Economics Principles and Policy (with InfoTrac)

by Baumol, William J.; Blinder, Alan S.

• ISBN13: 9780324221138
• ISBN10: 0324221134
• Edition: 10th
• Format: Hardcover
• Copyright: 2005-06-23
• Publisher: South-Western College Pub

Summary

This text is well known for using the Keynesian model in the teaching of economics; yet in recent editions, the authors have expanded coverage of the growth model considerably to achieve more balanced coverage. The text uses the aggregate supply/ aggregate demand model as a fundamental tool for learning macroeconomics. It achieves the right level of rigor and detail, presenting complicated concepts in a relatively straightforward manner and using timely economic data. Using puzzles, issues, and well-developed examples, the authors provide a good balance of theory to application. Homework Xpress is available with the anniversary Tenth Edition and two new sets of end of chapter questions have been added as well to help students prepare for exams: "Test Yourself" and "Discussion Questions".

Table of Contents

Preface	xxix
PART I GETTING ACQUAINTED WITH ECONOMICS	1	(76)
What Is Economics?	3	(18)
Ideas for Beyond the Final Exam	4	(4)
Idea 1: How Much Does It Really Cost?	4	(1)
Idea 2: Attempts to Repeal the Laws of Supply and Demand---The Market Strikes Back	5	(1)
Idea 3: The Surprising Principle of Comparative Advantage	5	(1)
Idea 4: Trade is a Win-Win Situation	5	(1)
Idea 5: The Importance of Thinking at the Margin	6	(1)
Idea 6: Externalities---A Shortcoming of the Market Cured by Market Methods	6	(1)
Idea 7: The Trade-Off between Efficiency and Equality	6	(1)
Idea 8: Government Policies Can Limit Economic Fluctuations---But Don't Always Succeed	7	(1)
Idea 9: The Short-Run Trade-Off between Inflation and Unemployment	7	(1)
Idea 10: Productivity Growth Is (Almost) Everything in the Long Run	8	(1)
Epilogue	8	(1)
Inside the Economist's Tool Kit	8	(5)
Economics as a Discipline	8	(1)
The Need for Abstraction	8	(3)
The Role of Economic Theory	11	(1)
What Is an Economic Model?	11	(1)
Reasons for Disagreements: Imperfect Information and Value Judgments	12	(1)
Summary	13	(1)
Key Terms	13	(1)
Discussion Questions	13	(1)
Appendix: Using Graphs: A Review	14	(7)
Graphs Used in Economic Analysis	14	(1)
Two-Variable Diagrams	14	(1)
The Definition and Measurement of Slope	15	(1)
Rays Through the Origin and 45° Lines	16	(1)
Squeezing Three Dimensions Into Two: Contour Maps	17	(1)
Summary	18	(1)
Key Terms	18	(1)
Test Yourself	19	(2)
The Economy: Myth and Reality	21	(16)
The American Economy: A Thumbnail Sketch	22	(3)
A Private-Enterprise Economy	23	(1)
A Relatively ``Closed'' Economy	23	(1)
A Growing Economy . . .	24	(1)
But with Bumps along the Growth Path	24	(1)
The Inputs: Labor and Capital	25	(5)
The American Workforce: Who Is in It?	25	(2)
The American Workforce: What Does It Do?	27	(2)
The American Workforce: What It Earns	29	(1)
Capital and Its Earnings	29	(1)
The Outputs: What Does America Produce?	30	(1)
The Central Role of Business Firms	30	(1)
What's Missing From the Picture? Government	31	(4)
The Government as Referee	32	(1)
The Government as Business Regulator	32	(1)
Government Expenditures	33	(1)
Taxes in America	33	(1)
The Government as Redistributor	34	(1)
Conclusion: It's a Mixed Economy	35	(1)
Summary	35	(1)
Key Terms	35	(1)
Discussion Questions	35	(2)
The Fundamental Economic Problem: Scarcity and Choice	37	(16)
Issue: What to Do about the Budget Deficit?	38	(1)
Scarcity, Choice, and Opportunity Cost	38	(2)
Opportunity Cost and Money Cost	39	(1)
Optimal Choice: Not Just Any Choice	40	(1)
Scarcity and Choice for a Single Firm	40	(3)
The Production Possibilities Frontier	41	(1)
The Principle of Increasing Costs	42	(1)
Scarcity and Choice for the Entire Society	43	(2)
Scarcity and Choice Elsewhere in the Economy	43	(1)
Issue Revisited: Coping with the Budget Deficit	44	(1)
The Concept of Efficiency	45	(1)
The Three Coordination Tasks of Any Economy	46	(1)
Specialization Fosters Efficient Resource Allocation	46	(2)
The Wonders of the Division of Labor	46	(1)
The Amazing Principle of Comparative Advantage	47	(1)
Specialization Leads to Exchange	48	(1)
Markets, Prices, and the Three Coordination Tasks	48	(2)
Last Word: Don't Confuse Ends With Means	50	(1)
Summary	50	(1)
Key Terms	51	(1)
Test Yourself	51	(1)
Discussion Questions	51	(2)
Supply and Demand: An Initial Look	53	(24)
Puzzle: What Happened to Oil Prices?	54	(1)
The Invisible Hand	54	(1)
Demand and Quantity Demanded	55	(4)
The Demand Schedule	56	(1)
The Demand Curve	56	(1)
Shifts of the Demand Curve	56	(3)
Supply and Quantity Supplied	59	(3)
The Supply Schedule and the Supply Curve	59	(1)
Shifts of the Supply Curve	60	(2)
Supply and Demand Equilibrium	62	(2)
The Law of Supply and Demand	64	(1)
Effects of Demand Shifts on Supply-Demand Equilibrium	64	(1)
Supply Shifts and Supply-Demand Equilibrium	65	(3)
Those Leaping Oil Prices: Puzzle Resolved	66	(1)
Application: Who Really Pays that Tax?	67	(1)
Battling the Invisible Hand: the Market Fights Back	68	(6)
Restraining the Market Mechanism: Price Ceilings	68	(2)
Case Study: Rent Controls in New York City	70	(1)
Restraining the Market Mechanism: Price Floors	71	(1)
Case Study: Farm Price Supports and the Case of Sugar Prices	71	(1)
A Can of Worms	72	(2)
A Simple But Powerful Lesson	74	(1)
Summary	74	(1)
Key Terms	74	(1)
Test Yourself	75	(1)
Discussion Questions	76	(1)
PART II THE BUILDING BLOCKS OF DEMAND AND SUPPLY	77	(116)
Consumer Choice: Individual and Market Demand	79	(24)
Puzzle: Why Shouldn't Water Be Worth More Than Diamonds?	80	(1)
Scarcity and Demand	80	(1)
Utility: A Tool to Analyze Purchase Decisions	81	(7)
The Purpose of Utility Analysis: Analyzing How People Behave, Not What They Think	81	(1)
Total Versus Marginal Utility	82	(1)
The ``Law'' of Diminishing Marginal Utility	82	(2)
Using Marginal Utility: The Optimal Purchase Rule	84	(2)
From Diminishing Marginal Utility to Downward-Sloping Demand Curves	86	(2)
Consumer Choice as a Trade-Off: Opportunity Cost	88	(3)
Consumer's Surplus: The Net Gain from a Purchase	88	(2)
Resolving the Diamond-Water Puzzle	90	(1)
Income and Quantity Demanded	91	(1)
From Individual Demand Curves to Market Demand Curves	91	(2)
Market Demand as a Horizontal Sum	91	(1)
The ``Law'' of Demand	92	(1)
Exceptions to the ``Law'' of Demand	93	(1)
Summary	93	(1)
Key Terms	94	(1)
Test Yourself	94	(1)
Discussion Questions	94	(1)
Appendix: Analyzing Consumer Choice Graphically: Indifference Curves	95	(8)
Geometry of Available Choices: The Budget Line	95	(1)
Properties of the Budget Line	95	(1)
Changes in the Budget Line	96	(1)
What the Customer Prefers: Properties of the Indifference Curve	97	(1)
The Slopes of Indifference Curves and Budget Lines	98	(1)
Tangency Conditions	99	(1)
Consequences of Income Changes: Inferior Goods	100	(1)
Consequences of Price Changes: Deriving the Demand Curve	100	(1)
Summary	101	(1)
Key Terms	101	(1)
Test Yourself	102	(1)
Demand and Elasticity	103	(20)
Issue: Will Taxing Cigarettes Make Teenagers Stop Smoking?	104	(1)
Elasticity: The Measure of Responsiveness	104	(5)
Price Elasticity of Demand and the Shapes of Demand Curves	107	(2)
Price Elasticity of Demand: Its Effect on Total Revenue and Total Expenditure	109	(2)
Issue Revisited: Will a Cigarette Tax Decrease Teenage Smoking Significantly?	110	(1)
What Determines Demand Elasticity?	111	(1)
Elasticity as a General Concept	112	(2)
Income Elasticity	112	(1)
Price Elasticity of Supply	113	(1)
Cross Elasticity of Demand	113	(1)
Changes in Demand: Movements Along the Demand Curve Versus Shifts in the Demand Curve	114	(2)
Demand Shifters	115	(1)
The Time Period of the Demand Curve and Economic Decision Making	116	(1)
Real-World Application: Polaroid Versus Kodak	117	(1)
In Conclusion	118	(1)
Summary	118	(1)
Key Terms	119	(1)
Test Yourself	119	(1)
Discussion Questions	119	(1)
Appendix: How Can We Find a Legitimate Demand Curve From Historical Statistics?	120	(3)
An Illustration: Did the Advertising Program Work?	121	(1)
How Can We Find A Legitimate Demand Curve From the Statistics?	121	(2)
Production, Inputs, and Cost: Building Blocks for Supply Analysis	123	(28)
Puzzle: How Can We Tell If Larger Firms Are More Efficient?	124	(1)
Short-Run Versus Long-Run Costs: What Makes an Input Variable?	124	(2)
The Economic Short Run Versus the Economic Long Run	125	(1)
Fixed Costs and Variable Costs	125	(1)
Production, Input Choice, and Cost With One Variable Input	126	(3)
Total, Average, and Marginal Physical Products	126	(1)
Marginal Physical Product and the ``Law'' of Diminishing Marginal Returns	127	(1)
The Optimal Quantity of an Input and Diminishing Returns	128	(1)
Multiple Input Decisions: The Choice of Optimal Input Combinations	129	(4)
Substitutability: The Choice of Input Proportions	130	(1)
The Marginal Rule for Optimal Input Proportions	131	(1)
Changes in Input Prices and Optimal Input Proportions	132	(1)
Cost and Its Dependence on Output	133	(5)
Input Quantities and Total, Average, and Marginal Cost Curves	133	(3)
The Law of Diminishing Marginal Productivity and the U-Shaped Average Cost Curve	136	(1)
The Average Cost Curve in the Short and Long Run	137	(1)
Economies of Scale	138	(5)
The ``Law'' of Diminishing Returns and Returns to Scale	139	(1)
Historical Costs Versus Analytical Cost Curves	140	(1)
Resolving the Economies of Scale Puzzle	141	(1)
Cost Minimization in Theory and Practice	142	(1)
Summary	143	(1)
Key Terms	144	(1)
Test Yourself	144	(1)
Discussion Questions	145	(1)
Appendix: Production Indifference Curves	145	(6)
Characteristics of the Production Indifference Curves, or Isoquants	145	(1)
The Choice of Input Combinations	146	(1)
Cost Minimization, Expansion Path, and Cost Curves	147	(1)
Summary	148	(1)
Key Terms	148	(1)
Test Yourself	149	(2)
Output, Price, and Profit: The Importance of Marginal Analysis	151	(22)
Puzzle: Can a Company Make a Profit by Selling Below its Costs?	153	(1)
Price and Quantity: One Decision, Not Two	153	(1)
Total Profit: Keep Your Eye on the Goal	154	(1)
Economic Profit and Optimal Decision Making	154	(5)
Total, Average, and Marginal Revenue	155	(1)
Total, Average, and Marginal Cost	156	(1)
Maximization of Total Profit	157	(1)
Profit Maximization: A Graphical Interpretation	158	(1)
Marginal Analysis and Maximization of Total Profit	159	(4)
Marginal Revenue and Marginal Cost: Guides to Optimization	161	(1)
Finding the Optimal Price from Optimal Output	162	(1)
Generalization: The Logic of Marginal Analysis and Maximization	163	(3)
Application: Fixed Cost and the Profit-Maximizing Price	164	(1)
Puzzle Resolved: Using Marginal Analysis to Unravel the Case of the ``Unprofitable'' Calculator	165	(1)
Conclusion: The Fundamental Role of Marginal Analysis	166	(1)
The Theory and Reality: A Word of Caution	167	(1)
Summary	167	(1)
Key Terms	168	(1)
Test Yourself	168	(1)
Discussion Questions	168	(1)
Appendix: The Relationships Among Total, Average, and Marginal Data	169	(4)
Graphical Representation of Marginal and Average Curves	170	(1)
Test Yourself	171	(2)
Investing in Business: Stocks and Bonds	173	(20)
Puzzle #1: What in the World Happened to the Stock Market?	174	(1)
Puzzle #2: The Stock Market's Unpredictability	174	(1)
Corporations and Their Unique Characteristics	175	(1)
Financing Corporate Activity: Stocks and Bonds	176	(3)
Plowback, or Retained Earnings	178	(1)
What Determines Stock Prices? The Role of Expected Company Earnings	179	(1)
Buying Stocks and Bonds	179	(3)
Selecting a Portfolio: Diversification	180	(1)
Following a Portfolio's Performance	181	(1)
Stock Exchanges and Their Functions	182	(4)
Regulation of the Stock Market	184	(1)
Stock Exchanges and Corporate Capital Needs	184	(2)
Speculation	186	(4)
Puzzle #2 Resolved: Unpredictable Stock Prices as ``Random Walks''	187	(3)
Puzzle #1 Redux: The Boom and Bust of the U.S. Stock Market	190	(1)
Summary	190	(1)
Key Terms	191	(1)
Test Yourself	191	(1)
Discussion Questions	191	(2)
PART III MARKETS AND THE PRICE SYSTEM	193	(88)
The Firm and the Industry Under Perfect Competition	195	(18)
Puzzle: Pollution Reduction Incentives That Actually Increase Pollution	196	(1)
Perfect Competition Defined	196	(1)
The Perfectly Competitive Firm	197	(5)
The Firm's Demand Curve under Perfect Competition	197	(1)
Short-Run Equilibrium for the Perfectly Competitive Firm	198	(1)
Short-Run Profit: Graphic Representation	199	(1)
The Case of Short-Term Losses	200	(1)
Shutdown and Break-Even Analysis	200	(2)
The Perfectly Competitive Firm's Short-Run Supply Curve	202	(1)
The Perfectly Competitive Industry	202	(7)
The Perfectly Competitive Industry's Short-Run Supply Curve	202	(1)
Industry Equilibrium in the Short Run	203	(1)
Industry and Firm Equilibrium in the Long Run	204	(3)
Zero Economic Profit: The Opportunity Cost of Capital	207	(1)
The Long-Run Industry Supply Curve	208	(1)
Perfect Competition and Economic Efficiency	209	(2)
Puzzle Resolved: Which Is Better to Cut Pollution--The Carrot or the Stick?	210	(1)
Summary	211	(1)
Key Terms	212	(1)
Test Yourself	212	(1)
Discussion Questions	212	(1)
Monopoly	213	(18)
Puzzle: What Happened to AT&T's ``Natural Monopoly'' in Telephone Service?	214	(1)
Monopoly Defined	214	(3)
Sources of Monopoly: Barriers to Entry and Cost Advantages	215	(1)
Natural Monopoly	216	(1)
The Monopolist's Supply Decision	217	(5)
Determining the Profit-Maximizing Output	218	(1)
Comparing Monopoly and Perfect Competition	219	(2)
Monopoly Is Likely to Shift Demand	221	(1)
Monopoly Is Likely to Shift Cost Curves	222	(1)
Can Anything Good Be Said About Monopoly?	222	(1)
Monopoly May Aid Innovation	222	(1)
Natural Monopoly: Where Single-firm Production is Cheapest	223	(1)
Price Discrimination Under Monopoly	223	(4)
Is Price Discrimination Always Undesirable?	225	(1)
The Puzzle Resolved: Competition in Telephone Service	226	(1)
Summary	227	(1)
Key Terms	228	(1)
Test Yourself	228	(1)
Discussion Questions	228	(3)
Between Competition and Monopoly	231	(28)
Three Puzzling Observations	232	(1)
Puzzle 1: Why Are There So Many Retailers?	232	(1)
Puzzle 2: Why Do Oligopolists Advertise More Than ``More Competitive'' Firms?	232	(1)
Puzzle 3: Why Do Oligopolists Seem to Change Their Prices So Infrequently?	232	(1)
Monopolistic Competition	232	(5)
Characteristics of Monopolistic Competition	233	(1)
Price and Output Determination Under Monopolistic Competition	234	(1)
The Excess Capacity Theorem and Resource Allocation	235	(1)
1st Puzzle Resolved: Explaining the Abundance of Retailers	236	(1)
Oligopoly	237	(14)
2nd Puzzle Resolved: Why Oligopolists Advertise but Perfectly Competitive Firms Generally Do Not	237	(1)
Why Oligopolistic Behavior Is So Difficult to Analyze	238	(1)
A Shopping List	238	(4)
Sales Maximization: An Oligopoly Model with Interdependence Ignored	242	(1)
3rd Puzzle Resolved: The Kinked Demand Curve Model	243	(2)
The Game-Theory Approach	245	(1)
Games with Dominant Strategies	246	(2)
Games without Dominant Strategies	248	(1)
Other Strategies: The Nash Equilibrium	248	(1)
Zero-Sum Games	249	(1)
Repeated Games	249	(2)
Monopolistic Competition, Oligopoly, and Public Welfare	251	(2)
A Glance Backward: Comparing the Four Market Forms	253	(2)
Summary	255	(1)
Key Terms	256	(1)
Test Yourself	256	(1)
Discussion Questions	256	(3)
Limiting Market Power: Regulation and Antitrust	259	(22)
The Public Interest Issue: Monopoly Power versus Mere Size	260	(1)
Part 1: Regulation	261	(1)
What Is Regulation?	261	(1)
Puzzle: Why Do Regulators Often Raise Prices?	262	(1)
Some Objectives of Regulation	262	(2)
Control of Market Power Resulting from Economies of Scale and Scope	262	(1)
Universal Service and Rate Averaging	263	(1)
Two Key Issues That Face Regulators	264	(3)
Setting Prices to Protect Consumers' Interests and Allow Regulated Firms to Cover Their Costs	264	(1)
Marginal versus Average Cost Pricing	264	(2)
Preventing Monopoly Profit but Keeping Incentives for Efficiency and Innovation	266	(1)
The Pros and Cons of ``Bigness''	267	(1)
Economies of Large Size	267	(1)
Required Scale for Innovation	267	(1)
Deregulation	268	(3)
The Effects of Deregulation	268	(2)
The Puzzle Revisited: Why Regulators Often Push Prices Upward	270	(1)
Part 2: Antitrust Laws and Policies	271	(1)
Measuring Market Power: Concentration	272	(3)
Concentration: Definition and Measurement---The Herfindahl-Hirschman Index	272	(2)
The Evidence of Concentration in Reality	274	(1)
A Crucial Problem for Antitrust: The Resemblance of Monopolization and Vigorous Competition	275	(1)
Anticompetitive Practices and Antitrust	275	(2)
Predatory Pricing	275	(1)
The Microsoft Case: Bottlenecks, Bundling, and Network Externalities	276	(1)
Use of Antitrust Laws to Prevent Competition	277	(1)
Concluding Observations	278	(1)
Summary	279	(1)
Key Terms	280	(1)
Discussion Questions	280	(1)
PART IV THE VIRTUES AND LIMITATIONS OF MARKETS	281	(112)
The Case for Free Markets I: The Price System	283	(24)
Puzzle: Crossing the San Francisco-Oakland Bay Bridge: Is the Price Right?	284	(1)
Efficient Resource Allocation and Pricing	284	(4)
Pricing to Promote Efficiency: An Example	285	(1)
Can Price Increases Ever Serve the Public Interest?	286	(2)
Scarcity and the Need to Coordinate Economic Decisions	288	(7)
Three Coordination Tasks in the Economy	289	(3)
Input-Output Analysis: The Near Impossibility of Perfect Central Planning	292	(2)
Which Buyers and Which Sellers Get Priority?	294	(1)
How Perfect Competition Achieves Efficiency: A Graphic Analysis	295	(3)
How Perfect Competition Achieves Optimal Output: A Marginal Analysis	298	(5)
The Invisible Hand at Work	300	(1)
Other Roles of Prices: Income Distribution and Fairness	300	(2)
Yet Another Free-Market Achievement: Growth versus Efficiency	302	(1)
San Francisco Bridge Pricing Revisited	302	(1)
Toward Assessment of the Price Mechanism	303	(1)
Summary	304	(1)
Key Terms	304	(1)
Test Yourself	304	(1)
Discussion Questions	305	(2)
The Shortcomings of Free Markets	307	(24)
Puzzle: Why Are Health-Care Costs in Canada Rising?	308	(1)
What Does the Market Do Poorly?	308	(1)
Efficient Resource Allocation: A Review	308	(2)
Externalities: Getting the Prices Wrong	310	(4)
Externalities and Inefficiency	310	(2)
Externalities Are Everywhere	312	(1)
Government Policy and Externalities	313	(1)
Provision of Public Goods	314	(1)
Allocation of Resources Between Present and Future	315	(2)
The Role of the Interest Rate	315	(1)
How Does It Work in Practice?	316	(1)
Some Other Sources of Market Failure	317	(4)
Imperfect Information: ``Caveat Emptor''	317	(1)
Rent Seeking	317	(1)
Moral Hazard	318	(1)
Principals, Agents, and Recent Stock Option Scandals	319	(2)
Market Failure and Government Failure	321	(1)
The Cost Disease of Some Vital Services in the Economy	322	(5)
Deteriorating Personal Services	322	(1)
Personal Services Are Getting More Expensive	323	(1)
Why Are These ``In-Person'' Services Costing So Much More?	324	(1)
Uneven Labor Productivity Growth in the Economy	324	(1)
A Future of More Goods but Fewer Services: Is It Inevitable?	325	(1)
Government May Make the Problem Worse	326	(1)
The Puzzle Resolved: Explaining the Rising Costs of Canadian Health Care	326	(1)
The Market System on Balance	327	(1)
Epilogue: The Unforgiving Market, Its Gift of Abundance, and Its Dangerous Friends	328	(1)
Summary	329	(1)
Key Terms	329	(1)
Test Yourself	330	(1)
Discussion Questions	330	(1)
The Case for Free Markets II: Innovation and Growth	331	(22)
The Market Economy's Incredible Growth Record	332	(2)
Innovation, Not Invention, Is the Unique Free-Market Accomplishment	334	(1)
The Big Puzzle: What Accounts for the Free Market's Incredible Growth Record?	334	(1)
Sources of Free-Market Innovation: Role of the Entrepreneur	335	(7)
Breakthrough Invention and the Entrepreneurial Firm	336	(2)
The Large Enterprises and Their Innovation ``Assembly Lines''	338	(3)
The Market Economy and the Speedy Dissemination of New Technology	341	(1)
Microeconomic Analysis of the Innovative Firm	342	(5)
Financing the Innovation ``Arms Race'': Firms with High R&D Costs and Low Marginal Costs	342	(1)
The Profits of Innovation	343	(1)
How Much Will a Profit-Maximizing Firm Spend on Innovation?	344	(1)
A Kinked Revenue Curve Model of Spending on Innovation	345	(1)
Innovation as a Public Good	346	(1)
Effects of Process Research on Outputs and Prices	346	(1)
Do Free Markets Spend Enough on R&D Activities?	347	(2)
Innovation as a Beneficial Externality	348	(1)
Why the Shortfall in Innovation Spending May Not Be So Big After All	349	(1)
Conclusion: The Market Economy and Its Innovation Assembly Line	349	(2)
Toward Solution of the Puzzle: How the Market Achieved its Unprecedented Growth	350	(1)
Summary	351	(1)
Key Terms	351	(1)
Discussion Questions	352	(1)
Externalities, the Environment, and Natural Resources	353	(22)
Puzzle: Those Resilient Natural Resource Supplies	354	(1)
Part 1: The Economics of Environmental Protection	354	(1)
Externalities: A Critical Shortcoming of the Market Mechanism	354	(7)
The Facts: Is the World Really Getting Steadily More Polluted?	355	(3)
The Role of Individuals and Governments in Environmental Damage	358	(1)
Pollution and the Law of Conservation of Matter and Energy	358	(3)
Supply-Demand Analysis of Environmental Externalities	361	(1)
Basic Approaches to Environmental Policy	361	(5)
Emissions Taxes versus Direct Control	363	(2)
Another Financial Device to Protect the Environment: Emissions Permits	365	(1)
Two Cheers for the Market	366	(1)
Part 2: The Economics of Natural Resources	367	(1)
Economic Analysis: The Free Market and Pricing of Depletable Resources	367	(2)
Scarcity and Rising Prices	367	(1)
Supply-Demand Analysis and Consumption	368	(1)
Actual Resource Prices in the Twentieth Century	369	(4)
Interferences with Price Patterns	370	(2)
Is Price Interference Justified?	372	(1)
On the Virtues of Rising Prices	373	(1)
Growing Reserves of Exhaustible Natural Resources: The Puzzle Revisited	373	(1)
Summary	373	(1)
Key Terms	374	(1)
Test Yourself	374	(1)
Discussion Questions	374	(1)
Taxation and Resource Allocation	375	(18)
Issue: Were the Tax Cuts of 2001-2003 Sound Policy?	376	(1)
The Level and Types of Taxation	376	(1)
Progressive, Proportional, and Regressive Taxes	377	(1)
Direct versus Indirect Taxes	377	(1)
The Federal Tax System	377	(4)
The Federal Personal Income Tax	377	(2)
The Payroll Tax	379	(1)
The Corporate Income Tax	379	(1)
Excise Taxes	379	(1)
The Payroll Tax and the Social Security System	379	(2)
The State and Local Tax System	381	(1)
Sales and Excise Taxes	381	(1)
Property Taxes	381	(1)
Fiscal Federalism	382	(1)
The Concept of Equity in Taxation	382	(1)
Horizontal Equity	382	(1)
Vertical Equity	382	(1)
The Benefits Principle	383	(1)
The Concept of Efficiency in Taxation	383	(2)
Tax Loopholes and Excess Burden	385	(1)
Shifting the Tax Burden: Tax Incidence	385	(4)
The Incidence of Excise Taxes	387	(1)
The Incidence of the Payroll Tax	388	(1)
When Taxation Can Improve Efficiency	389	(1)
Equity, Efficiency, and the Optimal Tax	389	(1)
Issue Revisited: The Pros and Cons of the Bush Tax Cuts	390	(1)
Summary	390	(1)
Key Terms	391	(1)
Test Yourself	391	(1)
Discussion Questions	392	(1)
PART V THE DISTRIBUTION OF INCOME	393	(68)
Pricing the Factors of Production	395	(22)
Puzzle: Why Does a Higher Return to Savings Reduce the Amount Some People Save?	396	(1)
The Principle of Marginal Productivity	396	(1)
Inputs and Their Derived Demand Curves	397	(2)
Investment, Capital, and Interest	399	(4)
The Demand for Funds	400	(1)
The Downward-Sloping Demand Curve for Funds	401	(1)
The Supply of Funds: The Puzzle Resolved	402	(1)
The Issue of Usury Laws: Are Interest Rates Too High?	402	(1)
The Determination of Rent	403	(6)
Land Rents: Further Analysis	404	(2)
Generalization: Economic Rent Seeking	406	(1)
Rent as a Component of an Input's Compensation	407	(1)
An Application of Rent Theory: Salaries of Professional Athletes	408	(1)
Rent Controls: The Misplaced Analogy	409	(1)
Payments to Entrepreneurship: Are Profits Too High or Too Low?	409	(3)
What Accounts for Profits?	410	(2)
Taxing Profits	412	(1)
Criticisms of Marginal Productivity Theory	412	(1)
Summary	413	(1)
Key Terms	414	(1)
Test Yourself	414	(1)
Discussion Questions	414	(1)
Appendix: Discounting and Present Value	415	(2)
Summary	416	(1)
Key Term	416	(1)
Test Yourself	416	(1)
Labor: The Human Input	417	(24)
Issue: Do Cheap Foreign Labor and Technological Progress Contribute to Lagging Wages?	419	(1)
Wage Determination in Competitive Labor Markets	419	(4)
The Demand for Labor and the Determination of Wages	420	(1)
Influences on MRPL: Shifts in the Demand for Labor	420	(1)
Technical Change, Productivity Growth, and the Demand for Labor	421	(1)
The Service Economy and the Demand for Labor	422	(1)
The Supply of Labor	423	(3)
Rising Labor-Force Participation	423	(1)
An Important Labor Supply Conundrum	424	(1)
The Labor Supply Conundrum Resolved	425	(1)
Why Do Wages Differ?	426	(5)
Labor Demand in General	427	(1)
Labor Supply in General	427	(1)
Ability and Earnings: The Rent Component of Wages	428	(1)
Investment in Human Capital	428	(1)
Education and Earnings: Dissenting Views	429	(1)
The Effects of Minimum Wage Legislation	430	(1)
Unions and Collective Bargaining	431	(8)
Unions as Labor Monopolies	433	(2)
Monopsony and Bilateral Monopoly	435	(1)
Collective Bargaining and Strikes	436	(2)
Issue Revisited: Foreign Competition, Technology, and American Jobs: Are Union Fears Justified?	438	(1)
Summary	439	(1)
Key Terms	440	(1)
Test Yourself	440	(1)
Discussion Questions	440	(1)
Poverty, Inequality, and Discrimination	441	(20)
Issue: Were the Bush Tax Cuts Unfair?	442	(1)
The Facts: Poverty	442	(3)
Counting the Poor: The Poverty Line	443	(1)
Absolute versus Relative Poverty	444	(1)
The Facts: Inequality	445	(1)
Some Reasons for Unequal Incomes	446	(2)
The Facts: Discrimination	448	(1)
The Trade-Off Between Equality and Efficiency	449	(2)
Policies to Combat Poverty	451	(3)
Education as a Way Out	451	(1)
The Welfare Debate and the Trade-Off	451	(1)
The Negative Income Tax	452	(2)
Other Policies to Combat Inequality	454	(1)
The Personal Income Tax	454	(1)
Death Duties and Other Taxes	454	(1)
Policies to Combat Discrimination	454	(2)
A Look Back	456	(1)
Summary	456	(1)
Key Terms	457	(1)
Test Yourself	457	(1)
Discussion Questions	457	(1)
Appendix: The Economic Theory of Discrimination	458	(3)
Discrimination by Employers	458	(1)
Discrimination by Fellow Workers	458	(1)
Statistical Discrimination	458	(1)
The Roles of the Market and the Government	459	(1)
Summary	460	(1)
Key Term	460	(1)
PART VI THE MACROECONOMY: AGGREGATE SUPPLY AND DEMAND	461	(132)
An Introduction to Macroeconomics	463	(20)
Issue: Was It George Bush's Fault?	464	(1)
Drawing A Line Between Macroeconomics and Microeconomics	464	(2)
Aggregation and Macroeconomics	464	(1)
The Foundations of Aggregation	465	(1)
The Line of Demarcation Revisited	465	(1)
Supply and Demand in Macroeconomics	466	(2)
A Quick Review	466	(1)
Moving to Macroeconomic Aggregates	467	(1)
Inflation	467	(1)
Recession and Unemployment	467	(1)
Economic Growth	467	(1)
Gross Domestic Product	468	(4)
Money as the Measuring Rod: Real versus Nominal GDP	468	(1)
What Gets Counted in GDP?	469	(1)
Limitations of the GDP: What GDP Is Not	470	(2)
The Economy on a Roller Coaster	472	(7)
Growth, but with Fluctuations	472	(1)
Inflation and Deflation	473	(1)
The Great Depression	474	(2)
From World War II to 1973	476	(1)
The Great Stagflation, 1973--1980	476	(1)
Reaganomics and Its Aftermath	477	(1)
Clintonomics: Deficit Reduction and the ``New Economy''	477	(1)
The Bush Economy and the 2004 Election	478	(1)
Issue Revisited: Was It George Bush's Fault?	479	(1)
The Problem of Macroeconomic Stabilization: A Sneak Preview	479	(2)
Combating Unemployment	479	(1)
Combating Inflation	480	(1)
Does It Really Work?	480	(1)
Summary	481	(1)
Key Terms	482	(1)
Test Yourself	482	(1)
Discussion Questions	482	(1)
The Goals of Macroeconomic Policy	483	(26)
Part 1: The Goal of Economic Growth	484	(1)
Productivity Growth: From Little Acorns. . .	484	(2)
Issue: Is Faster Growth Always Better?	486	(1)
The Capacity to Produce: Potential GDP and the Production Function	486	(1)
The Growth Rate of Potential GDP	487	(2)
Issue Revisited: Is Faster Growth Always Better?	488	(1)
Part 2: The Goal of Low Unemployment	489	(1)
The Human Costs of High Unemployment	490	(1)
Counting the Unemployed: The Official Statistics	491	(1)
Types of Unemployment	492	(2)
How Much Employment Is ``Full Employment''?	494	(1)
Unemployment Insurance: The Invaluable Cushion	494	(1)
Part 3: The Goal of Low Inflation	495	(1)
Inflation: The Myth and the Reality	495	(3)
Inflation and Real Wages	495	(2)
The Importance of Relative Prices	497	(1)
Inflation as a Redistributor of Income and Wealth	498	(1)
Real Versus Nominal Interest Rates	498	(1)
Inflation Distorts Measurements	499	(1)
Confusing Real and Nominal Interest Rates	499	(1)
The Malfunctioning Tax System	500	(1)
Other Costs of Inflation	500	(1)
The Costs of Low Versus High Inflation	501	(1)
Low Inflation Does Not Necessarily Lead to High Inflation	502	(1)
Summary	503	(1)
Key Terms	504	(1)
Test Yourself	504	(1)
Discussion Questions	504	(1)
Appendix: How Statisticians Measure Inflation	505	(4)
Index Numbers for Inflation	505	(1)
The Consumer Price Index	505	(1)
Using a Price Index to ``Deflate'' Monetary Figures	506	(1)
Using a Price Index to Measure Inflation	506	(1)
The GDP Deflator	506	(1)
Summary	507	(1)
Key Terms	507	(1)
Test Yourself	507	(2)
Economic Growth: Theory and Policy	509	(20)
Puzzle: Why Does College Education Keep Getting More Expensive?	510	(1)
The Three Pillars of Productivity Growth	510	(2)
Capital	511	(1)
Technology	511	(1)
Labor Quality: Education and Training	512	(1)
Levels, Growth Rates, and the Convergence Hypothesis	512	(2)
Growth Policy: Encouraging Capital Formation	514	(2)
Growth Policy: Improving Education and Training	516	(2)
Growth Policy: Spurring Technological Change	518	(1)
The Productivity Slowdown and Speed-Up in the United States	519	(4)
The Productivity Slowdown, 1973--1995	520	(1)
The Productivity Speed-up, 1995--??	521	(1)
Puzzle Resolved: Why the Relative Price of College Tuition Keeps Rising	522	(1)
Growth in the Developing Countries	523	(3)
The Three Pillars Revisited	523	(2)
Some Special Problems of the Developing Countries	525	(1)
From the Long Run to the Short Run	526	(1)
Summary	526	(1)
Key Terms	526	(1)
Test Yourself	527	(1)
Discussion Questions	527	(2)
Aggregate Demand and the Powerful Consumer	529	(22)
Issue: Demand Management and the Ornery Consumer	530	(1)
Aggregate Demand, Domestic Product, and National Income	530	(1)
The Circular Flow of Spending, Production, and Income	531	(2)
Consumer Spending and Income: The Important Relationship	533	(3)
The Consumption Function and the Marginal Propensity to Consume	536	(1)
Factors That Shift the Consumption Function	537	(3)
Issue Revisited: Why the Tax Rebates Failed in 1975 and 2001	538	(2)
The Extreme Variability of Investment	540	(1)
The Determinants of Net Exports	540	(1)
National Incomes	541	(1)
Relative Prices and Exchange Rates	541	(1)
How Predictable Is Aggregate Demand?	541	(1)
Summary	542	(1)
Key Terms	543	(1)
Test Yourself	543	(1)
Discussion Questions	543	(1)
Appendix: National Income Accounting	544	(7)
Defining GDP: Exceptions to the Rules	544	(1)
GDP as the Sum of Final Goods and Services	544	(1)
GDP as the Sum of All Factor Payments	545	(2)
GDP as the Sum of Values Added	547	(1)
Summary	548	(1)
Key Terms	548	(1)
Test Yourself	548	(1)
Discussion Questions	549	(2)
Demand-Side Equilibrium: Unemployment or Inflation?	551	(24)
Issue: Why Does the Market Permit Unemployment?	552	(1)
The Meaning of Equilibrium GDP	552	(1)
The Mechanics of Income Determination	553	(3)
The Aggregate Demand Curve	556	(2)
Demand-Side Equilibrium and Full Employment	558	(1)
The Coordination of Saving and Investment	559	(1)
Changes on the Demand Side: Multiplier Analysis	560	(5)
The Magic of the Multiplier	561	(1)
Demystifying the Multiplier: How It Works	562	(1)
Algebraic Statement of the Multiplier	563	(2)
The Multiplier Is a General Concept	565	(1)
The Multiplier and the Aggregate Demand Curve	566	(1)
Summary	567	(1)
Key Terms	568	(1)
Test Yourself	568	(1)
Discussion Questions	569	(1)
Appendix A: The Simple Algebra of Income Determination and the Multiplier	569	(1)
Test Yourself	570	(1)
Discussion Questions	570	(1)
Appendix B: The Multiplier with Variable Imports	570	(5)
Summary	573	(1)
Test Yourself	573	(1)
Discussion Question	573	(2)
Supply-Side Equilibrium: Unemployment and Inflation?	575	(18)
Puzzle: Why Did Inflation Fall While the Economy Boomed?	576	(1)
The Aggregate Supply Curve	576	(3)
Why the Aggregate Supply Curve Slopes Upward	576	(1)
Shifts of the Agregate Supply Curve	577	(2)
Equilibrium of Aggregate Demand and Supply	579	(1)
Inflation and the Multiplier	580	(1)
Recessionary and Inflationary Gaps Revisited	581	(2)
Adjusting to a Recessionary Gap: Deflation or Unemployment?	583	(1)
Does the Economy Have a Self-Correcting Mechanism?	584	(1)
An Example from Recent History: Deflation in Japan	584	(1)
Adjusting to an Inflationary Gap: Inflation	584	(3)
Demand Inflation and Stagflation	585	(1)
A U.S. Example	586	(1)
Stagflation From a Supply Shock	587	(1)
Applying the Model to a Growing Economy	588	(3)
Demand-Side Fluctuations	588	(1)
Supply-Side Fluctuations	589	(2)
Puzzle Resolved: Explaining The Roaring Nineties	591	(1)
A Role for Stabilization Policy	591	(1)
Summary	591	(1)
Key Terms	592	(1)
Test Yourself	592	(1)
Discussion Questions	592	(1)
PART VII FISCAL AND MONETARY POLICY	593	(116)
Managing Aggregate Demand: Fiscal Policy	595	(20)
Issue: Aggregate Demand, Aggregate Supply, and The Tax-Cut Debate of 2004	596	(1)
Income Taxes and the Consumption Schedule	596	(1)
The Multiplier Revisited	597	(3)
The Tax Multiplier	597	(1)
Income Taxes and the Multiplier	597	(1)
Automatic Stabilizers	598	(1)
Government Transfer Payments	599	(1)
Issue Revisited: The Bush-Kerry Debate over Taxes and Spending	600	(1)
Planning Expansionary Fiscal Policy	600	(1)
Planning Contractionary Fiscal Policy	601	(1)
The Choice Between Spending Policy and Tax Policy	601	(1)
Issue Redux: Bush versus Kerry	602	(1)
Some Harsh Realities	602	(1)
The Idea Behind Supply-Side Tax Cuts	603	(4)
Some Flies in the Ointment	604	(1)
Issue: Kerry and Bush Once More	605	(1)
Toward an Assessment of Supply-Side Economics	606	(1)
Summary	607	(1)
Key Terms	607	(1)
Test Yourself	607	(1)
Discussion Questions	608	(1)
Appendix A: Graphical Treatment of Taxes and Fiscal Policy	608	(3)
Multipliers for Tax Policy	610	(1)
Summary	611	(1)
Key Terms	611	(1)
Test Yourself	611	(1)
Discussion Questions	611	(1)
Appendix B: Algebraic Treatment of Fiscal Policy	611	(4)
Test Yourself	613	(2)
Money and the Banking System	615	(20)
Issue: Why Are Banks so Heavily Regulated?	616	(1)
The Nature of Money	616	(4)
Barter versus Monetary Exchange	617	(1)
The Conceptual Definition of Money	618	(1)
What Serves as Money?	618	(2)
How the Quantity of Money Is Measured	620	(2)
M1	620	(1)
M2	621	(1)
Other Definitions of the Money Supply	621	(1)
The Banking System	622	(3)
How Banking Began	622	(1)
Principles of Bank Management: Profits versus Safety	623	(1)
Bank Regulation	624	(1)
The Origins of the Money Supply	625	(1)
How Bankers Keep Books	625	(1)
Banks and Money Creation	626	(5)
The Limits to Money Creation by a Single Bank	626	(1)
Multiple Money Creation by a Series of Banks	627	(3)
The Process in Reverse: Multiple Contractions of the Money Supply	630	(1)
Why the Money Creation Formula Is Oversimplified	631	(1)
The Need for Monetary Policy	632	(1)
Summary	633	(1)
Key Terms	633	(1)
Test Yourself	634	(1)
Discussion Questions	634	(1)
Managing Aggregate Demand: Monetary Policy	635	(16)
Issue: Just Why Is Alan Greenspan so Important?	636	(1)
Money and Income: The Important Difference	636	(1)
America's Central Bank: The Federal Reserve System	637	(2)
Origins and Structure	637	(1)
Central Bank Independence	638	(1)
Implementing Monetary Policy: Open-Market Operations	639	(3)
The Market for Bank Reserves	639	(1)
The Mechanics of an Open-Market Operation	640	(2)
Open-Market Operations, Bond Prices, and Interest Rates	642	(1)
Other Methods of Monetary Control	642	(2)
Lending to Banks	643	(1)
Changing Reserve Requirements	644	(1)
How Monetary Policy Works	644	(2)
Investment and Interest Rates	645	(1)
Monetary Policy and Total Expenditure	645	(1)
Money and the Price Level in the Keynesian Model	646	(2)
Application: Why the Aggregate Demand Curve Slopes Downward	647	(1)
From Models to Policy Debates	648	(1)
Summary	648	(1)
Key Terms	649	(1)
Test Yourself	649	(1)
Discussion Questions	650	(1)
The Debate Over Monetary and Fiscal Policy	651	(22)
Issue: Should We Forsake Stabilization Policy?	652	(1)
Velocity and the Quantity Theory of Money	652	(3)
Some Determinants of Velocity	654	(1)
Monetarism: The Quantity Theory Modernized	655	(1)
Fiscal Policy, Interest Rates, and Velocity	655	(2)
Application: The Multiplier Formula Revisited	656	(1)
Application: The Government Budget and Investment	657	(1)
Debate: Should We Rely on Fiscal or Monetary Policy?	657	(1)
Debate: Should the Fed Control the Money Supply or Interest Rates?	658	(3)
Two Imperfect Alternatives	660	(1)
What Has the Fed Actually Done?	660	(1)
Debate: The Shape of the Aggregate Supply Curve	661	(2)
Debate: Should the Government Intervene?	663	(2)
Lags and the Rules-versus-Discretion Debate	665	(1)
Dimensions of the Rules-Versus-Discretion Debate	665	(4)
How Fast Does the Economy's Self-Correcting Mechanism Work?	665	(1)
How Long Are the Lags in Stabilization Policy?	666	(1)
How Accurate Are Economic Forcasts?	666	(1)
The Size of Government	666	(1)
Uncertainties Caused by Government Policy	666	(1)
A Political Business Cycle?	667	(1)
Issue Revisited: What Should Be Done?	668	(1)
Summary	669	(1)
Key Terms	670	(1)
Test Yourself	670	(1)
Discussion Questions	670	(3)
Budget Deficits in the Short and Long Run	673	(18)
Issue: Did the September 2001 Terrorist Attacks Warrant Fiscal Stimulus?	674	(1)
Should the Budget Be Balanced? The Short Run	674	(2)
The Importance of the Policy Mix	675	(1)
Surpluses and Deficits: The Long Run	676	(1)
Deficits and Debt: Terminology and Facts	677	(2)
Some Facts about the National Debt	677	(2)
Interpreting the Budget Deficit or Surplus	679	(3)
The Structural Deficit or Surplus	679	(2)
On-Budget versus Off-Budget Surpluses	681	(1)
Conclusion: What Happened after 1981?	681	(1)
Why Is the National Debt Considered A Burden?	682	(1)
Budget Deficits and Inflation	683	(1)
The Monetization Issue	683	(1)
Debt, Interest Rates, and Crowding Out	684	(2)
The Bottom Line	686	(1)
The Main Burden of the National Debt: Slower Growth	686	(2)
Issue Revisited: Was Fiscal Stimulus Warranted in 2001?	687	(1)
The Economics and Politics of the U.S. Budget Deficit	688	(1)
Summary	689	(1)
Key Terms	689	(1)
Test Yourself	690	(1)
Discussion Questions	690	(1)
The Trade-Off Between Inflation and Unemployment	691	(18)
Issue: Is the Trade-off Between Inflation and Unemployment a Relic of the Past?	692	(1)
Demand-Side Inflation versus Supply-Side Inflation: A Review	692	(1)
Origins of the Phillips Curve	693	(2)
Supply-Side Inflation and the Collapse of the Phillips Curve	695	(1)
Explaining the Fabulous 1990s	695	(1)
Issue Resolved: Why Inflation and Unemployment Both Declined	696	(1)
What the Phillips Curve Is Not	696	(2)
Fighting Unemployment With Fiscal and Monetary Policy	698	(1)
What Should Be Done?	699	(1)
The Costs of Inflation and Unemployment	699	(1)
The Slope of the (Short-Run) Phillips Curve	699
The Efficiency of the Economy's Self-Correcting Mechanism	690	(10)
Inflationary Expectations and the Phillips Curve	700	(2)
The Theory of Rational Expectations	702	(2)
What Are Rational Expectations?	702	(1)
Rational Expectations and the Trade-Off	703	(1)
An Evaluation	703	(1)
Why Economists (And Politicians) Disagree	704	(1)
The Dilemma of Demand Management	705	(1)
Attempts to Reduce the Natural Rate of Unemployment	705	(1)
Indexing	706	(1)
Summary	707	(1)
Key Terms	708	(1)
Test Yourself	708	(1)
Discussion Questions	708	(1)
PART VIII THE UNITED STATES IN THE WORLD ECONOMY	709	(56)
International Trade and Comparative Advantage	711	(22)
Issue: How Can Americans Compete with ``Cheap Foreign Labor''?	712	(1)
Why Trade?	713	(1)
Mutual Gains from Trade	713	(1)
International Versus Intranational Trade	714	(1)
Political Factors in International Trade	714	(1)
The Many Currencies Involved in International Trade	714	(1)
Impediments to Mobility of Labor and Capital	714	(1)
The Law of Comparative Advantage	715	(4)
The Arithmetic of Comparative Advantage	715	(1)
The Graphics of Comparative Advantage	716	(3)
Issue Resolved: Comparative Advantage Exposes the ``Cheap Foreign Labor'' Fallacy	719	(1)
Tariffs, Quotas, and Other Interferences With Trade	719	(2)
Tariffs versus Quotas	721	(1)
Why Inhibit Trade?	721	(4)
Gaining a Price Advantage for Domestic Firms	721	(1)
Protecting Particular Industries	722	(1)
National Defense and Other Noneconomic Considerations	723	(1)
The Infant-Industry Argument	724	(1)
Strategic Trade Policy	724	(1)
Can Cheap Imports Hurt a Country?	725	(2)
A Last Look at the ``Cheap Foreign Labor'' Argument	726	(1)
Summary	727	(1)
Key Terms	728	(1)
Test Yourself	728	(1)
Discussion Questions	728	(1)
Appendix: Supply, Demand, and Pricing in World Trade	729	(4)
How Tariffs and Quotas Work	730	(1)
Summary	731	(1)
Test Yourself	731	(2)
The International Monetary System: Order or Disorder?	733	(18)
Puzzle: Why Has the Dollar Been Sagging?	734	(1)
What Are Exchange Rates?	734	(1)
Exchange Rate Determination in a Free Market	735	(6)
Interest Rates and Exchange Rates: The Short Run	737	(1)
Economic Activity and Exchange Rates: The Medium Run	738	(1)
The Purchasing-Power Parity Theory: The Long Run	738	(2)
Market Determination of Exchange Rates: Summary	740	(1)
When Governments Fix Exchange Rates: The Balance of Payments	741	(1)
A Bit of History: The Gold Standard and the Bretton Woods System	742	(2)
The Classical Gold Standard	742	(1)
The Bretton Woods System	743	(1)
Adjustment Mechanisms Under Fixed Exchange Rates	744	(1)
Why Try to Fix Exchange Rates?	744	(1)
The Current ``Nonsystem''	745	(4)
The Role of the IMF	746	(1)
The Volatile Dollar	746	(2)
The Birth of the Euro	748	(1)
Puzzle Resolved: Why the Dollar Rose and then Fell	748	(1)
Summary	749	(1)
Key Terms	749	(1)
Test Yourself	750	(1)
Discussion Questions	750	(1)
Exchange Rates and the Macroeconomy	751	(14)
Issue: Should the U.S. Government Try to Stop the Dollar from Falling?	752	(1)
International Trade, Exchange Rates, and Aggregate Demand	752	(2)
Relative Prices, Exports, and Imports	752	(1)
The Effects of Changes in Exchange Rates	753	(1)
Aggregate Supply in an Open Economy	754	(1)
The Macroeconomic Effects of Exchange Rates	754	(2)
Interest Rates and International Capital Flows	755	(1)
Fiscal and Monetary Policies in an Open Economy	756	(2)
Fiscal Policy Revisited	756	(1)
Monetary Policy Revisited	757	(1)
International Aspects of Deficit Reduction	758	(2)
The Loose Link between the Budget Deficit and the Trade Deficit	759	(1)
Is the Trade Deficit a Problem?	760	(1)
On Curing the Trade Deficit	760	(2)
Change the Mix of Fiscal and Monetary Policy	760	(1)
More Rapid Economic Growth Abroad	761	(1)
Raise Domestic Saving or Reduce Domestic Investment	761	(1)
Protectionism	761	(1)
Conclusion: No Nation Is an Island	762	(1)
Issue Revisited: Should the Dollar Be Allowed to Fall?	762	(1)
Summary	763	(1)
Key Terms	763	(1)
Test Yourself	764	(1)
Discussion Questions	764	(1)
Glossary	765	(12)
Index	777