Ebook Macroeconomics - A contemporary introduction (8th edition): Part 2

(BQ) Part 2 book Macroeconomics - A contemporary introduction has contents: Fiscal policy, federal budgets and public policy, federal budgets and public policy, banking and the money supply, banking and the money supply, international trade, international finance, economic development.

12 Fiscal Policy PRESIDENT GEORGE W BUSH AGAIN.” THE JAPANESE TROUBLED ECONOMY PUSHED THROUGH TAX CUTS TO “GET THE COUNTRY MOVING GOVERNMENT CUT TAXES AND INCREASED SPENDING TO STIMULATE ITS THESE ARE EXAMPLES OF FISCAL POLICY, WHICH FOCUSES ON THE EFFECTS OF TAXING AND PUBLIC SPENDING ON AGGREGATE ECONOMIC ACTIVITY ROLE OF FISCAL POLICY IN THE ECONOMY? CYCLE? WHAT IS THE PROPER CAN FISCAL POLICY REDUCE SWINGS IN THE BUSINESS WHY DID FISCAL POLICY FALL ON HARD TIMES FOR NEARLY TWO DECADES, AND WHAT BROUGHT IT TO LIFE? DOES FISCAL POLICY AFFECT AGGREGATE SUPPLY? ANSWERS TO THESE AND OTHER QUESTIONS ARE ADDRESSED IN THIS CHAPTER, WHICH EXAMINES THE THEORY AND PRAC TICE OF FISCAL POLICY IN THIS CHAPTER, WE FIRST EX- PLORE THE EFFECTS OF FISCAL POLICY NEXT, WE BRING AGGREGATE SUPPLY INTO THE PICTURE THEN, WE EXAMINE THE ROLE OF FISCAL POLICY IN MOVING ©Vince Streano\Corbis ON AGGREGATE DEMAND THE ECONOMY TO ITS POTENTIAL OUTPUT PRACTICED SINCE FINALLY, WE REVIEW U.S FISCAL POLICY AS IT HAS BEEN WORLD WAR II THROUGHOUT PROGRAMS TO EXPLAIN FISCAL POLICY THE CHAPTER, WE USE SIMPLE TAX AND SPENDING 252 Part Fiscal and Monetary Policy A more complex treatment, along with the algebra behind it, appears in the appendix to this chapter Topics discussed include: • • • Theory of fiscal policy Discretionary fiscal policy Automatic stabilizers • • • Lags in fiscal policy Limits of fiscal policy Deficits, surpluses, and more deficits THEORY OF FISCAL POLICY Our macroeconomic model so far has viewed government as passive But government purchases and transfer payments at all levels in the United States total more than $4 trillion a year, making government an important player in the economy From highway construction, to unemployment compensation, to income taxes, to federal deficits, fiscal policy affects the economy in myriad ways We now move fiscal policy to center stage As introduced in Chapter 3, fiscal policy refers to government purchases, transfer payments, taxes, and borrowing as they affect macroeconomic variables such as real GDP, employment, the price level, and economic growth When economists study fiscal policy, they usually focus on the federal government, although governments at all levels affect the economy Fiscal Policy Tools Automatic stabilizers Structural features of government spending and taxation that reduce fluctuations in disposable income, and thus consumption, over the business cycle Discretionary fiscal policy The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth The tools of fiscal policy sort into two broad categories: automatic stabilizers and discretionary fiscal policy Automatic stabilizers are revenue and spending programs in the federal budget that automatically adjust with the ups and downs of the economy to stabilize disposable income and, consequently, consumption and real GDP For example, the federal income tax is an automatic stabilizer because (1) once adopted, it requires no congressional action to operate year after year, so it’s automatic, and (2) it reduces the drop in disposable income during recessions and reduces the jump in disposable income during expansions, so it’s a stabilizer, a smoother Discretionary fiscal policy, on the other hand, requires the deliberate manipulation of government purchases, transfer payments, and taxes to promote macroeconomic goals like full employment, price stability, and economic growth President Bush’s tax cuts are examples of discretionary fiscal policies Some discretionary policies are temporary, such as a one-time boost in government spending to fight a recession The Bush tax cuts were originally scheduled to expire, and thus would remain discretionary fiscal policy measures unless they are made permanent Using the income-expenditure framework developed earlier, we initially focus on the demand side to consider the effect of changes in government purchases, transfer payments, and taxes on real GDP demanded The short story is this: At any given price level, an increase in government purchases or in transfer payments increases real GDP demanded, and an increase in net taxes decreases real GDP demanded, other things constant Next, we see how and why Changes in Government Purchases Let’s begin by looking at Exhibit 1, with real GDP demanded of $14.0 trillion, as reflected at point a, where the aggregate expenditure line crosses the 45-degree line You may recall that this equilibrium was determined two chapters back, where government purchases and net taxes equaled $1.0 trillion each and did not vary with income—that is, they were autonomous, or independent of income Because government purchases equal net taxes, the government budget is balanced Chapter 12 253 Fiscal Policy Aggregate expenditure (trillions of dollars) C + I + G' + (X – M) C + I + G + (X – M) b 14.5 0.1 14.0 Exhibit Effect of a $0.1 Trillion Increase in Government Purchases on Aggregate Expenditure and Real GDP Demanded As a result of a $0.1 trillion increase in government purchases, the aggregate expenditure line shifts up by $0.1 trillion, increasing the level of real GDP demanded by $0.5 trillion This model assumes the price level remains unchanged a 45˚ 14.0 14.5 Real GDP (trillions of dollars) Now suppose federal policy makers, believing that unemployment is too high, decide to stimulate aggregate demand by increasing government purchases $0.1 trillion, or by $100 billion To consider the effect on aggregate demand, let’s initially assume that nothing else changes, including the price level and net taxes This additional spending shifts the aggregate expenditure line up by $0.1 trillion up to C ϩ I ϩ GЈ ϩ (X Ϫ M) At real GDP of $14.0 trillion, spending now exceeds output, so production increases This increase in production increases income, which in turn increases spending, and so it goes through the series of spending rounds The initial increase of $0.1 trillion in government purchases eventually increases real GDP demanded at the given price level from $14.0 trillion to $14.5 trillion, shown as point b in Exhibit Because output demanded increases by $0.5 trillion as a result of an increase of $0.1 trillion in government purchases, the multiplier in our example is equal to As long as consumption is the only spending component that varies with income, the multiplier for a change in government purchases, other things constant, equals 1/(1 Ϫ MPC), or 1/(1 Ϫ 0.8) in our example Thus, we can say that for a given price level, and assuming that only consumption varies with income, ⌬ Real GDP demanded = ⌬G ϫ _ Ϫ MPC where, again, the delta symbol (⌬) means “change in.” This same multiplier appeared two chapters back, when we discussed shifts of the consumption function, the investment function, and the net exports function Changes in Net Taxes A change in net taxes also affects real GDP demanded, but the effect is less direct A decrease in net taxes, other things constant, increases disposable income at each level of The Office of Management and Budget offers background on the federal budget, including the president’s budget message, an overview of the budget, and details of federal agencies Access this information for a recent budget at http://www whitehouse.gov/omb/ budget/fy2008/budget.html 254 Part Fiscal and Monetary Policy real GDP, so consumption increases In Exhibit 2, we begin again at equilibrium point a, with real GDP demanded equal to $14.0 trillion To stimulate aggregate demand, suppose federal policy makers cut net taxes by $0.1 trillion, or by $100 billion, other things constant We continue to assume that net taxes are autonomous—that is, that they not vary with income A $100 billion reduction in net taxes could result from a tax cut, an increase in transfer payments, or some combination of the two The $100 billion decrease in net taxes increases disposable income by $100 billion at each level of real GDP Because households now have more disposable income, they spend more and save more at each level of real GDP Because households save some of the tax cut, consumption increases in the first round of spending by less than the full tax cut Specifically, consumption spending at each level of real GDP rises by the decrease in net taxes multiplied by the marginal propensity to consume In our example, consumption at each level of real GDP increases by $100 billion times 0.8, or $80 billion Cutting net taxes by $100 billion causes the aggregate expenditure line to shift up by $80 billion, or $0.08 trillion, at all levels of real GDP, as shown in Exhibit This initial increase in spending triggers subsequent rounds of spending, following a now-familiar pattern in the income-expenditure cycle based on the marginal propensities to consume and to save For example, the $80 billion increase in consumption increases output and income by $80 billion, which in the second round leads to $64 billion in consumption and $16 billion in saving, and so on through successive rounds As a result, real GDP demanded eventually increases from $14.0 trillion to $14.4 trillion per year, or by $400 billion Effect of a $0.1 Trillion Decrease in Net Taxes on Aggregate Expenditure and Real GDP Demanded As a result of a decrease in net taxes of $0.1 trillion, or $100 billion, consumers, who are assumed to have a marginal propensity to consume of 0.8, spend $80 billion more and save $20 more billion at every level of real GDP The consumption function shifts up by $80 billion, or $0.08 trillion, as does the aggregate expenditure line An $80 billion increase of the aggregate expenditure line eventually increases real GDP demanded by $0.4 trillion Keep in mind that the price level is assumed to remain constant during all this Aggregate expenditure (trillions of dollars) Exhibit C ’ + I + G + (X – M) C + I + G + (X – M) c 14.4 0.08 14.0 a 45˚ 14.0 14.4 Real GDP (trillions of dollars) Chapter 12 Fiscal Policy 255 The effect of a change in net taxes on real GDP demanded equals the resulting shift of the aggregate expenditure line times the simple spending multiplier Thus, we can say that the effect of a change in net taxes is ⌬ Real GDP demanded ϭ (ϪMPC ϫ ⌬ NT) ϫ _ Ϫ MPC The simple spending multiplier is applied to the shift of the aggregate expenditure line that results from the change in net taxes This equation can be rearranged as ϪMPC ⌬ Real GDP demanded = ⌬ NT ϫ _ Ϫ MPC where ϪMPC/(1 Ϫ MPC) is the simple tax multiplier, which can be applied directly to the change in net taxes to yield the change in real GDP demanded at a given price level This tax multiplier is called simple because, by assumption, only consumption varies with income (taxes not vary with income) For example, with an MPC of 0.8, the simple tax multiplier equals Ϫ4 In our example, a decrease of $0.1 trillion in net taxes results in an increase in real GDP demanded of $0.4 trillion, assuming a given price level As another example, an increase in net taxes of $0.2 trillion would, other things constant, decrease real GDP demanded by $0.8 trillion Note two differences between the government purchase multiplier and the simple tax multiplier First, the government purchase multiplier is positive, so an increase in government purchases leads to an increase in real GDP demanded The simple tax multiplier is negative, so an increase in net taxes leads to a decrease in real GDP demanded Second, the multiplier for a given change in government purchases is larger by than the absolute value of the multiplier for an identical change in net taxes In our example, the government purchase multiplier is 5, while the absolute value of the tax multiplier is This holds because changes in government purchases affect aggregate spending directly—a $100 billion increase in government purchases increases spending in the first round by $100 billion In contrast, a $100 billion decrease in net taxes increases consumption indirectly by way of a change in disposable income Thus, each $100 billion decrease in net taxes increases disposable income by $100 billion, which, given an MPC of 0.8, increases consumption in the first round by $80 billion; people save the other $20 billion In short, an increase in government purchases has a greater impact on real GDP demanded than does an identical tax cut because some of the tax cut gets saved, so it leaks from the spending flow To summarize: An increase in government purchases or a decrease in net taxes, other things constant, increases real GDP demanded Although not shown, the combined effect of changes in government purchases and in net taxes is found by summing their individual effects INCLUDING AGGREGATE SUPPLY To this point in the chapter, we have focused on the amount of real GDP demanded at a given price level We are now in a position to bring aggregate supply into the picture The previous chapter introduced the idea that natural market forces may take a long time to close a contractionary gap Let’s consider the possible effects of using discretionary fiscal policy in such a situation Discretionary Fiscal Policy to Close a Contractionary Gap What if the economy produces less than its potential? Suppose the aggregate demand curve AD in Exhibit intersects the aggregate supply curve at point e, yielding the Simple tax multiplier The ratio of a change in real GDP demanded to the initial change in autonomous net taxes that brought it about; the numerical value of the simple tax multiplier is –MPC/(1 – MPC) 256 Part Exhibit Fiscal and Monetary Policy Discretionary Fiscal Policy to Close a Contractionary Gap SRAS130 Price level The aggregate demand curve AD and the short-run aggregate supply curve, SRAS130, intersect at point e Output falls short of the economy’s potential The resulting contractionary gap is $0.5 trillion This gap could be closed by discretionary fiscal policy that increases aggregate demand by just the right amount An increase in government purchases, a decrease in net taxes, or some combination could shift aggregate demand out to AD*, moving the economy out to its potential output at e* Potential output LRAS e* 130 125 e e' AD 13.5 14.0 Contractionary gap Expansionary fiscal policy An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output; fiscal policy used to close a contractionary gap AD* e" 14.5 Real GDP (trillions of dollars) short-run output of $13.5 trillion and price level of 125 Output falls short of the economy’s potential, opening up a contractionary gap of $0.5 trillion Unemployment exceeds the natural rate If markets adjusted naturally to high unemployment, the shortrun aggregate supply curve would shift rightward in the long run to achieve equilibrium at the economy’s potential output, point eЉ History suggests, however, that wages and other resource prices could be slow to respond to a contractionary gap Suppose policy makers believe that natural market forces will take too long to return the economy to potential output They also believe that the appropriate increase in government purchases, decrease in net taxes, or some combination of the two could increase aggregate demand just enough to return the economy to its potential output A $0.2 trillion increase in government purchases reflects an expansionary fiscal policy that increases aggregate demand, as shown in Exhibit by the rightward shift from AD to AD* If the price level remained at 125, the additional spending would increase the quantity demanded from $13.5 to $14.5 trillion This increase of $1.0 trillion reflects the simple spending multiplier effect, given a constant price level At the original price level of 125, however, excess quantity demanded causes the price level to rise As the price level rises, real GDP supplied increases, but real GDP demanded decreases along the new aggregate demand curve The price level rises until quantity demanded equals quantity supplied In Exhibit 3, the new aggregate demand curve intersects the aggregate supply curve at e*, where the price level is 130, the one Chapter 12 257 Fiscal Policy originally expected, and output equals potential GDP of $14.0 trillion Note that an expansionary fiscal policy aims to close a contractionary gap The intersection at point e* is not only a short-run equilibrium but a long-run equilibrium If fiscal policy makers are accurate enough (or lucky enough), the appropriate fiscal stimulus can close the contractionary gap and foster a long-run equilibrium at potential GDP But the increase in output results in a higher price level What’s more, if the federal budget was in balance before the fiscal stimulus, the increase in government spending creates a budget deficit In fact, the federal government has run deficits in 90 percent of the years since the early 1970s What if policy makers overshoot the mark and stimulate aggregate demand more than necessary to achieve potential GDP? In the short run, real GDP exceeds potential output In the long run, the short-run aggregate supply curve shifts back until it intersects the aggregate demand curve at potential output, increasing the price level further but reducing real GDP to $14.0 trillion, the potential output Discretionary Fiscal Policy to Close an Expansionary Gap Suppose output exceeds potential GDP In Exhibit 4, the aggregate demand curve, ADЈ, intersects the aggregate supply curve to yield short-run output of $14.5 trillion, an amount exceeding the potential of $14.0 trillion The economy faces an expansionary gap of $0.5 trillion Ordinarily, this gap would be closed by a leftward shift of the shortrun aggregate supply curve, which would return the economy to potential output but at a higher price level, as shown by point eЉ But the use of discretionary fiscal policy introduces another possibility By reducing government purchases, increasing net taxes, or employing some combination of the Potential output LRAS SRAS130 e" e' Price level 135 e* 130 AD' AD* 14.0 14.5 Expansionary gap Real GDP (trillions of dollars) Exhibit Discretionary Fiscal Policy to Close an Expansionary Gap The aggregate demand curve AD’ and the short-run aggregate supply curve, SRAS130, intersect at point e’, resulting in an expansionary gap of $0.5 trillion Discretionary fiscal policy aimed at reducing aggregate demand by just the right amount could close this gap without inflation An increase in net taxes, a decrease in government purchases, or some combination could shift the aggregate demand curve back to AD* and move the economy back to potential output at point e* 258 Part Contractionary fiscal policy A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; fiscal policy used to close an expansionary gap two, the government can implement a contractionary fiscal policy to reduce aggregate demand This could move the economy to potential output without the resulting inflation If the policy succeeds, aggregate demand in Exhibit shifts leftward from ADЈ to AD*, establishing a new equilibrium at point e* Again, with just the right reduction in aggregate demand, output falls to $14.0 trillion, the potential GDP Closing an expansionary gap through fiscal policy rather than through natural market forces results in a lower price level, not a higher one Increasing net taxes or reducing government purchases also reduces a government deficit or increases a surplus So a contractionary fiscal policy could reduce inflation and reduce a federal deficit Note that a contractionary fiscal policy aims to close an expansionary gap Such precisely calculated expansionary and contractionary fiscal policies are difficult to achieve Their proper execution assumes that (1) potential output is accurately gauged, (2) the relevant spending multiplier can be predicted accurately, (3) aggregate demand can be shifted by just the right amount, (4) various government entities can somehow coordinate their fiscal efforts, and (5) the shape of the short-run aggregate supply curve is known and remains unaffected by the fiscal policy itself Fiscal and Monetary Policy The Multiplier and the Time Horizon In the short run, the aggregate supply curve slopes upward, so a shift of aggregate demand changes both the price level and the level of output When aggregate supply gets in the act, we find that the simple multiplier overstates the amount by which output changes The exact change of equilibrium output in the short run depends on the steepness of the aggregate supply curve, which in turn depends on how sharply production costs increase as output expands The steeper the short-run aggregate supply curve, the less impact a given shift of the aggregate demand curve has on real GDP and the more impact it has on the price level, so the smaller the spending multiplier If the economy is already producing its potential, then in the long run, any change in fiscal policy aimed at stimulating demand increases the price level but does not affect output Thus, if the economy is already producing its potential, the spending multiplier in the long run is zero THE EVOLUTION OF FISCAL POLICY Now that you have some idea of how fiscal policy can work in theory, let’s take a look at fiscal policy in practice, beginning with the approach used before the Great Depression Prior to the Great Depression Classical economists A group of 18th- and 19thcentury economists who believed that economic downturns corrected themselves through natural market forces; thus, they believed the economy was self-correcting and needed no government intervention Before the 1930s, discretionary fiscal policy was seldom used to influence the macroeconomy Public policy was shaped by the views of classical economists, who advocated laissez-faire, the belief that free markets were the best way to achieve economic prosperity Classical economists did not deny that depressions and high unemployment occurred from time to time, but they argued that the sources of such crises lay outside the market system, in the effects of wars, tax increases, poor growing seasons, changing tastes, and the like Such external shocks could reduce output and employment, but classical economists believed that natural market forces, such as changes in prices, wages, and interest rates, could correct these problems Chapter 12 Fiscal Policy Simply put, classical economists argued that if the economy’s price level was too high to sell all that was produced, prices would fall until the quantity supplied equaled the quantity demanded If wages were too high to employ all who wanted to work, wages would fall until the quantity of labor supplied equaled the quantity demanded And if the interest rate was too high to invest all that had been saved, interest rates would fall until the amount invested equaled the amount saved So the classical approach implied that natural market forces, through flexible prices, wages, and interest rates, would move the economy toward potential GDP There appeared to be no need for government intervention What’s more, the government, like households, was expected to live within its means The idea of government running a deficit was considered immoral Thus, before the onset of the Great Depression, most economists believed that discretionary fiscal policy could more harm than good Besides, the federal government itself was a bit player in the economy At the onset of the Great Depression, for example, federal outlays were less than percent of GDP (compared to about 20 percent today) The Great Depression and World War II Although classical economists acknowledged that capitalistic, market-oriented economies could experience high unemployment from time to time, the depth and duration of the depression strained belief in the economy’s ability to mend itself The Great Depression was marked by four consecutive years of contraction during which unemployment reached 25 percent Investment plunged 80 percent Many factories sat idle With vast unemployed resources, output and income fell well short of the economy’s potential The stark contrast between the natural market adjustments predicted by classical economists and the years of high unemployment during the Great Depression represented a collision of theory and fact In 1936, John Maynard Keynes of Cambridge University, England, published The General Theory of Employment, Interest, and Money, a book that challenged the classical view and touched off what would later be called the Keynesian revolution Keynesian theory and policy were developed in response to the problem of high unemployment during the Great Depression Keynes’s main quarrel with the classical economists was that prices and wages did not seem to be flexible enough to ensure the full employment of resources According to Keynes, prices and wages were relatively inflexible in the downward direction—they were “sticky”—so natural market forces would not return the economy to full employment in a timely fashion Keynes also believed business expectations might at times become so grim that even very low interest rates would not spur firms to invest all that consumers might save It is said that geologists learn more about the nature of the Earth’s crust from one major upheaval, such as a huge earthquake or major volcanic eruption, than from a dozen lesser events Likewise, economists learned more about the economy from the Great Depression than from many more-modest business cycles Even though this depression began about eight decades ago, economists continue to sift through the rubble, looking for clues about how the economy really works Three developments in the years following the Great Depression bolstered the use of discretionary fiscal policy in the United States The first was the influence of Keynes’s General Theory, in which he argued that natural forces would not necessarily close a contractionary gap Keynes thought the economy could get stuck well below its potential, requiring the government to increase aggregate demand to boost output and employment The second development was the impact of World War II on output and employment The demands of war greatly increased production and erased cyclical 259 260 Part Employment Act of 1946 Law that assigned to the federal government the responsibility for promoting full employment and price stability unemployment during the war years, pulling the U.S economy out of its depression The third development, largely a consequence of the first two, was the passage of the Employment Act of 1946, which gave the federal government responsibility for promoting full employment and price stability Prior to the Great Depression, the dominant fiscal policy was a balanced budget Indeed, to head off a modest deficit in 1932, federal tax rates were raised, which only deepened the depression In the wake of Keynes’s General Theory and World War II, however, policy makers grew more receptive to the idea that fiscal policy could improve economic stability The objective of fiscal policy was no longer to balance the budget but to promote full employment with price stability even if budget deficits resulted Fiscal and Monetary Policy Automatic Stabilizers This chapter has focused mostly on discretionary fiscal policy—conscious decisions to change taxes and government spending to achieve the economy’s potential output Now let’s get a clearer picture of automatic stabilizers Automatic stabilizers smooth out fluctuations in disposable income over the business cycle by stimulating aggregate demand during recessions and dampening aggregate demand during expansions Consider the federal income tax For simplicity, we have assumed that net taxes are independent of income In reality, the federal income tax system is progressive, meaning that the fraction of income paid in taxes increases as a taxpayer’s income increases During an economic expansion, employment and incomes rise, moving some taxpayers into higher tax brackets As a result, taxes claim a growing fraction of income This slows the growth in disposable income and, hence, slows the growth in consumption Therefore, the progressive income tax relieves some of the inflationary pressure that might otherwise arise as output increases during an economic expansion Conversely, when the economy is in recession, output declines, employment and incomes fall, moving some people into lower tax brackets As a result, taxes take a smaller bite out of income, so disposable income does not fall as much as GDP Thus, the progressive income tax cushions declines in disposable income, in consumption, and in aggregate demand Another automatic stabilizer is unemployment insurance During economic expansions, the system automatically increases the flow of unemployment insurance taxes from the income stream into the unemployment insurance fund, thereby moderating consumption and aggregate demand During contractions, unemployment increases and the system reverses itself Unemployment payments automatically flow from the insurance fund to the unemployed, increasing disposable income and propping up consumption and aggregate demand Likewise, welfare payments automatically increase during hard times as more people become eligible Because of these automatic stabilizers, GDP fluctuates less than it otherwise would, and disposable income varies proportionately less than does GDP Because disposable income varies less than GDP does, consumption also fluctuates less than GDP does (as shown in a previous case study) The progressive income tax, unemployment insurance, and welfare benefits were initially designed not so much as automatic stabilizers but as income redistribution programs Their roles as automatic stabilizers were secondary effects of the legislation Automatic stabilizers not eliminate economic fluctuations, but they reduce their magnitude The stronger and more effective the automatic stabilizers are, the less need for discretionary fiscal policy Because of the greater influence of automatic stabilizers, the economy is more stable today than it was during the Great Depression and before As a measure of just how successful these automatic stabilizers have become in cushioning the impact of recessions, consider this: Since 1948, real GDP declined during seven years, but real consumption fell during only two years—by 0.8 percent in 1974 and by 466 bank branches, 311–312 bank holding company, 311–312 banking, 300–301 deregulation, 309 heavily regulated industry, 309 troubles during Great Depression, 306–308 bank mergers, 312 bank notes, 303, 305 Bank of America, 314 Bank of England, 305, 373 Bank of Internet USA, 330 Bank of Japan, 305 Bank of New England, 310 Bank of Russia statistics page, 303 Bank One, 314 banks assets, 323, 326 asymmetric information, 322 balance 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units, 36 consumption, 143, 190, 205 autonomous, 229 average decline, 203 change in, 192 dependent variable, 191 environmental problems, 150 expectations and, 196 flow variable, 194 increasing, 212, 254 induced, 230 marginal propensities to, 191–192 net wealth, 194–195 nonincome determinants of, 193–198 reflecting income, 190 relationship with income, 190–191 tax rates affecting, 263–264 variability, 202–203 variable new exports, 226–227 consumption function, 191– 196, 212, 217, 229, 270 consumption possibilities, 389–391 consumption possibilities frontier (CPF), 389 consumption possibilities table, 388 Continental Illinois Bank, 310 continuing resolutions, 275 contraction, 100–101 contractionary fiscal policy, 252 contractionary gap, 241, 243 closing, 238–240, 362–364 discretionary fiscal policy to close, 255–257 expansionary monetary policy, 345–346 conventions and developing countries, 449 convergence theory, 135–136 cooperatives, 54–55 coordination failure, 243 coping with financial crises, 334–335 corporate profits, 162 corporations, 54 cost of something, 28 cost-push inflation, 179 cottage industry system, 53 Council of Economic Advisers, 110 Council of Economic Advisors, 275 counter, 199 counterfeiting U.S currency, 319–320 countries balance of payments, 66 business taxes, 40 developing countries, 430–432 ease of doing business, 39–40 economic vitality, 430 exchange rates, 66 GNP (gross national product), 430 income distribution, 442 industrial market countries, 430–432 opportunity cost, 66 output per capita, 430 trade restrictions, 66 courts, 40 CPI (consumer price index), 152–154, 179–180 Crane & Company, 321 Creamer, Paula, 29 credit cards, 320–321 467 credits, 410 credit unions, 310 crop failures, 110–111 crowding in, 280 crowding out, 279, 288–289 Cruise, Tom, 29 C-Span archives, 367 currency, 318, 320, 422 current account, 410 current transactions, 414 customs developing countries, 449 economic systems based on, 45 cyclically balanced budget, 278 cyclical unemployment, 174 D Deaton, Angus, 136 debit cards, 320–321 debits, 410 debt, 285, 289–290 decision-making lag, 366 Declaration of Independence, 136 declining industries argument, 403–404 deficits, 411 1980s, 278–279 balance of payments, 414–415 budget philosophies and, 277–278 crowing in, 280 expansions, 269 financing, 280 interest rates, 279 intergenerational view, 289–290 persistence of, 279 rationale for, 277 recessions, 277–278 twin, 280 World War II, 278 defining relevant variables, 8–9 deflation, 178, 180 DeLong, J Bradford, 112, 200 demand, 72 amounts purchased per period, 72 468 demand (continued) demand curve, 73–75 demand schedule, 73–75 describing, 73–74 individual, 75 law of, 72–73 markets, 75, 81–83 other-things-constant assumption, 73 demand curve, 73–75 consumer expectations, 76–77 consumer income, 75 consumer tastes, 77 equilibrium, 83–84, 86 foreign exchange, 416–417 marginal benefit, 393 movement along, 74, 77 number or composition of consumers, 77 prices of other goods, 75–76 shifts of, 75–77, 83–84 demand for money, 340–341, 344, 354–355 demand-management policies, 261, 377 demand-pull inflation, 178 demand schedule, 73–75 demand-side economics, 110 demand-side equilibrium algebra, 269–271 Democrats and unemployment, 263 DeNiro, Robert, 29 deposit insurance, 309 depository institutions, 304–305 Depp, Johnny, 29 depreciation, 149–150, 416 depression, 100, 168 devaluation, 422 developed countries, 124, 430 developing countries, 124, 430–432 brain drain, 443 capital infrastructure, 438 conventions, 449 customs, 449 Index deficiencies in infrastructures, 135 education, 124–125, 435 entrepreneurial skills, 439 export promotion, 444 farmers, 437 financial institutions, 438 foreign aid, 445 freer trade, 444–445 health and nutrition, 432–434 high birth rates, 434–435 import substitution, 443–444 inefficient use of labor, 436–437 labor and environmental standards, 400 labor force, 430 lower wages, 403 migration, 443 natural resources, 437 poverty, 435, 441–442 special-interest groups, 444 trade deficits, 443 trade problems, 442–443 trade restrictions, 443 unemployment rate, 437 Diaz, Cameron, 29 discount rate, 308, 332 discouraged workers, 167 discretion, 374–376 discretionary fiscal policy, 256, 263, 265, 267–268, 367 contractionary gap, 255–257 expansionary gap, 257–258 permanent income, 263–264 reducing use of, 265 tax cuts, 252 discretionary monetary policy, 375 discretionary policy, 363, 365, 374 diseases, 433 disequilibrium, 88–91 disinflation, 178 disposable income (DI), 147, 161–162, 190–191, 204, 210 change in, 195 fraction saved, 197 independent variable, 191 investment, 200 distribution question, 42 division of labor, 34 dollar appreciating and depreciating, 416, 419 desire to acquire, 417 foreign currencies, 356–357 greater demand for, 280 international medium of exchange, 419 overvalued, 423 rising value of, 280 use internationally, 318–319 dollar-per-euro exchange rate, 417 domestic content requirements, 398 double coincidence of wants, 294 double counting, 143, 145 double-entry bookkeeping, 142, 144, 410 DR-CAFTA, 401 dual banking system, 305 dumping, 399, 402 durable goods, 52, 147 dysfunctional or corrupt government, 441 Dyson, Esther, 15 E ease of doing business, 39–40 e-banking, 330 economic activity, 149 economic analysis, science of, 8–15 economic choice, economic decision makers, 4–5, 106 economic development education, 124–125, 436 foreign aid, 445–446 institutions, 449–450 rules of the game, 39–41 economic fluctuations, 100 economic growth, 41, 61, 122–125, 132 Economic Report of the President, 275 Economic Review, 101 economics, 2–4 economic systems based on custom or religion, 45 goods and services produced, 42 mixed system, 44–45 ownership of resources, 446 pure capitalism, 42–43 pure command system, 43–44 questions answered by, 41–42 transitional economies, 44–45 types, 446–447 economic theory, economic transactions, 340, 410 economic welfare and GDP (gross domestic product), 150 economies of scale, 391 The Economist, 13, 200, 420 economists, 11–13 economy active policy versus passive policy, 362–368 aggregate demand, 105–108 aggregate output, 105 aggregate supply, 105–108 assessment of, 369 automatic stabilizers, 362 circular flow, 99 contraction, 100–101 convergence theory, 135–136 depression, 100 developing countries, 124 different views of, 374 difficulty of figuring out, 374–375 equilibrium, 107–108 expansion, 100–101 flow variable, 99 industrial market countries, 124 inflation, 101 investment demand curve, 199 knowledge, 99–100 lag structure, 375 linkage across, 103 measuring performance, 142 measuring size, 98 money, 99 more active, 340 normal capacity, 234 optimal performance, 110 peak, 101 performance, 98–100 price level, 105 production possibilities, 34–41 production possibilities frontier (PPF), 36 random disturbances, 102 recession, 100 relationships among key variables, 100 renewing itself, 99 ripple effect of 9/11, 218–219 saving rate, 197 seasonal fluctuations, 102 self-correcting forces, 362 self-sufficient householders, 149 stability and resiliency, 367 stable, 374–375 stock variable, 99 strong recovery, 266 summary income statement, 162 swings in, 375 testing new theories, 99 trough, 101 unstable, 374 Ecuador, 318 education, 124–125, 435–436 effectiveness lag, 366–367 efficiency, 35, 41 efficient anti-inflation policy, 372 efficient markets, 451 Einstein, Albert, electronic banking, 332 electronic cottage, 58–59 El Salvador, 320 Emergency Jobs Appropriation Act, 366 employee compensation, 162 employment growth, 112–113 long run, 244–245 Employment Act of 1946, 110, 260 enterprises, 447 entire relationship, 74 entitlement programs, 280 entrepreneurial ability, 3, 439 entrepreneurs, 3, 52–53 equation of exchange, 348–349, 351 equilibrium demand curve shifts, 83–84, 86 economy, 107–108 exchange rates, 417, 419 markets, 81–83 price and quantity, 83–84 supply curve shifts, 84–86 equilibrium interest rates, 342–343 equilibrium point, 83 equilibrium price, 83 equilibrium quantity, 83 Ernst & Young, 59 euro area, 416 Europe, 247 euro, 415–416 happiness, 136 European Central Bank, 373–374 European industrial policy, 138 European Union, 401, 424 euros, 401, 415–418 Eurostat, 247 euro zone, 416 events, 123–124 excess reserves, 326–330 exchange, 32–34, 62, 81, 305, 386 exchange rates, 66, 415–416 adjusting, 422 Index 469 aggregate demand curve, 106–107 arbitrageurs, 418–419 barter, 298 determining, 417–418 dollar-per-euro, 417 equilibrium, 417, 419 fixed, 421–422 flexible, 421, 423 managed float system, 423–424 overvalued dollar, 423 purchasing power parity (PPP) theory, 419–421 speculators, 418–419 volatility, 423–424 Excite Web site, 58 executive branch and federal budget, 284 exhaustible resources, expansion, 100–101 cyclical unemployment, 174 deficits, 265, 278 expansionary fiscal policy, 256–257, 368 expansionary gap, 237, 261 closing, 236–238, 364–365 discretionary fiscal policy closing, 257–258 labor shortage, 241 opening, 377 expansionary monetary policy, 345–346, 357, 370–372 expansionary policies, 262 expectations, 196, 369–373 expected inflation, 185 expected marginal benefit, expected marginal cost, expected price level, 232, 235 expected rate of return, 198 expected real interest rate, 185 expenditure, 145–148, 229–230 expenditure approach, 142–144 export function, 209 export promotion, 444 exports, 209, 386–387 exceeding imports, 204 high- and low-income countries, 442 production exceeds consumption, 391 export subsidies, 398 externalities, 60–61 F Facebook, 57 factories, 53 Fair, Ray, 262 fallacy of composition, 13 farmers, 437 Farrell, Colin, 29 fear of lending, 346 federal budget annually balanced budget, 277–278 biennial, 276 budget decisions, 275 budget resolution, 275 capital budget, 276–277 continuing resolutions, 275 cyclically balanced budget, 278 entitlement programs, 276 executive branch, 276 fiscal impact, 275, 277–274 functional finance, 278 income redistribution, 289 Medicare, 274, 282–283 no requirement to balance, 279 operating budget, 277 overly detailed, 276 persistence of deficit, 279 philosophies, 277–278 possible reforms, 276–277 presidential and congressional roles, 275 process, 274–277 public spending, 279 rationale for deficits, 277 short-lived budget surplus, 280–282 simplifying, 276–277 Social Security, 274, 282–283 surplus returned to deficit, 282 470 federal budget (continued) twin deficits, 280 uncontrollable items, 276 welfare spending, 274 federal budget deficit, 110, 261, 277, 284 ballooning, 368 before Great Depression, 277 increase, 279 reforming Social Security and Medicare, 282–283 since establishment of United States, 278–279 sluggish recovery, 368 federal debt, 112, 285 Federal Deposit Insurance Corporation (FDIC), 307 federal funds market, 325 federal funds rate, 325 monetary policy tools, 331–332 price stability, 347 short-term interest rates, 346–347 sustainable economic growth, 347 targeting, 346–348 federal governments, 61 federal income tax, 260 Federal Open Market Committee (FOMC), 307, 331, 346–348 federal outlays, 274, 282–283 Federal Reserve, 194 balance sheet, 333 board members, 215 credible monetary policy, 372–373 income source, 373 insulated from politics, 373 money machine, 335 stable price policy, 369 stimulating economy, 373 time horizon, 372–373 tools of monetary control, 333–335 Federal Reserve Bank of New York, 333 Federal Reserve Bank of Philadelphia, 346 Index Federal Reserve Bank of San Francisco, 156 Federal Reserve Banks, 305– 306, 318 Federal Reserve notes, 318, 333 Federal Reserve System, 305– 308, 320–321, 331 federal securities, 286 federal system of government, 61 Ferguson, Roger, Jr., 215 feudal lord, 299 fiat money, 301–302, 318 final goods and services, 142–143 finance companies, 322 finances, 451 financial account, 413–414 financial crisis, 332–333 financial institutions, 304–314, 438 financial intermediaries, 304 financial markets, 147 financial transactions, 414 Finland, 300 firms, 4–5, 52–54 borrowing, 147 collusion, 60 investment, 198 First Republic Bank of Dallas, 310 fiscal policy, 61, 365 aggregate supply, 255–258, 264 automatic stabilizers, 252, 260–261 balanced budget, 260 classical economists, 258–259 contractionary, 258 decision-making lag, 366 discretionary, 252 economic stability, 260 evolution of, 258–266 expansionary, 256–257 federal budget deficit, 261 Golden Age, 261 government purchases changes, 252–253 Great Depression, 259–260 implementation lag, 366 lags in, 263 laissez-faire, 258 natural rate of unemployment, 261 net taxes changes, 261– 263 presidential elections, 262–263 prior to Great Depression, 258–259 reviving slowing economy, 364 since 1990: from deficits to surpluses back to deficits, 265–256 stagflation, 261 tax cut, 261 theory of, 252–255 tools, 252 World War II, 259–260 Fiscal Policy Report Card on America’s Governors: 2002, 260 fixed exchange rates, 421– 422, 424 fixed incomes, 186 fixed-price weighting system, 155–156 flat rate taxes, 64, 270, 451 FleetBoston, 316 flexible exchange rates, 421, 423 flow, 299, 340 flow of income, 340 flow variable, 99 Ford, Gerald, 185 Ford, Henry, 145 foreign aid, 445–446 foreign exchange, 66, 414– 415 demand curve, 416–417 exchange rates, 415–416 purchasing power parity (PPP) theory, 419–421 supply curve, 417 foreign exchange market, 66, 415, 421 foreign investment, 280 formulating hypothesis, 10 forward looking, 200 fractional reserve banking system, 301, 307 France international comparisons of inflation, 182 international comparisons of unemployment, 175–176 unemployment rate, 247 Free Software Directory, 56 free trade, 399 frictional unemployment, 173 Friedman, Milton, 354, 356 full employment, 61, 174–175 functional finance, 278 future production, 37 G gains from trade, 386–392 Garnett, Kevin, 87 gasoline tax, 65 Gates, Bill, 29 GDP (gross domestic product), 62, 98, 142, 162, 204, 410 advanced estimate, 366 aggregate expenditure, 148 aggregate income, 144– 145 average decline, 203 consumption, 143, 202, 205 depreciation, 149–150 double counting, 143 economic welfare and, 150 existing buildings and machines, 143 expenditure approach, 143–144 final estimate, 366 final goods and services, 142–143 government purchases, 143–144 gross investment, 150 imputed income, 149 income approach, 144–145 inventories, 143 investment, 143, 202 leisure, 149 measuring output, 101 net exports, 144, 412 Index nominal dollars, 150–151 not reflecting all costs, 150 preliminary estimate, 366 price level changes, 105 production not included, 148–149 underground economy, 149 value added, 144–145 GDP price index, 154–155 gender annual earnings, 14 unemployment rates, 169 General Agreement on Tariffs and Trade (GATT), 398–399 General Electric, 128 The General Theory of Employment, Interest, and Money (Keynes), 109, 197, 259 Germany after World War II, 304 human capital, 135 hyperinflation, 354 international comparisons of inflation, 182 international comparisons of unemployment, 175–176 least independent banks, 373 reliable monetary system, 304 gifts of nature, global economy, 103 GNP (gross national product), 430 GNP per capita, 430 Goldman, Marshall, 451 goldsmiths, 301 goods, 3–4, 75, 144 ability to supply, 78 alternative, 80 average price, 105 complements, 76 free, inferior, 75 normal, 75 price changes, 75–76 prices as signals, 78–79 relative to prices of other, 74 scarcity, 2–4 substitutes, 76 traders, 294–295 unrelated, 76 goods and services average price, 154–155 consumers, 42 cost of buying, 152 households demanding, 52 international trade in, 144 medium of exchange, 295 merchandise trade balance, 412 production, 42 transforming resources into, 120 U.S imports and exports, 386–387 Google, 57, 127 Google Web site, 58 Gordon, Robert, 128 government budgets, 283 government consumption and gross investment, 143–144 government outlays, 283 government purchase function, 203, 212 government purchase multiplier, 259 government purchases, 143– 144, 205–206, 212, 229, 252–253, 255, 269–272, 274 government revenue, 394– 395 governments, 4, 60–61, 203 borrowing, 147 budget, 252 defining objectives, 61–62 dysfunctional or corrupt, 441 greatest happiness, 136 net taxes, 203–204 no market prices, 62 outlays, 147 purchases, 203 research and development (R&D), 132–133 role of, 59–61 rules of the game, 42, 59–60 safeguarding private property, 59 scarce resources, 134 separate jurisdictions, 61–62 shaping technological future, 134 size and growth, 62 sources of revenue, 63 structure and objectives, 61–62 transfer payments, 203–204 voluntary exchange versus coercion, 62 government spending multiplier, 269 gradualism, 450–451 graft and corruption, 41 Gramm-Leach-Bliley Act of 1999, 311 The Grapes of Wrath (Steinbeck), 166 Great Britain, 53 eliminated smallest coin, 300 unemployment benefits, 243 Great Depression, 62, 102, 108 banking troubles, 306–308 bank legislation passed during, 307–308 fiscal policy, 259–260 labor productivity, 125 limited bank assets, 308 unemployment, 259 U.S economy, 108–109 green accounting, 150 green GDP, 150 Greenpeace, 56 Greenspan, Alan, 356, 376 Gresham, Thomas, 298 Gresham’s law, 298, 303 gross debt, 285 gross investment, 150 gross private domestic investment, 143, 297 gross product, 98 gross state product, 98 471 gross world product, 98 Group of Seven (G-7), 124 growing economy, 355 growing money supply, 355 growth in practice, 124–131 production possibilities frontier (PPF), 118–120 rules of the game, 123–124 theory of, 118–124 H Hamilton, Alexander, 302 happiness and income, 136–137 hard currency, 419 health and nutrition, 432–434 hedonic method, 153 high birth rates, 434–435 higher prices, 78–84, 219–221 higher standard of living, 132 higher wage agreements, 370 high-income economies, 430 education, 436 exports, 442 health and nutrition, 432–434 high birth rates, 434–435 income per capita, 431–432 infant mortality, 433–434 Internet, 438 national income, 442 natural resources, 437 rules of the game, 440 high school dropouts, 171–172 Holzer, Harry, 171 Home Depot, 154 Hong Kong, 135, 302 Hoover, Herbert, 100 House budget committees, 275 household production, 57–58 households, 4–5 amount spent and amount saved, 190 borrowing, 147 domestic chores, 58 electronic cottage, 58–59 evolution of, 50 goods and services, 52 maximizing utility, 50–51 472 households (continued) net wealth, 194–195 personal income, 51–52 as resource suppliers, 51–52 savings, 147 self-sufficient, 50 short-term public assistance, 52 technological advances, 58 two-earner, 50 wealth, 106 women in labor force, 50 human body and U.S economy, 99–100 human capital, 3, 121, 124, 132 hyperinflation, 178, 302–303, 354, 372 hypothesis, formulating and testing, 10 hysteresis, 247 I IBM, 127 ideal money, 298 identifying question, 8–9 identity, 349 ignoring secondary effects, 13 IMF Web site, 424 impersonal exchange, 450 implementation lag, 366 imported steel tariffs, 405 import function, 209 import quotas, 395–398 imports, 209, 386–387 exceeding exports, 204 limiting, 397 production falling short, 391 tariffs, 394–395 import substitution, 443–444 imputed income, 149 incarceration, 171–172 income, 340 aggregate expenditure, 212–214 American-owned resources, 161 change in, 192 circular flow, 145–148 consumption reflecting, 190 Index disposable, 161–162 distribution within countries, 442 earned but not received, 161 employee compensation, 162 flow variable, 194 happiness and, 136–137 increasing, 212 money, 73 more equal distribution of, 61 more general form of, 229–230 net exports, 204, 209 personal, 161–162 pure capitalism, 42–43 real, 73 received but not earned, 161–162 relationship with consumption, 190–191 relative other people, 136–137 sources, 162 income approach, 142, 144–145 income expectations, 76–77 income-expenditure model, 213, 219, 229 increment of capital, 37 index number, 105 index numbers, 151 India, 45 individual demand, 75 individual supply, 79 induced consumption, 230 industrialized countries, 305 industrial market countries, 124, 430–432 industrial policy, 134 Industrial Revolution, 53 industries clustering, 131 demand curves, 199 productivity, 125–126 inefficient production, 35 infant-industry argument, 404 infant mortality, 433–434 inferior goods, 75 inflation, 101, 177, 298 aggregate supply, 179 annual rate of, 180 anticipated, 181 banks losing deposits, 308–309 cost-push inflation, 179 CPI (consumer price index), 179 demand-pull inflation, 178 eroding confidence in value of dollar, 181 exceeds expectations, 379 expected, 185 fixed incomes, 186 higher money income, 185 historical look, 179–181 hyperinflation in Brazil, 179–178 increases in, 377 interest rates, 183–185, 309 international comparisons of, 182 linking wages with, 182 metropolitan areas, 182 money, 303 money supply, 351, 353– 354 overstating, 152, 154 paying higher prices, 185 as penalty, 185 Phillips curve, 376 price level, 178 relative price changes, 181–182 Republicans, 263 sources of, 178–179 transaction costs of variable, 181 unanticipated, 181 unpopularity, 185–186 inflation expectations, 369–370 inflation rate, 110, 178 inflation targets, 374 information, 6–7, 30 Information Revolution, 58–59 ING Direct, 330 injections, 148 in-kind transfers, 52 Inomics search engine, 83 inputed income, 149 inputed rental income, 149 insect-rearing facility, 280 InsideHoops, 87 institutions, 449–452 Intel, 127–128, 134 interest, 183, 196, 290–291 interest rates changes in money supply, 344 consumption function, 196 cost of holding money, 341–342 crowding out, 279 decline in, 344 deficits, 279 discount rate, 306 drop in, 282 Fed-orchestrated increase in, 344 fluctuations, 355 government borrowing, 288 higher, 344 inflation, 183–185, 311 investment, 200, 344–345 loanable funds, 185 money demand, 341–342 reducing, 344 remaining stable, 355 setting ceiling on, 310–311 stabilizing, 356 surpluses, 279 virtual banks, 330 intermediate goods and services, 143 international comparisons of inflation, 182 international comparisons unemployment, 175–176 international economic transactions, 410 International Monetary Fund (IMF), 423–424, 445 international monetary system, 422–425 international perspective on public debt, 285–286 international specialization, 391–392 international trade, 66, 387–388 Internet banks, 332–333 high- and low-income economies, 438 productivity growth, 127–128 reducing transaction costs, 59 Inventory, 143, 214 inventory reductions, 214 investment, 143, 198, 212, 229 autonomous, 200 average decline, 203 business expectations, 203–202, 283–284 crowding in, 280 crowding out, 279 decline in, 344 demand for, 198–199 disposable income, 200 forward looking decisions, 200 government deficits and surpluses, 279–280 interest rates, 200, 344–345 market interest rate, 201 nonincome determinants, 200–203 saving, 120 undesirable fluctuations, 355 variability, 202–203 investment demand curve, 199, 346 investment function, 200, 212 invisible hand, 81 invisible hand of market coordination, 447 invisibles, 144, 412 Islamic law and charging interest, 45 Israel, 353–354 Italy international comparisons of inflation, 182 international comparisons of unemployment, 175–176 least independent banks, 373 net government debt relative to GDP, 290 J James, LeBron, 87 Japan falling wealth triggering recession, 223 government outlays, 283 happiness, 136 human capital, 135 income tax cut, 264 international comparisons of inflation, 182 international comparisons of unemployment, 175–176 real GDP, 223 saving, 197 U.S Treasury securities, 280 vending machines, 11–12 Japanese Information Network, 197 jobs and income argument, 402–403 John Deere, 216 Johnson, Lyndon B., 261 Johnson, Magic, 87 Jordan, Michael, 87 J.P Morgan chase, 314 K Kennedy, Anthony, 14 Kennedy, John F., 261 Keynes, John Maynard, 109–110, 197, 200–201, 259, 273 Kidman, Nicole, 29 Kornai, Janos, 450 Kuznets, Simon, 122, 142 L labor, aggregate supply, 232–233 ease of measuring, 120 effects of taxes on, 264–265 improvements in quality, 122 inefficient use of, 436–437 production cost, 120 quality of, 244 quantities, 122 Index 473 substituting for capital, 121 labor force, 167 labor force participation rate, 167–168 labor market dropouts, 171–172 labor productivity, 120–121 Great Depression, 125 growth, 125–126, 131, 369 human capital, 132 low, 436 physical capital, 132 United States, 125–126 World War II, 125 labor shortages, 379 labor supply curve, 236 lagging economic indicators, 104 laissez-faire philosophy, 43, 109, 258 Latin America, 424 Law, Jude, 29 law of comparative advantage, 32–34, 386, 389 law of demand, 72–73, 72–75 law of diminishing marginal returns from capital, 121 law of increasing opportunity cost, 36–37, 41 law of supply, 78 leading economic indicators, 103–104 leakages, 148 legal tender, 304 leisure, 149 lending agreements, 322 liabilities, 323, 326 liars loans, 322 life-cycle model of consumption and saving, 197 limited liability, 54 Linux, 56 liquidity, 341 versus profitability, 324–325 loanable funds, 183–185 loans, 301 local governments, 61 long run aggregate supply, 236–243 contractionary gap, 238– 240 employment, 240–241 expansionary gap, 236–237 money and aggregate demand, 348–354 tracing potential output, 240 wage flexibility, 240–241 long-run aggregate supply (LRAS) curve, 240, 349– 350 long-run equilibrium, 238, 257 long-run Phillips curve, 379–380 lower-than-expected price level, 379 low income, 437 low-income economies, 430 education, 436 exports, 442 health and nutrition, 432–434 high birth rates, 434–435 income per capita, 431–432 infant mortality, 433–434 Internet, 438 malnutrition, 433 national income, 442 rules of the game, 440 low-interest loans, 398 low labor productivity, 436 Lucas, Robert, 369 luxuries, 136 M M1 money, 318–320 Maastricht agreement, 373 Macapagal-Arroyo, Gloria, 14 macroeconomics, 7–8, 98, 237 macroeconomists, 99 malnutrition, 433 managed float system, 423–424 marginal, marginal analysis, marginal choice, marginal cost, 78, 394 marginal propensity to consume (MPC), 192– 193, 269 474 marginal propensity to import (MPI), 227, 270 marginal propensity to save (MPS), 192–193 marginal tax rates, 64 market demand, 75 market economy, 451 firms, 52–59 households, 50–52 market exchange, 62, 393–394 market failure, 59 market forces allocating resources, 43 contractionary gap, 362– 363 expansionary gap, 365 market interest rate, 198–199, 201 market order, 450 markets, 4, 449 clearing, 83 coordination, 81 demand and supply creation, 81–83 disequilibrium, 88–91 divided countries, 44 efficient, 451 equilibrium, 81–83 incentive power, 44 professional basketball, 87–88 requirements of efficient, 451–452 scarce resources, 134 transaction costs, 81 market supply, 79 market system, 43 Marshall, Alfred, 166 maximum selling price, 89 McDonald’s, 58 measuring the value, 299 Medicaid, 276 Medicare, 274, 276, 282–283 medium of exchange, 33, 99, 297, 341 member bank, 306 Mencken, H L., 137 mercantilism, 100, 142 merchandise, 144 merchandise trade balance, 66, 410–413 Index Merrill Lynch, 309 metropolitan areas, 182 Mexico, 357 microeconomics, 7–8 middle-income economies, 430 education, 436 health and nutrition, 432–434 income per capita, 431–432 infant mortality, 433–434 national income, 442 migration, 443 Ming, Yao, 87 minimum selling price, 88–89 Ministry of Economy, 353 Mitchell, Wesley C., 100 mixed system, 44–45 models, monetary policy, 61, 307, 339, 365, 367, 369 anticipating, 370–372 contrasting policies, 354–356 credibility, 372–373 decision-making lag, 366 implementation lag, 366 inflation expectations, 369–370 international considerations, 356–357 open-market operations, 307 passive rules, 374 problem of lags, 365–367 reviving slowing economy, 364 supply of gold, 422 targets, 354–357 targets after 1982, 356 targets before 1982, 356 monetary policy tools, 331–333 monetary systems, 303–304 monetary theory, 339 money, 5, 33, 99 acceptability, 302 bank creation, 325–328 banking, 300–301 checkable deposits, 320, 325–326 coins, 298–300 commodity feature, 302 commodity money, 297 currency, 320 demand and supply, 340–343 divisible, 298 durable, 298 earliest and its functions, 296–297 economic transactions, 340 evolution of, 296–304 exchanging for other financial assets, 343 fiat, 301–302 hoarding best, 298 holding wealth as, 341 inflation, 303 liquidity, 341 low opportunity cost, 298 M1, 318–319, 320 medium of exchange, 297, 341 money market mutual fund accounts, 320 narrow definition, 318–319 opportunity cost, 28, 30–31, 341 performing poorly, 302– 304 portable, 298 properties of ideal, 298 purchasing power, 302 regulating supply, 307 representative, 301–302 scarcity, 303 specialization, 33 stability, 298 store of value, 297, 351 trading away inferior, 298 uniform quality, 298 unit of account, 297 value of, 302 money aggregates, 318 money and aggregate demand long run, 348–354 short run, 343–346 money demand, 341–342 money demand curve, 341– 343, 346, 355 money expansion, 328–329 money income, 73 money market mutual fund, 309 money market mutual fund accounts, 320 money multiplier, 328–329 money supply, 344, 355–356, 375 increase in, 349 inflation, 351, 353–354 measures of, 318 multiple contraction, 329–330 steady and predictable growth, 356 money supply curve, 344 monopoly, 60 monthly employment data, 174 Moore, Demi, 29 moral hazard, 309 Motley, Brian, 152 multilateral agreement, 398–399 multilateral assistance, 445 multiplier with proportional income tax, 270 MySpace, 57 N National Academy of Social Insurance, 282 national banks, 305 National Basketball Association (NBA), 87–88 National Bureau of Economic Research (NBER), 100 national debt, 284 billing future taxpayers for current spending, 287–288 capital formation, 288–289 crowding out, 288–289 foreign ownership, 287– 288 interest, 286–287 interest payments, 274 measuring, 285 national defense argument, 401–402 national economy, 98–99 national income, 161–162, 442 national income accounting, 142, 148–150 national income accounts, 142–143, 150–151 nationalization, 450 National Steel, 404 national unemployment rate, 172 nation debt, 291 nations, 142–145 NationsBank, 316 natural monopoly, 60 natural rate hypothesis, 380 natural rate of unemployment, 233–234, 240, 261, 365, 380 natural resources, 3, 150, 437 needs, 72 negative externality, 61 net domestic product, 149– 150, 161–162 net export function, 204, 209–210, 212, 226 net exports, 144, 148, 162, 204–206, 210, 212, 229, 412 affecting spending, 227 income, 209 nonincome determinants, 204–205 shifts, 210 spending multiplier, 227 varying, 226, 230 Netherlands, 300 net interest, 162 net investment, 150 net investment income, 412–413 net taxes (NT), 147, 203–204, 253–255, 269–270 net tax multiplier, 269 net unilateral transfers abroad, 413 net wealth, 194–196 net worth, 325 New York City, 90–91 New York Federal Reserve Banks, 307 New Zealand, 373 nickels, 300 Nigeria, 135 Nike, 399 NikkeiNet, 223 Nixon, Richard, 110, 262 nominal dollars, 150–151 nominal GDP, 151, 155, 349, 351 nominal interest rate, 185 nominal wages, 232–234, 237, 239–241, 243, 369 noncustodial fathers, 171 nondurable goods, 52, 143 nonprofit institutions, 132– 133 Nordhaus, William, 262 normal capacity, 234 normal goods, 75 normative economic statement, 10–11 North American Free Trade Agreement (NAFTA), 401 North Korea (Democratic People’s Republic of Korea), 44 not-for-profit organizations, 56 Nowitzki, Dirk, 87 O occupations and unemployment, 172 O’Connor, Sandra Day, 14 OECD Web site, 242 Office of Management and Budget, 253 Office of National Statistics, 103 Office of the Comptroller of the Currency, 305 official unemployment figures, 176–177 off-the-books production, 149 OPEC (Organization of Petroleum Exporting Countries), 111 open-market operations, 307, 331–332 open-market purchase, 331 open-market sale, 331 open-source software, 56–57 operating budget, 272–273 Index 475 operating expenditures, 272 opportunities, 30 opportunity cost, 41 alternatives, 30 capital goods, 36–37 choice, 28–31 college, 28–29 consumer goods, 36–37 holding money, 341, 343 increment of capital, 37 investing in capital, 198 lower, 32 money, 28, 30–31 religious practices, 31 required time and information, 30 resources, 33 subjective, 30–31 varying, 30–31 women working in home, 50 Otellini, Paul, 14–15 other-things-constant assumption, 9, 73 output, 35, 370 efficiency, 41 exceeding economy’s potential, 379 output per capita, 129–130, 430 international comparisons, 130 owners’ equity, 323 P Panama, 304, 318 paper money, 301–302 partnerships, 54 passive approach, 374 passive policy, 368 versus active policy, 362– 368 contractionary gap, 362– 364 economy like supertanker on automatic pilot, 367 expansionary gap, 364–365 lags, 367 stable economy, 375 pay cuts, 243 payroll taxes, 63, 64–65, 283 peak, 101 pecuniary, 297 pecus, 297 pennies, 299–298 per capita consumption, 135 permanent income, 267–268 personal consumption expenditures, 143 personal exchange, 450 personal income, 51–52, 161–162 personal taxes, 162 per-worker production function, 121–122 Phillips, A W., 376 Phillips curve, 376–381 physical capital, 2–3, 121, 132, 143 physical flows, 451 policy rules, 374–376 political business cycles, 262–263 Pollakowski, Henry, 90 pollution tax, 65 positive economic statement, 10–11 positive externality, 61 potential GDP, 242 potential output, 235 changes in, 243 identifying, 365 natural rate of unemployment, 233 tracing, 240 poverty, 435, 441–442 poverty traps, 441 predatory dumping, 402 predicting average behavior, 12 present consumption, 37 president, 275 presidential candidates, 367–368 presidential elections, 266– 267 price ceilings, 89 price change accounting for, 150–156 income effect, 73 product quality, 153 substitution effect of, 72–73 476 price expectations, 76–77 price floors, 88–89 price indexes, 151–152 price level, 182, 256 constant, 221–223 consumption function, 195–196 decreasing, 196 effect of higher, 219–221 effect of lower, 221 equilibrium, 107–108 Great Depression, 108 higher than expected, 233–234 historical look, 179–181 increases, 196 index number, 105 inflation, 178 lower than expected, 235 measuring changes, 152 nearly eight decades of, 112–113 over time, 232 rational expectations, 371 reference number, 105 relationship with real GDP, 105–107 year-to-year changes in, 179–181 prices, 185 adjustments, 153 ceilings on, 110 higher, 78–84 inflexibility, 259 obscuring relative changes, 181–182 price stability, 61, 373 primary discount rate, 334 Princeton Review Web site, 28 private goods, 60 private property, 448–449 private property rights, 42 privatization, 450–451 producer cooperatives, 55 producer expectations, 80 producers changes in number, 80–81 surplus and market exchange, 393–394 production consumption, 391 Index do-it-yourself, 148–149 environmental problems, 150 fixed, 35 during given period, 35 inefficient, 35 marginal cost, 78 not included in GDP, 148–149 off-the-books, 149 possibilities without trade, 387–388 price level, 235 unattainable, 35 production possibilities, 34–41 production possibilities frontier (PPF), 41, 388 capital stock, 37 changes in resource availability, 37 economic growth, 119–120 efficiency and, 35 growth and, 118–120 inefficient and unattainable production, 35 law of increasing opportunity cost, 36–37, 41 rules of the game, 39 shape of, 36–37 shifting, 37–41 technological change, 38–39 productivity, 435–439 growth, 126–129 human capital, 124 income distribution within countries, 442 increasing, 34 industries, 125–126 inefficient use of labor, 436–437 low labor productivity, 436 natural resources, 437 in practice, 124–131 reflecting average, 120 rules of the game, 123–124, 439–440 technology, 122, 436 theory of, 118–124 productivity growth, 128–129 product markets, products availability of, 149 flows of, law of demand, 75 market distribution, 42 nations, 142–145 quality of, 149 shortage, 82 surplus, 81, 82 user-generated, 56–57 world supply and demand for, 394 professional basketball and market, 87–88 profit, 53, 233 profitability versus liquidity, 324–325 progressive taxation, 64 property, 43 property rights, 42, 44 proportional income tax, 64, 270 proprietors’ income, 52, 162 public capital, 292–293 public debt, 289–290 public goods, 43, 60 public infrastructure, 293 Public Policy Development Office (PPDO), 136 public spending, 283 purchasing power parity (PPP) theory, 419–421 pure capitalism, 42–43 pure command system, 43– 44 Q quality bias, 152–154 quantity demanded, 74 quantity supplied, 79 quantity theory of money, 349350 Quesnay, Franỗois, 142 quotas, 66 R race and unemployment rates, 169 radio call-in shows, 57 Raphael, Steven, 171 rational decision maker, rational expectations, 369, 375-376 rationality, 9-10 rational self-interest, Reagan, Ronald, 111, 185, 264, 284, 368 real (GDP), 105, 112 aggregate output, 105 annual percentage changes, 102 declining between 1973 and 1975, 111 depending on household wealth, 106 equilibrium, 107-108 Great Depression, 108 growth, 112 long-term growth trend, 101 nearly eight decades of, 112-113 before onset of depression, 108 relationship with price level, 105-107 real GDP, 105, 212-213 aggregate expenditure, 215-216 chain-weighted, 155-156 consumption, 229, 254 demand for money, 344 estimating, 155 exceeding spending, 214 increase in investment, 219 new income increasing, 216 price level, 221 spending exceeding, 214 real GDP demanded, 212-213, 223 algebra behind, 229-230 autonomous investment, 217 change in, 217, 269 increasing and decreasing, 255 net taxes, 269 price level, 219-221, 219 proportional income tax and variable net exports, 270 total change in, 217 real GDP per capita, 113, 265 real GDP supplied, 235 real income, 73 real interest rate, 185 realized capital gains, 54 real wage, 181, 232–233, 237, 240–241, 379 recession, 100, 102, 218, 367 1973–1975 and 1980, 110 1981, 112 1990, 112 cyclical unemployment, 174 deficits, 274 during first term of Republican presidents, 263 labor productivity growth, 128–129 terrorist attacks of September 2001, 112 unemployment rates, 168–170 recognition lag, 366 Red Cross, 56 Reeves, Keanu, 29 reference number, 105 regressive taxation, 64–65 regulating money supply, 307 regulating natural monopolies, 60 Reindeer Herders Association, 272 relative prices, 181–182 relevant resources, 79 religion, 45 renewable resources, rent ceilings, 90–91 rent seeking, 404 representative money, 301–302 Republicans and inflation, 263 required reserve ratio, 326 required reserves, 324 research, 132 research and development (R&D), 132–133 Research Seminar in Quantitative Economics (RSQE), 202 reserve accounts, 324 reserve banks Board of Governors, 307 reserve ratio, 301 reserve requirements, 328– 329, 332 reserves, 306 residential construction, 147 residents, 410 resource markets, resource price agreements, 234 resources, 2–3 allocating, 33 availability, 37 capitalist systems, 447 capital production, 36 employed efficiently, 35 fixed, 35, 118 fixed prices, 233 flows of, goods and services, 120 households supplying, 51–52 labor, market forces allocating, 43 misuse of wealth, 441 natural resources, opportunity cost, 33 owners, ownership, 448 prices, private ownership, 42 quality of, 244 quantity of, 244 socialist economies, 447 wages, rest of the world, 4, 65 revaluation, 422 revenue, 63 Revolutionary War, 98–100 Rockwell Collins, 218 Romania, 354 Romer, Christina, 368 Romer, David, 368 Roosevelt, Franklin D., 309 rules of the game, 35, 103, 446, 449 economic development, 39–41 fixed, 118 Index 477 government, 42, 59–60 high- and low-income economies, 440 improvements in, 39, 119 productivity, 439–440 Russia, 303, 354, 357 S salarium, 297 salary, 297 sales tax, 300 Sanyo, 11 saving, 124, 190–192, 199 saving function, 192–193 savings banks, 309–310 savings deposits, 320 scarcity, 3, 41, 73 Schwarzenegger, Arnold, 15 science of economic analysis economists telling stories, 11–12 normative versus positive economic statement, 10–11 pitfalls of faulty, 12–13 predicting average behavior, 12 scientific method, 8–10 scientific method, 8–10 SciForums.com, 264 S corporation, 54 seasonal unemployment, 173–174 secondary discount rate, 332 Secret Service, 319 seignior, 299 seigniorage, 299 self-interest, selling price, 88–89 selling time, Senate budget committees, 277 services, 2–4, 52, 143–144, 412 shortage, 82 short-lived budget surplus, 280–282 short run aggregate supply, 232–235 macroeconomics, 233 money and aggregate demand, 343–346 output exceeds potential, 234 price level, 233–235 short-run aggregate supply (SRAS) curve, 235–237, 256, 345–346, 369, 371, 377–378 short-run equilibrium, 265, 238, 257, 371–372 short-run output, 256 short-run Phillips curve, 377–381 short-run supply curve, 239 short-term public assistance, 52 simple money multiplier, 328–329 simple multiplier, 269 simple spending multiplier, 222–219, 270–271 simple tax multiplier, 255 Singapore, 135 Sky Chef, 218 “Slouching Toward Utopia,” 120 Smith, Adam, 34, 43, 81, 109, 118 social capital, 440 socialist economies, 447–448 social programs, 110 Social Security, 186, 274, 276, 282–283 Social Security Act of 1935, 175 soft budget constraints, 447 soft landing, 365 software, 56–57 sole proprietorships, 53–54 South African Customs Union, 401 South Korea, 44, 135 Southside Sportsman Club, 276 Soviet Union, 282 Spain, 373 SpeakOut.com, 275 special interests, 444–445 specialization, 32–34, 296, 386 gains from, 389–390 transaction costs, 52 specifying assumptions, 9–10 478 speculators, 418–419 spending, 212, 214–216 spending multiplier, 227, 230, 340 sporadic dumping, 402 stable price policy, 369 stagflation, 179, 246 1973 to 1980, 110–111 Phillips curve, 377 standard of living differences in, 124 increase in, 118 output per capita, 129–130 poorest third of world, 135 state banks, 305 state governments, 61 statistical discrepancy, 414 steel tariffs, 404–405 Steinbeck, John, 166 stock, 297, 340 stockholders, 54 stock market, 194–195 stock market crash, 108 stock money, 340 stock variable, 99 store of value, 299 structural unemployment, 174 substitutes, 76 substitution effect of price change, 72–73 Sultan of Brunei, 30 summary income statement, 166 sunk cost, 31 Sunkist, 55 supply increase in, 79 law of, 78 market creation, 81–83 supply curve, 78–79 supply schedule, 78–79 supply curve, 78–79, 397 equilibrium, 84–86 foreign exchange, 417 marginal cost, 394 movement along, 81 price change, 79–80 producers, 80–81 shifts, 79–81, 84–85 technology changes, 79 Index supply of money, 342–343 supply schedule, 78–79 supply shocks, 244 supply-side economics, 111 supply-side experiment, 264–265 “Sure You Should Go to College?” (Nemko), 28 surplus, 81, 82, 411 balance of payments, 414–415 interest rates, 279 Survey of Current Business, 155 Sutherland, Kiefer, 29 Swank, Hilary, 29 Swiss National Bank, 373 Switzerland, 373 T Tableau Économique (Quesnay), 142 Taiwan, 44, 135 Target, 154 target interest rate, 374 tariffs, 66, 394–395, 398–399, 405 tasks, 32 tastes, 77 Taurasi, Diana, 87 tax cuts, 261, 264–266 taxes, 52 ability-to-pay tax principle, 63 benefits-received tax principle, 63 claiming growing fraction of income, 260 discouraging activities, 65 flat rate, 451 high-income households, 265–266 household production, 58 increases and budget surplus, 285 progressive, 64 proportional, 64 public goods, 60 regressive, 64–65 revenue of government, 63 supply of labor, 264–265 temporary hike, 264 unintended consequences, 65 tax incidence, 63–65, 98–100 tax rates, 111–112, 263–264 technological change, 119, 122, 131–133 technology, 35 changes in, 38–39 finding best way to use, 128 fixed, 118 productivity, 436 supply curve, 79 teenage unemployment rate, 168–169 temporary tax hike, 264 terms of trade, 389 testing hypothesis, 10 Thailand, 136 Thatcher, Margaret, 130 theories, theory of fiscal policy, 252– 255 Theron, Charlize, 29 ThinkFree, 59 thrift institutions, 305, 310 thrifts, 304–305 time, 2, 6–7, 30 time deposits, 320 time-inconsistency problem, 370 token money, 299 Torvalds, Linus, 56 trade common markets, 401 developing countries problems, 442–443 economies of scale, 391 favorable growing seasons, 391 fertile land, 391 gains from, 386–392 increasing consumption, 390 liberalization, 444–445 multilateral agreement, 398–399 production possibilities without, 387–388 seasonal differences, 391 World Trade Organization (WTO), 399 Trade Agreement Acts of 1979, 402 trade balance, 410–411 trade-barrier reductions, 399 trade barriers, 398, 419 bilateral agreements, 400 import quotas, 395–397 tariffs, 394–395 trade deficit, 280 trade protection, 404 trade restrictions, 66, 401–404 traders, 296–297 transaction costs, 52, 58, 81 transactions, 410, 414 transfer payments, 52, 203– 204, 274 transitional economies, 44– 45, 446–447 transparent, 451 Treasury securities, 280, 286 trough, 101 Truman, Harry, 166 Trump, Donald, 14 Turner, Ted, 14 twin deficits, 280 two-earner households, 50 Tylenol, 100 U UConn Co-op, 55 unanticipated inflation, 181 unattainable production, 35 underemployment, 177, 436–437 underground economy, 149, 177 unemployment, 167, 437 above natural rate, 362 African Americans, 171–172 cyclical, 174 Democrats, 263 depression, 168 different groups, 169–172 Europe, 247 exceeding natural rate, 256 frictional, 173 Great Depression, 168 high school dropouts, 171–172 increases in, 377 international comparisons, 175–176 joining or rejoining labor force, 172 labor markets dropouts, 171–172 measuring, 166–167 mismatch of skills or geographic location, 174 natural rate, 233, 235, 261 occupations, 172 overqualified part-time workers, 177 over time, 168–169 Phillips curve, 376 problems with official figures, 176–177 prolonged high, 367 quitting jobs, 172 recession, 168 reduction in, 370 regions, 172 seasonal, 173–174 sources of, 172–174 structural, 174 technological change leading to, 131–132 true costs of, 167 unemployment benefits, 175 unemployment compensation, 175 unemployment insurance, 260 unemployment rate, 132 unemployment rates, 167– 170, 172 unilateral transfers, 413 United Kingdom change in real GDP, 103 happiness index, 136 international comparisons of inflation, 182 international comparisons of unemployment, 175–176 reserve requirements, 332 standard-of-living statistics, 103 United Nations, 136 United States banking structure today, 311–312 commercial banks, 311 consumer cooperatives, 55 CPI (consumer price index), 179 currency, 319–320 demand-pull inflation, 178 discretionary fiscal policy, 259 dollars, 320 dual banking system, 305 economic fluctuations, 100–103 exports, 204, 386 farmers, 437 federal system of government, 61 financial institutions, 304–314 GDP (gross domestic product), 62 government bonds, 333 government outlays, 283 growth limited, 135 happiness, 146 import quotas, 397 imports, 208, 386–387 industrial policy, 134 inflation, 372, 423 international comparisons of inflation, 182 international comparisons of unemployment, 175–176 international trade, 66 labor productivity, 125–126 mixed system, 44 national income accounting system, 142 net government debt relative to GDP, 286 net wealth of households, 194 never recalling currency policy, 319 output gaps, 246–247 per capita income, 411, 432 population growth, 112 pure capitalism, 43 Index 479 real GDP, 103 real GDP per capita, 129 research and development (R&D), 134 saving, 198 stagflation, 246 steel tariffs, 404–405 top banks, 314–316 trade deficit, 411–412, 423–424 trading partners, 387 wage flexibility, 242–243 United States economy, 98 after Great Depression to the early 1970s, 109– 110 decision makers, 99 Great Depression and before, 102–109 growth, 101 growth since 1929, 112– 113 history of, 108–113 human body and, 99–101 longest contraction, 108 normal times since 1980, 111–112 peak-to-trough-to-peak cycles, 101 rapid technological change, 153 recession, 218 recessions of 1973–1975 and 1980, 110 stagflation (1973 to 1980), 110–111 unit of account, 297 University of Michigan, 202 unlimited wants, unplanned inventory buildups, 214 unrelated goods, 76 UPS Logistics Technologies, 127 U.S Agency for International Development (USAID), 445 U.S bond, 325 U.S Bureau of Engraving and Printing, 318 U.S Census reports, 103 U.S Commerce Department, 150 U.S Department of Agriculture, 62 U.S Department of State report, 448 U.S General Accounting Office, 366 U.S Internal Revenue Service, 64 U.S Surgeon General, 62 U.S Treasury, 305, 319, 422 U.S Treasury Department, 319 U.S Treasury securities, 285, 287–288 user charges, 63 user-generated products, 56–57 utility, 51 V value added, 144–145 Vanilla Bean Café, 300 Vardy, Nicholas, 420 variable inflation, 181 variable net exports, 224–225, 228, 270–271 velocity of money, 349–351, 353 vending machines, 11–12 Venezuela, 303 vertical supply curve, 342 videoconferencing, 58 Vietnam, 110, 318 virtual banks, 330 visible hand of bureaucratic coordination, 447 Volcker, Paul, 356, 375 voluntary exchange, 62 W Wade, Dwayne, 87 wage agreements, 233, 369, 379 wages, 3, 185 ceilings on, 110 CPI to adjust for inflation, 154 flexibility, 240–241 high productivity, 403 increases, 369, 371 inflexibility, 259 480 wages, (continued) linking with inflation, 182 other countries, 403 over time, 232 paid in kind, 149 wage settlements, 369 Wales, Jimmy, 57 Wal-Mart, 72, 128, 154 Walton, Sam, 72 wants, 2, 72 war on terror, 263 The Wealth of Nations (Smith), 109 Index The Wealth of Nations (Smith), 118 welfare payments, 260 Western, Bruce, 171 Western Federal Savings and Loan of Missoula, 301 Whitman, Meg, 14 Wikipedia, 57 Winslet, Kate, 29 women, 50, 435 Woods, Tiger, 29 worker rights, 400 workers, 243 World Bank, 39, 430, 441, 443 world economy, 98–99 world price, 394 World Trade Organization (WTO), 399–400, 405 World Trade Organization Web site, 399 World Travel and Tourism Council, 218 World War II, 62, 102 boosted employment, 110 fiscal policy, 259–260 labor productivity, 125 Y YouTube, 57 Z Zimbabwe, 178, 303 Zimbra, 56-57 Zoho Virtual Office, 59 zombie banks, 309 ... techcrunch.com /20 07/10/ 12/ supply-side-economics-fail-music-industry-again/ read the var- The Supply-Side Experiment In 1981, President Ronald Reagan and Congress agreed on a 23 percent reduction in average income tax rates Reagan argued that a reduction... – MPC) 25 6 Part Exhibit Fiscal and Monetary Policy Discretionary Fiscal Policy to Close a Contractionary Gap SRAS130 Price level The aggregate demand curve AD and the short-run aggregate supply... Discretionary Fiscal Policy to Close an Expansionary Gap The aggregate demand curve AD’ and the short-run aggregate supply curve, SRAS130, intersect at point e’, resulting in an expansionary gap of