The 4th edition of Macroeconomics can now be packaged with MyEconLab For more details read the preface inside this text MyEconLab is the next generation of online learning and assessment With millions of users worldwide, Pearson’s leading MyLab solutions deliver highly personalised study paths, responsive learning tools, unlimited practice, customisable content and real-time evaluation and diagnostics MyEconLab gives educators the ability to move each student towards the moment that matters most—the moment of true understanding and learning Visit www.pearson.com.au/myeconlab Macr oeconomic s NEW! Oli v ie r Blanchar d Je f f r e y Sheen Reflecting the macroeconomic realities of the Australasian economy VIDEOS! E di t i on New to MyEconLab for Macroeconomics 4e are videos of IMF Chief Economist and lead US author, Olivier Blanchard, giving his insight into economics issues and how they relate to the theories and concepts in the text These videos will help students understand how real-world issues are affecting the world economy Oli v ie r Blanchar d Je f f r e y Sheen Macr oeconomics AUSTRALASIAN EDITION Edition Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e macroeconomics final.indd 21/03/13 3:32 PM Macr oeconomics AUSTRALA SIA N EDITION Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 18/03/13 12:13 PM Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 18/03/13 12:13 PM Oli v ier Blanchar d Je f f r e y Sheen Macr oeconomics AUSTRALA SIA N EDITION Edition Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 18/03/13 12:13 PM Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 Pearson Australia Unit 4, Level 14 Aquatic Drive Frenchs Forest NSW 2086 www.pearson.com.au Authorised adaptation from the United States edition entitled Macroeconomics, 6th edition, ISBN 0133061639 by Blanchard, Olivier; Johnson, David R., published by Pearson Education, Inc., publishing as Prentice Hall, Copyright © 2013 Fourth adaptation edition published by Pearson Australia Group Pty Ltd, Copyright © 2013 The Copyright Act 1968 of Australia allows a maximum of one chapter or 10% of this book, whichever is the greater, to be copied by any educational institution for its educational purposes provided that that educational institution (or the body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act For details of the CAL licence for educational institutions contact: Copyright Agency Limited, telephone: (02) 9394 7600, email: info@copyright.com.au All rights reserved Except under the conditions described in the Copyright Act 1968 of Australia and subsequent amendments, no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner Senior Acquisitions Editor: Simone Bella Senior Project Editor: Sandra Goodall Editorial Coordinator: Germaine Silva Production Coordinator: Caroline Stewart Copy Editor: Laura Davies Proofreader: Joy Montgomery Copyright and Pictures Editor: Emma Gaulton Indexer: Mary Coe Cover design by Nada Backovic Cover illustration by Ronny Grewal, RGLifeart Typeset by Aptara, Inc., India Printed in China 17 16 15 14 13 Author: Blanchard, Olivier (Olivier J.) Title: Macroeconomics : Australasian edition / Olivier Blanchard ; Jeffrey Sheen Edition: 4th ed ISBN: 9781442559516 (pbk.) ISBN: 9781442563018 (Vital Source) Notes: Includes index Subjects: Macroeconomics—Textbooks Other Author/Contributor: Sheen, Jeffrey R Dewey Number: 339 Every effort has been made to trace and acknowledge copyright However, should any infringement have occurred, the publishers tender their apologies and invite copyright owners to contact them Due to copyright restrictions, we may have been unable to include material from the print edition of the book in this digital edition, although every effort has been made to minimise instances of missing content Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 21/03/13 2:15 PM Professor Blanchard has done research on many macroeconomic issues, including the effects of fiscal policy, the role of expectations, price rigidities, speculative bubbles, unemployment in Western Europe, transition in Eastern Europe, the role of labour-market institutions and the various aspects of the current crisis He has done work for many governments and many international organisations, including the World Bank, the IMF, the OECD, the EU Commission and the EBRD He has published over 150 articles and edited or written over 20 books, including Lectures on Macroeconomics with Stanley Fischer He is a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society, a member of the American Academy of Arts and Sciences and a past vice-president of the American Economic Association He currently lives in Washington, DC with his wife, Noelle He has three daughters, Marie, Serena and Giulia JEFFREY SHEEN is a Professor of Economics at Macquarie University He did his undergraduate work in Cape Town, and received a PhD in economics at the London School of Economics and Political Science in 1977 He has held research and teaching positions at the London School of Economics, the University of Manchester, the University of Essex, the University of Sydney and Macquarie University He has been a visiting economist at the Reserve Bank of Australia His research has been in the general fields of macroeconomics and international economics He has done both theoretical and applied work, with a substantial interest in the Australian economy and has published widely in international journals Professor Sheen is council member of the Economics Society of Australia and has been a council member of the Australasian Standing Committee of the Econometric Society He is currently the managing editor of the Economic Record, Australia’s leading professional economics journal, and is a member of the Shadow Reserve Bank Board at the Centre for Applied Macroeconomic Analysis at the Australian National University He currently lives in Sydney and has two adult children, Rani and Jacob, who live in Toronto, Canada Abou t t he Au t hor s OLIVIER BLANCHARD is the Robert M Solow Professor of Economics at the Massachusetts Institute of Technology He did his undergraduate work in France and received a PhD in economics from MIT in 1977 He taught at Harvard from 1977 to 1982 and has taught at MIT since 1983 He has frequently received the award for best teacher in the department of economics He is currently on leave from MIT and serves as the Chief Economist at the International Monetary Fund Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 18/03/13 12:13 PM Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 18/03/13 12:13 PM Introduction Chapter A Tour of the World Chapter A Tour of the Book 23 THE CORE 46 • The Short Run 47 Chapter The Goods Market 48 Chapter Financial Markets 69 Chapter Goods and Financial Markets: The IS–LM Model 91 • The Medium Run 119 Chapter The Labour Market 120 Chapter Putting All Markets Together: The AS–AD Model 147 Chapter The Phillips Curve, the Natural Rate of Unemployment and Inflation 179 Chapter The Crisis 203 • The Long Run 225 Chapter 10 The Facts of Growth 226 Chapter 11 Saving, Capital Accumulation and Output 244 Chapter 12 Technological Progress and Growth 269 Chapter 13 Technological Progress: The Short, the Medium and the Long Run 288 EXTENSIONS 310 • Expectations 311 Chapter 14 Expectations: The Basic Tools 312 Chapter 15 Financial Markets and Expectations 336 Chapter 16 Expectations, Consumption and Investment 360 Chapter 17 Expectations, Output and Policy 381 • The Open Economy 401 Chapter 18 Openness in Goods and Financial Markets 402 Chapter 19 The Goods Market in an Open Economy 425 Chapter 20 Output, the Interest Rate and the Exchange Rate 448 Chapter 21 Exchange Rate Regimes 471 • Back to Policy 505 Chapter 22 Should Policy-makers Be Restrained? 506 Chapter 23 Fiscal Policy: A Summing Up 526 Chapter 24 Monetary Policy: A Summing Up 550 • Epilogue 574 Chapter 25 Epilogue: The Story of Macroeconomics 575 Appendix An Introduction to National Income and Product Accounts 589 Appendix A Maths Refresher 597 Appendix An Introduction to Econometrics 603 Glossary 608 Index 627 List of Symbols 637 Brief Cont ent s Copyright â Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 18/03/13 12:13 PM Cont ent s Preface xviii Introduction Chapter A Tour of the World 1.1 The crisis 1.2 Australia 1.3 The United States Should you worry about the US fiscal deficit? 10 1.4 The Euro area How can European unemployment be reduced? What has the Euro done for its members? 12 1.5 China 15 1.6 Looking ahead 17 Appendix: Where to find the numbers? 20 Chapter A Tour of the Book 11 14 14 23 2.1 Aggregate output GDP: Production and income Nominal and real GDP GDP: Level versus growth rate 23 24 25 27 2.2 The unemployment rate Why economists care about unemployment? 29 2.3 The inflation rate The GDP deflator The consumer price index Why economists care about inflation? 32 32 33 2.4 Output, unemployment and the inflation rate: Okun’s law and the Phillips curve Okun’s law The Phillips curve 30 34 35 35 36 2.5 The short run, the medium run, the long run 37 2.6 A tour of the book The core Extensions Back to policy Epilogue 38 38 39 39 39 Appendix: The construction of real GDP and chain-type indexes 44 THE CORE THE SHORT RUN 46 47 Chapter The Goods Market 48 3.1 The composition of GDP 3.2 The demand for goods Consumption (C ) Investment (I) Government spending (G) 49 50 51 52 53 3.3 The determination of equilibrium output Using algebra Using a graph Using words How long does it take for output to adjust? 53 54 55 57 57 3.4 Investment equals saving: An alternative way of thinking about goods–market equilibrium 61 3.5 Is the government omnipotent? A warning 63 Chapter Financial Markets 69 4.1 The demand for money Deriving the demand for money 69 71 4.2 Determining the interest rate: I Money demand, money supply and the equilibrium interest rate Monetary policy and open market operations Bond prices and bond yields Choosing money or choosing the interest rate? Money, bonds and other assets 73 4.3 Determining the interest rate: II What banks The supply of and demand for central bank money The demand for money The demand for reserves The demand for central bank money The determination of the interest rate 78 78 73 76 76 77 78 81 81 82 82 83 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 18/03/13 12:13 PM CONTENTS 4.4 Two alternative ways of looking at the equilibrium The interbank cash market and the cash rate The supply of money, the demand for money and the money multiplier Understanding the money multiplier 83 84 85 85 Chapter Goods and Financial Markets: The IS–LM Model 91 5.1 The goods market and the IS relation Investment, sales and the interest rate Determining output Deriving the IS curve Shifts of the IS curve 91 92 92 94 95 5.2 Financial markets and the LM relation 96 Real money, real income and the interest rate Deriving the LM curve Shifts of the LM curve 96 96 97 5.3 Putting the IS and the LM relations together 98 Fiscal policy, activity and the interest rate 99 Monetary policy, activity and the interest rate 102 5.4 Using a policy mix 104 5.5 How does the IS–LM model fit the facts? 109 Appendix: An alternative derivation of the LM relation as an interest rate rule THE MEDIUM RUN Chapter The Labour Market 116 119 120 6.1 A tour of the labour market The large flows of workers 120 121 6.2 Movements in unemployment 125 6.3 Wage determination Bargaining Efficiency wages Wages, prices and unemployment The expected price level The unemployment rate The other factors 127 129 129 131 131 131 131 6.4 Price determination 132 6.5 The natural rate of unemployment The wage-setting relation The price-setting relation Equilibrium real wages and unemployment From unemployment to employment From employment to output 133 133 134 134 135 136 6.6 Tax distortions and the natural rate of unemployment 137 6.7 Where we go from here 139 Appendix: Wage- and price-setting relations versus labour supply and labour demand 144 Chapter Putting All Markets Together: The AS–AD Model 147 7.1 Aggregate supply 148 7.2 Aggregate demand Deriving the AD curve with a fixed money stock Deriving the AD curve with an interest rate rule 150 151 153 7.3 Equilibrium in the short run and in the medium run Equilibrium in the short run From the short run to the medium run 155 155 156 7.4 The effects of a monetary policy expansion The dynamics of adjustment Going behind the scenes The neutrality of money 158 158 159 160 7.5 A decrease in the budget deficit Deficit reduction, output and the interest rate Budget deficits, output and investment 162 164 164 7.6 An increase in the price of oil Effects on the natural rate of unemployment The dynamics of adjustment 166 7.7 Conclusions The short run versus the medium run Shocks and propagation mechanisms Where we go from here 171 172 172 173 167 168 ix Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 18/03/13 12:13 PM www.downloadslide.net GLOSSARY secondary labour market A labour market where jobs are poor, wages are low, and turnover is high Contrast to the primary labour market securitisation The issuance of securities, based on an underlying portfolio of assets, such as mortgages, or commercial paper seignorage The revenues from the creation of money senior securities Those securities in a securitised asset whose claims will first be paid, ahead of any junior security claims separations Workers who are leaving or losing their jobs services Commodities that cannot be stored and thus must be consumed at the place and time of purchase severance payments Payments made by firms to laid-off workers shadow banking system The set of non-bank financial institutions, from SIVs to hedge funds share A financial asset issued by a firm that promises to pay a sequence of payments, called dividends, in the future Also called stock shocks Movements in the factors that affect aggregate demand and/or aggregate supply shoe-leather costs The costs of going to the bank (or an ATM) to take money out of a deposit account short run A period of time extending over a few years at most short-term bond A bond with maturity of one year or less short-term portfolio (capital) flows Changes in private foreign holdings of Australian assets and private Australian holdings of foreign assets, where the investor owns less than 10 per cent of the target asset See long-term direct investment (capital) flows simulation The use of a model to look at the effects of a change in an exogenous variable on the variables in the model skill-biased technological progress The proposition that new machines and new methods of production require skilled workers to a greater degree than in the past slope In a linear relation between two variables, the amount by which the first variable increases when the second increases by one unit slump A long period of low or no output growth social security trust fund A fund that the US Social Security has built up because contributions have slightly exceeded benefits since the early 1980s soft landing When the economy suffers a small amount after a negative macroeconomic shock Solow residual The excess of actual output growth over what can be accounted for by the growth in capital and labour solvency When an organisation’s balance sheet capital is positive spending caps Constraints set on discretionary government spending in the US in the 1990s spread The difference in yields between two assets Stability and Growth Pact (SGP) The agreement that countries adopting the euro signed, requiring them to keep their budget deficit under per cent of GDP or else face large fines stabilisation program A government program aimed at stabilising the economy Often used in the context of stopping a high inflation or even a hyperinflation Sometimes used to describe a plan to reduce a large deficit Often the two may be combined stagflation The combination of stagnation (or low output growth) and inflation staggering (of wage and price decisions) The fact that different wages (and prices) are adjusted at different times, making it impossible to achieve a synchronised decrease in nominal wage (or price) inflation standard of living An average measure of the economic wellbeing of the people in a country For example, output per capita or output per person standardised employment deficit See cyclically adjusted deficit state of technology The degree of technological development in a country or industry static expectations A prediction that the future value of a variable will be the same as its current value statistical discrepancy A difference between two numbers that should be equal, coming from 624 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z04_BLAN9516_4_LT_GLOS.indd 624 21/03/13 2:15 PM www.downloadslide.net GLOSSARY differences in sources or methods of construction for the two numbers steady state In an economy without technological progress, the state of the economy where output and capital per worker are no longer changing In an economy with technological progress, the state of the economy where output and capital per effective worker are no longer changing stock A variable that can be expressed as a quantity at a point in time (such as wealth) Also a synonym for share stocks An alternative term for inventories strategic interactions An environment in which the actions of one player depend on and affect the actions of another player structural change The change in the structure of the economy induced by technological progress structural deficit See cyclically adjusted deficit structural rate of unemployment See natural rate of unemployment structured investment vehicle (SIV) Financial intermediaries set up by banks SIVs borrow from investors, typically in the form of short-term debt, and invest in securities structures In the national income and product accounts: plants, factories, office buildings and hotels See non-residential investment subprime mortgages (subprimes) Mortgages with a higher risk of default by the borrower sudden stops When investors sell all of their assets in a country because of a perception of heightened risk superannuation Funds to which income earners and their employers contribute, building up savings that will yield an income in retirement supply-siders A group of economists in the 1980s who believed that tax cuts would increase activity by enough to increase tax revenues tariffs Taxes on imported goods tax smoothing The principle of keeping tax rates roughly constant, so that the government runs large deficits when government spending is exceptionally high and small surpluses the rest of the time tax wedge The proportional difference between the after-tax producer wage and the after-tax consumer wage Taylor rule A rule, suggested by John Taylor, telling a central bank how to adjust the nominal interest rate in response to deviations of inflation from its target, and of the unemployment rate from the natural rate technological catch-up When less advanced economies improve their level of technology by copying and adapting the new processes and products developed in the more advanced economies, usually through imitation technological frontier The state of technology that the most advanced countries have reached technological progress An improvement in the state of technology technological unemployment Unemployment brought about by technological progress TED spread The difference between the Libor yield and the the Treasury bill rate term deposit account See term deposits term deposits Deposits at banks which must not be withdrawn for a fixed period to benefit from an advantageous interest rate term structure of interest rates See yield curve time inconsistency (in game theory) The incentive for one player to deviate from his previously announced course of action once the other player has moved Tobin’s q The ratio of the value of the capital stock, calculated by adding the stock market value of firms and the debt of firms, to the replacement cost of capital total factor productivity See Solow residual total wealth The sum of human wealth and nonhuman wealth toxic assets Non-performing assets, from subprime mortgages to other non-performing loans tradable goods Goods that compete with foreign goods in domestic or foreign markets trade balance The difference between exports and imports Also called net exports trade deficit A negative trade balance—that is, imports exceed exports trade surplus A positive trade balance—that is, exports exceed imports 625 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z04_BLAN9516_4_LT_GLOS.indd 625 21/03/13 2:15 PM www.downloadslide.net GLOSSARY trade-weighted index See multilateral exchange rate trade-weighted real exchange rate See multilateral exchange rate transfers See government transfers Treasury bill (T-bill) A US government bond with a maturity of up to one year Treasury bond An Australian government bond with a maturity of one to 10 years (in the US, 10 years or more) Treasury Inflation Protected Securities (TIPS) Bonds introduced in the US in 1997 whose yields are indexed to inflation Treasury note A discount Australian government bond with a maturity of up to one year (in the US, one to 10 years) Troubled Asset Relief Program (TARP) The program introduced in October 2008 by the US administration, aimed at buying toxic assets, and, later, providing capital to banks and other financial institutions in trouble t-statistic A statistic associated with an estimated coefficient in a regression that indicates how confident one can be that the true coefficient differs from zero twin deficits The hypothesis that budget and trade deficits are closely related, as characterised to some degree in Australia and the United States since the early 1980s uncovered interest parity relation An arbitrage relation stating that domestic and foreign bonds must have the same expected rate of return, expressed in terms of the domestic currency underground economy That part of a nation’s economic activity that is not measured in official statistics, either because the activity is illegal or because people and firms are seeking to avoid taxes underwater mortgage A housing loan, where the amount outstanding exceeds the value of the house unemployment The number of people who not have a job, but who wish to work unemployment insurance The payments of unemployment benefits to workers who lose their jobs unemployment rate The ratio of the number of unemployed to the labour force union density The proportion of the workforce that is unionised usable observation An observation for which the values of all the variables under consideration are available for regression purposes user cost of capital The cost of using capital over a year, or a given period of time The sum of the real interest rate and the depreciation rate Also called the rental cost of capital value added The value a firm adds in the production process, equal to the value of its production minus the value of the intermediate inputs it uses in production wage indexation A rule that automatically increases wages in response to an increase in prices wage-price spiral The mechanism by which increases in wages lead to increases in prices, which lead in turn to further increases in wages, and so on wage-setting relation The relation between the wage chosen by wage setters, the price level and the unemployment rate war of attrition When both parties to an argument hold their grounds, hoping that the other party will give in wealth See financial wealth wholesale funding Financing through the issuance of short-term debt rather than through deposits yield See yield to maturity yield curve The relation between yield and maturity for bonds of different maturities Also called the term structure of interest rates yield to maturity The constant interest rate that makes the price of an n-year bond today equal to the present value of future payments Also called the n-year interest rate 626 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z04_BLAN9516_4_LT_GLOS.indd 626 21/03/13 2:15 PM www.downloadslide.net see also specific country asset(s) domestic versus foreign 416–7, 450–2 liquidity of 73 toxic 208 asset prices 351–3, 381–2 Aumann, Robert 511 Australia 2008 economic crisis 7–10, 342–4 Age Pension 255–7 balance of payments 413–4 bank runs 80 bank supervision 80–1 budget accounts 593–5 central bank see Reserve Bank of Australia as common currency area 491 current account 413–4 debt-to-GDP ratio 515–6 deflation 32 economic overview 6–10 exchange rates 407–11, 438, 482–3 exports/imports 403–4, 411 fiscal balance 529–30 fiscal policy 7–9 GDP 7–8, 27–8, 49, 226–7 during Great Depression 318 HILDA Survey 361 house prices 353–4 inflation 6–7, 195, 326 interbank cash market 84–5 interest rates 315–6, 326, 419 investment choices in 371–6 Labour Force Survey 29, 31, 121–2, 361 labour productivity 295–8 liquidity trap 316 mining boom 7–8, 169, 281, 342 monetary policy 9–10, 558 oil prices 169–71 output growth 6–7, 291–2 output per capita 245, 293 Phillips curve 179–83 policy mix 106, 109, 506 political factors 517–8 recessions 27–8, 125, 172–3 research and development 276 Reserve Bank Act 1959 570 reserve ratio 79 as safe haven 453–4 saving rate 244 standard of living 281 stock market 344, 351 superannuation 255–7 tax system 52, 138–9, 553–4 unemployment rate 6–7, 30–1, 121–2, 125–6, 188, 193, 195 wage determination 128, 301 yield curves 337 Australian Bureau of Statistics (ABS) 33, 122 Australian Prudential Regulation Authority (APRA) 81, 572 automatic stabiliser 536–7 autonomous spending 54, 56, 58 awards 128 backloading 393 balanced budget 54 balanced growth 274 balance of payments 412–5 balance sheet 76, 78 bank 205, 468–9 balancing item 414 bands (currency) 461 bank(s) 78–81 leverage 206–7, 565 RBA lending to 571–2 reserves 79, 82, 571 role in 2008 crisis 205, 219–20 solvency 205 see also central bank(s) Bank of England 550 Bank of International Settlements 412, 584 bank runs 79–81, 208, 479, 584 bank supervision 80–1 bargaining power 129, 171, 191 Barro, Robert 535, 579 Basel II and III 565 baseline projections 540 base year 32, 44–5 basis points 541 BBB (triple B) rating 210 behavioural economists 584 behavioural equation 51, 53 below the line 412 Bernanke, Ben 388, 506, 551, 583 bilateral exchange rates 410–2 Blinder, Alan 514, 557 bond(s) 70–1 default risk 336 defined 70, 338 domestic versus foreign 416–7, 450–2 indexed 338, 555 interest rate 71, 76, 78, 208–10, 312–3, 336 see also bond yields versus loans 79–80 maturity 336 versus money 71–2, 450 open market operations 76–7, 86, 151–3, 213, 572 spread 541–2 terminology 338 types of 338 bond prices 76–7, 336–44 arbitrage and 339–40 derivation of 339 bond ratings 338 bond yields 76–7, 336–7, 340–1 2008 crisis and 208–10 current 338 expectations 336–44 n-year interest rate 340–1 yield curve 337, 341–4 yield to maturity 336–7, 340–1 bracket creep 34, 553 Brainard, William 510 Brazilian bonds 418 Bretton Woods 471 broad money 559 Brookings Institution 507–8 bubbles 351–5, 564 budget Australian government accounts 593–5 balanced 54 government budget constraint 527–35 budget deficit 2008 crisis and 215–6 cyclically adjusted 536–7 dangers of 538–45 defined 61, 527 Euro area 520 inflation-adjusted 528 measurement of 529–30 output and 164–5, 536–7 Index AAA (triple A) rating 210 above the line 412 accelerationist Phillips curve 187 Access AEM model 507 Accords 128, 139 accrual measures 594 Acemoglu, Daron 583 adaptive expectations 391, 490 Africa 17 currency pegs 460 hyperinflation 544–5 standard of living 235 technological progress in 303–4 ageing populations 193, 255–7, 541 aggregate consumption 169, 360 aggregate demand 150–5 budget deficit and 162–6 dynamics 158–9 under fixed exchange rates 472–4, 501–2 liquidity trap and 218–9 oil prices and 166–71 technological progress and 289–91 aggregate demand curve 151–6 aggregate output 23–9 determinants of 37–8 see also gross domestic product aggregate private spending 383 aggregate production function 236 aggregate supply 148–50, 202 dynamics 158–9 under fixed exchange rates 473–5 liquidity trap and 218–9 technological progress and 289–91 aggregate supply curve 149, 155 Aghion, Philippe 583 Akerlof, George 582 algebra 54–5 All-Ordinaries Index 344, 351 alternative minimum tax (AMT) 540 American International Group (AIG) 207 amplification mechanisms 208 animal spirits 391, 576 anti-trust legislation 135 appreciation 406, 409–10, 452 approximations (mathematical) 598–9 arbitrage bond prices and 339–40 interest rates/exchange rates and 418–9 limits of 584 liquidity trap and 388–9 stock prices and 346, 352 Argentina, currency board 494–5 AS-AD model 147–78 liquidity trap and 218–9 see also aggregate demand; aggregate supply Asia four tigers 235 output per capita 235 technological progress in 305 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 627 18/03/13 11:55 AM www.downloadslide.net INDEX budget deficit (Continued) politics of 515–8 primary 528 reduction of 162–6, 172 expectations 391–6 investment and 102 taxes and 530–3, 535–6, 538, 540 US 11–2, 459–60, 515–8, 538–40 wars and 534, 537–8 see also fiscal contraction budget surplus defined 61 primary 528, 594 Bundesbank 463 business cycle 172 political 515–6 business inventories, change in 592 capital decreasing returns to 237 fixed consumption of 590 formation of 592 flow volatility 453–4, 565 golden-rule level of 254–5, 257, 259–61 human 261–3, 277 output and 244–51, 271–4 per worker 237–8, 245–6, 248, 249, 251, 261–2, 270–3 steady-state 250–1 user (rental) cost of 370–1 capital account 413–5 balance 414 deficit 414 surplus 414 transactions 413 capital accumulation 238–9 China 17 effects of output on 246 human capital 262 investment and 247 social security and 255–7 versus technological progress 279–82 wars and 249–50 capital controls 565 capital gains taxation 553–4 capital income 25 capital mobility 468–70 capital ratio 206 capital stock 247 capital substitutability 451, 467–8 carry-trade 565 Case-Shiller index 204–5 cash flow 372–3 cash market, interbank 84–5 cash rate 9–10, 84–5, 571 bond yields and 337, 342 credibility and 195 stock prices and 348 causality 291, 583, 606–7 Cavallo, Domingo 494 central bank(s) balance sheet 468–9 credibility of 195, 513–4 expectation management 386–90 independence of 513–4 inflation targeting 484, 550, 560–2, 573 interest rate and 77, 116, 153–5 monetary policy frameworks 550–1, 557–62 open market operations 76–7, 86, 151–3, 213, 572 policy mix 104–9 see also specific bank central bank money 79, 81–3 Central Europe 17 centralised authority 565 central parity 461 chain-type indexes 44–5 China during 2008 economic crisis 16–7 Confucian tradition 306 inflation rate 16 output growth 15–7, 281–2 sources of 305–6 patent rights 279 unemployment rate 16 Choi, Don 557 Churchill, Winston 475–7 The Churn: The Paradox of Progress (Schumpeter) 298–9 churning 298–302 civilian population (non-institutional) 120 closed economy 51, 406, 450 Cobb, Charles 266 Cobb-Douglas production function 266–8 collateral 211 collateralised debt obligations (CDOs) 207 collective bargaining 128 commodity prices exchange rates and 482–3 index 7–9 common currency areas 14–5, 461, 491–2 Commonwealth Employment Service (CES) 29 COMPACT model 508 compensation of employees 590 competition perfect/imperfect 132–3 unemployment rate and 193 compounding, force of 232 computers, price of 28–9 confidence 2008 crisis and 210 consumer 37, 95, 172, 210 confidence band 110–1 confidence interval 510 consols 329 constant interest rates 329–30 constant prices 25–6 constant returns to scale 237 consumer confidence 37, 95, 172, 210 consumer price index (CPI) 7, 33, 315 consumption 51–2 aggregate 169, 360 behaviour 51–2, 253, 363–5 decisions 374–6, 381–2 defined 49 disposable income and 51–2, 59, 603–5 expectations 360–7, 374–6, 381–2 of fixed capital 590 general government 592 life cycle theory of 360 permanent income theory of 360 per person 229 random walk of 580 saving rate and 253–5 shifts in 59–60 stock market and 348–9 theories of 576–7 volatility of 374–6 wealth 361–5 consumption function 51 contraction see fiscal contraction contractionary monetary policy 102–3, 105, 109 in medium run 486–8 in open economy 458–60 in short run 488–90 contractionary open market operations 76–7, 151–3 corporate bonds 338 see also bond(s) correlation 291, 583, 606–7 cost of living 33 coupon bonds 338 coupon payments 338 coupon rate 338 crawling peg 461 creative destruction 298, 583 credibility deficit reduction and 393–4 of monetary policy 195, 513–4 credit default swaps (CDSs) 207 credit (quantitative) easing 215, 388–90, 556, 563–4 credit market imperfections 583 crowding in/out of investment 102 currency appreciation 406, 409–10, 452 common 14–5, 461, 491–2 defined 70 depreciation 407, 409–10 trade balance and 434–9, 447 exchange rate see exchange rates float 477 foreign exchange 412 currency boards 493–4 current account 412–3 balance 439–43 deficit 413, 440–3 defined 70 exchange rates and 482 Current Population Survey (CPS) 31 current prices 25–6 current profit 371–2 current yield 338 cyclically adjusted deficit 536–7 Davis, Steve 299 debt finance 344 see also bond(s) debt monetisation 543 debt restructuring (rescheduling) 543 debt-to-GDP ratio 533 Australia 515–6 high see also budget deficit dangers of 538–45 US 216, 515–8, 539–40 wars and 534, 537–8 decision making investment 368–9, 374–6 versus consumption 374–6, 381–2 staggering of decisions 581 default risk 336, 543 deflation adverse effects of 34–5 defined 32 versus disinflation 194 GDP deflator 7, 32 628 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 628 18/03/13 11:55 AM www.downloadslide.net INDEX interest rates and 316–8 Phillips curve and 197 versus recession 34 deflation trap 317 degrees of freedom 605 demand aggregate see aggregate demand effective 575 for goods 50–3, 91, 425 determinants of 426–8 increases in 429–34 for money see demand for money in open economy 457 pent-up 219 demand for money 69–73 central bank money 81–3 derivation of 71–2 expectations 385 inflation and 559 interest rate and 73–7 see also IS-LM model liquidity trap and 212–3 money multiplier 85–6 in open economy 450 real 96 theory of 577 demand shocks 490 democracy 583 dependent variable 605 deposit insurance 79–81, 208, 211 depreciation 367 currency 407, 409–10 trade balance and 434–9, 447 per worker 248–9, 271–3 depreciation rate 367 depressions see Great Depression devaluations 407, 460, 475–6 developed countries export-GDP ratio 405 growth in 231–4, 279–81, 403 see also specific country developing countries 2008 economic crisis and capital flow volatility 453–4 growth in 403 standard of living 228 technological progress in 303–5 see also specific country development economics 236, 303 Diamond, Doug 584 Diamond, Peter 129, 554, 582 diffusion of technology 277–8 disability benefits 194 discount bonds 338, 339 discount factor 327 discount rate 327 discouraged workers 30, 124 disinflation 194–5, 391 disposable income 51–2, 59, 603–5 dissaving 51 dividends 344 dollar (nominal) GDP 25–7 dollarisation 493–4 domestic assets, versus foreign assets 416–7, 450–2 domestic demand for goods 425–8 determinants of 426–8 increases in 429–34 domestic goods, versus foreign goods 406 Dornbusch, Rudiger 580 Douglas, Paul 266 Dow Jones Industrial Index 344 DRI (Data Resources Incorporated) model 508 durable goods 592 duration of unemployment 31, 123 Dybvig, Philip 584 dynamics aggregate demand/supply 158–9 equilibrium adjustment 58 IS-LM model 109–12, 159–60 oil prices 168–71 saving rate 258–9 dynamic stochastic general equilibrium (DSGE) models 507, 509, 584 Easterlin, Richard 230 Easterlin paradox 230 Eastern Europe 17, 30 econometrics 57, 110, 187 introduction to 603–7 economic boom 290 Economics (Samuelson) 576 education 261–3, 301 effective demand 575 effective labour 270–1 effective real exchange rate 411 efficiency wages 129–30, 582 emerging economies see developing countries; specific country employment defined 29 natural level of 135–6 see also labour force; unemployment; workers employment protection 14, 132, 190–2 employment rate 125 endogenous growth 263 endogenous variables 52–3 enterprise bargaining 128 entitlement programs 541 entrepreneurship, culture of 277 EPA model 508–9 equilibrium in financial markets 83–6, 97, 385, 449–55 in goods market 53–63, 91–3, 102, 151, 428–9, 439, 448–9, 454 interest rate 73–6 labour market 144–6, 294 in medium run 155–7 in short run 155–7 unemployment rate 134–5 equilibrium condition 53–4, 61–2, 92 algebraic expression 54–5 graphing 55–7, 74 writing 57–8 equilibrium output determination of 53–61 exchange rate regime and 473–5 exports and 427–8 equity finance 344 see also stock(s) equity premium 351 euro 12–5, 461, 492–3 Euro area 12–3 see also European Union European Central Bank (ECB) 14, 493, 550 European Community (EC) 12 European Monetary System (EMS) 461, 463–4, 479–80 European Union (EU) 12 2008 economic crisis bond spreads 541–2 inflation rate 13–4 output growth 13–4 Stability and Growth Pact 506, 519–21 unemployment rate 13–4, 190–2 See also specific member countries exchange rates 471–504 bilateral 410–2 crises 477–80 current account and 482 expectations 451–2, 482–3, 490 fiscal policy and 435–7 fixed see fixed exchange rates flexible 472, 481–90 versus fixed 472, 490–5 interest rates and 417–9, 463–4, 467–70, 482–3, 502–4 in medium run 472–7, 486–90 multilateral 410–2 nominal 406–8, 482–3 in open economy 455 overshooting 484–6 real see real exchange rate in short run 473–5, 486–90 standard of living and 228 trade balance and 437–9 volatility of 483–4 exchange settlement accounts (ESAs) 84, 572 exogenous variables 52–3, 100 expansion(s) defined 27–8 fiscal see fiscal expansion expansionary monetary policy 102–3, 109–10 effects of 158–62, 172, 386–90 exchange rates and 484–5 interest rates and 320–4 liquidity trap and 214 modelling 508 stock market and 348 expansionary open market operations 76–7 expectations adaptive 391, 490 bonds 336–44 consumption 360–7, 374–6, 381–2 deficit reduction 391–6 effect of 2008 crisis on 210 exchange rates 451–2, 482–3, 490 income 365–7, 383 inflation 385–6 interest rates 312–8, 370–1, 383–6 IS-LM model 319, 385–7 investment 367–76, 380, 381–2 IS relation 382–4 Keynes on 576 liquidity trap 388–90 monetary policy 385–91 Phillips curve and 185 policy and 511–5 price level 131 productivity 296 rational 390–2, 490, 578–81 static 370, 380 stocks 344–50 taxes 383–4 expectations-augmented Phillips curve 187 expectations hypothesis 339–40 expected present discounted values 327–31, 334–5 629 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 629 18/03/13 11:55 AM www.downloadslide.net INDEX exports 50, 403–5 determinants of 427–8 exchange rates and 411–2 GDP and 405–6 in national accounts 592 net 50, 434, 447, 449, 592 extension agreements 191 face value 338 factor income, receipts/payments of 589 factor markets, openness in 402 see also open economy fads 353 federal deposit insurance 80, 211 federal funds market (US) 84–5 federal funds rate (US) 9–10, 84–5, 107, 110–1 Federal Reserve Board (US) 69 2008 economic crisis and asset portfolio 389 liquidity facilities 211 monetary policy framework 550, 558 role of 565 fertility of research 277 final goods 24 finance theory 351 financial crisis see global economic crisis (2008) financial intermediaries see bank(s) financial investment 70 financial markets 69–90 bonds see bond(s) demand for money see demand for money equilibrium in 83–6, 97, 385, 449–55 expectations 336–59 goods market combined with 454–6 interest rates see interest rate LM relation and 96–8 in open economy 402, 412–9, 449–56 stocks see stock(s) financial wealth 70, 361 fine-tuning 510–1 fire sale prices 208, 388–9 fiscal consolidation 99 fiscal contraction aggregate demand and 154 defined 99 monetary policy 102–3, 105, 109 fiscal deficit see budget deficit fiscal dominance 543 fiscal expansion aggregate demand and 154 defined 99 monetary policy 102–3, 109–10 effects of 158–62, 172 US (1980s) 458–60 fiscal policy during 2008 crisis 5, 211–2, 215–6 Australia 7–9 defined 53 effect on output 63–4 effects of 104 exchange rates 435–7 under fixed exchange rates 462–3 interest rate and 99–102 Japan 216–7 limits of 215–6 versus monetary policy 577–8 money supply and 543–5 in open economy 456–7 policy coordination 433 in policy mix 104–9 politics of 518–9 summary of 432, 526–7 fiscal shocks 490 fiscal stimulus (2009) 433–4 fiscal surplus see budget surplus Fischer, Stanley 580–1 Fisher, Irving 323 Fisher hypothesis (effect) 323–6 fixed capital consumption of 590 formation of 592 fixed exchange rates 460–4 aggregate demand 472–4, 501–2 aggregate supply 473–5 capital mobility and 468–70 exchange rate crises under 477–80 fiscal policy under 462–3 versus flexible rates 472, 490–5 monetary policy under 461–2 pegs 460–2, 493–4 revaluation/devaluation 407, 460, 475–6 types of 460–1 fixed investment 49 see also investment Fleming, Marcus 448, 458 flexible exchange rates 472, 481–90 versus fixed rates 472, 490–5 float (currency) 477 flow 70, 247 force of compounding 232 Ford, Henry 130 foreign aid 413 foreign assets, versus domestic assets 416–7, 450–2 foreign currency holdings 72–3, 416, 564–5 foreign currency swaps 572 foreign demand, increase in 431–2 foreign direct investment 565 foreign exchange 412 reserves 468 see also currency; exchange rates foreign goods, versus domestic goods 406 foreign trade see trade four tigers (Asia) 235 France interest rates 463–4 postwar capital stock 249–50 Frank, Barney 434 Friedman, Milton 187–9, 326, 360, 510, 576–8 full-employment deficit 536–7 fully-funded social security system 255–6 functions 600 fundamental value 352 Future Fund (Australia) 256 G20 433–4 Gali, Jordi 584 game playing 511, 515–8 game theory 511, 581 GDP see gross domestic product general government consumption 592 The General Theory of Employment, Interest, and Money (Keynes) 61, 91, 391, 575–6 generational issues 255, 537 geometric series 57, 597 Germany hyperinflation 544 unification of 463–4 Gertler, Mark 583 global economic crisis (2008) 3–5, 203–24 Australia and 7–10, 342–4 bank supervision and 80–1 bond yields and 342–3 channels affected China during 16–7 consumer expectations and 366–7 consumption function shifts 59–60 EU unemployment since 192 G20 fiscal stimulus 433–4 lessons learned 584–5 liquidity trap 562–5 monetary policy challenges 562–6 origins of 3–4, 173, 203–8 policy mix and 106 policy response 208–16 recovery from 4–5, 216–20, 343–4 globalisation 193, 302, 404 global output growth GNP (gross national product) 24, 415 golden-rule level of capital 254–5, 257, 259–61 gold standard 476–7 goods demand for 50–3, 91, 425 determinants of 426–8 increases in 429–34 durable 592 final 24 intermediate 24 non-durable 592 non-tradable 404 tradable 404 goods and services tax (GST) 52, 138 goods market 48–68 competition in 132–3 domestic versus foreign goods 406 equilibrium in 53–63, 91–3, 102, 151, 428–9, 439, 448–9, 454 financial market combined with 454–6 IS relation 91–6, 425–8 in open economy 402–12, 425–49, 454–6 government, control over output 63–4 government bonds 338 see also bond(s) government budget constraint 527–35 government purchases 592 government spending 53 aggregate demand and 151–3 decrease in see budget deficit, reduction of defined 49–50 expectations 384 increase in 430, 457 politics of 519 wars and 534, 537–8 government transfers 50 graphing 55–7, 74 Great Depression 59–60 causes of 355, 577 fear of, during 2008 crisis 210 interest rates in 316–8 lessons learned 584–5 Phillips curve and 197 technocracy movement 292 trade protectionism 403–4 Great Moderation 550 Greece 526, 542 630 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 630 18/03/13 11:55 AM www.downloadslide.net INDEX Greenspan, Alan 107, 551 Griliches, Zvi 277–8 gross domestic product (GDP) Australia 7–8, 27–8, 49, 226–7 composition of 49–50 debt-to-GDP ratio 533 Australia 515–6 US 216, 515–8 defined 24–5, 589 dollar 27 export ratio 405–6 versus GNP 415 growth rate 27–8 nominal 25–7, 32 real see real GDP US 228 gross domestic product (GDP) deflator 7, 32, 408 gross mixed income (GNI) 589–90 gross national product (GNP) 24, 415 gross operating surplus (GOS) 590 gross private fixed capital formation 592 growth 226–43 across countries 234–6 across time 234 balanced 274 creative destruction 583 defined 226 in developing countries 403 endogenous 263 GDP 27–8 output see output postwar 249–50 in rich countries 231–4, 279–81, 403 Solow framework 236–9 sources of 238–9 Stalinist 251 standard of living and 227–31 summary of facts 279–82 technological progress and 238–9, 269–75 total factor productivity 287 growth theory 236, 577 GST (goods and services tax) 52, 138 Hall, Robert 580 Hansen, Alvin 91, 576 happiness, money and 230–1 hard pegs 493–4 Harsanyi, John 511 health care costs 541 hedonic pricing 28–9 Hicks, John 91, 576 high debt, dangers of 538–45 high-powered money 85 HILDA (Household, Income and Labour Dynamics in Australia) Survey 361 hires 121 historical view economic statistics 21 standard of living 235 Holmstrom, Bengt 584 hostage taking 511–2 household disposable income 591 household income 591 housing prices 2008 economic crisis and 3, 204–5 bubbles 353–5, 564, 566 housing wealth 361 Howitt, Peter 583 human capital 261–3, 277 human wealth 362, 365 hybrid corn 277–8 hyperinflation 518, 544–5 hysteresis 194 identification problem 607 identity 50, 53 illiquidity 205, 584 imperfect capital mobility 469–70 imperfect competition 132–3 imports 50, 403–5 determinants of 426 exchange rates and 411–2 in national accounts 592 income defined 70 disposable 51–2, 59, 603–5 expectations 365–7, 383 GDP and 25 national accounts 23–4, 577, 589–91 nominal 71–2 interest rate and 74–5, 96 real 96 income balance 413 income taxes 52, 138 independent central bank 513–4 independent variables 605 indexed bonds 338, 555 index number 32 India 17, 228 indirect taxes 138, 591 individual (work) agreements 128 inflation 32–5 Australia 6–7, 195, 326 benefits of 556–7 China 16 costs of 552–5 defined 6, 32 disinflation 194–5, 391 EU 13–4 expectations 385–6 high 196 hyperinflation 518, 544–5 importance of 34–5 interest rates and 320–6 liquidity trap and 557 measurement of 33–4 money growth and 558–60 optimal rate 552–7 output growth and 35–7 policy and 512–3 pure 34 quantitative easing and 389 statistical resources 20–2 tax distortions 34, 553–4 unemployment rate and see Phillips curve US 10–1, 562 variability in 545, 555 zero 512–3 inflation accounting 529 inflation-adjusted deficit 528 inflation targeting 484, 550, 560–2, 573 interest rates and 320, 323 institutional factors 303–6, 583 instrument(s) 607 instrumental variable methods 607 interbank cash market 84–5 interest parity condition 417–8, 451–5, 478, 482, 502–4 interest rate(s) 2008 financial crisis and 204–5, 208–10 bonds 71, 76, 78, 208–10, 312–3, 336 see also bond yields budget deficit and 164–5 constant 329–30 demand for money and 73–7 see also IS-LM model determination of banks 78–81, 83 money supply 73–8 effect on investment 92 equilibrium 73–6 exchange rates and 417–9, 463–4, 467–70, 482–3, 502–4 expectations 312–8, 370–1, 383–6 Japan 216 monetary policy 102–3, 319–26, 450, 455 nominal see nominal interest rates real see real interest rates zero 330 interest rate rule 116–7, 153–5, 169, 484, 550, 561–2 INTERLINK model 508 intermediate goods 24 International Monetary Fund (IMF) 21, 219, 433 internet resources 22 inventory investment 50 investment 52–3 budget deficit and 164–6 capital accumulation and 247 crowding in/out of 102 decisions 368–9, 374–6, 381–2 deficit reduction and 102 defined 49, 70 effect of interest rate on 92, 101–2 expectations 367–76, 380, 381–2 foreign direct 565 inventory 50 nonresidential 49, 592 output and 246–7 per worker 248–9, 271–3 residential 49, 592 savings and 61–3 see also current account theory of 576 volatility of 374–6 Ireland, deficit reduction programs 395–6 IS curve 95 derivation of 94–5, 151 shifts in 95–6, 103–4, 151, 162 IS-LM model 91–117 deficit reduction 392–3 derivation of 98–105 dynamics 109–12, 159–60 expanded versions of 577, 579 expectations 343, 385–7 history of 576 interest rates 319–20 liquidity trap and 213–5 in open economy 455–6, 458 short-run equilibrium 105 US recession (2001) 108–9 see also LM curve Israel 494, 545 IS relation 61 expectations 382–4 extended 577 631 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 631 18/03/13 11:55 AM www.downloadslide.net INDEX IS relation (Continued) goods market and 91–6 in open economy 425–8, 455–6 taxes in 100–1, 110 Japan fiscal policy 216–7 interest rate 216 output growth 17 standard of living 232 stock market 216, 344, 351–2, 355 J-curve 437–9 Jorgenson, Dale 576 junior securities 207 junk bonds 338 Kenya 303–4 Keynes, John Maynard 61, 91, 391, 475–7, 575–6 Keynesians 577–8 new 582–5 Klein, Lawrence 577 Korea, North 304–5 Korea, South 304–5 Krugman, Paul 251, 302 Kuwait 415 Kuznets, Simon 23 Kydland, Finn 512, 580 labour, effective 270–1 labour force defined 29, 121 flows of workers 121–5 participation rate 30, 121 see also employment; workers Labour Force Survey (LFS) 29, 31, 121–2, 361 labour hoarding 291 labour income 25 labour in efficiency units 270 labour market 120–46 conditions in, unemployment and 14, 193 equilibrium 144–6, 294 overview 120–5 rigidities in 14, 190–2, 582 labour productivity 132, 295–8 Latin America 17, 325 see also specific country layoffs 123, 299–300 Lehman Brothers 3, 59–60 lender-of-last-resort 571 Lerner, Abba 435 leverage 206–7, 565 leverage ratio 206 Libor rate 208 life (of bond) 338 life cycle theory of consumption 360 life satisfaction, money and 230–1 linear relation 51 LINK model 509 liquidity 73 2008 crisis and 208, 211, 584 liquidity facilities 211 liquidity preference 576 liquidity trap 71, 212–5, 550 2008 economic crisis and 562–5 Australia 316 expectations and 388–90 inflation and 557 Japan 216–7 unconventional policy and 218–9, 563–4 Litterman, Robert 509 LIVERPOOL model 509 LM curve 97 derivation of 96–7, 151 liquidity trap and 213–5 shifts in 97–8, 103–4, 151 see also IS-LM model LM relation 73 expectations 385–7 financial markets and 96–8 interest rate rule 116–7, 153–5, 169, 484, 550, 561–2 nominal interest rate 319–20 in open economy 455–6 loan-to-value (LTV) ratio 564, 566 logarithmic scales 226, 600–2 long run deficit reduction in 391–2 defined 37–8 saving rate in 253 long-term interest rate 336 long-term unemployed 123–4 Lucas, Robert 194, 263, 391, 579–80, 583 Lucas critique 194–5, 579 Luddites 292 M1 70, 558–60 M3 558–60 Maastricht Treaty 493, 520 machinery and equipment 592 macroeconometric models 161–2, 391, 507–9, 577, 584 macroeconomic policy see policy macroeconomics common beliefs 585 data resources 20–2 history of 575–84 mathematical tools 597–602 recent developments 584–5 macro prudential tools 564–5 Malthus, Thomas Robert 234 Malthusian era 234 Mankiw, N Gregory 582 marginal propensity to consume 51 markups 135–6 Marshall, Alfred 435 Marshall-Lerner condition 434–5, 447, 449 mathematical tools 597–602 maturity (bonds) 336 Mavrodi, Sergei 352 McKibbin, Warwick 509 MCM (MultiCountry Model) 508 medium run budget deficit in 164–6, 172 contractionary monetary policy in 486–8 deficit reduction in 392 defined 37 equilibrium in 155–7 exchange rates in 472–7, 486–90 inflation targeting in 560 interest rates in 322–4 money neutrality in 162 oil prices in 172 versus short run 139, 172 technological progress in 292–8 Melbourne Institute 316 Menem, Carlos 494 menu cost 582 merchandise trade 410 mid-cycle deficit 536–7 MINIMOD model 509 minimum wage 128, 191 mining boom (Australia) 7–8, 169, 281, 342 MMM pyramid (Russia) 352–3 models of endogenous growth 263 macroeconometric 161–2, 391, 507–9, 577, 584 see also specific model modified Phillips curve 182–7 Modigliani, Franco 360, 510, 576–7 monetarists 577–8 monetary aggregates 559 monetary base 85 A Monetary History of the United States (Friedman & Schwartz) 577–8 monetary policy 76 during 2008 crisis 211–5 Australia 9–10 contractionary see contractionary monetary policy conventional versus unconventional 215, 218, 385, 388, 563–4 credibility of 195, 513–4 design of 557–8 effects of 104 EU 14 expansionary see expansionary monetary policy expectations 385–91 versus fiscal policy 577–8 under fixed exchange rates 461–2 interest rate and 102–3, 319–26, 450, 455 interest rate rule 116–7, 153–5, 169, 484, 550, 561–2 limits of 212–5 macro prudential tools 564–5 oil prices and 171 in open economy 458 in policy mix 104–9 stock market and 348, 390, 484 summary of 550–2 taxes and 105 US 9–10 monetary tightening 102–3 money bank liabilities 78–81 versus bonds 71–2, 450 broad 559 central bank 79, 81–3 defined 70 demand for see demand for money happiness and 230–1 high-powered 85 neutrality of 160–2, 189–90 types of 70 money creation 556 money finance 543–5 money illusion 554–5, 557 money multiplier 85–6 money supply 73–6 aggregate demand and 151–3 central bank money 81–3 fiscal policy and 543–5 growth targets 558 632 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 632 18/03/13 11:55 AM www.downloadslide.net INDEX inflation and 558–60 liquidity trap and 212–3 money multiplier 85–6 nominal 104 in open economy 455 real 96, 559 Moody’s Investors Service 338 Mortensen, Dale 129, 582 mortgage(s), 2008 economic crisis and 3, 204–5 mortgage-based security (MBS) 207 MPS model 577, 579 MSG model 509 multilateral exchange rates 410–2 multiplicative uncertainty 510 multipliers 54–7, 95, 383–4 Mundell, Robert 448, 458, 491 Mundell-Fleming model 448, 458, 459 Murphy MM model 507 NAIRU (non-accelerating-inflation rate of unemployment) 188 narrow banking 80 Nasdaq Index 344 Nash, John 511 National Bureau of Economic Research (NBER) 106 national income and product accounts (NIPA) 23–4, 577, 589–96 natural level of employment 135–6 natural level of output 136–7 banking crises and 219–20 natural rate of unemployment 133–7 defined 134–5 markups and 135–6 oil prices and 167–8 Phillips curve 187–8 variations across countries 190 variations over time 192–3 price-setting relation 133–4, 138, 144–6, 168, 293–6, 580–1 productivity and 292–8 taxes and 137–9 wage-setting relation 133–4, 138, 144–6, 168, 293–6, 580–1 natural real interest rate 322 negative gearing 553 negative real interest rates 556–7 negotiations 511–2 neoclassical synthesis 576–8 net capital flows 414 net cash balance 594 net debt 594–5 net exports 50, 434, 447, 449, 592 Netherlands, tulipmania 352 net interest 591 net national income (NNI) 589–90 net operating balance 594–5 net operating surplus (NOS) 590 net transfers received 413 net worth 594 neutrality of money 160–2, 189–90 new classicals 581–5 new growth theory 583–4 New-Keynesian model 584 new Keynesians 582–5 New Zealand 506 NIF model 507 Nikkei Index 216, 344, 351–2, 355 NINJA loans 205 NIPA (national income and product accounts) 23–4, 577, 589–96 nominal capital gains 554 nominal exchange rate 406–8, 482–3 nominal GDP 25–7, 32 nominal income 71–2 interest rate and 74–5, 96 liquidity trap and 563 nominal interest rates 312–8 Australia 315–6, 326, 419 cross-country movements 419 defined 313 IS-LM model 319–20 in medium run 322–4 monetary policy and 320, 389 present values and 330–1, 334–5 in short run 320–4, 385–6 US 419 nominal money supply 104 nominal rigidities 582 nominal stock price 347 nominal wage 148 non-accelerating inflation rate of unemployment (NAIRU) 188 non-durable goods 592 non-human wealth 362, 365 nonresidential investment 49, 592 non-tradable goods 404 North American Free Trade Agreement (NAFTA) 402 North Korea 304–5 n-year interest rate 340–1 Obstfeld, Maurice 302 OECD see Organization for Economic Cooperation and Development oil prices 166–72 Phillips curve and 182, 185 Okun, Arthur 35 Okun’s law 35–6 open economy current account balance in 439–43 defined 402 demand, increases in 429–34 exchange rates in 486–90 financial markets in 402, 412–9, 449–56 goods market in 402–12, 425–49, 454–6 IS-LM model 425–8, 455–6, 458 J-curve 437–9 money versus bonds in 450 policy in 456–60 trade balance equilibrium output and 428–9, 434–7 exchange rates and 434–9 open market operations 76–7, 86, 151–3, 213, 572 opportunity cost 262 optimal control 511, 580 optimal control theory 511 optimal currency area 491 optimal inflation rate 552–7 ordinary least squares (OLS) 604 Organization for Economic Cooperation and Development (OECD) 21 export-GDP ratios 405 inflation rates 552 output per person 233–4 see also developed countries Organization of Petroleum Exporting Countries (OPEC) 167 output adjustment over time 57–8, 156–7 aggregate 23–9 see also gross domestic product determinants of 37–8 Australia 6–7, 291–2 budget deficit and 164–5, 536–7 capital and 244–51, 271–4 China 15–7, 281–2 sources of 305–6 deficit reduction and 391–6 defined determination of 92–3 equilibrium see equilibrium output EU 13–4 global government control over 63–4 human capital and 262–3 inflation and 35–7 investment and 246–7 Japan 17 monetary policy expectations and 385–91 natural level of 136–7 banking crises and 219–20 in open economy 455 per worker 132 saving rate and 239, 244–7, 251–3 impact of 257–61, 274–6 in short run 288–92 stabilisation 536 statistical resources 20–2 trade balance and 428–9, 434–7 unemployment and 35–7 US 10–1, 280 output fluctuations 172 output per hour worked 229 output per person (capita) 227 across countries 234–6 across time 234 convergence of 231–4 democracy and 583 output per worker 229–30, 237–8, 245 evolution over time 249 human capital and 261–3 saving rate and 251–2 standard of living by 274 technological progress and 252–3, 270–3 overshooting exchange rates 484–6 panel data sets 361 paradox of saving 62–3 parameters 51–2 participation rate 30, 121 patents 278–9 pay-as-you-go social security system 255–6 PAYGO rule 519 payments balance of see balance of payments constant interest rates and 329–30 coupon 338 pegs 460–2, 493–4 pent-up demand 219 perfect capital mobility 469 perfect capital substitutability 451, 467–8 perfect competition 132–3 permanent income theory of consumption 360 633 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 633 18/03/13 11:55 AM www.downloadslide.net INDEX Perry, Rick 506 personal consumption expenditures 591 Phelps, Edmund 187–9, 578 Phillips, A.W 36, 179 Phillips curve 36–7, 179 accelerationist 187 deflation and 197 disinflation 194–5 expectations-augmented 187 high inflation and 196 history of 179, 578 inflation targeting 560–1 modified 182–7 in MPS model 577, 579 natural rate of unemployment 187–8 variations across countries 190 variations over time 192–3 neutrality of money and 189–90 original 181–2, 187 rational expectations and 579–80 Pissarides, Christopher 129, 582 players 511 policy 2008 crisis and 208–16 coordination of 433 expectations and 511–5 fiscal see fiscal policy game playing 511–2, 515–8 monetary see monetary policy in open economy 456–60 politics and 513–21, 581 restraints on 506–25 role of 578 theory of 581 time inconsistency 512–5, 580 uncertainty and 507–11 policy mix 104–9, 506 Australia 106, 109 debates about 577–8 US 106–9 political business cycle 515–6 politics fiscal restraints and 12 policy and 513–21, 581 population ageing 193, 255–7, 541 PPP see purchasing power parity Prescott, Edward 512, 580–2 present value 328–9 of expected profits 367–8, 380 interest rates and 327–31, 334–5 stock prices as 345–9 price(s) asset 351–3, 381–2 bond see bond prices constant versus current 25–6 determination of 132–3 exchange rates and 482–3 fire sale 208, 388–9 hedonic 28–9 inflation see inflation oil 166–71 relative 26 staggering of decisions 581 stock 345–9 wage determination and 131–2, 148 price level 32, 315 aggregate supply and 149–50 expected 131 price level target 153 price-setting relation 133–4, 138, 144–6, 168, 293–6, 580–1 primary deficit 528 primary surplus 528, 594 prison population 193–4 private saving 61, 102, 166 private spending, aggregate 383 producer price index (PPI) 33 production 25, 247 see also output production function 132 aggregate 236 Cobb-Douglas 266–8 human capital 261–2 technological progress and 269–71 productivity labour 132, 295–8 natural rate of unemployment and 292–8 in short run 288–92 total factor 287 product side, national accounts 23–4, 577, 591–3 profit expectations of 367–72, 380 sales and 92, 373–4 profitability 372–3 profit income 25 propagation mechanisms 172–3 propensity to consume 51, 57 propensity to save 62 property rights 303–4 protectionism (trade) 403–4 PSID (Panel Study of Income Dynamics) 361 public debt, 2008 economic crisis and public gross fixed capital formation 592 public saving 61 purchasing power parity (PPP) China 16 construction of 228–9 technological progress and 303–4 pure inflation 34 quantitative (credit) easing 215, 388–90, 556, 563–4 quits 123 quotas 402 random walk 347 of consumption 580 The Rate of Interest (Fisher) 323 rating agencies 207, 210 rational expectations 390–2, 490, 578–81 rational speculative bubbles 352 RBA see Reserve Bank of Australia Reagan, Ronald 459 real appreciation 409–10 real business cycle (RBC) theory 581–3 real capital gains 554 real demand for money 96 real depreciation 409–10 real exchange rate defined 406, 461, 472 derivation of 408–10 interest rates and 502–4 multilateral 411 trade deficits and 438 real GDP 25–7 in chained dollars 26 construction of 44–5 GDP deflator and 32 per capita 27 technological progress and 28–9 real income 96 real interest rates 312–8 Australia 315–6, 326 defined 313–4 deflation and 316–8 derivation of 313–4 ex-ante versus ex-post 316 exchange rates and 502–4 expectations 383–6 IS-LM model 319–20 in medium run 322–4 monetary policy and 320 natural 322 negative 556–7 present values and 330–1, 334–5 in short run 322–4 real money supply 96, 559 real stock price 347 real-time gross settlement (RTGS) 573 real wages 34, 134–5 recessions 2008 crisis see global economic crisis Australia 27–8, 125, 172–3 defined 27–8 versus deflation 34 EU 15 US 58, 106–9 regression 604 regression line 187, 604 relative prices 26 rental cost of capital 370–1 repurchase agreements (repos) 571–2 research and development (R&D) 275–9, 583 reservation wage 129 Reserve Bank of Australia (RBA) 69, 570–3 bank lending 571–2 cash rate see cash rate confidence interval 510 expectation management 386–90 financial system stability 80 inflation targeting 194–5, 320, 323, 484, 560, 573 mandate of 570–1 modelling 507 open market operations 572 organisation of 571 policy instruments 571 policy practices 509–10, 550, 558, 572–3 reserve ratio 79 reserves bank 79, 82, 571 foreign exchange 468 residential investment 49, 592 residual 605 retirement savings 364–5 returns to factors 237 returns to scale 237 revaluations 407, 460 Ricardian equivalence 535–6 Ricardo, David 535 Ricardo-Barro proposition 535 risk default 336, 543 expected value and 328 stocks 346, 351 risk averse 351 risk neutral 351 634 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 634 18/03/13 11:55 AM www.downloadslide.net INDEX risk premium 338, 351, 482 ‘Robinson Crusoe’ economy 61 Romer, Paul 263, 583 Roubini, Nouriel 584 Russia MMM pyramid 352–3 ruble collapse 478 Sachs, Jeffrey 509 safe havens 453 sales, profit and 92, 373–4 Samuelson, Paul 179, 181, 576 Sargent, Thomas 195, 391, 579–80 saving defined 61, 70, 253 investment and 61–3, 102 see also current account paradox of 62–3 private 61, 102, 166 public 61 for retirement 364–5 saving rate alternative 247–57 Australia 244 consumption and 253–5 defined 239, 244 golden rule and 259–61 increase in, dynamic effects of 258–9 output and 239, 244–7, 251–3 impact of 257–61, 274–6 US 244, 257, 259, 441–2 savings, defined 70 Schelling, Tom 511 Schumpeter, Joseph 298, 583 Schwartz, Anna 577 sclerosis 121 securitisation, complexity of 207–8 seignorage 543–4, 556 Selten, Reinhard 511 senior securities 207 separations 121, 127 shadow cost 371 shadowing banking system 206–7 Shadow Reserve Bank Board (Australia) 573 Shafir, Eldar 554 shares see stock(s) Shiller, Robert 205, 354 Shleifer, Andrei 583, 584 shocks defined 172 exchange rates and 490 financial crises 217 oil price 166–72, 182, 185 propagation mechanisms 172–3 shoe-leather costs 552–3 short run budget deficit in 164–6, 172 contractionary monetary policy in 488–90 deficit reduction in 391–2 defined 37 equilibrium in 155–7 exchange rates in 473–5, 486–90 interest rates in 320–4, 385–6 IS-LM model in 105 versus medium run 139, 172 money neutrality in 162 oil prices in 169, 172 saving rate in 253 technological progress in 288–92 short-term interest rate 336 Sims, Christopher 509 skill-biased technological progress 302 slippery slope argument 557 Social Science Research Council 577 social security 255–7, 364–5, 541 social security trust fund 256 Solow, Robert 179, 181 growth model 236–9, 577 technological progress measure 286–7 Solow residual 287 solvency 205 South Korea 304–5 Soviet Union 251 Spain 31–2 speculative bubbles 352 spending aggregate private 383 autonomous 54, 56, 58 government see government spending stock market and 348–9 see also consumption spending caps 519 spread 541–2 Stability and Growth Pact (SGP; EU) 506, 519–21 stagflation 578 staggering of decisions 581 Stalinist growth 251 standardised employment deficit 536–7 standard of living 10 Africa 235 Australia 281 in developed countries 232 in developing countries 228 measurement of 227–31 by output per worker 274 Standard & Poor’s ASX 200 Index 344–5 Standard & Poor’s Corporation (S&P) 338 ‘Starve the Beast’ strategy 517 state of technology 236, 270 see also technological progress static expectations 370, 380 statistical discrepancy 414 statistical resources 20–2 steady state 250 Cobb-Douglas production function 266–8 consumption per worker 254 output capital and 250–1 saving rate and 257–61 technological progress and 274 Stevenson, Betsey 230–1 stock(s) 344–50 2008 economic crisis and capital see capital consumer spending and 348–9 dividends 344 indices 344–5 investment expectations and 369–70 monetary policy and 348, 390, 484 price determination 345–50 random walk 347 risk 346, 351 well-functioning market 347 Stone, Richard 23 strategic interactions 511 Strauss-Kahn, Dominique 433 structural change 298 structural deficit 536–7 structural rate of unemployment 135 structured investment vehicle (SIV) 206–8 structures 592 subprime mortgages 204–5 sudden stops 453, 565 superannuation 255–7 supply aggregate see aggregate supply money see money supply supply-siders 459 Survey of Income and Program Participation 364 tariffs 402 tax(es) Australia 52, 138–9, 553–4 bracket creep 34, 553 budget deficit and 530–3, 535–6, 538, 540 capital gains 553–4 direct 138 distortionary effects of 139, 538, 553–4 expectations 383–4 income 52, 138 indirect 138, 591 inflation and 34, 553–4 in IS relation 100–1, 110 monetary policy and 105 natural rate of unemployment and 137–9 politics of 515–8 US 34, 459 tax base 137, 395 tax smoothing 538 tax wedges 138–9 Taylor, John 161, 509, 561, 581 Taylor model 161, 391, 509 Taylor rule 561–2, 573 T-bills (Treasury bills) 76, 211–2 T-bonds (Treasury bonds) 315–6, 326, 338 teaser rates 205 technocracy movement 292 technological catch-up 282 technological frontier 282 technological progress aggregate production function 236 aggregate supply/demand and 289–91 versus capital accumulation 279–82 China 17 churning 298–302 defined 238 determinants of 275–9 distribution effects 298–302 growth and 238–9, 269–75 human capital and 263 institutional factors 303–6, 583 measurement of 286–7 in medium run 292–8 natural rate of unemployment and 292–8 output per worker and 252–3, 270–3 real GDP and 28–9 research and development 275–9, 583 in short run 288–92 635 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 635 18/03/13 11:55 AM www.downloadslide.net INDEX technological progress (Continued) skill-biased 302 theory of 582 technological unemployment 292 TED spread 208–9 term deposits 71 term structure of interest rates 337 Thaler, Richard 584 time inconsistency 279, 512–5, 580 Tirole, Jean 584 Tobin, James 369, 576–7 Tobin’s q 369–70 total factor productivity (TFP) 287 total wealth 362 toxic assets 208 tradable goods 404 trade 2008 economic crisis and free 402 merchandise 410 see also exports; imports trade balance 50, 403 versus current account balance 439 exchange rates and 434–9 output and 428–9, 434–7 trade deficit 50, 403, 430 US 460 trade protectionism 403–4 trade surplus 50, 403 trade-weighted real exchange rate 411 Treasury bills (T-bills) 76, 211–2 Treasury bonds (T-bonds) 315–6, 326, 338 Treasury Inflation Protected Securities (TIPS) 338 Treasury notes 338 triple A (AAA) rating 210 triple B (BBB) rating 210 TRYM model 507 t-statistic 605 tulipmania (Holland) 352 Tversky, Amos 554 twin deficits 460 uncertainty, policy and 507–11 uncovered interest parity relation 417–8, 451–5, 478, 482, 502–4 underground economy 31 unemployment 29–32 2008 economic crisis Australia 6–7, 30–1, 121–2, 125–6, 188, 193, 195 calculation of 29–30 China 16 deficit reduction and 394 defined 6, 29, 121 duration of 31, 123 equilibrium 134–5 EU 13–4, 190–2 importance of 30–1 inflation and see Phillips curve labour market conditions and 14, 193 labour productivity and 295–8 long-term 123–4 movements in 125–7 natural see natural rate of unemployment non-accelerating inflation rate of (NAIRU) 188 output and 35–7 policy and 512–3 in short run 288–92 statistical resources 20–2 structural 135 technological 292 US 10–1, 31, 121, 188, 193–4, 296 wage determination and 131–2 unemployment insurance 132, 135, 190 United Kingdom bank runs 80 bond market 338 central bank 550, 565 debt ratio 539 gold standard 476–7 National Insurance system 256 Phillips curve 179, 181 United States 2008 crisis see global economic crisis ageing population 541 American Recovery and Reinvestment Act 2009 211 bank runs 80 bond market 338 budget deficits 11–2, 459–60, 515–9, 538–40 Budget Enforcement Act 1990 519 central bank see Federal Reserve Board Congressional Budget Office (CBO) 539–40 Contract with America 506 currency holdings 72–3, 416 current account deficit 440–3 debt ratio 216, 515–8, 539–40 Economic Recovery Act 1981 459 exchange rates 407–10 exports/imports 404, 412 federal deposit insurance 80, 211 federal funds market 84–5 Federal Reserve Bank Act of 1978 514 fiscal expansion (1980s) 458–60 GDP 228 Great Depression see Great Depression housing prices 204–5, 353–5 inflation rate 10–1, 562 interest rates 419, 483 monetary contraction (1980s) 458–60 New Deal 317, 575 New Economy 297 output growth 10–1, 280 output per capita 293 Panel Study of Income Dynamics (PSID) 361 Phillips curve 179, 181–3 Quantitative Easing I (QEI) 389 Quantitative Easing II (QEII) 389–90 R&D 276 recessions 58, 106–9 reserve ratio 79 saving rate 244, 257, 259, 441–2 Smoot-Hawley Act 1930 403–4 social security 256, 364–5, 541 statistical resources 20–1 Survey of Income and Program Participation 364 taxes 34, 459 trade deficit 460 trade protectionism 403–4 Troubled Asset Relief Program (TARP) 211 unemployment rate 10–1, 31, 121, 188, 193–4, 296 wage determination 128–9, 131, 301 usable observations 605 user cost of capital 370–1 value added 25 variables dependent 605 endogenous 52–3 exogenous 52–3, 100 independent 605 VAR (Vector AutoRegression) model 509 Venti, Steven 364 Volcker, Paul 458–9 von Wachter, Till 299 wage(s) determination of 127–32, 148 unemployment rate and 131–2 see also Phillips curve efficiency 129–30, 582 minimum 128, 191 nominal 148 real 34, 134–5, 137 reservation 129 staggering of decisions 581 wage indexation 196 wage inequality 300–2 wage-price spiral 182 wage-setting relation 133–4, 138, 144–6, 168, 293–6, 580–1 The Wall Street Journal 350 wars of attrition 517–8 capital stock and 249–50 debt ratio and 534, 537–8 wealth 70, 361–5 weighted sum 329 WHARTON model 508 wholesale funding 79–81, 208, 211 Wolfers, Justin 230–1 Woodford, Michael 584 workers bargaining power of 129, 171, 191 capital per 237–8, 245–6, 248, 249, 251, 261–2, 270–3 compensation of 590 depreciation per 248–9, 271–3 disability benefits 194 discouraged 30, 124 educational levels 261–3, 301 effect of unemployment rate on 126–7 flows of 121–5 investment per 248–9, 271–3 layoffs 123, 299–300 output per see output per worker protection of 14, 132, 190–2 skill levels 302 wages see wage(s) see also employment; labour force Yeltsin, Boris 478 yield see bond yields zero inflation 512–3 zero interest rates 330 Zimbabwe 544–5 636 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z05_BLAN9516_4_LT_INDX.indd 636 18/03/13 11:55 AM www.downloadslide.net ( )d () A a α B β C CU c c0 c1 D $D δ E – E Ee ε F G gA gK gm gN gy g H I I IM i i1 i2 i* in K L λ M Md Term Superscript d means demanded Superscript e means expected Aggregate private spending Also: Labour productivity/States of technology Effect of price level or inflation on interest rate Effect on the inflation rate of the unemployment rate, given expected inflation Government debt Also: Effect of markup and oil price on price level Effect of an increase in output growth on the unemployment rate Consumption Currency Proportion of money held as currency Consumption when disposable income equals zero Propensity to consume Current account deposits Also: Real dividend on a stock Nominal dividend on a stock Depreciation rate Nominal exchange rate (price of domestic currency in terms of foreign currency) Fixed nominal exchange rate Expected future exchange rate Real exchange rate Function in wage-setting relation Also: Production function Government spending Growth rate of technological progress Growth rate of capital Growth rate of nominal money Growth rate of population Growth rate of output Share of labour in total cost High-powered money/monetary base/central bank money Also: Human capital Fixed investment Investment, taken as exogenous Imports Nominal interest rate One-year nominal interest rate Two-year nominal interest rate Foreign nominal interest rate Medium-run or ‘neutral’ nominal interest rate Capital stock Labour force Proportion of labour contracts that are indexed and thus respond to actual inflation Money stock (nominal) Money demand (nominal) Introduced in Chapter 17 6, 12 23 4 3 15 15 11 18 20 18 18 10 12 12 12 14 11 3 15 15 18 10 4 List of Symbols Symbol Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z06_BLAN9516_4_LT_SYMB.indd 637 15/03/13 4:29 PM www.downloadslide.net LIST OF SYMBOLS Symbol s M m N Nn NX P P0 PT P* p pT r Π Q $Q R r rn S s T tonc td tind θ U u un V $V W Y $Y YD YL Yn Y* X Z z $Z Term Money supply (nominal) Markup of prices over wages Employment Natural level of employment Net exports GDP deflator/CPI/price level Price of oil Price level target Foreign price level Inflation Inflation target Risk premium on holding domestic versus foreign assets Profit per unit of capital Real stock price Nominal stock price Bank reserves Real interest rate Medium-run or ‘neutral’ real interest rate Private saving Private saving rate Net taxes (taxes paid by consumers minus transfers) Tax rate on employment Direct tax rate Indirect tax rate Reserve ratio of banks Unemployment Unemployment rate Natural rate of unemployment Present value of a sequence of real payments z Present value of a sequence of nominal payments $z Nominal wage Real GDP/output/supply of goods Nominal GDP Disposable income Labour income Natural level of output Foreign output Exports Demand for goods Factors that affect the wage, given unemployment Also: Real payment Nominal payment Introduced in Chapter 6 19 7 18 20 16 15 15 14 14 11 6 2 14 14 2 16 19 3 14 14 638 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2013 – 9781442559516 - Blanchard/Macroeconomics Australasian Edition 4e Z06_BLAN9516_4_LT_SYMB.indd 638 15/03/13 4:29 PM ... Cover design by Nada Backovic Cover illustration by Ronny Grewal, RGLifeart Typeset by Aptara, Inc., India Printed in China 17 16 15 14 13 Author: Blanchard, Olivier (Olivier J.) Title: Macroeconomics. .. Ltd) 2013 – 9781442559516 - Blanchard /Macroeconomics Australasian Edition 4e A01_BLAN9516_4_LT_FM.indd 23 18/03/13 12:13 PM MyEconLab for Blanchard/ Sheen Macroeconomics, 4th edition A guided tour... puts macroeconomics in historical perspective by showing the evolution of macroeconomics in the last 70 years, discussing current directions of research, and the lessons of the crisis for macroeconomics