Essentials of Economics with InfoTrac College Edition

by Sexton, Robert L.

• ISBN13: 9780324176704
• ISBN10: 0324176708
• Edition: 1st
• Format: Paperback
• Copyright: 2002-10-11
• Publisher: South-Western College Pub

Summary

Learn economics the easy way with ESSENTIALS OF ECONOMICS! Designed to take the intimidation out of economics, this economics text will help you master and retain the principles of economics. Short learning units, a built-in study guide, graphs, photos, and numerous study aids found throughout the text make learning easy by saving you valuable time. Xtra! provides you with the additional content practice and exam review materials you need to be successful in the course.

Table of Contents

The Role and Method of Economics	1	(22)
Economics: A Brief Introduction	2	(2)
Why Study Economics?	2	(1)
Economics---A Word with Many Different Meanings	2	(1)
Economics is all Around Us	3	(1)
In the News: Americans Score Poorly on Economic Literacy	4	(1)
Economics as a Science	4	(1)
Economics Is a Social Science	4	(1)
Macroeconomics and Microeconomics	5	(1)
Economic Behavior	5	(2)
Self-Interest	5	(1)
In the News: On Courage	6	(1)
Action and Inaction Have Consequences	6	(1)
Economic Theory	7	(2)
Economic Theories	7	(1)
Abstraction Is Important	7	(1)
Developing a Testable Proposition	8	(1)
From Hypothesis to Theory	8	(1)
Problems to Avoid in Scientific Thinking	9	(2)
Violation of the Ceteris Paribus Assumption	9	(1)
Confusing Correlation and Causation	9	(1)
In the News: Heavy Metal Music and Teen Suicide	10	(1)
The Fallacy of Composition	11	(1)
Positive and Normative Analysis	11	(12)
Positive Analysis	11	(1)
Normative Analysis	12	(1)
Positive Versus Normative Statements	12	(1)
Disagreement Is Common in Most Disciplines	12	(1)
In the News: Economists Do Agree	13	(1)
Economists Do Agree	13	(1)
Summary	14	(1)
Key Terms and Concepts	14	(1)
Review Questions	15	(1)
Appendix: Working with Graphs	16	(1)
Graphs Are an Important Economic Tool	16	(1)
Using Graphs and Charts	16	(2)
Using Graphs to Show the Relationship between Two Variables	18	(1)
The Graph of a Demand Curve	18	(1)
Using Graphs to Show the Relationship between Three Variables	19	(1)
Slope	20	(1)
Key Terms and Concepts	21
Study Guide	1	(22)
The Economic Way of Thinking	23	(18)
Scarcity	24	(3)
Know a Few Principles Well	24	(1)
Scarcity	24	(1)
Scarcity and Resources	24	(1)
Goods and Services	25	(1)
Are Those Who Want More Greedy?	25	(1)
Everyone Faces Scarcity	25	(1)
Even the Rich Face Scarcity	25	(1)
Scarcity and Growing Expectations	26	(1)
Opportunity Cost	27	(1)
Scarcity and Choices	27	(1)
To Choose Is to Lose	27	(1)
The Opportunity Cost of Going to College or Having a Child	27	(1)
Is That Really a Free Lunch, a Freeway, or a Free Beach?	28	(1)
Marginal Thinking	28	(3)
Choices are Primarily Marginal---Not All or Nothing	28	(3)
Incentives Matter	31	(3)
People Respond to Incentives	31	(1)
Application: Do Incentives Matter?	31	(1)
In the News: Cheating in School: Focusing on Integrity	32	(1)
Positive and Negative Incentives	32	(1)
Global Watch: Drunk Driving Draws Global Wrath	33	(1)
Specialization and Trade	34	(2)
Why Do People Specialize?	34	(1)
We All Specialize	34	(1)
Application: Comparative Advantage	34	(1)
The Advantages of Specialization	35	(1)
Specialization and Trade Lead to Greater Wealth and Prosperity	35	(1)
Market Prices Coordinate Economic Activity	36	(5)
How Does the Market System Work to Allocate Resources?	36	(1)
Market Prices Provide Important Information	36	(1)
What Effect Do Price Controls Have on the Market System?	37	(1)
Market Failure	37	(2)
Summary	39	(1)
Key Terms and Concepts	39	(1)
Review Questions	39
Study Guide	1	(40)
Scarcity, Trade-Offs, and Economic Growth	41	(18)
The Three Economic Questions Every Society Faces	42	(3)
Scarcity and the Allocation of Resources	42	(1)
What Is to Be Produced?	42	(1)
How Are the Goods to Be Produced?	43	(1)
Application: Market Signals	43	(1)
For Whom Are the Goods Produced?	44	(1)
The Circular Flow Model	45	(2)
Product Markets	45	(1)
Factor Markets	45	(1)
The Simple Circular Flow Model	45	(2)
The Production Possibilities Curve	47	(5)
The Production Possibilities Curve	47	(2)
Using Resources Efficiently	49	(1)
Inefficiency and Efficiency	50	(1)
The Law of Increasing Opportunity Costs	50	(1)
Application: The Production Possibilities Curve	51	(1)
Economic Growth and the Production Possibilities Curve	52	(7)
Generating Economic Growth	52	(1)
Growth Doesn't Eliminate Scarcity	53	(1)
Summing Up the Production Possibilities Curve	54	(1)
Global Watch: Correlation of Investment and Growth	55	(1)
In the News: Tourism Versus Ecosystems	56	(1)
Summary	57	(1)
Key Terms and Concepts	58	(1)
Review Questions	58
Study Guide	1	(58)
Supply and Demand	59	(36)
Markets	60	(1)
Defining a Market	60	(1)
Buyers and Sellers	60	(1)
Demand	61	(4)
The Law of Demand	61	(1)
Why Is There a Negative Relationship between Price and the Quantity Demanded?	61	(1)
An Individual Demand Schedule	62	(1)
An Individual Demand Curve	62	(1)
What Is a Market Demand Curve?	62	(2)
A Money Price	64	(1)
Money Prices Versus Relative Prices	64	(1)
Shifts in the Demand Curve	65	(7)
A Change in Demand Versus a Change in Quantity Demanded	65	(1)
Shifts in Demand	66	(1)
The Prices of Related Goods	66	(1)
Application: Substitute Goods	67	(1)
Application: Complementary Goods	68	(1)
Income	68	(1)
Application: Normal and Inferior Goods	69	(1)
Number of Buyers	69	(1)
Tastes	70	(1)
Expectations	70	(1)
Changes in Demand Versus Changes in Quantity Demanded Revisited	70	(1)
Application: Changes in Demand Versus Changes in Quantity Demanded	71	(1)
Supply	72	(7)
The Law of Supply	72	(1)
A Positive Relationship between Price and Quantity Supplied	73	(1)
An Individual Supply Curve	73	(1)
The Market Supply Curve	74	(1)
A Change in Quantity Supplied Versus a Change in Supply	74	(1)
Shifts in Supply	74	(1)
Input Prices	75	(1)
The Prices of Related Products	75	(1)
Expectations	76	(1)
Number of Suppliers	76	(1)
Technology	76	(1)
Regulation	76	(1)
Taxes and Subsidies	76	(1)
Weather	77	(1)
Change in Supply Versus Change in Quantity Supplied---Revisited	77	(1)
Application: Change in Supply Versus Change in Quantity Supplied	78	(1)
Market Equilibrium Price and Quantity	79	(3)
Equilibrium Price and Quantity	79	(1)
Shortages and Surpluses	79	(1)
Application: Shortages	80	(1)
In the News: Just the Ticket for Super Bowl Fans	81	(1)
Changes in Equilibrium Price and Quantity	82	(5)
A Change in Demand	82	(1)
A Change in Supply	82	(1)
Application: Change in Demand	83	(1)
In the News: Bad Weather Puts the Squeeze on Orange Crop	84	(1)
Changes in Both Supply and Demand	84	(1)
The Combinations of Supply and Demand Shifts	85	(2)
Price Controls	87	(8)
Price Controls	87	(1)
Price Ceilings: Rent Control	88	(1)
Price Floors: The Minimum Wage	89	(1)
Unintended Consequences	90	(1)
Summary	91	(1)
Key Terms and Concepts	92	(1)
Review Questions	92
Study Guide	1	(94)
Elasticities, Consumer Behavior, and Welfare	95	(32)
Price Elasticity of Demand	96	(5)
What Is the Price Elasticity of Demand?	96	(1)
Is the Demand Curve Elastic or Inelastic?	96	(1)
The Ranges of Elasticity	97	(1)
The Determinants of the Price Elasticity of Demand	98	(2)
In the News: Teen Smoking: Price Matters	100	(1)
Total Revenue and Price Elasticity of Demand	101	(4)
How Does the Price Elasticity of Demand Impact Total Revenue?	101	(1)
Price Elasticity Changes Along a Linear Demand Curve	102	(1)
Application: Elasticities and Total Revenue	103	(2)
Price Elasticity of Supply	105	(5)
What Is the Price Elasticity of Supply?	105	(2)
Elasticities and Taxes: Combining Supply and Demand Elasticities	107	(1)
In the News: Drugs across the Border	108	(2)
Consumer Behavior	110	(3)
Utility	110	(1)
Utility Is a Personal Matter	111	(1)
Total Utility and Marginal Utility	111	(1)
Diminishing Marginal Utility	112	(1)
The Law of Demand and the Law of Diminishing Marginal Utility	112	(1)
Application: Diminishing Marginal Utility	112	(1)
Consumer and Producer Surplus	113	(4)
Consumer Surplus	113	(1)
Marginal Willingness to Pay Falls as More Is Consumed	113	(1)
Price Changes and Changes in Consumer Surplus	114	(1)
Producer Surplus	114	(1)
Market Efficiency and Producer and Consumer Surplus	115	(2)
The Welfare Effects of Taxes	117	(10)
Using Consumer and Producer Surplus to Find the Welfare Effects of a Tax	118	(1)
Elasticity and the Size of the Deadweight Loss	118	(2)
Price Ceilings and Welfare Effects	120	(1)
Price Floors	120	(2)
The Welfare Effects of a Price Floor When the Government Buys Up the Surplus	122	(2)
Summary	124	(1)
Key Terms and Concepts	124	(1)
Review Questions	124
Study Guide	1	(126)
Externalities, Public Goods, and Public Choice	127	(14)
Externalities	128	(5)
Negative Externalities	128	(1)
What Can the Government Do to Correct for Negative Externalities?	129	(1)
Positive Externalities	130	(1)
What Can the Government Do to Correct for Positive Externalities?	131	(1)
In the News: Message in a Bottleneck: Is It Time to Start Charging Rush-Hour Commuters?	132	(1)
Non-Governmental Solutions to Externalities	133	(1)
Public Goods	133	(3)
What Is a Public Good?	133	(1)
Public Goods and the Free-Rider Problem	134	(1)
The Difficulty with Providing Public Goods---Assessing Accurate Benefits and Costs	135	(1)
Public Choice	136	(5)
Public Choice Analysis	136	(1)
Scarcity and Competition in the Public Sector	136	(1)
Differences between the Private Sector and the Public Sector	136	(1)
In the News: Wild Pitch	137	(1)
Individual-Consumption-Payment Link	138	(1)
Summary	138	(1)
Key Terms and Concepts	139	(1)
Review Questions	139
Study Guide	1	(140)
Production and Costs	141	(20)
Profits: Total Revenues Minus Total Costs	142	(3)
The Concept of Costs	142	(1)
Explicit Costs	142	(1)
Implicit Costs	142	(1)
Profits	143	(1)
Are Accounting Profits the Same as Economic Profits?	143	(1)
Application: Explicit and Implicit Costs	143	(1)
A Zero Economic Profit Is a Normal Profit	144	(1)
Sunk Costs	144	(1)
Application: Accounting Profits and Economic Profits	144	(1)
Production in the Short Run	145	(3)
The Short Run Versus the Long Run	145	(1)
Production in the Short Run	146	(1)
Diminishing Marginal Product	147	(1)
Costs in the Short Run	148	(4)
Fixed Costs, Variable Costs, and Total Costs	148	(1)
Average Total Cost	149	(1)
Marginal Cost	149	(1)
Application: Marginal Cost Versus Average Total Cost	149	(1)
How Are These Costs Related?	150	(2)
The Shape of the Short-Run Cost Curves	152	(3)
The Relationship between Marginal and Average Amounts	152	(1)
Why Is the Average Total Cost Curve U-Shaped?	152	(1)
The Relationship between Marginal Cost and Average Variable and Average Total Cost	153	(1)
Application: Marginal Versus Average Amounts	154	(1)
Cost Curves: Short Run and Long Run	155	(6)
Long-Run Versus Short-Run Cost Curves	155	(1)
The Shape of the Long-Run ATC Curve	156	(1)
Why Do Economies and Diseconomies of Scale Occur?	157	(1)
Shifting the Cost Curves	157	(1)
In the News: The Cost Revolution	158	(1)
Summary	159	(1)
Key Terms and Concepts	160	(1)
Review Questions	160
Study Guide	1	(160)
Competition	161	(26)
The Four Different Market Structures	162	(3)
A Perfectly Competitive Market	163	(2)
An Individual Price Taker's Demand Curve	165	(2)
An Individual Firm's Demand Curve	165	(1)
A Change in Market Price and the Firm's Demand Curve	166	(1)
Profit Maximization	167	(3)
Revenues in a Perfectly Competitive Market	167	(1)
Total Revenue	167	(1)
Average Revenue and Marginal Revenue	167	(1)
How Do Firms Maximize Profits?	168	(1)
Equating Marginal Revenue and Marginal Cost	168	(1)
The Marginal Approach	169	(1)
The Total Cost--Total Revenue Approach	169	(1)
Short-Run Profits and Losses	170	(6)
The Three-Step Method	170	(2)
Evaluating Economic Losses in the Short Run	172	(2)
Application: Evaluating Short-Run Economic Losses	174	(1)
Deriving the Short-Run Market Supply Curve	174	(1)
Application: Reviewing the Short-Run Output Decision	175	(1)
Long-Run Equilibrium	176	(3)
Economic Profits and Losses Disappear in the Long Run	176	(1)
The Long-Run Equilibrium for the Competitive Firm	177	(2)
Long-Run Supply	179	(8)
A Constant-Cost Industry	179	(1)
An Increasing-Cost Industry	179	(3)
Perfect Competition and Economic Efficiency	182	(1)
In the News: Internet Cuts Costs and Increases Competition	183	(1)
Summary	184	(1)
Key Terms and Concepts	184	(1)
Review Questions	185
Study Guide	1	(186)
Monopoly	187	(24)
Monopoly: The Price Maker	188	(2)
What Is a Monopoly?	188	(1)
Pure Monopoly Is a Rarity	188	(1)
Barriers to Entry	188	(2)
Demand and Marginal Revenue in Monopoly	190	(4)
Application: Demand and Marginal Revenue	192	(1)
Monopolists' Price in the Elastic Portion of the Demand Curve	193	(1)
The Monopolist's Equilibrium	194	(3)
How Does a Monopolist Determine the Profit-Maximizing Output?	194	(1)
Three-Step Method for Monopolists	195	(1)
Profits for a Monopolist	195	(1)
Losses for a Monopolist	195	(1)
Patents	196	(1)
Monopoly and Welfare Loss	197	(2)
Does Monopoly Promote Inefficiency?	197	(1)
Does Monopoly Retard Innovation?	198	(1)
Monopoly Policy	199	(5)
Antitrust Policies	200	(1)
Have Antitrust Policies Been Successful?	200	(1)
Government Regulation	200	(1)
In the News: Is Microsoft a Monopoly?	201	(2)
Difficulties in Average Cost Pricing	203	(1)
Price Discrimination	204	(7)
Price Discrimination	204	(1)
Why Does Price Discrimination Exist?	204	(1)
Application: Price Discrimination and Business Travelers	205	(1)
Resale Prevention: The Key to Price Discrimination	205	(1)
Application: Price Discrimination and Coupons	206	(1)
Price Discrimination and Time	207	(1)
Quantity Discounts	207	(1)
Summary	207	(1)
Key Terms and Concepts	208	(1)
Review Questions	208
Study Guide	1	(210)
Input Markets and the Distribution of Income	211	(34)
Input Markets	212	(2)
Markets for the Factors of Production	212	(1)
Determining the Price of a Productive Factor: Derived Demand	212	(1)
In the News: Demand, Not Higher Salaries, Drives Up Baseball Ticket prices	213	(1)
Supply and Demand in the Labor Market	214	(4)
Will Hiring That Input Add More to Revenue Than Costs?	214	(1)
The Demand Curve for Labor Slopes Downward	214	(1)
How Many Workers Will an Employer Hire?	215	(2)
The Market Labor Supply Curve	217	(1)
Labor Market Equilibrium	218	(5)
Determining Equilibrium in the Labor Market	218	(1)
Shifts in the Labor Demand Curve	218	(1)
Shifting the Labor Supply Curve	219	(1)
Application: Labor Supply and Demand	220	(2)
Global Watch: Cause, Consequence, and Cure of Child Labor	222	(1)
Labor Unions	223	(3)
Why Are There Labor Unions?	223	(1)
Where Are Labor Unions Found?	223	(1)
Union Impact on Labor Supply and Wages	224	(1)
Wage Differences for Similarly Skilled Workers	225	(1)
Can Unions Lead to Increased Productivity?	225	(1)
Land and Rent	226	(2)
The Supply of and Demand for Land	226	(1)
Economic Rent to Labor	226	(2)
Capital and Interest	228	(3)
Supply and Demand in the Capital Market	228	(1)
The Capital Investment Decision	229	(1)
The Interdependence of Input Markets	230	(1)
Application: Winning Big	230	(1)
Income Distribution	231	(4)
The Record Since 1935	231	(1)
Are We Overstating the Disparity in the Distribution of Income?	232	(1)
Moving Up and Down the Economic Ladder	233	(1)
Why Do Some Earn More than Others?	233	(2)
The Economics of Discrimination	235	(4)
Job-Entry Discrimination	235	(1)
Wage Discrimination	236	(1)
Discrimination or Differences in Productivity?	236	(1)
Why Do People Discriminate?	237	(1)
The Costs of Discrimination	238	(1)
Remedying Discrimination	238	(1)
Poverty	239	(6)
Defining Poverty	239	(2)
In the News: Defining Poverty Up	241	(1)
An Alternative Definition of Poverty	241	(1)
Summary	242	(1)
Key Terms and Concepts	243	(1)
Review Questions	243
Study Guide	1	(244)
Introduction to the Macroeconomy	245	(26)
Macroeconomic Goals	246	(2)
Three Major Macroeconomic Goals	246	(1)
What Other Goals Are Important?	247	(1)
How Do Value Judgements Affect Economic Goals?	247	(1)
Acknowledging Our Goals: The Employment Act of 1946	247	(1)
Employment and Unemployment	248	(5)
The Consequences of High Unemployment	248	(1)
What Is the Unemployment Rate?	248	(1)
The Worst Case of U.S. Unemployment	249	(1)
Variations in the Unemployment Rate	249	(1)
Are Unemployment Statistics Accurate Reflections of the Labor Market?	250	(1)
Who Are the Unemployed?	250	(1)
Reasons for Unemployment	251	(1)
How Much Unemployment?	251	(1)
The Average Duration of Unemployment	252	(1)
Labor Force Participation Rate	252	(1)
Different Types of Unemployment	253	(6)
Frictional Unemployment	253	(1)
Should We Worry About Frictional Unemployment?	254	(1)
Structural Unemployment	254	(1)
Imperfections and Unemployment	254	(1)
Cyclical Unemployment	255	(1)
Reducing Cyclical Unemployment	255	(1)
The Natural Rate of Unemployment	255	(1)
Application: Cyclical Unemployment	255	(1)
Global Watch: Unemployment Around the Globe, 2001	256	(1)
Unemployment Insurance	256	(1)
In the News: A Light That Never Goes Out	257	(1)
Does New Technology Lead to Greater Unemployment?	257	(2)
Inflation	259	(5)
Stable Price Level as a Desirable Goal	259	(1)
The Price Level over the Years	259	(1)
Who Loses with Inflation?	260	(1)
Unanticipated Inflation Distorts Price Signals	260	(1)
Menu and Shoe-Leather Costs	260	(1)
Global Watch: Average Annual Inflation Rates, Selected Countries	261	(1)
Application: Inflation	261	(1)
Inflation and Interest Rates	262	(1)
Anticipated Inflation and the Nominal Interest Rate	262	(1)
Do Creditors Always Lose during Inflation?	263	(1)
Protecting Ourselves from Inflation	263	(1)
Application: Anticipated Inflation and Interest Rates	263	(1)
Economic Fluctuations	264	(7)
Short-Term Fluctuations in Economic Growth	264	(1)
The Phases of a Business Cycle	264	(1)
How Long Does a Business Cycle Last?	265	(1)
Seasonal Fluctuations Affect Economic Activity	266	(1)
Political Business Cycles	267	(1)
Forecasting Cyclical Changes	267	(2)
Summary	269	(1)
Key Terms and Concepts	269	(1)
Review Questions	270
Study Guide	1	(270)
Measuring Economic Performance	271	(24)
National Income Accounting: Measuring Economic Performance	272	(1)
Why Do We Measure Our Economy's Performance?	272	(1)
What Is National Income Accounting?	272	(1)
What Is Gross Domestic Product?	272	(1)
Measuring Gross Domestic Product	273	(1)
The Expenditure Approach to Measuring GDP	273	(4)
The Expenditure Approach to Measuring GDP	273	(1)
Consumption (C)	274	(1)
Investment (I)	275	(1)
Government Purchases in GDP (G)	276	(1)
Exports (X -- M)	276	(1)
The Income Approach to Measuring GDP	277	(3)
The Income Approach to Measuring GDP	277	(1)
Factor Payments	278	(1)
Personal Income and Disposable Personal Income	278	(2)
Problems In Calculating an Accurate GDP	280	(7)
Problems in Calculating an Accurate GDP	280	(1)
How Do We Solve This Problem?	280	(1)
A Price Level Index	280	(1)
The Consumer Price Index (CPI) and the GDP Deflator	280	(1)
In the News: The Box-Office Leaders	281	(1)
How Is a Price Index Created?	281	(1)
Real GDP	282	(1)
Application: Babe Ruth's Salary Adjusted for Inflation	283	(1)
Is Real GDP Always Less Than Nominal GDP?	283	(1)
In the News: A Better CPI	284	(1)
Real GDP Per Capita	285	(2)
Why Is the Measure of Per Capita GDP So Important?	287	(1)
Problems with GDP as a Measure of Economic Welfare	287	(8)
Nonmarket Transactions	288	(1)
The Underground Economy	288	(1)
Measuring the Value of Leisure	288	(1)
Global Watch: Growing Underground	289	(1)
In the News: An Invaluable Environment	290	(1)
GDP and Externalities	290	(1)
In the News: Time Well Spent	291	(1)
Quality of Goods	292	(1)
Summary	292	(1)
Key Terms and Concepts	293	(1)
Review Questions	293
Study Guide	1	(294)
Economic Growth in the Global Economy	295	(12)
Economic Growth	296	(2)
Short Run Versus Long Run	296	(1)
Defining Economic Growth	296	(1)
The Rule of 70	296	(1)
Productivity: The Key to a Higher Standard of Living	297	(1)
Determinants of Economic Growth	298	(3)
Factors That Contribute to Economic Growth	298	(2)
In the News: The New Economy?	300	(1)
Raising the Level of Economic Growth	301	(6)
The Impact of Economic Growth	301	(1)
Saving Rates, Investment, Capital Stock, and Economic Growth	301	(1)
Research and Development	301	(1)
The Protection of Property Rights Impacts Economic Growth	302	(1)
Free Trade and Economic Growth	303	(1)
Education	303	(2)
Summary	305	(1)
Key Terms and Concepts	305	(1)
Review Questions	305
Study Guide	1	(306)
Aggregate Demand	307	(16)
The Determinants of Aggregate Demand	308	(3)
What Is Aggregate Demand?	308	(1)
Consumption (C)	308	(1)
Investment (I)	309	(1)
Government Purchases (G)	309	(1)
Net Exports (X -- M)	309	(2)
The Investment and Saving Market	311	(3)
Shifting the Investment Demand Curve	311	(1)
The Supply of National Saving	312	(2)
The Aggregate Demand Curve	314	(3)
How Is the Quantity of Real GDP Demanded Affected by the Price Level?	314	(1)
Why Is the Aggregate Demand Curve Negatively Sloped?	315	(2)
Shifts in the Aggregate Demand Curve	317	(6)
Does a Change in the Price Level Shift the Aggregate Demand Curve?	317	(1)
Aggregate Demand Curve Shifters	317	(1)
Application: Changes in Aggregate Demand	318	(1)
In the News: The Consumer Confidence Index: A Brief Description of the Consumer Confidence Survey	319	(1)
Summary	320	(1)
Key Terms and Concepts	321	(1)
Review Questions	321
Study Guide	1	(322)
Aggregate Supply and Macroeconomic Equilibrium	323	(16)
The Aggregate Supply Curve	324	(2)
What Is the Aggregate Supply Curve?	324	(1)
Why Is the Short-Run Aggregate Supply Curve Positively Sloped?	324	(1)
Why Is the Long-Run Aggregate Supply Curve Vertical?	325	(1)
Shifts in the Aggregate Supply Curve	326	(4)
Shifting Long-Run and Short-Run Supply Curves	326	(2)
What Factors Shift Short-Run Aggregate Supply Only?	328	(1)
Application: Shifts in the Short-Run Aggregate Supply Curve	329	(1)
Macroeconomic Equilibrium	330	(9)
Determining Macroeconomic Equilibrium	330	(1)
Contractionary and Expansionary Gaps	331	(1)
Demand-Pull Inflation	332	(1)
Cost-Push Inflation	332	(1)
What Helped the United States Recover in the 1980s?	333	(1)
Another Cause of a Contractionary Gap	333	(1)
Adjusting to a Contractionary Gap	333	(1)
Slow Adjustments to a Contractionary Gap	334	(1)
What Causes Wages and Prices to Be Sticky Downward?	334	(1)
Adjusting to an Expansionary Gap	335	(1)
How Precise Is the Aggregate Supply and Demand Model?	335	(2)
Summary	337	(1)
Key Terms and Concepts	337	(1)
Review Questions	337
Study Guide	1	(338)
Fiscal Policy	339	(32)
Fiscal Policy	340	(1)
Fiscal Policy	340	(1)
Fiscal Stimulus Affects the Budget	340	(1)
Government: Spending and Taxation	341	(6)
Growth in Government	341	(1)
Global Watch: A Global Comparison of Taxaton	342	(1)
Generating Government Revenue	343	(1)
Types of Taxation	343	(1)
Financing State and Local Government Activities	344	(1)
In the News: The Status of Social Security	345	(2)
The Multiplier Effect	347	(4)
Changes in RGDP	347	(1)
The Multiplier Effect	347	(1)
The Multiplier Effect at Work	347	(1)
Changes in the MPC Affect the Multiplier Process	348	(1)
The Multiplier and the Aggregate Demand Curve	349	(1)
Time Lags, Saving, Taxes, and Imports Reduce the Size of the Multiplier	349	(1)
In the News: Boeing Multiple-Use Fighter Jet Completes Flight: Developmental Aircraft in Race for Huge Contract	350	(1)
Fiscal Policy and the AD/AS Model	351	(4)
Fiscal Policy and the AD/AS Model	351	(1)
Budget Deficits and Fiscal Policy	351	(2)
In the News: The Bush Tax Cut	353	(1)
Budget Surpluses (or Budget Deficit Reductions) and Fiscal Policy	353	(2)
Automatic Stabilizers	355	(1)
Automatic Stabilizers	355	(1)
How Does the Tax System Stabilize the Economy?	355	(1)
Possible Obstacles to Effective Fiscal Policy	356	(4)
The Crowding-Out Effect	356	(1)
Time Lags in Fiscal Policy Implementation	357	(3)
Supply-Side Fiscal Policy	360	(4)
What Is Supply-Side Fiscal Policy?	360	(1)
Impact of Supply-Side Policies	360	(1)
The Laffer Curve	360	(1)
Research and Development and the Supply Side of the Economy	361	(1)
How Do Supply-Side Policies Affect Long-Run Aggregate Supply?	361	(1)
Critics of Supply-Side Economics	361	(1)
The Supply-Side and Demand-Side Effects of a Tax Cut	362	(2)
The National Debt	364	(7)
How Government Finances the Debt	364	(1)
Why Run a Budget Deficit?	365	(1)
The Burden of Public Debt	366	(1)
Summary	367	(1)
Key Terms and Concepts	368	(1)
Review Questions	368
Study Guide	1	(370)
Money and the Banking System	371	(24)
What Is Money?	372	(7)
Currency	372	(1)
Currency as Legal Tender	372	(1)
Demand Deposits and Other Checkable Deposits	372	(1)
In the News: Should We Get Rid of the Penny?	373	(1)
The Popularity of Demand Deposits and Other Checkable Deposits	373	(1)
Credit Cards	374	(1)
Savings Accounts	374	(1)
Money Market Mutual Funds	375	(1)
Stocks and Bonds	375	(1)
Liquidity	375	(1)
The Money Supply	376	(1)
How Was Money ``Backed''?	376	(1)
In the News: Tiny Micronesian Island Uses Giant Stones as Currency	377	(1)
What Really Backs Our Money Now?	377	(2)
The Functions of Money	379	(2)
Money as a Medium of Exchange	379	(1)
Money as a Measure of Value	380	(1)
Money as a Store of Value	380	(1)
Money as a Means of Deferred Payment	380	(1)
How Banks Create Money	381	(5)
Financial Institutions	381	(1)
The Functions of Financial Institutions	381	(1)
How Do Banks Create Money?	382	(1)
How Do Banks Make Profits?	382	(1)
Reserve Requirements	382	(1)
Fractional Reserve System	382	(1)
A Balance Sheet	383	(1)
The Required Reserve Ratio	384	(1)
Loaning Excess Reserves	384	(1)
Is More Money More Wealth?	385	(1)
The Money Multiplier	386	(3)
The Multiple Expansion Effect	386	(1)
New Loans and Multiple Expansions	386	(2)
The Money Multiplier	388	(1)
Why Is It Only ``Potential'' Money Creation?	388	(1)
How Is Money Destroyed?	388	(1)
The Collapse of America's Banking System, 1920--1933	389	(6)
What Happened to the Banking Industry?	389	(1)
What Caused the Collapse?	390	(1)
Bank Failures Today	391	(1)
Summary	392	(1)
Key Terms and Concepts	392	(1)
Review Questions	392
Study Guide	1	(394)
The Federal Reserve System and Monetary Policy	395	(34)
The Federal Reserve System	396	(3)
The Functions of a Central Bank	396	(1)
Location of the Federal Reserve System	396	(1)
The Fed's Relationship to the Federal Government	397	(1)
The Fed's Ties to the Executive Branch	397	(1)
In the News: Independence and the Central Bank	398	(1)
Fed Operations	399	(1)
The Equation of Exchange	399	(4)
The Equation of Exchange	399	(1)
Using the Equation of Exchange	400	(1)
How Volatile Is the Velocity of Money?	401	(1)
The Relationship between the Inflation Rate and the Growth in the Money Supply	401	(2)
Implementing Monetary Policy: Tools of the Fed	403	(4)
How Does the Fed Manipulate the Supply of Money?	403	(1)
Open Market Operations	403	(1)
Application: Open Market Operations	404	(1)
The Reserve Requirement	404	(1)
The Discount Rate	405	(1)
How the Fed Reduces the Money Supply	406	(1)
How the Fed Increases the Money Supply	406	(1)
How Else Can the Fed Influence Economic Activity?	406	(1)
Money, Interest Rates, and Aggregate Demand	407	(7)
The Money Market	407	(1)
The Demand for Money and the Nominal Interest Rate	408	(1)
Why Is the Supply of Money Relatively Inelastic?	408	(1)
Changes in Money Demand and Money Supply and the Nominal Interest Rate	409	(1)
The Fed Buys Bonds	409	(1)
The Fed Sells Bonds	409	(2)
Bond Prices and Interest Rates	411	(1)
Does the Fed Target the Money Supply or the Interest Rate?	411	(1)
Which Interest Rate Does the Fed Target?	412	(1)
Does the Fed Influence the Real Interest Rate in the Short Run?	412	(2)
Expansionary and Contractionary Monetary Policy	414	(3)
Expansionary Monetary Policy at Less Than Full Employment	414	(1)
Expansionary Monetary Policy at Full Employment	414	(1)
Contractionary Monetary Policy beyond Full Employment	415	(1)
Contractionary Monetary Policy at Full Employment	415	(1)
Monetary Policy in the Open Economy	415	(1)
Application: Money and the ADIAS Model	416	(1)
Problems in Implementing Monetary and Fiscal Policy	417	(4)
Problems in Conducting Monetary Policy	417	(1)
How Do Commercial Banks Implement the Fed's Monetary Policies?	417	(1)
Banks That Are Not Part of the Federal Reserve System and Policy Implementation	418	(1)
Fiscal and Monetary Coordination Problems	418	(1)
Alleviating Coordination Problems	418	(1)
Overall Problems with Monetary and Fiscal Policy	419	(2)
Rational Expectations	421	(8)
Can Human Behavior Counteract Government Policy?	421	(1)
The Rational Expectations Theory	421	(1)
Rational Expectations and the Consequences of Government Macroeconomic Policies	421	(1)
Anticipation of an Expansionary Monetary Policy	422	(1)
Unanticipated Expansionary Policy	422	(2)
When an Anticipated Expansionary Policy Change Is Less Than the Actual Policy Change	424	(1)
Critics of Rational Expectations Theory	424	(1)
Summary	425	(1)
Key Terms and Concepts	426	(1)
Review Questions	426
Study Guide	1	(428)
International Trade	429	(32)
The Growth in World Trade	430	(2)
Importance of International Trade	430	(1)
Trading Partners	430	(1)
In the News: Baywatch Is World Watched	431	(1)
Comparative Advantage and Gains from Trade	432	(3)
Economic Growth and Trade	432	(1)
The Principle of Comparative Advantage	432	(1)
Comparative Advantage and the Production Possibilities Curve	433	(1)
Application: Comparative Advantage and Absolute Advantage	434	(1)
In the News: The Miracle of Trade	434	(1)
Supply and Demand in International Trade	435	(5)
The Importance of Trade: Producer and Consumer Surplus	435	(1)
Free Trade and Exports---Domestic Producers Gain More Than Domestic Consumers Lose	436	(1)
Free Trade and Imports	437	(1)
Global Watch: Big Gains for Mexico from Free Trade	438	(2)
Tariffs, Import Quotas, and Subsidies	440	(5)
Tariffs	440	(1)
The Domestic Economic Impact of Tariffs	440	(1)
Arguments for Tariffs	441	(1)
Import Quotas	442	(1)
The Government Does Not Collect Revenues from Import Quotas	443	(1)
The Domestic Economic Impact of an Import Quota	443	(1)
The Economic Impact of Subsidies	444	(1)
The Balance of Payments	445	(4)
Balance of Payments	445	(1)
The Current Account	446	(1)
The Capital Account	447	(2)
Exchange Rates	449	(3)
The Need for Foreign Currencies	449	(1)
The Exchange Rate	449	(1)
Changes in Exchange Rates Affect the Domestic Demand for Foreign Goods	450	(1)
The Demand for a Foreign Currency	450	(1)
The Supply of a Foreign Currency	450	(1)
Determining Exchange Rates	450	(1)
Application: Exchange Rates	450	(1)
The Demand Curve for a Foreign Currency	451	(1)
The Supply Curve for Foreign Currency	451	(1)
Equilibrium in the Foreign Exchange Market	451	(1)
Equilibrium Changes in the Foreign Exchange Market	452	(9)
Determinants in the Foreign Exchange Market	452	(1)
Increased Tastes for Foreign Goods	452	(1)
Relative Income Increases or Reductions in U.S. Tariffs	453	(1)
Changes in European Income, Tariffs, or Tastes	453	(1)
How Do Changes in Relative Interest Rates Affect Exchange Rates?	454	(1)
Changes in the Relative Inflation Rate	454	(1)
Expectations and Speculation	455	(1)
Application: Determinants of Exchange Rates	455	(2)
Summary	457	(1)
Key Terms and Concepts	457	(1)
Review Questions	458
Study Guide	1	(460)
Study Guide Answers	461	(10)
Section Check Answers	471	(24)
Glossary	495	(4)
Index	499