Macroeconomics

by De Long, J. Bradford; Olney, Martha L.

• ISBN13: 9780072877588
• ISBN10: 0072877588
• Edition: 2nd
• Format: Hardcover
• Copyright: 2005-07-12
• Publisher: McGraw-Hill/Irwin

Summary

Macroeconomics 2e offers a new approach to the subject. Drawing upon vast experience teaching, researching, and advising the U.S. government on policy has enabled the authors to write an intermediate macroeconomics book that will set the standard for books in this area for years to come. For example, DeLong/Olney focuses on the interest rate rather than the AS/AD diagram and includes expanded coverage of the crucial topic of long-run growth. This lively text is modern, provides extensive insight into economic policy, incorporates a strong international perspective, and offers a broad historical perspective.

Author Biography

J. Bradford DeLong is a professor at the University of California–Berkeley.

Martha L. Olney is an adjunct professor at the University of California–Berkeley.

Table of Contents

Preface	xix
PART 1 PRELIMINARIES
Introduction to Macroeconomics	3	(24)
Overview	4	(6)
What Is Macroeconomics?	4	(2)
Economic Policy and Political Popularity: Policy	6	(1)
Macroeconomic Policy	6	(2)
Macroeconomics versus Microeconomics	8	(1)
Macroeconomic Policy and Your Quality of Life: Data	9	(1)
Tracking the Macroeconomy	10	(12)
Economic Statistics and Economic Activity	10	(2)
Six Key Variables	12	(2)
U.S. Real GDP per Worker: Data	14	(1)
The U.S. Unemployment Rate in the Twentieth Century: Data	15	(1)
U.S. Inflation Rates in the Twentieth Century: Data	16	(2)
Real Interest Rates: Data	18	(1)
The Stock Market: Data	19	(1)
The Exchange Rate: Details	20	(2)
The Current Macroeconomic Situation	22	(5)
The United States	22	(1)
Europe	23	(1)
Japan	24	(1)
Emerging Markets	24	(1)
Chapter Summary	25	(1)
Key Terms	26	(1)
Analytical Exercises	26	(1)
Policy Exercises	26	(1)
Measuring the Macroeconomy	27	(30)
Macroeconomic Data	28	(1)
The Exchange Rate	29	(5)
Nominal versus Real Exchange Rates	29	(2)
The Real Exchange Rate	31	(1)
Calculating the Real Exchange Rate: An Example	32	(2)
The Stock Market and Interest Rates	34	(5)
The Stock Market	34	(2)
Interest Rates	36	(1)
Calculating Real Interest Rates: An Example	37	(2)
The Price Level and Inflation	39	(4)
The Consumer Price Index	39	(1)
Calculating Price Indexes: An Example	39	(1)
Kinds of Index Numbers	40	(1)
Laspeyres and Paasche Index Numbers: Details	40	(2)
The Inflation Rate	42	(1)
Unemployment	43	(4)
Calculating the Unemployment Rate	43	(2)
Okun's Law	45	(1)
Forms of Okun's Law: Details	46	(1)
Real GDP	47	(10)
Calculating Real GDP	47	(1)
Real and Nominal GDP	48	(1)
Weighting Goods and Services by Their Market Values: An Example	48	(1)
Weighting Goods and Services by Their Base-Year Values: An Example	49	(1)
Intermediate Goods, Inventories, and Imputations	50	(1)
Components of Real GDP	51	(2)
What Is and Is Not in GDP	53	(2)
Chapter Summary	55	(1)
Key Terms	56	(1)
Analytical Exercises	56	(1)
Policy Exercises	56	(1)
Thinking Like an Economist	57	(24)
Understanding Macroeconomics	58	(5)
Economics: How Is It Like a Science?	58	(1)
Expectations and the Coming of the Great Depression: An Example	59	(1)
Reliance on Quantitative Models	60	(1)
Introducing the Rhetoric of Economics	61	(2)
The Circular Flow of Economic Activity	63	(5)
The Circular Flow Diagram	63	(3)
Different Measures of the Circular Flow	66	(1)
Accounting Definitions and Statistical Discrepancies: Tools	67	(1)
Patterns of Economists' Thought	68	(2)
Markets	68	(1)
Equilibrium	68	(1)
Graphs and Equations	69	(1)
Model Building	70	(11)
Representative Agents	71	(1)
Opportunity Cost	71	(1)
The Focus on Expectations	72	(1)
Solving Economic Models: Behavioral Relationships and Equilibrium Conditions	72	(1)
The Production Function: An Example of a Behavioral Relationship	73	(1)
Working with Exponents: Some Tools	74	(1)
A Sample Equilibrium Condition --- The Capital-Output Ratio: An Example	75	(1)
Chapter Summary	76	(1)
Key Terms	77	(1)
Analytical Exercises	77	(4)
PART 2 LONG-RUN ECONOMIC GROWTH
The Theory of Economic Growth	81	(38)
Sources of Long-Run Growth	82	(4)
The Efficiency of Labor	84	(1)
Capital Intensity	85	(1)
Fitting the Two Together	85	(1)
The Solow Growth Model	86	(15)
The Production Function	87	(2)
Using the Production Function: An Example	89	(1)
Saving, Investment, and Capital Accumulation	90	(3)
The Two Forms of the Production Function: Some Details	93	(1)
Calculating Output per Worker: An Example	94	(2)
Adding in Labor-Force and Labor-Efficiency Growth	96	(2)
The Balanced-Growth Capital-Output Ratio	98	(1)
Some Mathematical Rules of Thumb: Tools	99	(2)
Understanding the Growth Model	101	(7)
Balanced-Growth Output per Worker	101	(2)
Calculating Equilibrium Output per Worker: An Example	103	(2)
Off the Balanced-Growth Path	105	(1)
How Fast the Economy Heads for Its Balanced-Growth Path	106	(1)
Converging to the Balanced-Growth Path: An Example	106	(2)
Using the Solow Growth Model	108	(11)
The Labor-Force Growth Rate	108	(1)
An Increase in the Labor-Force Growth Rate: An Example	109	(1)
The Saving Rate and the Price of Capital Goods	110	(1)
An Increase in the Saving-Investment Rate: An Example	111	(1)
Growth Rate of the Efficiency of Labor	112	(3)
Chapter Summary	115	(1)
Key Terms	115	(1)
Analytical Exercises	115	(1)
Policy Exercises	116	(3)
The Reality of Economic Growth: History and Prospect	119	(40)
Before Modern Economic Growth	120	(8)
Before the Industrial Revolution	120	(1)
Premodern Economies	121	(2)
Understanding the Economy before the Industrial Revolution: Details	123	(1)
The End of the Malthusian Age	124	(4)
Modern American Economic Growth	128	(11)
American Long-Run Growth, 1800--1973	128	(5)
American Economic Growth 1973--1995: The Productivity Growth Slowdown	133	(2)
Effects of the Productivity Growth Slowdown	135	(1)
Did Real Standards of Living Decline during the Slowdown Period? The Details	135	(1)
Productivity Growth Speedup: The New Economy	136	(3)
Modern Economic Growth around the World	139	(9)
Divergence, Big Time	139	(2)
Purchasing-Power-Parity and Real Exchange Rate Comparisons: Some Tools	141	(1)
Why Have These Economies Converged? A Policy	141	(2)
The East Asian Miracle: Policy	143	(2)
Postcommunism: Policy	145	(1)
Sources of Divergence	145	(3)
Policies and Long-Run Growth	148	(11)
Hopes for Convergence	148	(1)
Policies for Saving, Investment, and Education	149	(1)
Policies for Technological Advance	150	(2)
Government Failure	152	(2)
Chapter Summary	154	(1)
Key Terms	155	(1)
Analytical Exercises	155	(1)
Policy Exercises	156	(3)
PART 3 FLEXIBLE-PRICE MACROECONOMICS
Building Blocks of the Flexible-Price Model	159	(34)
Potential Output and Real Wages	160	(8)
The Production Function	160	(2)
The Labor Market	162	(3)
Firm Labor Demand: An Example	165	(3)
Domestic Spending	168	(11)
Consumption Spending	168	(4)
Calculating Consumption from Income: An Example	172	(1)
Investment Spending	172	(1)
Kinds of Investment: Some Details	173	(3)
How Investment Responds to a Change in Interest Rates: An Example	176	(1)
The Stock Market: Some Details	176	(1)
How to Boost Investment: A Policy Issue	177	(1)
Government Purchases	177	(2)
International Trade	179	(4)
Gross Exports	179	(1)
Imports and Net Exports	180	(1)
The Exchange Rate	180	(1)
The J-Curve: Some Details	181	(2)
Conclusion	183	(10)
Chapter Summary	184	(1)
Key Terms	184	(1)
Analytical Exercises	184	(1)
Policy Exercises	185	(1)
Appendix 6a A Closer Look at Consumption	186	(7)
Equilibrium in the Flexible-Price Model	193	(32)
Full-Employment Equilibrium	194	(2)
The Flow-of-Funds Approach	194	(1)
Assumption of Price Flexibility	195	(1)
If Prices Were Truly Flexible . . . : Some Details	195	(1)
Two Approaches, One Model	196	(5)
Using the Circular Flow Diagram	196	(2)
Using Some Algebra	198	(1)
Unpacking the Flow-of-Funds Equation	198	(3)
Financial Transactions and the Flow of Funds: Some Details	201	(1)
The Real Interest Rate Adjusts to Ensure Equilibrium	201	(6)
Graphing the Saving-Investment Relationship	202	(3)
The Adjustment to Flow-of-Funds Equilibrium	205	(2)
Using the Model: What Makes the Real Interest Rate Change?	207	(3)
The Effect of a Change in Saving	207	(2)
The Effect of a Change in Investment Demand	209	(1)
Calculating the Equilibrium Real Interest Rate: Algebra	210	(10)
The Formula for the Equilibrium Real Interest Rate	210	(1)
Interpreting the Equilibrium Real Interest Rate Equation	211	(1)
Deriving the Equilibrium Interest Rate Equation: Details	212	(2)
Determining the Effect of a Change in Policy on Aggregate Demand	214	(1)
Calculating the Equilibrium Real Interest Rate from Parameter Values: An Example	214	(1)
Calculating the Equilibrium Real Interest Rate from Aggregate Demand Equations: An Example	215	(2)
Determining the Effect of a Change in Policy on Saving	217	(1)
A Government Purchases Boom: An Example	218	(2)
Conclusion	220	(5)
Chapter Summary	221	(1)
Key Terms	222	(1)
Analytical Exercises	222	(1)
Policy Exercises	222	(3)
Money, Prices, and Inflation	225	(28)
Money	226	(4)
Money: Liquid Wealth That Can Be Used to Buy Things	228	(2)
The Quantity Theory of Money	230	(8)
The Demand for Money	230	(1)
The Quantity Equation	231	(1)
Money and Prices	231	(2)
Calculating the Price Level from the Quantity Equation: An Example	233	(2)
Different Definitions of the Money Stock: Some Details	235	(1)
The Rate of Inflation	235	(3)
Inflation and the Nominal Interest Rate	238	(1)
The Costs of Inflation	238	(15)
The Costs of Moderate Expected Inflation	239	(1)
The Costs of Moderate Unexpected Inflation	240	(1)
Hyperinflation and Its Costs	240	(3)
Chapter Summary	243	(1)
Key Terms	243	(1)
Analytical Exercises	244	(1)
Policy Exercises	244	(1)
Appendix 8a The Interest Rate and Money Demand	245	(8)
PART 4 STICKY-PRICE MACROECONOMICS
The Sticky-Price Income-Expenditure Framework: Consumption and the Multiplier	253	(28)
Sticky Prices	255	(7)
Sticky Prices	255	(1)
Consequences of Sticky Prices	256	(4)
Why Are Prices Sticky?	260	(2)
Income and Expenditure	262	(13)
Building Up Planned Total Expenditure	262	(3)
Calculating the Consumption Function: An Example	265	(3)
Sticky-Price Equilibrium	268	(1)
Calculating the MPE: An Example	269	(3)
How Fast Does the Economy Move to Equilibrium? Some Details	272	(1)
The September 11 Terrorist Attack on the World Trade Center: An Example	273	(1)
Calculating the Difference between Planned Expenditure and Real GDP: An Example	274	(1)
The Multiplier	275	(6)
Determining the Size of the Multiplier	275	(1)
Changing the Size of the Multiplier	276	(1)
The Value of the Multiplier: An Example	277	(2)
Chapter Summary	279	(1)
Key Terms	279	(1)
Analytical Exercises	279	(1)
Policy Exercises	280	(1)
Investment, Net Exports, and Interest Rates: The IS Curve	281	(32)
Interest Rates and Planned Total Expenditure	282	(8)
The Importance of Investment	282	(1)
Investment and the Real Interest Rate	283	(5)
The Stock Market as an Indicator of Future Investment: Some Tools	288	(1)
Exports and Autonomous Spending	288	(2)
The IS Curve	290	(6)
Autonomous Spending and the Real Interest Rate	290	(1)
From the Interest Rate to Investment to Planned Total Expenditure	291	(2)
The Slope and Position of the IS Curve	293	(1)
Calculating the Dependence of Planned Expenditure on the Interest Rate: An Example	294	(2)
Using the IS Curve to Understand the Economy	296	(17)
Shifting the IS Curve	296	(1)
A Government Spending Increase and the IS Curve: An Example	297	(1)
Moving along the IS Curve	297	(1)
Moving along the IS Curve: An Example	298	(2)
Economic Fluctuations in the United States: The IS Curve as a Lens	300	(7)
Chapter Summary	307	(1)
Key Terms	307	(1)
Analytical Exercises	308	(1)
Policy Exercises	308	(2)
Appendix 10a The Term Premium and Expected Future Interest Rates	310	(3)
The Money Market and the LM Curve	313	(26)
The Money Market and the Money Stock	314	(5)
Wealth, Bonds, and the Demand for Money	314	(2)
Money Supply and Money Demand	316	(1)
Money Demand and the Quantity Theory: Details	317	(1)
Adjustment to Equilibrium	318	(1)
Bond Prices and Interest Rates: Details	318	(1)
The LM Curve	319	(2)
Interest Rates and Total Income	319	(1)
Drawing the LM Curve	319	(2)
The IS-LM Framework	321	(10)
The IS-LM Diagram	321	(2)
IS Shocks	323	(1)
IS-LM Equilibrium: An Example	323	(2)
An Investment Shock in the IS-LM Model: An Example	325	(2)
LM Shocks	327	(1)
Calculating the Effects of an LM Shock: An Example	327	(2)
Classifying Economic Disturbances	329	(2)
Aggregate Demand and Aggregate Supply	331	(8)
The Price Level and Aggregate Demand	331	(1)
The Price Level and Aggregate Supply	331	(2)
Prices: Stuck? Sticky? Flexible? An Example	333	(1)
The AS-AD Diagram	334	(1)
A Shock to Aggregate Demand: Details	335	(1)
Chapter Summary	336	(1)
Key Terms	337	(1)
Analytical Exercises	337	(1)
Policy Exercises	337	(2)
The Phillips Curve, Expectations, and Monetary Policy	339	(40)
Aggregate Supply and the Phillips Curve	340	(7)
Unemployment	340	(1)
Forms of Okun's Law: Details	341	(1)
Costs of High Unemployment: Policy	342	(1)
Aggregate Supply	342	(2)
The Phillips Curve Examined	344	(3)
Monetary Policy, Aggregate Demand, and Inflation	347	(10)
The Reaction of Monetary Policy to Inflation	347	(2)
The Monetary Policy Reaction Function: An Example	349	(2)
Equilibrium: The MPRF and the Phillips Curve	351	(1)
The Slope of the MPRF: An Example	352	(1)
From Income Expenditure to the MPRF: Some Details	352	(3)
Solving for Equilibrium: An Example	355	(1)
Using the MPRF-Phillips Curve Model	356	(1)
The Natural Rate of Unemployment	357	(4)
Demography and the Natural Rate	358	(1)
Institutions and the Natural Rate	359	(1)
Productivity Growth and the Natural Rate	359	(1)
The Past Level of Unemployment and the Natural Rate	359	(2)
Conclusion: The Fluctuating Natural Rate	361	(1)
Expected Inflation	361	(8)
The Phillips Curve under Static Expectations	361	(1)
The Phillips Curve under Adaptive Expectations	362	(1)
Static Expectations of Inflation in the 1960s: An Example	363	(1)
The Phillips Curve under Rational Expectations	363	(1)
A High-Pressure Economy under Adaptive Expectations: An Example	364	(1)
Adaptive Expectations and the Volcker Disinflation: Economic Policy	365	(3)
What Kind of Expectations Do We Have?	368	(1)
From the Short Run to the Long Run	369	(10)
Rational Expectations	369	(1)
Adaptive Expectations	370	(2)
Static Expectations	372	(1)
Chapter Summary	372	(1)
Key Terms	373	(1)
Analytical Exercises	373	(1)
Policy Exercises	373	(2)
Appendix 12a Equilibrium Inflation and Unemployment: Some Details	375	(4)
PART 5 MACROECONOMIC POLICY
Stabilization Policy	379	(36)
Monetary Policy Institutions	380	(5)
The Federal Reserve Board	380	(1)
The Federal Open Market Committee	381	(1)
The History of the Federal Reserve	381	(1)
How the Federal Reserve Operates	382	(2)
Japan's Liquidity Trap: Policy	384	(1)
Fiscal Policy Institutions	385	(4)
The Budget Cycle in Theory	385	(2)
The Budget Cycle in Practice	387	(2)
The History of Stabilization Policy	389	(3)
The Employment Act of 1946	389	(1)
Keynesian Overoptimism and the Monetarist Correction	389	(1)
Monetary Management in the 1980s and Beyond	390	(2)
The Power and Limits of Stabilization Policy	392	(7)
Economists' Disagreements	392	(1)
The Structure of the Economy and the Lucas Critique: The Details	392	(1)
The Implications of Uncertainty	393	(1)
What Are Leading Indicators? The Details	393	(1)
The Money Supply as a Leading Indicator	394	(1)
The Money Multiplier: Details	395	(2)
Long Lags and Variable Effects	397	(1)
The Limits of Stabilization Policy: Economic Policy	397	(2)
Monetary versus Fiscal Policy	399	(3)
Relative Power	399	(1)
Fiscal Policy: Automatic Stabilizers	400	(1)
Tax Cuts and Economic Stimulus: Policy	400	(1)
How Monetary Policy Works	401	(1)
Monetary Policy Instruments: Policy	401	(1)
Making Good Stabilization Policy: Rules versus Authorities	402	(7)
Competence and Objectives	402	(1)
The Political Business Cycle and Richard Nixon: Policy	403	(1)
Is There a Political Business Cycle? The Details	404	(2)
Credibility and Commitment	406	(1)
Central Bank Independence: Policy	406	(2)
Modern Monetary Policy	408	(1)
Financial Crises	409	(6)
Lenders of Last Resort	410	(1)
Deposit Insurance and Moral Hazard	411	(1)
Chapter Summary	412	(1)
Key Terms	413	(1)
Analytical Exercises	413	(1)
Policy Exercises	413	(2)
Budget Balance, National Debt, and Investment	415	(22)
The Budget Deficit and Stabilization Policy	416	(4)
The Budget Deficit and the IS Curve	416	(1)
The Bush Tax Cut of 2001: Policy	417	(1)
Measuring the Budget Balance	418	(2)
Measuring the Debt and the Deficit	420	(4)
Inflation	420	(1)
Public Investment	421	(1)
Future Government Liabilities and Generational Accounting	422	(2)
Analyzing the Debt and the Deficit	424	(13)
Sustainability	424	(2)
The Equilibrium Debt-to-GDP Ratio: An Example	426	(1)
Economic Effects of Deficits	427	(1)
The U.S. Debt-to-GDP Ratio: Data	428	(2)
Political Effects of Deficits	430	(1)
Effects of Deficits on Planned Expenditure	431	(1)
International Effects of Deficits	431	(1)
Deficits and Long-Run Economic Growth	432	(1)
Debt Service, Taxation, and Real GDP	433	(1)
Chapter Summary	434	(1)
Key Terms	435	(1)
Analytical Exercises	435	(1)
Policy Exercises	435	(2)
International Economic Policy	437	(30)
The History of Exchange Rates	438	(7)
The Classical Gold Standard	438	(1)
Currency Arbitrage under the Gold Standard: An Example	439	(3)
The Collapse of the Gold Standard	442	(2)
The Bretton Woods System	444	(1)
Our Current Floating-Rate System	444	(1)
How a Fixed Exchange Rate System Works	445	(5)
High Capital Mobility	446	(3)
Barriers to Capital Mobility	449	(1)
The Choice of Exchange Rate Systems	450	(3)
Benefits of Fixed Exchange Rates	451	(1)
Costs of Fixed Exchange Rates	451	(1)
Are Western Europe and the United States Optimal Currency Areas? An Example	452	(1)
Currency Crises	453	(14)
The European Crisis of 1992	453	(3)
The Mexican Crisis of 1994--1995	456	(2)
The East Asian Crisis of 1997--1998	458	(2)
The Dollar in the 2000s	460	(1)
Managing Crises	461	(3)
The Argentinean Crisis of 2001: An Example	464	(1)
Chapter Summary	465	(1)
Key Terms	466	(1)
Analytical Exercises	466	(1)
Policy Exercises	466	(1)
Changes in the Macroeconomy and Changes in Macroeconomic Policy	467	(26)
Changes in the Macroeconomy	468	(6)
The Past	468	(2)
The Future	470	(4)
The History of Macroeconomic Fluctuations	474	(5)
Estimating Long-Run Changes in Cyclical Volatility	474	(2)
Economic Policy	476	(3)
Understanding the Great Depression	479	(4)
The Magnitude of the Great Depression	479	(1)
Deflation and High Real Interest Rates	480	(3)
Macroeconomic Policy: Lessons Learned	483	(2)
Stabilization	483	(1)
Learning	483	(1)
Prospects	484	(1)
Macroeconomic Policy: Lessons Un- or Half-Learned	485	(8)
Lessons Unlearned: High European Unemployment	485	(2)
Lessons Half-Learned: Japanese Stagnation	487	(2)
Lessons Half-Learned: Moral Hazard	489	(1)
The Ultimate Lesson	490	(1)
Chapter Summary	491	(1)
Key Terms	491	(1)
Analytical Exercises	491	(1)
Policy Exercises	491	(2)
The Future of Macroeconomics	493	(16)
The Past of Macroeconomics	494	(2)
The Age of John Maynard Keynes	494	(1)
The Age of Milton Friedman and Robert Lucas	495	(1)
The Future of Macroeconomics: ``Real'' Business Cycles	496	(6)
One Possible Road	496	(1)
The Unevenness of Economic Growth	497	(1)
Supply Shocks (Oil Prices, For Example)	498	(1)
Analyzing Real Business Cycles	498	(1)
Problems of Real-Business-Cycle Theory	499	(2)
Assessment	501	(1)
The Future of Macroeconomics: New Keynesian Economics	502	(2)
Menu Costs	502	(1)
Staggered Prices and Coordination Failures	503	(1)
Assessment	503	(1)
Debts and Deficits, Consumption and Saving	504	(2)
Debts and Deficits: Ricardian Equivalence	504	(2)
Consumption and Saving	506	(1)
Does Monetary Policy Have a Long-Run Future?	506	(3)
Chapter Summary	508	(1)
Key Terms	508	(1)
Analytical Exercises	508	(1)
Epilogue	509	(7)
What Economists Know . . .	510	(3)
. . . About the Current State of the Economy	510	(1)
. . . About Long-Run Economic Growth	511	(1)
. . . About Business Cycles, Unemployment, and Inflation in the Long Run	512	(1)
. . . About Business Cycles, Unemployment, and Inflation in the Short Run	512	(1)
. . . About the Making of Macroeconomic Policy	512	(1)
What Economists Don't Know --- But Could Learn . . .	513	(2)
. . . About the Long-Run Relationship between Kinds of Investment and Productivity Growth	513	(1)
. . . About the Short-Run Determinants of Investment	514	(1)
. . . About the Impact of Government Policy on the Economy	514	(1)
. . . About the Microfoundations of Macroeconomics	515	(1)
What Economists Will Never Know . . .	515	(1)
. . . Chasing an Ever-Moving Target	515	(1)
Glossary	516	(25)
Index	541	(14)
Data Pages	555