Principles of Macroeconomics

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  • Edition: 8th
  • Format: Paperback
  • Copyright: 2009-01-01
  • Publisher: Pearson College Div
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Case and Fair is the trusted Macroeconomics text that teaches students through stories, graphs, and equations...and now, a new emphasis on excellence in assessment. These two highly-respected economists and educators have revised this best-selling Macroeconomics book to include more current topics and events while maintaining its hallmark feature of teaching economics through stories, graphs, and equations; relevant to students with various learning styles (verbal, visual, and numerical).

Table of Contents

Prefacep. xvii
Introduction to Economicsp. 1
The Scope and Method of Economicsp. 1
Why Study Economics?p. 2
To Learn a Way of Thinkingp. 2
To Understand Societyp. 4
News Analysis: Economics and Global Affairs in 2005p. 5
To Understand Global Affairsp. 6
To Be an Informed Voterp. 6
The Scope of Economicsp. 7
Microeconomics and Macroeconomicsp. 8
The Diverse Fields of Economicsp. 8
Further Exploration: The Fields of Economicsp. 9
The Method of Economicsp. 10
Theories and Modelsp. 11
Economic Policyp. 14
An Invitationp. 16
Summaryp. 16
Review Terms and Conceptsp. 16
Problem Setp. 17
How to Read and Understand Graphsp. 17
The Economic Problem: Scarcity and Choicep. 25
Scarcity, Choice, and Opportunity Costp. 26
Scarcity and Choice in a One-Person Economyp. 26
News Analysis Opportunity Costs and Internshipsp. 27
Scarcity and Choice in an Economy of Two or Morep. 28
The Production Possibility Frontierp. 31
Comparative Advantage and the Gains from Tradep. 36
The Economic Problemp. 39
Economic Systemsp. 39
Command Economiesp. 39
Laissez-Faire Economies: The Free Marketp. 40
Mixed Systems, Markets, and Governmentsp. 41
Looking Aheadp. 42
Summaryp. 42
Review Terms and Conceptsp. 43
Problem Setp. 43
Demand, Supply, and Market Equilibriump. 47
Firms and Households: The Basic Decision-Making Unitsp. 48
Input Markets and Output Markets: The Circular Flowp. 48
Demand in Product/Output Marketsp. 50
Changes in Quantity Demanded Versus Changes in Demandp. 51
Price and Quantity Demanded: The Law of Demandp. 51
Other Determinants of Household Demandp. 54
Shift of Demand versus Movement Along a Demand Curvep. 56
From Household Demand to Market Demandp. 57
Supply in Product/Output Marketsp. 59
Price and Quantity Supplied: The Law of Supplyp. 60
Other Determinants of Supplyp. 61
Shift of Supply versus Movement along a Supply Curvep. 62
From Individual Supply to Market Supplyp. 63
Market Equilibriump. 64
Excess Demandp. 65
Excess Supplyp. 66
Changes in Equilibriump. 67
Demand and Supply in Product Markets: A Reviewp. 70
Looking Ahead: Markets and the Allocation of Resourcesp. 70
News Analysis: Mad Cow Disease Cuts Demand for Cattle in 2005p. 71
Summaryp. 72
Review Terms and Conceptsp. 73
Problem Setp. 73
Demand and Supply Applicationsp. 77
The Price System: Rationing and Allocating Resourcesp. 77
Price Rationingp. 77
Constraints on the Market and Alternative Rationing Mechanismsp. 79
News Analysis: Hurricane Katrina and Gasoline Prices in 2005p. 83
Prices and the Allocation of Resourcesp. 84
Price Floorsp. 84
Supply and Demand Analysis: An Oil Import Feep. 85
Supply and Demand and Market Efficiencyp. 86
Consumer Surplusp. 87
Producer Surplusp. 88
Competitive Markets Maximize the Sum of Producer and Consumer Surplusp. 89
Potential Causes of Deadweight Loss from Under- and Overproductionp. 89
Further Exploration: The Drug Wars: A Matter of Supply and Demandp. 90
Looking Aheadp. 91
Summaryp. 91
Review Terms and Conceptsp. 92
Problem Setp. 92
Concepts and Problems in Macroeconomicsp. 95
Introduction to Macroeconomicsp. 95
The Roots of Macroeconomicsp. 96
The Great Depressionp. 96
Recent Macroeconomic Historyp. 96
Further Exploration: The Great Depression and John Maynard Keynesp. 97
Macroeconomic Concernsp. 98
Inflation and Deflationp. 98
Output Growth: Short Run and Long Runp. 99
Unemploymentp. 99
Government in the Macroeconomyp. 100
Fiscal Policyp. 100
Monetary Policyp. 100
Further Exploration: Macroeconomic Concerns from the Federal Reserve in 2005p. 101
Growth Policiesp. 101
The Components of the Macroeconomyp. 102
The Circular Flow Diagramp. 102
The Three Market Arenasp. 103
The Methodology of Macroeconomicsp. 104
Connections to Microeconomicsp. 105
Aggregate Demand and Aggregate Supplyp. 105
The U.S. Economy Since 1900: Trends and Cyclesp. 106
Expansion and Contraction: The Business Cyclep. 106
The U.S. Economy Since 1970p. 107
Summaryp. 110
Review Terms and Conceptsp. 110
Problem Setp. 111
Measuring National Output and National Incomep. 113
Gross Domestic Productp. 113
Final Goods and Servicesp. 114
Exclusion of Used Goods and Paper Transactionsp. 114
Exclusion of Output Produced Abroad by Domestically Owned Factors of Productionp. 115
Calculating GDPp. 115
The Expenditure Approachp. 116
Further Exploration GDP: One of the Great Inventions of the 20th Century-Survey of Current Businessp. 118
The Income Approachp. 120
Nominal versus Real GDPp. 122
Calculating Real GDPp. 122
Calculating the GDP Deflatorp. 124
The Problems of Fixed Weightsp. 124
Limitations of the GDP Conceptp. 125
GDP and Social Welfarep. 125
The Underground Economyp. 126
Gross National Income Per Capitap. 126
Looking Aheadp. 127
Summaryp. 127
Review Terms and Conceptsp. 128
Problem Setp. 128
Long-Run and Short-Run Concerns: Growth, Productivity, Unemployment, and Inflationp. 131
Long-Run Output and Productivity Growthp. 132
Recessions, Depressions, and Unemploymentp. 134
Defining and Measuring Unemploymentp. 135
Components of the Unemployment Ratep. 136
The Costs of Unemploymentp. 139
News Analysis: Jobs and Hurricanes in 2005p. 140
The Benefits of Recessionsp. 142
Inflationp. 143
Defining Inflationp. 143
Price Indexesp. 143
The Costs of Inflationp. 145
Further Exploration: World Economy in Transition: Bias in the US Consumer Price Index-Why It Could Be Importantp. 146
Inflation: Public Enemy Number One?p. 147
Looking Aheadp. 148
Summaryp. 148
Review Terms and Conceptsp. 149
Problem Setp. 149
The Goods and Money Marketsp. 151
Aggregate Expenditure and Equilibrium Outputp. 151
Aggregate Output and Aggregate Income (Y)p. 152
Income, Consumption, and Saving (Y, C, and S)p. 153
Explaining Spending Behaviorp. 153
Planned Investment (I)p. 157
Planned Aggregate Expenditure (AE)p. 159
Equilibrium Aggregate Output (Income)p. 160
The Saving/Investment Approach to Equilibriump. 163
News Analysis: Inventory Changes Signal Slower Growthp. 164
Adjustment to Equilibriump. 164
The Multiplierp. 165
The Multiplier Equationp. 167
Further Exploration: The Paradox of Thriftp. 169
The Size of the Multiplier in the Real Worldp. 169
The Multiplier in Action: Recovering From the Great Depressionp. 170
Looking Aheadp. 171
Summaryp. 171
Review Terms and Conceptsp. 171
Problem Setp. 172
Deriving the Multiplier Algebraicallyp. 173
The Government and Fiscal Policyp. 175
Government in the Economyp. 176
Government Purchases (G), Net Taxes (T), and Disposable Income (Y[subscript d])p. 176
Equilibrium Output: Y = C + I + Gp. 178
Fiscal Policy at Work: Multiplier Effectsp. 180
The Government Spending Multiplierp. 181
The Tax Multiplierp. 182
The Balanced-Budget Multiplierp. 184
The Federal Budgetp. 186
The Budgetp. 186
News Analysis: The Effect of a Natural Disaster on Government Spending and Taxation, 2005p. 187
The Surplus or Deficitp. 188
The Debtp. 188
The Economy's Influence on the Government Budgetp. 189
Tax Revenues Depend on the State of the Economyp. 189
Some Government Expenditures Depend on the State of the Economyp. 189
Automatic Stabilizersp. 190
Fiscal Dragp. 190
Full-Employment Budgetp. 190
Looking Aheadp. 191
Summaryp. 191
Review Terms and Conceptsp. 192
Problem Setp. 192
Deriving the Fiscal Policy Multipliersp. 193
The Case in Which Tax Revenues Depend on Incomep. 194
The Money Supply and the Federal Reserve Systemp. 197
An Overview of Moneyp. 197
What Is Money?p. 197
News Analysis: Real Goods as a Store of Value During Inflationp. 199
Commodity and Fiat Moniesp. 200
Measuring the Supply of Money in the United Statesp. 200
The Private Banking Systemp. 202
How Banks Create Moneyp. 202
A Historical Perspective: Goldsmithsp. 202
The Modern Banking Systemp. 203
The Creation of Moneyp. 205
The Money Multiplierp. 207
The Federal Reserve Systemp. 208
Functions of the Federal Reservep. 209
News Analysis: Japan's Battle with Deflationp. 210
The Federal Reserve Balance Sheetp. 210
How the Federal Reserve Controls the Money Supplyp. 212
The Required Reserve Ratiop. 212
The Discount Ratep. 213
Open Market Operationsp. 214
The Supply Curve for Moneyp. 217
Looking Aheadp. 218
Summaryp. 218
Review Terms and Conceptsp. 218
Problem Setp. 219
Money Demand, the Equilibrium Interest Rate, and Monetary Policyp. 221
The Demand for Moneyp. 221
The Transaction Motivep. 222
Money Management and the Optimal Balancep. 222
News Analysis: Money Demand and Interest Ratesp. 224
The Speculation Motivep. 226
The Total Demand for Moneyp. 226
Further Exploration: The Bond Market, the Money Market, and the Speculation Motivep. 227
Transactions Volume and the Price Levelp. 227
The Determinants of Money Demand: Reviewp. 229
The Equilibrium Interest Ratep. 229
Supply and Demand in the Money Marketp. 230
Changing the Money Supply to Affect the Interest Ratep. 231
Increases in Y and Shifts in the Money Demand Curvep. 232
Looking Ahead: The Federal Reserve and Monetary Policyp. 233
Summaryp. 233
Review Terms and Conceptsp. 234
Problem Setp. 234
The Various Interest Rates in the U.S. Economyp. 235
The Demand For Money: A Numerical Examplep. 237
Macroeconomic Analysisp. 239
Money, the Interest Rate, and Output: Analysis and Policyp. 239
The Links Between the Goods Market and the Money Marketp. 239
Investment, the Interest Rate, and the Goods Marketp. 240
Money Demand, Aggregate Output (Income), and the Money Marketp. 242
Combining the Goods Market and the Money Marketp. 244
Expansionary Policy Effectsp. 244
News Analysis: Interest Rates and Housingp. 247
Contractionary Policy Effectsp. 249
The Macroeconomic Policy Mixp. 250
Other Determinants of Planned Investmentp. 250
Looking Ahead: The Price Levelp. 251
Summaryp. 251
Review Terms and Conceptsp. 252
Problem Setp. 252
The Is-Lm Diagramp. 253
Aggregate Demand, Aggregate Supply, and Inflationp. 257
The Aggregate Demand Curvep. 257
Deriving the Aggregate Demand Curvep. 258
The Aggregate Demand Curve: A Warningp. 259
Other Reasons for a Downward-Sloping Aggregate Demand Curvep. 260
Aggregate Expenditure and Aggregate Demandp. 261
Shifts of the Aggregate Demand Curvep. 261
The Aggregate Supply Curvep. 263
The Aggregate Supply Curve: A Warningp. 263
Aggregate Supply in the Short Runp. 264
Shifts of the Short-Run Aggregate Supply Curvep. 266
The Equilibrium Price Levelp. 268
The Long-Run Aggregate Supply Curvep. 269
Potential GDPp. 269
Aggregate Demand, Aggregate Supply, and Monetary and Fiscal Policyp. 271
Long-Run Aggregate Supply and Policy Effectsp. 272
News Analysis: A New Federal Reserve Chairman Nominated in 2005p. 273
Further Exploration: The Simple "Keynesian" Aggregate Supply Curvep. 274
Causes of Inflationp. 274
Inflation Versus Sustained Inflation: A Reminderp. 274
Demand-Pull Inflationp. 275
Cost-Push, or Supply-Side, Inflationp. 275
Expectations and Inflationp. 276
Money and Inflationp. 277
Sustained Inflation as a Purely Monetary Phenomenonp. 278
Looking Aheadp. 278
Summaryp. 279
Review Terms and Conceptsp. 280
Problem Setp. 280
The Labor Market, Unemployment, and Inflationp. 281
The Labor Market: Basic Conceptsp. 281
The Classical View of the Labor Marketp. 282
News Analysis: Employment and Unemployment at the End of 2005p. 284
The Classical Labor Market and the Aggregate Supply Curvep. 284
The Unemployment Rate and the Classical Viewp. 285
Explaining the Existence of Unemploymentp. 286
Sticky Wagesp. 286
Efficiency Wage Theoryp. 287
Imperfect Informationp. 287
Minimum Wage Lawsp. 288
An Open Questionp. 288
The Short-Run Relationship Between The Unemployment Rate and Inflationp. 288
The Phillips Curve: A Historical Perspectivep. 290
Aggregate Supply and Aggregate Demand Analysis and the Phillips Curvep. 292
Expectations and the Phillips Curvep. 293
Is There a Short-Run Trade-Off Between Inflation and Unemployment?p. 293
The Long-Run Aggregate Supply Curve, Potential GDP, and the Natural Rate of Unemploymentp. 294
The Nonaccelerating Inflation Rate of Unemployment (NAIRU)p. 295
Looking Aheadp. 296
Summaryp. 297
Review Terms and Conceptsp. 297
Problem Setp. 298
Macroeconomic Issues and Policyp. 299
Time Lags Regarding Monetary and Fiscal Policyp. 299
Stabilization: "The Fool in the Shower"p. 299
Recognition Lagsp. 301
Implementation Lagsp. 301
Response Lagsp. 302
Monetary Policyp. 303
Controlling the Interest Ratep. 303
The Fed's Response to the State of the Economyp. 304
Monetary Policy Since 1990p. 305
Inflation Targetingp. 308
Fiscal Policy: Deficit Targetingp. 309
News Analysis: Will the New Fed Chair Change to Inflation Targeting in 2006?p. 310
The Effects of Spending Cuts on the Deficitp. 310
Economic Stability and Deficit Reductionp. 312
Summaryp. 313
Fiscal Policy Since 1990p. 313
Summaryp. 316
Review Terms and Conceptsp. 316
Problem Setp. 316
The Stock Market and the Economyp. 319
Stocks and Bondsp. 319
Bondsp. 319
Stocksp. 320
Further Exploration: Reading a Bond Tablep. 321
Further Exploration: Reading the Stock Pagesp. 322
Determining the Price of a Stockp. 322
The Stock Market Since 1948p. 323
Stock Market Effects on the Economyp. 325
The Crash of October 1987p. 325
The Boom of 1995-2000p. 326
Fed Policy and the Stock Marketp. 330
The Post-Boom Economyp. 330
News Analysis: Housing Wealth in 2006p. 331
Summaryp. 332
Review Terms and Conceptsp. 332
Problem Setp. 332
Household and Firm Behavior in the Macroeconomy: A Further Lookp. 335
Households: Consumption and Labor Supply Decisionsp. 335
The Keynesian Theory of Consumption: A Reviewp. 335
The Life-Cycle Theory of Consumptionp. 336
News Analysis: A New Pattern of Consumption and Income, 1946-1947p. 338
The Labor Supply Decisionp. 338
Interest Rate Effects on Consumptionp. 340
Government Effects on Consumption and Labor Supply: Texes and Transfersp. 341
A Possible Employment Constraint on Householdsp. 341
A Summary of Household Behaviorp. 342
The Household Sector Since 1970p. 343
Firms: Investment and Employment Decisionsp. 345
Expectations and Animal Spiritsp. 347
Excess Labor and Excess Capital Effectsp. 348
Inventory Investmentp. 349
A Summary of Firm Behaviorp. 350
The Firm Sector Since 1970p. 350
Productivity and the Business Cyclep. 353
The Relationship Between Output and Unemploymentp. 354
The Size of the Multiplierp. 355
Summaryp. 356
Review Terms and Conceptsp. 357
Problem Setp. 358
Long-Run Growthp. 359
The Growth Process: From Agriculture to Industryp. 359
The Sources of Economic Growthp. 361
An Increase in Labor Supplyp. 361
Increases in Physical Capitalp. 363
Increases in Human Capitalp. 364
Increases in Productivityp. 364
Growth and Productivity in the United Statesp. 365
Sources of Growth in the U.S. Economy: 1929-1982p. 366
Labor Productivity: 1952 I-2003 IIp. 367
Economic Growth and Public Policyp. 368
Suggested Public Policiesp. 368
News Analysis: Productivity Gains in Health Carep. 369
Further Exploration: Can We Really Measure Productivity Changes?p. 370
Growth Policy: A Long-Run Propositionp. 371
The Pros and Cons of Growthp. 372
The Progrowth Argumentp. 372
The Antigrowth Argumentp. 373
Summary: No Right Answerp. 375
Summaryp. 375
Review Terms and Conceptsp. 376
Problem Setp. 376
Debates in Macroeconomics: Monetarism, New Classical Theory, and Supply-Side Economicsp. 379
Keynesian Economicsp. 379
Monetarismp. 380
The Velocity of Moneyp. 380
The Quantity Theory of Moneyp. 381
Inflation as a Purely Monetary Phenomenonp. 382
The Keynesian/Monetarist Debatep. 383
New Classical Macroeconomicsp. 384
The Development of New Classical Macroeconomicsp. 384
News Analysis: Inflation and Money Supply in Latin Americap. 385
Rational Expectationsp. 385
Evaluating Rational-Expectations Theoryp. 388
Real Business Cycle Theoryp. 388
Supply-Side Economicsp. 389
Evaluating Supply-Side Economicsp. 390
Testing Alternative Macroeconomic Modelsp. 391
Summaryp. 392
Review Terms and Conceptsp. 392
Problem Setp. 393
The World Economyp. 395
International Trade, Comparative Advantage, and Protectionismp. 395
Trade Surpluses and Deficitsp. 396
The Economic Basis for Trade: Comparative Advantagep. 396
Absolute Advantage versus Comparative Advantagep. 397
Terms of Tradep. 401
Exchange Ratesp. 402
The Sources of Comparative Advantagep. 404
The Heckscher-Ohlin Theoremp. 405
Other Explanations for Observed Trade Flowsp. 405
Trade Barriers: Tariffs, Export Subsidies, and Quotasp. 405
News Analysis: New Trade Agreement with Central American and the Dominican Republic-2005p. 408
Free Trade or Protection?p. 409
The Case for Free Tradep. 409
The Case for Protectionp. 410
Further Exploration: A Petitionp. 412
An Economic Consensusp. 413
Summaryp. 413
Review Terms and Conceptsp. 415
Problem Setp. 415
Open-Economy Macroeconomics: The Balance of Payments and Exchange Ratesp. 417
The Balance of Paymentsp. 418
The Current Accountp. 419
The Capital Accountp. 420
The United States as a Debtor Nationp. 421
Equilibrium Output (Income) in an Open Economyp. 422
The International Sector and Planned Aggregate Expenditurep. 422
Imports and Exports and the Trade Feedback Effectp. 424
Import and Export Prices and the Price Feedback Effectp. 425
The Open Economy with Flexible Exchange Ratesp. 426
The Market for Foreign Exchangep. 426
Factors That Affect Exchange Ratesp. 429
The Effects of Exchange Rates on the Economyp. 432
News Analysis: The Dollar, China, and Trade in 2006p. 434
An Interdependent World Economyp. 436
Summaryp. 436
Review Terms and Conceptsp. 437
Problem Setp. 437
World Monetary Systems Since 1900p. 438
Globalizationp. 443
The Global Circular Flowp. 443
A Brief History of Economic Globalizationp. 445
The Benefits and Costs of Globalizationp. 446
The Free-Trade Debate Revisitedp. 446
Trade, Growth, and Povertyp. 448
The Globalization of Labor Markets: The Economics of Immigration and Outsourcingp. 449
Capital Mobilityp. 452
News Analysis: Outsourcing Is Not Just Customer Service Reps in Indiap. 453
Public Policy and Globalizationp. 454
Global Externalities and Public Goodsp. 454
Nongovernmental Organizations and International Economics: The Washington Consensusp. 455
Globalization, Capitalism, and Democracyp. 456
A Final Wordp. 457
Summaryp. 457
Review Terms and Conceptsp. 458
Problem Setp. 458
Economic Growth in Developing and Transitional Economiesp. 459
Life in the Developing Nations: Population and Povertyp. 460
Economic Development: Sources and Strategiesp. 461
The Sources of Economic Developmentp. 462
Strategies for Economic Developmentp. 463
News Analysis: Trade and Development in Africa-2003p. 466
Growth versus Development: The Policy Cyclep. 467
Issues in Economic Developmentp. 467
Population Growthp. 468
Developing-Country Debt Burdensp. 470
Economies in Transitionp. 471
Political Systems and Economic Systems: Socialism, Capitalism, and Communismp. 472
Central Planning Versus the Marketp. 473
The End of the Soviet Unionp. 474
The Transition to a Market Economyp. 474
Six Basic Requirements for Successful Transitionp. 474
News Analysis: Russia's Economy in 2005p. 475
Summaryp. 479
Review Terms and Conceptsp. 480
Problem Setp. 480
Glossaryp. G-1
Solutions to Even-Numbered Problemsp. S-1
Indexp. I-1
Photo CreditsP-1
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