Clear Current Connected to Today’s Student 13e Clear Connected The Macro Economy Today keeps students connected to the real world, and gives them ample opportunity to apply and practice what they’re learning Beyond the content in the book, students can connect to a wealth of online tools: • • • • • • www.mhhe.com/schiller13e ISBN 978-0-07-741647-8 MHID 0-07-741647-3 90000 EAN 780077 416478 www.mhhe.com Schiller *Connect® Economics is a web-based assignment and assessment platform that gives instructors the power to create automaticallygraded assignments using material directly from the text while connecting students with the tools and resources they’ll need to achieve success To learn more about Connect® Economics, visit www.mcgrawhillconnect.com THE MACRO ECONOMY TODAY 13e Bradley R Schiller with Cynthia Hill & Sherri Wall MD DALIM #1173115 11/28/11 CYAN MAG YELO BLK Connect real-world examples to life with YouTube activities and Video Cases* Connect with feedback through end-of-chapter problems and Expanded Feedback* Connect multiple concepts and apply analysis through Logic Cases* Connect with an optimal learning path through LearnSmart adaptive self-study technology* Connect with core content in the Connect® Plus dynamic eBook* Connect and study economics on-the-go with a new mobile study app designed to accompany Study Econ to accompany Schiller’s 13th edition Visit your mobile app store and download the Schiller: Study Econ app today! ECONOMY TODAY Economics happens all around us every day and The Macro Economy Today provides the most upto-date content available by keeping current with today’s economy and relating it to core concepts • Latest coverage of the Great Recession, Credit Crisis and Fiscal Stimulus policies • Updated In the News and World View articles infuse current events into every chapter MACRO Current THE The Macro Economy Today introduces economics in clear, understandable language that engages all students Core economic concepts are clearly defined and connected to real-world policy issues and current events The consistent underlying themes of market vs government, balanced perspectives and policy focus help bring clarity to the economic issues students encounter every day Study Econ Study Econ Mobile App Have you ever wished there was a fun way to learn key terms and concepts? STUDENTS Want to get better grades? (Who doesn’t?) Prefer to your homework online? (After all, you are online anyway…) Do you need more help understanding graphs? Would you like to be more efficient when studying for exams? Need a better way to study before the big test? (A little peace of mind is a good thing…) With McGraw-Hill's Connect Plus Economics, ® STUDENTS GET: • Immediate feedback on how you’re doing (No more wishing you could call your instructor at a.m.) • Quick access to lectures, practice materials, eBook, and more (All the material you need to be successful is right at your fingertips.) • A Self-Quiz and Study tool that assesses your knowledge and recommends specific readings, supplemental study materials, and additional practice work.* *Available with select McGraw-Hill titles McGraw-Hill is proud to offer a new mobile study app for students learning economics from Schiller’s The Macro Economy Today 13th edition The Study Econ app that accompanies your textbook will allow you to study on the go… whether you’re waiting for a class to start, sitting on a bus, or just lounging on the couch Features of the Study Econ mobile app include: Flashcards of every key term and definition from the textbook, customizable by chapter Basic math review for those pesky formulas we sometimes forget For example, how you calculate a percent increase? Not sure? Well, it’s in the app! Customizable self-quizzes that allow for more practice and feedback Common mistakes and pitfalls are included to help master key concepts Various games which help make learning key terms and concepts more engaging and fun! Visit your mobile app store and try Study Econ today! Search “Study Econ” and download Schiller’s The Macro Economy Today 13th edition mobile app MD DALIM #1173115B 11/28/11 CYAN MAG YELO BLK BACKUP • Easy online access to homework, tests, and quizzes assigned by your instructor The Study Econ mobile app was built with the student in mind You are on the go, and your study tools should be, too! Study Econ Study Econ Mobile App Have you ever wished there was a fun way to learn key terms and concepts? STUDENTS Want to get better grades? (Who doesn’t?) Prefer to your homework online? (After all, you are online anyway…) Do you need more help understanding graphs? Would you like to be more efficient when studying for exams? Need a better way to study before the big test? (A little peace of mind is a good thing…) With McGraw-Hill's Connect Plus Economics, ® STUDENTS GET: • Immediate feedback on how you’re doing (No more wishing you could call your instructor at a.m.) • Quick access to lectures, practice materials, eBook, and more (All the material you need to be successful is right at your fingertips.) • A Self-Quiz and Study tool that assesses your knowledge and recommends specific readings, supplemental study materials, and additional practice work.* *Available with select McGraw-Hill titles McGraw-Hill is proud to offer a new mobile study app for students learning economics from Schiller’s The Macro Economy Today 13th edition The Study Econ app that accompanies your textbook will allow you to study on the go… whether you’re waiting for a class to start, sitting on a bus, or just lounging on the couch Features of the Study Econ mobile app include: Flashcards of every key term and definition from the textbook, customizable by chapter Basic math review for those pesky formulas we sometimes forget For example, how you calculate a percent increase? Not sure? Well, it’s in the app! Customizable self-quizzes that allow for more practice and feedback Common mistakes and pitfalls are included to help master key concepts Various games which help make learning key terms and concepts more engaging and fun! Visit your mobile app store and try Study Econ today! Search “Study Econ” and download Schiller’s The Macro Economy Today 13th edition mobile app MD DALIM #1173115B 11/28/11 CYAN MAG YELO BLK BACKUP • Easy online access to homework, tests, and quizzes assigned by your instructor The Study Econ mobile app was built with the student in mind You are on the go, and your study tools should be, too! sch16473_fm_i-xxxii.indd Page i 11/29/11 8:03 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefile Less managing More teaching Greater learning INSTRUCTORS Would you like your students to show up for class more prepared? 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With McGraw-Hill's Connect Plus Economics, ® INSTRUCTORS GET: • Simple assignment management, allowing you to spend more time teaching • Auto-graded assignments, quizzes, and tests • Detailed Visual Reporting where student and section results can be viewed and analyzed • Sophisticated online testing capability • A filtering and reporting function that allows you to easily assign and report on materials that are correlated to accreditation standards, learning outcomes, and Bloom’s taxonomy • An easy-to-use lecture capture tool • The option to upload course documents for student access sch16473_fm_i-xxxii.indd Page ii 11/29/11 8:03 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefile Want an online, searchable version of your textbook? Wish your textbook could be available online while you’re doing your assignments? Connect Plus Economics eBook ® If you choose to use Connect ® Plus Economics, you have an affordable and searchable online version of your book integrated with your other online tools Connect Plus Economics eBook offers features like: đ Topic search • Direct links from assignments • Adjustable text size • Jump to page number • Print by section Want to get more value from your textbook purchase? Think learning economics should be a bit more interesting? Check out the STUDENT RESOURCES section under the Connect Library tab ® Here you’ll find a wealth of resources designed to help you achieve your goals in the course Every student has different needs, so explore the STUDENT RESOURCES to find the materials best suited to you sch16473_fm_i-xxxii.indd Page iii 11/29/11 10:17 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefile THE MACRO ECONOMY TODAY 13e sch16473_fm_i-xxxii.indd Page iv 11/29/11 8:04 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefile The McGraw-Hill Series Economics Essentials of Economics Brue, McConnell, and Flynn Essentials of Economics Second Edition Mandel Economics: The Basics Second Edition Schiller Essentials of Economics Eighth Edition Principles of Economics Slavin Economics, Microeconomics, and Macroeconomics Tenth Edition Economics of Social Issues Guell Issues in Economics Today Sixth Edition Sharp, Register, and Grimes Economics of Social Issues Nineteenth Edition Colander Economics, Microeconomics, and Macroeconomics Eighth Edition Econometrics Frank and Bernanke Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Fifth Edition Gujarati and Porter Essentials of Econometrics Fourth Edition Frank and Bernanke Brief Editions: Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Second Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Nineteenth Edition McConnell, Brue, and Flynn Brief Editions: Microeconomics and Macroeconomics Second Edition Miller Principles of Microeconomics First Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition Schiller The Economy Today, The Micro Economy Today, and The Macro Economy Today Thirteenth Edition Gujarati and Porter Basic Econometrics Fifth Edition Managerial Economics Baye Managerial Economics and Business Strategy Seventh Edition Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Fifth Edition Thomas and Maurice Managerial Economics Tenth Edition Intermediate Economics Bernheim and Whinston Microeconomics First Edition Dornbusch, Fischer, and Startz Macroeconomics Eleventh Edition Frank Microeconomics and Behavior Eighth Edition Advanced Economics Romer Advanced Macroeconomics Fourth Edition Money and Banking Cecchetti and Schoenholtz Money, Banking, and Financial Markets Third Edition Urban Economics O’Sullivan Urban Economics Eighth Edition Labor Economics Borjas Labor Economics Fifth Edition McConnell, Brue, and Macpherson Contemporary Labor Economics Ninth Edition Public Finance Rosen and Gayer Public Finance Ninth Edition Seidman Public Finance First Edition Environmental Economics Field and Field Environmental Economics: An Introduction Fifth Edition International Economics Appleyard, Field, and Cobb International Economics Seventh Edition King and King International Economics, Globalization, and Policy: A Reader Fifth Edition Pugel International Economics Fifteenth Edition sch16473_fm_i-xxxii.indd Page v 11/29/11 10:17 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefile THE MACRO ECONOMY TODAY 13e Bradley R Schiller The University of Nevada—Reno with Cynthia Hill Idaho State University & Sherri Wall University of Alaska—Fairbanks sch16473_fm_i-xxxii.indd Page vi 11/29/11 8:04 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefile THE MACRO ECONOMY TODAY Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020 Copyright © 2013, 2010, 2008, 2006, 2003, 2000, 1997, 1994, 1991, 1989, 1986, 1983, 1980 by The McGraw-Hill Companies, Inc All rights reserved Printed in the United States of America No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper DOW/DOW ISBN 978-0-07-741647-8 MHID 0-07-741647-3 Vice president and editor-in-chief: Brent Gordon Publisher: Douglas Reiner Sponsoring editor: Scott Smith Director of digital content: Douglas Ruby Executive director of development: Ann Torbert Development editor: Marianne L Musni Vice president of marketing: Robin J Zwettler Director of marketing: Bradley Parkins Senior marketing manager: Melissa Larmon Vice president of editing, design, and production: Sesha Bolisetty Lead project manager: Harvey Yep Senior buyer: Michael R McCormick Lead designer: Matthew Baldwin Senior photo research coordinator: Keri Johnson Photo researcher: Michelle Buhr Lead media project manager: Allison Souter Media project manager: Ron Nelms Interior designer: Matthew Baldwin Cover designer: Laurie Entringer Cover image: © Getty Images Typeface: 10/12 Times New Roman Compositor: Aptara®, Inc Printer: R R Donnelley Library of Congress Cataloging-in-Publication Data Schiller, Bradley R., 1943– The macro economy today / Bradley R Schiller, Cynthia Hill, Sherri Wall.—13th ed p cm.—(The McGraw-Hill series economics) Includes index ISBN 978-0-07-741647-8 (alk paper) ISBN 0-07-741647-3 (alk paper) Macroeconomics I Hill, Cynthia II Wall, Sherri III Title HB172.5.S3425 2013 339—dc23 2011046539 www.mhhe.com sch16473_fm_i-xxxii.indd Page vii 11/29/11 A B O U T 8:04 PM user-f494 T H E /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefile A U T H O R S Bradley R Schiller has over four decades of experience teaching introductory economics at the University of Nevada, American University, the University of California (Berkeley and Santa Cruz), and the University of Maryland He has given guest lectures at more than 300 colleges ranging from Fresno, California, to Istanbul, Turkey Dr Schiller’s unique contribution to teaching is his ability to relate basic principles to current socioeconomic problems, institutions, and public policy decisions This perspective is evident throughout The Macro Economy Today Dr Schiller derives this policy focus from his extensive experience as a Washington consultant He has been a consultant to most major federal agencies, many congressional committees, and political candidates In addition, he has evaluated scores of government programs and helped design others His studies of poverty, discrimination, training programs, tax reform, pensions, welfare, Social Security, and lifetime wage patterns have appeared in both professional journals and popular media Dr Schiller is also a frequent commentator on economic policy for television and radio, and his commentary has appeared in The Wall Street Journal, The Washington Post, The New York Times, and Los Angeles Times, among other major newspapers Dr Schiller received his Ph.D from Harvard and his B.A degree, with great distinction, from the University of California (Berkeley) He is now a professor of economics at the University of Nevada in Reno, where he hosts McGraw-Hill’s annual West Coast Teaching Economics Conference On his days off, Brad is on the tennis courts, the ski slopes, or the crystal-blue waters of Lake Tahoe Cynthia D Hill is a professor of economics at Idaho State University, where she has dedicated herself to helping students develop as thinkers and scholars Her academic research is primarily focused on economic education and the advancement of classroom pedagogy Over the past decade Professor Hill has undertaken many administrative roles, which focus on student success and educational advancement These positions include director of the University Honors Program, director of the Center for Teaching and Learning, and currently the position of executive director of the Student Success Center Professor Hill has won numerous teaching and public service awards over her 14-year tenure at Idaho State University, including the Carnegie Foundation for the Advancement of Teaching Idaho Professor of the Year, two-time Master Teacher, five-time Most Influential Professor, two-time Outstanding Public Servant, and Distinguished Public Servant She earned her bachelor’s degree from the University of Montana and her Ph.D from Washington State University Sherri L Wall has taught economics in the School of Management at the University of Alaska—Fairbanks since 2006 She is the founding faculty advisor for two student organizations at UAF: SWEET (Students Who Enjoy Economic Thinking) and SIFE (Students in Free Enterprise) The UAF SIFE team has won three Regional championships, and in 2011, were 2nd runner up in the opening round of competition at the National Exposition Sherri was a finalist in the Market-Based Management Institute’s Economic Communicators contest at the Association of Private Enterprise Conference in 2008 In that same year, she was recognized as Outstanding Faculty Member of the year by the UAF student body, and in 2010, Outstanding Student Organization Advisor Sherri has a Master’s of Science in Resource and Applied Economics, and is completing her Ph.D through a National Science Foundation fellowship Her research interests include economic issues of climate change in Alaska, institutional economics and economic education She has presented her research at universities and conferences around the world In her spare time, she finds great utility in the outdoor recreational opportunities in Alaska, including flying with her husband, hiking, fishing, hunting, skiing, and trail running ©Kelly Atlee Photography vii sch16473_glo_G1-G4.indd Page G-2 11/30/11 1:26 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net G-2 GLOSSARY discount rate: The rate of interest the Federal Reserve charges for lending reserves to private banks (14) discounting: Federal Reserve lending of reserves to private banks (14) discouraged worker: An individual who isn’t actively seeking employment but would look for or accept a job if one were available (6) discretionary fiscal spending: Those elements of the federal budget not determined by past legislative or executive commitments (12) disposable income (Dl): After-tax income of households; personal income less personal taxes (5, 9, 10, 11) dissaving: Consumption expenditure in excess of disposable income; a negative saving flow (9) dumping: The sale of goods in export markets at prices below domestic prices (19) economic growth: An increase in output (real GDP); an expansion of production possibilities (1, 2, 17, 21) economics: The study of how best to allocate scarce resources among competing uses (1) efficiency: Maximum output of a good from the resources used in production (1) embargo: A prohibition on exports or imports (19) employment rate: The percentage of the adult population that is employed (17) entrepreneurship: The assembling of resources to produce new or improved products and technologies (1) equation of exchange: Money supply (M ) times velocity of circulation (V ) equals level of aggregate spending (P Q) (15) equilibrium (macro): The combination of price level and real output that is compatible with both aggregate demand and aggregate supply (8, 9, 11) equilibrium GDP: The value of total output (real GDP) produced at macro equilibrium (AS AD) (9, 10) equilibrium price: The price at which the quantity of a good demanded in a given time period equals the quantity supplied (3) equilibrium rate of interest: The interest rate at which the quantity of money demanded in a given time period equals the quantity of money supplied (15) excess reserves: Bank reserves in excess of required reserves (13, 14) exchange rate: The price of one country’s currency expressed in terms of another’s; the domestic price of a foreign currency (20) expenditure equilibrium: The rate of output at which desired spending equals the value of output (9) exports: Goods and services sold to foreign buyers (5, 19) external debt: U.S government debt (Treasury bonds) held by foreign households and institutions (12) externalities: Costs (or benefits) of a market activity borne by a third party; the difference between the social and private costs (benefits) of a market activity (2, 4) extreme poverty (world): World Bank income standard of less than $1.25 per day per person (inflation adjusted) (21) factor market: Any place where factors of production (e.g., land, labor, capital) are bought and sold (3) factors of production: Resource inputs used to produce goods and services, e.g., land, labor, capital, entrepreneurship (1, 2) federal funds rate: The interest rate for interbank reserve loans (14, 15) fine-tuning: Adjustments in economic policy designed to counteract small changes in economic outcomes; continuous responses to changing economic conditions (18) fiscal policy: The use of government taxes and spending to alter macroeconomic outcomes (8, 11, 12, 18) fiscal restraint: Tax hikes or spending cuts intended to reduce (shift) aggregate demand (11, 12, 18) fiscal stimulus: Tax cuts or spending hikes intended to increase (shift) aggregate demand (11, 12, 18) fiscal year (FY): The 12-month period used for accounting purposes; begins October for the federal government (12) flexible exchange rates: A system in which exchange rates are permitted to vary with market supply-and-demand conditions; floating exchange rates (20) foreign exchange markets: Places where foreign currencies are bought and sold (20) foreign exchange reserves: Holdings of foreign currencies by official government agencies, usually the central bank or treasury (20) free rider: An individual who reaps direct benefits from someone else’s purchase (consumption) of a public good (4) frictional unemployment: Brief periods of unemployment experienced by people moving between jobs or into the labor market (6) full employment: The lowest rate of unemployment compatible with price stability, variously estimated at between percent and percent unemployment (6, 10) full-employment GDP: The value of total market output (real GDP) produced at full employment (8, 9, 10) GDP deflator: A price index that refers to all goods and services included in GDP (7) GDP gap (real): The difference between full-employment GDP and equilibrium GDP (11, 18) GDP per capita: Total GDP divided by total population; average GDP (5, 17) geometric growth: An increase in quantity by a constant proportion each year (17) gold reserves: Stocks of gold held by a government to purchase foreign exchange (20) gold standard: An agreement by countries to fix the price of their currencies in terms of gold; a mechanism for fixing exchange rates (20) government failure: Government intervention that fails to improve economic outcomes (1, 4) gross business saving: Depreciation allowances and retained earnings (10) gross domestic product (GDP): The total market value of all final goods and services produced within a nation’s borders in a given time period (2, 5) gross investment: Total investment expenditure in a given time period (5) growth rate: Percentage change in real output from one period to another (17) growth recession: A period during which real GDP grows but at a rate below the long-term trend of percent (8, 18) human capital: The knowledge and skills possessed by the workforce (2, 16, 17, 21) hyperinflation: Inflation rate in excess of 200 percent, lasting at least one year (7) import quota: A limit on the quantity of a good that may be imported in a given time period (21) imports: Goods and services purchased from international sources (5, 19) income quintile: One-fifth of the population, rank-ordered by income (e.g., top fifth) (2) income transfers: Payments to individuals for which no current goods or services are exchanged, such as Social Security, welfare, and unemployment benefits (11, 12) inequality trap: Institutional barriers that impede human and physical capital investment, particularly by the poorest segments of society (21) inflation: An increase in the average level of prices of goods and services (4, 5, 7, 8) inflation rate: The annual percentage rate of increase in the average price level (7) inflation targeting: The use of an inflation ceiling (“target”) to signal the need for monetary-policy adjustments (15) inflationary flashpoint: The rate of output at which inflationary pressures intensify; the point on the AS curve where slope increases sharply (6, 7, 16, 18) inflationary gap: The amount by which aggregate spending at full employment exceeds full-employment output (9) inflationary GDP gap: The amount by which equilibrium GDP exceeds full-employment GDP (9, 10, 11, 18) infrastructure: The transportation, communications, education, judicial, and other institutional systems that facilitate market exchanges (16) sch16473_glo_G1-G4.indd Page G-3 11/30/11 1:26 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net GLOSSARY injection: An addition of spending to the circular flow of income (10) in-kind transfers: Direct transfers of goods and services rather than cash, such as food stamps, Medicaid benefits, and housing subsidies (21) interest rate: The price paid for the use of money (15) intermediate goods: Goods or services purchased for use as input in the production of final goods or in services (5) internal debt: U.S government debt (Treasury bonds) held by U.S households and institutions (12) investment: Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories (5, 9, 16) investment rate: The percentage of total output (GDP) allocated to the production of new plants, equipment, and structures (21) item weight: The percentage of total expenditure spent on a specific product; used to compute inflation indexes (7) labor force: All persons over age 16 who are either working for pay or actively seeking paid employment (6, 17) labor force participation rate: The percentage of the working-age population working or seeking employment (6) labor productivity: Amount of output produced by a worker in a given period of time; output per hour (or day, etc.) (16) laissez faire: The doctrine of “leave it alone,” of nonintervention by government in the market mechanism (1, 8) law of demand: The quantity of a good demanded in a given time period increases as its price falls, ceteris paribus (3, 8) law of supply: The quantity of a good supplied in a given time period increases as its price increases, ceteris paribus (3) leakage: Income not spent directly on domestic output but instead diverted from the circular flow—for example, saving, imports, taxes (10) liability: An obligation to make future payment; debt (12) liquidity trap: The portion of the money demand curve that is horizontal; people are willing to hold unlimited amounts of money at some (low) interest rate (15) macroeconomics: The study of aggregate economic behavior, of the economy as a whole (1, 8) managed exchange rates: A system in which governments intervene in foreign exchange markets to limit but not eliminate exchange rate fluctuations; “dirty floats.” (20) marginal propensity to consume (MPC): The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income (9, 10, 11) marginal propensity to save (MPS): The fraction of each additional (marginal) dollar of disposable income not spent on consumption; MPC (9) marginal tax rate: The tax rate imposed on the last (marginal) dollar of income (16) market demand: The total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands (3) market failure: An imperfection in the market mechanism that prevents optimal outcomes (1, 4) market mechanism: The use of market prices and sales to signal desired outputs (or resource allocations) (1, 3, 4) market power: The ability to alter the market price of a good or service (4) market shortage: The amount by which the quantity demanded exceeds the quantity supplied at a given price; excess demand (3, 20) market supply: The total quantities of a good that sellers are willing and able to sell at alternative prices in a given time period, ceteris paribus (3) market surplus: The amount by which the quantity supplied exceeds the quantity demanded at a given price; excess supply (3) merit good: A good or service society deems everyone is entitled to some minimal quantity of (4) microeconomics: The study of individual behavior in the economy, of the components of the larger economy (1) microfinance: The granting of small (“micro”), unsecured loans to small businesses and entrepreneurs (21) Millennium Aid Goal: United Nations goal of raising foreign aid levels to 0.7 percent of donor-country GDP (21) Millennium Poverty Goal: United Nations goal of reducing global rate of extreme poverty to 15 percent by 2015 (21) mixed economy: An economy that uses both market signals and government directives to allocate goods and resources (1) monetary policy: The use of money and credit controls to influence macroeconomic outcomes (8, 14, 15, 18) money: Anything generally accepted as a medium of exchange (13) money illusion: The use of nominal dollars rather than real dollars to gauge changes in one’s income or wealth (7) money multiplier: The number of deposit (loan) dollars that the banking system can create from $1 of excess reserves; equal to required reserve ratio (13, 14) money supply (M1): Currency held by the public, plus balances in transactions accounts (13, 14, 15) money supply (M2): M1 plus balances in most savings accounts and money market funds (13, 14, 15) G-3 monopoly: A firm that produces the entire market supply of a particular good or service (2, 4) multiplier: The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles; 1y(1 MPC) (10, 11, 18) national debt: Accumulated debt of the federal government (12) national income (NI): Total income earned by current factors of production: GDP less depreciation and indirect business taxes, plus net foreign factor income (5) national income accounting: The measurement of aggregate economic activity, particularly national income and its components (5) natural monopoly: An industry in which one firm can achieve economies of scale over the entire range of market supply (4) natural rate of unemployment: The longterm rate of unemployment determined by structural forces in labor and product markets (6, 15, 18) net domestic product (NDP): GDP less depreciation (5) net exports: The value of exports minus the value of imports: (X M ) (5) net investment: Gross investment less depreciation (5, 17) nominal GDP: The value of final output produced in a given period, measured in the prices of that period (current prices) (5, 7) nominal income: The amount of money income received in a given time period, measured in current dollars (7) Okun’s Law: One percent more unemployment is estimated to equal percent less output (6) open economy: A nation that engages in international trade (19) open market operations: Federal Reserve purchases and sales of government bonds for the purpose of altering bank reserves (14) opportunity cost: The most desired goods or services that are forgone in order to obtain something else (1, 3, 4, 12, 19) optimal mix of output: The most desirable combination of output attainable with existing resources, technology, and social values (4, 12) outsourcing: The relocation of production to foreign countries (6) per capita GDP: The dollar value of GDP divided by total population; average GDP (2) personal income (Pl): Income received by households before payment of personal taxes (5) Phillips curve: A historical (inverse) relationship between the rate of unemployment and the rate of inflation; commonly expresses a trade-off between the two (16) sch16473_glo_G1-G4.indd Page G-4 11/30/11 1:26 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net G-4 GLOSSARY portfolio decision: The choice of how (where) to hold idle funds (14, 15) poverty rate: Percentage of the population counted as poor (21) poverty threshold (U.S.): Annual income of less than $22,000 for a family of four (2010, inflation adjusted) (21) precautionary demand for money: Money held for unexpected market transactions or for emergencies (15) price ceiling: An upper limit imposed on the price of a good (3) price floor: Lower limit set for the price of a good (3) price stability: The absence of significant changes in the average price level; officially defined as a rate of inflation of less than percent (7) private good: A good or service whose consumption by one person excludes consumption by others (4) product market: Any place where finished goods and services (products) are bought and sold (3) production possibilities: The alternative combinations of final goods and services that could be produced in a given period with all available resources and technology (1, 2, 5, 6, 17, 19) productivity: Output per unit of input—for example, output per labor-hour (2, 17, 21) progressive tax: A tax system in which tax rates rise as incomes rise (4) proportional tax: A tax that levies the same rate on every dollar of income (4) public choice: Theory of public sector behavior emphasizing rational self-interest of decision makers and voters (4) public good: A good or service whose consumption by one person does not exclude consumption by others (4) quota: A limit on the quantity of a good that may be imported in a given time period (19) rational expectations: Hypothesis that people’s spending decisions are based on all available information, including the anticipated effects of government intervention (18) real GDP: The value of final output produced in a given period, adjusted for changing prices (5, 7, 8, 17) real income: Income in constant dollars; nominal income adjusted for inflation (7) real interest rate: The nominal interest rate minus the anticipated inflation rate (7, 15) recession: A decline in total output (real GDP) for two or more consecutive quarters (8) recessionary gap: The amount by which aggregate spending at full employment falls short of full-employment output (9) recessionary GDP gap: The amount by which equilibrium GDP falls short of fullemployment GDP (9, 10, 11, 18) refinancing: The issuance of new debt in payment of debt issued earlier (12) regressive tax: A tax system in which tax rates fall as incomes rise (4) relative price: The price of one good in comparison with the price of other goods (7) required reserves: The minimum amount of reserves a bank is required to hold; equal to required reserve ratio times transactions deposits (13, 14) reserve ratio: The ratio of a bank’s reserves to its total transactions deposits (13) saving: That part of disposable income not spent on current consumption; disposable income less consumption (5, 9, 16) Say’s Law: Supply creates its own demand (8) scarcity: Lack of enough resources to satisfy all desired uses of those resources (1) seasonal unemployment: Unemployment due to seasonal changes in employment or labor supply (6) severe poverty (world): World Bank income standard of $2 per day per person (inflation adjusted) (21) shift in demand: A change in the quantity demanded at any (every) price (3) speculative demand for money: Money held for speculative purposes, for later financial opportunities (15) stagflation: The simultaneous occurrence of substantial unemployment and inflation (16, 18) structural deficit: Federal revenues at full employment minus expenditures at full employment under prevailing fiscal policy (12, 18) structural unemployment: Unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs (6, 16) substitute goods: Goods that substitute for each other; when the price of good x rises, the demand for good y increases, ceteris paribus (3) supply: The ability and willingness to sell (produce) specific quantities of a good at alternative prices in a given time period, ceteris paribus (3) supply-side policy: The use of tax incentives, (de)regulation, and other mechanisms to increase the ability and willingness to produce goods and services (8, 18) tariff: A tax (duty) imposed on imported goods (19) tax elasticity of supply: The percentage change in quantity supplied divided by the percentage change in tax rates (16) tax rebate: A lump-sum refund of taxes paid (16) terms of trade: The rate at which goods are exchanged; the amount of good A given up for good B in trade (19) trade deficit: The amount by which the value of imports exceeds the value of exports in a given time period (negative net exports) (19, 20) trade surplus: The amount by which the value of exports exceeds the value of imports in a given time period (positive net exports) (19) transactions account: A bank account that permits direct payment to a third party—for example, with a check or debit card (13) transactions demand for money: Money held for the purpose of making everyday market purchases (15) transfer payments: Payments to individuals for which no current goods or services are exchanged, like Social Security, welfare, and unemployment benefits (4, 16) Treasury bonds: Promissory notes (IOUs) issued by the U.S Treasury (12) underemployment: People seeking fulltime paid employment who work only parttime or are employed at jobs below their capability (6) unemployment: The inability of labor force participants to find jobs (4, 6) unemployment rate: The proportion of the labor force that is unemployed (6) value added: The increase in the market value of a product that takes place at each stage of the production process (5) velocity of money (V ): The number of times per year, on average, that a dollar is used to purchase final goods and services; PQ M (15, 18) voluntary restraint agreement (VRA): An agreement to reduce the volume of trade in a specific good; a “voluntary” quota (19) wealth effect: A change in consumer spending caused by a change in the value of owned assets (9) yield: The rate of return on a bond; the annual interest payment divided by the bond’s price (14) sch16473_ndx_I1-I22.indd Page I-1 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net I N D E X Note: Bold page numbers indicate definitions; page numbers followed by n indicate material in notes A Abkowitz, Alyssa, 401 Absolute advantage absolute costs, 421 defined, 421 Ackley, Gardner, 138 Across-nation income redistribution, 464–465 AD See Aggregate demand (AD) AD excess, 240–241 AD shortfall, 228, 231–233 Adjustable-rate mortgages (ARMs), 147 Adolescents, unemployment and, 116, 122–123 Advertising, future of economics and, 197–198 Affirmative action, 355 Age, structural unemployment and, 122–123 Aggregate consumption function, 186 Aggregate decisions, 3–4 Aggregate demand (AD), 164–165, 178–198 See also Aggregate supply/aggregate demand (AS/AD) model; Fiscal policy; Monetary policy AD excess, 240–241 AD shortfall, 228, 231–233 components of, 179–183, 189–193 defined, 164, 179, 208, 229, 281, 319 fiscal restraint and, 240–243, 253–255 fiscal stimulus and, 230–240, 250–272 foreign trade effect, 165 interest rate effect, 165 leakages and, 208–211 macro equilibrium and, 166–168, 170–171, 179 monetary policy and, 281, 319–320 prices and, 208 real balances effect, 164–165 reduced, 321 restraint and, 343 shifts in, 169, 174, 187–189, 190, 197–198, 216, 218 stimulus and, 343 Aggregate demand curve, 164–165, 190–195 Aggregate expenditure defined, 200 income and, 107 in Keynesian economics, 200 Aggregate supply (AS), 165–166 See also Aggregate supply/aggregate demand (AS/AD) model cost effect, 166 defined, 166, 179, 231, 341 fiscal stimulus and, 231 macro equilibrium and, 166–168, 171–172 profit effect, 166 shape of AS curve, 341–345 shifts in, 169, 174, 231, 345–348 supply-side policy and, 341–348 See also Supply-side policy Aggregate supply/aggregate demand (AS/AD) model, 163–170 aggregate demand in, 164–165, 169, 174 See also Aggregate demand (AD) aggregate supply in, 165–166, 169, 174 See also Aggregate supply (AS) Great Recession of 2008–2009 and, 169, 173–174 long-run self-adjustment, 172–173 macro equilibrium in, 166–168, 170–171, 179–180 macro failures in, 168–170 policy tools and, 173–174 short-run instability, 170–172, 173 Aggregate supply curve, 341–348 Agriculture See Farming AIDS, 469 Allen, Lea Ann Overstreet, 357 American Airlines, 310 American Recovery and Reinvestment Act, 250, 403 Americans with Disabilities Act, 389 Amgen, 36 Anheuser-Busch Cos., 439 Antitrust, 76–77 defined, 76 Apple Computer, Inc., 439 Apple iPhone, 51 Appreciation (currency), 444 Argentina, currency devaluation, 453 Arithmetic growth defined, 379 geometric growth versus, 379 Armour, Stephanie, 120 AS See Aggregate supply (AS) Asian crisis of 1997–1998, 446, 453 Assets, 264 AT&T, 51, 310 Automatic stabilizers, 254–255, 387 Autonomous consumption, 183–184 Average price, 133 Average propensity to consume (APC), 181, 183 Average propensity to save (APS), 183 B Baby Boomers, 270–271 Bailouts bank, 291–292, 322 currency, 453–454 Balance of payments, 441–443, 450 balance-of-payments deficit, 449 balance-of-payments surplus, 449 capital account balance, 443 current account balance, 443 defined, 442 exchange rates and, 448–453 trade balance, 442–443 Balanced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings Act), 270 Balanced budget multiplier, 239 Ballor, Jordan, 82 Ballot-box economics, 85 I-1 sch16473_ndx_I1-I22.indd Page I-2 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net I-2 INDEX Bangladesh, microloans in, 470 Bank of England, 325 Bank panics, 291, 297 Bank reserves See Reserves Banks See also Federal Reserve System; Monetary policy bailouts of, 291–292, 322 circular flow and, 289–291 decline of traditional, 310 deposit creation and, 281–284, 285, 290–291 failure of, 291–292, 297 financing injections, 290 money creation and, 281–287 monopoly banks, 282–284 multibank world, 284–287 regulation of, 282–284 as reluctant lenders, 322 types of bank accounts, 278–279 types of money and, 278–281 Banya, Nelson, 138 Barclay’s Bank, 439 Barriers to trade, 426–432 comparative effects of, 429–431 embargoes, 426–427 nontariff barriers, 432 quotas, 429, 430–431 tariffs, 358, 427–428, 430, 476 voluntary restraint agreements, 431–432 Barro, Robert, 405n Barter defined, 277 in Russia, 277 Base year defined, 99, 141, 367 GDP and, 99 Batson, Andrew, 235 Baum, Sandy, 134 Becker, Gary S., 19, 447 “Beggar they neighbor” policies, 428–429 Behavior consumer, 46, 184–186 maximizing, 46 Benefits, external, 75–76 Bernanke, Ben, 298, 320, 322, 330, 334, 335, 398 Birth control, 466–467 Black Thursday of 1929, 154 Bloomberg, Michael, 192 Bloomberg News, 198 Blumberg, Deborah Lynn, 304 Blumenthal, Susan, 468 BMW, 440–441, 443, 448 Board of Governors, Federal Reserve, 297–298, 388 Boeing Co., 414 Bonds See also Treasury bonds bond referenda, 85 defined, 303 yields, 304 Bono, 458 Booms, 221–222 Borrowing, willingness to borrow, 291 Boston Tea Party of 1776, 427 BP, 20, 58, 59, 63 BRAC, 470 Bracket creep, 140 Brazil, currency devaluation, 453 Brereton, Natasha, 148 British Petroleum (BP), 20, 58, 59, 63 Broda, Christian, 238 Budget deficits cyclical, 255–256 deficit ceilings, 269–270 deficit spending, 251 defined, 251 economic effects of, 258–260 fiscal policy and, 251–253, 258–260, 269–270 historical record on, 251, 252, 258 in Social Security, 270–271 structural, 256–257 Budget Enforcement Act (BEA) of 1990, 270 Budget surpluses defined, 252 economic effects of, 260–261 fiscal policy and, 251–253, 260–261 historical record on, 251, 252 uses for, 260 Bureau of Engraving and Printing, 281 Burns, Arthur, 405 Bush, George H W., 207, 262, 270, 353, 377, 395, 453 Bush, George W., 6, 16, 19–20, 238, 246, 256, 259, 298, 346, 351–355, 386, 395, 398, 400, 406–407 Business See also Entrepreneurship business climate, economic growth and, 473–474 circular flow and, 47–48 corporate profits, 105 expectations of, 190 indirect business taxes, 104–105 maximizing behavior of, 46 Business cycles, 154–175 aggregate demand and supply, 163–170 changes in, 386 defined, 155, 196, 387 features of, 157–159 Great Depression See Great Depression Great Recession of 2008–2009 See Great Recession of 2008–2009 in historical record, 154–155, 157–162 in international economics, 159 Keynesian revolution and, 156–157 long-run self-adjustment of, 172–173 model of macro economy, 162–163 short-run instability of, 170–172 stability of, 155–157, 170–173 Business saving self-adjustment debate and, 209–210 as source of economic growth, 374 Busts, 221–222 “Buy American” policies, 404, 428, 439 C Capacity utilization long-run changes in, 366–367 short-run changes in, 366 Capital defined, as factor of production, 4–5 sch16473_ndx_I1-I22.indd Page I-3 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net INDEX Capital account balance, 443 Capital income, 105–106 Capital-intensive production, 35 Capital investment, 470–471 Capital stock, 35 Carey, Clay, 357 Carl XVI Gustaf, King, 447 Carter, Jimmy, 386, 395 Cash bank ATMs and, 310 M1 and, 279, 281, 298, 315, 316 M2 and, 280–281, 298, 315 Castro, Fidel, 427, 473 Caterpillar, Inc., 414 Causation, graphs and, 26 Cell telephones, inflation and, 144 Central African Republic, health in, 468 Central American Free Trade Agreement (CAFTA), 434 Certificates of deposit (CDs), 280 Ceteris paribus defined, 19, 52 individual demand and, 52 Chad, education in, 467 Chain-weighted price adjustments, 100 Charpak, Georges, 447 Chávez, Hugo, 473 Checking accounts, 279, 297 China bank reserves of, 309 dumping and, 425, 426 economic growth and, 466–467, 472–474 exchange rate intervention and, 451 government failure and, 17 Great Depression and, 159 Great Recession of 2008–2009 and, 217, 235 gross domestic product (GDP) of, 32–33 hyperinflation in, 138, 140 infrastructure development and, 359 interest rates and inflation, 321 international trade and, 425, 426 reducing population growth, 466–467 tariffs on, 427, 428 trade barriers and, 475 voluntary restraint agreements, 431 Choice, 13–18 balance and, 18 in command economy, 14 debates concerning, 14–16 “for whom” decisions, 13 government failure and, 17 “how” decisions, 13 in market economy, 13–14 market failure and, 17 in mixed economy, 14, 17 “what” decisions, 13 Chrysler, 424 Cigarettes, secondhand smoking and, 74–75 Circular flow, 47–48 banks and, 289–291 dollars and exchange, 48 in factor markets, 47 of income, 106–107 injections and, 210 leakage and, 208 opportunity cost and, 48 in product markets, 47 self-adjustment debate and, 208, 210 supply and demand, 47–48 Citigroup, 470 Civil Aeronautics Board (CAB), 356 Civil War, 261–262, 278 Classical theory See also Self-adjustment debate of business cycles, 155–156 Keynesian denunciation of, 156–157 laissez-faire economics, 14, 155–156, 174, 196–197, 405–406 of long-term economic stability, 172–173 Clean Air Act of 1970, 389 Cline, Harry, 424 Cline, William, 475n Clinton, Bill, 16, 238, 246, 256, 259, 262, 346, 352, 353, 354, 395, 406, 453 Closed economy, 416 Coca-Cola Company, 440 College Board, 134 College tuition, 134–135 Command economy government failure and, 17 in international economics, 15 nature of, 14 Communism, 14, 314 Communist Manifesto (Marx), 14 Comparative advantage, 420–421 absolute costs, 421 defined, 420, 474 nature of, 420 opportunity costs, 420 pursuit of, 420–421 regional trade pacts and, 433–434 world trade and, 474–475 Competition, import-competing industries, 424 Complementary goods, 51 Conference Board, 187, 198 Confidence See also Expectations consumer, 187, 222–223 unemployment and, 119–120 Congo, health in, 468 Congressional Budget Office (CBO), 240, 251, 260, 400 Construction workers, 122 Consumer confidence Consumer Confidence Index, 187 maintaining, 222–223 Consumer Expenditures Survey of 2007, 142 Consumer Price Index (CPI), 140–142, 144 Consumer Product Safety Improvement Act, 357 Consumer saving Great Recession of 2008–2009 and, 223 self-adjustment debate and, 208–209, 223 Consumers circular flow and, 47–48 maximizing behavior of, 46 I-3 sch16473_ndx_I1-I22.indd Page I-4 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net I-4 INDEX Consumption (C) in aggregate demand, 179, 180–183, 319–320 defined, 180 Great Recession of 2008–2009 stimulus and, 238 income and, 180–181, 184 income-dependent, 184, 214–215 induced, 221 inflationary GDP gap and, 221 marginal propensity to consume (MPC), 182, 183, 186, 215, 233–234, 236 marginal propensity to save (MPS), 182, 183 nonconsumer spending versus, 201 saving versus, 181, 182–183 shortfall in Keynesian economics, 200–201 Consumption function, 183–189 characteristics of, 184–186 defined, 184 formula for, 184 marginal propensity to consume (MPC) and, 182, 183, 186, 215, 233–234, 236 one consumer’s behavior and, 184–186 shifts, 187–188 types of consumption and, 183–184 Consumption goods, 101 Consumption possibilities defined, 416–417 with trade, 417–419 without trade, 416–417 Continental Congress, 261, 329 Core inflation rate, 142 Core issues in economics, 2–21 basic decisions, 12–13 choice mechanisms, 13–18 economic growth, 12 economy is us, 3–4 individual versus aggregate decisions, 3–4 nature of economics, 18–20 production possibilities, 7–12, 13 scarcity, 4–6 Corning Inc., 426 Corporate profits, 105 Corporations See also Stock market corporate taxes, 80–81 Cost-benefit analysis government failure and, 84–85 valuation problems, 84–85 Cost-of-living adjustments (COLAs), 146–147 Cost-push inflation, 146 Costs cost effect, in aggregate supply, 166 external, 75 Cottle, Thomas, 120 Council of Economic Advisors (CEA), 124, 298, 374, 398, 401–402 Cranick, Gene, 73 Credit aggregate demand and, 189 consumption and, 184, 189 Credit cards, 279 Credit crisis of 2008, 291 Crishe, Lee, 322 Crowding in budget surpluses and, 260–261 defined, 260, 377 Crowding out budget deficits and, 258–259 defined, 244, 258, 332, 377 fiscal responsibility and, 377 interest rates and, 260 in macro models, 397 monetary policy and, 332 national debt and, 268–269 Crystal balls, 197–198, 399 Cuba economic growth in, 473 U.S embargo of, 427 Cuomo, Andrew, 192 Currency See also Dollars; Exchange rates; Foreign exchange markets appreciation of, 444 bank provision of, 297 depreciation of, 443–444 devaluation of, 453–454 Current account balance, 443 Current yield, 304 Cyclical deficits defined, 256 GDP growth and, 255 inflation and, 255–256 structural deficits versus, 257 Cyclical instability See also Great Recession of 2008–2009 aggregate supply/aggregate demand (AS/AD) model, 163–170, 189 in classical theory, 155–156, 172–173 demand-side theories, 170–171 eclectic explanations, 172 historical cycles, 154–155, 157–162, 172–173 in Keynesian theory, 156–157, 170–171 long-run self-adjustment, 172–173 model of macro economy, 162–163 in monetary theory, 171, 172–173 short-run, 170–172 supply-side theories, 171–172 Cyclical sensitivity, 261 Cyclical surpluses, 261 Cyclical unemployment, 123, 195, 219 D Debt See National debt Debt ceilings, 270 Debt service, 266 Defense spending See also War accumulation of debt and, 261–264 guns versus butter and, 7, 9–10 production possibilities curve and, 9–10 Deficit ceilings, 269–270 Deficit spending, 251 Deficits See also Budget deficits; Cyclical deficits balance-of-payments, 449 trade, 415, 443 Deflation dangers of, 140 sch16473_ndx_I1-I22.indd Page I-5 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net INDEX defined, 133 Great Recession of 2008–2009 and, 211 Delevingne, Lawrence, 401 Dell Computer, 36 Demand, 48–55 See also Demand curve aggregate demand See Aggregate demand (AD) ceteris paribus and, 52 defined, 48 demand schedule, 49–50, 54–55 determinants of, 51–52 equilibrium and, 59–63 individual, 49–53 law of, 51, 156 for money See Demand for money movements in, 53 shifts in, 52–53, 62 Demand curve, 50–51 defined, 50 individual, 50–51 Demand for money, 315–317 defined, 315 equilibrium rate of interest, 317 market demand curve, 316 money supply, 316–317 precautionary demand, 316 speculative demand, 316 transactions, 315–316 Demand-pull inflation, 146, 196, 221 Demand schedule, 54–55 defined, 49 individual, 49–50 Demand-side theories aggregate demand and, 178–198 Keynesian theory, 170–171, 199–204 monetary theories, 171 Demick, Barbara, 10 Denison, Edward, 375 Deposit creation, 290–291 constraints on, 286–287 defined, 282 nature of, 281 stages of, 282–284, 285 Deposit insurance, 291 Depository Institutions Deregulation and Monetary Control Act of 1980, 310 Depreciation defined, 101 national income and, 104 net domestic product and, 101 in self-adjustment debate, 209–210 Depreciation (currency), 443–444 Depression See Great Depression Deregulation, 355–358 See also Regulation cost reduction, 357–358 of factor markets, 355–356 of product markets, 356–357 Design problems, 400–401 Determinants of demand, 51–52 Determinants of supply, 56 Devaluation, 453–454 Developing nations, GDP per capita and, 369–370 Development See Economic growth Developmental patterns, 35 Direct government expenditures, 78 Discount rate, 301–302 defined, 302 increasing, 309 lowering, 308 Discounting, 302, 302n Discouraged workers, 118 Discretionary fiscal spending, 253–255 Dismal Sciences, 399 Disney, 414–415 Disposable income (DI) consumption and, 180–181 defined, 105, 180, 209, 235 self-adjustment debate and, 209, 214–215 tax cuts and, 235–236 Dissaving, 185–186 Dollars See also Currency; Exchange rates; Foreign exchange markets demand for, 439 supply of, 440 value of, 440–441, 445 Domenici, Pete V., 396 Domino’s, 52 Doomsayers, 378–381 Dougherty, Conor, 216 Dow, 414 Dumping, 425, 426 E Econometric macro models, 397–398 Economic development See Economic growth Economic growth, 365–382 agricultural development and, 471–472 capital investment and, 470–471 defined, 12, 33, 367, 465 Doomsayers and, 378–381 effects of GDP growth and, 255 entrepreneurship and, 473, 476–477 as exponential process, 369 future of, 378–381 geometric versus arithmetic, 379 global poverty and, 465–475 of government, 78–79 growth rate, 367–369 human capital development in, 35, 354–355, 372–373, 374, 376, 467–469 institutional reform and, 472–474 investment as source of, 372–374 in macro economy, 162 measures of, 367–372 national debt and, 268 nature of growth, 366–367 New Economy and, 368–369, 371–372 population growth and, 33–34, 466–467 possibility of limitless, 378–381 Rostow’s stages of development, 469–470 sources of, 372–376 types of, 366–367 world trade and, 474–475 I-5 sch16473_ndx_I1-I22.indd Page I-6 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net I-6 INDEX Economics core issues in, 2–21 defined, 5–6 ends versus means, 18 future of See Future of economics graphs in, 22–26 international See International economics macroeconomics versus microeconomics, 18–19 See also Macroeconomics; Microeconomics nature of, 18–20 normative versus positive analysis, 18 politics versus, 19–20, 85, 386, 403–404 theory versus reality, 19–20 Economist in Chief role, 2–3, Education college tuition, 134 as external benefit, 75–76 human capital and, 35, 36, 354–355, 374, 467–468 unemployment rate and, 117, 125 Education gap, 35, 36 Efficiency defined, 10 government failure and, 84 market economy and, 14 production possibilities and, 10–11 Ehrlich, Anne H., 380n Ehrlich, Paul, 380, 380n Elasticity, tax elasticity of supply, 352 Eliasson, Jan, 468 Ellis, Blake, 134 Embargoes, 426–427 Employment Act of 1946, 124, 393–394 Employment rate defined, 370 GDP per capita and, 370–371 Ends versus means, 18 Entrepreneurship defined, economic growth and, 473, 476–477 as factor of production, 4–5 marginal tax rates and, 350 Environmental destruction, 380 Environmental protection, 38, 357 pollution damages and, 380 water pollution, 381, 468 Equal opportunity programs, 355 Equation of exchange, 326–327 Equilibrium, 59–63 changes in, 61–63 international trade and, 429–430 macro See Macro equilibrium market clearing and, 59–60 market mechanism and, 60 market shortage, 60–61, 63 market surplus, 60, 63 money market, 315, 317 self-adjusting prices, 61 of supply and demand, 59–63, 166–168 undesired, 168 unstable, 168–169, 196 Equilibrium GDP, 195–196, 213 Equilibrium price, 59, 168–169, 429, 441 Equilibrium rate of interest changing interest rates, 317–318 defined, 317 Equity See Inequity Ethiopia, farm productivity in, 471–472 Ethnicity, unemployment and, 116–117 European Monetary Union (EMU), 452 European Union (EU) international trade and, 474–475 nontariff barriers, 432 voluntary restraint agreements, 431 World Trade Organization (WTO) and, 433 Evans, Kelly, 223 Excess reserves, 284–286 borrowings and, 301 computing, 299 defined, 284, 299 as lending power, 288–289 soaking up, 299–300 Exchange rates See also Foreign exchange markets appreciation and, 443–444 currency bailouts, 453–454 defined, 439 depreciation and, 443–444 devaluation, 453–454 dollars and, 48 exchange rate intervention, 448–453 fixed, 448–452 foreign exchange markets and, 439–443, 446–454 international comparison of, 442 market forces and, 444–446 resistance to changes in, 446–448 specialization and, 46 Excise taxes, 81 Expectations aggregate demand and, 187–188 consumer confidence and, 187, 222–223 consumption and, 183, 184–186, 187, 188 individual demand and, 52 investment and, 189, 190 monetary restraint and, 325 monetary stimulus and, 323–324 rational expectations, 405–406 in self-adjustment debate, 211, 222–223 supply-side policy and, 359–360, 377 Expenditure equilibrium, 196, 202–203 Exports comparative export ratios, 414 defined, 102, 414 export industries, 424 U.S., 414–415 External debt, 265, 268–269 External shocks, 163, 400 Externalities, 74–76 benefits, 75–76 costs, 75 defined, 38, 74 sch16473_ndx_I1-I22.indd Page I-7 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net INDEX inequity and, 77 market power and, 76–77 secondhand smoking, 74–75 “Extreme” poverty (world), 460 ExxonMobil, 440 F Factor markets defined, 47 deregulation and, 355–356 mandatory benefits, 356 minimum wages, 356 occupational health and safety, 356 trade barriers and, 358 Factor mobility, 36 Factors of production, 35–38 See also Capital; Entrepreneurship; Factor markets; Human capital; Labor force capital stock, 35 defined, 4, 35 described, 4–5 government and, 37–38 land, 4–5 productivity and, 35–37 striking a balance, 38 Fair Labor Standards Act of 1938, 356 Family and Medical Leave Act of 1993, 356, 389 Fanelli, James, 74 Farming agricultural development and, 471–472 food shortage in North Korea, 10 international perspective on, 424 limits to food production, 379 Federal Aviation Administration (FAA), 360 Federal Deposit Insurance Corporation (FDIC), 291–292 Federal Express, 36 Federal funds rate, 209, 306–307, 325 defined, 302, 318 money supply versus, 310 Federal government See also Federal income taxes; Regulation; United States economy direct expenditures of, 78 growth of, 78–79 income transfers of, 77, 78, 229, 254 Federal income taxes, 80, 96–97 Federal Open Market Committee (FOMC), 298, 302–306, 309, 388 Federal Reserve Act of 1913, 297 Federal Reserve System, 282, 296–311 bank bailouts and, 291–292, 322 Board of Governors, 297–298, 388 discount rate, 301–302, 308 discounting and, 302, 302n effectiveness of, 309–310 federal funds rate, 209, 302, 306–307, 310, 318, 325 Federal Open Market Committee (FOMC), 298, 302–306, 309, 388 Federal Reserve banks, 297 ownership of federal debt, 265 regulation of deposit creation, 286–287 reserve requirements, 284, 298–300, 307–308, 309, 449 I-7 services performed by, 297 structure of, 297–298 Federal Savings and Loan Insurance Corporation (FSLIC), 291 Final goods, 97 Financial markets See also International finance capital investment and, 470–471 economic growth and, 470–471 Financing injections, 290 Fine-tuning, 392–393 Fiscal policy, 228–247, 387–388 budget effects of, 229, 233–235, 241–242, 245–246, 251–261, 269–270 concern for content of, 245–246 debt accumulation, 261–264 debt burden, 265–268 debt ceilings, 270 debt ownership, 264–265 deficit ceilings, 269–270 deficits and, 251–253, 258–260, 269–270 defined, 174, 229, 251, 387 development of, 387–388 external debt, 265, 268–269 fine-tuning, 392–393 fiscal restraint tools, 240–243 See also Fiscal restraint fiscal stimulus tools, 230–240, 250–272 See also Fiscal stimulus government spending in, 229, 233–235, 241–242, 245–246, 251–258 Great Depression and, 258 in Great Recession of 2008–2009, 174, 228, 234, 238, 239–240, 242, 246, 250, 251 guidelines for, 243–245 idealized uses of, 391–393 interest rates and, 260 milestones of, 388 monetary policy versus, 332–333 nature of, 229–230 obstacles to implementation, 395–404 pork barrel politics and, 245 summary of policy tools, 387–388 surpluses and, 251–253, 260–261 taxation and, 229, 235–238, 242–243 time lags and, 244–245 transfer payments and, 229, 238–239, 243, 254, 270–271 Fiscal responsibility, 377 Fiscal restraint, 240–243, 343 budget cuts, 241–242, 253–255 defined, 240, 254, 388 fiscal target and, 241 reduced transfer payments, 243 tax increases, 242–243 Fiscal stimulus, 230–240, 250–272, 343 deficits and, 251 defined, 231, 254, 388 fiscal target and, 231–232 government spending increase, 233–235, 253–255 in Great Recession of 2008–2009, 174, 228, 234, 235, 238, 239–240 increased transfer payments, 238–239 Keynesian strategy and, 230–231 tax cuts and, 235–238, 262 sch16473_ndx_I1-I22.indd Page I-8 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net I-8 INDEX Fiscal year (FY), 253–254 Fischer, Edmond, 447 Fixed exchange rates, 448–452 Flexible exchange rates, 452–453 Flexible interest rates, 210–211 Flexible prices, 156, 211 Flow of income, 106–107 Food See also Farming guns versus butter, 7, 9–10 limits to food production, 379 shortages in North Korea, 10 “For whom” decisions market outcomes and, 64 nature of, 13, 30 in the U.S economy, 38–40 Ford Motor Company, 424 Fordham University, Index of Social Health, 108 Forecasts, 397, 398, 399–400 Foreign aid, in across-nation income redistribution, 464–465 Foreign exchange See Exchange rates; Foreign exchange markets Foreign exchange markets, 439–443 See also Exchange rates balance of payments and, 441–443, 450 currency bailouts, 453–454 defined, 446 demand for dollars, 439 equilibrium in, 429 market dynamics, 443–446 supply of dollars, 440 value of the dollar, 440–441 Foreign exchange reserves, 449 Foreign trade See International trade Forero, Juan, 473 Foundation for the Study of Cycles, 197–198, 399 Fractional reserves, 283–284 Free rider, 72–73 Free-trade equilibrium, 430 Frictional unemployment, 121 Friedman, Milton, 332, 332n, 333, 405, 405n Full employment, 121–125 Congressional targets for, 125 defined, 125, 220 as goal, 121, 124–125 “natural” rate of unemployment and, 125, 220, 327–328, 388 types of unemployment, 121–123 Full Employment and Balanced Growth Act of 1978, 125, 143 Full-employment GDP, 168, 194–195, 208 Future of economics See also Great Recession of 2008–2009 advertising, 197–198 anticipating aggregate demand shifts, 197–198 bank failure and, 291–292 concern for content of fiscal policy, 245–246 economic growth in, 378–381 economic policy tools and, 331–335 ending global poverty, 41 Federal Reserve System effectiveness, 309–310 international trade and, 433–434 organ transplants and, 64–66 outsourcing jobs and, 126–128 quality of life, 107–109 right-sizing government, 84–86 self-adjustment debate and, 405–407 Social Security and, 270–271 solar power and, 20–21 supply-side policy and, 360–361 virtues of inflation, 148 G Galbraith, John Kenneth, 107 Galles, Gary M., 431 Gambling, 82 Gates, Bill, 465, 466 Gates Foundation, 464–465 GATT (General Agreement on Tariffs and Trade), 433 GDP See Gross domestic product (GDP) GDP deflator, 142–143 GDP per capita, 32–33, 94, 98–100, 369–372 Gender female “inequality trap” and, 467–468 unemployment and, 116, 125 General Accounting Office (GAO), 356 General Agreement on Tariffs and Trade (GATT), 433 General Electric, 113 General Motors Corp., 13, 310, 331, 424, 440 Gentry, William, 350 Geometric growth arithmetic growth versus, 379 defined, 379 Germany Great Depression in, 159 hyperinflation and, 132, 138, 139, 140 Global poverty, 458–477 See also Poverty American poverty, 459–460 defining, 460–462 economic growth and, 465–475 ending, 41 entrepreneurship and, 476–477 GDP in poor nations, 33–34 goals and strategies concerning, 41, 462 income distribution and, 39–41 income redistribution and, 462–465 measuring, 460–462 persistent, 461–462 Goal conflicts, 395–396 Gold in exchange-rate intervention, 449–450 gold reserves, 449–450 gold standard, 448 Gold reserves, 449–450 Gold standard, 448 Google Inc., 36, 214 Government, 70–86 circular flow and, 47–48 factors of production and, 37–38 failure of See Government failure federal See Federal government growth of, 78–79 local See Local government market failure and, 71–78 maximizing behavior of, 46 regulation and See Regulation “right”-sizing, 84–86 role in command economy, 14 sch16473_ndx_I1-I22.indd Page I-9 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net INDEX role in market economy, 14 spending by See Government spending state See State government taxation and See Taxation Government failure, 82–84 ballot-box economics and, 85 cost-benefit analysis and, 84–85 defined, 17, 82 opportunity cost and, 84 perceptions of waste, 83 public choice theory, 85–86 Government regulation See Regulation Government spending, 101–102 in aggregate demand, 179, 192 discretionary versus automatic, 253–255 in fiscal policy, 192, 229, 241–242, 245–246, 251–258 fiscal restraint and, 241–242 fiscal stimulus and, 233–235 multiplier effect and, 233–234 national debt and, 267 purchases versus transfers, 229 Grameen Bank, 470 Gramm-Rudman-Hollings Act of 1985, 270 Graphs, 22–26 causation and, 26 linear versus nonlinear curves, 25–26 shifts, 24–25 slopes, 23–24, 25 Great Crash of 1929, 154–155 Great Depression, 159, 386 bank panics, 291, 297 “beggar thy neighbor” policies in, 428–429 budget surpluses in, 262 excess reserves and, 391 fiscal policy in, 258 historical record and, 159–160 imperfect knowledge and, 20 Keynesian economics and, 156–157, 170–171, 173 as macroeconomic failure, 154–155, 156 measurement problems and, 396–397 money supply growth in, 394–395 national income accounting and, 92, 99–100 net investment during, 101 new government services during, 78 reluctant lenders and, 322 short-run versus long-run measures and, 173 unemployment and, 123, 125, 154–155 Great Panic of 1929, 154–155 Great Recession of 2008–2009 aggregate supply/aggregate demand (AS/AD) model and, 169, 173–174 bank bailouts and, 291–292, 322 budget deficits and, 228, 250, 262–263 Consumer Confidence Index and, 187 consumer saving and, 223 consumption spending and, 238 credit crisis of 2008 and, 291, 322 debt accumulation and, 262–264 deflation risk and, 211 discretionary versus automatic stabilizers, 254–255 economic contraction in, 161–162 economic stimulus program, 19–20, 239–240 Economist in Chief role, 2–3, I-9 fiscal policy and, 174, 228, 234, 238, 239–240, 242, 246, 250, 251 international impact of, 217, 232, 235 monetary policy and, 174, 291–292, 298, 301, 306, 318, 322, 324, 391 multiplier process in, 215–217 predictions of, 398 prices in, 148 reluctant lenders and, 322 spending versus tax cuts and, 401 supply-side policy and, 174, 348, 359 Troubled Asset Relief Program (TARP), 292 unemployment in, 11–12, 113, 117, 119–120, 125–126, 174, 216 Greenspan, Alan, 132, 322, 330, 335, 392, 398, 405 Gregg, Judd, 386 Gross business saving, 210 Gross domestic product (GDP), 93–101 components of, 102 contraction of, 161–162, 164 decline in, 212–217 defined, 31, 93 equilibrium GDP, 195–196, 213 full-employment GDP, 168, 194–195, 208 gross national product (GNP) versus, 94 growth of, 33, 107–108, 255 as income measure, 102–104 international comparisons, 31–34, 94, 95 measurement problems, 95–97 mix of output, 34–35 nominal GDP, 98–100, 143, 367 as output measure, 31–34, 93–101 per capita, 32–33, 94, 98–100, 369–372 in poor nations, 33–34 real GDP, 98–100, 143, 155–162, 367 types of measures, 93–95 value added and, 97 Gross domestic product (GDP) gaps inflationary GDP gap, 196, 203–204, 220–222, 241, 392 recessionary GDP gap, 195–196, 201–203, 219, 230, 391 Gross investment, 101 Gross national product (GNP), 94 Growth rate, 367–369 See also Economic growth Growth recession defined, 160, 394 in the 1980s, 160, 262 Guns versus butter, 7, 9–10 H Hagenbaugh, Barbara, 211, 398 Hale, Ellen, 445 Hargreaves, Steve, 63n Harper, Lucinda, 242 Hawley, Willis, 428 Health human capital and, 468–469 impact of unemployment on, 120 Index of Social Health, 108 Heilbroner, Robert, 70 Heller, Walter W., 332n Heritage Foundation, 16, 18, 37 Heritage Index of Economic Freedom, 16, 18 Hershey, 431 Hewlett-Packard, 214 sch16473_ndx_I1-I22.indd Page I-10 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net I-10 INDEX Hibbs, Jason, 73n Hilsenrath, Jon, 324 Historical record budget surpluses and deficits in, 251, 252, 258, 263 business cycles in, 154–155, 157–162 economic growth rates, 368–369 economic record in, 393–395 inflation in, 145–146, 148 national debt in, 261–264 unemployment in, 125–126 Hitler, Adolf, 314 Holtz-Eakin, Douglas, 350 Hook, Jane, 264 Hoover, Herbert, 154, 257, 258, 429 Hopkins, Thomas, 355 Horsley, Scott, 359 Household income inflationary GDP gap and, 221 multiplier process and, 214 self-adjustment process and, 214, 221 Household savings, as source of economic growth, 374 Housing market consumption and, 183–184 declines in residential construction, 213 mortgage loans and, 147, 291, 322 property taxes and, 81 “How” decisions factors of production, 35–38 market outcomes and, 64 nature of, 13, 30 in the U.S economy, 35–38 Huber, Glenn, 350 Human capital, 354–355 affirmative action, 355 defined, 35, 354, 373, 467 economic growth and, 35, 354–355, 467–469 education spending, 354–355 female “inequality trap” and, 467 immigration as source of, 358, 376 increasing investment in, 376 management training, 374 as source of economic growth, 35, 354–355, 372–373, 374, 376, 467–469 structural unemployment, 354 transfer payments, 355 worker training and, 354 Human costs of inflation, 138 of unemployment, 113, 119–120 Hungary, hyperinflation and, 132 Hurricane Katrina, 146, 347, 468 Hurricane Rita, 146, 347 Hutchinson, G Evelyn, 380, 380n Hybrid aggregate supply, aggregate supply curve in, 341–342, 342 Hyperinflation, 132, 138, 139–140, 146, 148, 329 I IBM, 214, 331 Immigration, 358, 376 Imperfect knowledge, 20 Implementation problems, 401–404 Import quotas, 429–431, 475 Imports defined, 102, 413 import-competing industries, 424 quotas, 429–431, 475 self-adjustment debate and, 209 U.S., 413 In-kind transfers, 77, 459 InBev, 439 Income See also Global poverty; Poverty aggregate demand and, 188 consumption and, 184, 188 disposable See Disposable income (DI) equivalence of output and, 102–103 flow of, 106–107 household, 214, 221 income effects of inflation, 136, 137 measures of, 102–106 national income (NI) See National income accounting; National income (NI) personal income (PI), 104–106, 186 self-adjustment process and, 214–215 Income distribution, 38–40 global inequality of, 39–41 income quintile in, 39 redistribution and poverty, 462–465 redistributive effects of inflation, 133–139 U.S., 39 Income effects of inflation, 136, 137 Income loss, unemployment and, 119 Income quintile, 39 Income redistribution, monetary policy and, 331 Income taxes federal, 80 state and local, 81 Income transfers, 77, 78 defined, 229, 254 Income velocity of money defined, 326 stable velocity, 327 Index of Economic Freedom, 16, 18, 378 Index of Leading Economic Indicators, 197–198, 398–399 Index of Social Health, 108 Indirect business taxes, 104–105 Individual decisions, 3–4 Individual demand, 49–53 ceteris paribus and, 52 demand curve, 50–51 demand schedule, 49–50 determinants of, 51–52 law of demand, 51, 156 movements versus shifts in, 53 nature of, 49 shifts in, 52–53 Industrial Revolution, 379 Industry behavior See Behavior Inefficiency, production possibilities and, 11 Inequality trap, 467–468 Inequity, 77 economic growth and, 473 Infant industries, 425 sch16473_ndx_I1-I22.indd Page I-11 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net INDEX Inflation, 132–149 causes of, 146 chain-weighted price adjustments, 100 cost-push, 146 cyclical deficits and, 255–256 defined, 78, 100, 133, 168 deflation versus, 133, 140, 211 demand-pull, 146, 196, 221 excess aggregate demand and, 170–171 historical record on, 145–146, 148 hyperinflation, 132, 138, 139, 140, 146, 148, 329 idealized uses of economic policy and, 391–392 inflation-unemployment trade-offs, 343–345 inflationary flashpoint, 124, 148, 344–345, 395 inflationary GDP gap, 196, 203–204, 220–222, 241, 392 in macro instability of markets, 78, 168 macroeconomic consequences of, 139–140 measuring, 140–143 monetary policy and, 328, 334–335 nature of, 133 Phillips curve and, 343–345 poverty and, 459 price controls and, 132 price stability as goal, 143–145 protective mechanisms, 146–147 redistributive effects of, 133–139 short-run inflation-unemployment trade-offs, 219–220 stagflation, 341, 392 trends in U.S., 157 types of, 146 unemployment and, 143–145, 148, 157, 219–220, 341, 343–345, 345, 348 in the U.S., 132, 145–146, 157 Inflation rate core inflation rate, 142 defined, 140 Inflation targeting, 335 Inflationary flashpoint, 124, 148, 344–345, 395 Inflationary GDP gap, 196, 203–204 adjustment to, 220–222 defined, 196, 204, 221, 241, 392 fiscal restraint and, 241 Infrastructure defined, 358 development of, 358–359, 360–361, 377 rebuilding, 360–361 transportation costs and, 360–361, 390 Injections circular flow and, 210 defined, 210 Innovation, investment and, 189 Inputs, factors of production, 4–5 Insourcing, 126 Institutional reform, 472–474 Insurance companies, 310 Intangibles, quality of life and, 107–108 Intel Corporation, 375, 376 Interest rate effect, in aggregate demand, 165 Interest rates on adjustable-rate mortgages (ARMs), 147 budget deficits and, 260 crowding out and, 260 I-11 defined, 315 federal funds rate and, 209, 302, 306–307, 310, 318, 325 fiscal policy, 260 investment and, 189 liquidity trap, 322–323 long-term, 321–322, 330 monetary restraint and, 320–321 monetary stimulus and, 319–320, 321–322 real versus nominal, 147, 328–330 self-adjustment and, 210–211 short vs long-term, 321–322 unemployment and, 330–331 Intermediate goods, 97 Internal debt, 265 Internal financing, 470–471 Internal market forces, in macro economy, 162 Internal Revenue Service (IRS), 96–97 International balances, in macro economy, 162 International Business Machines Corp., 214, 331 International economics See also International finance; International trade agriculture in, 424 budget surpluses and deficits in, 253 comparative macro performance, 394 competition of U.S workers, 374 education gap in, 36 ending global poverty, 41 exchange in, 46 global inequality of gross domestic product (GDP), 94, 95 global inequality of income distribution, 39–40 Great Depression in, 159 Great Recession of 2008–2009 and, 217 gross domestic product (GDP) in, 31–34, 94, 95 high investment/fast growth and, 373 Index of Economic Freedom, 16, 18, 378 labor market in, 375 market versus command economies, 15 maximizing behavior, 46 monetary policy and, 309, 310, 325 money in, 277 outsourcing jobs and, 36–37, 126–128 price and, 63 specialization in, 46 stimulus in China, 235 terrorism and, 7, 125, 161, 169, 222, 347, 386, 400, 425 International finance, 438–454 See also Financial markets exchange rates in, 439–443, 446–454 market dynamics, 443–446 International Monetary Fund (IMF), 378, 454 International trade, 412–435 See also Exports; Imports barriers to See Barriers to trade comparative advantage and, 420–421 easing trade barriers, 358 economic growth and, 474–475 equilibrium and, 429–430 exchange rates in See Exchange rates; Foreign exchange markets export ratios, 414 foreign trade effect in aggregate demand, 165 future of, 433–434 Great Recession of 2008–2009 and, 174 sch16473_ndx_I1-I22.indd Page I-12 11/30/11 5:27 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles www.downloadslide.net I-12 INDEX International trade—Cont motivation to trade, 416–420 mutual gains, 419–420 protectionism, 423–426 terms of trade, 421–423 trade balances, 415 trade policy, 174 U.S trade patterns, 413–415 Inventory depletion of, 220 undesired, 213 Investment, 189–191 defined, 101, 189, 350 determinants of, 189–190 fiscal policy and, 238 foreign, 374 human capital, 354–355, 376 incentives for, 353, 377 inflationary GDP gap and, 220 infrastructure, 358–359 marginal tax rates, 350 monetary stimulus and, 319 multiplier process for, 212–213 shifts of, 190–191 as source of economic growth, 372–374 supply-side policy and, 353, 377 taxation and, 238 Investment function, 190 Investment goods, 101 Investment rate, 470–471 Invisible hand (Smith), 13–14, 17, 60 iPhone, 51 Irwin, Neil, 320 Isidore, Chris, 162, 309 Issenberg, Sasha, 234 Item weight, 141 J Japan deflation in, 133 earthquake of 2011, 347 Great Depression and, 159 Great Recession of 2008–2009 and, 217 international trade and, 474–475 U.S as net debtor and, 447 Job creation, outsourcing in, 127, 128 Johnson, Lyndon, 394–395 JPMorgan, 347 K KaKihara, Lei, 347 Kalwarski, Tara, 238 Das Kapital (Marx), 14 Karl, Kurt, 242 Karpova, Natalya, 277 Kennedy, John F., 6, 238, 462 Kennedy, Paul, 380 Keynes, John Maynard, 5, 14, 156n, 156–157, 162, 170–171, 182, 192, 199–204, 207, 208–211, 212, 230–231, 246, 253, 323 See also Keynesian economics Keynesian economics See also Fiscal policy; Self-adjustment debate aggregate expenditure in, 200 aggregate supply curve in, 341, 342 autonomous consumption in, 183–184 budget surpluses and deficits in, 253 consumption shortfall in, 200–201 demand-side theories of short-run instability, 170–171 fiscal stimulus and, 230–231, 230–240 government regulation and, 157 Great Depression and, 156–157, 170–171, 173 Great Recession of 2008–2009 and, 173–174, 228 Keynesian cross, 199–204 Keynesian revolution and, 156–157 macro equilibrium and, 218–220 macro failure and, 196 monetary policy and, 323, 325, 328, 330, 332–333 nonconsumer spending and, 201 recessionary GDP gap and, 195–196, 219 taxation and, 348–353 Kirchhoff, Sue, 211 Krebs, Edwin, 447 Kuznets, Simon, 92 L Labor force, 114–115 defined, 114, 370 as factor of production, 4–5 government role and, 38 growth of, 115 immigration and, 358, 376 international comparisons, 375 labor-force participants, 114–115 marginal tax rates and, 350 nonparticipants, 114 outsourcing and, 36–37, 126–128 regional trade pacts and, 433–434 Labor force participation rate, 114–115 Labor productivity defined, 354 human capital investment and, 354 Lackey, Kathleen, 66n LaFraniere, Sharon, 277 Lahart, Justin, 11 Laissez faire See also Self-adjustment debate defined, 14, 155 macroeconomics based on, 14, 155–156, 174, 196–197, 405–406 Land, as factor of production, 4–5 Law of demand, 51, 156 Law of supply, 56 Leading indicators, 197–198, 398–399 Leakage aggregate demand, 208–211 consumer saving and, 208–209 defined, 208 Legal framework, 37 See also Regulation Leinwand, Donna, 58n Lending power excess reserves as, 288–289 willingness to lend, 290–291 Lenin, Vladimir, 314 Letendre, Gerry, 445 ... 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