MacroEconomics: Principles for a Changing World

Description

Title......Page 3 Copyright......Page 4 About the Author......Page 8 Vision and Story of Economics......Page 10 Principles for a Changing World......Page 12 Rethinking the Connection Between Author, Text, and Technology......Page 14 Thinking About Data Literacy......Page 22 Thinking About What Global Means......Page 25 Acknowledgments......Page 30 Brief Contents......Page 34 Contents......Page 36 1 Exploring Economics......Page 56 BY THE NUMBERS Economics as a Career......Page 60 Why Should One Study Economics?......Page 62 Economic Theories and Reality......Page 63 Efficiency Versus Equity......Page 64 ISSUE Do Economists Ever Agree on Anything?......Page 65 Positive Versus Normative Questions......Page 66 Principle 2: When Making Decisions, One Must Take into Account Tradeoffs and Opportunity Costs......Page 68 Principle 4: People Respond to Incentives, Both Good and Bad......Page 70 ISSUE Would a City Change Its Name for a Game Show?......Page 71 Principle 6: Markets Are Generally Efficient; When They Aren’t, Government Can Sometimes Correct the Failure......Page 72 Principle 7: Economic Growth, Low Unemployment, and Low Inflation Are Economic Goals That Do Not Always Coincide......Page 73 Principle 8: Institutions and Human Creativity Help Explain the Wealth of Nations......Page 74 AROUND THE WORLD Nunavut: Land of Abundance and Scarcity......Page 75 Summing It All Up: Economics Is All Around Us......Page 76 Chapter Summary......Page 77 QUESTIONS AND PROBLEMS......Page 81 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 83 APPENDIX Working With Graphs and Formulas......Page 84 Scatter Plots......Page 85 Pie Charts......Page 87 Simple Graphs Can Pack In a Lot of Information......Page 88 A Few Simple Rules for Reading Graphs......Page 90 Graphs and Models......Page 92 Computing the Slope of a Linear Line......Page 93 Nonlinear Relationships......Page 95 Computing the Slope of a Nonlinear Curve......Page 96 Simple Linear Equations......Page 97 Shifting Curves......Page 98 Correlation Is Not Causation......Page 100 2 Production, Economic Growth, and Trade......Page 101 BY THE NUMBERS Growth, Productivity, and Trade Are Key to Our Prosperity......Page 105 Economic Systems......Page 106 Entrepreneurial Ability......Page 107 AROUND THE WORLD Ironbridge: The Beginnings of the Industrial Revolution......Page 108 Production Possibilities......Page 111 Opportunity Cost......Page 112 Increasing Opportunity Costs......Page 113 Economic Growth......Page 114 Expanding Resources......Page 116 Technological Change......Page 117 Summarizing the Sources of Economic Growth......Page 119 ISSUE Is the Ocean the Next Frontier? Land Reclamation and Underwater Cities......Page 120 DAVID RICARDO (1772–1823)......Page 122 The Gains from Trade......Page 125 ISSUE Do We Really Specialize in That? Comparative Advantage in the United States and China......Page 126 Chapter Summary......Page 128 QUESTIONS AND PROBLEMS......Page 132 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 134 3 Supply and Demand......Page 135 BY THE NUMBERS The World of Markets......Page 139 ISSUE Do Markets Exist for Everyone, Including Dogs and Cats?......Page 141 The Price System......Page 142 Willingness-to-Pay: The Building Block of Market Demand......Page 143 The Law of Demand: The Relationship Between Quantity Demanded and Price......Page 144 The Demand Curve......Page 145 Tastes and Preferences......Page 147 Prices of Related Goods......Page 148 Changes in Demand Versus Changes in Quantity Demanded......Page 149 The Supply Curve......Page 152 Production Technology......Page 153 Costs of Resources......Page 154 Changes in Supply Versus Changes in Quantity Supplied......Page 155 Market Equilibrium......Page 159 ALFRED MARSHALL (1842–1924)......Page 161 ISSUE Two-Buck Chuck: Will People Drink $2-a-Bottle Wine?......Page 165 Predicting the New Equilibrium When Both Curves Shift......Page 166 AROUND THE WORLD Tokyo Disneyland: Is THAT the Line for Space Mountain?!......Page 168 Chapter Summary......Page 170 KEY CONCEPTS......Page 175 QUESTIONS AND PROBLEMS......Page 176 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 179 4 Markets and Government......Page 181 BY THE NUMBERS Price Controls and Supports in the Economy Today......Page 185 Consumer and Producer Surplus: A Tool for Measuring Economic Efficiency......Page 187 When Prices Exceed Equilibrium......Page 191 When Prices Fall Below Equilibrium......Page 193 Lack of Competition......Page 194 AROUND THE WORLD Singapore: Resolving Traffic Jams and Reducing Pollution Using Price Controls......Page 195 Market Efficiency Versus Equity......Page 196 Price Ceilings......Page 198 Price Floors......Page 200 ISSUE Are Price Gouging Laws Good for Consumers?......Page 202 Chapter Summary......Page 205 KEY CONCEPTS......Page 209 QUESTIONS AND PROBLEMS......Page 210 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 213 5 Introduction to Macroeconomics......Page 215 BY THE NUMBERS A Slow and Steady Macroeconomic Recovery......Page 219 Defining Business Cycles......Page 221 Dating Business Cycles......Page 223 Leading Economic Index......Page 224 Yield Curve......Page 225 ISSUE The End of the Recession . . . It Does Not Feel Like It......Page 226 NOBEL PRIZE: SIMON KUZNETS (1901–1985)......Page 229 Spending and Income: Looking at GDP in Two Ways......Page 230 Gross Domestic Product......Page 232 Gross Private Domestic Investment......Page 233 Net Exports of Goods and Services......Page 235 Compensation of Employees......Page 236 Corporate Profits......Page 237 Summing Up Income Measures......Page 238 Population and GDP per Capita......Page 240 AROUND THE WORLD Costa Rica: Pura Vida and Happiness Without a High Level of GDP......Page 241 Nonmarket Activities and the Informal Economy......Page 243 Chapter Summary......Page 246 KEY CONCEPTS......Page 250 QUESTIONS AND PROBLEMS......Page 251 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 253 6 Measuring Inflation and Unemployment......Page 255 BY THE NUMBERS The Twin Evils of Inflation and Unemployment......Page 259 Inflation......Page 261 What Causes Inflation?......Page 262 Measuring Inflation: Consumer Price Index, Producer Price Index, and GDP Deflator......Page 263 The Consumer Price Index......Page 264 The Producer Price Index......Page 265 Adjusting for Inflation: Escalating and Deflating Series (Nominal Versus Real Values)......Page 266 The Consequences of Inflation......Page 267 Hyperinflation......Page 268 ISSUE The Consequences of Counterfeit Money on Inflation......Page 269 The Historical Record......Page 271 Employed......Page 273 Monthly Employment Surveys......Page 274 Employment Trends......Page 275 Problems with Unemployment Statistics......Page 276 Underemployment and Marginally Attached Workers......Page 277 AROUND THE WORLD The Boom and Bust of Dickinson, North Dakota......Page 278 Structural Unemployment......Page 280 Cyclical Unemployment......Page 281 Changes in the Unemployment Rate Around the Natural Rate......Page 282 ISSUE Why Do Unemployment Rates Differ So Much Within the United States?......Page 283 Chapter Summary......Page 286 QUESTIONS AND PROBLEMS......Page 290 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 292 7 Economic Growth......Page 293 BY THE NUMBERS Why Should We Care About Economic Growth?......Page 297 How Is Economic Growth Measured?......Page 299 Small Differences in Growth Lead to Large Differences in Income Over Time......Page 300 Power of Compounding Growth Rates......Page 301 Rule of 70......Page 302 ISSUE Can Economic Growth Bring a Billion People Out of Poverty?......Page 303 Long-Run Growth Involves Expanding Capacity......Page 306 Factors of Production......Page 307 Production Function......Page 309 Increasing the Quality of the Labor Force......Page 311 Increasing the Capital-to-Labor Ratio......Page 312 Improvements in Technology and Ideas......Page 313 AROUND THE WORLD Kazakhstan: The Next Destination of Growth and Trade......Page 314 Human Capital: Public Education and Financial Aid......Page 317 Enforcement of Contracts......Page 318 Economic Freedom......Page 319 ISSUE Did Economic Growth Peak a Century Ago? Prospects for Future Growth......Page 320 Chapter Summary......Page 324 QUESTIONS AND PROBLEMS......Page 328 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 330 8 Aggregate Expenditures......Page 331 BY THE NUMBERS The Role of Spending in the Economy......Page 335 Consumption and Saving......Page 337 Average Propensities to Consume and Save......Page 339 Marginal Propensities to Consume and Save......Page 340 Investment......Page 343 Investment Demand......Page 344 Aggregate Investment Schedule......Page 346 The Simple Aggregate Expenditures Model......Page 348 Macroeconomic Equilibrium in the Simple Model......Page 349 JOHN MAYNARD KEYNES (1883–1946)......Page 350 The Multiplier......Page 352 The Multiplier Works in Both Directions......Page 353 Paradox of Thrift......Page 354 ISSUE Do High Savings Rates Increase the Risk of a Long Recession?......Page 355 AROUND THE WORLD Brazil’s Beco Do Batman: How Graffiti Revived a Neighborhood......Page 357 Tax Changes and Equilibrium......Page 359 The Balanced Budget Multiplier......Page 361 Adding Net Exports......Page 362 Recessionary Gap......Page 363 ISSUE Was Keynes Right About the Great Depression?......Page 364 Chapter Summary......Page 367 KEY CONCEPTS......Page 371 QUESTIONS AND PROBLEMS......Page 372 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 375 9 Aggregate Demand and Supply......Page 376 BY THE NUMBERS The Sheer Size of Aggregate Demand and Aggregate Supply......Page 380 Why Is the Aggregate Demand Curve Negatively Sloped?......Page 382 Determinants of Aggregate Demand......Page 383 Consumer Spending......Page 384 Government Spending and Net Exports......Page 385 AROUND THE WORLD Myanmar: Opening a Country to a Boom in Aggregate Demand......Page 387 Long Run......Page 390 Short Run......Page 391 Input Prices......Page 392 Productivity......Page 393 Market Power of Firms......Page 394 Inflationary Expectations......Page 395 The Spending Multiplier......Page 397 The Great Depression......Page 399 Demand-Pull Inflation......Page 401 Cost-Push Inflation......Page 402 ISSUE Why Didn’t Stimulus Measures Over the Past Decade Lead to Inflation?......Page 404 Chapter Summary......Page 407 QUESTIONS AND PROBLEMS......Page 412 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 415 APPENDIX Deriving the Aggregate Demand Curve......Page 416 10 Fiscal Policy and Debt......Page 418 BY THE NUMBERS Your Government and Its Financial Operation......Page 422 Discretionary Fiscal Policy......Page 424 Taxes......Page 426 Transfers......Page 427 Expansionary and Contractionary Fiscal Policy......Page 428 Fiscal Policy and Aggregate Supply......Page 432 Reducing Tax Rates......Page 433 Expanding Investment and Reducing Regulations......Page 434 AROUND THE WORLD Qatar: A Nation Built for the Future......Page 435 Fiscal Policy Timing Lags......Page 438 The Government’s Bias Toward Borrowing and Away from Taxation......Page 439 Defining Deficits and the National Debt......Page 442 ISSUE How Big Is the Economic Burden of Interest Rates on the National Debt?......Page 444 Financing Debt and Deficits......Page 445 Is the Size of the Public Debt a Problem?......Page 448 Does It Matter If Foreigners Hold a Significant Portion of the Public Debt?......Page 449 How Will the National Debt Affect Our Future? Are We Doomed?......Page 450 Chapter Summary......Page 453 KEY CONCEPTS......Page 457 QUESTIONS AND PROBLEMS......Page 458 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 460 11 Saving, Investment, and the Financial System......Page 461 BY THE NUMBERS The Financial System and Its Sheer Size and Scope......Page 465 Medium of Exchange......Page 467 Store of Value......Page 468 AROUND THE WORLD Using Plastic Money (Literally) in Australia......Page 469 Narrowly Defined Money: M1......Page 470 A Broader Definition: M2......Page 471 Supply and Demand for Loanable Funds......Page 472 Shifts in the Supply of Loanable Funds......Page 473 Income or Asset Prices......Page 474 Business Expectations......Page 475 The Bridge Between Savers and Borrowers......Page 477 Types of Financial Assets......Page 478 Bond Prices and Interest Rates......Page 479 Stocks and Investment Returns......Page 480 Short-Term Borrowing......Page 482 The Power (or Danger) of Compounding Interest......Page 483 To Contribute or Not to Contribute?......Page 484 Social Security......Page 485 ISSUE Can a Stock Market Crash Increase Long-Term Savings?......Page 486 Individual Retirement Arrangements (IRAs)......Page 488 Chapter Summary......Page 489 KEY CONCEPTS......Page 493 QUESTIONS AND PROBLEMS......Page 494 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 495 12 Money Creation and the Federal Reserve......Page 497 BY THE NUMBERS Banks and the Federal Reserve......Page 501 Creating Money as If Out of Thin Air......Page 503 Fractional Reserve Banking System......Page 504 The Money Creation Process......Page 505 Money Leakages......Page 508 Leakages by Individuals and Businesses......Page 509 The Effect of Foreign Currency Holdings......Page 510 AROUND THE WORLD The Rise and Fall of the Famous (and Infamous) Swiss Bank Account......Page 511 The Board of Governors......Page 514 Federal Reserve Banks......Page 515 The Fed as Lender of Last Resort......Page 516 Reserve Requirements......Page 518 The Federal Funds Target......Page 519 Information Lags......Page 520 ISSUE What Can the Fed Do When Interest Rates Reach 0%?......Page 521 Implementation Lags......Page 522 Chapter Summary......Page 524 QUESTIONS AND PROBLEMS......Page 528 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 530 13 Monetary Policy......Page 532 BY THE NUMBERS Monetary Policy in Action......Page 536 Examples of Monetary Policy in Action......Page 538 When Is It Optimal to Loosen or Tighten Monetary Policy?......Page 539 Expansionary Monetary Policy......Page 540 Contractionary Monetary Policy......Page 541 The Long Run: The Classical Theory......Page 543 IRVING FISHER (1867–1947)......Page 544 Money Illusion and Sticky Wages and Prices......Page 545 NOBEL PRIZE: MILTON FRIEDMAN (1912–2006)......Page 546 Summary of the Effectiveness of Monetary Policy......Page 547 Demand Shocks......Page 549 Implications for Short-Run Monetary Policy......Page 550 Rules Versus Discretion......Page 552 The Federal Funds Target and the Taylor Rule......Page 553 A Recap of the Fed’s Policy Tools......Page 554 ISSUE The Record of the Fed’s Performance......Page 555 The Fed: Dealing with an Economic Crisis Not Seen in 80 Years......Page 558 The Eurozone Crisis and the Role of the European Central Bank......Page 559 ISSUE The Challenges of Monetary Policy with Regional Differences in Economic Performance......Page 561 AROUND THE WORLD Why Would a Country Give Up Its Monetary Policy?......Page 563 Chapter Summary......Page 565 QUESTIONS AND PROBLEMS......Page 569 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 571 14 Macroeconomic Policy: Challenges in a Global Economy......Page 573 BY THE NUMBERS The Long Road Back: The Great Recession and the Jobless Recovery......Page 577 From the Housing Bubble to the Financial Crisis......Page 579 Subprime Mortgages and Collateralized Debt Obligations......Page 580 Collapsing Financial Markets......Page 581 The Government’s Policy Response......Page 582 The Financial Crisis and Its Effects......Page 583 Unemployment and Inflation: Phillips Curves......Page 585 Productivity, Prices, and Wages......Page 586 The Importance of Inflationary Expectations......Page 588 Inflationary Expectations and the Phillips Curve......Page 589 Accelerating Inflation......Page 590 Returning Inflation to Normal Levels......Page 591 Rational Expectations and Policy Formation......Page 592 Policy Implications of Rational Expectations......Page 593 A Critique of Rational Expectations......Page 594 Are Recoveries Becoming “Jobless Recoveries”?......Page 596 Rising Future Debt Obligations: Health Care and Social Security......Page 600 ISSUE Inflating Our Way Out of Debt: Is This an Effective Approach?......Page 601 Will Globalization Lead to Increased Obstacles to Economic Growth?......Page 602 AROUND THE WORLD Life on the Autobahn: Germany’s Role in European Growth and Stability......Page 604 Chapter Summary......Page 606 QUESTIONS AND PROBLEMS......Page 610 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 612 15 International Trade......Page 614 BY THE NUMBERS International Trade......Page 618 Absolute and Comparative Advantage......Page 621 Practical Constraints on Trade......Page 623 ISSUE The Challenge of Measuring Imports and Exports in a Global Economy......Page 625 Determining the Terms of Trade......Page 627 The Impact of Trade......Page 628 How Trade Is Restricted......Page 629 Effects of Tariffs and Quotas......Page 630 ISSUE Do Foreign Trade Zones Help or Hurt American Consumers and Workers?......Page 633 Antidumping......Page 635 National Defense Argument......Page 636 Trade and Domestic Employment......Page 637 Trade and Its Effect on Working Conditions in Developing Nations......Page 638 AROUND THE WORLD Can One Country’s Festival Disrupt World Trade?......Page 639 Chapter Summary......Page 641 KEY CONCEPTS......Page 644 QUESTIONS AND PROBLEMS......Page 645 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 647 16 Open Economy Macroeconomics......Page 649 BY THE NUMBERS The Foreign Exchange Market......Page 653 Imports and Exports......Page 655 Transfers......Page 656 The Capital Account......Page 657 Real Exchange Rates......Page 658 Purchasing Power Parity......Page 659 A Market for Foreign Exchange......Page 661 Flexible Exchange Rates......Page 662 Currency Appreciation and Depreciation......Page 663 Exchange Rates and the Capital Account......Page 664 Exchange Rates and Aggregate Supply and Demand......Page 665 ISSUE Would a Stronger Chinese Yuan Be Good for Americans?......Page 667 Pegging Exchange Rates Under a Flexible Exchange Rate System......Page 669 Policies Under Fixed Exchange Rates......Page 670 Policies Under Flexible Exchange Rates......Page 672 AROUND THE WORLD Hyder, Alaska: An American Town That Uses the Canadian Dollar......Page 673 Chapter Summary......Page 676 KEY CONCEPTS......Page 679 QUESTIONS AND PROBLEMS......Page 680 ANSWERS TO QUESTIONS IN CHECKPOINTS......Page 681 Sources for By the Numbers......Page 683 Glossary......Page 688 Index......Page 703