Brief Principles of Macroeconomics

by Mankiw, N. Gregory

• ISBN13: 9780324236972
• ISBN10: 0324236972
• Edition: 4th
• Format: Paperback
• Copyright: 2006-02-17
• Publisher: South-Western College Pub

Summary

Mankiw's Principles of Economics textbooks continue to be the most popular and widely used text in the economics classroom. BRIEF PRINCIPLES OF MACROECONOMICS, 4th Edition features a strong revision of content in all 18 chapters while maintaining the clear and accessible writing style that is the hallmark of the highly respected author. The 4th edition also features an expanded instructor's resource package designed to assist instructors in course planning and classroom presentation and full integration of content with Aplia, the leading online Economics education program. In the 4th edition Greg Mankiw has created a full educational program for students and instructors -- Experience Mankiw 4th edition. "I have tried to put myself in the position of someone seeing economics for the first time. My goal is to emphasize the material that students should and do find interesting about the study of the economy." - N. Gregory Mankiw.

Table of Contents

Preface: To the Instructor	vii
Preface: To the Student	xx
PART 1 INTRODUCTION	1	(60)
Ten Principles of Economics	3	(16)
How People Make Decisions	4	(4)
Principle 1: People Face Trade-offs	4	(1)
Principle 2: The Cost of Something Is What You Give Up to Get It	5	(1)
Principle 3: Rational People Think at the Margin	6	(1)
Principle 4: People Respond to Incentives	7	(1)
How People Interact	8	(3)
Principle 5: Trade Can Make Everyone Better Off	8	(1)
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity	9	(1)
Principle 7: Governments Can Sometimes Improve Market Outcomes	10	(1)
FYI: Adam Smith and the Invisible Hand	10	(1)
How the Economy as a Whole Works	11	(3)
Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods and Services	12	(1)
Principle 9: Prices Rise When the Government Prints Too Much Money	12	(1)
Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment	13	(1)
FYI: How to Read This Book	14	(1)
Conclusion	14	(1)
Summary	15	(1)
Key Concepts	15	(1)
Questions for Review	16	(1)
Problems and Applications	16	(3)
Thinking Like an Economist	19	(28)
The Economist as Scientist	20	(8)
The Scientific Method: Observation, Theory, and More Observation	20	(1)
The Role of Assumptions	21	(1)
Economic Models	22	(1)
Our First Model: The Circular-Flow Diagram	22	(2)
Our Second Model: The Production Possibilities Frontier	24	(2)
Microeconomics and Macroeconomics	26	(1)
FYI: Who Studies Economics?	27	(1)
The Economist as Policy Adviser	28	(4)
Positive versus Normative Analysis	28	(1)
Economists in Washington	29	(1)
In the News: Super Bowl Economics	30	(1)
Case Study: Mr. Mankiw Goes to Washington	31	(1)
Why Economists Disagree	32	(2)
Differences in Scientific Judgments	32	(1)
Differences in Values	33	(1)
Perception versus Reality	33	(1)
Let's Get Going	34	(2)
In the News: Why You Should Study Economics	35	(1)
Summary	36	(1)
Key Concepts	36	(1)
Questions for Review	36	(1)
Problems and Applications	36	(2)
Appendix Graphing: A Brief Review	38	(9)
Graphs of a Single Variable	38	(1)
Graphs of Two Variables: The Coordinate System	39	(1)
Curves in the Coordinate System	40	(2)
Slope	42	(2)
Cause and Effect	44	(3)
Interdependence and the Gains from Trade	47	(14)
A Parable for the Modern Economy	48	(4)
Production Possibilities	48	(2)
Specialization and Trade	50	(2)
Comparative Advantage: The Driving Force of Specialization	52	(3)
Absolute Advantage	52	(1)
Opportunity Cost and Comparative Advantage	52	(2)
Comparative Advantage and Trade	54	(1)
FYI: The Legacy of Adam Smith and David Ricardo	55	(1)
Applications of Comparative Advantage	55	(3)
Should Tiger Woods Mow His Own Lawn?	55	(1)
In the News: Evolution and Economics	56	(1)
Should the United States Trade with Other Countries?	56	(2)
Conclusion	58	(1)
Summary	58	(1)
Key Concepts	59	(1)
Questions for Review	59	(1)
Problems and Applications	59	(2)
PART 2 HOW MARKETS WORK	61	(28)
The Market Forces of Supply and Demand	63	(26)
Markets and Competition	64	(1)
What Is a Market?	64	(1)
What Is Competition?	64	(1)
Demand	65	(6)
The Demand Curve: The Relationship between Price and Quantity Demanded	65	(1)
Market Demand versus Individual Demand	66	(1)
Shifts in the Demand Curve	67	(2)
Case Study: Two Ways to Reduce the Quantity of Smoking Demanded	69	(2)
Supply	71	(4)
The Supply Curve: The Relationship between Price and Quantity Supplied	71	(1)
Market Supply versus Individual Supply	71	(1)
Shifts in the Supply Curve	72	(3)
Supply and Demand Together	75	(7)
Equilibrium	75	(2)
Three Steps to Analyzing Changes in Equilibrium	77	(4)
In the News: Political Unrest Shifts the Supply Curve	81	(1)
Conclusion: How Prices Allocate Resources	82	(2)
Summary	84	(1)
Key Concepts	84	(1)
Questions for Review	85	(1)
Problems and Applications	85	(4)
PART 3 THE DATA OF MACROECONOMICS	89	(42)
Measuring a Nation's Income	91	(22)
The Economy's Income and Expenditure	92	(2)
The Measurement of Gross Domestic Product	94	(2)
``GDP Is the Market Value . . .''	94	(1)
``. . . Of All . . . ''	94	(1)
``. . . Final . . .''	95	(1)
``. . . Goods and Services . . .''	95	(1)
``. . . Produced . . .''	95	(1)
``. . . Within a Country . . .''	95	(1)
``. . . In a Given Period of Time.''	95	(1)
The Components of GDP	96	(3)
Consumption	96	(1)
FYI: Other Measures of Income	97	(1)
Investment	97	(1)
Government Purchases	98	(1)
Net Exports	98	(1)
Case Study: The Components of U.S. GDP	99	(1)
Real versus Nominal GDP	99	(5)
A Numerical Example	100	(1)
The GDP Deflator	101	(1)
Case Study: Real GDP over Recent History	102	(1)
In the News: GDP Lightens Up	103	(1)
In the News: The Underground Economy	104	(1)
Is GDP a Good Measure of Economic Well-Being?	104	(4)
Case Study: International Differences in GDP and the Quality of Life	106	(1)
Case Study: Who Wins at the Olympics?	107	(1)
Conclusion	108	(1)
Summary	109	(1)
Key Concepts	109	(1)
Questions for Review	109	(1)
Problems and Applications	110	(3)
Measuring the Cost of Living	113	(18)
The Consumer Price Index	114	(8)
How the Consumer Price Index Is Calculated	114	(2)
Problems in Measuring the Cost of Living	116	(1)
FYI: What Is in the CPI's Basket?	117	(1)
In the News: Accounting for Quality Change	118	(2)
The GDP Deflator versus the Consumer Price Index	120	(2)
Correcting Economic Variables for the Effects of Inflation	122	(4)
Dollar Figures from Different Times	122	(1)
Case Study: Mr. Index Goes to Hollywood	123	(1)
Indexation	123	(1)
Real and Nominal Interest Rates	124	(1)
Case Study: Interest Rates in the U.S. Economy	125	(1)
Conclusion	126	(1)
Summary	127	(1)
Key Concepts	128	(1)
Questions for Review	128	(1)
Problems and Applications	128	(3)
PART 4 THE REAL ECONOMY IN THE LONG RUN	131	(92)
Production and Growth	133	(26)
Economic Growth around the World	134	(4)
FYI: A Picture Is Worth a Thousand Statistics	136	(2)
FYI: Are You Richer Than the Richest American?	138	(1)
Productivity: Its Role and Determinants	138	(4)
Why Productivity Is So Important	138	(1)
How Productivity Is Determined	139	(2)
FYI: The Production Function	141	(1)
Case Study: Are Natural Resources a Limit to Growth?	141	(1)
Economic Growth and Public Policy	142	(13)
Saving and Investment	143	(1)
Diminishing Returns and the Catch-Up Effect	143	(2)
Investment from Abroad	145	(1)
Education	146	(1)
Health and Nutrition	146	(1)
In the News: Promoting Human Capital	147	(1)
Property Rights and Political Stability	148	(1)
Free Trade	149	(1)
Research and Development	150	(1)
Population Growth	150	(1)
In the News: Rich Farmers versus the World's Poor	151	(1)
In the News: Foreign Aid	152	(3)
Conclusion: The Importance of Long-Run Growth	155	(1)
Summary	155	(1)
Key Concepts	156	(1)
Questions for Review	156	(1)
Problems and Applications	156	(3)
Saving, Investment, and the Financial System	159	(22)
Financial Institutions in the U.S. Economy	160	(5)
Financial Markets	160	(2)
Financial Intermediaries	162	(1)
FYI: How to Read the Newspaper's Stock Tables	163	(2)
Summing Up	165	(1)
Saving and Investment in the National Income Accounts	165	(3)
Some Important Identities	166	(1)
The Meaning of Saving and Investment	167	(1)
The Market for Loanable Funds	168	(8)
Supply and Demand for Loanable Funds	168	(2)
Policy 1: Saving Incentives	170	(1)
Policy 2: Investment Incentives	171	(1)
Policy 3: Government Budget Deficits and Surpluses	172	(2)
Case Study: The History of U.S. Government Debt	174	(2)
Conclusion	176	(1)
Summary	177	(1)
Key Concepts	177	(1)
Questions for Review	177	(1)
Problems and Applications	178	(3)
The Basic Tools of Finance	181	(16)
Present Value: Measuring the Time Value of Money	182	(2)
FYI: The Magic of Compounding and the Rule of 70	184	(1)
Managing Risk	184	(5)
Risk Aversion	184	(1)
The Markets for Insurance	185	(1)
FYI: The Peculiarities of Health Insurance	186	(1)
Diversification of Firm-Specific Risk	187	(1)
The Trade-off between Risk and Return	188	(1)
Asset Valuation	189	(4)
Fundamental Analysis	190	(1)
The Efficient Markets Hypothesis	190	(1)
Case Study: Random Walks and Index Funds	191	(1)
In the News: Nobel Caliber Investment Advice	192	(1)
Market Irrationality	193	(1)
Conclusion	193	(1)
Summary	194	(1)
Key Concepts	194	(1)
Questions for Review	194	(1)
Problems and Applications	195	(2)
Unemployment	197	(26)
Identifying Unemployment	198	(9)
How Is Unemployment Measured?	198	(3)
Case Study: Labor-Force Participation of Men and Women in the U.S. Economy	201	(1)
Does the Unemployment Rate Measure What We Want It To?	202	(2)
In the News: The Rise of Adult Male Joblessness	204	(1)
How Long Are the Unemployed without Work?	204	(2)
Why Are There Always Some People Unemployed?	206	(1)
Job Search	207	(4)
Why Some Frictional Unemployment Is Inevitable	207	(1)
Public Policy and Job Search	207	(1)
In the News: German Unemployment	208	(2)
Unemployment Insurance	210	(1)
Minimum-Wage Laws	211	(2)
FYI: Who Earns the Minimum Wage?	212	(1)
Unions and Collective Bargaining	213	(3)
The Economics of Unions	213	(1)
Are Unions Good or Bad for the Economy?	214	(1)
In the News: Should You Join a Union?	215	(1)
The Theory of Efficiency Wages	216	(2)
Worker Health	216	(1)
Worker Turnover	216	(1)
Worker Quality	217	(1)
Worker Effort	217	(1)
Case Study: Henry Ford and the Very Generous $5-a-Day Wage	218	(1)
Conclusion	218	(1)
Summary	219	(1)
Key Concepts	219	(1)
Questions for Review	220	(1)
Problems and Applications	220	(3)
PART 5 MONEY AND PRICES IN THE LONG RUN	223	(50)
The Monetary System	225	(20)
The Meaning of Money	226	(6)
The Functions of Money	226	(1)
The Kinds of Money	227	(1)
In the News: The History of Money	228	(1)
Money in the U.S. Economy	229	(2)
FYI: Credit Cards, Debit Cards, and Money	231	(1)
Case Study: Where Is All the Currency?	231	(1)
The Federal Reserve System	232	(2)
The Fed's Organization	232	(1)
The Federal Open Market Committee	233	(1)
Banks and the Money Supply	234	(7)
The Simple Case of 100-Percent-Reserve Banking	234	(1)
Money Creation with Fractional-Reserve Banking	235	(1)
The Money Multiplier	236	(1)
The Fed's Tools of Monetary Control	237	(2)
Problems in Controlling the Money Supply	239	(1)
Case Study: Bank Runs and the Money Supply	239	(1)
FYI: The Federal Funds Rate	240	(1)
Conclusion	241	(1)
Summary	241	(1)
Key Concepts	242	(1)
Questions for Review	242	(1)
Problems and Applications	242	(3)
Money Growth and Inflation	245	(28)
The Classical Theory of Inflation	246	(13)
The Level of Prices and the Value of Money	246	(1)
Money Supply, Money Demand, and Monetary Equilibrium	247	(1)
The Effects of a Monetary Injection	248	(1)
A Brief Look at the Adjustment Process	249	(2)
The Classical Dichotomy and Monetary Neutrality	251	(1)
Velocity and the Quantity Equation	252	(2)
Case Study: Money and Prices during Four Hyperinflations	254	(1)
The Inflation Tax	255	(1)
In the News: The German Hyperinflation	256	(1)
The Fisher Effect	257	(2)
The Costs of Inflation	259	(9)
A Fall in Purchasing Power? The Inflation Fallacy	260	(1)
Shoeleather Costs	260	(1)
Menu Costs	261	(1)
Relative-Price Variability and the Misallocation of Resources	262	(1)
Inflation-Induced Tax Distortions	262	(2)
Confusion and Inconvenience	264	(1)
A Special Cost of Unexpected Inflation: Arbitrary Redistributions of Wealth	264	(1)
Case Study: The Wizard of Oz and the Free-Silver Debate	265	(1)
In the News: How to Protect Your Savings from Inflation	266	(2)
Conclusion	268	(1)
Summary	269	(1)
Key Concepts	269	(1)
Questions for Review	269	(1)
Problems and Applications	270	(3)
PART 6 THE MACROECONOMICS OF OPEN ECONOMIES	273	(48)
Open-Economy Macroeconomics: Basic Concepts	275	(24)
The International Flows of Goods and Capital	276	(9)
The Flow of Goods: Exports, Imports, and Net Exports	276	(1)
Case Study: The Increasing Openness of the U.S. Economy	277	(1)
The Flow of Financial Resources: Net Capital Outflow	278	(1)
The Equality of Net Exports and Net Capital Outflow	279	(1)
Saving, Investment, and Their Relationship to the International Flows	280	(1)
In the News: Americans Rely on Capital Flows from Abroad	281	(1)
Summing Up	282	(1)
Case Study: Is the U.S. Trade Deficit a National Problem?	283	(2)
The Prices for International Transactions: Real and Nominal Exchange Rates	285	(3)
Nominal Exchange Rates	285	(1)
Real Exchange Rates	286	(1)
FYI: The Euro	287	(1)
A First Theory of Exchange-Rate Determination: Purchasing-Power Parity	288	(7)
The Basic Logic of Purchasing-Power Parity	289	(1)
Implications of Purchasing-Power Parity	289	(2)
Case Study: The Nominal Exchange Rate during a Hyperinflation	291	(1)
In the News: The Starbucks Index	292	(1)
Limitations of Purchasing-Power Parity	292	(2)
Case Study: The Hamburger Standard	294	(1)
Conclusion	295	(1)
Summary	295	(1)
Key Concepts	295	(1)
Questions for Review	296	(1)
Problems and Applications	296	(3)
A Macroeconomic Theory of the Open Economy	299	(22)
Supply and Demand for Loanable Funds and for Foreign-Currency Exchange	300	(4)
The Market for Loanable Funds	300	(2)
The Market for Foreign-Currency Exchange	302	(2)
FYI: Purchasing-Power Parity as a Special Case	304	(1)
Equilibrium in the Open Economy	304	(4)
Net Capital Outflow: The Link between the Two Markets	304	(1)
Simultaneous Equilibrium in Two Markets	305	(2)
FYI: Disentangling Supply and Demand	307	(1)
How Policies and Events Affect an Open Economy	308	(8)
Government Budget Deficits	308	(2)
In the News: The U.S. Trade Deficit	310	(1)
Trade Policy	311	(2)
Political Instability and Capital Flight	313	(2)
Case Study: Could Capital Flee from the United States?	315	(1)
Conclusion	316	(1)
Summary	317	(1)
Key Concepts	317	(1)
Questions for Review	318	(1)
Problems and Applications	318	(3)
PART 7 SHORT-RUN ECONOMIC FLUCTUATIONS	321	(94)
Aggregate Demand and Aggregate Supply	323	(38)
Three Key Facts about Economic Fluctuations	324	(2)
Fact 1: Economic Fluctuations Are Irregular and Unpredictable	324	(1)
Fact 2: Most Macroeconomic Quantities Fluctuate Together	324	(2)
Fact 3: As Output Falls, Unemployment Rises	326	(1)
Explaining Short-Run Economic Fluctuations	326	(4)
The Assumptions of Classical Economics	326	(1)
In the News: Offbeat Indicators	327	(1)
The Reality of Short-Run Fluctuations	328	(1)
The Model of Aggregate Demand and Aggregate Supply	328	(2)
The Aggregate-Demand Curve	330	(4)
Why the Aggregate-Demand Curve Slopes Downward	330	(3)
Why the Aggregate-Demand Curve Might Shift	333	(1)
The Aggregate-Supply Curve	334	(10)
Why the Aggregate-Supply Curve Is Vertical in the Long Run	335	(1)
Why the Long-Run Aggregate-Supply Curve Might Shift	336	(2)
Using Aggregate Demand and Aggregate Supply to Depict Long-Run Growth and Inflation	338	(1)
Why the Aggregate-Supply Curve Slopes Upward in the Short Run	339	(3)
Why the Short-Run Aggregate-Supply Curve Might Shift	342	(2)
Two Causes of Economic Fluctuations	344	(11)
The Effects of a Shift in Aggregate Demand	345	(2)
FYI: Monetary Neutrality Revisited	347	(1)
Case Study: Two Big Shifts in Aggregate Demand: The Great Depression and World War II	348	(1)
Case Study: The Recession of 2001	349	(1)
FYI: The Origins of Aggregate Demand and Aggregate Supply	350	(1)
The Effects of a Shift in Aggregate Supply	351	(2)
Case Study: Oil and the Economy	353	(1)
FYI: The Macroeconomic Impact of Hurricane Katrina	354	(1)
Conclusion	355	(1)
Summary	355	(1)
Key Concepts	356	(1)
Questions for Review	356	(1)
Problems and Applications	357	(4)
The Influence of Monetary and Fiscal Policy on Aggregate Demand	361	(24)
How Monetary Policy Influences Aggregate Demand	362	(9)
The Theory of Liquidity Preference	363	(2)
The Downward Slope of the Aggregate-Demand Curve	365	(1)
FYI: Interest Rates in the Long Run and the Short Run	366	(2)
Changes in the Money Supply	368	(1)
The Role of Interest-Rate Targets in Fed Policy	369	(1)
Case Study: Why the Fed Watches the Stock Market (and Vice Versa)	370	(1)
How Fiscal Policy Influences Aggregate Demand	371	(6)
Changes in Government Purchases	371	(1)
The Multiplier Effect	371	(1)
A Formula for the Spending Multiplier	372	(1)
Other Applications of the Multiplier Effect	373	(1)
The Crowding-Out Effect	374	(1)
Changes in Taxes	375	(1)
FYI: How Fiscal Policy Might Affect Aggregate Supply	376	(1)
Using Policy to Stabilize the Economy	377	(3)
The Case for Active Stabilization Policy	377	(1)
Case Study: Keynesians in the White House	378	(1)
The Case against Active Stabilization Policy	379	(1)
Automatic Stabilizers	380	(1)
Conclusion	380	(1)
Summary	381	(1)
Key Concepts	381	(1)
Questions for Review	382	(1)
Problems and Applications	382	(3)
The Short-Run Trade-Off Between Inflation and Unemployment	385	(30)
The Phillips Curve	386	(3)
Origins of the Phillips Curve	386	(1)
Aggregate Demand, Aggregate Supply, and the Phillips Curve	387	(2)
Shifts in the Phillips Curve: The Role of Expectations	389	(9)
The Long-Run Phillips Curve	389	(3)
The Meaning of ``Natural''	392	(1)
Reconciling Theory and Evidence	392	(1)
The Short-Run Phillips Curve	393	(2)
The Natural Experiment for the Natural-Rate Hypothesis	395	(2)
In the News: How to Keep Expected Inflation Low	397	(1)
Shifts in the Phillips Curve: The Role of Supply Shocks	398	(2)
The Cost of Reducing Inflation	400	(8)
The Sacrifice Ratio	401	(1)
Rational Expectations and the Possibility of Costless Disinflation	402	(1)
The Volcker Disinflation	403	(2)
The Greenspan Era	405	(1)
In the News: The Case for Inflation Targeting	406	(1)
Case Study: Why Were Inflation and Unemployment So Low at the End of the 1990s?	406	(2)
Conclusion	408	(1)
Summary	409	(1)
Key Concepts	410	(1)
Questions for Review	410	(1)
Problems and Applications	411	(4)
PART 8 FINAL THOUGHTS	415	(26)
Five Debates Over Macroeconomic Policy	417	(24)
Should Monetary and Fiscal Policymakers Try to Stabilize the Economy?	418	(2)
Pro: Policymakers Should Try to Stabilize the Economy	418	(1)
Con: Policymakers Should Not Try to Stabilize the Economy	418	(2)
In the News: The Fine-Tuning of George W. Bush	420	(1)
Should Monetary Policy Be Made by Rule Rather Than by Discretion?	420	(5)
Pro: Monetary Policy Should Be Made by Rule	421	(1)
In the News: Inflation Targeting as a Rule for Monetary Policy	422	(2)
Con: Monetary Policy Should Not Be Made by Rule	424	(1)
Should the Central Bank Aim for Zero Inflation?	425	(3)
Pro: The Central Bank Should Aim for Zero Inflation	425	(1)
Con: The Central Bank Should Not Aim for Zero Inflation	426	(1)
In the News: The Optimal Rate of Inflation	427	(1)
Should the Government Balance Its Budget?	428	(4)
Pro: The Government Should Balance Its Budget	428	(1)
Con: The Government Should Not Balance Its Budget	429	(1)
In the News: Dealing with Deficits	430	(2)
Should the Tax Laws Be Reformed to Encourage Saving?	432	(3)
Pro: The Tax Laws Should Be Reformed to Encourage Saving	432	(2)
In the News: Tax Reform	434	(1)
Con: The Tax Laws Should Not Be Reformed to Encourage Saving	434	(1)
Conclusion	435	(1)
Summary	436	(1)
Questions for Review	437	(1)
Problems and Applications	437	(4)
Appendix: Quick Quiz Answers	441	(10)
Glossary	451	(4)
Index	455