Macroeconomics

by Gordon, Robert J.

• ISBN13: 9780201770360
• ISBN10: 0201770369
• Edition: 9th
• Format: Hardcover
• Copyright: 2003-01-01
• Publisher: Addison Wesley

Summary

Thoroughly revised to reflect the macroeconomic issues of the twenty-first century, Macroeconomics, Ninth Edition combines classic, time-tested pedagogy with a fresh treatment of timely topics and the use of the most current data. The Ninth Edition represents the most complete revision in many years. While retaining its organization of income determination, the IS-LM model, and the SP-DG inflation model "up front," this edition applies the recent ups and downs of the U.S. "New Economy" to make the study of business cycles, monetary and fiscal policy, inflation, saving, and investment more exciting and more relevant than ever. New to this edition is a chapter (11) that grapples with the big questions of economic growth and develops an analysis that goes beyond the standard theories and builds on the best research in the field. The text is universally praised for consistently holding up the theory to the magnifying glass of reality, and this edition is no exception. Substantive case studies and international perspective boxes-including the 9/11 disaster as a classic "shock" to supply and demand-bolster the macroeconomic theory.

Table of Contents

Preface: To the Instructor	xvii
Preface: To the Student	xxvi
PART ONE Introduction and Measurement	1	(58)
What Is Macroeconomics?	3	(22)
How Macroeconomics Affects Our Everyday Lives	3	(2)
Defining Macroeconomics	5	(1)
Actual and Natural Real GDP	6	(3)
Macroeconomics in the Short Run and Long Run	9	(4)
Case Study: A Century of Business Cycles	13	(2)
Macroeconomics at the Extremes	15	(4)
Taming Business Cycles: Stabilization Policy	19	(1)
The ``Internationalization'' of Macroeconomics	20	(5)
How Does U.S. Economic Performance Rank?	21	(4)
The Measurement of Income, Prices, and Unemployment	25	(34)
Why We Care About Income	25	(1)
The Circular Flow of Income and Expenditure	26	(1)
What Transactions Should Be Included in Income and Expenditure?	27	(2)
Components of Expenditure	29	(8)
Where to Find the Numbers: A Guide to the Data	30	(7)
A Summary of Types of Spending	37	(2)
How Much Income Flows from Business Firms to Households?	39	(2)
Nominal GDP, Real GDP, and the GDP Deflator	41	(3)
Saving, Investment, and Government Budgets Around the World	42	(2)
How Nominal GDP Is Split Between Inflation and Changes in Real GDP	44	(5)
How to Calculate Inflation, Real GDP Growth, or Any Other Growth Rate	49	(1)
Measuring Unemployment	49	(3)
Case Study: Unemployment and the Output Ratio	52	(7)
PART TWO Income, Interest Rates, Policy, and the Open Economy	59	(132)
The Simple Keynesian Theory of Income Determination	61	(26)
Business Cycles, Unemployment, and Income Determination	61	(1)
Planned Expenditure	62	(4)
Case Study: Why Did U.S. Saving Almost Vanish in 2001?	66	(1)
The Economy In and Out of Equilibrium	67	(5)
The Multiplier Effect	72	(2)
Fiscal Policy	74	(13)
How the United States and Japan Use Fiscal Policy	78	(5)
Appendix to Chapter 3: Allowing for Income Taxes and Income-Dependent Net Exports	83	(4)
The IS-LM Model	87	(30)
Introduction	87	(1)
Interest Rates and Rates of Return	88	(1)
The Relation of Autonomous Planned Spending to the Interest Rate	89	(5)
How Monetary Policy Actually Worked in 2001	93	(1)
The IS Curve	94	(4)
Learning About Diagrams: The IS Curve	96	(2)
Why People Use Money	98	(2)
Income, the Interest Rate, and the Demand for Money	100	(1)
The LM Curve	101	(5)
Learning About Diagrams: The LM Curve	104	(2)
The IS Curve Meets the LM Curve	106	(1)
Monetary Policy in Action	107	(2)
How Fiscal Expansion Can ``Crowd Out'' Investment	109	(8)
The Worldwide Effects on Consumer Confidence of the September 11 Attacks	110	(7)
Monetary Policy, Fiscal Policy, and the Government Budget	117	(34)
Introduction	117	(1)
Strong and Weak Effects of Monetary Policy	118	(2)
Strong and Weak Effects of Fiscal Policy	120	(2)
Using Fiscal and Monetary Policy Together	122	(6)
Policy Paralysis in Japan	126	(2)
Case Study: The Debate Over Monetary and Fiscal Policy Stimulus in the 2001 U.S. Recession	128	(3)
The Pervasive Effects of the Government Budget	131	(2)
Case Study: The Government Budget in Historical Perspective	133	(2)
The Structural Budget	135	(4)
National Saving and the Consequences of the Government Budget	139	(3)
Conclusion: The Role of Monetary and Fiscal Policy	142	(9)
Appendix to Chapter 5: The Elementary Algebra of the IS-LM Model	147	(4)
International Trade, Exchange Rates, and Macroeconomic Policy	151	(40)
Introduction	151	(2)
Foreign Trade, the Balance of Payments, and International Indebtedness	153	(4)
Exchange Rates	157	(1)
The Market for Foreign Exchange	158	(4)
Nominal and Real Exchange Rates in the Long Run	162	(3)
Exchange Rate Systems	165	(5)
Big Mac Meets PPP	166	(4)
Case Study: The Trilemma, Fixed Exchange Rates, and Perfect Capital Mobility	170	(2)
Determinants of Net Exports	172	(4)
The Real Exchange Rate and Interest Rate	176	(4)
Exchange Rates and Monetary Policy in the U.S., Europe, and Japan	178	(2)
The IS-LM Model in a Small Open Economy	180	(4)
Capital Mobility and Exchange Rates in a Large Open Economy	184	(2)
Summary of Monetary and Fiscal Policy Effects in Open Economies	186	(1)
Conclusion: Economic Policy in the Open Economy	186	(5)
PART THREE Inflation and Unemployment	191	(116)
Aggregate Demand, Aggregate Supply, and the Self-Correcting Economy	193	(33)
The Role of Aggregate Demand and Supply	193	(1)
Flexible Prices and the AD Curve	194	(2)
Shifting the Aggregate Demand Curve with Monetary and Fiscal Policy	196	(3)
Learning About Diagrams: The AD Curve	198	(1)
Alternative Shapes of the Short-Run Aggregate Supply Curve	199	(2)
The Aggregate Supply Curve When the Nominal Wage Rate Is Constant	201	(3)
Learning About Diagrams: The SAS Curve	203	(1)
How the Wage Rate Is Set	204	(2)
Fiscal and Monetary Expansion in the Short and Long Run	206	(4)
Summary of the Economy's Adjustment to an Increase in Aggregate Demand	209	(1)
Classical Macroeconomics: The Quantity Theory of Money and the Self-Correcting Economy	210	(2)
The Keynesian Revolution: The Failure of Self-Correction	212	(7)
Deflation Deepens Japan's Dilemma	216	(3)
Case Study: What Caused the Great Depression?	219	(7)
Inflation: Its Causes and Cures	226	(45)
Introduction	226	(1)
Real GDP, the Inflation Rate, and the Short-Run Phillips Curve	227	(3)
The Adjustment of Expectations	230	(3)
Learning About Diagrams: The Short-Run (SP) and Long-Run (LP) Phillips Curves	232	(1)
Nominal GDP Growth and Inflation	233	(2)
Effects of an Acceleration in Nominal GDP Growth	235	(2)
Expectations and the Inflation Cycle	237	(2)
Recession as a Cure for Inflation	239	(3)
Case Study: How Large Is the Sacrifice Ratio?	242	(2)
Did Disinflation in Europe Differ from That in the United States?	244	(1)
The Importance of Supply Disturbances	244	(3)
The Response of Inflation and Real GDP to a Supply Shock	247	(5)
Case Study: The Goldilocks Economy---Why Inflation Was So Low in the 1990s	252	(4)
Inflation and Output Fluctuations: Recapitulation of Causes and Cures	256	(15)
Appendix to Chapter 8: The Elementary Algebra of the SP-DG Model	263	(8)
The Goals of Stabilization Policy: Low Inflation and Low Unemployment	271	(36)
The Costs and Causes of Inflation	271	(1)
Money and Inflation	272	(5)
Money Growth and Inflation	275	(2)
Interest Rates and Inflation	277	(3)
The Government Budget Constraint and the Inflation Tax	280	(3)
Starting and Stopping a Hyperinflation	283	(3)
Costs of a Fully Anticipated Inflation: Creeping Inflation versus Hyperinflation	286	(4)
The Wizard of Oz as a Monetary Allegory	287	(3)
Indexation and Other Reforms to Reduce the Costs of Inflation	290	(2)
The Indexed Bond Has Arrived	291	(1)
Why the Unemployment Rate Cannot Be Reduced to Zero	292	(1)
Sources of Mismatch Unemployment	293	(2)
Turnover Unemployment and Job Search	295	(4)
Case Study: Why Is Unemployment in Europe Higher Than in the United States?	299	(3)
Conclusion: Solutions to the Inflation and Unemployment Dilemma	302	(5)
PART FOUR Macroeconomics in the Long Run: Growth and Public Finance	307	(96)
The Theory of Economic Growth	309	(29)
The Importance of Economic Growth	309	(2)
Standards of Living as the Consequence of Economic Growth	311	(2)
The Growth Experience of Seven Countries over the Last Century	312	(1)
The Production Function and Economic Growth	313	(4)
Solow's Theory of Economic Growth	317	(4)
Technology in Theory and Practice	321	(3)
Puzzles That Solow's Theory Cannot Explain	324	(3)
Human Capital, Immigration, and the Solow Puzzles	327	(2)
Endogenous Growth Theory: How Is Technological Change Produced?	329	(3)
Conclusion: Are There Secrets of Growth?	332	(6)
Appendix to Chapter 10: General Functional Forms and the Production Function	336	(2)
The Big Questions of Economic Growth	338	(41)
Answering the Big Questions	338	(2)
The Standard of Living and Concepts of Productivity	340	(3)
The Failure of Convergence	343	(7)
Human Capital and Technology	350	(3)
Political Capital, Infrastructure, and Geography	353	(6)
Growth Success and Failure in the Tropics	357	(2)
Case Study: Uneven U.S. Growth Across Eras: Why the Productivity Growth Slowdown?	359	(5)
Labor Supply Shifts as a Source of Faster or Slower Productivity Growth	364	(4)
The ``New Economy'' and the Revival of Productivity Growth	368	(6)
How the Great Inventions Created Economic Growth: Life in the ``Bad Old Days''	370	(4)
Conclusion on the Great Questions of Growth	374	(5)
The Government Budget, the Public Debt, and Social Security	379	(24)
Introduction: The Government Budget and Long-Run Economic Growth	379	(1)
Long-Run Effects of Fiscal Policy on Economic Growth and Welfare	380	(2)
The Future Burden of the Government Debt	382	(2)
Will the Government Remain Solvent?	384	(3)
The Debt-GDP Ratio: How Does the United States Compare?	386	(1)
Case Study: Historical Behavior of the Debt-GDP Ratio Since 1790	387	(2)
How the Budget Deficit Grew and Disappeared	389	(3)
Alternative Views of Fiscal Policy: Supply-Side Economics	392	(2)
Alternative Views of Fiscal Policy: The Barro-Ricardo Equivalence Theorem	394	(2)
How Should Social Security Be ``Saved''?	396	(4)
The Budget Surplus Recasts the Debate	400	(3)
PART FIVE Stabilization Policy in an Open Economy	403	(66)
Money and Financial Markets	405	(33)
Money in a World of Many Financial Assets and Liabilities	405	(1)
Financial Institutions, Markets, and Instruments	406	(4)
Definitions of Money	410	(4)
Smart Cards, E-Money, and the Money Supply	413	(1)
High-Powered Money and Determinants of the Money Supply	414	(3)
The Fed's Three Tools for Changing the Money Supply	417	(4)
Theories of the Demand for Money	421	(5)
Case Study: Why Interest Rates Were More Volatile in the 1980s and Less Volatile in the 1990s	426	(2)
Why the Federal Reserve ``Sets'' Interest Rates	428	(10)
Where in the World Is All the U.S. Currency?	432	(6)
Stabilization Policy in the Closed and Open Economy	438	(31)
The Central Role of Demand Shocks	438	(1)
Stabilization Targets and Instruments in the Activists' Paradise	439	(4)
Rules vs. Activism in a Nutshell: The Optimism-Pessimism Grid	443	(1)
Policy Rules	443	(3)
Policy Pitfalls: Lags and Uncertain Multipliers	446	(5)
Case Study: Was the Fed Responsible for the Decline in Economic Volatility?	451	(5)
Time Inconsistency, Credibility, and Reputation	456	(3)
Case Study: Should Monetary Policy Target the Exchange Rate?	459	(3)
The Debate About the Euro	460	(2)
Rules Versus Discretion: An Assessment	462	(7)
PART SIX Sources of Instability in the Private Economy	469	(60)
Instability in the Private Economy: Consumption Behavior	471	(30)
Consumption and Economic Stability	471	(1)
Case Study: Main Features of U.S. Consumption Data	472	(2)
Background: The Conflict Between the Time-Series and Cross-Section Evidence	474	(3)
Forward-Looking Behavior: The Permanent-Income Hypothesis	477	(4)
Forward-Looking Behavior: The Life-Cycle Hypothesis	481	(4)
Rational Expectations and Other Amendments to the Simple Forward-Looking Theories	485	(4)
Did Households Spend or Save the 2001 Tax Rebate?	487	(2)
Bequests and Uncertainty	489	(4)
Why Do Some Countries Save So Much?	490	(3)
Case Study: Did the Stock Market Boom Cause the Collapse in the Household Saving Rate?	493	(4)
Conclusion: Consumption and the Case For and Against Activism	497	(4)
Instability in the Private Economy: Investment	501	(28)
Investment and Economic Stability	501	(1)
Case Study: The Historical Instability of Investment	502	(2)
The Accelerator Hypothesis of Net Investment	504	(4)
Case Study: The Simple Accelerator and the Postwar U.S. Economy	508	(2)
The Flexible Accelerator	510	(1)
The Neoclassical Theory of Investment Behavior	511	(2)
User Cost and the Role of Monetary and Fiscal Policy	513	(4)
Tobin's q: Does It Explain Investment Better Than the Accelerator or Neoclassical Theories?	514	(3)
Business Confidence and Speculation	517	(2)
Case Study: The Boom and Bust in ``New Economy'' Investment	519	(5)
The Level and Variability of Investment Around the World	522	(2)
Investment as a Source of Instability of Output and Interest Rates	524	(1)
Conclusion: Investment and the Case For and Against Activism	524	(5)
PART SEVEN Debates at the Macroeconomic Frontier	529
New Classical Macro Confronts New Keynesian Macro	531
Introduction: Classical and Keynesian Economics, Old and New	531
Imperfect Information and the ``Fooling Model''	532
The Lucas Model and the Policy Ineffectiveness Proposition	535
The Real Business Cycle Model	539
Productivity Fluctuations in the United States and Japan	540
New Classical Macroeconomics: Limitations and Positive Contributions	545
Essential Features of the New Keynesian Economics	548
Why Small Nominal Rigidities Have Large Macroeconomic Effects	549
Coordination Failures and Indexation	553
Long-Term Labor Contracts as a Source of the Business Cycle	554
``Real'' Sources of Wage Stickiness	556
Assessment of the New Keynesian Model	557
Conclusion: Where We Stand	562
The Evolution of Events and Ideas	562
The Reaction of Ideas to Events, 1923--47	563
The Reaction of Ideas to Events, 1947--69	566
The Reaction of Ideas to Events, 1970--2001	570
The Reaction of Ideas to Events in the World Economy	576
Macro Mysteries: Unsettled Issues and Debates	577
How Does Macroeconomics Differ in the United States and Europe?	578
Appendixes
A: Time Series Data for the U.S. Economy: 1875--2001	1	(7)
B: International Annual Time Series Data for Selected Countries: 1960--2001	8	(6)
C: Data Sources and Methods	14
Glossary	1	(1)
Index	1