Essentials of Economics

by Mankiw, N. Gregory

• ISBN13: 9780030292712
• ISBN10: 0030292719
• Edition: 2nd
• Format: Paperback
• Copyright: 2000-06-08
• Publisher: South-Western College Pub

Summary

With an easy-to-understand writing style, ESSENTIALS OF ECONOMICS is the most popular and widely used economics textbook in college Economics classes. Author Greg Mankiw has created a textbook that's accessible to everyone, particularly students encountering economics for the first time -- emphasizing real-life scenarios and engaging facts on the economy and its fundamental principles.

Table of Contents

Preface to the Instructor	xi
Preface to the Student	xxix
PART ONE INTRODUCTION	1	(62)
Ten Principles of Economics	3	(16)
How People Make Decisions	4	(4)
People Face Tradeoffs	4	(1)
The Cost of Something Is What You Give Up to Get It	5	(1)
Rational People Think at the Margin	6	(1)
People Respond to Incentives	7	(1)
How People Interact	8	(4)
Trade Can Make Everyone Better Off	8	(1)
Markets Are Usually a Good Way to Organize Economic Activity	9	(1)
FYI: Adam Smith and the Invisible Hand	10	(1)
Governments Can Sometimes Improve Market Outcomes	11	(1)
How the Economy as a Whole Works	12	(3)
A Country's Standard of Living Depends on Its Ability to Produce Goods and Services	12	(1)
Prices Rise When the Government Prints Too Much Money	13	(1)
Society Faces a Short-Run Tradeoff between Inflation and Unemployment	14	(1)
Conclusion	15	(1)
Summary	16	(1)
Key Concepts	16	(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	21	(1)
The Role of Assumptions	22	(1)
Economic Models	22	(1)
Our First Model: The Circular-Flow Diagram	23	(2)
Our Second Model: The Production Possibilities Frontier	25	(2)
Microeconomics and Macroeconomics	27	(1)
The Economist as Policy Adviser	28	(3)
Positive versus Normative Analysis	28	(1)
Economists in Washington	29	(2)
Why Economists Disagree	31	(2)
Differences in Scientific Judgments	31	(1)
Differences in Values	32	(1)
Perception versus Reality	32	(1)
Let's Get Going	33	(1)
Summary	34	(1)
Key Concepts	34	(1)
Questions for Review	34	(1)
Problems and Applications	35	(1)
Appendix: Graphing---A Brief Review	36	(11)
Graphs of Single Variable	36	(1)
Graphs of Two Variables: The Coordinate System	37	(1)
Curves in the Coordinate System	38	(3)
Slope	41	(1)
Cause and Effect	42	(1)
Omitted Variables	43	(1)
Reverse Causality	44	(3)
Interdependence and the Gains from Trade	47	(16)
A Parable for the Modern Economy	48	(4)
Production Possibilities	48	(2)
Specialization and Trade	50	(2)
The Principle of Comparative Advantage	52	(3)
Absolute Advantage	53	(1)
Opportunity Cost and Comparative Advantage	53	(1)
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?	56	(1)
In the News: Who Has a Comparative Advantage in Producing Lamb?---Lamb Tariffs Fleece U.S. Consumers	56	(1)
Should the United States Trade with Other Countries?	57	(1)
Conclusion	58	(1)
Summary	59	(1)
Key Concepts	59	(1)
Questions for Review	59	(1)
Problems and Applications	59	(4)
PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK	63	(76)
The Market Forces of Supply and Demand	65	(28)
Markets and Competition	66	(1)
Competitive Markets	66	(1)
Competition: Perfect and Otherwise	66	(1)
Demand	67	(8)
What Determines the Quantity and Individual Demands?	67	(1)
Price	68	(1)
Income	68	(1)
Prices of Related Goods	68	(1)
Tastes	68	(1)
Expectations	68	(1)
The Demand Schedule and the Demand Curve	69	(1)
Ceteris Paribus	70	(1)
Market Demand versus Individual Demand	70	(2)
Shifts in the Demand Curve	72	(1)
Case Study: Two Ways to Reduce the Quantity of Smoking Demanded	73	(2)
Supply	75	(3)
What Determines the Quantity an Individual Supplies?	75	(1)
Price	75	(1)
Input Prices	75	(1)
Technology	75	(1)
Expectations	75	(1)
The Supply Schedule and the Supply Curve	76	(1)
Market Supply versus Individual Supply	77	(1)
Shifts in the Supply Curve	77	(1)
Supply and Demand Together	78	(10)
Equilibrium	78	(3)
Three Steps to Analyzing Changes in Equilibrium	81	(2)
Example: A Change in Demand	83	(1)
Shifts in Curves versus Movements along Curves	83	(1)
Example: A Change in Supply	84	(1)
Example: A Change in Both Supply and Demand	85	(1)
In the News: Mother Nature Shits the Supply Curve---4-Day Cold Spell Slams California: Crops Devastated; Price of Citrus to Rise	86	(1)
Summary	86	(2)
Conclusion: How Prices Allocate Resources	88	(1)
Summary	89	(1)
Key Concepts	90	(1)
Questions for Review	90	(1)
Problems and Applications	90	(3)
Elasticity and Its Application	93	(24)
The Elasticity of Demand	94	(10)
The Price Elasticity of Demand and Its Determinants	94	(1)
Necessites versus Luxuries	94	(1)
Availability of Close Substitutes	95	(1)
Definition of the Market	95	(1)
Time Horizon	95	(1)
Computing the Price Elasticity of Demand	95	(1)
the Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities	96	(2)
The Variety of Demand Curves	98	(1)
Total Revenue and the Price Elasticity of Demand	98	(3)
Elasticity and Total Revenue along a Linear Demand Curve	101	(1)
Case Study: Pricing Admission to a Museum	102	(1)
Other Demand Elasticities	102	(1)
The Income Elasticity of Demand	102	(1)
In the News: On the Road with Elasticity---For Whom the Both Tolls, Price Really Does Matter	103	(1)
The Cross-Price Elasticity of Demand	104	(1)
The Elasticity of Supply	104	(4)
The Price Elasticity of Supply and Its Determinants	104	(1)
Computing the Price Elasticity of Supply	105	(1)
The Variety of Supply Curves	105	(3)
Three Applications of Supply, Demand, and Elasticity	108	(5)
Can Good News for Farming Be Bad News for Farmers?	108	(2)
Why Did OPEC Fail to Keep the Price of Oil High?	110	(2)
Does Drug Interdiction Increase or Decrease Drug-Related Crime?	112	(1)
Conclusion	113	(1)
Summary	114	(1)
Key Concepts	114	(1)
Questions for Review	114	(1)
Problems and Applications	115	(2)
Supply, Demand, and Government Policies	117	(22)
Controls on Prices	118	(10)
How Price Ceilings Affect Market Outcomes	118	(2)
Case Study: Lines at the Gas Pump	120	(1)
In the News: Does a Drought Need to Cause a Water Shortage?---Trickle-Down Economics	121	(1)
Case Study: Rent Control in the Short Run and Long Run	122	(1)
How Price Floors Affect Market Outcomes	123	(1)
In the News: Rent Control in New York---Threat to End Rent Control Stirs Up NYC	124	(2)
Case Study: The Minimum Wage	126	(1)
Evaluating Price Controls	127	(1)
Taxes	128	(7)
How Taxes on Buyers Affect Market Outcomes	129	(1)
How Taxes on Sellers Affect Market Outcomes	130	(1)
Case Study: Can Congress Distribute the Burden of a Payroll Tax?	131	(2)
Elasticity and Tax Incidence	133	(1)
Case Study: Who Pays the Luxury Tax?	134	(1)
Conclusion	135	(1)
Summary	135	(1)
Key Concepts	136	(1)
Questions for Review	136	(1)
Problems and Applications	136	(3)
PART THREE SUPPLY AND DEMAND II: MARKETS AND WELFARE	139	(64)
Consumers, Producers, and The Efficiency of Markets	141	(20)
Consumer Surplus	142	(5)
Willingness to Pay	142	(1)
Using the Demand Curve to Measure Consumer Surplus	143	(3)
How a Lower Price Raises Consumer Surplus	146	(1)
What Does Consumer Surplus Measures?	147	(1)
Producer Surplus	147	(5)
Cost and the Willingness to Sell	148	(1)
Using the Supply Curve to Measure Producer Surplus	149	(2)
How a Higher Price Raises Producer Surplus	151	(1)
Market Efficiency	152	(3)
The Benevolent Social Planner	152	(1)
Evaluating the Market Equilibrium	153	(3)
In the News: Ticket Scalping---Tickets? Supply Meets Demand on Sidewalk	156
Conclusion: Market Efficiency and Market Failure	155	(3)
Summary	158	(1)
Key Concepts	158	(1)
Questions for Review	158	(1)
Problems and Applications	158	(3)
Application: The Costs of Taxation	161	(18)
The Deadweight Loss of Taxation	162	(4)
How A Tax Affects Market Participants	163	(1)
Welfare without a Tax	164	(1)
Welfare with a Tax	165	(1)
Changes in Welfare	165	(1)
Deadweight Losses and the Gains from Trade	165	(1)
The Determinants of the Deadweight Loss	166	(4)
Case Study: The Deadweight Loss Debate	168	(2)
FYI: Henry George and the Land Tax	170	(1)
Deadweight Loss and Tax Revenue as Taxes Vary	170	(5)
Case Study: The Laffer Curve and Supply-Side Economics	172	(2)
In the News: How to Be Master of the Universe---Supply-Side Is a Winning Strategy	174	(1)
Conclusion	175	(1)
Summary	175	(1)
Key Concepts	176	(1)
Questions for Review	176	(1)
Problems and Applications	176	(3)
Application: International Trade	179	(24)
The Determinants of Trade	180	(2)
The Equilibrium without Trade	180	(1)
The World Price and Comparative Advantage	181	(1)
The Winners and Losers from Trade	182	(10)
The Gains and Losses of an Exporting Country	182	(2)
The Gains and Losses of an Importing Country	184	(2)
The Effects of a Tariff	186	(1)
In the News: Life in Isoland---Clinton Warns U.S. Will Fight Cheap Imports	187	(2)
The Effects of an Import Quota	189	(2)
The Lessons for Trade Policy	191	(1)
The Arguments for Restricting Trade	192	(5)
FYI: Other Benefits of International Trade	193	(1)
The Jobs Argument	193	(1)
The National-Security Argument	194	(1)
The Infant-Industry Argument	194	(1)
The Unfair-Competition Argument	195	(1)
The Protection-as-a-Bargaining-Chip Argument	195	(1)
Case Study: Trade Agreements	195	(1)
In the News: A Chicken Invasion---U.S. Chicken in Every Pot? Nyet! Russians Cry Foul	196	(1)
Conclusion	197	(3)
In the News: The Case for Unilateral Disarmament in the Trade Wars---Free Trade without Treaties	198	(2)
Summary	200	(1)
Key Concepts	200	(1)
Questions for Review	200	(1)
Problems and Applications	201	(2)
PART FOUR THE ECONOMICS OF THE PUBLIC SECTOR	203	(40)
Externalities	205	(20)
Externalities and Market Inefficiency	207	(5)
Welfare Economics: A Recap	207	(1)
Negative Externalities in Production	208	(1)
Positive Externalities in Production	209	(1)
Case Study: The Debate over Technology Policy	210	(1)
Externalities in Consumption	211	(1)
Private Solutions to Externalities	212	(3)
The Types of Private Solutions	212	(1)
The Coase Theorem	213	(1)
Why Private Solutions Do Not Always Work	214	(1)
Public Policies toward Externalities	215	(5)
Regulation	215	(1)
Pigovian Taxes and Subsidies	216	(1)
Case Study: Why is Gasoline Taxed So Heavily?	217	(1)
Tradable Pollution Permits	218	(1)
Objectives to the Economic Analysis of Pollution	219	(2)
In the News: Children as Externalities---Mum's the Word: When Children Should Be Screened and Not Head	221
Conclusion	220	(2)
Summary	222	(1)
Key Concepts	222	(1)
Questions for Review	222	(1)
Problems and Applications	222	(3)
Public Goods and Common Resources	225	(18)
The Different Kinds of Goods	226	(1)
Public Goods	227	(6)
The Free-Rider Problem	228	(1)
Some Important Public Goods	228	(1)
National Defense	228	(1)
Basic Research	228	(1)
Figthing Poverty	229	(1)
Case Study: Are Lighthouses Public Goods?	230	(1)
The Difficult Job of Cost-Benefit Analysis	231	(1)
Case Study: How Much Is a Life Worth?	231	(2)
In the News: Existence Value---They Exist. Therefore They Are. But, Do You Care?	233	(1)
Common Resources	233	(6)
The Tragedy of the Commons	234	(1)
Som Important Common Resources	235	(1)
Clean Air and Water	235	(1)
Oil Pools	235	(1)
Congested Roads	235	(1)
In the News: The Singapore Solution---Economics of Road Pricing	236	(1)
Fish, Whales, and Other Wildlife	237	(1)
In the News: Should Yellowstone Charge as Much as Disney World?---Save the Parks, and Make a Profit	238	(1)
Case Study: Why the Cow Is Not Extinct	238	(1)
Conclusion: The Importance of Property Rights	239	(1)
Summary	240	(1)
Key Concepts	240	(1)
Questions for Review	240	(1)
Problems and Applications	241	(2)
PART FIVE FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY	243	(82)
The Costs of Production	245	(22)
What Are Costs?	246	(3)
Total Revenue, Total Cost, and Profit	246	(1)
Costs as Opportunity Costs	247	(1)
The Cost of Capital as an Opportunity Cost	247	(1)
Economic Profit versus Accounting Profit	248	(1)
Production and Costs	249	(3)
The Production Function	249	(2)
From the Production Function to the Total-Cost Curve	251	(1)
The Various Measures of Cost	252	(7)
Fixed and Variable Costs	253	(1)
Average and Marginal Cost	254	(1)
Cost Curves and Their Shapes	255	(1)
Rising Marginal Cost	255	(1)
U-Sjhaped Average Total Cost	256	(1)
The Relationship between Marginal Cost and Average Total Cost	256	(1)
Typical Cost Curves	256	(3)
Costs in the Short Run and in the Long Run	259	(2)
The Relationship Between Short-Run and Long-Run Average Total Cost	259	(1)
Economies and Diseconomies of Scale	260	(1)
FYI: Lessons from a Pin Factory	261	(1)
Conclusion	261	(1)
Summary	262	(1)
Key Concepts	263	(1)
Questions for Review	263	(1)
Problems and Applications	263	(4)
Firms in Competitive Markets	267	(24)
What Is a Competitive Market?	268	(2)
The Meaning of Competition	268	(1)
The Revenue of a Competitive Firm	269	(1)
Profit Maximization and the Competitive Firm's Supply Curve	270	(10)
A Simple Example of Profit Maximization	270	(1)
The Marginal-Cost Curve and the Firm's Supply Decision	271	(2)
The Firm's Short-Run Decision to Shut Down	273	(1)
Spilt Milk and Other Sunk Costs	274	(2)
Case Study: Near-Empty Restaurants and Off-Season Miniature Golf	276	(1)
The Firm's Long-Run Decision to Exit or Enter a Market	276	(1)
Measuring Profit in Our Graph for the Competitive Firm	277	(1)
In the News: Entry and Exit in Transition Economies---Russia Is Not Poland, and That's Too Bad	278	(2)
Supply Curve in a Competitive Market	280	(7)
The Short Run: Market Supply with a Fixed Number of Firms	280	(1)
The Long Run: Market Supply with Entry and Exit	281	(2)
Why Do Competitive Firms Stay in Business If They Make Zero Profit?	283	(1)
A Shift in Demand in the Short Run and Long Run	284	(1)
Why the Long-Run Supply Curve Might Slope Upward	284	(2)
In the News: Entry or Overinvestment?---In Some Industries, Executives Foresee Tough Times Ahead; A Key Culprit: High Profits	286	(1)
Conclusion: Behind the Supply Curve	287	(1)
Summary	287	(1)
Key Concepts	288	(1)
Questions for Review	288	(1)
Problems and Applications	288	(3)
Monopoly	291	(34)
Why Monopolies Arise	292	(4)
Monopoly Resources	293	(1)
Case Study: The DeBeers Diamond Monopoly	293	(1)
Government-Created Monopolies	294	(1)
Natural Monopolies	294	(2)
How Monopolies Make Production and Pricing Decisions	296	(7)
Monopoly versus Competition	296	(1)
A Monopoly's Revenue	296	(3)
Profit Maximization	299	(2)
FYI: Why a Monopoly Does Not Have a Supply Curve	301	(1)
A Monopoly's Profit	301	(1)
Case Study: Monopoly Drugs versus Generic Drugs	302	(1)
The Welfare Cost of Monopoly	303	(3)
The Deadweight Loss	304	(2)
The Monopoly's Profit: A Social Cost?	306	(1)
Public Policy toward Monopolies	306	(6)
Increasing Competition with Antitrust Laws	307	(1)
Regulation	308	(1)
Public Ownership	309	(1)
In the News: Public Transport and Private Enterprise---Man with a Van	310	(1)
Doing Nothing	310	(2)
Price Discrimination	312	(7)
A Parable about Pricing	312	(1)
The Moral of the Story	313	(1)
The Analytics of Price Discrimination	314	(1)
Examples of Price Discrimination	315	(1)
Movie Tickets	315	(1)
In the News: The Best Monopolist---Let's Play Monopoly	316	(2)
Airline Prices	318	(1)
Discount Coupons	318	(1)
Financial Aid	318	(1)
Quantity Discounts	318	(1)
Conclusion: The Prevalence of Monopoly	319	(1)
Summary	319	(1)
Key Concepts	320	(1)
Questions for Review	320	(1)
Problems and Applications	320	(5)
PART SIX THE DATA OF MACROECONOMICS	325	(36)
Measuring a Nation's Income	327	(18)
The Economy's Income and Expenditure	328	(2)
The Measurement of Gross Domestic Product	330	(3)
``GDP Is the Market Value...''	330	(1)
``Of All...''	330	(1)
``Final...''	331	(1)
``Goods and Services...''	331	(1)
``Produced...''	331	(1)
``Within a Country...''	331	(1)
FYI: Other Measures of Income	332	(1)
``...In a Given Period of Time.''	332	(1)
The Components of GDP	333	(1)
Real versus Nominal GDP	334	(4)
A Numerical Example	335	(1)
The GDP Deflator	336	(1)
Case Study: Real GDP over Recent History	337	(1)
GDP and Economic Well-Being	338	(4)
In the News: GDP Lightens Up---From Greenspan, a (Truly) Weighty Idea	339	(1)
Case Study: International Differences in GDP and the Quality of Life	340	(1)
In the News: Hidden GDP---The Russian Economy: Notes from Underground	341	(1)
Conclusion	342	(1)
Summary	342	(1)
Key Concepts	343	(1)
Questions for Review	343	(1)
Problems and Applications	343	(2)
Measuring the Cost of Living	345	(16)
The Consumer Price Index	346	(8)
How to Consumer Price Index Is Calculated	346	(2)
FYI: What is in the CPI's Basket?	348	(1)
Problems in Measuring the Cost of Living	349	(1)
In the News: Shopping for the CPI---Is the CPI Accurate? Ask the Sleuths Who Get the Numbers	350	(2)
In the News: A CPI for Senior Citizens---Prices That Don't Fit the Profile: Is Index Mismatched to Retirees' Reality?	352	(1)
The GDP Deflator versus the Consumer Price Index	353	(1)
Correctomg Economic Variables for the Effects of Inflation	354	(4)
Dollar Figures from Different Times	354	(1)
Case Study: Mr. Index Goes to Hollywood	355	(1)
Imdexatopm	355	(1)
Real and Nominal Interest Rates	356	(2)
Conclusion	358	(1)
Summary	358	(1)
Key Concepts	359	(1)
Questions for Review	359	(1)
Problems and Applications	359	(2)
PART SEVEN THE REAL ECONOMY IN THE LONG RUN	361	(78)
Production and Growth	364	(23)
Economic Growth around the World	364	(2)
FYI: The Magic of Compounding and the Rule of 70	366	(1)
Productivity: Its Role and Determinants	366	(5)
Why Productivity Is So Important	367	(1)
How Productivity Is Determined	367	(1)
Physical Capital	368	(1)
Human Capital	368	(1)
Natural Resources	368	(1)
Technological Knowledge	369	(1)
FYI: The Production Function	369	(1)
Case Study: The Natural Resources a Limit to Growth?	370	(1)
Economic Growth and Public Policy	371	(10)
The Important of Saving and Investment	371	(2)
Diminishing Returns and the Catch-Up Effect	373	(1)
Investment from Abroad	374	(1)
Education	375	(1)
Property Rights and Political Stability	375	(1)
Free Trade	376	(1)
The Control of Population Growth	377	(1)
FYI: Thomas Malthus on Population Growth	378	(1)
Research and Development	379	(1)
Case Study: The Productivity Slowdown	379	(2)
Conclusion: The Importance of Long-Run Growth	381	(3)
In the News: A Solution to Africa's Problems---Growth in Africa: It Can Be Done	382	(2)
Summary	384	(1)
Key Concepts	384	(1)
Questions for Review	384	(1)
Problems and Applications	384	(3)
Saving, Investment, and The Financial System	387	(26)
Financial Institutions in the U.S. Economy	388	(5)
Financial Markets	389	(1)
The Bond Market	389	(1)
The Stock Market	390	(1)
Financial Intermediaries	390	(1)
FYI: How to Read the Newspaper's Stock Tables	391	(1)
Banks	391	(1)
Mutual Funds	392	(1)
Summing Up	393	(1)
Saving and Investment in the National Income Accounts	393	(5)
In the News: The Stock Market Boom of the 1990s---Are Stocks Overvalued? Not a Chance	394	(1)
Some Important Identities	394	(3)
The Meaning of Saving and Investment	397	(1)
The Market for Loanable Funds	398	(10)
Supply and Demand for Loanable Funds	398	(3)
FYI: Present Value	401	(1)
Policy 1: Taxes and Saving	402	(1)
Policy 2: Taxes and Investment	403	(1)
Policy 3: Government Budget Deficits and Surpluses	404	(2)
Case Study: The Debate over the Budget Surplus	406	(1)
Case Study: The History of U.S. Government Debt	407	(1)
Conclusion	408	(1)
Summary	409	(1)
Key Concepts	409	(1)
Questions for Review	409	(1)
Problems and Applications	410	(3)
Unemployment and Its Natural Rate	413	(26)
Identifying Unemployment	414	(7)
How Is Unemployment Measures?	414	(4)
Case Study: Labor-Force Participation of Men and Women in the U.S. Economy	418	(1)
Does the Unemployment Rate Measure What We Want It To?	419	(1)
How Long Are the Unemployed without Work?	420	(1)
Why Are There Always Some People Unemployed?	421	(1)
Job Search	421	(4)
Why Some Frictional Unemployment Is Inevitable	422	(1)
Public Policy and Job Search	422	(1)
Unemployment Insurance	423	(1)
In the News: German Unemployment---For Germany, Benefits Are Also a Burden	424	(1)
Minimum-Wage Laws	425	(1)
Unions and Collective Bargaining	426	(4)
The Economics of Unions	427	(1)
Are Unions Good or Bad for the Economy?	428	(1)
In the News: Should You Join a Union?---On Payday, Union Jobs Stack Up Very Well	429	(1)
The Theory of Efficiency Wages	430	(5)
Worker Health	431	(1)
Worker Turnover	431	(1)
Worker Effort	431	(1)
Worker Quality	432	(1)
FYI: The Economics of Asymmetric Information	433	(1)
Case Study: Henry Ford and the Very Generous $5-a-Day Wage	434	(1)
Conclusion	435	(1)
Summary	436	(1)
Key Concepts	436	(1)
Questions for Review	436	(1)
Problems and Applications	437	(2)
PART EIGHT MONEY AND PRICES IN THE LONG RUN	439	(50)
The Meaning of Money	442	(19)
The Functions of Money	443	(4)
The Kinds of Money	443	(1)
In the News: Money on the Island of Yap---Fixed Assets, or Why a Loan in Yap Is Hard to Roll Over	444	(1)
Money in the U.S. Economy	445	(1)
FYI: Credit Cards, Debit Cards, and Money	446	(1)
Case Study: Where Is All the Currency?	446	(1)
The Federal Reserve System	447	(2)
The Fed's Organization	448	(1)
The Federal Open Market Committee	448	(1)
Banks and the Money Supply	449	(8)
The Simple Case of 100-Percent-Reserve Banking	450	(1)
Money Creation with Fractional-Reserve Banking	451	(1)
The Money Multiplier	452	(1)
The Fed's Tools of Monetary Control	453	(1)
Open-Market Operations	454	(1)
Reserve Requirements	454	(1)
The Discount Rate	454	(1)
Problems in Controlling the Money Supply	455	(1)
Case Study: Bank Runs and the Money Supply	456	(1)
Conclusion	457	(1)
Summary	457	(1)
Key Concepts	458	(1)
Questions for Review	458	(1)
Problems and Applications	458	(3)
Money Growth and Inflation	461	(28)
The Classical Theory of Inflation	463	(12)
The Level of Prices and the Value of Money	463	(1)
Money Supply, Money Demand, and Monetary Equilibrium	464	(2)
The Effect of a Monetary Injection	466	(1)
A Brief Look at the Adjustment Process	466	(1)
The Classical Dichotomy and Monetary Neutrality	467	(2)
Velocity and the Quantity Equation	469	(2)
Case Study: Money and Prices during Four Hyperinflations	471	(1)
The Inflation Tax	472	(1)
In the News: Russia Turns to the Inflation Tax---Russia's New Leaders Plan to Pay Debts by Printing Money	473	(1)
The Fisher Effect	473	(2)
The Costs of Inflation	475	(8)
A Fall in Purchasing Power? The Inflation Fallacy	475	(1)
Shoeleather Costs	476	(1)
In the News: The Hyperinflation in Serbia---Special, Today Only: 6 Million Dinars for a Snickers Bar	477	(1)
Menu Costs	478	(1)
Relative-Price Variability and the Misallocation of Resources	478	(1)
Inflation-Induced Tax Distortions	478	(2)
Confusion and Inconvenience	480	(1)
A Special Cost of Unexpected Inflation: Arbitrary Redistributions of Wealth	481	(1)
Case Study: The Wizard of Oz and the Free-Silver Debate	481	(2)
Conclusion	483	(1)
In the News: How to Protect Your Savings from Inflation---Inflation Fighters for the Long Term	484	(1)
Summary	484	(2)
Key Concepts	486	(1)
Questions for Review	486	(1)
Problems and Applications	486	(3)
PART NINE SHORT-RUN ECONOMIC FLUCUATIONS	489	(322)
Aggregate Demand and Aggregate Supply	491	(32)
Three Key Facts about Economic Fluctuations	492	(3)
Economic Fluctuations Are Irregular and Unpredictable	492	(2)
Most Macroeconomic Quantities Fluctuate Together	494	(1)
As Output Falls, Unemployment Rises	495	(1)
Explaining Short-Run Economic Fluctuations	495	(2)
How the Short Run Differs from the Long Run	495	(1)
The Basic Model of Economic Fluctuations	496	(1)
The Aggregate-Demand Curve	497	(5)
Why the Aggregate-Demand Curve Slopes Downward	497	(1)
The Price Level and Consumption: The Wealth Effect	498	(1)
The Price Level and Investment: The Interest-Rate Effect	498	(1)
The Price Level and Net Exports: The Exchange-Rate Effect	499	(1)
Summary	499	(1)
Why the Aggregate-Demand Curve Might Shift	499	(1)
Shifts Arising from Consumption	499	(1)
Shifts Arising from Investment	500	(1)
Shifts Arising from Government Purchases	500	(1)
Shifts Arising from Net Exports	500	(1)
Summary	501	(1)
The Aggregate-Supply Curve	502	(8)
Why the Aggregate-Supply Curve Is Vertical in the Long Run	502	(1)
Why the Long-Run Aggregate-Supply Curve Might Shift	503	(1)
Shifts Arising from Labor	503	(1)
Shifts Arising from Capital	504	(1)
Shifts Arising from Natural Resources	504	(1)
Shifts Arising from Technological Knowledge	504	(1)
Summary	504	(1)
A New Way to Depict Long-Run Growth and Inflation	505	(1)
Why the Aggregate-Supply Curve Slopes Upward in the Short Run	506	(1)
The Misperceptions Theory	507	(1)
The Sticky-Wage Theory	507	(1)
The Sticky-Price Theory	507	(1)
Summary	508	(1)
Why the Short-Run Aggregate-Supply Curve Might Shift	508	(2)
Two Causes of Economic Fluctuations	510	(8)
The Effects of a Shift in Aggregate Demand	511	(2)
Case Study: Two Big Shifts in Aggregate Demand: The Great Depression and World War II	513	(2)
In the News: How Consumers Shift Aggregate Demand---Consumers Get the Credit for Expanding Economy	515	(1)
The Effect of a Shift in Aggregate Supply	515	(2)
Case Study: Oil and the Economy	517	(1)
Conclusion: The Origins of Aggregate Demand and Aggregate Supply	518	(1)
Summary	519	(1)
Key Concepts	520	(1)
Questions for Review	520	(1)
Problems and Applications	520	(3)
The Influence of Monetary and Fiscal Policy on Aggregate Demand	523	(288)
How Monetary Policy Influences Aggregate Demand	524	(10)
The Theory of Liquidity Preference	525	(1)
Money Supply	525	(1)
Money Demand	526	(1)
Equilibrium in the Money Market	527	(1)
The Downward Slope of the Aggregate-Demand Curve	527	(2)
FYI: Interest Rates in the Long Run and the Short Run	529	(1)
Changes in the Money Supply	530	(1)
The Role of Interest-Rate Targets in Fed Policy	530	(2)
Case Study: Why the Fed Watches the Stock Market (and Vice Versa)	532	(1)
In the News: European Central Bankers Expand Aggregate Demand---European Banks, Acting in Unison, Cut Interest Rate: 11 Nations Decide That Growth, Not Inflation, Is Top Concern	533	(1)
How Fiscal Policy Influences Aggregate Demand	534	(7)
Changes in Government Purchases	534	(1)
The Multiplier Effect	535	(1)
A Formula for the Spending Multiplier	535	(2)
Other Applications of the Multiplier Effect	537	(1)
The Crowding-Out Effect	538	(1)
Changes in Taxes	538	(2)
In the News: Japan Tries a Fiscal Stimulus---The Land of the Rising Outlook: Public Spending May Have Reversed Japan's Downturn	540	(1)
FYI: How Fiscal Policy Might Affect Aggregate Supply	541	(1)
Using Policy to Stabilize the Economy	541	(4)
The Case for Active Stabilization Policy	541	(1)
Case Study: Keynesians in the White House	542	(2)
The Case against Active Stabilization Policy	544	(1)
Automatic Stabilizers	544	(1)
Conclusion	545	(1)
In the News: The Independence of the Federal Reserve---Don't Tread on the Fed	546	(1)
Summary	546	(2)
Key Concepts	548	(1)
Questions for Review	548	(1)
Problems and Applications	548	(263)
Glossary	811
Credits	555	(2)
Index	557