81
Key Concepts and Summary ... 81
Chapter 03 International Trade ... 83
Absolute Advantage ... 85
A Numerical Example of Absolute Advantage and Trade ... 85
Trade and Opportunity Cost ... 88
Limitations of the Numerical Example ... 89
Comparative Advantage ... 89
Identifying Comparative Advantage ... 90
Mutually Beneficial Trade with Comparative Advantage ... 92
How Opportunity Cost Sets the Boundaries of Trade ... 94
Comparative Advantage Goes Camping ... 95
The Power of the Comparative Advantage Example ... 95
Intra-industry Trade between Similar Economies ... 95
The Prevalence of Intra-industry Trade between Similar Economies ... 95
Gains from Specialization and Learning ... 96
Economies of Scale, Competition, Variety ... 97
Dynamic Comparative Advantage ... 98
The Size of Benefits from International Trade ... 99
From Interpersonal to International Trade ... 100
Key Concepts and Summary ... 101
Chapter 04 Demand and Supply ... 102
Demand, Supply, and Equilibrium in Markets for Goods and Services ... 103
Demand for Goods and Services ... 103
Supply of Goods and Services ... 103
Equilibrium—Where Demand and Supply Cross ... 105
Shifts in Demand and Supply for Goods and Services ... 107
The Ceteris Paribus Assumption ... 107
An Example of a Shifting Demand Curve ... 107
Factors That Shift Demand Curves ... 108
Summing Up Factors That Change Demand ... 109
An Example of a Shift in a Supply Curve ... 110
Factors That Shift Supply Curves ... 111
Summing Up Factors That Change Supply ... 112
Shifts in Equilibrium Price and Quantity: The Four-Step Process ... 112
Good Weather for Salmon Fishing ... 113
Seal Hunting and New Drugs ... 114
The Interconnections and Speed of Adjustment in Real Markets ... 115
Price Ceilings and Price Floors in Markets for Goods and Services ... 115
Price Ceilings ... 115
Price Floors ... 118
Responses to Price Controls: Many Margins for Action ... 119
Policy Alternatives to Price Ceilings and Price Floors ... 121
Supply, Demand, and Efficiency ... 122
Consumer Surplus, Producer Surplus, Social Surplus ... 122
Inefficiency of Price Floors and Price Ceilings ... 123
Demand and Supply as a Social Adjustment Mechanism ... 125
Key Concepts and Summary ... 125
Chapter 05 Labor and Financial Capital Markets.pdf ... 127
Demand and Supply at Work in Labor Markets ... 127
Equilibrium in the Labor Market ... 128
Shifts in Labor Demand ... 129
Shifts in Labor Supply ... 130
Technology and Wage Inequality: The Four-Step Process ... 130
Price Floors in the Labor Market: Living Wages and Minimum Wages ... 131
The Minimum Wage as an Example of a Price Floor ... 132
Demand and Supply in Financial Capital Markets ... 133
Who Demands and Who Supplies in Financial Capital Markets ... 134
Equilibrium in Financial Capital Markets ... 135
Shifts in Demand and Supply in Financial Capital Markets ... 135
The United States as a Global Borrower: The Four-Step Process ... 136
Price Ceilings in Financial Capital Markets: Usury Laws ... 137
Don’t Kill the Price Messengers ... 138
Key Concepts and Summary ... 140
Chapter 06 Globalization and Protectionism ... 141
Protectionism: An Indirect Subsidy from Consumers to Producers ... 142
Demand and Supply Analysis of Protectionism ... 142
Who Benefits and Who Pays? ... 144
International Trade and Its Effects on Jobs, Wages, and Working Conditions ... 145
Fewer Jobs? ... 145
Trade and Wages ... 147
Labor Standards ... 148
The Infant Industry Argument ... 149
The Dumping Argument ... 150
The Growth of Anti-Dumping Cases ... 150
Why Might Dumping Occur? ... 151
Should Anti-Dumping Cases Be Limited? ... 151
The Environmental Protection Argument ... 151
The Race to the Bottom Scenario ... 152
Pressuring Low-Income Countries for Higher Environmental Standards ... 153
The Unsafe Consumer Products Argument ... 153
The National Interest Argument ... 154
How Trade Policy Is Enacted: Global, Regional, and National ... 156
The World Trade Organization ... 156
Regional Trading Agreements ... 157
Trade Policy at the National Level ... 158
Long-Term Trends in Barriers to Trade ... 158
The Trade-offs of Trade Policy ... 159
Key Concepts and Summary ... 160
Chapter 07 Elasticity ... 162
Price Elasticity of Demand ... 163
Price Elasticity of Supply ... 166
Elastic, Inelastic, and Unitary Elasticity ... 168
Applications of Elasticity ... 170
Elasticity as a General Concept ... 176
Key Concepts and Summary ... 179
Chapter 08 Household Decision Making ... 181
Consumption Choices ... 181
How Changes in Income and Prices Affect Consumption Choices ... 185
Labor-Leisure Choices ... 191
Intertemporal Choices in Financial Capital Markets ... 194
Key Concepts and Summary ... 198
Appendix to Chapter 08 ... 200
What Is an Indifference Curve? ... 200
Utility-Maximizing with Indifference Curves ... 202
Changes in Income ... 204
Responses to Price Changes: Substitution and Income Effects ... 205
Indifference Curves with Labor-Leisure and Intertemporal Choices ... 207
Conclusion ... 212
Key Concepts and Summary ... 212
Chapter 09 Cost and Industry Structure ... 214
The Structure of Costs in the Short Run ... 216
The Structure of Costs in the Long Run ... 220
Conclusion ... 228
Key Concepts and Summary ... 228
Chapter 10 Perfect Competition ... 230
Quantity Produced by a Perfectly Competitive Firm ... 231
Entry and Exit in the Long-Run Output ... 239
Factors of Production in Perfectly Competitive Markets ... 241
Efficiency in Perfectly Competitive Markets ... 246
Conclusion ... 247
Key Concepts and Summary ... 247
Chapter 11 Monopoly ... 250
Barriers to Entry ... 251
Legal Restrictions ... 251
Control of a Physical Resource ... 251
Technological Superiority ... 252
Natural Monopoly ... 253
Intimidating Potential Competition ... 254
Summing Up Barriers to Entry ... 254
How a Profit-Maximizing Monopoly Chooses Output and Price ... 255
Demand Curves Perceived by a Perfectly Competitive Firm and by a Monopoly ... 255
Total and Marginal Revenue for a Monopolist ... 255
Marginal Revenue and Marginal Cost for a Monopolist ... 258
Illustrating Monopoly Profits ... 259
The Inefficiency of Monopoly ... 261
Conclusion ... 262
Key Concepts and Summary ... 263
Chapter 12 Monopolistic Competition and Oligopoly ... 265
Monopolistic Competition ... 266
Differentiated Products ... 266
Perceived Demand for a Monopolistic Competitor ... 266
How a Monopolistic Competitor Chooses Price and Quantity ... 267
Monopolistic Competitors and Entry ... 269
Monopolistic Competition and Efficiency ... 271
The Benefits of Variety and Product Differentiation ... 272
Oligopoly ... 272
Why Do Oligopolies Exist? ... 273
Collusion or Competition? ... 273
The Prisoner’s Dilemma ... 273
The Oligopoly Version of the Prisoner’s Dilemma ... 274
How to Enforce Cooperation ... 276
Conclusion ... 277
Key Concepts and Summary ... 278
Chapter 13 Competition and Public Policy ... 280
Corporate Mergers ... 281
Regulations for Approving Mergers ... 281
The Four-Firm Concentration Ratio ... 282
The Herfindahl-Hirschman Index ... 283
New Directions for Antitrust ... 284
Regulating Anticompetitive Behavior ... 285
When Breaking Up Is Hard to Do: Regulating Natural Monopolies ... 287
The Choices in Regulating a Natural Monopoly ... 287
Cost-Plus versus Price Cap Regulation ... 289
The Great Deregulation Experiment ... 289
Doubts about Regulation of Prices and Quantities ... 289
The Effects of Deregulation ... 290
Frontiers of Deregulation ... 291
Around the World: From Nationalization to Privatization ... 292
Key Concepts and Summary ... 293
Chapter 14 Environmental Protection and Negative Externalities ... 295
Externalities ... 297
Pollution as a Negative Externality ... 297
Command-and-Control Regulation ... 298
Market-Oriented Environmental Tools ... 299
Market-Friendly Environmental Tool #1: Pollution Charges ... 299
Market-Friendly Environmental Tool #2: Marketable Permits ... 300
Market-Friendly Environmental Tool #3: Better-Defined Property Rights ... 302
Applying Market-Oriented Environmental Tools ... 303
The Benefits and Costs of U.S. Environmental Laws ... 303
Benefits and Costs of Clean Air and Clean Water ... 304
Marginal Benefits and Marginal Costs ... 305
The Unrealistic Goal of Zero Pollution ... 306
International Environmental Issues ... 306
The Trade-off between Economic Output and Environmental Protection ... 307
Key Concepts and Summary ... 308
Chapter 15 Technology, Positive Externalities and Public Goods ... 310
The Incentives for Developing New Technology ... 312
Some Grumpy Inventors ... 312
The Positive Externalities of New Technology ... 313
Contrasting Positive Externalities and Negative Externalities ... 314
How to Raise the Rate of Return for Innovators ... 315
Intellectual Property Rights ... 315
Government Spending on Research and Development ... 317
Tax Breaks for Research and Development ... 318
Cooperative Research and Development ... 318
A Balancing Act ... 318
Public Goods ... 319
The Definition of a Public Good ... 319
The Free Rider Problem ... 320
The Role of Government in Paying for Public Goods ... 322
Positive Externalities and Public Goods ... 322
Key Concepts and Summary ... 323
Chapter 16 Poverty and Economic Inequality ... 324
Drawing the Poverty Line ... 325
The Poverty Trap ... 327
The Safety Net ... 329
Temporary Assistance for Needy Families ... 330
Earned Income Credit (EIC) ... 330
Food Stamps ... 331
Medicaid ... 331
Other Safety Net Programs ... 332
Measuring Income Inequality ... 332
Income Distribution by Quintiles ... 332
Lorenz Curve ... 333
Causes of Growing Income Inequality ... 335
The Changing Composition of American Households ... 335
A Shift in the Distribution of Wages ... 335
Government Policies to Reduce Income Inequality ... 337
Redistribution ... 338
The Ladder of Opportunity ... 338
Inheritance Taxes ... 339
The Trade-off between Incentives and Income Equality ... 340
Key Concepts and Summary ... 341
Chapter 17 Issues in Labor Market - Unions, Discrimination and Immigration ... 343
Labor Unions ... 344
Facts about Union Membership and Pay ... 345
Higher Wages for Union Workers ... 346
The Decline in U.S. Union Membership ... 348
Concluding Thoughts about the Economics of Unions ... 351
Employment Discrimination ... 351
Earnings Gaps by Race and Gender ... 351
Investigating the Female/Male Earnings Gap ... 353
Investigating the Black/White Earnings Gap ... 353
Competitive Markets and Discrimination ... 355
Public Policies to Reduce Discrimination ... 355
An Increasingly Diverse Workforce ... 356
Immigration ... 356
Historical Patterns of Immigration ... 357
Economic Effects of Immigration ... 357
Proposals for Immigration Reform ... 358
Conclusion ... 359
Key Concepts and Summary ... 359
Chapter 18 Information, Risk and Insurance ... 361
The Problem of Imperfect Information ... 362
“Lemons” and Other Examples of Imperfect Information ... 362
How Imperfect Information Can Affect Equilibrium Price and Quantity ... 363
When Price Mixes with Imperfect Information about Quality ... 363
Mechanisms to Reduce the Risk of Imperfect Information ... 364
Insurance and Imperfect Information ... 366
How Insurance Works ... 366
Risk Groups and Actuarial Fairness ... 368
The Moral Hazard Problem ... 368
The Adverse Selection Problem ... 370
Government Regulation of Insurance ... 370
Conclusion ... 373
Key Concepts and Summary ... 373
Chapter 19 Financial Markets ... 375
How Businesses Raise Financial Capital ... 376
Early-Stage Financial Capital ... 376
Profits as a Source of Financial Capital ... 377
Borrowing: Banks and Bonds ... 377
Corporate Stock and Public Firms ... 378
How Firms Choose between Sources of Financial Capital ... 379
How Households Supply Financial Capital ... 381
Bank Accounts ... 381
Bonds ... 383
Stocks ... 384
Mutual Funds ... 388
Housing and Other Tangible Assets ... 388
The Trade-offs between Return and Risk ... 389
How to Become Rich ... 391
Why It’s Hard to Get Rich Quick: The Random Walk Theory ... 391
Getting Rich the Slow, Boring Way ... 392
How Capital Markets Transform Financial Flows ... 392
Key Concepts and Summary ... 393
Appendix to Chapter 19 ... 395
Chapter 20 Public Choice ... 398
When Voters Don’t Participate ... 399
Special-Interest Politics ... 400
Identifiable Winners, Anonymous Losers ... 401
Pork Barrels and Logrolling ... 401
Voting Cycles ... 403
Where Is Government’s Self-Correcting Mechanism? ... 403
A Balanced View of Markets and Government ... 404
Key Concepts and Summary ... 405
Chapter 21 The Macroeconomic Perspective.pdf ... 407
Measuring the Size of the Economy: Gross Domestic Product ... 409
GDP Measured by Components of Demand ... 409
GDP Measured by What Is Produced ... 412
The Problem of Double Counting ... 412
Comparing GDP among Countries ... 413
Converting Currencies with Exchange Rates ... 413
Converting to Per Capita GDP ... 416
The Pattern of GDP over Time ... 417
How Well Does GDP Measure the Well-Being of Society? ... 418
Some Differences between GDP and Standard of Living ... 418
Does a Rise in GDP Overstate or Understate the Rise in the Standard of Living? ... 421
GDP Is Rough, but Useful ... 421
Conclusion ... 421
Key Concepts and Summary ... 422
Chapter 22 Economic Growth.pdf ... 423
The Relatively Recent Arrival of Economic Growth ... 424
Worker Productivity and Economic Growth ... 425
The Power of Sustained Economic Growth ... 427
The Aggregate Production Function ... 428
Components of the Aggregate Production Function ... 428
Growth Accounting Studies ... 431
A Healthy Climate for Economic Growth ... 432
Future Economic Convergence? ... 432
Arguments Favoring Convergence ... 434
Arguments That Convergence Is Neither Inevitable Nor Likely ... 435
The Slowness of Convergence ... 436
Key Concepts and Summary ... 437
Chapter 23 Unemployment.pdf ... 438
Unemployment and the Labor Force ... 439
In or Out of the Labor Force? ... 439
Calculating the Unemployment Rate ... 439
Controversies over Measuring Unemployment ... 440
Patterns of Unemployment ... 441
The Historical U.S. Unemployment Rate ... 441
Unemployment Rates by Group ... 442
International Unemployment Comparisons ... 443
Why Unemployment Is a Puzzle for Economists ... 444
Looking for Unemployment with Flexible Wages ... 445
Why Wages Might Be Sticky Downward ... 445
The Short Run: Cyclical Unemployment ... 446
The Long Run: The Natural Rate of Unemployment ... 447
Frictional Unemployment ... 448
Productivity Shifts and the Natural Rate of Unemployment ... 449
Public Policy and the Natural Rate of Unemployment ... 450
The Natural Rate of Unemployment in Recent Years ... 451
The Natural Rate of Unemployment in Europe ... 452
A Preview of Policies to Fight Unemployment ... 453
Key Concepts and Summary ... 453
Chapter 24 Inflation.pdf ... 455
Combining Prices to Measure the Inflation Rate ... 456
The Changing Price of a Basket of Goods ... 456
Index Numbers ... 458
Measuring Changes in the Cost of Living ... 460
Practical Solutions for the Substitution and the Quality/New Goods Biases ... 461
Alternative Price Indexes: PPI, GDP Deflator, and More ... 462
Inflation Experiences ... 463
Historical Inflation in the U.S. Economy ... 463
Inflation around the World ... 464
Adjusting Nominal Values to Real Values ... 465
Nominal to Real GDP ... 465
Nominal to Real Interest Rates ... 467
The Dislocations of Inflation ... 468
The Land of Funny Money ... 468
Unintended Redistributions of Purchasing Power ... 469
Blurred Price Signals ... 471
Problems of Long-Term Planning ... 471
Some Benefits of Inflation? ... 472
Indexing and Its Limitations ... 472
Indexing in Private Markets ... 472
Indexing in Government Programs ... 473
Might Indexing Reduce Concern Over Inflation? ... 473
A Preview of Policy Discussions of Inflation ... 473
Key Concepts and Summary ... 474
Chapter 25 The Balance of Trade.pdf ... 476
Measuring Trade Balances ... 477
Components of the U.S. Current Account Balance ... 477
Trade Balances in Historical and International Context ... 479
The Intimate Connection between Trade Balances and Flows of Financial Capital ... 480
The Parable of Robinson Crusoe and Friday ... 480
The Balance of Trade as the Balance of Payments ... 481
The National Saving and Investment Identity ... 483
The National Saving and Investment Identity ... 483
Domestic Savings and Investment Determine the Trade Balance ... 484
Exploring Trade Balances One Factor at a Time ... 484
How Short-Term Movements in the Business Cycle Can Affect the Trade Balance ... 485
When Are Trade Deficits and Surpluses Beneficial or Harmful? ... 486
The Difference between Level of Trade and the Trade Balance ... 487
Final Thoughts about Trade Balances ... 489
Key Concepts and Summary ... 489
Chapter 26 The Aggregate Supply - Aggregate Demand Model.pdf ... 491
Macroeconomic Perspectives on Demand and Supply ... 492
Say’s Law and the Macroeconomics of Supply ... 492
Keynes’ Law and the Macroeconomics of Demand ... 493
Combining Supply and Demand in Macroeconomics ... 494
Building a Model of Aggregate Supply and Aggregate Demand ... 494
The Aggregate Supply Curve and Potential GDP ... 494
The Aggregate Demand Curve ... 496
Equilibrium in the Aggregate Supply–Aggregate Demand Model ... 497
AS and AD Are Macro, not Micro ... 497
Shifts in Aggregate Supply ... 498
How Productivity Growth Shifts the AS Curve ... 498
How Changes in Input Prices Shift the AS Curve ... 498
Shifts in Aggregate Demand ... 499
How Changes by Consumers and Firms Can Affect AD ... 500
How Government Macroeconomic Policy Choices Can Shift AD ... 502
How the AS–AD Model Combines Growth, Unemployment, Inflation, and the Balance of Trade ... 503
Growth and Recession in the AS–AD Diagram ... 504
Unemployment in the AS–AD Diagram ... 504
Inflationary Pressures in the AS–AD Diagram ... 504
The Balance of Trade and the AS–AD Diagram ... 506
Keynes’ Law and Say’s Law in the AS–AD Model ... 507
Key Concepts and Summary ... 508
Chapter 27 The Keynesian Perspective.pdf ... 511
The Building Blocks of Keynesian Analysis ... 512
The Importance of Aggregate Demand in Recessions ... 512
Wage and Price Stickiness ... 513
The Two Keynesian Assumptions in the AS–AD Model ... 514
The Components of Aggregate Demand ... 515
What Causes Consumption to Shift? ... 515
What Causes Investment to Shift? ... 516
What Causes Government Demand to Shift? ... 517
What Causes Exports and Imports to Shift? ... 517
The Phillips Curve ... 518
The Discovery of the Phillips Curve ... 518
The Instability of the Phillips Curve ... 520
Keynesian Policy for Fighting Unemployment and Inflation ... 521
The Expenditure-Output Model ... 522
The Axes of the Expenditure-Output Diagram ... 522
The Potential GDP Line and the 45-degree Line ... 523
The Aggregate Expenditure Schedule ... 524
Building the Aggregate Expenditure Schedule ... 524
Consumption as a Function of National Income ... 524
Investment as a Function of National Income ... 525
Government Spending and Taxes as a Function of National Income ... 526
Exports and Imports as a Function of National Income ... 527
Building the Combined Aggregate Expenditure Function ... 528
Equilibrium in the Keynesian Cross Model ... 530
Where Equilibrium Occurs ... 530
Recessionary and Inflationary Gaps ... 531
The Multiplier Effect ... 532
How Does the Multiplier Work? ... 532
Calculating the Multiplier ... 534
Calculating Keynesian Policy Interventions ... 535
Multiplier Trade-offs: Stability vs. the Power of Macroeconomic Policy ... 536
Is Keynesian Economics Pro-Market or Anti-Market? ... 536
Key Concepts and Summary ... 537
Appendix to Chapter 27.pdf ... 539
Chapter 28 The Neo Classical Perspective.pdf ... 543
The Building Blocks of Neoclassical Analysis ... 544
The Importance of Potential GDP in the Long Run ... 544
The Role of Flexible Prices ... 546
How Fast Is the Speed of Macroeconomic Adjustment? ... 548
Policy Implications of the Neoclassical Perspective ... 549
Fighting Recession or Encouraging Long-Term Growth? ... 549
Fighting Unemployment or Inflation? ... 550
The Neoclassical Phillips Curve Trade-Off ... 552
Macroeconomists Riding Two Horses ... 553
Key Comments and Summary ... 554
Chapter 29 Money and Banks.pdf ... 556
Defining Money by Its Functions ... 557
Barter and the Double Coincidence of Wants ... 557
Three Functions for Money ... 558
Measuring Money: Currency, M1, and M2 ... 558
How Banks Work ... 560
Banks as Financial Intermediaries ... 561
A Bank’s Balance Sheet ... 562
How Banks Go Bankrupt ... 564
How Banks Create Money ... 565
The Story of System Bank ... 566
The Money Multiplier ... 567
Cautions about the Money Multiplier ... 568
Conclusion ... 569
Key Concepts and Summary ... 569
Chapter 30 Monetary Policy and Bank Regulation.pdf ... 571
Monetary Policy and the Central Bank ... 572
The Federal Reserve ... 572
Other Tasks and Funding of Central Banks ... 573
How a Central Bank Affects the Money Supply ... 574
Open Market Operations ... 574
Reserve Requirements ... 577
The Discount Rate ... 577
Quantitative Easing ... 577
Forward Guidance ... 578
Monetary Policy and Economic Outcomes ... 578
The Effect of Monetary Policy on Interest Rates ... 578
The Effect of Monetary Policy on Aggregate Demand ... 579
What the Federal Reserve Has Done ... 580
Pitfalls for Monetary Policy ... 582
Long and Variable Time Lags ... 583
Excess Reserves ... 583
Unpredictable Movements of Velocity ... 584
Is Unemployment or Inflation More Important? ... 586
Should the Central Bank Tackle Asset Bubbles and Leverage Cycles? ... 588
Bank Regulation ... 588
Bank Runs ... 589
A Weakened Banking Sector ... 589
Deposit Insurance ... 590
Bank Supervision ... 590
Lender of Last Resort ... 591
Summary ... 592
Conclusion ... 592
Key Concepts and Summary ... 592
Chapter 31 Exchange Rates and International Capital Flows.pdf ... 594
How the Foreign Exchange Market Works ... 595
The Extraordinary Size of the Foreign Exchange Markets ... 595
Demanders and Suppliers of Currency in Foreign Exchange Markets ... 595
Participants in the Exchange Rate Market ... 598
Strengthening and Weakening Currency ... 598
Demand and Supply Shifts in Foreign Exchange Markets ... 601
Expectations about Future Exchange Rates ... 602
Differences across Countries in Rates of Return ... 603
Relative Inflation ... 603
Purchasing Power Parity ... 605
Macroeconomic Effects of Exchange Rates ... 605
Exchange Rates, Aggregate Demand, and Aggregate Supply ... 606
Fluctuations in Exchange Rates ... 608
Exchange Rates, Trade Balances, and International Capital Flows ... 609
Summing Up Public Policy and Exchange Rates ... 612
Exchange Rate Policies ... 612
Floating Exchange Rates ... 612
Using Soft Pegs and Hard Pegs ... 614
Trade-offs of Soft Pegs and Hard Pegs ... 615
A Single Currency ... 617
Conclusion ... 618
Chapter 32 Government Budgets and Fiscal Policy.pdf ... 620
An Overview of Government Spending ... 621
Total U.S. Government Spending ... 621
Keeping Federal Budget Numbers in Perspective ... 623
State and Local Government Spending ... 623
An Overview of Taxation ... 624
State and Local Taxes ... 626
Federal Deficits and Debt ... 628
Debt/GDP Ratio ... 628
The Path from Deficits to Surpluses to Deficits ... 629
Using Fiscal Policy to Affect Recession, Unemployment and Inflation ... 630
Expansionary Fiscal Policy ... 632
Contractionary Fiscal Policy ... 633
Automatic Stabilizers ... 634
Counterbalancing Recession and Boom ... 634
Practical Problems with Discretionary Fiscal Policy ... 635
Long and Variable Time Lags ... 635
Temporary and Permanent Fiscal Policy ... 636
Coordinating Fiscal and Monetary Policy ... 636
Structural Economic Change Takes Time ... 637
The Limitations of Potential GDP and the Natural Rate of Unemployment ... 637
Educating Politicians ... 637
Summing Up Discretionary Fiscal Policy ... 638
Requiring a Balanced Budget? ... 638
Conclusion ... 639
Key Concepts and Summary ... 639
Chapter 33 Government borrowings and National Savings.pdf ... 641
How Government Borrowing Affects Investment and the Trade Balance ... 641
The National Saving and Investment Identity ... 642
What about Budget Surpluses and Trade Surpluses? ... 642
Fiscal Policy, Investment, and Economic Growth ... 643
Crowding Out Physical Capital Investment ... 643
The Interest Rate Connection ... 644
Public Investment in Human Capital ... 646
How Fiscal Policy Can Improve Technology ... 648
Summary of Fiscal Policy, Investment, and Economic Growth ... 648
Will Private Saving Offset Government Borrowing? ... 649
Fiscal Policy and the Trade Balance ... 650
Twin Deficits? ... 650
Fiscal Policy and Exchange Rates ... 650
From Budget Deficits to International Economic Crisis ... 652
Using Fiscal Policy to Address Trade Imbalances ... 653
Conclusion ... 654
Key Concepts and Summary ... 654
Chapter 34 Macroeconomic Policy around the world.pdf ... 656
The Diversity of Countries and Economies across the World ... 657
Economic Growth ... 658
Growth Policies for the Technological Leaders ... 659
Growth Policies for the Converging Economies ... 659
Growth Policies for the Technologically Disconnected ... 660
Lower Unemployment ... 662
Unemployment from a Recession ... 662
The Natural Rate of Unemployment ... 663
Undeveloped Labor Markets ... 664
Policies for Lower Inflation ... 664
Policies for a Sustainable Balance of Trade ... 665
Concerns over International Trade in Goods and Services ... 666
Concerns over International Flows of Capital ... 666
Final Thoughts on Economics and Market Institutions ... 668
Key Concepts and Summary ... 670
Index.pdf ... 671