Macroeconomics [2nd ed] 9780132992794, 1292001305, 9781292001302, 0132992795

Table of contents :
Cover......Page 1
Title......Page 2
Contents......Page 6
When You Enter the Job Market can Matter a Lot......Page 36
Macroeconomics in the Short Run and in the Long Run......Page 37
Long-Run Growth in the United States......Page 38
Some Countries Have Not Experienced Significant Long-Run Growth......Page 40
Aging Populations Pose a Challenge to Governments Around the World......Page 41
Unemployment in the United States......Page 43
Inflation Rates Fluctuate Over Time and Across Countries......Page 44
Economic Policy Can Help Stabilize the Economy......Page 45
International Factors Have Become Increasingly Important in Explaining Macroeconomic Events......Page 47
What Is the Best Way to Analyze Macroeconomic Issues?......Page 49
Macroeconomic Models......Page 50
Solved Problem 1.2: Do Rising Imports Lead to a Permanent Reduction in U.S. Employment?......Page 51
Forming and Testing Hypotheses in Economic Models......Page 52
Making the Connection: Why Should the United States Worry About the “Euro Crisis”?......Page 53
1.3 Key Issues and Questions of Macroeconomics......Page 54
Problems and Applications, Data Exercise......Page 56
Key Issue and Question......Page 60
How the Government Calculates GDP......Page 62
The Circular Flow of Income......Page 64
National Income Identities and the Components of GDP......Page 66
The Relationship Between GDP and GNP......Page 69
GDP Versus GDI......Page 70
GDP and National Income......Page 71
2.2 Real GDP, Nominal GDP, and the GDP Deflator......Page 72
Solved Problem 2.2A: Calculating Real GDP......Page 73
Solved Problem 2.2B: Calculating the Inflation Rate......Page 75
The Chain-Weighted Measure of Real GDP......Page 76
Making the Connection: Trying to Hit a Moving Target: Forecasting with “Real-Time Data”......Page 77
Comparing GDP Across Countries......Page 78
2.3 Inflation Rates and Interest Rates......Page 79
The Consumer Price Index......Page 80
Making the Connection: Does the CPI Provide a Good Measure of Inflation for a Family with College Students?......Page 81
How Accurate Is the CPI?......Page 82
The Way the Federal Reserve Measures Inflation......Page 83
Interest Rates......Page 84
2.4 Measuring Employment and Unemployment......Page 86
Answering the Key Question......Page 88
Problems and Applications, Data Exercise......Page 89
Key Issue and Question......Page 99
3.1 An Overview of the Financial System......Page 100
Financial Markets and Financial Intermediaries......Page 101
Making the Connection: The Controversial World of Subprime Lending......Page 103
Making the Connection: Investing in the Worldwide Stock Market......Page 106
Asymmetric Information and Principal–Agent Problems in Financial Markets......Page 108
3.2 Financial Crises, Government Policy, and the Financial System......Page 109
Financial Intermediaries and Leverage......Page 110
Bank Panics......Page 112
The Financial Crisis of 2007–2009......Page 114
The Mortgage Market and the Subprime Lending Disaster......Page 115
Runs on the Shadow Banking System......Page 117
Government Policies to Deal with the Financial Crisis of 2007–2009......Page 118
Making the Connection: Fed Policy During Panics, Then and Now: The Collapse of the Bank of United States in 1930 and the Collapse of Lehman Brothers in 2008......Page 119
The Demand and Supply of Money......Page 122
Shifts in the Money Demand Curve......Page 123
Equilibrium in the Money Market......Page 124
Calculating Bond Interest Rates and the Concept of Present Value......Page 125
Present Value and the Prices of Stocks and Bonds......Page 127
The Economy’s Many Interest Rates......Page 130
Answering the Key Question......Page 134
Appendix: More on the Term Structure of Interest Rates......Page 141
Problems and Applications, Data Exercise......Page 135
Key Issue and Question......Page 143
4.1 The Balance of Payments......Page 144
The Current Account......Page 147
The Financial Account......Page 148
The Capital Account......Page 149
Nominal Exchange Rates......Page 150
Real Exchange Rates......Page 152
The Foreign-Exchange Market......Page 153
Exchange Rate Policy......Page 154
Policy Choices and the Current Exchange Rate Systems......Page 155
Making the Connection: Greece Experiences a “Bank Jog”......Page 156
Purchasing Power Parity......Page 159
Why Purchasing Power Parity Doesn’t Hold Exactly......Page 160
The Interest Parity Condition......Page 161
Solved Problem 4.3: Making a Financial Killing by Buying Brazilian Bonds?......Page 162
Making the Connection: Brazilian Firms Grapple with an Unstable Exchange Rate......Page 164
4.4 The Loanable Funds Model and the International Capital Market......Page 165
Saving and Supply in the Loanable Funds Market......Page 166
Investment and the Demand for Loanable Funds......Page 167
Explaining Movements in Saving, Investment, and the Real Interest Rate......Page 168
Small Open Economy......Page 170
Large Open Economy......Page 173
Answering the Key Question......Page 174
Problems and Applications, Data Exercise......Page 175
Key Issue and Question......Page 182
5.1 The Aggregate Production Function......Page 183
The Cobb–Douglas Production Function......Page 184
The Demand for Labor and the Demand for Capital......Page 187
Changes in Capital, Labor, and Total Factor Productivity......Page 188
Making the Connection: Foreign Direct Investment Increases Real GDP in China......Page 189
5.2 A Model of Real GDP in the Long Run......Page 190
The Markets for Capital and Labor......Page 191
The Division of Total Income......Page 193
Solved Problem 5.2: Calculating the Marginal Product of Labor and the Marginal Product of Capital......Page 195
5.3 Why Real GDP per Worker Varies Among Countries......Page 196
The per Worker Production Function......Page 197
Macro Data: How Well do International Capital Markets Allocate Capital?......Page 198
What Explains Total Factor Productivity?......Page 199
Making the Connection: Comparing Research and Development Spending and Labor Productivity in China and the United States......Page 200
Making the Connection: How Important Were the Chinese Economic Reforms of 1978?......Page 203
Answering the Key Question......Page 205
Problems and Applications, Data Exercise......Page 206
Key Issue and Question......Page 211
6.1 The Solow Growth Model......Page 212
Capital Accumulation......Page 213
The Steady State......Page 215
Transition to the Steady State......Page 217
Saving Rates and Growth Rates......Page 219
Macro Data: Do High Rates of Saving and Investment Lead to High Levels of Income?......Page 220
Labor Force Growth and the Steady State......Page 221
The Effect of an Increase in the Labor Force Growth Rate......Page 222
Solved Problem 6.2: The Effect of a Decrease in the Labor Force Growth Rate on Real GDP per Worker......Page 223
Technological Change......Page 225
Steady-State Growth Rates......Page 226
Convergence to the Balanced Growth Path......Page 228
Making the Connection: Will China’s Standard of Living Ever Exceed that of the United States?......Page 230
Do All Countries Converge to the Same Steady State?......Page 231
6.5 Endogenous Growth Theory......Page 232
AK Growth Models: Reconsidering Diminishing Returns......Page 233
Two-Sector Growth Model: The Production of Knowledge......Page 235
Making the Connection: What Explains Recent Economic Growth in India?......Page 236
Making the Connection: Should the Federal Government Invest in Green Energy?......Page 238
Problems and Applications, Data Exercise......Page 241
The Growth Accounting Equation for Real GDP......Page 247
Total Factor Productivity as the Ultimate Source of Growth......Page 248
Key Issue and Question......Page 251
7.1 What Is Money, and Why Do We Need It?......Page 252
The Functions of Money......Page 253
Commodity Money Versus Fiat Money......Page 254
Making the Connection: When Money Is No Longer Money: Hyperinflation in Zimbabwe......Page 255
How Is Money Measured?......Page 257
Which Measure of the Money Supply Should We Use?......Page 258
How the Fed Changes the Monetary Base......Page 259
The Process of Money Creation......Page 260
7.3 The Quantity Theory of Money and Inflation......Page 262
The Quantity Theory Explanation of Inflation......Page 263
Making the Connection Is the Inflation Rate Around the World Going to Increase in the Near Future?......Page 264
Solved Problem 7.3: The Effect of a Decrease in the Growth Rate of the Money Supply......Page 265
Can the Quantity Theory Accurately Predict the Inflation Rate?......Page 266
7.4 The Relationships Among the Growth Rate of Money, Inflation, and the Nominal Interest Rate......Page 267
Real Interest Rates and Expected Real Interest Rates......Page 268
The Fisher Effect......Page 269
Money Growth and the Nominal Interest Rate......Page 270
Costs of Expected Inflation......Page 271
How Large Are the Costs of Expected Inflation?......Page 273
Macro Data: What Is the Expected Inflation Rate?......Page 274
Making the Connection: Did the Fed’s Actions During the Financial Crisis of 2007–2009 Increase the Expected Inflation Rate?......Page 275
Inflation Uncertainty......Page 276
Benefits of Inflation......Page 277
Causes of Hyperinflation......Page 278
German Hyperinflation After World War I......Page 279
Problems and Applications, Data Exercise......Page 280
Open Market Operations......Page 290
The Simple Deposit Multiplier......Page 291
A More Realistic Money Multiplier......Page 294
Key Issue and Question......Page 295
Shifting the Demand Curve......Page 297
Factors That Shift the Labor Supply Curve......Page 299
The Effect of Technological Change......Page 301
Solved Problem 8.1: Why Don’t People Work as Much as They Did Decades Ago?......Page 302
Frictional Unemployment and Job Search......Page 304
Structural Unemployment......Page 305
Cyclical Unemployment......Page 306
Making the Connection: Did the Structural Unemployment Rate Rise During the Recession of 2007–2009?......Page 307
Unemployment Around the World......Page 309
8.3 The Natural Rate of Unemployment......Page 310
Solved Problem 8.3: How Many Jobs Does the U.S. Economy Create Every Month?......Page 311
What Determines the Natural Rate of Unemployment?......Page 314
Making the Connection: Are Strict Labor Laws to Blame for Unemployment in France?......Page 317
Equilibrium Real Wages and Unemployment......Page 319
Efficiency Wages......Page 320
Minimum Wage Laws......Page 321
Problems and Applications, Data Exercise......Page 322
Key Issue and Question......Page 329
The Keynesian and Classical Approaches......Page 331
Macroeconomic Shocks and Price Flexibility......Page 332
Why Are Prices Sticky in the Short Run?......Page 333
Making the Connection: The Curious Case of the 5-Cent Bottle of Coke......Page 335
9.2 What Happens During a Business Cycle?......Page 336
The Changing Severity of the U.S. Business Cycle......Page 337
Measuring Business Cycles......Page 340
Solved Problem 9.2: Dating U.S. Recessions......Page 341
Costs of the Business Cycle......Page 343
Making the Connection: Did the 2007–2009 Recession Break Okun’s Law?......Page 344
Movements of Economic Variables During the Business Cycle......Page 348
The Global Business Cycle......Page 349
9.3 Shocks and Business Cycles......Page 350
Multiplier Effects......Page 351
An Example of a Shock with Multiplier Effects: The Bursting of the Housing Bubble......Page 353
Aggregate Demand and Aggregate Supply: An Introduction......Page 354
Aggregate Supply Shocks and the Business Cycle......Page 356
Should Policy Try to Offset Shocks?......Page 357
Making the Connection: How Important Is Housing in the Business Cycle?......Page 358
Answering the Key Question......Page 359
Problems and Applications, Data Exercise......Page 360
Appendix: The Formula for the Expenditure Multiplier......Page 366
Key Issue and Question......Page 367
Equilibrium in the Goods Market......Page 369
The Multiplier Effect......Page 372
The Government Purchases and Tax Multipliers......Page 374
Solved Problem 10.1: Calculating Equilibrium Real GDP......Page 375
Constructing the IS Curve......Page 378
The IS Curve and the Output Gap......Page 379
The Link Between the Short-Term Nominal Interest Rate and the Long-Term Real Interest Rate......Page 381
Macro Data Box: Real Interest Rates and the Global Savings Glut......Page 384
Deriving the MP Curve Using the Money Market Model......Page 385
Shifts of the MP Curve......Page 386
Demand Shocks and Fluctuations in Output......Page 388
Making the Connection: Will the European Financial Crisis Cause a Recession in the United States?......Page 391
Monetary Policy and Fluctuations in Real GDP......Page 392
Solved Problem 10.3: Using the IS–MP Model to Analyze the 2001 Tax Cut......Page 395
IS–MP and Aggregate Demand......Page 396
Problems and Applications, Data Exercise......Page 399
Asset Market Equilibrium......Page 405
Deriving the LM Curve......Page 406
Shifting the LM Curve......Page 407
Equilibrium in the IS–LM Model......Page 408
Solved Problem 10A.1: Monetary Policy During the Great Depression......Page 410
An Alternative Derivation of the MP Curve......Page 412
Problems and Applications, Data Exercise......Page 413
Key Issue and Question......Page 415
11.1 The IS–MP Model and the Phillips Curve......Page 416
Okun’s Law, the Output Gap, and the Phillips Curve......Page 420
Movement Along an Existing Phillips Curve......Page 423
Shifts of the Phillips Curve......Page 424
Making the Connection: Lots of Money but Not Much Inflation Following the Recession of 2007–2009......Page 425
Using Monetary Policy to Fight a Recession......Page 427
Solved Problem 11.1: Fed Policy to Keep Inflation from Increasing......Page 428
Using the IS–MP Model to Analyze the Financial Crisis and the Housing Crash......Page 431
The IS Curve with a Floating Exchange Rate......Page 433
Monetary Policy with a Floating Exchange Rate......Page 435
The IS–MP Model with a Fixed Exchange Rate......Page 436
The MP Curve with a Fixed Exchange Rate......Page 437
Macro Data: Did the Gold Standard Make the Great Depression Worse?......Page 438
Making the Connection: Can the Euro Survive?......Page 439
Problems and Applications, Data Exercise......Page 442
Key Issue and Question......Page 447
Creation of the Federal Reserve System......Page 449
The Structure of the Federal Reserve System......Page 450
12.2 The Goals of Monetary Policy......Page 451
Financial Market Stability......Page 452
Open Market Operations......Page 453
Discount Loans and the Lender of Last Resort......Page 454
Reserve Requirements......Page 455
New Monetary Policy Tools in Response to the 2007–2009 Financial Crisis......Page 456
Making the Connection: On the Board of Governors, Four Can Be a Crowd......Page 458
Monetary Policy and Aggregate Expenditure......Page 459
Using Monetary Policy to Fight a Recession......Page 460
Using Monetary Policy to Deal with a Supply Shock......Page 462
Solved Problem 12.4: Did the Federal Reserve Make the Great Depression Worse?......Page 464
The Liquidity Trap, the Zero Lower Bound, and Alternative Channels of Monetary Policy......Page 466
Policy Lags......Page 470
Economic Forecasts......Page 471
Model Uncertainty......Page 472
Consequences of Policy Limitations......Page 473
Solved Problem 12.5: Did the Fed Help Cause the 2001 Recession?......Page 474
Making the Connection: “Too Big to Fail”—The Legacy of Continental Illinois......Page 478
12.6 Central Bank Independence......Page 479
The Independence of the U.S. Federal Reserve......Page 480
Monetary Policy with Floating Exchange Rates......Page 482
Monetary Policy with a Fixed Exchange Rate......Page 483
The Policy Trilemma for Economic Policy......Page 484
Problems and Applications, Data Exercise......Page 488
Key Issue and Question......Page 496
Who Conducts Fiscal Policy?......Page 498
Traditional Tools of Fiscal Policy......Page 499
Making the Connection: Why Was the Severity of the 2007–2009 Recession So Difficult to Predict?......Page 501
The Budget Deficit and the Budget Surplus......Page 503
Making the Connection: How Did the Federal Government Run a Budget Surplus in the Late 1990s and Early 2000s?......Page 505
Macro Data: Did Fiscal Policy Fail During the Great Depression?......Page 508
The Deficit and the Debt......Page 509
Is the Federal Debt a Problem?......Page 510
Fiscal Policy and the IS Curve......Page 511
Using Discretionary Fiscal Policy to Fight a Recession......Page 512
Automatic Stabilizers......Page 514
Solved Problem 13.3A: Should the Federal Government Eliminate the Budget Deficit?......Page 516
Making the Connection: State and Local Government Spending During the 2007–2009 Recession......Page 518
Personal Income Tax Rates and the Multiplier......Page 519
Solved Problem 13.3B: Calculating Equilibrium Real GDP and the Expenditure Multiplier with Income Taxes......Page 520
The Effects of Changes in Tax Rates on Potential GDP......Page 521
Policy Lags......Page 523
The Uncertainty of Economic Models......Page 524
When Will Fiscal Multipliers Be Large?......Page 526
Consequences of Policy Limitations......Page 527
Evaluating the American Recovery and Reinvestment Act......Page 528
Fiscal Policy with Floating Exchange Rates......Page 529
Fiscal Policy with a Fixed Exchange Rate......Page 530
Problems and Applications, Data Exercise......Page 531
Key Issue and Question......Page 539
14.1 Aggregate Demand Revisited......Page 541
The Aggregate Demand Curve......Page 542
Shifts of the Aggregate Demand Curve......Page 543
When Are Shifts to the Aggregate Demand Curve Permanent?......Page 546
14.2 Aggregate Supply and the Phillips Curve......Page 547
Shifts in the Aggregate Supply Curve......Page 549
Equilibrium in the AD–AS Model......Page 550
The Effects of a Supply Shock......Page 551
Permanent Demand Shocks: Changes in the Central Bank Reaction Function......Page 553
Macro Data: Are Oil Supply Shocks Really That Important?......Page 554
Making the Connection: The End of Stagflation and the Volcker Recession......Page 556
Temporary Demand Shocks: Changes in Aggregate Expenditure......Page 557
Solved Problem 14.3: Applying the AD–AS Model to an Increase in Housing Construction......Page 559
14.4 Rational Expectations and Policy Ineffectiveness......Page 561
Rational Expectations and Anticipated Policy Changes......Page 562
Rational Expectations and Demand Shocks......Page 563
Are Anticipated and Credible Policy Changes Actually Ineffective?......Page 564
The Taylor Rule......Page 565
The Case for Discretion......Page 568
The Case for Rules......Page 569
Making the Connection: Central Banks Around the World Try Inflation Targeting......Page 570
Problems and Applications, Data Exercise......Page 571
Key Issue and Question......Page 578
15.1 Debt and Deficits in Historical Perspective......Page 579
The Government Budget Constraint......Page 580
The Relationship Between the Deficit and the National Debt......Page 581
Gross Federal Debt Versus Debt Held by the Public......Page 582
The Debt-to-GDP Ratio......Page 583
Composition of Federal Government Revenue and Expenditure......Page 584
Federal Government Expenditure......Page 585
Expressing the Deficit as a Percentage of GDP......Page 586
Making the Connection: The European Debt Crisis......Page 587
When Is Fiscal Policy Sustainable?......Page 588
Solved Problem 15.2: Can Japan Grow Its Way Out of Debt?......Page 589
The Conventional View: Crowding Out Private Investment......Page 591
Macro Data: Do Government Deficits Increase Real Interest Rates?......Page 592
Projections of Federal Government Revenue and Expenditure......Page 594
Making the Connection: Many Proposals but Not Much Progress on the Deficit......Page 595
Will the United States Pay Off Its Debt?......Page 596
Policy Options......Page 598
Key Terms and Concepts, Review Questions......Page 601
Appendix A: Showing the Conditions for a Sustainable Fiscal Policy......Page 606
Appendix B: Showing the Relationship between Budget Deficits and Private Expenditure......Page 607
Key Issue and Question......Page 608
Households and Firms are Forward Thinking......Page 609
An Important Difference Between Consumption and Investment......Page 610
Consumption and GDP......Page 611
The Intertemporal Budget Constraint and Consumption Smoothing......Page 612
Two Theories of Consumption Smoothing......Page 613
Permanent Versus Transitory Changes in Income......Page 616
Consumption and the Real Interest Rate......Page 617
Housing Wealth and Consumption......Page 618
How Policy Affects Consumption......Page 619
Solved Problem 16.2: Effects of a Temporary Tax Cut on Your Consumption......Page 620
Credit Rationing of Households......Page 621
Making the Connection: The Temporary Cut in Payroll Taxes......Page 623
Precautionary Saving......Page 624
Tax Incentives and Saving......Page 625
16.3 Factors That Determine Private Investment......Page 626
The Investment Decisions of Firms......Page 627
Corporate Taxes and the Desired Capital Stock......Page 630
Macro Data: How Important Are Corporate Taxes for Investment?......Page 631
Making the Connection: From Transitory Tax Cuts to Tax Reform......Page 633
Solved Problem 16.3: Depreciation, Taxes, and Investment Spending......Page 634
Credit Rationing and the Financial Accelerator......Page 636
Answering the Key Question......Page 638
Problems and Applications, Data Exercise......Page 639
Glossary......Page 644
Index......Page 649

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