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R GLENN HUBBARD ANTHONY PATRICK O’BRIEN Essentials of Economics SIXTH EDITION This page intentionally left blank 561590_MILL_MICRO_FM_ppi-xxvi.indd 24/11/14 5:26 PM Practice, Engage, and Assess • Enhanced eText—The Pearson eText gives students access to their textbook anytime, anywhere In addition to notetaking, highlighting, and bookmarking, the Pearson eText offers interactive and sharing features Students actively read and learn, through embedded and auto-graded practice, real-time data-graphs, animations, author videos, and more Instructors can share comments or highlights, and students can add their own, for a tight community of learners in any class • Practice—Algorithmically generated homework and study plan exercises with instant feedback ensure varied and productive practice, helping students improve their understanding and prepare for quizzes and tests Draw-graph exercises encourage students to practice the language of economics • Learning Resources—Personalized learning aids 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easy-to-assign, auto-graded, and available in Single and Multiplayer versions, Experiments in MyEconLab make learning fun and engaging • Reporting Dashboard—View, analyze, and report learning outcomes clearly and easily Available via the Gradebook and fully mobile-ready, the Reporting Dashboard presents student performance data at the class, section, and program levels in an accessible, visual manner • LMS Integration—Link from any LMS platform to access assignments, rosters, and resources, and synchronize MyLab grades with your LMS gradebook For students, new direct, single sign-on provides access to all the personalized learning MyLab resources that make studying more efficient and effective • Mobile Ready—Students and instructors can access multimedia resources and complete assessments right at their fingertips, on any mobile device CVR_HUB5840_06_SE_FEP.indd 12/9/15 10:23 AM This page intentionally left blank 561590_MILL_MICRO_FM_ppi-xxvi.indd 24/11/14 5:26 PM Essentials of Economics Fifth Edition R Glenn Hubbard Columbia University Anthony Patrick O’Brien Lehigh University Boston Columbus Indianapolis New York San Francisco Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo A01_HUB6922_06_SE_FM.indd 18/02/16 10:10 AM Vice President, Business Publishing: Donna Battista Executive Editor: David Alexander Executive Development Editor: Lena Buonanno Editorial Assistant: Michelle Zeng Vice President, Product Marketing: Maggie Moylan Director of Marketing, Digital Services and Products: Jeanette Koskinas Product Marketing Managers: Tricia Murphy, Kaitlyn Banasynski Field Marketing Manager: Ramona Elmer Product Marketing Assistant: Jessica Quazza Team Lead, Program Management: Ashley Santora Program Manager: Lindsey Sloan Team Lead, Project Management: Jeff Holcomb Project Manager: Carla Thompson Operations Specialist: Carol Melville Creative Director: Blair Brown 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within the software version specified Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A and other countries This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation FRED ® is a registered trademark and the FRED ® Logo and ST LOUIS FED are trademarks of the Federal Reserve Bank of St Louis http://research stlouisfed.org/fred2/ Copyright © 2017 by Pearson Education, Inc or its affiliates All Rights Reserved Manufactured in the United States of America This publication is protected by copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned com/permissions/ Acknowledgments of third-party content appear in the appropriate section within the text PEARSON, ALWAYS LEARNING, and MYECONLAB® are exclusive trademarks owned by Pearson Education, Inc or its affiliates in the U.S and/or other countries Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, icons, or other trade dress are for demonstrative or descriptive purposes only Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees, or distributors Library of Congress Cataloging-in-Publication Data Names: Hubbard, R Glenn, author | O’Brien, Anthony Patrick, author Title: Essentials of economics / R Glenn Hubbard, Columbia University, Anthony Patrick O’Brien, Lehigh University Description: Fifth Edition | Boston : Pearson, 2016 | Revised edition of the authors’ Essentials of economics, 2015 | Includes bibliographical references and index Identifiers: LCCN 2016005444| ISBN 9780134106922 | ISBN 013410692X Subjects: LCSH: Economics Classification: LCC HB171 H83 2016 | DDC 330—dc23 LC record available at http://lccn.loc.gov/2016005444 10 9 8 7 6 5 4 3 2 1 A01_HUB6922_06_SE_FM.indd ISBN 10: 0-13-410692-X ISBN 13: 978-0-13-410692-2 3/8/16 5:56 PM For Constance, Raph, and Will —R Glenn Hubbard For Cindy, Matthew, Andrew, and Daniel —Anthony Patrick O’Brien A01_HUB6922_06_SE_FM.indd 18/02/16 10:10 AM This page intentionally left blank 561590_MILL_MICRO_FM_ppi-xxvi.indd 24/11/14 5:26 PM About the Authors Glenn Hubbard, policymaker, professor, and researcher R Glenn Hubbard is the dean and Russell L Carson Professor of Finance and Economics in the Graduate School of Business at Columbia University and professor of economics in Columbia’s Faculty of Arts and Sciences He is also a research associate of the National Bureau of Economic Research and a director of Automatic Data Processing, Black Rock Closed-End Funds, and MetLife He received his Ph.D in economics from Harvard University in 1983 From 2001 to 2003, he served as chairman of the White House Council of Economic Advisers and chairman of the OECD Economic Policy Committee, and from 1991 to 1993, he was deputy assistant secretary of the U.S Treasury Department He currently serves as co-chair of the nonpartisan Committee on Capital Markets Regulation Hubbard’s fields of specialization are public economics, financial markets and institutions, corporate finance, macroeconomics, industrial organization, and public policy He is the author of more than 100 articles in leading journals, including American Economic Review, Brookings Papers on Economic Activity, Journal of Finance, Journal of Financial Economics, Journal of Money, Credit, and Banking, Journal of Political Economy, Journal of Public Economics, Quarterly Journal of Economics, RAND Journal of Economics, and Review of Economics and Statistics His research has been supported by grants from the National Science Foundation, the National Bureau of Economic Research, and numerous private foundations Tony O’Brien, award-winning professor and researcher Anthony Patrick O’Brien is a professor of economics at Lehigh University He received his Ph.D from the University of California, Berkeley, in 1987 He has taught principles of economics for more than 20 years, in both large sections and small honors classes He received the Lehigh University Award for Distinguished Teaching He was formerly the director of the Diamond Center for Economic Education and was named a Dana Foundation Faculty Fellow and Lehigh Class of 1961 Professor of Economics He has been a visiting professor at the University of California, Santa Barbara, and the Graduate School of Industrial Administration at Carnegie Mellon University O’Brien’s research has dealt with issues such as the evolution of the U.S automobile industry, the sources of U.S economic competitiveness, the development of U.S trade policy, the causes of the Great Depression, and the causes of black–white income differences His research has been published in leading journals, including American Economic Review, Quarterly Journal of Economics, Journal of Money, Credit, and Banking, Industrial Relations, Journal of Economic History, and Explorations in Economic History His research has been supported by grants from government agencies and private foundations v A01_HUB6922_06_SE_FM.indd 18/02/16 10:10 AM www.downloadslide.net I-6 Subject Index Europe budget deficit, 657 carbon dioxide emissions, 135 underground economy, 405 European Central Bank, inflation targeting, 600 European Central Bank (ECB), 558, 698 European Union (EU), 135, 657, 662 common currency, 697 Evans-Pritchard, Ambrose, 571 excess capacity, 369 excess reserves, 546 exchange rate, net exports and, 500 exchange-traded funds (ETFs), 193 exchanges, 193 excludability, 165 exit decision, 307–309 expansion, 396, 478 expansionary fiscal policy, 625–626 interest rates and, 636 expansionary monetary policy, 586, 588–589, 593, 627–628 expectations See also rational expectations adjustment to errors in past, 509 aggregate demand curve shifts, 499, 509 expected future price, 79–80 demand curve shift, 83–84 experimental economics, 212, 225 explicit costs, 198, 262 implicit costs vs., 262–263 exports, 662 circular-flow diagram, 399 exchange rate movements, 686–687 net, 401 external economies, 670 comparative advantage, 670 financial firms in New York, 670 external funds, 190 externalities, 110 of car driving, 132–133 causes, 128 economic efficiency, 125–128 government policies, 129–136 health care market, 163–164 market failure, 128 negative in production, 126–127 positive in consumption, 127–128 face value, 191 factor markets, 54 factors of production, 18, 42, 54 circular-flow diagram, 399–400 market system, 42 fairness business implications, 227–228 Super Bowl tickets, 227 ultimatum game experiment, 225–226 family doctors, 13–14 Fannie Mae See Federal National Mortgage Association farm program, 118–119 farm subsidies See farming, price support program Z03_HUB6922_05_SE_SIDX.indd farming competition, 289–293 price support program, 118–119 Farnsworth, Philo, 60 fast-track authority, 678 Faure, David, 204 FBI See Federal Bureau of Investigation FDA See Food and Drug Administration FDI See foreign direct investment FDIC See Federal Deposit Insurance Corporation Federal Bureau of Investigation (FBI), 5, 22, 621, 622, 624 Federal Deposit Insurance Corporation (FDIC), 555 federal funds market, 583 federal funds rate, 575, 582, 583– 584, 610 quantitative easing, 586–588 Taylor rule, 598–599 federal government debt, 647, 648 balancing budget, pros and cons, 646–647 Federal Home Loan Mortgage Corporation (“Freddie Mac”), 200, 605 Federal Housing Finance Agency, 607 Federal National Mortgage Association (“Fannie Mae”), 200, 605 Federal Open Market Committee (FOMC), 556, 557, 580 control over monetary policy, 633 federal funds rate, focus on, 611 statements, 595 timing, 595 timing fiscal policy, 633–634 transcripts of meetings, 616 Federal Reserve, 540 See also monetary policy bank panic, role in, 554 financial crisis of 2008, 607–608 forecasts, monetary policy, 589–590 inflation policy, 614 limitations on setting policy, 612 money reserve requirements, 558 shifting aggregate demand curve, 499 supply management of, 556–557 negative interest rates, 575 response to failure of Lehman Brothers, 607–608 “shadow banking system” and financial crisis of 2007–2009, 558–560 Federal Reserve Act, 555, 570, 576 Federal Reserve Note, 540 Federal Trade Commission (FTC), 341, 354 merger regulations, 344–346 monopoly, 341 Federal Trade Commission Act, 341 fee-for-service, 155 Feldman, Reva, 138 Feldstein, Martin, 658 fiat money, 540 final good or service, 397 financial capital, 18, 190 financial crisis, 2007–2009, 200–202, 519–520 principal–agent problem, 201–202 financial intermediaries, 469 financial markets, 190, 469, 559 stability, as Federal Reserve goal, 576 financial security, 190, 469 Financial Stability Oversight Council, 201 financial statements, 199–200 balance sheet, 199 income statement, 198–199 usefulness of, 197–199 financial system, 56, 190, 400, 460, 468, 485–486 macroeconomics of saving and investment, 470–471 market for loanable funds, 471–477 overview of, 468–470 role of banks, 537 Finklestein, Eric, 148 firms, 17–18, 186, 190 in circular-flow diagram, 55–56 corporations, 186, 187 structure and governance, 189–190, 199–203 expectations, shifts in aggregate demand curve, 499 financial information balance sheet, 199 income statements, 198–199 investment decisions, 197–199 funds, 190–199 external sources, 190–193 stock and bond markets, 193 limited and unlimited liability, 186–187 number in the market, 85 small businesses, 188–189 fiscal policy, 499, 620 aggregate demand, 625–627 automatic stabilizers vs discretionary fiscal policy, 620 contractionary, 628 and expansionary, 625–626 countercyclical, 627 deficits, surpluses, and federal government debt balancing budget, pros and cons, 646–647 budget as automatic stabilizer, 644 described, 643–644 federal government debt, 647 problem of debt, 647 defined, 620 expansionary, and contractionary, 625–626 government purchases and tax multipliers aggregate supply, effects of, 631–632 changes in tax rates, effects of, 631 decreases, 632 described, 629–633 government spending and jobs, 619 and taxes, 621–623 Great Depression, 645–646 limits to economic stabilization described, 633–634 long-run crowding out, 637 long-run effects described, 648–649 supply-side, size of, 650–651 of tax policy, 648–649 of tax reform, 649–650 of tax simplification, 649 monetary policy vs., 626 private spending, reduction in, 635 short-run crowding out, 635–637 stimulus package of 2009, 638–640 fiscal year, 198 Fishback, Price, 611 Fisher, Irving, 561–562 Fitzgerald, F Scott, 452 fixed costs, 261–262 in publishing, 262 fixed exchange rate system, 686 Fleck, Leonard, 24 Floud, Roderick, 153 Flynn, Patricia M., 23 Fogel, Robert, 153, 181–182, 462, 463 FOMC See Federal Open Market Committee Food and Drug Administration (FDA), 24, 67, 328, 351 food prices, 601–602 food stamp program, 622, 644 Football Bowl Subdivision, Ford, Gerald, 23 Ford, Henry, 59, 60, 188, 255, 277, 286, 385, 436, 450 Ford, Whitey, 103 foreign exchange market and exchange rates demand shifts, 685 described, 683 equilibrium, 684–685, 686 exports and imports, 686–687 net exports, 500 nominal exchange rate, 683 non-market exchange rates, 686 real exchange rate, 683 supply shifts, 685–686 foreign variables, aggregate demand curve, 500 formulas areas of rectangle and triangle, 36–37 percentage change, 35–36 steps for using, 37 fracking, 146, 286, 380 and oil prices, 92 fractional reserve banking system, 554 France economic growth and health, 462 exchange market, 686–687 27/02/16 10:24 AM www.downloadslide.net Subject Index health, link to economic prosperity, 462 trade as percent of world exports, 665 as percentage of GDP, 665 Freddie Mac See Federal Home Loan Mortgage Corporation free market, 56 free trade, 671–672 Freedom to Farm Act of 1996, 119 Freeman, Richard, 59 frictional unemployment, 432 Friedman, Milton, 314, 531, 563, 588, 597, 612, 614, 694 fringe benefits, 168–169 FTC See Federal Trade Commission Fuld, Richard, 616 full employment, 433 full-employment GDP, 505 Fuller, Ida May, 623 funds, external sources for firms, 190–193 future aggregate demand curve shifts, 499, 509 behavior, 232 expected future price, 79–80, 85 price level, shifts in short-run aggregate supply curve, 509 game theory, 374 duopoly, 374–375 firm behavior and prisoner’s dilemma, 376–379 Garthwaite, Craig L., 66, 391 gasoline market elasticity, 243–244, 251, 254 price elasticities, 235–236 Gates, Bill, 4, 24, 59, 81, 82, 188, 543 GATT See General Agreement on Tariffs and Trade GDP See gross domestic product GDP deflator, 408–409, 437 Geithner, Timothy, 560, 570, 607 General Agreement on Tariffs and Trade (GATT), 679 general incorporation laws, 186 The General Theory of Employment, Interest, and Money (Keynes), 531, 533, 645, 655 generally accepted accounting principles, 197 generic drugs, 329 Germany, 167 bond negative yield, 587, 612 euro, 567 exchange rates, 683 hyperinflation during 1920s, 564, 571 net exports and euro, 500–501 specialization, 668 trade as percent of world exports, 665 as percentage of GDP, 665 unemployment rates, 435 Giffen, Robert, 222 Giffen goods, 222 Gillette, King, 60 Z03_HUB6922_05_SE_SIDX.indd Glaeser, Edward, 651 Glass-Steagall Act, 201 global warming, 134–136 globalization, 679 arguments, 679–681 opposition to World Trade Organization, 679–681 unemployment and, 680 GNP See gross national product Goddard, Robert, 60 goods, 4, 18 decreasing importance, 485 price elasticity of demand, 241 share in consumer’s budget, 241 Gorilla glass, 459, 492 Gottschalk, Peter, 508 government budget deficit See also budget deficit government intervention, 56, 117 See also taxes aggregate demand curve, shifts in, 499 antitrust laws, 340–347 barrier to entry, 372–373 black markets, 122–123 externalities, 129–136 federal budget, 471 free trade, 671–672 health care system, 165–166 peer-to-peer sites, 122–123 price ceilings positive and normative analysis, 125 rent control policy in housing markets, 109, 121–122 winners, losers, and inefficiency, 124 price floors in agricultural markets, 118–119 in labor markets (minimum wage policy), 119–120 positive and normative analysis, 125 winners, losers, and inefficiency, 124 private property, legal protection of, 466 restrictions, international trade drawbacks of tariffs and quotas, 676–678 dumping, 682 free trade, 671–672 positive vs normative analysis, 682–683 protectionism, 680–681 quotas and voluntary export restraints, 673–674 sugar quota, economic effect of, 675–676 tariffs, 672–673 unemployment rate and, 434–436 government purchases, 401, 401, 402, 499 as automatic stabilizer, 644 multiplier formula, 629–631 government purchases multiplier, 631 government spending, 619 purchases and expenditures, 621–622 government-sponsored enterprises (GSEs), 605 grading systems, 22 Grand Teton National Park, 256 grants to state and local governments, 622 graphing, 27 cost curves, 272–273 linear vs nonlinear, 34 one variable, 28–29 production, 266–267 production possibilities frontier, 42–45 slopes of lines, 30 cause and effect, 32–34 more than two variables, 30–32 of nonlinear curves, 34 positive and negative relationships, 32 two variables, 29–34 cause and effect, 32–34 linear vs nonlinear, 34 more than two variables, 30–32 Great Britain See also United Kingdom (U.K.) standard of living in 1700s, 152 Great Depression, 11, 118, 200, 428, 478, 486, 503, 512, 521, 529, 531, 555, 576, 621, 634, 646–647, 679 deflation, 446–447 financial system and, 486 fiscal policy, 645–646 severity of, 644 Great Moderation, 484–485, 492 Great Recession, 478, 484 See also recession; recession of 2007–2009 banking and, 421 severity, 485 Greece, 537, 554, 566 bank runs, 554–555 budget deficit, 646 role of banks, 537 greenhouse gases, 134–136 Greenspan, Alan, 595, 599, 611 M1 and M2 goals, dropping, 582 Greenstein, Shane, 112–113 Griffin, Robert, III, 253 Grimm, Bruce T., 591 gross domestic income, 412 gross domestic product (GDP), 35–36, 397, 663, 664 components government consumption and gross investment, 401 gross private domestic investment, 400–401 net exports of goods and services, 401 personal consumption expenditures, 400 equation, 401–402 measuring total production, 397–398 I-7 Nigeria, 410–411, 417 per capita, 405–406 production, income, and circular flow diagram, 398–400 real vs nominal calculating real, 407–408 comparing, 407–409 GDP deflator, 408–409 shortcomings crime and other social problems, 406 household production, 404 income distribution, 406 leisure, value of, 406 pollution, 406 underground economy, 404–406 total production and total income measures other than, 411–413 disposable personal income, 412 division of income, 412–413 gross national product (GNP), 411 national income, 411 personal income, 412 value-added method, measuring by, 403–404 gross national product (GNP), 411 gross private domestic investment, 400–401 group plans, 155 group policies, 163 GSEs See government-sponsored enterprises guild system, 56 Guimaraes, Paulo, 508 Güth, Werner, 225 Hamermesh, Daniel, 252, 415 Hamilton, Alexander, 466 Harberger, Arnold, 339 Hathaway, Ian, 205 Hayes, David, 147 health prosperity, connection to, 462–463 U.S., improving, 152–154 health care, 152 adverse selection, 160–161 asymmetric information, 160–163 in Canada, 157 digital, 20–21 employment, 19 externalities, 163–164 free medical school, 16–17 government intervention, 165–166 in Japan, 157 jobs growth forecast, outcomes, comparing around world, 158–160 physician’s assistants, numbers of, 19 technological innovation, in United Kingdom, 157–158 U.S system, 154–156 policy debate, 173–175 rising costs, 166–167 27/02/16 10:24 AM www.downloadslide.net I-8 Subject Index health insurance, 154–155, 163 adverse selection, 160–161 obesity and, 5–7 regulation, 174 take-home pay affected by, 151, 177 health maintenance organizations (HMOs), 155 Health Resources and Services Administration (HRSA), 3, 13, 16 Heather, Peter, 566–567 Heckel, Thomas, 508 hedge funds, 559 Hendel, Igal, 234 hepatitis C medications, 67 Herfindahl-Hirschman Index (HHI), 345–346, 371 HHI See Herfindahl-Hirschman Index high school dropouts, unemployment among, 427 high school graduates, unemployment among, 427 Hispanic population, unemployment rates, 427 Hitler, Adolf, 564 HMOs See health maintenance organizations Hobijn, Bart, 507–508, 526–527 Hoch, Stephen, 233 Hoff, Ted, 60 Hogin, David, 138, 139 Hong Kong, government intervention, 56 Hoover, Herbert, 69, 657, 677 horizontal mergers, 343 Houghton, Armory, 459 household survey, Bureau of Labor Statistics (BLS), 422–424 households, 18 in circular-flow diagram, 55 expectations, shifts in aggregate demand curve, 499 production, 404 housework, 53–54, 69 housing market See also residential construction “bubble” inflation and deflation of, 519, 603–604 leveraged investments and, 606–607 subprime borrowers and, 547 decline in aggregate demand, 512–513, 516 falling prices, 446–447 financial crisis of 2007–2009, 560 monetary policy, 575 HRSA See Health Resources and Services Administration Hubbard, Glenn, 176, 191 Huckleberry Finn (Twain), 61, 329 Hufbauer, Gary Clyde, 315, 695 Hulbert, Mark, 207 human capital, 19 economic growth and, 465 hyperinflation, 563, 564 hypotheses, forming and testing, 13–14 Z03_HUB6922_05_SE_SIDX.indd Ilzetzki, Ethan, 641 Immigration and Naturalization Service, 622 implicit costs, 198, 262 explicit costs vs., 262–263 imports, 400, 401, 662 exchange rate movements, 686–687 income circular-flow diagram and, 55 market demand and, 76–77 money vs., 655 wealth vs., 543 income distribution exclusion from GDP, 406 inflation, 444 redistribution, 10 who receives goods and services, 10 income effect, 75, 219–220 income statement, 198 income tax See corporate income tax; individual income tax; taxes increasing-cost industries, 311–312 increasing marginal opportunity cost, 46–47 Independent Payment Advisory Board (IPAB), 174, 177 index numbers, 438 India economic growth and health, 462, 466–467, 489 health, link to economic prosperity, 462 interest rates, 614 oil demand, 380 oil prices, 520 political problems, 467 public education system, 466–467 specialization, 668 indirect finance, 190 individual income tax, policy changes, 648–649 individual mandate, 161, 173–174 Indonesia, factories, 680 inefficient production possibilities, 43 inelastic demand, 235 elastic demand and, 235 infant industries, protecting, 681 infant mortality, 153 inferior good, 77, 219 inferior technologies, 224 inflation consumer price index (CPI) accuracy of, 438–440 described, 437–438 costs on economy anticipated, 444–445 distribution of income, 444 unanticipated, 445 Federal Reserve measuring, 601–602 targeting, 600–601 measuring with CPI, 601–602 monetary policy, 594–595 price indexes, 440–442 producer price index (PPI), 440 usual cause, 518 inflation gap, 598 inflation rate, 396, 437 business cycle, 482–483 in U.S., 1952–2015, 577 inflation targeting, 600–601 informal sector See underground economy information, financial market, 469–470 infrastructure, 647 initial public offering (IPO), 206, 207 innovation, 18 input, 18 price, market supply curve and, 84 price of, 84 inputs, 260 inside directors, 189 Inside Out (movie), 432 Instagram, 693 intellectual property (IP), 403 protecting, 679 rights, 61–62 interest, 412 on the national debt, 622 interest-rate effect on investment, 498 interest rates, 191 aggregate demand and, 584 expansionary fiscal policy, 636 Federal Reserve, 597–598 movement, explaining, 473–475 negative, 575, 587–588 real vs nominal, 442–444 intermediate good or service, 397 Internal Revenue Service, 649 international trade See also trade comparative advantage, 665–667, 669–670, 670–671 consumption, increasing, 667–668 government restrictions drawbacks of tariffs and quotas, 676–678 dumping, 682 free trade, 671–672 positive vs normative analysis, 682–683 protectionism, 680–681 quotas and voluntary export restraint (VER), 673–674 sugar quota, economic effect of, 675–676 tariffs, 672–673 losses, 669 price level, effect on net exports, 498 time, comparative advantage over, 670–671 TPP, 661 U.S arguments, 679–681 importance to economy, 663 world context, 664 WTO, opposition to, 679–681 International Trade Commission, 678 international-trade effect, 498 Internet, cost of, 112–113 investment, 400 aggregate demand and, 584 economists’ definition of, 401 interest-rate effect, 498 movement, explaining, 473–475 research and development and, 402–403 investment banks, 605–606 invisible hand, 58–59 IP See intellectual property iPad, 57–59, 59, 224, 541 international market system, 57–59 iPhone, forecasting demand, 81–82 IPO See initial public offering iPod, 59 Iran, 380 Ireland, 167, 418 Irwin, Douglas A., 695 Italy, trade as percentage of GDP, 665 Japan, 167 budget deficits, 657 comparative advantage, 666–667 consumption, increasing, 667–668 deflation, 446 exchange rate demand shift, 685 equilibrium, 686 supply shift, 685–686 exchange rates, 683–688 factories, 680 foreign exchange, 683–688 health care system, 157, 158, 175 international trade comparative advantage example, 666–667 as percent of world exports, 665 as percentage of GDP, 665 labor force, aging, 508 as market or modern mixed economy, 11 paper shortage, 566 specialization, 668 Jeffries, Alec, 60 Jensen, Robert T., 222–223, 251 Jevons, William Stanley, 566 Jimenez, Joe, 20 job creation and destruction over time, 431 job search, 432 Jobs, Steve, 59, 60, 82, 188, 340 Johnson, Brian, 64 Johnson, Lyndon, 422 Johnson, Ron, 211, 233–234, 254 Kahn, Lisa B., 395 Kahneman, Daniel, 226–229, 231, 233, 234 Kaiser Family Foundation and Health Research and Educational Trust, 151 Kalanick, Travis, 124, 228 Kennedy, John F., 633–634 Kent, Robert, 233 Kenya, 692 Kessler, Daniel, 176 key input, ownership of, 372 Keynes, John Maynard, 531, 532, 533, 640, 645, 655 Keynesian revolution, 531 Kilby, Jack, 60 27/02/16 10:24 AM www.downloadslide.net Subject Index Kim, Arnold, 231 King, Leo, 20 Klinger, Leslie S., 61–62, 71 Knetsch, Jack, 226–229 Kocher, Robert, 16 Korda, Michael, 387 Kramarz, Francis, 452 Krueger, Alan, 120, 228 Kuwait, 380 Kydland, Finn, 532 La Monte, Lou, 138 labor, 18 See also workers average product of, 267 comparative advantage, 670 as factor of production, 54 globalization and wages for, 680 marginal product of, 265 labor force, 422, 508 labor force participation rate, 424 trends, 426–427 labor market, price floor, 119–120 labor productivity, 464 determining, 465 labor theory of value, 533 labor unions, unemployment, 436 Lady Gaga, 402–403 Landsburg, Steven, 473, 491, 696 laptops, 321 law of demand, 75, 212, 220 change in demand vs change in quantity demanded, 81 holding everything else constant (ceteris paribus), 75 income effect, 75 substitution effect, 75 variables influencing market demand, 76–80 law of diminishing marginal utility, 213 law of diminishing returns, 265–266 law of supply, 83 change in supply vs change in quantity supplied, 86 holding everything else constant (ceteris paribus), 83 variables influencing market supply, 83 layoffs, 421, 433–434 Le Bihan, Hervé, 508 Leamer, Edward, 512, 528 Ledley, Robert, 60 legal issues contracts and property rights, enforcement of, 62, 466 market environment, 60–62 private property, protection of, 60–62 legal tender, 540 Leibenstein, Harvey, 353 Leibowitz, Stan, 224–225 leisure, value of, 406 Lemieux, Thomas, 452 lender of last resort, 554 Lenin, Vladimir, 10, 534 Leslie S Kling v Conan Doyle Estate, Ltd., 62, 71 Z03_HUB6922_05_SE_SIDX.indd leveraged investments, 560, 606–607 Lewis, Michael, 70, 148, 312–314 liability, 198 assets vs., 551 limited and unlimited, 186–187 life expectancy, 152–154, 159, 461, 462–463 limited liability, 186 Lincoln, Abraham, 88–89 Lindquist, Everett Franklin, 60 linear demand curve, 244–245 linear vs nonlinear graphs, 34 liquidity, 469, 539, 577 trap, 587 List, John, 226–227 Litan, Robert E., 205 loanable funds market, 471–477 summary of model, 477 lobbyists, 372–373 Lockheed, Malcolm, 60 logrolling, 677–678 long run, 261 long-run aggregate supply (LRAS) curve, 505, 650 long-run average cost curve, 274, 309 long-run competitive equilibrium, 309 long-run cost, 274–278 long-run economic growth, 460–461, 461 calculating and rule of 70, 463–464 health, connection to prosperity, 462–463 potential real GDP, 467–468 rates determinants increases in capital per hour worked, 464–465 India example, 466–467 private property rights, 466 technological change, 465 long-run supply curve, 310 perfectly competitive market, 309–310 long-term real rate of interest, 581–582 loss, deadweight, 116–117 Lowry, Sean, 315, 695 Lucas, Robert, new classical model, 532 Luck, Andrew, 69 Luey, Beth, 262 luxury goods, price elasticity, 241 Lynch, Kevin, 98 Lynch, William, 286 M1 money supply, 542–543, 544, 545, 597 M2 money supply, 543, 544 Macaulay, Thomas, 71 macroeconomic equilibrium long and short run, 510–517 long and short run expansion, 513–514 long and short run recession, 511–513 long and short run supply shock, 514–515 long-run, 511–512 macroeconomics, 17, 396 Austrian model, 532–533 Keynesian revolution, 531 Marxism, 533–534 monetarist model, 531 new classical model, 532 real business cycle model, 532 Magie, Elizabeth, 329 magnetic resonance imaging (MRI), 175–176 Malaysia, 58 factories, 680 malpractice costs, 169 managers, corporate and investors’ interests, 199 Mantle, Mickey, 103 manufacturing sector, 663–664 maps, 27–28 marginal analysis, marginal benefit (MB), 7, 111, 152 equals marginal cost in competitive equilibrium, 115–116 marginal cost (MC), 7, 113, 269– 272, 294, 361–362 equals marginal benefit in competitive equilibrium, 115–116 negative externality, 126–127 marginal opportunity costs, increasing, 46–47 marginal product of labor, 265 average product and, 267–268 marginal revenue (MR), 294, 359 marginal tax rate, 648, 649 marginal utility (MU), 213 equal per dollar spent, 213–215 marginal values, 268–269 Margolis, David N., 452 Margolis, Stephen, 224–225 market, 4, 54 market-based reforms, health care, 175–177 market basket, 437 market definition, 345 market demand, 74 deriving the market demand curve, 222 market economy, 10 market equilibrium, 86 demand and supply interaction, 86–89 eliminating surpluses and shortages, 87–88 interaction, importance of, 88 market failure, 128, 224–225 market for loanable funds, 460, 471–472 market power, 339 technological change and, 340 market share, 28 market supply curve, 83 perfectly competitive industry, 305 market system circular flow of income (households and firms), 55 command-and-control approach vs., 133–134 economic incentives, entrepreneur role of, 59 I-9 factor markets, 54 factors of production, 54 gains from free markets, 56 iPad example, 57–59 legal basis contracts and property rights, enforcement of, 62 private property, protection of, 60–62 market structures summarized, 290 mechanism, 56–57 product markets, 54 Marshall, Alfred, 222 Martin, William McChesney, 612 Marx, Karl, 533–534 massive open online courses (MOOCs), 259, 284, 347–348 maturities, 191, 557 McCraw, Thomas K., 389 McDevitt, Ryan, 112–113 McDonald, Daniel J., 616 measure of concentration, 345 Medicaid, 6, 67, 151, 152, 155, 167, 170, 171, 174, 192, 644 medical school, 16–17 medical technology, 170 Medicare, 131, 151, 152, 155, 157, 167, 170–171, 174, 177, 181, 192, 622–624, 639 reimbursements, 174 as single-payer system, 175 medium of exchange, 539 Mendoza, Enrique G., 641 Menger, Carl, 532 menu costs, 445, 508 mergers, 343–346 horizontal, 343 standards, 345–346 vertical, 343 Mexico specialization, 668 trade, 662 microeconomics, 17, 396 midpoint formula, 236 military, 424–425 Mill, John Stuart, 533 millennials generation, 79 Miller, Johnny Lee, 61 Miller, Nolan H., 222–223, 251 Milwaukee Bucks, 253 minimum efficient scale, 275 minimum wage, 11, 144 minimum wage, effect on employment, 14–15, 119–120, 429, 435–436 Minions (movie), 432 misery index, 422 Misra, Kanishka, 656 mixed economy, 11 Modi, Narendra, 467 Monacelli, Tommaso, 641 monetarism, 531, 597 monetarist model, 531 monetary aggregate, 541 monetary growth rule, 531, 597 A Monetary History of the United States: 1867–1960 (Friedman and Schwartz), 531 27/02/16 10:24 AM www.downloadslide.net I-10 Subject Index monetary policy, 499, 556, 576 contractionary, 591–592, 594–595 dynamic aggregate demand and aggregate supply model, 592–597 economic activity forecasts, Federal Reserve, 589–590 inflation, fighting, 576 interest rates and aggregate demand, 584 real GDP and price level, effects on, 585–586 recessions, Federal Reserve and, 588–589 effects (hypothetical), 595–596 expansionary, 588–589, 591–592, 593 Federal Reserve system financial crisis of 2007–2009, 558–560 money supply, management of, 556–557 fiscal policy vs., 626 foundation of, 538 goals economic growth, 577–578 high employment, 576–577 price stability, 576 stability of financial markets and institutions, 576 housing market, effect on, 575 money market and Federal Reserve choices demand for money, 578–579 equilibrium, 580–581 federal funds rate, importance of, 583–584 inflation targeting, 594–595 interest rates, 581–582 real GDP and price level, 593–594 “real-time data,” 590–591 shifts in money demand curve, 579–580 summary, 591–592 target, choosing, 578, 582, 590– 591, 597–602, 600–601 quantitative easing, 586–588 quantity theory of described, 561–564 Germany, hyperinflation in, 564 high rates of inflation, 563–564 inflation, 561–562 money and price (quantity equation), 561 targets, 578 money, 538 acceptance, 540 banks balance sheets, 546, 548 real-world deposit multiplier, 553–554 multiplier, 550–554 T-accounts, 548–550, 551–553 barter, 538 Federal Reserve system, establishment, 554–556 functions, 539 Z03_HUB6922_05_SE_SIDX.indd 10 deferred payment, standard of, 539–540 medium of exchange, 539 store of value, 539 unit of account, 539 income or wealth vs., 543 measurements in U.S credit cards and debit cards, 544 defined, 542–543 M1, 542–543, 544 M2, 543, 544 money market, 578 equilibrium in, 580–581 mutual funds, 543, 559 money supply process, 546 monetary policy and interest rates, 592 monopolistic competition, 290, 358 consumer benefits, 369 demand curve, 358 differentiation, 369 excess capacity, 369 inefficiency, 369 long-run profits, 364–368 marginal revenue, 358–360 perfectly competitive market vs., 368–370 short-run profit maximization, 361–363 monopoly, 290, 326–328 antitrust laws, 340–341 barriers to entry, 328–333 government, 328–330 key resources, control of, 330 natural monopoly, 332–333 network externalities, 331–332 equilibrium, 337 government policy towards, 340–347 measuring the efficiency losses from, 338–339 perfect competition vs., 337–338 profit maximization, 335–337 Montornès, Jérémi, 508 moral hazard, 162 adverse selection vs., 163 financial crisis, 608 health insurance market, 162–163 Morgan, J P., 341 Morgenstern, Oskar, 374 mortality rate, 153, 158 mortgage-backed bonds, 192 mortgage-backed securities, 200, 559, 587, 605 mortgage industry, financial meltdown and, 560 mortgage loans, 445, 559 mortgages, 605 MRI See magnetic resonance imaging multilateral negotiations, 679 multiplier effect, 629 See also tax multipliers fiscal policy, 632–633, 641 Murphy, Kevin, 223 Musk, Elon, 23, 41, 64 mutual funds, 192–193, 469 Warren Buffet on, 196–197 NAFTA See North American Free Trade Agreement Nakamoto, Satoshi, 544 NASDAQ See National Association of Securities Dealers Automated Quotation NASDAQ Composite Index, 194 Nash, John, 376 Nash equilibrium, 376 National Association of Securities Dealers Automated Quotation (NASDAQ), 193–195 National Bureau of Economic Research (NBER), 478–479, 492 National Collegiate Athletic Association (NCAA), 326–328 national debt, 647 National Health Insurance, 157, 173 National Health Service (NHS), 157–158, 179 national income, 411 national income accounting, 411, 470 National Income and Product Accounts (NIPA), 411 National Institutes of Health, 81 National Park Service, 146, 256, 622 national security, 681 natural monopoly, 328, 332–333 regulating, 346–347 natural rate of unemployment, 433 natural resources, 18 aggregate supply curve shift, 509 comparative advantage, 669 as factor of production, 54 NBER See National Bureau of Economic Research necessities, price elasticity, 241 negative equity, 607 negative externality, 126, 129, 163 negative interest rates, 575, 587–588 neo-quantity theory of money model, 531 net benefit, 117 net exports, 401 aggregate demand and, 498, 585 price level, 498 net income, 198 net nutritional status, 153 net worth, 199, 546 The Netherlands, 657 obesity in, 131 trade as percent of world exports, 665 as percentage of GDP, 665 network externality, 224–225, 328, 331–332 Nevo, Aviv, 234 new classical macroeconomics, 532 new classical model, 532 new Keynesians, 531 new product bias, 439 New York City financial firms, 670 map of, 27 rent control, 109, 121–122 New Zealand, 321 NHS See National Health Insurance; National Health Service Ni, Timothy, 507–508, 526–527 Nigeria, 380–382 GDP, 410–411, 417 NIPA See National Income and Product Accounts nominal assets, 497 nominal exchange rate, 683 nominal gross domestic product (GDP), 407 See also gross domestic product comparing to real GDP, 408 nominal interest rate, 442–444, 472–473, 587 nominal variable, 440 nominal wage, 441 nonbank financial firms, 559 noncooperative equilibrium, 376 nondurable goods, 400, 481 nonlinear curves, slope of, 34 nonlinear relationship, 34 normal good, 76, 219 health care, 158 normal rate of return, 198 normative analysis, 14 international trade, 679–683 positive analysis, confusing with, 15 price ceilings, 125 North American Free Trade Agreement (NAFTA), 662 North Korea, 11, 56, 534 Norway, 158, 167 Obama, Barack, 17, 22–23, 135, 147, 149, 151, 166, 173, 311, 313, 422, 449, 528, 530, 560, 619, 634, 637, 638, 639, 641, 642, 643, 645, 653, 656, 661, 664, 690, 691, 693 obesity, health insurance and, 5–7 O’Brien, Anthony, 191 occupational licensing, 373 O’Connor, Sandra Day, 23 O’Donoghue, Ted, 253–254 OECD See Organization for Economic Cooperation and Development Office of the United States Trade Representative, 661 oil prices, 101, 102, 251 See also Organization of Petroleum Exporting Countries fracking, 92 high and U.S productivity slowdown of 1974–1975, 521–522 India and China, 520 recession and, 520 supply and demand, 101, 102 Okun, Arthur, 422 oligopoly, 290, 358 barriers to entry, 371–374 cartels, 380–382 economies of scale, 371–372 game theory, duopoly, 374–375 government-imposed barriers, 372–373 ownership of key inputs, 372 27/02/16 10:24 AM www.downloadslide.net Subject Index music streaming, 371–372 price collusion, 379–380 Oliver, Joe, 417 Oliver Twist (Dickens), 61 omitted variable, 33 online businesses, cost concepts, 259, 278 online peer-to-peer lending, 546–547 OPEC See Organization of Petroleum Exporting Countries open economy, 470 open market operations, 557–558 open market purchase, 557 open market sale, 558 operating at a loss, 300–301 opportunity cost, 8, 9, 43, 198, 219, 229, 262, 435, 665 and comparative advantage, 53–54 example, 50–51 goods and services produced, 10 money, holding, 579 nonmonetary, 229–230 optimal decisions at margin, 7–8, 215 Organization for Economic Cooperation and Development (OECD), 158–159, 416 Organization of Petroleum Exporting Countries (OPEC), 380–382, 521–522, 602 origin, 28 Oster, Emily, 69 Oster, Sharon, 309 Otellini, Paul, 480 out-of-pocket spending (health care), 155–156, 166, 167 outlet bias, 439 output, profit maximization in perfectly competitive market, 294–296 output effect, 359 output gap, 598 outside directors, 189 over-the-counter market, 193 Owen, David, 138 ownership of a key input, 372 Pace, Noemi, 6–7 Page, Larry, 340 Pakistan, factories, 680 Parker, Jonathan, 638 Parry, Ian W H., 132–133 partnerships, 186–187 patents, 61, 328–329, 373 path dependent, 224 Patient Protection and Affordable Care Act (PPACA), 17, 151, 161, 166, 173–177 See also Affordable Care Act (ACA) Patrick, Deval, 149 Patterson, James, 246 Paulson, Henry, 607 payoff matrix, 375 payoffs, 374 payroll, establishment survey, 429–430 payroll tax, 622 PCE See personal consumption expenditures price index Z03_HUB6922_05_SE_SIDX.indd 11 peer-to-peer sites, 122–123 People’s Bank of China, 570 Peppers, Larry, 645–646 percentage change, formulas, 35–36 perfectly competitive market, 74, 291 allocative efficiency, 314 demand curve, 292–293 long-run supply curve, 309–310 market supply curve, 305 maximizing profits, 294–296 monopolistic competition vs., 368–370 poultry farming example, 289–290 price takers, 291 productive efficiency, 312–314 perfectly elastic demand, 239 perfectly inelastic demand, 239 permanent income, 638 Perotti, Roberto, 641 personal consumption expenditures price index (PCE), 602, 615 personal income, 412 personal loans, subprime, 547 Peru, 405 Petty, Tom, 252 pharmaceutical firms, patent protection and, 328–329 physical capital, 18, 465 physicians See doctors Pickens, T Boone, 286 pie chart, 28 Pigou, A C., 129, 133 Pigovian taxes and subsidies, 133, 136, 147 plastic recycling, 92–93 pollution exclusion from GDP, 406 tradable emissions allowances, 134 Poole, William, 610, 615 population, demand shift, 79 Porter, Michael, 389 Portugal, Pedro, 508 positive analysis, 14 international trade, 682–683 normative analysis, confusing with, 15 price ceilings, 125 positive externality, 110, 126, 163 Posner, Richard, 61 potential GDP, 467 actual and, 467–468, 505 poultry farming, perfect competition in, 289–290 Powell, Ken, 388 PPF See production possibilities frontier PPI See producer price index preexisting conditions, 163 premiums, 155 Prescott, Edward, 532, 651 prescription drugs, 177 price contracts, 506 of inputs, 84 market mechanism, 57 perfectly competitive market, 291 shifts and demand/supply curves, 96 stability and Federal Reserve, 576 price ceilings, 110 positive and normative analysis, 125 rent control policy in housing markets, 109, 121–122, 124 winners, losers, and inefficiency, 124 price collusion, 379–380 price effect, 359 price elasticity of demand, 212, 234 availability of close substitutes, 241 calculating, 237–238 definition of the market, 241 determinants, 241 e-books, 246–247 luxuries vs necessities, 241 measuring, 234–235 midpoint formula, 236–237 passage of time, 241 percentage changes, 235 perfectly elastic and perfectly inelastic, 239 polar cases, 239 share of good in consumer’s budget, 242 summary table, 240 table of estimated, 242 total revenue and, 243–247 price floor, 110 farm program, 118–119 in labor markets (minimum wage policy), 119–120 positive and normative analysis, 125 winners, losers, and inefficiency, 124 price indexes See Consumer Price Index (CPI) price leadership, 379 price level, 408–409, 437 business cycle, 482–483 consumption, 497 inflation rate vs., 483 price maker, monopoly, 333 price taker, 291, 333 pricing strategy, surge pricing, 228–229 primary dealers, 607 primary market, 194, 559 prime borrowers, 547 principal, 191 principal–agent problem, 162, 189 corporations, 189–190 financial crisis, 2007–2009, 201–202 prisoner’s dilemma, 376 advertising, 378 escaping, 377–379 private benefit, 126, 164 private cost, 126 private firms, 193 private property, legal protection of, 60–61, 466 I-11 private savings, 470 private spending, reduction in, 635 process technologies, 670 procyclical policy, 589 producer price index (PPI), 437, 440 producer surplus, 113–115, 114, 339 measurement, 114 product markets, 54 product technologies, 670 production factors of, 18 circular flow diagram, 399–400 graphing, 266–267 gross domestic product (GDP), 397–400 shortcomings, 404–405 negative externalities, 129 production function, 263–264 cost and, 264–265 production possibilities frontier (PPF), 42 graphing, 42–45 productive efficiency, 12, 312, 369 perfectly competitive market, 312–314 productivity cost of health care, 169–170 technological change, 84 profit, 18, 187, 293 cost curve graph, 296–300 division of income, 412–413 maximizing in perfectly competitive market, 294–296 property rights, 60, 128 enforcement of, 62, 464 as externality, 128 protectionism, 680–681 public domain, 61, 329 public enterprise, 330 public firm, 193 public franchise, 330 public good, 165 public saving, 471 publishing industry, 262 purchasing power, 75, 408 deflation, 565 inflation and, 537, 539 QE See quantitative easing quality bias, 439 quantitative easing (QE), 586–588, 642 quantity demanded, 74, 81 quantity equation, 561 quantity supplied, 82, 86 quantity theory of money, 561 equation, 561 high rates of inflation, 563–564 inflation, 561–565 Quinn, Michael A., 23 quota, 373, 673 costs of, 676–678 QWERTY keyboards, 224 27/02/16 10:24 AM www.downloadslide.net I-12 Subject Index R&D See research and development Rabin, Matthew, 253–254 Ramey, Valerie A., 641 Ransom, Roger, 415–416 rational decisions, 211 consumers, 229 future behavior, 232 market mechanism, 57 nonmonetary opportunity costs, 229–230 shopping, 232–234 sunk costs, 230–231 ticket prices, 229, 247 rational expectations, 532 rational thought, Read, Leonard, 70 Reagan, Ronald, 23 real business cycle model, 532 real exchange rate, 683 real gross domestic product (GDP), 407 calculating, 407–408 using base-year prices, 407–408 comparing to nominal GDP, 408 fiscal policy, 625–627 in India, 466–467 monetary policy, 593–594 per capita, 461, 463 percentage change, 38 potential GDP, 467–468 using chain-weighted prices, 408 real interest rate, 442–444, 472–473 real variable, 440 real wages, calculating, 441–442 real-world deposit multiplier, 553–554 rebate checks, 637–638 Rebelo, Sergio, 641 recession, 396, 478 business expansion during, 479–480 buying house during, 575, 609 declaring, 478–479 expansionary monetary policy, 588–589 inflation targeting, 600–601 pay cuts, 495, 523 unemployment, 521 wages, 507 recession of 2007–2009 aggregate demand, 503–504 automobile sales, 395 durable goods, decrease in demand, 459 financial crisis, 519–520 housing market bubble and inflation and deflation, 519 housing market bubble and subprime borrowers, 547 impact on banking, 421 interest rates, 575 long term impact, 421 oil price increase, 520 potential GDP, length of time to return to, 515–516 severity, 421, 485, 634–635 surprise to most economists, 516 unemployment, 421, 428–429 Z03_HUB6922_05_SE_SIDX.indd 12 rectangle, area of, 36 Redburn, Tom, 696 Redlick, Charles J., 641 regulatory commissions, 346 Reichsbank, 564 Reinhart, Carmen M., 513, 634–635 Reitzes, Ben, 64 relative prices, 57 rent, 412–413 rent-control regulations, 109 black markets, 123 housing market, effect on, 121–122, 124 reparations, 564 repeated game, 377 required reserve ratio, 546 required reserves, 546 research and development (R&D) investment spending and, 402–403 spending, BEA on, 402–403 Reserve Primary Fund, 608 reserves, 546 Residency Review Committee (RRC), 25 residential investment, 401 residential mortgage loan, 519, 558–559 resources control of key, 330 economic, 8, 18 increasing marginal opportunity, 46–47 natural, unexpected changes in price, 509 restaurant industry, opening your own, 357 retained earnings, 190, 468 retaliation strategies, 377 revenue, 7, 18 average revenue (AR), 294 marginal revenue (MR), 294 perfectly competitive market, 294–295 reverse causality, 33–34 Ricardo, David, 311, 533, 691 risk, financial system, 469 risk pooling, 161 risk sharing, 469 Ritter, Jay, 207 rivalry, 165 Robinson-Patman Act, 341 Rockefeller, David, 23 Rockefeller, John D., 341 Rogoff, Kenneth, 513, 634–635 Roman Empire, 566–567 Romer, Christina D., 516, 528, 641 Romer, David H., 641 Roosevelt, Franklin D., 645 Roosevelt, Theodore, 326 Rowling, J.K., 246 Royal, Ségolène, 450 rule of 70, 463–464 rules of thumb, behavioral economics, 232–233 Russia, 69 resources, 330 Ruth, Babe, 103 Rutte, Mark, 657 S&P 500, 194, 195 Saban, Nick, Sacerdote, Bruce, 651 Salinger, J.D., 246 Sanders, Bernie, 313, 693 Sarbanes-Oxley Act of 2002, 200 Sargent, Thomas, 532, 564 Saudi Arabia, 380–382 savings and investment, 470–471 movement, explaining, 473–475 scarcity, 4, 42 shortage vs., 122 schedule, demand, 74–75 Schneider, Friedrich, 567 Schumpeter, Joseph, 340 Schwartz, Anna Jacobson, 531, 563 scientific method, 14 seafood restaurants, monopoly of, 325, 326 seasonal unemployment, 432 SEC See Securities and Exchange Commission secondary market, 194 banking securitization, 559 Securities and Exchange Commission (SEC), 197, 207 securities dealers, 193 securitization, 200, 559, 616 security, 559 Selten, Reinhard, 225 Sen, Amartya, 489 separation of ownership from control, 189 services, 4, 18, 400 business cycle, 485 70, rule of, 463–464 shadow banking system, 558–560, 577 shareholders, 189, 193, 199 sharing economy, 109, 138–139, 228–229 peer-to-peer lending firms, 546–547 Sharp, Isadore, 479–480 Sherlock Holmes series, 61–62, 71 Sherman Act, 340–341, 344 Shiller, Robert J., 641 shoes, 661, 663–664 employment, 678 tariffs, 677–678, 688, 690 shopping, behavioral economics, 232–234 short run, 261 market supply curve in perfectly competitive industry, 305 produce vs shut down, 302–305 supply curve, 303–304 short-run aggregate supply (SRAS) curve, 496, 505–508 shifts vs movements along, 508 variables shifting, 508–510 short-run production and short-run cost, 269–272 short-term nominal rate of interest, 582 shortage, 88 scarcity vs., 122 shutdown point, 304 Sichel, Daniel, 415 Sikorsky, Igor, 60 simple deposit multiplier, 550–554 sin taxes, 130 Singapore, government intervention, 56 single-payer health care system, 157, 165, 175 Skidelsky, Robert, 453 Slate, 325 slope, elasticity compared, 238 slope graphing, 30 cause and effect, 32–34 more than two variables, 30–32 positive and negative relationships, 33 Small, Kenneth A., 132–133 small businesses, importance to U.S economy, 188–189 smart medical devices, 20–21 smartphones, 3, 21, 73, 82 as substitutes for smartwatches, 77–78, 97 smartwatches, 73, 75, 76, 78, 105 complementary products, 98–99 shifts in demand, 90–92 as substitutes for smartphones, 77–78, 97 Smith, Adam, 56, 70, 103, 267, 282, 533 on “invisible hand,” 57, 70 Smith, Fred, 60 Smith, Vernon, 225 Smoot-Hawley Tariff (1930), 677–678, 679 Sobotta, David, 81–82 social benefit, 126, 164 social cost, 126 social influences consumer decision making celebrity endorsements, 223–224 fairness, 225–228 network externalities, 224–225 social insurance programs, 435 social media, advertising on, 186 social problems, 406 social science, economics as, 14, 15 Social Security, 11, 56, 131, 180, 192, 400, 452, 470, 485, 622–624 Social Security Disability Insurance, 427, 429 socialized medicine, 157 soda, effect of taxes on market for, 130–131 solar panel industry, 301–302, 320 sole proprietorship, 186–187, 648 Sood, Neeraj, 6, Sound Dollar Act, 599 South Africa, diamond production, 330–331 South Korea, 683 trade, as percent of world exports, 665 Soviet Union Marxism, 533–534 planned economy, 10–11 Spain, 167 interest rates, 575 27/02/16 10:24 AM www.downloadslide.net Subject Index specialization, 48–50, 265 speculators, 685 Spencer, Peter, 571 Spider-Man comics, 103 stagflation, 514 Stalin, Joseph, 534 Standard & Poor’s/Case-Shiller Home Price Index, 451 Standard & Poor’s Index, 524 standard of deferred payment, 539–540 standard of living, 460–461 Nigeria, 410–411 state and local governments, grants to, 622 state health insurance marketplaces, 174 Statistical Abstract of the United States, 281 Stigler, George, 316 stock(s), 192–193, 469 prices, predicting, 195–196 why many people are poor investors, 195–196 Stock, James H., 147 stock and bond markets, 193 price fluctuations, 194–195 stock market bubble, 603 indexes, 194 store of value, 539 money as, 539 strategies, 374 structural unemployment, 432–433 student attendance at college football games, subprime borrowers, 547, 569 subprime loans, 604 interest rates, 547 subprime personal loans, 547 subsidies, 119 externalities and, 130–131 substitutes, 77 prices in production, 84 substitutes in production, 84 substitution bias, 439 substitution effect, 75, 219–220 sugar import policy, 674–675 factors, 682–683 impact on jobs, 680 sulfur dioxide cap-and-trade system, 134 Summers, Lawrence, 67 Sundback, Gideon, 60 sunk costs, 230, 302 Super Bowl tickets, 228 Supplemental Nutrition Assistance Program, 622 supply change in supply vs change in quantity supplied, 86 expected future prices, 85 law of supply, 83 loanable funds market, 472 number of firms in the market, 85 price of inputs, 84 prices of substitutes in production, 84 Z03_HUB6922_05_SE_SIDX.indd 13 quantity supplied, 82 schedule, 83 shift, effect on market equilibrium, 90–92 tax effects, 650–651 technological change, 84 variables shifting, 83–85 supply curve, 83 short run, 303–304 supply schedule, 83 supply shock, 509, 514–515, 520 supply-side economics, 648 surge pricing, 228–229 Surico, Paolo, 656 surplus, 87 economic, 116, 118 eliminating, in market equilibrium, 87–88 Sutch, Richard, 415–416 Sweden, health care spending, 167 switching costs, 224 Switzerland, comparative advantage, 670 Sylla, Richard, 466 T-accounts, 548–550, 551–553 tablet computers, 81–82 Tacitus, 567 TANF See Temporary Assistance for Needy Families Tanzania, 692–693 tariff, 373, 662, 672–673 costs of, 676–678 elimination, 678 running shoes, 661 shoes, 688, 690 shoes made in USA, 677–678 TPP and, 662 TARP See Troubled Asset Relief Program tastes, 78 tax cuts multiplier, 631 tax multipliers aggregate supply, effects of, 631–632 changes in tax rates, effects of, 631 fiscal policy, 629–631 tax reform, economic effect of, 649–650 tax wedge, 648 taxes on cigarettes and soda, 130–131 division of income, 412, 413 government spending and, 621–623 health care reform legislation, 174 long-run effects of policy change, 648–649 negative externality, 129 simplification, 649 sin, 130 Taylor, John B., 598, 614–615, 641, 656 Taylor rule, 598–599 technological change, 47, 84, 260, 465 costs, 259 e-money, 544–545 long-run economic growth, 465 market power and, 340 short-run aggregate supply curve, shifts in, 508 technology, 18, 260, 465 See also apps; Internet; laptops; smartphones; smartwatches; tablet computers comparative advantage, 670 cost, of health care, 170 in health care, 20–21 health care innovations, Tedlow, Richard S., 389 Temporary Assistance for Needy Families (TANF), 435, 622, 644 terms of trade, 667 Thailand, 683 Thaler, Richard, 226–229, 253 Thiel, Peter, 350 third-party payer, 162 effects on costs, 171 Thoma, Mark, 652 Thornton, Daniel L., 616 thumb rules, behavioral economics, 232–233 ticket prices for college football, time comparative advantage, 670–671 job creation and job destruction, 431 price elasticity of demand, 241 time-series graph, 28, 29 tipping, 225 Tobias, Andrew, 316 tools commodity money, 540 fiat money, 540 top management, 189 total cost, 261 total revenue, 36, 243, 295–296, 359 linear demand curve, 244–245 and price elasticity of demand, 243–247 Toyoda, Sakichi, 59 TPP See Trans-Pacific Partnership tradable emissions allowances, 134 trade, 42, 48, 662 See also international trade comparative advantage, 51 specialization, 48–50 Trade Adjustment Assistance program, 434 trade-offs, car buying, 41, 62 scarcity, 42 trade rounds, 679 trade war, 678 trademarks, 329 trading desk, 557 Trans-Pacific Partnership (TPP), 313, 661, 678 impact on New Balance, 663–664 opposition to, 693 tariffs, 662–663 transfer payments, 400, 412, 470, 622 economic stabilization, 485–486 I-13 traveler’s checks, 542, 543 Treasury bills and bonds See U.S Treasury bills and bonds triangle, area of, 36–37 Trigari, Antonella, 641 Troubled Asset Relief Program (TARP), 560, 608 Trout, Mike, 566 Truman, Harry, 173 Trump, Donald, 23 tuition, 255 Tuohy, Kevin, 60 Turner, Donald, 344 Turner, Ted, 23 Tversky, Amos, 231, 233 Twain, Mark, 61, 329 U.K See United Kingdom ultimatum game experiment, 225–226 unattainable production possibilities, 43 underground economy, 404–406 underwriting, 201 unemployed, 422 unemployment See also Phillips curve by demographic group, 427 establishment survey, 429–431, 441–442 explaining efficiency wages, 436 government policies and unemployment rate, 434–436 labor unions, 436 globalization and, 680 household survey, 422–424 job creation and job destruction over time, 431 length of time unemployed, 428 recession of 2007–2009, 421 seasonally adjusted, 432 trends in labor force participation, 426–427 types of, 431–434 cyclical unemployment, 433 frictional unemployment and job search, 432 full employment, 433 structural unemployment, 432–433 in the U.S., 11 unemployment insurance, 435, 485 payments, 435 unemployment rate, 422, 423–424 business cycle, 483–484 household production and, 415 problems measuring, 425–426 unions See labor unions unit-elastic demand, 235 unit of account, money defined, 539 United Kingdom (U.K.) deflation, 454 economic growth and health, 462 health, link to economic prosperity, 462 health care system, 157–158, 158, 167, 173, 175 27/02/16 10:24 AM www.downloadslide.net I-14 Subject Index United Kingdom (U.K.) (continued) life expectancy, 152 productivity, 489 trade as percent of world exports, 665 as percentage of GDP, 665 United States (U.S.) automobile market, 41 cage-free eggs, 289 components of GDP in 2014 for, 401–402 consumption, 32 currency, 540 demographics, 78–79 economic growth, long-run, 460–461 health and, 462–463 economic stability, 485–486 economy effect, shoe tariffs, 678 exchange rate consumers and, 685 demand shift, 685 equilibrium, 684–685 exports and imports, 686–687 net exports, 498 sources of currency demand, 683–684 supply shift, 685–686 farm program, 118–119, 291–293 financial crisis of 2007–2009, 200–202 government intervention, spending, 621–623 greenhouse gas emissions, 134–136 health, link to economic prosperity, 462–463 health care changes, 19, 151, 153 height, 153 insurance, 5–7, 160–163, 161–162 medical school, 16–17 reasons for long-run improvements, 153–154 system, 3, 154–156 health care system, 158 housing boom, 16 infant mortality, 153 international trade, 661–664 world context, 664 as market or mixed economy, 11 minimum wage program, 119–120 money, defining, 542–543 overweight adults, 232 resources, 330 small businesses, 188–189 Z03_HUB6922_05_SE_SIDX.indd 14 social insurance history, 623–624 solar panel industry, 301–302 tipping, 225 universal health insurance, 157 “upside down” on mortgage, 607 U.S See United States U.S Bureau of Economic Analysis, 402–403, 414, 461, 470, 590–591 U.S Census Bureau, 78, 155, 188, 281, 370–371, 422, 588 U.S Centers for Disease Control and Prevention (CDC), 5–7, 154, 256 U.S Centers for Medicare & Medicaid Studies, 151 U.S Constitution, property rights amendments (5th and 14th), 60 U.S Department of Commerce, 588, 661, 663 U.S Department of Justice, 391 U.S Department of Labor, 422 U.S Department of Treasury, 519, 541 U.S Department of Treasury bills and bonds, 546 U.S Energy Information Administration, 251 U.S Government Accountability Office, 681, 682 U.S Health Resources and Services (HRSA), 3, 13, 16 U.S Patent and Trademark Office, 329, 403 U.S Postal Service (USPS), 351 U.S Treasury, financial crisis, 607–608 U.S Treasury bills and bonds nominal interest rate, 443–444 raising funds through, 647 ratings, 191–192 utility, 212–220 diminishing marginal, 213 equal marginal utility per dollar spent, 213–215 equalize marginal utilities per dollar, 217–219 optimal consumption level, 216–217 price change, 219–220 utils, 213 vaccinations, 164 value, store of, 539 value added, 403 value-added method, measuring GDP by, 403–404 Vanhuele, Marc, 234 variable costs, 261 aggregate demand (AD) curve, 498–502 aggregate supply curve, 508–510 costs, 261 graphing more than two, 30–32 one, 28–29 two, 29–34 omitted, 30 short-run aggregate supply curve (SRAS), 508–510 supply, 84 Varian, Hal R., 692 vault cash, 546 Vegh, Carlos A., 641 Velde, Franỗois, 568 velocity of money (V), 561 Venezuela, 143, 380, 571 VER See voluntary export restraint vertical mergers, 343 Veterans Health Administration, 152, 154, 155 Vietnam, 681 Vigano, Davide, 98 Virag, Dennis, 64 virtuous cycle, 332 Viscusi, W Kip, 131 visual effects industry, 322–323 Volcker, Paul, 576, 614 target for federal funds rate, 599 voluntary exchange, 12 voluntary export restraint (VER), 673 von Furstenberg, Diane, 23 von Hayek, Friedrich, 532–533 von Mises, Ludwig, 532 von Neumann, John, 374 wealth, money vs., 543 wealth effect, 497 The Wealth of Nations (Smith), 56, 103, 267 “wearables,” 98 Western Europe See also Europe; European Union government intervention, 56 as market or modern mixed economy, 11 Wieland, Volker, 641, 656 Wilhelm II, 564 Williams, John, 599 Wilson, Woodrow, 570 Winterkorn, Martin, 64 Wiseman, Eric, 480 Wither, Michael, 429 The Wonderful Wizard of Oz (Baum), 67 Wood, Robert, 479 Woolman, Collett E., 495 workers See also labor entries discouraged, 423, 425 short-run aggregate supply curve, 508, 509 World Health Organization (WHO), 159, 406 world price, 671 World Trade Organization (WTO), 679, 690 opposition to, 679–681 World War I, 391, 564, 643, 647–648 World War II, 479, 486, 512, 531, 538, 566, 576–577, 598, 620–623, 643, 645, 647–648, 678–679, 681 Wozniak, Steve, 60, 340 Wright, Orville, 18, 60, 188 Wright, Wilbur, 18, 60, 188 Wu, JunJie, 147 x-axis, 28 wages adjustments, slowness in, 506–508 contracts, 506 division of income, 412–413 protectionism, 680 real, calculating, 441–442 Wall Street Reform and Consumer Protection Act (DoddFrank Act), 201, 202, 568 banks and, 568 Walton, Sam, 23 Walvoord, Barbara, 22 Wansink, Brian, 233 Weadock, Teresa, 591 y-axis, 28 Yellen, Janet, 429, 449, 613, 642–643 Yellowstone National Park, 146, 256 yen See Japan Young, John Parke, 564 Zedong, Mao, 12, 566 Zélie, Mademoiselle, 566 Zimbabwe, 405, 542–543, 563 hyperinflation, 563 Zuckerberg, Mark, 59, 185, 188 27/02/16 11:24 AM www.downloadslide.net Credits Photo Front matter, page vii(t), Courtesy of Glenn Hubbard; page vii(b), Courtesy of Tony O’Brien Chapter 1, page 2, Phanie/ Alamy Stock Photo; page 9, Chris Grosser/Southcreek Global/ ZUMApress.com/Alamy Stock Photo; page 16, Paul Bradbur/ Caiaimage/OJO+/Getty Images Chapter 2, page 40, Michael Short/Bloomberg/Getty Images; page 53, Rolf Bruderer/ Glow Images; page 55B, Mikael Damkier/Shutterstock; page 55L, Elena Elisseeva/Shutterstock; page 55R, Stockbroker/MBI/ Alamy Stock Photo; page 55T, JupiterImages/Getty Images; page 58, Qilai Shen/Bloomberg/ Getty Images; page 61, Photos 12/ Alamy Stock Photo Chapter 3, page 72, Xinhua/ Alamy Stock Photo; page 77, Maxim Shemetov/Reuters; page 78, Tim Boyle/Getty Images; page 81, Peter Horree/ Alamy Stock Photo Chapter 4, page 108, Symphonie/ The Image Bank/Getty Images; page 124, Silke Woweries/Corbis Chapter 5, page 150, Bill Aron/ PhotoEdit, Inc Chapter 6, page 184, Anil Kumar/Alamy Stock Photo; page 195, Wang Lei/CHINE NOUVELLE/SIPA/Newscom Chapter 7, page 210, Mark Lennihan/AP Images; page 222, Giles Angel/Alamy Stock Photo; page 228, photopitu/Fotolia; page 231, Jay Paul/The New York Times/Redux Pictures; page 233, Bebeto Matthews/AP Images; page 247, OleksiyMaksymenko Photography/Alamy Stock Photo Chapter 8, page 258, Thomas Imo/Alamy Stock Photo; page 260, BRIAN KERSEY/UPI/ Newscom; page 262, Damon Higgins/Corbis; page 267, Ria Novosti/Alamy Stock Photo; page 277, CSU Archives/Everett Collection Inc/Alamy Stock Photo Chapter 9, page 288, Alan Hopps/Moment Open/Getty Images; page 311, Alex Segre/ Alamy Stock Photo Chapter 10, page 324, Katja Heinemann/Robert Harding World Imagery; page 327, Robert Willett/Raleigh News & Observer/TNS/Tribune Content Agency LLC/Alamy Stock Photo; page 329, John Mutrux/MCT/ Newscom; page 331, Gregory Wrona/Alamy Stock Photo; page 342, Pixellover RM 9/ Alamy Stock Photo Chapter 11, page 356, Glen Martin/Getty Images; page 365, Craig Warga/Bloomberg/Getty Images; page 370, Fred Prouser/ Reuters; page 373, Mel Evans/AP Images; page 379, Alamy Stock Photo Chapter 12, page 394, Regina H Boone/Detroit Free Press/ TNS/Tribune Content Agency LLC/Alamy Stock Photo; page 399B, Mikael Damkier/ Shutterstock; page 399C, Yoshio Tomii/SuperStock; page 399L, Eric Gevaert/Shutterstock; page 399R, Bill Aron/PhotoEdit, Inc.; page 399T, JupiterImages/ Getty Images; page 403, Herve Coste/MAXPPP/Newscom; page 405, Nureldin Abdallah Mohamed/Reuters Chapter 13, page 420, Eduardo Munoz/Reuters; page 433, Andrew Burton/Reuters/Landov Chapter 14, page 458, Steve Marcus/Reuters/Landov; page 473, Everett Collection; page 479, Bradley C Bower/ Bloomberg/Getty Images Chapter 15, page 494, Steve Allen/Allen Creative/Alamy Stock Photo; page 512, Kimberly White/Corbis; page 533, Lebrecht Music and Arts Photo Library/ Alamy Stock Photo Chapter 16, page 536, Laurence Geai/SIPA/Newscom; page 541, Bloomberg/Getty Images; page 544, Bloomberg/Getty Images; page 547, Air Images/ Shutterstock; page 559, Lynne Sladky/AP Images; page 559, Ezio Petersen/UPI/Landov; page 559, Eightfish/Alamy; page 559, Dietmar Plewka/imagebroker/ Alamy; page 564, Bettmann/Corbis Chapter 17, page 574, PHILIPPE DESMAZES/AFP/Getty Images; page 606, Rebecca Cook/Reuters/ Corbis Chapter 18, page 618, Bob Kreisel/ Alamy Stock Photo; page 634, Richard Drew/AP Images; page 642, Bao Dandan/Xinhua/Alamy Stock Photo; page 645, AP Images Chapter 19, page 660, Pablo Martinez Monsivais/AP Images; page 664, Boston Globe/Getty Images; page 677, i4images rm/ Alamy Stock Photo; page 681, Lucenet Patrice/Oredia/Alamy Stock Photo Tex t Chapter page 5, John Hechinger, “FBI Presses Banks to Boost Security as Robberies Rise,” Wall Street Journal, October 8, 2002 page 27, © 2011 City Maps Inc Chapter pages 201–202, Michael Lewis, “The End,” Portfolio, December 2008 Chapter page 226, Steffen Andersen, et al., “Stakes Matter in Ultimatum Game,” American Economic Review, Vol 101, No 7, December 2011, pp 3427–3439 page 223, Gary Becker and Kevin M Murphy, Social Economics, Cambridge: Harvard University Press, 2000, p page 242, Table 7.7, “Estimated Real-World Price Elasticities of Demand,” Kelly D Brownell and Thomas R Frieden, “Ounces of Prevention—The Public Policy Case for Taxes on Sugared Beverages,” New England Journal of 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Fiscal Multipliers,” Journal of Monetary Economics, Vol 57, No 5, July 2010, pp 531–553; Ethan Ilzetzki, Enrique G Mendoza, and Carlos A Vegh, “How Big (Small?) 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Faculty Fellow and Lehigh Class of 1961 Professor of Economics He has been a visiting professor at the University of California, Santa Barbara, and the Graduate School of Industrial Administration