MacroEconomics principles problems and policies

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ac ro macroeconomics m McConnell Brue Flynn Macroeconomics PRINCIPLES, PROBLEMS, AND POLICIES THE MCGRAW-HILL SERIES: ECONOMICS ESSENTIALS OF ECONOMICS Brue, McConnell, and Flynn Essentials of Economics Third Edition Mandel M: Economics, The Basics Third Edition Schiller and Gebhardt Essentials of Economics Tenth Edition PRINCIPLES OF ECONOMICS Asarta and Butters Connect Master: Economics First Edition Colander Economics, Microeconomics, and Macroeconomics Tenth Edition Frank, Bernanke, Antonovics, and Heffetz Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Sixth Edition Frank, Bernanke, Antonovics, and Heffetz Streamlined Editions: Principles of Economics, Principles of Microeconomics, Principles of Macroeconomics Third Edition Karlan and Morduch Economics, Microeconomics, and Macroeconomics  Second Edition McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twenty-First Edition ECONOMICS OF SOCIAL ISSUES Guell Issues in Economics Today Seventh Edition Register and Grimes Economics of Social Issues Twenty-First Edition ECONOMETRICS Gujarati and Porter Basic Econometrics Fifth Edition Hilmer and Hilmer Practical Econometrics First Edition MANAGERIAL ECONOMICS Baye and Prince Managerial Economics and Business Strategy Ninth Edition Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Sixth Edition Cecchetti and Schoenholtz Money, Banking, and Financial Markets Fifth Edition URBAN ECONOMICS O’Sullivan Urban Economics Eighth Edition LABOR ECONOMICS Borjas Labor Economics Seventh Edition McConnell, Brue, and Macpherson Contemporary Labor Economics Eleventh Edition PUBLIC FINANCE Rosen and Gayer Public Finance Tenth Edition ENVIRONMENTAL ECONOMICS Thomas and Maurice Managerial Economics Twelfth Edition Field and Field Environmental Economics: An Introduction Seventh Edition INTERMEDIATE ECONOMICS INTERNATIONAL ECONOMICS Bernheim and Whinston Microeconomics Second Edition Dornbusch, Fischer, and Startz Macroeconomics Twelfth Edition Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition Frank Microeconomics and Behavior Ninth Edition Schiller and Gebhardt The Economy Today, The Micro Economy Today, and The Macro Economy Today Fourteenth Edition ADVANCED ECONOMICS Slavin Economics, Microeconomics, and Macroeconomics Eleventh Edition MONEY AND BANKING Romer Advanced Macroeconomics Fourth Edition Appleyard and Field International Economics Ninth Edition Pugel International Economics Sixteenth Edition THE FOUR VERSIONS OF MCCONNELL, BRUE, FLYNN Chapter* Economics Microeconomics Macroeconomics Essentials of Economics Limits, Alternatives, and Choices x x x x The Market System and the Circular Flow x x x x Demand, Supply, and Market Equilibrium x x x x Market Failures: Public Goods and Externalities x x x x Government’s Role and Government Failure x x x x Elasticity x x   x Utility Maximization x x     Behavioral Economics x x     Businesses and the Costs of Production x x   x 10 Pure Competition in the Short Run x x   x 11 Pure Competition in the Long Run x x   x 12 Pure Monopoly x x   x 13 Monopolistic Competition  x x   x 14 Oligopoly and Strategic Behavior x x 15 Technology, R&D, and Efficiency x x     16 The Demand for Resources x x     17 Wage Determination x x   x 18 Rent, Interest, and Profit x x     19 Natural Resource and Energy Economics x x     20 Public Finance: Expenditures and Taxes x x     21 Antitrust Policy and Regulation x x     22 Agriculture: Economics and Policy x x     23 Income Inequality, Poverty, and Discrimination x x   x 24 Health Care x x     25 Immigration x x     26 An Introduction to Macroeconomics x   x   27 Measuring Domestic Output and National Income x   x x 28 Economic Growth x   x x 29 Business Cycles, Unemployment, and Inflation x   x x 30 Basic Macroeconomic Relationships x   x   31 The Aggregate Expenditures Model x   x   32 Aggregate Demand and Aggregate Supply x   x x 33 Fiscal Policy, Deficits, and Debt x   x x 34 Money, Banking, and Financial Institutions x   x x 35 Money Creation x   x   36 Interest Rates and Monetary Policy x   x x 37 Financial Economics x   x   38 Extending the Analysis of Aggregate Supply x   x   39 Current Issues in Macro Theory and Policy x   x   40 International Trade x x x x 41 The Balance of Payments, Exchange Rates, and Trade Deficits x x x x 42 The Economics of Developing Countries x x x   *Chapter numbers refer to Economics: Principles, Problems, and Policies A red “X” indicates chapters that combine or consolidate content from two or more Economics chapters x Twenty-First Edition Macroeconomics PRINCIPLES, PROBLEMS, AND POLICIES Campbell R McConnell University of Nebraska Stanley L Brue Pacific Lutheran University Sean M Flynn Scripps College MACROECONOMICS: PRINCIPLES, PROBLEMS, AND POLICIES, TWENTY-FIRST EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2018 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2015, 2012, and 2009 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 McGraw-Hill Education, 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 LWI 21 20 19 18 17 ISBN MHID ISBN MHID 978-1-259-91567-3 (student edition) 1-259-91567-0 (student edition) 978-1-259-91575-8 (instructor’s edition) 1-259-91575-1 (instructor’s edition) Chief Product Officer, SVP Products & Markets: G Scott Virkler Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Betsy Whalen Managing Director: Susan Gouijnstook Senior Brand Manager: Katie Hoenicke Director, Product Development: Rose Koos Product Developer: Adam Huenecke Senior Director, Digital Content Development: Douglas Ruby Marketing Manager: Virgil Lloyd Director, Content Design & Delivery: Linda Avenarius Program Manager: Mark Christianson Content Project Managers: Harvey Yep (Core); Bruce Gin (Assessment) Buyer: Laura Fuller Design: Tara McDermott Cover Image: © Getty Images/Kativ Content Licensing Specialists: Shawntel Schmitt (Image); Beth Thole (Text) Typeface: Stix Mathjax MAIN 10/12 Compositor: Aptara®, Inc Printer: LSC Communications All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Names: McConnell, Campbell R., author | Brue, Stanley L., 1945- author |   Flynn, Sean Masaki, author Title: Macroeconomics : principles, problems, and policies / Campbell R   McConnell, University of Nebraska, Stanley L Brue, Pacific Lutheran   University, Sean M Flynn, Scripps College Description: Twenty First Edition | Dubuque : McGraw-Hill Education, [2018]   | Revised edition of Macroeconomics, 2015 Identifiers: LCCN 2016044903| ISBN 9781259915673 (student edition : alk   paper) | ISBN 1259915670 (student edition : alk paper) Subjects: LCSH: Macroeconomics Classification: LCC HB172.5 M3743 2018 | DDC 339—dc23 LC record available at https://lccn.loc.gov/2016044903 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites mheducation.com/highered To Mem and to Terri and Craig, and to past instructors ABOUT THE AUTHORS CAMPBELL R MCCONNELL earned his Ph.D from the University of Iowa after receiving degrees from Cornell College and the University of Illinois He taught at the University of Nebraska–Lincoln from 1953 until his retirement in 1990 He is also coauthor of Contemporary Labor Economics, eleventh edition, and Essentials of Economics, third edition, and has edited readers for the principles and labor economics courses He is a recipient of both the University of Nebraska Distinguished Teaching Award and the James A Lake Academic Freedom Award and is past president of the Midwest Economics Association Professor McConnell was awarded an honorary Doctor of Laws degree from Cornell College in 1973 and received its Distinguished Achievement Award in 1994 His primary areas of interest are labor economics and economic education He has an extensive collection of jazz recordings and enjoys reading jazz history STANLEY L BRUE did his undergraduate work at Augustana College (South Dakota) and received its Distinguished Achievement Award in 1991 He received his Ph.D from the University of Nebraska–Lincoln He is retired from a long career at Pacific Lutheran University, where he was honored as a recipient of the Burlington Northern Faculty Achievement Award Professor Brue has also received the national Leavey Award for excellence in economic education He has served as national president and chair of the Board of Trustees of Omicron Delta Epsilon International Economics Honorary He is coauthor of Economic Scenes, fifth edition (Prentice-Hall); Contemporary Labor Economics, eleventh edition; Essentials of Economics, third edition; and The Evolution of Economic Thought, eighth edition (Cengage Learning) For relaxation, he enjoys international travel, attending sporting events, and going on fishing trips SEAN M FLYNN did his undergraduate work at the University of Southern California before completing his Ph.D at U.C Berkeley, where he served as the Head Graduate Student Instructor for the Department of Economics after receiving the Outstanding Graduate Student Instructor Award He teaches at Scripps College (of the Claremont Colleges) and is the author of Economics for Dummies, second edition (Wiley), and coauthor of Essentials of Economics, third edition His research interests include finance, behavioral economics, and health economics An accomplished martial artist, he has represented the United States in international aikido tournaments and is the author of Understanding Shodokan Aikido (Shodokan Press) Other hobbies include running, traveling, and enjoying ethnic food viii KEY GRAPHS 1.2 The Production Possibilities Curve 11 2.2 The Circular Flow Diagram 38 3.6 Equilibrium Price and Quantity 57 10.2 Consumption and Saving Schedules 203 10.5 The Investment Demand Curve 210 11.2 Equilibrium GDP in a Private Closed Economy 225 11.7 Recessionary and Inflationary Expenditure Gaps 235 12.7 The Equilibrium Price Level and Equilibrium Real GDP 254 16.1 The Demand for Money, the Supply of Money, and the Equilibrium Interest Rate 325 16.4 Monetary Policy and Equilibrium GDP 340 16.5 The AD-AS Theory of the Price Level, Real Output, and Stabilization Policy 346 20.2 Trading Possibilities Lines and the Gains from Trade 417 21.1 The Market for Foreign Currency (Pounds) 441 ix www.downloadslide.net IND8 Index Janus, 303 Japan central bank, 108, 296 exports of, 452 hyperinflation in, 196 modern economic growth and, 161 total fertility rate, 174–175 JPMorgan Chase, 298, 301, 302, 303 Keynes, John Maynard, 222, 234–238, 373 Labor, See also Labor force; Labor market; Labor-force participation rate; Wage determination cheap foreign labor argument for trade protection, 427–428 economic growth and, 167–168 inputs versus productivity in economic growth accounting, 167–168 productivity of (See Labor productivity) as resource, specialization of (See Specialization) unions (See Labor unions) Labor force, 182 See also Unemployment Labor market See also Labor; Labor force offshoring of jobs, 430 specialization of, 430 Labor productivity, 166–167 economic growth and, 174 labor inputs versus, 167–168 taxation and, 386 Labor unions, wage contracts and, 256 Labor-force participation rate, 167 Labor-intensive goods, 412 Laffer, Arthur, 386 Laffer Curve, 386–387 Lags fiscal policy and, 275–276 monetary policy and, 343 Laissez-faire capitalism, 28 Land, Land rent, rent-seeking behavior and, 106 Land-intensive goods, 412 Latinos See Hispanics Law of demand, 49 Law of diminishing marginal utility, 49 Law of increasing opportunity costs, 10–11 Law of supply, 53–54 Leader countries, 162–164, 165 Leakage, 226, 234 Learning by doing, 31, 172 Least-cost production, 34 Legal issues aggregate supply and, 252–253 forms of business (See Corporations; Partnerships; Sole proprietorships) Legal tender, 294 Lehman Brothers, 301 Leisure economic growth and, 160 gross domestic product and, 151 Lender of last resort, 298, 301–302, 304, 332 Lerner, Abba, 401 Lettuce, market for, 69 Leverage, 319 Liabilities commercial bank, 309, 312 of Federal Reserve Banks, 327 Licenses, 98–99 Limited and bundled choice, 108 Limited income, of individuals, Limited liability rule, 356–357 Linear relationship, equation of, 24 Liquidity, 290 commercial bank, 315 money and, 290 Liquidity trap, 344–345 Living standards, 161–163 Loaded terminology, in economic reasoning, 16 Loan guarantees, 110 Loan(s) See also Borrowing; Credit; Debt of commercial banks, 313–314 to commercial banks, 327 in creation of money, 313–314 lending potential of commercial banks and, 316–320 leverage and financial instability, 319 mortgage default crisis and, 299–300, 342–343 in multiple destruction of money, 320 repayment of, 320 subprime mortgage loans, 299–300, 342–343 Local government, fiscal policies of, 276–277 Logrolling, 116–117 Long run, 374 aggregate supply in, 250, 375, 378 Phillips Curve in, 384–385 Long-run aggregate supply, 375, 378 Long-run aggregate supply curve, 250 Long-term vertical Phillips Curve, 384–385 Lotteries, 355–356 Lump-sum tax, 232 Luxuries, necessities versus, M1, 290–292 M2, 292–293 Macroeconomic instability, 393–397 aggregate supply shocks and, 383 coordination failures and, 396–397 monetarist view of, 394–395 real-business-cycle view of, 395–396 Macroeconomics, 5, 123–133, 220–238 See also Aggregate demand; Aggregate supply; Economic growth; Inflation; Unemployment “big picture,” 345–347 business cycles, 123 discretionary stabilization policy, 403 domestic macroeconomic adjustments, 449–450 expectations and, 127–128 fixed-exchange rate systems and, 449–450 income-consumption and income-saving relationships, 201–206 instability (See Macroeconomic instability) interest-rate-investment relationship, 208–210 microeconomics versus, models for, 125–126 modern economic growth and, 125–126 multiplier effect, 213–217 performance and policy in, 123–125 policy rules and, 401–404 “self-correction” by economy and, 397–400 shocks and, 127–130 stability and, 207 sticky prices and, 131–132 uncertainty and, 127–130 Mainstream macroeconomics, 404 Maintenance costs, 211 Majority voting, 115–117 implications of, 116 inefficient outcomes of, 115–117 median-voter model, 117–118 paradox of, 117–118 Managed floating exchange rates, 450–451 criticisms of, 451 support for, 451 Marginal analysis, See also Cost-benefit analysis; Marginal utility; MB = MC rule comparing benefits and costs, in competitive markets, 58 economics of war and, 12 fast-food lines and, optimal allocation and, 11–12, 57–58, 80–81 for public goods, 84, 86–87 slopes and, 23 Marginal benefit (MB), See also Cost-benefit analysis; MB = MC rule Marginal cost (MC), 53–54 Marginal propensity to consume (MPC), 205–206 multiplier effect and, 214–217 as slope, 205 Marginal propensity to save (MPS), 205–206, 214–217 Marginal tax rate, 386 Marginal utility, 49 Marginal-cost-marginal-benefit rule, 87 Market demand, 49–50, 83 Market economy, 37 Market equilibrium, 56–58 changes in demand and, 58, 69–71 changes in supply and, 58–60, 69–71 complex cases, 60–61 efficient allocation, 57–58 equilibrium price, 56–57, 422 equilibrium quantity, 56–57 rationing function of prices, 56 Market failures, 76–94 in competitive markets, 77 externalities and, 88–91 free-rider problem, 83–84 government involvement and, 32, 92, 94, 103 information failure, 98–100 nature of efficiently functioning markets, 77–82 public goods and, 82–87 Market for externality rights, 93 advantages of, 93 operation of market, 93 Market for money, 338 Market portfolio, 362 beta and, 362 Security Market Line and, 363–366 Market supply, 54 Market systems, 29–42 bureaucratic inefficiency versus, 108–109 business risk in, 39–42 change in, 34–35 characteristics of, 29–32 circular flow model and, 37–39 competition in, 30, 33 demise of command systems and, 36–37 efficiency in, 33, 36 www.downloadslide.net Index IND9 fundamental questions of, 32–35 imperfect institutions in, 111 “invisible hand” and, 36–37, 104 money in, 31–32 progress in, 35 pure competition (See Pure competition) pure monopoly (See Pure monopoly) in the United States, 28–29 virtues of, 36 Market(s), 30 See also Demand; Market systems; Supply in market systems (See Market systems) nature of, 48 role of, 48 Marriott, 100 MasterCard, 293 Maximum willingness to pay, 77–79, 80 MB = MC rule See also Costbenefit analysis; Marginal analysis comparing MB and MC, 86 in competitive markets, 58 economics of war, 12 for government efficiency, 103 optimal allocation and, 11–12, 57–58, 80–81 for optimal reduction of an externality, 92 for public goods, 84, 86 McDonald’s, 33 Measurement units, slopes and, 23 Median-voter model, 117–118 Medicare shortfalls in, 282–283 unfunded liabilities, 106–107 Medium of exchange, 31–32, 290 Menu costs, 256 Merrill Lynch, 301, 303 MetLife, 303 Mexico cheap foreign labor argument for trade protection, 427–428 comparative advantage, 412 exports of, 452 land-intensive goods, 412 North American Free Trade Agreement (NAFTA), 172, 429 opportunity-cost ratio, 415 Microchips, productivity acceleration and, 171 Microeconomics, of government (See Public choice theory; Public goods; Taxes and taxation) macroeconomics versus, Microsoft Corporation, 41, 171 Middle East modern economic growth and, 161 oil cartel, 194, 252, 382–383, 411 Military self-sufficiency argument for trade protection, 425–426 Mill, John Stuart, 237 Minimum wage, 257 Misery Index, 383 Mixed effects, of inflation, 193 Mizuho Financial, 298 Mobil Travel Guide, 100 Modern economic growth, 125–126, 160–164 catching up and, 161–164 uneven distribution of, 161 Monetarism, 394–395, 405 Monetary multiplier, 318–320 Monetary policy, 107, 323–347 See also Federal Reserve System cause-effect chain and, 338–339 cyclical asymmetry, 344–345 discount rate, 298, 301–302, 332 discretionary, 403 evaluating, 342–345 expansionary, 334–336, 339 federal funds rate and, 315, 333–338, 344–345 Federal Reserve functions in, 298–299 government role in promoting stability and, 295, 394–395 interest on reserves, 332–333 interest rates and, 323–347 liquidity trap, 344–345 macroeconomic instability and, 394–395 misdirection of stabilization policy, 107–108 monetary rule and, 401–402 money supply and, 290–295, 298 open-market operations, 297, 327–331 politicization of, 107–108 problems and complications, 344–345 recent U.S policy, 342–345 reserve ratio, 298, 310–311, 316– 320, 331–332 restrictive, 336–337366, 340–342 tools of, 327–333 Monetary rule, 401–402 Money, 31–32, 289–304 See also Currency; Interest creation of (See Money creation) functions of, 290 interest rates and demand for, 324 market for, 338 in market systems, 31–32 as medium of exchange, 31–32, 290 prices and, 294–295 purchasing power and, 294, 295 as store of value, 290, 292–295 time-value of money and, 353–356 as unit of account, 290 value of, 294 Money capital, Money creation, 308–320 fractional reserve system, 308–309 multiple destruction of money, 320 multiple-deposit expansion, 316–320 Money market deposit account (MMDA), 292 Money market mutual funds (MMMF), 292 Money supply See also Bank(s); Monetary policy “backing” for, 293–295 components of, 290–293 controlling, 298 Federal Reserve role in, 298 M1, 290–2923 M2, 292–293320 Monopoly, 45–427 See also Pure monopoly Moral hazard problem, 99, 301 Morale, 256–257 Morgan, Theodore, 196n Morgan Stanley, 301, 302, 303 Mortgage default crisis, 299–300, 342–343 Mortgage-backed securities, 299–300, 301 Multilateral trade agreements, 428–430 Multiple counting, 138–139 Multiple-deposit expansion, 316–320 Multiplier effect, 213–217 changes in equilibrium GDP and, 227 consumption and, 214–217 marginal propensities and, 214–217 monetary multiplier, 318–320 rationale for, 214 size of, 215–217 Mutual funds, 357–358 as investment, 357–358 largest, 357 types of, 357–358, 367 in U.S financial services industry, 303 National banks, 297 National Bureau of Economic Research (NBER), 180 National Credit Union Administration (NCUA), 294, 297, 312 National defense See also Terrorist attacks of September 11, 2001 economics of war, 12 imperfect institutions and, 111 military self-sufficiency argument for trade protection and, 425–426 National income (NI), 58, 137–153 abroad, 247 gross domestic product (GDP) and, 146 National income accounting, 138–140, 153 See also Gross domestic product (GDP) National Income and Product Accounts, 153 negative, 230 net export schedule, 228–229 positive, 229–230 National Income and Product Accounts (NIPA), 138, 153 National Monetary Commission, 296 Natural rate of unemployment (NRU), 184 Near-monies, 292 Necessities, luxuries versus, Negative externalities, 88 correcting for, 88, 90–91 government intervention, 90–91 market-based approach to, 93 optimal amount of externality reduction, 91–94 of taxation, 90 Negative GDP gap, 184–186, 235–236, 257, 267, 339 Negative net exports, 230 Negative slope, 23 Net costs of import quotas, 425 of tariffs, 425 Net domestic product (NDP), 146 Net exports (X), 142–143, 228–230 aggregate expenditures and, 228 changes in aggregate demand and, 247 equilibrium GDP and, 229–230 in national accounting, 153 Net foreign factor income, 144–145 Net investment income, 439 Net private domestic investment, 142 Net taxes, 270 Net transfers, 439 Net worth, of commercial banks, 309 Network effects, 172 New classical economics, 397–399 New Economy, 258 New York Community Bank, 303 New York Life, 303 New York Stock Exchange, as market, 48 Nicaragua, inflation in, 196 Nominal GDP, 124, 147–151, 149–150 adjustment for price changes, 149–150 real GDP versus, 147–151 www.downloadslide.net IND10 Index Nominal income, 191 Nominal interest rates, 193 Nondiversifiable risk, 360 Nondurable goods, 141, 181–182 business cycles and, 181–182 nondurable consumer goods, defined, 181–182 Noneconomic costs, of unemployment, 187 Noneconomic sources of wellbeing, 151 Nonexcludability, 83 Nonincome determinants of consumption and saving, 206–208 Noninvestment transactions, in GDP, 141–142 Nonmarket activities, gross domestic product and, 151 Nonproduction transactions, 139 Nonrivalry, 83 Nontariff barriers (NTB), 423 Normal goods, 51 Normative economics, North American Free Trade Agreement (NAFTA), 172, 429 North Korea, command system in, 28, 37 Northwestern Mutual, 303 NOW (negotiable order of withdrawal) accounts, 292 Number of buyers, change in demand and, 51, 52 Number of sellers, change in supply and, 55 Obama, Barack, 266, 274 Occupational licensing, 98–99 Occupation(s) See also Education and training burden of unemployment and, 186 occupational licensing, 98–99 Official reserves, 445–446, 460 Offshoring, 184 Offshoring, 430 Oil industry, cartels in, 194, 252, 382–383, 411 Okun, Arthur, 185 Okun’s law, 185 Olympics, preset ticket prices, 72–73 OPEC (Organization of Petroleum Exporting Countries), 194, 252, 382–383, 411 Open economy, 228–230, 412 Open-market operations, 297, 327–331 buying securities, 328–329 selling securities, 330–331 Operating costs, 211 Operational lag, 276 Opportunity cost(s), See also Economic costs budget line, choice and, law of increasing, 10–11 Opportunity-cost ratio, 414–415 Optimal allocation, in marginal analysis, 11–12, 57–58, 80–81 Optimal reduction of an externality, 91–94, 92 Oracle, 171 Organization of Petroleum Exporting Countries (OPEC), 194, 252, 382–383, 411 Other-things-equal assumption (ceteris paribus), in graphical expression, 22–23 income-consumption relationship and, 201–206 Outpayments, 439 Output coordination problem in command systems, 36–37 equilibrium real output, 253 in market systems, 34 potential, 184–186 Outsourcing, 430 Ownership of resources private property, 29, 41 public, 278–279, 281 restricting business risk to owners, 40, 42 Paper money, 291, 293–295, 309 Paradox of thrift, 208 Paradox of voting, 117–118 Parity concept, 126, 442 Partnerships, 38–39 Part-time workers, unemployment rate and, 182–183 Passively managed funds, 358, 367 Patents, 164, 165 Pay for performance, free-rider problem and, 83–84, 85 PayPal, 171 Peak, of business cycle, 180 Pension funds, in U.S financial services industry, 303 Pentagon Federal Credit Union, 303 Per capita GDP, 126, 159–164 Per capita income, 161 Percentage rate of return, 358 Percentages, 358 Personal consumption expenditures (C), 141, 246 Personal income (PI), 146 Personal income tax, 48, 246 Per-unit production costs, 249 Phillips, A W., 380 Phillips Curve, 380–385 aggregate supply shocks and, 383 disinflation and, 385 long-run, 384–385 nature of, 380–381 short-run, 384 vertical, 384–385 Picker, Les, 388n Pigou, Arthur, 90 Pigovian taxes, 90 Planned investment, 222, 224, 226 Political business cycles, 276 Political corruption, 110–111 Political issues business cycles and, 60, 181 in fiscal policy, 276 special interests, 116 Pollution, air, 89, 93 Population growth, birthrates and, 167 Pork-barrel politics, 105–106, 112 Portfolio, 357 diversification and, 360–361 market, 362, 363–366 Positive economics, Positive externalities, 88–89 Positive GDP gap, 184–186, 376 Positive net exports, 229–230 Positive relationships See Direct relationships Positive slope, 23 Post hoc, ergo propter hoc fallacy, 17 Postrel, Virginia, 41 Potential GDP, 184–186 Potential output, 184–186 Preferences limited and bundled choice, 108 paradox of voting and, 117 Prescription drugs, patents and innovation, 165 Present value, 353–356 applications of, 355–356 compound interest, 353–354 present value model, 354–356 Preset prices, 72–73 Price ceilings, 60–61 black markets and, 61 graphical analysis, 61 rationing and, 61 Price changes, nominal GDP versus real GDP, 147–151 Price floors, 62–64 additional consequences of, 63–64 effect of, 62–64 graphical analysis, 62–63 on wheat, 62–64 Price index, 149 Consumer Price Index (CPI), 188, 192 dividing nominal GDP by, 149–150 GDP, 149 Price wars, 132, 256 Price-level stability, 257–258 Price-level surprises, 399 Price(s) See also Equilibrium price level; Inflation ceilings on, 60–61 change in demand and, 51–52, 58, 69–71 change in supply and, 54–55, 58–60, 69–71 demand shocks and, 127–130 efficiency and, 81–82 equilibrium price level, 56–57, 253–258, 375 flexible, 127–132 floors on, 62–64 government-set, 60–64 of imported resources, 252 inflexible, 127–132 inverse relationship with quantity, 49 law of demand and, 49 in market systems, 30, 33–34 money and, 294–295 preset, 72–73 price-level surprises, 399 rates of return and, 359 rationing function of, 56 of related goods, 51–52 relative, 49 resource, 54–55 scalping and, 72–73 sticky, 127–132 in supply and demand analysis of exports and imports, 419–422 supply shocks and, 128 Primary markets, 72 Prime interest rate, 335 Principal-agent problem, 104–106 Principle of comparative advantage, 415–416 See also Comparative advantage Private bargaining, 90 Private closed economy, 222 Private goods, 82–83, 115 Private property, 29 Private sector, 103, 108–111 Private transfer payments, 139 Probability-weighted average, 361 Producer expectations change in supply and, 55 changes in aggregate demand and, 247 Producer surplus, 79–80 Product markets, 39 Production costs least-cost, 34 in market systems, 33–34 short-run, 248 Production possibilities curve, 10, 11 Production possibilities model, 9–13 assumptions of, economic growth and, 13–14, 166–167, 379 economics of war and, 12 www.downloadslide.net Index IND11 future and, 14–15 international trade and, 15 law of increasing opportunity costs, 10–11 optimal allocation and, 11–12 production possibilities curve, 10 production possibilities table, 10 Production possibilities table, 10 Productive efficiency, 57, 80 Productivity, 252 See also Economies of scale acceleration of, 170–173 aggregate supply and, 252 business cycles and, 181 economic growth and, 171–172 Professional organizations, occupational licensing in, 98–99 Professional sports teams consumer expectations for, 52 salary caps and deferred compensation, 356 Profit commercial bank, 315 corporate, 144 income approach to GDP and, 144 increasing returns, 171–172 investment demand and, 213 in market system, 39–40 start-up firms and, 171–172 Progress, in market systems, 35 Progressive taxes, 271 Property and equipment, commercial bank acquisition of, 310 Property rights economic growth and, 164 in market systems, 29 Proportional taxes, 271 Proprietors’ income, income approach to GDP and, 144 Prosperity abroad, international economic linkages, 230 Protection-against-dumping argument for trade protection, 426 Protectionism, proponents of, 431 Protective tariffs, 423 Prudential, 303 Public choice theory, 115–118 government failure and, 108 majority voting in, 115–117 Public debt, 279–283 external, 281 false concerns, 280 foreign-owned, 281 future generations and, 280 gross domestic product and, 279 interest on, 279–280 international comparisons, 279 money as debt, 293–294 ownership of, 278–279, 281 substantive issues, 280 Public goods, 82–87 characteristics of, 83–84 cost-benefit analysis for, 86–87 demand for, 84–86 externalities and, 88–91 free-rider problem and, 83–84, 85 information failures, 98–100 marginal analysis, 86–87 optimal quantity of, 84 preferences through majority voting, 115 private goods versus, 83–84 Public investments, 281–282 Public ownership, of public debt, 278–279, 281 Public sector See also Government in aggregate expenditures (AE) model, 231–234 government purchases, 142, 153, 231–232, 268 quasi-public goods and, 87 resource reallocation and, 87 taxation, 232–234 Public transfer payments, 139 Public utilities, price discrimination in, 27 Public-private complementarities, 281–282 Purchasing power inflation and, 193, 294, 295 money and, 294 stabilizing, 295 Purchasing-power-parity theory, 126, 442 Pure capitalism, 28 Pure competition, 36, 104 Pure monopoly, 28–240 Purposeful behavior, Putnam, 303 Qualification, information failures, 100 Quality, of products, gross domestic product and, 151 Quantitative easing (QE), 336, 343 Quantity of capital, 168–169 change in quantity demanded, 52–53, 58 change in quantity supplied, 55, 58–60 equilibrium, 56–57 inverse relationship with price, 49 Quasi-public banks, 296 Quasi-public goods, 87 Quotas, import, 423, 425 Race See African Americans; Hispanics Railroads deregulation of, 110 regulatory capture, 109 Ratchet effect, 256, 269 Rates of return arbitrage and, 359 asset prices and, 359 average expected rate of return, 361, 362 calculating, 358–359 expected, 208–209, 246–247, 361, 362 risk-free, 362–363 Rational expectations theory (RET), 397–400, 405 Rational self-interest, purposeful behavior and, Rationing, prices and, 56, 61 Reagan, Ronald, 387, 389 Real capital See Capital Real domestic output, 223 Real estate exchange rates and, 443 subprime mortgage crisis, 299–300, 342–343 Real GDP, 124, 147–151, 149 See also Gross domestic product (GDP) adjustment for price changes, 149–150 economic growth and, 159, 174–175 nominal GDP versus, 147–151 taxation and, 388 Real GDP per capita, 159–164 Real income, 191 Real interest rates, 193, 209, 246 changes in aggregate demand and, 246 inflation and, 193 as nonincome determinant of consumption and saving, 207 Real-balances effect, 244 Real-business-cycle theory, 395–396 Recession, 124, 180 See also Great Recession of 2007–2009 in aggregate demand-aggregate supply model, 377–378 in business cycle, 124, 125, 180, 181 decreases in aggregate demand and, 255–257 expansionary monetary policy, 334–336, 339 in extended AD-AS model, 377–378 in the U.S., 180 Recessionary expenditure gap, 234–236 inflationary expenditure gap versus, 237, 238 Keynes’ solution to, 236 Recognition lag, 275–276 Refinancing, of public debt, 280 Regressive taxes, 271 Regulation See Government regulation Regulatory agency, 109 Regulatory capture, 109–110 deregulation as alternative, 109–110 railroad industry, 109 Relative interest rates, exchange rates and, 443 Relative price, 49 Relative scarcity, 294 Rent income approach to GDP and, 144 land, 106 Rent controls, 61–62 Rent-seeking behavior, 106 Repo, 331 Representative democracy, medianvoter problem, 117–118 Required reserves, 298, 310–311, 316–320, 327, 331–332 Research and development (R&D), economies of scale and, 172 Reserve ratio, 310–311, 316–320, 332 discount rate and, 332 lowering, 331 raising, 331 term auction facility, 298 Reserve requirements, 298, 310–311, 316–320, 327, 331–332 Reserve(s) actual, 311–312 of commercial banks, 310–311, 316–320, 327, 331–332 excess, 311–312, 314 Residual claimants, 40 Resource allocation See also Resource markets economic growth and, 170 supply of energy in (See Energy economics) Resource markets, 39 See also Interest; Profit; Rent; Supply of resources; Wage determination in circular flow model, 39 public sector role in reallocation, 87 resource prices and, 54–55 Restrictive monetary policy, 336–337, 340–342 Revenue tariffs, 423 Reverse repo, 330–331 Reverse wealth effect, 206 Ricardo, David, 237, 413 Risk, 359–361 See also Insurance; Uncertainty average expected rate of return and, 361, 362 business, 39–426 comparing risky investments, 361–363 diversification and, 359–361 exchange-rate, 454 www.downloadslide.net IND12 Index Risk—Cont government role in reducing private-sector risks, 103 international investment risks, 361 in market system, 39–42 restricting to owners, 40, 42 risk-free rate of return, 362–363 Security Market Line and, 363–366 shielding employees and suppliers from, 39–42 shocks and, 127–130 Risk premium, 363 Risk-free interest rate, 362–363, 363–366 Ritter, Joseph A., 153n Ritter, Lawrence S., 401n Rivalry, 83 Rivlin, Alice M., 175n Roman Empire, 125 Romer, Christina, 388, 388n Romer, David, 388, 388n Royal Bank of Scotland, 298 Rule of 70, 159, 188 Russia, command system in, 28, 36–37 Sahay, Ratna, 196n Salary caps, present value and, 356 Salmon, market for, 70 Saving schedule, 204–206 other considerations, 207 shifts in, 207 Savings, 126 average propensity to save (APS), 204–205 in equilibrium GDP, 226 income and, 201–206 marginal propensity to save (MPS), 214–217 multiplier and, 214–217 nonincome determinants of, 206–208 paradox of thrift, 208 taxation and, 386 Savings accounts, 292 Savings and loan associations (S&Ls), 292, 303 Savings deposits, 292, 320 Say, J B., 237 Say’s law, 237 Scalping, 72–73 Scarce resources, Scarcity, economic growth and, 159 economic perspective and, economic resources and, marginal analysis and, relative, 294 Schneider, Friedrich, 152n Scientific method, Seacrest, Ryan, Search unemployment, 183 Secondary markets, 72 Secondhand sales, exclusion from GDP, 139 Securities firms, in U.S financial services industry, 303 Securitization, 300, 301 Security Market Line (SML), 363–366 Self-correction of economy, 397–400 mainstream view of, 399–400 new classical economics view of, 397–399 Self-interest, 29–30, 36 Self-selection, 58 Self-sufficiency output mix, 415 September 11, 2001, terrorist attacks, 12, 258, 276, 403 Service economy, 141 Services, 141 business cycles and, 181–182 private (See Private goods) public (See Public goods) Shadow banking system, 300 Shocks, 127–128 demand, 127–132 expectations and, 127–130 importance of, 127–128 supply, 128, 383, 394 Short run, 374–375 aggregate supply in, 248–253, 374–375 Phillips Curve in, 384 production costs in, 248 Shortage, 56 Short-run aggregate supply curve, 249, 374–375 Silber, William L., 401n Simple multiplier, 246, 267 Simultaneous consumption, 172 Slope of a nonlinear curve, 24 Slope of a straight line, 23 infinite, 23–24 marginal analysis and, 23 measurement units and, 23 negative, 23 positive, 23 zero, 23–24 Small business See Entrepreneurs; Start-up firms Smith, Adam, 36, 104, 413, 413n Smith Barney, 302 Smoot-Hawley Tariff Act of 1930, 427 Snyder’s of Hanover, 46 Social Security adjustment of benefits for inflation, 188 adverse selection problem, 100 shortfalls in, 282–283 unfunded liabilities, 106–107 Social Security Trust Fund, 282–283 Socialism See Command systems Society, economizing problem of, Sole proprietorships, 38 Solyndra, 110 South Korea international trade, 412 market system in, 37 Soviet Union, 28, 37, former Special interests logrolling and, 116 nature of, 116 rent seeking and, 106 special-interest effect, 105–106 Special-interest effect, 105–106 Specialization, 31 comparative advantage and, 415–416 division of labor and, 31 gains from, 430 geographic, 31 labor, 430 in market systems, 31 offshoring and, 430 Specialized inputs, 172 Speculation in currency markets, 454 in determination of exchange rates, 443 Sports See Professional sports teams SSI See Supplemental Security Income (SSI) Stagflation, 383 Standard & Poor’s 500 Index, 357 Start-up firms, 171–172 See also Entrepreneurs economic growth and, 171–172 information technology, 171 productivity acceleration and, 171–172 State banks, 297 State government fiscal policies of, 276–277 lotteries, 355–356 Steam engine, 160 Sterilization, 448 Sticky prices See Inflexible (“sticky”) prices Stock exchanges, 48 Stock market bubbles and, 273 crash of 1929, 17 exclusion from GDP, 139 Stock(s), 356 bonds versus, 357 exchange rates and, 443 as investment, 356–357 limited liability rule, 356–357 Store of value, 290, 293–295 Street entertainers, 84 Structural adjustment, 133 Structural unemployment, 183–184 Student loans, 62–63 Subprime mortgage loans, 299–300, 342–343 Subsidies, 253 change in supply and, 55 for consumers, 90 in correcting for positive externalities, 90–91 export, 423 as government intervention, 90 government provision, 90 for suppliers, 90 Substitute goods, 51 change in demand and, 52 change in supply and, 55, 56 prices of, 51–52 Substitute resources, 57 Substitution effect, 49 Supplemental Security Income (SSI) government role in promoting, 295, 394–395 monetary policy and, 295, 394–395 of purchasing power of money, 295 self-correction of economy, 397–400 shifts in income and savings schedules, 207 sources of macroeconomic instability, 394–395 Supply, 53–56 See also Market supply aggregate (See Aggregate supply) change in demand and, 69–71 change in quantity supplied, 55, 58–60 change in supply, 54–55, 58–60, 69–71 determinants of, 54, 55 law of supply, 53–54 market supply, 54 resource (See Supply of resources) supply curve, 54 Supply curve, 54 reaction to demand shifts, 72 upsloping versus vertical, 71–72 Supply factors, 165 Supply of resources, increase in, 13–14 Supply schedule, 53 Supply shifters, 54 Supply shocks, 128, 383, 394 Supply-side economics, 385–389 incentives to save and invest, 386 incentives to work, 386 Laffer Curve and, 386–387 Supply-side market failures, 77 Surplus, 56 balance-of-payments, 450 budget, 269 Sushi, market for, 71 Swift, Taylor, www.downloadslide.net Index IND13 T Rowe Price, 303 TANF (Temporary Assistance for Needy Families), 99 Target rate of inflation, 402 Tariffs, 423–425 direct effects, 424 economic impact of, 424–425 indirect effects, 424–425 international economic linkages, 230–231 net costs of, 425 Tastes change in demand and, 50–51, 52 in determination of exchange rates, 442 in market systems, 35 Taxes and taxation aggregate supply and, 386–387 changes in aggregate demand and, 247 changes in supply and, 55, 56 clipping coins in, 190 corporate, 144, 211, 253 equilibrium GDP and, 232–234 fiscal policy and increase in, 269–270 fiscal policy and reduction of, 268 as government intervention, 90 incentives and, 386 Laffer Curve and, 386–387 marginal tax rate, 386 negative externalities and, 90 personal, 246 on production and imports, 144 progressive, 271 proportional, 271 public debt and, 280 public sector, 232–234 real GDP and, 388 regressive, 271 shifts in income and savings schedules, 207 shifts in investment demand curve and, 211 specific taxes, 90 supply-side economics, 386–387 underground economy and, 151 Taxes on production and imports, 144 Taylor rule, 337–338 TD Ameritrade, 303 Teamsters Union, 303 Technology See also Innovation advances in, 14, 35, 164, 168, 171–172 changes in aggregate demand and, 247 changes in supply and, 55 economic growth and, 14, 164, 171–172 in market systems, 31, 35 in production possibilities model, 9 productivity changes and, 171 shifts in investment demand curve and, 211 Temporary Assistance for Needy Families (TANF), 99 Term auction facility, 298 Terms of trade, 416 comparative advantage and, 416 flexible exchange rates and, 444 Terrorist attacks of September 11, 2001, 12, 258, 276, 403 Thrift institutions, 292 in Federal Reserve System, 297–298 required reserves of, 327 in U.S financial services industry, 303 TIAA-CREF, 302, 303 Ticket scalping, 72–73 Till money/vault cash, 310 Time duration of unemployment, 187 specialization and, 31 supply-side economics and, 387 timing problems in fiscal policy, 275–276 Time deposits, 292 Time preference, 362–363 Time-value of money applications, 355–356 compound interest, 353–354 present value, 353–356 Token money, 291 Total cost (TC), 33 Total demand See Demand curve; Market demand Total fertility rate, 174–175 Total money demand, 324 Total revenue (TR), 33 Total supply See Market supply; Supply curve; Supply schedule Toyota, 138 Trade Adjustment Assistance Act of 2002, 430 Trade barriers, 423–425 net costs of, 425 trade barrier wars, 427 types of, 423–425 (See also Import quotas; Tariffs) Trade deficits, 411, 438 causes of, 452–453 implications of, 453 increased current consumption, 452 of the U.S., 452–453 Trade surplus, 411, 438 Trade unions See Labor unions Trade-offs, Trading possibilities line, 416–418 Training See Education and training Transactions demand for money, 324 Transfer payments See also Income distribution exclusion from GDP, 139 public debt as, 280 public versus private, 139 Treasury bills, 279 Treasury bonds, 279 Federal Reserve purchases of, 327 Federal Reserve sale of, 330–331 Troubled Asset Relief Program (TARP), 301 Trough, of business cycle, 180 Trucking, deregulation of, 110 Tuition, 62–63 Uber, 58 Unanticipated inflation, 191 Unattainable combinations, Uncertainty See also Risk flexible exchange rates and, 444 shocks and, 127–130 Underground economy See also Taxes and taxation exchange controls and, 449 gross domestic product and, 151 price ceilings and, 61 Undistributed corporate profits, 144, 146 Unemployment, 13–15, 124, 182–187 cyclical, 184, 255–257 definition of full employment, 184 downward wage inflexibility and, 183 economic cost of, 184–187 education and, 187 gender and, 187 Great Recession of 2007–2009 and, 186, 195 inflation and, 380–383 measurement of, 182–183 noneconomic costs of, 187 in production possibilities model, 13 structural, 183–184 trends in, 383 types of, 183–184 unequal burdens, 186–187 in the U.S., 125, 182–183 Unemployment equilibrium, 396–397 Unemployment rate, 182–183 Unfunded liabilities, 106–107 Unions See Labor unions Unit of account, 290 United Kingdom Bank of England, 108, 296 modern economic growth and, 162–164 United States dollar See also Exchange rate(s) economic growth measures and, 125–126 purchasing power of, 294 United States economy See also Federal government balance of payments, 437–440 business cycles in, 179 capital-intensive goods, 412 circular flow model and, 146–147, 148 commercial banks in, 297–298 comparative advantage, 412 economic growth in, 159–164, 170–173, 195 economics of war and, 12, 258, 276 export supply, 420–421 fiscal policy in, 271–283 gasoline market in, 60–61, 70–71, 98 Great Depression and, 13, 17, 131, 133, 180, 222, 231, 237, 299, 393, 427 Great Recession of 2007–2009 (See Great Recession of 2007-2009) gross domestic product (GDP) of, 124, 125–126 inflation in, 189, 195 international trade and, 411 (See also International trade) market system in, 29 monetary policy in, 342–345 mortgage default crisis, 342–343 multilateral trade agreements, 428–430 North American Free Trade Agreement (NAFTA), 172, 429 offshoring of jobs and, 430 opportunity-cost ratio, 414 productivity acceleration and, 171–172 public sector, 231–234 recent and projected fiscal policy, 273–275 recent monetary policy, 342–345 recessions in, 180 specialization and, 84 supply and demand analysis for international trade, 419–422 terrorist attacks of September 11, 2001, 12, 258, 276, 403 trade adjustment assistance, 430 trade deficits, 452–453 unemployment in, 125, 182–183 U.S Bureau of Economic Analysis (BEA), 153 U.S Bureau of Engraving and Printing, 291, 308 U.S Bureau of Labor Statistics, 182 U.S Census Bureau, 153 U.S Department of Commerce, 153, 437 U.S Department of Energy (DOE), 110 U.S Food and Drug Administration (FDA), 109 www.downloadslide.net IND14 Index U.S government securities, 278 assets of Federal Reserve Banks, 326–327 liabilities of Federal Reserve Banks, 327 open-market operations and, 327–331 purchase by commercial banks, 314–315 U.S Mint, 291, 308 U.S Office of Personnel Management, 153 U.S savings bonds, 278 U.S Securities and Exchange Commission (SEC), 109 U.S Treasury Department, 278 Unlimited wants, Unplanned changes, 226–227 Unrelated goods, 52 Upsloping supply curve, 72 Uruguay Round, 428 U.S Department of Agriculture, 112 Utility, marginal utility (See Marginal utility) purposeful behavior and, Value added, 139 Value judgment, Vanguard, 303 Variables dependent, 22 independent, 22 Vault cash, 310 Végh, Carlos, 196n Velocity, of money, 394–395 Vertical axis, 21 Vertical intercept, 24 Vertical Phillips Curve, long-term, 384–385 Vertical supply curve, 72 Visa card, 293 Voluntary export restriction (VER), 423 Voting See Majority voting Wachovia, 301 Wage contracts, 256 Wage determination downward wage inflexibility and, 400–434 pay for performance, 83–84 Wage(s) See also Wage determination efficiency, 256, 400 minimum, 257 Wait unemployment, 183 Wall Street Reform and Consumer Protection Act, 302–303 Walmart, 39 War See also National defense economics of, 12, 258, 276 price wars, 132, 256 Washington Mutual, 301, 302 Watt, James, 160 Wealth aggregate demand and, 246 changes in aggregate demand and, 246 household, 206 as nonincome determinant of consumption and saving, 206 Wealth effect, 206, 246 Wealth of Nations, The (Smith), 36 Well-being, noneconomic sources of, 152 Wells Fargo, 298, 301, 302, 303 Wendy’s, 100 Wheat, price floors on, 62–64 Williams, Raburn, 196n Women economic growth and, 168 in the labor force, 168 unemployment and, 186 World price, 419–420, 422 World Trade Organization (WTO), 172, 428–429 Yahoo!, 171 Zero inflation, 196 Zero interest rate policy (ZIRP), 343 Zero lower bound problem, 344–345 Zero slopes, 23–24 Zimbabwe, hyperinflation in, 196 ZIRP (zero interest rate policy), 343 Zuckerberg, Mark, www.downloadslide.net www.downloadslide.net www.downloadslide.net www.downloadslide.net www.downloadslide.net www.downloadslide.net www.downloadslide.net www.downloadslide.net ... Markets Demand Law of Demand  /  The Demand Curve  /  Market Demand  /  Changes in Demand  /  Changes in Quantity Demanded 48 48 Supply 53 Market Equilibrium 56 Changes in Supply, Demand, and Equilibrium... CPA and a House Painter  413 Consider This: Misunderstanding the Gains from Trade 418 Supply and Demand Analysis of Exports and Imports 419 Supply and Demand in the United States  /  Supply and. .. Economics, Principles of Microeconomics, Principles of Macroeconomics Third Edition Karlan and Morduch Economics, Microeconomics, and Macroeconomics Second Edition McConnell, Brue, and Flynn