Ebook Macroeconomics: Part 2

(BQ) Part 2 book Macroeconomics has contents: Business cycles, monetary policy in the short run, fiscal policy in the short run, aggregate demand, aggregate supply, and monetary policy, fiscal policy and the government budget in the long run, consumption and investment, the balance of payments, exchange rates, and macroeconomic policy.

Find more at www.downloadslide.com CHAPTER Business Cycles LEARNING OBJECTIVES After studying this chapter, you should be able to: 8.1 Explain the difference between the short run and the long run in macroeconomics (pages 272–277) 8.2 Understand what happens during a business cycle (pages 278–289) 8.3 Explain how economists think about business cycles (pages 290–293) 8A Derive the formula for the expenditure multiplier (page 301) FORD RIDES THE BUSINESS CYCLE ROLLERCOASTER The graph on the next page shows sales of Ford cars and trucks in the United States from the early 1960s through 2010 A firm’s sales can be affected by many factors, such as the prices it charges relative to its competitors, how innovative its products seem to consumers, and the effectiveness of its advertising campaigns But for firms like Ford that sell consumer durables that buyers may have to borrow money to purchase, sales are heavily affected by the business cycle The ups and downs in Ford’s sales shown in the graph mirror the business cycle For instance, the two most severe business cycle recessions since World War II occurred during 1981–1982 and 2007–2009 During each period, Ford’s sales declined by more than 40% Although rising gasoline prices also hurt Ford’s sales during these periods, the largest effect was from the business cycle The causes and consequences of the business cycle were not always a significant part of the study of economics Modern macroeconomics began during the 1930s, as economists and policymakers struggled to understand why the Great Depression was so severe During just the first two years of the Great Depression, from 1929 to 1931, Continued on next page Key Issue and Question At the end of Chapter 1, we noted key issues and questions that serve as a framework for the book Here are the key issue and question for this chapter: Issue: Economies around the world experience a business cycle Question: Why does the business cycle occur? Answered on page 293 271 Find more at www.downloadslide.com Quantity of Ford cars and trucks sold in the United States (millions) 272 CHAPTER • Business Cycles 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Note: Shaded areas represent recessions Ford’s sales declined by almost two-thirds Ford was hardly alone During the same two years, General Motors’ sales fell by nearly one-half, and U.S Steel’s sales declined by nearly three-quarters From the business cycle peak in 1929 to the business cycle trough in 1933, real GDP declined by 27%, real investment spending declined by an astonishing 81%, and the S&P 500 stock price index declined by 85%—the largest decline in U.S history Unemployment soared from less than 3% in 1929 to more than 20% in 1933, and it remained above 11% as late as 1939 As economists studied the events of the Great Depression, they came to understand more clearly that although in the long run real GDP experiences an upward trend, in the short run real GDP fluctuates around this trend These short-run fluctuations in real GDP consisting of alternating periods of expansion and recession are what economists mean by the business cycle Research has shown that the U.S economy has experienced business cycles dating back to at least the early nineteenth century The business cycle is not uniform: Periods of expansion are not all the same length, nor are periods of recession, but every period of expansion in U.S history has been followed by a period of recession, and every period of recession has been followed by a period of expansion Economists have developed short-run macroeconomic models to analyze the business cycle British economist John Maynard Keynes developed a particularly influential model in 1936 in direct response to the Great Depression In this chapter, we begin our discussion of the macroeconomic short run AN INSIDE LOOK on page 294 analyzes why auto sales rose in the United States in 2010 for the first time since the recession that began in 2007 Sources: Ford Motor Company, Annual Report, various years; U.S Bureau of Economic Analysis; David R Weir, “A Century of U.S Unemployment, 1890–1990,” in Roger L Ransom, Richard Sutch, and Susan B Carter (eds.), Research in Economic History, Vol 14, Westport, CT: JAI Press, 1992, Table D3, pp 341–343; and Robert J Shiller, Irrational Exuberance, Princeton, NJ: Princeton University Press, 2005, as updated at www.econ.yale.edu/~shiller/data.htm In Chapters and 5, we developed a model of long-run economic growth As we have seen, the analysis of long-run economic growth is a key part of modern macroeconomics In this chapter and the four that follow, we shift our focus from the long run to the short run We begin our analysis in this chapter by identifying the ways in which the short run differs from the long run in macroeconomics 8.1 Learning Objective Explain the difference between the short run and the long run in macroeconomics The Short Run and the Long Run in Macroeconomics In microeconomic analysis, economists rely heavily on the model of demand and supply Economists usually assume that the markets they are analyzing are in equilibrium: For example, they assume that the quantity of apples demanded equals the quantity of apples supplied Put another way, economists typically assume that markets clear because prices rise to eliminate shortages and fall to eliminate surpluses We know that it is not literally true that all markets for goods are in equilibrium all the time If you can’t find a popular toy during the holidays or can’t get a reservation at a favorite restaurant on a Saturday night or are waiting in line to buy Apple’s latest electronic gadget, you know that prices not adjust continually to keep all markets cleared all the time Still, these examples of nonmarket clearing, or disequilibrium, are exceptions to typical market behavior, and assuming that markets are in equilibrium does not distort in any significant way our usual microeconomic analysis Find more at www.downloadslide.com The Short Run and the Long Run in Macroeconomics 273 We made the same assumption of market clearing in analyzing long-run economic growth in Chapters and 5, when we ignored the fact that unemployment sometimes exists in labor markets and that the level of real GDP does not always equal potential GDP Recall that potential GDP is the level of real GDP attained when firms are producing at capacity and labor is fully employed We could safely ignore unemployment and the possibility that firms may produce below capacity because these are not factors that affect the long-run growth rate of an economy In this chapter, though, we are shifting our focus to the short run In particular, we want to begin the process of explaining the business cycle, or the alternating periods of expansion and recession that the U.S economy has experienced for more than 200 years Two key facts about the business cycle are: Unemployment rises—and employment falls—during a recession, and unemployment falls—and employment rises—during an expansion Real GDP declines during a recession, and real GDP increases during an expansion The Keynesian and Classical Approaches Do the movements in employment and output during the business cycle represent equilibrium, market-clearing, behavior? Or these movements represent disequilibrium, nonmarket-clearing, behavior? Economists have debated these questions for many years Modern macroeconomics began in 1936, when the British economist John Maynard Keynes published The General Theory of Employment, Interest, and Money In that book, Keynes argued that the high levels of unemployment and low levels of output that the world economy was experiencing during the Great Depression represented disequilibrium He labeled the perspective that the economy was always in equilibrium as classical economics These labels have stuck, and down to the present Keynesian economics stands for the perspective that business cycles represent disequilibrium or nonmarket-clearing behavior, and classical economics represents the perspective that business cycles can be explained using equilibrium analysis If the Keynesian view is correct, then the increase in cyclical unemployment during a recession primarily represents involuntary unemployment, or workers who would like to find jobs at the current wage rate but who are unable to So, the quantity of labor supplied is greater than the quantity of labor demanded Similarly, the decline in real GDP occurs primarily because some firms would like to sell more goods or services at prevailing prices but are unable to so So, in the markets for some goods and services, the quantity supplied is greater than the quantity demanded If the classical view is correct, the labor market and the markets for goods and services remain in equilibrium during the business cycle Although employment and output decline during a recession, they so because of the voluntary decisions of households to supply less labor and firms to supply fewer goods and services The majority of economists believe that the basic Keynesian view of the business cycle is correct, although the details of their explanations of the business cycle are significantly different from those that Keynes offered in 1936 A significant minority of economists, however, believes that the classical view is correct The views of these economists are sometimes called the new classical macroeconomics, where the word new is used to distinguish their views from the views of economists writing before 1936 In this and the following chapters, we will focus on the Keynesian view In later chapters, we will discuss the classical view further Macroeconomic Shocks and Price Flexibility The word cycle in the phrase business cycle can be misleading if it suggests that the economy follows a regular pattern of recessions and expansions of the same length and intensity in a self-perpetuating cycle Although decades ago some economists thought of business cycles in more or less this way, today most not Instead, most economists—of both the Keynesian and classical schools—see the business cycle as resulting from the response of households Potential GDP The level of real GDP attained when firms are producing at capacity and labor is fully employed Business cycle Alternating periods of expansion and recession Expansion The period of a business cycle during which real GDP and employment are increasing Recession The period of a business cycle during which real GDP and employment are decreasing Keynesian economics The perspective that business cycles represent disequilibrium or nonmarket-clearing behavior Classical economics The perspective that business cycles can be explained using equilibrium analysis Find more at www.downloadslide.com 274 CHAPTER • Business Cycles Macroeconomic shock An unexpected exogenous event that has a significant effect on an important sector of the economy or on the economy as a whole and firms to macroeconomic shocks A macroeconomic shock is an unexpected exogenous event that has a significant effect on an important sector of the economy or on the economy as a whole.1 Examples of macroeconomic shocks are a financial crisis, the collapse of a housing bubble, a significant innovation in information technology, a significant unexpected increase in oil prices, or an unexpected change in monetary or fiscal policy Macroeconomic shocks require many households and firms to change their behavior For example, the collapse of the housing bubble in the United States during 2006 reduced the demand for housing Firms engaged in residential construction and workers employed by those firms had to adjust to the decline in demand Similarly, as use of personal computers spread during the 1980s, firms making large mainframe computers, typewriters, and other office equipment had to adjust to a decline in demand One of the benefits of the market system is its flexibility Every month in the United States, new firms open and existing firms expand their operations, creating millions of jobs, while at the same time other firms close or contract their operations, destroying millions of jobs Generally, a market system handles well the flow of resources—labor, capital, and raw materials—from declining industries to expanding industries A macroeconomic shock, however, requires an economy to make these adjustments quickly, so the results can be disruptive For example, at the height of the housing bubble in the United States from 2004 to 2006, residential construction averaged more than 6% of GDP By the first half of 2011, with the housing bubble having burst, residential construction was only about 2.2% of GDP That decline may sound small, but it amounted to reduced spending on new houses of over $480 billion If total output and total employment in the U.S economy were not to decline, then substantial resources, including more than million workers, would have to leave the construction industry and find employment elsewhere—a difficult task to accomplish in a short period of time In fact, the economy did not adjust smoothly to the collapse of the housing bubble As a result, employment and output in the U.S economy declined substantially We know from microeconomic analysis that markets adjust to changes in demand and supply through changes in prices One reason an economy may have difficulty smoothly adjusting to a macroeconomic shock is that prices and wages may not fully adjust to the effects of the shock in the short run In fact, many economists believe that a key difference between the macroeconomic short run and the macroeconomic long run is that in the short run prices and wages are “sticky,” while in the long run prices and wages are flexible By “sticky,” economists mean that prices and wages not fully adjust in the short run to changes in demand or supply, while in the long run they fully adjust Recall the important distinction between nominal and real variables A nominal price is the stated price of a product, not corrected for changes in the price level, while a real price is corrected for changes in the price level Similarly, a nominal wage is not corrected for changes in the price level, while a real wage is corrected When we refer to price and wage stickiness, we are referring to nominal prices and wages, not real prices and wages Economists call the slow adjustment of nominal prices and wages to shocks nominal price and wage rigidity or nominal price and wage stickiness Why Are Prices Sticky in the Short Run? The fact that prices are often sticky in the short run is a key reason macroeconomic shocks can result in fluctuations in total employment and total output So, understanding why prices can be sticky is an important macroeconomic issue Two key factors cause price stickiness First, we need to note that in reality most firms are in imperfectly competitive markets Recall from your principles of economics course that a firm is in a perfectly competitive market if the market has many buyers and sellers and the firm is competing with other firms 1Recall from Chapter that economists refer to something that is taken as given as exogenous, and something that will be explained by the model as endogenous Find more at www.downloadslide.com The Short Run and the Long Run in Macroeconomics 275 selling identical products In a perfectly competitive market, a firm cannot affect the price of its product In an imperfectly competitive market, however, a firm has some control over price Second, there are often costs to firms from changing prices If changing prices is costly, firms face a trade-off when demand or supply curves shift For example, when the demand curve for a firm’s product shifts to the left, a firm will benefit from cutting prices because quantity demanded does not fall by as much as it would if the firm held price constant So, a firm will hold price constant only if it incurs a cost to changing the price We would expect that a firm will lower its price following a decline in demand if the benefit to doing so would be greater than the cost The firm will not lower its prices if the benefit would be less than the cost The same is true following an increase in demand: If the benefit from raising the price does not exceed the cost, the firm will hold its price constant Why is it costly for firms to change prices? Firms such as JCPenney and IKEA print catalogs and create Web sites that list the prices of their products If prices change, these firms must take the time and incur the cost to reprint their catalogs, update their Web sites, and change the prices marked on their store merchandise Customers may also be angered if a firm raises prices, as might happen, for instance, if a hardware store raised the price of snow shovels after a winter storm Customers and firms may also agree to long-term contracts For instance, customers of some fuel oil companies have signed contracts to buy home heating oil at a fixed price during the coming year In addition, before firms adjust their prices, they must figure out how much demand and supply have shifted in their individual markets and how long-lived these shifts might be For example, the manager of a hotel may realize that the economy has moved into a recession and may expect that demand for rooms in the hotel has declined But rather than lower prices right away—and run the risk of annoying customers by quickly raising them again—the manager may want to see how much the recession affects tourism and business travel in that city In this case, we can think of the cost of changing prices as the cost of determining how the firm should respond to a macroeconomic shock These various costs to firms of changing prices are called menu costs Economists call these costs menu costs because one example of menu costs is the cost of printing up new restaurant menus How Long Are Prices Sticky? Economic research has shown that most firms in West- ern Europe and the United States change prices just once or twice a year, with firms in the service sector typically changing prices less frequently than manufacturing firms.2 Economists have also found that firms are more likely to change prices as a result of shocks to the firm’s sector than to shocks to the aggregate economy.3 Making the Connection The Curious Case of the 5-Cent Coke There is price stickiness and then there is the case of the price of a bottle of Coke As we have seen, there are reasons firms may not fully adjust the prices of their products to changes in demand and supply in the short run The period involved, though, is usually a year or two After that amount of time has passed, firms will typically have fully adjusted their prices Over a period of decades, most firms experience many shifts in demand and 2Alan Blinder, “On Sticky Prices: Academic Theories Meet the Real World,” in N Gregory Mankiw (ed.), Monetary Policy, Chicago: University of Chicago Press, 1994; and Campbell Leith and Jim Malley, “A Sectoral Analysis of Price-Setting Behavior in U.S Manufacturing Industries,” Review of Economics and Statistics, Vol 89, No March 2007, pp 335–342 3Jean Boivin, Marc Giannoni, and Ilian Mihov, “Sticky Prices and Monetary Policy: Evidence from Disaggregated U.S Data,” American Economic Review, Vol 99, No 1, March 2009, pp 350–384 Menu costs The costs to firms of changing prices Find more at www.downloadslide.com 276 CHAPTER • Business Cycles supply Despite short-run price stickiness, these shifts ought to result in the prices of the firm’s products changing many times Not so with a bottle of Coca-Cola, however Between 1886 and 1955, the price of a standard, 6.5-ounce glass bottle of Coke remained unchanged, at cents During this long period, World War I and World War II occurred, as did the Great Depression of the 1930s, other severe recessions, Prohibition—which lasted from 1919 to 1933 and during which sales of alcoholic beverages were illegal in the United States—a tripling of the price of sugar, and tremendous changes in the structure of the soft drink industry as well as in the technology of producing soft drinks In other words, the demand for Coke and the cost of producing it went through many changes during this 70-year period, but Coca-Cola held the price of its most important product constant Coca-Cola was introduced in 1886 by an Atlanta, Georgia, druggist named John Stith Pemberton At first he sold it as a “patent medicine.” Patent medicines were bottled liquids that their sellers claimed would cure a variety of physical ailments Pemberton claimed that Coca-Cola acted as a nerve tonic and stimulant and could cure headaches Although patent medicines were typically sold in large bottles for a price of $0.75 to $1.00, Pemberton hit on the idea of selling Coca-Cola in single servings for a nickel, thereby expanding the number of consumers who could afford to buy it At first, most Coke was sold by the glass at soda fountains, drug stores, and restaurants Following the introduction of the distinctive 6.5-ounce “hobble skirt” bottle in 1916, bottle sales, particularly through vending machines, became increasingly important Daniel Levy and Andrew T Young of Emory University have provided the most careful account of why Coca-Cola kept the price of its most important product fixed for decades Levy and Young argue that three main factors account for this extraordinary episode of price rigidity: First, from 1899 to 1921, the firm was obligated by long-term contracts to provide its bottlers with the syrup that Coca-Cola is made from at a fixed price of $0.92 per gallon Although Coca-Cola manufactured the syrup, the bottlers that actually produced the soft drink and distributed it for sale were independent businesses After 1921, the price Coca-Cola charged its bottlers for syrup varied, and this no longer became an important reason for inflexibility in the retail price Second, the technology of vending machines was such that for years they could accept only a single coin and could not make change Coca-Cola, therefore, could not adjust the price of a bottle in penny increments Third, Coca-Cola believed that it was important that consumers be able to buy the signature 6.5-ounce Coke bottle using a single coin This meant that to raise the price from a nickel, the firm would have to start charging a dime, which would be a 100% increase in price During the 1950s, Robert Woodruff, who was then president of Coca-Cola, tried to get around this problem by urging newly elected President Eisenhower, who happened to be Woodruff ’s friend and hunting companion, to have the U.S Treasury begin issuing a 7.5-cent coin Eisenhower forwarded the proposal to the Department of the Treasury, but the Treasury did not pursue the idea further Ultimately, rising costs and advances in vending machine technology led Coca-Cola to abandon its fixed-price strategy By 1955, Coke was selling for 5, 6, 7, or even 10 cents in different parts of the country In 1959, 6.5-ounce bottles of Coke were no longer selling for cents anywhere in the United States The saga of the nickel Coke provides an extreme example of why a firm may consider it profitable to hold the price of a product constant, despite large swings in demand and costs Sources: Daniel Levy and Andrew T Young, “‘The Real Thing’: Nominal Price Rigidity of the Nickel Coke, 1886–1959,” Journal of Money, Credit, and Banking, Vol 36, No 4, August 2004, pp 765–799; Richard S Tedlow, New and Improved: The Story of Mass Marketing in America, New York: Basic Books, 1990; and E J Kahn, Jr., The Big Drink: The Story of Coca-Cola, New York: Random House, 1960 Test your understanding by doing related problem 1.6 on page 296 at the end of this chapter Find more at www.downloadslide.com The Short Run and the Long Run in Macroeconomics 277 Long-term labor contracts help explain why nominal wages can be sticky For example, when a firm negotiates a long-term labor contract with a labor union, the contract fixes the nominal wage for the duration of the contract, which is typically several years Even if economic conditions change, it is often difficult and costly to renegotiate long-term contracts In addition to formal contracts, firms often arrive at implicit contracts with workers An implicit contract is not a written, legally binding agreement Instead, it is an informal arrangement a firm enters into with workers in which the firm refrains from making wage cuts during recessions in return for workers being willing to accept smaller wage increases during expansions Firms may also refrain from cutting wages during recessions for fear that their best workers will quit to find jobs at other firms once an economic expansion improves conditions in the labor market As we saw in Chapter 7, firms sometimes pay higher than equilibrium real wages known as efficiency wages to motivate workers to be more productive Efficiency wage considerations can also lead firms to maintain wages during a recession All these reasons help to explain why nominal wages are typically sticky in the short run Making the Connection Union Contracts and the U.S Automobile Industry U.S automobile companies have been losing market share to foreign competition since the 1970s Along with the decline in market share has come a decrease in employment At General Motors (GM) alone, employment went from 618,000 workers 30 years ago to fewer than 100,000 in 2009 The failure of U.S automobile companies to bring their costs under control is part of the reason for these declines In particular, Chrysler, Ford, and GM signed labor contracts with the United Automobile Workers union (UAW) that provided generous healthcare and retirement benefits These contracts made it difficult for the companies either to reduce wages and benefits or to shed unnecessary workers When the companies did lay off workers, the union contracts ensured that the workers received up to 95% of their pay Therefore, the U.S automobile companies found it very difficult to reduce labor costs when the demand for automobiles changed Not surprisingly, the rigid cost structure hindered the ability of U.S firms to adjust to changes in the automobile market The recession of 2007–2009 was so severe that Chrysler and GM declared bankruptcy and were saved from shutting down only when the federal government agreed in 2009 to invest in the firms As part of the agreement that brought the firms out of bankruptcy, the UAW agreed to changes in labor contracts that reduced the healthcare benefits for existing retirees and made it easier to lay off workers The changes to retiree benefits reduced GM’s costs by nearly $3 billion per year, and it expects to reduce its U.S workforce by more than half of its 2009 level, to 40,000 workers While GM had been losing money when U.S auto sales were 15 million vehicles per year, the company now believes that with the changes in labor contracts it can turn a profit if U.S auto sales exceed 10.5 million vehicles per year The rigid cost structures at Chrysler and GM prevented those companies from responding quickly to the 2007–2009 recession However, once the companies faced bankruptcy and liquidation, they were able to alter their cost structures by negotiating with the UAW to achieve lower labor costs Sources: David Robinson, “Bankruptcy Puts GM at Rock Bottom,” McClatchy—Tribune Business News, May 31, 2009; and Sharon Terlep and Mike Ramsey, “Auto Makers Reverse Skid,” Wall Street Journal, May 10, 2010 Test your understanding by doing related problem 1.7 on page 296 at the end of this chapter Find more at www.downloadslide.com 278 CHAPTER • Business Cycles What Happens During a Business Cycle? 8.2 Economists think of the business cycle as resulting from macroeconomic shocks that push real GDP away from potential GDP For example, the United States experienced three large shocks during 2007–2009: the collapse of the housing bubble, a financial crisis that increased the cost of obtaining loans, and a large increase in the price of imported oil As a result of these shocks, the growth rate of real GDP decreased from 2.9% during the fourth quarter of 2007 to -6.8% during the fourth quarter of 2008 The financial crisis and the increase in oil prices were global shocks that affected most countries For instance, among countries using the euro for their currency, the growth rate of real GDP decreased from 1.7% during the fourth quarter of 2007 to -7.1% during the fourth quarter of 2008 Figure 8.1 illustrates the phases of the business cycle Panel (a) shows an idealized business cycle, with real GDP increasing smoothly in an expansion to a business cycle peak and then decreasing smoothly in a recession to a business cycle trough, followed by another expansion Panel (b) shows the period before and during the recession of 2007–2009 The figure shows that a business cycle peak was reached in December 2007 The following recession was the most severe since the Great Depression of the 1930s Panel (b) also shows the growth of potential GDP during this period Recall that potential GDP is the level of real GDP when all resources are fully employed Notice that even when the economy was in a business cycle expansion after the second quarter of 2009, real GDP remained well below potential GDP Why we care about the business cycle? Declining real GDP is always accompanied by declining employment As people lose jobs, their incomes and standard of living decline In severe recessions, the long-term unemployed can encounter severe financial hardship, even destitution Declining GDP also increases business bankruptcies, with some entrepreneurs having a lifetime’s investment in a business wiped out in a year or two The failure of a large firm can bring economic decline to a whole geographical area Expanding Billions of 2005 dollars Real GDP Learning Objective Understand what happens during a business cycle Real GDP Peak Trough $15,500 Potential GDP 14,500 13,500 12,500 Real GDP 11,500 Expansion Recession Expansion 9,500 2002 Time (a) An idealized business cycle Recession Expansion Expansion 10,500 2003 2004 2005 2006 2007 2008 2009 2010 2011 (b) Actual movements of real GDP and of potential GDP for 2002–2011 Figure 8.1 The Business Cycle Panel (a) shows an idealized business cycle, with real GDP increasing smoothly in an expansion to a business cycle peak and then decreasing smoothly in a recession to a business cycle trough, followed by another expansion The periods of expansion are shown in green, and the period of recession is shown in red Panel (b) shows the severe recession of 2007–2009, with real GDP remaining below potential GDP well into the expansion Sources: U.S Bureau of Economic Analysis; Congressional Budget Office; and National Bureau of Economic Research • Find more at www.downloadslide.com Annual percentage change in real GDP What Happens During a Business Cycle? 279 25% Figure 8.2 Fluctuations in Real GDP, 1900–2010 20 The annual growth rate of real GDP fluctuated more before 1950 than it has since 1950 15 10 Sources: For 1900–1928: Louis D Johnston and Samuel H Williamson,“What Was the U.S GDP Then?”www.measuringworth org/usgdp,2010; and for 1929–2010: U.S.Bureau of Economic Analysis Ϫ5 • Ϫ10 Ϫ15 1900 1920 1940 1960 1980 2000 GDP, on the other hand, opens up employment opportunities to millions of additional workers and makes it possible for more entrepreneurs to realize the dream of opening a business The Changing Severity of the U.S Business Cycle One way to gauge the severity of the economic fluctuations caused by a business cycle is to look at annual percentage changes, or growth rates, in real GDP Figure 8.2 shows the annual growth rates for real GDP between 1900 and 2010 The fluctuations in real GDP were clearly more severe before 1950 than after 1950 In particular, there were eight years before 1950 during which real GDP declined by 3% or more, but there were no years with such declines after 1950 The increased stability of real GDP after the early 1980s, as well as the mildness of the recessions of 1991–1992 and 2001, led some economists to describe the period as the “Great Moderation.” The recession that began in December 2007, though, was the most severe since the Great Depression of the 1930s, suggesting that the Great Moderation was over The unusual severity of the 2007–2009 recession can also be seen by comparing its length to the lengths of other recent recessions Table 8.1 shows that in the late nineteenth century, the average length of recessions was the same as the average length of expansions During the first half of the twentieth century, the average length of expansions decreased slightly, and the average length of recessions decreased significantly As a result, expansions were about six months longer than recessions during those years The most striking change came after 1950, when the length of expansions greatly increased and the length Table 8.1 Period 1870–1900 1900–1950 1950–2010 Until 2007, the Business Cycle Had Become Milder Average length of expansions Average length of recessions 26 months 26 months 25 months 62 months 19 months 11 months Note: The World War I and World War II periods have been omitted from the computations in the table Source: National Bureau of Economic Research Find more at www.downloadslide.com 280 CHAPTER • Business Cycles of recessions decreased In the second half of the twentieth century, expansions were more than six times as long as recessions In other words, in the late nineteenth century, the U.S economy spent as much time in recession as it did in expansion, but after 1950, the U.S economy experienced long expansions interrupted by relatively short recessions The recession of 2007–2009 is an exception to this experience of relatively short, mild recessions This recession lasted 18 months, making it the longest since the 43-month recession that began the Great Depression Does the length and severity of the 2007–2009 recession indicate that the United States is returning to an era of severe fluctuations in real GDP? A full answer to this question will not be possible for several years But we can gain some perspective on the question by considering the explanations that economists have offered for why the U.S economy experienced a period of relative macroeconomic stability from 1950 to 2007: ● ● ● ● The increasing importance of services and the declining importance of goods As services, such as medical care or investment advice, have become a much larger fraction of GDP, there has been a corresponding relative decline in the production of goods For example, at one time, manufacturing production accounted for about 40% of GDP, whereas today it accounts for only about 12% Manufacturing production, particularly production of durable goods such as automobiles, fluctuates more than does the production of services The establishment of unemployment insurance and other government transfer programs that provide funds to the unemployed Before the 1930s, programs such as unemployment insurance, which provides government payments to workers who lose their jobs, and Social Security, which provides government payments to retired and disabled workers, did not exist These and other government programs make it possible for workers who lose their jobs during recessions to have higher incomes and, therefore, to spend more than they would otherwise spend This additional spending may have helped to shorten recessions Active federal government policies to stabilize the economy Before the Great Depression of the 1930s, the federal government did not attempt to end recessions or prolong expansions Because the Great Depression was so severe, with the unemployment rate rising to more than 20% of the labor force and real GDP declining by almost 30%, public opinion began favoring government attempts to stabilize the economy In the years since World War II, the federal government has actively tried to use policy measures to end recessions and prolong expansions Many economists believe that these government policies have played a key role in stabilizing the economy Some economists note that during the period of the Great Moderation, both the average inflation rate and the volatility of the inflation rate decreased, suggesting that monetary policy had become more effective Other economists, however, argue that active policy has had little effect This macroeconomic debate is an important one, and we will consider it further in Chapters 10 to 12 when we discuss the federal government’s monetary and fiscal policies The increased stability of the financial system The severity of the Great Depression of the 1930s was caused in part by instability in the financial system More than 5,000 banks failed between 1929 and 1933, reducing the savings of many households and making it difficult for households and firms to obtain the credit needed to maintain their spending In addition, a decline of more than 80% in stock prices greatly reduced the wealth of many households and made it difficult for firms to raise funds by selling stock In Chapter 10, we will discuss some of the institutional changes that resulted in increased stability in the financial system during the years after the Great Depression Most economists believe that the return of financial instability during the 2007–2009 recession is a key reason the recession was so severe If the United States is to return to macroeconomic stability, stability will first have to return to the financial system Find more at www.downloadslide.com I-8 Index exchange rate system, 574 exports/imports, 33 GDP, 143, 171, 454 GDP per capita, Great Recession, 407 inflation, 8, 454 international trade, 10 long-run growth, March 2011 earthquake and tsunami, 299 natural disasters, 568 ownership of U.S debt, 560 real GDP per capita, 1820–2008, 145, 148 stock prices, 1980-2011, 64 unemployment, 7, 239–240 unionization, 258–259, 269 Japanese Nikkei 225, 64 JCPenney, 275 Jefferson, Thomas, 365 “Jobless recoveries,” 245 Job market entry, Job Openings and Labor Turnover Survey (JOLTS), 247 Job search, 240–241 Johanns, Mike, 512 Johnson, Ian, 216 Johnson, Simon, 166 Johnson & Johnson Health Care Systems Inc., 560 Johnston, Louis D., 4, Jones, Charles, 184 Joulfaian, David, 239 JPMorgan Chase, 72, 74, 195, 339, 364, 411, 522 Kahn, Lisa, 1, 286 Kamps, Christophe, 510 Kansas, Dave, 199 Kasler, Dale, 323 Katz, Lawrence, 250, 251, 252, 286 KB Home, 24 Kenya, 55 Keynes, John Maynard, 82, 272, 273, 309, 541 Keynesian economics, 273 Khrushchev, Nikita, 125–126 Kihara, Leika, 477 Kilian, Lutz, 462 Kocherlakota, Narayana, 232, 244 Kohn, Donald, 375–376 Konstam, Dominic, 594 Korea, 166 Kraay, Aart, 148 Kroeber, Arthur, 216 Krueger, Alan, 250, 251, 252, 286 Krugman, Paul, 461 Krutsinger, Martin, 50 Kuang, Katherine, 251, 260 Kuwait, 143, 177, 290 Kydland, Finn, 475–476 Kyrgyzstan, 204, 212 Labor aggregate market in U.S., 2009, 118 changes, 114 good-producing industries, 242 Keynesian view, 273 marginal product, 140 marginal products, 111–113 quality, 165 share of income in United States, 1949–2010, 108 Labor force, 6, 47 growth rate, 159–160 Labor market, 232–233 See also Unemployment demand curve shifts, 233–234 equilibrium, 236–238 marginal product of labor, 233 nominal and real wages, 233 supply, 235–236 Labor productivity, 2–3 growth, accounting for, 122–124 standard of living, 144–151 Labor unions, 254–255, 258–259 Lagging indicators, 289 Lanman, Scott, 487 Laos, 204 Latin America GDP, 40 Layard, Richard, 149–150 Layoffs, temporary, 245 Leading indicators, 288 Learning by doing, 165 Lebergott, Stanley, Lee, Tim, 132 Legal tender, 191 Lehman Brothers, 70, 71–73, 74, 97, 345, 351, 364 bankruptcy, 302–303, 322–323, 385–386, 393–394 Leisure time, value of, 148–149 substitution effect in labor market, 236 Leith, Campbell, 275 Lender of last resort, 69, 369 Lenihan, Brian, 517 Leonard, Christopher, 297, 560 Leonhardt, David, 232 Lesotho, 204 Levine, Ross, 168 Levitt, Steven D., 188–189 Levy, Donald, 276 LIBOR See London Interbank Offered Rate Libya, 212 Life-cycle hypothesis, 528 Life expectancy, 150–151 Lifei, Zheng, 115 Liquidity, 66, 91 Liquidity premium theory, 92 Liquidity problems, 69 Lithuania, 473 Living standard See Standard of living LM curve, 353 deriving, 354–355 shifting, 355–356 Loanable funds market investment and demand for, 77–78 saving and supply, 76–77 summary, 80 Loayza, Norman, 168 Local government spending, 409, 427–428 London Interbank Offered Rate (LIBOR), 73, 352 London Stock Exchange, 65 Longhofer, Stanley, 532 Long run, 272–273 Long-run economic growth aging populations as challenge to, 5–6 balanced growth path, convergence, and long-run equilibrium, 168–173 countries without significant, 4–5 defined, economic performance by country, 143 labor productivity and standard of living, 144–151 Solow growth model, 151–161 total factor productivity and labor productivity, 162–168 in United States, 3–4 Long-term real interest rate, 451 Lowenstein, Roger, 53 Lucas, Robert, 470 Lump-sum taxes, 503–504 Luxembourg, 151 M1, 193 market for money model, 82 multiplier in U.S., 1959–2010, 197 U.S growth rates, 1960–2010, 194 M2, 193 China, 217 inflation and, 201 U.S growth rates, 1960–2010, 194 MacGuineas, Maya, 512 Mackenzie, Michael, 560, 594 Mackey, Maureen, 568 Macroeconomics See also Measurements analyzing, 11–12 approach to specific questions, 11–16 defined, focus, 2–11 international factors, 9–11 key issues and questions, 16–17 long run, 2–5 microeconomic decision-making and, 522–523 models, 12–15 non-economists’ view of, 15–16 short run, Macroeconomic shock, 274 Maddison, Angus, 40, 106, 192 Malanga, Steven, 32 Malawi, 167, 204 Malaysia, 590 Malley, Jim, 275 Managed float exchange-rate system, 574 Mankiw, N Gregory, 172, 275, 529 Manufacturers Alliance, 546 Manufacturing workers, 242, 244–245 as percentage of GDP, 253 Mao Zedong, 167 Marginal product of capital (MPK), 109–110, 140 rate of return to capital, 142 share of income, 540–541 Marginal product of labor (MPL), 111, 140, 233 Marginal propensity to consume (MPC), 306, 529 Market basket, CPI, 44 Market for money model, 82, 85 Find more at www.downloadslide.com Index Martin, Katie, 199 Matlack, Carol, 269 Mauro, Paolo, 464 McDonald’s, 25, 570–572 McKinnon, John, 522, 546 McLeish, Neil, 393 McMillin, Molly, 546 Measurements circular flow of income, 27–29 comparing GDP across countries, 38–40 employment and unemployment, 47–49 expenditures, 29–31, 33 GDP and GNP, 33 GDP totals, 25–33 inflation rates, 41–45 interest rates, 45–47 national income accounting, 26–27 national income and GDP, 40–41 nominal GDP, 33 price indexes and GDP deflator, 35–36 real GDP, 33–35, 37 recession, 23–24 MeasuringWorth web site, 22 Medicaid, 5–6 percentage of GDP, 494 reducing, 510–511 Medicare, 5–6, 31–32 CBO projections, 505 payroll tax, 491, 493, 509 percentage of GDP, 494 reducing, 510–511 sustainability, 494 Medium of exchange, 190 Mellinger, Andrew, 166–167 Men, labor force, 250 Mendoza, Enrique G., 435 Menu costs, 207–208, 275 Mercedes, 289 Merski, Paul, 94 Mexico, 148, 201, 204 debt, 492 exchange rate, 569–570, 575–577, 584 fiscal policy, 587–588 Great Recession, 407 real GDP per hour worked, 127–129 trade as percentage of GDP, 561 unemployment, 246 Mian, Atif, 536 Microeconomics, defined, Microsoft, 64 Mihov, Ilian, 275 Miles, William, 532 Miller, Stephen, 15–16, 22 Milne, Richard, 560 Minimum wage laws, 255–256 Minns, Chris, 149 Mischel, Lawrence, 267 Mishkin, Frederic, 472, 535 Mittal, Lakshmi, 105 Models assumptions, endogenous variables, and exogenous variables, 13–14 forming and testing hypotheses, 14–15 steps to develop, 12 uncertainty and fiscal policy, 434 uncertainty and monetary policy, 388 Modigliani, Franco, 528 Moldova, 201, 204 Monacelli, Tommaso, 435 Monetary aggregates, 193 Monetary base, 194–195 A Monetary History of the United States (Friedman and Schwartz), 1867–1960, 363 Monetary policy, 9, 256–257 See Federal Reserve; MP curve aggregate expenditure, 376–378, 454–456 bank lending channel, 383–384 defined, 9, 365 discount loans, 372 economic crisis of 2007–2009, 373–375 economic forecasts, 387 economic growth, 368–369, 379 employment, 368 exchange rates, 583–584 expected inflation rate, 210 financial market stability, 369 fixed exchange rate, 588 floating exchange rates, 583–584 foreign-exchange market, 369–370 goals, 367–370 Great Depression, 359–360 Great Moderation, 448–449 increasing output, 356–358 inflation expectations, 478–479 inflation-fighting tactics, 378, 380 inflation targeting, 476–477 interest rates, 369, 373 IS-MP model, 376–386 limitations, 386–394 model uncertainty, 388 moral hazard, 393–394 MP curve, 319 open market operations, 370, 372 policy lags, 386–387 policy trilemma, 590 poorly timed, 388–389 price stability, 367–368 prospects for change, 398–399 quantitative easing, 384–386 real GDP fluctuations, 319–321 recession-fighting tactics, 378 reserve requirements, 372, 373 rules, 450–451 rules versus discretion, 472–477 supply shock, 378, 381 Taylor rule, 472–475 tools, 370–376 Monetary policy curve, 312–313 short-term nominal interest rate and long-term real interest rate, 313–315 Monetary policy rules, 450–451 change, 461–464 defined, 450 Monetary Report to the Congress, 387 Monetary rule, 472 Money commodity money versus fiat money, 191 costs of inflation, 206–212, 216 demand curve shifts, 82–84 Federal Reserve and money supply, 194–197 I-9 functions, 189–191 hyperinflation, 188–189, 192, 212–214 interest rates and, 202–205 measuring (M1 and M2), 193–194 multiplier, 226–229 nominal interest rate, 207 quantity theory of money and inflation, 197–201, 230 Money market equilibrium, 84–85 Money Market Investor Funding Facility, 74 Money market model, 315–317 Money market mutual fund, 193, 322–323 Money multiplier, 195 open market operations, 226–227 simple deposit multiplier, 227–229 Mongolia, 201, 204 Montgomery, Lori, 506, 512 Moody’s, 315, 559, 568 Morales, Lymari, 16 Moral hazard, 393 collapse of Bank of United States, 71–72 defined, 68, 393 Federal Reserve, 364, 393–394 fiscal policy, 436–437 government “bailouts,” 70–71 Morgan Stanley, 62 Mortgage-backed securities, 67–68, 303 TARP, 411–412 Mortgage market Bank of United States collapse, 72 reforms, 344 subprime lending disaster, 67–68 Motorola Solutions, Inc., 560 MP curve alternative derivation, 360–361 defined, 304 deriving from money market model, 315–317 monetary policy, 319 open economy with fixed exchange rate, 585 open economy with floating exchange rate, 579–580 shifts, 317–319 Mugabe, Robert, 192 Multiplier defined, 308 fiscal, 436 personal income tax rates, 428–432 Multiplier effects, 290–292 aggregate expenditure and output, 307–309 defined, 308 expenditure formula, 301 shock, example of, 292–293 Mundell, Robert, 590–591 Mutual fund, 62 money market, 193 Nadeau, Gerard, 94 Namibia, 176–177 NASDAQ, 64, 65, 386, 465 National Association for Business Economics, 487 Find more at www.downloadslide.com I-10 Index National Bureau of Economic Research (NBER), 23–24, 38, 231, 281, 282, 325 National Commission on Fiscal Responsibility and Reform, 506 National Federal of Independent Business (NFIB), 94 National income, 41 National income accounting, 26, 565–567 National Income and Product Accounts (NIPA), 26 National income identities, 29–31, 498–499 National Labor Relations Act, 254 National Opinion Research Center (NORC), 15 Natural disasters, 568 Natural rate of unemployment, 243, 246–247 Congressional Budget Office (CBO), 401 demographics, 250–251 model, 247–249 Phillips curve, 329 public policy, 251–252 sectoral shifts, 252–253 technological change, 252 United States, 249–253 Natural resources, 27 NBER See National Bureau of Economic Research Net change, 247 Net effect, real interest rate, 531 Net exports, 33, 78–79, 563 loanable funds market, 80 Net factor payments, 33, 563 The Netherlands, 7, 33, 143 Net interest, government, 494 New Century Financial Corporation, 74 New classical macroeconomics, 273 New classical models, 323 New Keynesian model, 323 Newspaper industry, 252 New York Clearing House, 365 New York Stock Exchange, 61, 64, 65 New Zealand, 166, 396 Niger, 145, 166 Nigeria GDP, 148 inflation, underground economy, 26 Nintendo, 33 Nokia, 65 Nominal and real wages, 233 Nominal exchange rate, 562, 569, 588–589 Nominal GDP, 33–34 Nominal interest rate, 45–46 minimum, 461 money growth and, 204–205 short term, link to long-term real interest rate, 313–315, 450 Nominal rental cost of capital, 116 Nondurable goods, 29, 525 Noninstitutional money market mutual fund shares, 193 Nonmarket clearing, 272 Normative analysis, 14 Norris, Floyd, 560 North, Douglass, 165–166 Northern Rock, 74 North Korea, 166 Norway, 143 Novy-Marx, Robert, 32 Obama, Barack, 75, 285, 344, 367, 408, 411, 440–441, 500, 506, 512, 521–522, 546, 547, 552 Official reserves, 562 Official reserve transactions, 562 Ohlemacher, Stephen, 537 Oil prices, 252–253 fuel oil contracts, 275 shocks, 289–290, 342, 378–379, 381, 459–461, 462 O’Keefe, Patrick, 568 Okun’s Law, 284, 285–286, 330–333 Online brokerage firms, 65 Open economy, 561 Open market operations, 195 defined, 367 Federal Reserve, 370, 372 money multiplier, 226–227 Open market purchase, 370 Open market sale, 370 Open-Market Trading Desk, 371 Oreopoulos, Philip, 1, 21 Organisation for Economic Co-operation and Development (OECD), 135, 253, 487, 492 Organization of Petroleum Exporting Countries (OPEC), 290, 459 Orphanides, Athanasios, 462 Orszag, Peter, 501 O’Sullivan, Jim, 398 Otoo, Maria, 252 Outlet bias, 44 Output fluctuations, 321–322 Output gap, 282–283 “Over-the-counter” market, 64 Owens, Jeffrey, 546 Pacific Investment Management Company (PIMCO), 560 Padgett Business Services, 94 Pakistan, 106 Paletta, Damian, 506 Panics, 71–73 Patent medicines, 276 Paulson & Co., 62 Payroll survey, 49 Payroll tax, 490–491, 493, 509 temporary cut, 536–537 Pelton, Jack, 546 Pemberton, John Stith, 276 Peng, Ken, 216 Pension fund, 62 PepsiCo Inc, 114–115 Perfectly competitive market, 274–275 Permanent income, 305, 527 Permanent-income hypothesis, 527 Perotti, Roberto, 435, 510 Personal consumption, 29 Personal consumption expenditures (PCE) price index, 44–45 Personal income, 41 Personal income tax rates, 428–432 Peterson, Bruce, 550 Peterson, Cheryl, 265 Phelps, Edmund, 328 Philadelphia, Federal Reserve Bank of, 46, 332 Philippines, 573 Phillips, A.W.H., 327, 456 Phillips, Mary, 247–248 Phillips curve, 327–330 aggregate supply (AS), 456–457 defined, 304 inflation data fit, 334–335 monetary policy to fight inflation, 335–338, 579 movements along existing, 333–334 Okun’s law, 330–333 shifts, 334 Pierce, Robert, 474 Pittman, Mark, 303, 323 Planned investment spending, 304 Plaza Accord, 574 Plosser, Charles, 398 PNC Bank, 228–229 Policy ineffectiveness proposition, 470 Policy lags fiscal policy, 432–433 monetary policy, 386–387 Policy trilemma, 589–592 Politi, James, 364, 560 Pollution, 150 Portugal, 487, 495, 577 Positive analysis, 14 Potential GDP, 273, 285 Potter, Simon, 245 Povich, Susan, 546 Powell, Michael, 248 Precautionary saving, 537–538 Prescott, Edward, 258, 475–476 Present value, 85–86 stock and bond prices, 87–88 Price flexibility macroeconomic shocks and, 273–274 short-run stickiness, 274–275, 276 Price indexes chain-weighted measure of real GDP, 37 GDP deflator and, 35–36 Prices demand for money, 83 stability, 367–368, 450 Primary budget deficit (PD), 488 Primary Dealer Credit Facility, 74, 374 Principal, 46 Principal–agent problem, 68–69 Prison population, 251 Procyclical variable, 288 Production costs shifting aggregate supply curve, 458 excluded from GDP, 26 factor of, 27 Productivity inflation, 331–332 Okun’s law, 285–286 unemployment, 252 Profit, 116 loanable funds market, 80 Proprietary trading, 344 Public debt, 490–491 Find more at www.downloadslide.com Index I-11 Public employee pensions, 31–32 Publicly traded companies, 63–64 Public policy, unemployment, 249 Purchasing power, 206 Purchasing power parity (PPP), 39, 571–572 Putnam Investments, 322 PwC, 106 Qatar, 201 Qing Dynasty, 167 Quality of goods and services, 44 Quantitative easing, 199, 210, 384–386 Quantity equation, 197 Quantity theory of money, 198 Quantity theory of money and inflation, 197–201 growth rate version, 230 Quinlan, Tim, 18 Race, unemployment and, 250 Ramey, Garey, 287 Ramey, Valerie, 287, 435, 437 Ramsey, Mike, 277 Ransom, Roger L., 272 Rate movement, 78–79 Ratings, bond, 315 Rational expectations anticipated and credible policy changes, 471–472 anticipated policy changes, 470–471 defined, 469 demand shocks, 471 Rauh, Joshua, 32 Real estate bubble See Housing bubble Real exchange rates, 570–571 Real gross domestic product (GDP), 4, 33–34 accounting for growth, 120–123 budget deficit, 486–487 business cycle fluctuations, 272, 278 business cycles, 287 chain-weighted measure, 37 China, 114–115 consumption, 524–526 debt ratio, 507 demand for money, 83 factor, 131 Federal Reserve policy, 368–369 full-employment GDP, 307 government revenue and expenditure percentages, 493, 505 Great Recession, 407 growth per capita in U.S (1900–2010), India, 105–106 Keynesian view, 273 long-run model, 116–120 monetary policy, 319–321, 450 Okun’s law, 285 per hour worked, 141, 161, 163, 186–187 per hour worked among countries, 127–131 steady-state growth rates, 163 Real gross domestic product (GDP) per capita components, 145–146 happiness, 149–150 income distribution, 147–148 international comparisons, 143–144 international rankings, 143–144 leisure time, value of, 148–149 life expectancy, 150–151 Real interest rate, 46 aggregate expenditure and, 304–312 consumption, 530–531 exchange rate, 451 government deficits, 500 long-term, link to short-term nominal interest rate, 313–315 negative, 461–462 Real rental cost of capital, 119 Real rental price of capital, 117 Real wage, 117 equilibrium and unemployment, 253 over time, 119 Rebelo, Sergio, 182 Recession, 273 automatic stabilizers, 423–424 bank panics and, 412–413 debt, 487 discretionary fiscal policy, 421–423, 425 monetary policy, 378 of 2001, Federal Reserve and, 389–393, 412 Volcker, 464–465 Recession of 2007–2009 See Economic crisis of 2007–2009 Recognition lags, 386 Reddy, Sudeep, 210, 522, 537 Redlick, Charles J., 435 Reinhart, Carmen, 413 Reinhart, Vincent, 199 Relative prices, 211 Reliance Industries, 105 Rentenbank, 214 Republic of China, 167, 224 Required reserve ratio, 196–197, 372 Research and development, total factor productivity (TFP), 164–165 Reserve Bank of New Zealand, 450, 476 Reserve Bank of Zimbabwe (RBZ), 189, 192 Reserve Primary Fund, 322–323 Reserve requirements, 372 Reserves, 195 Residential investment, 29 Retail money market mutual fund shares, 193 Revenue government projections, 505, 507 sources of government, 493 Revenue Act of 1964, 544 Ricardian equivalence, 503–504 Ricardo, David, 503 Richardson, Peter, 291 Risk defined, 66 interest rates, 90–91 Risk structure of interest rates, 90, 313–314 Robinson, David, 277 Robinson, James, 166 Rockland Trust, 94 Roger, Scott, 477 Rogoff, Kenneth, 413, 462, 500 Romania, 204 Romer, Christina, 208, 245, 285–286, 408, 435, 440–441 Romer, David, 172, 208, 435 Romer, Paul, 182 Roosevelt, Franklin, 72 Rose, David, 287 Rosen, Harvey, 238, 239 Rossi, Vanessa, 568 Rotemberg, Julio, 250 Rowe, Jonathan, 63 Russia GDP, 143, 151, 179 holdings of U.S securities, 594 inflation rate and nominal interest rate, 204 underground economy, 26 Sacerdote, Bruce, 258 Sachs, Jeffrey, 166–167 Salas, Caroline, 487 Sales tax, 27 Samwick, Andrew, 538 Sargent, Thomas, 188–189, 214, 470, 472 Saunders, Laura, 546 Savings global glut, 474 life-cycle hypothesis, 528 loanable funds market, 80 precautionary, 537–538 rate movement, 78–79 tax incentives, 538–539 Schiantarelli, Fabio, 510 Schneider, Friedrich, 26 Schumpeter, Joseph, 252 Schwartz, Anna, 363–364 Science expenditures, 509 Seasonal unemployment, 240–241 Secondary market, 61 Second Bank of the United States, 365 Sectors, employment shifts across, 249, 252–253 Securitization, 67 Seigniorage, 206, 488, 493, 511 Self-employed persons, 49 Sen, Sudeshna, 125 September 11, 2001, terrorist attacks, 290 Serbia, 204 Services, 29 growth rates, 525 importance, 280 SGS Alternate, 263 Shadow banking system, 373 Shah, Heil, 199 Shanghai Stock Exchange, 65 Shelby, Richard, 364, 405 Shepherdson, Ian, 94 Sheridan, Niamh, 476–477 Shiller, Robert J., 272 Shimer, Robert, 250 Shocks, 273–274 business cycle phases, 278 demand, 321–322 desired capital stock, 545 Find more at www.downloadslide.com I-12 Index financial and real estate, 339–342 global business cycle, 289 monetary policy, 378–381 Shoe-leather costs, 207 Short run, 272–273 See also IS-MP price stickiness, 274–275, 277 Short-term nominal interest rate, 451 Shoven, John B., 43 Silk, Leonard, 465 Simple deposit multiplier, 227–229 Singapore, 212 GDP, 143, 151 Great Recession, 407 Skinner, Jonathan, 538 Slavov, Sita Nataraj, 43 Sloan, Alfred, 62 Slym, Karl, 132 Small businesses, 60, 94 Smith, Adam, 166 Social institutions, 165–166 Social insurance taxes, 493 Social Security, 5–6, 31–32, 56 changes, 510–512 indexing, 43 percentage of GDP, 494 sustainability, 494 taxes, 493 trust fund, 490–491 Social Security Disability Reform Act, 251–252 Solow, Robert, 120, 152 Solow growth model, 151–161 CBO long-term budget outlook, 508 convergence to balanced growth path, 169 depreciation, labor force growth rate, and real GDP per hour worked, 159–161 equilibrium, 154–157, 161 savings rate and real GDP per hour worked, 157, 159 taxes and standard of living, 544 Somalia, 145 Sony, 65 Soros Fund Management, 62 Souleles, Nicholas, 535 South Africa, 151, 201 South Korea, 166 exchange rate, 573, 574, 592 international trade, 10 unionization, 255, 258 Sovereign wealth fund, 560 Soviet Union, 349 economic growth, 125–126 Spain, 396 debt, 487, 495, 577 interest rates, 474 unemployment rates, Specialization, 190 Speculators, 573 Spiegelman, Robert, 251 Stagflation, 331, 459, 462, 464 Standard of deferred payment, 191 Standard of living China versus U.S., 170–171 distribution of income, 147–148 happiness, 149–150 labor productivity, 144–151 leisure time, value of, 148–149 life expectancy, 150–151 Standard & Poor’s, 50, 559 Standard & Poor’s 500, 64, 465 Starbucks, 384 State government spending, 409, 427–428 Steady state, 154–157 capital–labor ratio, 185–186 depreciation, labor force growth rate, and real GDP per hour worked, 159 savings rate and real GDP per hour worked, 157 summary of changes, 161 Stevenson, Betsey, 150 Stickiness, short-run, 274–275, 276 Stimulus bill See American Recovery and Reinvestment Act Stock, James, 449 Stock market bubble, 66–67, 290, 465, 471 inflation and, 336–338 investing, 64–65 Japanese natural disasters, 568 losses in 2008, 299 recognition lags, 386 Stocks, 10 defined, 61 present value and prices, 87–88 Stocks, bonds, and stock market indexes, 63–64 Store of value, 190 Structural unemployment, 241, 243 recession of 2007–2009, 232, 244–245 Subprime mortgages, 67–68, 93 principal–agent problem, 68–69 Sub-Saharan Africa, Subsidies, farm, 506 Substitution bias, 44 Substitution effect, 235, 236 interest rates, 530–531 Sufi, Amir, 536 Summers, Lawrence, 396 Sung, Chinmei, 115 SunTrust Bank, 228–229 Supply curve exchange rate, 575 labor services, 235–236 Supply shock aggregate demand and aggregate supply (AD-AS) model, 457–461 aggregate supply (AS), 456 monetary policy, 378–379, 381 Suriname, 212 Surplus, government, 79 Survey of Professional Forecasters, 332 Sutch, Richard, 272 Sweden GDP, 143 unemployment rates, Switzerland, 212 Central Bank, 396 GDP, 143 T-account, 226–227 T Rowe Price, 62 Taiwan, 224 TALF See Term Asset-Backed Securities Loan Facility TARP See Troubled Asset Relief Program Tata Motors, 105 Tax-adjusted user cost of capital, 543–544 Taxes budget deficit, financing, 509 economic crisis of 2007–2009, 32, 521–522, 552–553 fiscal policy, 410–411 interest, 91 investment spending, 547–548 IS-MP model of 2001 tax cut, 325–327 loanable funds market, 80 lump-sum, 503–504 policy changes, 511 savings incentive, 538–539 temporary cut, 533–534, 536–537, 552–553 Tax Reform Act (1986), 544 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, 522, 547–548 Tax wedge, 431 Taylor, John, 435, 438, 473 Taylor rule, 472–474 real interest rate, 474–475 TD Ameritrade, 65 TDF See Term Deposit Facility Technology, 106–107 expenditures, 509 labor demand curve shift, 234 total factor productivity (TFP), 164 unemployment, 243, 249, 252 Tedlow, Richard S., 276 TED spread, 352 Télécom SA, 259–260 Temporary employment agencies, 252 Temporary layoffs, 245 Terlep, Sharon, 59–60, 63, 277 Term Asset-Backed Securities Loan Facility (TALF), 75, 374 Term Auction Facility, 74, 374 Term Deposit Facility (TDF), 373 Term premium, 92, 313 Term securities lending facility, 374 Term structure of interest rates, 90, 91–93, 313, 376 Thailand, 573–574 capital controls, 590 exchange rate, 592 Thomas, Robert Paul, 165–166 Thomson Reuters/University of Michigan Survey of Consumers report, 478 Time-inconsistency problem, 475 TMX Group, 65 Tobin, James, 548–549 Tobin’s q, 548–549 Tokyo Stock Exchange, 65 Toll Brothers, 24 Tonga, 201 Too-big-to-fail policy, 393 Total factor productivity (TFP), 108 capital and labor changes, 114 growth, 125–126, 162–184 Total spending, 245 Toyota, 25, 65, 241, 289, 565 post-recession sales increase, 294 Trade deficit, 504 Find more at www.downloadslide.com Index I-13 Trading Room Automated Processing System (TRAPS), 370, 372 Transactions costs, 189 Transfer payments, 31, 280 explosion in debt-to-GDP ratio, 507 fiscal policy, 411 international, 563 reducing, 506, 510–511 Ricardian equivalence, 504 unemployment, 411, 445 Transitory income, 527 Travelers, 62 Treasury bills defined, 90 Federal Reserve purchase of, 195, 226 foreign ownership, 559–560, 594–595 market for money model, 82 open market sale or purchase, 370 present value, 88 term premium, 313 Treasury bonds, 90 budget deficit, financing, 489, 508–509, 559–560 crowding out private investment, 499–501 Fed open market operations, 377 foreign ownership, 559–560, 594–595 gross federal debt, 490 interest-rate risk, 92 interest rates, 89 London Interbank Offered Rate, 73 nominal interest rates, 209 quantitative easing, 384–385 term premium, 92, 313 term structure, 90, 91 Treasury Department (U.S.), 276 economic crisis of 2007–2009, 71, 72–73 foreign-exchange policy, 370 money market mutual fund guarantee, 323 TARP/CPP program, 412 Treasury Inflation Protected Securities (TIPS), 209 Treasury notes, 90 Trichet, Jean-Claude, 464 Trigari, Antonella, 435 Trinidad and Tobago, 151 Trotta, Daniel, 546 Troubled Asset Relief Program (TARP), 71, 74, 411–412 Truman, Harry, 23, 409 Trust funds, government, 490–491 Tsunami, Japanese, 568 Tunisia, 212 Turkey, 201, 204, 212 2011 Index of Economic Freedom, 164–165 U-6 unemployment measure, 262–263 Uchitelle, Louis, 265 Uganda, 5, 167 Ulrich, Lawrence, 59–60 Unanticipated policy changes, 470–471 Underground economy, 26 Unemployment business cycles, 272, 273, 278–279 cyclical, 243, 245 developed countries, duration worldwide, 246 efficiency wages, 253–254 equilibrium real wages, 253 Federal Reserve policy, 368 fluctuations, frictional, 240–241 full, 245 insurance, 241 labor unions, 254–255 measuring, 47–49 minimum wage laws, 255–256 monetary policy and classical dichotomy, 256–257 natural rate, 246–253, 401 Okun’s Law, 284, 285 Phillips curve, 327–329 rates in Western Europe and United States, 257–260 structural, 241, 243, 244–245 transfer payments, 411, 445 2008 recession, 1, 60, 231–232, 407, 440–441 underemployment, 262–263 United States, 6–7 worldwide, 239–240 Unemployment insurance, 241, 251, 280, 552–553 Unemployment rate, 6–7 calculating, 47–49 Unions, 254–255, 258–259 automobile industry in U.S., 277 United Automobile Workers (UAW), 277 United Kingdom average hours worked, 149 current account, 564 exchange rate system, 574 GDP, 143 Great Recession, 407 growth rates, 138 holdings of U.S debt, 594 hysteresis, 286 international trade, 10 long-run growth, 4–5 real GDP per capita, 1820–2008, 145, 148 unemployment, 7, 239–240 unionization, 255, 258–259 value-added tax (VAT), 556 United Nations, 161 United States aging population, balance of payments, 2010, 563, 565–566 budget deficits, 488–489 business cycles, changing severity of, 279–280 capital and labor share of income, 1949–2010, 108 capital outflow, 566–567 current account, 562, 563–564 debt, 486–487 deficit reduction, 582–583 deviation of real GDP from potential GDP, 289 exchange rate, 575–577 exchange rate system, 574 financial account, 564–565 fiscal policy, 505–511, 512–513, 580–582 foreign investment in, 11 GDP, 38–39, 143–144 goods-producing industries, 242 imports and exports as percentage of GDP, 9–10 inflation, 8, 199, 212 inflation in 1960s and 1970s, 329–330, 449 labor productivity, 129 long-run growth, 3–4 money growth and inflation, 201 net asset position, 567 nominal interest rate and inflation, 204 Phillips curve, 333–335 real gross domestic product (GDP) per capita 1820–2008, 145 1900–2010, real GDP per hour worked, 127–129 research and development and labor productivity, 164–165 standard of living, 170–171 stock prices, 1980–2011, 64 trade as percentage of GDP, 561 underground economy, 26 unemployment, 6–7, 239–240, 246, 257–260, 262–263 unionization, 258–259 Unit of account, 190 United Arab Emirates, 151 Upward-sloping yield curve, 92 U.S Bureau of Economic Analysis, 13, 410 U.S Civil War hyperinflation, 223–224 U.S Department of Labor, 47 U.S dollar See Dollar, U.S User cost of capital (uc), 541 U.S National Income and Product Accounts (NIPA), 26 U.S Steel, 272 U.S Treasury See Treasury Department Valletta, Rob, 245, 251, 260 Value-added tax (VAT), 410, 556 Vanguard, 62, 65, 322 Variables, movement during business cycle, 288–289 Vaughan, Martin, 537 Vegh, Carlos A., 435 Velocity of money, 198 Vending machines, 276 Venezuela, 212 inflation, Vietnam, 151 Visa Inc., 560 Vitner, Mark, 18 Vizio, 26–27 Vlasic, Bill, 59–60 Volcker, Paul, 330, 464–465 von Wachter, Till, Wage cuts, 212 Wages See also Real wage efficiency, 253–254 nominal, 233 stickiness, 277 Find more at www.downloadslide.com I-14 Index Wagner, Mark, 549–550 Waki, Natsuko, 568 Walker, Scott, 32 Wallace, Neil, 470 Wall Street Reform and Consumer Protection Act, 394 Wal-Mart, 251 Walsh, Mary Williams, 32 Warsh, Kevin, 375–376 Wassener, Bettina, 216 Watson, Mark, 449 Weadock, Teresa, 38 Wealth, labor market, 238–239 Weil, David R., 172, 272 Weisman, Jonathan, 506 Welfare costs, 208 Wells Fargo Securities, 18 Werking, George, 247–248 Wessel, David, 376, 568 Whelan, Robbie, 24 White, Stanley, 477 Wieland, Volker, 435, 438 Williams, Mark, 167 Williamson, Samuel H., 4, Wilson, Woodrow, 365 Winning, David, 560 Wolf, Charles, 560 Wolfers, Justin, 150 Wolford, John, 247–248 Women in labor force, 250 Woodbury, Stephen, 251 Woodford, Michael, 477 Woodruff, Robert, 276 Worker preferences, 258 World Bank, 139, 524–525 goods-producing sector, 253 International Comparison Program (ICP), 39, 55 Wyss, David, 50 Yang, Jing, 560 Yanping, Li, 115 Young, Andrew T., 276 Yugoslavia, 224 Zambia, 148, 167, 204, 212, 287 Zandi, Mark, 437–438, 552 Zervos, Sara, 168 Zimbabwe, 145, 180 hyperinflation, 12, 188, 192, 224 Zumbrun, Joshua, 398 Find more at www.downloadslide.com Key Symbols and Abbreviations pt: Current inflation rate pet: Expected inflation rate a: Capital’s share in national income - a: Labor’s share in national income A: Index of how efficiently the economy transforms capital and labor into real GDP; total factor productivity AD: Aggregate demand curve AE : Aggregate expenditure AS: Aggregate supply curve B: U.S Treasury bonds C: Personal consumption expenditures C: Currency in circulation CA: Current account balance CPI: Consumer price index D: Checking account deposits d: Depreciation rate DP: Default-risk premium ER: Excess reserves f: Rate of job finding G: Government purchases gA : Growth rate of total factor productivity gK : Growth rate of the capital stock gL : Growth rate of labor hours I: Investment or gross private domestic investment i: Nominal interest rate i: Investment per hour worked iTarget : Target for the nominal federal funds rate iLT : Long-term nominal interest rate IS curve: Equilibrium in the goods market; shows the equilibrium combinations of the real interest rate and real GDP (or the output gap) K: Quantity of capital goods available to firms, or the capital stock k: Capital per hour worked, or the capital–labor ratio k*: Steady-state capital–labor ratio L: Quantity of labor LM curve: Equilibrium in the market for money; shows the equilibrium combinations of the real interest rate and the output gap M: Money supply MB: Monetary base m: Money multiplier M1: A narrower measure of the money supply M2: A broader measure of the money supply M: Sum of currency in circulation, C, and checking account deposits, D MP curve: Monetary policy curve MPC: Marginal propensity to consume MPK: Marginal product of capital MPL: Marginal product of labor NCF: Net capital outflows NX: Net exports of goods and services P: Price level PCE: Personal consumption expenditures price index r: Real interest rate, or real rental price of capital r*: Long-run equilibrium real federal funds rate rrD : Required reserve ratio R: Nominal rental cost of capital R: Bank reserves RR: Required bank reserves s: Rate of job separation s: Saving rate SForeign : Saving from the foreign sector SGovernment : Saving from the government SHousehold: Saving from households st : Effects of a supply shock sy: Investment per hour worked T: Taxes TR: Transfer payments TSE: Term structure effect Ut : Current unemployment rate UN : Natural rate of unemployment W: Nominal wage w: Real wage Y: Real GDP; also total income y: Real GDP per hour worked ' Y : Output gap YD: Disposable income Equations Actual real interest rate: Actual r = i - p Aggregate Expenditure (AE): C + I + G + NX Basic growth accounting equation: gY = gA + a b gK + a bgL 3 Break-even investment: Depreciation + Dilution = dk + nk = (d + n)k Budget deficit: PDt + itBt - = ¢Bt + ¢MBt Budget deficits and private behavior: 3(G + TR) - T4 = S Household - I - NX K Capital–labor ratio: k = L Cobb–Douglas production function (real GDP): Y = AK aL1 - a Cobb–Douglas production function (U.S data): Y = AK L3 Cobb–Douglas production function (real GDP per hour worked): y = Ak Consumption function: C = C + MPC * Y D Current account and net capital outflows: CA = NCF ¢Y = Expenditure multiplier: ¢ Autonomous expenditure (1 - MPC) Expected inflation rate: p = i - r e Expected real interest rate: Expected r = i - p GDP: GNP + Net factor payments Pt + - Pt * 100 Inflation rate: Inflation rate = pt + = Pt e Investment per hour worked: i = sy Investment and sources of funds: I = SHousehold + SGovernment - NCF Bt - ¢MBt Pt - 1Yt - PtYt Bt - ¢MBt b = + (rt - gY) Fiscal Policy sustainability 2: ¢ a PtYt PtYt Pt - 1Yt - PtYt Fiscal Policy sustainability 1: ¢ a Bt PtYt Bt b = PDt PtYt PDt + 3it - (pt + gY)4 Government budget constraint: Gt + TRt + itBt - = Tt + ¢Bt + ¢MBt Nominal GDP * 100 GDP deflator: GDP deflator = Real GDP Growth accounting equation for real GDP (absolute): gY = gA + a b gK + a bgL 3 gL gA gK Growth accounting equation for real GDP (relative share): = a b + a b a b + a b a b gY gY gY Chapter 6, page 202 Chapter 9, page 304 Chapter 4, page 121 Chapter 5, page 154 Chapter 13, page 488 Chapter 13, page 499 Chapter 4, page 123 Chapter 4, page 108 Chapter 4, page 108 Chapter 4, page 123 Chapter 9, page 305 Chapter 15, page 565 Chapter 9, page 308 Chapter 2, page 46 Chapter 2, page 46 Chapter 6, page 202 Chapter 2, page 33 Chapter 2, page 36 Chapter 5, page 153 Chapter 15, page 566 Chapter 13, page 495 Chapter 13, page 496 Chapter 13, page 488 Chapter 2, page 35 Chapter 4, page 121 Chapter 4, page 122 Find more at www.downloadslide.com Growth accounting equation for real GDP per hour worked (absolute): gy = gA + a bgk gA gk Growth accounting equation for real GDP per hour worked (relative share): = a b + a b a b gy gy Chapter 4, page 123 Chapter 4, page 123 Growth rate of the nominal exchange rate: % change in E Domestic = pForeign - pDomestic Chapter 15, page 572 Growth rate of the real exchange rate: % change in eDomestic = % change in E Domestic + % change in P Domestic - % change in P Foreign Labor force: Employed + Unemployed Chapter 15, page 571 Chapter 7, page 248 B bWealth + a b Y N N Long-term real interest rate: rLT = i + TSE + DP - pe Life-cycle hypothesis: C = a Chapter 14, page 529 Chapter 9, page 314 Chapter 10, page 384 Y Marginal product of capital (MPK): MPK = a b a b K Y Marginal product of labor (MPL): MPL = a b a b L ¢C Marginal propensity to consume (MPC): ¢Y D Monetary base: Currency in circulation + Reserves 1C>D2 + Money multiplier: M = M/MB = m = 1C>D2 + rrD + 1ER>D2 Money supply: Money multiplier * Monetary base (C>D) + b * MB M = m * MB = a (C>D) + rrD + (ER>D) National income identity: Y = C + I + G + NX s = Natural rate of unemployment: U = s + f + ( f >s) Units of foreign currency Nominal exchange rate: E Domestic = Units of domestic currency Okun’s law: Cyclical unemployment rate = -0.5 * Output gap Yt - Y Pt Output gap: Output gap = Y Pt Chapter 4, page 110 Chapter 4, page 111 Chapter 9, page 306 Chapter 6, page 195 Chapter 6, page 196 Chapter 6, page 195 Chapter 6, page 196 Chapter 2, page 29 Chapter 7, page 249 Chapter 15, page 570 Chapter 8, page 284 Chapter 8, page 282 Permanent income hypothesis: C = aY Permanent Phillips curve (unemployment rate): pt = pet - a(Ut - U N) - st ' Phillips curve (output gap): pt = pet + bYt - st Future value n Present value: Present value = (1 + i)n Primary Deficit: PDt = Gt + TRt - Tt Profit: Revenue - Cost Quantity equation (levels): M * V = P * Y Quantity equation (rates of change): % Change in M + % Change in V = % Change in P + % Change in Y Quantity theory of money explanation for inflation: p = % Change in M - % Change in Y Real exchange rate: eDomestic = E Domestic a P Domestic P Foreign b Chapter 7, page 233 Chapter 3, page 76 Change in real GDP Chapter 4, page 111 Change in capital stock Real GDP Real GDP Hours worked b = a b * a b Population Hours worked Population sA d Steady-state capital–labor ratio: k* = c d + n s d d + n ' = r * + pt + g(pt - pTarget) + hYt Steady-state real GDP per hour worked: y* = A c Velocity of money: V = P * Y M Chapter 5, page 145 Chapter 5, page 156 Chapter 5, page 156 Chapter 12, page 473 Market value of the firm Tobin’s q: q = Replacement cost of capital Y Total factor productivity: A = K L3 Unemployment rate: Unemployment rate = a Chapter 13, page 488 Chapter 4, page 116 Chapter 6, page 197 Chapter 6, page 198 Chapter 6, page 198 Chapter 6, page 202 Standard of living: a Taylor rule: iTarget Chapter 3, page 87 Chapter 15, page 570 Real interest rate: r = i - p W Real wage: w = P Saving: S = SHousehold + SGovernment + SForeign Slope of the production function: Chapter 14, page 527 Chapter 9, page 329 Chapter 9, page 331 Chapter 14, page 548 Chapter 4, page 113 Number of unemployed Labor force b * 100 Chapter 2, page 47 Chapter 6, page 198 Find more at www.downloadslide.com MyEconLab and Hubbard/O’Brien/Rafferty, Macroeconomics: The Power of Practice MyEconLab creates the perfect pedagogical loop that provides not only text-specific assessment and practice problems, but also tutorial support to make sure students learn from their mistakes Auto-generated Test and Assignments MyEconLab comes with preloaded assignments, all of which are automatically graded and include select end-of-chapter questions and problems from the textbook ▼ Study Plan A Study Plan is generated from each student’s results on quizzes and tests Students can clearly see which 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representative for more information on Pearson Choices Find more at www.downloadslide.com MyEconLab and Hubbard/O’Brien/Rafferty, Macroeconomics: The Power of Practice MyEconLab creates the perfect pedagogical loop that provides not only text-specific assessment and practice problems, but also tutorial support to make sure students learn from their mistakes Auto-generated Test and Assignments MyEconLab comes with preloaded assignments, all of which are automatically graded and include select end-of-chapter questions and problems from the textbook ▼ Study Plan A Study Plan is generated from each student’s results on quizzes and tests Students can clearly see which topics they have mastered and, more importantly, which they need to work on Find more at www.downloadslide.com www.myeconlab.com ▼ Learning Resources To further reinforce understanding, Study Plan and Homework problems link to additional learning resources: ■ A step-by-step Guided Solution helps students break down a problem much the same way as an instructor would during office hours ■ The eText page on which the topic of the exercise is explained promotes reading the text when further explanation is needed ■ A graphing tool encourages students to draw and manipulate graphs and deepen their understanding by illustrating economic relationships and ideas ▼ Unlimited Practice Many Study Plan and Instructor-assigned exercises contain algorithms to ensure students get as much practice as they need As students work through Study Plan or Homework exercises, instant feedback and tutorial resources guide them towards understanding Find more at www.downloadslide.com THE PEARSON SERIES IN ECONOMICS Abel/Bernanke/Croushore Macroeconomics* Froyen Macroeconomics Laidler The Demand for Money Bade/Parkin Foundations of Economics* Fusfeld The Age of the Economist Leeds/von Allmen The Economics of Sports Berck/Helfand The Economics of the Environment Gerber International Economics* Leeds/von Allmen/Schiming Economics* Bierman/Fernandez Game Theory with Economic Applications Gordon Macroeconomics* Lipsey/Ragan/Storer Economics* Roberts The Choice: A Fable of Free Trade and Protection Greene Econometric Analysis Lynn Economic Development: Theory and Practice for a Divided World Rohlf Introduction to Economic Reasoning Miller Economics Today* Ruffin/Gregory Principles of Economics Blanchard Macroeconomics* Blau/Ferber/Winkler The Economics of Women, Men and Work Boardman/Greenberg/Vining/Weimer Cost-Benefit Analysis Boyer Principles of Transportation Economics Gregory Essentials of Economics Gregory/Stuart Russian and Soviet Economic Performance and Structure Hartwick/Olewiler The Economics of Natural Resource Use Branson Macroeconomic Theory and Policy Heilbroner/Milberg The Making of the Economic Society Brock/Adams The Structure of American Industry Heyne/Boettke/Prychitko The Economic Way of Thinking Bruce Public Finance and the American Economy Hoffman/Averett Women and the Economy: Family, Work, and Pay Carlton/Perloff Modern Industrial Organization Holt Markets, Games and Strategic Behavior Case/Fair/Oster Principles of Economics* Hubbard/O’Brien Economics* Caves/Frankel/Jones World Trade and Payments: An Introduction Chapman Environmental Economics: Theory, Application, and Policy Hubbard/O’Brien/Rafferty Macroeconomics* Hughes/Cain American Economic History Cooter/Ulen Law & Economics Husted/Melvin International Economics Downs An Economic Theory of Democracy Jehle/Reny Advanced Microeconomic Theory Ehrenberg/Smith Modern Labor Economics Johnson-Lans A Health Economics Primer Ekelund/Ressler/Tollison Economics* Keat/Young Managerial Economics Farnham Economics for Managers Folland/Goodman/Stano The Economics of Health and Health Care Fort Sports Economics * denotes Money, Banking, and the Financial System* titles Klein Mathematical Methods for Economics Krugman/Obstfeld/Melitz International Economics: Theory & Policy* Riddell/Shackelford/Stamos/ Schneider Economics: A Tool for Critically Understanding Society Ritter/Silber/Udell Principles of Money, Banking & Financial Markets* Understanding Modern Economics Sargent Rational Expectations and Inflation Miller/Benjamin The Economics of Macro Issues Sawyer/Sprinkle International Economics Miller/Benjamin/North The Economics of Public Issues Scherer Industry Structure, Strategy, and Public Policy Mills/Hamilton Urban Economics Mishkin The Economics of Money, Banking, and Financial Markets* The Economics of Money, Banking, and Financial Markets, Business School Edition* Macroeconomics: Policy and Practice* Schiller The Economics of Poverty and Discrimination Sherman Market Regulation Silberberg Principles of Microeconomics Stock/Watson Introduction to Econometrics Murray Econometrics: A Modern Introduction Introduction to Econometrics, Brief Edition Nafziger The Economics of Developing Countries Studenmund Using Econometrics: A Practical Guide O’Sullivan/Sheffrin/Perez Economics: Principles, Applications and Tools* Tietenberg/Lewis Environmental and Natural Resource Economics Parkin Economics* Perloff Microeconomics* Microeconomics: Theory and Applications with Calculus* Environmental Economics and Policy Todaro/Smith Economic Development Waldman Microeconomics Perman/Common/McGilvray/Ma Natural Resources and Environmental Economics Waldman/Jensen Industrial Organization: Theory and Practice Phelps Health Economics Weil Economic Growth Pindyck/Rubinfeld Microeconomics* Williamson Macroeconomics Log onto www.myeconlab.com to learn more ... Quarter Growth Rate of Real GDP 20 00 Q1 20 00 Q2 20 00 Q3 20 00 Q4 1.0% 8.0 0.3 2. 4 20 01 Q1 20 01 Q2 20 01 Q3 20 01 Q4 -1.3% 2. 6 -1.1 1.4 20 02 Q1 20 02 Q2 20 02 Q3 20 02 Q4 3.5% 2. 1 2. 0 0.1 Solving the Problem... 9,500 20 02 Time (a) An idealized business cycle Recession Expansion Expansion 10,500 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 (b) Actual movements of real GDP and of potential GDP for 20 02 20 11... potential level by the following: ( -1 .2) ( -1 .2) ( -1 .2) ( -1 .2) * * * * 1.0 0.5 0 .2 0.1 = = = = - 1 .2% in 20 09 - 0.6% in 20 10 - 0 .2% in 20 11 - 0.1% in 20 12 Because of the multiplier effect, a