(BQ) Part 2 book Macroeconomics has contents: Macroeconomics - Events and ideas; crises and consequences; inflation, disinflation, and deflation; monetary policy; money, banking, and the federal reserve system; fiscal policy, aggregate demand and aggregate supply.
Find more at http://www.downloadslide.com for Krugman/Wells, Macroeconomics, Fourth Edition Found in LaunchPad, this game-like quizzing system helps you focus your study time Quizzes adapt to correct and incorrect answers and provide instant feedback and a learning path unique to your needs, including individualized follow-up quizzes that help build skills in areas that need more work WORK IT OUT Tutorials Also in LaunchPad, the new Work It Out feature gives you an effective new way to build the skills you need for the principles of economics course These online tutorials guide you step-by-step through solving a key problem in each chapter Choice-specific feedback and video explanations provide you with interactive assistance SCAN here for a sample Work It Out problem LaunchPad logo suite http://qrs.ly/sg49xiw and Build Success! @worthecon facebook.com/worthecon * Surveys were conducted by Macmillan Education WORTH PUBLISHERS Robin Wells FOURTH EDITION FOURTH EDITION You’ll find LaunchPad even more effective when used with LearningCurve Surveyed students overwhelmingly recommend both Would you? Tell us about your experience using LaunchPad Contact us at wortheconomics@macmillan.com MACROECONOMICS Paul Krugman MACROECONOMICS LaunchPad makes preparing for class and studying for exams more effective Everything you need is right here in one convenient location—a complete interactive e-Book, all interactive study tools, and several ways to assess your understanding of concepts Surveys of hundreds of students* taking the principles of economics course and using LaunchPad show that LaunchPad has real benefits: Wells Krugman LaunchPad logo suite When it comes to explaining fundamental economic principles by drawing on current economic issues and events, there is no one more trusted than Nobel laureate and New York Times columnist Paul Krugman and co-author, Robin Wells In this best-selling introductory textbook, Krugman and Wells’ signature storytelling style and uncanny eye for revealing examples help readers understand how economic concepts play out in our world WORTH www.macmillanhighered.com www.ebook3000.com CHAPTER CHAPTER-OPENING STORIES RLD VIE O W Applications in Macroeconomics W Find more at http://www.downloadslide.com GLOBAL COMPARISONS 1: First Principles, 1: Common Ground, 2: Economic Models: Trade-offs 2: From Kitty Hawk to Dreamliner, 25 2: Pajama Republics, 37 3: Supply and Demand, 67 3: NEW: A Natural Gas Boom, 67 3: Pay More, Pump Less, 71 4: Price Controls and Quotas: 4: Big City, Not-So-Bright Ideas, 103 4: Check Out Our Low, Low Wages!, 116 5: International Trade, 131 5: NEW: The Everywhere Phone, 131 5: Productivity and Wages Around the 6: Macroeconomics: The Big Picture, 6: NEW: The Pain in Spain, 169 6: NEW: Slumps Across the Atlantic, 177 7: GDP and the CPI: Tracking the 7: The New #2, 191 7: GDP and the Meaning of Life, 204 8: Unemployment and Inflation, 217 8: NEW: Hitting the Braking Point, 217 8: Natural Unemployment Around the OECD, 9: Long-Run Economic Growth, 245 9: NEW: Airpocalypse Now, 245 9: NEW: What’s the Matter with Italy? 260 and Trade, 25 Meddling with Markets, 103 169 Macroeconomy, 191 World, 137 230 10: NEW: Bonds Versus Banks, 299 10: Savings, Investment Spending, 10: Funds for Facebook, 279 11: Income and Expenditure, 317 11: From Boom to Bust, 317 12: Aggregate Demand and Aggregate 12: NEW: What Kind of Shock?, 349 12: Supply Shocks of the Twenty-first 13: Fiscal Policy, 385 13: 13: The American Way of Debt, 404 14: Money, Banking, and the Federal 14: NEW: Funny Money, 419 14: The Big Moneys, 421 15: Monetary Policy, 455 15: NEW: The Most Powerful Person in 15: Inflation Targets, 470 16: Inflation, Disinflation, and 16: Bringing a Suitcase to the Bank, 485 16: Disinflation Around the World, 502 17: Crises and Consequences, 513 17: From Purveyor of Dry Goods to Destroyer 18: Macroeconomics: Events and 18: A Tale of Two Slumps, 539 19: Open-Economy Macroeconomics, 19: Switzerland Doesn’t Want Your Money, and the Financial System, 279 Supply, 349 Reserve System, 419 Deflation, 485 Ideas, 539 563 How Big Is Big Enough?, 385 Government, 455 Century, 372 of Worlds, 513 563 www.ebook3000.com 19: Big Surpluses, 569 Find more at http://www.downloadslide.com Blue type indicates global example ECONOMICS IN ACTION 1: Boy or Girl? It Depends on the Cost, 10 n Restoring Equilibrium on the Freeways, 17 n BUSINESS CASES 1: How Priceline.com Revolutionized the Travel Industry, 21 Adventures in Babysitting, 20 2: Rich Nation, Poor Nation, 39 n Economists, Beyond the Ivory Tower, 43 2: Efficiency, Opportunity Cost, and the Logic of 3: Beating the Traffic, 78 n Only Creatures Small and Pampered, 85 n The Price of 3: NEW: An Uber Way to Get a Ride, 97 4: NEW: Price Controls in Venezuela: “You Buy What They Have,” 110 n NEW: The Rise and 4: Medallion Financial: Cruising Right Along, 124 5: NEW: How Hong Kong Lost Its Shirts, 140 n Trade, Wages, and Land Prices in the Nineteenth 5: Li & Fung: From Guangzhou to You, 158 Admission, 89 n NEW: The Cotton Panic and Crash of 2001, 95 Fall of the Unpaid Intern, 116 n NEW: Crabbing, Quotas, and Saving Lives in Alaska, 122 Century, 147 n Trade Protection in the United States, 151 n Beefing Up Exports, 156 6: Fending Off Depression, 172 n Comparing Recessions, 178 n A Tale of Two Countries, Lean Production at Boeing, 45 180 n A Fast (Food) Measure of Inflation, 182 n NEW: Spain’s Costly Surplus, 184 7: Creating the National Accounts, 201 n Miracle in Venezuela?, 205 n Indexing to the Montgomery Ward, 186 7: Getting a Jump on GDP, 211 8: Failure to Launch, 223 n Structural Unemployment in East Germany, 232 n Israel’s 8: NEW: Day Labor in the Information Age, 240 9: India Takes Off, 249 n NEW: Is the End of Economic Growth in Sight?, 256 n NEW: Why Did 9: NEW: How Boeing Got Better, 274 CPI, 209 Experience with Inflation, 239 6: NEW: The Business Cycle and the Decline of Britain Fall Behind?, 262 n Are Economies Converging?, 266 n NEW: The Cost of Limiting Carbon, 272 10: Sixty Years of U.S Interest Rates, 292 n Banks and the South Korean Miracle, 300 n The Great American Housing Bubble, 306 10: NEW: Grameen Bank: Banking Against Poverty, 308 11: NEW: Sand State Slump, 320 n Famous First Forecasting Failures, 326 n Interest Rates and the U.S Housing Boom, 331 n Inventories and the End of a Recession, 339 11: What’s Good for America Is Good for GM, 341 12: Moving Along the Aggregate Demand Curve, 1979–1980, 358 n NEW: Sticky Wages in the Great Recession, 367 n Supply Shocks Versus Demand Shocks in Practice, 375 n Is Stabilization Policy Stabilizing?, 378 12: NEW: Slow Steaming, 380 13: What Was in the Recovery Act?, 392 n NEW: Austerity and the Multiplier, 396 n Europe’s Search for a Fiscal Rule, 401 n NEW: Are We Greece?, 409 13: NEW: Here Comes the Sun, 411 14: The History of the Dollar, 425 n It’s a Wonderful Banking System, 429 n Multiplying Money Down, 434 n The Fed’s Balance Sheet, Normal and Abnormal, 440 n Regulation After the 2008 Crisis, 447 14: The Perfect Gift: Cash or a Gift Card?, 449 15: A Yen for Cash, 460 n The Fed Reverses Course, 466 n What the Fed Wants, the Fed Gets, 471 n International Evidence of Monetary Neutrality, 475 15: PIMCO Bets on Cheap Money, 477 16: Zimbabwe’s Inflation, 491 n NEW: The Phillips Curve in the Great Recession, 499 n The Great Disinflation of the 1980s, 503 n NEW: Is Europe Turning Japanese?, 506 16: Licenses to Print Money, 508 17: The Day the Lights Went Out at Lehman, 517 n Erin Go Broke, 522 n Banks and the Great Depression, 527 n NEW: If Only It Were the 1930s, 532 n Bent Breaks the Buck, 534 18: When Did the Business Cycle Begin?, 540 n The End of the Great Depression, 544 n The Fed’s Flirtation with Monetarism, 550 n NEW: The 1970s in Reverse, 553 n NEW: Lats of Luck, 558 19: The Golden Age of Capital Flows, 572 n Low-Cost America, 580 n China Pegs the Yuan, 585 n NEW: The Little Currency That Could, 589 www.ebook3000.com 19: NEW: A Yen for Japanese Cars, 591 Find more at http://www.downloadslide.com this page left intentionally blank www.ebook3000.com Find more at http://www.downloadslide.com MACROECONOMICS FOURTH EDITION Paul Krugman Princeton University Robin Wells www.ebook3000.com Find more at http://www.downloadslide.com Vice President, Editorial: Charles Linsmeier Cover Photos Credits Publisher: Shani Fisher Central Photo: Lobby in the rush hour is made in the manner of blur and a blue tonality: blurAZ/Shutterstock First Row (left to right): Female Korean factory worker: Image Source/Getty Images; Market food: Izzy Schwartz/Getty Images; High gas prices in Fremont, California: Mpiotti/Getty Images Second Row: Red sports car: Shutterstock; View of smoking coal power plant: iStockphoto/Thinkstock; Lab technician using microscope: Jim Arbogast/Getty Images Third Row: Lightbulbs in box: © fStop/Alamy; Market food: Izzy Schwartz/Getty Images Fourth Row: Set of coloured flags of many nations of the world: © FC_Italy/ Alamy; Stack of cargo containers at sunrise in an intermodal yard: Shutterstock; Depression era photo of man holding sign: The Image Works Fifth Row: Stock market quotes from a computer screen: Stephen VanHorn/ Shutterstock; Portrait of a college student on campus: pkchai/Shutterstock; Peaches: Stockbyte/Photodisc Sixth Row: Rear view of people window shopping: Thinkstock; Power plant pipes: Corbis; Power lines: Brand X Pictures; Three students taking a test: © Royalty-Free/ Corbis; Paper money: Shutterstock Seventh Row: Woman from the Sacred Valley of the Incas: hadynyah/Getty Images; Paint buckets with various colored paint: Shutterstock; Close up of hands woman using her cell phone: Shutterstock; Paper money: Shutterstock Eighth Row: Cows: Stockbyte/Photodisc; Wind turbine farm over sunset: Ted Nad/ Shutterstock; Wall Street sign: thinkstock; Busy shopping street Center Gai Shibuya, Tokyo: Tom Bonaventure/Photographer’s Choice RF/Getty Images; Paper money: Shutterstock Ninth/Tenth Rows: Waiter in Panjim: Steven Miric/Getty Images; Group of friends carrying shopping bags on city street: Monkey Business Images/Shutterstock; Set of coloured flags of many nations of the world: © FC_Italy/Alamy; Soybean Field: Fotokostic/Shutterstock; Drilling rig workers: Istockphoto; Tropical fish and hard corals in the Red Sea, Egypt: Vlad61/Shutterstock; Modern train on platform: Shutterstock Eleventh/Twelfth Rows: Paper money: Shutterstock; View of smoking coal power plant: iStockphoto/Thinkstock; Welder: Tristan Savatier/Getty Images; container ship: EvrenKalinbacak/Shutterstock; Market food: Izzy Schwartz/Getty Images; Modern train on platform: Shutterstock Thirteenth Row: Printing U.S dollar banknotes: Thinkstock; Stock market quotes from a computer screen: Stephen VanHorn/Shutterstock Marketing Manager: Tom Digiano Marketing Assistant: Alex Kaufman Executive Development Editor: Sharon Balbos Consultant: Ryan Herzog Executive Media Editor: Rachel Comerford Media Editor: Lukia Kliossis Editorial Assistant: Carlos Marin Director of Editing, Design, and Media Production: Tracey Kuehn Managing Editor: Lisa Kinne Project Editor: Jeanine Furino Senior Design Manager: Vicki Tomaselli Cover Design: Brian Sheridan, Hothouse Designs, Inc Illustrations: TSI evolve, Network Graphics Illustration Coordinator: Janice Donnola Photo Editor: Cecilia Varas Photo Researcher: Elyse Rieder Production Managers: Barbara Anne Seixas, Stacey Alexander Supplements Project Editor: Edgar Bonilla Composition: TSI evolve Printing and Binding: RR Donnelley ISBN-13: 978-1-4641-1037-5 ISBN-10: 1-4641-1037-9 Library of Congress Control Number: 2015930274 © 2015, 2013, 2009, 2006 by Worth Publishers All rights reserved Printed in the United States of America First printing Worth Publishers 41 Madison Avenue New York, NY 10010 www.worthpublishers.com www.ebook3000.com Find more at http://www.downloadslide.com To beginning students everywhere, which we all were at one time www.ebook3000.com Find more at http://www.downloadslide.com this page left intentionally blank www.ebook3000.com Find more at http://www.downloadslide.com Author Krugman/Wells _ Title _Economics 4e Perm Fig.# P001_ New Fig.# _ PUN01 Old Fig.# L/LC/TS/CP/B&W/CAR N/PU/PUAC ABOUT THE AUTHORS Paul Krugman, recipient of the 2008 Nobel Memorial Prize in Economic Sciences, taught at Princeton University for 14 years and, as of June 2015, he will have joined the faculty of the Graduate Center of the City University of New York In his new position, he is associated with the Luxembourg Income Study, which tracks and analyzes income inequality around the world He received his BA from Yale and his PhD from MIT Before Princeton, he taught at Yale, Stanford, and MIT He also spent a year on the staff of the Council of Economic Advisers in 1982–1983 His research has included pathbreaking work on international trade, economic geography, and currency crises In 1991, [No caption] Ligaya Franklin Krugman received the American Economic Association’s John Bates Clark medal In addition to his teaching and academic research, Krugman writes extensively for nontechnical audiences He is a regular op-ed columnist for the New York Times His best-selling trade books include End This Depression Now!, The Return of Depression Economics and the Crisis of 2008, a history of recent economic troubles and their implications for economic policy, and The Conscience of a Liberal, a study of the political economy of economic inequality and its relationship with political polarization from the Gilded Age to the present His earlier books, Peddling Prosperity and The Age of Diminished Expectations, have become modern classics Robin Wells was a Lecturer and Researcher in Economics at Princeton University She received her BA from the University of Chicago and her PhD from the University of California at Berkeley; she then did postdoctoral work at MIT She has taught at the University of Michigan, the University of Southampton (United Kingdom), Stanford, and MIT vii www.ebook3000.com Find more at http://www.downloadslide.com BRIEF CONTENTS Preface xvii PART What Is Economics? The Ordinary Business of Life Chapter First Principles Chapter 2 Economic Models: Trade-offs and Trade 25 Appendix Graphs in Economics 51 PART Chapter Supply 349 with Markets 103 Chapter 5 International Trade 131 Appendix Consumer and Producer Surplus 163 PART Chapter 3 Introduction to Macroeconomics Macroeconomics: The Big Picture 169 Chapter 7 GDP and the CPI: Tracking the Macroeconomy 191 Unemployment and Inflation 217 Chapter PART Long-Run Economic Growth Long-Run Economic Growth 245 Savings, Investment Spending, and the Financial System 279 Stabilization Policy Fiscal Policy 385 Taxes and the Multiplier 417 Chapter 14 Money, Banking, and the Federal Reserve Appendix Chapter 15 System 419 Monetary Policy 455 Appendix econciling the Two Models of the Interest R Rate 481 Chapter 16 Chapter 17 Inflation, Disinflation, and Deflation 485 Crises and Consequences 513 PART Events and Ideas Chapter 18 Chapter Chapter 10 PART Chapter 13 Supply and Demand Supply and Demand 67 Chapter 4 Price Controls and Quotas: Meddling 5 Short-Run Economic Fluctuations Chapter 11 Income and Expenditure 317 Appendix Deriving the Multiplier Algebraically 347 Chapter 12 Aggregate Demand and Aggregate Introduction PART PART Chapter Macroeconomics: Events and Ideas 539 The Open Economy 19 Open-Economy Macroeconomics 563 Macroeconomic Data Tables M-1 Solutions to “Check Your Understanding” Questions S-1 Glossary G-1 Index I-1 Appendix Toward a Fuller Understanding of Present Value 313 viii www.ebook3000.com Find more at http://www.downloadslide.com G-10 G L O S S A R Y V value added (of a producer) the value of a producer’s sales minus the value of its purchases of intermediate goods and services wealth (of a household) the value of accumulated savings wealth effect of a change in the aggregate price level the effect on con- of a graph along which values of the y-variable are measured; also referred to as the y-axis sumer spending caused by the change in the purchasing power of consumers’ assets when the aggregate price level changes A rise in the aggregate price level decreases the purchasing power of consumers’ assets, so consumers decrease their consumption; a fall in the aggregate price level increases the purchasing power of consumers’ assets, so consumers increase their consumption vertical intercept the point at which a wedge the difference between the variable a quantity that can take on more than one value velocity of money the ratio of nominal GDP to the money supply vertical axis the vertical number line curve hits the vertical axis; it shows the value of the y-variable when the value of the x-variable is zero vicious cycle of deleveraging describes the sequence of events that takes place when a firm’s asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans, forcing sales of more assets and causing further declines in asset prices W wasted resources a form of inefficiency in which people expend money, effort, and time to cope with the shortages caused by a price ceiling demand price of the quantity transacted and the supply price of the quantity transacted for a good when the supply of the good is legally restricted Often created by a quantity control, or quota willingness to pay the maximum price a consumer is prepared to pay for a good world price the price at which a good can be bought or sold abroad World Trade Organization (WTO) an international organization of member countries that oversees international trade agreements and rules on disputes between countries over those agreements X x‑axis the horizontal number line of a graph along which values of the x‑variable are measured; also referred to as the horizontal axis Y y‑axis the vertical number line of a graph along which values of the y‑variable are measured; also referred to as the vertical axis Z zero bound the lower bound of zero on the nominal interest rate zero lower bound for interest rates statement of the fact that interest rates cannot fall below zero Find more at http://www.downloadslide.com INDEX Note: Key terms appear in boldface type A Abe, Shinzo, 591 Abengoa, 411 absolute advantage, 36, 136–138 absolute value, 56 academic performance, monetary incentives to improve, 10 accelerator principle, 329–330 account, money as unit of, 422 accountability, inflation targeting and, 470 desired investment spending vs., 330 AD-AS model, 368–376 long-run macroeconomic equilibrium and, 372–375 short-run effects of shifts of aggregate demand and, 369–372 short-run macroeconomic equilibrium and, 368–369 short-run Phillips curve and, 496 Africa See also specific countries economic growth of, 263–264, 265–266, 267 aggregate consumption function, 324–326 aggregate demand, 350–358 See also AD-AS model aggregate output and, in Keynesian economics, 542–543 interest rate effect and, 352 monetary policy and, 467–472 wealth effect and, 352 aggregate demand curve, 350–356 See also AD-AS model downward slope of, 351–352 income-expenditure model and, 352–354 movement along, 355, 358 shifts of, 354–357, 388 aggregate output, 202 See also real GDP aggregate demand and, in Keynesian economics, 542–543 equilibrium, short-run, 369 aggregate price level, 206 changes in, shifts of money demand curve and, 459–460 equilibrium, short-run, 369 interest rate effect of a change in, 352 normalization of measure of, 206 wealth effect of a change in, 352 aggregate production function, 251–255 aggregate spending, 195 autonomous change in, 320 aggregate supply curve See also AD-AS model; long-run aggregate supply curve; shortrun aggregate supply curve short-run, 358 short-run Phillips curve and, 496 aggregate wealth, changes in, aggregate consumption function and, 326 agriculture falling prices and, 12 subsidies and, 154 trade, wages, and land prices in the 19th century and, 147–148 AIG See American International Group (AIG) air pollution See pollution Airbus, 274 airline industry fuel costs and, 79, 81 price floors and, 115 Alaskan crab fishing, 122–123 Alcoa, 96 Allegis Group, 240 Allen, Paul, 297 allocation to consumers, inefficient, 107–108 efficiency in, 29 of sales among sellers, inefficient, 114–115 Amazon, 279 American Economic Association, American International Group (AIG), 518 American Recovery and Reinvestment Act, 42, 385, 388, 391, 392–393, 411 Apple, 131 Applebee’s, 75 appreciation, 574 arc method of calculating slope, 56–58 area, below or above a curve, calculating, 59–60 Argentina banking crisis and unemployment in, 524 default by, 405 education level in, 257, 258, 261 financial crisis in, 571 long-run economic growth of, 180–181 real GDP per capita in, 263–264, 265 Armenia, hyperinflation in, 485 asset(s) of Federal Reserve System, 437–439, 440–441 financial See financial assets illiquid, 296 liquid, 296 physical, 293 asset bubbles, 518, 519 See also housing market crash asset prices expectations for, 303–305 macroeconomics and, 305–306 austerity expansionary, 557 fiscal, stimulus vs., 531 multiplier and, 396–397 Australia cotton production in, 95 minimum wage in, 116 net public debt of, 404 unemployment in, 230 autarky, 134, 136 automatic stabilizers, 396 autonomous change in aggregate spending, 320 autonomous consumer spending, 322 axes, of a graph, 52 B babysitting cooperative, 20 balance of payments accounts, 564–568 balance of payments on current account, 566 balance of payments on financial account, 566, 568–571 balance of payments on goods and services, 566 balance sheet effect, 445 banana trade, 153 Banerjee, Abhjit, 42 Bangladesh clothing production of, 37, 39, 139 comparative advantage and, 39 bank(s), 299–300, 426–430 central See central banks; European Central Bank; Federal Reserve System (Fed) commercial See commercial banks failures of See bank runs; banking crises functions of, 426–427 government guarantees of banks’ liabilities and, 526 investment, 443, 513 See also Bear Stearns; JP Morgan Chase; Lehman Brothers money creation by, 430–432 regulation of, 428–429 runs on See bank runs shadow, 516–517 Swiss, 563 bank deposits, 294, 299–300 checkable, 420 bank failures See bank runs; banking crises bank holiday, 443, 520 Bank of England, 439, 470 Bank of Japan, 506, 591 bank reserves, 426 excess, 432–433 bank runs, 426 causes of, 427–428 deposit insurance and, 429–430 in 1930s, 443 re-emergence of, 516–517 banking purpose of, 515–516 shadow, 514, 516–517, 533 trade-off between rate of return and liquidity and, 514–515 banking crises, 514, 518–528 See also financial crises government intervention in, 525–527 Great Depression and, 520, 521, 527–528 historical, 520–521 logic of, 518–520 modern, 521–523 money multiplier and, 434–435 recessions and recovery and, 523–524 severity of recessions due to, 524–525 of 2008, in United States, 523–524 Find more at http://www.downloadslide.com I-2 I N D E X banking systems nationalization of, 526–527 of United States See U.S banking system bank’s capital, 428–429 bar graphs, 62 barter, 37 Bear Stearns, 440, 441, 447, 517, 518 behavioral economics, 304 behavioral finance, 304 Belgium GDP per capita and wellbeing in, 204 international trade of, 132 net public debt of, 404 unemployment and inflation in, 230, 500 Bent, Bruce, 534 Bernanke, Ben, 378, 558 on current account deficit, 571 as Fed chair, 435, 455 on inflation targeting, 470 tribute to Friedman, 539 Big Mac prices, purchasing power parity and, 579 black markets, 109 Blanchard, Olivier, 558 BLS See Bureau of Labor Statistics (BLS) BMW, 580 Board of Governors, 217 Boehner, John, 385 Boeing, 25, 39, 45, 274 bonds, 192, 296 calculating price using present value, 315 Booth School of Business, 42 borrowing See debt; government borrowing; loan(s) Brazil financial crisis in, 571 hyperinflation in, 235 purchasing power parity of, 579 U.S subsidies to cotton farmers and, 154 breakage, 449 Bretton Woods system, 584, 587 Britain See United Kingdom Brookings Institution, 558 Bryan, William Jennings, 237 Brynjolfsson, Eric, 257 budget balance, 281, 397–402 cyclically adjusted, 398–400 as measure of fiscal policy, 398 value of, 401 budget deficits, 281 consumer spending and, 391 debt vs., 404 European, 401–402 fiscal policy and, 402–404 in practice, 406–407 unemployment and, 399 budget surplus, 281 Bureau of Consumer Financial Protection, 447 Bureau of Economic Analysis, GDP estimates of, 211 Bureau of Labor Statistics (BLS) data collection by, 210 income and spending figures provided by, 321 labor utilization measures calculated by, 220 Bush, George W., 543 business confidence, 543 business cycle, 173–178 beginning of, 540–541 charting, 174–175 classical view of, 540 cyclically adjusted budget balance and, 398–400 depressions and See depressions; Great Depression international, exchange rates and, 588–589 as international phenomenon, 177 in Keynesian theory, 543 Montgomery Ward’s decline and, 186 political, 549–550 real, 552–553 recessions and See Great Recession, 2007–2009; recession(s) taming, 177 business opportunities, perceived changes in, shifts of demand for loanable funds and, 288 business world See also industries; specific industries economists in, 43–44 firms in See firms; producer(s) business-cycle peaks, 175 business-cycle troughs, 175 C cab(s) See taxis call centers, 155 Cambodia, clothing exports of, 37 Camp, Garrett, 97 Canada auto industry of, 140 forest product exports of, 138 gasoline consumption in, 71 GDP per capita and wellbeing in, 204 government size in, 386 international trade of, 132 long-run economic growth of, 180–181 minimum wage in, 116 money and inflation in, 475 net public debt of, 404 unemployment in, 230 capital bank’s, 428–429 financial, 282 foreign, economic growth and, 258 human See human capital physical See physical capital capital account, 566, 568–571 capital flows See also capital inflows golden age of, 572–573 international, underlying determinants of, 571 two-way, open-economy macroeconomics and, 572–573 capital inflows, 568 changes in, shifts of supply of loanable funds and, 289–290 net, 281–282 capital market, 38 Cardpool.com, 449 causal relationships, 52–53 causality, reverse, 64 CBO See Congressional Budget Office (CBO) cell phones See iPhones; smartphone industry central banks, 435, 439 See also Bank of England; Bank of Japan; European Central Bank; Federal Reserve System (Fed) in eurozone, 440 inflation targeting and, 470 as lender of last resort, 526, 527, 531 monetary policy and See monetary policy centrally planned economies, certificates of deposit (CDs), 456 chained dollars, 203 Chávez, Hugo, 110–111 checkable bank deposits, 420 Chile banking crisis in, 514 grape exports of, 138 unemployment in, 230 China clothing exports of, 37 clothing production in, 139 cotton production in, 95 current account surplus of, 569 demand for cotton clothing in, 95 disappearing girls in, 10–11 economic growth of, 245, 246, 258 economy of, 191, 202 education level in, 258, 259, 261 international trade of, 132 pollution in, 245 quantity of currency in circulation in, 421 smartphone production and, 131, 133–137 supply shocks of twentyfirst century and, 372 trade surplus of, 183 U.S tire import tariffs and, 154 wages in, 155 choice See individual choice Chrysler, 45 circular-flow diagram, 27, 37–39 balance of payments and, 567 national accounts and, 192–195 Citizens’ Bank of Louisiana, 425 classical macroeconomics, 486–488, 540–541 key macroeconomic questions and, 555–556 Keynesian macroeconomics vs., 542–543 classical model of the price level, 486–488, 540 Clean Air Acts of 1970 and 1990, 272 climate, comparative advantage and, 138 closed economies, savingsinvestment spending identity in, 280–281 clothing industry Chinese, 37, 95, 139 comparative advantage in, 37, 39, 139 in Hong Kong, 140–141 Coca-Cola, 68 COLA(s) See cost-of-living allowances (COLAs) collective bargaining, 228 college See higher education Colombia, banking crisis and unemployment in, 524 command economies, commercial banks, 443 open-market operations and, 437–439 commodity money, 422 commodity prices, changes in, shifts of the shortrun aggregate supply curve and, 362, 363 Find more at http://www.downloadslide.com INDEX commodity-backed money, 422–423, 425 comparative advantage, 27, 33–37, 39, 132–141 absolute advantage vs., 36, 136–138 factor intensity and, 136–138 gains from, 36, 135–136 Heckscher-Ohlin model and, 138–139, 146–147 production possibilities and, 133–135 in real world, 36–37 sources of, 138–141 competitive markets, 66 supply and demand model of See demand curve; demand schedule; supply and demand model; supply curve; supply schedule complements, 74 changes in prices of, shifts of the demand curve and, 82 in production, 82 concert tickets, market for, 89–90 conditional convergence, 267 congestion pricing, 78 Congressional Budget Office (CBO), 493 unemployment rate and, 231 consumer(s), inefficient allocation to, 107–108 consumer electronics See also smartphone industry China’s comparative advantage in, 137 consumer price index (CPI), 207–208 core, 503–504 payments indexed to, 209–210 consumer protection, following financial crisis of 2008, 533 consumer spending, 192, 321–327 autonomous, 322 budget deficits and, 391 crowding out of, by government spending, 390 current disposable income and, 321–324 fiscal policy and, 387–388 income and, 18–19, 388 shifts of aggregate consumption function and, 324–326 consumer surplus, 106 demand curve and, 163–165 export effects on, 144–145 import effects on, 143–144 individual, 164 tariffs and, 149 total, 164 willingness to pay and, 164–165 consumption, marginal propensity to consume and, 318–319, 320, 322–323 consumption bundle, 206 consumption function, 322–326 aggregate, 324–326 container-shipping industry, 380 contractionary fiscal policy, 389–390 contractionary monetary policy, 467–468 convergence hypothesis, 265, 266–268 core inflation rate, 504 cost(s), 111 of disinflation, 502–503 external See greenhouse gas emissions; negative externalities; pollution menu, of inflation, 235–236, 239 opportunity See opportunity cost of quantity controls, 121–122 shoe-leather, of inflation, 235, 239 transaction, 294 unit-of-account, of inflation, 236 cost-of-living allowances (COLAs) indexing of, to CPI, 210 nominal wage and, 363 cotton prices of, 95 U.S subsidies to cotton farmers and, 154 Council of Economic Advisers, 43 counterfeiting, 419, 508 coupon, on bonds, 315 CPI See consumer price index (CPI) crab fishing, in Alaska, quotashare system and, 122–123 Crafts, Nicholas, 531 credit crunches, 513, 524–525 credit markets changes in, shifts of money demand curve and, 460 overnight, 517 crowding out, 288–289, 547 expansionary fiscal policy and, 390 currencies See also dollar(s), U.S.; euro; exchange rate(s); peso, Mexican appreciation of, 574 depreciation of, 574, 587 government borrowing and, 409 quantity in circulation, global comparison of, 421 reasons for holding, 424 wage cuts and, 589–590 currency crises, 584 currency in circulation, 420 current account, 566 deficit in, 571 curves, 53–54 See also specific curves calculating area below or above, 59–60 horizontal, 55–56 maximum and minimum points, 58–59 nonlinear, 56–58 slope of, 54–59 vertical, 55–56 customers, changes in number of, shift of demand curve and, 75–77 cyclical unemployment, 229 output gap and, 493–494 cyclically adjusted budget balance, 398–400 Czech Republic, unemployment in, 232 D Daly, Mary, 367–368 De Grauwe, Paul, 409 De La Rue, 508 debt government See government debt monetization of, 488 public, 404 debt deflation, 504–505 debt overhang, 525 debt-GDP ratio, 406–407 dedicated taxes, 408 default, on government debt, 296, 405 deficits See also budget deficits in current account, 571 deflation, 504–507 causes of, 181–182 debt, 504–505 expected, effects of, 505– 506 failure to materialize following 2008, 553 negative demand shocks and, 375 pain of, 182 winners and losers from, 238 demand aggregate See AD-AS model; aggregate demand; aggregate demand curve I-3 changes in, 90–96 for cotton clothing, 95 excess See shortages for housing, 303 law of, 70, 351 for loanable funds, 284–286 for natural gas, 67 quantity demanded vs., 72 for stocks, 301–303 demand curve, 69–78 consumer surplus and, 163–165 demand schedule and, 69–70 domestic, 142 individual, 75–77 market, 76 for money, 458–460 movements along, 72, 80–81 shifts of, 70–78, 91–92, 93–94 simultaneous shift of demand curve and supply curve and, 93–94 willingness to pay and, 163–164 demand price, 119 demand schedule, 69–70 demand shocks, 350, 369–370, 372, 373 stabilization policy and, 377–378 supply shocks vs., 375–376 Denmark, GDP per capita and well-being in, 204 dependent variable, 52–53 deposit insurance, 300, 428, 526–527 depositors, 299 depreciation, of currencies, 574, 587 depressions See also business cycle; Great Depression preventing, 172–173 derivatives, regulation following financial crisis of 2008, 533 devaluation, of fixed exchange rates, 586–587 diminishing returns to physical capital, 252 direct foreign investment, 568 discount rate, 436–437 discount window, 429 discouraged workers, 220 discretionary fiscal policy, 396, 555 discretionary monetary policy, 546–547, 556 disinflation, 485 costs of, 502–503 of 1980s, 503–504 disposable income, 192, 193, 388 Find more at http://www.downloadslide.com I-4 I N D E X consumer spending and, 321–324 expected, changes in, aggregate consumption function and, 325–326 diversification, 295 diversified portfolio of stocks, 298 dividends, 192, 316 dixies, 425 Dodd-Frank bill See Wall Street Reform and Consumer Protection Act dollar(s), U.S breaking of link to gold, 425 chained, 203 exchange rate and, 577, 578–579 as fiat money, 423, 425 history of, 425 unit-of-account role of, 236 domestic demand curve, 142 domestic supply curve, 142 double coincidence of wants, 420–421 double-dip recessions, 375 Duffie, Darrell, 26 E earnings See also income; wage(s) retained, 329 East Asia See also specific countries economic growth of, 263– 265, 267 East Germany, structural unemployment in, 232–233 eBay, 90 econometrics failures of, 326–327 origin of, 326 Economic Experts Panel of Chicago Booth’s Initiative on Global Markets, 42 economic fluctuations, 3–4 See also business cycle; depressions; Great Depression; Great Recession, 2007–2009; recession(s) economic growth, of China, 245 long-run See long-run economic growth production possibilities frontier and, 31–33 economic interaction See interaction economic models See models; specific models economic policy, 19–20 See also fiscal policy; macroeconomic policy; monetary policy; stabilization policy economics See also macroeconomics; microeconomics behavioral, 304 Keynesian See Keynesian economics positive and normative, 40–41 supply-side, 552 economists in business world and government, 43–44 disagreement among, 41–43 economy, closed, savings-investment spending identity in, 280–281 command (planned), convergence of, 265, 266–268 market, 2, open, 563 self-correcting, 374, 375, 376 self-regulating, 172 Edison, Thomas, 259 education See also higher education economic growth and, 258 government subsidies to, 261 levels in Argentina, 257, 258, 261 levels in China, 258, 259, 261 efficiency, 15–17 See also inefficiency in allocation, 29 in production, 29 production possibilities frontier and, 29 efficiency wage(s), structural unemployment and, 229 efficient markets hypothesis, 303–305 Eichengreen, Barry, 172 Eisenhower, Dwight D., 75 El Salvador, comparative advantage and, 39 Elance-oDesk, 232, 240 embedded inflation, 472 Embraer, 33, 39 employee/employer mismatches, structural unemployment and, 229 employment, 218 See also labor entries; unemployment; unemployment rate; wage(s) temporary, 232, 240 Environmental Protection Agency (EPA), greenhouse gas emissions and, 272 EPA See Environmental Protection Agency (EPA) equilibrium, 13–15 on freeways, 17–18 income-expenditure, 334–336, 352, 353 macroeconomic See macroeconomic equilibrium market See market equilibrium equilibrium exchange rate, 574–577 equilibrium interest rate, 461–463 loanable funds market and, 287–288 equilibrium price, 69, 86 concert ticket market and, 89–90 market price above, 88 market price below, 88–89 equilibrium quantity, 69, 86 equity, 15–16 An Essay on the Principle of Population (Malthus), 255–256 ethanol, U.S tariff on, 151 EU See European Union (EU) euro, 584 France’s switch to, 233 government borrowing and, 409 Spain’s adoption of, 184 wage cuts and, 589 euro area See also specific countries aftermath of financial crisis of 2008 in, 529, 532 central banks in, 440 financial crisis of 2008 in, 528, 529–531 quantity of currency in circulation in, 421 unemployment and inflation in, 500 Europe See also Eastern European countries; euro area; European Union (EU); specific countries stability pact of, 401–402 unemployment in, 229 European Central Bank, 401, 409–410, 439–440 deflation and, 506–507 as lender of last resort, 531 response to financial crisis of 2008, 557 European Union (EU), 153 tariff on banana imports of, 153 Eurosclerosis, 229 Eurozone See euro area; specific countries excess demand See shortages excess reserves, 432–433 excess supply See consumer surplus; producer surplus; surpluses exchange, money as medium of, 421 exchange market interventions, 582–583 exchange rate(s), 568, 573–590 business decisions and, 580–581 devaluation and revaluation of, 586–587 equilibrium, 574–577 fixed See fixed exchange rates floating See floating exchange rates international business cycles and, 588–589 locking of, 584 measurement of, 574 nominal, 577, 578–579 purchasing power parity and, 579–580 real, inflation and, 577–579 Exchange Rate Mechanism, 584 exchange rate policy, 581–586 exchange rate regimes, 582 Bretton Woods and, 584, 587 dilemma concerning, 584–585 fixed, 582–583 floating, 582 expansion(s), 175 See also business cycle definition of, 176 unemployment during, 222 expansionary austerity, 557 expansionary fiscal policy, 388–389, 390–391 effectiveness in fighting recessions, 555 as response to financial crisis of 2008, 556–557 expansionary monetary policy, 467 effectiveness in fighting recessions, 554–555 expected deflation, effects of, 505–506 export(s), 132, 194 effects on international trade, 144–145 net, 200 exporters, 93 exporting industries, 146 externalities, negative See greenhouse gas emissions; negative externalities; pollution ExxonMobil, 68 Find more at http://www.downloadslide.com INDEX F Facebook, 279 factor abundance, comparative advantage and, 138–139 factor incomes, 565 earned from firms, gross domestic product as, 199 factor intensity, 138–139 factor markets, 38 factor prices, wages as, 146 factors of production, 32, 138 comparative advantage and, 138–139 Heckscher-Ohlin model and, 138–139 movement between industries, 146 prices of, wages as, 146 fairness, 15–16 Fannie Mae, 444, 447, 527 farming See agriculture fashion models, market for, 94 FDIC See Federal Deposit Insurance Corporation (FDIC) Fed See Federal Reserve System (Fed) Federal Deposit Insurance Corporation (FDIC), 300, 428, 526–527 federal funds market, 436 federal funds rate, 436 target, 461, 464–465, 466 Taylor rule and, 469 Federal Open Market Committee (FOMC), 349, 436 response to financial crisis in 2008, 349, 350 target federal funds rate and, 466 Federal Reserve System (Fed), 357, 419, 434–440 assets and liabilities of, 437–439, 440–441 balance sheet of, 440–441 creation of, 442–444, 520 discount rate and, 436–437 interest on assets of, 439 as lender of last resort, 527 monetarism and, 550 open-market operations and, 435, 437–439 reserve requirements and, 436–437 structure of, 435–436 fiat money, 423, 425 Fidelity, 534 final goods and services, 195 domestically produced, GDP as spending on, 197–198 GDP as value of production of, 196–197 finance, behavioral, 304 financial account, 566, 568–571 financial assets, 293 types of, 296–297 financial capital, 282 financial contagion, 518, 519–520 financial crises See also bank runs; banking crises; Great Depression economic problems caused by, 349, 350 global savings glut and, 571 of 2007–2009 See Great Recession, 2007–2009 financial institutions, resolution authority and, 533–534 financial intermediaries, 297–300, 426 See also bank(s) financial markets, 193, 284 financial panics, 514, 519–520 financial risk, 294–295 financial system, 279, 293–301 economic growth and, 261–262 financial intermediaries and, 297–300 fluctuations in, 301–307 tasks of, 294–296 types of financial assets and, 296–297 Finkelstein, Amy, 42 Finland banking crisis in, 514, 521–522, 524 GDP per capita and wellbeing in, 204 unemployment and inflation in, 230, 500, 524 firms, 38 See also producer(s) gross domestic product as factor income earned from, 199 recessions and, 176 fiscal austerity, 531 fiscal policy, 172, 385–416 budget balance as measure of, 398 contractionary, 389–390 discretionary, 396, 555 end of Great Depression and, 544–545 expansionary, 388–389, 390–391, 555 government budget and total spending and, 387–388 government spending and, 387 government transfers and, 387 lags in, 391–392 long-run implications of, 402–410 multiplier and, 393–397 reduction of unemployment in long run and, 555 shifts of the aggregate demand curve and, 356, 357 taxes and, 386–387 fiscal years, 403–404 Fisher, Irving, 291, 504–505 Fisher effect, 291–292, 504–505 fishing, for crab, in Alaska, quota-share system and, 122–123 fixed exchange rates, 582–583 devaluation and revaluation of, 586–587 floating exchange rates, 582 monetary policy under, 587–588 FOMC See Federal Open Market Committee (FOMC) food, shortages of, in Venezuela, 110–111 Ford, 45, 566 forecasts, 41 foreign exchange controls, 583 foreign exchange market, 574 See also exchange rate(s); exchange rate policy foreign exchange reserves, 582 Fox Searchlight Pictures, 117 fracking, 67, 68 France currency conversion in, 233 gasoline consumption in, 71 GDP per capita and wellbeing in, 204 government size in, 386 international trade of, 132 minimum wage in, 116 net public debt of, 404 stability pact and, 401 unemployment and inflation in, 500 Freddie Mac, 444, 447, 527 free trade, 148 free-trade agreements, between United States and South Korea, 156–157 freeways, equilibrium on, 17–18 frictional unemployment, 225–226, 232 Friedman, Milton on business cycle, 177, 546 on effectiveness of monetary policy in fighting recessions, 555 I-5 on expected future income, 325–326 on expected inflation, 497 honored by Bernanke, 539 on inflation and unemployment, 549 monetarism and, 546–549 A Monetary History of the United States, 521, 546 on prevention of Great Depression, 521 Frisch, Ragnar, 540 Fryer, Roland, Jr., 10 fuel prices, airline industry and, 81 Fuld, Richard, 517 fundamentals, 303–304 Fung, Victor, 158 G gains from trade, 12 international, 135–136, 138 money’s role in generating, 420 total surplus and, 167–168 Gap, 449 gasoline consumption of, international comparison of, 71 seasonal demand for, 81 shortage of, price controls and, 104 Gates, Bill, 297 GDP See gross domestic product (GDP) GDP deflator, 208, 209 GDP per capita, 203–204 well-being and, 204 Geithner, Tim, 517 General Motors (GM), 45, 225, 341 The General Theory of Employment, Interest, and Money (Keynes), 172, 177, 542, 543, 544 Germany See also East Germany budget deficit in, 403 current account surplus of, 569 gasoline consumption in, 71 GDP per capita and wellbeing in, 204 hyperinflation in, 235, 421, 485, 489 international trade of, 132 Nazi takeover of, economic causes of, 172, 374, 541 net public debt of, 404 productivity in, 260 real GDP of, 255 savings-investment spending identity in, 282–283 stability pact and, 401 supply shocks of twentyfirst century and, 372 Find more at http://www.downloadslide.com I-6 I N D E X trade surplus of, 183 unemployment and inflation in, 230, 500 gift cards, 449 Glass-Steagall Act, 443, 444 global savings glut, 571 globalization, 132 See also export(s); import entries; international trade; trade challenges to, 154–156 comparative advantage and See comparative advantage Great Recession and, 169–170 hyperglobalization and, 131 offshore outsourcing and, 154, 155 GM See General Motors (GM) GNP See gross national product (GNP) Goldman Sachs, 43 goods and services balance of payments on, 566 complements See complements final See final goods and services government purchases of, 194, 393–394 inferior, 74–75 as inputs See inputs intermediate, 195 markets for, 38 normal, 74–75 substitutes See substitutes Google, 279 Gordon, Robert, 256–257 governance, economic growth and, 262 government See also federal entries in circular-flow diagram, 194 economists in, 43 intervention in banking crises, 525–527 macroeconomic policy and See fiscal policy; macroeconomic policy; monetary policy; stabilization policy role of, Keynesian economics and, 543 taxes and See tax(es) government borrowing, 194 changes in, shifts of demand for loanable funds and, 288 crowding out of private investment by, 390 currencies and, 409 government budget See also budget entries fiscal policy and, 387–388 government debt, 402–403 budget deficits vs., 404 debt-GDP ratio and, 406–407 default on, 405 in practice, 406–407 problems posed by, 405– 406 from World War II, 407 government intervention, 16–17 government policies See also fiscal policy; macroeconomic policy; monetary policy; stabilization policy aggregate demand and, 357 economic growth and, 260–262 spending and, 19–20 unemployment and, 229, 232 government purchases of goods and services, 194 multiplier effects of, 393–394 government spending crowding out of private spending by, 390 fiscal policy and, 387 government transfers, 192, 193 changes in, multiplier effects of, 394–395 fiscal policy and, 387 implicit liabilities due to, 407–409 Grameen Bank, 308 graphs, 51–66 bar, 62 calculating area above or below curve and, 59–60 curves on, 53–54 numerical, 60–64 pie charts, 62 scatter diagrams, 61–62 slope of curve and, 54–59 time-series, 60–61 two-variable, 51–53 variables and, 51 Great Depression, 19, 541–545 avoiding repeat of, 539 banking crises and, 520, 521, 527–528 causes of, 369–370, 447 deflation during, 238 econometrics and, 326 end of, 369–370, 544–555 Friedman and Schwartz’s views on, 546 Great Recession compared with, 169, 170, 172 Keynes’s explanation of, 542–544 macroeconomic policy activism and, 544 money multiplier and, 434–435 national accounts and, 201 Nazi takeover of Germany and, 172, 541 origin of macroeconomics and, 170, 177 policy focus of macroeconomics and, 171–172 price indexes during, 209 Great Moderation, 554 Great Moderation consensus, 554–559 Great Recession, 2007–2009, 26, 444–448, 528–534 causes of, 485 in Europe, 528, 529–531 failure of deflation to materialize following, 553 global effects of, 169–170 Great Depression compared with, 169, 170, 172 Great Moderation consensus and, 556–558 mortgage-backed securities and, 26 oil prices and, 376 Phillips curve in, 499–500 preventing depression following, 172–173 recession of 2001 compared with, 178 regulation in wake of, 533–534 severity of, 539 sticky wages in, 367–368 stimulus-austerity debate and, 531 unemployment following, 226 in United States, 528–529 Greece aftermath of financial crisis of 2008 in, 529 budget deficit in, 401–403 fiscal crisis in, 409 government debt of, 404, 405 unemployment and inflation in, 230, 500 wage cuts in, 589 greenbacks, 425 greenhouse gas emissions See also pollution reducing, 272–273 Greenspan, Alan, 307, 409, 435 Gross, Bill, 477 gross domestic product (GDP), 191, 195–201 calculating, 195–200 per capita, in United States, 60–61 change in level vs rate of change in, 248 components of, 198, 199–200 current account and, 566 gross national product vs., 200 imputed value in, 197 income-expenditure equilibrium, 335 nominal See nominal GDP real See real GDP uses of, 201 wages and, global comparison of, 137 gross national product (GNP), 200 current account and, 566 growth accounting, 251, 253 growth recessions, 223 H health insurance, government See Medicaid; Medicare Heckscher-Ohlin model, 138–139, 146–147 herd mentality, 304 Herriot, James, 85 higher education opportunity cost of attending college and, unemployment rate among new graduates and, 223–224 Hobijn, Bart, 367–368 Honduras, clothing exports of, 37 Hong Kong banking crisis and unemployment in, 524 clothing production of, 140–141 economic growth of, 158, 264 GDP per capita and wellbeing in, 204 horizontal axis, 52 horizontal curves, 55–56 horizontal intercept, 54 household(s), 38 in circular-flow diagram, 192–195 housing See also Fannie Mae; Freddie Mac; mortgage entries demand for, 303 prices of, in banking crises, 521–522 shortage of, in New York City, 103 U.S housing bubble and, 306–307, 317, 320–321, 331–332, 513 housing market crash, subprime lending and, 445–446 Hoynes, Hilary, 42 human capital, 280 See also education; higher education definition of, 282 growth in productivity and, 251 Find more at http://www.downloadslide.com INDEX Hurricane Katrina, 67 Hurricane Sandy, price controls following, 104 hydraulic fracturing, 67, 68 hyperglobalization, 131 hyperinflation, 182 in Armenia, 485 in Brazil, 235 in Germany, 235, 421, 485, 489 logic of, 489–491 in Nicaragua, 485 in Zimbabwe, 485, 491 I Iceland money and inflation in, 475 wage cut in, currency and, 589–590 illegal activity, price floors and, 115 illiquid assets, 296 IMF See International Monetary Fund (IMF) imperfectly competitive markets, prices in, 359 implicit liabilities, 407–409 import(s), 132, 194 effects on international trade, 142–144 import quotas, 150–151 import-competing industries, 146 imputed value, in gross domestic product, 197 in kind, 236 incentives, 9–10 income See also wage(s) changes in, shift of demand curve and, 74–75 disposable See disposable income expected changes in, change in demand and, 75 factor See factor incomes limited, real, 234 spending and, 18–19, 388 income distribution, 38 income inequality, globalization and, 155 income support programs See Social Security income taxes See also tax(es) fiscal policy and, 387 indexing of tax brackets to CPI and, 210 income-expenditure equilibrium, 334–336, 352, 353 income-expenditure equilibrium GDP, 335 income-expenditure model, 332–340 aggregate demand curve and, 352–354 equilibrium and, 334–336 multiplier process and inventory adjustment and, 336–340 planned aggregate spending and real GDP and, 333–334 increasing returns to scale, international trade and, 140 independent variable, 52–53 India cotton exports of, 95 economic growth of, 246 money and inflation in, 475 real GDP per capita in, 249–250 individual choice, 5, 6–11 incentives and, 9–10 opportunity cost and, 7–8 resource scarcity and, 6–7 trade-offs and, 8–9 individual consumer surplus, 164 individual demand curve, 75–77 individual producer surplus, 166 individual supply curve, 83 Indonesia, banking crisis and unemployment in, 524 Industrial Revolution, 180 industries See also specific industries factor movement between, 146 IndyMac, 429–430 inefficiency See also efficiency caused by price ceilings, 106–109 price floors causing, 113–115 resource use and, 15 inefficient allocation of sales among sellers, 114–115 inefficient allocation to consumers, 107–108 inefficiently high quality, 115 inefficiently low quality, 108–109 inefficiently low quantity, 113 inequality, globalization and, 155 infant industry argument for trade protection, 152 inferior goods, 74–75 inflation, 19, 485–504 See also deflation; hyperinflation causes of, 181–182 classical model of money and prices and, 486– 488 costs of disinflation and, 502–504 disinflation and, 238 embedded, 472 expectations for, short-run Phillips curve and, 497–499 Fisher effect and, 291–292, 504–505 Friedman-Phelps hypothesis and, 549 inflation tax and, 488–489 loanable funds market and, 290–293 long-run Phillips curve and, 500–502 McDonald’s hamburger costs and, 182 menu costs of, 235–236, 239 nonaccelerating inflation rate of unemployment and, 502 Okun’s law and, 494 output gap and unemployment rate and, 492–493 pain of, 182 price level and, 233–234 real exchange rates and, 577–579 shoe-leather costs of, 235, 239 short-run Phillips curve and, 494–499 supply shocks and, 350 in United States, 485 unit-of-account costs and, 236 in Venezuela, 205 inflation rate, 234–236 price indexes and, 207 inflation targeting, 469–470 response to financial crisis of 2008 and, 558 inflation tax, 488–489 inflationary gaps, 374–375 infrastructure, government subsidies to, 260–261 inputs, 81 changes in prices of, shifts of the supply curve and, 81–82 Institute for Supply Management (ISM), 211 institutions, changes in, shifts of money demand curve and, 460 insurance, deposit, 300, 428, 526–527 insurance companies, selling life insurance, 299 intellectual property rights, economic growth and, 262 interaction, 5, 12–18 economy-wide, 18–20 efficiency and, 15–16 equilibrium and, 13–15 I-7 gains from trade and, 12–13 government intervention and, 16–17 interest, on Treasury bills, 439 interest rate(s), 461–466 discount, 436–437 equilibrium See equilibrium interest rate federal funds See federal funds rate Fisher effect and, 291–292, 504–505 holding money and, 456–457 inflation and, 237 investment spending and, 328–329 liquidity preference model of, 462 loanable funds market and, 290–292, 463 in long run, changes in money supply and, 474–475 long-term, 465–466 models of, 463 monetary policy and, 463–465, 466 nominal See nominal interest rate prime, 358 real See real interest rate short-term, 457–458 zero lower bound for, 471 interest rate effect of a change in the aggregate price level, 352 intermediate goods and services, 195 Internal Revenue Service See income taxes international business cycles, exchange rates and, 588–589 international comparisons See global comparisons International Monetary Fund (IMF), 43–44, 531 International Panel on Climate Change (IPCC), 272 international trade, 131–162 See also export(s); import entries comparative advantage and, 132–141 export effects and, 144–145 import effects and, 142–144 increasing returns to scale and, 140 Ricardian model of, 133–137 trade protection and See trade protection unbalanced, 183–185 wages and, 146–148 Find more at http://www.downloadslide.com I-8 I N D E X wages and land prices in the 19th century and, 147–148 international trade agreements, 153–154 international transfers, 565 internships, unpaid, 116–117 inventories, 194 multiplier process and, 336–339 unplanned investment spending and, 330–331 inventory investment, 330 investment inventory, 330 investment spending vs., 280 investment banks, 443 See also Bear Stearns; JP Morgan Chase; Lehman Brothers collapse of, 513 investment spending, 327–332 actual, 283, 330 circular-flow diagram and, 194 desired, 283 economic growth and, 258 expected future real GDP and production capacity and, 329–330 interest rate and, 328–329 investment vs., 280 planned, 328 recessions and, 339–340 savings-investment spending identity and, 280–283 unplanned, inventories and, 330–331 invisible hand, 2–3 IPCC See International Panel on Climate Change (IPCC) iPhones, 131 See also smartphone industry Ireland banking crisis in, 522–523, 526, 527 budget deficit in, 401–402 GDP per capita and wellbeing in, 204 government debt of, 404, 405 infrastructure in, 260–261 minimum wage in, 116 unemployment and inflation in, 230, 500 ISM See Institute for Supply Management (ISM) Israel GDP per capita and wellbeing in, 204 inflation in, 235–236, 239 money and inflation in, 475 Italy aftermath of financial crisis of 2008 in, 529–531 budget deficit in, 401–402 disinflation in, 502 gasoline consumption in, 71 GDP per capita and wellbeing in, 204 government debt of, 404, 405 productivity in, 260 unemployment and inflation in, 230, 500 J James, LeBron, Japan automobile industry of, 591 Bank of Japan and, 506, 591 banking crisis in, 514, 521–522, 524 cash society in, 460–461 current account surplus of, 569 deflation in, 506 economic growth of, 258, 267 gasoline consumption in, 71 GDP per capita and wellbeing in, 204 government size in, 386 international trade of, 132 natural resources of, 255 net public debt of, 404 productivity and wages in, 137 quantity of currency in circulation in, 421 real GDP per capita in, 257 size of economy of, 191, 202 unemployment in, 230, 524 Jay Cooke and Co., 520 job creation argument for trade protection, 152 job search, 225 jobless recovery, 223 JP Morgan Chase, 517 just-in-time production, 45 K Kalanick, Travis, 97 Kennedy, John F., 233 Keynes, John Maynard, 336, 377, 486 The General Theory of Employment, Interest, and Money and, 172, 177, 542, 543, 544 Keynesian economics and, 542–544 on long run, 540 A Tract on Monetary Reform, 377 Keynesian cross, 336 Keynesian economics, 172, 542–544 challenges to, 545–550, 551 classical macroeconomics vs., 542–543 impact on role of government, 543 key macroeconomic questions and, 555–556 macroeconomic policy activism and, 544 KFC, 75 Knickerbocker Trust, 442 Korea See South Korea Kuwait, real GDP of, 255 Kuznets, Simon, 201 Kydland, Finn, 553 L labor See also employment; unemployment; unemployment rate; work comparative advantage and, 137–138 labor force, 219 changes in, 231 labor force participation rate, 219 labor market See also employment; unemployment; unions; wage(s) flows in, 225–226 labor productivity See productivity labor strikes, 228 labor unions, structural unemployment and, 228–229 Latin America See also specific countries economic growth of, 263–264, 265, 267 Latvia, fiscal policy debate over, 558–559 law of demand, 70, 351 lean manufacturing, 45 Lehman, Henry, 513 Lehman Brothers, 349, 447, 513, 514, 516, 517–518, 522 lender of last resort, 526, 527, 531 lending, subprime, housing bubble and, 445–446 leverage, 444–445 Levi’s, 158 Levitt, Steve, 10 Li & Fung, 158 liabilities, 294 of Federal Reserve System, 437–438, 440–441 implicit, 407–409 Libya, printing of banknotes for, 508 licenses, 118 life insurance companies, 299 linear relationships, 53 liquid assets, 296 liquidity financial system and, 295–296 trade-off between rate of return and, 514–515 liquidity preference model of the interest rate, 462 liquidity trap, 504–505 loan(s), 296 loanable funds market, 284–293 capital flows and, 568–571 demand for loanable funds and, 284–286 equilibrium interest rate and, 287–288 inflation and interest rates and, 290–293 shifts of demand for loanable funds and, 288–289 shifts of supply of loanable funds and, 289–290 supply of loanable funds and, 286–287 loan-backed securities, 296–297 London, England air pollution in, 269–270 congestion pricing in, 78 long run, definition of, 366 long-run aggregate supply curve, 364–366 movement from short-run aggregate supply curve to, 366–367 long-run economic growth, 178–181, 245–278 aggregate production function and, 251–255 beginning of, 180 differences in, 263–268 end of, 256–257 government’s role in promoting, 260–263 natural resources and, 255–256, 268–269 productivity and, 250–251 rates of, 248–249, 257–263 real GDP per capita and, 246–248 sustainable, 268 long-run macroeconomic equilibrium, 372–375 long-run Phillips curve, 500–502 Long-Term Capital Management (LTCM), 444–445, 448, 514, 517 long-term interest rates, 457, 465–466 Los Angeles, congestion pricing in, 78 Find more at http://www.downloadslide.com INDEX loss aversion, 304 lowflation, 506–507 LTCM See Long-Term Capital Management (LTCM) Lucas, Robert, 551 lump-sum taxes, 395 M M1 and M2 monetary aggregates, 423–424, 456, 459–460 M3 monetary aggregate, 423, 460 Macro Advisers, 43 Macroeconomic Advisers, 211 macroeconomic equilibrium long-run, 372–375 short-run, 368–369 macroeconomic policy, 19–20 See also fiscal policy; monetary policy development of focus on, 171–172 exchange rates and, 586–590 inflation and See inflation stabilization, 376–379 unemployment and See unemployment macroeconomic policy activism, 544 macroeconomic questions, 170–171 macroeconomics, 3–4, 169 asset prices and, 305–306 business cycle and See business cycle classical, 540–541 Great Moderation consensus and, 554–559 inflation and deflation and See deflation; hyperinflation; inflation international imbalances and, 183–185 Keynesian See Keynesian economics long-run economic growth and See long-run economic growth new classical, 550–553 new Keynesian, 551–552 open-economy See open-economy macroeconomics origins of, 170, 177 scope of, 170 Maddison, Angus, 180, 257 Maduro, Nicolás, 110 Maersk, 380 Malaysia, banking crisis and unemployment in, 524 Malthus, Thomas, 268 An Essay on the Principle of Population, 255–256 Mankiw, N Gregory, 543 marginal analysis, marginal decisions, marginal propensity to consume (MPC), 318–319, 320, 322–323 marginal propensity to save (MPS), 318 marginally attached workers, 220 market(s) black, price ceilings and, 109 capital, 38 competitive See competitive markets for concert tickets, 89–90 credit, overnight (repo), 460, 517 efficiency and See efficiency factor, 38 for fashion models, 94 federal funds, 436 financial, 193, 284 foreign exchange, 574 See also exchange rate(s); exchange rate policy for goods and services, 38 housing See housing for loanable funds See loanable funds market market basket, 206–207 market demand curve, 76 market economies, 2, market equilibrium, 69, 86 shift of demand curve and, 91–92 market failure, 3, 16 market price, 87–89 above equilibrium price, 88 below equilibrium price, 88–89 market supply curve, 83–84 market timing, 305 market-clearing price, 86 markets for goods and services, 38 Marshall, Alfred, 1, maturity transformation, 514, 516 maximum of curve, 58–59 MBSs See mortgage-backed securities (MBSs) McAfee, Andrew, 257 McCulley, Paul, 514 McDonald’s, 75 Big Mac prices and purchasing power parity and, 579 hamburger prices and inflation and, 182 Medallion Financial, 124 Medicaid, 387, 396 Medicare, 387 implicit liabilities due to, 407, 408 medium of exchange, money as, 421 menu costs, 235–236, 239 Mercedes, 580 merchandise trade balance, 566 Mexico clothing exports of, 37 international trade of, 132 money and inflation in, 475 real GDP per capita in, 257 unemployment in, 230 microeconomic questions, 170 theory and policy and, 171–172 whole as greater than sum of its parts and, 171 microeconomics, 3, 169 Microsoft, 283, 297 middlemen, 86 Milan, congestion pricing in, 78 minimum, 58–59 minimum wage, 111, 115, 116 structural unemployment and, 227–228 unpaid internships and, 116–117 Mitchell, Wesley, 540 models, 25–49 AD-AS See AD-AS model circular-flow diagram as, 37–39 comparative advantage as, 33–37 economists’ disagreements and, 41–43 economists in business world and government and, 43–44 financial crisis of 2008– 2009 and, 26 Heckscher-Ohlin model, 138–139, 146–147 illustrating with graphs, 51 See also graphs income-expenditure See income-expenditure model liquidity preference, of interest rate, 462 positive vs normative economics and, 40–41 of price ceilings, 105–106 of price level, classical, 486–488, 540 production possibilities frontier as, 27–33 rational expectations, 551 Ricardian, of international trade, 133–137 supply and demand See demand curve; demand schedule; supply and demand model; supply curve; supply schedule monetarism, 546–549, 550 key macroeconomic questions and, 555–556 I-9 monetary aggregates, 423–424, 456, 459–460 monetary base, 433–434 A Monetary History of the United States (Friedman and Schwartz), 521, 546 monetary incentives, to improve academic performance, 10 monetary neutrality, 474, 475–476 monetary policy, 172, 217, 455–480 aggregate demand and, 467–472 changes in interest rate and, in long run, 474–475 contractionary, 467–468 demand for money and, 456–461 discretionary, 546–547, 556 effectiveness of, 471–472 expansionary, 467, 554–555 under floating exchange rates, 587–588 increase in, short- and longrun effects of, 472–474 interest rates and, 461–466 loss of effectiveness of, 525 monetary neutrality and, 474, 475–476 reduction of unemployment in long run and, 555 response to financial crisis of 2008 and, 557–558 revival following World War II, 545–546 shifts of the aggregate demand curve and, 356, 357 Taylor rule for, 469 monetary policy rule, 548 monetization of debt, 488 money, 420–425 classical model of the price level and, 486–488 commodity, 422 commodity-backed, 422– 423, 425 counterfeiting of, 408, 419 definition of, 420–421 fiat, 423, 425 opportunity cost of holding, 456–458 printing of, 508 roles of, 421–422 supply of See money supply velocity of, 548 money demand curve, 458–460 shifts of, 459–460 money market mutual funds, 534 money multiplier, 432 in reality, 433–435 Find more at http://www.downloadslide.com I-10 I N D E X reserves and bank deposits and, 432–433 money supply, 182, 420, 430–435 bank creation of money and, 430–432 changes in, interest rate in long run and, 474–475 components of, 423 increase in, short- and longrun effects of, 472–474 measuring, 423–424 money multiplier in reality and, 433–435 reserves, bank deposits, and money multiplier and, 432–433 money supply curve, 462 Montgomery Ward, business cycle and, 186 Morgan, J P., 442 Morgan Stanley, 43, 477 mortgage(s) See also Fannie Mae; Freddie Mac inflation and, 237 mortgage-backed securities (MBSs), financial crisis of 2008–2009 and, 26 movements along the aggregate demand curve, 355, 358 along the short-run aggregate supply curve, 361 movements along the demand curve, 72 movements along the supply curve, 80–81, 91 MPC See marginal propensity to consume (MPC) MPS See marginal propensity to save (MPS) Mugabe, Robert, 491 multiplier, 317, 318–321, 393–397 algebraic derivation of, 347 austerity and, 396–397 changes in government transfers and taxes and, 394–395 increase in government purchases of goods and services and, 393–394 money See money multiplier taxes and, 395–396, 417–418 Mumbai, India, rent control in, 109 Murstein, Andrew, 124 mutual funds, 297–298 N NAFTA See North American Free Trade Agreement (NAFTA) NAIRU See nonaccelerating inflation rate of unemployment (NAIRU) national accounts, 192–201 circular-flow diagram and, 192–195 creating, 201 gross domestic product and, 195–201 National Bureau of Economic Research (NBER), 175, 176, 540 National Income, 1929–35, 201 national income and product accounts See national accounts national savings, 281 national security argument for trade protection, 152 nationalization, of banking system, 526–527 natural gas industry boom and, 67–68 change in price and, 69, 73, 77–78 Hurricane Katrina and, 67, 92 natural rate hypothesis, 549 natural rate of unemployment, 224–233 changes in, 230–232 cyclical unemployment and, 229 frictional unemployment and, 225–226, 232 job creation and job destruction and, 224–225 long-run Phillips curve and, 502 structural unemployment and, 227–229, 232–233 natural resources, long-run economic growth and, 255–256, 268–269 NBC News, 117 NBER See National Bureau of Economic Research (NBER) near-moneys, 423–424 negative demand shocks, 375 negative externalities, 271 See also greenhouse gas emissions; pollution negative relationships, 54 negative supply shocks, 370, 371, 376 net capital inflow, 281–282 net exports, 200 net present value, 314 Netherlands GDP per capita and wellbeing in, 204 unemployment and inflation in, 230, 500 new classical macroeconomics, 550–553 New Growth Theory, 261–262 new Keynesian economics, 551–552 New York City rent control in, 103, 104– 105 taxi medallions in, 103, 118, 122, 124 New York Clearinghouse, 442 New Zealand apple exports of, 138 inflation targeting in, 470 unemployment in, 230 Nicaragua, hyperinflation in, 485 Nigeria natural resources of, 255 real GDP per capita in, 263–264, 265–266 Nixon, Richard, 550 nominal exchange rate, 577, 578–579 nominal GDP, 203 real GDP vs., in Venezuela, 205 nominal interest rate, 237 long-term, 457 real interest rate vs., 290 nominal wage, 359 average, 360 changes in, shifts of the short-run aggregate supply curve and, 362–363 nonaccelerating inflation rate of unemployment (NAIRU), longrun Phillips curve and, 501–502 nonlinear curves, 56–58 nonlinear relationships, 53 normal goods, 74–75 normalization, of measure of aggregate price level, 206 normative economics, 40–41 North American Free Trade Agreement (NAFTA), 153 Northern Rock, 430, 526 Norway banking crisis and unemployment in, 524 congestion pricing in, 78 current account surplus of, 569 net public debt of, 404 unemployment in, 230 numerical graphs, 60–64 interpreting, 62–64 types of, 60–62 O Obama, Barack, 67, 68, 385, 443 Obama stimulus See American Recovery and Reinvestment Act OECD See Organization for Economic Cooperation and Development (OECD) offshore outsourcing, 154, 155 oil Norway’s exports of, 404 as source of wealth, 255 U.S consumption of, economic growth and, 269–270 oil prices container-shipping industry and, 380 economic problems caused by rises in, 349, 350 nominal wage in 1970s and, 362–363 price controls on, 104 real, 268, 269 recessions caused by rise in, 375–376 short-run Phillips curve and, 499 Okun, Arthur, 494 Okun’s law, 494 Olive Garden, 75 omitted variables, 63–64 one-child policy, 10–11 open economies, 183, 563 savings-investment spending identity in, 281–283 open-economy macroeconomics, 563–595 balance of payments accounts and, 564–568 exchange rate and See exchange rate(s); exchange rate policy modeling the financial account and, 568–571 two-way capital flows and, 572–573 underlying determinants of international capital flows and, 571 open-market operations, 435, 437–439 opportunity cost, 7–8 constant, 30 of holding money, 456–458 increasing, 30 production possibilities frontier and, 30–31 of taxi medallions, 121 Organization for Economic Cooperation and Development (OECD), natural unemployment around, 230 origin, 52 O’Rourke, Kevin, 172 other things equal assumption, 27, 70, 74 Find more at http://www.downloadslide.com INDEX output(s) aggregate See aggregate output; real GDP potential, 365 output gaps, 375 unemployment rate and, 492–494 See also Phillips curve; shortrun Phillips curve outsourcing, offshore, 154, 155 overconfidence, 304 overnight credit market, 517 P Pacific Investment Management Company (PIMCO), 477 pajama republics, 37 Pakistan, cotton production in, 95 panic buying, 95 Panic of 1873, 520 Panic of 1893, 520, 523 Panic of 1907, 442, 443, 514 paradox of thrift, 171, 338– 339 patents, 262 Paulson, Hank, 517, 518 Paulson, John, 304 pauper labor fallacy, 137, 138 pension funds, 298 Pepsi, 68 perfectly competitive markets, prices in, 359 peso, Mexican, exchange rate and, 577, 578–579 Phelps, Edmund, 497, 549 Philippines, banking crisis and unemployment in, 524 Phillips, A W H., 494 Phillips curve in Great Recession, 499–500 long-run, 500–502 short-run See short-run Phillips curve physical assets, 293 physical capital, 280 definition of, 282 diminishing returns to, 252–253, 254 growth in productivity and, 251 size of stock of, shifts of the aggregate demand curve and, 355–356 pie charts, 62 PIMCO See Pacific Investment Management Company (PIMCO) planned aggregate spending, income- expenditure model and, 333–334 planned economies, planned investment spending, 328 point method of calculating slope, 58 Poland, unemployment in, 230 political business cycle, 549–550 political stability, economic growth and, 262, 266 politics, of trade protection, 152–153 pollution See also greenhouse gas emissions in China, 245 economic growth and, 269–270 population growth of, standard of living and, 255–256, 268 Malthus’s views on, 255–256, 268 Portugal budget deficit in, 401–402 GDP per capita and wellbeing in, 204 government debt of, 404, 405 unemployment and inflation in, 500 positive economics, 40–41 positive relationships, 54 positive supply shocks, 370, 371 potential output, 365 PPF See production possibility frontier (PPF) Prescott, Edmund, 553 present value, 285, 313–316 calculating bond prices using, 315 calculating stock prices using, 316 of multiyear projects, calculating, 313–314 net, 314 of a one-year project, calculating, 313 of projects with revenues and costs, 314–315 price(s) of assets See asset prices of bonds, calculating using present value, 314 buying vs selling, 86 changes in See price changes commodity, changes in, shifts of the short-run aggregate supply curve and, 362, 363 congestion pricing and, 78 demand, 119 equilibrium See equilibrium price expected changes in, change in demand and, 75 factor, wage rate as, 146 of land, world trade in agriculture in 19th century and, 147–148 market See market price market-clearing, 86 of oil See oil prices in perfectly vs imperfectly competitive markets, 359 received vs paid, 86 relative, 136 of stock, calculating using present value, 315 supply, 119 world, 142–143 price ceilings, 103, 104–111 inefficiency caused by, 106–109 modeling, 105–106 quantities and, 114 reasons for, 110 price changes expected, change in demand and, 75 shift of demand curve and, 74 shift of supply curve and, 81–82 price controls, 104 See also price ceilings; price floors inefficient allocation and, 107–108 price floors, 103, 104, 111–117 inefficiency caused by, 113–115 quantities and, 114 reasons for, 116 price indexes, 191, 205–210 consumer price index See consumer price index (CPI) market baskets and, 206–207 producer price index, 208 price levels See also inflation rate aggregate See aggregate price level classical model of, 486–488, 540 inflation and, 233–234 See also deflation; inflation price stability, 182, 377–378, 468 Priceline.com, 21 prime rate, 358 principal, 315 private investment, crowding out of, by government borrowing, 390 private savings, 193 changes in, shifts of supply of loanable funds and, 289–290 I-11 producer(s), changes in number of, shifts of the supply curve and, 83–84 producer price index (PPI), 208 producer surplus (PS), 112 export effects on, 144–145 import effects on, 143–144 individual, 166 supply curve and, 165–167 tariffs and, 149 total, 166 product(s) See goods and services production complements in, 82 efficiency in, 29 just-in-time, 45 substitutes in, 82, 85 production capacity, investment spending and, 329–330 production function, aggregate, 251–255 production possibility frontier (PPF), 27–33 comparative advantage and, 133–135 economic growth and, 31–33 efficiency and, 29 opportunity cost and, 30–31 productivity, 250 changes in, shifts of the short-run aggregate supply curve and, 363 international comparison of, 137 long-run economic growth and, 250–251 total factor, 255 profit(s) in competitive markets, 96 during recessions, 176 property rights, economic growth and, 262, 266 protection, 148 See also trade protection public debt, 404 purchases, government See government purchases of goods and services purchasing power, inflation and See inflation purchasing power parity, 579–580 Q quality inefficiently high, price floors and, 115 inefficiently low, price floors and, 108–109 quantitative easing, 506–507, 557–558 Find more at http://www.downloadslide.com I-12 I N D E X quantity inefficiently low, price floors and, 107 price ceilings and price floors and, 114 quantity controls, 118 anatomy of, 118–121 costs of, 121–122 quantity demanded, 69 demand vs., 72 quantity supplied, 79 quota(s), 118 See also quantity controls for crab, 122–123 import, 150–151 quota limits, 118 quota rent, 121 quota share, 123 R Race Against the Machine (Brynjolfsson and McAfee), 257 random walk, 305 rate of return, trade-off between liquidity and, 514–515 rational expectations, 551–552 rational expectations model, 551 R&D See research and development (R&D) Reagan, Ronald, 552 real business cycle theory, 552–553 real exchange rates, inflation and, 577–579 real GDP, 202–205 See also aggregate output calculating, 202–203 changes in, shifts of money demand curve and, 460 future, expected, investment spending and, 329–330 income-expenditure model and, 333–334 nominal GDP vs., in Venezuela, 205 real GDP per capita, 246–248 See also economic growth; GDP per capita; long-run economic growth growth rates of, 248–249 real incomes, 234 real interest rate, 237 nominal interest rate vs., 290 real wage, 234 recession(s), 3–4, 19, 20 See also business cycle; Great Recession, 2007–2009 babysitting cooperative in, 20 following banking crises, severity of, 524–525 definition of, 176 double-dip, 375 effectiveness of expansionary fiscal policy for fighting, 555 effectiveness of expansionary monetary policy for fighting, 554–555 growth, 223 investment spending and, 339–340 of 1979–1980 and 1981–1982, 375 pain of, 175–176 of 2001 and 2007–2009, compared, 178 unemployment during, 221–222 recessionary gaps, 373–374 Reconstruction Finance Corporation (RFC), 443 recoveries See business cycle; expansion(s) Recovery Act See American Recovery and Reinvestment Act regulation of banks, 428–429 in wake of financial crisis of 2008, 533–534 Regulation Q, 443, 444 Reinhart, Carmen, 524 related goods See complements; substitutes relative price(s), gains from trade and, 136 rent, quota, 121 rent control, 103 in Mumbai, India, 109 in New York City, 104–105, 110 repo market, 460, 517 research and development (R&D), 259 economic growth and, 258–259 government subsidies to, 261 reserve(s) bank, 426 bank, excess, 432–433 foreign exchange, 582 reserve ratio, 427 reserve requirements, 429 resolution authority, 533–534 resources, efficient use of, 15–16 natural, long-run economic growth and, 255–256, 268–269 scarce, 6–7 wasted See wasted resources retained earnings, 329 revaluation, 586–587 reverse causality, 64 RFC See Reconstruction Finance Corporation (RFC) Ricardian equivalence, 391, 557 Ricardian model of international trade, 133–137 Ricardo, David, 148, 391 risk, financial, 294–295 risk aversion, 295 Rockefeller, John D., 442 Rogoff, Kenneth, 524, 529, 550 Romer, Christina, 471, 472 Romer, David, 471, 472 Romer, Paul, 261–262 Roosevelt, Franklin Delano, 425, 429, 443, 520 attempts to end Great Depression, 544 Rule of 70, 248, 255 Russia See also Soviet Union, former current account surplus of, 569 financial crisis in, 571 S Sachs, Jeffrey, 266 Saez, Emmanuel, 42 safeguard mechanism, 154 sales, inefficient allocation among sellers, 114–115 Samoa, rule of the road in, 14 Samuelson, Paul, 542 Saudi Arabia current account surplus of, 569 oil exports of, 139 trade surplus of, 183 savings economic growth and, 258 global savings glut and, 571 marginal propensity to save and, 318 private, 193 savings and loans, 444 savings-investment spending identity, 280–283 actual vs desired investment spending and, 283 in closed economy, 280–281 in open economy, 281–283 scarce resources, 6–7 scatter diagrams, 61–62 Schumpeter, Joseph, 173, 540 Schwartz, Anna, 521, 539, 546 A Monetary History of the United States, 521, 546 Sears, Roebuck and Co., 186 Second Industrial Revolution, 256 Secret Service, 419 securities, 26 loan-backed, 296–297 securitization, 296, 446, 513 banking crisis precipitated by, 522 seignorage, 489, 490, 508 self-correcting economy, 374, 375, 376 self-regulating economy, 172 sellers, inefficient allocation of sales among, 114–115 Sen, Amartya, 11 server farms, 279 services See final goods and services; goods and services shadow banking, 514, 516–517 regulation of, 533 Shanghai, 565 shifts of aggregate demand, shortrun effects of, 369–370 of the aggregate demand curve, 354–356, 388 of demand for loanable funds, 288–289 of the money demand curve, 459–460 of the short-run aggregate supply curve, 361–363, 370–372 of supply of loanable funds, 289–290 shifts of the demand curve, 70–78, 91–92, 93–94 shifts of the supply curve, 80–85, 92–94 Shiller, Robert, 304 Shindell, Robert, 117 shoe-leather costs, 235, 239 shortages, 86–87 of housing in New York City, 103 market price and, 88–89 short-run aggregate supply curve, 358, 359–363 movement to long-run aggregate supply curve from, 366–367 shifts of, 361–363 short-run equilibrium aggregate output, 369 short-run equilibrium aggregate price level, 369 short-run macroeconomic equilibrium, 368–369 short-run Phillips curve, 494–499 aggregate supply curve and, 496 inflation expectations and, 497–499 supply shocks and, 495, 497, 499 short-term interest rates, 457–458 Singapore congestion pricing in, 78 economic growth of, 264 GDP per capita and wellbeing in, 204 Find more at http://www.downloadslide.com INDEX slope, 54–59 arc method of calculating, 56–58 constant, 30 negative, increasing and decreasing, 56, 57 point method of calculating, 58 positive, increasing and decreasing, 56, 57 Slovak Republic, unemployment in, 230 smartphone industry, 131, 133–137 Smith, Adam, The Wealth of Nations (Smith), 2, 12–13, 422, 423, 542 Smithfield Foods, 565 social insurance, 387 social insurance programs See Medicaid; Medicare; Social Security social insurance taxes, 386 Social Security, 387 implicit liabilities due to, 407–409 indexing of, to CPI, 209–210 Social Security trust fund, 408–409 Solana, 411 solar power, 411 Solow, Robert, 263 South Africa, money and inflation in, 475 South Korea banking crisis in, 524 economic growth of, 300–301 free-trade agreement with United States, 156–157 gasoline consumption in, 71 money and inflation in, 475 real GDP per capita in, 263–265 smartphone production and, 131 unemployment in, 230, 524 Soviet Union, former See also Russia command economy of, Spain aftermath of financial crisis of 2008 in, 529–531 banking crisis in, 524 budget deficit in, 401–402 economic growth of, 267 GDP per capita and wellbeing in, 204 government debt of, 404, 405 Great Recession and, 169 inflation in, 500 trade surplus of, 184 unemployment in, 230, 500, 524 specialization, 12–13 spending government policies and, 19–20 income and, 18–19 inflation and, 19 investment See investment spending Sri Lanka clothing exports of, 37 comparative advantage and, 39 stabilization policy, 376–379 stagflation, 350, 371, 499 standard of living population growth and, 255–256, 268 recessions and, 176 sticky wages, 359, 360 in Great Recession, 367–368 Stiglitz, Joseph, 385 stimulus See also American Recovery and Reinvestment Act; expansionary fiscal policy austerity vs., 531 stock(s), 192, 297 calculating price using present value, 315 demand for, 301–303 diversified portfolio of, 298 dividends on, 315 market timing and, 305 store of value, 422 structural unemployment, 227–229, 231, 232–233 StubHub, 90 Subaru, 591 subprime lending, 445–446 subsidies agricultural, 154 government, productivity and, 260–261 substitutes, 74 changes in prices of, shifts of the demand curve and, 82 in production, 82, 85 sugar industry, trade protection for, 152–153 supply of loanable funds, 286–287 of money See money supply of natural gas, 67 supply and demand model, 67–97 See also demand; demand curve; demand schedule; supply; supply curve; supply schedule changes in supply and demand and, 90–96 competitive markets and, 68, 96 equilibrium and, 86–90 key elements of, 68–69 supply curve, 79–90 aggregate See aggregate supply curve domestic, 142 individual, 83 market, 83–84 for money, 462 movements along, 80–81, 91 shifts of, 80–85, 92–93 simultaneous shift of demand curve and, 93–94 supply schedule and, 79–80 supply price, 119 supply schedule, 79–80 supply shocks, 350, 370–372 demand shocks vs., 375–376 macroeconomic policy and, 378 negative, 370, 371, 376 short-run Phillips curve and, 495, 497, 499 of twenty-first century, 372 supply-side economics, 552 surge pricing, 97 surpluses, 86 budget, 281 consumer See consumer surplus market price and, 88 producer See producer surplus trade, 183 Survey of Current Business, 201 sustainable long-run economic growth, 268 Sveriges Riksbank, 439 sweatshop labor fallacy, 137–138 Sweden banking crisis in, 521–522, 523, 524 GDP per capita and wellbeing in, 204 nationalization of banking system in, 526 unemployment in, 230, 524 Swiss National Bank, 563 Switzerland banks in, 563 money and inflation in, 475 unemployment in, 230 watch production of, 139 T T-accounts, 426–427 Taiwan, economic growth of, 264 tangent line, 58 target federal funds rate, 461, 464–465, 466 tariffs, 148–150 tastes, changes in, shift of demand curve and, 75 tax(es) changes in, multiplier effects of, 394–395 I-13 dedicated, 408 effect on multiplier, 395–396 fiscal policy and, 386–387 income See income taxes inflation, 488–489 lump-sum, 395 multiplier and, 395–396, 417–418 social insurance, 386 value-added, 42 tax models, 26 taxis medallions in New York City, 103, 118, 124 Uber as alternative to, 97 Taylor, John, 469 Taylor rule for monetary policy, 469 technological change in banking, shifts of money demand curve and, 460 growth in productivity and, 251 natural rate of unemployment and, 232 shifts of the supply curve and, 82 technological progress, 251 economic growth and, 274 exogenous vs endogenous sources of, 261–262 productivity growth and, 254–255 technology, 32 cell phone See iPhones; smartphone industry comparative advantage and, 138, 139–140 TED spread, 447 temporary employment, 232, 240 textiles, U.S import quotas on, 151 Thailand banking crisis and unemployment in, 524 financial crisis in, 571 A Theory of the Consumption Function (Friedman), 325–326 Thoma, Mark, 44 thrifts, 444 time lags, in fiscal policy, 391–392 time-series graphs, 60–61 total catch quota system, 122 total consumer surplus, 164 total factor productivity, 255 real business cycle theory and, 552 total producer surplus, 166 total surplus, gains from trade and, 167–168 Toyota, 225, 591 A Tract on Monetary Reform (Keynes), 377 Find more at http://www.downloadslide.com I-14 I N D E X trade, 12 See also export(s); import(s); international trade free, 148 gains from See gains from trade trade balance, 566 trade deficits, 183 trade protection, 148–157 arguments for, 152 challenges to globalization and, 154–156 import quotas as, 150–151 international trade agreements and World Trade Organization and, 153–154, 156–157 politics of, 152–153 tariffs as, 148–150 in United States, 151 trade surpluses, 183 trade-off(s), 8–9 between rate of return and liquidity, 514–515 traffic congestion, congestion pricing and, 78 transaction costs, 294 transfers See government transfers transparency, inflation targeting and, 470 Treasury bills, interest on, 439 truncation, 63 trusts, Panic of 1907 and, 442 Turkey inflation in, 486 money and inflation in, 475 two-variable graphs, 51–53 U Uber, 97 underemployed workers, 220 unemployment, 218–233 budget deficit and, 399 cyclical See cyclical unemployment definition of, 218 duration of, 226 frictional, 225–226, 232 Friedman-Phelps hypothesis and, 549 growth and, 221–223 measuring, 218–219 natural rate of See natural rate of unemployment among new graduates, 223–224 during recessions, 175–176 reduction in long run, monetary and fiscal policy and, 555 structural, 227–229, 232–233, 241 unemployment rate, 219 before and after banking crises, 523–524 natural See natural rate of unemployment output gap and See also Phillips curve; short– run Phillips curve, 492–494 significance of, 219–221 unions, structural unemployment and, 228–229, 231 unit of account, 422 United Kingdom Bank of England and, 439, 470 beginning of business cycle in, 541 disinflation in, 502 economic growth of, 262–263 gasoline consumption in, 71 net public debt of, 404 response to financial crisis of 2008 in, 557 unemployment in, 230 United States See also Federal and federal entries banking system of See U.S banking system deflation in, 238 disinflation in, 502, 503– 504 gasoline consumption in, 71 GDP per capita and wellbeing in, 204 housing bubble in, 306–307, 317, 320–321, 331–332, 513 inflation in, 236, 475, 485 interest rates in, 292–293 minimum wage in, 116 net public debt of, 404 oil consumption and economic growth of, 269–270 productivity and wages in, 137 productivity growth in, 255 productivity in, 260 real GDP per capita in, 247 regulation following financial crisis of 2008 in, 533–534 savings-investment spending identity in, 282– 283 trade deficit of, 183 trade protection in, 151 unemployment in, 218, 221–223, 230, 524 U.S banking system, 441–448 crisis in, in early twentieth century, 441–444 Federal Reserve System and See Federal Reserve System (Fed) financial crisis of 2008 and, 444–448 savings and loan crisis of 1980s and, 444 U.S Census Bureau, unemployed defined by, 218 U.S International Trade Commission, 151 unit-of-account costs, 236 universities See higher education unpaid interns, 116–117 unplanned inventory investment, 330 U-6, 220 V value added, 197 value-added taxes (VAT), 42 Vanguard, 534 variable(s), 51 dependent, 52–53 independent, 52–53 omitted, 63–64 VAT See value-added taxes (VAT) velocity of money, 548 Venezuela price controls in, 110–111 real vs nominal GDP in, 205 vertical axis, 52 vertical curves, 55–56 vertical intercept, 54 veterinary services, substitutes in production and, 85 vicious cycle of deleveraging, 445 Vietnam clothing exports of, 37 shrimp production of, 133, 136, 138, 154 wasted resources, 108 price controls and, 108 price floors and, 115 wealth, 293 aggregate, changes in, aggregate consumption function and, 326 changes in, shifts of the aggregate demand curve and, 355, 356 wealth effect of a change in the aggregate price level, 352, 355 The Wealth of Nations (Smith), 2, 12–13, 422, 423, 542 wedges, 121 Whole Foods, 449 wholesale price index, 208 willingness to pay, 104–107 consumer surplus and, 164–165 demand curve and, 163–164 work See employment; labor entries; unemployment; unemployment rate Works Progress Administration (WPA), 396 World Bank, 43 world price, 142–143 World Trade Organization (WTO), 153, 155 World War II government debt from, 407 Great Depression and, 541 price ceilings during, 104 price indexes during, 209 WPA See Works Progress Administration (WPA) Wright, Wilbur and Orville, 25 WTO See World Trade Organization (WTO) W wage(s), 359 efficiency, 229 as factor prices, 146 international comparison of, 137 international inequality of, 155 international trade and, 146–147 minimum See minimum wage nominal See nominal wage real, 234 sticky See sticky wages structural unemployment and, 229 wage rate, as factor price, 146 Wall Street Reform and Consumer Protection Act, 447, 533–534 Walmart, 158, 186 Washington, George, X x-axis, 52 Y y-axis, 52 Yellen, Janet, 217, 455 Yunus, Mohammed, 308 Z zero bound, 504 zero interest rate policy See ZIRP (zero interest rate policy) zero lower bound for interest rates, 471 Zimbabwe, hyperinflation in, 236, 485, 491 ZIRP (zero interest rate policy), 506 zones of recent settlement, 572–573 Zuckerberg, Mark, ... 22 3 The Natural Rate of Unemployment 22 4 The Causes of Inflation and Deflation 181 The Pain of Inflation and Deflation 1 82 Job Creation and Job Destruction 22 4 Frictional Unemployment 22 5... the Decline of Britain Fall Behind?, 26 2 n Are Economies Converging?, 26 6 n NEW: The Cost of Limiting Carbon, 27 2 10: Sixty Years of U.S Interest Rates, 29 2 n Banks and the South Korean Miracle,... What? 20 0 What GDP Tells Us 20 1 FOR INQUIRING MINDS: G ross ECONOMICS ➤ IN ACTION Creating the National Accounts 20 1 Real GDP: A Measure of Aggregate Output 20 2 Calculating Real GDP 20 2 What