(BQ) Part 2 book Economic the basic has contents: Fiscal policy, monetary policy, the financial markets, international trade, technological change, economics of the labor market, the distribution of income, the distribution of income, economics of energy, the environment, and global climate change.
www.downloadslide.com CH 11 FISCAL POLICY I n 2008 and 2009, the federal government used its financial muscle to combat the Great Recession President George W Bush signed a bill to help prop up the failing banking system, and President Barack Obama followed with legislation that pumped $787 billion worth of federal spending and tax cuts into the faltering economy These increases in federal spending and cuts in taxes helped prevent the Great Recession from turning into something worse But it also left the United States with a huge budget deficit as spending far exceeded tax revenues In this chapter, we will analyze the economic effects of fiscal policy—that is, decisions about government spending, taxes, and debt in both the short run and the long run In the short term, fiscal policy consists of the government’s budget decisions that affect employment, output, and inflation over the next couple of years That includes the spending increases and tax cuts that the government enacted to fight the Great Recession In the long term, fiscal policy creates the link between government spending and taxation decisions and the country’s economic growth Fiscal policy is probably the most politically charged area of economics Each year, lawmakers and government officials in Washington decide how to allocate trillions of dollars The result is a federal budget hundreds of pages long in which every sentence can make a big impact on someone’s life or company And of course, members of Congress get elected in part because of their ability to influence the budget in favor of individuals and comFISCAL POLICY panies that donated Decisions about govmoney to campaigns ernment spending, taxes, and borrowing in But leaving politics the short and long run aside, reputable economists disagree about the right way to run fiscal policy Some favor a larger role for the government, especially when the economy is in a slump Others argue for shrinking government spending and taxation because they prefer less government interference and oversight And a third group of economists focuses on reducing the size of the budget deficit, which is the difference between spending and revenue In this chapter, we will lay out the basics of fiscal policy We will discuss both the positive and negative impacts of government spending, taxes, and borrowing on the rest of the economy, presenting the different perspectives in an unbiased fashion We will end this chapter by examining long-term fiscal policy LEARNING OBJECTIVES After reading this chapter, you should be able to: LO11-1 Identify key differences between the private sector and government LO11-2 Describe the short-term impacts of increased government spending, and use the multiplier effect to calculate the effect of fiscal stimulus LO11-3 Summarize the limitations of using increased government spending to stimulate growth LO11-4 Discuss the ways that changes in tax rates affect the economy LO11-5 Explain how the budget deficit affects the economy in the short run and in the long run www.downloadslide.com 184 CH 11 Fiscal Policy THE GOVERNMENT AND THE ECONOMY LO11-1 important roles is to act as a pipeline, shifting money from some people to others LO11-1 In many ways, a dollar spent by the governIdentify key differment contributes as much to economic output as Imagine an armored car filled with a million a dollar spent in the private sector Paying a ences between dollars, making a pickup from a local bank schoolteacher’s salary, fixing a bridge, or prothe private sector Now imagine a fleet of 3.9 million armored viding medical care for the elderly can be just as and government cars, each with a million dollars in it That’s important—or perhaps even more important— what you would need to carry the $3.9 trillion to the economy than your neighbor’s purchasing an expenthe federal government spent in 2015 sive sports car If we add in the spending of state and local governments, However, there is a big difference between government the total would be even higher In 2015, government at all and the private sector In the private sector, businesses and levels—federal, state, and local—spent almost $6 trillion individuals collect and spend money by means of market Of that amount, $2.6 trillion paid for transactions They exchange money either for goods and serthe salaries of government workers and TRANSFER PAYMENTS vices, in the case of businesses and their customers, or for for goods and services provided to the Government social labor, in the case of workers and employers All transactions benefits paid to government This is what we called are voluntary, so presumably all parties benefit individuals, including “government output” in Chapter What’s more, as we saw in Chapter 5, private businesses Social Security, Another $600 billion went for interest Medicare, and unemare always under pressure to cut costs and find ways to payments on government, while the reployment benefits b ecome more efficient If they don’t that, they are at risk maining $2.7 trillion went to transfer of being put out of business by competitors TAXATION payments—government payments to The main way the Governments, in contrast, are under no such economic individuals such as Social Security, government raises pressure to be efficient and innovative Nobody is going to Medicare, welfare, and other payments revenue from individuput the federal government out of business or take away its such as subsidies to businesses In als and businesses customers Instead, the level of government spending is set other words, one of government’s most by the political system rather than the economic system, and that spending is funded through a combination of taxation and borrowing Taxation, the main way the government raises money, is a legally required transfer of funds from individuals and businesses to the government Governments also raise money by borrowing Like private borrowers, governments have to pay interest on their debts But unlike private borrowers, they can pay back their debts by raising taxes if necessary For these reasons, the government has a special role in the economy HOW IT WORKS: LEVELS OF GOVERNMENT In this chapter, we talk about government as if it were one big entity But there are three separate levels of government, each of which has different patterns of spending and taxation The federal government, based in Washington, DC, spends mostly on national defense, Medicare, Medicaid, and Social Security In contrast, the 50 state governments and the more than 30,000 county and municipal governments have different sets of priorities Their big expenses are education and local services such as police, fire protection, and waste collection State governments also pay quite a bit toward Medicaid—the medical care for the poor Take the city of Springfield, Massachusetts, which has a population of 150,000 and is also home of the Basketball Hall of Fame (which, naturally, is shaped a bit like a basketball) In 2015, the city had a budget of $582 million Out of that, 63.5 percent was spent on education and 10.7 percent on public safety (police and fire). This is a very different spending pattern from that of the federal government THE SHORT-TERM IMPACT OF GOVERNMENT SPENDING LO11-2 Each year, the federal budget is set through a complicated and exhausting process beginning in February, when the president proposes a budget for the next fiscal year (which starts on October of each year) For the next nine months, various congressional committees and the executive branch wrangle over everything from the overall level of spending down to the smallest details, such as the funding for the M arine Mammal Commission (total 2015 budget: $3.3 million) Eventually, Congress and the president agree on how much is to be spent and what the tax rules will be What’s important here is that the level of spending is set through the political system Congress and the president can decide to either increase or decrease government spending When Congress and the president decide to boost or cut federal spending, what happens to the rest of the economy? www.downloadslide.com CH 11 Fiscal Policy 185 To make this more concrete, let’s say they macroeconomics, which uses increases in govchoose to boost spending by allocating an extra ernment spending and cuts in taxes (as we will LO11-2 $10 million dollars for repairing a bridge that is see later in this chapter) to combat the effect of Describe the shortabout to collapse We’ll ignore for the moment recessions Such increases in government the important question of where the added spending and cuts in taxes are called fiscal term impacts of $10 million comes from (though we’ll see later stimulus because they involve changes in fiscal increased governin the chapter that this makes a big difference policy Economist John Maynard Keynes origiment spending, to the economy) nally proposed the use of government spending and use the multiThe government spends some of the money to stimulate the economy in the 1930s during plier effect to calon labor: architects and engineers to draw up the the Great Depression He argued that the reason culate the effect of plans, truck drivers to move the supplies, confor the steep decline in GDP during the Depresfiscal stimulus struction workers to assemble the parts, police sion was the lack of demand—a problem the officers to supervise the site It spends some government could correct by spending more money on equipment: cranes, drilling equipment, trucks Since then, economists have had long and complex d isputes about the validity of the Other money goes for materials: steel, concrete, paint Keynesian approach Over time, they As you can see, repairing the bridge creates more demand have come to better understand many for labor, materials, and equipment In other words, the deKEYNESIAN APPROACH An approach to macroof its limitations, which we will dismand schedule for labor and the demand schedule for coneconomics that uses cuss later in this chapter However, facstruction materials and equipment both shift to the right, as increases in governing a worsening recession in late 2008 we see in Figures 11.1 and 11.2 ment spending and and early 2009, most economists The effect of the increase in government spending is to cuts in taxes to combat agreed that it was important for the push up the quantity of labor from L to L′ and to push up the recessions government to support demand The quantity of construction materials from Q to Q′ In other FISCAL STIMULUS American Recovery and Reinvestment words, unemployment falls because more workers are emIncreases in governAct (ARRA) signed by President ployed And production increases because more construcment spending and Obama in February 2009 was intended tion materials are being demanded and supplied cuts in taxes designed to stimulate growth and job creation by This brings us to the following general principle: In the to boost the economy boosting demand (see Table 11.1) short term, an increase in government spending lowers unemployment and increases GDP, all other things being equal This principle is the essence of the Keynesian approach to FIGURE 11.2 The Impact of Government Spending on the Labor Market An increase in government spending pushes the demand curve for labor to the right, which boosts the quantity of labor supplied and demanded from L to L' Demand curve for labor after increase in government spending Wage Supply curve for labor W′ W Original demand curve for labor L L′ Quantity of Labor Supplied and Demanded When the government spends money to repair a bridge, that pushes the demand curve for construction materials to the right, which boosts the quantity of construction material supplied and demanded from Q to Q' Price of Construction Materials FIGURE 11.1 The Impact of Government Spending on the Market for Construction Materials Supply curve for construction materials P′ P Demand curve for construction materials after increase in government spending Original demand curve for construction materials Q Q′ Quantity of Construction Materials Supplied and Demanded www.downloadslide.com 186 CH 11 Fiscal Policy TABLE 11.1 Major Fiscal Stimulus Legislation, 2008–2010 Economic Stimulus Act Date: February 2008, signed by President George W Bush Amount: $152 billion Key aspects: Provided tax rebates for low- and middle-income households and investment incentives for some businesses Troubled Asset Relief Program (TARP) Date: October 2008, signed by President George W Bush Amount: $410 billion invested, $244 billion repaid (as of March 2011) Key aspects: Gave the federal government authority to prop up the economy by investing up to $700 billion in troubled financial institutions and selected nonfinancial businesses American Recovery and Reinvestment Act (ARRA) Date: February 2009, signed by President Barack Obama Amount: $787 billion Key aspects: Gave a wide range of tax reductions, including tax credits for college tuition, first-time home buyers, and home owners who invest in energy efficiency Increased spending on health care and education, including aid to local school districts and Pell grants Invested in highway, bridge, rail, and air projects Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Date: December 2010, signed by President Barack Obama Amount: $858 billion Key aspects: Extended tax reductions that were going to expire as of December 2010 Extended unemployment benefits Temporarily cut payroll tax The Multiplier Effect Now let’s continue our story of repairing the bridge With more workers employed, the demand for consumer products goes up Workers now have money to buy necessities like food, consumer durables like cars, and luxuries like occasional dinners out That boosts spending, which increases sales across the whole range of businesses, including grocery stores, auto dealers, and restaurants Think about auto dealers, for example Remember, the government itself doesn’t buy any extra cars because it’s repairing the bridge, but the newly hired construction workers If the government hires 1,000 construction workers, and 100 of them buy new cars with their paychecks, that’s 100 cars that weren’t MULTIPLIER EFFECT sold before The short-term boost The rise in sales across the board enin economic activity courages private-sector businesses to that flows from the hire more workers as well: more car government’s spendsales staff, more supermarket checkout ing increase (or tax cut) clerks, more restaurant cooks What’s JOB MULTIPLIER more, if sales go up enough, the auto The total number of dealers may be tempted to add another jobs created by one building to accommodate the new deadditional governmentmand And guess what? The construcfunded job tion company that builds the new auto SPENDING MULTIPLIER dealership probably has to hire new The increase in GDP workers too created by one addiIn other words, the initial government tional dollar of government expenditures hiring effort creates enough additional purchasing power in the economy to induce another round of hiring in the private sector And those extra workers, in turn, boost the economy with their purchases as well Taken together, this multiplier effect is the short-term boost in economic activity that flows from the government’s spending increase (or tax cut, as we will see later in the chapter) A similar multiplier effect occurs for any type of government spending For example, giving food stamps to poor households raises the demand for food, leading grocery stores to hire more cashiers A purchase order for military submarines increases employment at the shipyards that keeps local stores humming, boosts construction of new homes for the shipyard workers, and perhaps even increases jobs at beach resorts as the workers can afford more family vacations We can state the multiplier as a job multiplier, which gives the total number of jobs created by one additional government-funded job A job multiplier of means that each new government job creates one new private-sector job A job multiplier of means no additional private-sector jobs are created Alternatively, we can state the multiplier as a spending multiplier, which gives the increase in GDP created by one additional dollar of government expenditures Suppose the government spends an additional dollar on hiring workers or buying supplies By itself that would boost GDP by $1 because government spending on goods and services is one component of GDP (as we saw in Chapter 7) But that dollar could have an additional effect as that new worker uses the www.downloadslide.com new income to increase his purchases A spending multiplier of 1.4 means that GDP goes up by $1.40 in response to the initial spending increase: $1 from the bigger government component and $0.40 extra in the private sector To put things in a wider perspective, suppose the government boosts spending by $100 billion If the spending multiplier is 1.4, GDP will rise by $140 billion, including both the initial spending and its follow-up effects That seems like a lot of money However, with national GDP in early 2016 running at about $18 trillion per year, a $140 billion increase is equivalent to only about a 0.8 percent increase in GDP (0.8 percent = $140 billion/$18 trillion) Economists use the multiplier to help estimate the impact of fiscal stimulus (see “Spotlight: The Impact of ARRA”) The multiplier can work at either the national or the local level One of the best examples of the multiplier effect on the local level plays out in Washington, DC The main employer in the District of Columbia is, of course, the federal government, which accounts for about 30 percent of all the area’s workers In fact, if it weren’t for the federal government, most private-sector businesses in Washington wouldn’t be there, including many law firms and trade associations that lobby legislators and regulators Without the government and the multiplier effect, Washington might be a small and sleepy village The Marginal Propensity to Consume What determines the size of the multiplier? One factor is the marginal propensity to consume (MPC), which is the portion that households spend of each additional dollar they receive Think about a construction worker being hired to build the bridge When she gets the pay from her new job, she has the choice to spend the money or put it in the bank If her marginal propensity to consume is 6, she’ll spend 60 cents of that additional dollar and save the remaining 40 cents The higher the marginal propensity to consume, the bigger the multiplier will be, all other things being equal If those newly hired construction workers run right out and buy cars, they’ll give a big boost to the rest of the economy More autoworkers will be hired, who in turn will go out and spend their wages on renovating their homes, say That will lift the employment of carpenters, and so forth But if the newly hired construction workers sock all their money away in the bank, the short-term boost to the economy will be much smaller Car sales won’t go up, extra autoworkers won’t be hired, and employment won’t rise as much At one end of the scale, poor individuals typically have a marginal propensity to consume of close to They are generally short of money for necessities So, given an extra dollar, they are forced to spend it all (a survey by the Federal Reserve suggests that only about one-third of low-income households any saving) CH 11 Fiscal Policy 187 SPOTLIGHT: THE IMPACT OF ARRA From the beginning, President Obama and his team tried to track the impact of the American Recovery and Reinvestment Act (ARRA) on jobs They required recipients to report on job creation and set up a website, www.recovery.defense.gov, to offer the public this information Tracking the job creation, though, turned out to be more difficult than expected Part of the problem was the sheer diversity of projects ARRA-funded projects included everything from $23 million to help complete biking and walking trails near Philadelphia and Camden, New Jersey; to $73 million for the construction of “Warriors in Transition Barracks” for military personnel who were wounded in Iraq or Afghanistan; to $1.6 billion for cleaning up the Savannah River nuclear weapons site in South Carolina In the end, the best estimates of the job impact of ARRA came from the spending and job multipliers used by the Congressional Budget Office (CBO) For example, in a February 2015 report, CBO estimated that spending on infrastructure had a spending multiplier of as little as 0.4, or as much as 2.2, spread over several quarters Based on this assumption, CBO estimated that the stimulus program raised GDP by as little as 0.4 percent or as much as 1.8 percent in 2009, by 0.7 percent to 4.1 percent in 2010, and by 0.4 percent to 2.3 percent in 2011 Similarly, CBO estimated that the stimulus raised employment by 200,000 to 900,000 jobs in 2009, by 700,000 to 3.3 million jobs in 2010, and by 500,000 to 2.6 million jobs in 2011 What’s remarkable is how wide these ranges are Despite the best efforts of economists, macroeconomic policy is still an inexact science Source: The Congressional Budget Office, https://www.cbo.gov/ sites/default/files/114th-congress-2015-2016/reports/49958ARRA.pdf and www.recovery.defense.gov In contrast, the richest individuals don’t spend all their income, so if you give them an extra dollar, it’s not likely to affect their spending habits much Indeed, if you give Mark Zuckerberg of Facebook an extra $100, he’s not likely to go on a buying spree As a result, the rich have a very low marginal propensity to MARGINAL consume—perhaps close to zero PROPENSITY TO The implication? The multiplier is CONSUME (MPC) higher if government spending goes, diThe portion that rectly or indirectly, to people with a high households spend marginal propensity to consume A govof each additional ernment project that hires unemployed dollar they receive www.downloadslide.com 188 CH 11 Fiscal Policy OVERSEAS LEAKAGE A situation where fiscal stimulus leads to increased imports rather than to faster growth at home workers into long-term jobs generally has a big multiplier effect because these workers are likely to spend a lot of their wages But a program that hands out money to rich Americans is unlikely to have the same immediate impact on GDP Overseas Leakage Another factor affecting the multiplier is the amount of money that’s spent on goods and services produced in the United States versus the amount spent on imports Government spending, if it is to boost output, needs to encourage SPOTLIGHT: FISCAL STIMULUS AND THE BUY AMERICAN PROVISION ARRA, the 2009 stimulus legislation, was intended to create jobs for Americans To that end, Congress wanted to discourage the stimulus funds from being used to buy imported goods So, the legislation contained a “Buy American” provision—public works projects funded by the legislation had to be built only using “iron, steel, and manufactured goods produced in the United States.” Seems clear, right? Except that the legislation contained several large exceptions to the Buy American rule The government is allowed to waive the rule if it costs too much to buy American, if American-made goods are not available in sufficient quantities, or if the agency overseeing a project says that requiring American-made products would be “inconsistent with the public interest.” For example, ARRA included funding for making highspeed broadband available to more people But because most broadband equipment uses components from all over the world, the government had to issue a broad waiver of the Buy American requirement to achieve its goals Another example: The Air Force wanted to construct housing for military families at an Alaskan base using ARRA funds But the Air Force waived the Buy American requirements when it couldn’t find domesticmade versions of a “Residential Style Polished Chrome Toilet Paper Holder” and other similar items In the end, it’s hard to say how much impact the Buy American requirements had or how much of the fiscal stimulus leaked overseas In a global economy, buying American is easier to say than to accomplish Source: https://innovationandgrowth.wordpress.com/2011/04/18/ air-force-certifies-the-weakness-of-domestic-manufacturing/ production and employment in the United States But in a world where so many products are made overseas, it becomes more likely that fiscal stimulus will lead to increased imports rather than to faster growth at home This transfer of domestic economic stimulus to foreign markets is known as overseas leakage Leakage was less important in the past In the 1960s, for example, imports of goods and services equaled only percent of gross domestic purchases As of 2015, imports of goods and services made up almost 16 percent of gross domestic purchases For some types of goods, such as clothing and toys, imports supply more than half of all U.S purchases As overseas leakage grows, the multiplier from fiscal stimulus shrinks That’s especially true when the government purchases directly from overseas suppliers, which completely skips any job creation in the United States (see “Spotlight: Fiscal Stimulus and the Buy American Provision”) The Size of the Multiplier With all the different factors affecting the impact of government spending on the economy, there is much disagreement among economists about the size of the job and spending multipliers. But as the next section shows, the exact size of the multiplier usually depends on where we are in the business cycle What’s more, the use of government spending to boost the economy comes with some troubling negative consequences, including inflation and debt These, too, will be discussed in the next section and the rest of the chapter THE LIMITATIONS OF SPENDING STIMULUS LO11-3 So far, we’ve focused on one aspect of fiscal policy: how increased government spending can boost employment and GDP In the short run, this seems to imply that if the spending and job multipliers are greater than 1, a clear strategy exists for creating widespread prosperity: Ramp up government budgets and watch the economy improve In fact, in the 1960s many economists and politicians believed that the government could get rid of unemployment and reduce poverty by stimulating the economy In August 1964, for example, President Lyndon Johnson signed a bill that created the Job Corps, an agency that trained and found jobs for poor young people who might otherwise not be employed The stated goal was to drive the unemployment rate down to percent or less But economists gradually learned that there were plenty of downsides to stimulating the economy through fiscal policy In fact, those downsides greatly limited the situations in which the government could use spending as an economic strategy www.downloadslide.com CH 11 Fiscal Policy 189 AN INCREASE IN GOVERNMENT SPENDING TENDS TO RAISE WAGES AND PRICES IN THE SHORT TERM The Perils of Inflation In other words, an increase in government spending is more likely to have a positive impact on jobs and output Let’s start with inflation In the previous section, we showed when the economy is well into a recession so that the unemhow the bridge repair effort by the government would inployment rate is above the natural rate and real GDP is becrease the quantities demanded of labor, construction matelow potential GDP An increase in government spending is rials, and all sorts of other goods and services But if we more likely to lead to higher inflation when the unemploylook again at Figures 11.1 and 11.2, we also see something ment rate is below the natural rate and real GDP is above else: an increase in wages and prices potential GDP In other words, an attempt to use governHere’s another way to think about it: In some ment spending to boost the economy also tends respects, a recession is like a big pothole in a to create inflation The extra government LO11-3 highway It makes the ride bumpier, slower, and spending pushes up demand, and prices and more dangerous And just as a paving crew fills wages rise faster than they would otherwise Summarize the in the pothole with asphalt, the government can This makes sense In the bridge example, limitations of using fill in the recession “pothole” by increasing the government would need to hire a lot of increased governspending That gives business and individuals a skilled construction workers If they already ment spending to smoother ride had jobs in the private sector, the government stimulate growth But what if the paving crew keeps pouring would need to offer higher wages to lure them on asphalt after the pothole is filled? The cars away Similarly, the need for steel for the don’t move faster Instead, we just get a big bump in the road bridge is likely to raise the price of steel As a result, in the that may even cause more problems than the original potshort term, an increase in government spending raises hole did Similarly, if the government continues to boost wages and prices spending after the recession is over, we get more inflation Which effect of government spending is likely to be rather than faster growth stronger—the impact on output or the impact on inflation? Indeed, this explains why President Johnson’s attempt to It depends on where we are in the business cycle Repush the unemployment rate down below percent in the member from Chapter 10 that the business cycle consists of 1960s didn’t work over the long run He could boost governrecession and expansion During a recession, the unemployment spending, and he did, to create additional jobs at a time ment rate rises above the natural rate Real GDP drops and when the economy was already doing well But that also led falls beneath potential GDP until the economy reaches a to an acceleration of inflation—not a good thing trough Then the process reverses itself In the depths of a recession, when things seem miserable, there are plenty of underutilized resources—workers, factories, buildings, equipment At that point, an increase in government spending can provide an effective boost to the economy The job and spending multipliers will be relatively high, and the effect on inflation will be relatively low For example, if there are many unemployed skilled construction workers, a new government bridge-building project can lower unemployment without depriving private companies of their workforce But what if the economy is already doing very well? Then, most available resources and workers are already being used by private industry So, if the government comes in and boosts spending, there will be a big effect on inflation and relatively small job and spending multipliers Returning to the bridge example, if most skilled construction workers are already employed in private jobs, the government’s need for help with the new bridge will bid up the cost of workers rather than adding to employment Lags in Policy That brings us to the next problem: figuring out the right time for the government to spend When an economy goes into recession, unemployment rises and real GDP falls below potential GDP STIMULATIVE So, according to the analysis we’ve just A government policy seen, boosting government spending in action, such as a tax cut, that pushes up a recession should be stimulative— output and reduces that is, it should have a good chance of unemployment in the pushing up output and reducing unemshort run ployment in the short run But now LAG here’s a question: When an economic The length of time downturn hits, can C ongress and the between recognizing president increase government spendthat the economy is in ing quickly enough to any good? recession and getting This may seem like an odd issue, but fiscal stimulus or it’s tougher for them to so than you monetary stimulus into might think There are big lags in the effect www.downloadslide.com 190 CH 11 Fiscal Policy government response First, it takes time to recognize that the economy is in a recession Moreover, any major project—like a new bridge—takes months or years to get going The money has to be approved by Congress and signed by the president, which does not happen quickly Then the construction contracts have to be given out, which is also not a quick process Given that the recession of 1990–1991 and the recession of 2001 both lasted only eight months, the stimulative spending may not actually take effect until after the recession has ended If the spending comes when the economy is already out of recession, it is worse than simply being late: It adds to inflation For that reason, in past downturns, recessionfighting policy has focused on tax cuts (to be covered in the next section) and changes in monetary policy (to be covered in the next chapter) Of course, the Great Recession lasted long enough for Washington to react with fiscal stimulus The downturn started in December 2007, and ARRA was not passed until February 2009, 14 months later However, the recession was still going on, and the stimulus was much welcomed TABLE 11.2 Major Types of U.S Taxes The biggest revenue source for the government is the federal income tax Name of Tax What It Taxes Income tax All individual income including wages, gains from investments, tips, and lottery winnings Property tax The value of residential and commercial real estate Payroll tax Wage payments (paid by both employees and employers to fund Social Security and Medicare) Corporate income tax Corporate profits Sales tax Retail sales Excise tax Particular items such as gasoline, tobacco, and alcoholic beverages TAXATION LO11-4 collects a lot more tax than it used to But Up to this point, we’ve focused on the impact of compared to the size of the economy, tax LO11-4 government spending But remember that the collections have not changed much in the past money the government spends has to come Discuss the ways 30 years or so from somewhere Either the government raises In 1970, governments at all levels collected that changes in tax funds through taxes, or it taxes and fees totaling roughly 27 percent of rates affect the borrows GDP Surprisingly, taxes and fees were only economy INCOME TAX Let’s first look at the 29 percent of GDP in 2015—taking just a A tax collected on economic effects of tax inslightly larger share of the economy compared individual income creases or tax cuts Then in the next to their level 45 years earlier The reason? Tax collections PROPERTY TAX section we’ll examine government have risen enormously since 1974, but so has GDP A tax collected on the borrowing value of residential and commercial real estate PAYROLL TAX A tax collected on wage payments, paid by both employees and employers to fund Social Security and Medicare CORPORATE INCOME TAX A tax collected on corporate profits SALES TAX A tax collected on retail sales EXCISE TAX A tax collected on particular items such as gasoline, tobacco, and alcoholic beverages The Basics The main source of money for government spending is taxation Taxes include a diverse collection of ways in which the government raises money: income tax, property tax on the value of homes and commercial buildings, payroll tax that funds Social Security and Medicare, corporate income tax, sales tax on retail purchases, and excise tax on gasoline, tobacco, and alcohol In addition, there are all sorts of smaller taxes, such as taxes on hotel rooms, airline tickets, and sporting events (often called an amusement tax) Table 11.2 lists the major taxes in the United States We often complain about being overtaxed, and certainly the government Changes in the Tax System The single biggest tax is the federal personal income tax Figure 11.3 shows the income tax as a share of GDP, along with key changes in tax policy When the tax share rises, as it did in the late 1970s and the late 1990s, political pressure for tax cuts mounts For example, the federal income tax as a share of GDP peaked at 9.3 percent in 1981, the year President Ronald Reagan proposed and got Congress to approve deep tax cuts Similarly, the federal income tax share of GDP reached a peak of 10.0 percent in 2000, making it easy for P resident George W Bush to make a case for cutting taxes But when the income tax share falls as it did in the early 1990s, it becomes easier for the legislature to pass tax increases For example, the tax share reached a low of 7.5 percent in 1992, the year Bill Clinton was elected president Once in office, Clinton proposed an income tax increase The big exception to this general pattern, however, is 2009 Despite the relatively low share of GDP going to the www.downloadslide.com CH 11 Fiscal Policy 191 IN THE SHORT RUN, TAX CUTS ARE STIMULATIVE AND TAX INCREASES ARE CONTRACTIONARY, ALL OTHER THINGS BEING EQUAL Federal Personal Income Tax as a Share of GDP, 1969–2014 After decades of political fights, the federal income tax as a share of GDP today is near its long-term average Source: Bureau of Economic Analysis, www.bea.gov 16% Federal Personal Income Tax as Percentage of GDP FIGURE 11.3 2000: George W Bush is elected and cuts taxes soon after taking office 1981: Ronald Reagan’s tax cuts sail through Congress 14% 12% 2013: Barack Obama raises taxes on top earners 10% 8% 6% 1992: Bill Clinton is elected and raises taxes soon after taking office 4% 2% 2009: Barack Obama offers tax incentives to help stimulate the weak economy 14 20 11 08 20 05 20 02 20 20 99 19 96 19 93 19 90 19 87 19 84 81 personal income tax, President Obama did not push to raise tax rates because of the weakness of the economy Instead, he waited until 2013, when the economy had improved, to raise taxes on top earners. So far, we have focused on the personal income tax However, big shifts have occurred in other kinds of taxes For example, the corporate income tax has shrunk as a share of the total tax pie In part, that’s because corporations have good lobbyists, who help rewrite the tax code to favor them But it’s also the result of globalization, which means companies earn more of their money overseas That makes it much harder for the U.S government to tax company profits In comparison, a much bigger proportion of tax revenue now comes from payroll taxes—the taxes on wages that pay for Social Security, Medicare, unemployment insurance, and the like Payroll taxes have been hiked several times as policymakers struggle to ensure that these programs are well funded Currently, employees pay 6.2 percent of their wages for Social Security, on income up to a maximum of $118,500 in 2016, and 1.45 percent of wages for Medicare, with no upper limit Employers chip in the same amount (We will discuss Social Security and Medicare further in Chapter 18.) 19 19 78 19 72 75 19 19 19 69 0% Year The Direct Impact of Taxes Obviously, if you pay a dollar to the government in taxes, that’s a dollar you don’t have available to spend Disposable income is defined as the amount of income people have left after paying taxes Naturally, tax cuts tend to boost disposable income, whereas tax increases tend to lower it (leaving out the effect of anything else the government might do) As a result, an increase in taxes will generally dampen spending, and a decrease in taxes will boost spending In other words, tax cuts are stimulative, meaning that they lower unemployment and increase DISPOSABLE INCOME GDP in the short run, all other things The amount of income being equal By contrast, tax increases people have left after are contractionary, meaning they tend paying taxes to reduce output and employment, all CONTRACTIONARY other things being equal A description of a Changes in taxes also have an impact government policy on inflation In particular, a decrease in action, such as a tax taxes will boost wages and prices in increase, that reduces the short term, all other things being output and pushes up equal To see why, look at F igure 11.4, unemployment in the which shows the short-term impact of short run www.downloadslide.com 192 CH 11 Fiscal Policy FIGURE 11.4 The Stimulative Effect of a Tax Cut A tax cut boosts the disposable income of consumers, which causes their demand curve for goods and services (such as cars) to shift to the right This boosts the quantity supplied and demanded of cars while raising their prices Demand curve for cars after income tax cuts Price of Cars Supply curve for cars P′ P Original demand curve for cars Q Q′ Quantity of Cars Supplied and Demanded a reduction in income taxes on the market for cars As taxes are cut, disposable incomes go up, which shifts the demand curve for cars (as well as for other goods and services) to the right As a result, the new quantity demanded in the market is higher, and so is the price of cars Using Tax Cuts to Fight Recession If the economy goes into recession, the government can cut taxes as a way of putting money into the hands of people who may otherwise be struggling financially and unable to spend In some ways, this is similar to the argument in favor of boosting spending to TAX MULTIPLIER fight recessions As shown in FigThe increase in GDP ure 11.4, a tax cut is stimulative from a $1 cut in taxes What’s more, as the effect of a tax INCENTIVE EFFECT cut spreads through the economy, econWhen a tax discouromists can estimate the tax multiplier, ages the economic which is the increase in GDP from a activity being taxed $1 cut in taxes The tax multiplier deSUPPLY-SIDE pends on the marginal propensity to ECONOMICS consume and overseas leakage, among A school of economic other things thought that emphaHowever, for fighting recession, a sizes the importance tax cut has a big advantage over a of low marginal tax spending increase: The tax cut can be rates put into effect more quickly For examMARGINAL TAX RATE ple, in January 2008, President George The tax a person pays W Bush proposed a tax rebate—a type on the last dollar of of one-time tax cut The rebate was income earned quickly passed by Congress The first rebate checks were in the hands of Americans by May 2008, while the economy was still struggling That’s fast enough to be effective Incentives and Taxes However, fighting recession is not the only reason why some economists and politicians favor lowering taxes In the 1970s a group of economists began to focus on the negative incentive effects of taxes That is, higher taxes discourage whatever activity is being taxed So, if labor income is heavily taxed, you are less likely to work hard A high sales tax on clothing would make you less likely to buy clothing and more likely to buy something else And a heavy tax on profits, which lessens the benefit of being successful in business, would make it less likely for you to start a new company This link between taxes and incentives is the essential insight of supply-side economics Supply-side economics focuses on the marginal tax rate: the tax you pay on the last dollar of income you earn For example, when the marginal tax rate is 30 percent, if you earn an extra dollar, the government gets 30 percent of it and you get 70 percent Different people may have different marginal tax rates, depending on their level of income and the tax code The marginal tax rate is important because it determines your incentives for working a bit more If your marginal tax rate were 95 percent, for example, it would not pay for you to increase your hours of work because the government would be taking 95 cents of every additional dollar you made But if your marginal tax rate were 10 percent, the federal government’s share would be close to zero Supply-side economics argues that cutting taxes gives people an incentive to work and invest more Over the past 30 years, many economists and politicians have accepted the proposition that cutting marginal tax rates can be beneficial In the 1950s, as shown in Figure 11.5, the top marginal tax rate (the rate paid by those in the highest income brackets) was actually around 90 percent To pick just one year—say, 1955—the tax code called for a 91 percent tax rate on a married couple with a taxable income greater than $400,000 (adjusting for inflation, that $400,000 would be worth about $3 million today) That’s an amazingly high tax rate But the top marginal rate was repeatedly lowered over time As of 2016, the top marginal rate for the federal income tax was down to 39.6 percent for married couples with taxable income greater than $466,950 One extreme version of supply-side economics argues that cutting taxes can stimulate enough work and investment to actually increase tax revenues That has been one argument given in favor of tax cuts, starting with Ronald Reagan’s 1981 cuts and continuing through to George W. Bush’s tax cuts in 2001 and 2003 But most economists today accept that cutting marginal tax rates simply decreases tax revenues www.downloadslide.com GL-8 Glossary movement along a supply curve The effect of a price change on the quantity supplied multinational A business that operates in multiple countries multiplier effect The short-term boost in economic activity that flows from the government’s spending increase (or tax cut) mutual funds A financial intermediary that, for a fee, invests the money of customers in a group of stocks N nonmarket economy The part of the economy where people perform productive work without getting paid Includes child-rearing and volunteer work nonprofit organizations Enterprises that focus on providing useful services to society rather than maximizing profits nonrenewable energy Sources of energy like fossil fuels that have only a limited supply nonresidential investment The buildings, equipment, and software that businesses purchase to use in production national market A market where buyers and sellers can be in different parts of a country normal good A good whose demand rises more or less in step with income national savings The sum of personal savings, government savings, and business savings nuclear power An energy source using contained nuclear reactions to generate electricity natural barriers to trade Obstacles to trade that include distance and differences in cultures natural monopoly An industry in which it may make economic sense to have only one supplier natural rate of unemployment The level of unemployment in the economy at which inflation is more or less stable Also called NAIRU O offshoring The movement of manufacturing and service sector jobs to lower-wage countries negative externalities An undesirable impact that an economic activity can have on others oil price shock The events occurring in 1973 when the Organization of Petroleum Exporting Countries (OPEC) put an embargo on oil shipments to the United States and several European countries Skyrocketing oil prices followed, which helped trigger an era of high inflation negotiated price A price that is determined on a case-bycase basis as a result of negotiation between individual buyers and sellers old-age dependency ratio The ratio of the size of the older population (65 years and over) to the size of the workingage population (ages 20 through 64) net exports The difference between exports and imports oligopoly A situation where a market has only a small number of sellers producing similar products net worth Total household assets minus liabilities network externality How the decision of a person to use a network affects the value of that network to other people New Deal A collection of public programs that President Franklin Roosevelt instituted to alleviate economic suffering during the Great Depression New Economy The period between 1995 and 2007 when productivity growth rebounded almost to what it was during the Golden Age open market operations The process by which the Federal Reserve affects short-term interest rates opportunity cost The value or benefit of the next-best alternative use of money or time output gap The difference between real and potential GDP output of government The government’s purchases of goods and services Also called government consumption and investment outputs The goods and services a business sells to customers new entrants New businesses competing in an existing market, or existing businesses that are expanding into a new market outsourcing Shift of labor to third parties to handle tasks once done by a firm’s own employees new markets Markets with new products and services, or markets that include mostly new buyers and sellers overseas leakage A situation where fiscal stimulus leads to increased imports rather than to faster growth at home nominal change The increase or decrease in a monetary value over time without adjusting for inflation non-zero-sum economy Occurs when an economy can produce more of one good or service without having to curtail production of another Nonaccelerating inflation rate of unemployment (NAIRU) See natural rate of unemployment noncompeting labor markets Occurs when the workers in one labor market not seek jobs in another P patent A protection against copying granted by the U.S Patent and Trademark Office to inventors for their discoveries payroll tax A tax collected on wage payments, paid by both employees and employers to fund Social Security and Medicare www.downloadslide.com Glossary GL-9 peak The date a recession starts—the high point of an economy before its decline private sector The economy outside of government, including privately owned businesses peak oil The theory that global production of oil may be nearing its highest point privatization The shifting of certain aspects of government programs, such as Social Security, to the private sector pegged exchange rate Occurs when the government of one country manages its exchange rate to be fixed in relation to another currency product A good or service perfect competition A situation in which all buyers and sellers in a market are price takers perfectly inelastic supply The quantity supplied does not change at all when the price changes personal consumption The goods and services bought by households personal savings What remains from household income after taxes and consumption spending are taken out personal savings rate Savings by households as a share of disposable income pollution One important negative externality from economic activity positive externality A desirable impact that an economic activity can have on others potential GDP The output of the economy along a smooth path of growth, assuming no strains on production or unused resources potential growth rate The rate at which potential GDP increases; also the combination of the long-term growth rate of the labor force plus the long-term growth rate of productivity poverty line An income level that is supposed to indicate the lowest acceptable living standard in an economy; it depends on the number of people in the household and is adjusted for inflation each year poverty rate The percentage of people living in households that earn incomes below the poverty line pretax income distribution The spread of incomes before taxes have been taken out price The rate at which buyers and sellers exchange money for a good or service price appreciation An increase in the price of a stock price elasticity of demand The percentage change in quantity demanded that results from a percent change in price price elasticity of supply The percentage change in quantity supplied, given a percent change in price price takers Buyers and sellers who take the market price as given and make their buying and production decisions accordingly production The process of turning inputs into outputs production function The link between the inputs of a business and its outputs production possibility frontier (PPF) All the combinations of different goods and services the economy is capable of producing at a particular time, assuming full use of all resources productivity Economic output divided by the number of labor hours worked productivity slowdown The period from 1973 to 1995 in which productivity grew at a much slower pace than in the Golden Age productivity-enhancing innovation Technological change that provides more of the same product while holding inputs constant It has the effect of shifting the supply curve to the right profit The difference between revenues and costs profit maximization The main objective of a business in a market economy: finding a way to achieve the largest difference between revenue and costs profit-maximizing rule A profit-maximizing business will increase production as long as marginal revenue exceeds marginal cost progressive tax A tax that requires high-income households to pay a higher tax rate than low-income households property tax A tax collected on the value of residential and commercial real estate protectionism The use of tariffs, quotas, or other barriers to trade to protect domestic jobs and businesses public companies Businesses that have sold shares of stock (also called equity) to the general public public debt The total of government borrowing public goods Goods and services that benefit many people in a city, region, or country public sector The portion of the economy that includes the federal, state, and local levels of government pure price change An increase in the price of a good with no change in its quality or characteristics Q principal The sum of money in any loan that the lender gives the borrower quality-of-life innovation Technological change that enhances the quality of life for you and those around you private return from innovative activities The gain to an original company that devotes resources to innovative activities quantitative easing (QE) The use by central banks of open market operations to bring down long-term interest rates, such as mortgage rates www.downloadslide.com GL-10 Glossary quantity demanded The amount of a good or service that a buyer is willing to purchase at a given price quantity supplied The amount of a good or service that a seller is willing to supply at a given price quintiles 20 percent of a group Used when considering income distribution quotas Government-imposed disincentives to trade that include numerical limits on the number of imported products coming into a country R revealed preference One way of putting a monetary value on the health impacts of pollution, based on analyzing the choices that people make in their daily lives to change their risk of death or injury Also used to assess the monetary value of harm to environmental amenities revenue The amount of money companies get from selling their products or services risk The possibility that something unexpected, either good or bad, will happen to an investment risk from innovative activities The possibility that spending on innovative activities such as R&D will not pay off rational individual A person who maximizes his or her utility, subject to a budget constraint risk of default The possibility of not getting paid back on a loan real change The change in a quantity adjusted for inflation See inflation-adjusted change risk-return principle The concept that the only way to get higher expected returns over the long run is to take more risks real GDP Gross domestic product, adjusted for inflation real GDP growth The growth in gross domestic product adjusted for inflation Also known as economic growth real GDP per capita Real GDP divided by the number of people in a country Serves as a measure of the standard of living recession A significant decline in economic activity spread across the economy, lasting more than a few months redistribution The transfer of money from high-income to low-income households rules Regulations issued by various government agencies S safety net Government programs that provide a measure of economic security for the poor, the sick, and the vulnerable sale price A price intentionally set below the market price to stimulate purchases sales tax A tax collected on retail sales regressive tax A tax that requires high-income households to pay a lower tax rate than low-income households satiation The point at which the value of additional consumption of a good or service goes to zero relative price shift A situation where the inflation rate of a good or service is significantly higher or lower than the overall inflation rate sellers Businesses or individuals who receive money in exchange for supplying goods and services renewable energy Energy sources such as wind and solar power shift in tastes A shift in the demand curve for a good or service based on a change in consumer preferences rent-seeking behavior Occurs when businesses spend money trying to influence the government short-term aggregate supply curve A curve that shows the short-term link between the average price level and the quantity of goods and services produced research and development (R&D) Money and resources— particularly human resources—that economies or businesses devote to science and technology short-term cost function The link between the output of a business and the cost of producing that output, assuming that fixed costs cannot be changed reserve requirement The requirement that banks keep a portion of their deposits either in cash in their vaults or on reserve with the Federal Reserve short-term costs See variable costs residential investment The construction of new homes and the renovation of existing homes retirement poverty problem The problem that poor people often don’t have enough income to save for retirement retirement uncertainty problem The problem that individuals don’t know how long they will live after retirement return The gain on your investment in a year, measured as a percentage of original investment return from innovative activities The payback to spending on innovative activities such as R&D short-term growth Economic growth over a single year short-term profit maximization The process of running a business to achieve the greatest excess of revenues over costs, assuming that fixed costs cannot be changed shutdown decision A business decision to keep operating or not, based on the level of profits single-payer system A proposed health plan in which health care spending for everyone is paid for through the government smoothing out the business cycle One key goal of the Federal Reserve, which tries to keep the economy from dropping into a steep recession www.downloadslide.com Social Security The government program that provides income support to older citizens who have contributed during their working years Glossary GL-11 surplus A situation where government revenues exceed government spending spending multiplier The increase in GDP created by one additional dollar of government expenditures system of national accounts All the statistics that feed into the process for estimating the quarterly and annual output of the U.S economy stagflation A combination of slow economic growth and rapid inflation T standard of value The use of monetary values to make comparisons between different items standardized products Outputs that differ from each other in only a small number of easily identifiable features stated preference One way of determining the monetary value of the damage done by pollution, based on surveys of individuals or other direct queries sticky wages Wages that don’t change much in the short term in response to economic conditions stimulative A government policy action, such as a tax cut, that pushes up output and reduces unemployment in the short run stock A piece of ownership in a company Also called equity stock market A market in which shares of stocks are bought and sold stock trade The purchase or sale of a share of stock by an investor stockbrokers The financial intermediaries that handle the buying and selling of shares between investors store of value The property of money that it can be used for purchases in the future structural unemployment A situation in which there is a mismatch between the skills of unemployed workers and the needs of employers with unfilled jobs substitute Two inputs are substitutes if a business will use more of one when the price of the other rises superstar economy Situations in which there is a widening gap in compensation between the top people and the merely competent suppliers of capital The investors who provide the funds In the banking system, for example, the suppliers of capital are the depositors in the bank supply chain The network of suppliers needed to make a particular product supply curve A line on a graph showing the link between price and quantity supplied supply curve for innovative activities Reports the quantity of innovative activities that are supplied, given their price supply schedule The link between a seller’s quantity supplied and the market price supply shift A change in the amount sellers produce at a given price supply-side economics A school of economic thought that emphasizes the importance of low marginal tax rates tariffs Extra charges or taxes levied on imports by a country tax incidence The people or businesses who ultimately have to bear the burden of a tax tax multiplier The increase in GDP from a $1 cut in taxes taxation The main way the government raises revenue from individuals and businesses technological change An improvement in knowledge that increases the quantity and range of goods and services an economy can deliver technological diffusion The process by which new ideas spread from one person or business to other parts of the economy term The length of a loan; the period of time during which a borrower repays principal back to a lender third party In health care, an external organization that pays for health care services for an individual time value of money The opportunity cost of not having one’s money available for use for some period total cost The sum of costs for each of the inputs used in production total return The total return on a share of stock is the change in the stock price, plus the dividend, divided by the original price tradable pollution permits A government-endorsed “allowance” that gives a business the right to emit a particular amount of pollution These permits can be traded or sold among private businesses trade balance The difference between exports and imports of goods and services trade deficit Occurs when a trade balance is negative so that imports exceed exports trade in goods Exchanges that occur when sellers physically ship items to another country trade in services Exchanges that occur when a person or a company in one country provides a service to a resident of a different country transfer payments Government social benefits paid to individuals, including Social Security, Medicare, and unemployment benefits Treasury bills Securities the federal government issues with terms as short as one month Treasury bonds Securities the federal government issues each year to fund the budget deficit with terms as long as 10 years and 30 years www.downloadslide.com GL-12 Glossary trough The date on which a recession ends and the economy starts heading up again V U value of a statistical life A monetary value economists treat as the cost to society of an additional death—in this book, from pollution underemployed Individuals who take jobs below their skill or education levels or who are working part-time involuntarily variable costs Costs that managers can quickly raise or lower by decisions they make today underground economy The portion of the economy that does not pay taxes or otherwise get reported by government venture capital The funds provided to risky start-ups by venture capital firms unemployed A description of individuals who not have jobs but are actively looking for work venture capital firms Financial intermediaries that provide funds to risky start-ups unemployment rate The percentage of the labor force that is unemployed vertical axis A vertical reference line on a graph, usually labelled to show values unexpected inflation The sudden acceleration of the rate of price increases above expected inflation volume discount A price set below the market price to reward buyers who purchase a large quantity of items unfair competition In global trade, cases in which a foreign country favors its own exporting industries by lowering their taxes or giving them some other subsidy W union A group of workers who bargain collectively with employers for wages, benefits, and working conditions wage–price spiral A situation that occurs when businesses and workers boost prices and wages to try to stay ahead of rising expected inflation upward-sloping A graph where higher values on the horizontal axis are generally associated with higher values on the vertical axis upward-sloping supply curve A supply curve that is consistent with the law of supply, so that an increase in price leads to an increase in quantity supplied As a result, the line slopes up when read from left to right users of capital The eventual recipients, such as borrowers, of funds from a bank or other financial intermediary utility A measure of the physical and emotional benefits a person gets from consumption utility function The link between the goods and services a person consumes and his or her utility wealth effect One reason aggregate quantity demanded falls as the average price level rises Also, the phenomenon in which higher wealth leads to more consumption Z zero price Occurs when an additional unit of a good or service is offered at no cost to buyers zero-sum economy When the only way an economy can produce more of something is to produce less of something else www.downloadslide.com INDEX Note: Page numbers followed by f refer to figures; page numbers followed by t refer to tables; page numbers followed by n refer to notes A A380 airplane, 66 Absolute advantage, 252–254 Accountants, 287–288 Acer, 78 Adaptation strategies, 349 Adjustable-rate mortgages, 209 Advance purchase discounts, 23 Advanced Research Projects Agency, 101 Adverse selection, 327, 330 Advertising, 79–80 AerCap, 55 Affordable Care Act, 330 See also Health care After-tax income distribution, 309 Age health care costs and, 326, 327 impact on labor, 285, 292 Aggregate demand, 218–219, 220f, 221–222 Aggregate equilibrium, 219 Aggregate production function, 155–158 Aggregate supply, 219, 220–221 AIG, 205 Air conditioning, 296 Air France, 264 Air pollution, 344, 347 Air travel, 3–4, 138 Airbnb, 234, 275t Airbus, 8, 66, 83, 252, 259, 277 Aircraft manufacturing, 66 Airline Deregulation Act of 1978, 96, 97 Airline pilots, 290, 295 Alzheimer’s disease, 271 Amazon, 78, 83, 227, 234, 248, 269 Amenities, environmental, 344 American Airlines, 71, 79 American Electric Power, 69 American Licorice Company, 61 American Recovery and Reinvestment Act “Buy American” rule, 188 key provisions, 186t measuring effects of, 187 purpose, 8, 185 stimulative effect, 190 Angry Birds game, 252 “The Anguish of Central Banking,” 209 Annual household income, Antigua and Barbuda, 250 Antitrust laws, 103t, 104 Apache, 54 App developers, 288 Apparel, 134t Apple, 5, 25, 54, 67, 79, 80, 83, 127, 131, 138, 227, 234, 248, 254, 256, 268, 275t, 276 Apple Music, 40 Apples, 46 Applied research, 272 Appreciating currencies, 260–261 Artificial intelligence, 288 Asplundh Tree Expert Company, 58 Assets, foreign ownership, 262 Associate degrees, 156 Asus, 77 AT&T, 83, 85, 104, 157, 272, 277 AT&T Picturephone, Athlete salaries, 146t, 302–303 Atlantic City, 36 Auto dealers, 80–81 Auto loans, 207–209 Automakers bailouts, 92, 175 market power shifts, 85 recessions’ impact, 174–175 regulation, 92, 341, 347 technological progress, 5–6, 288 Automatic stabilizers, 195 Automobile as technological change, 288 Automobile purchases, 123, 134t Average price level, 134–135 Average product, 59–60 Axes of graphs, 14 B Baby boom generation, 295 Bahamas, 349 Bailouts, 92, 175 Bank of America, 236 Bankruptcies, 175 Banks Fed lending to, 206, 211–212 as financial intermediaries, 232–234 reserve requirement, 206, 207, 212–213 Bar graphs, 14–15 Barriers to entry, 78 Barriers to trade See Trade barriers Baseball players, 290, 302–303 Baseball ticket prices, 146t Basic research, 102, 272 Basketball Hall of Fame, 184 BBC, 247 Bedell family, 126 Bell Labs, 272, 277 Benchmark Capital, 234 Benefit cuts, Social Security, 323–324 Benefits, 286 Bernanke, Ben, 173, 201, 203, 206, 210, 211, 214 Best Buy, 78 Big Three automakers, 85 Biofuels, 339t, 343t Biotechnology, 271 Bloomberg, Michael, 107 BMW, 254, 264 Board of Governors (Fed), 203 Boeing, 4, 6, 8, 55, 66, 67, 71, 83, 127, 243, 245, 252, 259, 264, 277, 289 Bolivia, hyperinflation in, 142 Bollywood, 290 Bond market, 238 Bondholders, 239 Borrowing, reasons for, 228–229 Borrowing by governments, 193–196, 240 Bradlee’s, 78 Brand names, 80 Branson, Richard, 273 Brazil, hyperinflation in, 141–142 Brazilian computer industry, 258 Brin, Sergey, 56, 267, 299 British Petroleum, 339 British thermal units, 336 Broadband networks, 103, 152 Bubbles, 240 Budget constraints, 109 Budget deficits, 193–196 Building codes, 159 Bulova, 271 Bureau of Economic Analysis, 10, 120, 153 Bureau of Engraving and Printing, 92 Bureau of Labor Statistics, 120, 134, 136 Burns, Arthur, 209 Bush, George W budget deficits, 120 Great Recession intervention, 8, 173, 183 tax cuts, 11, 190, 192, 194, 310 Business Cycle Dating Committee (NBER), 172 Business cycles, 172–173, 204, 214–215 See also Recessions Business know-how, 56, 60 Businesses achieving profit maximization, 64–67 cost principles, 60–63 production inputs and outputs, 55–60 rationale for borrowing, 228–229 recessions’ impact, 174–175 revenues, 63–64 role in economies, 54 Business-to-business transactions, 56 Butter market, 23 “Buy American” rule, 188 Buyers defined, 22 C CAFE standards, 341 Calhoun, Lee, 46 IN-1 www.downloadslide.com IN-2 Index Call centers, 60, 254 Candy Crush Saga, 252 Cap-and-trade systems, 348, 350 Cape Wind project, 344 Capital costs of, 60 as economic input, 55 impact on production function, 58–59 suppliers and users, 234 Capital gains taxes, 100t Car alarms, 105 Car dealers, 80–81 Car loans, 207–209 Car purchases, 123, 134t Carbon monoxide emissions, 347 Carbon taxes, 100t, 101, 350 Carter, Jimmy, Casinos, 36 Catalytic converters, 347 Catastrophic health insurance, 326 Caterpillar, 54 Cell phones, 270 Cellulosic ethanol, 343 Cement, 41–43 Census Bureau, 120, 156, 302 Central banks, 203, 204, 209 See also Federal Reserve Centrally planned economies, 7, CEO pay, 301, 303 Ceteris paribus, 24 Change in private inventories, 121, 122t, 126–127 Changing tastes, 46 Charles Schwab, 236 Checking accounts, 202 Cheese market, 23 Chernobyl nuclear disaster, 268 Chief executive officers, 54, 301, 303 China auto market, 30 average wages, 254, 255f cement demand, 41–43 economic growth, 152, 159, 163t economic transformation, furniture manufacture, 44–45, 79, 250 government role in economy, 96 lead paint use in, 265 move away from planned economy, WTO membership, 249 Chrysler, 8, 85, 92, 175 Cisco, 177, 234, 275t Clean Air Act, 347 Climate change, 348–351 Clinton, Bill, 11, 190, 310 Clinton, Hillary, 292 Clothing market, 40–41, 42f, 78, 134t Clustering, innovation, 275 CNN, 247 Coal, 339t, 344 Coca-Cola, 79, 80, 239 Coffee market, 138 Collective bargaining, 294 College education See Higher education Collusion, 82, 104 Color TV, 268 Comcast, 157 Command-and-control approach, 97–98, 341, 347–348 Commercial contracts, 103t Commodities, 75 Communication, international, 247–248 Communication expenses, 134t Community colleges, 156 Compact disks, 40, 41f, 42f Comparative advantage, 252–254 Competition basic elements, 7–8 benefits of, 73, 83–84 globalization’s impact, innovation’s benefits, 277 in labor market, 290 market structures for, 80–83 perfect, 74–80, 83–85 unfair, 258–259 Competitive advantage, 277 Complements, 112, 288 Compulsory attendance laws, 98 Computer programmer incomes, 146t Computers See also Information technology comparing, 74 impact on income distribution, 304 impact on labor, 288 long-run competition, 77–78 progress in, 268–269 reducing pollution from, 348 spending declines, 177 comScore, 88 Congestion pricing, 107 Congressional Budget Office, 187 Conservation of energy, 340–343 Conspicuous spending, 123 Construction materials, 185 Consumer choice, modeling, 108–111 Consumer Financial Protection Bureau, 92 Consumer price index basis for, 135 furniture prices versus, 251f globalization’s impact, 255 inflation rate based on, 136 long-run trend, 135f major contributors, 134t medical care, 134t, 327 Consumer Product Safety Commission, 92, 93 Consumer protection regulation, 103t Consumers, globalization’s benefits for, 255 Consumption annual household, as GDP component, 121, 122–123 income effects, 46–48 marginal propensity, 187–188 Contractionary effects, 191 Cooks, 290 Copy machines, 112–113 Core inflation, 136–137 Corn grades, 74 Corn prices, 28 Corning, 240 Corporate income taxes, 190t, 191 Corporate profits taxes, 100t Corruption, 99 Corruptions Perception Index, 99 Cosmetologists, 286 Cost function, 61–62, 111, 113, 345–346 Cost-of-living adjustments, 143 Costs basic principles, 60–63 defined, 54 higher education, 291–292 minimizing, 111–113 of transactions, 143 Credit cards, 209 Credit scores, 233 Crest, 79 Crop damage, 344, 345 Crowding out, 195 Crude oil production, 251–252, 253, 338–339 Cruzados, 142 Cruzeiros, 142 Currency, 202, 259–261 Customer support, 60 Cyclical unemployment, 170 D Daimler, George, 338 The Dark Knight (movie), 174 Data, graphing, 15–17 Data centers, 157 DDT, 347 Debt in U.S households, 228 Decaffeinated coffee, Deepwater Horizon disaster, 339 Default risk defined, 231, 235 estimating, 233 by governments, 240 influences on, 232 Defense Department (U.S.), 101 Defense spending, 126, 259 Deficits, 193–196, 261–263, 322 Defined benefit plans, 320, 321 Defined contribution plans, 320, 321, 324 Deflation, 133, 143, 204 Dell, 77 Demand aggregate, 218–219, 220f, 221–222 elasticity, 48 impact of price on, 23–27 income effects, 46–48 law of, 24–25 matching with supply, 36–37 price elasticity, 110–111, 114 recessions’ impact, 174–175 Demand curves aggregate, 218–219, 220f for innovative activity, 273, 276–278 labor, 285–287 for loans, 229–230 movements along, 43 Demand schedules defined, 24 graphing, 26–27, 38, 39 modeling consumer decisions, 108–111 recessions’ impact, 174–175 Demand shifts, 40, 41–43, 176–177 Demographic change, 327 Deng Xiaoping, 9, 159 Department of Justice (U.S.), 104 www.downloadslide.com Index Department stores, 78, 83 Deposit insurance, 92, 234 Deposits, loans from, 233 Depp, Johnny, 290 Depreciating currencies, 260–261 Deregulation, 8–9, 95–96, 97 Derivatives, 240 Developing countries energy use, 336, 340 greenhouse gas emissions, 350–351 growth of market-based systems, 8, 159 impact on global labor supply, 289 impact of trade on, 245, 258 new markets in, 30 production shifts to, 137–138 Development, 272 Differentiation, 79–80 Diminishing marginal product, 58 Diminishing marginal utility, 109 Direct lending, 211–212 Discount rate, 211 Discount window, 211–212 Discounts, 23 Discretionary intervention, 214 Discrimination, 311–312 Disinflation, 143 Disney, Walt, Disposable income, 191 Disruptive trade, 258 Distance, as natural trade barrier, 247 Diversification, 237, 239 Dividends, 236 Dodd-Frank Act, 106, 206, 240–241 Dollar, 259, 260f Dot-com bubble, 240 Dot-com companies, 177 Dow Jones Industrial Average, 237 Downward-sloping curves, 17, 27 Drake, 81 Dreamliner airplane, 66, 127 Driverless vehicles, 288 Drones, 104, 267 Dropbox, 234 Drug development, 67, 276 DuPont, 270 E Earned income tax credit, 11 eBay, 22, 275t Ecological damage, 344 E-commerce, 269 Economic competition, 7–8 See also Competition Economic data gathering, 102 Economic growth determinants, 155–158 government and, 158–159 impact on living standards, 150, 152, 154–155 importance, 150–152 long-run trend, 149 measuring, 152–154 productivity and, 159–161 Economic Stimulus Act, 186t Economics, elements of, 9–11 Economies businesses’ basic role, 54 competition’s benefits, 73, 83–84 governments’ role, 7–9 key forces, 4–7 need for measures, 120–122 response to interest rate changes, 208–209 top 10 GDPs, 10f Edison, Thomas, 277 Education benefits to labor, 156, 288, 290–292 in consumer price index, 134t economic forces affecting, 285 government role, 92, 98, 102–103 to increase human capital, 156–157 inflation-adjusted spending, 140 labor market discrimination and, 311–312 legal requirements, 159 Education policies, 11 Education premium, 291, 304 Education spending, 47 Effective tax rates, 309 Efficiency, government’s lack, 99 Eight-hour day, 293 80/20 ratio, 304 Eisenhower, Dwight, 93 Elastic demand, 48, 110, 111 Elastic supply, 48, 113 Elasticity, 48 Electricity, 270 Electronic Arts, 275t Employer health insurance plans, 328–329 Employer retirement plans, 319, 320–321 Employment See also Labor market globalization’s impact, 255–257 by governments, 94f health care, 326 minimum wage impact, 293 recent U.S growth, tracking job creation, 187 Energy prices determinants of, 339–340 impact on aggregate supply, 221 impact on recessions, 176 omitted from core inflation, 137 sustainability and, 340–343 wage–price spirals and, 142 Energy resources conservation, 340–343 consumption and supply, 336–339 negative externalities, 344 oil production, 82, 251–252, 253, 288, 338–339 sustainable, 340–343 Energy technologies, 5–6 Energy use labels, 74 Engineers, 274 Enron, 231 Entertainment industry, 174 Environmental amenities, 344 Environmental economics global climate change, 348–351 pollution, 98, 104, 105, 343–348 Environmental Protection Agency, 95, 98, 345, 347 Equal Employment Opportunity Commission, 95, 311 IN-3 Equilibrium, aggregate, 219 Equilibrium price, 37, 39 Equilibrium supply, 37 Equipment, knowledge represented by, 56 Equity, 236 Estate taxes, 100t Ethanol, 28, 337, 342–343 Ethnicity, labor market discrimination and, 311–312 Euro, 259 European Central Bank, 204 Event risk, 235 Excess demand, 36, 37 Excess supply, 36, 37 Exchange rates, 259–261 Excise taxes, 100t, 101, 190t Executive compensation, 303 Expansion, 172 Expected inflation, 141–143 Expected return, 235 Expedia, 301 Experience, benefits to labor, 292 Exported goods and services from China, defined, 246 exchange rates and, 260 as GDP component, 121, 122t, 127 globalization’s impact, Externalities basic principles, 104–105 government measures to avoid, 342 pollution as, 104, 105, 342, 343–346 of quality-of-life innovations, 271 Extraction, marginal cost, 337, 340 ExxonMobil, 22, 337 F Facebook, 7, 83, 105, 187, 227, 234, 236, 237, 248, 254, 275, 275t, 279, 301 FaceTime, Fairness, income inequality and, 307 Fast food, Fast-food cooks, 290 Fed funds rate changing to address crises, 210 current levels, 213 defined, 206 impact on loan rates, 207–209 impact on prices, 209 Federal Aviation Administration, 8, 104 Federal Deposit Insurance Corporation, 92, 93, 234 Federal Express, 234 Federal Open Market Committee, 206–207 Federal Reserve goals and tools, 203–206 inflation-fighting efforts, 178 mistakes of, 213 money stock measures, 202 origins, 203 regulation, 92 response to Great Recession, 8, 173, 201 short-term interest rate control, 206–210 statistics from, 120 www.downloadslide.com IN-4 Index Federal spending, 184 See also Government spending Federal Trade Commission, 74, 92, 104 Fiber-optic cable, 240 Fiji, 349 Film industry, 252 Final goods and services, 121 Finance, average pay, 146t Financial crisis of 2007–2009 See Financial markets; Great Recession Financial intermediaries, 233–234 Financial markets as cause of market shifts, 45 as cause of recessions, 176 crises, 7, 203, 240–241 economic impacts, 6–7 intermediaries, 232–234, 238–240 markets for loans, 228–232 regulation, 103t risk and return in, 235–238 Financial Services Modernization Act, 106 Financial stability, policies to maintain, 204–205 Financing gap in Social Security, 322–323 Fiscal policy See also Government spending defined, 183 government borrowing and, 193–196 limitations, 188–190 monetary versus, 213–214 short-term effects, 183–188 taxation and, 190–193 Fiscal stimulus defined, 185 estimating effects, 187–188 limitations, 188–190 programs for, 186t shrinking multiplier, 188 Fixed costs, 63 Fixed-income securities, 239 Fixed-rate mortgages, 209 Flammable Fabrics Act, 92, 93 Flat-panel TVs, 252, 253 Flexibility, governments’ lack, 99 Flight attendants, 295 Flight engineers, 290 Floating exchange rates, 259 Flowers, 251, 253 Food, 110, 134t, 137 Food and Drug Administration, 8, 104 Food stamps, 11, 186 Ford, Henry, 44, 267 Ford Motor Company, 8, 67, 80, 85, 207, 237 Foreclosure, 231 Foreign trade See Globalization; International trade Fort Madison (IA) factory, 249 Fossil fuels, 337, 338, 339, 350 Four-legged stool of retirement income, 319 401(k) plans, 320 Fracking, 337, 338 Free-rider problem, 102 Frictional unemployment, 169–170 Friedman, Milton, 172 Frosch, Dan, 102n Fuel cells, 343t Fuel efficiency standards, 341 Fukushima nuclear disaster, 104–105, 268, 338, 339 Fuller, Ida May, 322 Furniture impact of imports on jobs, 257f manufacturing in China, 44–45, 79, 250 price decline, 250, 251f Future-oriented activities, 228 G Gains from trade, 250–252 Gambling casinos, 36 Games, 252 Gasoline, lead removal from, 347 Gasoline market demand elasticity, 110, 111 forces of conservation, 340–343 Hurricane Katrina’s effects, 43 impact on consumer price index, 134t price determinants, 339–340 Gasoline rationing, 95–96 Gates, Bill, 269, 299 GDP per capita, 129 Gender discrimination, 311–312 General Agreement on Tariffs and Trade, 248–249 General Electric, 56, 127 General Motors, 8, 80, 85, 92, 175, 207, 242, 320 Genetic research, 271 German hyperinflation, 141 Global catch-up, 307f Global climate change, 348–351 Global Crossing, 234 Global market economy, Global markets, 22, 252 Globalization See also International trade as cause of market shifts, 44–45 continuing growth, 245 economic impacts, impact on competition, 75 impact on income distribution, 305 impact on inflation rate, 137–138 impact on labor, 288–290, 295 impact on monopolies, 83 impact on productivity, 161 impact on tax revenues, 191 Go-karts, 38–39, 40f Golden Age of productivity growth, 160 Goldman Sachs, 227, 236, 289 Goods, trade in, 246 Google, 56, 80, 83, 88, 127, 157, 227, 234, 236, 248, 254, 267, 270, 271, 275, 275t, 288, 299 Government borrowing, 193–196, 240 Government intervention advantages and disadvantages, 97–101 as cause of market shifts, 45–46 for energy conservation, 341–342, 343 finding right role, 101–105 during Great Recession, 8, 92, 173, 175, 183 in health care debated, 331 history in U.S., 92–96 impact on aggregate demand, 222 impact on economic growth, 158–159 in income distribution, 105, 306–311 overview, 8–9 political debate, 11, 91–92 to reduce pollution, 347–348 Government spending See also Fiscal policy on basic research, 272 consumption and investment, 121, 122t, 125–126 cost-of-living adjustments, 143 deficits, 193–196 inflation-adjusted, 140 limitations, 188–190 magnitude, 184 main types compared, 126f productivity and, 160 safety net programs, 9–11, 125 short-term effects, 184–188 Governments’ basic role in economies, 7–9 Graduate schools, 285 Graphical user interface, 276 Graphs, 14–17, 26–27, 38 Great Depression Fed mistakes, 213 impact on government role in economy, 92–93 origin of economic indicators in, 120 preventing recurrence, 167 recovery from, Great Recession causes, 176 Fed’s response, 8, 173, 201, 211–212 government bailouts, 92, 175 government programs to address, 8, 183 impact on federal budget, 194 market turbulence, 167 output gap, 168 recovery from, start and end dates, 172–173 unemployment rate, 169 Great Society programs, 94 Green GDP, 347 Greenhouse gases, 344, 348, 349, 350–351 Greenspan, Alan, 143, 203, 204, 210, 214 Gross domestic product components of, 121–127 defined, 9, 10, 121 exclusions, 127–128 government spending as percentage, 96 “green,” 347 as growth measure, 152–154 health care as percentage, 325f international comparisons, 128–129 potential versus real, 168–169 short-term effects of government spending, 185 taxes as percentage, 190, 191f Gross domestic purchases, 127 Growth See Economic growth Growth rate of productivity, 160 H Hafner, Katie, 25n Hairdressers, 286 Hankook Tire, 263 Hawaiian hoary bat, 345 www.downloadslide.com Index Head Start, 94 Health care average pay, 146t economic forces affecting, 324–327 federal law, 4, 11, 91, 317–318, 330 government involvement, 91 historic improvements, 4, 271 imported and exported services, 246–247 recession resistance, 174 reform efforts, 328–331 regulation, 103t rising costs, 327–328 Health care uncertainty problem, 326, 329 Health impacts of pollution, 344 Health Insurance Portability and Accountability Act, 106 Heilmeier, George, 253 Hepatitis C, Hewlett-Packard, 275t Higgins, Adrian, 46n High school education, 98 Higher education benefits to labor, 290–292 in China, 159 economic forces affecting, 285 percentage of U.S workforce with, 158f public funding, 92 two-year, 157 varying opinions on, 11 High-risk borrowers, 232 Hoary bats, 345 Home construction, 124, 125f Home Depot, 63, 237 Honda, 8, 259 Horizontal axes, 14, 16–17 Hospitals, average pay, 146t Households, 302 Housing costs, 134t, 135 Housing market, 9, 205f, 209, 240 Human capital, 155, 156 Humphrey-Hawkins Act, 203 Hurricane Katrina, 43, 177 Hurricanes, 177 Hussein, Saddam, 176 Hybrid cars, 67 Hydraulic fracturing, 337, 338 Hydropower, 339t, 343t Hyperinflation, 141–142 I IBM, 80, 127, 268–269, 272, 320 Ideas, global sharing, 252 Imitation, 81, 278 Immigration labor market impact, 296 as political issue, 91, 159 of scientists and engineers, 274, 275f Implicit collusion, 82 Imported goods and services defined, 246 exchange rates and, 260 globalization’s impact, impact on GDP, 127 as percentage of purchases, 188 Incentive effects, 192, 308 Incentive problem, 99, 331 Incidence of taxation, 114 Income annual household, disposable, 191 effects on demand, 46–48 median U.S household, 139 redistribution, 105, 308–311 Income distribution economic growth and, 151–152 forces of change, 304–306 labor market discrimination and, 311–312 measuring, 302–304 political debate, 306–308 redistribution, 105, 308–311 U.S disparities, 301 Income gap See Income distribution Income inequality See also Income distribution debated, 306–308 forces of change, 304–306 labor market discrimination and, 311–312 measuring, 303–304 redistribution, 105, 308–311 Income mobility, 308 Income taxes, 100t, 101, 190–191 Indeed.com, 284 Indexes, stock, 237–238 India, 73, 152, 254 Individual mandate, 330 Indoor plumbing, 150 Industrial equipment, 123–124 Industries, 103t, 146t Inefficiency of taxation, 99 Inelastic demand, 48, 110, 111, 114 Inelastic supply, 48, 113, 114 Inequality in incomes See Income inequality Infant industry argument, 258 Infant mortality, 150 Inferior goods, 47–48 Inflation See also Prices adjusting for, 139–141 defined, 135 economic growth versus, 152–154 effects of government spending, 189 elements of, 133 expectations and, 141–143 impact of fed funds rate, 209 indexing benefits to, 321 policies to control, 204, 214 prevention efforts causing recession, 177–178 recent Fed responses, 209–210 relative price shifts and, 137–139 taxation’s effects, 191–192 unemployment versus, 171–172 Inflation rate, 135–136 See also Inflation Inflation risk, 235 Inflation targeting, 214 Inflation-adjusted change, 139 Information revolution, 161, 221, 222, 269, 271 Information technology See also Technological change average pay, 146t impact on productivity, 161, 221, 270, 271 as percentage of nonresidential investment, 124f progress in, 268–269 spending declines, 177 IN-5 Initial public offerings, 236 Innovation activities producing, 271–273 competition’s influence, demand-side forces, 276–278 globalization and, 256 government measures to promote, 342 governments’ lack, 99 major types, 270–271 relation to technological change, 268 supply-side forces, 273–275 Innovation clusters, 275 Inputs, 54, 55–56 Instagram, 234, 275t Insurance average pay in, 146t on bank deposits, 92, 234 health care, 91, 286, 318, 326–327, 328–330 New Deal programs, 93, 94t regulation, 106 unemployment, 125, 186t, 194 volume discounts, 23 Intel, 4, 6, 60, 127, 234, 268, 269, 275, 275t Intellectual property protection, 276–277 Intensity of competition, 277 Interest payments on federal debt, 195 Interest rate effect, 219 Interest rates as cause of market shifts, 45 ceilings, 96 credit scores’ effect, 233t effects of government spending, 195f factors affecting, 231–232 Fed control, 206–210, 214 impact on borrowing, 229–230 as price of loans, 228 on reserves, 212 Intermediaries, 232–234, 238–240 Intermediate inputs costs of, 60 defined, 55–56 omitted from GDP, 121–122, 124 Internal combustion engine, 338 International comparisons of government role in economy, 96, 97f International trade See also Globalization absolute versus comparative advantage, 252–254 balance, 261–263 continuing growth, 245 exchange rates, 259–261 falling barriers, 247–250 gains from, 250–252 impact on income distribution, 305 impact on individual workers, 254–259 overview, 246–247 Internet creation of, 101 e-commerce, 269 gambling via, 250 impact on job searches, 284 impact on telecommunications services, 44 innovations, 270 physical investments in, 157 Interstate highway program, 93 www.downloadslide.com IN-6 Index Intuit, 275t Inventories, 121, 122t, 126–127 Inventors, 277 See also Innovation Investment by governments, 122t nonresidential, 121, 122t, 123–124 residential, 121, 122t, 124, 125f Investment banks, 236 Invisible hand, 36–37 iPad, 30 iPhone, 5, 25, 79, 127, 255, 269 iPod, 138–139, 252 Island countries, 349 J Japan, 164t, 250 Jet fuel costs, 71, 352 JetBlue, 229 Job Corps, 188 Job market decisions, 285 Job multipliers, 186 Job search websites, 284 Jobs See Employment; Labor market Jobs, Steve, 25, 268 Johnson, Lyndon B., 94–95, 188, 189, 328 JPMorgan Chase, 227 K Katrina, Hurricane, 43, 177 Kawamoto, H., 253n Kennedy, John F., 93–94 Keynes, John Maynard, 185 Keynesian approach, 185 Khan, Shah Rukh, 290 Khosrowshahi, Dara, 301 King Digital Entertainment, 252 Kiribati, 349 Kleiner Perkins, 234 Knowledge in aggregate production function, 155, 158 costs of accumulating, 60 as economic input, 56 Krona, 265 Kuwait invasion, 176 Kuznets, Simon, 120 L Labor in aggregate production function, 155, 156 costs of, 60 as economic input, 55 marginal product, 57–59, 285 recessions’ impact, 173, 174f unpaid, 127–128 Labor force benefits of education, 156, 288, 290–292 defined, 156, 169, 284 immigration’s impact, 296 role in potential GDP growth, 168 Labor force participation rate, 284, 285 Labor market discrimination, 311–312 equilibrium forces, 287–290 global manufacturing wages compared, 255f globalization’s impact, 255–257 innovation’s benefits in, 278 job creation tracking, 187 law of supply, 29 new jobs in, 30 regulation, 292–295 short-term effects of government spending, 185 supply and demand curves, 284–287 variety in, 290–292 workers as sellers, 22 Labor pool effect of globalization, 289, 290, 305 Labor unions, 171, 294–295 Lady Gaga, 131 Lags, 189–190, 209 Laissez-faire economies, Land, 55, 60, 155 Law of demand, 24–25, 229–230 Law of supply, 28–29, 66 Laws, defined, 158 LCD TVs, 252, 253 Lead in gasoline, 347 Lead paint, 265 Legal barriers to trade, 247 Legos, 21 Lehman Brothers, 173, 205 Lenders, 142–143, 205 Levels of government, 184 Licensed professions, 293–294 Licensing inventions, 277 Life cycle approach to health care spending, 325–327 Life cycle theory of retirement, 318–319 Life expectancy, 329 Linden Lab, 275t Line graphs, 15 Lipitor, 328 Living standards globalization’s impact, 255 relation to economic growth, 150, 152, 154–155 in U.S economic model, Loans common types, 229t from Federal Reserve, 206, 211–212 impact of fed funds rate, 207–209 intermediaries, 232–234 market forces, 228–232 Lobbying, 99 Local markets, 22 Local unemployment, 171 Location, impact on labor, 296–297 Long-term aggregate supply curve, 219, 220f Long-term cost function, 63 Long-term costs, 63 Long-term growth, 155 Long-term interest rates, 211 Long-term labor supply, 295–297 Long-term profit maximization, 66–67 Low-income households, 11 Luxury goods, 47, 327 LZR Racer swimsuit, 281 M M1, 202 M2, 202 Macroeconomics, 119 Major league baseball players, 290, 302–303 Manicurists, 294 Manufacturing “buy American” rules, 188 cement, 43 China’s focus on, 245, 257 clothing, 40, 41f, 78 cost function and marginal cost, 61–62, 75–77 furniture, 44–45, 79, 250 globalization’s impact, 6, 54, 250–251, 256, 262 inventories, 126–127 investment trends, 123 job losses, 170, 254, 256, 257f, 305 long-term planning, 66 offshoring, 60, 78, 254, 289 pollution from, 344, 348 regulations, 92 wages, 146t, 254, 255f Margin requirement, 212–213 Marginal cost elements of, 62 fossil fuel extraction, 337, 340 of labor, 286 in perfect competition, 75 in profit-maximizing rule, 64 Marginal product of labor, 57–59, 285 Marginal propensity to consume, 187–188 Marginal revenue defined, 64 of labor, 285, 286–287 with monopolistic competition, 80–81 with perfect competition, 75 in profit-maximizing rule, 66, 286–287 Marginal tax rates, 192, 193f Marginal utility, 109 Marine Mammal Commission, 184 Market basket (BLS), 134–135 Market demand schedules, 24, 38, 39 Market economies basic elements, 22–23 businesses’ basic role, 54 common market structures, 80–83 competition’s benefits, 73, 83–84 defined, 21 developing countries’ adoption, 8, 159 equilibrium supply and demand, 37–39 excess supply and demand, 36–37 impact of price on demand, 23–27 impact of price on supply, 27–30 new markets, 30 perfect competition, 74–80 shifts, 40–46 Market equilibrium factors in, 37–39 in perfect competition, 76–77 shifts in, 40–46 Market expansion effect of globalization, 289, 305 Market mechanism, 37 Market power, 84–85 www.downloadslide.com Index Market prices, 22–23, 74, 236 Market regulation, 103–104 See also Regulations Market shifts, 40–46 Market structures, 80–83 Market supply schedule, 28, 29–30, 38, 39 Market transactions, Market wages, 286 Market-based approaches to energy conservation, 341–342 Market-based approaches to pollution, 348 Markets, basic features, Marshall Field’s, 78 Massachusetts Institute of Technology, 280 Material damage, 344, 345 Mattress flammability, 92, 93 McDonald’s, 5, 8, 61, 131, 237 Median household income, 139 Medicaid, 11, 94, 328 Medical spending See also Health care in consumer price index, 134t, 327 economic forces affecting, 324–327 as personal consumption, 123 rising costs, 327–328 Medical tourism, 247 Medicare, 94, 191, 328–329 Memory chips, 75 Mercedes-Benz, 254, 338 Merck, 298 Merrill Lynch, 236 Microprocessors, 4, 5, 268, 269, 271 Microsoft, 50, 80, 83, 88, 157, 235, 237, 264, 269, 276, 299 Military spending, 186 Milk market, 23 The Millionaire (TV show), 139 Minimum wage, 292–293, 306 Mishkin, Frederic, 205 Mitigation strategies, 349–350 Mixed economies, 96 MLB ticket prices, 146t Mobile games, 252 Mobile phones, 79 Model T, 44 Mondale, Walter, 292 Monetary policy See also Federal Reserve defined, 201 goals and tools, 203–206 issues in applying, 213–215 quantitative easing, 210 short-term interest rate control, 206–210 Money, functions of, 202–203 Money illusion, 139, 140 Money stock, 202 Money supply, 206 Monopolies, 82–83 Monopolistic competition, 80–82 Monster Board, 284 Monster.com, 284 Moore, Gordon, 269, 275 Moore’s law, 269, 279 Mortgages financial crisis and, 240 financial market for, 6, 238 impact of fed funds rate, 209 subprime, 211 tax advantages, IN-7 Motor vehicles, 5–6 See also Automakers Movements, shifts versus, 43–44 Movies, 252, 290 MTV, 248 Multinationals, 22 Multiplier effect, 186–188, 192 Municipal governments, 184 Music streaming services, 40 Musicians, 81 Non-zero-sum economies, 151–152 Nordhaus, W., 269n Normal goods, 47 Noyce, Bob, 275 NSFNET, 101 Nuclear power, 6, 268, 338, 339, 343t Nylon, 268, 270 N Obama, Barack criticized for deficits, 120 Dodd-Frank Act signing, 240 efforts to track job creation, 187 fuel economy rules under, 341 Great Recession intervention, 8, 173, 183, 185, 222 health care reform, 4, 11, 91, 317, 330 tax increases, 191, 310 Occupational licensing, 293–294 Occupational Safety and Health Administration, 95 Offshoring, 6, 138, 254 Oil prices impact on aggregate supply, 176, 221 shock of 1973, 95, 142, 176, 213 wage–price spirals and, 142 Oil production absolute advantage in, 253 access to resources for, 251–252 global shifts, 338–339, 340 oligopolies, 82 reserves, 338, 340 technological development, 288 Old-age dependency ratio, 322 Old-age-related health care costs, 326 Oligopolies, 82 Omidyar, Pierre, 22 “One-child” policy, OPEC, 82, 95 Open Market Committee (Fed), 206–207 Opportunity cost, 26, 284, 292 Oracle, 275t Organization of Petroleum Exporting Countries, 82, 95 Otto, Nicholas, 338 Output gap, 168–169 Outputs, 54, 125–126 Outsourcing, 59–60 See also Globalization; International trade Overseas leakage, 188 Overseas travel, 150 Overtime pay, 293 Owners’ equivalent rent, 134, 135 NAIRU, 172, 178 Nantucket Sound, 344 NASDAQ, 236, 238 National Basketball Association, 82–83 National Bureau of Economic Research, 172 National Confectioners Association, 61 National defense spending, 126 National Education Association, 294 National Endowment for the Arts, 94–95 National Endowment for the Humanities, 94–95 National Highway Traffic Safety Administration, 92, 103 National Labor Relations Act, 294 National Labor Relations Board, 294 National markets, 22 National Maximum Speed Law, 341 National Public Radio, 95 National Science Foundation, 101 National security industries, 259 Natural barriers to trade, 247–248 Natural gas, 338, 339t Natural monopolies, 83 Natural rate of unemployment, 172 Natural resources, 251–252, 337, 344 Negative demand shifts, 176–177 Negative externalities, 104–105, 271, 342 Negative supply shifts, 176 Negotiated prices, 23 Net exports, 121, 122t, 127 Net worth, 318 Netflix, 236 Network externalities, 105 New car loans, 207–209 New Deal, 93, 94t New Economy, 214 New entrants, 77 New goods and services, 270 New markets, 30 New York Stock Exchange, 236, 238 Niantic, 252 Nintendo, 264 Niobium, 252 Nixon, Richard, 95 Noise pollution, 346, 348 Nominal change in money value, 139, 140 Nonaccelerating inflation rate of unemployment (NAIRU), 172, 178 Noncash benefits, 306, 308 Noncompeting labor markets, 290 Nonmarket economy, 127–128 Nonparticipation in retirement plans, 320 Nonprofit organizations, 54 Nonrenewable resources, 337 Nonresidential investment, 121, 122t, 123–124 O P Packet switching, 101 Page, Larry, 56, 267, 299 Panics, financial, 203 Participation in retirement plans, 320 Patents, 276–277 Pay gaps, 311–312 Payroll taxes changes over time, 191 economic impacts, 100t www.downloadslide.com IN-8 Index Payroll taxes (cont.) formula, 321 future trends, 296, 324 sources, 190t Peak in business cycle, 172, 173f Pebble Beach Golf Club, 262 Pegged exchange rates, 259 Penzias, Arno A., 272 People Express, 97 Per-capita GDP, 129 Per-capita health care spending, 325f Perfect competition elements of, 74–75 long run, 77–80 market power versus, 83–85 profit maximization in, 75–77 Perfectly inelastic supply, 113 Performers, 81 Personal computers, 268–269 See also Computers Personal consumption, 121, 122–123 Personal savings rate, 323 Pets.com, 234 Pfizer, 127 Pharmaceutical development, 67, 276 Philbin, Regis, 139 Physical capital, 155, 157 Pilots, 290, 295 Pirates of the Caribbean movies, 290 Planned economies, 7, Playstation game consoles, 50 Plumbing, 150 Pokemon Go, 252 Pollution controlling, 98, 346–348 as negative externality, 104, 105, 343–346 reductions, 271 Pollution permits, 348, 350 Population shifts, 296–297 Positive externalities, 105, 271 Potential GDP, 168–169, 171, 219 Potential growth rate, 168 Pound, 259 Poverty health care and, 326, 329 levels in U.S., 301, 306 in retirement, 318 taxation and, 310–311 PPF, 151 Preferences, revealed and stated, 345 Prepaid tuition, 24 Pretax income distribution, 309 Price appreciation, 237 Price elasticity of demand, 110–111, 114 Price elasticity of supply, 113, 114 Price takers, 74 Prices See also Inflation average level, 134–135 of common stock, 236–237 defined, 22 impact of fed funds rate, 209 impact on demand, 23–27 impact on supply, 27–30, 43 invisible hand effects, 36–37 market, 22–23 under monopolies and oligopolies, 82 under monopolistic competition, 80–81 perfect competition’s effect, 77–78 trade benefits, 250–251 Principal defined, 228 Prius car, 67 Private sector defined, 91 Private space travel, 273 Private toll roads, 102 Privatization of Social Security, 324 Procter & Gamble, 242 Producer decisions, modeling, 111–113 Production See also Manufacturing cost principles, 60–63 defined, 54 inputs and outputs, 55–60 Production function, 56–60, 155–158 Production possibility frontier, 151 Productivity overview, 159–161 role in potential GDP growth, 168 slowdown, 160–161 technology’s impact, 161, 221, 270, 271 Products, standardized, 74 Products defined, 22 Professional licenses, 293–294 Profit maximization achieving, 64–67, 286–287 defined, 54 with monopolistic competition, 80–81 in perfect competition, 75–77 Profit-maximizing rule, 64 Profits defined, 54 Progressive taxation, 309, 310 Propensity to consume, 187–188 Property taxes, 100t, 190t Prosperity, measuring, Protectionism, 257–259 Public Broadcasting Service, 95 Public companies, 236 Public debt, 193 Public education, 98 See also Education Public goods, 101–103 Public sector defined, 92 Public transportation, 47–48 Pure price changes, 138 Q Quality improvements, 138–139 Quality-of-life innovations, 270–271 Quantitative easing, 205–206 Quantity demanded See also Demand as aggregate demand, 218 defined, 23 effect of taxes, 99–101 impact of price on, 23–27, 110–111 Quantity supplied defined, 27 effect of taxes, 99–101 impact of price on, 27–30, 43, 113 Quintiles, 302–303 Quotas, 248, 249–250 R Race discrimination, 311–312 Rational individuals, 109 Raw materials, 46, 155, 158 RCA, 253 Reagan, Ronald age at election, 292 antigovernment policies, 96 tax cuts, 190, 192, 194, 308, 310 Real change in money value, 139 Real dollars, 140–141 Real GDP GDP versus, 153–154 Japan statistics, 164t per capita, 154–155, 164t potential versus, 168–169 recessions, 172–173 Real wages, 140–141 Rebates, tax, 192 Recessions basic features, 172–175 causes, 175–178 effects of government spending, 189 effects of tax cuts, 192 official dates, 172 Recreation, 134t Red Delicious apples, 46 Redistribution of income, 105, 308–311 Regressive taxation, 309, 310, 350 Regulation of money, 202–203 Regulations See also Government intervention basic functions, 8, 103–104, 105 current examples, 92, 93 deficiencies, 240 labor, 292–295 Relative price shifts, 137–139 Renewable energy sources, 6, 337, 339, 344 Rent-seeking behavior, 99, 308, 331 Repossession, 231 Research and development, 60, 272, 276 Research as public good, 102 Reserve requirement, 206, 207, 212–213 Reserves, fossil fuel, 338, 340 Residential investment, 121, 122t, 124, 125f Residential mortgage market, Restaurants, 80 Retailing, average pay in, 146t Retirement, 318–324 Retirement age, 324 Retirement uncertainty problem, 319, 321 Return on investment, 235, 276 Revealed preferences, 345 Revenues, 54, 63–64 See also Marginal revenue Ridley, Daisy, 290 Right-to-work laws, 294 Risk default, 231, 232, 233, 235 defined, 235 in financial system, 205, 235–236 from innovative activities, 276 in stock market, 236–238 Risk–return principle, 235, 236–238 Rockefeller Center, 262 Roosevelt, Franklin, 93 www.downloadslide.com Index Rovio, 252 Royalties, 277 Rules, defined, 158 Rules-based intervention, 214 Rural counties, 297 S Safety nets, 9–11 Sale prices, 23 Sales taxes, 100t, 190t, 309, 310f S&P 500 Stock Index, 237, 238 Sarbanes–Oxley Act, 287–288 Satellites, 102 Satiation, 25 Savannah River nuclear weapons site, 187 Saving for retirement, 318–319, 323 Savings accounts, 235 Schools, public spending on, 98 See also Education Schwarzenegger, Arnold, 290 Scientists, 274 Sea level rise, 349 Search engines, 270 Self-employment, 299 Sellers, 22 Sequoia Capital, 234 Services globalization, 6, 138 India’s focus on, 257–258 trade in, 246–247 787 Dreamliner, 66, 127 Shampoo, 79–80 Shamrock Farms, 23 Shareholder rights, 236 Shifts in market economies, 40–46 Shifts in tastes, 46 Shipping containers, 247, 248 Short-term aggregate supply curve, 219, 220f Short-term cost function, 63 Short-term costs, 63 Short-term growth, 155 Short-term interest rates, 206–210 Short-term profit maximization, 66 Shutdown decisions, 78–79 Siemens AG, 249, 254 Silicon Valley, 275 Simmons, Andrea, 228 Single-payer systems, 330 Skills, improving, 156–157 Skype, Smartphones, 270 Snapchat, 234 Social return from innovation, 276 Social Security challenges to, 321–324 cost-of-living adjustments, 143 New Deal origins, 93, 321 retirement income from, 319, 321 tax rate, 191 Software, 124, 253 Solar power, 337, 340, 343t Solow, Robert, 271 Sony, 50 Sony Walkman, 138–139 Space program, 94, 268 Space tourism, 273 SpaceShipOne, 273 Speed limit law, 97, 341 Speedo, 281 Spending multipliers, 186–187 Spotify, 40 SRI International, 273 Stability, financial, 204–205 Stagflation, 176, 221 Standardized products, 74 Star Wars movies, 140, 252, 290 Starbucks, 22, 63, 69 Start-up firms, 234 State governments, 184 Stated preferences, 345 State-owned enterprises, 96 Statistical life, value of, 345 Stem cells, 271, 277 Stern’s, 78 Sticky wages, 170–171 Stimulative actions, 189–190, 192f, 194–195 Stock indexes, 237–238 Stock market financial crisis impact, 205f foreign participation, 262 margin requirement, 212 as part of financial system, risk–return principle, 7, 236–238 Stockbrokers, 236 Strikes, 295 Structural unemployment, 170 Stumberg, Justin, 339 Subprime mortgages, 211 Subsidies, 259 Substitutes, 82–83, 112, 288 Sulfur dioxide, 348 Sun, 177 Superstar economy, 305 Suppliers of capital, 234 Supply aggregate, 219, 220–221 elasticity, 48 impact of price on, 27–30, 43 law of, 28–29, 66 matching with demand, 36–37 price elasticity, 113, 114 Supply chains, global, 127 Supply curves aggregate, 219, 220f defined, 30 for innovative activity, 273–275 labor, 284–285, 295–297 for loans, 230–231 movements along, 43–44 Supply schedules defined, 27–28 graphing, 29–30, 38, 39 Supply shifts, 40–41, 176 Supply-demand diagram, 38 Supply-side economics, 192, 308 Surgeons, 290 Surpluses (budget), 193 Surveys, 27 Sustainable energy resources, 340–343 Swift, Taylor, 81 IN-9 Synthetic fibers, 270 System of national accounts, 121 T Taft-Hartley Act, 294 Target, 78 Tariffs, 248–249 Tastes, 46 Tax credits, 11 Tax cuts direct impacts, 191–192 fairness argument for, 307 impact on deficits, 194 political influences, 190–191, 214 during recessions, 183, 190, 192 Tax deductions, 328 Tax incidence, 114 Tax multipliers, 192 Tax policies, 11 See also Taxation Tax rates, 192, 193f Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, 186t Tax return data, 304 Taxation changes over time, 190–191 defined, 184 direct impacts, 191–192 effects of lowering, 192 inefficiencies, 99–101 paying burden of, 114, 296 to promote energy conservation, 342, 343 for public goods, 102 redistribution through, 105, 308–311 to reduce pollution, 348, 350 top rates, 193f types, 190 Taylor, Jeff, 284 TCP/IP standard, 101 T.D Ameritrade, 236 Tech bust, 210, 240 Technological change See also Information technology activities producing, 271–273 as cause of market shifts, 44 creating new markets, 30 demand-side forces, 276–278 government measures to promote, 342 impact on aggregate production function, 158 impact on health care costs, 328 impact on inflation rate, 137, 138–139 impact on labor, 288 impact on monopolies, 83 as key economic force, 5–6 in oil and gas production, 337, 338 overview, 268–269 regulation, 104 supply-side forces, 273–275 types of innovations, 270–271 Technological diffusion, 278 Telep, David, 228 Telephone service, increasing competition, 83 Television as innovation, 270, 271 Television networks, 247–248 www.downloadslide.com IN-10 Index Teradyne, 237 Term of a loan, 228 Terrorism, 176, 210, 211 Third-party medical payments, 328 Three Mile Island nuclear incident, 268 Ticket prices, 146t Tide, 79 Time value of money, 231 TIROS-1, 102 T-Mobile, 104 Toll roads, 102 Tootsie Roll Industries, 61 Toshiba, 252 Total cost of production, 60–61 Total return on stocks, 237 Tourism, 150, 247, 273 Tournament effect, 303 Toy Story (movie), 174 Toyota, 8, 67, 80, 85, 131, 264, 270 Toyota Camry, Tradable pollution permits, 348, 350 Trade See International trade Trade balances, 261–263 Trade barriers arguments for, 257–259 legal, 247, 248–250 natural, 247–248 Trade deficits, 261–263 Trade in goods, 246 Trade in services, 246–247 Trade policies, 103t Trade surpluses, 262 Training, 156–157 Transaction costs, 143 Transfer payments, 125, 184 Transistors, 277 Transparency International, 99 Transportation, technological progress, 5–6 Travel (overseas), 150 Treasury bills, 240 Treasury bonds, 240, 321, 322–323 Tree-trimming, 58 Trickling Springs Creamery, 23 Trillions, 122 Troubled Asset Relief Program, 8, 186t Troughs (business cycle), 172, 173f Trump, Donald, 36, 292 Trust fund, Social Security, 321, 322 Trust in value of money, 202–203 Tsunamis, 339 Tuition, prepaid, 24 Twitter, 234, 275t “Two-child” policy, 2008 recession See Great Recession Two-year colleges, 156 Tyson, Mike, 36 U Uber, 234, 275t Underemployed workers, 169 Underground economy, 128 Unemployment average period of, 284 education and, 291t efforts to reduce, 188, 214 inflation versus, 171–172 overview, 169–171 post-2008 recovery, recessions’ impact, 173, 174f short-term effects of government spending, 185 Unemployment rate, 169, 170f Unexpected inflation, 142–143 Unfair competition, 258–259 Uniform Commercial Code, 103 Unions, 171, 294–295 Unit elasticity, 110 Unpaid work, 127–128 Upward-sloping line graphs, 16 Upward-sloping supply curves, 30 U.S economic model, U.S Patent and Trademark Office, 277 U.S Trade Representative, 98 Users of capital, 234 Utility companies, 83 Utility function, 108–109 Utility maximization, 110 V Value of money, 202 Value of a statistical life, 345 Variable costs, 63 Venture capital availability, 274–275 as part of financial system, 6, 7, 234 risk and return, 235 Vertical axes, 14, 16–17 Video telephones, Virgin Galactic, 273 Visual pollution, 344 Voice mail, 288 Volcker, Paul, 178, 204, 209–210 Volume discounts, 23 W Wage–price freezes, 95 Wage–price spirals, 141, 142 Wages among noncompeting workers, 290 cost-of-living adjustments, 143 effects of government spending, 189 equilibrium forces, 287–290 global manufacturers compared, 255f immigration’s impact, 296 impact on labor supply, 29 impact of union membership, 294f, 295 market level, 286 minimum, 292–293, 306 real versus nominal, 140–141 sticky, 170–171, 219 Walkman player, 138–139 Walmart, 6, 56, 63, 67, 78, 125 Walt Disney, 239, 248 Walton, Sam, 56 Warriors in Transition Barracks, 187 Washington, DC, employment, 187 Water pollution, 344 Watt, James, 267 Wealth effect, 219 Wealth taxes, 100t Weather observation, 102 Web design, 30 Webvan, 234 Wendy’s, Who Wants to Be a Millionaire (TV show), 139 Wii game machine, 264 Wilson, Robert W., 272 Wilson, Woodrow, 155 Wind turbines, 249, 343t, 344 Woellert, Lorraine, 250n Working-age population trends, 295–296 Works Progress Administration, 93 Workweek length, 293 World Trade Center attacks, 210, 211 World Trade Organization, 249, 250 World War II, 120 Worldcom, 177 Wozniak, Steve, 268 X X-axis, 14 Xbox, 50 Xerox, 276 Y Y2K bug, 177 Yager, Sarah, 46n Yahoo! 88, 234, 275, 275t Y-axis, 14 Yellen, Janet, 201, 203, 213, 214 Yen, 259 Youth, innovation’s benefits for, 278 YouTube, 236, 269, 275, 275t Yuan, 259, 260f Z Zero price, 25–26 Zero-sum economies, 151–152 Zuckerberg, Mark, 187, 301 ... Percentage of GDP 20 06 2, 160 −50 — 20 07 2, 269 −55 — 20 08 2, 318 −79 — 20 09 2, 267 −138 — 20 10 2, 340 −130 — 20 11 2, 438 −108 — 20 12 2,488 −100 — 20 13 2, 545 − 82 — 20 14 2, 591 −88 — 20 15 2, 647 −88 —... Percentage of GDP FIGURE 11.6 2. 0% 0.0% 2. 0% –4.0% –6.0% –8.0% –10.0% 99 20 02 20 05 20 08 20 11 20 14 96 19 93 19 90 19 87 19 84 19 81 19 78 19 75 19 72 19 69 19 19 19 66 – 12. 0% Fiscal Year for unemployment... called the public debt If the government runs a deficit, LO11-5 If there is a gap between spending and tax revthen the public debt increases As of 20 15, the enues—as there was in 20 15 the government