(BQ) Part 2 book Macroeconomics has contents: Business cycles; classical business cycle analysis - market clearing macroeconomics; keynesianism - the macroeconomics of wage and price rigidity; unemployment and inflation; exchange rates, business cycles, and macroeconomic policy in the open economy; monetary policy and the federal reserve system; government spending and its financing,...and other contents.
Chapter Business Cycles Learning Objectives 8.1 Define and describe the business cycle 8.2 Summarize the history of the American business cycle 8.3 Describe the behavior of various variables over the course of business cycles 8.4 Use aggregate demand and aggregate supply to describe the impact on business cycles of various shocks 280 Since the Industrial Revolution, the economies of the United States and many other countries have grown tremendously That growth has transformed economies and greatly improved living standards Yet even in prosperous countries, economic expansion has been periodically interrupted by episodes of declining production and income and rising unemployment Sometimes—fortunately, not very often—these episodes have been severe and prolonged But whether brief or more extended, declines in economic activity have been followed almost invariably by a resumption of economic growth This repeated sequence of economic expansion giving way to temporary decline followed by recovery, is known as the business cycle The business cycle is a central concern in macroeconomics because business cycle fluctuations—the ups and downs in overall economic activity—are felt throughout the economy When the economy is growing strongly, prosperity is shared by most of the nation’s industries and their workers and owners of capital When the economy weakens, many sectors of the economy experience declining sales and production, and workers are laid off or forced to work only part-time Because the effects of business cycles are so widespread, and because economic downturns can cause great hardship, economists have tried to find the causes of these episodes and to determine what, if anything, can be done to counteract them The two basic questions of (1) what causes business cycles and (2) how policymakers should respond to cyclical fluctuations are the main concern of Part of this book The answers to these two questions remain highly controversial Much of this controversy involves the proponents of the classical and Keynesian approaches to macroeconomics, introduced in Chapter In brief, classical economists view business cycles as generally representing the economy’s best response to disturbances in production or spending Thus classical economists not see much, if any, need for government action to counteract these fluctuations In contrast, Keynesian economists argue that, because wages and prices adjust slowly, disturbances in production or spending may drive the economy away from its most desirable level of output and employment for long periods of time According to the Keynesian view, government should intervene to smooth business cycle fluctuations We explore the debate between classicals and Keynesians, and the implications of that debate for economic analysis and macroeconomic policy, in Chapters 9–11 In this chapter we provide essential background for that discussion by presenting the basic features of the business cycle We begin with a definition and a brief history of the business cycle in the United States We then turn to a more detailed discussion of business cycle characteristics, or “business cycle facts.” We conclude the chapter with a brief preview of the alternative approaches to the analysis of business cycles Chapter 8 | Business Cycles 281 8.1 What Is a Business Cycle? Define and describe the business cycle Countries have experienced ups and downs in overall economic activity since they began to industrialize Economists have measured and studied these fluctuations for more than a century Marx and Engels referred to “commercial crises,” an early term for business cycles, in their Communist Manifesto in 1848 In the United States, the National Bureau of Economic Research (NBER), a private nonprofit organization of economists founded in 1920, pioneered business cycle research The NBER developed and continues to update the business cycle chronology, a detailed history of business cycles in the United States and other countries The NBER has also sponsored many studies of the business cycle: One landmark study was the 1946 book Measuring Business Cycles, by Arthur Burns (who served as Federal Reserve chairman from 1970 until 1978) and Wesley Mitchell (a principal founder of the NBER) This work was among the first to document and analyze the empirical facts about business cycles It begins with the following definition: Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises A cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration business cycles vary from more than one year to ten or twelve years.1 Five points in this definition should be clarified and emphasized Aggregate economic activity Business cycles are defined broadly as fluctuations of “aggregate economic activity” rather than as fluctuations in a single, specific economic variable such as real GDP Although real GDP may be the single variable that most closely measures aggregate economic activity, Burns and Mitchell also thought it important to look at other indicators of activity, such as employment and financial market variables Expansions and contractions Figure 8.1—a diagram of a typical business cycle—helps explain what Burns and Mitchell meant by expansions and contractions The dashed line shows the average, or normal, growth path of aggregate economic activity, as determined by the factors we considered in Chapter The solid curve shows the rises and falls of actual economic activity The period of time during which aggregate economic activity is falling is a contraction or recession If the recession is particularly severe, it becomes a depression After reaching the low point of the contraction, the trough (T), aggregate economic activity begins to increase The period of time during which aggregate economic activity grows is an expansion or a boom After reaching the high point of the expansion, the peak (P), aggregate economic activity begins to decline again The entire sequence of decline followed by recovery, measured from peak to peak or trough to trough, is a business cycle Figure 8.1 suggests that business cycles are purely temporary deviations from the economy’s normal growth path However, part of the output losses and gains that occur during a business cycle may become permanent Peaks and troughs in the business cycle are known collectively as turning points One goal of business cycle research is to identify when turning points occur Burns and Mitchell, Measuring Business Cycles, New York: National Bureau of Economic Research, 1946, p 282 Part 3 | Business Cycles and Macroeconomic Policy Figure 8.1 Aggregate economic activity A business cycle The solid curve graphs the behavior of aggregate economic activity over a typical business cycle The dashed line shows the economy’s normal growth path During a contraction aggregate economic activity falls until it reaches a trough, T The trough is followed by an expansion during which economic activity increases until it reaches a peak, P A complete cycle is measured from peak to peak or trough to trough Aggregate economic activity Expansion T Normal growth path Contraction P Expansion T P Time Aggregate economic activity isn’t measured directly by any single variable, so there’s no simple formula that tells economists when a peak or trough has been reached.2 In practice, a small group of economists who form the NBER’s Business Cycle Dating Committee determine that date The committee meets only when its members believe that a turning point may have occurred By examining a variety of economic data, the committee determines whether a peak or trough has been reached and, if so, the month it happened However, the committee’s announcements usually come well after a peak or trough occurs, so their judgments are more useful for historical analysis of business cycles than as a guide to current policymaking Comovement Business cycles not occur in just a few sectors or in just a few economic variables Instead, expansions or contractions “occur at about the same time in many economic activities.” Thus, although some industries are more sensitive to the business cycle than others, output and employment in most industries tend to fall in recessions and rise in expansions Many other economic variables, such as prices, productivity, investment, and government purchases, also have regular and predictable patterns of behavior over the course of the business cycle The tendency of many economic variables to move together in a predictable way over the business cycle is called comovement Recurrent but not periodic The business cycle isn’t periodic, in that it does not occur at regular, predictable intervals and doesn’t last for a fixed or predetermined length of time (“In Touch with Data and Research: The Seasonal Cycle and the Business Cycle,” p 307, discusses the seasonal cycle—or economic fluctuations over the seasons of the year—which, unlike the business cycle, is periodic.) A conventional definition used by the media—that a recession has occurred when there are two consecutive quarters of negative real GDP growth—isn’t widely accepted by economists The reason that economists tend not to like this definition is that real GDP is only one of many possible indicators of economic activity Chapter 8 | Business Cycles 283 Although the business cycle isn’t periodic, it is recurrent; that is, the standard pattern of contraction–trough–expansion–peak recurs again and again in industrial economies Persistence The duration of a complete business cycle can vary greatly, from about a year to more than a decade, and predicting it is extremely difficult However, once a recession begins, the economy tends to keep contracting for a period of time, perhaps for a year or more Similarly, an expansion, once begun, usually lasts a while This tendency for declines in economic activity to be followed by further declines, and for growth in economic activity to be followed by more growth, is called persistence Because movements in economic activity have some persistence, economic forecasters are always on the lookout for turning points, which are likely to indicate a change in the direction of economic activity 8.2 The American Business Cycle: The Historical Record Summarize the history of the American business cycle An overview of American business cycle history is provided by the NBER’s monthly business cycle chronology,3 as summarized in Table 8.1 It gives the dates of the troughs and peaks of the thirty-three complete business cycles that the U.S economy has experienced since 1854 Also shown is the number of months that each contraction and expansion lasted The Pre–World War I Period The period between the Civil War (1861–1865) and World War I (1917–1918) was one of rapid economic growth in the United States Nevertheless, as Table 8.1 shows, recessions were a serious problem during that time Indeed, the longest contraction on record is the 65-month-long decline between October 1873 and March 1879, a contraction that was worldwide in scope and is referred to by economic historians as the Depression of the 1870s Overall, during the 1854–1914 period the economy suffered 338 months of contraction, or nearly as many as the 382 months of expansion In contrast, from the end of World War II in 1945 through June 2009, the number of months of expansion (642) outnumbered months of contraction (122) by more than five to one The Great Depression and World War II The worst economic contraction in the history of the United States was the Great Depression of the 1930s After a prosperous decade in the 1920s, aggregate economic activity reached a peak in August 1929, two months before the stock market crash in October 1929 Between the 1929 peak and the 1933 trough, real GDP fell by nearly 30% During the same period the unemployment rate rose from about 3% to nearly 25%, with many of those lucky enough to have jobs only able to work parttime To appreciate how severe the Great Depression was, compare it with the recession of 2007–2009, which was the longest recession and the recession with the largest drop in real GDP in the period since World War II During the Great Depression, For a detailed discussion of the NBER chronologies, see Geoffrey H Moore and Victor Zarnowitz, “The NBER’s Business Cycle Chronologies,” in Robert J Gordon, ed., The American Business Cycle: Continuity and Change, Chicago: University of Chicago Press, 1986 The NBER chronology is available at the NBER’s Web site, www.nber.org 284 Part 3 | Business Cycles and Macroeconomic Policy Table 8.1 NBER Business Cycle Turning Points and Durations of Post–1854 Business Cycles Trough Expansion (months from trough to peak) Peak Contraction (months from peak to next trough) Dec 1854 Dec 1858 June 1861 Dec 1867 Dec 1870 30 22 46 (Civil War) 18 34 June 1857 Oct 1860 Apr 1865 June 1869 Oct 1873 18 8 32 18 65 Mar 1879 May 1885 Apr 1888 May 1891 June 1894 36 22 27 20 18 Mar 1882 Mar 1887 July 1890 Jan 1893 Dec 1895 38 13 10 17 18 June 1897 Dec 1900 Aug 1904 June 1908 Jan 1912 24 21 33 19 12 June 1899 Sept 1902 May 1907 Jan 1910 Jan 1913 18 23 13 24 23 Dec 1914 Mar 1919 July 1921 July 1924 Nov 1927 44 (WWI) 10 22 27 21 Aug 1918 Jan 1920 May 1923 Oct 1926 Aug 1929 7 18 14 13 43 (Depression) Mar 1933 June 1938 Oct 1945 Oct 1949 May 1954 50 80 (WWII) 37 45 (Korean War) 39 May 1937 Feb 1945 Nov 1948 July 1953 Aug 1957 13 (Depression) 8 11 10 8 Apr 1958 Feb 1961 Nov 1970 Mar 1975 July 1980 24 106 (Vietnam War) 36 58 12 Apr 1960 Dec 1969 Nov 1973 Jan 1980 July 1981 10 11 16 6 16 Nov 1982 Mar 1991 Nov 2001 June 2009 92 120 73 July 1990 Mar 2001 Dec 2007 8 8 18 Source: NBER Web site, www.nber.org/cycles.html real GDP fell by 30% from its peak to its trough, a decline that was far more severe than the 4.7% peak-to-trough decline in real GDP during the 2007–2009 recession In addition, the 25% unemployment rate during the Great Depression was more than double the unemployment rate of 10% reached during the 2007–2009 recession Although no sector escaped the Great Depression, some were particularly hard hit In the financial sector, stock prices continued to collapse after the crash Depositors withdrew their money from banks, and borrowers, unable to repay their bank loans, were forced to default; as a result, thousands of banks were forced to go out of business or merge with other banks In agriculture, farmers were bankrupted by low crop prices, and a prolonged drought in the Midwest turned thousands of Chapter 8 | Business Cycles 285 farm families into homeless migrants Investment, both business and residential, fell to extremely low levels, and a “trade war”—in which countries competed in erecting barriers to imports—virtually halted international trade Although most people think of the Great Depression as a single episode, technically it consisted of two business cycles, as Table 8.1 shows The contraction phase of the first cycle lasted forty-three months, from August 1929 until March 1933, and was the most precipitous economic decline in U.S history After Franklin Roosevelt took office as President in March 1933 and instituted a set of policies known collectively as the New Deal, a strong expansion began and continued for fifty months, from March 1933 to May 1937 By 1937 real GDP was almost back to its 1929 level, although at 14% the unemployment rate remained high Unemployment remained high in 1937 despite the recovery of real GDP because the number of people of working age had grown since 1929 and because increases in productivity allowed employment to grow more slowly than output The second cycle of the Great Depression began in May 1937 with a contraction phase that lasted more than a year Despite a new recovery that began in June 1938, the unemployment rate was still more than 17% in 1939 The Great Depression ended dramatically with the advent of World War II Even before the Japanese attack on Pearl Harbor brought the United States into the war in December 1941, the economy was gearing up for increased armaments production After the shock of Pearl Harbor, the United States prepared for total war With production supervised by government boards and driven by the insatiable demands of the military for more guns, planes, and ships, real GDP almost doubled between 1939 and 1944 Unemployment dropped sharply, averaging less than 2% of the labor force in 1943–1945 and bottoming out at 1.2% in 1944 Post–World War II U.S Business Cycles As World War II was ending in 1945, economists and policymakers were concerned that the economy would relapse into depression As an expression of this concern, Congress passed the Employment Act of 1946, which required the government to fight recessions and depressions with any measures at its disposal But instead of falling into a new depression as feared, the U.S economy began to grow strongly Only a few relatively brief and mild recessions interrupted the economic expansion of the early postwar period None of the five contractions that o ccurred between 1945 and 1970 lasted more than a year, whereas eighteen of the twentytwo previous cyclical contractions in the NBER’s monthly chronology had lasted a year or more The largest drop in real GDP between 1945 and 1970 was 3.7% during the 1957–1958 recession, and throughout this period unemployment never exceeded 8.1% of the work force Again, there was a correlation between economic expansion and war: The 1949–1953 expansion corresponded closely to the Korean War, and the latter part of the strong 1961–1969 expansion occurred during the military buildup to fight the Vietnam War Because no serious recession occurred between 1945 and 1970, some economists suggested that the business cycle had been “tamed,” or even that it was “dead.” This view was especially popular during the 106-month expansion of 1961–1969, which was widely attributed not only to high rates of military spending during the Vietnam War but also to the macroeconomic policies of Presidents Kennedy and Johnson Some argued that policymakers should stop worrying 286 Part 3 | Business Cycles and Macroeconomic Policy about recessions and focus their attention on inflation, which had been gradually increasing over the 1960s Unfortunately, reports of the business cycle’s death proved premature Shortly after the Organization of Petroleum Exporting Countries (OPEC) succeeded in quadrupling oil prices in the fall of 1973, the U.S economy and the economies of many other nations fell into a severe recession In the 1973–1975 recession U.S real GDP fell by 3.2% and the unemployment rate reached 9%— not a depression but a serious downturn, nonetheless Also disturbing was the fact that inflation, which had fallen during most previous recessions, shot up to unprecedented double-digit levels Inflation continued to be a problem for the rest of the 1970s, even as the economy recovered from the 1973–1975 recession More evidence that the business cycle wasn’t dead came with the sharp 1981–1982 recession This contraction lasted sixteen months, the same length as the 1973–1975 decline, and the unemployment rate reached 11%, a postwar high Many economists claim that the Fed knowingly created this recession to reduce inflation Inflation did drop dramatically, from about 11% to less than 4% per year The recovery from this recession was strong, however The “Long Boom” After the severe 1981–1982 recession the U.S economy began an extended period of economic growth and reduced volatility of major macroeconomic variables The extended period of economic growth is often called the “long boom,” which began in 1982 and ended with the recession of 2001 During this period of time there was only one recession, which began in July 1990 and ended in March 1991, eight months after the peak Not only was the 1990–1991 recession short-lived, it was not very severe (the unemployment rate peaked in mid 1992 at 7.7%—not particularly high for a recession) In the mid-1980s, during the early part of the Long Boom, the volatility of many major macroeconomic variables declined sharply This period of reduced volatility, known as the Great Moderation, coincided with the remainder of the Long Boom and even beyond (See the discussion of the Great Moderation on pp 287–289.) The Great Recession The long boom was ended by the 2001 recession, which was followed by six years of modest economic growth Then in December 2007, the economy entered the longest and deepest recession to hit the United States since the Great Depression, a recession that has come to be known as the Great Recession The Great Recession began with a housing crisis (see “In Touch with Data and Research: The Housing Crisis That Began in 2007,” in Chapter 7, pp 254–255), which was followed by a financial crisis that rivaled that of the Great Depression (see “Application: The Financial Crisis of 2008,” in Chapter 14, pp 564–565), as numerous financial institutions failed or required government assistance to save them The unemployment rate rose above 10% for the first time since 1982, and the Federal Reserve reduced interest rates to near zero The recession ended in June 2009, but in the years following, economic growth was fairly sluggish and the unemployment rate declined at a very slow pace, despite the use of expansionary fiscal and monetary policies Chapter 8 | Business Cycles 287 Have American Business Cycles Become Less Severe? Macroeconomists believed that, over the long sweep of history, business cycles generally have become less severe Obviously, no recession in the United States since World War II can begin to rival the severity of the Great Depression Even putting aside the Great Depression, economists generally believed that business downturns before 1929 were longer and deeper than those since 1945 According to the NBER business cycle chronology (Table 8.1), for example, the average contraction before 1929 lasted nearly twenty-one months and the average expansion lasted slightly more than twenty-five months Since 1945, contractions have shortened to an average of eleven months, and expansions have lengthened to an average of more than fifty months, even excluding the lengthy expansion of the 1990s Standard measures of economic fluctuations, such as real GDP growth and the unemployment rate, also show considerably less volatility since 1945, relative to data available for the pre–1929 era Since World War II a major goal of economic policy has been to reduce the size and frequency of recessions If researchers found—contrary to the generally accepted view—that business cycles had not moderated in the postwar period, serious doubt would be cast on the ability of economic policymakers to achieve this goal For this reason, although the question of whether the business cycle has moderated over time may seem to be a matter of interest only to economic historians, this issue is of great practical importance Thus Christina Romer, who served as Chair of the Council of Economic Advisers under President Obama, sparked a heated controversy by writing a series of articles in the 1980s denying the claim that the business cycle has moderated over time.4 Romer’s main point concerned the dubious quality of the pre–1929 data Unlike today, in earlier periods the government didn’t collect comprehensive data on economic variables such as GDP Instead, economic historians, using whatever fragmentary information they could find, have had to estimate historical measures of these variables Romer argued that methods used for estimating historical data typically overstated the size of earlier cyclical fluctuations For example, widely accepted estimates of pre–1929 GNP5 were based on estimates of just the goods-producing sectors of the economy, which are volatile, while ignoring less-volatile sectors such as wholesale and retail distribution, transportation, and services As a result, the volatility of GNP was overstated Measured properly, GNP varied substantially less over time than the widely accepted statistics showed Romer’s arguments sparked additional research, though none proved decisively whether volatility truly declined after 1929 Nonetheless, the debate served the useful purpose of forcing a careful reexamination of the historical data New research shows that economic volatility declined in the mid 1980s and remained low until the financial crisis of 2008 Because the quality of the data is not an issue for the period following World War II, the decline in volatility in the mid The articles included “Is the Stabilization of the Postwar Economy a Figment of the Data?” American Economic Review, June 1986, pp 314–334; “The Prewar Business Cycle Reconsidered: New Estimates of Gross National Product, 1869–1908,” Journal of Political Economy, February 1989, pp 1–37; and “The Cyclical Behavior of Individual Production Series, 1889–1984,” Quarterly Journal of Economics, February 1991, pp 1–31 As discussed in Chapter 2, until 1991 the U.S national income and product accounts focused on GNP rather than GDP As a result, studies of business cycle behavior have often focused on GNP rather than GDP 288 Part 3 | Business Cycles and Macroeconomic Policy 1980s, relative to the preceding forty years, probably reflects a genuine change in economic volatility rather than a change in how economic data are produced Other economic variables, including inflation, residential investment, output of durable goods, and output of structures, also appear to fluctuate less in the past twenty-five years than they did in the preceding forty years Research by James Stock of Harvard University and Mark Watson of Princeton University6 shows that the volatility, as measured by the standard deviation of a variable, declined by 20% to 40% for many of the twenty-one variables they examine, including a decline of 33% for real GDP, 27% for employment, and 50% for inflation Because the decline in volatility of macroeconomic variables has been so widespread, economists have dubbed this episode “the Great Moderation.”7 To see what we mean by the Great Moderation, let’s begin by looking at real GDP growth since 1960 In Figure 8.2, we have plotted the quarterly growth rate of real GDP (seasonally adjusted at an annual rate) You can see that from 1960 until about 1984, the growth rate changes significantly from quarter to quarter, but after 1984 it seems considerably more stable In the Great Recession (2007–2009), the growth rate became more volatile, but it isn’t clear yet if the Great Moderation is over or not Another graphical device that will help us to see the Great Moderation is a plot of the standard deviation of quarterly real GDP growth The standard MyEconLab Real-time data Figure 8.2 Quarterly GDP growth at annual rate (percent per year) GDP growth, 1960–2012 The chart shows the annualized quarterly growth rate of seasonally adjusted GDP from the first quarter of 1960 to the second quarter of 2012 The growth rate is more volatile before 1984 than after 1984 Source: Authors’ calculations from data on real GDP from the Federal Reserve Bank of St. Louis FRED database, research.stlouisfed.org/fred2/ GDPC1 20 15 10 GDP GROWTH –5 –10 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year “Has the Business Cycle Changed and Why?” NBER Macroeconomics Annual 2002 (Cambridge, MA: MIT Press, 2002), pp 159–218 See Ben S Bernanke, “The Great Moderation.” Speech at the Eastern Economic Association meetings, February 20, 2004, available at www.federalreserve.gov/boarddocs/speeches/2004/20040220/default.htm Chapter 8 | Business Cycles 289 Figure 8.3 Standard deviation of GDP growth rate (percent per year) Standard deviation of GDP growth, 1960–2012 The chart shows the standard deviation of the annualized quarterly growth rate of GDP, over seven-year periods, from 1960 to 2012 The sevenyear standard deviation fell sharply in about 1984, but rose during the recession that began in 2007 Source: Authors’ calculations from data on real GDP from the Federal Reserve Bank of St. Louis FRED database, research.stlouisfed.org/fred2/ GDPC1 STANDARD DEVIATION OF GDP GROWTH 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year deviation of a variable is a measure of its volatility Because we think the volatility has changed over time, we are going to calculate the standard deviation over seven-year periods The result is shown in Fig 8.3 Note that each point shown on the graph represents the standard deviation of GDP growth for the preceding seven years The graph shows a sharp decline in about 1984 in the seven-year standard deviation The uptick in that standard deviation in 2009 might lead some to worry that the Great Moderation could be over; but from 2009 to 2012, the standard deviation remained below the levels it reached before the Great Moderation Somewhat surprisingly, the reduction in volatility seemed to come from a sudden, one-time drop rather than a gradual decline The break seems to have come around 1984 for many economic variables, though for some variables the break occurred much later What accounts for this reduction in the volatility of the economy? Stock and Watson found that better monetary policy is responsible for about 20% to 30% of the reduction in output volatility, with reduced shocks to the economy’s productivity accounting for about 15% and reduced shocks to food and commodity prices accounting for another 15% The remainder is attributable to some unknown form of good luck in terms of smaller shocks to the economy.8 Since the Stock and Watson paper was written, much additional research has been undertaken, with mixed results For example, Shaghil Ahmed, Andrew Levin, and Beth Ann Wilson [“Recent Improvements in U.S Macroeconomic Stability: Good Policy, Good Practices, or Good Luck?” Review of Economics and Statistics, vol 86 (2004), pp 824–832] suggest that good luck played the biggest role, while others find a larger role for monetary policy, including Peter M Summers [“What Caused the Great Moderation? Some Cross-Country Evidence,” Federal Reserve Bank of Kansas City, Economic Review (Third Quarter 2005), pp 5–32] 634 Glossary substitution effect of the real interest rate on saving: (4) the tendency of consumers to save more, and thereby substitute future consumption for current consumption, in response to a higher reward for saving (p 113) supply shock: (3) a change in an economy’s production function—that is, in the amount of output that can be produced by using given quantities of capital and labor; also known as a productivity shock (p 68) supply-side economics: (15) a school of economic thought based on the premise that all aspects of economic behavior—such as labor supply, saving, and investment—respond strongly to economic incentives, and, in particular, to incentives provided by the tax code (p 593) tax-adjusted user cost of capital: (4) indicates how large the before-tax expected future marginal product of capital must be to make a proposed investment profitable; equivalently, the (unadjusted) user cost of capital divided by minus the effective tax rate (p 128) tax rate smoothing: (15) a policy of maintaining stable tax rates over time so as to minimize the distortions created by the tax code See distortions (p 594) Taylor rule: (14) a guideline for monetary policy, it relates the real Fed funds rate to the difference between output and full-employment output and the difference between inflation and its target (p 570) terms of trade: (13) the quantity of foreign goods that can be obtained in exchange for one domestic good; also known as the real exchange rate (p 489) term premium: (7) the higher interest rate paid to holders of long-term bonds to compensate them for the added risk compared with short-term bonds, so that the interest rate on long-term bonds exceeds that suggested by the expectations theory of the term structure (p 251) time to maturity: (7) the amount of time until an asset matures and the investors receive their principal (p 250) total factor productivity: (3) a measure of the overall effectiveness with which the economy uses capital and labor to produce output; also known as productivity (p 62) trade deficit: (1) a nation’s excess of imports over exports (p 8) trade surplus: (1) a nation’s excess of exports over imports (p 8) transfers: (2) payments by the government, excluding payments made in exchange for current goods or services; examples of transfers are Social Security and Medicare benefits, unemployment insurance, and welfare payments (p 32) trough: (8) in a business cycle, the time when economic activity stops falling and begins rising (p 281) turning points: (8) peaks or troughs in the business cycle (p 281) turnover costs: (11) the costs associated with hiring and training new workers (p 410) unanticipated inflation: (12) the actual rate of inflation minus the rate of inflation that was expected to occur (p 452) underground economy: (2) the portion of the economy that includes both legal activities hidden from government record keepers and illegal activities (p 27) undervalued exchange rate: (13) in a fixed-exchange-rate system, an exchange rate that is lower than its fundamental value See fundamental value of the exchange rate (p 512) unemployment: (1) the number of people who are available for work and actively seeking work but cannot find jobs (p 5) unemployment rate: (3) the fraction of the labor force that is unemployed (p 88) unemployment spell: (3) the period of time that an individual is continuously unemployed (p 90) unilateral transfers: (5) payments made from one country to another that not correspond to the purchase of any good, service, or asset; examples are foreign aid and gifts by domestic residents to foreigners (p 172) unit of account: (7) the basic unit for measuring economic value (dollars, for example) (p 244) user cost of capital: (4) the expected real cost of using a unit of capital for a specified period of time; equal to the depreciation cost plus the interest cost (p 124) uses-of-saving identity: (2) the accounting identity that states that private saving equals the sum of investment, the government deficit, and the current account balance (p 40) utility: (4) an individual’s economic satisfaction or wellbeing (p 155) value added: (2) for any producer, the value of output minus the value of purchased inputs (p 23) vault cash: (14) currency held in the vaults of banks; vault cash forms a portion of banks’ reserves (p 549) velocity: (7) the number of times the money stock “turns over” each period; calculated as nominal GDP divided by the nominal money supply (p 262) wealth: (2) the assets minus the liabilities of an individual, firm, or country; also known as net worth (p 36) world real interest rate: (5) the real interest rate that prevails in the international capital market in which individuals, businesses, and governments borrow and lend across national borders (p 181) zero lower bound: (14) a situation in which the nominal interest rate is zero and cannot decline further because a nominal interest rate below zero would make it more profitable for an investor to hold cash rather than make a loan (p 561) Name Index Note: When page numbers are followed by an n, the reference appears in a footnote, but not in the text on that page Aaronson, Daniel, 92 Abel, Andrew B., 223 Abraham, Katharine, 384n Acemoglu, Daron, 605n Agarwal, Sumit, 121–122 Ahmed, Shaghil, 289n Akerlof, George, 410 Alesina, Alberto, 573–574 Alexopoulos, Michelle, 414 Alfonsin, Raul, 519 Aruoba, S Boragan, 304 Ashenfelter, O., 80n Auerbach, Alan J., 130n, 605 Baily, Martin N., 213n Baldwin, Richard E., 492n Ball, Laurence, 466n, 473–474 Barefoot, Kevin B., 179n Barro, Robert, 601–603n Barsky, Robert, 299n, 307 Bartlett, John, 291n Bernanke, Ben S., 142n, 190, 192n, 217n, 236n, 272n, 288n, 377n, 386, 463n, 465n, 475, 557, 559n, 560–562, 561n, 574n–575 Bernheim, B Douglas, 603n Bils, Mark, 419–420 Bizer, David, 595n Blanchard, Olivier J., 163n, 306, 389n Blinder, Alan, 418–419 Blundell, Richard, 80n Boivin, Jean, 420 Boskin, Michael, 47–48 Bowman, David, 553n Brainard, William C., 559n Brunner, K., 290n, 461, 468n Burns, Arthur, 22, 281, 303 Burnside, Craig, 376–377 Bush, George W., 21 Bush, President, 584 Cagan, Philip, 470n, 611 Campbell, John Y., 163n Cappelli, Peter, 414 Card, D., 80n Carlstrom, Charles T., 86n Carroll, Christopher D., 272n Carter, Jimmy, 467, 572 Cavallo, Domingo, 520 Cavallo, Michele, 198n Chauvin, Keith, 414 Chen, Duanjie, 129 Christiano, Lawrence, 381n Clark, Todd E., 50n Clinton, President, 584 Cohen, Jon, 414 Croushore, Dean, 112, 397, 559n Cummins, Jason, 130 Davis, Steven, 383 Denison, Edward F., 211–213 Devereux, Paul J., 299n Dewald, William, 42n Diebold, Francis X., 304–305 Durlauf, Steven, 595n Eggertsson, Gauti, 605 Eichenbaum, Martin, 377, 381n Eichengreen, Barry, 232n Evans, Charles L., 304 Fay, Jon, 377 Feige, Edgar, 27n Feldstein, Martin S., 518n Ferguson, Roger W Jr., 192, 218n Fernald, John G., 86n, 236n Fischer, Stanley, 163n, 306, 389n, 468n, 469, 603n Fisher, Irving, 263n Fisher, Jonas, 303 Ford, Henry, 414–415 Fraumeni, Barbara M., 27n Friedman, Milton, 160–161n, 300, 388–389, 452, 470n, 542– 544, 566–568, 575n, 611n Fuerst, Timothy S., 86n Fujita, Shigeru, 295n, 296–297 Gagnon, Etienne, 553n Garner, C Alan, 142n Garrett, Thomas A., 597n Gerdes, Geoffrey R., 261n Gertler, Mark, 557 Giannoni, Marc, 420 Goldfeld, Stephen, 262 Gordon, Robert J., 48, 213n, 283n Gorodnichenko, Yuriy, 605 Greenspan, Alan, 474–475 Greenwood, Jeremy, 214 Hall, Robert E., 163n Haltiwanger, John, 383 Hassett, Kevin, 130 Hausman, Jerry A., 594n Hicks, Sir John, 316 Hobijn, Bart, 214–215n Holtz-Eakin, Douglas, 236n Hubbard, R Glenn, 130 Ibarra-Caton, Marilyn, 179n Ingenito, Robert, 88 Johnson, David, 122 Jovanovic, Boyan, 214–215 Kao, Chihwa, 236n Kashyap, Anil, 419 Katz, Lawrence, 384n, 465n Keane, Michael, 397 Keynes, John Maynard, 16–17 King, Robert G., 369n, 387n Klenow, Peter, 419–420 Kozicki, Sharon, 466n Krueger, Alan, 465n Kuang, Katherine, 91 Kuznets, Simon, 22 Kydland, Finn, 368, 370–371 Landefeld, J Steven, 27n, 46 Laubach, Thomas, 574n Leahy, Mike, 553n Lebow, David, 48 Lettau, Martin, 142n Levin, Andrew, 289n Lilien, David, 382n Liu, Chin Te, 304 635 636 Name Index Liu, Chunlin, 121–122 Lucas, Robert E Jr., 233n, 290, 389, 461 Ludvigson, Sydney, 142n MaCurdy, Thomas, 80n Maddison, Angus, 208, 231 Mankiw, N Gregory, 163n, 223, 418n, 466n, 473 Mazumder, Bhashkar, 92 McClelland, Robert, 122 McColough, Peter C., 217n McGibany, James M., 260n Medoff, James, 377 Meltzer, A H., 290n, 461, 468n Menem, Carlos, 520 Meyer, Stephen, 415 Mihov, Ilian, 420 Mintz, Jack, 129 Miron, Jeffrey, 307 Mishkin, Frederic S., 163n, 574n–575n Mitchell, Wesley, 22, 281, 303 Modigliani, Franco, 161 Moore, Geoffrey H., 283n Muth, John F., 395n Nakamura, Emi, 419 Nguyen, Elena L., 178n–179 Nixon, Richard M., 467, 472 Norwood, Janet L., 14n Nourzad, Farrokh, 260n Obama, President, 287 Okun, Arthur, 94 Orphanides, Athanasios, 466n, 572 Park, Donghyun, 232n Parker, Jonathan, 122, 142, 299n Parker, Randall E., 314n Parker, Robert P., 46 Pham-Kanter, Genevieve, 304 Phelps, Edmund, 452, 567 Phillips, A W., 450, 476 Plosser, Charles, 369n, 387n Poole, William, 555n Posen, Adam S., 574n Poterba, James M., 121n, 594n Prescott, Edward, 368, 370–374 Radford, R A., 243 Raff, Daniel M G., 415 Ramey, Garey, 295n, 296–297 Ramey, Valerie, 605 Reagan, Ronald, 467 Rebelo, Sergio, 369n, 377 Reinhart, Vincent R., 561n Rhine, Russell M., 597n Ricardo, David, 119n Rogoff, Kenneth, 573n Romer, Christina D., 3, 7, 9, 287, 314n, 336, 389 Romer, David, 336, 389 Romer, Paul, 233n Roosevelt, Franklin D., 542, 597 Rotemberg, J., 142n, 377n, 465n Rothman, Philip, 314n Rudd, Jeremy, 48 Rudebusch, Glenn D., 305, 553n Runkle, David, 142n, 397 Samuelson, Paul, 291 Sargent, Thomas, 461 Schechter, Shani, 92 Schwartz, Anna J., 300, 388–389, 542–544, 567–568 Scotti, Chiara, 304 Seskin, Eugene P., 27n Shambaugh, Jay C., 518n Shapiro, Carl, 410n Shapiro, Matthew D., 120–121 Shiffer, Zalman F., 469 Shimer, Robert, 465 Shin, Kwanho, 232n Silver, Stephen, 444 Sims, Christopher, 336 Slemrod, Joel, 120–121 Smith, Adam, 15–16, 341n, 381 Solon, Gary, 299n Solow, Robert, 219, 375–376 Souleles, Nicholas, 121–122 Steindel, Charles, 45 Steinsson, Jon, 419 Stewart, Jimmy, 541n Stiglitz, Joseph E., 410n Stock, James H., 288–289n, 299n, 306, 466, 559n Summers, Lawrence H., 223, 415, 573–574 Summers, Peter M., 289n Sumner, Scott, 444 Taylor, John, 369n, 570–572 Tobin, James, 133–135, 140 Trehan, Bharat, 86n, 88 Truman, Harry, 14n Ulan, Michael, 42n Valetta, Rob, 91 Volcker, Paul, 389, 460, 474–475, 572–573n Walsh, Carl, 573n Wascher, William L., 218n Watson, Mark W., 288–289n, 299n, 306, 466, 559n Wieland, Volker, 466n Williams, John, 466n Williamson, J., 469 Wilson, Beth Ann, 289n Woodford, Michael, 369n, 435, 605n Yorukoglu, Mehmet, 214 Zarnowitz, Victor, 28 n Zeckhauser, Richard J., 223 Subject Index Note: Page numbers in boldface type indicate pages where terms are defined; when page numbers are followed by an n, the reference appears in a footnote, but not in the text on that page Absorption, 181 Accounting See also Growth accounting balance of payments, 174, 175n balance of payments accounts, 169–179 national income, 33 national income accounts, 22–23, 53 Acyclical variable, 290, 301, 313 AD–AS model See Aggregate demand-aggregate supply (AD–AS) model ADS Business Conditions Index See AruobaDiebold-Scotti (ADS) Business Conditions Index Adverse aggregate demand shock, 310 Adverse productivity shock, recessionary impact of, 369–370 Adverse supply shock, 69, 83–84, 86 inflation and unemployment and, 458, 476 IS–LM model, 332–334, 350 small open economy and, 185 temporary adverse supply shock, 332–334, 350 After-tax interest rates, calculating, 115 Aggregate demand, 105, 138 business cycle analysis, 308–312 classical approach and, 588, 606 and fiscal policy, 588–590 government purchases and, 606, 611 IS curve and, 323 Keynesian approach, 588, 606, 611 Aggregate demand-aggregate supply (AD–AS) model about, 308–313, 316–317, 342–349, 350, 352–353 aggregate demand (AD) curve, 342–344 aggregate supply curve, 344–347 algebraic version, 365–366, 406–407 equilibrium, 347–348 Keynesian approach, 424–425 misperceptions theory, 399 monetary neutrality in, 340–341 numerical exercise for, 405 numerical version of, 357 Aggregate demand (AD) curve, 308–309, 313, 342–344, 350, 352, 365, 371, 399, 406, 437, 454 Aggregate demand management, 433, 437 Aggregate demand shocks, 310–311, 371, 428–429, 437, 444 Aggregate economic activity, 281–282 Aggregate labor demand, 77, 96 Aggregate labor demand curve, 77 Aggregate labor supply, 82–83, 96 Aggregate level of desired consumption, 106 Aggregate output, 116 Okun’s law, 94–95, 99 Aggregate price level, misperceptions theory and, 389 Aggregate saving, 36–38 government saving, 37–39, 54–55 private saving, 37–40, 55 Aggregate saving, national saving, 37–39, 38, 41, 54–55 Aggregate supply, business cycle analysis, 308–312 Aggregate supply curve, 309, 344–347, 350, 352, 365–366, 389–390, 406, 443 Aggregate supply of labor, 77 Aggregate supply shocks, 311–312 Aggregation, 10, 18 asset market equilibrium, 265–268 monetary aggregates, 245–246 AIG, 565 American Enterprise Institute, 12 American Recovery and Reinvestment Act of 2009, 604 Appreciation, exchange rate and, 485–486 Argentina, 1, 515, 519–521 Argentine peso, 483, 519–521 Aruoba-Diebold-Scotti (ADS) Business Conditions Index, 304–305, 559 Asset demands, 256 Asset market, 242 equilibrium in See Asset market equilibrium LM curve, 323–330 monetary expansion and, 338 Asset market equilibrium, 265–268, 323–330, 363–364 Asset market equilibrium condition, 267–268, 276 Assets diversification, 256 expected return, 249–250, 249n of households, 253 housing as, 252 liquidity, 250, 260–261 nonmonetary, 324–325 portfolio, 249 risk, 250, 256n types, 251–253, 256 Australia, 207–208, 574, 582 Austria, 582 Automatic stabilizers, 589, 611 Automatic teller machines (ATMs), 261 Average labor productivity, 3–4 cyclical nature of, 292, 298–299 Average tax rate, 591–593, 611 Balance of payments, 174, 175n Balance of payments accounts, 169–179, 199 capital and financial account, 172–176, 199 current account, 169–171, 174–176, 191–193, 194–198, 199 net foreign assets and, 176–177 net income from abroad, 171–172 Balance of payments deficit, 511 Bank reserves, 536, 538, 538n, 575 calculating, 549 defined, 549 interest on, 536, 553 requirements, 549–551 Bank runs, 541–542 Banks and banking See also Central bank; Federal Reserve Bank balance sheets, 536–537 bank reserves, 536, 538, 538n, 549–551, 553, 575 bank runs, 541–542 currency-deposit ratio (CU/DEP), 539–540, 545 depository institutions, 535, 549 discount rate, 551–552 discount window lending, 551–552 Federal Deposit Insurance Corporation (FDIC), 541–542 fractional reserve banking, 536 Great Depression, 542–543 high-powered money, 536 liquid assets, 536 monetary base, 536, 540–541, 544, 549, 575 multiple expansion of loans and deposits, 538 100% reserve banking, 536 open-market operations, 248, 537–538, 550, 553, 576 primary credit discount loan, 551 reserve-deposit ratio (RES/DEP), 536, 539, 539n, 540–541, 545 secondary credit discount loan, 551 vault cash, 549 BEA See Bureau of Economic Analysis “Beachhead effect”, 492, 492n Bear Sterns, 563, 565 Belarus, 270 Belgium, 582 Bequests, 161 Big Mac index, 487 Binding borrowing constraints, consumption and, 121, 163 Board of Governors of the Federal Reserve System, 548 Bonds, 252 discount bonds, 324n interest rates of, 324 maturity of, 117 nominal bonds, 272 time to maturity, 250–251 yield curve of, 117 Boom, 281 Borrowing constraints, 121, 163, 603 Brazil, 515, 574 Brazilian real, 521 Bretton Woods system, 483, 509 British pound, 484 Brookings Institution, 12 Budget constraint, 152–155 Budget deficit See Budget surplus Budget line, 153, 164 Budget surplus, 38 Bulgaria, 270 Bureau of Economic Analysis (BEA), 24, 45–46, 171 Bureau of Labor Statistics, 46, 48, 87 Bureau of the Census, 171 Business current transfer payments, 34 637 638 Subject Index Business cycle analysis, 306, 308 See also Classical approach; Keynesian approach aggregate demand and aggregate supply, 308–312 classical approach, 367–407 Business cycle chronology, 281 Business Cycle Dating Committee (NBER), 282 Business cycle facts, 290–306, 312–313, 430 Business Cycle Indicators, 291 Business cycles, 312 aggregate economic activity and, 281 analysis of, 306, 308 average labor productivity and, 292, 298–299 calibrating, 371–374 classical model, 368–378 comovement and, 282, 290, 307, 312 defined, 4, 280–281, 312 employment and unemployment, 292, 294–298 expenditures and, 292–294 financial variables and, 292, 300–301 Great Depression, 4–5, 9, 17, 283–285, 313, 370–371, 542–543, 576 Great Moderation, 288–289, 313 Great Recession, 286, 313, 560–564, 576 indexes of economic activity, 302–305, 559 international aspects of, 301–302 international trade and, international transmission of, 503 investment spending and, 122–123 “Long Boom”, 286, 313 money growth and inflation, 292, 299–300 pre-World War I period, 283 production and, 291–292 productivity and, 64 real wage and, 299 seasonal cycle and, 307 in U.S., 4, 283–289, 313 World War II, 283–285 Business cycle theory, 428–431, 437 Business fixed investment, 31 CA See Current account balance Calibration, 371 Canada, 198, 208, 302, 574, 582 Capital, 61 diminishing marginal productivity of, 66 marginal product of capital (MPK), 65–67, 66, 96, 123, 125–128, 135, 185 tax-adjusted user cost of capital, 128 user cost of capital, 123–124, 146 utilization rate of capital, 376 Capital account, 172, 199 Capital account balance, 172 Capital and financial account, 172–174, 199 current account, relationship with, 174–176 Capital and financial account balance (KFA), 173, 199, 202 Capital controls, 182n Capital good, 28 Capital-labor ratio, 224, 238 Golden Rule capital-labor ratio, 222 steady-state capital-labor ratio, 222–226 Capital services, 376 Capital stock, 70 desired capital stock, 123–133, 144, 146 labor demand and, 76 marginal product of capital (MPK), 66, 96, 123, 125–128, 135, 185 production function and, 64–65 Capital utilization, 377 “Cashless society”, 261 Cash management accounts, 261 Central bank, 535, 535n, 575–576 See also Federal Reserve Bank; Federal Reserve System credibility, 568–570, 572–573, 576 currency unions, 516–518 exchange rate and, 483, 511, 522 money multiplier, 538–541, 540n, 542–546, 575–576 money supply control, 246, 275, 386–387 open-market operations, 248, 537–538, 550, 553, 576 CFNAI See Chicago Fed National Activity Index Chain-weighting, 45–46 Check 21 law, 261 Chicago Fed National Activity Index (CFNAI), 303–305, 559 China, economic growth of, 231–232 Chronic unemployment, 92–93, 96 Cigarettes as medium of exchange, 244 as money, 243 Civil War, 583 Classical theory about, 340 on aggregate demand, 588, 606 on business cycles, 368–378 on disinflation, 474 on fiscal policy, 588 on fiscal policy shocks, 378–382 on general equilibrium, 341 on government purchases, 381, 398 IS–LM model, 340–342, 506, 604–605 jobless recoveries, 384–386 on marginal product of labor (MPN), 412 on monetary neutrality, 350, 398, 509, 565 on monetary nonneutrality, 387–389, 398 monetary policy and, 386–389, 534 on money, 386–389 on oil price shocks, 382 on price adjustment process, 352 on prices and wages, 16, 18–19, 350, 416, 435 principles of, 15–19, 280, 308 rational expectations assumption, 396 on recessions, 367, 381 on unemployment, 382–386, 463 Classical model of the labor market, 83–84, 96 Closed economy, goods market equilibrium in, 135–136, 144, 146 saving-investment diagram, 136–140, 144–145 Cobb-Douglas production function, 62n, 210n Coincident index, 302 Coincident variable, 290, 313 COLAs See Cost-of-living adjustments Cold-turkey disinflation, 471–473, 476 Comovement, 282, 290, 307, 312 Competition monopolistic competition, 416–418, 417, 420n perfect competition, 417 Computer Revolution, 45–46 Congressional Budget Office, 11 Constant-dollar GDP, 44 See also Real gross domestic product Constant-growth-rate rule, 576 Constant-markup rule, 420, 420n Consumer price index (CPI), 46–47, 54 cost of living and, 47–48 PCE vs., 49–50 defined, 6n in the United States, 6, 6n Consumer prices consumer price index (CPI), 6, 6n, 46–48, 54 personal consumption expenditures (PCE) price index, 49–51 Consumer sentiment index, 110–112 Consumer spending, forecasts of, 110–112 Consumption, 31, 106–122, 143 borrowing constraints and, 121, 163 consumption-smoothing motive, 108 cyclical behavior of, 293 decision of an individual, 106–107 desired consumption, 106, 116 fiscal policy and, 115–116 formal model of, 152–167 GDP and, 31 government purchases and, 118 income change affecting, 108–110, 143, 158–160 life-cycle model, 161–162 marginal propensity to consume (MPC), 109, 118n optimal level of, 157–158 real interest rate changes affecting, 113–115, 143–144, 164–167 Ricardian equivalence proposition, 119–120, 119n, 144, 162–163, 362n, 427n, 600–602, 611–612 steady-state consumption per worker, 238 taxes and, 119–122 U.S stock market 1980s–1990s, 141–142 wealth changes affecting, 113, 141, 160 Consumption of fixed capital See Depreciation Consumption-smoothing motive, 108 Consumption spending, consumer sentiment index and, 112 Contraction, 281 monetary contraction, 507–509 Corporate profits, 33–34 Corporate taxes, 584 Correlation, 373 Cost of living, consumer price index (CPI) and, 47–48 Cost-of-living adjustments (COLAs), 444, 469 Council of Economic Advisers, 11 Countercyclical variable, 290, 313 CPI See Consumer price index Credibility of central bank, 569–570, 572–573 of government, 474 Credit easing, 562 CU/DEP See Currency-deposit ratio Currency Argentina’s economic crisis, 517–519 Bretton Woods system, 483, 509 devaluation, 486 euro, history of, 517–518 European monetary unification, 517–519 exchange rates, 482–503 forward exchange rates, 483–484 gold standard, 483, 511 inconvertible currency, 511 overvalued currency, 510–512 revaluation, 486 speculative run, 511–512, 522 spot rate, 483 undervalued currency, 512–513 Currency board, 520 Currency-deposit ratio (CU/DEP), 539–540, 545 Currency unions, 516–518 Current account, 169–171, 199 capital and financial account, relationship with, 174–176 exchange rate, 494n fiscal policy and, 194–198 net exports of goods and services, 169–170 U.S as international debtor, 177–179, 191–193 Current account balance (CA), 39–40, 172, 199, 202 “twin deficits”, 9, 194, 196–199 in U.S., 40, 191–193 Current deficit, 587 Current income, changes in and consumption, 158–159 Current surplus of government enterprises, 34 Cyclical unemployment, 93, 452n unanticipated inflation and, 455, 459, 476 Data development, 14 Debt-GDP ratio, 611, 616 Deficits, 586–587, 611 See also Government budget deficit Deflation, Demand aggregate demand, 105, 138 asset demands, 256 effective labor demand, 421 for labor, 70–77 meeting demand at fixed nominal price, 420–421 Demand for money, 256–257, 275 determinants of, 257–262 elasticities, 261–262 equality of money demanded and money supplied, 324–327 interest rates and, 258 money demand function, 258–259, 276 nominal money demand, 275 payment technologies and, 260–261 price level, 257, 260 real income and, 257–258, 260 risk and, 260–261 wealth and, 260 Denmark, 582 Depository institutions, 535, 549 Depreciation, 35, 35n exchange rate and, 485–486 national wealth and, 41 user cost of capital and, 124 Depreciation allowances, 128 Depression, 281 See also Great Depression Desired capital stock, 123–129, 146 changes in, 126–127 determining, 125–126 investment and, 130–133 taxes and, 127–128 Desired consumption, 106, 116, 143 Desired investment, 132–133, 143 goods market equilibrium and, 362 shifts in investment curve, 139–140, 144 Desired national saving, 107, 116, 118–120, 143, 146, 180, 320n, 323 current account deficit and, 194–195 shifts in the saving curve and, 138–139 Devaluation, 486 Diminishing marginal productivity, of capital, 66 Discount bond, 324n Discount loans, 551–552, 552n Discount rate, 551–552 Discount window lending, 551–552 Discouraged workers, 89–90 Discretion, 566 Disinflation, 471–474, 476 Distortions, tax-induced, 592, 611 Diversification, 256 Dollar See United States dollar Domestic income, effect of changes in, 495–497 Domestic output, effect of changes in, 495–497, 522 Domestic real interest rate, 496–497 DSGE models See Dynamic, stochastic, general equilibrium (DSGE) models Durable goods, 293 Durable goods spending, cyclical behavior of, 430 Dynamic, stochastic, general equilibrium (DSGE) models, 378, 434–436 Subject Index EC See European Community ECB See European Central Bank Econometric models, 335 Economic activity, indexes of, 302–305, 559 Economic analysis, 60 Economic data, collection of, 14 Economic growth See also Long-run economic growth in major countries, 207–208 of China, 231–232 defined, 237 determinants for, economic output and, endogenous growth theory, 233–234, 235n, 237–238 Solow model of, 218–232, 235, 237 sources of, 208–218 sources of in U.S., 211–212 of United States, 1–4, 208, 231–232, 237 Economic models, 12–13 Economic output, 2n, average labor productivity, 3–4 economic growth and, national income accounting, 23 rates of growth, 2n, of United States, 2–3 Economic Recovery Tax Act of 1981 (ERTA), 593 Economic Report of the President, 24, 88 Economic shocks See Shocks Economic theories, 12–13, 19 Economic variables cyclic behavior of, 290–291 rational expectations about, 396 types, 290 Economists See Macroeconomists Effective labor demand, 421 Effective labor demand curve, 421, 437 Effective tax rate, 128–129 Efficiency wage model, 410–415 employment and unemployment in, 412–414, 436 wage determination in, 411–412 Efficiency wages, 412, 415, 436 FE line and, 414–415 Effort curve, 411 Egypt, 30 Elasticities demand for money and, 261–262 equations, 619 Electronic payment, 261, 261n Employees compensation of, 33 foreign workers, 190 utility, 78, 96 Employment See also Unemployment changes in employment status, 89–91 cyclical nature of, 292, 294–298 in efficiency wage model, 412–414 employment ratio, 89 full-employment level of employment, 83, 317 full-employment output, 85, 96, 99, 349 jobless recoveries, 384–386 not-in-labor-force status, 87, 89 Employment Act of 1946, 285 Employment ratio, 89 The Employment Situation (Bureau of Labor Statistics), 88 Endogenous growth theory, 233–234, 235n, 237–238 Endogenous variables, 335 Energy prices, modern history of, 86 Environmental issues, national income accounts and, 29 639 Equilibrium, 16 aggregate demand-aggregate supply (AD–AS) model, 347–348 asset market equilibrium, 265–268, 323–330, 363–364 general equilibrium, 330–334, 336–342, 347 goods market equilibrium, 135–136, 144, 146, 180–184, 199–200, 319–323, 362–363 labor market equilibrium, 83–85, 317–319, 360–361 long-run equilibrium, 347, 366 short-run equilibrium, 338–339, 347, 352–353, 366 ERTA See Economic Recovery Tax Act of 1981 Euro, history of, 517–518 Europe labor productivity in, 217 monetary unification, 517–519 U.S financial crisis of 2008, 518 European Central Bank (ECB), 517–518, 574 European Community (EC), 517 European countries, money growth and inflation in eastern European countries, 269–270 Excess sensitivity, 163 Exchange rate appreciation and depreciation, 485–486 central bank and, 483, 511, 522 determination of, 493–497 fundamental value of the exchange rate, 510 monetary contraction and, 507 net exports and, 489–492 overvalued exchange rate, 510, 522 purchasing power parity (PPP), 486–488, 521 supply-and-demand analysis, 493–497 undervalued exchange rate, 512–513 Exchange rates, 482–503 defined, 482, 486n fixed-exchange-rate system, 482–483, 486, 509–516 flexible-exchange-rate system, 482, 521–522 floating-exchange-rate system, 482, 521 foreign exchange market, 482–484 forward exchange rates, 483–484 nominal exchange rates, 482–484, 486–488, 493–494, 509, 521 real appreciation, 486 real exchange rates, 484–486 spot rate, 483 Exogenous variables, 335 Expansion, 281 jobs lost and gained, 298 Expectations-augmented Phillips curve, 452–455, 476 Expectations theory of the term structure, 251 Expected after-tax real interest rate, 115, 146 Expected future marginal product of capital, small open economy and, 185–186 Expected future real wage, 79 Expected inflation and demand for money, 260 LM curve and, 327 nominal interest rate and, 270–271 Expected inflation rate, 271, 475 Expected price level, 391 Expected real interest rate, 52–55, 53, 136n Expected return, 249–250 Expenditure approach, 23, 25, 30–33, 53–54 Expenditures, cyclical nature of, 292–294 Exponents, 621 Exports, 199 of goods and services, 169–170, 199 monetary contraction and, 507 net exports (NX), 32–33, 169–170, 199 640 Subject Index Exports (continued) net exports and real exchange rate, 489–492 trade deficit, trade surplus, from United States, 7–8, 7n, 189–190 Factors of production, 61 Fannie Mae, 562, 565 FDIC See Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation (FDIC), 541–542, 565 Federal funds rate, 116–117, 301, 552 Taylor rule, 570–572, 576 Federal funds rate targeting, 553–557, 576 Federal Open Market Committee (FOMC), 548, 576 Federal Reserve Act of 1913, 547 Federal Reserve Bank balance sheet, 535–536 history of, 547 location of banks, 547 money multiplier, 538–546, 540n, 575–576 open-market operations, 53, 248, 537–538, 550, 553–576 Federal Reserve Bank of St Louis, FRED database, 24, 88, 171, 246 Federal Reserve Board, 548 FRB/US model, 335 Greenbook forecasts, 336 Federal Reserve districts, 547 Federal Reserve System about, 2, 8, 11, 547–548, 576 balance sheet, 548–549, 562–563 Board of Governors, 548, 576 credit easing, 562 discount rate, 551, 552 discount window lending, 551–552 Federal funds rate targeting, 553–557, 576 Fed funds rate, 552 forward guidance, 561 history of, 547 indicators, 553 inflation targeting, 574–575, 575n instruments, 553 intermediate targets, 553, 576 location of banks, 547 M1 and M2, 246 Maturity Extension Program, 562 monetary policy and, 534–575 money supply and, 246–249, 275 Operation Twist, 562 personal consumption expenditures (PCE) price index, 49–51 Prime Dealer Credit Facility, 565 quantitative easing, 562 Taylor rule, 570–572, 576 Term Auction Facility, 565 Term Securities Lending Facility, 565 zero lower bound, 561, 576 Fed funds rate, See Federal funds rate Feedback effects, 506n FE line, 317–319, 349, 351, 420, 437 adverse supply shock, 332 efficiency wages and, 414–415 factors that shift, 318–319 fiscal policy change and, 380 general equilibrium, 331 international considerations, 498, 498n Keynesian approach, 422 monetary supply and, 336–337 Final goods and services, 27–28 Financial account, 172–173 Financial account balance, 173 Financial contracts, indexed, 469 Financial crisis of 2008, 143, 518, 543–546, 553n, 564–565, 576 Financial inflow, 173 Financial markets, integration of, 481 Financial outflow, 173 Financial securities bonds, 252 expected return, 249–250, 249n liquidity, 250, 260–261 risk, 250 stocks, 252 time to maturity, 250–251 Finland, 582 Fiscal expansion, international effects of, 504–506, 522 Fiscal policy, 8, 611 aggregate demand and, 588–590 classical approach, 588 consumption and saving and, 115–116 current account and, 194–198 incentive effects of, 591–595 Keynesian approach, 425–428, 431, 588–589 Keynesian model, 425–428, 433 local policy, 584 macroeconomy and, 588–595 as stabilization tool, 588 state policy, 584 of United States, 8–9, 9n, 194–198 Fiscal policy shocks, in classical approach, 378–382 Fixed exchange rate, 509–516 fixing the rate, 510–512 flexible exchange rate vs., 515–516, 521–522 monetary policy and, 512–515 money supply under, 512–515 Fixed-exchange-rate system, 482–483, 486, 509–516, 522 Fixed-income securities, 252 Fixed nominal price, 420–421 Flexible exchange rate, fixed exchange rate vs., 515–516, 521–522 Flexible-exchange-rate system, 482, 521–522 Floating-exchange-rate system, 482, 521 Flow variables, 40–41 FOMC See Federal Open Market Committee Ford Motor Company, 415 Forecasts, 335 of consumer spending, 110–112 forecasting models, 335 Greenbook forecasts, 336 macroeconomic, 10–11 of money supply, 395 of recessions, 306 Foreign currency, exchange rates, 482–503 Foreign direct investment, 176 Foreign exchange markets, 482–484 Foreign real interest rate, 496n, 497, 503 Foreign workers, 190 Forward exchange rates, 483–484 Forward guidance, 561 Fractional reserve banking, 536 France, 208, 302, 582 FRB/US model, 335 Freddie Mac, 562, 565 Frictional unemployment, 92, 96 Friedman-Phelps analysis, 452–460 Full-employment budget deficit, 589, 589n, 590, 611 Full-employment equilibrium, 453 Full-employment level of employment, 83, 317, 453 Full-employment output, 85, 96, 99, 317, 349, 361, 391, 437 Fully anticipated inflation, 467 Functions, 617 of several variables, 620 slopes of, 618–619 Fundamental identity of national income accounting, 25–26, 55 Fundamental value of the exchange rate, 510 Future income, changes in and consumption, 159–160 GDP See Gross domestic product GDP deflator, 44, 46 General equilibrium, 330–334, 347 algebraic solutions, 406–407 IS–LM model, 330–334, 349, 364–365 monetary expansion and, 336–340 monetary neutrality, 341–342 price adjustment and, 336–342 and price level, 339–340 The General Theory of Employment, Interest and Money (Keynes), 16, 316 Germany, 1, 198, 208, 302, 496n, 573, 582 Global economic system, Globalization international balance of payments, 169–171, 189 international economy, 7–8 U.S economy and, 189–191 GNP See Gross national product Golden Rule capital-labor ratio, 222 Gold standard, 483, 511 Goods final goods, 27–28 government purchases, 32–33 intermediate, 27–28 net exports (NX), 32–33, 169–170 newly produced, 27 unsold goods, 25n Goods market, 70, 106, 144 equilibrium in See Goods market equilibrium IS curve, 319–323 monetary expansion and, 338 Goods market equilibrium in closed economy, 135–136, 144, 146 IS–LM model, 319–323 in large open economy, 188, 199, 201 in open economy, 180–181, 199–202, 499 real interest rate and, 319–320 saving-investment diagram, 136–140, 144–145, 181–184, 200–201 in small open economy, 181–184, 199–200 Government budget surplus, 38 credibility and reputation of, 474 current surplus of government enterprises, 34 net government income, 36, 54 Government bonds, 548 Government budget, 580–588, 595 deficits and surpluses, 586–588 government outlays, 580–583 taxes, 583–586 Government budget deficit, 9, 38, 40, 595–596, 611 current account and, 194–195 full-employment budget deficit, 589–590, 611 inflation and, 605–612 money supply and, 606–607 national saving and, 195–196, 600 primary government budget deficit, 586 in small open economy, 194–195 tax cuts and, 196 “twin deficits”, 9, 194, 196–199 in the United States, 9, 595–596 Government capital, 590 Government capital formation, 590–591, 611 Government capital investment, 590 Government consumption, 37, 37n Government consumption expenditures, 580, 584 Government debt, 117, 595–597, 599–600 Government expenditures, in U.S., 582 Government investment, 37, 580 Government outlays, 38, 580–583, 586, 611 Government policies, to raise long-run living standards, 235–237 Government purchases multiplier, 445, 605 Government purchases, 32, 580 AD curve, 344 aggregate demand and, 606, 611 consumption and, 144 economy, impact on, 604–605 for goods and services, 32–33 interest rates and, 118 international effects of, 504–506 IS curve shifts and, 322, 398, 501 Keynesian approach, 425–427, 437 labor supply and, 379–380, 379n in open economy, 501–502 “twin deficits”, 196–199 Government receipts, 38 Government saving, 37–39, 54–55 Government spending, 580–612 defined, 8n in the United States, 8–9 Government surpluses, 596 Gradualism, 472 Grants in aid, 584–585 Graphs, 617 Great Depression (U.S.), 4–5, 9, 17, 283–285, 313, 370–371, 542–543, 576 Great Moderation (U.S.), 288–289, 313 Great Recession (U.S.), 286, 313, 560–564, 576 Greece, 518, 582 Greenbook forecasts, 336 Gross domestic product (GDP), 26, 53 expenditure approach to measuring, 23, 25, 30–33, 53–54 GNP vs., 28, 30, 287, 287n government outlays, 581 income approach to measuring, 23–25, 24, 33–36, 53–54 monetary policy and, 558 natural resources and, 29 nominal GDP, 44, 54, 264 product approach to measuring, 26–28, 53–54 real GDP, 2n, 3, 42-44, 54 Gross investment, 130–131, 144 Gross national product (GNP), 28, 30, 35, 287, 287n Growth accounting, 210–212, 211n, 237 Growth accounting equation, 209, 238 Growth rate formulas, 621–622 High-powered money, 536, 540 Home equity line of credit, 261 Household assets, 253 Housing as asset, 252 investment in, 133 “underwater”, 255 Housing crisis (U.S.), 252–255, 565 Human capital, 233, 236 Hyperinflation, 470, 612 Iceland, 582 IMF See International Monetary Fund Imports taxes on, 34 trade deficit, Subject Index trade surplus, to United States, 7–8, 7n Income changes in, effect on consumption and saving, 108–109, 143, 158–160 income-expenditure identity, 30–31, 55, 136 life-cycle income, 162 national income accounting, 23 net government income, 36 permanent income theory, 160–161 private disposable income, 35, 54–55 Income approach, 23–25, 24, 33–36, 53–54 Income effect of a higher real wage, 79–80, 96 Income effect of the real interest rate on saving, 114, 166 Income elasticity of money demand, 261–262, 269 Income-expenditure identity, 30–31, 55, 136 Income-leisure trade-off, 78 Income policies, 472 Income tax, 583, 589 Inconvertible currency, 511 Indexed contracts, 469 Indexes of economic activity, 302–305, 559 Index of leading economic indicators, 303 Indicators, 553 Indifference curves, 155–157 Individual cash management accounts, 261 Individual retirement accounts (IRAs), 115 Industrial production index, 291–292, 302 Inflation, 6–7, 48, 467–475 Argentina’s economic crisis, 517–519 business cycles and, 299–300 central bank independence and, 573–574, 576 costs of, 467–470, 476 disinflation, 471–474, 476 in eastern European countries, 269 expectations-augmented Phillips curve, 452–455, 476 expected inflation rate, 271, 475 fighting, 471–475 fully anticipated inflation, 467 government budget deficit and, 605–611, 612 hyperinflation, 470, 612 Keynesian approach to, 430 measuring expectations, 272 money growth and, 268–274, 340 nominal interest rates and, 271–272 personal consumption expenditures (PCE) price index, 49–51 Phillips curve, 449–452, 450, 476 sacrifice ratio, 473 seignorage and, 607–612 shifting Phillips curve, 455–460 unanticipated inflation, 454, 468, 470, 476 unemployment and, 449–476 wage and price controls, 472, 474 Inflation prediction equation, 271 Inflation rate, 6, 48, 50n, 276 expected inflation rate, 271, 475 money growth and, 268, 275 in the United States, 48–49, 450–451, 564 Inflation targeting, 574–575, 575n, 576 Inflation tax, 608 Information technology revolution, 214, 217–218, 374 Infrastructure, productivity and, 236 Instruments, 553 Interest, on bank reserves, 536, 553 Interest elasticity of money demand, 261–262 Interest rate(s), 51–54 after-tax interest rates, calculating, 115 on bank reserves, 553 and demand for money, 258, 260 discount rate, 551–552 expectations theory of the term structure, 251 641 expected real interest rate, 52–55, 53, 136n Fed funds rate, See Federal Funds rate Federal funds rate, 116–117, 552 government purchases and, 118 on loans, 116–117 nominal interest rate, 52, 54 price of nonmonetary asset and, 324 prime rate, 116–117 real interest rate, 52, 54, 113–115, 136n, 143–144 real vs nominal, 52 short-term interest rates, 553–554 stabilization of, 576 world real interest rate, 181 Interest rate differential, 273 Interest rate targeting, 554–557, 576 Intermediate goods and services, 27–28 Intermediate targets, 553, 576 International balance of payments, 169–171, 189 International economy, 7–8 International Monetary Fund (IMF), 24, 198 International trade, 169–171, 199, 481 exchange rates, 482–503 macroeconomic policy and, 504–509 monetary contraction and, 507–509 in open economy, 504–509 trade imbalances, U.S fiscal expansion and, 504–506, 522 Inventories, 27 Inventory investment, 28, 28n, 133, 293 Investment, 31, 122–135 defined, 31, 122 desired capital stock and, 130–133 desired investment, 132–133, 139–140 GDP and, 31–32 gross investment, 130–131, 144 in housing, 133 inventory investment, 28, 28n, 133, 293 lags and, 132–133 in large open economy, 201–202 net investment, 131 q theory of, 133 residential investment, 32, 133 saving-investment diagram, 136–140, 144–145, 200–201 in small open economy, 200–201 stock market and, 133–135 taxes, effect of on, 129–130 Tobin’s q and, 133–135 Investment curve, 200, 319 Investment spending, 105, 122, 429 Investment tax credit, 128 “Invisible hand” argument, 15–16, 311 IRAs See Individual retirement accounts Ireland, 582 IS curve, 319–323, 349, 351, 437 adverse supply shock, 333 factors that shift, 321–323 fiscal policy change and, 380 general equilibrium, 333 Keynesian approach, 422 money supply and, 336–337 open economy, 498–503 tax cut effect on, 427 IS–LM model, 316–352 adverse supply shock, 332–334 algebraic versions of, 360–366, 531–533 asset market equilibrium, 323–330 classical vs Keynesian versions, 340–342, 506, 604 components of, 497–498 FE line, 317–319, 331–332, 336–337, 349 fiscal expansion and, 504–506, 522 general equilibrium in, 330–334, 349, 364–365 goods market equilibrium, 319–323 642 Subject Index IS–LM model (continued) IS curve, 319–323, 333, 336–337, 349 Keynesian approach, 340–342, 422–424, 503 labor market equilibrium, 317–319, 349 LM curve, 323–331, 333, 336–337, 350 monetary contraction, 506 nominal money supply increase and, 336–340, 350 numerical exercise for solving, 357–359, 528–530 oil prices analysis, 334 in open economy, 497–503, 522, 528–533 productivity and, 397 RBC theory, 370 real shock and, 369 temporary adverse productivity shock, 369 Israel, 469, 574 Italy, 198, 518, 573, 582 Japan, 3, 207–208, 231–232, 302, 481, 496n, 503, 561, 582 Japanese yen, 482, 484–485 J curve, 489–490 Job creation, 383, 383n Job destruction, 383, 383n Job finding rate, 295–296 Jobless recoveries, 384–386 Job loss rate, 295–297 Jobs, international trade and, 190 Kennedy-Johnson tax cut, 583 Keynesian approach, 408–446 about, 16–19, 280, 308, 311, 313, 340 AD–AS model and, 424–425 on aggregate demand, 588, 606, 611 business cycle theory, 428–431, 437 on cold-turkey disinflation, 471–473, 476 on disinflation, 474 on fiscal policy, 425–428, 431, 588–589 on fixed nominal price, 420 on general equilibrium, 341 on government purchases, 425–427, 437 on gradualism, 472 history of, 17 on inflation, 430 IS–LM model and, 340–342, 422–424, 503, 506, 604–605 on labor demand curve, 421 on macroeconomic policy, 460, 476 on macroeconomic stabilization, 431–433, 437 on monetary neutrality, 350, 509, 565 on monetary nonneutrality, 437 on monetary policy, 422–425, 433, 513, 534 multiplier concept, 426, 445–448 on oil price shocks, 434, 437 on price rigidity, 417 on prices and wages, 17–19, 311, 350, 435 on price stickiness, 416–421, 437 rational expectations assumption, 396 real-wage rigidity, 409–415, 436 on recessions, 367, 430 to stabilization policy, 432 on supply shocks, 312, 433–434 on tax cuts, 427–428 theory of cycles, 430 on unemployment, 17, 17n, 19, 457, 463 KFA See Capital and financial account balance Korea, Korean War, 285, 581 Labor, 61 aggregate supply of labor, 77 demand for, 70–77, 96 income effect of a higher real wage, 79–80, 96 marginal product of labor (MPN), 66–68, 71–75, 96 marginal revenue product of labor (MRPN), 71, 96 substitution effect of a higher real wage, 79–80, 96 supply of, 77–83, 360 utilization rate of labor, 376 Labor contracts nonneutrality of money, 442–443 short-run aggregate supply (SRAS) curve with, 442 Labor demand, 70–77, 96 aggregate labor demand, 77, 96 capital stock and, 76 effective labor demand, 421 marginal product of labor (MPN) and, 66–68, 71–75, 96 real wage and, 72–73 Labor demand curve, 73–75, 96 defined, 74 factors that shift curve, 75–76 Keynesian approach, 421 Labor force, 87-88, 96, 465, 476 Labor hoarding, 377, 398 Labor market, 60–61, 98–99 adverse supply shock affecting, 83–84, 86 algebraic equations, 360–361 classical model of, 83–84, 96 data, 88 equilibrium in See Labor market equilibrium full-employment level of employment, 83, 317 full-employment output, 85, 96, 99, 317 monetary expansion and, 338 not-in-labor-force status, 87, 89 unemployment, 87–93 Labor market equilibrium, 83–85, 317–319, 349, 360–361 Labor productivity, 370, 430–431 Labor services, 376 Labor supply, 77–83, 78n aggregate labor supply, 82–83, 96 excess supply of labor and efficiency wage model, 413 and government purchases, 379–380, 379n real wages and, 78–81 tax reform and, 593–594 Labor supply curve, 81–83, 96 Labor utilization, cyclical behavior of, 377 Lagging variable, 290, 313 Lags, investment and, 132–133 Large open economy, 186–194 defined, 186 goods market equilibrium, 188, 199, 201 investment in, 201–202 national saving in, 201–202 real interest rate in, 199 world real interest rate, 187–188 Leading index, 302 Leading variable, 290, 313 Legal and human environment, 213 Lehman Brothers, 565 Leisure, 77–78, 77n, 96 Life-cycle model, 161–162 Linear functions, 617 Liquidity, 250, 260–261 Liquidity trap, 561 Living standards, government policies to raise, 235–237 LM curve, 323–330, 350–352, 437 aggregate demand shocks and, 429 deriving, 325 factors that shift, 327–330 general equilibrium, 331, 333 Keynesian approach, 422 money supply and, 327–329, 336–337, 348, 555 Loans, discount loans, 551–552, 552n Local fiscal policy, 584 “Long Boom” (U.S.), 286, 313 Long-run aggregate supply (LRAS) curve, 310–311, 350, 391, 437 AD–AS model, 308 IS–LM model, 346 money supply changes and, 393 Long-run economic growth, 2–4, 207–208 determinants of, 228–231 population growth and, 226, 228–229 productivity growth and, 226, 229–231 saving rate and, 226–227 Solow model, 218–232, 235, 237 Long-run equilibrium, 347, 366, 437 Long-run living standards, government policies to raise, 235–237 Long-run Phillips curve, 462 LRAS curve See Long-run aggregate supply (LRAS) curve LR curve, 556–557 Lucas critique, 461 M1 (monetary aggregate), 245–247, 262, 275, 540n, 553 M2 (monetary aggregate), 246, 264, 275, 540n, 553 Maastricht Treaty, 517 Macroeconomic analysis, 1, 11, 18–19 Macroeconomic forecasting, 10–11 Macroeconomic models, 335–336 AD–AS model, 308–313, 316–317 DSGE models, 378, 434–436 FRB/US model, 335 IS–LM model, 316–352 Keynesian business cycle theory, 428–431, 437 real business cycle theory (RBC theory), 369–370, 372, 374, 380, 397–398 Macroeconomic policy, 8–9 international effects of, 504–509 in open economy, 504–509 Phillips curve and, 460–461, 476 Macroeconomic research, 12–13, 19 Macroeconomics, 1–10 See also Classical approach; Keynesian approach microeconomics vs., 9–10 unemployment and inflation, 449–476 unified approach to, 18–19 Macroeconomic stabilization, 431–433, 437 Macroeconomists activities of, 10–14, 19 disagreement among, 14–15, 14n Macroeconomy, fiscal policy and, 588–595 Marginal cost, 420 Marginal product of capital (MPK), 65–67, 66, 96, 123, 125–128, 135 small open economy and, 185–186 as technological shock, 429n Marginal product of labor (MPN), 66–68, 350, 412 classical approach to, 412 defined, 67, 96 labor demand and, 66–68, 71–73, 96 labor demand curve, 73–75, 96 Marginal product of labor (MPN) curve, 412 Marginal propensity to consume (MPC), 109, 118n Marginal revenue product of labor (MRPN), 71, 96 Marginal tax rate, 591–593 Market-clearing real interest rate, 319–321, 349 Market value, GDP and, 26–27 Markup, 420 Maturity, 250–251 of bonds, 117 Maturity Extension Program, 562 MBSs See Mortgage-backed securities Measurement, economic, 22–23 Measuring Business Cycles (Burns and Mitchell), 271 Medicare payments, 32n Medium of exchange, 244 Menu costs, 418 Microeconomics, 9–10 Misperceptions theory, 399 monetary nonneutrality and, 389–396, 398 MMMFs See Money market mutual funds Monetarists, 534, 558n, 566, 576 Monetary aggregates, 245–246, 553–554 Monetary base, 536, 540–541, 544, 575 calculating, 549 components, 549 factors affecting, 550 Monetary contraction international effects of, 507–509 nominal exchange rate and, 509, 513 Monetary data, 246 Monetary expansion, and general equilibrium, 336–340 A Monetary History of the United States, 1867– 1960 (Friedman and Schwartz), 388, 542 Monetary neutrality in aggregate demand-aggregate supply (AD–AS) model, 340–341 classical approach on, 350, 398, 509, 565 general equilibrium, 341–342 Keynesian approach, 460, 509, 565 Monetary nonneutrality, 387–389, 398 Keynesian approach, 437 labor contracts and, 442–443 misperceptions theory and, 389–396 price stickiness and, 416, 437 short-run, 443 Monetary policy, 8, 11 central bank credibility, 568–570, 572–573, 576 classical approach to, 386–389, 534 currency unions, 516–518 defined, 534 Federal funds rate targeting, 553–557, 576 Federal Reserve System and, 534–576 fixed exchange rate and, 512–515, 522 in Great Recession, 560–564, 576 inflation targeting, 574–575, 575n intermediate targets, 553, 576 international effects of, 507 Keynesian approach, 422–425, 433, 513, 534 lags in effects of, 557–558 misperceptions theory, 392–396 rational expectations, 395–397 rules-based approach vs discretion, 565–572, 576 targets, 553–557 Taylor rule, 570–572, 576 uncertainty and, 558–560, 576 Money, 242–243, 251–252, 275 classical approach to, 386–389 demand for money, 256–257 high-powered money, 536, 540 measuring, 245 in POW camp, 243 quantity theory of, 262–265, 263, 263n as store of value, 244–245 as unit of account, 244 Money demand See Demand for money Money demand function, 258–259, 276 Money growth business cycles and, 299–300 inflation and, 268–274, 340 Money market mutual funds (MMMFs), 245 Money multiplier, 538–541, 540n, 575–576 defined, 540 during financial crisis of 2008, 543–546, 576 during Great Depression, 542–543, 576 factors affecting, 550 Subject Index Money supply, 534, 576 anticipated changes in, 393–394 business cycles and, 299–300 changes in, 336–340, 350, 387, 392–396 defined, 514, 575–576 determination of, 535–546 factors affecting, 550 Federal Reserve System and, 534–576 forecasts of, 395 government budget deficit and, 606–607 groups affecting, 535 IS–LM model, 336–340, 350, 387 LM curve, 327–329, 348, 555 money multiplier, 538–541, 540n, 542–546, 575–576 in open economy, 522 open-market operations, 248, 537–538, 550, 553, 576 shifts in, 437 unanticipated changes in, 392–393, 398 under fixed exchange rate, 512–515 Money supply-money demand diagram, 324 Monopolistic competition, 416–418, 417, 420n Mortgage-backed securities (MBSs), 255, 564 Mortgage reset, 254 Mortgages, 254–255, 564–565 MPC See Marginal propensity to consume MPK See Marginal product of capital MPN See Marginal product of labor MRPN See Marginal revenue product of labor Multiple expansion of loans and deposits, 538 Multiplier concept, 426, 445–448 government purchases multiplier, 455, 605 money multiplier, 538–546, 540n, 550, 575–576 National Accounts, 24 National Account Statistics, 24 National Bureau of Economic Research (NBER), 12, 281–282, 303 National debt, 511 National income, 33 National income accounts, 22–23, 53 balance of payments accounts, 169–179 natural resources and environment and, 29 National Income an Product Accounts (NIPA), 24 National saving, 37–39, 38, 41, 54–55 and government budget deficit, 195–196, 600 real interest rate increase and, 114 in large open economy, 201–202 in small open economy, 200–201 Solow model and, 235 National wealth, 41–42, 41n, 54 Natural rate of unemployment, 93, 456–457, 463–466, 476 Natural resources, national income accounts and, 29 NBER See National Bureau of Economic Research Net exports (NX), 32–33, 169–170, 199 determinants of, 497 J curve, 489–490 monetary contraction, 507 real exchange rate and, 489–492, 521 United States, 491–492 Net exports (NX) curve, in open economy, 498–501 Net factor payments from abroad (NFP), 30, 171–172, 171n, 180 Net foreign assets, 41 balance of payments accounts and, 176–177 of United States (end of 2011), 178 Net government income, 36, 54 643 Netherlands, 582 Net income from abroad, 171–172 Net interest, 34 Net interest payments, 581–582, 585 Net investment, 131 Net unilateral transfers, 172 New Deal (U.S.), 285 New Deal legislation, 542 Newly produced goods and services, 27 New Zealand, 573, 573n NFP See Net factor payments from abroad NIPA See National Income and Product Accounts Not-in-labor-force status, 87, 89 Nominal appreciation, 485 Nominal bonds, 272–273 Nominal depreciation, 485 Nominal exchange rate, 482–484, 521 determination of, 493–494 flexible-exchange-rate system, 522 monetary contraction and, 509, 513 purchasing power parity (PPP), 486–488, 521 supply and demand, 493 Nominal Federal funds rate, 564 Nominal government budget deficit, 607 Nominal gross domestic product (nominal GDP), 44, 54, 264 Nominal interest rate, 52, 54, 259 cyclical nature of, 300–301 and demand for money, 260 and expected inflation, 270–271 as Fed target, 555n LM curve and, 327 Nominal money demand, 275 Nominal money growth, cyclical nature of, 300 Nominal money supply, 264, 268, 324, 348–349 LM curve and, 327 monetary expansion and, 336–340 Nominal shocks, 369 Nominal variables, 42 Nominal wage, 72 Nominal-wage rigidity, 443 Nonlinear functions, 617 Non-lump-sum taxes, 604 Nonmonetary assets, prices of and interest rates, 324 Nonneutrality of money See monetary nonneutrality Normative analysis, 15, 19 Norway, NX See Net exports OECD See Organization for Economic Cooperation and Development Official reserve assets, 173 Official settlements balance, 173-174 Oil prices effect of rise in, 430 real exchange rate and, 490 U.S business cycles and, 286 U.S productivity slowdown and, 214 Oil price shocks, 374 classical approach and, 382 IS–LM model, 334 Keynesian model, 434, 437 output, employment, and real wages during, 85–86 Okun’s law, 94–95, 97, 99, 104, 463 Okun’s law coefficient, 94n 100% reserve banking, 536 Open economy, 7, 168 See also Large open economy; Small open economy fiscal expansion and, 504–506, 522 flexible exchange rates, 522 644 Subject Index Open economy (continued) goods market equilibrium in, 180–181, 199–202, 499 international trade and, 504–509 IS curve, 498–503 IS–LM model in, 497–503, 522, 528–533 macroeconomic policy in, 504–509 monetary contraction and, 507–509 money supply in, 522 Open-market operations, 248, 537–538, 550, 553, 576 Open-market purchase, 248, 538, 550 Open-market sale, 248 Operation Twist, 562 Organization for Economic Cooperation and Development (OECD) National Accounts, 24 tax rates on capital for OECD countries, 128–129 Output (economic) See Economic output Overvalued currency, 510–512 Overvalued exchange rate, 510, 522 Participation rate, 88 Payment technologies, and demand for money, 260–261 PCE index See Personal consumption expenditures (PCE) price index Peak, 281, 312–313 Perfect competition, 417 Permanent income theory, 160–161 Persistence, 283, 312 Personal consumption expenditures (PCE) price index, 49–51 Personal taxes, 583–584 Per-worker production function, 220–221, 220n, 238 Petroleum net exports, in U.S., 193 Phillips curve, 449, 450–452, 455, 476 expectations-augmented Phillips curve, 452–455, 476 long-run Phillips curve, 462 macroeconomic policy and, 460–461, 476 natural rate of unemployment, 456–457 shifting Phillips curve, 455–460 supply shocks and, 457–458 Pollution control, national income accounts and, 29 Population growth, long-run economic growth and, 226, 228–229 Portfolio, 249 Portfolio allocation, theory of, 261 Portfolio allocation decision, 249, 275 Positive analysis, 15, 19 Potential output, 85, 96 PPP See Purchasing power parity Present value of lifetime resources (PVLR), 154, 160, 162–163 Present value, 154–155 President’s Council of Economic Advisers, 24 Price adjustment and general equilibrium, 336–342 self-correcting economy, 339–341 Price controls, inflation and, 472 Price indexes, 44, 54 Price level in AD–AS model, 352 and demand for money, 257, 260 general equilibrium and, 339–340 Price rigidity, 417 Prices, 242 classical approach on, 16, 18–19, 350, 416, 435 fixed nominal price, 420–421 Keynesian approach on, 17–19, 350, 435 LM curve and, 327 menu costs, 418 monetary policy and, 558 of nonmonetary asset and interest rate(s), 324 of stocks, 252 Price setter, 417 Price stickiness, 416–421 empirical evidence on, 418–420 monetary nonneutrality and, 416, 437 Price taker, 417 Primary credit discount loan, 551 Primary current deficit, 586–587 Primary government budget deficit, 586 Prime Dealer Credit Facility, 565 Prime rate, 116–117, 301 Private disposable income, 35, 54–55 Private saving, 37–40, 55 Private sector, disposable income, 35–36, 55 Procyclical variable, 290, 313 Product approach, 23–28, 53–54 Production cyclical nature of, 291–292 taxes on, 34 Production function, 61–69, 97–99, 375–376, 421 Cobb-Douglas production function, 62n, 210n equation for, 61–62, 95, 208 in per-worker terms, 220–221, 220n, 238 supply shocks and, 430 in U.S economy, 62–64 Productivity, 60 growth accounting and productivity slowdown, 211–212 improvement in and living standards, 229 infrastructure and, 236 labor productivity, 370 total factor productivity, 62 unemployment and, 465 Productivity growth government policies to affect, 235–236 growth accounting, 210–212, 211n, 237 long-run economic growth and, 226, 229–231 in the U.S., 3, 63–64, 212–218 Productivity index, in the U.S., 63 Productivity shocks, 68, 369, 372–374 Propagation mechanism, 395–396 Proprietors’ income, 33 Public sector macroeconomic analysis in, 11 macroeconomic research in, 12 Purchasing power parity (PPP), 486–488, 521 PVLR See Present value of lifetime resources q theory of investment, 133 Quality adjustment bias, 47 Quantitative easing, 562 Quantity theory of money, 262–265, 263, 263n Rate of inflation See Inflation rate Rational expectations, 395–397 RBC theory See Real business cycle theory Reagan tax cut, 583 Real appreciation, 486 Real balances, 259 Real business cycle theory (RBC theory), 369–370, 372, 374, 380, 397–398 Real exchange rate, 484–486 net exports and, 489–492, 521 purchasing power parity (PPP), 486–488, 521 real appreciation, 486 Real gross domestic product (real GDP), 2n, 3, 42–44, 54 chain-weighted, 45–46 GDP deflator, 44, 46 monetary policy and, 558 Real gross national product (real GNP), 2n, Real income, and demand for money, 257–258, 260 Real interest rate, 52, 54, 136n budget line and, 164 changes in, effect on consumption and saving, 113–115, 143–144 changes in, effects of, 496–497, 522 cyclical nature of, 301 and demand for money, 258, 260 domestic real interest rate, 496–497 effects of, 317n exchange rate and net exports and, 495–497 expected after-tax real interest rate, 115, 146 as Fed target, 555 foreign real interest rate, 496n, 497, 503 goods market equilibrium and, 319 income effect of the real interest rate on saving, 114, 166 in large open economy, 199, 202 LM curve and, 328 market-clearing, 319–321, 349 oil price shocks and, 334 in small open economy, 199 substitution effect and, 113–114, 144, 165–167 Real money demand, 324, 329–330 Real money supply, 327–329 Real output, exchange rate and net exports and, 495–497 Real seignorage revenue, 608–611 Real shocks, 369 Real variable, 44 Real wage, business cycle and, 299 Real-wage rigidity, 409–415, 436 Real wages, 72–73, 96 aggregate demand shocks and, 444 aggregate labor supply, 82–83, 96 during oil price shocks, 85–86 expected future real wage, 79 income effect of a higher real wage, 79–80, 96 labor supply and, 78–81 labor supply curve, 81–83, 96 substitution effect of a higher real wage, 79–80, 96 supply shocks and, 444 Recessions, 281, 282n, 313 aggregate demand shocks, 429 classical approach, 367, 381 defined, forecasting, 306 job creation and destruction, 383 jobless recoveries, 384–386 jobs lost and gained, 298 Keynesian approach, 367, 430 productivity shocks and, 372–374 sources of, 374 unemployment and, U.S., 285–286, 313 Relative purchasing power parity, 488 Rental income, 33, 33n Research and development, government policies to encourage, 236–237 Reserve assets, 511 Reserve-deposit ratio (RES/DEP), 536, 539–541, 539n, 545 Residential investment, 32, 133 Resource depletion, national income accounts and, 29 Revaluation, 486 Reverse causation, 387–388, 398 Ricardian equivalence proposition, 119–120, 119n, 144, 162–163, 362n, 427n, 600–602, 611–612 departures from, 603–604 Risk assets, 250, 256n and demand for money, 260–261 Risk premium, 250 Rules, 566, 576 Rules-based approach to monetary policy, 566–570, 576 Sacrifice ratio, 473 Saving, 36, 54, 105–122, 143 aggregate saving, 36–38 bequests and, 161 decision of an individual, 106–107 desired national saving, 107, 116, 118–120, 138–139, 143, 146, 180 expected after-tax real interest rate, 115, 146 fiscal policy and, 115–116 formal model of, 152–167 government purchases and, 118 government saving, 37–39, 54–55 income change affecting, 108–110, 143 income effect of the real interest rate on saving, 114, 166 life-cycle model, 161–162 measure of, 41 national saving, 37–39, 38, 41, 54–55 private saving, 37–40, 55 real interest rate changes affecting, 113–115, 143, 164–167 real return to saving, 115 Ricardian equivalence proposition, 119–120, 119n, 144, 162–163, 362n, 427n, 600–602, 611–612 saving-investment diagram, 136–140, 144–145, 200–201 stock and flow and, 41 substitution effect of the real interest on saving, 113–114, 144, 165–167 taxes and, 115, 119–122 wealth and, 40–42 wealth changes affecting, 113 Saving curve, 200 Saving-investment diagram in closed economy, 136–140, 144–145 in open economy, 181–184, 200–201 Saving rate endogenous growth theory on, 235n government policies to affect, 235 long-run economic growth and, 226–227 in the U.S., 38–39, 42, 235 Seasonal cycle, and business cycles, 307 Secondary credit discount loan, 551 Securities, open-market operations, 248, 537–538, 550, 553, 576 Seignorage, 606–612 Service industries, foreign workers in, 190 Services final services, 27–28 government purchases, 32–33 intermediate, 27–28 net exports (NX), 32–33, 169–170 Shifts, of a curve, 620–621 Shirking model, 410 Shocks See also Supply shock adverse productivity shock, 369–370 adverse supply shock, 69, 83–84, 86 aggregate demand shocks, 310–311, 371, 428–429, 437 aggregate supply shocks, 311–312 business cycles, 313 monetary policy and, 560 nominal shocks, 369 oil price shocks, 85–86, 334, 374 productivity shocks, 68, 369, 372–374 real shocks, 369 Subject Index in small open economy, 184–186 technology shocks, 214, 217–218, 374 Shoe leather costs, 468 Short-run aggregate supply (SRAS) curve, 309, 350, 352–353, 391 AD–AS model, 308–309, 365, 437 IS–LM model, 345–346 with labor contracts, 442 money supply changes and, 392 Short-run equilibrium, 338–339, 347, 352–353, 366, 400, 406–407, 437 Short-term interest rates, 553–554 Slopes of functions, 618–619 Small open economy, 181–186 defined, 181 economic shocks and, 184–186 goods market equilibrium in, 181–184, 199–200 government budget deficit and current account in, 194–195 investment in, 200–201 national saving in, 200–201 real interest rate in, 199 saving and investment in, 181–186 Social Security, 48, 212, 597–599 Social Security taxes, 584 Solow model of economic growth, 218–232, 235, 237 endogenous growth theory and, 233 setup of, 219–220 Solow residual, 374–376, 397 Soviet Union, 11 Spain, 518, 573–574, 582 Speculative attack, 511 Speculative run, 511–512, 522 Spending consumption and saving, 106–122 cyclical nature of, 293 investment and, 122–135 investment spending, 105, 122 national income accounting, 23 Spot rate, 483 SRAS curve See Short-run aggregate supply (SRAS) curve Stabilization policy, 432 Stagflation, 17, 433, 437 State fiscal policy, 584 State government, 606 Statistical discrepancy, 34–35, 176 Steady state, 220–226, 238 Steady-state capital-labor ratio, 222–226, 228, 230 Steady-state consumption per worker, 238 Stimulus package, 604 Stock market investment and, 133–135 U.S 1987–2012, 140–143 Stock prices, cyclical nature of, 300–301 Stocks, 252 Stock variables, 40–41 Store of value, 244–245 Structural unemployment, 92–93, 96 Subprime mortgages, 254 Subsidies, 581 Subsidies less surpluses of government enterprises, 581 Substitution bias, 48 Substitution effect of a higher real wage, 79–80, 96 Substitution effect of the real interest on saving, 113–114, 144, 165–167 Supply-and-demand analysis, exchange rate, 493–497 Supply curve, exchange rate and, 494n Supply of labor, 77–83, 360 645 Supply shocks, 69–70, 75–76, 83 adverse supply shock, 69, 83–84, 86, 185, 332–334, 350 aggregate supply shocks, 311–312 defined, 69, 95 Keynesian approach, 312, 433–434 oil price shocks, 85–86, 334 Phillips curve and, 457–458 production function and, 430 real wages and, 444 stagflation and, 437 Supply-side economics, 593 Survey of Current Business, 24, 171 Sweden, 208, 574, 582 Swiss franc, 484 Switzerland, 573 Targets, 553–557 TARP See Troubled Asset Relief Program Tax(es), 583–586 average tax rate, 591–593, 611 composition of, 119, 585–586 corporate taxes, 584 depreciation allowances, 128 desired capital stock and, 127–128, 146 effective tax rate, 128–129 goods market equilibrium and, 362 income tax, 583, 589 investment, effect of on, 129–130 investment tax credit, 128 marginal tax rate, 591–593 non-lump-sum taxes, 604 personal taxes, 583–584 on production and imports, 34 real return to saving and, 115 savings and, 119–122 tax rate smoothing, 594 Tax-adjusted user cost of capital, 128 Tax changes, 378n, 588 Tax credits, investment and, 129–130 Tax cuts aggregate demand and, 588, 606 consumption and saving and, 119–121, 144 government budget deficit resulting from, 196 Keynesian approach, 427–428 Tax-induced distortions, 592, 611 Tax rate smoothing, 594 Tax rebates, consumer response to, 120–122 Tax reform, 130, 593 Tax Reform Act of 1986, 593–594 Taylor rule, 570–572, 576 Technology shocks, 214, 217–218, 374 Temporary adverse supply shock, 332–334, 350 Term Auction Facility, 565 Term premium, 251 Term Securities Lending Facility, 565 Terms of trade, 489 Theory of cycles, 430 Theory of portfolio allocation, 261 Time to maturity, 250–251 TIPS See Treasury Inflation-Protected Securities Tobin’s q, 133–135 Total budget deficit, 586 Total factor productivity, 62, 375 Trade balance, 171 Trade deficits, 8–9 Trade imbalances, 7, Trade surpluses, Transfer payments (TR), 580–582, 584 Transfers, 32 Treasury bonds, 548 Treasury Inflation-Protected Securities (TIPS), 272–274 Treasury securities, 548 Treaty on European Union, 517 646 Subject Index Troubled Asset Relief Program (TARP), 565 Trough, 281–282, 312–313, 384–386 Turkey, 30, 270 Turning point, 281 Turnover costs, 410 “Twin deficits”, 9, 194, 196–199 Unanticipated inflation, 454, 468, 470, 476 cyclical unemployment and, 455, 455n, 459, 476 Uncertainty, and monetary policy, 558–560, 576 Underground economy, 27, 27n Undervalued currency, 512–513 Undervalued exchange rate, 512–513 Unemployment, 5, 87–93, 96, 462–466 See also Employment causes of, 1, 92–93 changes in employment status, 89–91 classical approach, 382–386, 463 costs of, 463 cyclical nature of, 292, 294–298 cyclical unemployment, 93, 452n discouraged workers, 89–90 duration of, 90–92 in efficiency wage model, 412–414 expectations-augmented Phillips curve, 452–455, 476 frictional unemployment, 92, 96 inflation and, 449–476 Keynesian approach, 17, 17n, 19, 457, 463 measure of, measuring, 87–88 natural rate of unemployment, 93, 456–457, 463–466, 476 Okun’s law, 94–95, 99, 463 Phillips curve, 449–452, 450, 476 productivity and, 465 shifting Phillips curve, 455–460 structural unemployment, 92–93, 96 unemployment spell, 90 in the United States, 1, 5, 5n, 91–93, 283, 285–286 Unemployment duration, 90–92 Unemployment insurance, 589 Unemployment rate, 88, 96, 476 defined, 5, 88 long-term behavior of, 463–466 natural rate of unemployment, 93, 456–457, 463–466, 476 in the United States, 5, 5n, 464 Unemployment spell, 90 Unilateral transfers, 39n United Kingdom, 208, 302, 573–574, 582 United Nations, National Account Statistics, 24 United States See also Federal Reserve Bank; Federal Reserve Board; Federal Reserve System; Government budget; Government budget deficit; Government debt; Government purchases balance of payments accounts, 169–171 bank runs, 541–542 budget surpluses in the 1990s, Bureau of Economic Analysis (BEA), 24, 45, 46, 171 Bureau of Labor Statistics, 46, 48, 87 business cycles in, 4, 283–289, 313 Congressional Budget Office, 11 consumer price index (CPI) in, 6, 6n consumption, cyclical behavior of, 293 Council of Economic Advisers, 11 current account balance (CA), 40, 191–193 current account deficit, 191–198 deflation in, disinflation in, 476 economic data collection in, 14, 171 economic growth in, 1–4, 208, 231–232, 237 economic history of, modern, economic output of, economic volatility, 313 employment cycles in, 294–295 employment status of adult population, 87–88 expectations augmented Phillips curve, 459 exports and imports, 7–8, 7n Federal funds rate, 564 financial crisis of 2008, 143, 518, 543–546, 553n, 564–565, 576 fiscal policy of, 8–9, 9n, 194–198 GDP in, 30 globalization, impact on U.S economy, 189–191 GNP in, 30 government expenditures in, 8–9, 582 government purchases in, 32–33 Great Depression, 4–5, 9, 17, 283–285, 313, 370–371, 542–543, 576 Great Moderation, 288–289, 313 Great Recession, 286, 313, 560–564, 576 gross and net investment, 131 household assets, 253 housing crisis (2007), 252–255, 565 industrial production index, 291–292, 302 inflation and nominal interest rate, 272 inflation and unemployment in, 450–451 inflation rate in, 48–49, 450–451, 564 inflation targeting, 574 as international debtor, 177–179, 191–193 investment tax credit, 128 labor force in, 465 labor market data, 88 “Long Boom”, 286, 313 monetary aggregates, 245–246 monetary base, 540–541, 544 monetary control in, 547–553 money multiplier, 540–546, 575–576 money supply, 247–248, 541, 576 national income accounts in, 24 net exports and value of the dollar, 491 New Deal, 285 nominal and real interest rates, 52 Okun’s law, 95 output per worker, petroleum net exports as percent of GDP, 193 Phillips curve, 451, 459 price controls, 472 production function of, 62–64 productivity growth in, 3, 63–64, 212–218 rate of inflation in, real exchange rate, 492 saving rate in, 38–39, 42, 235 Social Security, 48, 212, 597–599 stimulus package, 604–605 stock market 1987–2012, 140–143 tax reform in the 1980s, 593–594 total government outlays, 581 Treasury securities, 117, 179 Troubled Asset Relief Program (TARP), 565 “twin deficits”, 9, 194, 196–199 unemployment duration in, 91–92 unemployment in, 1, 5, 5n, 91–93, 283, 285–286, 294–295, 450–451 unemployment rates in, 5, 5n, 464 velocity of M1 and M2, 263–264 World War II, 283–285 United States dollar demand for by foreigners, 264 exchange rate, 482–484 export quality and value of, 495 foreign holdings of, 248 net exports and, 491–492 supply and demand of, 493 Unit of account, 244 Unsold goods, national income accounts on, 25n User cost of capital, 123-124, 146 Uses-of-saving identity, 40, 54–55, 180 Utility, 78, 96, 155 Utilization rate of capital, 376 Utilization rate of labor, 376 Value added, 23 Vault cash, 549 Velocity, 262, 275–276 Vietnam War, 285 “Virtual currency”, euro as, 517 Wage and price controls, inflation, 472, 474 Wages classical approach on, 16, 18–19, 350, 416, 435 efficiency wage, 412, 436 efficiency wage model, 410–415 Keynesian approach on, 17–19, 350, 435 nominal wage, 72 real-wage rigidity, 409–415 real wages, 72–73, 78–83, 96 shirking model, 410 Wealth, 36 changes in, effect on consumption and saving, 113, 160 and demand for money, 260 measure of, 41, 113 national wealth, 41–42, 41n, 54 saving and, 40–42 stock and flow and, 41 The Wealth of Nations (Smith), 16 World Economic Outlook, 24 World real interest rate, 181, 186–187 World War II, 283–285, 581, 583, 587, 588n, 596 Yield (of bond), 324 Yield curve (of bond), 117 Zero-coupon bond, 324n Zero lower bound, 561, 576 Zimbabwe, 470 Key Macroeconomic Data Note: Data from 1930 to 1985 shown for every fifth year; data from 1985 to 2011 shown for every year Year Nominal GDPa (PY) Real GDPb (Y) Consumptionb (C) Investmentb (I) Government Purchasesb (G) Net Exportsb (NX) 1930 1935 1940 1945 91.2 73.3 101.4 223.0 892.0 864.2 1165.9 2010.7 696.8 683.0 852.7 1000.9 67.6 63.1 119.7 74.4 161.4 182.2 245.3 1402.2 - 11.4 - 19.0 - 2.3 - 30.3 1950 1955 1960 1965 293.7 414.7 526.4 719.1 2004.2 2498.2 2828.5 3607.0 1282.7 1543.8 1783.6 2240.8 252.3 284.0 295.4 435.7 492.4 779.3 871.0 1048.7 - 11.0 - 17.2 - 16.1 - 23.5 1970 1975 1980 1985 1038.3 1637.7 2788.1 4217.5 4266.3 4875.4 5834.0 6843.4 2738.9 3212.6 3764.5 4538.3 473.4 502.2 715.2 939.8 1233.7 1251.6 1358.8 1599.0 - 61.1 - 7.5 6.9 - 163.8 1986 1987 1988 1989 4460.1 4736.4 5100.4 5482.1 7080.5 7307.0 7607.4 7879.2 4722.4 4868.0 5064.3 5207.5 933.5 962.2 984.9 1024.4 1696.2 1737.1 1758.9 1806.8 - 180.9 - 173.0 - 128.4 - 99.1 1990 1991 1992 1993 1994 5800.5 5992.1 6342.3 6667.4 7085.2 8027.1 8008.3 8280.0 8516.2 8863.1 5313.7 5321.7 5503.2 5698.6 5916.2 989.9 909.4 983.1 1070.9 1216.4 1864.0 1884.4 1893.2 1878.2 1878.0 - 72.9 - 32.1 - 35.2 - 74.9 - 106.5 1995 1996 1997 1998 1999 7414.7 7838.5 8332.4 8793.5 9353.5 9086.0 9425.8 9845.9 10274.7 10770.7 6076.2 6288.3 6520.4 6862.3 7237.6 1254.3 1365.3 1535.2 1688.9 1837.6 1888.9 1907.9 1943.8 1985.0 2056.1 - 98.8 - 110.7 - 139.8 - 252.5 - 356.5 2000 2001 2002 2003 2004 9951.5 10286.2 10642.3 11142.2 11853.3 11216.4 11337.5 11543.1 11836.4 12246.9 7604.6 7810.3 8018.3 8244.5 8515.8 1963.1 1825.2 1800.4 1870.1 2058.2 2097.8 2178.3 2279.6 2330.5 2362.0 - 451.3 - 471.8 - 548.5 - 603.7 - 687.9 2005 2006 2007 2008 2009 12623.0 13377.2 14028.7 14291.5 13973.7 12623.0 12958.5 13206.4 13161.9 12757.9 8803.5 9054.5 9262.9 9211.7 9032.6 2172.3 2231.8 2159.5 1939.8 1458.1 2369.9 2402.1 2434.2 2497.4 2589.4 - 722.7 - 729.4 - 648.8 - 494.7 - 355.1 2010 2011 14498.9 15075.7 13063.0 13299.1 9196.2 9428.8 1658.0 1744.0 2605.8 2523.9 - 419.6 - 408.0 a Billions of dollars per year bBillions of (chained) 2005 dollars per year Key Macroeconomic Data Note: Data from 1930 to 1985 shown for every fifth year; data from 1985 to 2011 shown for every year Inflation Rated (P) Unemployment Rate (%) (u) 1930 1935 1940 1945 10.23 8.48 8.70 11.09 - 3.7 2.0 1.2 2.6 5.9 17.6 14.0 2.2 25.8 25.9 39.7 99.2 - 0.46 - 4.30 - 4.94 - 15.94 0.17 0.04 0.38 1950 1955 1960 1965 14.66 16.60 18.61 19.94 1.1 1.7 1.4 1.8 5.2 4.4 5.5 4.5 110.8 131.1 140.3 163.5 6.10 3.95 0.30 - 1.41 1.20 1.73 2.88 3.95 1970 1975 1980 1985 24.34 33.59 47.79 61.63 5.3 9.5 9.1 3.0 5.0 8.5 7.2 7.2 209.1 281.4 395.7 587.0 - 2.84 - 53.24 - 73.83 - 212.31 6.39 5.78 11.43 7.48 1986 1987 1988 1989 62.99 64.82 67.05 69.58 2.2 2.9 3.4 3.8 7.0 6.2 5.5 5.3 666.4 743.5 774.8 782.2 - 221.23 - 149.73 - 155.18 - 152.64 5.98 5.78 6.67 8.11 1990 1991 1992 1993 1994 72.26 74.82 76.60 78.29 79.94 3.9 3.5 2.4 2.2 2.1 5.6 6.9 7.5 6.9 6.1 810.6 859.0 965.9 1078.5 1145.2 - 221.04 - 269.24 - 290.32 - 255.05 - 203.19 7.49 5.38 3.43 3.00 4.25 1995 1996 1997 1998 1999 81.61 83.16 84.63 85.58 86.84 2.1 1.9 1.8 1.1 1.5 5.6 5.4 4.9 4.5 4.2 1143.1 1106.5 1070.1 1080.6 1102.3 - 163.95 - 107.43 - 21.88 69.27 125.61 5.49 5.01 5.06 4.78 4.64 2000 2001 2002 2003 2004 88.72 90.73 92.20 94.14 96.79 2.2 2.3 1.6 2.1 2.8 4.0 4.7 5.8 6.0 5.5 1103.6 1140.3 1196.7 1273.8 1344.3 236.24 128.24 - 157.76 - 377.59 - 412.73 5.82 3.39 1.60 1.01 1.37 2005 2006 2007 2008 2009 100.00 103.23 106.23 108.58 109.53 3.3 3.2 2.9 2.2 0.9 5.1 4.6 4.6 5.8 9.3 1371.5 1374.5 1372.4 1434.7 1637.3 - 318.35 - 248.18 - 160.70 - 458.55 - 1412.69 3.15 4.73 4.35 1.37 0.15 2010 2011 110.99 113.36 1.3 2.1 9.6 9.0 1741.9 2009.5 - 1293.49 - 1299.60 0.14 0.05 Year Money Supplye (M) Federal Government Budget Surplusa Price Levelc (P) Interest Ratef (i) c GDP deflator, base year 2005 = 100 dPercent per year eM1 measure, billions of dollars f3-month Treasury bills, secondary market, percent per year ... Jan 19 12 24 21 33 19 12 June 1899 Sept 19 02 May 1907 Jan 1910 Jan 1913 18 23 13 24 23 Dec 1914 Mar 1919 July 1 921 July 1 924 Nov 1 927 44 (WWI) 10 22 27 21 Aug 1918 Jan 1 920 May 1 923 Oct... 1.1.5, at www.bea.gov 1947 19 52 1957 19 62 1967 19 72 1977 19 82 1987 19 92 1997 20 02 2007 20 12 Year 11 Summary table 10 shows that residential investment leads the cycle 29 4 Part 3 | Business Cycles... June 20 12 (expansion) October 20 08 (recession) 1 42. 3 million 1.5% 2. 1 million 12. 7 million 17.9% 2. 3 million –0 .2 million 145.1 million 1.6% 2. 3 million 9.5 million 22 .6%