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Chapter 2, page 27: U.S Department of Commerce; Chapter 5, page 135: Everett Collection/SuperStock; page 153: Fotosearch/SuperStock; Chapter 8, page 249: A H C./AGE Fotostock; Chapter 10, page 323: Robert Kradin/AP Images; page 325: MGM/The Kobal Collection; Chapter 11, page 366: Rob Crandall/The Image Works; Chapter 12, page 404: Iain Masterton/Alamy; page 405: Eye Ubiquitous/SuperStock; page 407: Holton Collection/SuperStock; Chapter 13, page 437: AFP/ Getty Images; page 440: Digital Vision; Chapter 14, page 454: VisionsofAmerica/Joe Sohm; page 474: Medioimages/Photodisc; Chapter 15, page 492: Bachrach/Getty Images; page 498: Caro/Alamy; Chapter 16, page 528: Dmitry Kalinovsky/Shutterstock; page 534: ClassicStock/Alamy; Chapter 17, page 545 top: Chuck Nacke/Alamy; page 545 bottom: Che Qingjiu/Imaginechina/AP Images; page 546: Charles Bennett/AP Images; Chapter 18, page 591: Directphoto/Alamy Many of the designations used by manufacturers and sellers to distinguish their products are claimed as trademarks Where those designations appear in this book, and Addison-Wesley was aware of a trademark claim, the designations have been printed in initial caps or all caps Library of Congress Cataloging-in-Publication Data Gordon, Robert J (Robert James), Macroeconomics/Robert Gordon.—12th ed p cm Includes index ISBN 978-0-13-801491-9 (student) Macroeconomics I Title HB172.5 G67 2012 339–dc22 2011006181 Copyright © 2012, 2009, 2006, 2003, 2000 Pearson Education, Inc All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America For information on obtaining permission for use of material in this work, please submit a written request to Pearson Education, Inc., Rights and Contracts Department, 501 Boylston Street, Suite 900, Boston, MA 02116, fax your request to 617-671-3447, or e-mail at http://www.pearsoned.com/legal/permission.htm ISBN-13 ISBN-10 978-0-13-801491-9 0-13-801491-4 10—RRD—15 14 13 12 11 About the Author Robert J Gordon Robert J Gordon is Stanley G Harris Professor in the Social Sciences and Professor of Economics at Northwestern University He did his undergraduate work at Harvard and then attended Oxford University in England on a Marshall Scholarship He received his Ph.D in 1967 at M.I.T and taught at Harvard and the University of Chicago before coming to Northwestern in 1973, where he has taught for 38 years and was chair of the Department of Economics from 1992 to 1996 Professor Gordon is one of the world’s leading experts on inflation, unemployment, and productivity growth His recent work on the rise and fall of the New Economy, the U.S productivity growth revival, and the recent stalling of European productivity growth has been widely cited He is the author of The Measurement of Durable Goods Prices, which has become known as the definitive work showing that government price indexes substantially overstate the rate of inflation His book of collected essays, Productivity Growth, Inflation, and Unemployment, was published in 2004 He is editor of Milton Friedman’s Monetary Framework: A Debate with His Critics, The American Business Cycle, and The Economics of New Goods In addition, he is the author of more than 100 scholarly articles and more than 60 published comments on the research of others In addition to his main field of macroeconomics, he is also a frequently quoted expert and author on the airline industry and is the founder and president of an Internet chat group on airline management Gordon is a Research Associate of the National Bureau of Economic Research and since 1978 a member of its Business Cycle Dating Committee, a Research Fellow of the Centre for Economic Policy Research (London), a Research Fellow of OFCE in Paris, a Guggenheim Fellow, a Fellow of the American Academy of Arts and Sciences, and a Fellow of the Econometric Society He has served as the coeditor of the Journal of Political Economy and as an elected at-large member of the Executive Committee of the American Economic Association He serves currently as advisor to the Brookings Panel on Economic Activity and on the economic advisory panel of the Bureau of Economic Analysis He has served as a member of the Technical Panel on Assumptions and Methods of the Social Security Administration and on the national “Boskin Commission” to assess the accuracy of the U.S Consumer Price Index Gordon lives in Evanston, Illinois, with his wife, Julie, and their two dogs, Lucky and Toto (see the box on p 325 for more about Toto) v with love, for Julie Brief Contents Preface PART I Introduction and Measurement CHAPTER What Is Macroeconomics? CHAPTER The Measurement of Income, Prices, and Unemployment PART II xvi 24 The Short Run: Business Cycles and Policy Responses Income and Interest Rates: The Keynesian Cross Model and the IS Curve 54 CHAPTER Strong and Weak Policy Effects in the IS-LM Model 88 CHAPTER Financial Markets, Financial Regulation, and Economic Instability 121 CHAPTER The Government Budget, the Government Debt, and the Limitations of Fiscal Policy 158 International Trade, Exchanges Rates, and Macroeconomic Policy 190 CHAPTER CHAPTER PART III The Price Level, Inflation, and Unemployment CHAPTER Aggregate Demand, Aggregate Supply, and the Great Depression 231 CHAPTER Inflation: Its Causes and Cures 265 The Goals of Stabilization Policy: Low Inflation and Low Unemployment 314 CHAPTER 10 PART IV The Long Run: Economic Growth, Success, and Failure CHAPTER 11 The Theory of Economic Growth 358 CHAPTER 12 The Big Questions of Economic Growth 387 PART V Monetary Policy and the Sources of Instability CHAPTER 13 Money, Banks, and the Federal Reserve 424 CHAPTER 14 The Goals, Tools, and Rules of Monetary Policy 450 CHAPTER 15 The Economics of Consumption Behavior 481 CHAPTER 16 The Economics of Investment Behavior 517 PART VI The Evolution of Macroeconomic Ideas CHAPTER 17 New Classical Macro and New Keynesian Macro 543 CHAPTER 18 Conclusion: Where We Stand 571 vii Contents Preface PART I CHAPTER Introduction and Measurement What Is Macroeconomics? 1-1 How Macroeconomics Affects Our Everyday Lives Global Economic Crisis Focus: What Makes It Unique? 1-2 Defining Macroeconomics 1-3 Actual and Natural Real GDP 1-4 Macroeconomics in the Short Run and Long Run 1-5 CASE STUDY: How Does the Global Economic Crisis Compare to Previous Business Cycles? 11 1-6 Macroeconomics at the Extremes 13 1-7 Taming Business Cycles: Stabilization Policy 17 International Perspective: Differences Between the United States and Europe Before and During the Global Economic Crisis 18 Global Economic Crisis Focus: New Challenges for Monetary and Fiscal Policy 20 The “Internationalization” of Macroeconomics 20 The Measurement of Income, Prices, and Unemployment 24 2-1 Why We Care About Income 24 2-2 The Circular Flow of Income and Expenditure 24 2-3 What GDP Is, and What GDP Is Not 26 2-4 2-5 Where to Find the Numbers: A Guide to the Data 27 Components of Expenditure 30 Global Economic Crisis Focus: Which Component of GDP Declined the Most in the Global Economic Crisis? 34 The “Magic” Equation and the Twin Deficits 34 Global Economic Crisis Focus: Chicken or Egg in Recessions? 36 2-6 Where Does Household Income Come From? 37 2-7 Nominal GDP, Real GDP, and the GDP Deflator 39 How to Calculate Inflation, Real GDP Growth, or Any Other Growth Rate 41 Measuring Unemployment 42 Understanding the Global Economic Crisis: The Ranks of the Hidden Unemployed 44 2-8 APPENDIX TO CHAPTER 2: How We Measure Real GDP and the Inflation Rate viii 11 Global Economic Crisis Focus: How It Differs from 1982–83 1-8 CHAPTER xvi 51 Contents PART II CHAPTER ix The Short Run: Business Cycles and Policy Responses Income and Interest Rates: The Keynesian Cross Model and the IS Curve 54 3-1 Business Cycles and the Theory of Income Determination 54 Global Economic Crisis Focus: What Were the Shocks That Made the 2008–09 Economic Crisis So Severe? 56 3-2 Income Determination, Unemployment, and the Price Level 56 3-3 Planned Expenditure 57 Global Economic Crisis Focus: Financial Market Instability as the Main Cause of the Global Economic Crisis 61 The Economy In and Out of Equilibrium 61 3-4 Understanding the Global Economic Crisis: How Changes in Wealth Influence Consumer Spending 62 3-5 The Multiplier Effect 67 3-6 Sources of Shifts in Planned Spending 69 3-7 How Can Monetary Policy Affect Planned Spending? 72 3-8 3-9 3-10 The Relation of Autonomous Planned Spending to the Interest Rate 73 Understanding the Global Economic Crisis: A Central Explanation of Business Cycles Is the Volatility of Investment 74 The IS Curve 76 Conclusion: The Missing Relation 78 Learning About Diagrams: The IS Curve 79 APPENDIX TO CHAPTER 3: Allowing for Income Taxes and Income-Dependent Net Exports CHAPTER 85 Strong and Weak Policy Effects in the IS-LM Model 88 4-1 88 Introduction: The Power of Monetary and Fiscal Policy 4-2 Income, the Interest Rate, and the Demand for Money 88 4-3 The LM Curve 91 Learning About Diagrams: The LM Curve 93 4-4 The IS Curve Meets the LM Curve 94 4-5 4-6 4-7 4-8 4-9 Global Economic Crisis Focus: Causes of a Leftward Shift in the IS Curve 95 Monetary Policy in Action 96 How Fiscal Expansion Can “Crowd Out” Private Investment 97 Global Economic Crisis Focus: How Monetary Policy Can Be Ineffective in the IS-LM Model 99 Strong and Weak Effects of Monetary Policy 99 Understanding the Global Economic Crisis: How Easy Money Helped to Create the Housing Bubble and Bust 102 Strong and Weak Effects of Fiscal Policy 105 Using Fiscal and Monetary Policy Together 107 International Perspective: Monetary Policy Hits the Zero Lower Bound in Japan and in the United States 110 APPENDIX TO CHAPTER 4: The Elementary Algebra of the IS-LM Model 117 www.downloadslide.com Index 45-degree line, 59 France economic growth in, 360–361 inflation in, 282–283 Franklin, Benjamin, 504 FRED database (Federal Reserve Bank of St Louis), 27 Friedman, Benjamin M., 442n, 467n, 581n Friedman, Milton, 15n, 151n, 257n, 278n, 460n, 543, 577 constant growth rate rule and, 455–456 fooling model and, 544–546 forward-looking expectations and, 482 nominal interest rate rule and, 471n permanent-income hypothesis and, 488–492 policy rules and, 466, 578 portfolio approach of, 442 Garraty, John A., 248n GDP See Gross domestic product (GDP) GDP deflator chain-weighted, 53 explanation of, 39, 40 Great Depression and, 251 implicit, 53 importance of, 41–42 real GDP and calculation of, 51 value of, 41 GDP gap explanation of, real, unemployment gap and, 24 General equilibrium, 95 General functional form, 386 General Motors Corporation (GM), 185 The General Theory of Employment, Interest, and Money (Keynes), 249, 485, 543, 574 Geography, economic growth and, 403–407 Germany debt-GDP ratio in, 171 economic growth in, 360–361 fiscal policy in, 259 Great Depression in, 13–14, 16, 258–259 hyperinflation in, 14–16, 335–336 inflation in, 282–283 investment in, 536–537 saving rate in, 503 unemployment in, 350, 351 Global Economic Crisis, 9n See also Economic recovery (2010–2011) aggregate demand curve and, 236 automatic stabilization and, 165 blame associated with, 122 budget deficit and, 159, 162, 332 business cycles and, 11–13, 34, 123, 124 compared to previous business cycles, 11–13 disinflation and, 283–284 economic ideas changed by, 585–586 economic stimulus and, 498–499 effect on households of, 121 in Europe, 18–19 explanation of, 1, 121, 122, 572 financial markets and, 61, 121 fiscal and monetary policy and, 20, 99, 121, 154–155, 451, 588, 591–592 flexible exchange rate and, 223–224 following Great Moderation, 54–55 foreign investors and dollar shortage and, 152 GDP and, 34 housing price bubble and, 63, 102–104, 138–139, 290–291, 322, 533, 583, 585 inflation and, 290–291, 296, 314–315 interest rates and, 250, 471 investment and, 34, 36, 74–75 IS-LM model and, 95, 108, 121–122, 139–141, 144–146 life-cycle hypothesis and, 493 long-term economic growth and, 414–415 main causes of, 584–585 policy dilemma and, 154–155 quantitative easing and, 148–149 real business cycle model and, 554, 585 shocks affecting, 56 spread of, 21, 151–152 term premium and risk premium and, 142–145, 151–152 unemployment and, 1–2, 44–45, 125–127, 314–315, 342, 350–351 uniqueness of, in United States, 18–21, 122–127 wealth and consumer spending and, 62–63 worldwide economic downturn and, 123–124 GNP See Gross national product (GNP) Goethe, Johann Wolfgang, 24 Goodfriend, Marvin, 581 Goods consumption of, 483–485 final, 28, 30 included in final product, 26, 28 intermediate, 28 Goolsbee, Austan D., 529n Gordon, Robert J., 9n, 176n, 183n, 255n, 257n, 292n, 410n, 412n, 413n, 462n, 535n, 561n, 571n, 575n Gore, Al, Government economy and, 32–33 goods and services purchased by, 34 size of, 160 Government budget crowding out of net exports and, 159 historical background of, 160–161 recessions and, 162 twin deficits and, 35–36 Government budget constraint bond creation vs money creation and, 331–332 effects of inflation and, 332–333 equation for, 331–332 explanation of, 331 inflation tax and, 333–334 Government budget deficit actual, 166–167 automatic stabilization and, 162–163 bond creation vs money creation and, 331–332 debt-GDP ratio and, 171–174 I-5 discretionary fiscal policy and, 164–165 explanation of, 35–36, 320 financing and, 71 impact of future generations of, 159–160 natural, 165–166 private saving and, 502 real income and, 163 recessions and, 36, 159, 162, 332 solvency and, 169–170, 172 Government budget surplus explanation of, 36 income level and, 86 natural, 165–167 of 1998–2001, 159 real income and, 163 Government debt explanation of, 167–168 future burden of, 168–169 public debt and, 168–169 Government-owned, privately operated (GOPO) capital, 534–535 Government policies diversion and, 401–403 economic growth and, 399–401 population growth and, 396–397 saving rate and, 396, 397 Government spending consumption and, 109 crowding-out effect and, 98–99, 174–175 New Deal programs and, 182–183 real income and interest rate and, 98 taxation and, 70 transfers to states/localities and, 181, 184 Great Britain See United Kingdom Great Contraction of 1929–1933, 134 Great Depression bank failures during, 131 causes of, 253–261, 586 debt-GDP ratio and, 172, 174 deflation during, 251–252 economic theory and, 543 excess reserves during, 151 in Germany, 13–14, 16 investment in, 75, 534–535 macroeconomic variables and, 572–574 New Deal programs and, 182, 183 nominal and real wage rates and, 260 output ratio and, 254–255, 257, 259 policy failures during, 260–261 price level and, 257, 259, 260 saving during, 487, 488 stock market crash and, 84, 134–135, 249 unemployment in, 11–14, 110, 255 in United States and Europe, 258–259 weak aggregate demand and, 255–257 Great Moderation explanation of, 54–55, 424, 462 Fed and, 461–464 Great Recession of 2007–2009, 254–255 See also Global Economic Crisis Greece, 475 Greek crisis, 186 Greenspan, Alan, 153 www.downloadslide.com I-6 Index Greenwald, Bruce, 557n Gross, 30 Gross debt, 168 Gross domestic product (GDP) See also GDP deflator; Real GDP actual and natural real, 4–7 calculation of, 39, 41 expenditures on, 57 explanation of, 4, 26 investment and, 75 items included/excluded from, 26, 28–29 multiplier effect and, 174–175, 177–178 net exports and, 32 nominal, 39, 40, 273–275, 517 Gross national product (GNP) depreciation in, 30 explanation of, 29 gross investment and, 524 Gross private domestic investment (GPDI) behavior of components of, 520–521 fluctuations in, 518–520 Growth rate, calculation of, 41 Growth rate of velocity, 317, 318 Gulf War (1991), 195n Hall, Robert E., 400n, 402n, 498n, 566n Harburg, Edgar Y., 231 Harrison, Bennett, 345n Harrod, Roy, 366 Harrod-Domar economic growth model, 366 Harrod-neutral technological change, 370n Hatton, T J., 574n Heller, Walter, 577 Hellicopter drop, 176 Herbert, Bob, 349n Heston, Alan, 361n, 393, 394n, 396n Hicks, John, 78n High-powered money (H) explanation of, 428–430 supply of, 430, 433 Hitler, Adolf, 13 Hong Kong, 213, 407 Hoover, Herbert, Households housing prices and, 103–104 income and expenditures in, 24–26 income flow to, 37–38 saving and investment in, 31–32, 63, 506–510 Household wealth See also Wealth autonomous consumption and, 60 explanation of, 60, 62 explosion and collapse of, 507–508 financial and, 508, 509 measurement of, 62–63 ratio of saving to personal disposable income and, 512 Housing price bubble explanation of, 133 Global Economic Crisis and, 63, 102–104, 138–139, 290–291, 322, 352, 533, 583, 585 in 2000–2006, 133–136 Huang, Kevin X., 561n Human capital economic growth and, 398 explanation of, 375–376 Solow model and, 376–377 technological change and, 398 total output and, 376 Hurd, Michael, 505n Hyperinflation See also Inflation costs of anticipated, 335–336 explanation of, 14, 315–316, 334–335 in Germany, 14–16 origins of, 336–337 Hysteresis, 347–348 Ideas evolution of, 571–572 reaction to events (1923–1947), 572–575 reaction to events (1947–1969), 575–578 reaction to events (1970–2010), 578–586 world economy and, 586–588 Immigration, from poor countries to rich countries, 377, 408 Import price shocks, 286, 287 Imports See also International trade effect of, 33, 33n explanation of, 32 leakage and, 174–175 Income See also Real income from abroad, 192 circular flow of, 24–26 demand for money and, 89 domestic, 38 expenditure and, 34–35, 37 money supply, interest rates and, 89 permanent, 489 personal, 38 transitory, 490 Income-determination multiplier, 86–87, 428–429 Incomes policy, 337 Income taxes See also Taxes/taxation effect of, 85–86 indexation of, 330 leakage and, 174–175 multiplier and, 86 Indexation coordination failures and, 561–562 cost of living agreements and, 563–564 inflation costs and, 336–337 wage, 336–337 Indexed bonds, 328–330 India, 401–402 Induced consumption, 58 Induced net exports, 86–87 Induced saving explanation of, 67 marginal propensity to save and, 59–60 Inflation See also Disinflation between 1971–1982, 578, 580 adjustment of expectations and, 271–272 adjustment to long-run equilibrium and, 280–292 COLAs and, 290–292 cold turkey remedy for, 280 core, 292 costs of, 315–316, 326–328, 330 cures for, 296 currency depreciation and, 205 demand, 284 demand-pull, 268 deregulation of financial institutions and, 328 determinants of, 316–317 effects of, 320, 332–334 expected, 270–272, 277–279, 323–325 explanation of, 2, 265–266 fast, 42 Fed and, 146n, 468–470 in Germany, 14–16 Global Economic Crisis and, 290–291, 296, 314–315 government budget constraint and, 330–334 hyperinflation and, 14–16, 315–316, 334–337 See also Hyperinflation indexed bonds and, 328–330 indexed tax system and, 330 in Latin America, 16 measurement of, 41, 266 moderate vs extreme, 315–316 monetary policy and, 468 money and, 316–320 nominal and real interest rates and, 321–328 nominal GDP growth and, 273–277, 280–281, 292, 293, 294, 296, 315, 316 output and, 4, 293–295 output ratio and, 266, 267 process of, 279 real GDP and, 7, 265–266, 268–271, 274, 275, 277 recession and, 280–283 shoe-leather cost of, 326–327 short-run Phillips curve and, 270–271, 273, 288 solutions to, 350–352 supply, 284 supply shocks and, 284, 286–293 unanticipated, 322–323 unemployment rate and, 5, 6, 297–301 Inflation tax, 333 Infrastructure economic growth and, 403, 411 effects of spending on, 181, 184 explanation of, 388 Injections, 35 Innovation See Financial innovation Input-output model, 561–562 Intangible capital, 413 Interest rate differential, 218 Interest rates See also Nominal interest rate; Real interest rate actual real, 321 asset purchases and, 144 autonomous consumption and, 60, 73 autonomous planned spending and, 73, 75–77, 101 capital mobility and, 219–220 crowding-out effect and, 175–176 demand for money and, 89–91, 104 expected real, 321 Fed and, 73, 97, 102–103, 108–109, 142–147, 348, 434, 443–446, 481 fiscal policy and, 106 functions of, 73 income, money supply and, 89 www.downloadslide.com Index investment and, 538 IS-LM model and, 140, 221–222, 443 long-term, 73 nominal, 321, 325, 327–328 real exchange rate and, 218–220 real income and, 79, 98 saving rate and, 502–503 short-term, 73, 140, 142 types of, 73, 102 zero lower bound for, 104–105, 141 Intermediate goods, 28 Internal combustion engine, 410 International investment position changes in, 197 net, 195–197 standard of living and, 197 International perspective cell phone use, 441 credit and debit card use, 440–441 Debt-GDP Ratio, 171 disinflation in Europe vs United States, 282–283 economic growth, 360–361 Global Economic Crisis and Canada, 153 Global Economic Crisis and U.S and Europe, 18–19 Great Depression in Europe vs United States, 258–259 on investments, 536–537 macroeconomics in Europe vs United States, 590–591 monetary policy in Japan, 110–111 money growth and inflation, 319 productivity fluctuations, 552–553 saving rate, 502–503 South Korea vs North Korea, 404–405 urban slums in poor cities, 401 International trade See also Exports; Foreign exchange rates; Imports balance of payments outcome and, 193–194 current account and, 191–198 Internet, macroeconomic data from, 27 Intertemporal substitution, 551 Inventions, productivity and, 410–411, 413, 416, 419–420 Inventory investment, 30, 520–521 Investment behavior neoclassical theory of, 528–530 taxation and, 528, 530, 532–533 Investment See also Foreign investment accelerator hypothesis of net, 528, 531–526 business confidence and speculation and, 533–534, 536 business cycles and volatility of, 74–75 determinants of gross, 527 economic stability and, 517–521 fixed, 31 flexible accelerator theory of, 526–528 GDP and, 75 Global Economic Crisis and, 34, 36, 74–75 during Great Depression and World War II, 534–535 instability of output and interest rates and, 536–539 international perspective on, 536–537 inventory, 30 IS shifts and, 537–538 net, 522–525 private, 30, 31 saving and, 31–32 in steady state, 364–365 Taylor Rule and, 539 user cost and role of monetary and fiscal policy and, 532–533 Ireland, 475 IS curve derivation of, 76–78 expansionary fiscal policy and, 97–99 explanation of, 76, 78, 88 interest rate and, 99, 537–538 investment volatility and, 75 LM curve and, 94–95, 117 net wealth effect and, 139 recessions and, 139–140 shifts in, 78n, 79, 107, 139, 255–257, 443, 444, 537–538 slope in, 79, 88, 100–101, 104, 105 vertical, 101, 104, 110, 249–250, 256 IS-LM model See also LM curve economic growth and, 108–109 elementary algebra of, 117–120 explanation of, 95, 96, 107, 451, 565 fiscal expansion and, 159 Global Economic Crisis and, 95, 108, 121–122, 139–141, 144–146 interest rates and, 140, 221–222, 443 monetary policy and, 158 perfect capital mobility and, 220–221 real interest rate and, 323n Israel, inflation in, 336 Italy debt-GDP ratio in, 171 economic growth in, 360–361 inflation rate in, 282–283 saving rate in, 503 Japan debt-GDP ratio in, 171 economic growth in, 360–361 foreign official reserves of, 193 Great Depression in, 258, 259 investments in, 536–537 liquidity trap in, 104 monetary policy in, 110–111 output gap in, 123–124 productivity in, 552–553 saving rate in, 503 U.S dollar and, 588 Jobless recoveries, 45 Job search, 342–344 Job training, 341 Johnson, Harry, 543n Johnson, Lyndon, Johnson, Simon, 402n Jones, Charles I., 400n, 402n Jorgenson, Dale, 528 Kahn, R F., 485n Katz, Lawrence F., 345n, 346n, 584n Kennedy, John F., 577 Kenya, poverty in, 401 I-7 Keynes, John Maynard, 424 aggregate demand and, 255–256 business confidence and level of investment and, 534–535 consumption function and, 485, 487 economic theory of, 249–253, 543, 544, 557 The General Theory of Employment, Interest, and Money, 249, 485, 543, 574 new Keynesian theories, 544, 556–562, 564–566 rigid nominal wages and, 257 wage rigidity and, 252–253 Keynes Effect, 251, 252 Keynesian Cross model, 65, 67 Keynesian Revolution, 249–253, 574–575 Kindleberger, Charles P., 136n King, Robert G., 549n, 557n Korea See North Korea; South Korea Korean War, 464, 575 Kotlikoff, Laurence J., 504n Krenn, Robert, 176n, 183n, 255n, 535n, 575n Krueger, Alan B., 345n, 346n, 584n Kurihara, K K., 492n Kydland, Finn E., 466, 549n Labor-augmenting technological change, 370 Labor contracts characteristics of, 562–563 COLAs and, 563–564 long-term, 562 Labor force, 43, 389n Labor-force participation rate, 43, 389n Labor market equilibrium in, 253, 544 in real business cycle model, 549–551 Labor productivity See also Productivity in Europe, 416–418 explanation of, 389 real wage and, 391 standard of living vs., 389–390 in United States, 409, 416–418 Labor unions, 562–563 Lags added together, 460 change in, 460 effectiveness, 458–461 explanation of, 457 types of, 457–458 Landes, David S., 406n La Porta, Rafael, 402n Large open economy explanation of, 220 small open economy vs., 222–223 LAS curve See long-run aggregate supply curve Latin America, 16, 477 See also specific countries Leahy, John, 505n Leakages explanation of, 35 from spending stream, 85–86, 174–175 tax, 38 Legal environment, 399–402 Legislative lag, 457–458 Lehman Brothers, 184 www.downloadslide.com I-8 Index Leijonhufvud, Axel, 251n Lettau, Martin, 529n Leverage bubbles and, 134 explanation of, 130–131 Levin, Andrew, 464n Liabilities, 128–129 Life-cycle hypothesis (LCH) bequests and, 501, 504–505 explanation of, 482, 492, 501 lifetime asset holding and, 493–496 liquidity constraints and, 501 retirement and, 505–506 saving rate and, 502, 503 Liquidity trap, 104, 250 Liu, Zheng, 561n LM curve See also IS-LM model changing prices and, 232–233 demand for money and, 97, 101, 104 derivation of, 92–93 explanation of, 88, 91–94 horizontal, 104, 110, 250, 256 IS curve and, 94–95, 117 money supply and, 99, 100, 107, 232 shifts in, 443–444 slope of, 100–101, 104–105 vertical, 105 Long run, economic growth in, 9–10 Long-run aggregate supply (LAS) curve, 232, 244–245, 268, 269 Long-run equilibrium, 244, 245 Long-run Phillips (LP) curve, 273, 578 Long-term interest rates, 73 Long-term labor contracts, 562–564 Lopez-de-Silanes, Florencio, 402n Lucas, Robert E., Jr., 358n, 378, 544, 546–547, 580 Lucas model, 547 Ludvigson, Sydney, 529n Maastricht Treaty, 475 Macroeconomic data, 27 Macroeconomic externality, 560 Macroeconomics “big three“ concepts in, 1–3 explanation of, at extremes, 13–16 Great Depression and, 543 internationalization of, 20–21 microeconomics vs., in short and long run, 7–10 in United States vs Europe, 590–591 unsettled issues and debates in, 588–592 Macroeconomic theories See also specific theories developments in, 543–544 new classical, 543–544 Macroeconomic variables in 1923 and 1947, 573 in 1948 and 1969, 576 in 1970 and 2010, 579 Magic equation, 34, 36, 38, 71 Malaysia, economic growth in, 407 Mali, 404, 407 Manchester, William, 13n Mankiw, N Gregory, 374n, 376n, 501n, 558n Marginal cost decline in, 562 effects of sticky, 560–561 output and, 559, 561 Marginal leakage rate explanation of, 85–86 income and, 87 Marginal product of capital (MPK), 529–530 Marginal propensity to consume (MPC) explanation of, 58, 59, 497n long-run and short-run, 490–491 multiplier effect and, 67–68 Marginal propensity to save, 59 Marginal revenue curve, 559 Margo, Robert, 574n Market clearing, 545 Market equilibrium See Equilibrium Markets See Financial markets Marshall, Alfred, 543 Marshall, Eliot, 481 Marshall Plan, 587 McCallum, Bennett T., 549n McNamara, Francis X., 440 Menu cost of inflation, 327 Menu costs, 557, 558 Mexico, economic growth in, 399 Microeconomics, Minimum wage, unemployment and, 341 Misery index, 315 Mismatch unemployment causes and cures for, 341, 352 explanation of, 339 sources of, 340–341 Mitchell, Kristen B., 345n Mitchell, Wesley, 387 Modigliani, Franco, 482, 492, 493, 504n M1, 425, 426, 436, 437, 581–882 Monetarism, 455 Monetarists, 427 Monetary expansion, 221, 222 Monetary impotence, 249, 250 Monetary policy See also Federal Reserve between 1983–2001, 464–466 aggregate demand curve and, 234–236 analysis of, 590–591 change in multipliers, 460–461 COLAs and, 290–292 contractionary, 96 credibility and reputation and, 467 demand shocks and, 450–451, 462, 464 in Europe, 590–591 exchange rate and, 476–477 exogenous variables and, 57 expansionary, 96 explanation of, 17, 102 fiscal policy used with, 107–111 fixed and flexible exchange rates and, 220–224 flexible exchange rate and, 221–222 formulation of, 107n Global Economic Crisis and, 20, 99, 121, 154, 451, 588 goals of, 54, 424 Great Depression and, 257 inflation rate and, 468 in Japan, 110–111 lags and uncertain multipliers and, 457–462 money supply and, 96–97 negative IS shock and, 140–141 planned spending and, 72–73 policy rules and, 455–457 rules vs discretion and, 468, 471–473, 476 shocks caused by, 55 stabilization targets and instruments and, 451–453 strong effects of, 100–101 supply shocks and, 462, 464 Taylor Rule and, 468–471 time inconsistency and, 466–467 user cost of capital and, 530–533 weak effects of, 101, 104–105 Money See also Dollar (U.S.) budget deficits and creation of, 331–332 convenience services provided by, 326 cost and benefits of holding, 437–438 creation of, 427–428 demand for, 89–91, 97, 101, 104–105 helicopter drop of, 176 high-powered, 428–430, 433 interest rate and demand for, 89–91 M1 definition of, 425, 426, 436 M2 definition of, 426, 436 quantity theory of, 246–247, 442 square root hypothesis of, 439n supply of, 97 Money-creation multiplier, 428–430, 433 Money demand factors that shift, 91 Fed and, 436 income and, 89 instability of, 426–427 interest rate and, 89–91, 104, 443–446 interest responsiveness of, 105 LM curve and, 97 portfolio approach to, 439, 442 theories of, 436–439, 442 transactions, 437–439 unstable, 445 Money demand shocks, 471 Money market, 86 Money market mutual funds, 425 Money multiplier, 430 Money-multiplier shocks, 436, 471 Money supply aggregate demand curve and, 234–235 constant growth rate rule for, 455 determinants of, 427–431 explanation of, 89 Fed and, 97, 99, 101, 107, 425, 431–436, 445 interest rates and, 104n LM curve and, 99, 100, 107, 232 nominal GDP and, 316, 317 rule for, 472–473 Monopolistic firms, price setting by, 558–560 Mortgage-backed securities (MBS) explanation of, 134 Fed and, 149, 150 Mortgage brokers, 137 Mortgages See also Housing price bubble Global Economic Crisis and, 138, 151 subprime, 103, 122, 137–138 MPC See Marginal propensity to consume (MPC) M2, 425–426, 437 Multifactor productivity (MFP) www.downloadslide.com Index explanation of, 371, 390, 552 measurement of, 391 Multiplier effect example of, 68–69 explanation of, 67 of fiscal policy stimulus, 174–178 Multipliers autonomous spending, 117 balance budget, 72, 87 calculation of, 67–68, 69n for different types of fiscal policy, 177–178 dynamic, 460 explanation of, fiscal, 107–108 fiscal expansion and, 70–71, 97–98 government expenditure, 174–175 income-determination, 86–87, 428–429 income taxes and, 86 money, 430 money-creation, 428–430, 433 tax, 71, 72 Multiplier uncertainty, 460 Mundell, Robert, 323n Mundell Effect, 323n Muth, John, 547n NAIRU (non-accelerating inflation rate of unemployment), 583–584 Nasar, Sylvia, 345n National income accounting, 26, 27 National income and product accounts (NIPA) explanation of, 26, 27 flaws in, 509–511 rent payments and, 31n National saving, 197–198 See also Saving Natural employment deficit (NED) explanation of, 165–166 historical behavior of, 166–167 Natural employment surplus (NES), 165–166 Natural GDP, 482–485 Natural rate hypothesis, 545, 578 Natural real GDP business cycles and, explanation of, 4, 69, 248 relation between actual real GDP and, 4, unemployment and, 5–6, 11, 12, 298 Natural unemployment rate decline in, 589–590 explanation of, 5–6, 338–339, 452 following 1990, 345–348 mismatch component of, 340 Neoclassical growth theory explanation of, 365–366, 390 weaknesses in, 372, 387–388 Neoclassical theory of investment behavior, 528–531 Net, 30 Net debt, 168 Net domestic product (NDP), 30, 38 Net exports See also Exports autonomous and induced, 86–87 crowding out of, 159 determinants of, 215–216 explanation of, 32, 34, 192 foreign exchange rate and, 216–217 Net foreign investment, 32 Net international investment position, 195–197 Net investment, 522–525 Net revaluations, 195 Net tax revenue, 35 Net unilateral transfers, 192 Neutral policy, supply shocks and, 289 Neutral technological change, 370 New classical macroeconomics business firm behavior and, 558 explanation of, 543–544, 580 fooling model and, 544–546 models that combine elements of new Keynesian and, 565–566, 591 positive contributions of, 554–556 real business cycle model and, 551–554 New Deal, 131 fiscal stimulus of 2008–2011 and, 182–183 New Keynesian economics business firm behavior and, 558 criticisms of, 564–565 explanation of, 544, 556–558 labor contracts and, 562 models that combine elements of new classical and, 565–566 original vs., 556–557 small nominal rigidities and large macroeconomic effects and, 557–561 New Normal, 347 Nicaragua, inflation in, 316 Nixon, Richard, Nominal, 39 Nominal anchor, 471 Nominal exchange rates explanation of, 205 of U.S dollar, 211–212 Nominal GDP See also Gross domestic product (GDP) acceleration and, 275–277 explanation of, 39, 40, 517 inflation and, 273–277, 280–281, 292, 293, 294, 296, 315, 316 money supply and, 316, 317 Nominal GDP rule, 473, 476 Nominal interest rate See also Interest rates explanation of, 321, 325 taxes and, 327–328 Nominal interest rate rule, 472 Nominal rigidity effect of small, 557–561 explanation of, 557 input-output approach and, 562 large macroeconomic effects of small, 557–561 Nominal wage rate Great Depression and, 260 long-run equilibrium and, 244 short-run aggregate supply curve and, 239–242, 269 Nominal wages, rigid, 252–254, 257 Non-market-clearing model, 556 North, Douglass C., 402n North Korea, economic growth in, 404–405 Obama stimulus program See Fiscal stimulus of 2008–2011 Oil prices, 580 Oil shocks, 284, 286, 287 Okun, Arthur M., 298, 315, 345n, 577 Okun’s Law, 298–299, 313, 473n Oliner, Stephen D., 412n, 529n OPEC oil shocks, 284 Open economy economic policy in, 224–225 explanation of, 20 large, 220, 222–223 monetary and fiscal policy effects in, 224 small, 220, 222–223 Open-market operations, 432–434 Optimism-pessimism grid, 454 Output economic growth and, 396, 398 effects of, human capital and, 376 investment as source of instability of, 536–538 per person, 363, 364 real GDP, 24 recessions in real, 559 saving rate and population growth and, 397, 398 Output gap in 1960–2010, 462–465 economic downturns and, 123–124 explanation of, Fed and, 146n, 147, 462, 465–466 in Germany, 350n Output ratio in 1929–1941, 254–255, 257, 259 explanation of, 299 inflation and, 266, 267 rule to target, 473 supply shocks and, 288 unemployment and, 299, 313 Overbuilding cycles, 533 Panic of 1908, 430 Parameters, 64, 119n Parker, Jonathan A., 499n Patents, 400 Payment technologies, 91 Per capita income, 372–373 Per capita real GDP, 16, 17 Perfect capital mobility, 219–220 Permanent income, 489 Permanent-income hypothesis (PIH) cross-section and time-series data and, 490–492 explanation of, 482, 488–490 liquidity constraints and, 501 rational expectations and, 497 Permits, 400 Persistent unemployment dimensions of, 346–347 human cost of, 348–349 Personal disposable income, 38 Personal income, 35, 38 Personal saving See also Saving explanation of, 31–32 household wealth and, 63 I-9 www.downloadslide.com I-10 Index Peru cost of starting business in, 400 inflation in, 316, 335 Peter, Laurence J., 314 Phelps, Edmund S., 292n, 543, 545–546, 577, 578 Philippines real GDP in, 16, 17 real income per capita in, 358 Phillips, A W H., 270 Phillips curve, 467, 578, 580 See also Longrun Phillips (LP) curve; Short-run Phillips (SP) curve Pigou, Arthur C., 248 Pigou Effect, 251, 252 Planned spending See also Autonomous planned spending monetary policy and, 72–73 sources of shifts in, 69 Plosser, Charles I., 549n Poland, inflation in, 316 Policy activism case against, 457 explanation of, 450 views of, 456 Policy credibility, 467 Policy ineffectiveness proposition (PIP), 548 Policy instruments explanation of, 17, 452 rules for, 471–472 Policy mix economic growth and, 108–109 explanation of, 109 interactions in, 109–111 Policy rules activism vs., 454 assessment of alternative, 472 debate regarding, 455 discretion vs., 468 explanation of, 450 negative case for, 456–457 positive case for, 455–456 Political environment, 399–402 Politics, Poole, William, 444 Poor nations See also Developing nations convergence hypothesis and, 394 economic growth in, 589 geography and, 408 starting businesses in, 400 technological change in, 399, 419 Pope, Alexander, 121 Population growth, 396–397 Portfolio approach, 439, 442 Poverty See also Developing nations; Poor nations economic growth and, 394–395 urban slums and, 401 Prescott, Edward, 466, 544, 549n Price elasticity of demand, 201, 203n Price level aggregate supply and, 56–57 expectations of, 546–547 fiscal expansion and, 243–244 in Germany, 14, 15 planned spending and, 247 real money supply and, 232 self-correction and, 249 Price setting, 558–560 Private investment explanation of, 30, 34 fixed investment as, 31 inventory investment as, 30 Production function explanation of, 362–364 general functional forms and, 385–386 slope of, 373 Productivity in Asia, 16 in Europe, 18, 19, 390, 415–418, 590 explanation of, fluctuations in, 552–553, 589 geography and, 405 goals of, 17–19 inflation and, 286–287 inventions and, 410–411, 413, 416, 419–420 labor, 389–391 multifactor, 371, 390, 391, 552 output and, real GDP and, 7, 24 real wage and, 391 short-run aggregate supply curve and, 240 standard of living and, 24, 389–390 technological change and, 412, 413, 419–420 total factor, 371 in United States, 18, 19, 408–418, 582 Productivity growth from 1970s to 1995, 411, 419 after 2004 and in future, 413–415, 420 causes of revival in, 412–413 in Europe vs United States, 415–418 postwar, 409–410 revival in 1995–2004, 412, 418, 419 until 1970s, 410 Productivity growth shocks, 286–287 Public debt, 168–169 Purchasing power parity (PPP) exchange rate and, 208–209 explanation of, 206 factors in breakdown of, 207 inflation differentials and, 206–207 q theory, 528–529 Quantitative easing explanation of, 148 Fed and, 148–149 term and yield premiums and, 149, 151 Quantity equation explanation of, 246–247 inflation and, 316 Quantity theory of money, 247, 442 Rand, Ayn, 54 Rational expectations appeal of, 554–555 explanation of, 497–499, 547 Lucas and, 547–548 Raw materials, 240, 411 Real balance effect, 250–252 Real business cycle (RBC) model assessment of, 551–554 explanation of, 548–549, 581 Global Economic Crisis and, 554, 585 labor market in, 549–551 Real exchange rates explanation of, 205–206 interest rates and, 218–220 real interest rate and, 218–219 of U.S dollar, 211 Real GDP See also Gross domestic product (GDP) actual, 4–7, 69 calculation of, 39, 41, 51–53 equilibrium, 67 explanation of, 39, 50 Fed and, 96, 97 Great Depression and, 258 growth rate of, 54, 317 importance of, 41–42 inflation and, 7, 265–266, 268–271, 274, 275, 277 natural, 4–7, 69, 248 in Philippines, 16, 17 productivity and, 7, 24 in South Korea, 16, 17 unemployment and, 7, 11–13, 24, 56 Real GDP gap See Output gap Real income automatic stabilization effect of, 163 expansionary fiscal policy and, 97–99 government and, 163 interest rate and, 79, 98 international variations in, 372–373 net exports and, 216 price level and, 232 slowdown in, 413–414 Real interest rate See also Interest rates expected, 321 IS-LM model and, 323n real exchange rate and, 218–219 Real money balances, 89, 90 Real rigidity, 557 Real wage, 260, 391 Recessions See also Global Economic Crisis of 1953–1954, 575, 577 of 1974–1975, 580 in 1981–1982, 124–127, 315, 352 of 2001, 582 budget deficits and, 36, 159, 162, 332 consumer durables and, 500–501 effect of, 162 human costs of, 344–345 IS curve and, 139–140 in real output, 559 unemployment and, 44–45, 125–127 in United States, 122–127 Recognition lag, 457 Redistribution effect, 251 Reinhart, Carmen M., 122n, 585 Reinsdorf, Marshall B., 512n Required reserves, 434–435 Research and development (R&D), 399 Reserve requirements, 434–435 Residential investment, 520 Residual, 371 Retirement bequests and, 501, 504–505 consumption and, 505–506 Revaluation, 210 Rhode, Paul W., 257n Ricardo, David, 504 Rigid rule, 455 www.downloadslide.com Index Rigid wages, 249 Risk, 129 Risk premium explanation of, 144 Global Economic Crisis and, 144–145, 151–152 Robinson, James, 402 Rockoff, Hugh, 325n Rogoff, Kenneth S., 122n, 585 Rohwedder, Susann, 505n Romer, Christina D., 257n, 458–459 Romer, David, 374n, 376n, 458–459, 557n Romer, Paul, 378, 379n Roosevelt, Franklin D., 182, 260 Rudebusch, Glenn, 529n Sachs, Jeffrey D., 402n, 404–407, 411 Sacrifice ratio, 282 Sahm, Claudia, 179n Sales, estimating expected, 521–522 Sargent, Thomas J., 548n, 555n, 580 Saving See also National saving; Personal saving current account and national, 197–198 government policy and, 396, 397 induced, 59–60, 67 investment and, 31–32 personal, 31–32 Solow growth model and, 366–369, 395–396 in steady state, 364–365 Saving rate bequests and, 504–505 changes in, 63, 506–508 data on, 509–510 economic growth and, 502 government policies and, 396, 397 interest rates and, 502–503 international perspective on, 502–503 measures of, 510–512 net wealth and, 508 output and, 397, 398 short-run variability and long-run consistency in, 487–488 Solow growth model, 366–369, 395–396 tax cuts and, 504 Savings deposits, 425 Scadding, John, 488n Schwartz, Anna J., 151n, 257n Securities interest rates and purchase of, 144 mortgage-backed, 134, 149, 150 Securitization, 137 Segert, Alice, 336n Seignorage, 333 Self-correction aggregate demand-supply model and, 247–248 explanation of, 246 Great Depression and, 259–260 price deflation and, 257 price level and, 249 Services consumption of, 483–485 in gross domestic product, 26 in gross national product, 29 Service sector, in Europe, 418 Shapiro, Matthew, 179n Shleifer, Andrei, 402n Shocks See Demand shocks; supply shocks Shoe-leather cost of inflation, 326–327 Short run, business cycles in, 8–9 Short-run aggregate supply (SAS) curve alternative shapes of, 237–239 explanation of, 231, 242 nominal wage rate and, 239–243, 268 Short-run equilibrium, 245 Short-run Phillips (SP) curve See also SP-DG model equation for, 305–306 explanation of, 270–271, 273, 305, 577, 578, 580 inflation expectations and, 271–272 shifts in, 310–311 supply shocks and, 288, 289 Short-term interest rates explanation of, 73, 140 Global Economic Crisis and, 142 Sichel, Daniel E., 412n, 464n, 529n Siegert, Alice, 16n Simon, John, 462n Simons, Henry C., 455n Simple accelerator theory assumptions of, 526–527 postwar economy and, 524–526 Singapore, economic growth in, 407 Slemrod, Joel, 179n Small open economy explanation of, 220 large open economy vs., 222–223 Software investment, 520 Solow, Robert M., 264, 362n, 366, 379n, 390, 412, 442n, 577 Solow growth model convergence and, 392–395 explanation of, 366–367, 387 predictions of, 395–397 saving rate and, 366–369, 395–396 simplified version of, 371 technological change and, 369–370, 398 weaknesses in, 372, 387–388, 398 Solow’s paradox, 412 Solow’s residual, 371, 372, 390 See also Multifactor productivity (MFP) Solvency, 169–170 Solvency condition, 170, 172 South Korea economic growth in, 358, 404, 405 productivity growth in, 18 real GDP in, 16, 17 Southwest Airlines, 68–69 SP curve See Short-run Phillips (SP) curve SP-DG model, 305–313, 565 See also DG line; Short-run Phillips (SP) curve Spending, 64, 69, 72–73 See also Expenditures; Government spending S&P 500 stock price index, 133 Square root hypothesis of money, 439n Stabilization policy See also Fiscal policy; Monetary policy business cycles and, 17–19 explanation of, 19 monetary policy and, 451–453 role of, 19–20, 481 I-11 Staggered contracts, 557 Stagnation, in Japan, 110 Standard and Poor’s 500-stock index, 62 Standard of living economic growth and, 359, 361–362 in Europe, 417–418 explanation of, 389 international investment position and, 197 labor productivity and, 24, 389–390 in United States, 409 Steady state, saving and investment in, 364–365 Stein, Gertrude, 88 Stein, Herbert, 517 Stiglitz, Joseph, 380, 557n Stiroh, Kevin J., 412n Stock, 26 Stock, James H., 464n Stock market, 62, 507–508 Stock market crash (1929), 134–135, 249, 584 Stock price bubbles explanation of, 133 in 1927–1929, 133–135, 584, 585 in 1996–2000, 133–134 Structural deficit, 162 Structural surplus, 162 Structural unemployment, 340, 342 Subprime mortgage-baked securities (MBS), foreign investment in, 152 Subprime mortgages crisis caused by, 151 explanation of, 103, 122 origins of, 137–138 reasons for investment in, 138 Summers, Lawrence H., 504n Summers, Robert, 361n, 393, 394n, 396n Supply curve, 203, 204 Supply inflation, 284 Supply shocks adverse and beneficial, 287, 292, 319–320 consequences of, 311–312 explanation of, 265, 268 function of, 471 graphical summary of role of, 292–293 importance of, 284 policy responses to, 289 real business cycle model and, 549, 550 reduced volatility of, 462, 464 short-run Phillips curve and, 288–290 types of, 284–287 unemployment and inflation and, 300–301 Surplus See also Government budget surplus automatic stabilization and, 162–163 balance of payments, 190–197 basic, 330–333 current account, 190–191 cyclical, 162–163 foreign trade, 190–191 natural employment, 165–166 structural, 162–166 Svensson, Lars E O., 470, 476n www.downloadslide.com I-12 Index Target variables explanation of, 17, 452–453 rules for, 473 Tax cuts saving rate and, 504 weak effects of, 178–180 Taxes/taxation See also Fiscal policy; Income taxes; specific types of taxes based on nominal interest, 327–328 government spending and, 70 investments and, 528, 530, 532–533 Tax multiplier, 71, 72 Taylor, John B., 469, 528n Taylor Rule explanation of, 446, 450, 455, 456, 470, 473 Fed attitude toward inflation and output and, 468–471, 581 fixed, 470 function of, 473, 476, 481 inflation targeting vs., 590–592 investment volatility and, 539 zero lower bound and, 470, 471 Technological change convergence and, 393 geography and, 404, 405 human capital and, 398–399 labor-augmenting, 370 neutral, 370 in poor nations, 399, 419 productivity and, 412, 413, 419–420 Solow growth model and, 369–370, 398 Technology shocks, 551–554 Temple, Jonathan, 374n Term premium explanation of, 142 Global Economic Crisis and, 142, 144–145 Terrorist attack of September 11, 2001, 159 Tevlin, Stacey, 529n Thailand, economic growth in, 407 Time deposits, 425 Time inconsistency debate regarding, 468 explanation of, 466–467 Time series, 487 Time-series data conflict between cross-section and, 490–492 explanation of, 487 saving ratio, 487 Time-series evidence, cross-section vs., 485–487 TIPS (Treasury Inflation-Protected Securities), 328, 329 Tobin, James, 251n, 256n, 315, 437, 439, 442, 528–529, 557n, 577 Toniolo, Gianni, 257n Total expenditures, 57, 61 Total factor productivity, 371 Total labor force, 43 Trade See Exports; Foreign exchange rates; Imports; International trade Transaction accounts, 425 Transactions demand for money, 437–439 Transfer payments explanation of, 26 government and, 32, 33 recession of 2008–2009 and, 183 to states/localities, 181, 184 Transitory income, 490 Transmission lag, 458 Traveler’s checks, 425 Treasury bills, 433 Treasury bonds, 102, 324 Trilemma, 191, 212, 221, 225, 476 Tropical countries, 406, 407 Troubled Asset Relief Program (TARP), 184–185 Turnover unemployment explanation of, 339, 351 job search and, 342–343 reasons for, 343–344 TV-NAIRU, 583–584 Unanticipated inflation, 322–323 Unemployed explanation of, 43 hidden, 44–45 Unemployment, structural, 340 Unemployment gap, 6, 24 Unemployment/unemployment rate See also Natural unemployment rate actual, 5–6, 11, 12, 338–339 behavior of, 313 classical view of, 248 cyclical, 339 effects of, in Europe, 18, 19, 347, 350–351, 590 explanation of, 1, 43 flaws in definition of, 44 Global Economic Crisis and, 1–2, 44–45, 125–127, 314–315, 342 in Great Depression, 11–14, 110, 127 hiring discrimination and, 341 human costs of, 344–345 inflation and, 297–301 measurement of, 42–43 minimum wage and, 341 mismatch, 339–341, 352 natural, 5–6, 338–339, 345–348, 452 natural real GDP and, 298 non-accelerating inflation rate of, 583–584 output and, output ratio and, 299, 313 persistent, 346–349 real GDP and, 7, 11–13, 24, 53, 56 reduction in, 337–338 rule to target, 473 solutions to, 350–352 turnover, 339, 342–344, 351 in United States, 11–13, 18, 19, 292 Unintended inventory accumulation, 66 United Kingdom economic growth in, 359–362 Great Depression in, 258–259 inflation rate in, 282–283 United States in 1947–1969, 575–578 in 1970–2010, 578–586 balance of payments outcome for, 193, 194 consumption behavior in, 482–485 debt-GDP ratio in, 171, 173 disinflation in, 282 economic growth in, 360–361 employment gap in, 125 flexible exchange rate and, 212–213, 223–224 Global Economic Crisis in, 18–21, 122–127 Great Depression in, 13–14, 258–259 inflation rate in, 282–283 international investment position in, 195–197 investments in, 536–537 labor contracts in, 562–564 labor-force participation rate in, 389n macroeconomics in Europe vs., 590–591 monetary policy in, 110–111 open economy in, 20 output gap in, 123–125 perfect capital mobility and, 220 postwar investment behavior in, 525–526 productivity in, 18, 19, 408–418, 552–553, 582, 590 real GDP in, 54, 55 recessions in, 18–21, 122–127 role in world monetary system of, 186–187 between 1920s and 1930s, 572–575 saving rate in, 503 standard of living in, 409 trilemma and, 191, 212, 221, 225 unemployment rate in, 11–13, 18, 19, 292 world economy and, 586–588 World War II and, 575 Urban areas, poverty in, 401 Urban slums, 401 User cost of capital explanation of, 529–530 monetary and fiscal policy and, 530–533 Value added, 28 Variables endogenous, 57 exogenous, 57, 96 target, 17 Velocity, growth rate of, 317, 318 Versailles Peace Treaty, 15 Vietnam War, 464, 577 Vishny, Robert, 402n Wage indexation, 336 Wage rates COLAs and, 563–564 equilibrium real, 242 long-run equilibrium and nominal, 244 short-run aggregate supply curve and nominal, 239–242 in union sector, 563 upward pressure on, 340–341 Wallace, Neil, 548n Warner, Andrew, 402n Wars See also specific wars debt-GDP ratio and, 172, 174 fiscal expansion and, 176 Warsh, David, 379n www.downloadslide.com Index Washington Mutual, 137 Watson, Mark W., 464n Wealth See also Household wealth autonomous consumption and, 122 consumer spending and changes in, 62–63 demand for money and, 91 household, 60, 62–63, 506–510, 512 Wealth effect, 442n Web sites, for macroeconomic data, 27 Weil, David N., 374n, 376n Welfare, economic growth and, 358 Whelan, Karl, 529n Will, George F., 571 Wilson, B A., 464n The Wizard of Oz, 325 Wolfe, Kathy, 215n Women, discrimination against, 341 Woodford, Michael, 476n, 528n World War I, German hyperinflation following, 15 World War II economic events during, 575 investment in, 534–535 policies leading to, 259 reserve requirements during, 435n saving during, 487, 488 Yuan (China), 213 Zero lower bound explanation of, 104–105, 141, 147, 176 monetary impotence and, 250 Taylor Rule and, 470, 471 Zimbabwe, inflation in, 16, 316 I-13 www.downloadslide.com This page intentionally left blank www.downloadslide.com Understanding the Global Economic Crisis Boxes Section 2-8 Section 3-4 Section 3-8 Section 4-7 Section 5-4 Section 5-6 Section 6-10 Section 9-9 Section 10-5 Section 10-10 Section 15-6 The Ranks of the Hidden Unemployed How Changes in Wealth Influence Consumer Spending A Central Explanation of Business Cycles Is the Volatility of Investment How Easy Money Helped to Create the Housing Bubble and Bust Two Bubbles: 1927–29 in the Stock Market Versus 2000–06 in the Housing Market The IS-LM Summary of the Causes of the Global Economic Crisis Comparing the Obama Stimulus with FDR’s New Deal The Role of Inflation During the Housing Bubble and Subsequent Economic Collapse How a Large Recession Can Create a Large Fiscal Deficit Why Did Unemployment Rise Less in Europe Than in the United States After 2007? Did Households Spend or Save the 2008 Economic Stimulus Payments? International Perspective Boxes Section 1-7 Section 4-9 Section 5-8 Section 6-6 Section 7-5 Section 8-9 Section 9-7 Section 10-2 Section 11-2 Section 12-5 Section 12-5 Section 12-5 Section 13-5 Section 14-8 Section 15-7 Section 16-8 Section 17-5 Section 18-6 Differences Between the United States and Europe Before and During the Global Economic Crisis Monetary Policy Hits the Zero Lower Bound in Japan and in the United States Weighing the Causes: Why Did Canada Perform Better? The Debt-GDP Ratio: How Does the United States Compare? Big Mac Meets PPP Why Was the Great Depression Worse in the United States Than in Europe? Did Disinflation in Europe Differ from That in the United States? Money Growth and Inflation The Growth Experience of Seven Countries Over the Past Century A Symptom of Poverty: Urban Slums in the Poor Cities Institutions Matter: South Korea Versus North Korea Growth Success and Failure in the Tropics Plastic Replaces Cash, and the Cell Phone Replaces Plastic The Debate About the Euro Why Do Some Countries Save So Much? The Level and Variability of Investment Around the World Productivity Fluctuations in the United States and Japan How Does Macroeconomics Differ in the United States and Europe? Page 44 62 74 102 134 146 182 290 332 350 498 Page 18 110 153 171 208 258 282 319 360 401 404 407 440 474 502 536 552 590 www.downloadslide.com Case Studies and Boxes of Special Interest Section 1-5 Section 2-3 Section 5-2 Section 5-6 Section 6-3 Section 6-7 Section 6-9 Section 7-7 Section 8-9 Section 10-3 Section 10-4 Section 12-6 Section 12-7 Section 14-5 Section 14-7 Section 14-9 Section 15-2 Section 15-8 Section 16-2 Section 16-4 Section 16-5 Section 16-8 How Does the Global Economic Crisis Compare to Previous Business Cycles? Where to Find the Numbers: A Guide to the Data Dimensions of the Global Economic Crisis Why Do Asset Purchases Reduce Interest Rates? The Government Budget in Historical Perspective Historical Behavior of the Debt-GDP Ratio Since 1790 The Fiscal Policy Stimulus of 2008–11 Asia Intervenes with Buckets to Buy Dollars and Finance the U.S Current Account Deficit—How Long Can This Continue? What Caused the Great Depression? The Wizard of Oz as a Monetary Allegory The Indexed Bond (TIPS) Protects Investors from Inflation Uneven U.S Productivity Growth Across Eras The Productivity Growth Contrast Between Europe and the United States Was the Fed Responsible for the Great Moderation of 1986–2007? The Taylor Rule and the Changing Fed Attitude Toward Inflation and Output Should Monetary Policy Target the Exchange Rate? Main Features of U.S Consumption Data Did the Rise and Collapse of Household Assets Cause the Decline and Rise of the Household Saving Rate? The Historical Instability of Investment The Simple Accelerator and the Postwar U.S Economy Tobin’s q: Does It Explain Investment Better Than the Accelerator or Neoclassical Theories? Investment in the Great Depression and World War II Summarizing the Core Concepts Section 2-7 Section 3-10 Section 4-3 Section 7-10 Section 8-3 Section 8-5 Section 8-6 Section 9-3 Section 9-8 Section 14-2 How to Calculate Inflation, Real GDP Growth, or Any Other Growth Rate Learning About Diagrams: The IS Curve Learning About Diagrams: The LM Curve Summary of Monetary and Fiscal Policy Effects in Open Economies Learning About Diagrams: The AD Curve Learning About Diagrams: The SAS Curve Summary of the Economy’s Adjustment to an Increase in Aggregate Demand Learning About Diagrams: The Short-Run (SP) and Long-Run (LP) Phillips Curves Types of Supply Shocks and When They Mattered Rules Versus Activism in a Nutshell: The Optimism-Pessimism Grid Page 11 27 122 144 160 172 177 212 253 325 329 408 415 461 468 476 482 506 518 524 528 534 Page 41 79 93 224 237 242 245 273 286 454 www.downloadslide.com www.downloadslide.com Guide to Symbols [Note: For most variables, the level is indicated by an uppercase letter (X) while the growth rate is indicated by a lowercase letter (x) Each such variable is listed only once in this list by the appropriate uppercase letter (X).] Symbol Chapter Where Introduced Definition ¢ A A A b 11 15 4–Appendix Real autonomous expenditure Autonomous growth factor; multifactor productivity Assets held in life-cycle hypothesis b b B c c C C d D 11 13 10 13 13 11 Elasticity of output with respect to capital input Broker’s fee in Baumol’s theory of money demand Dollar amount of government bonds outstanding Marginal propensity to consume Fraction of bank deposits held as currency by the public Real personal consumption expenditures Currency held by the public Depreciation rate D 13 Demand deposits (accounts at banks or thrift institutions that allow checks to be written) e 7 13 Real foreign exchange rate Nominal foreign exchange rate Fraction of deposits that banks hold as reserves e¿ e E The change in a magnitude Dollar change of Ap in response to a one percentage-point change in the interest rate Nominal government debt (¢D = nominal government deficit) Real expenditures (E = C + I + G + NX) f 4–Appendix Dollar change of the demand for real money in response to a one percentage-point change in the interest rate F g G h 9–Appendix 4–Appendix Real government transfer payments Slope of the short-run Phillips curve (SP) Real government purchases of goods and services Dollar change of the demand for real money in response to a one-dollar change in real income, holding the interest rate constant h H H 9–Appendix 12 10 Response of unemployment to the output ratio Hours of labor input High-powered money (same as the monetary base; consists of currency plus bank reserves) i I j k k1 k2 k K L 10 9–Appendix 4–Appendix 4–Appendix 15 11 Nominal or market interest rate Real gross private investment Coefficient of adjustment of expectations Spending multiplier Multiplier for autonomous spending in IS-LM model Multiplier for real money supply in IS-LM model Marginal propensity to consume out of permanent income Capital stock Money demand function www.downloadslide.com Symbol Chapter Where Introduced Definition L 15 Age at death in life-cycle hypothesis M nx N 3–Appendix 11 Nominal money supply Response of net exports to a change in real income In Chapter 11, labor input and population In Chapter 12, population NX Real net exports P Price index or price deflator r Real interest rate R Real government tax revenue R s 15 Age at retirement in life-cycle hypothesis s 11 Average propensity to save; ratio of saving to income S Real private saving, including business firms and households t 3–Appendix Income tax rate t T Ratio of net government tax revenues to GDP u U 16 Real user cost of capital Actual unemployment rate v V 16 Capital-output ratio in accelerator theory of investment Marginal propensity to save (s = - c) Real government tax revenue net of transfers (T = R - F) Velocity of money (V = PY/M) W X xN 9–Appendix Nominal wage rate Y Real income, real output, real GDP YN z 9–Appendix 9–Appendix Log of ratio of actual to natural real GDP expressed as a percent The contribution of supply shocks to the inflation rate Nominal GDP (X = PY) Excess nominal GDP growth (xN = x - yN) Frequently used superscripts d Demand, as in demand for real balances (M/P)d e Expected, as in expected rate of inflation (pe) f Foreign, as in foreign interest rate (rf) N Natural, as in natural rate of unemployment (UN) or natural real GDP (YN) s Supply, as in the nominal money supply (Ms) Frequently used subscripts Initial situation prior to a change New situation after a change a Autonomous, as in autonomous consumption (Ca) p Planned, as in planned expenditures (Ep) u Unplanned, as in unintended inventory investment (Iu) ... Congress Cataloging-in-Publication Data Gordon, Robert J (Robert James), Macroeconomics/ Robert Gordon. —12th ed p cm Includes index ISBN 978-0-13-801491-9 (student) Macroeconomics I Title HB172.5 G67... Palatino Cover image: © Collier Campbell Lifeworks/CORBIS Photo credits: page v photo of Robert J Gordon by Julie P Gordon; Chapter 2, page 27: U.S Department of Commerce; Chapter 5, page 135: Everett... Theory and Practice Weil Economic Growth Williamson Macroeconomics Log onto www.myeconlab.com to learn more Macroeconomics Twelfth Edition Robert J Gordon Stanley G Harris Professor in the Social