Macroeconomics : Principles, Applications, and Tools

by O'Sullivan, Arthur; Sheffrin, Steven; Perez, Steve

• ISBN13: 9780132329286
• ISBN10: 013232928X
• Edition: 5th
• Format: Hardcover
• Copyright: 2007-01-01
• Publisher: Prentice Hall

Summary

Ors"Sullivan/Sheffrin makes use of Active Learning Tools which get readers involved in role-playing, help them apply concepts, and offer reinforcement of the material. The books hallmark feature includes a focus on the 5 Key Principles of Economics: 1) Opportunity Cost, 2) The Marginal Principle (comparing marginal benefits and marginal costs), 3) Diminishing Returns, 4) The Spillover Principle (for externalities in production and consumption), and, 5) The Reality Principle (distinguishing real from nominal magnitudes). For economists, financial analysts and other finance professionals.

Table of Contents

Preface	p. xiv
Introduction and Key Principles
Introduction: What Is Economics?	p. 2
What Is Economics?	p. 4
Positive Versus Normative Analysis	p. 5
The Three Key Economic Questions: What, How, and Who?	p. 6
Economic Models	p. 6
Economic Analysis and Modern Problems	p. 7
Economic View of Traffic Congestion	p. 7
Economic View of Poverty in Africa	p. 7
Economic View of Japan's Economic Problems	p. 8
The Economic Way of Thinking	p. 9
Use Assumptions to Simplify	p. 9
Isolate Variables-Ceteris Paribus	p. 9
Think at the Margin	p. 10
Rational People Respond to Incentives	p. 10
Pedalling for Television Time	p. 11
Preview of Coming Attractions: Macroeconomics	p. 11
To Understand Why Economies Grow	p. 11
London Solves Its Congestion Problem	p. 12
To Understand Economic Fluctuations	p. 13
To Make Informed Business Decisions	p. 13
Preview of Coming Attractions: Microeconomics	p. 13
To Understand Markets and Predict Changes	p. 13
To Make Personal and Managerial Decisions	p. 14
To Evaluate Public Policies	p. 14
Summary	p. 15
Key Terms	p. 15
Exercises	p. 15
Using Graphs and Percentages	p. 17
Using Graphs	p. 17
Computing Percentage Changes and Using Equations	p. 24
The Key Principles of Economics	p. 28
The Principle of Opportunity Cost	p. 30
The Cost of College	p. 30
The Opportunity Costs of Time and Invested Funds	p. 31
Opportunity Cost and the Production Possibilities Curve	p. 31
The Marginal Principle	p. 33
The Opportunity Cost of Military Spending	p. 34
How Many Movie Sequels?	p. 35
Renting College Facilities	p. 36
Automobile Emissions Standards	p. 36
Continental Airlines Uses the Marginal Principle	p. 37
The Principle of Voluntary Exchange	p. 37
Exchange and Markets	p. 37
Online Games and Market Exchange	p. 38
The Principle of Diminishing Returns	p. 38
Tiger Woods and Weeds	p. 39
Diminishing Returns from Sharing a Production Facility	p. 39
Fertilizer and Crop Yields	p. 40
The Real-Nominal Principle	p. 40
The Declining Real Minimum Wage	p. 41
Repaying Student Loans	p. 42
Summary	p. 43
Key Terms	p. 43
Exercises	p. 43
Economic Experiment	p. 47
Exchange and Markets	p. 48
Comparative Advantage and Exchange	p. 50
Specialization and the Gains from Trade	p. 50
Comparative Advantage Versus Absolute Advantage	p. 52
The Division of Labor and Exchange	p. 52
Comparative Advantage and International Trade	p. 53
Moving Jobs to Different States and Different Countries	p. 54
Movie Exports	p. 54
Candy Cane Makers Move to Mexico for Cheap Sugar	p. 55
Markets	p. 56
Virtues of Markets	p. 56
Markets in a Prisoner of War Camp	p. 57
Market Failure and the Role of Government	p. 58
Government Enforces the Rules of Exchange	p. 59
Government Can Reduce Economic Uncertainty	p. 60
Summary	p. 61
Key Terms	p. 61
Exercises	p. 61
Demand, Supply, and Market Equilibrium	p. 66
The Demand Curve	p. 68
The Individual Demand Curve and the Law of Demand	p. 68
From Individual Demand to Market Demand	p. 69
The Supply Curve	p. 70
The Individual Supply Curve and the Law of Supply	p. 71
Why Is the Individual Supply Curve Positively Sloped?	p. 72
From Individual Supply to Market Supply	p. 73
Why Is the Market Supply Curve Positively Sloped?	p. 74
Market Equilibrium: Bringing Demand and Supply Together	p. 74
Excess Demand Causes the Price to Rise	p. 75
Excess Supply Causes the Price to Drop	p. 76
Market Effects of Changes in Demand	p. 76
Change in Quantity Demanded Versus Change in Demand	p. 76
Increases in Demand Shift the Demand Curve	p. 77
Decreases in Demand Shift the Demand Curve	p. 78
A Decrease in Demand Decreases the Equilibrium Price	p. 80
Market Effects of Changes in Supply	p. 80
Change in Quantity Supplied Versus Change in Supply	p. 80
Increases in Supply Shift the Supply Curve	p. 81
An Increase in Supply Decreases the Equilibrium Price	p. 82
Decreases in Supply Shift the Supply Curve	p. 83
A Decrease in Supply Increases the Equilibrium Price	p. 83
Simultaneous Changes in Demand and Supply	p. 84
Predicting and Explaining Market Changes	p. 85
Applications of Demand and Supply	p. 86
Hurricane Katrina and Baton Rouge Housing Prices	p. 86
Ted Koppel Tries to Explain Lower Drug Prices	p. 87
Electricity from the Wind	p. 88
The Bouncing Price of Vanilla Beans	p. 89
Platinum, Jewelry, Catalytic Converters	p. 90
Summary	p. 91
Key Terms	p. 91
Exercices	p. 91
Economic Experiment	p. 96
The Basic Concepts in Macroeconomics
Measuring a Nation's Production and Income	p. 98
The "Flip" Sides of Macroeconomic Activity: Production and Income	p. 100
The Circular Flow of Production and Income	p. 101
The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product	p. 102
The Components of GDP	p. 103
Putting It All Together: The GDP Equation	p. 107
The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income	p. 107
Measuring National Income	p. 108
Measuring National Income Through Value Added	p. 109
An Expanded Circular Flow	p. 109
Using Value Added to Measure the True Size of Wal-Mart	p. 110
A Closer Examination of Nominal and Real GDP	p. 111
Measuring Real Versus Nominal GDP	p. 111
How to Use the GDP Deflator	p. 112
Fluctuations in GDP	p. 113
GDP as a Measure of Welfare	p. 114
Shortcomings of GDP as a Measure of Welfare	p. 114
The NBER and the 2001 Recession	p. 115
The Links Between Self-Reported Happiness and GDP	p. 117
Summary	p. 118
Key Terms	p. 118
Exercises	p. 118
Unemployment and Inflation	p. 122
Examining Unemployment	p. 124
How Is Unemployment Defined and Measured?	p. 124
After Growing Sharply, Women's Labor Force Participation Has Leveled Off	p. 125
Alternative Measures of Unemployment and Why They're Important	p. 126
NEETS Are the New Discouraged Workers in Japan	p. 127
Who Are the Unemployed?	p. 128
Categories of Unemployment	p. 128
Types of Unemployment: Cyclical, Frictional, and Structural	p. 129
The Natural Rate of Unemployment	p. 130
The Costs of Unemployment	p. 130
Finding the Optimal Level of Unemployment Insurance	p. 131
The Consumer Price Index and the Cost of Living	p. 132
The CPI Versus the Chain Index for GDP	p. 133
Problems in Measuring Changes in Prices	p. 133
Inflation	p. 134
Historical U.S. Inflation Rates	p. 135
Using the CPI to Adjust Social Security Benefits	p. 136
The Perils of Deflation	p. 136
The Costs of Inflation	p. 137
Anticipated Inflation	p. 137
Unanticipated Inflation	p. 137
Summary	p. 138
Key Terms	p. 139
Exercises	p. 139
The Economy in the Long Run
The Economy at Full Employment	p. 142
Wage and Price Flexibility and Full Employment	p. 144
Understanding Full Employment	p. 144
The Production Function	p. 144
Wages and the Demand and Supply for Labor	p. 147
Labor Market Equilibrium	p. 147
Changes in Demand and Supply	p. 147
Immigration Affects Both the Demand and Supply for Labor	p. 149
Labor Market Equilibrium and Full Employment	p. 149
Labor Supply Varies Across Countries and Time	p. 151
Using the Full-Employment Model	p. 151
Taxes and Potential Output	p. 151
A Nobel Laureate Explains Why Europeans Work Less Than Americans or the Japanese	p. 153
Real Business Cycle Theory	p. 153
Dividing Output Among Competing Demands for GDP at Full Employment	p. 155
International Comparisons	p. 155
Crowding Out in a Closed Economy	p. 156
Crowding Out in an Open Economy	p. 158
Crowding In	p. 158
Summary	p. 158
Key Terms	p. 159
Exercises	p. 159
Why Do Economies Grow?	p. 162
Economic Growth Rates	p. 164
Measuring Economic Growth	p. 164
Comparing the Growth Rates of Various Countries	p. 166
Increased Growth Leads to Less Child Labor in Developing Countries	p. 167
Are Poor Countries Catching Up?	p. 167
Capital Deepening	p. 168
Saving and Investment	p. 169
Growth Need Not Cause Increased Inequality	p. 170
How Do Population Growth, Government, and Trade Affect Capital Deepening?	p. 171
Limits to Capital Deepening	p. 172
The Key Role of Technological Progress	p. 172
How Do We Measure Technological Progress?	p. 173
Using Growth Accounting	p. 173
How Growth in Singapore and Hong Kong Differed	p. 174
Worldwide Factors Slowed U.S. Productivity Growth	p. 174
The Internet and Information Technology Raised Productivity Throughout the Economy	p. 176
What Causes Technological Progress?	p. 176
Research and Development Funding	p. 177
Monopolies That Spur Innovation	p. 177
The Scale of the Market	p. 178
Induced Innovations	p. 178
Education, Human Capital, and the Accumulation of Knowledge	p. 178
A Virtuous Circle: GDP and Health	p. 179
New Growth Theory	p. 180
A Key Governmental Role: Providing the Correct Incentives and Property Rights	p. 180
Lack of Property Rights Hinders Growth in Peru	p. 181
Summary	p. 182
Key Terms	p. 182
Exercises	p. 183
A Model of Capital Deepening	p. 186
Economic Fluctuations
Aggregate Demand and Aggregate Supply	p. 190
Sticky Prices and Their Macroeconomic Consequences	p. 192
Price Stickiness in Retail Catalogs	p. 194
Understanding Aggregate Demand	p. 194
What Is the Aggregate Demand Curve?	p. 194
The Components of Aggregate Demand	p. 195
Why the Aggregate Demand Curve Slopes Downward	p. 195
Shifts in the Aggregate Demand Curve	p. 196
How the Multiplier Makes the Shift Bigger	p. 198
Understanding Aggregate Supply	p. 200
The Long-Run Aggregate Supply Curve	p. 201
The Short-Run Aggregate Supply Curve	p. 202
Business Investment, Net Exports, and the 2001 Recession	p. 203
Supply Shocks	p. 204
How the U.S. Economy Has Coped with Oil Price Fluctuations	p. 205
From the Short Run to the Long Run	p. 205
Looking Ahead	p. 207
Summary	p. 207
Key Terms	p. 207
Exercises	p. 208
Fiscal Policy	p. 210
The Role of Fiscal Policy	p. 212
Fiscal Policy and Aggregate Demand	p. 212
The Fiscal Multiplier	p. 213
The Limits to Stabilization Policy	p. 214
The Federal Budget	p. 216
Federal Spending	p. 216
Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs	p. 218
Federal Revenues	p. 219
The Federal Deficit and Fiscal Policy	p. 220
Automatic Stabilizers	p. 220
How Governments Use Budget Baselines to Forecast Deficits	p. 221
Are Deficits Bad?	p. 222
Fiscal Policy in U.S. History	p. 222
The Depression Era	p. 223
The Kennedy Administration	p. 223
The Vietnam War Era	p. 223
The Reagan Administration	p. 224
The Clinton and George W. Bush Administrations	p. 224
Surveys Show Much of the 2001 Tax Cuts Were Saved	p. 225
Summary	p. 226
Key Terms	p. 227
Exercises	p. 227
The Income-Expenditure Model	p. 230
A Simple Income-Expenditure Model	p. 232
Equilibrium Output	p. 233
Adjusting to Equilibrium Output	p. 234
The Consumption Function	p. 235
Consumer Spending and Income	p. 235
Changes in the Consumption Function	p. 236
Rising Home Equity, the Wealth Effect, and Increased Consumer Spending	p. 237
Equilibrium Output and the Consumption Function	p. 238
Saving and Investment	p. 239
Understanding the Multiplier	p. 240
Increased Investment Spending Raises GDP After Natural Disasters	p. 241
Government Spending and Taxation	p. 242
Fiscal Multipliers	p. 242
Using Fiscal Multipliers	p. 244
John Maynard Keynes: A World Intellectual	p. 246
Understanding Automatic Stabilizers	p. 247
Exports and Imports	p. 249
The Locomotive Effect: How Foreign Demand Affects a Country's Output	p. 251
The Income-Expenditure Model and the Aggregate Demand Curve	p. 252
Summary	p. 253
Key Terms	p. 254
Exercises	p. 254
Economic Experiment	p. 256
Formulas for Equilibrium Income and the Multiplier	p. 257
Investment and Financial Markets	p. 262
An Investment: A Plunge into the Unknown	p. 264
Evaluating the Future	p. 265
Energy Price Uncertainty Reduces Investment Spending	p. 266
Understanding Present Value	p. 266
Options for a Lottery Winner	p. 268
Real and Nominal Interest Rates	p. 269
Interest Rates Vary by Risk and Length of Loan	p. 270
Understanding Investment Decisions	p. 271
Investment and the Stock Market	p. 272
How Financial Intermediaries Facilitate Investment	p. 274
When Financial Intermediaries Malfunction	p. 275
Fannie Mae and Freddie Mac Facilitate Homeownership: But Do They Increase Risk?	p. 276
Summary	p. 277
Key Terms	p. 277
Exercises	p. 278
Economic Experiment	p. 279
Money, Banking, and Monetary Policy
Money and the Banking System	p. 280
What Is Money?	p. 282
Three Properties of Money	p. 282
Different Types of Monetary Systems	p. 283
Measuring Money in the U.S. Economy	p. 284
More Than Half of U.S. Currency is Held Overseas	p. 285
How Banks Create Money	p. 286
A Bank's Balance Sheet: Where the Money Comes From and Where It Goes	p. 286
How Banks Create Money	p. 287
How the Money Multiplier Works	p. 288
How the Money Multiplier Works in Reverse	p. 289
A Banker's Bank: The Federal Reserve	p. 290
The Structure of the Federal Reserve	p. 290
Two Recent Major Leaders of the Federal Reserve Board	p. 292
The Independence of the Federal Reserve	p. 293
What the Federal Reserve Does During a Financial Crisis	p. 293
Coping with a Stock Market Crash: Black Monday, 1987	p. 293
The Financial System Under Stress: September 11, 2001	p. 294
Summary	p. 295
Key Terms	p. 295
Exercises	p. 295
Economic Experiment	p. 298
Formula for Deposit Creation	p. 299
The Federal Reserve and Monetary Policy	p. 300
The Money Market	p. 302
The Demand for Money	p. 302
How the Federal Reserve Can Change the Money Supply	p. 304
Open Market Operations	p. 305
Other Tools of the Fed	p. 305
How Interest Rates Are Determined: Combining the Demand and Supply of Money	p. 306
Interest Rates and Bond Prices	p. 307
Rising Interest Rates During an Economic Recovery	p. 308
Interest Rates and How They Change Investment and Output (GDP)	p. 310
Monetary Policy and International Trade	p. 312
Monetary Policy Challenges for the Fed	p. 313
Lags in Monetary Policy	p. 313
The Effectiveness of Committees	p. 314
Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds	p. 315
Making the Federal Reserve More Transparent	p. 316
Looking Ahead: From the Short Run to the Long Run	p. 316
Summary	p. 317
Key Terms	p. 317
Exercises	p. 317
Inflation, Unemployment, and Economic Policy
Modern Macroeconomics: From the Short Run to the Long Run	p. 320
Linking the Short Run and the Long Run	p. 322
The Difference Between the Short and Long Run	p. 322
Wages and Prices and Their Adjustment over Time	p. 322
How Wage and Price Changes Move the Economy Naturally Back to Full Employment	p. 323
Returning to Full Employment from a Recession	p. 324
Returning to Full Employment from a Boom	p. 325
Economic Policy and the Speed of Adjustment	p. 325
Liquidity Traps	p. 327
Japan's Lost Decade	p. 327
Political Business Cycles	p. 328
Elections, Political Parties, and Voter Expectations	p. 328
Understanding the Economics of the Adjustment Process	p. 329
The Long-Run Neutrality of Money	p. 330
Crowding Out in the Long Run	p. 332
An Unfortunate Gamble	p. 333
Classical Economics in Historical Perspective	p. 334
Say's Law	p. 334
Keynesian and Classical Debates	p. 334
Summary	p. 335
Key Terms	p. 335
Exercises	p. 336
The Dynamics of Inflation and Unemployment	p. 338
Money Growth, Inflation, and Interest Rates	p. 340
Inflation in a Steady State	p. 340
How Changes in the Growth Rate of Money Affect the Steady State	p. 341
Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation	p. 342
Are the Public's Expectations About Inflation Rational?	p. 343
U.S. Inflation and Unemployment in the 1980s	p. 344
Shifts in the Natural Rate of Unemployment in the 1990s	p. 345
Regional Differences in Unemployment Increase the Natural Rate	p. 346
How the Credibility of a Nation's Central Bank Affects Inflation	p. 347
Increased Political Independence for the Bank of England Lowered Inflation Expectations	p. 349
Inflation and the Velocity of Money	p. 349
Inflation-Indexed Bonds in the United States	p. 350
Hyperinflation	p. 352
How Budget Deficits Lead to Hyperinflation	p. 353
Summary	p. 354
Key Terms	p. 354
Exercises	p. 355
Economic Experiment	p. 357
Macroeconomic Policy Debates	p. 358
Should We Balance the Federal Budget?	p. 360
The Budget in Recent Decades	p. 60
The Budget and Social Security	p. 361
Five Debates About Deficits	p. 362
New Methods to Measure the Long-Term Fiscal Imbalances for the United States	p. 365
Should the Fed Target Inflation?	p. 366
Two Debates About Inflation Targeting	p. 367
Bernanke on Inflation Targeting	p. 368
Should We Tax Consumption Rather Than Income?	p. 369
Two Debates About Consumption Taxation	p. 370
The Flat Tax is a Tax on Consumption	p. 372
Summary	p. 373
Key Terms	p. 373
Exercises	p. 373
The International Economy
International Trade and Public Policy	p. 376
Benefits from Specialization and Trade	p. 378
Production Possibilities Curve	p. 378
Comparative Advantage and the Terms of Trade	p. 379
The Consumption Possibilities Curve	p. 380
How Free Trade Affects Employment	p. 381
Protectionist Policies	p. 382
Import Bans	p. 382
Quotas and Voluntary Export Restraints	p. 382
Responses to Protectionist Policies	p. 384
The Impact of Tariffs on the Poor	p. 384
What Are the Rationales for Protectionist Policies?	p. 385
To Shield Workers from Foreign Competition	p. 385
To Nurture Infant Industries	p. 385
Measuring the Costs of Protecting Jobs	p. 386
To Help Domestic Firms Establish Monopolies in World Markets	p. 386
Protection for Candle Makers	p. 387
A Brief History of International Tariff and Trade Agreements	p. 388
Ongoing Trade Negotiations	p. 389
Recent Policy Debates and Trade Agreements	p. 389
Are Foreign Producers Dumping Their Products?	p. 389
Do Trade Laws Inhibit Environmental Protection?	p. 390
Do Outsourcing and Trade Cause Inequality?	p. 391
Why Do People Protest Against Free Trade?	p. 392
Summary	p. 393
Key Terms	p. 393
Exercises	p. 393
The World of International Finance	p. 396
How Exchange Rates Are Determined	p. 398
What Are Exchange Rates?	p. 398
How Demand and Supply Determine Exchange Rates	p. 399
Changes in Demand or Supply	p. 400
Real Exchange Rates and Purchasing Power Parity	p. 401
The Current Account, the Financial Account, and the Capital Account	p. 403
Big Macs and Purchasing Power Parity	p. 404
Rules for Calculating the Current, Financial, and Capital Accounts	p. 405
Fixed and Flexible Exchange Rates	p. 407
Fixing the Exchange Rate	p. 407
World Savings and U.S. Current Account Deficits	p. 408
Fixed Versus Flexible Exchange Rates	p. 408
The U.S. Experience with Fixed and Flexible Exchange Rates	p. 410
Exchange Rate Systems Today	p. 411
The First Decade of the Euro	p. 411
Managing Financial Crises	p. 412
The Argentinean Financial Crisis	p. 413
Summary	p. 414
Key Terms	p. 414
Exercises	p. 415
Economic Experiment	p. 416
Glossary	p. 417
Photo Credits	p. 424
Index	p. 425
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