Principles of Macroeconomics, Thirteenth Edition
By Karl E Case, Ray C Fair and Sharon M Oster
Contents
PART I Introduction to Economics 27
1 The Scope and Method
of Economics 27
Why Study Economics? 28
To Learn a Way of Thinking 28
ECONOMICS IN PRACTICE Rainfall and Schooling
in India 29
ECONOMICS IN PRACTICE Majoring in Economics
Makes You Less Vulnerable to a Recession! 30
To Understand Society 30
To Be an Informed Citizen 31
The Scope of Economics 31
Microeconomics and Macroeconomics 31
ECONOMICS IN PRACTICE How Italian Is a
Ferrari? 32
The Diverse Fields of Economics 33
The Method of Economics 34
Theories and Models 34
ECONOMICS IN PRACTICE Does Your Part-Time
Job Affect Your Academic Performance? 36
Economic Policy 36
An Invitation 38
Economic Skills and Economics as a Career 38
Summary 38 Review Terms and Concepts 39
Problems 39 Appendix: How to Read and Understand Graphs 41
2 The Economic Problem: Scarcity
and Choice 49
Scarcity, Choice, and Opportunity Cost 50
Scarcity and Choice in a One-Person
Economy 50
Scarcity and Choice in an Economy of Two or
More 51
ECONOMICS IN PRACTICE Frozen Foods and
Opportunity Costs 52
The Production Possibility Frontier 55
The Economic Problem 61
ECONOMICS IN PRACTICE Changing Consumption
Patterns in China 62
Economic Systems and the Role
of Government 62
Command Economies 62
Laissez-Faire Economies: The Free Market 63
Mixed Systems, Markets, and Governments 64
Looking Ahead 64
Summary 64 Review Terms and Concepts 65 Problems 65
3 Demand, Supply, and Market
Equilibrium 69
Firms and Households: The Basic
Decision-Making Units 70
Input Markets and Output Markets: The Circular
Flow 70
Demand in Product/Output Markets 72
Changes in Quantity Demanded versus Changes
in Demand 72
Price and Quantity Demanded: The Law
of Demand 73
Other Determinants of Household Demand 76
ECONOMICS IN PRACTICE Have You Bought This
Textbook? 77
ECONOMICS IN PRACTICE People Drink Tea on
Rainy Days 78
Shift of Demand versus Movement along
a Demand Curve 79
From Household Demand to Market Demand 80
Supply in Product/Output Markets 82
Price and Quantity Supplied: The Law of Supply 83
Other Determinants of Supply 84
Shift of Supply versus Movement along a Supply
Curve 85
From Individual Supply to Market Supply 86
Market Equilibrium 87
Excess Demand 87
Excess Supply 89
Market Equilibrium with Equations 90
Changes in Equilibrium 90
ECONOMICS IN PRACTICE Quinoa 93
Demand and Supply in Product Markets:
A Review 93
ECONOMICS IN PRACTICE “Shrinkflation” during
Festive Seasons 94
Looking Ahead: Markets and the Allocation
of Resources 95
Summary 95 Review Terms and Concepts 96 Problems 97
4 Demand and Supply
Applications 100
The Price System: Rationing and Allocating
Resources 101
Price Rationing 101
Constraints on the Market and Alternative
Rationing Mechanisms 103
ECONOMICS IN PRACTICE Why Do I Have to Pay More
for My Food? The Truth behind the Flood Crises 105
Prices and the Allocation of Resources 107
Price Floor 107
Supply and Demand Analysis: Tariffs (Tax) 108
ECONOMICS IN PRACTICE The Price Mechanism
at Work for Shakespeare 109
Supply and Demand and Market Efficiency 110
Consumer Surplus 110
Producer Surplus 111
Competitive Markets Maximize the Sum
of Producer and Consumer Surplus 112
Potential Causes of Deadweight Loss from
Under- and Overproduction 113
Looking Ahead 114
Summary 114 Review Terms and Concepts 114 Problems 115
PART II Concepts and Problems in
Macroeconomics 118
5 Introduction to
Macroeconomics 118
Macroeconomic Concerns 119
Output Growth 119
Unemployment 121
Inflation and Deflation 121
The Components of the Macroeconomy 122
The Circular Flow Diagram 122
The Three Market Arenas 123
The Role of the Government in
the Macroeconomy 124
A Brief History of Macroeconomics 125
ECONOMICS IN PRACTICE Macroeconomics in
Literature 126
The U.S. Economy since 1970 127
Summary 129 Review Terms and Concepts 129 Problems 129
6 Measuring National Output
and National Income 131
Gross Domestic Product 132
Final Goods and Services 132
Exclusion of Used Goods and Paper
Transactions 133
Exclusion of Output Produced Abroad
by Domestically Owned Factors of
Production 133
Calculating GDP 134
The Expenditure Approach 134
ECONOMICS IN PRACTICE Are Christie’s Brokerage
Services Counted in GDP? 135
ECONOMICS IN PRACTICE Estimating
Depreciation in the National Income and Product
Accounts 137
The Income Approach 138
Nominal versus Real GDP 140
ECONOMICS IN PRACTICE GDP: One of the Great
Inventions of the 20th Century 141
Calculating Real GDP 142
Calculating the GDP Deflator 143
The Problems of Fixed Weights 144
Limitations of the GDP Concept 144
GDP and Social Welfare 144
The Informal Economy 145
ECONOMICS IN PRACTICE An Alternative to GDP:
The Human Development Index 145
Gross National Income per Capita 146
Looking Ahead 147
Summary 147 Review Terms and Concepts 148 Problems 148
7 Unemployment, Inflation, and
Long-Run Growth 151
Unemployment 152
Measuring Unemployment 152
ECONOMICS IN PRACTICE Time Use for the
Unemployed in a Recession 153
Components of the Unemployment Rate 154
ECONOMICS IN PRACTICE Female Labor Force
Participation and Economic Development 155
The Costs of Unemployment 155
ECONOMICS IN PRACTICE The Consequences
of Unemployment Persist 156
Inflation and Deflation 157
The Consumer Price Index 157
The Costs of Inflation 159
What about Deflation? 161
ECONOMICS IN PRACTICE Chain-Linked Consumer
Price Index in the News 161
Long-Run Growth 162
Output and Productivity Growth 162
Looking Ahead 164
Summary 164 Review Terms and Concepts 164 Problems 165
PART III The Core of Macroeconomic
Theory 167
8 Aggregate Expenditure and
Equilibrium Output 169
The Keynesian Theory of Consumption 170
ECONOMICS IN PRACTICE Behavioral Biases in
Saving Behavior 174
Other Determinants of Consumption 174
Planned Investment (I) versus Actual
Investment 175
Planned Investment and the Interest Rate (r) 175
Other Determinants of Planned
Investment 176
The Determination of Equilibrium Output
(Income) 176
The Saving/Investment Approach to Equilibrium 179
Adjustment to Equilibrium 180
The Multiplier 180
ECONOMICS IN PRACTICE The Rise and Fall of
Nokia 181
The Multiplier Equation 183
ECONOMICS IN PRACTICE The Paradox of
Thrift 184
The Size of the Multiplier in the Real World 185
Looking Ahead 185
Summary 186 Review Terms and Concepts 186 Problems 186
Appendix: Deriving the Multiplier Algebraically 189
9 The Government and Fiscal
Policy 190
Government in the Economy 191
Government Purchases (G), Net Taxes (T),
and Disposable Income (Yd) 191
The Determination of Equilibrium Output
(Income) 193
Fiscal Policy at Work: Multiplier Effects 195
The Government Spending Multiplier 195
The Tax Multiplier 198
The Balanced-Budget Multiplier 199
The Federal Budget 201
The Budget in 2017 201
Fiscal Policy since 1993: The Clinton, Bush, Obama,
and Trump Administrations 202
ECONOMICS IN PRACTICE Regional Autonomy and
Government Budgeting in Spain 204
The Federal Government Debt 205
The Economy’s Influence on the Government
Budget 206
Automatic Stabilizers and Destabilizers 206
Full-Employment Budget 207
Looking Ahead 207
Summary 207 Review Terms and Concepts 208
Problems 208 EOC Questions 210 Appendix A 211
Appendix B 212 Appendix Summary 215
Appendix Problems 215
10 Money, the Federal Reserve,
and the Interest Rate 216
An Overview of Money 217
What Is Money? 217
ECONOMICS IN PRACTICE Don’t Kill the
Birds! 218
Commodity and Fiat Monies 218
Measuring the Supply of Money in the United
States 219
How Banks Create Money 221
A Historical Perspective: Goldsmiths 221
ECONOMICS IN PRACTICE A Run on the Bank:
George Bailey, Mary Poppins, Wyatt Earp 222
The Modern Banking System 223
The Creation of Money 224
The Money Multiplier 226
The Federal Reserve System 227
Functions of the Federal Reserve 228
The Demand for Money 229
Interest Rates and Security Prices 230
ECONOMICS IN PRACTICE Professor Serebryakov
Makes an Economic Error 231
How the Federal Reserve Controls the Interest
Rate 232
Tools Prior to 2008 232
Expanded Fed Activities Beginning in 2008 233
The Federal Reserve Balance Sheet 234
Tools After 2008 235
Looking Ahead 236
Summary 236 Review Terms and Concepts 237 Problems 237
Appendix 240 Appendix Problems 242
11 The Determination of
Aggregate Output, the Price
Level, and the Interest
Rate 243
The Aggregate Supply (AS) Curve 244
Aggregate Supply in the Short Run 244
Shifts of the Short-Run Aggregate Supply Curve 246
The Aggregate Demand (AD) Curve 247
Planned Aggregate Expenditure and the Interest
Rate 247
The Behavior of the Fed 248
ECONOMICS IN PRACTICE Central Bankers: Does
Personality Matter? 250
Deriving the AD Curve 251
ECONOMICS IN PRACTICE Central Banks and Price
Stability: Which Prices to Look At? 252
The Final Equilibrium 253
Other Reasons for a Downward-Sloping AD
Curve 254
The Long Run AS Curve 254
Potential GDP 255
ECONOMICS IN PRACTICE The Simple “Keynesian”
Aggregate Supply Curve 256
Summary 257 Review Terms and Concepts 257 Problems 257
12 Policy Effects and Cost Shocks
in the AS/AD Model 260
Fiscal Policy Effects 261
Fiscal Policy Effects in the Long Run 262
Monetary Policy Effects 263
The Fed’s Response to the Z Factors 263
Shape of the AD Curve When the Fed Cares More
About the Price Level than Output 263
What Happens When There Is a Zero Interest
Rate Bound? 264
Shocks to the System 265
Cost Shocks 265
ECONOMICS IN PRACTICE South African Prices
Surge as Cape Town Goes Dry 266
Demand-Side Shocks 267
Expectations 267
Monetary Policy since 1970 268
Inflation Targeting 269
Looking Ahead 270
Summary 270 Review Terms and Concepts 270 Problems 270
13 The Labor Market in the
Macroeconomy 273
The Labor Market: Basic Concepts 274
The Classical View of the Labor Market 274
The Classical Labor Market and the Aggregate
Supply Curve 276
The Unemployment Rate and the Classical
View 276
Explaining the Existence of Unemployment 276
Efficiency Wage Theory 277
Imperfect Information 277
Minimum Wage Laws 277
Explaining the Existence of Cyclical
Unemployment 278
Sticky Wages 278
ECONOMICS IN PRACTICE Evidence on Sticky
Wages 279
ECONOMICS IN PRACTICE How the Sharing
Economy Is Transforming the Job Market 280
An Open Question 280
The Short-Run Relationship between the
Unemployment Rate and Inflation 281
The Phillips Curve: A Historical Perspective 282
Aggregate Supply and Aggregate Demand Analysis
and the Phillips Curve 284
Expectations and the Phillips Curve 285
Inflation and Aggregate Demand 285
The Long-Run Aggregate Supply Curve, Potential
Output, and the Natural Rate
of Unemployment 286
The Nonaccelerating Inflation Rate
of Unemployment (NAIRU) 287
Looking Ahead 288
Summary 288 Review Terms and Concepts 289 Problems 289
PART IV Further Macroeconomics Issues 292
14 Financial Crises, Stabilization,
and Deficits 292
The Stock Market, the Housing Market, and
Financial Crises 293
Stocks and Bonds 293
Determining the Price of a Stock 293
The Stock Market Since 1948 295
Housing Prices Since 1952 296
Household Wealth Effects on the Economy 297
Financial Crises and the 2008 Bailout 297
ECONOMICS IN PRACTICE Predicting an Economy’s
Future 298
Time Lags Regarding Monetary and Fiscal
Policy 299
Recognition Lags 301
Implementation Lags 301
Response Lags 302
Summary 303
Government Deficit Issues 303
Deficit Targeting 303
Summary 305 Review Terms and Concepts 306 Problems 306
15 Household and Firm Behavior in
the Macroeconomy: A Further
Look 308
Households: Consumption and Labor Supply
Decisions 309
The Life-Cycle Theory of Consumption 309
The Labor Supply Decision 310
Interest Rate Effects on Consumption 312
Government Effects on Consumption and Labor
Supply: Taxes and Transfers 312
A Possible Employment Constraint on
Households 313
A Summary of Household Behavior 314
The Household Sector Since 1970 314
ECONOMICS IN PRACTICE Measuring Housing
Price Changes 315
Firms: Investment and Employment Decisions 317
Expectations and Animal Spirits 317
Excess Labor and Excess Capital Effects 318
Inventory Investment 319
A Summary of Firm Behavior 320
The Firm Sector Since 1970 320
Productivity and the Business Cycle 322
The Short-Run Relationship between Output
and Unemployment 323
The Size of the Multiplier 324
ECONOMICS IN PRACTICE Estimating Multipliers:
The Mafia Link 325
Summary 325 Review Terms and Concepts 327 Problems 327
16 Long-Run Growth 329
The Growth Process: From Agriculture
to Industry 330
Sources of Economic Growth 331
Increase in Labor Supply 331
ECONOMICS IN PRACTICE Government Strategy
for Growth 332
Increase in Physical Capital 333
Increase in the Quality of the Labor Supply
(Human Capital) 335
Increase in the Quality of Capital (Embodied
Technical Change) 335
ECONOMICS IN PRACTICE Germany’s Open Border
Policy 336
Disembodied Technical Change 336
More on Technical Change 337
U.S. Labor Productivity: 1952 I–2017 IV 338
Growth and the Environment and Issues
of Sustainability 339
Summary 341 Review Terms and Concepts 341 Problems 342
17 Alternative Views
in Macroeconomics 345
Keynesian Economics 346
Monetarism 346
The Velocity of Money 346
The Quantity Theory of Money 347
The Keynesian/Monetarist Debate 348
Supply-Side Economics 349
The Laffer Curve 349
Evaluating Supply-Side Economics 350
New Classical Macroeconomics 351
The Development of New Classical
Macroeconomics 351
Rational Expectations 352
ECONOMICS IN PRACTICE Brexit and Consumer
Expectations 353
Real Business Cycle Theory and New Keynesian
Economics 354
Evaluating the Rational Expectations
Assumption 355
Behavioral Macroeconomics 356
Testing Alternative Macroeconomic
Models 356
Summary 357 Review Terms and Concepts 358 Problems 358
PART V The World Economy 361
18 International Trade,
Comparative Advantage,
and Protectionism 361
Trade Surpluses and Deficits 362
The Economic Basis for Trade: Comparative
Advantage 362
Absolute Advantage versus Comparative
Advantage 363
Terms of Trade 367
Exchange Rates 368
The Sources of Comparative Advantage 370
The Heckscher-Ohlin Theorem 370
Other Explanations for Observed Trade
Flows 371
Trade Barriers: Tariffs, Export Subsidies,
and Quotas 371
ECONOMICS IN PRACTICE Globalization Improves
Firm Productivity 372
U.S. Trade Policies, GATT, and the WTO 373
ECONOMICS IN PRACTICE What Happens When
We Lift a Quota? 373
Free Trade or Protection? 375
The Case for Free Trade 375
The Case for Protection 377
ECONOMICS IN PRACTICE Reshaping the Global
Trade Order 379
An Economic Consensus 381
Summary 381 Review Terms and Concepts 382 Problems 382
19 Open-Economy Macroeconomics:
The Balance of Payments and
Exchange Rates 385
The Balance of Payments 386
The Current Account 386
The Financial Account 388
ECONOMICS IN PRACTICE Debtor and Creditor
Nations 389
Equilibrium Output (Income) in an Open
Economy 389
The International Sector and Planned Aggregate
Expenditure 389
Imports, Exports, and the Trade Feedback
Effect 392
Import and Export Prices and the Price Feedback
Effect 392
The Open Economy with Flexible Exchange
Rates 393
The Market for Foreign Exchange 394
Factors That Affect Exchange Rates 397
The Effects of Exchange Rates on the
Economy 399
An Interdependent World Economy 402
Summary 402 Review Terms and Concepts 403
Problems 403 Appendix: World Monetary Systems since 1900 405
Appendix Summary 410 Appendix Problems 410
20 Economic Growth in Developing
Economies 411
Life in the Developing Nations: Population
and Poverty 412
ECONOMICS IN PRACTICE What Can We Learn
from the Height of Children? 413
Economic Development: Sources
and Strategies 413
The Sources of Economic Development 414
ECONOMICS IN PRACTICE Corruption 416
Strategies for Economic Development 417
ECONOMICS IN PRACTICE Who You Marry May
Depend on the Rain 419
Two Examples of Development: China
and India 421
ECONOMICS IN PRACTICE Boosting Agricultural
Income through Digital Finance 422
Development Interventions 422
Random and Natural Experiments: Some New
Techniques in Economic Development 423
Education Ideas 423
Health Improvements 424
Summary 425 Review Terms and Concepts 425 Problems 426
PART VI Methodology 428
21 Critical Thinking about
Research 428
Selection Bias 429
Causality 430
Correlation versus Causation 430
Random Experiments 431
Regression Discontinuity 432
ECONOMICS IN PRACTICE Moving
to Opportunity 433
ECONOMICS IN PRACTICE Control Groups and
Experimental Economics 434
Difference-in-Differences 435
ECONOMICS IN PRACTICE Using Difference-in-
Differences to Study the Efficacy of Medical Insurance
in Japan 436
Statistical Significance 437
Regression Analysis 438
Summary 440 Review Terms and Concepts 440 Problems 441
Glossary 443
Index 453
Photo Credits 469