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Macroeconomicsis widely praised for its ability to present theory as a way of evaluating key macro questions, such as why some countries are rich and others are poor. For all readers interested in macroeconomics.

Author Biography

Robert J. Gordon is Stanley G. Harris Professor in the Social Sciences and Professor of Economics at Northwestern University. He holds a bachelor’s degree from Harvard University, after which he attended Oxford University in England on a Marshall Scholarship. He received his PhD from the Massachusetts Institute of Technology. He taught at Harvard and the University of Chicago before moving to Northwestern in 1973, where he has taught for more than thirty years and where he was the chair of the Department of Economics from 1992 to 1996.

Professor Gordon is one of the world’s leading experts on inflation, unemployment, and productivity growth. His recent research includes work on the rise and fall of the New Economy, the U.S. productivity growth revival, and the recent stalling of European productivity growth. He is the author of several books, more than 100 scholarly articles, and more than 60 published comments on the research of others.

He is a research associate at the National Bureau of Economic Research (NBER), a research fellow of the Centre for Economic Policy Research in London, a Guggenheim Fellow, a fellow of the American Academy of Arts and Sciences, and a fellow of the Econometric Society.

Table of Contents

CHAPTER 1 What Is Macroeconomics?

1-1 How Macroeconomics Affects Our Everyday Lives

Global Economic Crisis Focus: What Makes It Unique?

1-2 Defining Macroeconomics

1-3 Actual and Natural Real GDP

1-4 Macroeconomics in the Short Run and Long Run

1-5 CASE STUDY: How Does the Global Economic Crisis Compare to Previous Business Cycles?

Global Economic Crisis Focus: How It Differs from 1982—83

1-6 Macroeconomics at the Extremes

1-7 Taming Business Cycles: Stabilization Policy

International Perspective: Differences Between the United States and Europe Before and During the Global Economic Crisis

Global Economic Crisis Focus: New Challenges for Monetary and Fiscal Policy

1-8 The “Internationalization” of Macroeconomics


CHAPTER 2 The Measurement of Income, Prices, and Unemployment

2-1 Why We Care About Income

2-2 The Circular Flow of Income and Expenditure

2-3 What GDP Is, and What GDP Is Not

[BOX]Where to Find the Numbers: A Guide to the Data

2-4 Components of Expenditure

Global Economic Crisis Focus: Which Component of GDP Declined the Most in the Global Economic Crisis?

2-5 The “Magic” Equation and the Twin Deficits

Global Economic Crisis Focus: Chicken or Egg in Recessions?

2-6 Where Does Household Income Come From?

2-7 Nominal GDP, Real GDP, and the GDP Deflator

[BOX] How to Calculate Inflation, Real GDP Growth, or Any Other Growth Rate

2-8 Measuring Unemployment

Understanding the Global Economic Crisis: The Ranks of the Hidden Unemployed

APPENDIX TO CHAPTER 2: How We Measure Real GDP and the Inflation Rate


CHAPTER 3 Income and Interest Rates: The Keynesian Cross Model and the IS Curve

3-1 Business Cycles and the Theory of Income Determination

Global Economic Crisis Focus: What Were the Shocks That Made the 2008­—09 Economic Crisis So Severe?

3-2 Income Determination, Unemployment, and the Price Level

3-3 Planned Expenditure

Global Economic Crisis Focus: Financial Market Instability as the Main Cause of the Global Economic Crisis

3-4 The Economy In and Out of Equilibrium

Understanding the Global Economic Crisis: How Changes in Wealth Influence Consumer Spending

3-5 The Multiplier Effect

3-6 Sources of Shifts in Planned Spending

3-7 How Can Monetary Policy Affect Planned Spending?

3-8 The Relation of Autonomous Planned Spending to the Interest Rate

Understanding the Global Economic Crisis: A Central Explanation of Business Cycles Is the Volatility of Investment

3-9 The IS Curve

3-10 Conclusion: The Missing Relation

[BOX] Learning About Diagrams: The IS Curve

APPENDIX TO CHAPTER 3:Allowing for Income Taxes and Income-Dependent Net Exports


CHAPTER 4 Strong and Weak Policy Effects in the IS-LM Model

4-1 Introduction: The Power of Monetary and Fiscal Policy

4-2 Income, the Interest Rate, and the Demand for Money

4-3 The LM Curve

[BOX]Learning About Diagrams: The LM Curve

4-4 The IS Curve Meets the LM Curve

Global Economic Crisis Focus: TITLE TO COME

4-5 Monetary Policy in Action

4-6 How Fiscal Expansion Can “Crowd Out” Private Investment

Global Economic Crisis Focus: TITLE TO COME

4-7 Strong and Weak Effects of Monetary Policy

Understanding the Global Economic Crisis: How Easy Money Helped to Create the Housing Bubble and Bust

4-8 Strong and Weak Effects of Fiscal Policy

4-9 Using Fiscal and Monetary Policy Together

International Perspective: Monetary Policy Hits the Zero Lower Bound in Japan and the United States

APPENDIX TO CHAPTER 4:The Elementary Algebra of the IS-LM Model


CHAPTER 5 Financial Markets, Financial Regulation, and Economic Instability

5-1 Introduction: Financial Markets and Macroeconomics

5-2 CASE STUDY: Dimensions of the Global Economic Crisis

5-3 Financial Institutions, Balance Sheets, and Leverage

5-4 A Hardy Perennial: Bubbles and Crashes

Understanding the Global Economic Crisis: Two Bubbles: 1927—29 in the Stock Market Versus 2000—06 in the Housing Market

5-5 Financial Innovation and the Subprime Mortgage Market

5-6 The IS-LM Model, Financial Markets, and the Monetary Policy Dilemma

[BOX] Why Do Asset Purchases Reduce Interest Rates?

Understanding the Global Economic Crisis: The IS-LM Summary of the Causes of the Global Economic Crisis

5-7 The Fed’s New Instrument: Quantitative Easing

5-8 How the Crisis Became Worldwide and the Dilemma for Policymakers

International Perspective: Weighing the Causes: Why Did Canada Perform Better?


CHAPTER 6 The Government Budget, the Government Debt, and Limitations of Fiscal Policy

6-1 Introduction: Can Fiscal Policy Rescue Monetary Policy from Ineffectiveness?

6-2 The Pervasive Effects of the Government Budget

6-3 CASE STUDY:The Government Budget in Historical Perspective

6-4 Automatic Stabilization and Discretionary Fiscal Policy

Global Economic Crisis Focus: Automatic Stabilization and Fiscal Stimulus in the Crisis

6-5 Government Debt Basic Concepts

6-6 Will the Government Remain Solvent?

International Perspective: The Debt-GDP Ratio: How Does the United States Compare?

6-7 CASE STUDY: Historical Behavior of the Debt-GDP Ratio Since 1790

6-8 Factors Influencing the Multiplier Effect of a Fiscal Policy Stimulus

6-9 CASE STUDY: The Fiscal Policy Stimulus of 2008—11

6-10 Government Spending and Transfers to States/Localities

Understanding the Global Economic Crisis: Comparing the Obama Stimulus with FDR’s New Deal

6-11 Conclusion: Strengths and Limitations of Fiscal Policy


CHAPTER 7 International Trade, Exchanges Rates, and Macroeconomic Policy

7-1 Introduction

7-2 The Current Account and Balance of Payments

7-3 Exchange Rates

7-4 The Market for Foreign Exchange

7-5 Real Exchange Rates and Purchasing Power Parity

International Perspective: Big Mac Meets PPP

7-6 Exchange Rate Systems

7-7 CASE STUDY: Asia Intervenes with Buckets to Buy Dollars and Finance the U.S. Current Account Deficit–How Long Can This Continue?

7-8 Determinants of Net Exports

7-9 The Real Exchange Rate and Interest Rate

7-10 Effects of Monetary and Fiscal Policy with Fixed and Flexible Exchange Rates

Global Economic Crisis Focus: Is the United States Prevented from Implementing a

Fiscal Policy Stimulus by Its Flexible Exchange Rate?

[BOX] Summary of Monetary and Fiscal Policy Effects in Open Economies

7-11 Conclusion: Economic Policy in the Open Economy


CHAPTER 8 Aggregate Demand, Aggregate Supply, and the Great Depression

8-1 Combining Aggregate Demand with Aggregate Supply

8-2 Flexible Prices and the AD Curve

8-3 Shifting the Aggregate Demand Curve with Monetary and Fiscal Policy

Global Economic Crisis Focus: The Crisis Was a Demand Problem Not Involving Supply

[BOX] Learning About Diagrams: The AD Curve

8-4 Alternative Shapes of the Short-Run Aggregate Supply Curve

8-5 The Short-Run Aggregate Supply (SAS) Curve When the Nominal Wage Rate Is Constant

[BOX] Learning About Diagrams: The SAS Curve

8-6 Fiscal and Monetary Expansion in the Short and Long Run

[BOX] Summary of the Economy’s Adjustment to an Increase in Aggregate Demand

8-7 Classical Macroeconomics: The Quantity Theory of Money and the Self-Correcting Economy

8-8 The Keynesian Revolution: The Failure of Self-Correction

Global Economic Crisis Focus: The Zero Lower Bound as Another Source

of Monetary Impotence

8-9 CASE STUDY: What Caused the Great Depression?

International Perspective: Why Was the Great Depression Worse in the United States

Than in Europe?


CHAPTER 9 Inflation: Its Causes and Cures

9-1 Introduction

9-2 Real GDP, the Inflation Rate, and the Short-Run Phillips Curve

9-3 The Adjustment of Expectations

[BOX] Learning About Diagrams: The Short-Run (SP) and Long-Run (LP) Phillips Curves

9-4 Nominal GDP Growth and Inflation

9-5 Effects of an Acceleration in Nominal GDP Growth

9-6 Expectations and the Inflation Cycle

9-7 Recession as a Cure for Inflation

International Perspective: Did Disinflation in Europe Differ from That in the

United States?

Global Economic Crisis Focus: Policymakers Face the Perils of Deflation

9-8 The Importance of Supply Shocks

[BOX] Types of Supply Shocks and When They Mattered

9-9 The Response of Inflation and the Output Ratio to a Supply Shock

Understanding the Global Economic Crisis: The Role of Inflation During the Housing Bubble and Subsequent Economic Collapse

9-10 Inflation and Output Fluctuations: Recapitulation of Causes and Cures

9-11 How Is the Unemployment Rate Related to the Inflation Rate?

APPENDIX TO CHAPTER 9: The Elementary Algebra of the SP-DG Model



CHAPTER 10 The Goals of Stabilization Policy: Low Inflation and Low Unemployment

Global Economic Crisis Focus: Inflation Versus Unemployment in the Crisis

10-1 The Costs and Causes of Inflation

10-2 Money and Inflation

International Perspective: Money Growth and Inflation

10-3 Why Inflation Is Not Harmless

Global Economic Crisis Focus: The Housing Bubble as Surprise Inflation Followed by Surprise Deflation

[BOX] The Wizard of Oz as a Monetary Allegory

10-4 Indexation and Other Reforms to Reduce the Costs of Inflation

[BOX] The Indexed Bond (TIPS) Protects Investors from Inflation

10-5 The Government Budget Constraint and the Inflation Tax

Understanding the Global Economic Crisis: How a Large Recession Can Create a Large Fiscal Deficit

10-6 Starting and Stopping a Hyperinflation

10-7 Why the Unemployment Rate Cannot Be Reduced to Zero

10-8 Sources of Mismatch Unemployment

Global Economic Crisis Focus: The Crisis Raises the Incidence of Structural


10-10 The Costs of Persistently High Unemployment

Understanding the Global Economic Crisis: Why Did Unemployment Rise Less in Europe Than in the United States After 2007?

10-11 Conclusion: Solutions to the Inflation and Unemployment Dilemma


CHAPTER 11 The Theory of Economic Growth

11-1 The Importance of Economic Growth

11-2 Standards of Living as the Consequence of Economic Growth

International Perspective: The Growth Experience of Seven Countries Over the Last Century

11-3 The Production Function and Economic Growth

11-4 Solow’s Theory of Economic Growth

11-5 Technology in Theory and Practice

11-6 Puzzles That Solow’s Theory Cannot Explain

11-7 Human Capital, Immigration, and the Solow Puzzles

11-8 Endogenous Growth Theory: How Is Technological

Change Produced?

11-9 Conclusion: Are There Secrets of Growth?

APPENDIX TO CHAPTER 11:General Functional Forms and the Production Function


CHAPTER 12 The Big Questions of Economic Growth

12-1 Answering the Big Questions

12-2 The Standard of Living and Concepts of Productivity

12-3 The Failure of Convergence

12-4 Human Capital and Technology

12-5 Political Capital, Infrastructure, and Geography

International Perspective: A Symptom of Poverty: Urban Slums in the Poor Cities

International Perspective: Institutions Matter: South Korea Versus North Korea

International Perspective: Growth Success and Failure in the Tropics

12-6 CASE STUDY: Uneven U.S. Productivity Growth Across Eras

Global Economic Crisis Focus: Lingering Effects of the 2007—09 Recession

on Long-Term Economic Growth

12-7 CASE STUDY: The Productivity Growth Contrast Between Europe and the United States

12-8 Conclusion on the Great Questions of Growth


CHAPTER 13 Money, Banks, and the Federal Reserve

13-1 Money as a Tool of Stabilization Policy

13-2 Definitions of Money

13-3 High-Powered Money and Determinants of the Money Supply

13-4 The Fed’s Three Tools for Changing the Money Supply

13-5 Theories of the Demand for Money

International Perspective: Plastic Replaces Cash, and the Cell Phone Replaces Plastic

13-6 Why the Federal Reserve “Sets” Interest Rates


CHAPTER 14 The Goals, Tools, and Rules of Monetary Policy

14-1 The Central Role of Demand Shocks

Global Economic Crisis Focus: The Weakness of Monetary Policy After 2008 Reveals a More General Problem

14-2 Stabilization Targets and Instruments in the Activists’ Paradise

[BOX]Rules Versus Activism in a Nutshell: The Optimism-Pessimism Grid

14-3 Policy Rules

14-4 Policy Pitfalls: Lags and Uncertain Multipliers

14-5 CASE STUDY: Was the Fed Responsible for the Great Moderation of 1986—2007?

14-6 Time Inconsistency, Credibility, and Reputation

14-7 CASE STUDY: The Taylor Rule and the Changing Fed Attitude Toward Inflation and Output

Global Economic Crisis Focus: Taylor’s Rule Confronts the Zero Lower Bound

14-8 Rules Versus Discretion: An Assessment

International Perspective: The Debate About the Euro

14-9 CASE STUDY: Should Monetary Policy Target the Exchange Rate?


CHAPTER 15 The Economics of Consumption Behavior

15-1 Consumption and Economic Stability

15-2 CASE STUDY: Main Features of U.S. Consumption Data

15-3 Background: The Conflict Between the Time-Series and Cross-Section Evidence

15-4 Forward-Looking Behavior: The Permanent-Income Hypothesis

15-5 Forward-Looking Behavior: The Life-Cycle Hypothesis

Global Economic Crisis Focus: The Modigliani Theory Helps Explain the Crisis and

Recession of 2007—09

15-6 Rational Expectations and Other Amendments to the Simple Forward-Looking Theories

Understanding the Global Economic Crisis: Did Households Spend or Save the 2008 Economic Stimulus Payments?

15-7 Bequests and Uncertainty

International Perspective: Why Do Some Countries Save So Much?

15-8 CASE STUDY: Did the Rise and Collapse of Household Assets Cause the Decline and Rise of the Household Saving Rate?

15-9 Why the Official Household Saving Data Are Misleading

15-10 Conclusion: Does Consumption Stabilize the Economy?


CHAPTER 16 The Economics of Investment Behavior

16-1 Investment and Economic Stability

16-2 CASE STUDY: The Historical Instability of Investment

16-3 The Accelerator Hypothesis of Net Investment

16-4 CASE STUDY: The Simple Accelerator and the Postwar U.S. Economy

16-5 The Flexible Accelerator

[BOX] Tobin’s q: Does It Explain Investment Better Than the Accelerator or Neoclassical Theories?

16-6 The Neoclassical Theory of Investment Behavior

16-7 User Cost and the Role of Monetary and Fiscal Policy

16-8 Business Confidence and Speculation

[BOX] Investment in the Great Depression and World War II

International Perspective: The Level and Variability of Investment Around the World

16-9 Investment as a Source of Instability of Output and Interest Rates

16-10 Conclusion: Investment as a Source of Instability 545


CHAPTER 17 New Classical Macro and New Keynesian Macro

17-1 Introduction: Classical and Keynesian Economics, Old and New

17-2 Imperfect Information and the “Fooling Model”

17-3 The Lucas Model and the Policy Ineffectiveness Proposition

17-4 The Real Business Cycle Model

17-5 New Classical Macroeconomics: Limitations and Positive Contributions

International Perspective: Productivity Fluctuations in the United States and Japan

Global Economic Crisis Focus: The 2007—09 Crisis and the Real Business Cycle Model

17-6 Essential Features of the New Keynesian Economics

17-7 Why Small Nominal Rigidities Have Large Macroeconomic Effects

17-8 Coordination Failures and Indexation

17-9 Long-Term Labor Contracts as a Source of the Business Cycle

17-10 Assessment of the New Keynesian Model


CHAPTER 18 Conclusion: Where We Stand

18-1 The Evolution of Events and Ideas

Global Economic Crisis Focus: Can Economics Explain the Crisis or Does the Crisis

Require New Ideas?

18-2 The Reaction of Ideas to Events, 1923—47

18-3 The Reaction of Ideas to Events, 1947—69

18-4 The Reaction of Ideas to Events, 1970—2010

Global Economic Crisis Focus: Termites Were Nibbling Away at the Prosperity of


18-5 The Reaction of Ideas to Events in the World Economy

18-6 Macro Mysteries: Unsettled Issues and Debates

International Perspective: How Does Macroeconomics Differ in the United States and Europe?



A Time Series Data for the U.S. Economy: 1875—2010

B International Annual Time Series Data for Selected Countries: 1960—2010

C Data Sources and Methods






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