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