Economics A Contemporary Introduction (with InfoTrac)

by McEachern, William A.

• ISBN13: 9780324288605
• ISBN10: 0324288603
• Edition: 7th
• Format: Hardcover
• Copyright: 2005-01-05
• Publisher: South-Western College Pub

Summary

This very successful textbook is distinguished by a superior writing style that draws upon common student experiences to introduce economic concepts, making economic theory more accessible and interesting. "Case Studies" and numerous examples take advantage of students' intuitive knowledge of economics, building upon real-life situations. A streamlined design places pedagogy and illustrations directly within the flow of the text, making them less distracting and more useful for students. A fully integrated program of technology enhancements sets this text apart by pairing the book with numerous online multimedia learning tools that have been developed to help the text better serve a wide range of learning styles. The text uniquely integrates classroom use of The Wall Street Journal by including in-text pedagogy to help readers learn to analyze the latest economic events as reported in the Journal.

Table of Contents

Part 1 Introduction to Economics
The Art and Science of Economic Analysis	1	(26)
The Economic Problem: Scarce Resources, Unlimited Wants	2	(4)
Resources	2	(1)
Goods and Services	3	(1)
Economic Decision Makers	4	(1)
A Simple Circular-Flow Model	4	(2)
The Art of Economic Analysis	6	(2)
Rational Self-Interest	6	(1)
Choice Requires Time and Information	6	(1)
Economic Analysis Is Marginal Analysis	7	(1)
Microeconomics and Macroeconomics	7	(1)
The Science of Economic Analysis	8	(12)
The Role of Theory	8	(1)
The Scientific Method	8	(2)
Normative Versus Positive	10	(1)
Economists Tell Stories	10	(1)
Case Study: A Yen for Vending Machines	11	(1)
Predicting Average Behavior	12	(1)
Some Pitfalls of Faulty Economic Analysis	12	(1)
If Economists Are So Smart, Why Aren't They Rich?	13	(1)
Case Study: College Major and Career Earnings	13	(7)
Appendix: Understanding Graphs	20	(7)
Drawing Graphs	21	(1)
The Slopes of Straight Lines	22	(1)
The Slope, Units of Measurement, and Marginal Analysis	22	(2)
The Slopes of Curved Lines	24	(1)
Line Shifts	25	(2)
Some Tools of Economic Analysis	27	(19)
Choice and Opportunity Cost	28	(3)
Opportunity Cost	28	(1)
Case Study: The Opportunity Cost of College	28	(1)
Opportunity Cost Is Subjective	29	(1)
Sunk Cost and Choice	30	(1)
Comparative Advantage, Specialization, and Exchange	31	(3)
The Law of Comparative Advantage	31	(1)
Absolute Advantage Versus Comparative Advantage	31	(1)
Specialization and Exchange	32	(1)
Division of Labor and Gains from Specialization	33	(1)
Case Study: Specialization Abound	33	(1)
The Economy's Production Possibilities	34	(5)
Efficiency and the Production Possibilities Frontier	34	(1)
Inefficient and Unattainable Production	35	(1)
The Shape of the Production Possibilities Frontier	35	(1)
What Can Shift the Production Possibilities Frontier?	36	(1)
What Can We Learn from the PPF?	37	(1)
Three Questions Every Economic System Must Answer	38	(1)
Economic Systems	39	(7)
Pure Capitalism	39	(1)
Pure Command System	40	(1)
Mixed and Transitional Economies	41	(1)
Economies Based on Custom or Religion	41	(5)
Economic Decision Makers	46	(18)
The Household	47	(2)
The Evolution of the Household	47	(1)
Households Maximize Utility	47	(1)
Households as Resource Suppliers	48	(1)
Households as Demanders of Goods and Services	49	(1)
The Firm	49	(4)
The Evolution of the Firm	49	(1)
Types of Firms	50	(2)
Nonprofit Institutions	52	(1)
Why Does Household Production Still Exist?	52	(1)
Case Study: The Electronic Cottage	53	(1)
The Government	53	(5)
The Role of Government	54	(1)
Government's Structure and Objectives	55	(1)
The Size and Growth of Government	56	(1)
Sources of Government Revenue	57	(1)
Tax Principles and Tax Incidence	57	(1)
The Rest of the World	58	(6)
International Trade	59	(1)
Exchange Rates	60	(1)
Trade Restrictions	60	(1)
Case Study: Wheels of Fortune	60	(4)
Demand and Supply Analysis	64	(25)
Demand	65	(5)
The Law of Demand	65	(1)
The Demand Schedule and Demand Curve	66	(2)
Shifts of the Demand Curve	68	(1)
Changes in Consumer Income	68	(1)
Changes in the Prices of Related Goods	68	(1)
Changes in Consumer Expectations	69	(1)
Changes in the Number or Composition of Consumers	70	(1)
Changes in Consumer Tastes	70	(1)
Supply	70	(6)
The Supply Schedule and Supply Curve	71	(1)
Shifts of the Supply Curve	72	(1)
Changes in Technology	72	(1)
Changes in the Prices of Relevant Resources	72	(1)
Changes in the Prices of Alternative Goods	72	(1)
Changes in Producer Expectations	73	(1)
Changes in the Number of Producers	73	(1)
Demand and Supply Create a Market	74	(1)
Markets	74	(1)
Market Equilibrium	74	(2)
Changes in Equilibrium Price and Quantity	76	(5)
Shifts of the Demand Curve	76	(1)
Shifts of the Supply Curve	77	(2)
Simultaneous Shifts of Demand and Supply Curves	79	(1)
Case Study: The Market for Professional Basketball	80	(1)
Disequilibrium	81	(8)
Price Floors	81	(1)
Price Ceilings	81	(2)
Case Study: The Toy Business Is Not Child's Play	83	(6)
Part 2 Introduction to the Market System
Elasticity of Demand and Supply	89	(26)
Price Elasticity of Demand	90	(6)
Calculating Price Elasticity of Demand	90	(2)
Categories of Price Elasticity of Demand	92	(1)
Elasticity and Total Revenue	92	(1)
Price Elasticity and the Linear Demand Curve	92	(2)
Constant-Elasticity Demand Curves	94	(2)
Determinants of the Price Elasticity of Demand	96	(4)
Availability of Substitutes	96	(1)
Proportion of the Consumer's Budget Spent on the Good	97	(1)
A Matter of Time	97	(1)
Elasticity Estimates	98	(1)
Case Study: Deterring Young Smokers	99	(1)
Price Elasticity of Supply	100	(4)
Constant Elasticity Supply Curves	101	(2)
Determinants of Supply Elasticity	103	(1)
Other Elasticity Measures	104	(8)
Income Elasticity of Demand	104	(1)
Case Study: The Market for Food and ``The Farm Problem''	105	(2)
Cross-Price Elasticity of Demand	107	(5)
Appendix: Price Elasticity and Tax Incidence	112	(3)
Demand Elasticity and Tax Incidence	112	(1)
Supply Elasticity and Tax Incidence	113	(2)
Consumer Choice and Demand	115	(25)
Utility Analysis	116	(1)
Tastes and Preferences	116	(1)
The Law of Diminishing Marginal Utility	117	(1)
Measuring Utility	117	(11)
Units of Utility	117	(1)
Utility Maximization in a World Without Scarcity	118	(1)
Utility Maximization in a World of Scarcity	119	(1)
Utility-Maximizing Conditions	120	(1)
Case Study: Water, Water, Everywhere	121	(1)
The Law of Demand and Marginal Utility	122	(2)
Consumer Surplus	124	(1)
Market Demand and Consumer Surplus	125	(2)
Case Study: The Marginal Value of Free Medical Care	127	(1)
The Role of Time in Demand	128	(5)
Appendix: Indifference Curves and Utility Maximization	133	(7)
Consumer Preferences	133	(2)
The Budget Line	135	(1)
Consumer Equilibrium at the Tangency	136	(1)
Effects of a Change in Price	137	(1)
Income and Substitution Effects	137	(3)
Production and Cost in the Firm	140	(25)
Cost and Profit	141	(2)
Explicit and Implicit Costs	141	(1)
Alternative Measures of Profit	141	(2)
Production in the Short Run	143	(3)
Fixed and Variable Resources	143	(1)
The Law of Diminishing Marginal Returns	143	(1)
The Total and Marginal Product Curves	144	(2)
Costs in the Short Run	146	(4)
Total Cost and Marginal Cost in the Short Run	146	(2)
Average Cost in the Short Run	148	(1)
The Relationship Between Marginal Cost and Average Cost	149	(1)
Costs in the Long Run	150	(10)
The Long-Run Average Cost Curve	150	(2)
Economies of Scale	152	(1)
Diseconomies of Scale	152	(1)
Case Study: At the Movies	153	(1)
Economies and Diseconomies of Scale at the Firm Level	154	(1)
Case Study: Billions and Billions of Burgers	154	(6)
Appendix: A Closer Look at Production and Costs	160	(5)
The Production Function and Efficiency	160	(1)
Isoquants	160	(2)
Isocost Lines	162	(1)
The Choice of Input Combinations	163	(1)
The Expansion Path	163	(2)
Part 3 Market Structure and Pricing
Perfect Competition	165	(28)
An Introduction to Perfect Competition	166	(2)
Perfectly Competitive Market Structure	166	(1)
Demand Under Perfect Competition	167	(1)
Short-Run Profit Maximization	168	(3)
Total Revenue Minus Total Cost	168	(1)
Marginal Revenue Equals Marginal Cost	169	(2)
Economic Profit in the Short Run	171	(1)
Minimizing Short-Run Losses	171	(3)
Fixed Cost and Minimizing Losses	171	(1)
Marginal Revenue Equals Marginal Cost	172	(2)
Shutting Down in the Short Run	174	(1)
The Firm and Industry Short-Run Supply Curves	174	(4)
The Short-Run Firm Supply Curve	174	(1)
The Short-Run Industry Supply Curve	175	(1)
Firm Supply and Market Equilibrium	176	(92)
Case Study: Winner-Take-All Labor Markets	268
Perfect Competition in the Long Run	178	(4)
Zero Economic Profit in the Long Run	179	(1)
The Long-Run Adjustment to a Change in Demand	179	(3)
The Long-Run Industry Supply Curve	182	(3)
Constant-Cost Industries	182	(1)
Increasing-Cost Industries	183	(2)
Perfect Competition and Efficiency	185	(8)
Productive Efficiency: Making Stuff Right	185	(1)
Allocative Efficiency: Making the Right Stuff	185	(1)
What's So Perfect About Perfect Competition?	185	(2)
Case Study: Experimental Economics	187	(6)
Monopoly	193	(23)
Barriers to Entry	194	(3)
Legal Restrictions	194	(1)
Economics of Scale	195	(1)
Control of Essential Resources	195	(1)
Case Study: Is a Diamond Forever?	196	(1)
Revenue for the Monopolist	197	(4)
Demand, Average Revenue, and Marginal Revenue	197	(1)
The Gains and Loss from Selling One More Unit	198	(1)
Revenue Schedules	199	(1)
Revenue Curves	199	(2)
The Firm's Costs and Profit Maximization	201	(4)
Profit Maximization	201	(3)
Short-Run Losses and the Shutdown Decision	204	(1)
Long-Run Profit Maximization	204	(1)
Monopoly and the Allocation of Resources	205	(2)
Price and Output Under Perfect Competition	205	(1)
Price and Output Under Monopoly	206	(1)
Allocative and Distributive Effects	206	(1)
Problems Estimating the Deadweight Loss of Monopoly	207	(2)
Why the Deadweight Loss of Monopoly Might Be Lower	207	(1)
Why the Deadweight Loss Might Be Higher	207	(1)
Case Study: The Mail Monopoly	208	(1)
Price Discrimination	209	(7)
Conditions for Price Discrimination	209	(1)
A Model of Price Discrimination	209	(1)
Examples of Price Discrimination	210	(1)
Perfect Price Discrimination: The Monopolist's Dream	211	(5)
Monopolistic Competition and Oligopoly	216	(23)
Monopolistic Competition	217	(7)
Characteristics of Monopolistic Competition	217	(1)
Product Differentiation	217	(1)
Short-Run Profit Maximization or Loss Minimization	218	(2)
Zero Economic Profit in the Long Run	220	(1)
Case Study: Fast Forward	221	(1)
Monopolistic Competition and Perfect Competition Compared	222	(2)
An Introduction to Oligopoly	224	(3)
Varieties of Oligopoly	224	(1)
Case Study: The Unfriendly Skies	225	(1)
Economies of Scale	225	(1)
The High Cost of Fntry	226	(1)
Crowding Out the Competition	226	(1)
Models of Oligopoly	227	(12)
Collusion and Cartels	227	(2)
Price Leadership	229	(1)
Game Theory	230	(4)
Comparison of Oligopoly and Perfect Competition	234	(5)
Part 4 Resource Markets
Resource Markets	239	(20)
The Once-Over	240	(1)
Resource Demand	240	(1)
Resource Supply	240	(1)
The Demand and Supply of Resources	241	(6)
The Market Demand for Resources	241	(1)
The Market Supply of Resources	242	(1)
Temporary and Permanent Resource Price Differences	242	(2)
Opportunity Cost and Economic Rent	244	(3)
A Closer Look at Resource Demand	247	(12)
The Firm's Demand for a Resource	247	(1)
Marginal Revenue Product	248	(1)
Marginal Resource Cost	249	(2)
Shifts of the Demand for Resources	251	(1)
Case Study: The Derived Demand for Architects	252	(1)
The Optimal Use of More Than One Resource	253	(1)
Case Study: The McMinimum Wage	253	(6)
Labor Markets and Labor Unions	259	(23)
Labor Supply	260	(10)
Labor Supply and Utility Maximization	260	(2)
Wages and Individual Labor Supply	262	(1)
Nonwage Determinants of Labor Supply	263	(2)
Market Supply of Labor	265	(1)
Why Wages Differ	266	(2)
Case Study: Winner-Take-All Labor Markets	268	(2)
Unions and Collective Bargaining	270	(1)
Types of Unions	270	(1)
Collective Bargaining	271	(1)
The Strike	271	(1)
Union Wages and Employment	271	(11)
Inclusive, or Industrial, Unions: Negotiating a Higher Industry Wage	271	(2)
Exclusive, or Craft, Unions: Reducing Labor Supply	273	(1)
Increasing Demand for Union Labor	274	(1)
Recent Trends in Union Membership	275	(2)
Case Study: Unionizing Information Technology Workers	277	(5)
Capital, Interest, and Corporate Finance	282	(17)
The Role of Time in Production and Consumption	283	(7)
Production, Saving, and Time	283	(1)
Consumption, Saving, and Time	284	(1)
Optimal Investment	284	(3)
Case Study: The Value of a Good Idea---Intellectual Property	287	(1)
The Market for Loanable Funds	288	(1)
Why Interest Rates Differ	289	(1)
Present Value and Discounting	290	(4)
Present Value of Payment One Year Hence	291	(1)
Present Value for Payments in Later Years	291	(1)
Present Value of an Income Stream	292	(1)
Present Value of an Annuity	292	(1)
Case Study: The Million-Dollar Lottery?	293	(1)
Corporate Finance	294	(5)
Corporate Stock and Retained Earnings	294	(1)
Corporate Bonds	295	(1)
Securities Exchanges	295	(4)
Transaction Costs, Imperfect Information, and Market Behavior	299	(18)
Rationale for the Firm and Its Scope of Operation	300	(5)
The Firm Reduces Transaction Costs	300	(1)
The Boundaries of the Firm	301	(3)
Case Study: The Trend Towards Outsourcing	304	(1)
Economies of Scope	305	(1)
Market Behavior with Imperect Information	305	(3)
Optimal Search with Imperfect Information	306	(1)
The Winner's Curse	307	(1)
Asymmetric Information in Product Markets	308	(3)
Hidden Characteristics: Adverse Selection	308	(1)
Hidden Actions: The Principal-Agent Problem	309	(1)
Asymmetric Information in Insurance Markets	310	(1)
Coping with Asymmetric Information	310	(1)
Asymmetric Information in Labor Markets	311	(6)
Adverse Selection in Labor Markets	311	(1)
Signaling and Screening	311	(1)
Case Study: The Reputation of a Big Mac	312	(5)
Part 5 Market Failure and Public Policy
Economic Regulation and Antitrust Policy	317	(21)
Business Behavior, Public Policy, and Government Regulation	318	(1)
Regulating Natural Monopolies	319	(2)
Unregulated Profit Maximization	319	(1)
Setting Price Equal to Marginal Cost	319	(1)
Subsidizing the Natural Monopolist	320	(1)
Setting Price Equal to Average Cost	321	(1)
The Regulatory Dilemma	321	(1)
Alternative Theories of Economic Regulation	321	(3)
Producers' Special Interest in Economic Regulation	322	(1)
Case Study: Airline Regulation and Deregulation	322	(2)
Antitrust Law and Enforcement	324	(5)
Origins of Antitrust Policy	324	(2)
Antitrust Law Enforcement	326	(1)
Per Se Illegality and the Rule of Reason	326	(1)
Mergers and Public Policy	326	(1)
Merger Waves	327	(2)
Competitive Trends in the U.S. Economy	329	(9)
Market Competition over Time	329	(2)
Case Study: Microsoft on Trial	331	(1)
Recent Competitive Trends	332	(1)
Problems with Antitrust Policy	333	(5)
Public Goods and Public Choice	338	(19)
Public Goods	339	(3)
Private Goods, Public Goods, and In Between	339	(1)
Optimal Provision of Public Goods	340	(2)
Paying for Public Goods	342	(1)
Public Choice in a Representative Democracy	342	(9)
Median Voter Model	342	(1)
Special Interest and Rational Ignorance	343	(1)
Distribution of Benefits and Costs	344	(2)
Case Study: Farm Subsidies	346	(2)
Rent Seeking	348	(1)
Case Study: Campaign Finance Reform	349	(1)
The Underground Economy	350	(1)
Bureaucracy and Representative Democracy	351	(6)
Ownership and Funding of Bureaus	351	(1)
Ownership and Organizational Behavior	351	(1)
Bureaucratic Objectives	352	(1)
Private Versus Public Production	353	(4)
Externalities and the Environment	357	(23)
Externalities and the Common-Pool Problem	358	(2)
Renewable Resources	358	(1)
Resolving the Common-Pool Problem	359	(1)
Optimal Level of Pollution	360	(8)
External Costs with Fixed Technology	360	(1)
External Costs with Variable Technology	361	(3)
Case Study: Destruction of the Tropical RainForests	364	(1)
The Coase Theorem	365	(1)
Markets for Pollution Rights	366	(1)
Pollution Rights and Public Choice	367	(1)
Environmental Protection	368	(5)
Air Pollution	368	(1)
Case Study: City in the Clouds	369	(2)
Water Pollution	371	(1)
Hazardous Waste and the Superfund	371	(1)
Solid Waste: ``Paper or Plastic?''	372	(1)
Positive Externalities	373	(7)
Income Distribution and Poverty	380	(22)
The Distribution of Household Income	381	(4)
Income Distribution by Quintiles	381	(1)
The Lorenz Curve	381	(1)
A College Education Pays More	382	(2)
Problems with Distribution Benchmarks	384	(1)
Why Incomes Differ	384	(1)
Poverty and the Poor	385	(4)
Official Poverty Level	385	(1)
Programs to Help the Poor	386	(3)
Who Are the Poor?	389	(5)
Poverty and Age	389	(1)
Poverty and Public Choice	389	(1)
The Feminization of Poverty	390	(2)
Poverty and Discrimination	392	(1)
Affirmative Action	393	(1)
Unintended Consequences of Income Assistance	394	(1)
Disincentives	394	(1)
Does Welfare Cause Dependency?	395	(1)
Welfare Reform	395	(7)
Case Study: Is Welfare-to-Work Working?	396	(1)
Recent Reforms	396	(2)
Case Study: Oregon's Program of ``Tough Love''	398	(4)
Part 6 International Microeconomics
International Trade	402	(23)
The Gains from Trade	403	(6)
A Profile of Exports and Imports	403	(2)
Production Possibilities Without Trade	405	(1)
Consumption Possibilities Based on Comparative Advantage	406	(2)
Reasons for International Specialization	408	(1)
Trade Restrictions and Welfare Loss	409	(8)
Tariffs	410	(1)
Import Quotas	411	(2)
Quotas in Practice	413	(1)
Tariffs and Quotas Compared	413	(1)
Other Trade Restrictions	413	(1)
Freer Trade by Multilateral Agreement	414	(1)
The World Trade Organization	414	(1)
Case Study: The WTO and the ``Battle in Seattle''	415	(1)
Common Markets	416	(1)
Arguments for Trade Restrictions	417	(8)
National Defense Argument	417	(1)
Infant Industry Argument	417	(1)
Antidumping Argument	417	(1)
Jobs and Income Argument	418	(1)
Declining Industries Argument	419	(1)
Problems with Protection	419	(1)
Case Study: Bush's Steel Tariffs	420	(1)
Import Substitution Versus Export Promotion	421	(4)
Part 7 Fundamentals of Macroeconomics
Introduction to Macroeconomics	425	(20)
The National Economy	426	(2)
What's Special About the National Economy?	426	(1)
The Human Body and the U.S. Economy	427	(1)
Knowledge and Performance	427	(1)
Economic Fluctuations and Growth	428	(4)
U.S. Economic Fluctuations	428	(2)
Case Study: The Global Economy	430	(2)
Leading Economic Indicators	432	(1)
Aggregate Demand and Aggregate Supply	432	(3)
Aggregate Output and the Price Level	432	(1)
The Aggregate Demand Curve	433	(1)
The Aggregate Supply Curve	434	(1)
Equilibrium	434	(1)
A Short History of the U.S. Economy	435	(10)
The Great Depression and Before	435	(1)
The Age of Keynes: After the Great Depression to the Early 1970s	436	(2)
The Great Stagflation: 1973 to 1980	438	(1)
Experience Since 1980	439	(1)
Case Study: Over Seven Decades of Real GDP and Price Levels	440	(5)
Productivity and Growth	445	(22)
Theory of Productivity and Growth	446	(5)
Growth and the Production Possibilities Frontier	446	(2)
What Is Productivity?	448	(1)
Labor Productivity	448	(1)
The Per-Worker Production Function	449	(1)
Technological Change	450	(1)
Rules of the Game	451	(1)
Productivity and Growth in Practice	451	(7)
Education and Economic Development	452	(1)
U.S. Labor Productivity	453	(1)
Slowdown and Rebound in Productivity Growth	454	(1)
Case Study: Computers and Productivity Growth	455	(1)
Output per Capita	456	(1)
International Comparisons	456	(2)
Other Issues of Technology and Growth	458	(9)
Does Technological Change Lead to Unemployment?	459	(1)
Research and Development	459	(2)
Do Economies Converge	461	(1)
Industrial Policy	462	(1)
Case Study: Picking Technological Winners	462	(5)
Measuring the Economy and the Circular Flow	467	(22)
The Product of a Nation	468	(3)
National Income Accounts	468	(1)
GDP Based on the Expenditure Approach	469	(1)
GDP Based on the Income Approach	470	(1)
The Circular Flow of Income and Expenditure	471	(3)
The Income Half of the Circular Flow	471	(2)
The Expenditure Half of the Circular Flow	473	(1)
Leakages Equal Injections	474	(1)
Limitations of National Income Accounting	474	(3)
Some Production Is Not Included in GDP	474	(1)
Leisure, Quality, and Variety	475	(1)
Case Study: Tracking a $12 Trillion Economy	475	(1)
What's Gross about Gross Domestic Product?	476	(1)
GDP Does Not Reflect All Costs	476	(1)
GDP and Economic Welfare	477	(1)
Accounting for Price Changes	477	(9)
Price Indexes	477	(1)
Consumer Price Index	478	(1)
Problems with the CPI	479	(1)
The GDP Price Index	480	(1)
Moving from Fixed Weights to Chain Weights	480	(1)
Case Study: Computer Prices and GDP Estimation	481	(5)
Appendix: National Income Accounts	486	(3)
National Income	486	(1)
Personal and Disposable Income	486	(1)
Summary of National Income Accounts	486	(1)
Summary Income Statement of the Economy	487	(2)
Unemployment and Inflation	489	(23)
Unemployment	490	(9)
Measuring Unemployment	490	(2)
Labor Force Participation Rate	492	(1)
Unemployment over Time	492	(1)
Unemployment in Various Groups	492	(1)
Unemployment Varies Across Regions	493	(2)
Case Study: Poor King Coal	495	(1)
Sources of Unemployment	496	(1)
The Meaning of Full Employment	497	(1)
Unemployment Compensation	498	(1)
International Comparisons of Unemployment	498	(1)
Problems with Official Unemployment Figures	499	(1)
Inflation	499	(13)
Case Study: Hyperinflation in Brazil	500	(1)
Two Sources of Inflation	501	(1)
A Historical Look at Inflation and the Price Level	502	(1)
Anticipated Versus Unanticipated Inflation	503	(1)
The Transaction Costs of Variable Inflation	503	(1)
Inflation Obscures Relative Price Changes	504	(1)
Inflation Across Metropolitan Areas	504	(1)
Inflation Across Countries	504	(1)
Inflation and Interest Rates	505	(2)
Why Is Inflation Unpopular?	507	(5)
Aggregate Expenditure Components	512	(22)
Consumption	513	(7)
A First Look at Consumption and Income	513	(2)
The Consumption Function	515	(1)
Marginal Propensities to Consume and to Save	515	(1)
MPC, MPS, and the Slope of the Consumption and Saving Functions	516	(1)
Nonincome Determinants of Consumption	517	(2)
Case Study: The Life-Cycle Hypothesis	519	(1)
Investment	520	(5)
The Demand for Investment	520	(2)
From Micro to Macro	522	(1)
Planned Investment and the Economy's Income	523	(1)
Nonincome Determinants of Planned Investment	523	(1)
Case Study: Investment Varies Much More than Consumption	524	(1)
Government	525	(1)
Government Purchase Function	526	(1)
Net Taxes	526	(1)
Net Exports	526	(1)
Net Exports and Income	526	(1)
Nonincome Determinants of Net Exports	527	(1)
Composition of Aggregate Expenditure	527	(5)
Appendix: Variable Net Exports	532	(2)
Net Exports and Income	532	(1)
Shifts of Net Exports	532	(2)
Aggregate Expenditure and Aggregate Demand	534	(22)
Aggregate Expenditure and Income	535	(4)
The Components of Aggregate Expenditure	535	(2)
Real GDP Demanded	537	(1)
What If Planned Spending Exceeds Real GDP?	538	(1)
What If Real GDP Exceeds Planned Spending?	538	(1)
The Simple Spending Multiplier	539	(4)
An Increase in Planned Spending	539	(2)
Using the Simple Spending Multiplier	541	(1)
Case Study: Fear of Flying	542	(1)
The Aggregate Demand Curve	543	(8)
A Higher Price Level	543	(2)
A Lower Price Level	545	(1)
The Multiplier and Shifts in Aggregate Demand	545	(2)
Case Study: Falling Consumption Triggers Japan's Recession	547	(4)
Appendix A: Variable Net Exports Revisited	551	(3)
Net Exports and the Spending Multiplier	552	(1)
A Change in Autonomous Spending	552	(2)
Appendix B: The Algebra of Income and Expenditure	554	(2)
The Aggregate Expenditure Line	554	(1)
A More General Form of Income and Expenditure	554	(1)
Varying Net Exports	555	(1)
Aggregate Supply	556	(20)
Aggregate Supply in the Short Run	557	(4)
Labor and Aggregate Supply	557	(1)
Potential Output and the Natural Rate of Unemployment	558	(1)
Actual Price Level Higher than Expected	558	(1)
Why Costs Rise When Output Exceeds Potential	559	(1)
An Actual Price Level Lower than Expected	560	(1)
The Short-Run Aggregate Supply Curve	560	(1)
From the Short Run to the Long Run	561	(7)
Closing an Expansionary Gap	561	(2)
Closing a Contractionary Gap	563	(2)
Tracing Potential Output	565	(1)
Wage Flexibility and Employment	565	(1)
Case Study: U.S. Output Gaps and Wage Flexibility	566	(2)
Changes in Aggregate Supply	568	(8)
Increases in Aggregate Supply	568	(2)
Decreases in Aggregate Supply	570	(1)
Case Study: Why Is Unemployment So High in Europe?	571	(5)
Part 8 Fiscal and Monetary Policy
Fiscal Policy	576	(21)
Theory of Fiscal Policy	577	(3)
Fiscal Policy Tools	577	(1)
Changes in Government Purchases	577	(1)
Changes in Net Taxes	578	(2)
Including Aggregate Supply	580	(3)
Discretionary Fiscal Policy to Close a Contractionary Gap	580	(2)
Discretionary Fiscal Policy to Close an Expansionary Gap	582	(1)
The Multiplier and the Time Horizon	583	(1)
The Evolution of Fiscal Policy	583	(11)
The Great Depression and World War II	583	(1)
Automatic Stabilizers	584	(1)
From the Golden Age to Stagflation	585	(1)
Fiscal Policy and the Natural Rate of Unemployment	586	(1)
Lags in Fiscal Policy	586	(1)
Discretionary Fiscal Policy and Permanent Income	587	(1)
The Feedback Effects of Fiscal Policy on Aggregate Supply	587	(1)
U.S. Budget Deficits of the 1980s and 1990s	588	(1)
Case Study: The Supply-Side Experiment	588	(1)
Case Study: Discretionary Fiscal Policy and Presidential Elections	589	(1)
Balancing the Federal Budget---Temporarily	590	(4)
Appendix: The Algebra of Demand-Side Equilibrium	594	(3)
Net Tax Multiplier	594	(1)
The Multiplier When Both G and NT Change	594	(1)
The Multiplier with a Proportional Income Tax	594	(1)
Including Variable Net Exports	595	(2)
Money and the Financial System	597	(23)
The Evolution of Money	598	(7)
Barter and the Double Coincidence of Wants	598	(1)
The Earliest Money and Its Functions	598	(2)
Desirable Qualities of Money	600	(1)
Coins	600	(1)
Money and Banking	601	(1)
Paper Money	602	(1)
The Value of Money	603	(1)
When Money Performs Poorly	603	(1)
Case Study: When Monetary Systems Break Down	604	(1)
Financial Institutions in the United States	605	(15)
Commercial Banks and Thrifts	605	(1)
The Birth of the Fed	605	(1)
Powers of the Federal Reserve System	606	(1)
Banking During the Great Depression	607	(1)
Roosevelt's Reforms	608	(2)
Banks Lost Deposits When Inflation Increased	610	(1)
Bank Deregulation	610	(1)
Savings Banks on the Ropes	611	(1)
Commercial Banks Were Also Failing	612	(1)
U.S. Banking Structure	613	(3)
Case Study: Banking Troubles in Japan	616	(4)
Banking and the Money Supply	620	(21)
Money Aggregates	621	(4)
The Narrow Definition of Money: M1	621	(1)
Case Study: Faking It	622	(1)
Broader Money Aggregates	623	(1)
Credit Cards and Debit Cards: What's the Difference?	624	(1)
How Banks Work	625	(3)
Banks Are Financial Intermediaries	625	(1)
Starting a Bank	626	(1)
Reserve Accounts	627	(1)
Liquidity Versus Profitability	627	(1)
How Banks Create Money	628	(6)
Creating Money Through Excess Reserves	628	(3)
A Summary of the Rounds	631	(1)
Reserve Requirements and Money Expansion	631	(1)
Limitations on Money Expansion	632	(1)
Multiple Contraction of the Money Supply	632	(1)
Case Study: Banking on the Net	633	(1)
The Fed's Tools of Monetary Control	634	(7)
Open-Market Operations and the Federal Funds Rate	635	(1)
The Discount Rate	635	(1)
Reserve Requirements	636	(1)
The Fed Is a Money Machine	636	(5)
Monetary Theory and Policy	641	(20)
The Demand and Supply of Money	642	(3)
The Demand for Money	642	(1)
Money Demand and Interest Rates	643	(1)
The Supply of Money and the Equilibrium Interest Rate	644	(1)
Money and Aggregate Demand in the Short Run	645	(5)
Interest Rates and Planned Investment	645	(1)
Adding Short-Run Aggregate Supply	646	(2)
Case Study: Targeting the Federal Funds Rate	648	(2)
Money and Aggregate Demand in the Long Run	650	(5)
The Equation of Exchange	650	(1)
The Quantity Theory of Money	651	(1)
What Determines the Velocity of Money?	652	(1)
How Stable Is Velocity?	652	(2)
Case Study: The Money Supply and Inflation Around the World	654	(1)
Targets for Monetary Policy	655	(6)
Contrasting Policies	655	(2)
Targets Before 1982	657	(1)
Targets After 1982	657	(4)
The Policy Debate: Active or Passive?	661	(23)
Active Policy Versus Passive Policy	662	(6)
Closing a Contractionary Gap	662	(2)
Closing an Expansionary Gap	664	(1)
Problems with Active Policy	664	(1)
The Problem of Lags	665	(2)
A Review of Policy Perspectives	667	(1)
Case Study: Active Versus Passive Presidential Candidates	667	(1)
The Role of Expectations	668	(5)
Monetary Policy and Expectations	669	(1)
Anticipating Monetary Policy	670	(1)
Policy Credibility	671	(1)
Case Study: Central Bank Independence and Price Stability	672	(1)
Policy Rules Versus Discretion	673	(2)
Limitations on Discretion	674	(1)
Rules and Rational Expectations	674	(1)
The Phillips Curve	675	(9)
The Short-Run Phillips Curve	677	(1)
The Long-Run Phillips Curve	677	(2)
The Natural Rate Hypothesis	679	(1)
Evidence of the Phillips Curve	679	(5)
Federal Budgets and Public Policy	684	(19)
The Federal Budget Process	685	(2)
The Presidential and Congressional Roles	686	(1)
The Congressional Role in the Budget Process	686	(1)
Problems with the Federal Budget Process	686	(1)
Possible Budget Reforms	687	(1)
The Fiscal Impact of the Federal Budget	687	(7)
The Rationale for Deficits	688	(1)
Budget Philosophies and Deficits	688	(1)
Federal Deficits Since the Birth of the Nation	689	(1)
Why Have Deficits Persisted?	690	(1)
Deficits, Surpluses, Crowding Out, and Crowding In	690	(1)
The Twin Deficits	691	(1)
The Short-Lived Budget Surplus	691	(2)
Case Study: Reforming Social Security and Medicare	693	(1)
The Relative Size of the Public Sector in the United States	694	(1)
The National Debt	694	(9)
International Perspective on Public Debt	695	(1)
Interest on the National Debt	696	(1)
Who Bears the Burden of the Debt?	697	(1)
Crowding Out and Capital Formation	698	(1)
Case Study: An Intergenerational View of Deficits and Debt	699	(4)
Part 9 International macroeconomics
International Finance	703	(18)
Balance of Payments	704	(5)
International Economic Transactions	704	(1)
The Merchandise Trade Balance	704	(2)
The Balance on Goods and Services	706	(1)
Unilateral Transfers	706	(1)
The Capital Account	707	(1)
Deficits and Surpluses	707	(2)
Foreign Exchange Rates and Markets	709	(6)
Foreign Exchange	709	(1)
The Demand for Foreign Exchange	710	(1)
The Supply of Foreign Exchange	710	(1)
Determining the Exchange Rate	711	(1)
Arbitrageurs and Speculators	711	(2)
Purchasing Power Paricy	713	(1)
Case Study: The Big Mac Price Index	713	(2)
Flexible Exchange Rates	715	(1)
Fixed Exchange Rates	715	(1)
Development of the International Monetary System	715	(6)
The Bretton Woods Agreement	716	(1)
The Demise of the Bretton Woods System	716	(1)
The Current System: Managed Float	717	(1)
Case Study: The Asian Contagion	717	(4)
Glossary	721	(12)
Index	733