Giáo trình Macroeconomics ploicy and practice 2nd global edition by mishkin

Macroeconomics Policy and Practice For these Global Editions, the editorial team at Pearson has collaborated with educators across the world to address a wide range of subjects and requirements, equipping students with the best possible learning tools This Global Edition preserves the cutting-edge approach and pedagogy of the original, but also features alterations, customization, and adaptation from the North American version Global edition Global edition Global edition  Macroeconomics P  olicy and Practice SECOND edition SECOND edition Mishkin This is a special edition of an established title widely used by colleges and universities throughout the world Pearson published this exclusive edition for the benefit of students outside the United States and Canada If you purchased this book within the United States or Canada you should be aware that it has been imported without the approval of the Publisher or Author Pearson Global Edition Frederic S Mishkin MyEconLab Provides the Power of Practice ® Optimize your study time with MyEconLab, the online assessment and tutorial system When you take a sample test online, MyEconLab gives you targeted feedback and a personalized Study Plan to identify the topics you need to review Study Plan Real-Time Data Analysis Exercises Up-to-date macro data is a great way to engage in and understand the usefulness of macro variables and their impact on the economy Real-Time Data Analysis exercises communicate directly with the Federal Reserve Bank of St Louis’s FRED® site, so every time FRED posts new data, students see new data End-of-chapter exercises accompanied by the Real-Time Data Analysis icon include RealTime Data versions in MyEconLab The Study Plan shows you the sections you should study next, gives easy access to practice problems, and provides you with an automatically generated quiz to prove mastery of the course material Select in-text figures labeled MyEconLab RealTime Data update in the electronic version of the text 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students see new data End-of-chapter exercises accompanied by the Real-Time Data Analysis icon include RealTime Data versions in MyEconLab The Study Plan shows you the sections you should study next, gives easy access to practice problems, and provides you with an automatically generated quiz to prove mastery of the course material Select in-text figures labeled MyEconLab RealTime Data update in the electronic version of the text using FRED data Current News Exercises Posted weekly, we find the latest microeconomic and macroeconomic news stories, post them, and write auto-graded multi-part exercises that illustrate the economic way of thinking about the news Unlimited Practice As you work each exercise, instant feedback helps you understand and apply the concepts Many Study Plan exercises contain algorithmically generated values to ensure that you get as much practice as you need Interactive Homework Exercises Participate in a fun and engaging activity that helps promote active learning and mastery of important economic concepts Pearson’s experiments program is flexible and easy for instructors and students to use For a complete list of available experiments, visit www.myeconlab.com Learning Resources Study Plan problems link to learning resources that further reinforce concepts you need to master • Help Me Solve This learning aids help you break down a problem much the same way as an instructor would during office hours Help Me Solve This is available for select problems • eText links are specific to the problem at hand so that related concepts are easy to review just when they are needed MyEconLab đ Find out more at www.myeconlab.com ã A graphing tool enables you to build and manipulate graphs to better understand how concepts, numbers, and graphs connect A02_MISH9598_ECN_EP.indd 04/02/14 12:46 PM A02_MISH9598_ECN_EP.indd 04/02/14 12:46 PM www.ebookslides.com A02_MISH9598_ECN_EP.indd 04/02/14 12:46 PM nd Edition Macroeconomics Policy and Practice Global Edition Frederic S Mishkin Columbia University Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo A01_MISH9598_FM_001-044.indd 11/02/14 10:12 AM Macroeconomics Matters: The Latest Economic Events and Policy Responses APPLICATIONS apply the analysis in each chapter to explain important real-world situations Chapter Measuring Macroeconomic Data POLICY AND PRACTICE c examples of policies and how they were executed MACROECONOMICS IN THE NEWS boxes introduce relevant news articles and data from the daily press and explain how to read them • Can GDP Buy Happiness? • Policy and Overstatements of the Cost of Living • Unemployment and Employment • Interest Rates Chapter Aggregate Production and Productivity • Why Are Some Countries Rich and Others Poor? • Explaining Real Wage Growth • Oil Shocks, Real Wages, and the Stock Market Chapter Saving and Investment in Closed and Open Economies • How the United States Became the Largest Net Debtor in the World cits • Government Policies to Stimulate Saving • Crowding Out and the Debate over the 2009 Fiscal Stimulus Package • Balance of Payments Accounts Chapter Money and ation • Testing the Quantity Theory of Money • Testing the Fisher Effect • The Zimbabwean ation • The Monetary Aggregates Chapter Appendix The Money Supply Process • Quantitative Easing and the Money Supply 2007–2013 Chapter The Sources of Growth and the Solow Model • Evidence on Convergence, 1960–2012 • U.S Growth Rates in the Postwar Period • China’s One-Child Policy and Other Policies to Limit Population Growth Chapter Drivers of Growth: Technology, Policy, and Institutions • Does Population Growth Improve Living Standards? • Government Measures to Increase Human Capital • The World Bank’s Doing Business • Does Foreign Aid Work? Chapter Business Cycles: An Introduction Chapter The IS Curve • Leading Economic Indicators • The Vietnam War Buildup, 1964–1969 • The Fiscal Stimulus Package of 2009 Chapter 10 Monetary Policy and Aggregate Demand • Movements Along the MP Curve: The Rise in the Federal Funds Rate Target, 2004–2006 • Shifts in the MP Curve: Autonomous Monetary Easing at the Onset of the 2007–2009 Financial Crisis Chapter 11 Aggregate Supply and the Phillips Curve • The Phillips Curve Tradeoff and Macroeconomic Policy in the 1960s Chapter 12 The Aggregate Demand and Supply Model A01_MISH9598_FM_001-044.indd ation, 1980–1986 • Negative Demand Shocks, 2001– 2004 • Negative Supply Shocks, 1973–1975 and 1978–1980 • Positive Supply Shocks, 1995–1999 • Negative Supply and Demand Shocks and the 2007–2009 Financial Crisis • The United Kingdom and the 2007–2009 Financial Crisis • China and the 2007–2009 Financial Crisis 04/02/14 5:12 PM www.ebookslides.com APPLICATIONS apply the analysis in each chapter to explain important real-world situations POLICY AND PRACTICE c examples of policies and how they were executed Chapter 13 Macroeconomic Policy and Aggregate Demand and Supply Analysis ation • Nonconventional Monetary Policy and Quantitative Easing • The Federal Reserve’s Use of the Equilibrium Real Interest Rate, r* • The Activist/Nonactivist Debate Over the Obama Fiscal Stimulus Package • The Fed’s Use of the Taylor Rule • Abenomics and the Shift in Japanese Monetary Policy in 2013 Chapter 14 The Financial System and Economic Growth • The Tyranny of Collateral • Is China a Counter-Example to the Importance of Financial Development to Economic Growth? Chapter 15 Financial Crises and the Economy • The Mother of All Financial Crises: The Great Depression • The Global Financial Crisis of 2007–2009 Chapter 16 Fiscal Policy and the Government Budget MACROECONOMICS IN THE NEWS boxes introduce relevant news articles and data from the daily press and explain how to read them • Was the Fed to Blame for the Housing Price Bubble? • The Federal Reserve’s Nonconventional Monetary Policies and Quantitative Easing During the Global Financial Crisis • Japan’s Lost Decade, 1992–2002 • Debate Over Central Bank Response to Bubbles • The Entitlements Debate: Social Security and Medicare/Medicaid • The European Sovereign Debt Crisis • Tax Smoothing • The 2009 Debate Over Tax-Based Versus Spending-Based Fiscal Stimulus • Two Expansionary Fiscal Contractions: Denmark and Ireland • The Debate Over Fiscal Austerity in Europe • The Bush Tax Cuts and Ricardian Equivalence Chapter 17 Exchange Rates and International Economic Policy • The Global Financial Crisis and the Dollar • Why Are Exchange Rates So Volatile? • How Did China Accumulate Over $3 Trillion of International Reserves? • Will the Euro Survive? • The Collapse of the Argentine Currency Board • Foreign Exchange Rates Chapter 18 Consumption and Saving • Consumer Confidence and the Business Cycle • Housing, the Stock Market, and the Collapse of Consumption in 2008 and 2009 • The 2008 Tax Rebate • Behavioral Policies to Increase Saving • The Consumer Confidence and Consumer Sentiment Indices Chapter 19 Investment • Stock Market Crashes and Recessions • U.S Government Policies and the Housing Market Chapter 20 The Labor Market, Employment, and Unemployment • Why Has Labor Force Participation of Women Increased? • Why Are Income Inequality and Returns to Education Increasing? • Why Are European Unemployment Rates Generally Much Higher Than U.S Unemployment Rates? • Unemployment Insurance and Unemployment • Minimum Wage Laws Chapter 21 The Role of Expectations in Macroeconomic Policy • The Consumption Function • A Tale of Three Oil Price Shocks • The Political Business Cycle and Richard Nixon • The Demise of Monetary Targeting in Switzerland • Ben Bernanke and the Federal Reserve Adoption of Inflation Targeting • The Appointment of Paul Volcker, ation Hawk A01_MISH9598_FM_001-044.indd 04/02/14 5:12 PM www.ebookslides.com Editor in Chief: Donna Battista Executive Acquisitions Editor: Adrienne D’Ambrosio Head of Learning Asset Acquisition: Laura Dent Acquisitions Editor: Christina Masturzo Associate Editor, Global Edition: Toril Cooper Program Manager: Carolyn Philips Editorial Assistant: Patrick Henning Executive Marketing Manager: Lori DeShazo Managing Editor: Jeff Holcomb Project Manager: Alison Eusden Publisher, Global Edition: Angshuman Chakraborty Publishing Administrator and Business Analyst, Global Edition: Shokhi Shah Khandelwal Media Producer: M Vikram Kumar Senior Project Editor, Global Edition: Vaijyanti Senior Manufacturing Controller, Production, Global Edition: Trudy Kimber Operations Specialist: Carol Melville Senior Art Director: Jonathan Boylan Cover Art: ©Toa55/Shutterstock MyEconLab Content Project Manager: Noel Lotz Executive Media Producer: Melissa Honig Associate Project Manager, Rights and Permissions: Samantha Graham Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on the appropriate page within text FRED® is a registered trademark and the FRED® logo and ST LOUIS FED are trademarks of the Federal Reserve Bank of St Louis, http://research.stlouisfed.org/fred2/ Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A and other countries Screen shots and icons reprinted with permission from the Microsoft Corporation This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation Pearson Education Limited Edinburgh Gate Harlow Essex CM20 2JE England and Associated Companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson Education Limited 2015 The rights of Frederic S Mishkin to be identified as the author of this work have been asserted by him in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Macroeconomics: Policy and Practice, 2nd edition, ISBN 978-0-13342431-7, by Frederic S Mishkin, published by Pearson Education © 2015 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS All trademarks used herein are the property of their respective owners The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library 10 15 14 13 12 11 ISBN 10: 1-292-01959-X ISBN 13: 978-1-292-01959-8 Typeset in 10/12 Palatino LT Std by Cenveo® Publisher Services Printed and bound by Courier Kendallville in The United States of America A01_MISH9598_FM_001-044.indd 08/02/14 11:46 AM To My Mom A01_MISH9598_FM_001-044.indd 04/02/14 5:12 PM www.ebookslides.com I-6 Federal Reserve Bank of New York, 58, 149, 165 Federal Reserve System, U.S (Fed), 58, 165, 185, 262 actions of, 61, 313, 360, 371, 399 balance sheet of, 169–173 banks, 148–149, 148f Board of Governors, 148, 149, 375 control of money supply by, 148–150, 148f financial crisis and, 447–448, 452–454, 453f H-50, 151 measures, 78 mission of, 56 monetary aggregates and, 150–151, 151t, 152f monetary base of, 169–170 monetary policy and, 295–296, 453–455, 455f open market operations of, 171 reserves, 308f, 309 Taylor Rule and, 391–392 FICO (Fair Issac Corporation), 444 Finance companies, 419, 419t direct, 417, 417f indirect, 417f, 418 Financial crisis (2007–2009), 463 causes of, 444–445 depression and, 452–459, 453f, 455f, 458t effects of, 445 Fed and, 447–448, 452–454, 453f Great Recession during, 57, 299f, 300, 300f height of, 451–452, 451f worldwide intervention during, 457, 458t Financial crisis, global, 463 actions to prevent, 56–57 banking crisis and, 438f, 439f, 440–441 China’s (2007–2009), 364–366, 365f debt deflation and, 438f, 439f, 441 dynamics of, 436–451 initiation of, 436–440, 438f, 439f UK’s (2007–2009), 363, 364f Financial deepening, 428, 431 Financial development, 431 of China, 430 economic growth and, 428–430, 429n9 Financial engineering, 444 Z02_MISH9598_IDX_687-704.indd Financial frictions, 279, 290, 344, 345t, 346, 418 Financial innovation, 437 Financial instruments, 417 Financial intermediaries concept, 417f, 418 types of, 419, 419t Financial intermediation, 417f, 418 Financial liberalization, 437 Financial sector regulation and supervision of, 425–428 safety net for, 426–428 transparency within, 425–426 Financial system, 431 information challenges and, 418–425, 419t, 422f, 423f role of, 416–418, 417f Financial variables business cycle and, 259, 259f, 260f, 261f, 262f macroeconomic variables and, 259, 259f, 260f, 261f, 262f Financing constraints, 575 Fiscal austerity, in Europe, 492 Fiscal policy, 470, 498 aggregate supply and, 485f, 488– 489, 488f, 488n10, 489f effects of, 129–131, 130f, 131n2 government budget and, 471–475, 472t, 473f, 475n2 in long-run, 481–484 in short-run, 484–492, 485f, 488f, 488n10, 489f, 490f sunny-side economics and, 489– 490, 489n11, 490f tightening of, 55–56 Fiscal stimulus package (2009), 130f, 131–132 analysis of, 289 debate over, 388–389, 486, 486n9 rationale for, 223–224 Fisher, Irving, 85, 153–155, 153n3, 539 Fisher effect, 160, 161f Fisher equation, 85–86, 85n6, 153–155, 153n3, 165 Fixed exchange rate regime, 521 Flinders Island, 241 Floating exchange rate regime, 521 Flow, 67–68, 68f FOMC See Federal Open Market Committee Food, 94, 357 Ford, Henry, 604, 605 Ford Motor Company, 277–278, 604, 605 Foreign aid benefits of, 233, 233n12–13 issues, 232–233, 232n9–11, 233n12–13 poverty and, 233n12 Foreigners, 152 Foreign exchange market, 503 Foreign exchange rate, 503, 530 aggregate demand and, 517–519, 518f changes in, 512–517, 513f, 514f, 516f equilibrium in, 511–512, 511f expected future, 515–517, 516f fixed, 521–526, 522f, 524f floating, 521 forward, 504 importance of, 505–507 intervention in, 519–521, 521f in long run, 507–510 nominal and real, 504–505 pegging, 526–528 in short run, 510–512, 511f spot, 504 supply analysis and, 517–519, 518f Foreign exchange trading, 507 France, 191–192, 191f Freddie Mac, 452 Free-rider problem, 420–421 Friedman, Milton, 145, 158, 319n2, 327, 392, 408, 623 Friedman-Phelps Phillips curve analysis, 327–329, 327n3–4, 328f GDP See Gross Domestic Product The General theory of Employment, Interest, and Money (Keynes), 265, 267, 275, 317 Germany, 200, 228 Giannoni, Marc, 269 Globalization, 598 GNP See Gross National Product Goldin, Claudia, 225 Goods consumer durables as, 69, 69t nondurable, 69, 69t services as, 69, 69t unfinished, 66 unsold finished, 66 Goods, capital GDP and, 66 spending for, 70 Goods and services final, 64, 65–66 intermediate, 65–66 market value of, 64–66 newly produced, 64, 67 04/02/14 5:46 PM www.ebookslides.com I-7      nonmarket, 65 nontradable, 508 price of, 77 production of, 64, 65 in relationship with CPI, 78–79 revenue from, 104 Goods market equilibrium, 141–144, 291 in closed economy, 127f, 128 in open economy, 133–134 in small open economy, 127f, 132f, 134–136, 135f solving for, 281–282, 282n6 trade deficit and, 127f, 132f, 135–136, 135f trade surplus and, 134–135, 135f Google, 225 Government budget fiscal policy and, 471–475, 472t, 473f, 475n2 revenue and, 474 Government consumption government investment and, 69t, 70 government purchases and, 118–119, 119f Government debt of countries, 479t foreign indebtedness and, 482 growth of, 475–477, 476f high, 481–483, 483n5 redistribution effects of, 482–483, 483n5 size of, 475–479 Government dissaving, 131 Government income net, 75 as transfers, 75, 276n1 Government investment government consumption and, 69t, 70 government purchases and, 118–119, 119f, 472, 472f Government policies, 120 Government purchases, 276 changes in, 129–131, 130f, 286–287, 286f fixed level of, 280–281 GDP and, 68–72, 69t, 72f government investment and, 118–119, 119f, 472, 472f on health care, 225 monetary policy and, 344, 344t, 345 national income accounting and, 68–69, 69t, 70 on R&D, 225–226 Z02_MISH9598_IDX_687-704.indd taxes and, 280–281, 281n5 total, 471–473, 472t, 473f unemployment rate and, 48–49, 48f Government saving changes in, 130f, 131, 131n2 components of, 118–119, 119f decline in, 137–138, 138f Government spending See Government purchases Government-sponsored enterprises (GSEs), 583 Grants, 226 Great Depression (1929–1933), 264, 275 period of, 63, 441–444, 442f, 443f recovery after, 444 representations of, 49–50, 49f unemployment rate during, 51, 51f Great Inflation, 264 during 1980s, 52f, 53, 56, 56f inflation rate during, 145 Great Moderation, 254t, 263f, 264–265 Great Recession (2007–2009), 63, 251, 265, 663 financial crisis during, 57, 299f, 300, 300f, 343, 362–363, 362f, 371, 435 government budget deficits ­during, 55, 56f, 130f, 131–132 unemployment rate during, 51, 51f Greece, 480–481, 492 convergence and, 198–199, 199f unemployment rate of, 51, 52f Greenspan, Alan, 435, 460–461, 631 Gross Domestic Product (GDP) capital goods and, 66 components of, 68–69, 69t consumption expenditure and, 68–69, 69t, 71–72, 72f definitions of, 64, 87 deflator, 77–78, 77n4, 80f expenditure approach to, 68–72, 69t, 72f, 87, 88, 89 fluctuations in, 49f, 50 government purchases and, 68–72, 69t, 72f happiness and, 46, 67 implicit price deflator for, 77–78, 77n4, 80f, 87 income approach to, 72–75, 74t, 87, 88, 90 inventory investment and, 66 investment and, 68–70, 69t, 71–72, 72f measurement of, 63–64 modifications to, 67 national income and, 74t national income identity and, 68–70, 69t net export and, 68–69, 69t, 71, 71n2 nominal, 75–78, 87 PCE and, 68–69, 69t, 71–72, 72f, 87 production approach to, 64–68, 68f, 87, 88 spending components of, 71–72, 72f targeting, nominal, 633–634 transfers and, 70–71 U.S., 64, 67, 72f, 75, 251, 471 Gross Domestic Product, Real of Bolivia (2012), 50, 50f business cycle and, 255–256, 257f chain-weighted measures of, 77 cross-country per capita (2012), 50–51, 50f determination of, 94 macroeconomic variables and, 255–256, 257f nominal and, 75–78, 87, 88, 90 per capita of Europe, 191–192, 191f per capita of U.S (1900–2013), 49–50, 49f, 50f population growth and, 205–207, 206f, 207f of Rwanda (2012), 50, 50f of South Korea (2012), 50–51, 50f Gross national happiness, 67 Gross National Product (GNP) income approach and, 74t measurement of, 74–75, 74n3, 74t Growth accounting, 190, 215 of cross-country comparisons, 213–214 equation, 210–211 postwar U.S and, 212, 213f in practice, 211–212 rates, 213–214 Growth theory, endogenous, 233n14, 243 factors affecting, 234–242, 237f, 238f, 239f, 240f, 242f labor and, 233–234 production function and, 234 production of technology and, 234–235, 235f GSEs See Government-sponsored enterprises Haiti, 190, 191–192, 191f, 199, 231, 424 Harvard University, 226 Haughey, Charles, 491 04/02/14 4:50 PM www.ebookslides.com I-8 Head Start Program, 225 Health care, 94, 361 insurance, 73, 74t Health maintenance organizations (HMOs), 361 Hedge funds, 419, 419t Hicks, Sir John, 284n7 Hierarchical mandates, 373–374 HMOs See Health maintenance organizations Hong Kong, 213 Honohan, Patrick, 429 Household, 498 formation, 582 rational inattention of, 267–268 services, 65 survey, 83 House of Representatives, U.S., 451 Housing market, 57, 557, 582–583, 583f, 584 prices, residential, 445–447, 447f rent and, 65, 74 services, 65 Human capital government measures and, 225–226 increasing, 224–225, 481 Human development index, 67 Humphrey-Hawkins Act of 1978, 394 Hyperinflation, 165 levels, 53, 53f periods of, 159 in Zimbabwe, 159 Ideas, nonrival, 223 IMF See International Monetary Fund Implementation lag, 387 Imports net export and, 71, 71n2 tax on, 474 Impossible trinity, 524 Income categories of, 72–75, 74t changes in, 556 consumption to, 545, 545f disposable, 123, 126–127, 127f, 276 effect, 547 expenditure and, 64 factor, 74, 74t, 117 inequality, 483n5 levels, 109, 307 measures, 74–75, 74n3, 74t net factor, 74, 74t Z02_MISH9598_IDX_687-704.indd other, 73–74, 74t permanent, 552 private disposable, 75 of self-employed, 72–74, 74t tax, 75, 117, 119 tax rates, 120 terminology, 146 total, 64 transitory, 552 See also Government income; National income Income, per capita of China, 97–98, 98t, 191–192, 192f, 430 of countries, 97–98, 98t, 191–192, 191f of Japan, 97–98, 98t, 191–192, 191f of Nigeria, 191–192, 191f output, 239, 239t of poor countries, 96–98, 97n3, 98t of rich countries, 96–98, 97n3, 98t of U.S., 97–98, 98t, 190–192, 191f Income approach to GDP, 72–75, 74t, 87, 88, 90 GNP and, 74t Index of economic indicators, 255 India, 191–192, 191f, 228–229 Individual Retirement Accounts (IRAs), 120 Inflation, 408, 495 anticipated, 162–163 business cycle and, 256, 258f controlling, 56 cost-push, 395–396, 395f, 397 costs and, 145, 162–164 demand-push, 395, 396–397, 397f double-digit, 264 expectations about, 61 expected, 336, 337f hedges, 320 interest rates and, 160, 161f macroeconomic variables and, 256, 258f measurement of, 77–81, 77n4, 80f menu, 163 as monetary phenomenon, 158, 392–394, 393f, 394n11, 395f, 664 money growth rates and, 158, 158f policy, anti-, 656–658, 657f price index and, 77 prices and, 51–53, 52f, 53f procyclical, 645 reducing, 56, 670–671 shoe-leather, 163 stabilizing, 373, 373n4, 374–384, 375n5, 376f, 377f, 378n6–7, 379f, 380f, 381n8, 382f, 383f, 385f, 386f tax, 494 Taylor principle and, 298, 298n2 unanticipated, 162–163 unemployment and, 326–327, 326f, 664–665 See also Non-accelerating i­ nflation rate of unemployment Inflation rate cross-country comparisons of, 53, 53f data, 49, 51–53, 52f, 53f definition of, 79, 87 equilibrium and, 348 during Great Inflation, 145 percentage change method and, 80–81 price index and, 80, 80f U.S (1910–2013), 51–53, 52f during WWII, 51–53, 52f of Zimbabwe, 53, 53f Information, asymmetric, 418–420, 419t, 421–424, 422f, 423f collateral, 424 problems with, 436 Information challenges, 418–425, 419t, 422f, 423f Infrastructure building, 223–224 physical, 223 Institutions basic, 222 depository, 419, 419t property rights and, 227–233, 228t, 230n6, 232n9–11, 233n12–14 role of, 227 rule, 668 Insurance companies, 419, 419t health, 73, 74t social, 472 unemployment, 70, 601–602 Interest payment, 71, 75 payment, net, 473 Interest rate, real domestic, 512–513, 513f foreign, 513–514, 514f monetary policy and equilibrium, 374–375, 375n5, 376f natural, 374 04/02/14 4:50 PM www.ebookslides.com I-9      Interest rates, 546–550, 547f, 549f equilibrium and, 308f, 310–311, 311f for Federal Home Loan ­Mortgage Corporation, 84 and inflation, 160, 161f measurement of, 84–86, 85n6, 86f money market and, 307–311, 308f, 311f, 311n4, 312f types of, 84, 84f for U.S Treasury bills, 84, 161 Interest rates, nominal federal funds rate and, 296 real and, 85–86, 86f, 87, 90, 93 Interest rates, real consumer spending and, 126–127, 127f consumption expenditure and, 277 falling, 130, 131 for investments, 279 net export and, 279–280, 280n3 nominal and, 85–86, 86f, 87, 90, 93 planned investment spending and, 278 rising, 131 world, 133, 135–136 International Monetary Fund (IMF), 232 Interstate Highway System, U.S., 224 Intertemporal budget constraint in action, 539–541, 539n3, 540f optimization of, 543–544, 544f preferences of, 542–543 present discounted value and, 541–543, 542f Intertemporal choice, 562 consumption and theory of, 539 model, 544–550, 545f, 547f, 549f Intertemporal marginal rate of substitution, 543 Intuition IS curve and, 282–283 behind money multiplier, 182–183, 183n3 results, 401 Inventories, 66 Inventory investment component, 276–277 GDP and, 66 holding, 578–579 theory of, 579–580 Investment, 93, 124, 125f, 141–144 bank, 417 “bathtub model” and, 196, 197, 198f business fixed, 567 Z02_MISH9598_IDX_687-704.indd capital government, 482 categories, 68–70, 69t closed economy, changes in saving and, 128–133, 130f, 131n2, 132f closed economy, saving and, 125–128, 127f curve, 132–133, 132f definition of, 70 depreciation and, 194–195, 195f determinants of, 576t–578t diagram, saving-, 127f, 128, 284–285, 285f expenditure, 68–70, 69t fixed, 69t, 70, 277 function, 193–194, 194f, 194n3, 195f GDP and, 68–70, 69t, 71–72, 72f levels, 127f, 128 neoclassical theory on, 568–578, 571f, 572f, 573f, 574f, 576t–578t net foreign, 121 open economy, saving and, 133 planned, 279 real interest rates for, 279 residential, 69t, 70, 567, 581–582, 582f rise in, 132–133, 132f small open economy, changes in saving and, 136–139, 137f, 138f, 139f spending, 567–568, 568f tax credit, 133 See also Government investment; Inventory investment Investment, autonomous analysis, 127f, 128 changes in, 131f, 132–133 as component, 279 monetary policy and, 344, 344t, 345 spending, 290 Investment spending, planned, 276 fixed, 277 inventory, 277–278 real interest rates and, 278 Iraq War (2002), 477 IRAs See Individual Retirement Accounts Ireland, 429, 450, 491, 492 IS curve, 291 comprehension of, 282–285, 284f, 284n7, 285f intuition and, 282–283 with numerical example, 283 planned expenditure and, 275–276 saving-investment diagram and, 284–285, 285f shift in, 285–290, 286f, 287f, 288f, 290t, 303–305, 304f, 305n3, 306f Italy, 205, 492 Japan, 205 convergence and, 198–199, 199f lost decade of, 458–459 per capita income of, 97–98, 98t, 191–192, 192f post-war, 200 Jay Cooke & Company, 262, 440 Jewelry, 147 Job creation, 61 Johnson, Lyndon B., 325, 327 Jorgenson, Dale, 568 J.P Morgan, 452 Katz, Lawrence, 225, 604 Kennedy, John F., 325, 327 Kenya, 191f, 192 Keynes, John Maynard, 265, 267, 275, 276, 279, 307, 317, 323, 550 Keynesian model, new, 656–659, 657f, 668–671 basis of, 616, 645–646 building blocks of, 646–649, 646f comparison of, 655 fluctuations in, 649–650, 650f objections to, 650–651 Keynesian model, traditional, 251, 270, 651, 656, 657f, 659, 668–671 comparison of, 655 on consumption, 550–551 on economic fluctuations, 265–266 long run and, 266–267, 266t short run and, 266–267, 266t theories of money demand, 317–319, 318n1 King, Robert, 428 Klenow, Peter, 269 Kleptocracies, 231 Knickerbocker Trust Company, 262, 440 Kremer, Michael, 241 Krueger, Alan, 604 Kuznets, Simon, 63 Kydland, Finn, 622 Labor costs, 104 factor prices, demand for capital and, 104–106, 104n7–9, 105n10 factor prices and supply of ­capital, 106, 107f growth of, 110t 04/02/14 4:50 PM www.ebookslides.com I-10 Labor (cont.) hoarding, 644 input, 100, 100f levels, 204n8 measurement of, 95 productivity of, 95–96, 97n3, 109n11, 211n10 Romer model and, 233–234 unit of, 109n11 See also Marginal product of labor Labor demand, 104–106, 104n7–9, 105n10 changes in, 593–594, 594f, 594n3 Labor force excluded from, 81 types of, 81–82 women in, 595–598, 595f, 596f, 597f, 598f Labor-force participation rate, 82–83, 83f Labor income concept of real, 108–109 share, 109 Labor market, U.S demand curve and, 591, 592–593, 592f developments in, 588–590, 589f, 590f, 591f equilibrium in, 593 real wages for, 590, 591f supply curve and, 591, 593, 593n1–2 unemployment rate for, 590, 591f Labor supply capital supply and factor prices, 106, 107f changes in, 594–595, 595f Laffer, Arthur, 489–490 Lags, 387–389 Land as collateral, 424–425 legal title to, 425 Latin America, 60, 191–192, 191f Law common, 228, 229 of one price, 507–508 reading of, 230 Lawyers, 229 Legal system economic growth and, 229 effective, 222 enforcement of contracts within, 228–229, 228t origins of, 228–229, 228t property rights and, 227–229, 228t resouces for, 228–229 Z02_MISH9598_IDX_687-704.indd 10 Legislative lag, 387 Lehman Brothers, 260, 363, 364, 440, 451 Leisure, 593 Lender-savers, 417, 417f, 418, 440 Leverage cycle, 437 Levine, Ross, 428 Liabilities currency in circulation as, 169–170 definition of, 417 monetary, 169–170 primary, 419, 419t reserves as, 169–170 LIBOR See London Inter-Bank ­Offered Rate Life -cycle consumption function, 555–559, 558f -cycle hypothesis, 555–559, 558f expectancy, 67 Liquidity constraints, 496, 548–550, 549f money demand and, 307 of other assets, 320 preference framework, 307, 313 preference function, 307, 319 preference theory, 307 provision, 403, 403f trap, 321, 321n3 Liquidity preference, theory, 307 Literacy, 67 Loan car, 163–164 obtaining, 425 private, 421 Loans, discount as asset, 169, 170, 172 effects of, 172–173 Loan-to-value ratio, 447 London Inter-Bank Offered Rate (LIBOR), 84 Lucas, Robert, 190, 620 Lucas critique consumption function and, 621 econometric policy evaluation and, 620 of policy evaluation, 620–625 Maastricht Treaty, 373 Macroeconomic analysis, 619–620 Macroeconomic data interpretation of, 49–53, 49f, 50f, 51f, 52f, 53f measurement of, 63–64 Macroeconomic models, 48–49, 48f, 68 Macroeconomic policy during 1960s, 327 issues, 53–57, 54f, 55f, 56f, 60–61 objectives of, 371–374, 371n1, 372n2, 373n4 rule and, 57 Macroeconomics agreement on, 663–668 disagreement on, 668–672 finance and, 414–415 practice of, 47–53, 48f, 49f, 50f, 51f, 52f, 53f, 59–60 study of, 47 summary on, 59 time horizons in, 265–267, 266t Macroeconomic variables, 270 business cycle and, 255–260, 256f, 257f, 258f, 259f, 260f, 261f, 262f financial variables and, 259, 259f, 260f, 261f, 262f inflation and, 256, 258f real GDP and, 255–256, 257f unemployment and, 256, 258f Managed float regime, 521 Mandate-consistent inflation ­objective, 632 Marginal product decline of, 99–100, 99f, 100f diminishing, 99 Marginal product of capital (MPK) calculation for, 101, 101n5 indication of, 99–100, 99f real rental price of capital and, 105, 105n10 supply shock and, 102f, 103, 103n6 Marginal product of labor (MPL) calculation for, 101, 101n5 indication of, 100, 100f real wage rate and, 105, 105n10, 108–109 supply shocks and, 102f, 103, 103n6 Marginal propensity to consume, 277, 550 Marginal rate of substitution, 543 Marginal rate of substitution, intertemporal, 543 Market -clearing assumption, 645 financial, 260, 449–450 operations, open, 149 power, 267 value of goods and services, 64–66 See also Goods market ­equilibrium 04/02/14 4:50 PM www.ebookslides.com I-11      Market equilibrium, 196 concept of, 106 factor prices and, 106–108, 107f Marshall Plan, 233, 233n13 Massachusetts Institute of Technology (MIT), 226 McCallum, Bennet, 620, 622 Measuring Business Cycles (Burns & Mitchell), 251 Medicaid, 478 Medicare, 70, 471, 478 Meltzer, Alan, 622–623 Merrill Lynch, 451 Mexico, 191f, 192 Microcredit, 418 Microeconomic models, 47–49, 48f Microeconomics rationale, 619 study of, 47 Mihov, Ilian, 269 MIT See Massachusetts Institute of Technology Mitchell, Wesley, 251, 253 Monetary aggregates, 165 Fed and, 150–151, 151t, 152f M1, 150–151, 151t, 152f M2, 150–151, 151t, 152f measures of, 151t usage of, 152f Monetary base, 185 control of, 170–173 Fed’s, 169–170 nonborrowed, 173, 177 U.S Treasury’s, 169–170 A Monetary History of the United States (Friedman & Schwartz), 623 Monetary neutrality, 394 Monetary policy, 313, 408 autonomous, 344, 344t autonomous consumption ­expenditure and, 344, 344t, 345 autonomous easing of, 298, 299f, 300 autonomous investment and, 344, 344t, 345 autonomous net exports and, 344, 344t, 345 autonomous tightening of, 298 equilibrium real interest rate and, 374–375, 375n5, 376f Fed and, 295–296 financial friction and, 344, 344t, 346 government purchases and, 344, 344t, 345 management of, 56 Z02_MISH9598_IDX_687-704.indd 11 nonconventional, 402–403, 402f shift in Japan’s, 406–407, 407f taxes and, 344, 344t, 345 Taylor principle and, 297–298, 297n1, 298n2 at zero lower bound, 399–407, 400f, 402f, 403f, 405f zero lower bound and, 399–407, 400f, 402f, 403f, 405f, 408 Monetary policy, inflationary causes of, 394–398, 395f, 397f Great Inflation and, 395f, 397f, 398–399, 398f Monetary policy curve (MP), 249 inflation rate and, 296, 297f movements along, 297f, 298–299, 299f, 300f shifts in, 298, 299f, 300, 300f, 305, 310f Taylor Rule and, 379f, 386f, 390–391, 391f upward slope of, 297–298, 297n1, 298n2 usage of, 295 Monetary union, 524–525 Money, 165 balances, real, 307 demand curve for, 308, 308f forms of, 147 functions of, 146–147 government-issued, 493–494, 493n13 growth rates and inflation, 158, 158f high-powered, 170 meaning of, 146 measurement of, 150–152, 151t, 152f as medium of exchange, 146–147 neutrality of, 156 printing, 493 quantity of, 145 quantity theory of, 153–158, 153n3, 157f, 158f simple curve for, 308f, 309 as stock, 146 as store of value, 147 as unit of account, 147 velocity of, 153–154, 153n3 wealth and, 146 Money demand, 323 evidence on, 320–322, 321n3, 321t factors, 154, 320 interest rates and, 321, 321n3 Keynesian theories of, 317–319, 318n1 liquidity and, 307 portfolio theories of, 319–320, 319n2, 323 precautionary motive of, 317–318 speculative motive of, 317–318 stability of, 322 transaction motive of, 317 Money market equilibrium in, 308f, 309 interest rates and, 307–311, 308f, 311f, 311n4, 312f Money multiplier concept, 180–181 deriving, 181–182 intuition behind, 182–183, 183n3 Money supply control of, 148–150, 148f determination of, 177–180, 178t, 179f, 180t process, 169–184, 176t, 178t, 179f, 180t, 183n3 quantitative easing and, ­179–180, 179f, 180t responses, 183–184 Monitoring, 422 Monopoly, 267 Moral hazard, 420, 436, 442–443, 442f Mortgage loans, 425 subprime, 444 Mortgage market, subprime collapse of, 251 problems with, 445 MPK See Marginal product of capital MPL See Marginal product of labor Mugabe, Robert, 159, 231 Multiplier expenditure, 485–486 fiscal, 487–488, 488f tax, 484–486, 485f, 485n8 See also Money multiplier Mutual funds, 419, 419t Myopia, 89 The Mystery of Capital (De Soto), 230, 424 NAIRU See Non-accelerating inflation rate of unemployment Napoleonic Code, 228 National Bureau of Economic ­Research (NBER), 253, 253n2 National Central Banks (NCBs), 150 04/02/14 4:50 PM www.ebookslides.com I-12 National income to capital owners, 108–112, 110t, 111f, 113, 114 distribution of, 108–112, 110t, 111f, 113–115 GDP and, 74t identity, 68–70, 69t measurement of, 74–75, 74t to workers, 108–112, 110t, 111f, 113, 114 National income accounting fundamental identity of, 64 government spending and, 68–70, 69t invention of, 63 system, 64 National Income and Product ­Accounts, 63 National Institutes of Health, 226 National saving, 124, 125f, 495 calculation of, 119 policies to stimulate, 120 rate, 119–120, 203 reduction in, 482 National Science Foundation, 226 NBER See National Bureau of Economic Research NCBs See National Central Banks Neoclassical synthesis, new, 663 Neoclassical theory on investment, 568–578, 571f, 572f, 573f, 574f, 576t–578t Net capital outflow, 121–122, 121n1, 136 Net capital outflow identity, 121–122, 121n1, 124, 125f Net domestic product, 74 Net export, 276 autonomous, 280, 281, 281n4, 289, 344, 345t, 346 function, 280 GDP and, 68–69, 69t, 71, 71n2 imports and, 71, 71n2 real interest rates and, 279–280, 280n3 U.S trade deficits and, 71–72, 72f, 121 Net factor income, 74, 74t Net foreign assets, 122–123, 122f Net worth, 419, 419t New York Times, 388 New Zealand, 228, 373 Nigeria oil of, 94 per capita income of, 191–192, 191f Nixon, Richard, 624 Z02_MISH9598_IDX_687-704.indd 12 Nominal anchor, 637 benefits of, 626 commitment to, 667 role of, 626–631, 627f, 629f, 630f Non-accelerating inflation rate of unemployment (NAIRU), 331 North, Douglass, 227 North America, 191–192, 191f Northern Rock, 449–450 Norway, 67 Obama, Barack, 131, 388, 471, 477, 484, 486, 604 Objects, 223 Objects, rival, 223 OECD See Organization of ­Economic Cooperation and Development Office of the Controller of the ­Currency, 452n8 Ohio Life Insurance and Trust Company, 440 Oil embargo, 357 of Nigeria, 94 price shocks, 629–631, 629f, 630f shocks, 110–112, 111f, 398 wealth, 94 Okun’s law, 332–335, 332f, 333f, 333n8–9 OPEC See Organization of the ­Petroleum Exporting Countries Open market purchase, 171 sale, 171 Open market operations bank system and, 171–172 factors of, 149 Fed’s, 171 securities and, 170 Optimal forecast, 618 Organization of Economic ­Cooperation and Development (OECD), 67, 198 Organization of the Petroleum Exporting Countries (OPEC), 103, 357 Originate-to-distribute, 445 Output, 131 aggregate, 129, 156 capital and, 99–100, 99f, 100f domestic, 71n2 gap, 253, 337–338, 338f levels, 200, 202 natural rate of, 331 per capita income, 239, 239t potential, 252–253, 252t technology as production, 222–223 value of, 64–65 Parmalat, 426 Patents, 225, 226–227 Payment interest, 71, 75 technology, 71, 317 PCE See Personal consumption expenditure deflator Peg, crawling, 526 Pegging advantages of, 526–527 disadvantages of, 527–528 foreign exchange rate, 526–528 Pension funds, 419, 419t People’s Bank of China, 366 Percentage change method, inflation rate and, 80–81 Permanent income hypothesis, 552, 553–554, 553f, 554f Personal consumption expenditure, 68–69, 69t, 71–72, 72f, 87 Personal consumption expenditure deflator (PCE), 78, 80f, 87 Peru, 230 Phelps, Edmund, 328 Philippines, 424 Phillips, A W., 325 Phillips curve, 249, 339 after 1960s, 328f, 329 accelerationist, 331 analysis, 326–327, 326f analysis, Friedman-Phelps, 327–329, 327n3–4, 328f concept, 325–326 expectations-augmented, 328–329, 328f long-run, 328f, 329 modern, 329–331, 330n5 short-run, 329 short-run aggregate supply curve and, 335 tradeoff, 327 Policy conduct, 621–623 discretionary, 57 implementation, 387–389 key, 46 rule-determined, 57 trilemma, 523–524, 524f Policy makers, 622, 637 activist, 387, 388–389 debate of, 388–389 economic activity and, 387–388 nonactivist, 387, 388–389 07/02/14 11:37 AM www.ebookslides.com I-13      Population engaged in R&D, 236–237, 237f increase in, 239, 239f Population growth changes in, 205 living standards and, 240–241, 240f policies limiting, 207 Real GDP and, 205–207, 206f, 207f in Solow growth model, 203–207, 204f, 204n8, 206f, 207f steady state and, 203–205, 204f, 204n8 “Pork” spending, 482 Portfolio theories of money ­demand, 319–320, 319n2, 323 Portugal, 198–199, 199f Poverty, 94, 233n12 See also Countries, poor PPP See Theory of purchasing power parity Prescott, Edward, 622 Price changing, 267–268 controls, 357 of currency, 279–280, 280n3 deflator for GDP, implicit, 77–78, 77n4, 80f, 87 as flexible, 155 fluctuation of, 163 of goods and services, 77 inflation and, 51–53, 52f, 53f level, 76 market, 103–104 relative, 162–163, 164 setting, staggered, 268 shocks, 336, 337f stability, 373, 664 See also Factor prices; Sticky prices Price index inflation and, 77 inflation rate and, 80, 80f See also Consumer price index Prime rate, 84 Principal-agent problems, 445 Production, 93 approach to GDP, 64–68, 68f, 87, 88 changes in R&D, 238, 238f conventional inputs, 223 factors of, 94–95 function, 95–96, 234 function and Romer model, 234 of goods and services, 64, 65 inputs, 222 just-in-time, 578 Z02_MISH9598_IDX_687-704.indd 13 smoothing, 579 tax on, 474 total, 64 Production, aggregate, 94–103, 95n1, 97n3, 98t, 99f, 100f, 102f, 113, 114 Production function, aggregate, 113, 114 application of, 96–98, 97n3, 98t changes in, 101–103, 102f description of, 95–96 supply shocks and, 101–103, 102f Production function, Cobb-Douglas aggregate, 192 characteristics of, 98–101, 99f, 100f, 113 general form of, 95, 95n1 properties of, 109 Productivity, 243 of capital, 95–96 description of, 95 exogenous, 222 growth in Solow growth model, 208–209, 208f growth of, 110t of labor, 95–96, 97n3, 109n11 policies to promote, 223–227 total factor, 95, 211n10 Profits, 74, 74t Property rights, 147, 222, 243 grabbing hand and, 230–231 institutions and, 227–233, 228t, 230n6, 232n9–11, 233n12–14 legal system and, 227–229, 228t obstacles to, 229–231, 230n6 The Purchasing Power of Money (Fisher), 153 Quantitative easing, 404, 404n12, 454–456 Quantity theory, 165 inflation and, 156–158, 157f, 158f in long run, 157–158, 157f of money, 153–158, 153n3, 157f, 158f price level and, 155–156 in short run, 158, 158f test, 157–158, 157f, 158f Random walk hypothesis, 559–560, 562 Ratio capital-labor, 193 dependency, 477 employment, 82–83, 83f, 588–590, 589f employment-to-population, 588 loan-to-value, 447 sacrifice, 656, 657f Ratio, required reserve changes in, 177 factors of, 170 Rational expectations, 637 concept of, 330n5, 616 policy making and, 617–620, 618n1 revolution, 620 theory, 619–620 R&D See Research and development Reagan, Ronald, 137, 138f, 476 Real estate, 425 Recession, 581 1973–1975, 256 1981–1982, 256 2001, 253 consumer spending during, 256 representations of, 49–50, 49f start of, 253 See also Great Recession Recognition lag, 387 Regulation of financial sector, 425–428 macroprudential, 462 prudential, 428 Regulatory forbearance, 459, 459n9 Reinhart, Carmen, 479 Rent, housing, 65, 74 Rental cost of capital, real concept of, 104–106 notation for, 104n8 Rental price of capital, real concept of, 104–106, 104n8 MPK and, 105, 105n10 negative supply shock’s effect on, 110–112, 111f Repurchase agreements (repos), 448 Research and development (R&D) encouragement of, 225–227 government purchases on, 225–226 patents and, 225, 226–227 population engaged in, 236–237, 237f production changes in, 238, 238f tax incentives for, 225, 226 Reserve Bank of New Zealand, 373 Reserves bank, 170–171 borrowed, 170, 173, 177 excess, 170, 176, 178 Fed, 308f, 309 international, 519 as liabilities, 169–170 required, 170 04/02/14 4:50 PM www.ebookslides.com I-14 Restrictive covenants, 423 Retirement benefits, 73, 74t Returns expected, 319, 531 on saving, 120 to scale, constant, 98 Revaluation, 523 Revenue from goods and services, 104 from seignorage, 494 tax, 75, 117, 119 Ricardian equivalence, 498 bottom line on, 496–497 government budget deficits and, 494–497 implications of, 495 objections to, 496 Risk averse, 319 currency and, 320 definition of, 319 hazard, 420 Rogoff, Kenneth, 479, 633 Rolls-Royce, 122 Romer, Christine, 486 Romer, Paul, 233 Romer model, 233n14, 243 factors affecting, 234–242, 237f, 238f, 239f, 240f, 242f labor and, 233–234 production function and, 234 production of technology and, 234–235, 235f saving and, 241–242, 242f Roosevelt, Franklin Delano, 442 Royal Dutch Shell, 426 Ruble, 152 Rule adoption of, 621 case for, 623 constant-money-growth-rate, 622–623 -determined policy, 57 institutions, 668 macroeconomic policy and, 57 types of, 622–623 See also Taylor Rule Russia, 152 Rwanda, 50, 50f Sachs, Jeffrey, 232, 232n9 St Louis Federal Reserve FRED database, 61–62, 84, 632 Salaries employee, 72–73, 74t non, 109, 110t Samuelson, Paul, 259, 325, 327 Z02_MISH9598_IDX_687-704.indd 14 Sargent, Thomas, 620 Saving, 93, 141–144 changes in, 129–132, 130f closed economy, changes in investment and, 128–133, 130f, 131n2, 132f closed economy, investment and, 125–128, 127f domestic, 136–137, 137f government policies to ­stimulate, 120 -investment diagram, 127f, 128 open economy, investment and, 133 policies, 561 private, 118, 119f, 131n2 returns on, 120 small open economy, changes in investment and, 136–139, 137f, 138f, 139f uses of, 121–122, 121n1 wealth and, 117–124, 119f, 123f, 124f, 125f See also Government saving; National saving Saving-investment diagram, 284–285, 285f Saving rate, 551 changes in Solow growth model, 200–203, 200n5, 201f, 202f, 203n6 cross-country comparisons of, 55, 55f government, 117 national, 119–120, 203 private, 118, 119f U.S., 54–55, 54f, 61, 117, 119f, 124 of workers, 193–194, 194f SCAP See Supervisory Capital ­Assessment Program Schleifer, Andrei, 231 Schwartz, Anna, 623 Screening, 422 Securities as assets, 169, 170–171 markets, 423–424 mortgage-backed, 444 open market operations and, 170 purchase of, 176 sale of, 417 Securities and Exchange Commission, U.S (SEC), 425–426 Securitization, 444 Seignorage currency, 493, 493n14 revenue from, 494 Seko, Mobutu Sese, 232 Self-correcting mechanism, 408 disappearance of, 401, 402f of economy, 351, 361 Self-employed, 72–74, 74t September 55, 2001 terrorist ­attacks, 354 Services, 69, 69t Services, goods and final, 64, 65–66 intermediate, 65–66 market value of, 64–66 newly produced, 64, 67 nonmarket, 65 nontradable, 508 price of, 77 production of, 64, 65 in relationship with CPI, 78–79 revenue from, 104 Shelter, 94 Shinzo Abe, 406 Shocks, 408 energy, 103 natural environment, 103 oil, 110–112, 111f technology, 101 See also Supply shocks Singapore, 213 Social Security, 70 benefits, 79 increases, 478 program, 471 Social Security Administration, 477 Solow, Robert, 58, 192, 325, 327 Solow diagram, 196 Solow growth model, 215 algebra of, 220–221 building blocks of, 192–200, 194f, 194n3, 195f, 197f, 198f, 199f, 199n4 concept, 192 dynamics of, 195f, 196–197, 197f limitations of, 210 population growth in, 203–207, 204f, 204n8, 206f, 207f productivity growth in, 208–209, 208f results of, 209–210 saving rate changes in, 200–203, 200n5, 201f, 202f, 203n6 steady state and, 195–196 Solow residual, 211 business cycle fluctuations and, 643, 644f productivity shocks and, 644–645 07/02/14 11:37 AM www.ebookslides.com I-15      South Korea, 199 economic growth of, 190, 213 Real GDP of (2012), 50–51, 50f Sovereign debt crisis, 477–481, 498 Soviet Union, 430 Spain, 492 Speculative attacks, 527–528 Spending autonomous, 279, 289–290 autonomous investment, 290 for capital goods, 70 categories of, 68 components of GDP, 71–72, 72f education, 225 investment, 567–568, 568f “pork,” 482 types of, 276 U.S., 57 See also Consumer spending; Government purchases; Investment spending Stabilization policy active, 57 of economic activity, 372, 372n2, 374–384, 375n5, 376f, 377f, 378n6–7, 379f, 380f, 381n8, 382f, 383f, 385f, 386f effectiveness of, 670 implications for, 652–655, 653t, 654f importance of, 46 Stagflation, 356 Stagnation, 356 Standard of living within countries, 62 differences in, 94 Standard & Poor’s, 449 Stanford University, 79, 226 Statistical discrepancy, 74, 74n3 statistics See Economic statistics Steady state “bathtub model” of, 196, 197, 198f levels, 200 population growth and, 203–205, 204f, 204n8 Solow growth model and, 195–196 solving, 220–221 summary on, 209–210 Sticky prices, 270 empirical evidence for, 268–269 role of, 266–267, 266t sources of, 267–268 Stiglitz, Joseph, 67 Stock, 147 common, 67 concept of, 67–68, 68f Z02_MISH9598_IDX_687-704.indd 15 -out avoidance, 579 prices, 259, 259f Stock, capital increase of, 99 level of, 568–569, 573–574, 573f, 574f Stock market crash, 442, 442f, 557, 581 effects on, 110–112, 111f Substitution effect, 547, 547n5 Summers, Larry, 635 Supervision of financial sector, 425–428 prudential, 428 Supervisory Capital Assessment Program (SCAP), 452n8 Supply excess, 106–108, 107f, 308f, 309 negative, 362–363, 362f -siders, 489 See also Aggregate supply Supply curve aggregate demand curve and, 343–347, 344t, 347t factors, 310–311, 311f, 311n4 U.S labor market and, 591, 593, 593n1–2 Supply curve, aggregate, 339, 367 factor, 325 long-run, 331–332, 332f Phillips curve and short-run, 335 shifts in, 335–338, 336f, 337f, 338f short- and long-run, 346–347, 347t short-run, 332–335, 332f, 333f, 333n8–9 Supply shocks, 367 aggregate production function and, 101–103, 102f effect of, 102f, 103, 103n6 negative, 102f, 103, 110–112, 111f, 357, 358f permanent, 358–359, 359f, 359n3, 380–381, 380f, 381n8 positive, 102f, 103, 110–112, 111f, 360–361, 361f temporary, 355–357, 356f, 381–384, 382f, 383f, 385f, 386f types of, 101–103 Supply shocks, aggregate credibility and, 628–629, 629f equilibrium and, 355–363, 356f, 358f, 359f, 360f, 362f negative, 357, 358f permanent, 358–359, 359f, 359n3 positive, 360–361, 361f Survey establishment, 83 household, 83 on workers, 83 Sweden, 228 Swiss Interbank Clearing, 625 Swiss National Bank, 625 Switzerland, 51, 52f, 198, 199f, 625 T-account, 171 Taiwan, 213 Targeting exchange rate, 631 inflation, 631–633 nominal GDP, 633–634 Tariffs, 474 TARP See Treasury Asset Relief Plan Tasmania, 241 Tax, 575, 575n3 breaks, 55, 120 capital gains, 120 changes, 129, 288, 288f code, 133 consumption, 120 corporate, 474 credit, investment, 133 distortions, 162–163, 483 federal income, 474 government purchases and, 280–281, 281n5 higher, 55 incentives, 120 incentives for R&D, 225, 226 income, 75, 117, 119 inflation, 494 monetary policy and, 344, 344t, 345 multiplier, 484–486, 485f, 485n8 national sales, 55, 120 negative, 276, 276n1 personal, 474 on production and imports, 474 rates, income, 120 rebate (2008), 554, 555f revenue, 75, 117, 119 smoothing, 483–484 value-added, 120 wedges, 483 Taylor, John, 297, 447 Taylor principle, 311n4, 666 differences, 390 inflation and, 298, 298n2 monetary policy and, 297–298, 297n1, 298n2 Taylor Rule, 623 equation, 389–390 Fed and, 391–392 04/02/14 4:50 PM www.ebookslides.com I-16 Taylor Rule (cont.) as guide, 389–390 MP and, 379f, 386f, 390–391, 391f in practice, 391–392 Teal Book, 375n5 Tech bubble, 354 Technological spillover, 240 Technology, 243 available, 192 endogenous growth theory and production of, 234–235, 235f excludability and, 223 as ideas, 223 payment, 71, 317 as production output, 222–223 Romer model and production of, 234–235, 235f shocks, 101 Theory agency, 436 economic, 47–48, 48f intertemporal choice, 539 inventory investment, 579–580 neoclassical investment, 568–578, 571f, 572f, 573f, 574f, 576t–578t rational expectations, 619–620 Tobin’s q, 580–581, 584 See also Quantity theory Theory of purchasing power parity (PPP), 508 Third World, 227 This Time It’s Different: Eight ­Centuries of Financial Folly ­(Reinhart & Rogoff), 479 Time fixed period of, 67 -inconsistency problem, 622, 666–667 motion studies, 230–231 subscripts, 193–194, 194f Tobin, James, 318, 580–581, 584 Toyota Corolla, 145 Trade, terms of, 504 Trade balance concept, 121, 121n1 decline in, 136 higher, 136 negative, 71, 124, 125f net capital outflow and, 121–122 Trade deficits, U.S dangers of, 57 decline in, 124, 125f goods market equilibrium and, 127f, 132f, 135–136, 135f net export and, 71–72, 72f, 121 Trade imbalances, global dangers of, 57 significance of, 46 Z02_MISH9598_IDX_687-704.indd 16 Trade surplus of China, 57, 121 goods market equilibrium and, 134–135, 135f Transaction bank, 122 costs, 146–147 forward, 504 motive of money demand, 317 spot, 503–504 Transfer examples of, 276n1 GDP and, 70–71 government income as, 75, 276n1 payments, 472–473 Traveler’s checks, 150, 165 Treasury, U.S monetary base of, 169–170 monetary liabilities of, 169–170 Treasury Asset Relief Plan (TARP), 457 Treasury bills, U.S interest rates for, 84, 161 short-term, 86, 259, 260f Treasury bonds, U.S., ten-year rate for, 84 Treasury securities, U.S., 478 Trump, Donald, 146 UK See United Kingdom UN See United Nations Unemployed chronically, 600 flows, 599 Unemployment business cycle and, 256, 258f cyclical rate, 605 data, 49 duration of, 600 dynamics of, 598–600, 599f employment and, 83 frictional, 372, 600–601, 601n5 inflation and, 326–327, 326f, 664–665 insurance, 70, 601–602 insurance benefits, 70 macroeconomic variables and, 256, 258f measurement of, 81–83, 83f natural rate of, 328, 328n4, 372, 605–610, 606f, 607n7, 608f, 609t spells, 600 structural, 372, 602–603, 603f wage growth and, 325 See also Non-accelerating inflation rate of unemployment Unemployment rate, 47 cross-country comparisons of (2003–2013), 51, 52f Europe’s, 608–609, 608f, 609t factors, 82–83, 83f, 372, 372n2, 590, 590f government spending and, 48–49, 48f during Great Depression, 51, 51f during Great Recession, 51, 51f of Greece, 51, 52f measurement of, 81–83, 83f, 87, 90 post-WWII, 51, 51f of Switzerland, 51, 52f U.S (1929–2013), 51, 51f for U.S labor market, 590, 591f See also Endogenous variables Unions, 604 United Kingdom (UK), 325 financial crisis (2007–2009) of, 363, 364f per capita income of, 191–192, 191f United Nations (UN) Millennium Project, 232 rankings by, 67 United States (U.S.), 140 currency, 152 economic growth of, 190, 212, 213f education in, 224–225 expenditure components for, 73f GDP, 64, 67, 72f, 75, 251, 471 government budget deficits, 55, 56f inflation rate (1910–2013) of, 51–53, 52f as net debtor, 123–124, 124f, 125f per capita income of, 97–98, 98t, 190–192, 192f real GDP per capita of (1900–2013), 49–50, 49f, 50f saving rate of, 54–55, 54f, 61, 117, 119f, 124 spending, 57 unemployment rate (1929–2013) of, 51, 51f Universities, 226 U.S See United States U.S dollar global financial crisis and, 515 value of, 47, 279–280, 280n3 yardstick, 163 Uses-of-saving identity, 121–122, 121n1, 141 Utility, 542 04/02/14 4:50 PM www.ebookslides.com I-17      Value -added tax, 120 of capital, loss of, 74, 74t imputed, 65 market, 64–66 of output, 64–65 present, 541–543, 542f present discounted, 541–543, 542f of U.S dollar, 47 Variables coincident, 255 consumer optimism, 48–49, 48f endogenous, 48–49, 48f exogenous, 48–49, 48f lagging, 255 leading, 255 in macroeconomic models, 48–49, 48f, 68 nominal, 75 real, 76 See also Economic variables Velocity determinants of, 154 of money, 153–154, 153n3 Vietnam War, 200, 287, 287f Vishny, Robert, 231 Volcker, Paul, 353, 399, 634 Volcker Disinflation, 353–354, 353f, 355f Wage controls, 357 efficiency, 604, 605 Z02_MISH9598_IDX_687-704.indd 17 employee, 72–74, 74t as flexible, 155, 668 growth and unemployment, 325 non, 109, 110t rate, 104 real, 590, 591f Wage, minimum imposed, 603 laws, 603–604 Wage rate, real application of, 110–112, 111f definition of, 104, 104n8–9 explanation of, 109–110, 109n11, 110t growth of, 110t MPL and, 105, 105n10, 108–109 Walk hypothesis, 559–560, 562 Wall Street, 259, 435 Wall Street Journal, 84, 388 Wars, 61, 200, 287, 287f, 357, 477 See also World War I; World War II Wealth, 141–144, 319 amount of, 93 changes in, 556 consumption to, 545, 545f money and, 146 national, 118 oil, 94 saving and, 117–124, 119f, 123f, 124f, 125f See also Countries, rich Weil, David, 213 Welfare, 542 The White Man’s Burden (Easterly), 232 Women, 595–598, 595f, 596f, 597f, 598f Workers discouraged, 81–82, 599 national income to, 108–112, 110t, 111f, 113, 114 number of, 109n11 saving rate of, 193–194, 194f survey on, 83 Work in process, 579 World Bank, 230–231, 426, 429 WorldCom, 426 World War I (WWI), 254t, 262–277, 262n4, 263f World War II (WWII), 147, 475–476, 498 destruction and economic growth post, 200 inflation rate during, 51–53, 52f unemployment rate post-, 51, 51f U.S business cycle post-, 254t, 262–277, 263f Zaire, 232 Zero lower bound fiscal multiplier at, 487–488, 488f monetary policy and, 399–407, 400f, 402f, 403f, 405f, 408 Zimbabwe, 231 hyperinflation in, 159 inflation rate of, 53, 53f 04/02/14 4:50 PM www.ebookslides.com Z02_MISH9598_IDX_687-704.indd 18 04/02/14 4:50 PM www.ebookslides.com Guide to Commonly Used Symbols Symbol Term α fraction of population devoted to R&D β parameter that indicates how expectations of future inflation affect current inflation γ responsiveness of inflation to output gap δ depreciation rate ∆ change in a variable ε real exchange rate λ responsiveness of real interest rate to inflation rate π inflation rate πe expected rate of inflation πT inflation target Π real economic profits ρ price shock τ tax rate χ productivity of research and development A available technology (total factor productivity) AD aggregate demand curve AS aggregate supply curve B bonds BR borrowed reserves c consumption per worker currency ratio c c responsiveness of consumption to real interest rates C consumption expenditure C currency in circulation C autonomous consumption responsiveness of investment to real interest rates d D checkable deposits D demand curve excess reserves ratio e E nominal exchange rate expected exchange rate Ee Epar fixed exchange rate ER excess reserves EX exports f financial friction productivity growth rate g gA growth rate of technology (total factor productivity) gK growth rate of capital growth rate of labor gL gY growth rate of output G government purchases GC government consumption GI government investment i investment per worker i nominal interest rate I investment I autonomous investment iD interest rate on dollar assets iF interest rate on foreign assets IM imports IS IS curve k capital per worker (capital-labor ratio) K capital kG Golden Rule capital-labor ratio L labor Z03_MISH9598_EP.indd 2-3 Symbol Term LA labor devoted to producing new technology LP labor devoted to producing goods and services LRAS long-run aggregate supply curve long-run Phillips curve LRPC m money multiplier M money supply Md demand for money Ms money supply monetary base MB MBn nonborrowed monetary base MD money demand curve MP monetary policy curve mpc marginal propensity to consume MPK marginal product of capital MPL marginal product of labor MRS marginal rate of substitution MS money supply curve population growth rate (labor force growth rate) n N population net exports NX NX autonomous net exports P price or price level real price of unit of capital p k PC Phillips curve real interest rate r r autonomous component of the real interest rate rc real rental price of capital real interest rate for investments ri R rental price of capital R reserves in banking system RD nominal expected return on dollar assets RF nominal expected return on foreign assets required reserve ratio rr RR required reserves savings per worker s S supply curve S savings or national savings sG Golden Rule saving rate SG government savings private savings SP SRAS short-run aggregate supply curve T taxes unemployment rate U Un natural rate of unemployment uc user cost of capital V velocity of money w real wage rate W wage rate W initial wealth (assets) x responsiveness of net exports to real interest rates y income per worker (output per worker) Y output, income YD private disposable income YP potential output YP permanent income Ype planned expenditure YT transitory income 11/02/14 12:37 PM www.ebookslides.com Guide to Commonly Used Symbols Symbol Term α fraction of population devoted to R&D β parameter that indicates how expectations of future inflation affect current inflation γ responsiveness of inflation to output gap δ depreciation rate ∆ change in a variable ε real exchange rate λ responsiveness of real interest rate to inflation rate π inflation rate πe expected rate of inflation πT inflation target Π real economic profits ρ price shock τ tax rate χ productivity of research and development A available technology (total factor productivity) AD aggregate demand curve AS aggregate supply curve B bonds BR borrowed reserves c consumption per worker currency ratio c c responsiveness of consumption to real interest rates C consumption expenditure C currency in circulation C autonomous consumption responsiveness of investment to real interest rates d D checkable deposits D demand curve excess reserves ratio e E nominal exchange rate expected exchange rate Ee Epar fixed exchange rate ER excess reserves EX exports f financial friction productivity growth rate g gA growth rate of technology (total factor productivity) gK growth rate of capital growth rate of labor gL gY growth rate of output G government purchases GC government consumption GI government investment i investment per worker i nominal interest rate I investment I autonomous investment iD interest rate on dollar assets iF interest rate on foreign assets IM imports IS IS curve k capital per worker (capital-labor ratio) K capital kG Golden Rule capital-labor ratio L labor Z03_MISH9598_EP.indd 2-3 Symbol Term LA labor devoted to producing new technology LP labor devoted to producing goods and services LRAS long-run aggregate supply curve long-run Phillips curve LRPC m money multiplier M money supply Md demand for money Ms money supply monetary base MB MBn nonborrowed monetary base MD money demand curve MP monetary policy curve mpc marginal propensity to consume MPK marginal product of capital MPL marginal product of labor MRS marginal rate of substitution MS money supply curve population growth rate (labor force growth rate) n N population net exports NX NX autonomous net exports P price or price level real price of unit of capital p k PC Phillips curve real interest rate r r autonomous component of the real interest rate rc real rental price of capital real interest rate for investments ri R rental price of capital R reserves in banking system RD nominal expected return on dollar assets RF nominal expected return on foreign assets required reserve ratio rr RR required reserves savings per worker s S supply curve S savings or national savings sG Golden Rule saving rate SG government savings private savings SP SRAS short-run aggregate supply curve T taxes unemployment rate U Un natural rate of unemployment uc user cost of capital V velocity of money w real wage rate W wage rate W initial wealth (assets) x responsiveness of net exports to real interest rates y income per worker (output per worker) Y output, income YD private disposable income YP potential output YP permanent income Ype planned expenditure YT transitory income 11/02/14 12:37 PM ... Publisher, Global Edition: Angshuman Chakraborty Publishing Administrator and Business Analyst, Global Edition: Shokhi Shah Khandelwal Media Producer: M Vikram Kumar Senior Project Editor, Global Edition: ... asserted by him in accordance with the Copyright, Designs and Patents Act 1988 Authorized adaptation from the United States edition, entitled Macroeconomics: Policy and Practice, 2nd edition, ... WEBSITE, www.pearsonglobaleditions.com /mishkin Chapter 12 Web Appendix C The Algebra of the Aggregate Demand and Supply Model Go to the Companion Website, www.pearsonglobaleditions.com /mishkin Chapter