Principles of Macroeconomics, Fifth Edition
By Ben Bernanke, Nilss Olekalns, Robert Frank Kate, Antonovics and Ori Heffetz
Contents In Full
Preface xiv
Assurance of learning xvi
AACSB statement xvi
About the Australian author xvii
About the US authors xvii
Acknowledgments xx
How to use this book xxi
Digital resources xxiv
PART 1
ISSUES IN MACROECONOMICS
CHAPTER 1
Macroeconomics: The bird’s-eye view of the
economy 5
Learning objectives (LO) 5
Setting the scene 5
The major macroeconomic issues 7
1.1.1 Economic growth and living standards 7
1.1.2 Productivity 9
1.1.3 Recessions and expansions 10
1.1.4 Unemployment 11
1.1.5 Inflation 12
1.1.6 Economic interdependence among nations 13
1.2 Macroeconomic policy 14
1.2.1 Types of macroeconomic policy 15
1.2.2 Positive versus normative analyses of macroeconomic
policy 15
1.3 Aggregation 16
1.4 Studying macroeconomics: A preview 18
Summary 19
Key terms 19
Review questions 19
Problems 20
References 20
CHAPTER 2
Measuring economic activity: Gross
domestic product and unemployment 21
Learning objectives (LO) 21
Setting the scene 21
2.1 Measuring economic activity: Gross domestic product and unemployment 22
2.1.1 GDP: The fine print 23
2.1.2 Final goods and services 26
2.1.3 Produced within a country during a given period 28
2.2 Methods for measuring GDP 29
2.2.1 The national income accounting identity 31
2.2.2 GDP and the incomes of capital and labour 32
2.3 Nominal GDP versus real GDP 34
2.4 Real GDP is not the same as economic wellbeing 36
2.4.1 Leisure time 36
2.4.2 Non-market economic activities 37
2.4.3 Environmental quality and resource depletion 38
2.4.4 Quality of life 38
2.4.5 Poverty and economic inequality 38
2.4.6 GDP is related to economic wellbeing 39
2.4.7 Availability of goods and services 39
2.4.8 Life expectancy 39
2.5 Unemployment and the unemployment rate 41
2.5.1 Measuring unemployment 41
2.5.2 The costs of unemployment 41
2.5.3 The duration of unemployment 42
2.5.4 The unemployment rate versus ‘true’ unemployment 43
Summary 44
Key terms 44
Review questions 45
Problems 45
References 47
CHAPTER 3
Measuring the price level and inflation 49
Learning objectives (LO) 49
Setting the scene 49
3.1 The consumer price index: Measuring the price level 50
3.2 Inflation 51
3.2.1 A common misperception about inflation 52
3.2.2 Adjusting for inflation 53
3.3 Does the CPI measure ‘true’ inflation? 56
3.3.1 The costs of inflation: Not what you think 57
3.4 The true costs of inflation 59
3.4.1 Shoe-leather costs 59
3.4.2 Noise in the price system 59
3.4.3 Distortions of the tax system 60
3.4.4 Unexpected redistribution of wealth 60
3.4.5 Interference with long-run planning 61
3.4.6 Menu costs 61
3.4.7 Hyperinflation 62
3.5 Inflation and interest rates 63
3.5.1 The real interest rate 64
3.6 Deflation 65
Summary 67
Key terms 68
Review questions 68
Problems 68
References 70
CHAPTER 4
Saving, investment and wealth 71
Learning objectives (LO) 71
Setting the scene 71
4.1 Saving and wealth 72
4.1.1 Stocks and flows 75
4.1.2 Capital gains and losses 76
4.2 Why do people save? 79
4.2.1 Saving and the real interest rate 79
4.2.2 Saving, self-control and demonstration effects 82
4.3 National saving and its components 84
4.3.1 The measurement of national saving 84
4.3.2 Private and public components of national saving 86
4.3.3 Public saving and the government budget 87
4.4 Is low household saving a problem? 91
4.5 Investment and capital formation 91
4.6 Saving, investment and financial markets 96
4.6.1 The effects of new technology 97
Summary 99
Key terms 100
Review questions 100
Problems 100
References 101
CHAPTER 5
Wages, employment and the labour market 103
Learning objectives (LO) 103
Setting the scene 103
5.1 The perfectly competitive model of the labour market 104
5.1.1 Wages and the demand for labour 105
5.1.2 Shifts in the demand for labour 108
5.1.3 The supply of labour 111
5.1.4 Shifts in the supply of labour 112
5.1.5 Equilibrium in the perfectly competitive model of the labour market 112
5.2 Explaining the trends in real wages and employment 114
5.2.1 Large increases in real wages in industrialized countries 114
5.2.2 Real wages growth and employment in Australia 115
5.2.3 Increasing wage inequality: The effects of globalisation and technological change 116
5.3 Unemployment 120
5.3.1 Types of unemployment and their costs 120
5.4 Impediments to full employment 122
5.4.1 Minimum wage laws 122
5.4.2 Labour unions 123
5.4.3 Unemployment benefits 123
5.4.4 Other government regulations 124
Summary 125
Key terms 126
Review questions 127
Problems 127
References 129
PART 2
SHORT-RUN MACROECONOMICS: THE ANALYSIS OF THE BUSINESS CYCLE
CHAPTER 6
Short-term economic fluctuations: An
introduction 135
Learning objectives (LO) 135
Setting the scene 135
6.1 Contractions and expansions 136
6.1.1 Some facts about short-term economic fluctuations 140
6.2 Output gaps and cyclical unemployment 144
6.2.1 Potential output and the output gap 145
6.2.2 The natural rate of unemployment 146
6.2.3 Okun’s law 148
6.3 Why do short-term fluctuations occur? A preview and a parable 149
Summary 153
Key terms 154
Review questions 154
Problems 155
References 155
CHAPTER 7
Spending and output in the short run 157
Learning objectives (LO) 157
Setting the scene 157
7.1 An introduction to the Keynesian model 159
7.2 Aggregate expenditure 161
7.2.1 Planned expenditure versus actual expenditure 161
7.2.2 Consumer spending and the economy 162
7.3 Planned aggregate expenditure and output 164
7.4 Short-run equilibrium output 166
7.5 Consumption and investment in the two-sector model 168
7.6 The 45-degree diagram 170
7.7 Withdrawals and injections 172
7.8 The four-sector model 175
7.9 Planned spending and the output gap 177 Page x
7.10 The multiplier 183
7.11 Stabilising planned spending: The role of fiscal and
monetary policies 185
Summary 186
Key terms 187
Review questions 187
Problems 187
References 188
CHAPTER 8
Fiscal policy 189
Learning objectives (LO) 189
Setting the scene 189
8.1 Government purchases and planned spending 190
8.2 Taxes, transfers and aggregate spending 195
8.3 Fiscal policy as a stabilisation tool: Three qualifications 199
8.3.1 Fiscal policy and the supply side 199
8.3.2 The problem of deficits 199
8.3.3 The relative inflexibility of fiscal policy 201
8.4 Contemporary fiscal policy 202
8.4.1 The distribution of income 202
8.4.2 Managing demographic change 205
8.4.3 Fiscal policy and the public debt 207
Summary 210
Key terms 211
Review questions 211
Problems 212
References 213
CHAPTER 9
Money, prices and the Reserve Bank 215
Learning objectives (LO) 215
Setting the scene 215
9.1 The financial system and the allocation of saving to productive uses 216
9.1.1 The banking system 216
9.1.2 Bonds and stocks 217
9.2 Bond markets, stock markets and the allocation of savings 221
9.2.1 The informational role of bond and stock markets 221
9.3 Money and its uses 224
9.3.1 Measuring money 225
9.4 Commercial banks and the creation of money 226
9.4.1 The money supply with both currency and deposits 229
9.5 Money and prices 230
9.5.1 Velocity 231
9.5.2 Money and inflation in the long run 231
9.6 The Reserve Bank of Australia 233
9.6.1 Influencing interest rates: Open-market operations
233
Summary 237
Key terms 238
Review questions 238
Problems 238
References 239
CHAPTER 10
The Reserve Bank and the economy 241
Learning objectives (LO) 241
Setting the scene 241
10.1 The Reserve Bank, interest rates and monetary policy 242
10.1.1 The implications of a change in monetary policy for the money supply 245
10.2 Can the Reserve Bank control real interest rates? 247
10.3 The effects of the Reserve Bank’s actions on the economy 248
10.3.1 Planned aggregate expenditure and the real interest rate 248
10.3.2 The Reserve Bank fights a recession 253
10.3.3 The Reserve Bank fights inflation 255
10.4 The Reserve Bank’s policy reaction function 260
10.5 Monetary policymaking: Art or science? 263
Summary 263
Key terms 264
Review questions 264
Problems 264
References 265
APPENDIX TO CHAPTER 10
Monetary policy in the basic Keynesian model 266
CHAPTER 11
Aggregate demand, aggregate supply and
inflation 269
Learning objectives (LO) 269
Setting the scene 270
11.1 Inflation, spending and output: aggregate demand curve 270
11.1.1 Inflation, the Reserve Bank and the aggregate demand curve 271
11.1.2 Other reasons for the downward slope of the aggregate demand curve 271
11.1.3 Shifts of the aggregate demand curve 272
11.1.4 Shifts of the aggregate demand curve versus movements along the aggregate demand curve 274
11.2 Inflation and supply decisions 275
11.2.1 Inflation inertia 276
11.2.2 Output gaps and inflation 278
11.3 The aggregate demand–aggregate supply diagram 281
11.4 The self-correcting economy 283
11.5 Sources of inflation 284
11.5.1 Excessive aggregate spending 284
11.5.2 Inflation shocks 285
11.6 Controlling inflation 291
Summary 296
Key terms 297
Review questions 297
Problems 298
APPENDIX TO CHAPTER 11
Algebra of aggregate demand and aggregate supply 300
Aggregate demand curve 300
Shifts of aggregate demand curve 301
Short-run equilibrium 302
Long-run equilibrium 302
References 302
CHAPTER 12
Macroeconomic policy 303
Learning objectives (LO) 303
Setting the scene 303
12.1 What is the role of stabilisation policy? 304
12.1.1 Stabilisation policy and demand shocks 304
12.1.2 Stabilisation policy and inflation shocks 305
12.2 Inflationary expectations and credibility 308
12.2.1 Central bank independence 308
12.2.2 Announcing a numerical inflation target 309
12.2.3 Central bank reputation 311
12.3 Fiscal policy and the supply side 311
12.4 Policymaking: Art or science? 314
Summary 315
Key terms 316
Review questions 316
Problems 316
References 317
PART 3
LONG RUN MACROECONOMICS: THE ANALYSIS OF ECONOMIC GROWTH
CHAPTER 13
The economy in the long run: An
introduction to economic growth 323
Learning objectives (LO) 323
Setting the scene 323
13.1 Introduction to economic growth 324
13.2 Economic growth and potential output 325
13.3 Growth rates and differences in living standards 329
13.3.1 Why ‘small’ differences in growth rates matter 330
13.4 Why nations become rich: The crucial role of average labour productivity 332
13.4.1 The determinants of average labour productivity 333
13.5 The costs of economic growth 342
13.6 Promoting economic growth 343
13.6.1 Policies to increase human capital 343
13.6.2 Policies that promote saving and investment 343
13.6.3 Policies that support research and development 343
13.6.4 The legal and political framework 344
13.6.5 The poorest countries: A special case? 344
13.7 Are there limits to growth? 345
Summary 348
Key terms 348
Review questions 349
Problems 349
References 351
CHAPTER 14
The production function approach to understanding growth 353
Learning objectives (LO) 353
Setting the scene 353
14.1 Economists and economic growth 355
14.2 The production function 355
14.2.1 Capital 358
14.2.2 Labour 360
14.2.3 Bringing labour and capital together: The production function 362
14.3 The Cobb–Douglas production function 366
14.4 Growth accounting 368
14.4.1 Economic growth and the factors of production 368
14.4.2 The sources of economic growth 369
Summary 374
Key terms 375
Review questions 375
Problems 375
References 376
CHAPTER 15
Saving, capital formation and comparative economic growth 377
Learning objectives (LO) 377
Setting the scene 378
15.1 Saving, investment and economic growth 378
15.1.1 Saving, investment and the income accounting identity 378
15.2 The neo-classical (Solow–Swan) model of economic growth 379
15.2.1 A diagrammatic treatment 382
15.2.2 Evidence 386
Summary 395
Key terms 395
Review questions 395
Problems 396
References 397
PART 4
OPEN-ECONOMY MACROECONOMICS
CHAPTER 16
International trade 403
Learning objectives (LO) 403
Setting the scene 403
16.1 Production and consumption possibilities and the benefits of trade 404
16.1.1 The production possibilities curve 404
16.1.2 Consumption possibilities with and without international trade 409
16.1.3 Comparative advantage and international trade 413
16.1.4 Sources of comparative advantage 417
16.2 A supply and demand perspective on trade 418
16.2.1 Winners and losers from trade 420
16.3 Protectionist policies: Tariffs and quotas 421
16.3.1 Tariffs 421
16.3.2 Quotas 423
16.3.3 The inefficiency of protectionism 425
Summary 426
Key terms 427
Review questions 427
Problems 427
References 429
CHAPTER 17
Exchange rates and the open economy 431
Learning objectives (LO) 431
Setting the scene 432
17.1 Nominal exchange rates 432
17.1.1 Flexible versus fixed exchange rates 435
17.2 The real exchange rate 436
17.3 The determination of the exchange rate 439
17.3.1 A simple theory of exchange rates: Purchasing power parity 439
17.3.2 Shortcomings of the PPP theory 441
17.4 The determination of the exchange rate: A supply and demand analysis 442
17.4.1 The supply of dollars 442
17.4.2 The demand for dollars 443
17.4.3 Equilibrium value of the dollar 443
17.4.4 Changes in the supply of dollars 443
17.4.5 Changes in the demand for dollars 445
17.5 Monetary policy and the exchange rate 445
17.5.1 The exchange rate as a tool of monetary policy 447
17.6 Fixed exchange rates 448
17.6.1 How to fix an exchange rate 448
17.6.2 Speculative attacks 451
17.6.3 Monetary policy and fixed exchange rates 453
17.7 Should exchange rates be fixed or flexible? 458
Summary 460
Key terms 461
Review questions 461
Problems 462
References 463
CHAPTER 18
The balance of payments: Net exports and
international capital flows 465
Learning objectives (LO) 465
Setting the scene 465
18.1 The balance of payments 466
18.1.1 The current account 467
18.1.2 The capital account 469
18.2 Capital flows and the relationship between the capital and the current accounts 471
18.2.1 Capital flows and the current account balance 471
18.3 The determinants of international capital flows 474
18.4 Saving, investment and capital inflows 475
18.5 The saving rate and the trade and current account deficits 478
Summary 480
Key terms 480
Review questions 480
Problems 480
References 481
PART 5
CONCLUDING THOUGHTS
CHAPTER 19
Macroeconomics: What have we learnt? 485
Learning objectives (LO) 485
Setting the scene 485
19.1 Lessons from the past 486
19.2 Schools of thought in macroeconomics 488
19.2.1 Keynesian economics 488
19.2.2 Monetarism 489
19.2.3 New classical macroeconomics 490
19.2.4 New Keynesian macroeconomics 490
19.2.5 Growth theory and the real business cycle school 491
19.3 Some concluding thoughts 492
Summary 492
Key terms 493
Review questions 493
Problems 493
References 494
Answers to concept checks 495
Glossary 509
Index 515