Macroeconomics [22 ed.] 9781264112456
33,909 495 15MB
English Pages [765] Year 2020
Table of contents :
The Mcgraw-Hill Series: Economics
Essentials of Economics
Principles of Economics
Economics of Social Issues
Econometrics
Managerial Economics
Intermediate Economics
Advanced Economics
Money and Banking
Urban Economics
Labor Economics
Public Finance
Environmental Economics
International Economics
The Seven Versions of Mcconnell, Brue, Flynn
macroeconomics
About the Authors
Key Graphs
In Memoriam
CAMPBELL R. McCONNELL (1928-2019)
Preface
Significant Content Updates
Improved Efficiency for Instructors
Improved Readability for Students
Examples and Illustrations that Resonate with Students
Accelerating Student Achievement via Adaptive Learning and Innovative Ancillary Materials
Before Class
During Class
Guided Peer Instruction
Application-Based Activities (ABAs)
A 22nd Edition for the 21st Century
Chapter-by-Chapter Changes
Acknowledgments
Contributors
Reviewers
Connect Tools for Customizing Classes
Instructor-Authored Homework Problems
Custom Publishing
Test Builder in Connect
Assurance of Learning Ready
AACSB Statement
Brief Contents
Contents
Limits, Alternatives, and Choices
Learning Objectives
The Economic Perspective
Scarcity and Choice
Consider This…
Purposeful Behavior
Marginal Analysis: Comparing Benefits and Costs
Theories, Principles, and Models
Microeconomics and Macroeconomics
Microeconomics
Macroeconomics
Positive and Normative Economics
Quick Review 1.1
Individual’s Economizing Problem
Limited Income
Global Perspective 1.1
Average Income, Selected Nations
Unlimited Wants
A Budget Line
Attainable and Unattainable Combinations
Trade-Offs and Opportunity Costs
Choice
Income Changes
Consider This…
Did Zuckerberg, Seacrest, and Grande Make Bad Choices?
Quick Review 1.2
Society’s Economizing Problem
Scarce Resources
Resource Categories
Land
Labor
Capital
Entrepreneurial Ability
Production Possibilities Model
Production Possibilities Table
Production Possibilities Curve
Key Graph
Quick Quiz for Figure 1.2
Law of Increasing Opportunity Costs
Shape of the Curve
Economic Rationale
Optimal Allocation
Quick Review 1.3
Production Possibilities Model
Production Possibilities Table
Production Possibilities Curve
Key Graph
Quick Quiz for Figure 1.2
Law of Increasing Opportunity Costs
Shape of the Curve
Economic Rationale
Optimal Allocation
Quick Review 1.3
Unemployment, Growth, and the Future
A Growing Economy
Increases in Resource Supplies
Advances in Technology
Present Choices and Future Possibilities
Global Perspective 1.2
Gross Fixed Capital Formation as a Percentage of National Income, Selected Nations, 2017
A Qualification: International Trade
Quick Review 1.4
Last Word
The Marginal Starbucks
New Store Placement
Location Saturation
Menu Maneuvers
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
PROBLEMS
Graphs and Their Meanings
Constructing a Graph
Direct and Inverse Relationships
Dependent and Independent Variables
Axis Placement of Dependent and Independent Variables
Other Things Equal
Slope of a Line
Positive Slope
Negative Slope
Slopes and Measurement Units
Slopes and Marginal Analysis
Infinite and Zero Slopes
Vertical Intercept
Equation of a Linear Relationship
Slope of a Nonlinear Curve
APPENDIX SUMMARY
APPENDIX TERMS AND CONCEPTS
APPENDIX DISCUSSION QUESTIONS
APPENDIX REVIEW QUESTIONS
APPENDIX PROBLEMS
The Market System and the Circular Flow
Learning Objectives
Economic Systems
Laissez-Faire Capitalism
The Command System
The Market System
Characteristics of the Market System
Private Property
Freedom of Enterprise and Choice
Global Perspective 2.1
Index of Economic Freedom, Selected Economies, 2019
Self-Interest
Competition
Markets and Prices
Quick Review 2.1
Technology and Capital Goods
Specialization
Division of Labor
Geographic Specialization
Use of Money
Active, but Limited, Government
Quick Review 2.2
Five Fundamental Questions
What Will Be Produced?
How Will the Goods and Services Be Produced?
Consider This…
Bitcoin and Cheap Electrons
Who Will Get the Output?
How Will the System Accommodate Change?
How Will the System Promote Progress?
Technological Advance
Capital Accumulation
Quick Review 2.3
The “Invisible Hand”
The Demise of the Command Systems
The Coordination Problem
The Incentive Problem
Consider This…
Korea by Night
The Circular Flow Model
Key Graph
Quick Quiz for Figure 2.2
Households
Businesses
Product Market
Resource Market
Quick Review 2.4
How the Market System Deals with Risk
The Profit System
Shielding Employees and Suppliers from Business Risk
Dealing with Losses
Consider This…
Built on Sand
Benefits of Restricting Business Risk to Owners
Attracting Inputs
Focusing Attention
Quick Review 2.5
Last Word
Hasta La Vista, Venezuela
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Demand, Supply, and Market Equilibrium
Learning Objectives
Markets
Demand
Law of Demand
The Demand Curve
Market Demand
Changes in Demand
Tastes
Number of Buyers
Income
Prices of Related Goods
Substitutes
Complements
Unrelated Goods
Consumer Expectations
Changes in Quantity Demanded
Quick Review 3.1
Supply
Law of Supply
The Supply Curve
Market Supply
Determinants of Supply
Changes in Supply
Resource Prices
Technology
Taxes and Subsidies
Prices of Other Goods
Producer Expectations
Number of Sellers
Changes in Quantity Supplied
Quick Review 3.2
Market Equilibrium
Equilibrium Price and Quantity
Key Graph
Quick Quiz for FIGURE 3.6
Consider This…
Emergent Equilibria
Rationing Function of Prices
Efficient Allocation
Quick Review 3.3
Changes in Supply, Demand, and Equilibrium
Changes in Demand
Changes in Supply
Complex Cases
Supply Increase; Demand Decrease
Supply Decrease; Demand Increase
Supply Increase; Demand Increase
Supply Decrease; Demand Decrease
Global Perspective 3.1
Average Price of a Loaf of White Bread, Selected Nations, 2018
Consider This…
Salsa and Coffee Beans
Application: Government-Set Prices
Price Ceilings on Gasoline
Graphical Analysis
Rationing Problem
Black Markets
Rent Controls
Price Floors on Wheat
Graphical Analysis
Additional Consequences
Quick Review 3.4
Last Word
Student Loans and Tuition Costs
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Additional Examples of Supply and Demand
Changes in Supply and Demand
Lettuce
Pink Salmon
Gasoline
Consider This…
Uber and Dynamic Pricing
Upward Sloping versus Vertical Supply Curves
Reactions to Demand Shifts
Upward Sloping Supply Curves
Vertical Supply Curves
Preset Prices
Olympic Figure Skating Finals
Olympic Curling Preliminaries
APPENDIX SUMMARY
APPENDIX DISCUSSION QUESTIONS
APPENDIX REVIEW QUESTIONS
APPENDIX PROBLEMS
Market Failures Caused by Externalities and Asymmetric Information
Learning Objectives
Efficiently Functioning Markets
Consumer Surplus
Graphing Consumer Surplus
Producer Surplus
Graphing Producer Surplus
Quick Review 4.1
Total Surplus and Efficiency
Efficiency Losses (Deadweight Losses)
Quick Review 4.2
Positive and Negative Externalities
Negative Externalities
Key Graph
Quick Quiz for Figure 4.5
Positive Externalities
Quick Review 4.3
Government Intervention
Direct Controls
Consider This…
The Fable of the Bees
Pigovian Taxes
Global Perspective 4.1
Percentage of CO2 Emissions Taxed, Selected Nations, 2015
Subsidies and Government Provision
Quick Review 4.4
Society’s Optimal Amount of Externality Reduction
MC, MB, and Equilibrium Quantity
Shifts of MB and MC Curves
Government’s Role in the Economy
Consider This…
Congestion Pricing
Quick Review 4.5
Asymmetric Information
Inadequate Buyer Information about Sellers
Example: Gasoline Market
Example: Licensing of Surgeons
Inadequate Seller Information about Buyers
Moral Hazard Problem
Adverse Selection Problem
Qualification
Quick Review 4.6
Last Word
Visible Pollution, Hidden Costs
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Public Goods, Public Choice, and Government Failure
Learning Objectives
Public Goods
Characteristics of Private Goods
Public Goods Characteristics
Consider This…
Street Entertainers
Optimal Quantity of a Public Good
Quick Review 5.1
Demand for Public Goods
Comparing MB and MC
Cost-Benefit Analysis
Concept
Illustration
Quasi-Public Goods
The Reallocation Process
Quick Review 5.2
Public Choice Theory and Voting Paradoxes
Public Choice Theory
Revealing Preferences through Majority Voting
Inefficient Voting Outcomes
Illustration: Inefficient “No” Vote
Illustration: Inefficient “Yes” Vote
Implications
Interest Groups and Logrolling
INTEREST GROUPS
POLITICAL LOGROLLING
Paradox of Voting
Preferences
Voting Outcomes
Median-Voter Model
Example
Real-World Applicability
Implications
Quick Review 5.3
Alternative Voting Mechanisms
Quadratic Voting
Example
Discussion
Mechanism Design
Quick Review 5.4
Government Failure
Representative Democracy and the Principal-Agent Problem
Special-Interest Effect
Consider This…
Getting Fleeced
Rent-Seeking Behavior
Quick Review 5.5
Limited and Bundled Choice
Bureaucracy and Inefficiency
Consider This…
Government, Scofflaw
Inefficient Regulation and Intervention
Regulatory Capture
Deregulation as an Alternative
Corruption
Imperfect Institutions
Quick Review 5.6
Last Word
Should Governments Subsidize Corporate Relocations?
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
An Introduction to Macroeconomics
Learning Objectives
Performance and Policy
Real GDP
Unemployment
Inflation
Preview
Quick Review 6.1
The Miracle of Modern Economic Growth
Global Perspective 6.1
GDP per Person, Selected Countries
Quick Review 6.2
Saving, Investment, and Choosing between Present and Future Consumption
Consider This…
Economic versus Financial Investment
Banks and Other Financial Institutions
Quick Review 6.3
Uncertainty, Expectations, and Shocks
The Importance of Expectations and Shocks
Demand Shocks and Sticky Prices
Example: A Single Firm Dealing with Demand Shocks and Sticky Prices
Setting Expectations
Key Graph
Quick Quiz for Figure 6.1
Full Employment with No Shocks
Price Changes if There Are Demand Shocks and Flexible Prices
Output Changes if There Are Demand Shocks and Sticky Prices
Generalizing from a Single Firm to the Entire Economy
Consider This…
The Great Recession
Quick Review 6.4
How Sticky Are Prices?
Categorizing Macroeconomic Models Using Price Stickiness
Quick Review 6.5
Last Word
The Behavioral Economics of Sticky Prices
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Measuring Domestic Output and National Income
Learning Objectives
Assessing the Economy’s Performance
Gross Domestic Product
Final Products Only
Domestic Output Only
A Monetary Measure
Value Added
Gross Output and Multiple Counting
GDP Excludes Nonproduction Transactions
Financial Transactions
Secondhand Sales
Two Ways of Looking at GDP: Spending and Income
Quick Review 7.1
The Expenditures Approach
Personal Consumption Expenditures (C )
Gross Private Domestic Investment (Ig)
Positive and Negative Changes in Inventories
Noninvestment Transactions
Gross Investment versus Net Investment
Government Purchases (G )
Net Exports (Xn)
Putting It All Together: GDP = C + Ig + G + Xn
Global Perspective 7.1
Comparative GDPs in Trillions of U.S. Dollars, Selected Nations, 2017
The Income Approach
Compensation of Employees
Rents
Interest
Proprietors’ Income
Corporate Profits
Taxes on Production and Imports
From National Income to GDP
Net Foreign Factor Income
Consumption of Fixed Capital
Statistical Discrepancy
Quick Review 7.2
Other National Accounts
Net Domestic Product
National Income
Personal Income
Disposable Income
The Circular Flow Revisited
Quick Review 7.3
Nominal GDP versus Real GDP
Adjustment Process in a One-Product Economy
GDP Price Index
Dividing Nominal GDP by the Price Index
An Alternative Method
Real-World Considerations and Data
Quick Review 7.4
Shortcomings of GDP
Nonmarket Activities
Leisure and Psychic Income
Improved Product Quality
The Underground Economy
Global Perspective 7.2
The Underground Economy as a Percentage of GDP, Selected Nations, 2015
GDP and the Environment
Composition and Distribution of Output
Noneconomic Sources of Well-Being
The Importance of Intermediate Output
Quick Review 7.5
Last Word
Measuring Quality to Price the Priceless
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Economic Growth
Learning Objectives
Economic Growth
Growth as a Goal
Arithmetic of Growth
Growth in the United States
Quick Review 8.1
Modern Economic Growth
The Uneven Distribution of Growth
Catching Up Is Possible
Institutional Structures That Promote Modern Economic Growth
Consider This…
Patents and Innovation
Quick Review 8.2
Determinants of Growth
Supply Factors
Demand Factor
Efficiency Factor
Production Possibilities Analysis
Growth and Production Possibilities
Labor and Productivity
Hours of Work
Labor Productivity
Accounting for Growth
Labor Inputs versus Labor Productivity
Technological Advance
Quantity of Capital per Worker
Education and Training
Average Test Scores of Eighth-Grade Students in Math and Science, Top 10 Test-Taking Countries
Economies of Scale and Resource Allocation
Economies of Scale
Improved Resource Allocation
Quick Review 8.3
Recent Fluctuations in Average Productivity Growth
Reasons for the Rise in Average Productivity Growth Between 1995 and 2010
The Microchip and Information Technology
Start-ups
Increasing Returns
Global Competition
Global Perspective 8.2
Global Competitiveness Index
Implications for Economic Growth
The Recent Productivity Slowdown
Quick Review 8.4
Is Growth Desirable and Sustainable?
The Antigrowth View
In Defense of Economic Growth
Quick Review 8.5
Last Word
Ladies First
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Business Cycles, Unemployment, and Inflation
Learning Objectives
The Business Cycle
Phases of the Business Cycle
Causation: A First Glance
Cyclical Impact: Durables and Nondurables
Quick Review 9.1
Unemployment
Measurement of Unemployment
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Consider This…
Downwardly Sticky Wages and Unemployment
Definition of Full Employment
Economic Cost of Unemployment
The GDP Gap
Okun’s Law
Unequal Burdens
Noneconomic Costs
Quick Review 9.2
Inflation
Measurement of Inflation
Facts of Inflation
Global Perspective 9.1
Inflation Rates in Five Industrial Nations, 2008–2018
Types of Inflation
Demand-Pull Inflation
Cost-Push Inflation
Core Inflation
Quick Review 9.3
Redistribution Effects of Inflation
Nominal and Real Income
Anticipations
Who Is Hurt by Inflation?
Fixed-Income Receivers
Savers
Creditors
Who Is Unaffected or Helped by Inflation?
Flexible-Income Receivers
Debtors
Anticipated Inflation
Other Redistribution Issues
Quick Review 9.4
Does Inflation Affect Output?
Cost-Push Inflation and Real Output
Demand-Pull Inflation and Real Output
The Case for Zero Inflation
The Case for Mild Inflation
Hyperinflation
Adverse Effects
Examples
Causation
Motivation
Termination
Quick Review 9.5
Last Word
The Great Skills Shortage
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Basic Macroeconomic Relationships*
Learning Objectives
The Income-Consumption and Income-Saving Relationships
The Consumption Schedule
Key Graph
Quick Quiz for Figure 10.2
The Saving Schedule
Average and Marginal Propensities
APC and APS
Global Perspective 10.1
Average Propensities to Consume, Selected Nations
MPC and MPS
MPC and MPS as Slopes
Quick Review 10.1
Nonincome Determinants of Consumption and Saving
Other Important Considerations
Consider This…
The Great Recession and the Paradox of Thrift
The Interest-Rate–Investment Relationship
Expected Rate of Return
The Real Interest Rate
Investment Demand Curve
Key Graph
Quick Quiz for Figure 10.5
Quick Review 10.2
Shifts of the Investment Demand Curve
Instability of Investment
Quick Review 10.3
The Multiplier Effect*
Rationale
Key Graph
Quick Quiz for Figure 10.7
The Multiplier and the Marginal Propensities
How Large Is the Actual Multiplier?
Quick Review 10.4
Last Word
Toppling Dominoes
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
The Aggregate Expenditures Model
Learning Objectives
Assumptions and Simplifications
A “Stuck Price” Model
Unplanned Inventory Adjustments
Current Relevance
A Preview
Consumption and Investment Schedules
Quick Review 11.1
Equilibrium GDP: C + Ig = GDP
Tabular Analysis
Real Domestic Output
Aggregate Expenditures
Equilibrium GDP
Disequilibrium
Graphical Analysis
Key Graph
Quick Quiz for Figure 11.2
Other Features of Equilibrium GDP
Saving Equals Planned Investment
No Unplanned Changes in Inventories
Changes in Equilibrium GDP and the Multiplier
Quick Review 11.2
Adding International Trade
Net Exports and Aggregate Expenditures
The Net Export Schedule
Net Exports and Equilibrium GDP
Positive Net Exports
Negative Net Exports
Global Perspective 11.1
Net Exports of Goods, Selected Nations, 2017
International Economic Linkages
Prosperity Abroad
Exchange Rates
A Caution on Tariffs and Devaluations
Quick Review 11.3
Adding the Public Sector
Government Purchases and Equilibrium GDP
Tabular Example
Graphical Analysis
Taxation and Equilibrium GDP
Tabular Example
Graphical Analysis
Injections, Leakages, and Unplanned Changes in Inventories
Equilibrium versus Full-Employment GDP
Recessionary Expenditure Gap
Key Graph
Quick Quiz for Figure 11.7
Keynes’s Solution to a Recessionary Expenditure Gap
Inflationary Expenditure Gap
Application: The Recession of 2007–2009
Quick Review 11.4
Last Word
Say’s Law, the Great Depression, and Keynes
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Aggregate Demand and Aggregate Supply
Learning Objectives
Aggregate Demand
Aggregate Demand Curve
Real-Balances Effect
Interest-Rate Effect
Foreign Purchases Effect
Changes in Aggregate Demand
Consumer Spending
Consumer Wealth
Household Borrowing
Consumer Expectations
Personal Taxes
Investment Spending
Real Interest Rates
Expected Returns
Government Spending
Net Export Spending
National Income Abroad
Exchange Rates
Quick Review 12.1
Aggregate Supply
Aggregate Supply in the Immediate Short Run
Aggregate Supply in the Short Run
Aggregate Supply in the Long Run
Focusing on the Short Run
Quick Review 12.2
Changes in Aggregate Supply
Input Prices
Domestic Resource Prices
Prices of Imported Resources
Productivity
Legal-Institutional Environment
Business Taxes and Subsidies
Government Regulation
Quick Review 12.3
Equilibrium in the AD-AS Model
Key Graph
Quick Quiz for Figure 12.7
Changes in Equilibrium
Increases in AD: Demand-Pull Inflation
Decreases in AD: Recession and Cyclical Unemployment
Key Graph
Quick Quiz for Figure 12.9
Global Perspective 12.1
Size of GDP Gaps, Selected Countries, 2017
Decreases in AS: Cost-Push Inflation
Increases in AS: Full Employment with Price-Level Stability
Quick Review 12.4
Last Word
Stimulus and the Great Recession
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
The Relationship of the AD Curve to the Aggregate Expenditures Model
Deriving the AD Curve from the Aggregate Expenditures Model
Aggregate Demand Shifts and the Aggregate Expenditures Model
APPENDIX SUMMARY
APPENDIX DISCUSSION QUESTIONS
APPENDIX REVIEW QUESTIONS
Appendix Problems
Fiscal Policy, Deficits, and Debt
Learning Objectives
Fiscal Policy and the AD-AS Model
Expansionary Fiscal Policy
Key Graph
Quick Quiz for Figure 13.1
Increased Government Spending
Tax Reductions
Combined Government Spending Increases and Tax Reductions
Contractionary Fiscal Policy
Decreased Government Spending
Increased Taxes
Combining Government Spending Decreases with Tax Increases
Quick Review 13.1
Built-In Stability
Tax Collections and the Business Cycle
Automatic or Built-In Stabilizers
Economic Importance
Tax Progressivity
Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
Cyclically Adjusted Budget
Quick Review 13.2
Recent and Projected U.S. Fiscal Policy
Fiscal Policy from 2000 to 2007
Fiscal Policy During and After the Great Recession
Problems, Criticisms, and Complications of Implementing Fiscal Policy
Problems of Timing
Political Considerations
Future Policy Reversals
Offsetting State and Local Finance
Crowding-Out Effect
Quick Review 13.3
The U.S. Public Debt
Ownership
International Comparisons
Global Perspective 13.1
Publicly Held Debt: International Comparisons
Interest Charges
False Concerns
Bankruptcy
Refinancing
Taxation
Burdening Future Generations
Substantive Issues
Income Distribution
Incentives
Foreign-Owned Public Debt
Crowding-Out Effect Revisited
Public Investments and Public-Private Complementarities
Quick Review 13.4
Last Word
The Social Security and Medicare Time Bombs
The Social Security Shortfall
The Medicare Shortfall
The Unpleasant Options
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Money, Banking, and Financial Institutions
Learning Objectives
The Functions of Money
The Components of the Money Supply
Money Definition M 1
Currency: Coins + Paper Money
Checkable Deposits
Institutions That Offer Checkable Deposits
Two Qualifications
Money Definition M2
Consider This…
Are Credit Cards Money?
Quick Review 14.1
What “Backs” the Money Supply?
Money as Debt
Value of Money
Acceptability
Legal Tender
Relative Scarcity
Money and Prices
The Purchasing Power of the Dollar
Inflation and Acceptability
Stabilizing Money’s Purchasing Power
Quick Review 14.2
The Federal Reserve and the Banking System
Historical Background
Board of Governors
The 12 Federal Reserve Banks
Central Bank
Quasi-Public Banks
Bankers’ Banks
FOMC
Commercial Banks and Thrifts
Global Perspective 14.1
The World’s 12 Largest Financial Institutions, 2018
Fed Functions, Responsibilities, and Independence
Federal Reserve Independence
Quick Review 14.3
The Financial Crisis of 2007 and 2008
Overview
Prelude
Causes
Crisis
Quick Review 14.4
Immediate Response
The Treasury Bailout: TARP
The Fed’s Lender-of-Last-Resort Activities
Post-Crisis Policy Changes
Quick Review 14.5
Last Word
Too Big to Fail. Too Big to Jail?
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Money Creation
Learning Objectives
The Fractional Reserve System
Illustrating the Idea: The Goldsmiths
Significant Characteristics of Fractional Reserve Banking
A Single Commercial Bank
Transaction 1: Creating a Bank
Transaction 2: Acquiring Property and Equipment
Transaction 3: Accepting Deposits
Transaction 4: Depositing Reserves in a Federal Reserve Bank
Excess Reserves
Control
Global Perspective 15.1
Required Reserve Ratios, Selected Countries, 2018
An Asset for the Bank, a Liability for the Fed
Transaction 5: Clearing a Check Drawn Against the Bank
Quick Review 15.1
Money-Creating Transactions of a Commercial Bank
Transaction 6: Granting a Loan
Transaction 7: Buying Government Securities
Profits, Liquidity, and the Federal Funds Market
Quick Review 15.2
The Banking System: Multiple-Deposit Expansion
The Banking System’s Lending Potential
The Monetary Multiplier
Reversibility: The Multiple Destruction of Money
Quick Review 15.3
Last Word
Banking, Leverage, and Financial Instability
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Interest Rates and Monetary Policy
Learning Objectives
Interest Rates
The Demand for Money
Transactions Demand, Dt
Key Graph
Quick Quiz for Figure 16.1
Asset Demand, Da
Total Money Demand, Dm
The Equilibrium Interest Rate
Interest Rates and Bond Prices
Quick Review 16.1
The Consolidated Balance Sheet of the Federal Reserve Banks
Global Perspective 16.1
Central Banks, Selected Nations
Assets
Securities
Loans to Commercial Banks
Liabilities
Reserves of Commercial Banks
Treasury Deposits
Federal Reserve Notes Outstanding
Quick Review 16.2
Tools of Monetary Policy
Open-Market Operations
Buying Securities
From Commercial Banks
From the Public
Selling Securities
To Commercial Banks
To the Public
Repos and Reverse Repos
The Reserve Ratio
Raising the Reserve Ratio
Lowering the Reserve Ratio
The Discount Rate
Interest on Reserves
Relative Importance
Quick Review 16.3
Fed Targets and the Taylor Rule
The Fed’s Unemployment Target
The Fed’s Inflation Target
Why 2 Percent?
Compensating for Upward Measurement Bias
Protecting Savers
Assisting Downward Wage Flexibility
Avoiding the Zero Lower Bound
Balancing Inflation and Unemployment
The Bullseye Chart
Using the Taylor Rule to Aim for the Bullseye
Northwest and Southeast: No Conflicts
Northwest of the Center
Southeast of the Center
Southwest and Northeast: Conflicts
Southwest of the Center
Northeast of the Center
Putting Policy Weights on Inflation and Unemployment
The Taylor Rule
Predicting Fed Policy with the Taylor Rule
Favoring the Unemployment Gap over the Inflation Gap
A Caveat
The Diminished Role of the Federal Funds Rate
The Federal Funds Rate Before the Financial Crisis
The Federal Funds Rate After the Financial Crisis
Quick Review 16.4
Monetary Policy, Real GDP, and the Price Level
Cause-Effect Chain
Key Graph
Quick Quiz for Figure 16.3
Market for Money
Investment
Equilibrium GDP
Effects of an Expansionary Monetary Policy
Effects of a Restrictive Monetary Policy
Quick Review 16.5
Monetary Policy: Evaluation and Issues
Recent U.S. Monetary Policy
The Mortgage Default Crisis
Problems and Complications
Recognition and Operational Lags
Cyclical Asymmetry and the Liquidity Trap
Other Issues and Concerns
Quick Review 16.6
The “Big Picture”
Key Graph
Quick Quiz for Figure 16.4
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
PROBLEMS
PROBLEMS
Financial Economics
Learning Objectives
Financial Investment
Present Value
Compound Interest
The Present Value Model
Quick Review 17.1
Applications
Take the Money and Run?
Salary Caps and Deferred Compensation
Some Popular Investments
Stocks
Bonds
Mutual Funds
Quick Review 17.2
Calculating Investment Returns
Percentage Rates of Return
The Inverse Relationship Between Asset Prices and Rates of Return
Consider This…
Corporate ownership
Arbitrage
Quick Review 17.3
Risk
Diversification
Global Perspective 17.1
International Differences in Risk
Quick Review 17.4
Comparing Risky Investments
Average Expected Rate of Return
Beta
Relationship Between Risk and Average Expected Rate of Return
The Risk-Free Rate of Return
Quick Review 17.5
The Security Market Line
Security Market Line: Applications
An Increase in the Risk-Free Rate by the Fed
The Security Market Line during the Great Recession
Quick Review 17.6
Last Word
Index Funds versus Actively Managed Funds
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Extending the Analysis of Aggregate Supply
Learning Objectives
From Short Run to Long Run
Short-Run Aggregate Supply
Long-Run Aggregate Supply
Long-Run Equilibrium in the AD-AS Model
Quick Review 18.1
Applying the Extended AD-AS Model
Demand-Pull Inflation in the Extended AD-AS Model
Cost-Push Inflation in the Extended AD-AS Model
Analysis
Policy Dilemma
A Controversy: Recessions and Stimulus in the Extended AD-AS Model
Economic Growth with Ongoing Inflation
Increases in Long-Run Aggregate Supply
Increases in Aggregate Demand and Inflation
Quick Review 18.2
The Inflation-Unemployment Relationship
The Phillips Curve
Aggregate Supply Shocks and the Phillips Curve
Adverse Aggregate Supply Shocks Contradict the Phillips Curve
Stagflation’s Demise
Post–Great Recession Evidence Against a Stable Phillips Curve
The Misery Index
Global Perspective 18.1
The Misery Index, Selected Nations, 2007–2017
The Long-Run Phillips Curve
Short-Run Phillips Curve
Long-Run Vertical Phillips Curve
Disinflation
Quick Review 18.3
Taxation and Aggregate Supply
Taxes and Incentives to Work, Save, and Invest
The Laffer Curve
Criticisms of the Laffer Curve
Taxes, Incentives, and Time
Inflation or Higher Real Interest Rates
Position on the Curve
Evaluation
Quick Review 18.4
Last Word
Do Tax Increases Reduce Real GDP?*
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Current Issues in Macro Theory and Policy
Learning Objectives
What Causes Macro Instability?
Mainstream View
Changes in Aggregate Demand
Adverse Aggregate Supply Shocks
Monetarist View
Equation of Exchange
Stable Velocity
Monetary Causes of Instability
Real-Business-Cycle View
Consider This…
Too Much Money?
Coordination Failures
Quick Review 19.1
Does the Economy “Self-Correct”?
New Classical View of Self-Correction
Examples of Macroeconomic Self-Correction
Rational Expectations Theory and the Speed of Self-Correcting Adjustments
Unanticipated Price-Level Changes
Fully Anticipated Price-Level Changes
Mainstream View of Self-Correction
Downward Wage Inflexibility
Efficiency Wage Theory
Quick Review 19.2
Rules or Discretion?
In Support of Policy Rules
Monetary Rules
Inflation Targeting
Global Perspective 19.1
Central Bank Inflation Targets, Selected Central Banks, 2018
Balanced Budget
In Defense of Discretionary Stabilization Policy
Discretionary Monetary Policy
Discretionary Fiscal Policy
Policy Successes
Quick Review 19.3
Summary of Alternative Views
Last Word
Market Monetarism
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
International Trade
Learning Objectives
Some Key Trade Facts
Global Perspective 20.1
EXPORTS AS A SHARE OF GDP, SELECTED NATIONS, 2018
The Economic Basis for Trade
Comparative Advantage
Consider This…
A CPA and a House Painter
Quick Review 20.1
Two Isolated Nations
Opportunity-Cost Ratio in the United States
Opportunity-Cost Ratio in Mexico
Self-Sufficiency Output Mix
Specializing Based on Comparative Advantage
Terms of Trade
Gains from Trade
Key Graph
Quick Quiz for Figure 20.2
Improved Alternatives
Quick Review 20.2
Greater Output
Trade with Increasing Costs
The Case for Free Trade
Quick Review 20.3
Supply and Demand Analysis of Exports and Imports
Supply and Demand in the United States
U.S. Export Supply
U.S. Import Demand
Supply and Demand in Canada
Equilibrium World Price, Exports, and Imports
Quick Review 20.4
Trade Barriers and Export Subsidies
Economic Impact of Tariffs
Key Graph
Quick Quiz for Figure 20.6
Direct Effects
Indirect Effect
Economic Impact of Quotas
Quick Review 20.5
Net Costs of Tariffs and Quotas
The Case for Protection: A Critical Review
Military Self-Sufficiency Argument
Diversification-for-Stability Argument
Infant Industry Argument
Protection-Against-Dumping Argument
Increased Domestic Employment Argument
Cheap Foreign Labor Argument
Quick Review 20.6
Multilateral Trade Agreements and Free-Trade Zones
General Agreement on Tariffs and Trade
World Trade Organization
The European Union
North American Free Trade Agreement
Trade Adjustment Assistance
Offshoring of Jobs
Quick Review 20.7
Last Word
Petition of the Candlemakers, 1845
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
The Balance of Payments, Exchange Rates, and Trade Deficits
Learning Objectives
International Financial Transactions
Quick Review 21.1
The Balance of Payments
Current Account
Balance on Goods
Balance on Services
Global Perspective 21.1
U.S. Trade Balances in Goods and Services, Selected Nations, 2017
Balance on Current Account
Capital and Financial Account
Capital Account
Financial Account
Why the Balance?
Quick Review 21.2
Flexible Exchange Rates
Key Graph
Quick Quiz for Figure 21.1
Depreciation and Appreciation
Determinants of Flexible Exchange Rates
Changes in Tastes
Relative Income Changes
Relative Inflation Rate Changes
Relative Interest Rates
Changes in Relative Expected Returns on Stocks, Real Estate, and Production Facilities
Speculation
Disadvantages of Flexible Exchange Rates
Uncertainty and Diminished Trade
Terms-of-Trade Changes
Instability
Quick Review 21.3
Fixed Exchange Rates
Foreign Exchange Market Replaced by Government Peg
Official Reserves
Defending a Peg by Altering Demand or Supply
Trade Policies
Exchange Controls and Rationing
Domestic Macroeconomic Adjustments
Quick Review 21.4
The Current Exchange Rate System: The Managed Float
In Support of the Managed Float
Concerns with the Managed Float
Quick Review 21.5
Recent U.S. Trade Deficits
Causes of the Trade Deficits
Implications of U.S. Trade Deficits
Increased Current Consumption
Increased U.S. Indebtedness
Quick Review 21.6
Last Word
Are Common Currencies Common Sense?
The Loss of Independent Monetary Policy
The Loss of External Adjustments
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Previous International Exchange-Rate Systems
The Gold Standard: Fixed Exchange Rates
Gold Flows
Domestic Macroeconomic Adjustments
Collapse of the Gold Standard
The Bretton Woods System
IMF and Pegged Exchange Rates
Fundamental Imbalances: Adjusting the Peg
Demise of the Bretton Woods System
APPENDIX SUMMARY
APPENDIX TERMS AND CONCEPTS
APPENDIX DISCUSSION QUESTIONS
APPENDIX REVIEW QUESTIONS
APPENDIX PROBLEMS
The Economics of Developing Countries
Learning Objectives
The Rich and the Poor
Classifications
Comparisons
Growth, Decline, and Income Gaps
The Human Realities of Poverty
Obstacles to Economic Development
Natural Resources
Human Resources
Large Populations
The Demographic Transition
Qualifications
Unemployment and Underemployment
Low Labor Productivity
Capital Accumulation
Domestic Capital Formation
Savings Potential
Capital Flight
Consider This…
Faster, Please
Investment Obstacles
Technological Advance
Sociocultural and Institutional Factors
Sociocultural Obstacles
Institutional Obstacles
Quick Review 22.1
The Vicious Circle
The Role of Government
A Positive Role
Establishing the Rule of Law
Building Infrastructure
Embracing Globalization
Building Human Capital
Promoting Entrepreneurship
Developing Credit Systems
Avoiding High Rates of Inflation
Controlling Population Growth
Making Peace with Neighbors
Public-Sector Problems
Global Perspective 22.1
The Corruption Perceptions Index, Selected Nations, 2018*
The Role of Advanced Nations
Expanding Trade
Admitting Temporary Workers
Discouraging Arms Sales
Foreign Aid: Public Loans and Grants
Direct Aid
Global Perspective 22.2
Official Development Assistance as a Percentage of GDP, Selected Nations
The World Bank Group
Foreign Harm?
Dependency and Incentives
Bureaucracy and Centralized Government
Corruption and Misuse
Flows of Private Capital
Quick Review 22.2
Last Word
Microfinance and Cash Transfers
Microcredit
Conditional cash transfers
Unconditional cash transfers
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Glossary
Selected Economics Statistics for Various Years, 1929–1993
Selected Economics Statistics for Various Years, 1994–2018
List shows the average income for selected nations, with Switzerland as the highest and Malawi as lowest Graphic Text Alternative (Chapter 1)
Figure 1.1 Text Alternative (Chapter 1)
Figure 1.2 Text Alternative (Chapter 1)
Figure 1.3 Text Alternative (Chapter 1)
Figure 1.4 Text Alternative (Chapter 1)
Figure 1.5 Text Alternative (Chapter 1)
Figure 1.6 Text Alternative (Chapter 1)
Horizontal bar chart represents gross fixed capital formation as a percentage of national income, 2017 Graphic Text Alternative (Chapter 1)
Figure 1 Text Alternative (Chapter 1)
Figure 2 Text Alternative (Chapter 1)
Figure 3 Text Alternative (Chapter 1)
Figure 4 Text Alternative (Chapter 1)
Data for Appendix problem 4 Graphic Text Alternative (Chapter 1)
A Graph Plots Graphic Text Alternative (Chapter 1)
Data for Appendix problem 7 Graphic Text Alternative (Chapter 1)
Data for Appendix problem 8 Graphic Text Alternative (Chapter 1)
Three countries from each category, Free, Mostly Free, Moderately Free, Mostly Unfree, and Repressed, are listed Graphic Text Alternative (Chapter 2)
Figure 2.1 Text Alternative (Chapter 2)
Figure 2.2 Text Alternative (Chapter 2)
Figure 3.1 Text Alternative (Chapter 3)
Figure 3.2 Text Alternative (Chapter 3)
Figure 3.3 Text Alternative (Chapter 3)
Figure 3.4 Text Alternative (Chapter 3)
Figure 3.5 Text Alternative (Chapter 3)
Figure 3.6 Text Alternative (Chapter 3)
Figure 3.7 Text Alternative (Chapter 3)
Horizontal bar chart shows average price for a 500 gram loaf of white bread, in 2018 Graphic Text Alternative (Chapter 3)
Figure 3.8 Text Alternative (Chapter 3)
Figure 3.9 Text Alternative (Chapter 3)
A Graph of Supply Graphic Text Alternative (Chapter 3)
Figure 1 Text Alternative (Chapter 3)
Figure 2 Text Alternative (Chapter 3)
Figure 3 Text Alternative (Chapter 3)
A Diagram Shows Graphic Text Alternative (Chapter 3)
Figure 4 Text Alternative (Chapter 3)
Figure 5 Text Alternative (Chapter 3)
Figure 6 Text Alternative (Chapter 3)
Figure 4.1 Text Alternative (Chapter 4)
Figure 4.2 Text Alternative (Chapter 4)
Figure 4.3 Text Alternative (Chapter 4)
Figure 4.4 Text Alternative (Chapter 4)
Figure 4.5 Text Alternative (Chapter 4)
Figure 4.6 Text Alternative (Chapter 4)
Bar graph shows the percentage of carbon dioxide emissions taxed for year 2015 Graphic Text Alternative (Chapter 4)
Figure 4.7 Text Alternative (Chapter 4)
Figure 4.8 Text Alternative (Chapter 4)
Figure 5.1 Text Alternative (Chapter 5)
Figure 5.2 Text Alternative (Chapter 5)
Global Perspective 6.1 Text Alternative (Chapter 6)
Figure 6.1 Text Alternative (Chapter 6)
Figure 7.1 Text Alternative (Chapter 7)
Figure 7.2 Text Alternative (Chapter 7)
Global Perspective 7.1 Text Alternative (Chapter 7)
Global Perspective 7.2 Text Alternative (Chapter 7)
Figure 8.1 Text Alternative (Chapter 8)
Figure 8.2 Text Alternative (Chapter 8)
Figure 8.3 Text Alternative (Chapter 8)
Figure 8.4 Text Alternative (Chapter 8)
Global Perspective 8.1 Text Alternative (Chapter 8)
Global Perspective 8.1 Text Alternative (Chapter 8)
Figure 8.5 Text Alternative (Chapter 28)
Global Perspective 8.2 Text Alternative (Chapter 8)
Figure 9.1 Text Alternative (Chapter 9)
Figure 9.2 Text Alternative (Chapter 9)
Figure 9.3 Text Alternative (Chapter 9)
Figure 9.4 Text Alternative (Chapter 9)
Global Perspective 9.1 Text Alternative (Chapter 9)
Figure 10.1 Text Alternative (Chapter 10)
Figure 10.2 Text Alternative (Chapter 10)
Global Perspective 10.1 Text Alternative (Chapter 10)
Figure 10.3 Text Alternative (Chapter 10)
Figure 10.4 Text Alternative (Chapter 10)
Figure 10.5 Text Alternative (Chapter 10)
Figure 10.6 Text Alternative (Chapter 10)
Figure 10.7 Text Alternative (Chapter 10)
Figure 10.8 Text Alternative (Chapter 10)
Figure 11.1 Text Alternative (Chapter 11)
Figure 11.2 Text Alternative (Chapter 11)
Figure 11.3 Text Alternative (Chapter 11)
Figure 11.4 Text Alternative (Chapter 11)
A Bar Graph Shows Graphic Text Alternative (Chapter 11)
Figure 11.5 Text Alternative (Chapter 11)
Figure 11.6 Text Alternative (Chapter 11)
Figure 11.7 Text Alternative (Chapter 11)
Figure 12.1 Text Alternative (Chapter 12)
Figure 12.2 Text Alternative (Chapter 12)
Figure 12.3 Text Alternative (Chapter 12)
Figure 12.4 Text Alternative (Chapter 12)
Figure 12.5 Text Alternative (Chapter 12)
Figure 12.6 Text Alternative (Chapter 12)
Figure 12.7 Text Alternative (Chapter 12)
Figure 12.8 Text Alternative (Chapter 12)
Figure 12.9 Text Alternative (Chapter 12)
Global Perspective 12.1 Text Alternative (Chapter 12)
Figure 12.10 Text Alternative (Chapter 12)
Figure 12.11 Text Alternative (Chapter 12)
Figure 1 Text Alternative (Chapter 12)
Figure 2 Text Alternative (Chapter 12)
Figure 13.1 Text Alternative (Chapter 13)
Figure 13.2 Text Alternative (Chapter 13)
Figure 13.3 Text Alternative (Chapter 13)
Figure 13.4 Text Alternative (Chapter 13)
Figure 13.5 Text Alternative (Chapter 13)
Figure 13.6 Text Alternative (Chapter 13)
Global Perspective 13.1 Text Alternative (Chapter 13)
Figure 14.1 Text Alternative (Chapter 14)
Figure 14.2 Text Alternative (Chapter 14)
Figure 14.3 Text Alternative (Chapter 14)
Global Perspective 14.1 Text Alternative (Chapter 14)
Global Perspective 15.1 Text Alternative (Chapter 15)
Figure 15.1 Text Alternative (Chapter 15)
Figure 16.1 Text Alternative (Chapter 16)
World's Central Banks Graphic Text Alternative (Chapter 16)
T-account of the Federal Reserve Banks Graphic Text Alternative (Chapter 16)
Federal Reserve Banks Selling Bonds Graphic Text Alternative (Chapter 16)
Commercial Bank Borrowing Graphic Text Alternative (Chapter 16)
Figure 16.2 Text Alternative (Chapter 16)
Figure 16.3 Text Alternative (Chapter 16)
Figure 16.4 Text Alternative (Chapter 16)
Composite Risk Rating Graphic Text Alternative (Chapter 17)
Figure 17.1 Text Alternative (Chapter 17)
Figure 17.2 Text Alternative (Chapter 17)
Figure 17.3 Text Alternative (Chapter 17)
Figure 17.4 Text Alternative (Chapter 17)
Figure 18.1 Text Alternative (Chapter 18)
Figure 18.2 Text Alternative (Chapter 18)
Figure 18.3 Text Alternative (Chapter 18)
Figure 18.4 Text Alternative (Chapter 18)
Figure 18.5 Text Alternative (Chapter 18)
Figure 18.6 Text Alternative (Chapter 18)
Figure 18.7 Text Alternative (Chapter 18)
Figure 18.8 Text Alternative (Chapter 18)
Figure 18.9 Text Alternative (Chapter 18)
Figure 18.10 Text Alternative (Chapter 18)
The Misery Index Graphic Text Alternative (Chapter 18)
Figure 18.11 Text Alternative (Chapter 18)
Figure 18.12 Text Alternative (Chapter 18)
A Graph Plots Graphic Text Alternative (Chapter 18)
Figure 19.1 Text Alternative (Chapter 19)
Figure 19.2 Text Alternative (Chapter 19)
Figure 19.3 Text Alternative (Chapter 19)
GLOBAL PERSPECTIVE 20.1 Graphic Text Alternative (Chapter 20)
Figure 20.1 Text Alternative (Chapter 20)
Figure 20.2 Text Alternative (Chapter 20)
Figure 20.3 Text Alternative (Chapter 20)
Figure 20.4 Text Alternative (Chapter 20)
Figure 20.5 Text Alternative (Chapter 20)
Figure 20.6 Text Alternative (Chapter 20)
GLOBAL PERSPECTIVE 21.1 Graphic Text Alternative (Chapter 21)
Figure 21.1 Text Alternative (Chapter 21)
Figure 21.2 Text Alternative (Chapter 21)
Figure 22.1 Text Alternative (Chapter 22)
Figure 22.2 Text Alternative (Chapter 22)
Figure 22.3 Text Alternative (Chapter 22)
GLOBAL PERSPECTIVE 22.1 Graphic Text Alternative (Chapter 22)
GLOBAL PERSPECTIVE 22.2 Graphic Text Alternative (Chapter 22)
The Mcgraw-Hill Series: Economics
Essentials of Economics
Principles of Economics
Economics of Social Issues
Econometrics
Managerial Economics
Intermediate Economics
Advanced Economics
Money and Banking
Urban Economics
Labor Economics
Public Finance
Environmental Economics
International Economics
The Seven Versions of Mcconnell, Brue, Flynn
macroeconomics
About the Authors
Key Graphs
In Memoriam
CAMPBELL R. McCONNELL (1928-2019)
Preface
Significant Content Updates
Improved Efficiency for Instructors
Improved Readability for Students
Examples and Illustrations that Resonate with Students
Accelerating Student Achievement via Adaptive Learning and Innovative Ancillary Materials
Before Class
During Class
Guided Peer Instruction
Application-Based Activities (ABAs)
A 22nd Edition for the 21st Century
Chapter-by-Chapter Changes
Acknowledgments
Contributors
Reviewers
Connect Tools for Customizing Classes
Instructor-Authored Homework Problems
Custom Publishing
Test Builder in Connect
Assurance of Learning Ready
AACSB Statement
Brief Contents
Contents
Limits, Alternatives, and Choices
Learning Objectives
The Economic Perspective
Scarcity and Choice
Consider This…
Purposeful Behavior
Marginal Analysis: Comparing Benefits and Costs
Theories, Principles, and Models
Microeconomics and Macroeconomics
Microeconomics
Macroeconomics
Positive and Normative Economics
Quick Review 1.1
Individual’s Economizing Problem
Limited Income
Global Perspective 1.1
Average Income, Selected Nations
Unlimited Wants
A Budget Line
Attainable and Unattainable Combinations
Trade-Offs and Opportunity Costs
Choice
Income Changes
Consider This…
Did Zuckerberg, Seacrest, and Grande Make Bad Choices?
Quick Review 1.2
Society’s Economizing Problem
Scarce Resources
Resource Categories
Land
Labor
Capital
Entrepreneurial Ability
Production Possibilities Model
Production Possibilities Table
Production Possibilities Curve
Key Graph
Quick Quiz for Figure 1.2
Law of Increasing Opportunity Costs
Shape of the Curve
Economic Rationale
Optimal Allocation
Quick Review 1.3
Production Possibilities Model
Production Possibilities Table
Production Possibilities Curve
Key Graph
Quick Quiz for Figure 1.2
Law of Increasing Opportunity Costs
Shape of the Curve
Economic Rationale
Optimal Allocation
Quick Review 1.3
Unemployment, Growth, and the Future
A Growing Economy
Increases in Resource Supplies
Advances in Technology
Present Choices and Future Possibilities
Global Perspective 1.2
Gross Fixed Capital Formation as a Percentage of National Income, Selected Nations, 2017
A Qualification: International Trade
Quick Review 1.4
Last Word
The Marginal Starbucks
New Store Placement
Location Saturation
Menu Maneuvers
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
PROBLEMS
Graphs and Their Meanings
Constructing a Graph
Direct and Inverse Relationships
Dependent and Independent Variables
Axis Placement of Dependent and Independent Variables
Other Things Equal
Slope of a Line
Positive Slope
Negative Slope
Slopes and Measurement Units
Slopes and Marginal Analysis
Infinite and Zero Slopes
Vertical Intercept
Equation of a Linear Relationship
Slope of a Nonlinear Curve
APPENDIX SUMMARY
APPENDIX TERMS AND CONCEPTS
APPENDIX DISCUSSION QUESTIONS
APPENDIX REVIEW QUESTIONS
APPENDIX PROBLEMS
The Market System and the Circular Flow
Learning Objectives
Economic Systems
Laissez-Faire Capitalism
The Command System
The Market System
Characteristics of the Market System
Private Property
Freedom of Enterprise and Choice
Global Perspective 2.1
Index of Economic Freedom, Selected Economies, 2019
Self-Interest
Competition
Markets and Prices
Quick Review 2.1
Technology and Capital Goods
Specialization
Division of Labor
Geographic Specialization
Use of Money
Active, but Limited, Government
Quick Review 2.2
Five Fundamental Questions
What Will Be Produced?
How Will the Goods and Services Be Produced?
Consider This…
Bitcoin and Cheap Electrons
Who Will Get the Output?
How Will the System Accommodate Change?
How Will the System Promote Progress?
Technological Advance
Capital Accumulation
Quick Review 2.3
The “Invisible Hand”
The Demise of the Command Systems
The Coordination Problem
The Incentive Problem
Consider This…
Korea by Night
The Circular Flow Model
Key Graph
Quick Quiz for Figure 2.2
Households
Businesses
Product Market
Resource Market
Quick Review 2.4
How the Market System Deals with Risk
The Profit System
Shielding Employees and Suppliers from Business Risk
Dealing with Losses
Consider This…
Built on Sand
Benefits of Restricting Business Risk to Owners
Attracting Inputs
Focusing Attention
Quick Review 2.5
Last Word
Hasta La Vista, Venezuela
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Demand, Supply, and Market Equilibrium
Learning Objectives
Markets
Demand
Law of Demand
The Demand Curve
Market Demand
Changes in Demand
Tastes
Number of Buyers
Income
Prices of Related Goods
Substitutes
Complements
Unrelated Goods
Consumer Expectations
Changes in Quantity Demanded
Quick Review 3.1
Supply
Law of Supply
The Supply Curve
Market Supply
Determinants of Supply
Changes in Supply
Resource Prices
Technology
Taxes and Subsidies
Prices of Other Goods
Producer Expectations
Number of Sellers
Changes in Quantity Supplied
Quick Review 3.2
Market Equilibrium
Equilibrium Price and Quantity
Key Graph
Quick Quiz for FIGURE 3.6
Consider This…
Emergent Equilibria
Rationing Function of Prices
Efficient Allocation
Quick Review 3.3
Changes in Supply, Demand, and Equilibrium
Changes in Demand
Changes in Supply
Complex Cases
Supply Increase; Demand Decrease
Supply Decrease; Demand Increase
Supply Increase; Demand Increase
Supply Decrease; Demand Decrease
Global Perspective 3.1
Average Price of a Loaf of White Bread, Selected Nations, 2018
Consider This…
Salsa and Coffee Beans
Application: Government-Set Prices
Price Ceilings on Gasoline
Graphical Analysis
Rationing Problem
Black Markets
Rent Controls
Price Floors on Wheat
Graphical Analysis
Additional Consequences
Quick Review 3.4
Last Word
Student Loans and Tuition Costs
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Additional Examples of Supply and Demand
Changes in Supply and Demand
Lettuce
Pink Salmon
Gasoline
Consider This…
Uber and Dynamic Pricing
Upward Sloping versus Vertical Supply Curves
Reactions to Demand Shifts
Upward Sloping Supply Curves
Vertical Supply Curves
Preset Prices
Olympic Figure Skating Finals
Olympic Curling Preliminaries
APPENDIX SUMMARY
APPENDIX DISCUSSION QUESTIONS
APPENDIX REVIEW QUESTIONS
APPENDIX PROBLEMS
Market Failures Caused by Externalities and Asymmetric Information
Learning Objectives
Efficiently Functioning Markets
Consumer Surplus
Graphing Consumer Surplus
Producer Surplus
Graphing Producer Surplus
Quick Review 4.1
Total Surplus and Efficiency
Efficiency Losses (Deadweight Losses)
Quick Review 4.2
Positive and Negative Externalities
Negative Externalities
Key Graph
Quick Quiz for Figure 4.5
Positive Externalities
Quick Review 4.3
Government Intervention
Direct Controls
Consider This…
The Fable of the Bees
Pigovian Taxes
Global Perspective 4.1
Percentage of CO2 Emissions Taxed, Selected Nations, 2015
Subsidies and Government Provision
Quick Review 4.4
Society’s Optimal Amount of Externality Reduction
MC, MB, and Equilibrium Quantity
Shifts of MB and MC Curves
Government’s Role in the Economy
Consider This…
Congestion Pricing
Quick Review 4.5
Asymmetric Information
Inadequate Buyer Information about Sellers
Example: Gasoline Market
Example: Licensing of Surgeons
Inadequate Seller Information about Buyers
Moral Hazard Problem
Adverse Selection Problem
Qualification
Quick Review 4.6
Last Word
Visible Pollution, Hidden Costs
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Public Goods, Public Choice, and Government Failure
Learning Objectives
Public Goods
Characteristics of Private Goods
Public Goods Characteristics
Consider This…
Street Entertainers
Optimal Quantity of a Public Good
Quick Review 5.1
Demand for Public Goods
Comparing MB and MC
Cost-Benefit Analysis
Concept
Illustration
Quasi-Public Goods
The Reallocation Process
Quick Review 5.2
Public Choice Theory and Voting Paradoxes
Public Choice Theory
Revealing Preferences through Majority Voting
Inefficient Voting Outcomes
Illustration: Inefficient “No” Vote
Illustration: Inefficient “Yes” Vote
Implications
Interest Groups and Logrolling
INTEREST GROUPS
POLITICAL LOGROLLING
Paradox of Voting
Preferences
Voting Outcomes
Median-Voter Model
Example
Real-World Applicability
Implications
Quick Review 5.3
Alternative Voting Mechanisms
Quadratic Voting
Example
Discussion
Mechanism Design
Quick Review 5.4
Government Failure
Representative Democracy and the Principal-Agent Problem
Special-Interest Effect
Consider This…
Getting Fleeced
Rent-Seeking Behavior
Quick Review 5.5
Limited and Bundled Choice
Bureaucracy and Inefficiency
Consider This…
Government, Scofflaw
Inefficient Regulation and Intervention
Regulatory Capture
Deregulation as an Alternative
Corruption
Imperfect Institutions
Quick Review 5.6
Last Word
Should Governments Subsidize Corporate Relocations?
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
An Introduction to Macroeconomics
Learning Objectives
Performance and Policy
Real GDP
Unemployment
Inflation
Preview
Quick Review 6.1
The Miracle of Modern Economic Growth
Global Perspective 6.1
GDP per Person, Selected Countries
Quick Review 6.2
Saving, Investment, and Choosing between Present and Future Consumption
Consider This…
Economic versus Financial Investment
Banks and Other Financial Institutions
Quick Review 6.3
Uncertainty, Expectations, and Shocks
The Importance of Expectations and Shocks
Demand Shocks and Sticky Prices
Example: A Single Firm Dealing with Demand Shocks and Sticky Prices
Setting Expectations
Key Graph
Quick Quiz for Figure 6.1
Full Employment with No Shocks
Price Changes if There Are Demand Shocks and Flexible Prices
Output Changes if There Are Demand Shocks and Sticky Prices
Generalizing from a Single Firm to the Entire Economy
Consider This…
The Great Recession
Quick Review 6.4
How Sticky Are Prices?
Categorizing Macroeconomic Models Using Price Stickiness
Quick Review 6.5
Last Word
The Behavioral Economics of Sticky Prices
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Measuring Domestic Output and National Income
Learning Objectives
Assessing the Economy’s Performance
Gross Domestic Product
Final Products Only
Domestic Output Only
A Monetary Measure
Value Added
Gross Output and Multiple Counting
GDP Excludes Nonproduction Transactions
Financial Transactions
Secondhand Sales
Two Ways of Looking at GDP: Spending and Income
Quick Review 7.1
The Expenditures Approach
Personal Consumption Expenditures (C )
Gross Private Domestic Investment (Ig)
Positive and Negative Changes in Inventories
Noninvestment Transactions
Gross Investment versus Net Investment
Government Purchases (G )
Net Exports (Xn)
Putting It All Together: GDP = C + Ig + G + Xn
Global Perspective 7.1
Comparative GDPs in Trillions of U.S. Dollars, Selected Nations, 2017
The Income Approach
Compensation of Employees
Rents
Interest
Proprietors’ Income
Corporate Profits
Taxes on Production and Imports
From National Income to GDP
Net Foreign Factor Income
Consumption of Fixed Capital
Statistical Discrepancy
Quick Review 7.2
Other National Accounts
Net Domestic Product
National Income
Personal Income
Disposable Income
The Circular Flow Revisited
Quick Review 7.3
Nominal GDP versus Real GDP
Adjustment Process in a One-Product Economy
GDP Price Index
Dividing Nominal GDP by the Price Index
An Alternative Method
Real-World Considerations and Data
Quick Review 7.4
Shortcomings of GDP
Nonmarket Activities
Leisure and Psychic Income
Improved Product Quality
The Underground Economy
Global Perspective 7.2
The Underground Economy as a Percentage of GDP, Selected Nations, 2015
GDP and the Environment
Composition and Distribution of Output
Noneconomic Sources of Well-Being
The Importance of Intermediate Output
Quick Review 7.5
Last Word
Measuring Quality to Price the Priceless
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Economic Growth
Learning Objectives
Economic Growth
Growth as a Goal
Arithmetic of Growth
Growth in the United States
Quick Review 8.1
Modern Economic Growth
The Uneven Distribution of Growth
Catching Up Is Possible
Institutional Structures That Promote Modern Economic Growth
Consider This…
Patents and Innovation
Quick Review 8.2
Determinants of Growth
Supply Factors
Demand Factor
Efficiency Factor
Production Possibilities Analysis
Growth and Production Possibilities
Labor and Productivity
Hours of Work
Labor Productivity
Accounting for Growth
Labor Inputs versus Labor Productivity
Technological Advance
Quantity of Capital per Worker
Education and Training
Average Test Scores of Eighth-Grade Students in Math and Science, Top 10 Test-Taking Countries
Economies of Scale and Resource Allocation
Economies of Scale
Improved Resource Allocation
Quick Review 8.3
Recent Fluctuations in Average Productivity Growth
Reasons for the Rise in Average Productivity Growth Between 1995 and 2010
The Microchip and Information Technology
Start-ups
Increasing Returns
Global Competition
Global Perspective 8.2
Global Competitiveness Index
Implications for Economic Growth
The Recent Productivity Slowdown
Quick Review 8.4
Is Growth Desirable and Sustainable?
The Antigrowth View
In Defense of Economic Growth
Quick Review 8.5
Last Word
Ladies First
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Business Cycles, Unemployment, and Inflation
Learning Objectives
The Business Cycle
Phases of the Business Cycle
Causation: A First Glance
Cyclical Impact: Durables and Nondurables
Quick Review 9.1
Unemployment
Measurement of Unemployment
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Consider This…
Downwardly Sticky Wages and Unemployment
Definition of Full Employment
Economic Cost of Unemployment
The GDP Gap
Okun’s Law
Unequal Burdens
Noneconomic Costs
Quick Review 9.2
Inflation
Measurement of Inflation
Facts of Inflation
Global Perspective 9.1
Inflation Rates in Five Industrial Nations, 2008–2018
Types of Inflation
Demand-Pull Inflation
Cost-Push Inflation
Core Inflation
Quick Review 9.3
Redistribution Effects of Inflation
Nominal and Real Income
Anticipations
Who Is Hurt by Inflation?
Fixed-Income Receivers
Savers
Creditors
Who Is Unaffected or Helped by Inflation?
Flexible-Income Receivers
Debtors
Anticipated Inflation
Other Redistribution Issues
Quick Review 9.4
Does Inflation Affect Output?
Cost-Push Inflation and Real Output
Demand-Pull Inflation and Real Output
The Case for Zero Inflation
The Case for Mild Inflation
Hyperinflation
Adverse Effects
Examples
Causation
Motivation
Termination
Quick Review 9.5
Last Word
The Great Skills Shortage
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Basic Macroeconomic Relationships*
Learning Objectives
The Income-Consumption and Income-Saving Relationships
The Consumption Schedule
Key Graph
Quick Quiz for Figure 10.2
The Saving Schedule
Average and Marginal Propensities
APC and APS
Global Perspective 10.1
Average Propensities to Consume, Selected Nations
MPC and MPS
MPC and MPS as Slopes
Quick Review 10.1
Nonincome Determinants of Consumption and Saving
Other Important Considerations
Consider This…
The Great Recession and the Paradox of Thrift
The Interest-Rate–Investment Relationship
Expected Rate of Return
The Real Interest Rate
Investment Demand Curve
Key Graph
Quick Quiz for Figure 10.5
Quick Review 10.2
Shifts of the Investment Demand Curve
Instability of Investment
Quick Review 10.3
The Multiplier Effect*
Rationale
Key Graph
Quick Quiz for Figure 10.7
The Multiplier and the Marginal Propensities
How Large Is the Actual Multiplier?
Quick Review 10.4
Last Word
Toppling Dominoes
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
The Aggregate Expenditures Model
Learning Objectives
Assumptions and Simplifications
A “Stuck Price” Model
Unplanned Inventory Adjustments
Current Relevance
A Preview
Consumption and Investment Schedules
Quick Review 11.1
Equilibrium GDP: C + Ig = GDP
Tabular Analysis
Real Domestic Output
Aggregate Expenditures
Equilibrium GDP
Disequilibrium
Graphical Analysis
Key Graph
Quick Quiz for Figure 11.2
Other Features of Equilibrium GDP
Saving Equals Planned Investment
No Unplanned Changes in Inventories
Changes in Equilibrium GDP and the Multiplier
Quick Review 11.2
Adding International Trade
Net Exports and Aggregate Expenditures
The Net Export Schedule
Net Exports and Equilibrium GDP
Positive Net Exports
Negative Net Exports
Global Perspective 11.1
Net Exports of Goods, Selected Nations, 2017
International Economic Linkages
Prosperity Abroad
Exchange Rates
A Caution on Tariffs and Devaluations
Quick Review 11.3
Adding the Public Sector
Government Purchases and Equilibrium GDP
Tabular Example
Graphical Analysis
Taxation and Equilibrium GDP
Tabular Example
Graphical Analysis
Injections, Leakages, and Unplanned Changes in Inventories
Equilibrium versus Full-Employment GDP
Recessionary Expenditure Gap
Key Graph
Quick Quiz for Figure 11.7
Keynes’s Solution to a Recessionary Expenditure Gap
Inflationary Expenditure Gap
Application: The Recession of 2007–2009
Quick Review 11.4
Last Word
Say’s Law, the Great Depression, and Keynes
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Aggregate Demand and Aggregate Supply
Learning Objectives
Aggregate Demand
Aggregate Demand Curve
Real-Balances Effect
Interest-Rate Effect
Foreign Purchases Effect
Changes in Aggregate Demand
Consumer Spending
Consumer Wealth
Household Borrowing
Consumer Expectations
Personal Taxes
Investment Spending
Real Interest Rates
Expected Returns
Government Spending
Net Export Spending
National Income Abroad
Exchange Rates
Quick Review 12.1
Aggregate Supply
Aggregate Supply in the Immediate Short Run
Aggregate Supply in the Short Run
Aggregate Supply in the Long Run
Focusing on the Short Run
Quick Review 12.2
Changes in Aggregate Supply
Input Prices
Domestic Resource Prices
Prices of Imported Resources
Productivity
Legal-Institutional Environment
Business Taxes and Subsidies
Government Regulation
Quick Review 12.3
Equilibrium in the AD-AS Model
Key Graph
Quick Quiz for Figure 12.7
Changes in Equilibrium
Increases in AD: Demand-Pull Inflation
Decreases in AD: Recession and Cyclical Unemployment
Key Graph
Quick Quiz for Figure 12.9
Global Perspective 12.1
Size of GDP Gaps, Selected Countries, 2017
Decreases in AS: Cost-Push Inflation
Increases in AS: Full Employment with Price-Level Stability
Quick Review 12.4
Last Word
Stimulus and the Great Recession
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
The Relationship of the AD Curve to the Aggregate Expenditures Model
Deriving the AD Curve from the Aggregate Expenditures Model
Aggregate Demand Shifts and the Aggregate Expenditures Model
APPENDIX SUMMARY
APPENDIX DISCUSSION QUESTIONS
APPENDIX REVIEW QUESTIONS
Appendix Problems
Fiscal Policy, Deficits, and Debt
Learning Objectives
Fiscal Policy and the AD-AS Model
Expansionary Fiscal Policy
Key Graph
Quick Quiz for Figure 13.1
Increased Government Spending
Tax Reductions
Combined Government Spending Increases and Tax Reductions
Contractionary Fiscal Policy
Decreased Government Spending
Increased Taxes
Combining Government Spending Decreases with Tax Increases
Quick Review 13.1
Built-In Stability
Tax Collections and the Business Cycle
Automatic or Built-In Stabilizers
Economic Importance
Tax Progressivity
Evaluating How Expansionary or Contractionary Fiscal Policy Is Determined
Cyclically Adjusted Budget
Quick Review 13.2
Recent and Projected U.S. Fiscal Policy
Fiscal Policy from 2000 to 2007
Fiscal Policy During and After the Great Recession
Problems, Criticisms, and Complications of Implementing Fiscal Policy
Problems of Timing
Political Considerations
Future Policy Reversals
Offsetting State and Local Finance
Crowding-Out Effect
Quick Review 13.3
The U.S. Public Debt
Ownership
International Comparisons
Global Perspective 13.1
Publicly Held Debt: International Comparisons
Interest Charges
False Concerns
Bankruptcy
Refinancing
Taxation
Burdening Future Generations
Substantive Issues
Income Distribution
Incentives
Foreign-Owned Public Debt
Crowding-Out Effect Revisited
Public Investments and Public-Private Complementarities
Quick Review 13.4
Last Word
The Social Security and Medicare Time Bombs
The Social Security Shortfall
The Medicare Shortfall
The Unpleasant Options
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Money, Banking, and Financial Institutions
Learning Objectives
The Functions of Money
The Components of the Money Supply
Money Definition M 1
Currency: Coins + Paper Money
Checkable Deposits
Institutions That Offer Checkable Deposits
Two Qualifications
Money Definition M2
Consider This…
Are Credit Cards Money?
Quick Review 14.1
What “Backs” the Money Supply?
Money as Debt
Value of Money
Acceptability
Legal Tender
Relative Scarcity
Money and Prices
The Purchasing Power of the Dollar
Inflation and Acceptability
Stabilizing Money’s Purchasing Power
Quick Review 14.2
The Federal Reserve and the Banking System
Historical Background
Board of Governors
The 12 Federal Reserve Banks
Central Bank
Quasi-Public Banks
Bankers’ Banks
FOMC
Commercial Banks and Thrifts
Global Perspective 14.1
The World’s 12 Largest Financial Institutions, 2018
Fed Functions, Responsibilities, and Independence
Federal Reserve Independence
Quick Review 14.3
The Financial Crisis of 2007 and 2008
Overview
Prelude
Causes
Crisis
Quick Review 14.4
Immediate Response
The Treasury Bailout: TARP
The Fed’s Lender-of-Last-Resort Activities
Post-Crisis Policy Changes
Quick Review 14.5
Last Word
Too Big to Fail. Too Big to Jail?
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Money Creation
Learning Objectives
The Fractional Reserve System
Illustrating the Idea: The Goldsmiths
Significant Characteristics of Fractional Reserve Banking
A Single Commercial Bank
Transaction 1: Creating a Bank
Transaction 2: Acquiring Property and Equipment
Transaction 3: Accepting Deposits
Transaction 4: Depositing Reserves in a Federal Reserve Bank
Excess Reserves
Control
Global Perspective 15.1
Required Reserve Ratios, Selected Countries, 2018
An Asset for the Bank, a Liability for the Fed
Transaction 5: Clearing a Check Drawn Against the Bank
Quick Review 15.1
Money-Creating Transactions of a Commercial Bank
Transaction 6: Granting a Loan
Transaction 7: Buying Government Securities
Profits, Liquidity, and the Federal Funds Market
Quick Review 15.2
The Banking System: Multiple-Deposit Expansion
The Banking System’s Lending Potential
The Monetary Multiplier
Reversibility: The Multiple Destruction of Money
Quick Review 15.3
Last Word
Banking, Leverage, and Financial Instability
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Interest Rates and Monetary Policy
Learning Objectives
Interest Rates
The Demand for Money
Transactions Demand, Dt
Key Graph
Quick Quiz for Figure 16.1
Asset Demand, Da
Total Money Demand, Dm
The Equilibrium Interest Rate
Interest Rates and Bond Prices
Quick Review 16.1
The Consolidated Balance Sheet of the Federal Reserve Banks
Global Perspective 16.1
Central Banks, Selected Nations
Assets
Securities
Loans to Commercial Banks
Liabilities
Reserves of Commercial Banks
Treasury Deposits
Federal Reserve Notes Outstanding
Quick Review 16.2
Tools of Monetary Policy
Open-Market Operations
Buying Securities
From Commercial Banks
From the Public
Selling Securities
To Commercial Banks
To the Public
Repos and Reverse Repos
The Reserve Ratio
Raising the Reserve Ratio
Lowering the Reserve Ratio
The Discount Rate
Interest on Reserves
Relative Importance
Quick Review 16.3
Fed Targets and the Taylor Rule
The Fed’s Unemployment Target
The Fed’s Inflation Target
Why 2 Percent?
Compensating for Upward Measurement Bias
Protecting Savers
Assisting Downward Wage Flexibility
Avoiding the Zero Lower Bound
Balancing Inflation and Unemployment
The Bullseye Chart
Using the Taylor Rule to Aim for the Bullseye
Northwest and Southeast: No Conflicts
Northwest of the Center
Southeast of the Center
Southwest and Northeast: Conflicts
Southwest of the Center
Northeast of the Center
Putting Policy Weights on Inflation and Unemployment
The Taylor Rule
Predicting Fed Policy with the Taylor Rule
Favoring the Unemployment Gap over the Inflation Gap
A Caveat
The Diminished Role of the Federal Funds Rate
The Federal Funds Rate Before the Financial Crisis
The Federal Funds Rate After the Financial Crisis
Quick Review 16.4
Monetary Policy, Real GDP, and the Price Level
Cause-Effect Chain
Key Graph
Quick Quiz for Figure 16.3
Market for Money
Investment
Equilibrium GDP
Effects of an Expansionary Monetary Policy
Effects of a Restrictive Monetary Policy
Quick Review 16.5
Monetary Policy: Evaluation and Issues
Recent U.S. Monetary Policy
The Mortgage Default Crisis
Problems and Complications
Recognition and Operational Lags
Cyclical Asymmetry and the Liquidity Trap
Other Issues and Concerns
Quick Review 16.6
The “Big Picture”
Key Graph
Quick Quiz for Figure 16.4
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
PROBLEMS
PROBLEMS
Financial Economics
Learning Objectives
Financial Investment
Present Value
Compound Interest
The Present Value Model
Quick Review 17.1
Applications
Take the Money and Run?
Salary Caps and Deferred Compensation
Some Popular Investments
Stocks
Bonds
Mutual Funds
Quick Review 17.2
Calculating Investment Returns
Percentage Rates of Return
The Inverse Relationship Between Asset Prices and Rates of Return
Consider This…
Corporate ownership
Arbitrage
Quick Review 17.3
Risk
Diversification
Global Perspective 17.1
International Differences in Risk
Quick Review 17.4
Comparing Risky Investments
Average Expected Rate of Return
Beta
Relationship Between Risk and Average Expected Rate of Return
The Risk-Free Rate of Return
Quick Review 17.5
The Security Market Line
Security Market Line: Applications
An Increase in the Risk-Free Rate by the Fed
The Security Market Line during the Great Recession
Quick Review 17.6
Last Word
Index Funds versus Actively Managed Funds
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Extending the Analysis of Aggregate Supply
Learning Objectives
From Short Run to Long Run
Short-Run Aggregate Supply
Long-Run Aggregate Supply
Long-Run Equilibrium in the AD-AS Model
Quick Review 18.1
Applying the Extended AD-AS Model
Demand-Pull Inflation in the Extended AD-AS Model
Cost-Push Inflation in the Extended AD-AS Model
Analysis
Policy Dilemma
A Controversy: Recessions and Stimulus in the Extended AD-AS Model
Economic Growth with Ongoing Inflation
Increases in Long-Run Aggregate Supply
Increases in Aggregate Demand and Inflation
Quick Review 18.2
The Inflation-Unemployment Relationship
The Phillips Curve
Aggregate Supply Shocks and the Phillips Curve
Adverse Aggregate Supply Shocks Contradict the Phillips Curve
Stagflation’s Demise
Post–Great Recession Evidence Against a Stable Phillips Curve
The Misery Index
Global Perspective 18.1
The Misery Index, Selected Nations, 2007–2017
The Long-Run Phillips Curve
Short-Run Phillips Curve
Long-Run Vertical Phillips Curve
Disinflation
Quick Review 18.3
Taxation and Aggregate Supply
Taxes and Incentives to Work, Save, and Invest
The Laffer Curve
Criticisms of the Laffer Curve
Taxes, Incentives, and Time
Inflation or Higher Real Interest Rates
Position on the Curve
Evaluation
Quick Review 18.4
Last Word
Do Tax Increases Reduce Real GDP?*
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Current Issues in Macro Theory and Policy
Learning Objectives
What Causes Macro Instability?
Mainstream View
Changes in Aggregate Demand
Adverse Aggregate Supply Shocks
Monetarist View
Equation of Exchange
Stable Velocity
Monetary Causes of Instability
Real-Business-Cycle View
Consider This…
Too Much Money?
Coordination Failures
Quick Review 19.1
Does the Economy “Self-Correct”?
New Classical View of Self-Correction
Examples of Macroeconomic Self-Correction
Rational Expectations Theory and the Speed of Self-Correcting Adjustments
Unanticipated Price-Level Changes
Fully Anticipated Price-Level Changes
Mainstream View of Self-Correction
Downward Wage Inflexibility
Efficiency Wage Theory
Quick Review 19.2
Rules or Discretion?
In Support of Policy Rules
Monetary Rules
Inflation Targeting
Global Perspective 19.1
Central Bank Inflation Targets, Selected Central Banks, 2018
Balanced Budget
In Defense of Discretionary Stabilization Policy
Discretionary Monetary Policy
Discretionary Fiscal Policy
Policy Successes
Quick Review 19.3
Summary of Alternative Views
Last Word
Market Monetarism
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
International Trade
Learning Objectives
Some Key Trade Facts
Global Perspective 20.1
EXPORTS AS A SHARE OF GDP, SELECTED NATIONS, 2018
The Economic Basis for Trade
Comparative Advantage
Consider This…
A CPA and a House Painter
Quick Review 20.1
Two Isolated Nations
Opportunity-Cost Ratio in the United States
Opportunity-Cost Ratio in Mexico
Self-Sufficiency Output Mix
Specializing Based on Comparative Advantage
Terms of Trade
Gains from Trade
Key Graph
Quick Quiz for Figure 20.2
Improved Alternatives
Quick Review 20.2
Greater Output
Trade with Increasing Costs
The Case for Free Trade
Quick Review 20.3
Supply and Demand Analysis of Exports and Imports
Supply and Demand in the United States
U.S. Export Supply
U.S. Import Demand
Supply and Demand in Canada
Equilibrium World Price, Exports, and Imports
Quick Review 20.4
Trade Barriers and Export Subsidies
Economic Impact of Tariffs
Key Graph
Quick Quiz for Figure 20.6
Direct Effects
Indirect Effect
Economic Impact of Quotas
Quick Review 20.5
Net Costs of Tariffs and Quotas
The Case for Protection: A Critical Review
Military Self-Sufficiency Argument
Diversification-for-Stability Argument
Infant Industry Argument
Protection-Against-Dumping Argument
Increased Domestic Employment Argument
Cheap Foreign Labor Argument
Quick Review 20.6
Multilateral Trade Agreements and Free-Trade Zones
General Agreement on Tariffs and Trade
World Trade Organization
The European Union
North American Free Trade Agreement
Trade Adjustment Assistance
Offshoring of Jobs
Quick Review 20.7
Last Word
Petition of the Candlemakers, 1845
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
The Balance of Payments, Exchange Rates, and Trade Deficits
Learning Objectives
International Financial Transactions
Quick Review 21.1
The Balance of Payments
Current Account
Balance on Goods
Balance on Services
Global Perspective 21.1
U.S. Trade Balances in Goods and Services, Selected Nations, 2017
Balance on Current Account
Capital and Financial Account
Capital Account
Financial Account
Why the Balance?
Quick Review 21.2
Flexible Exchange Rates
Key Graph
Quick Quiz for Figure 21.1
Depreciation and Appreciation
Determinants of Flexible Exchange Rates
Changes in Tastes
Relative Income Changes
Relative Inflation Rate Changes
Relative Interest Rates
Changes in Relative Expected Returns on Stocks, Real Estate, and Production Facilities
Speculation
Disadvantages of Flexible Exchange Rates
Uncertainty and Diminished Trade
Terms-of-Trade Changes
Instability
Quick Review 21.3
Fixed Exchange Rates
Foreign Exchange Market Replaced by Government Peg
Official Reserves
Defending a Peg by Altering Demand or Supply
Trade Policies
Exchange Controls and Rationing
Domestic Macroeconomic Adjustments
Quick Review 21.4
The Current Exchange Rate System: The Managed Float
In Support of the Managed Float
Concerns with the Managed Float
Quick Review 21.5
Recent U.S. Trade Deficits
Causes of the Trade Deficits
Implications of U.S. Trade Deficits
Increased Current Consumption
Increased U.S. Indebtedness
Quick Review 21.6
Last Word
Are Common Currencies Common Sense?
The Loss of Independent Monetary Policy
The Loss of External Adjustments
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Previous International Exchange-Rate Systems
The Gold Standard: Fixed Exchange Rates
Gold Flows
Domestic Macroeconomic Adjustments
Collapse of the Gold Standard
The Bretton Woods System
IMF and Pegged Exchange Rates
Fundamental Imbalances: Adjusting the Peg
Demise of the Bretton Woods System
APPENDIX SUMMARY
APPENDIX TERMS AND CONCEPTS
APPENDIX DISCUSSION QUESTIONS
APPENDIX REVIEW QUESTIONS
APPENDIX PROBLEMS
The Economics of Developing Countries
Learning Objectives
The Rich and the Poor
Classifications
Comparisons
Growth, Decline, and Income Gaps
The Human Realities of Poverty
Obstacles to Economic Development
Natural Resources
Human Resources
Large Populations
The Demographic Transition
Qualifications
Unemployment and Underemployment
Low Labor Productivity
Capital Accumulation
Domestic Capital Formation
Savings Potential
Capital Flight
Consider This…
Faster, Please
Investment Obstacles
Technological Advance
Sociocultural and Institutional Factors
Sociocultural Obstacles
Institutional Obstacles
Quick Review 22.1
The Vicious Circle
The Role of Government
A Positive Role
Establishing the Rule of Law
Building Infrastructure
Embracing Globalization
Building Human Capital
Promoting Entrepreneurship
Developing Credit Systems
Avoiding High Rates of Inflation
Controlling Population Growth
Making Peace with Neighbors
Public-Sector Problems
Global Perspective 22.1
The Corruption Perceptions Index, Selected Nations, 2018*
The Role of Advanced Nations
Expanding Trade
Admitting Temporary Workers
Discouraging Arms Sales
Foreign Aid: Public Loans and Grants
Direct Aid
Global Perspective 22.2
Official Development Assistance as a Percentage of GDP, Selected Nations
The World Bank Group
Foreign Harm?
Dependency and Incentives
Bureaucracy and Centralized Government
Corruption and Misuse
Flows of Private Capital
Quick Review 22.2
Last Word
Microfinance and Cash Transfers
Microcredit
Conditional cash transfers
Unconditional cash transfers
SUMMARY
TERMS AND CONCEPTS
DISCUSSION QUESTIONS
REVIEW QUESTIONS
PROBLEMS
Glossary
Selected Economics Statistics for Various Years, 1929–1993
Selected Economics Statistics for Various Years, 1994–2018
List shows the average income for selected nations, with Switzerland as the highest and Malawi as lowest Graphic Text Alternative (Chapter 1)
Figure 1.1 Text Alternative (Chapter 1)
Figure 1.2 Text Alternative (Chapter 1)
Figure 1.3 Text Alternative (Chapter 1)
Figure 1.4 Text Alternative (Chapter 1)
Figure 1.5 Text Alternative (Chapter 1)
Figure 1.6 Text Alternative (Chapter 1)
Horizontal bar chart represents gross fixed capital formation as a percentage of national income, 2017 Graphic Text Alternative (Chapter 1)
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Data for Appendix problem 4 Graphic Text Alternative (Chapter 1)
A Graph Plots Graphic Text Alternative (Chapter 1)
Data for Appendix problem 7 Graphic Text Alternative (Chapter 1)
Data for Appendix problem 8 Graphic Text Alternative (Chapter 1)
Three countries from each category, Free, Mostly Free, Moderately Free, Mostly Unfree, and Repressed, are listed Graphic Text Alternative (Chapter 2)
Figure 2.1 Text Alternative (Chapter 2)
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Horizontal bar chart shows average price for a 500 gram loaf of white bread, in 2018 Graphic Text Alternative (Chapter 3)
Figure 3.8 Text Alternative (Chapter 3)
Figure 3.9 Text Alternative (Chapter 3)
A Graph of Supply Graphic Text Alternative (Chapter 3)
Figure 1 Text Alternative (Chapter 3)
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A Diagram Shows Graphic Text Alternative (Chapter 3)
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Bar graph shows the percentage of carbon dioxide emissions taxed for year 2015 Graphic Text Alternative (Chapter 4)
Figure 4.7 Text Alternative (Chapter 4)
Figure 4.8 Text Alternative (Chapter 4)
Figure 5.1 Text Alternative (Chapter 5)
Figure 5.2 Text Alternative (Chapter 5)
Global Perspective 6.1 Text Alternative (Chapter 6)
Figure 6.1 Text Alternative (Chapter 6)
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Global Perspective 8.1 Text Alternative (Chapter 8)
Figure 8.5 Text Alternative (Chapter 28)
Global Perspective 8.2 Text Alternative (Chapter 8)
Figure 9.1 Text Alternative (Chapter 9)
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Figure 11.4 Text Alternative (Chapter 11)
A Bar Graph Shows Graphic Text Alternative (Chapter 11)
Figure 11.5 Text Alternative (Chapter 11)
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Global Perspective 12.1 Text Alternative (Chapter 12)
Figure 12.10 Text Alternative (Chapter 12)
Figure 12.11 Text Alternative (Chapter 12)
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Figure 15.1 Text Alternative (Chapter 15)
Figure 16.1 Text Alternative (Chapter 16)
World's Central Banks Graphic Text Alternative (Chapter 16)
T-account of the Federal Reserve Banks Graphic Text Alternative (Chapter 16)
Federal Reserve Banks Selling Bonds Graphic Text Alternative (Chapter 16)
Commercial Bank Borrowing Graphic Text Alternative (Chapter 16)
Figure 16.2 Text Alternative (Chapter 16)
Figure 16.3 Text Alternative (Chapter 16)
Figure 16.4 Text Alternative (Chapter 16)
Composite Risk Rating Graphic Text Alternative (Chapter 17)
Figure 17.1 Text Alternative (Chapter 17)
Figure 17.2 Text Alternative (Chapter 17)
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The Misery Index Graphic Text Alternative (Chapter 18)
Figure 18.11 Text Alternative (Chapter 18)
Figure 18.12 Text Alternative (Chapter 18)
A Graph Plots Graphic Text Alternative (Chapter 18)
Figure 19.1 Text Alternative (Chapter 19)
Figure 19.2 Text Alternative (Chapter 19)
Figure 19.3 Text Alternative (Chapter 19)
GLOBAL PERSPECTIVE 20.1 Graphic Text Alternative (Chapter 20)
Figure 20.1 Text Alternative (Chapter 20)
Figure 20.2 Text Alternative (Chapter 20)
Figure 20.3 Text Alternative (Chapter 20)
Figure 20.4 Text Alternative (Chapter 20)
Figure 20.5 Text Alternative (Chapter 20)
Figure 20.6 Text Alternative (Chapter 20)
GLOBAL PERSPECTIVE 21.1 Graphic Text Alternative (Chapter 21)
Figure 21.1 Text Alternative (Chapter 21)
Figure 21.2 Text Alternative (Chapter 21)
Figure 22.1 Text Alternative (Chapter 22)
Figure 22.2 Text Alternative (Chapter 22)
Figure 22.3 Text Alternative (Chapter 22)
GLOBAL PERSPECTIVE 22.1 Graphic Text Alternative (Chapter 22)
GLOBAL PERSPECTIVE 22.2 Graphic Text Alternative (Chapter 22)
![Macroeconomics [22 ed.]
9781264112456](https://ebin.pub/img/200x200/macroeconomics-22nbsped-9781264112456.jpg)
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- McConnell Brue Flynn
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