Macroeconomics

by Hubbard, R. Glenn; O'Brien, Anthony P.

• ISBN13: 9780130348258
• ISBN10: 0130348252
• Edition: 1st
• Format: Paperback
• Copyright: 2006-01-01
• Publisher: Pearson College Div

Summary

Where are you headed? &No matter what your career, you will need to understand how economic forces affect you and your work. &Hubbard/O'Brien, Macroeconomics 1/e gives you the motivation and the tools to understand those forces. &You're on your way.

Table of Contents

Preface	vi
Acknowledgments	xx
Part 1: Introduction
Economics: Foundations and Models	2	(30)
What Happens When U.S. Firms Move to China?	2	(19)
Building a Foundation: Economics and Individual Decisions	5	(1)
People Are Rational	5	(1)
People Respond to Economic Incentives	5	(1)
Optimal Decisions Are Made at the Margin	5	(1)
Solved Problem 1-1: Apple Computer Makes a Decision at the Margin	6	(1)
The Economic Problem That Every Society Must Solve	7	(1)
What Goods and Services Will Be Produced?	7	(1)
How Will the Goods and Services Be Produced?	7	(1)
Who Will Receive the Goods and Services Produced?	7	(1)
Centrally Planned Economies versus Market Economies	8	(1)
The Modern ``Mixed'' Economy	8	(1)
Efficiency and Equity	9	(1)
Economic Models	10	(1)
The Role of Assumptions in Economic Models	10	(1)
Forming and Testing Hypotheses in Economic Models	10	(1)
Making the Connection 1-1: When Economists Disagree: A Debate over Outsourcing	11	(1)
Normative and Positive Analysis	12	(1)
Microeconomics and Macroeconomics	13	(1)
``Don't Let This Happen To You!'' Don't Confuse Positive Analysis with Normative Analysis	13	(1)
A Preview of Important Economic Terms	14	(1)
Conclusion	15	(1)
An Inside Look: How Does Economic Growth in China Affect Other Countries?	16	(2)
Summary	18	(1)
Key Terms	18	(1)
Review Questions	19	(1)
Problems and Applications	19	(2)
Appendix: Using Graphs and Formulas	21	(11)
Graphs of One Variable	22	(1)
Graphs of Two Variables	23	(1)
Slopes of Lines	23	(1)
Taking Into Account More Than Two Variables on a Graph	24	(1)
Positive and Negative Relationships	25	(1)
Slopes of Nonlinear Curves	25	(3)
Formulas	28	(1)
Formula for a Percentage Change	28	(1)
Formulas for the Areas of a Rectangle and a Triangle	28	(1)
Summary of Using Formulas	29	(1)
Problems and Applications	29	(3)
Trade-offs, Comparative Advantage, and the Market System	32	(30)
Managers Making Choices at BMW	32	(30)
Production Possibilities Frontiers and Real-World Trade-offs	34	(1)
Graphing the Production Possibilities Frontier	34	(2)
Solved Problem 2-1: Drawing a Production Possibilities Frontier for Rosie's Boston Bakery	36	(2)
Making the Connection 2-1: Trade-offs and Tsunami Relief	38	(1)
Increasing Marginal Opportunity Costs	38	(1)
Economic Growth	39	(1)
Trade	40	(1)
Specialization and Gains from Trade	40	(2)
Absolute Advantage versus Comparative Advantage	42	(2)
``Don't Let This Happen To You!'' Don't Confuse Absolute Advantage and Comparative Advantage	44	(1)
Comparative Advantage and the Gains from Trade	44	(1)
Solved Problem 2-2: Comparative Advantage and the Gains from Trade	44	(2)
The Market System	46	(1)
The Circular Flow of Income	46	(2)
The Gains from Free Markets	48	(1)
The Market Mechanism	48	(1)
Making the Connection 2-2: Story of the Market System in Action: ``I, Pencil''	49	(1)
The Role of the Entrepreneur	50	(1)
The Legal Basis of a Successful Market System	50	(1)
Making the Connection 2-3: Property Rights in Cyberspace: Napster, Kazaa, and iTunes	51	(2)
Conclusion	53	(1)
An Inside Look: Choosing the Production Mix at BMW	54	(8)
Where Prices Come From: The Interaction of Demand and Supply	62	(34)
How Hewlett-Packard Manages the Demand for Printers	62	(34)
The Demand Side of the Market	64	(1)
The Demand of an Individual Buyer	64	(1)
Demand Schedules and Demand Curves	64	(1)
Individual Demand and Market Demand	65	(1)
The Law of Demand	66	(1)
What Explains the Law of Demand?	66	(1)
Holding Everything Else Constant: The Ceteris Paribus Condition	67	(1)
Variables That Shift Market Demand	68	(1)
Making the Connection 3-1: Why Supermarkets Need to Understand Substitutes and Complements	69	(1)
Making the Connection 3-2: Companies Respond to a Growing Hispanic Population	70	(2)
A Change in Demand versus a Change in Quantity Demanded	72	(1)
Making the Connection 3-3: Estimating the Demand for Printers at Hewlett-Packard	72	(1)
The Supply Side of the Market	73	(1)
Supply Schedules and Supply Curves	73	(1)
Individual Supply and Market Supply	74	(1)
The Law of Supply	74	(1)
Variables That Shift Supply	75	(1)
A Change in Supply versus a Change in Quantity Supplied	76	(1)
Market Equilibrium: Putting Demand and Supply Together	77	(1)
How Markets Eliminate Surpluses and Shortages	78	(1)
Demand and Supply Both Count	79	(1)
Solved Problem 3-1: Demand and Supply Both Count: A Tale of Two Letters	80	(1)
The Effect of Demand and Supply Shifts on Equilibrium	81	(1)
The Effect of Shifts in Supply on Equilibrium	81	(1)
Making the Connection 3-4: The Falling Price of Large Flat-Screen Televisions	82	(1)
The Effect of Shifts in Demand on Equilibrium	83	(1)
The Effect of Shifts in Demand and Supply over Time	84	(1)
Solved Problem 3-2: High Demand and Low Prices in the Lobster Market?	85	(1)
Shifts in a Curve versus Movements along a Curve	86	(1)
``Don't Let This Happen To You!'' Remember: A Change in a Good's Price Does Not Cause the Demand or Supply Curve to Shift	87	(1)
Conclusion	87	(1)
An Inside Look: Hewlett-Packard Cuts PC Prices to Sell More Printers	88	(8)
Economic Efficiency, Government Price Setting, and Taxes	96	(34)
Should the Government Control Apartment Rents?	96	(29)
Consumer Surplus and Producer Surplus	98	(1)
Consumer Surplus	99	(1)
Making the Connection 4-1: The Consumer Surplus from Satellite Television	100	(1)
Producer Surplus	101	(1)
What Consumer Surplus and Producer Surplus Measure	101	(1)
The Efficiency of Competitive Markets	102	(1)
Marginal Benefit Equals Marginal Cost in Competitive Equilibrium	102	(1)
Economic Surplus	103	(1)
Deadweight Loss	103	(1)
Economic Surplus and Economic Efficiency	104	(1)
Government Intervention in the Market: Price Floors and Price Ceilings	104	(1)
Price Floors: The Example of Agricultural Markets	105	(1)
Making the Connection 4-2: Price Floors in Labor Markets: The Minimum Wage	106	(1)
Price Ceilings: The Example of Rent Controls	107	(1)
``Don't Let This Happen To You!'' Don't Confuse ``Scarcity'' with a ``Shortage''	108	(1)
Black Markets	109	(1)
Solved Problem 4-1: What's the Economic Effect of a ``Black Market'' for Apartments?	109	(1)
Making the Connection 4-3: Does Holiday Gift Giving Have a Deadweight Loss?	110	(1)
The Results of Government Intervention: Winners, Losers, and Inefficiency	111	(1)
Positive and Normative Analysis of Price Ceilings and Price Floors	111	(1)
The Economic Impact of Taxes	112	(1)
The Effect of Taxes on Economic Efficiency	112	(1)
Tax Incidence: Who Actually Pays a Tax?	112	(2)
Solved Problem 4-2: When Do Consumers Pay All of a Sales Tax Increase?	114	(2)
Making the Connection 4-4: Is the Burden of the Social Security Tax Really Shared Equally between Workers and Firms?	116	(1)
Conclusion	117	(1)
An Inside Look: Dealing with Rent Control	118	(7)
Appendix: Quantitative Demand and Supply Analysis	125	(5)
Demand and Supply Equations	125	(1)
Calculating Consumer Surplus and Producer Surplus	126	(2)
Review Questions	128	(1)
Problems and Applications	129	(1)
Part 2: Firms in the Domestic and International Economies
Firms, the Stock Market, and Corporate Governance	130	(32)
Google: From Dorm Room to Wall Street	130	(22)
Types of Firms	132	(1)
Who Is Liable? Limited and Unlimited Liability	132	(1)
Making the Connection 5-1: What's in a ``Name''? Lloyd's of London Learns about Unlimited Liability the Hard Way	133	(1)
Corporations Earn the Majority of Revenue and Profits	134	(1)
The Structure of Corporations and the Principal-Agent Problem	134	(1)
Corporate Structure and Corporate Governance	134	(1)
Solved Problem 5-1: Does the Principal-Agent Problem Also Apply to the Relationship between Managers and Workers?	135	(1)
How Firms Raise Funds	136	(1)
Sources of External Funds	136	(1)
Stock and Bond Markets Provide Capital---and Information	137	(1)
``Don't Let This Happen To You!'' When Google Shares Change Hands, Google Doesn't Get the Money	138	(1)
Making the Connection 5-2: Following General Electric's Stock and Bond Prices in the Financial Pages	139	(1)
Using Financial Statements to Evaluate a Corporation	140	(1)
Making the Connection 5-3: A Bull in China's Financial Shop	141	(1)
The Income Statement	142	(1)
The Balance Sheet	143	(1)
Understanding the Business Scandals of 2002	143	(1)
Solved Problem 5-2: What Makes a Good Board of Directors?	144	(1)
Conclusion	145	(1)
An Inside Look: Google's Initial Public Offering	146	(6)
Appendix: Tools to Analyze Firms' Financial Information	152	(10)
Using Present Value to Make Investment Decisions	152	(2)
Solved Problem 5A-1: How to Receive Your Contest Winnings	154	(1)
Using Present Value to Calculate Bond Prices	155	(1)
Using Present Value to Calculate Stock Prices	155	(1)
A Simple Formula for Calculating Stock Prices	156	(1)
Going Deeper into Financial Statements	157	(1)
Analyzing Income Statements	157	(1)
Analyzing Balance Sheets	158	(4)
Comparative Advantage and the Gains from International Trade	162	(40)
Sugar Quota Drives U.S. Candy Manufacturers Overseas	162	(33)
An Overview of International Trade	164	(1)
The Importance of Trade to the U.S. Economy	164	(1)
U.S. International Trade in a World Context	165	(1)
Making the Connection 6-1: Has Outsourcing Hurt the U.S. Economy?	166	(1)
Comparative Advantage: The Basis of All Trade	167	(1)
A Brief Review of Comparative Advantage	167	(1)
Comparative Advantage in International Trade	167	(1)
The Gains from Trade	168	(1)
Increasing Consumption through Trade	169	(1)
Solved Problem 6-1: The Gains from Trade	170	(2)
Why Don't We See Complete Specialization?	172	(1)
Does Anyone Lose as a Result of International Trade?	172	(1)
``Don't Let This Happen To You!'' Remember That Trade Creates Both Winners and Losers	173	(1)
Where Does Comparative Advantage Come From?	173	(1)
Making the Connection 6-2: Why Is Dalton, Georgia, the Carpet-Making Capital of the World?	174	(1)
Comparative Advantage Over Time: The Rise and Fall---and Rise---of the U.S. Consumer Electronics Industry	174	(1)
Government Policies That Restrict Trade	175	(2)
Tariffs	177	(1)
Quotas	178	(1)
Measuring the Economic Impact of the Sugar Quota	179	(1)
Solved Problem 6-2: Measuring the Economic Effect of a Quota	179	(2)
The High Cost of Preserving Jobs with Tariffs and Quotas	181	(1)
Gains from Unilateral Elimination of Tariffs and Quotas	181	(1)
Other Barriers to Trade	182	(1)
The Argument over Trade Policies and Globalization	182	(1)
Why Do Some People Oppose the World Trade Organization?	182	(1)
Making the Connection 6-3: The Unintended Consequences of Banning Goods Made with Child Labor	183	(2)
Making the Connection 6-4: Has NAFTA Helped or Hurt the U.S. Economy?	185	(1)
Dumping	186	(1)
Positive versus Normative Analysis (Once Again)	187	(1)
Conclusion	187	(1)
An Inside Look: The United States and Australia Reduce Trade Barriers	188	(7)
Appendix: Multinational Firms	195	(7)
Multinational Firms	195	(1)
A Brief History of Multinational Enterprises	195	(1)
Strategic Factors in Moving from Domestic to Foreign Markets	196	(2)
Making the Connection 6A-1: Have Multinational Corporations Reduced Employment and Lowered Wages in the United States?	198	(1)
Challenges to U.S. Firms in Foreign Markets	199	(1)
Competitive Advantages of U.S. Firms	199	(3)
Part 3: Macroeconomic Foundations and Long-Run Growth
GDP: Measuring Total Production and Income	202	(26)
Increases in GDP Spur Hiring at Freightliner	202	(26)
Gross Domestic Product Measures Total Production	205	(1)
Measuring Total Production: Gross Domestic Product	205	(1)
Solved Problem 7-1: Calculating GDP	206	(1)
Production, Income, and the Circular Flow Diagram	207	(1)
Components of GDP	208	(1)
``Don't Let This Happen To You!'' Remember What Economists Mean by ``Investment''	209	(1)
Making the Connection 7-1: Spending on Homeland Security	209	(1)
An Equation for GDP and Some Actual Values	210	(1)
Measuring GDP by the Value Added Method	211	(1)
Does GDP Measure What We Want It to Measure?	212	(1)
Shortcomings in GDP as a Measure of Total Production	212	(1)
Making the Connection 7-2: How the Underground Economy Hurts Developing Countries	213	(1)
Shortcomings of GDP as a Measure of Well-Being	214	(1)
Making the Connection 7-3: Did World War II Bring Prosperity?	214	(1)
Real GDP versus Nominal GDP	215	(1)
Calculating Real GDP	215	(1)
Solved Problem 7-2: Calculating Real GDP	216	(1)
Comparing Real GDP and Nominal GDP	217	(1)
Making the Connection 7-4: How Freightliner Uses Forecasts of GDP	218	(1)
The GDP Deflator	218	(1)
Other Measures of Total Production and Total Income	219	(1)
Gross National Product (GNP)	219	(1)
Net National Product (NNP)	220	(1)
National Income	220	(1)
Personal Income	220	(1)
Disposable Personal Income	220	(1)
Conclusion	221	(1)
An Inside Look: Movements in Canadian GDP	222	(6)
Unemployment and Inflation	228	(32)
Lucent Technologies Deals with Unemployment and Inflation	228	(32)
Measuring the Unemployment Rate and the Labor Force Participation Rate	230	(1)
The Household Survey	230	(2)
Solved Problem 8-1: What Happens If You Include the Military?	232	(1)
Problems with Measuring the Unemployment Rate	233	(1)
Trends in Labor Force Participation	233	(1)
Making the Connection 8-1: What Explains the Increase in ``Kramers''?	234	(1)
Unemployment Rates for Demographic Groups	235	(1)
How Long Are People Usually Unemployed?	235	(1)
The Establishment Survey: Another Measure of Employment	236	(1)
Job Creation and Job Destruction Over Time	237	(1)
Types of Unemployment	237	(1)
Frictional Unemployment and Job Search	238	(1)
Structural Unemployment	239	(1)
Cyclical Unemployment	239	(1)
Full Employment	239	(1)
Making the Connection 8-2: How Should We Categorize the Unemployment at Lucent Technologies?	240	(1)
Explaining Unemployment	240	(1)
Government Policies and the Unemployment Rate	240	(2)
Labor Unions	242	(1)
Efficiency Wages	242	(1)
Making the Connection 8-3: Why Did Henry Ford Pay His Workers Twice as Much as Other Car Manufacturers?	243	(1)
Measuring Inflation	243	(1)
The Consumer Price Index	244	(1)
Is the CPI Accurate?	245	(1)
``Don't Let This Happen To You!'' Don't Miscalculate the Inflation Rate	246	(1)
The Producer Price Index	247	(1)
Using Price Indexes to Adjust for the Effects of Inflation	247	(1)
Solved Problem 8-2: Calculating Real Average Hourly Earnings	248	(1)
Falling Real Wages at Lucent	249	(1)
Real versus Nominal Interest Rates	249	(2)
Does Inflation Impose Costs on the Economy?	251	(1)
Inflation Affects the Distribution of Income	251	(1)
The Problem with Anticipated Inflation	251	(1)
Making the Connection 8-4: Why a Lower Inflation Rate Is Like a Tax Cut for Lucent's Bondholders	252	(1)
The Problem with Unanticipated Inflation	253	(1)
Conclusion	253	(1)
An Inside Look: Managers and Workers at Boeing Negotiate Wages	254	(6)
Economic Growth, the Financial System, and Business Cycles	260	(32)
Growth and the Business Cycle at the Ford Motor Company	260	(32)
Long-Run Economic Growth Is the Key to Rising Living Standards	262	(2)
Making the Connection 9-1: The Connection between Economic Prosperity and Health	264	(1)
Calculating Growth Rates and the Rule of 70	265	(1)
What Determines the Rate of Long-Run Growth?	266	(1)
Solved Problem 9-1: The Role of Technological Change in Growth	267	(1)
Making the Connection 9-2: What Explains Rapid Economic Growth in Botswana?	268	(1)
Potential Real GDP	269	(1)
Saving, Investment, and the Financial System	270	(1)
An Overview of the Financial System	270	(2)
The Macroeconomics of Saving and Investment	272	(1)
The Market for Loanable Funds	273	(1)
Making the Connection 9-3: Ebenezer Scrooge: Accidental Promoter of Economic Growth?	274	(3)
Solved Problem 9-2: How Would a Consumption Tax Affect Saving, Investment, the Interest Rate, and Economic Growth?	277	(1)
The Business Cycle	278	(1)
Some Basic Business Cycle Definitions	278	(1)
Making the Connection 9-4: Who Decides If the Economy Is in a Recession?	278	(1)
What Happens during a Business Cycle?	279	(3)
``Don't Let This Happen To You!'' Don't Confuse the Price Level and the Inflation Rate	282	(3)
Why Is the Economy More Stable?	285	(1)
Conclusion	285	(1)
An Inside Look: Growth and the Chinese Automobile Industry	286	(6)
Long-Run Economic Growth: Sources and Policies	292	(36)
The Chinese Economic Miracle	292	(36)
Economic Growth Over Time and Around the World	294	(1)
Economic Growth from 1,000,000 B.C. to the Present	294	(1)
Making the Connection 10-1: Why Was England First?	295	(1)
Small Differences in Growth Rates Are Important	296	(1)
``Don't Let This Happen To You!'' Don't Confuse Average Annual Percentage Change with Total Percentage Change	297	(1)
Why Do Growth Rates Matter?	297	(1)
Making the Connection 10-2: The Benefits of an Earlier Start: Standards of Living in China and Japan	297	(1)
``The Rich Get Richer and . . .''	298	(1)
What Determines How Fast Economies Grow?	298	(2)
The Per-Worker Production Function	300	(1)
Which Is More Important for Economic Growth: More Capital or Technological Change?	301	(1)
Technological Change: The Key to Sustaining Economic Growth	301	(1)
Making the Connection 10-3: Why Did the Soviet Union's Economy Fail?	302	(1)
Solved Problem 10-1: Using the Economic Growth Model to Analyze the Failure of the Soviet Union's Economy	303	(1)
Endogenous Growth Theory	304	(1)
Joseph Schumpeter and Creative Destruction	305	(1)
Economic Growth in the United States	306	(1)
Economic Growth in the United States Since 1950: Fast, Then Slow, Then Fast Again	306	(1)
What Caused the Productivity Slowdown of 1973--1995?	307	(1)
The Productivity Boom: Are We in a ``New Economy''?	308	(1)
Why Has Productivity Growth Been Faster in the United States than in Other Countries?	309	(2)
Why Isn't the Whole World Rich?	311	(1)
Catch-up: Sometimes, But Not Always	312	(2)
Solved Problem 10-2: The Economic Growth Model's Predictions of Catch-up	314	(1)
Why Don't More Low-Income Countries Experience Rapid Growth?	315	(2)
The Benefits of Globalization	317	(1)
Making the Connection 10-4: Globalization and the Spread of Technology in Bangladesh	318	(1)
Growth Policies	319	(1)
Enhancing Property Rights and the Rule of Law	319	(1)
Improving Health and Education	320	(1)
Policies with Respect to Technology	320	(1)
Policies with Respect to Saving and Investment	320	(1)
Is Economic Growth Good or Bad?	321	(1)
Conclusion	321	(1)
An Inside Look: India Achieves Growth through Efficiency and Globalization	322	(6)
Part 4: Short-Run Flucuations
Output and Expenditure in the Short Run	328	(42)
Demand Forecasts Backfire at Cisco Systems	328	(40)
The Aggregate Expenditure Model	330	(1)
Aggregate Expenditure	330	(1)
The Difference between Planned Investment and Actual Investment	331	(1)
Macroeconomic Equilibrium	331	(1)
Adjustments to Macroeconomic Equilibrium	332	(1)
Determining the Level of Aggregate Expenditure in the Economy	333	(1)
Consumption	333	(3)
The Relationship between Consumption and National Income	336	(2)
Income, Consumption, and Saving	338	(1)
Solved Problem 11-1: Calculating the Marginal Propensity to Consume and the Marginal Propensity to Save	339	(1)
Planned Investment	340	(1)
Making the Connection 11-1: Cisco Rides the Roller Coaster of Information Technology Spending	341	(1)
Government Purchases	342	(1)
Net Exports	342	(2)
Graphing Macroeconomic Equilibrium	344	(4)
Showing a Recession on the 45°-Line Diagram	348	(1)
The Important Role of Inventories	349	(1)
Making the Connection 11-2: Business Attempts to Control Inventories, Then . . . and Now	349	(1)
A Numerical Example of Macroeconomic Equilibrium	350	(1)
``Don't Let This Happen To You!'' Don't Confuse Aggregate Expenditure with Consumption Spendin	351	(1)
Solved Problem 11-2: Determining Macroeconomic Equilibrium	351	(1)
The Multiplier Effect	352	(2)
Making the Connection 11-3: The Multiplier in Reverse: The Great Depression of the 1930s	354	(2)
A Formula for the Multiplier	356	(1)
Summarizing the Multiplier Effect	357	(1)
Solved Problem 11-3: Using the Multiplier Formula	357	(2)
The Aggregate Demand Curve	359	(1)
Conclusion	360	(2)
An Inside Look:: Expenditure in Japan Soars, Nudging Up GDP	362	(6)
The Algebra of Macroeconomic Equilibrium	368	(1)
Appendix: The Algebra of Macroeconomic Equilibrium	368	(2)
Aggregate Demand and Aggregate Supply Analysis	370	(36)
Caterpillar Recovers Slowly from the 2001 Recession	370	(33)
Aggregate Demand	372	(1)
Why Is the Aggregate Demand Curve Downward Sloping?	373	(1)
Shifts of the Aggregate Demand Curve versus Movements Along It	374	(1)
``Don't Let This Happen To You!'' Be Clear Why the Aggregate Deman d Curve Is Downward Sloping	374	(1)
The Variables that Shift the Aggregate Demand Curve	375	(1)
Making the Connection12-1: The Effect of Exchange Rates on Caterpillar's Sales	376	(1)
Solved Problem 12-1: Movements Along the Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve	377	(1)
Aggregate Supply	378	(1)
The Long-Run Aggregate Supply Curve	378	(2)
The Short-Run Aggregate Supply Curve	380	(1)
Shifts of the Short-Run Aggregate Supply Curve versus Movements Along It	381	(1)
Variables that Shift the Short-Run Aggregate Supply Curve	382	(1)
Macroeconomic Equilibrium in the Long Run and the Short Run	383	(1)
Recessions, Expansions, and Supply Shocks	384	(4)
A Dynamic Aggregate Demand and Aggregate Supply Model	388	(1)
What is the Usual Cause of Inflation?	389	(1)
The Slow Recovery from the Recession of 2001	389	(2)
Making the Connection 2-2: Does Rising Productivity Growth Reduce Employment?	391	(2)
The More Rapid Recovery of 2003--2004	393	(1)
Solved Problem 12-2: Showing the Oil Shock of 1974--1975 on a Dynamic Aggregate Demand and Aggregate Supply Graph	394	(1)
Conclusion	395	(1)
An Inside Look: Construction Company Komatsu Benefits from Exports to China	396	(7)
Appendix: Macroeconomic Schools of Thought	403	(3)
The Monetarist Model	403	(1)
The New Classical Model	404	(1)
The Real Business Cycle Model	404	(1)
Making the Connection 12A-1: Karl Marx: Capitalism's Severest Critic	405	(1)
Part 5: Monetary and Fiscal Policy
Money, Banks, and the Federal Reserve System	406	(32)
McDonald's Money Problems in Argentina	406	(32)
What is Money and Why Do We Need It?	408	(1)
Barter and the Invention of Money	408	(1)
Making the Connection 13-1: Money in a World War II Prisoner-of-War Camp	409	(1)
The Functions of Money	409	(1)
What Can Serve as Money?	410	(2)
Making the Connection 13-2: Money without a Government? The Strange Case of the Iraqi Dinar	412	(1)
How Do We Measure Money Today?	412	(1)
M1: The Narrowest Definition of the Money Supply	413	(1)
M2: A Broader Definition of Money	414	(1)
``Don't Let This Happen To You!'' Don't Confuse Money with Income or Wealth	414	(1)
Solved Problem 13-1: The Definitions of M1 and M2	415	(1)
What About Credit Cards and Debit Cards?	415	(1)
How Do Banks Create Money?	415	(1)
Bank Balance Sheets	416	(1)
``Don't Let This Happen To You!'' Know When a Checking Account Is an Asset and When It Is a Liability	416	(1)
Using T-Accounts to Show How a Bank Can Create Money	417	(2)
The Simple Deposit Multiplier	419	(1)
Solved Problem 13-2: Showing How Banks Create Money	420	(3)
The Federal Reserve System	423	(1)
Making the Connection 13-3: The 2001 Bank Panic in Argentina	423	(1)
The Organization of the Federal Reserve System	424	(1)
How the Federal Reserve Manages the Money Supply	424	(3)
Putting It All Together: Decisions of the Nonbank Public, Banks, nd the Fed	427	(1)
The Quantity Theory of Money	427	(1)
Connecting Money and Prices: The Quantity Equation	427	(1)
The Quantity Theory Explanation of Inflation	428	(1)
High Rates of Inflation	429	(1)
High Inflation in Argentina	429	(1)
Making the Connection 13-4: The German Hyperinflation of the Early 1920s	430	(1)
Conclusion	431	(1)
An Inside Look: Does Using the Dollar Destabalize Latin American Countries?	432	(6)
Monetary Policy	438	(34)
Why Did Homebuilder Toll Brothers, Inc., Prosper During the 2001 Recession?	438	(34)
What Is Monetary Policy?	440	(1)
The Goals of Monetary Policy	440	(1)
The Money Market and the Fed's Choice of Targets	441	(1)
Monetary Policy Targets	442	(1)
The Demand for Money	442	(1)
Shifts in the Money Demand Curve	443	(1)
How the Fed Manages the Money Supply: A Quick Review	444	(1)
Equilibrium in the Money Market	444	(2)
Solved Problem 14-1: The Relationship between Treasury Bill Prices and Their Interest Rates	446	(1)
A Tale of Two Interest Rates	447	(1)
Choosing a Monetary Policy Target	447	(1)
The Importance of the Federal Funds Rate	448	(1)
Monetary Policy and Economic Activity	449	(1)
How Interest Rates Affect Aggregate Demand	449	(1)
Making the Connection 14-1: Was There a Housing Market ``Bubble'' in the Early 2000s?	450	(1)
The Effects of Monetary Policy on Real GDP and the Price Level	451	(2)
Can the Fed Eliminate Recessions?	453
Making the Connection 14-2: The Fed Responds to the Terrorist Attacks of September 11, 2001	452	(2)
Making the Connection 14-3: Why Was Monetary Policy Ineffective in Japan?	454	(1)
Using Monetary Policy to Fight Inflation	454	(2)
Solved Problem 14-2: The Effects of Monetary Policy	456	(1)
A Summary of How Monetary Policy Works	457	(1)
Making the Connection 14-4: Why Does Wall Street Care about Monetary Policy?	458	(1)
``Don't Let This Happen To You!'' Remember That with Monetary Policy It's the Interest Rates---Not the Money---That Counts	459	(1)
Can the Fed Get the Timing Right?	459	(1)
A Closer Look at the Fed's Setting of Monetary Policy Targets	460	(1)
Should the Fed Target the Money Supply?	460	(1)
Why Doesn't the Fed Target Both the Money Supply and the Interest Rate?	461	(1)
The Taylor Rule	461	(1)
Should the Fed Target Inflation?	462	(1)
Is the Independence of the Federal Reserve a Good Idea?	463	(1)
The Case for Fed Independence	464	(1)
The Case against Fed Independence	465	(1)
Conclusion	465	(1)
An Inside Look: Monetary Policy Spurs Housing Boom	466	(6)
Fiscal Policy	472	(42)
A Boon for H&R Block	472	(36)
Fiscal Policy	474	(1)
What Fiscal Policy Is and What It Isn't	474	(1)
Automatic Stabilizers versus Discretionary Fiscal Policy	474	(1)
An Overview of Government Spending and Taxes	475	(1)
Making the Connection 15-1: The Future of Social Security and Medicare	476	(2)
Using Fiscal Policy to Influence Aggregate Demand	478	(1)
Expansionary Fiscal Policy	478	(1)
Contractionary Fiscal Policy	479	(1)
A Summary of How Fiscal Policy Affects Aggregate Demand	479	(1)
``Don't Let This Happen To You!'' Don't Confuse Fiscal Policy and Monetary Policy	480	(1)
The Government Purchases and Tax Multipliers	481	(2)
The Effect of Changes in Tax Rates	483	(1)
Taking Into Account the Effects of Aggregate Supply	483	(1)
The Multipliers Work in Both Directions	483	(1)
Solved Problem 15-1: Fiscal Policy Multipliers	484	(1)
The Limits of Fiscal Policy to Stabalize the Economy	485	(2)
Does Government Spending Reduce Private Spending?	487	(1)
Crowding Out in the Short Run	487	(1)
Crowding Out in the Long Run	488	(1)
Making the Connection 15-2: Limits to Fiscal Policy: Japan in the late 1990s	489	(1)
Deficits, Surpluses, and Federal Government Debt	490	(1)
How the Federal Budget Can Serve as an Automatic Stabilizer	490	(2)
Making the Connection 15-3: Did Fiscal Policy Fail During the Great Depression?	492	(1)
Solved Problem 15-2: The Effect of Economic Fluctuations on the Budget Deficit	493	(1)
Should the Federal Budget Always Be Balanced?	494	(1)
The Federal Government Debt	494	(2)
Is the Government Debt a Problem?	496	(1)
The Effects of Fiscal Policy in the Long Run	496	(1)
The Long-Run Effects of Tax Policy	496	(1)
Tax Simplification	497	(1)
Making the Connection 15-4: Should the United States Adopt the ``Flat Tax''?	498	(1)
The Economic Effect of Tax Reform	499	(1)
How Large Are Supply-Side Effects?	500	(1)
Conclusion	501	(1)
An Inside Look: Tax Receipts Increase in 2005, but Deficit Still Looms Large	502	(6)
Appendix: A Closer Look at the Multiplier	508	(6)
An Expression for Equilibrium Real GDP	508	(1)
A Formula for the Government Purchases Multiplier	509	(1)
A Formula for the Tax Multiplier	510	(1)
The ``Balanced Budget'' Multiplier	510	(1)
The Effects of Changes in Tax Rates on the Multiplier	511	(1)
The Multiplier in an Open Economy	511	(3)
Inflation, Unemployment, and Federal Reserve Policy	514	(30)
Why Does Whirlpool Care About Monetary Policy?	514	(30)
The Discovery of the Short-Run Trade-off between Unemployment and Inflation	516	(1)
Explaining the Phillips Curve with Aggregate Demand and Aggregate Supply Curves	516	(2)
Is the Phillips Curve a Policy Menu?	518	(1)
Solved Problem 16-1: The Policy Menu View of the Phillips Curve	519	(1)
Is the Short-Run Phillips Curve Stable?	519	(1)
The Long-Run Phillips Curve	520	(1)
The Role of Expectations of Future Inflation	520	(2)
Making the Connection 16-1: Do Workers Understand Inflation?	522	(1)
The Short-Run and Long-Run Phillips Curves	522	(1)
Shifts in the Short-Run Phillips Curve	523	(1)
How Does a Vertical Long-Run Phillips Curve Affect Monetary Policy?	524	(1)
Making the Connection 16-2: Does the Natural Rate of Unemployment Ever Change?	525	(1)
Solved Problem 16-2: Changing Views of the Phillips Curve	526	(1)
Expectations of the Inflation Rate	526	(1)
The Effect of Rational Expectations on Monetary Policy	527	(1)
Is the Short-Run Phillips Curve Really Vertical?	528	(1)
Real Business Cycle Models	529	(1)
How the Fed Fights Inflation	530	(1)
The Effect of a Supply Shock on the Phillips Curve	530	(1)
Paul Volcker and Disinflation	531	(1)
``Don't Let This Happen To You!'' Don't Confuse Disinflation with Deflation	532	(1)
Solved Problem 16-3: Using Monetary Policy to Lower the Inflation Rate	532	(2)
Alan Greenspan and the Importance of a Credible Monetary Policy	534	(1)
De-emphasizing the Money Supply	534	(1)
The Importance of Fed Credibility	535	(1)
Monetary Policy Credibility after Greenspan	535	(1)
A Failure of Credibility at the Bank of Japan	536	(1)
Federal Reserve Policy and Whirlpool's ``Pricing Power''	536	(1)
Conclusion	537	(1)
An Inside Look: Wage Rates for Hourly Workers Stagnate	538	(6)
Part 6: The International Economy
Macroeconomics in an Open Economy	544	(28)
Chinese Towels Invade Japan	544	(28)
The Balance of Payments: Linking the United States to the International Economy	546	(1)
The Current Account	546	(1)
The Financial Account	547	(1)
The Capital Account	548	(1)
Why Is the Balance of Payments Always Zero?	549	(1)
Solved Problem 17-1: Understanding the Arithmetic of Open Economies	549	(1)
``Don't Let This Happen To You!'' Don't Confuse the Balance of Trade, the Current Account Balance, and the Balance of Payments	550	(1)
The Foreign Exchange Market and Exchange Rates	551	(1)
Making the Connection 17-1: Exchange Rates in the Financial Pages	551	(1)
Equilibrium in the Market for Foreign Exchange	552	(1)
``Don't Let This Happen To You!'' Don't Confuse What Happens When a Currency Appreciates with What Happens When It Depreciates	553	(1)
How Do Shifts in Demand and Supply Affect the Exchange Rate?	553	(2)
Some Exchange Rates Are Not Determined by the Market	555	(1)
How Movements in the Exchange Rate Affect Exports and Imports	555	(1)
Solved Problem 17-2: Effect of Changing Exchange Rates on the Prices of Imports and Exports	556	(1)
The Real Exchange Rate	556	(1)
The International Sector and National Saving and Investment	557	(1)
Net Exports Equal Net Foreign Investment	557	(1)
Domestic Saving, Domestic Investment, and Net Foreign Investment	558	(1)
Solved Problem 17-3: Arriving at the Saving and Investment Equation	559	(1)
The Effect of a Government Budget Deficit on Investment	560	(1)
Making the Connection 17-2: Why Is the United States Called the ``World's Largest Debtor''?	561	(1)
Monetary Policy and Fiscal Policy in an Open Economy	562	(1)
Monetary Policy in an Open Economy	562	(1)
Fiscal Policy in an Open Economy	563	(1)
Conclusion	563	(1)
An Inside Look: Distorted Price Signals Nurture U.S. Current-Account Deficit	564	(8)
The International Financial System	572
Fluctuating Exchange Rates Push Molson Breweries to Sell the Canadiens	572	(24)
Exchange-Rate Systems	574	(1)
``Don't Let This Happen To You!'' Remember That Modern Currencies Are Fiat Money	575	(1)
The Current Exchange Rate System	575	(1)
The Floating Dollar	575	(1)
Making the Connection 18-1: The Toronto Blue Jays Gain from the Rising Value of the Canadian Dollar	576	(1)
What Determines Exchange Rates in the Long Run?	577	(1)
Making the Connection 18-2: The Big Mac Theory of Exchange Rates	578	(1)
Solved Problem 18-1: Calculating Purchasing Power Parity Exchange Rates Using Big Macs	579	(1)
The Euro	580	(2)
Making the Connection 18-3: The Underground Economy in Europe Surfaces	582	(1)
Pegging Against the Dollar	582	(4)
Making the Connection 18-4: Crisis and Recovery in South Korea	586	(1)
Solved Problem 18-2: Coping with Fluctuations in the Value of the U.S. Dollar	587	(1)
International Capital Markets	588	(1)
Conclusion	589	(1)
An Inside Look: Strong Euro Slashes Profits at Some EU Firms	590	(6)
Appendix: The Gold Standard and the Bretton Woods System	596
The Gold Standard	596	(1)
The End of the Gold Standard	596	(1)
The Bretton Woods System	597	(1)
The Collapse of the Bretton Woods System	598
Glossary	1	(1)
Company Index	1	(2)
Subject Index	3
Credits	1