Macroeconomics Principles and Policy

by Baumol, William J.

• ISBN13: 9780030268588
• ISBN10: 0030268583
• Edition: 8th
• Format: Paperback
• Copyright: 1999-08-02
• Publisher: South-Western College Pub

Summary

Since introducing the aggregate supply/aggregate demand model as a fundamental tool for learning economics in the first edition of their textbook, William Baumol and Alan Blinder have, for over two decades, led the teaching and learning of economics with their authoritative and timely discussion of the field. Now in its eighth edition, Macroeconomics: Principles and Policy remains a time-tested tool in teaching and learning the ever-evolving field of economics.

Table of Contents

About the Authors	ix
Preface	xi
PART I Getting Acquainted with Economics	1	(90)
What is Economics	3	(14)
Ideas for Beyond the Final Exam	4	(5)
How Much Does It Really Cost	4	(1)
Attempts to Repeal the Laws of Supply and Demand---The Market Strikes Back	4	(1)
The Surprising Principle of Comparative Advantage	5	(1)
Trade Is a Win-Win Situation	5	(1)
The Importance of Thinking at the Margin	6	(1)
Externalities: A Shortcoming of the Market Cured by Market Methods	6	(1)
Why the Costs of Education and Medical Care Keep Growing	6	(1)
The Trade-off between Efficiency and Equality	7	(1)
The Short-Run Trade-off between Inflation and Unemployment	8	(1)
Inflation Distorts Measurements	8	(1)
Why Was It Important to Reduce the Budget Deficit	8	(1)
Productivity Growth Is (Almost) Everything in the Long Run	9	(1)
Epilogue	9	(1)
Inside the Economist's Tool Kit	9	(6)
Economics as a Discipline	9	(1)
The Need for Abstraction	10	(2)
The Role of Economic Theory	12	(1)
What Is an Economic Model	13	(1)
Reasons for Disagreements: Imperfect Information and Value Judgments	14	(1)
Common Sense: Useful but Dangerous	15	(1)
Summary	15	(1)
Key Terms	16	(1)
Questions for Review	16	(1)
The Use and Misuse of Graphs	17	(14)
Graphs Used in Economic Analysis	18	(1)
What's Wrong With This Graph	18	(5)
Two-Variable Diagrams	18	(2)
The Definition and Measurement of Slope	20	(2)
Rays through the Origin and 45° Lines	22	(1)
Squeezing Three Dimensions into Two: Contour Maps	22	(1)
Perils in the Interpretation of Graphs	23	(4)
The Interpretation of Growth Trends	24	(1)
Distorting Trends by Choice of the Time Period	25	(2)
Dangers of Omitting the Origin: The Puzzle Solved	27	(3)
Unreliability of Steepness and Choice of Units	28	(2)
Summary	30	(1)
Key Terms	30	(1)
Questions for Review	30	(1)
The Economy: Myth and Reality	31	(20)
The American Economy: A Thumbnail Sketch	32	(5)
A Private Enterprise Economy	32	(2)
A Relatively ``Closed'' Economy	34	(1)
A Growing Economy ... but with Inflation	34	(2)
Bumps along the Growth Path: Recessions	36	(1)
The Inputs: Labor and Capital	37	(4)
The American Workforce: Who Is in It	38	(1)
The American Workforce: What It Does	38	(2)
The American Workforce: What It Earns	40	(1)
Capital and Its Earnings	41	(1)
The Outputs: What Does America Produce	41	(1)
The Central Role of Business Firms	42	(1)
Measuring Economic Progress	43	(2)
What's Missing from the Picture? Government	45	(4)
The Government as Referee	46	(1)
The Government as Business Regulator	46	(1)
Government Expenditures	46	(1)
Taxes in America	47	(1)
The Government as Redistributor	48	(1)
Conclusion: The Mixed Economy	49	(1)
Summary	49	(1)
Key Terms	50	(1)
Questions for Review	50	(1)
Scarcity and Choice: The Economic Problem	51	(16)
What to do with the Budget Surplus	52	(1)
Scarcity, Choice, and Opportunity Cost	52	(2)
Opportunity Cost and Money Cost	53	(1)
Scarcity and Choice for a Single Firm	54	(2)
The Production Possibilities Frontier	54	(1)
The Principle of Increasing Costs	55	(1)
Scarcity and Choice for the Entire Society	56	(1)
Scarcity and Choice Elsewhere in the Economy	56	(1)
Allocating the Budget Surplus	57	(2)
Application: Economic Growth in the United States and the Asian ``Tigers''	57	(2)
The Concept of Efficiency	59	(1)
The Three Coordination Tasks of any Economy	60	(1)
Specialization Fosters Efficient Resource Allocation	60	(2)
The Wonders of the Division of Labor	60	(1)
The Amazing Principle of Comparative Advantage	61	(1)
Specialization Leads to Exchange	62	(1)
Markets, Prices, and the Three Coordination Tasks	63	(1)
Last Word: Don't Confuse Ends with Means	64	(1)
Summary	64	(1)
Key Terms	65	(1)
Questions for Review	65	(2)
Supply and Demand: An Initial Look	67	(24)
What in the World Happened to those Asian Currencies	68	(1)
The Invisible Hand	68	(2)
Demand and Quantity Demanded	70	(3)
The Demand Schedule	70	(1)
The Demand Curve	71	(1)
Shifts of the Demand Curve	71	(2)
Supply and Quantity Supplied	73	(4)
The Supply Schedule and the Supply Curve	73	(2)
Shifts of the Supply Curve	75	(2)
Supply and Demand Equilibrium	77	(3)
The Law of Supply and Demand	79	(1)
Effects of Demand Shifts on Supply-Demand Equilibrium	79	(1)
Application: The Fall of the Rupiah	80	(2)
Supply Shifts and Supply-Demand Equilibrium	80	(1)
Application: Who Really Pays That Tax	81	(1)
Fighting the Invisible Hand: The Market Fights Back	82	(5)
Restraining the Market Mechanism: Price Ceilings	83	(1)
Case Study: Rent Controls in New York City	83	(2)
Restraining the Market Mechanism: Price Floors	85	(1)
Case Study: Sugar Price Supports	85	(1)
A Can of Worms	86	(1)
A Simple but Powerful Lesson	87	(1)
Summary	87	(1)
Key Terms	88	(1)
Questions for Review	88	(3)
PART II The Macroeconomy: Aggregate Supply and Demand	91	(120)
The Realm of Macroeconomics	93	(20)
How did we Grow so Fast	94	(1)
Drawing a Line Between Macroeconomics and Microeconomics	94	(2)
Aggregation and Macroeconomics	94	(1)
Foundations of Aggregation	95	(1)
The Line of Demarcation Revisited	95	(1)
Supply and Demand Reinterpreted Through a Macroeconomic Lens	96	(1)
A Quick Review	96	(1)
Moving to Macroeconomic Aggregates	96	(1)
Inflation	97	(1)
Recession and Unemployment	97	(1)
Economic Growth	97	(1)
Gross Domestic Product	97	(4)
Money as the Measuring Rod: Real versus Nominal GDP	98	(1)
What Gets Counted in GDP	98	(1)
Limitations of the GDP: What GDP Is Not	99	(2)
The Economy on a Roller Coaster	101	(7)
Growth, But with Fluctuations	101	(2)
Inflation and Deflation	103	(1)
The Great Depression	103	(2)
From World War II to 1973	105	(1)
The Great Stagflation, 1973--1980	106	(1)
Reaganomics and Its Aftermath	106	(1)
Clintonomics: Deficit Reduction and ``The Best Economy in 30 Years''	107	(1)
The Problem of Macroeconomic Stabilization: A Sneak Preview	108	(2)
Combating Unemployment	109	(1)
Combating Inflation	109	(1)
Does It Really Work	109	(1)
Summary	110	(1)
Key Terms	111	(1)
Questions for Review	111	(2)
The Goals of Macroeconomic Policy	113	(28)
The Goal Of Economic Growth	114	(1)
Is More Growth Always Better	114	(1)
The Capacity to Produce: Potential GDP	115	(1)
Alternative Measures of Economic Growth	116	(1)
The U.S. Productivity Slowdown: Is America on the Decline	117	(1)
Explanations for the Productivity Slowdown	118	(1)
Lagging Investment	118	(1)
High Energy Prices	118	(1)
Workforce Skills	119	(1)
A Technological Slowdown	119	(1)
The Costs Of Unemployment	119	(2)
The Human Costs of High Unemployment	121	(1)
Counting the Unemployed: The Official Statistics	122	(1)
Types of Unemployment	123	(1)
How Much Employment is ``Full Employment''	124	(1)
Unemployment Insurance: The Invaluable Cushion	124	(2)
The Costs Of Inflation	126	(1)
Inflation: The Myth and the Reality	126	(3)
Inflation and Real Wages	126	(1)
The Illusion of Traditional ``Fair'' Prices	127	(1)
The Importance of Relative Prices	127	(2)
Inflation as a Redistributor of Income and Wealth	129	(1)
Real Versus Nominal Interest Rates	129	(1)
Inflation Distorts Measurements	130	(2)
Confusing Real and Nominal Interest Rates	131	(1)
Public Utility Regulation	131	(1)
The Malfunctioning Tax System	131	(1)
Usury Laws	131	(1)
Other Costs of Inflation	132	(1)
The Costs of Low Versus High Inflation	132	(1)
Low Inflation Does not Necessarily Lead to High Inflation	133	(2)
Summary	135	(1)
Key Terms	135	(1)
Questions for Review	135	(1)
How Statisticians Measure Inflation	136	(1)
Index Numbers for Inflation	136	(1)
The Consumer Price Index	136	(1)
How to Use a Price Index to ``Deflate'' Monetary Figures	137	(1)
The GDP Deflator	138	(1)
Summary	138	(1)
Key Terms	138	(1)
Questions for Review	139	(2)
Income and Spending: The Powerful Consumer	141	(20)
Demand Management and the Ornery Consumer	142	(1)
Aggregate Demand, Domestic Product, and National Income	143	(1)
The Circular Flow of Spending, Production, and Income	144	(2)
Consumer Spending and Income: The Important Relationship	146	(2)
The Consumption Function and the Marginal Propensity to Consume	148	(2)
Movements Along Versus Shifts of the Consumption Function	150	(2)
Other Determinants of Consumer Spending	150	(2)
Why Tax Policy Failed in 1975	152	(1)
How Predictable is Consumer Behavior	153	(1)
Summary	154	(1)
Key Terms	154	(1)
Questions to Review	155	(1)
National Income Accounting	155	(1)
Defining GDP: Exceptions to the Rules	155	(1)
GDP as the Sum of Final Goods and Services	156	(1)
GDP as the Sum of All Factor Payments	156	(2)
GDP as the Sum of Values Added	158	(1)
Summary	159	(1)
Key Terms	160	(1)
Questions for Review	160	(1)
Demand-Side Equilibrium: Unemployment or Inflation	161	(18)
Why Does the Market Permit Unemployment	162	(1)
The Extreme Variability of Investment	163	(2)
Business Confidence and Expectations about the Future	163	(1)
The Level and Growth of Demand	164	(1)
Technical Change and Product Innovation	164	(1)
The Real Rate of Interest	164	(1)
Tax Provisions	165	(1)
The Determinants of Net Exports	165	(1)
National Incomes	165	(1)
Relative Prices and Exchange Rates	166	(1)
Equilibrium on the Demand Side of the Economy	166	(5)
The Meaning of Equilibrium GDP	167	(1)
Constructing the Expenditure Schedule	168	(2)
The Mechanics of Income Determination	170	(1)
The Aggregate Demand Curve	171	(2)
Demand-Side Equilibrium and Full Employment	173	(1)
The Coordination of Saving and Investment	174	(2)
Summary	176	(1)
Key Terms	177	(1)
Questions for Review	177	(1)
The Simple Algebra of Income Determination	177	(1)
Questions for Review	178	(1)
Changes on the Demand Side: Multiplier Analysis	179	(16)
Would Cutting Taxes Work in Japan	180	(1)
The Magic of the Multiplier	180	(4)
Demystifying the Multiplier: How It Works	181	(1)
Algebraic Statement of the Multiplier	182	(2)
The Multiplier: A General Concept	184	(2)
The Multiplier Effect of Consumer Spending	184	(1)
Other Multipliers	185	(1)
The Multiplier in Reverse	186	(1)
The Paradox of Thrift	186	(1)
Tax Cutting in Japan	187	(1)
The Multiplier and the Aggregate Demand Curve	188	(1)
Summary	189	(1)
Key Terms	189	(1)
Questions for Review	189	(1)
The Simple Algebra of the Multiplier	190	(1)
The Multiplier with Variable Imports	190	(2)
Summary	192	(1)
Questions for Review	193	(2)
Supply-Side Equilibrium: Unemployment and Inflation	195	(16)
How Could Inflation Fall While the Economy Boomed	196	(1)
The Aggregate Supply Curve	196	(3)
Why the Aggregate Supply Curve Slopes Upward	196	(1)
Shifts of the Aggregate Supply Curve	197	(2)
Equilibrium of Aggregate Demand and Supply	199	(1)
Recessionary and Inflationary Gaps Revisited	200	(2)
Adjusting to a Recessionary Gap: Deflation or Unemployment	202	(1)
Does the Economy Have a Self-Correcting Mechanism	203	(1)
An Example from Recent History: Disinflation in the 1990s	203	(1)
Adjusting to an Inflationary Gap: Inflation	203	(3)
Demand Inflation and Stagflation	204	(1)
A Recent Example	205	(1)
Stagflation from a Supply Shock	206	(1)
Explaining the Roaring Nineties	206	(1)
Inflation and the Multiplier	207	(1)
A Role for Stabilization Policy	208	(1)
Summary	209	(1)
Key Terms	209	(1)
Questions for Review	209	(2)
PART III Fiscal and Monetary Policy	211	(130)
Managing Aggregate Demand: Fiscal Policy	213	(20)
How to Stimulate Japan's Economy	214	(1)
Income Taxes and the Consumption Schedule	214	(3)
The Multiplier Revisited	217	(2)
Automatic Stabilizers	218	(1)
Multipliers for Tax Policy	219	(1)
The Japanese Economy	219	(1)
Government Transfer Payments	220	(1)
Planning Expansionary Fiscal Policy	220	(2)
Planning Contractionary Fiscal Policy	222	(1)
The Choice Between Spending Policy and Tax Policy	222	(1)
Some Harsh Realities	223	(1)
The Idea Behind Supply-Side Tax Cuts	224	(1)
Some Files in the Ointment	225	(2)
Toward an Assessment of Supply-Side Economics	226	(1)
Two Sides to the Supply Side	227	(1)
Summary	228	(1)
Key Terms	228	(1)
Questions for Review	228	(1)
Algebraic Treatment of Fiscal Policy and Aggregate Demand	229	(4)
Questions for Review	231	(2)
Money and the Banking System	233	(22)
What Caused the Biggest ``Bank Run'' in History	234	(1)
The Nature of Money	235	(3)
Barter versus Monetary Exchange	235	(1)
The Conceptual Definition of Money	236	(1)
What Serves as Money	236	(2)
How the Quantity of Money is Measured	238	(2)
M1	239	(1)
M2	239	(1)
Other Definitions of the Money Supply	240	(1)
The Banking System	240	(4)
How Banking Began	241	(2)
Principles of Bank Management: Profits versus Safety	243	(1)
Bank Regulation	244	(1)
The Origins of the Money Supply	244	(2)
How Bankers Keep Books	244	(2)
Banks and Money Creation	246	(5)
The Limits to Money Creation by a Single Bank	246	(2)
Multiple Money Creation by a Series of Banks	248	(2)
The Process in Reverse: Multiple Contractions of the Money Supply	250	(1)
Why the Deposit Creation Formula is Oversimplified	251	(1)
The Asian Bank Run Explained	252	(1)
The Need for Monetary Policy	252	(1)
Summary	253	(1)
Key Terms	253	(1)
Questions for Review	254	(1)
Monetary Policy and the National Economy	255	(20)
Just Why is Alan Greenspan so Important	256	(1)
Money and Income: The Important Difference	257	(1)
America's Central Bank: The Federal Reserve System	257	(3)
Origins and Structure	257	(1)
The Independence of the Fed	258	(2)
Controlling the Money Supply: Open Market Operations	260	(3)
Open Market Operations, Bond Prices, and Interest Rates	262	(1)
Other Methods of Monetary Control	263	(2)
Lending to Banks	264	(1)
Changing Reserve Requirements	265	(1)
Supply-Demand Analysis of the Money Market	265	(3)
The Money Supply Mechanism	265	(1)
The Demand for Money	266	(1)
Equilibrium in the Money Market	267	(1)
How Monetary Policy Works	268	(1)
Investment and Interest Rates	269	(1)
Monetary Policy and Total Expenditure	269	(1)
Money and the Price Level in the Keynesian Model	270	(2)
Application: Why the Aggregate Demand Curve Slopes Downward	271	(1)
From Models to Policy Debates	272	(1)
Summary	272	(1)
Key Terms	273	(1)
Questions for Review	273	(2)
The Debate Over Monetary Policy	275	(22)
Should we Forsake Stabilization Policy	276	(1)
Velocity and the Quantity Theory of Money	276	(5)
The Determinants of Velocity	278	(2)
Monetarism: The Quantity Theory Modernized	280	(1)
Fiscal Policy, Interest Rates, and Velocity	281	(2)
Application: The Multiplier Formula Revisited	283	(1)
Application: Deficit Reduction and Investment	283	(1)
Debate: Should Stabilization Policy Rely on Fiscal or Monetary Policy	283	(2)
Debate: Should the Fed Control the Money Supply or Control Interest Rates	285	(3)
Two Imperfect Alternatives	286	(1)
What Has the Fed Actually Done	286	(2)
Debate: The Shape of the Aggregate Supply Curve	288	(2)
Debate: Should the Government Intervene	290	(2)
Lags and the Rules-versus-Discretion Debate	291	(1)
Dimensions of the Rules-Versus-Discretion Debate	292	(2)
How Fast Does the Economy's Self-Correcting Mechanism Work	292	(1)
How Long Are the Lags in Stabilization Policy	292	(1)
How Accurate Are Economic Forecasts	292	(1)
The Size of Government	292	(1)
Uncertainties Caused by Government Policy	293	(1)
A Political Business Cycle	293	(1)
What Should be Done	294	(1)
Summary	294	(1)
Key Terms	295	(1)
Questions for Review	295	(2)
Deficits, Monetary Policy, and Growth	297	(22)
Are Smaller Deficits Good or Bad for Growth	298	(1)
Should the Budget be Balanced	298	(2)
The Importance of the Policy Mix	299	(1)
Deficits and Debt: Terminology and Facts	300	(2)
Some Facts about the National Debt	300	(2)
Interpreting the Budget Deficit	302	(4)
The Structural Deficit	302	(2)
Inflation Accounting for Interest Payments	304	(1)
Conclusion: What Happened after 1981	305	(1)
Bogus Arguments About the Burden of the Debt	306	(2)
Budget Deficits and Inflation	308	(2)
The Monetization Issue	309	(1)
Deficits, Interest Rates, and Crowding Out	310	(2)
The Bottom Line	312	(1)
The True Burden of the National Debt: Slower Growth	312	(1)
Resolving the Issue of Deficits and Growth	313	(2)
The Importance of the Policy Mix	314	(1)
The Economics and Politics of the U.S. Budget Deficit	315	(1)
Summary	316	(1)
Key Terms	317	(1)
Questions for Review	317	(2)
The Phillips Curve and Economic Growth	319	(22)
Is the Trade-Off Between Inflation and Unemployment a Relic of the Past	320	(1)
Demand-Side Inflation Versus Supply-Side Inflation: A Review	320	(1)
Applying the Model to a Growing Economy	321	(1)
Demand-Side Inflation and the Phillips Curve	322	(3)
Supply-Side Inflation and the Collapse of the Phillips Curve	325	(1)
Explaining the 1990s	325	(1)
Why Inflation and Unemployment Both Declined	326	(1)
What the Phillips Curve is not	326	(3)
Fighting Unemployment with Fiscal and Monetary Policy	328	(1)
What Should Be Done	329	(1)
The Costs of Inflation and Unemployment	329	(1)
The Slope of the (Short-Run) Phillips Curve	329	(1)
The Efficiency of the Economy's Self-Correcting Mechanism	329	(1)
Inflationary Expectations and the Phillips Curve	330	(2)
The Theory of Rational Expectations	332	(2)
What Are Rational Expectations	332	(1)
Rational Expectations and the Trade-off	333	(1)
An Evaluation	334	(1)
Why Economists (And Politicians) Disagree	334	(1)
The Dilemma of Demand Management	335	(1)
The Trade-off between Inflation and Unemployment	335	(1)
Attempts to Reduce the Natural Rate of Unemployment	335	(2)
Indexing	337	(1)
Summary	338	(1)
Key Terms	338	(1)
Questions for Review	338	(3)
PART IV The United States in the World Economy	341	(58)
International Trade and Comparative Advantage	343	(22)
How can Americans Compete with ``Cheap Foreign Labor''	344	(1)
Why Trade	345	(1)
Mutual Gains from Trade	346	(1)
International Versus International Trade	346	(1)
Political Factors in International Trade	347	(1)
The Many Currencies Involved in International Trade	347	(1)
Impediments to Mobility of Labor and Capital	347	(1)
The Law of Comparative Advantage	347	(4)
The Arithmetic of Comparative Advantage	348	(1)
The Graphics of Comparative Advantage	349	(2)
Comparative Advantage Exposes the Fallacy of ``Cheap Foreign Labor''	351	(1)
Supply-Demand Equilibrium and Pricing in World Trade	352	(1)
Tariffs, Quotas, and Other Interferences with Trade	353	(3)
How Tariffs and Quotas Work	354	(2)
Tariffs versus Quotas	356	(1)
Why Inhibit Trade	356	(3)
Gaining a Price Advantage	356	(1)
Protecting Particular Industries	357	(2)
Other Arguments for Protection	359	(2)
National Defense and Other Noneconomic Considerations	359	(1)
The Infant-Industry Argument	359	(1)
Strategic Trade Policy	359	(2)
Can Cheap Imports Hurt a Country	361	(1)
A Last Look at the ``Cheap Foreign Labor'' Argument	362	(1)
Summary	362	(1)
Key Terms	363	(1)
Questions for Review	363	(2)
The International Monetary System: Order or Disorder	365	(20)
What Happened to the Asian Tigers	366	(1)
What Are Exchange Rates	366	(2)
Exchange Rate Determination in a Free Market	368	(4)
The Purchasing-Power Parity Theory: The Long Run	368	(2)
Economic Activity and Exchange Rates: The Medium Run	370	(1)
Interest Rates and Exchange Rates: The Short Run	371	(1)
Market Determination of Exchange Rates: Summary	372	(1)
Fixed Exchange Rates and the Balance of Payments	372	(3)
Defining the Balance of Payments in Practice	374	(1)
A Bit of History: The Gold Standard and the Bretton Woods System	375	(1)
The Classical Gold Standard	375	(1)
The Bretton Woods System	375	(1)
Adjustment Mechanisms Under Fixed Exchange Rates	376	(1)
Why Try to Fix Exchange Rates	377	(1)
The Current ``Nonsystem''	378	(4)
The Role of the IMF	379	(1)
The Volatile Dollar	379	(1)
The Dawn of the Euro	380	(2)
The Fate of the Asian Tigers	382	(1)
Summary	382	(1)
Key Terms	383	(1)
Questions of Review	383	(2)
Exchange Rates and the Macroeconomy	385	(14)
Should the Yen Rise or Fall	386	(1)
International Trade, Exchange Rates, and Aggregate Demand	386	(2)
Relative Prices, Exports, and Imports	387	(1)
The Effects of Changes in Exchange Rates	387	(1)
Aggregate Supply in an Open Economy	388	(1)
The Macroeconomic Effects of Exchange Rates	389	(1)
Interest Rates and International Capital Flows	390	(1)
Fiscal and Monetary Policies in an Open Economy	390	(2)
Fiscal Policy Revisited	391	(1)
Monetary Policy Revisited	392	(1)
International Aspects of Deficit Reduction	392	(2)
The Loose Link between the Budget Deficit and the Trade Deficit	393	(1)
Is The Trade Deficit a Problem	394	(1)
On Curing the Trade Deficit	395	(2)
Change the Mix of Fiscal and Monetary Policy	395	(1)
More Rapid Economic Growth Abroad	395	(1)
Raise Domestic Saving or Reduce Domestic Investment	395	(1)
Protectionism	396	(1)
Conclusion: No Nation is an Island	397	(1)
The Yen's Effect on Smaller Asian Economics	397	(1)
Summary	397	(1)
Key Terms	398	(1)
Questions for Review	398	(1)
Glossary	399	(8)
Index	407