10e Macroeconomics A Contemporary Introduction Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 10e Macroeconomics A Contemporary Introduction William A McEachern University of Connecticut Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Macroeconomics: A Contemporary Introduction, 10e William A McEachern VP/Editorial Director: Erin Joyner Editor in Chief: Joe Sabatino © 2014, 2012 South-Western, Cengage Learning ALL RIGHTS RESERVED No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, 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product, submit all requests online at www.cengage.com/permissions Further permissions questions can be emailed to permissionrequest@cengage.com Library of Congress Control Number: 2012950620 ISBN-13: 978-1-133-18813-1 ISBN-10: 1-133-18813-3 South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.ichapters.com Printed in the United States of America 1 2 3 4 5 6 7 16 15 14 13 12 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it About the Author William A McEachern started teaching large sections of economic principles shortly after joining the University of Connecticut In 1980, he began offering teaching workshops around the country, and, in 1990, he created The Teaching Economist, a newsletter that focuses on making teaching more effective and more fun His research in public finance, public policy, and industrial organization has appeared in a variety of journals, including Economic Inquiry, National Tax Journal, Journal of Industrial Economics, Quarterly Review of Economics and Finance, Southern Economic Journal, and Public Choice His books and monographs include Managerial Control and Performance (D.C Heath), School Finance Reform (CREUES), and Tax-Exempt Property and Tax Capitalization in Metropolitan Areas (CREUES) He has also contributed chapters to edited volumes such as Rethinking Economic Principles (Irwin Publishing), Impact Evaluations of Vertical Restraint Cases (Federal Trade Commission), Readings in Public Choice Economics (University of Michigan Press), and International Handbook on Teaching and Learning Economics (Edward Elgar Publishing) Professor McEachern has been quoted in or written for the Times of London, New York Times, Wall Street Journal, Christian Science Monitor, USA Today, Challenge Magazine, Connection, CBS MarketWatch.com, and Reader’s Digest He has also appeared on Now with Bill Moyers, Voice of America, and National Public Radio In 1984, Professor McEachern won the University of Connecticut Alumni Association’s Faculty Award for Distinguished Public Service and in 2000 won the Association’s Faculty Award for Excellence in Undergraduate Teaching He is the only person in the university’s history to receive both He was born in Portsmouth, N.H., earned an undergraduate degree with honors from College of the Holy Cross, served three years as a U.S Army officer, and earned an M.A and Ph.D from the University of Virginia To Pat v Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Brief Contents Brief Contents PART 1 Introduction to Economics The Art and Science of Economic Analysis Economic Tools and Economic Systems 26 Economic Decision Makers 46 Demand, Supply, and Markets 66 PART 2 Fundamentals of Macroeconomics Introduction to Macroeconomics 92 Tracking the U.S Economy 113 Unemployment and Inflation 136 Productivity and Growth 161 Aggregate Expenditure and Aggregate Demand 184 10 Aggregate Supply 207 PART 3 Fiscal and Monetary Policy 11 Fiscal Policy 227 12 Federal Budgets and Public Policy 248 13 Money and the Financial System 270 14 Banking and the Money Supply 294 15 Monetary Theory and Policy 314 16 Macro Policy Debate: Active or Passive? 337 PART 4 International Economics 17 International Trade 359 18 International Finance 382 19 Economic Development 400 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it vii viii Contents Table of Contents PART 1 Introduction to Economics Chapter The Art and Science of Economic Analysis The Economic Problem: Scarce Resources, Unlimited Wants Resources 2 | Goods and Services | Economic Decision Makers 5 | A Simple Circular-Flow Model The Art of Economic Analysis Rational Self-Interest | Choice Requires Time and Information 8 | Economic Analysis Is Marginal Analysis 8 | Microeconomics and Macroeconomics The Science of Economic Analysis The Role of Theory 10 | The Scientific Method 10 | Normative Versus Positive 12 | Economists Tell Stories 12 | Predicting Average Behavior 13 | Some Pitfalls of Faulty Economic Analysis 13 | If Economists Are So Smart, Why Aren’t They Rich? 14 | Case Study: The Information Economy 14 Appendix: Understanding Graphs Drawing Graphs 21 | The Slope of a Straight Line 22 | The Slope, Units of Measurement, and Marginal Analysis 22 | The Slopes of Curved Lines 23 | Line Shifts 25 | Appendix Questions 25 Chapter Economic Decision Makers 46 The Household 47 The Evolution of the Household 47 | Households Maximize Utility 47 | Households as Resource Suppliers 47 | Households as Demanders of Goods and Services 49 The Firm The Evolution of the Firm 49 | Types of Firms 50 | Cooperatives 51 | Not-for-Profit Organizations 52 | Case Study: The Information Economy 53 | Why Does Household Production Still Exist? 54 The Government The Role of Government 55 | Government’s Structure and Objectives 57 | The Size and Growth of Government 58 | Sources of Government Revenue 59 | Tax Principles and Tax Incidence 60 20 The Rest of the World International Trade 62 | Exchange Rates 62 | Trade Restrictions 63 Demand 67 The Law of Demand 67 | The Demand Schedule and Demand Curve 68 Choice and Opportunity Cost 27 Opportunity Cost 27 | Case Study: Bringing Theory to Life 27 | Opportunity Cost Is Subjective 29 | Sunk Cost and Choice 30 Comparative Advantage, Specialization, and Exchange 30 Supply The Law of Comparative Advantage 31 | Absolute Advantage Versus Comparative Advantage 31 | Specialization and Exchange 32 | Division of Labor and Gains From Specialization 33 Shifts of the Supply Curve Changes in Technology 75 | Changes in the Prices of Resources 75 | Changes in the Prices of Other Goods 75 | Changes in Producer Expectations 76 | Changes in the Number of Producers 76 The Economy’s Production Possibilities Efficiency and the Production Possibilities Frontier, or PPF 34 | Inefficient and Unattainable Production 35 | The Shape of the Production Possibilities Frontier 35 | What Can Shift the Production Possibilities Frontier? 37 | What We Learn From the PPF 39 Economic Systems Three Questions Every Economic System Must Answer 39 | Pure Capitalism 40 | Pure Command System 41 | Mixed and Transitional Economies 42 | Economies Based on Custom or Religion 43 Shifts of the Demand Curve Changes in Consumer Income 70 | Changes in the Prices of Other Goods 71 | Changes in Consumer Expectations 72 | Changes in the Number or Composition of Consumers 72 | Changes in Consumer Tastes 72 34 39 62 66 26 55 Chapter Demand, Supply, and Markets Chapter Economic Tools and Economic Systems 49 73 The Supply Schedule and Supply Curve 73 Demand and Supply Create a Market Markets 77 | Market Equilibrium 78 Changes in Equilibrium Price and Quantity Shifts of the Demand Curve 80 | Shifts of the Supply Curve 81 | Simultaneous Shifts of Demand and Supply Curves 82 Disequilibrium 70 75 77 80 84 Price Floors 84 | Price Ceilings 84 | Case Study: Bringing Theory to Life 85 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com 434 Index Czech Republic GDP per capita, 412 international trade, 366 D Deaton, Angus, 181 debit cards, 297–299 debt ceiling, 263 debt default, 263 decision-making lag, 342 defense spending, as percentage of federal outlays, 59, 249 deficits crowding out and crowding in, 254–255 defined, 105 history of, 253–254 international finance, 387–388 overview, 252 persistence of, 254 philosophies and, 253 rationale for, 252 twin, 255–256 deflation, 150 demand aggregate, 99–102, 318–329 changes in equilibrium price and quantity, 80–84 defined, 67 demand curve, 68–73 demand schedule, 68–70 disequilibrium, 84–85 foreign exchange, 389–390 individual, 70 investment, 319 law of, 67–68 market, 70 market creation through, 77–79 money, 315–319 demand curve aggregate, 100–101, 150– 151, 201–205 defined, 68 investment, 192 movement along given, 72–73 overview, 68–70 shifts in, 70–73, 80–84 demand schedules, 68–70 demand-pull inflation, 150 demand-side economics, 105 Democratic Republic of the Congo fertility rates, 405 infant mortality, 404 Internet users, 411 per capita income, 402–403 telephone lines, 410 dependent variables, 20–21 deposit insurance, 263, 283–284 depository institutions, defined, 279 depreciation, defined, 123 depressions, 96 See also Great Depression deregulation, 284 developed (industrial market) countries, 169, 402, 406, 415 DI (disposable income), 119, 133–134 diminishing marginal returns, 166 direct (positive) relation between variables, 21, 23 discount rates, 309 discouraged workers, 138, 148 discretionary fiscal policy to close expansionary gaps, 230–231 to close recessionary gaps, 229–230 defined, 228 inflation expectations and, 344–345 permanent income and, 236 policy rules versus, 349–351 stagflation, 234 disequilibrium defined, 84 price ceilings, 84–85 price floors, 84 disinflation, 150 disposable income (DI), 119, 133–134 distribution question, 40 diversification, banking and, 300 dividends, 48 division of labor, 33–34 Dodd-Frank Wall Street Reform and Consumer Protection Act, 289–290, 332 Doha Round, 374–375, 414 domestic content requirements, 372 double coincidence of wants, 271 double counting, 115, 117 double-entry bookkeeping system, 114, 383 Draghi, Mario, 334 dual banking system, 279 dumping, 373, 377 durable goods, 48–49, 115 dysfunctional (corrupt) governments, 414 E economic analysis art of, 7–9 pitfalls of faulty, 13 science of, 9–14 wants versus resources, 2–6 economic decision makers firms, 49–53 governments, 55–62 household production, 54–55 households, 47–49 overview, rest of world, 62–65 economic development differences in, 401–406 education and, 169–170 foreign aid and, 417–420 international trade and, 415–417 productivity as key to, 406–413, 415 economic fluctuations (business cycles) defined, pure capitalism and, 41 in United States, 96–98 economic growth defined, 37 education and economic development, 169–170 governmental role in, 57 international comparisons, 173–176 leading economic indicators, 98–99 national debt and, 265–266 output per capita, 173 overview, 162, 169 production possibilities frontier and, 37, 39, 162–164 rules of the game, 167–169 slowdown and rebound in, 172–173 technology and, 176–180 US labor productivity, 170–171 in US since 1929, 109–112 economic models (economic theories), 9, 13 economic systems custom- or religion-based, 43–45 defined, 39 goods and services, 39 mixed and transitional, 42–43 pure capitalism, 39–40 pure command system, 40–41 economic theories (economic models), 9, 13 economic tools, 26–45 economics, defined, economies of scale, 366 economy, defined, 93 Ecuador, use of dollar, 295–296 education college majors and annual earnings, 14–16 economic development and, 169–170, 407 opportunity cost of, 27–28 effectiveness lag, 342 efficiency defined, 35 production possibilities frontier and, 34–35, 39 Egypt Big Mac Index, 394 women in labor force, 406 Einstein, Albert, Emergency Jobs Appropriation Act, 342 employee compensation, 134–135 employment See also unemployment full, 57, 147 rate of, 21, 333 wage flexibility and, 218, 221 Employment Act of 1946, 105, 232 entitlement programs, 251 entrepreneur(s) defined, evolution of firms, 49–50 entrepreneurial ability in circular-flow model, 5–6 defined, entrepreneurship, economic development and, 409–410 equation of exchange, 325 equilibrium aggregate demand and aggregate supply, 101–102 changes in equilibrium price and quantity, 80–84 defined, 79 market, 78–79 equilibrium interest rate, 316–318 equilibrium point, 79 equilibrium price, 79–84 equilibrium quantity, 79–84 Ethiopia fertility rates, 405 infant mortality, 404 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Index 435 Internet users, 411 natural resources, 408 per capita income, 402–403 telephone lines, 409–410 euro zone, 389 Europe inflation, 154 unemployment, 143, 145 European Central Bank, 334, 348 European Union common markets, 375–376 economies of scale, 366 US trade deficit with, 385 excess quantity demanded (shortages), 79 excess quantity supplied See surpluses excess reserves, 302 exchange See also foreign exchange; international trade comparative advantage, 31 overview, 30–31 specialization and, 32–33 exchange rates defined, 388 determining, 391–392 fixed, 395 flexible, 395 overview, 62–63 exhaustible resources, expansionary gaps active policy versus passive policy, 340–341 aggregate supply in long run, 213–215 defined, 214 discretionary fiscal policy, 230–231 wage flexibility, 218 expansionary policy, 228, 320– 321, 344–346 expansions, 96–97 expectations consumer, 80, 190–191 demand curve and changes in, 72 income, 72 price, 72 rational, 343–344, 350–351 role of in macro policy, 343–347 supply curve and changes in, 76 expected marginal benefit, 8, 14–16 expected marginal cost, 8, 14–16 expenditure See also aggregate expenditure in circular-flow model, 5–6 of personal income, 48–49 expenditure approach to GDP, 114–116 explicit wage agreements, 209 export promotion, 416–417 export subsidies, 372 externality(ies) defined, 57 governmental role in dealing with, 57 F Facebook, 54, 181 fallacy of composition, 13 farm households, 47 FDIC (Federal Deposit Insurance Corporation), 263, 283 federal budgets deficits, 252–256 defined, 249 national debt, 259–266 process, 249–252 relative size of public sector, 258–259 surpluses, 254–257 federal debt See national debt Federal Deposit Insurance Corporation (FDIC), 263, 283 Federal Farm Credit System, 263 federal funds market, 303 federal funds rate, 303, 308–309, 322–323 Federal Open Market Committee (FOMC), 281–282, 308, 322–324, 344 Federal Reserve System (The Fed) See also fiscal policy; monetary policy Board of Governors, 281–282 control of money supply, 308–311 defined, 280 deposit insurance, 283 districts of, 280 Federal Reserve notes, 295 goals of, 283 during Great Depression, 281 interest rates, 318–320 money creation, 303–306 organization chart of, 282 origins of, 279–280 powers of, 281 reducing bank reserves, 307–308 regulating money supply, 283 starting banks, 301–303 targets for monetary policy, 329–334 transparency, 323–324 fiat money, 277 final goods and services, 115 finance companies, 300 financial account, 386–387 financial institutions See banking; financial system financial intermediaries, 279 financial markets circular flow of output and income, 119–120 defined, 119 Financial Stability Oversight Council, 290 financial system bank failures, 284 bank notes and fiat money, 277 banking deregulation, 284 commercial banks and thrifts, 279 early banking, 276–277 Federal Reserve System, 279–283 Great Recession, 287–292 lost deposits and increasing inflation, 283–284 value of money, 277–278 when money performs poorly, 278–279 Firefox, 53 firm(s) circular flow of output and income, 119–121 in circular-flow model, 5–6 cooperatives, 51–52 defined, 50 as economic decision makers, evolution of, 49–50 not-for-profit organizations, 52–53 types of, 50–51 fiscal policy automatic stabilizers, 232–233 contractionary, 230 defined, 57, 228 discretionary, 229–231 history of, 231–234, 236–240 limits on effectiveness of, 234–236 overview, 228 simple spending multiplier and time horizon, 231 tools of, 228 fixed exchange rates, 395 flat tax (proportional taxation), 60 flexible (floating) exchange rates, 395 flow variables, 94 FOMC (Federal Open Market Committee), 281–282, 308, 322–324, 344 Food for Peace program, 418 Ford, Gerald, 158 foreign aid convergence, 419–420 debate over, 418–419 defined, 418 overview, 417–418 foreign exchange arbitrageurs, 392–393 defined, 63 demand for, 389–390 determining rate, 391–392 fixed exchange rates, 395 flexible exchange rates, 395 overview, 388–389 purchasing power parity, 393 speculators, 392–393 supply of, 390 foreign exchange markets, 63, 390–391 fractional reserve banking system, 276 France GDP per capita, 175 government outlays, 58, 258 net debt, 261 post-high school degrees, 170 real GDP, 176 research and development spending, 178 top banks, 291 as US trading partner, 62, 361 free goods, perception of, frictional unemployment, 145 Friedman, Milton, 330–331 full employment defined, 147 governmental role in, 57 functional finance, 253 functional relations between variables, 20–21 G G-7 (Group of Seven), 169 GATT See General Agreement on Tariffs and Trade Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com 436 Index GDP See gross domestic product GDP price index, 100, 128–129 Gell-Mann, Murray, 95 General Agreement on Tariffs and Trade (GATT) defined, 373 Doha Round, 374–375, 414 Uruguay Round, 373 General Motors (GM), 289, 378 Germany aging population, 405 central bank independence, 348 convergence, 420 demise of Bretton Woods system, 397 exports as share of GDP, 360 fertility rates, 405 GDP per capita, 175 government outlays, 58, 258 infant mortality, 404 Internet users, 411 net debt, 261 per capita income, 402 post-high school degrees, 170 real GDP, 176 research and development spending, 178 telephone lines, 410 top banks, 291 unemployment, 98 as US trading partner, 62, 361 GM (General Motors), 289, 378 GNI (gross national income), 401 GNP (gross national product), 133–134 gold standard, 396 Golden Age of fiscal policy, 233–234 good(s) capital, 163, 361 in circular-flow model, 5–6 consumer, 163, 361 defined, durable, 48–49, 115 economic systems and production of, 39 final, 115 free, perception of, households as demanders of, 49 inferior, 70–71 intermediate, 115 nondurable, 48–49, 115 normal, 70–71 overview, 3–4 prices of, 71–72, 75–76, 82 private, 56 production possibilities frontier, 35–38 public, 41, 56 supply curve and changes in prices of, 75–76 Google, 54 Gore, Al, 158 government circular flow of output and income, 119–121 debate over proper role of, 12, 41 as economic decision makers, price ceilings, 84–86 price floors, 84 pure command system, 41–42 role of in market system, 41, 55–57 size and growth of, 58–59 sources of revenue, 59–60 structure and objectives of, 57–58 tax principles and tax incidence, 60–62 government consumption and gross investment, 115–116 government purchases changes in, 244 demand-side effects of, 244–245 as determinant of aggregate expenditure, 194–195 expenditure approach to GDP, 115–116 Great Recession, 239–240 as share of US GDP, 116–117 of surpluses (excess quantity supplied), 84 Gramm-Leach-Bliley Act of 1999, 285 graphs defined, 20 drawing, 21–22 line shifts, 25 overview, 20–21 slope, units of measurement, and marginal analysis, 22–23 slope of straight line, 22 slopes of curved lines, 23–24 Great Depression Board of Governors, 281–282 deposit insurance, 283 economic growth since, 109–110 Federal Open Market Committee, 281–282 fiscal policy, 232 goals of Fed, 283 money supply regulation, 283 overview, 103–104, 281 unemployment rate, 139–140 Great Recession bailing out AIG, 331–332 Cash for Clunkers program, 240–241 as change in rules of the game, 168 consumption and, 188–189 Dodd-Frank Act, 289–290 end of, 98 federal deficits, 253, 257 Fed’s response to, 331–333 fiscal policy, 238–240 incentive problems, 287–289 labor productivity, 175 monetary control, 310 overview, 107–108 quantitative easing, 332–333 reducing risk of “too big to fail”, 332 subprime mortgages and mortgage-backed securities, 287 top banks, 290–292 Troubled Asset Relief Program, 289 uncertainty about rules of the game, 39 unemployment benefits, 147 unemployment rate, 140–142 Greece aging population, 405 federal debt, 262–263 green accounting (green GDP), 124 Greenspan, Alan, 323, 331, 351 gross debt, 259 gross domestic product (GDP) based on expenditure approach, 115–116 based on income approach, 117–118 computation of, 114 defined, 93 economic welfare and, 124 government share of, 58–59 leisure, quality, and variety, 122–123 net production versus, 123 not all costs reflected in, 123–124 not all production reflected in, 122 output per capita, 173–175 gross national income (GNI), 401 gross national product (GNP), 133–134 gross private domestic investment, 115, 191 gross world product, 93 Group of Seven (G-7), 169 H Haiti, human capital, 165 happiness, income and, 180–181 health infant mortality, 404 malnutrition, 403 overview, 402–403 hedonic method, 127 high birth rates, 404–406 HIV/AIDS, 402–403 Hong Kong convergence, 419 deflation, 150 export promotion, 417 price levels, 190 Hoover, Herbert, 95 horizontal axis, 20 households in circular-flow model, 5–6, 119–121 as demanders of goods and services, 49 as economic decision makers, evolution of, 47 production by, 49, 54–55 as resource suppliers, 47–48 utility maximization by, 47 human capital defined, labor productivity, 165 production possibilities frontier, 37 Hungary aging population, 405 Big Mac Index, 394 GDP per capita, 412 hyperinflation defined, 150 in Zimbabwe, 149–150, 278, 408 hypotheses defined, 11 formulating, 11–12 testing, 12 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Index 437 I IMF (International Monetary Fund), 396 immigration, 416 implementation lag, 342 implicit wage agreements, 209 import quotas defined, 63 overview, 370–371 in practice, 371–372 tariffs versus, 372 import substitution, 416–417 in kind payments, 122 income aggregate expenditure and, 195–198 in circular-flow model, 5–6 consumption and, 185–186 demand curve and changes in, 70–71 governmental role in equal distribution of, 57 happiness and, 180–181 sources of personal, 48 income approach to GDP, 114, 117–118 income distribution, economic development and, 415 income effect(s), of price changes, 68 income expectations, 72 income-expenditure model, 197 independent (unrelated) variables, 20–21, 23 index numbers, 99, 125 India Big Mac Index, 394 caste system, 43 fertility rates, 405 human capital, 165 import substitution, 417 infant mortality, 404 Internet users, 409, 411 per capita income, 402 telephone lines, 410 as US trading partner, 361 individual demand, 70 individual income taxes as percentage of federal government revenue, 59–60 principles of, 60 individual supply, 74 Indonesia Big Mac Index, 394 currency stabilization, 395 industrial market (developed) countries, 169, 402, 406, 415 industrial policy, 179–180 Industrial Revolution, 50 inefficiency, 35 infant mortality, 404 inferior goods, 70–71 inflation consumer price index and, 128 defined, 96, 273 discretionary policy and expectations of, 344–345 effects of, 155–158 increasing, 283–284 measuring, 151–154 money and, 278 overview, 149–150 sources of, 150–151 targets for monetary policy, 333–334 inflation rate, 105–106 inflation targets, 349 information asymmetric, 300 needed for choice, opportunity cost and, 29 scarcity of, information economy overview, 14–16 user-generated products, 53–54 Information Revolution, 55 injections, 121 in-kind transfers, 48 interest in circular-flow model, 5–6 defined, 3, 156 payments on national debt, 261–262 as percentage of government outlay, 59 as source of personal income, 48 interest rate(s) aggregate demand in short run, 318–320 crowding out, 255 defined, 156 as determinant of consumption, 190 inflation and, 156–157 as monetary policy target, 329–331 money demand and, 316 intermediate goods and services, 115 international finance balance of payments, 383–388 development of, 396–398 foreign exchange, 388–393, 395 International Monetary Fund (IMF), 396 international trade arguments for restrictions on, 376–379 economic development and, 415–417 efforts to reduce barriers to, 373, 375–376 expenditure approach to GDP, 115–116 gains from, 360–367 opportunity cost and, 62 restrictions on and welfare loss, 367–372 trade deficits, 256 inventories expenditure approach to GDP, 115 real GDP demanded for given price level, 197 inverse (negative) relation between variables, 21, 23 investment annual percentage change in, 193 effect of government deficits and surpluses on, 254–255 expenditure approach to GDP, 115 gross, 123 investment and income, 192–193 investment demand curve, 192 money and aggregate demand in short run, 318–320 net, 123 overview, 191 as share of US GDP, 116–117 variation in, 193–194 investment banks, 108 investment demand, 319 investment demand curve, 192 “invisible hand”, 41, 77, 104 Ireland, federal debt, 263 Islamic law, 43 Italy aging population, 405 central bank independence, 348 GDP per capita, 175 government outlays, 58, 258 net debt, 261 post-high school degrees, 170 real GDP, 176 research and development spending, 178 J Japan aging population, 405 Big Mac Index, 394 convergence, 420 education, 407 fertility rates, 405 GDP per capita, 175 government outlays, 58, 258–259 infant mortality, 404 inflation, 154 Internet users, 411 natural resources, 408 net debt, 260–261 per capita income, 402 post-high school degrees, 169–170 productivity, 164 real GDP, 176 research and development spending, 178 telephone lines, 410 top banks, 291 Treasury securities, 264–265 unemployment, 143, 145 US debt to, 256 US trade deficit with, 385 as US trading partner, 62, 361 Johnson, Lyndon B., 233 Jordan, women in labor force, 406 JPMorgan Chase, 290–291 K Kazakhstan, GDP per capita, 412 Kennedy, John F., 233 Kenya fertility rates, 405 infant mortality, 404 Internet users, 411 migration, 416 per capita income, 402 telephone lines, 410 Kerry, John, 158 Keynes, John Maynard, 104–105, 192, 232, 252 Keynesianism, 104–105 Knittel, Christopher, 241 Kuwait, natural resources, 408 Kuznets, Simon, 114, 166–167 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com 438 Index L labor in circular-flow model, 5–6 defined, division of, 33–34 personal income from, 48 labor force, defined, 138 labor force participation rate, 138–139 labor productivity defined, 164 economic development and, 407 inefficient use of labor, 407–408 overview, 165 slowdown and rebound in, 172 in United States, 170–171 lagging economic indicators, 99 laissez-faire, 41, 103, 231 law of comparative advantage, 31–33 law of demand demand schedule and demand curve, 68–70 income effect of price change, 68 substitution effect of price change, 67–68 wants and needs, 67 law of diminishing marginal returns, 166 law of increasing opportunity cost defined, 36 production possibilities frontier, 36, 39 law of supply, 73 leading economic indicators, 98–99 leakages, 121 legal tender, 277, 296–297 Lehman Brothers, 108, 238, 288–289, 331–332 leisure, 122–123 Lesotho, HIV/AIDS in, 402 liabilities, 301–302 LibreOffice, 53 Libya, women in labor force, 406 limited liability corporations, 51 Linux, 53 liquidity, 302–303 loanable funds market, 156–157 loan-to-value ratio, 288 long run aggregate demand in, 324–329 aggregate supply in, 213–221 in macroeconomics, 214 money demand in, 324–329 long-run aggregate supply (LRAS) curve aggregate supply decreases, 223–224 aggregate supply increases, 221–222 defined, 217 expansionary gaps, 213 overview, 217 recessionary gap, 215 shifts of, 221–224 tracing potential output, 217–218 wage flexibility and employment, 218, 221 long-run equilibrium, 214 long-run Phillips curve, 353–355 long-term unemployed, 141 LRAS curve See long-run aggregate supply curve Lucas, Robert, 343–344 M M1, 295, 298, 327–329 M2, 297–298, 327–329 macro policy active policy versus passive policy, 338–343 Phillips curve, 351–356 policy rules versus discretion, 349–351 role of expectations, 343–347 macroeconomics aggregate demand and supply, 99–102 defined, economic fluctuations and growth, 96–99 history of US economy, 103–112 national economy, 93–95 overview, 8–9 malnutrition, 403 managed float system, 397–398 Marathon Oil, 75 marginal, defined, marginal analysis, 8, 22–23 marginal benefit, 8, 14–16 marginal cost (MC) expected, 8, 14–16 supply and, 73 marginal propensity to consume (MPC), 187–188, 199–200 marginal propensity to save (MPS), 187, 200 marginal returns, law of diminishing, 166 marginal tax rate defined, 60 federal personal income tax, 60–61 market(s) creation of through supply and demand, 77–79 defined, overview, 77 market demand, 70 market failures, 55 market supply, 74 market system, 41 Marshall, Alfred, 137 MC See marginal cost McDonald’s division of labor, 33 entrepreneurship, 410 Medicare, 59, 249, 259, 266–267 medium of exchange, 272 mercantilism, 95, 114 merchandise trade balance, 62, 383–385 Mercosur, 375 Merrill Lynch, 283–284 Mexico Big Mac Index, 394 debt default, 264 Federal Reserve and, 334 migration, 416 North American Free Trade Agreement, 375 post-high school degrees, 169 US trade deficit with, 385 as US trading partner, 62, 360–361 microeconomics, 8–9 migration, 416 Mitchell, Wesley C., 96 mixed economic systems, 42–43 monetary policy Board of Governors and, 281–282 defined, 57 money and aggregate demand in long run, 324–329 money and aggregate demand in short run, 318–323 money demand, 315–316 money supply, 315–318 targets for, 329–334 money banking and, 276–279 barter and double coincidence of wants, 271 coins, 275–276 counterfeit, 296–297 creating, 303–307 defined, 272 as medium of exchange, 32, 94, 272 overview, 271 properties of ideal, 273–274 as store of value, 273 as unit of account, 272 money aggregates defined, 295 as monetary policy target, 331 money demand defined, 315 interest rates and, 316 overview, 315–319 money income changes in demand curve and, 80 defined, 68 money market mutual funds, 284, 297 money multiplier, 306 money supply creating money, 303–307 credit cards and debit cards, 297–299 equilibrium interest rate and, 316–318 Fed’s control of, 308–311 interest rates and investment, 318–319 M1, 295 M2, 297 as monetary policy target, 329–330 multiple contraction of, 307–308 overview, 315–316 regulating, 283 monopolies, natural, 56 mortgage-backed securities, 287–288 movement along given demand curves, 72 movement along supply curves, 77 MPC (marginal propensity to consume), 187–188, 199–200 MPS (marginal propensity to save), 187, 200 multilateral assistance, 418 multiple currency system, 150 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Index 439 N NAFTA (North American Free Trade Agreement), 375 National Banking Act of 1863, 279 national banks, 279 National Bureau of Economic Research (NBER), 96–97 national debt (federal debt) crowding out and capital formation, 264–265 debt ceiling and debt default, 263 defined, 107, 259 economic growth and, 265–266 held by public, 259–260 interest payments on, 261–262 international perspective on, 260–261 measuring, 259–260 overview, 259 sustainability of, 262–263 who bears burden of, 264 national income accounting system limitations of, 122 overview, 114–115 personal and disposable income, 133–134 summary income statement of economy, 134–135 natural monopolies, 56 natural rate hypothesis, 355 natural rate of unemployment, 209, 211, 234–235 natural resources in circular-flow model, 5–6 defined, differences in endowments of, 365–366 economic development and, 408 misuse of, 414 NBER (National Bureau of Economic Research), 96–97 negative (inverse) relation between variables, 21, 23 negative externalities, 57 net debt, 260–261 net domestic product, 123 net exports defined, 116 as determinant of aggregate expenditure, 195 as share of US GDP, 116–117 net interest national income accounts, 134–135 as percentage of federal outlays, 249 net investment income, 385–386 net investment income from abroad, 386 net taxes (NT), 119, 194–195, 244–246 net unilateral transfers abroad, 386 net wealth, 188–190 net worth, 301 Netherlands exports as share of GDP, 360 government outlays as percentage of GDP, 258 net debt, 261 as US trading partner, 62, 361 New Zealand, central bank independence, 348 Nigeria civil war, 414 convergence, 420 Nixon, Richard, 106 nominal GDP, 124 nominal interest rate, 156–157 nominal wages defined, 208 stickiness of, 218 nondurable goods, 48–49, 115 normal goods, 70–71 normative economic statements (value judgments), 12 North American Free Trade Agreement (NAFTA), 375 North Korea private ownership, 412–413 pure command system, 42 Norway, Big Mac Index, 394 not-for-profit organizations, 52–53 NT (net taxes), 119, 194–195, 244–246 number of consumers, changes in, 72, 80 number of producers, changes in, 76–77, 82 O Obama, Barack, 159, 228, 238– 240, 267, 289, 338, 342 1/r (simple money multiplier), 306–307 OPEC (Organization of the Petroleum Exporting Countries), 106, 385 open-market operations, 282–283, 308–309 open-market purchases, 308 open-market sales, 308 opportunity cost absolute advantage versus comparative advantage, 31 defined, 27 higher education, 27–28 holding money, 316 ideal money, 273–274 international trade and, 62 overview, 27 production possibilities frontier, 36, 39 subjectivity of, 29–30 sunk cost, 30 women in labor force, 47 Organization of the Petroleum Exporting Countries (OPEC), 106, 385 origin, defined, 20 other-things-constant (ceteris paribus) assumption, 10, 67, 73 output per capita, 173 P panics, 280 partnerships, 50–52 passive policy closing expansionary gaps, 340–341 closing recessionary gap, 338–339 lags in, 341–343 overview, 338 payroll taxes, as percentage of federal government revenue, 59–60 pecuniary, 272 permanent income, 236 persistent dumping, 377 personal consumption expenditures, 115 personal income, 133–134 Peru, import substitution, 417 per-worker production function (PF), 165–167 Philippines, migration, 416 Phillips, A W., 351–352 Phillips curve defined, 352 evidence of, 355–356 framework, 352–353 long-run, 354–355 natural rate hypothesis, 355 overview, 351–352 short-run, 353–354 physical capital defined, 2–3 expenditure approach to GDP, 115 labor productivity, 165 production possibilities frontier, 37 Poland Big Mac Index, 394 GDP per capita, 412 political business cycles, 234–235 Pollakowski, Henry, 86 poorest-billion category, 413–414 Portugal aging population, 405 federal debt, 263 positive (direct) relation between variables, 21, 23 positive economic statements, 12 positive externalities, 57 potential output defined, 209 overview, 209 tracing, 217–218 when output exceeds potential, 210–211 poverty, poorest-billion category, 413–414 PPF See production possibilities frontier PPP (purchasing power parity) theory, 393 predatory dumping, 377 preferences See tastes and preferences president, role in federal budget process, 250 price(s) changes in equilibrium price and quantity, 80–84 consumer price index, 125–128 demand and, 67–69 demand curve and changes in, 71–72 effects of surpluses and shortages on, 79 GDP price index, 128–129 of goods, 75–76 income effect of changes in, 68 of resources, 75 substitution effect of changes in, 67–68 supply and, 73–74 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com 440 Index price ceilings, 84–90 price expectations, 72 price floors, 84–85 price indexes chain-weighted system, 129–130 consumer price index, 125–128 defined, 125 GDP price index, 100, 128–129 overview, 124–125 price levels aggregate demand curve and, 201–203 aggregate output and, 99–100 aggregate supply in short run, 209–211 defined, 99 as determinant of consumption, 190 inflation and, 151–152 price stability central bank independence and, 348 governmental role in, 57 primary discount rate, 309 prisons, economics in, 274–275 private goods, 56 private property rights in China, 42–43 defined, 40 privatization, 174, 412 producer cooperatives, 52 producer expectations, changes in, 82 producer surplus, from market exchange, 367–368 product markets, defined, production, defined, 164 production possibilities frontier (PPF) defined, 35 diagram of, 36 efficiency and, 34–35 growth and, 162–164 inefficient and unattainable production, 35 lessons learned from, 39 shape of, 35–36 shifts in, 37–39 without trade, 361–363 productivity defined, 164 education and economic development, 169–170 international comparisons, 173–176 as key to economic development, 406–413, 415 labor productivity, 165, 170–171 output per capita, 173 overview, 162 per-worker production function, 165–166 production possibilities frontier and, 162–164 rules of the game, 167–169 slowdown and rebound in, 172–173 technological change, 166–167, 176–180 products, in circular-flow model, 5–6 profit in circular-flow model, 5–6 defined, profitability, liquidity versus, 302–303 progressive taxation, 60 property rights, private, 40, 42–43 proportional taxation (flat tax), 60 proprietors defined, 48 sole proprietorships, 50 proprietors’ income national income accounts, 134–135 as source of personal income, 48 public (communal) ownership of property, 41 public good(s) defined, 56 governmental role in providing, 56 pure capitalism and, 41 public sector, relative size of, 258–259 purchasing power, 278 purchasing power parity (PPP) theory, 393 pure capitalism, 39–41 pure command system, 40–42 Q Qatar, natural resources, 408 quantitative easing, 332–333 quantity demanded defined, 69 overview, 69–70 quantity supplied, 74 quantity theory of money, 325–326 Quesnay, François, 114 quotas defined, 63 overview, 370–371 in practice, 371–372 tariffs versus, 372 R race income and happiness, 181 unemployment rate, 141–142 Radford, R.A., 274 rational expectations defined, 343–344 rules and, 350–351 rational ignorance, 372 rational self-interest defined, overview, Reagan, Ronald, 107, 158, 237 real GDP (real gross domestic product) aggregate supply and demand, 101–102 annual percentage change in, 193 defined, 100 economic fluctuations, 97–98 Great Recession, 239–240 if exceeds spending, 197–198 if spending exceeds, 197 international comparisons, 173–174, 176 real GDP (real gross domestic product) demanded, 196–197, 201–203 real income, 68 real interest rate, 156 real wages, 208 realized capital gains, 51 recessionary gaps active policy versus passive policy, 338–339 aggregate supply in long run, 215–216 defined, 216 discretionary fiscal policy and, 229–230 expansionary monetary policy and, 320–321 wage flexibility and, 218, 220 recessions, 9, 96–97 See also Great Recession recognition lag, 341–342 redistribution of wealth as percentage of federal outlays, 59, 249–250 role of government in, 57 regressive taxation, 61 relative price changes, inflation and, 155–156 religion-based economic systems, 43–45 renewable resources, rent in circular-flow model, 5–6 defined, rent seeking, 379 rental housing imputed rental income, 122 rent ceilings, 84–90 secondary effects of controlling, 14 as source of personal income, 48, 134–135 required reserve ratio, 302 required reserves, 302, 307 research and development, 177–179 reserve accounts, 302 reserve ratio, 276 reserves, defined, 281 residential construction, 115 resource(s) in circular-flow model, 5–6 defined, household production and, 47–48, 54 overview, 2–3 production possibilities frontier and availability of, 37–38 supply curve and changes in prices of, 75, 82 resource markets in circular-flow model, 5–6 defined, rest of world circular flow of output and income, 119–121 as economic decision maker, exchange rates, 62–63 international trade, 62 trade restrictions, 63–65 revenue, in circular-flow model, 5–6 Romania, GDP per capita, 412 Roosevelt, Franklin D., 281 rules of game defined, 37, 167 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Index 441 economic development and, 411–413 governmental role in establishing and enforcing, 56 production possibilities frontier, 37–38, 164 production possibilities frontier and improvements in, 37–39 pure capitalism and, 41 Russia Big Mac Index, 394 debt default, 264, 322 Federal Reserve and, 334 fertility rates, 405–406 GDP per capita, 412 infant mortality, 404 Internet users, 411 per capita income, 402 productivity, 164 telephone lines, 409–410 Treasury securities, 265 S S corporations, 51 salary, 272 Saudi Arabia Big Mac Index, 394 natural resources, 408 women in labor force, 406 savings in China, 191 as expenditure of personal income, 49 savings deposits, 297 scarcity defined, determination of price, 67 of goods and services, 3–4 of information, production possibilities frontier and, 39 of resources, 2–3 of time, scientific method diagram of, 11 formulating hypothesis, 11–12 identifying question and defining variables, 10 overview, 10 specifying assumptions, 10–11 testing hypothesis, 12 Scotland, top banks, 291 seasonal unemployment, 145 secondary discount rate, 309 secondary effects (unintended consequences), 13–14, 61 self-correcting economic forces, 338 September 11, 2001 terrorist attacks, 107, 168, 237, 310 service(s) balance on, 385 in circular-flow model, 5–6 defined, economic systems and production of, 39 expenditure approach to GDP, 115 as expenditure of personal income, 48 final, 115 households as demanders of, 49 intermediate, 115 overview, 3–4 scarcity of, 3–4 US imports and exports, 360 shadow banking system, 332 Shakespeare, William, 30 shift of demand curves, 72 shift of supply curves, 77 short run aggregate demand in, 318–324 aggregate supply in, 208–212 in macroeconomics, 210–211 money demand in, 318–323 shortages (excess quantity demanded), 79 short-run aggregate supply (SRAS) curve aggregate supply decreases, 223–224 defined, 211 expansionary gaps, 213–214 money and aggregate demand in short run, 320–321 overview, 211–212 recessionary gap, 215–216 shifts of, 222–224 short-run equilibrium, 214 short-run Phillips curve, 353–356 simple money multiplier (1/r), 306–307 simple spending multiplier defined, 200 fiscal policy, 231 increase in spending, 198–199 overview, 198 using, 199–200 Singapore convergence, 419 export promotion, 417 slope alternative, 23 of curved line, 23–24 defined, 22 dependent on unit of measure, 22–24 of straight line, 22 Smith, Adam, 33, 41, 77, 103–104 social capital, 413 Social Security cost-of-living adjustments, 158 ignored in measuring national debt, 259–260 payroll taxes, 59, 61 as percentage of federal outlays, 249 reforming, 266–267 Social Security Act of 1935, 147 sole proprietorships, 50, 52 Solyndra, 180 South Africa, Big Mac Index, 394 South Korea Big Mac Index, 394 capitalist economy, 42 convergence, 419 export promotion, 417 as US trading partner, 62, 361 Southern African Customs Union, 376 Soviet Union, 43 Spain aging population, 405 central bank independence, 348 federal debt, 263 government outlays as percentage of GDP, 258 net debt, 261 special interests, trade liberalization and, 417 specialization comparative advantage, 31–32 diagram of, 33 disadvantages of, 34 division of labor and gains from, 33–34 exchange and, 32–33 of labor, 34 overview, 30–31 reasons for international, 365–367 specific tariffs, 368–369 speculators, 392–393 sporadic dumping, 377 SRAS curve See short-run aggregate supply curve stagflation, 105–106, 151, 233–234 Starbucks, state banks, 279 statistical discrepancy, 387 Steinbeck, John, 137 stimulus spending, 105, 108, 180, 228, 237–241, 253, 339 stock variables, 94 stocks, corporate, 51, 115–116 stores of value, 273 storytelling, 12–13 stress test, 332 structural unemployment, 146 subprime mortgages, 287–288 substitutes defined, 71 demand curve and availability of, 80 substitution effect of price changes, 67–68 Sudan, women in labor force, 406 Sultan of Brunei, 29 sunk cost, 30 Sunkist, 52 supernote, 296 supply See also aggregate supply; money supply changes in equilibrium price and quantity, 80–84 defined, 73 disequilibrium, 84–85 foreign exchange, 390 individual, 74 law of, 73 market, 74 market creation through, 77–79 money, 283, 295, 297–299 supply curve, 73–77 supply schedule, 73–75 supply curve aggregate, 101, 151, 211– 212, 217–221, 320–321 defined, 73 movement along, 77 overview, 73–75 shifts in, 75–77, 81–84 supply schedules, 73–75 supply shocks adverse, 222–223 beneficial, 222 defined, 221 supply-side economics, 107 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com 442 Index surpluses (excess quantity supplied) crowding out and crowding in, 254–255 defined, 78–79 government purchases of, 84 international finance, 387–388 short-lived, 256–257 Swaziland, HIV/AIDS in, 402 Sweden Big Mac Index, 394 exports as share of GDP, 360 Switzerland aging population, 405 Big Mac Index, 394 central bank independence, 348 exports as share of GDP, 360 Treasury securities, 265 T Taiwan Big Mac Index, 394 capitalist economy, 42 convergence, 419 export promotion, 417 Treasury securities, 265 as US trading partner, 361 tariffs defined, 63 overview, 368–370 quotas versus, 372 TARP (Troubled Asset Relief Program), 108, 238, 289 tastes and preferences changes in demand curve and, 80 defined, 72 demand curve and changes in, 72–73 differences in, 366–367 tax incidence, 60–62 tax principles, 60–62 taxation as automatic stabilizer, 228, 233 avoidance of through household production, 54–55 budget surpluses, 256–257 as expenditure of personal income, 48–49 by percentage of federal government revenue, 59–60 Reagan-era cuts, 107 as source of revenue, 59–60 tax cuts, 233, 236–237, 239, 253, 257 Taylor, John, 351 technology changes in supply curve and, 82 economic development and, 407 evolution of firms, 50 household production and changes in, 55 industrial policy, 179–180 production possibilities frontier and changes in, 37–38, 163–164 productivity and growth and, 166–167 research and development, 177–179 supply curve and changes in, 75 unemployment and, 176–177 terms of trade, 363 Texas Medical Center, 53 Thatcher, Margaret, 174 thrift institutions (thrifts), 279 time as basis of resource payments, 3 needed for choice, opportunity cost and, 29 as resource for labor, scarcity of, time deposits (certificates of deposit [CDs]), 297 time-inconsistency problem, 345 time-series graphs, 20–21 token money, 275 “too big to fail”, 289, 332 Torvalds, Linus, 53 trade deficits, 384 trade restrictions, 63–65 trade surpluses, 384 trading partners, 360–361 transaction costs defined, 77 evolution of firms, 49 reduction of, 55 of variable inflation, 155 transfer payments defined, 48 as source of personal income, 48 variation in, 194 transitional economies, 42–43, 412–413 Treasury securities, 255–256, 259, 261, 264 Troubled Asset Relief Program (TARP), 108, 238, 289 Truman, Harry, 137 Turkey, Big Mac Index, 394 Twitter, 54 U UConn Co-op, 52 U-Haul, 79 Ukraine, GDP per capita, 412 unanticipated inflation, 155 unattainable production, 35 underemployment, 148, 407 underground economy, 122 underwater loans, 288–289 unemployment full employment, 147 inefficient use of labor and, 407–408 measuring, 137–143, 148 natural rate of, 209, 234–235 sources of, 143–146 technological change and, 176–177 unemployment benefits, 147–148 unemployment insurance, 233 unemployment rate, defined, 138 unilateral transfers and current account balance, 386 unintended consequences (secondary effects), 13–14, 61 unit of account, 272 United Arab Emirates, natural resources, 408 United Kingdom Big Mac Index, 394 exports as share of GDP, 360 fertility rates, 405 GDP per capita, 174–175 government outlays, 58, 258 Great Depression era employment and wages, 220 infant mortality, 404 Internet users, 411 net debt, 261 per capita income, 402 post-high school degrees, 170 promotion of happiness, 180 real GDP, 176 research and development spending, 178 telephone lines, 410 top banks, 291 Treasury securities, 265 as US trading partner, 62, 361 United States adverse supply shocks, 223 aging population, 405 banking in, 279–284, 287–292 Big Mac Index, 394 change in real GDP, 97–98 circular flow, 118–121 college majors and annual earnings, 14–16 consumption and income, 185–186 consumption and investment, 193–194 economic fluctuations, 96–98 economic growth since 1929, 109–110 exports, 360 federal outlays, 59 federal personal income tax rates, 60–61 fertility rates, 405 GDP, 58, 115–118, 258 government structure, 57 HIV/AIDS, 402 imports, 360 income and happiness, 181 infant mortality, 404 inflation, 151–154 Internet users, 411 labor productivity, 170–173 mixed economy, 42 national income accounts, 114–115, 122–124 net debt, 260–261 output gaps and wage flexibility, 219–220 output per capita, 173–175 per capita income, 402–403 personal income and expenditures, 48 post-high school degrees, 169–170 price indexes, 124–125 research and development spending, 177–178 sources of government revenue, 59 telephone lines, 410 top banks, 291 trade with rest of the world, 62 trading partners, 360–361 types of firms, 50–52 unemployment, 138–145 units of account, 272 units of measurement, 22–23 unrelated (independent) variables, 20–21, 23 Uruguay Round, 373 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Index 443 US Agency for International Development (USAID), 418 US Bureau of Weights and Measures, 56 USAID (US Agency for International Development), 418 user-generated products, 53–54 utility, defined, 47 utility maximization, by households, 47 V value added, 117–118 value judgments (normative economic statements), 12 variable(s) defined, 10 defining, 10 graphing, 20–25 that affect market demand, 70 variety, 122–123 velocity of money defined, 325 determining factors, 327 stability of, 327–329 vending machines, 10 Venezuela inflation, 150 nationalization, 412 vertical axis, 20 Vietnam GDP per capita, 412–413 use of dollar, 295 Volcker, Paul, 331, 351 Volkswagen, 378 Voltaire, 95 voluntary exchange, 58 vote maximization, 58 W wage(s) in circular-flow model, 5–6 college majors and, 14–16 defined, as source of personal income, 48 wage flexibility employment and, 218, 221 US output gaps and, 219–220 Wales, Jimmy, 53 Walmart, 67–68 Walton, Sam, 67 Washington Mutual, 290 welfare as automatic stabilizer, 233 as percentage of federal outlays, 249 Wells Fargo, 290–291 Wikipedia, 53 women in developing countries, 406 fertility rates, 405–406 high birth rates, 404–406 income and happiness, 181 infant mortality, 404 in labor force, 47, 139 occupations dominated by, 43 unemployment rate, 141–142 World Bank, 401 world price, 369 World Trade Organization (WTO), 373–374, 376–377 Y YouTube, 54 Z Zimbabwe hyperinflation, 149–150, 278, 408 unemployment, 408 zombie banks, 284 Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at http://www.downloadslide.com Copyright 2012 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... Cost and Choice 30 Comparative Advantage, Specialization, and Exchange 30 Supply The Law of Comparative Advantage 31 | Absolute Advantage Versus Comparative Advantage 31 | Specialization and... the mix can vary from a drive-through car wash (much capital and little labor) to a Saturday morning charity car wash (much labor and little capital) Down-to-earth examples turn the abstract into... exceeds the amount people want For example, air and seawater often seem free because we can breathe all the air we want and have all the seawater we can haul away Yet, despite the old saying “The