Economics, Fourteenth Edition
By Michael Parkin
Detailed Contents:
Part One
Introduction 39
Chapter 1 ◆ What Is Economics? 39
Definition Of Economics 40
Two Big Economic Questions 41
What, How, And For Whom? 41
Do Choices Made In The Pursuit Of Self-Interest
Also Promote The Social Interest? 43
The Economic Way Of Thinking 47
A Choice Is A Tradeoff 47
Making A Rational Choice 47
Benefit: What You Gain 47
Cost: What You Must Give Up 47
How Much? Choosing At The Margin 48
Choices Respond To Incentives 48
Economics As Social Science And Policy Tool 49
Economist As Social Scientist 49
Economist As Policy Adviser 49
Economists In The Economy 50
Jobs For An Economics Major 50
Will Jobs For Economics Majors Grow? 50
Earnings Of Economics Majors 51
Skills Needed For Economics Jobs 51
A Diversity Challenge In The Economics Profession 51
Worked Problem, Summary (Key Points And Key Terms),
Problems And Applications, And Additional Problems And
Applications Appear At The End Of Each Chapter.
Appendix Graphs In Economics 55
Graphing Data 55
Graphing Economic Data 56
Scatter Diagrams 56
Graphs Used In Economic Models 58
Variables That Move In The Same Direction 58
Variables That Move In Opposite Directions 59
Variables That Have A Maximum Or A Minimum 60
Variables That Are Unrelated 61
The Slope Of A Relationship 62
The Slope Of A Straight Line 62
The Slope Of A Curved Line 63
Graphing Relationships Among More Than Two
Variables 64
Ceteris Paribus 64
When Other Things Change 65
Mathematical Note Equations Of Straight Lines 66
■ At Issue, 46
■ Economics In The News, 44
C Hapter 2 ◆ T He Economic P Roblem 7 1
Production Possibilities And Opportunity Cost 72
Production Possibilities Frontier 72
Production Efficiency 73
Tradeoff Along The Ppf 73
Opportunity Cost 73
Using Resources Efficiently 75
The Ppf And Marginal Cost 75
Preferences And Marginal Benefit 76
Allocative Efficiency 77
Gains From Trade 78
Comparative Advantage And Absolute Advantage 78
Achieving The Gains From Trade 80
The Liz–Joe Economy And Its Ppf 82
Economic Growth 83
The Cost Of Economic Growth 83
A Nation’s Economic Growth 84
Changes In What We Produce 84
Economic Coordination 86
Firms 86
Markets 86
Property Rights 86
Money 86
Circular Flows Through Markets 86
Coordinating Decisions 87
■ Economics In Action, 84
■ Economics In The News, 74, 88
Part One Wrap- Understanding The Scope Of Economics
Your Economic Revolution 95
Talking With Esther Duflo 96
Part Two
How Markets Work 97
Chapter 3 ◆ Demand And Supply 97
Markets And Prices 98
Demand 99
The Law Of Demand 99
Demand Curve And Demand Schedule 99
A Change In Demand 100
A Change In The Quantity Demanded Versus A
Change In Demand 102
Supply 104
The Law Of Supply 104
Supply Curve And Supply Schedule 104
A Change In Supply 105
A Change In The Quantity Supplied Versus A
Change In Supply 106
Market Equilibrium 108
Price As A Regulator 108
Price Adjustments 109
Predicting Changes In Price And Quantity 110
An Increase In Demand 110
A Decrease In Demand 110
An Increase In Supply 112
A Decrease In Supply 112
Changes In Both Demand And Supply 114
Mathematical Note
Demand, Supply, And Equilibrium 118
Up ◆ ■ Economics In The News, 111, 113, 116
Chapter 4 ◆ Elasticity 125
Price Elasticity Of Demand 126
Calculating Price Elasticity Of Demand 126
Inelastic And Elastic Demand 127
The Factors That Influence The Elasticity
Of Demand 128
Elasticity Along A Linear Demand Curve 129
Total Revenue And Elasticity 130
Your Expenditure And Your Elasticity 132
More Elasticities Of Demand 133
Income Elasticity Of Demand 133
Cross Elasticity Of Demand 134
Elasticity Of Supply 136
Calculating The Elasticity Of Supply 136
The Factors That Influence The Elasticity Of
Supply 137
■ Economics In Action, 131, 133, 134
■ Economics In The News, 132, 135, 140
Chapter 5 ◆ Efficiency And Equity 147
Resource Allocation Methods 148
Market Price 148
Command 148
Majority Rule 148
Contest 148
First-Come, First-Served 148
Lottery 149
Personal Characteristics 149
Force 149
Benefit, Cost, And Surplus 150
Demand, Willingness To Pay, And Value 150
Individual Demand And Market Demand 150
Consumer Surplus 151
Supply And Marginal Cost 151
Supply, Cost, And Minimum Supply-Price 152
Individual Supply And Market Supply 152
Producer Surplus 153
Is The Competitive Market Efficient? 154
Efficiency Of Competitive Equilibrium 154
Market Failure 156
Sources Of Market Failure 156
Alternatives To The Market 157
Is The Competitive Market Fair? 158
It’s Not Fair If The Result Isn’t Fair 158
It’s Not Fair If The Rules Aren’t Fair 160
Case Study: A Generator Shortage In A Natural
Disaster 160
■ Economics In Action, 155
■ At Issue, 161
■ Economics In The News, 162
Chapter 6 ◆ Government Actions In Markets 169
A Housing Market With A Rent Ceiling 170
A Housing Shortage 170
Increased Search Activity 170
An Illicit Market 170
Inefficiency Of A Rent Ceiling 171
Are Rent Ceilings Fair? 172
A Labor Market With A Minimum Wage 173
Minimum Wage Brings Unemployment 173
Is The Minimum Wage Fair? 173
Inefficiency Of A Minimum Wage 174
Taxes 175
Tax Incidence 175
Equivalence Of A Tax On Buyers And Sellers 176
Taxes And Efficiency 177
Tax Influence Of The Elasticity Of Demand 178
Tax Influence Of The Elasticity Of Supply 179
Taxes And Fairness 180
The Big Tradeoff 180
Production Quotas And Subsidies 181
Production Quotas 181
Subsidies 182
Markets For Illegal Goods 184
A Free Market For A Drug 184
A Market For An Illegal Drug 184
Legalizing And Taxing Drugs 185
■ Economics In Action, 172, 180, 183
■ At Issue, 174
■ Economics In The News, 186
Chapter 7 ◆ Global Markets In Action 193
How Global Markets Work 194
International Trade Today 194
What Drives International Trade? 194
Why The United States Imports T-Shirts 195
Why The United States Exports Airplanes 196
Winners, Losers, And The Net Gain
From Trade 197
Gains And Losses From Imports 197
Gains And Losses From Exports 198
Gains For All 198
International Trade Restrictions 199
Tariffs 199
Import Quotas 202
Other Import Barriers 205
Export Subsidies 205
The Case Against Protection 206
Helps An Infant Industry Grow 206
Counteracts Dumping 206
Saves Domestic Jobs 206
Allows Us To Compete With Cheap Foreign Labor 206
Penalizes Lax Environmental Standards 207
Prevents Rich Countries From Exploiting Developing Countries 207
Reduces Offshore Outsourcing That Sends Good
U.S. Jobs To Other Countries 207
Avoiding Trade Wars 208
Why Is International Trade Restricted? 208
Compensating Losers 209
■ Economics In Action, 194, 200, 205
■ At Issue, 208
■ Economics In The News, 204, 210
Part Two Wrap-Up ◆
Understanding How Markets Work
The Amazing Market 217
Talking With Susan Athey 218
Part Three
Households’ Choices 219
Chapter 8 ◆ Utility And Demand 219
Consumption Choices 220
Consumption Possibilities 220
Preferences 221
Utility-Maximizing Choice 223
A Spreadsheet Solution 223
Choosing At The Margin 224
The Power Of Marginal Analysis 226
Revealing Preferences 226
Predictions Of Marginal Utility Theory 227
A Fall In The Price Of A Movie 227
A Rise In The Price Of Soda 229
A Rise In Income 230
The Paradox Of Value 231
Temperature: An Analogy 232
New Ways Of Explaining Consumer Choices 234
Behavioral Economics 234
Neuroeconomics 235
Controversy 235
■ Economics In Action, 232
■ Economics In The News, 236
Chapter 9 ◆ Possibilities, Preferences, And Choices 243
Consumption Possibilities 244
Budget Line 244
Budget Equation 245
Preferences And Indifference Curves 247
Marginal Rate Of Substitution 248
Degree Of Substitutability 249
Predicting Consumer Choices 250
Best Affordable Choice 250
A Change In Price 251
A Change In Income 253
Substitution Effect And Income Effect 254
■ Economics In Action, 252
■ Economics In The News, 256
Part Three Wrap-Up ◆
Understanding Households’ Choices
Making The Most Of Life 263
Talking With
Steven D. Levitt 264
Part Four
Firms And Markets 265
Chapter 10 ◆ Organizing Production 265
The Firm And Its Economic Problem 266
The Firm’s Goal 266
Accounting Profit 266
Economic Accounting 266
A Firm’s Opportunity Cost Of Production 266
Economic Accounting: A Summary 267
The Firm’s Decisions 267
The Firm’s Constraints 268
Technological And Economic Efficiency 269
Economic Efficiency 269
Information And Organization 271
Command Systems 271
Incentive Systems 271
The Principal–Agent Problem 271
Coping With The Principal–Agent Problem 271
Types Of Business Organization 272
Pros And Cons Of Different Types Of Firms 273
Markets And The Competitive Environment 275
Measures Of Concentration 276
Limitations Of A Concentration Measure 278
Produce Or Outsource? Firms And Markets 280
Firm Coordination 280
Market Coordination 280
Why Firms? 280
■ Economics In Action, 274, 277, 279, 281
■ Economics In The News, 272, 282
Chapter 11 ◆ Output And Costs 289
Decision Time Frames 290
The Short Run 290
The Long Run 290
Short-Run Technology Constraint 291
Product Schedules 291
Product Curves 291
Total Product Curve 292
Marginal Product Curve 292
Average Product Curve 294
Short-Run Cost 295
Total Cost 295
Marginal Cost 296
Average Cost 296
Marginal Cost And Average Cost 296
Why The Average Total Cost Curve Is U-Shaped 296
Cost Curves And Product Curves 298
Shifts In The Cost Curves 300
Long-Run Cost 302
The Production Function 302
Short-Run Cost And Long-Run Cost 302
The Long-Run Average Cost Curve 304
Economies And Diseconomies Of Scale 304
■ Economics In Action, 294, 305
■ Economics In The News, 298, 306
Chapter 12 ◆ Perfect Competition 313
What Is Perfect Competition? 314
How Perfect Competition Arises 314
Price Takers 314
Economic Profit And Revenue 314
The Firm’s Decisions 315
The Firm’s Output Decision 316
Marginal Analysis And The Supply Decision 317
Temporary Shutdown Decision 318
The Firm’s Supply Curve 319
Output, Price, And Profit In The Short Run 320
Market Supply In The Short Run 320
Short-Run Equilibrium 321
A Change In Demand 321
Profits And Losses In The Short Run 321
Three Possible Short-Run Outcomes 322
Output, Price, And Profit In The Long Run 323
Entry And Exit 323
A Closer Look At Entry 324
A Closer Look At Exit 324
Long-Run Equilibrium 325
Changes In Demand And Supply As Technology Advances 326
A Decrease In Demand 326
An Increase In Demand 327
Technological Advances Change Supply 328
Competition And Efficiency 330
Efficient Use Of Resources 330
Choices, Equilibrium, And Efficiency 330
■ Economics In Action, 323, 325
■ Economics In The News, 327, 329, 332
Chapter 13 ◆ Monopoly 339
Monopoly And How It Arises 340
How Monopoly Arises 340
Monopoly Price-Setting Strategies 341
A Single-Price Monopoly’s Output And Price Decision 342
Price And Marginal Revenue 342
Marginal Revenue And Elasticity 343
Price And Output Decision 344
Single-Price Monopoly And Competition Compared 346
Comparing Price And Output 346
Efficiency Comparison 347
Redistribution Of Surpluses 348
Rent Seeking 348
Rent-Seeking Equilibrium 348
Price Discrimination 349
Two Ways Of Price Discriminating 349
Increasing Profit And Producer Surplus 350
A Price-Discriminating Airline 350
Efficiency And Rent Seeking With Price
Discrimination 353
Monopoly Regulation 355
Efficient Regulation Of A Natural Monopoly 355
Second-Best Regulation Of A Natural
Monopoly 356
■ Economics In Action, 341, 353
■ Economics In The News, 354, 358
Chapter 14 ◆ Monopolistic Competition 365
What Is Monopolistic Competition? 366
Large Number Of Firms 366
Product Differentiation 366
Competing On Quality, Price, And Marketing 366
Entry And Exit 367
Examples Of Monopolistic Competition 367
Price And Output In Monopolistic Competition 368
The Firm’s Short-Run Output And Price Decision 368
Profit Maximizing Might Be Loss Minimizing 368
Long Run: Zero Economic Profit 369
Monopolistic Competition And Perfect Competition 370
Is Monopolistic Competition Efficient? 371
Product Development And Marketing 372
Product Development 372
Advertising 372
Using Advertising To Signal Quality 374
Brand Names 375
Efficiency Of Advertising And Brand Names 375
■ Economics In Action, 367, 373
■ Economics In The News, 376
Chapter 15 ◆ Oligopoly 383
What Is Oligopoly? 384
Barriers To Entry 384
Small Number Of Firms 385
Examples Of Oligopoly 385
Oligopoly Games 386
What Is A Game? 386
The Prisoners’ Dilemma 386
An Oligopoly Price-Fixing Game 388
A Game Of Chicken 393
Repeated Games And Sequential Games 394
A Repeated Duopoly Game 394
A Sequential Entry Game In A Contestable Market 396
Antitrust Law 398
The Antitrust Laws 398
Price Fixing Always Illegal 399
Three Antitrust Policy Debates 399
Mergers And Acquisitions 401
■ Economics In Action, 385, 392, 400, 401
■ Economics In The News, 395, 402
Part Four Wrap-Up ◆
Understanding Firms And Markets
Managing Change And Limiting Market Power 409
Talking With Thomas Hubbard 410
Part Five
Market Failure And Government 411
Chapter 16 ◆ Public Choices,
Public Goods, And Healthcare 411
Public Choices 412
Why Governments? 412
Public Choice And The Political Marketplace 412
Political Equilibrium 413
What Is A Public Good? 414
A Fourfold Classification 414
The Things Our Governments Buy 414
Providing Public Goods 416
The Free-Rider Problem 416
Marginal Social Benefit Of A Public Good 416
Marginal Social Cost Of A Public Good 417
Efficient Quantity Of A Public Good 417
Inefficient Private Provision 417
Efficient Public Provision 417
Inefficient Public Overprovision 419
The Economics Of Healthcare 420
Healthcare Market Failure 420
Alternative Public Choice Solutions 421
Better Solutions? 425
■ Economics In Action, 412, 415, 418, 421, 423
■ At Issue, 424
■ Economics In The News, 426
Chapter 17 ◆ Externalities 433
Externalities In Our Lives 434
Negative Production Externalities 434
Positive Production Externalities 434
Negative Consumption Externalities 434
Positive Consumption Externalities 434
Negative Externality: Pollution 436
Private, External, And Social Cost 436
Establish Property Rights 437
Mandate Clean Technology 438
Tax Or Cap And Price Pollution 439
Coping With Global Externalities 442
Negative Externality: The Tragedy Of The
Commons 443
Unsustainable Use Of A Common Resource 443
Inefficient Use Of A Common Resource 444
Achieving An Efficient Outcome 446
Positive Externality: Knowledge 448
Private Benefits And Social Benefits 448
Government Actions In The Market With External
Benefits 449
Illustrating An Efficient Outcome 449
Bureaucratic Inefficiency And Government
Failure 450
■ Economics In Action, 435, 440, 442, 445, 447 , 451
■ At Issue, 441
■ Economics In The News, 452
Part Five Wrap-Up ◆
Understanding Market Failure And Government We, The People, … 459
Talking With Caroline M. Hoxby 460
Part Six
Factor Markets, Inequality,
And Uncertainty 461
Chapter 18 ◆ Markets For Factors Of
Production 461
The Anatomy Of Factor Markets 462
Markets For Labor Services 462
Markets For Capital Services 462
Markets For Land Services And Natural Resources 462
Entrepreneurship 462
The Demand For A Factor Of Production 463
Value Of Marginal Product 463
A Firm’s Demand For Labor 463
A Firm’s Demand For Labor Curve 464
Changes In A Firm’s Demand For Labor 465
Labor Markets 466
A Competitive Labor Market 466
Differences And Trends In Wage Rates 468
A Labor Market With A Union 469
Capital And Natural Resource Markets 473
Capital Rental Markets 473
Land Rental Markets 473
Nonrenewable Natural Resource Markets 475
Mathematical Note
Present Value And Discounting 480
■ Economics In Action, 468, 477
■ At Issue, 471
■ Economics In The News, 474, 478
Chapter 19 ◆ Economic Inequality 487
Economic Inequality In The United States 488
The Distribution Of Income 488
The Income Lorenz Curve 489
The Distribution Of Wealth 490
Wealth Or Income? 490
Annual Or Lifetime Income And Wealth? 491
Trends In Inequality 491
Poverty 493
Inequality In The World Economy 495
Income Distributions In Selected Countries 495
Global Inequality And Its Trends 496
The Sources Of Economic Inequality 497
Human Capital 497
Discrimination 498
Contests Among Superstars 499
Unequal Wealth 500
Income Redistribution 501
Income Taxes 501
Income Maintenance Programs 501
Subsidized Services 501
The Big Tradeoff 502
■ Economics In Action, 492, 494, 502
■ Economics In The News, 504
Chapter 20 ◆ Uncertainty And
Information 511
Decisions In The Face Of Uncertainty 512
Expected Wealth 512
Risk Aversion 512
Utility Of Wealth 512
Expected Utility 513
Making A Choice With Uncertainty 514
Buying And Selling Risk 515
Insurance Markets 515
A Graphical Analysis Of Insurance 516
Risk That Can’t Be Insured 517
Private Information 518
Asymmetric Information: Examples And
Problems 518
The Market For Used Cars 518
The Market For Loans 521
The Market For Insurance 522
Uncertainty, Information, And The Invisible Hand 523
Information As A Good 523
Monopoly In Markets That Cope With Uncertainty 523
■ Economics In Action, 517, 522
■ Economics In The News, 524
Part Six Wrap-Up ◆
Understanding Factor Markets, Inequality,
And Uncertainty
For Whom? 531
Talking With
Raj Chetty 532
Part Seven
Monitoring Macroeconomic
Performance 533
Chapter 21 ◆ Measuring The Value Of
Production: Gdp 533
Gross Domestic Product 534
Gdp Defined 534
Gdp And The Circular Flow Of Expenditure And Income 534
Why “Domestic” And Why “Gross”? 536
Measuring U.S. Gdp 537
The Expenditure Approach 537
The Income Approach 538
Nominal Gdp And Real Gdp 539
Calculating Real Gdp 539
The Uses And Limitations Of Gdp 540
The Standard Of Living Over Time 540
The Standard Of Living Across Countries 542
Limitations Of Gdp 543
Appendix Graphs In Macroeconomics 548
The Time-Series Graph 548
Making A Time-Series Graph 548
Reading A Time-Series Graph 548
Ratio Scale Reveals Trend 549
A Time-Series With A Trend 549
Using A Ratio Scale 549
Mathematical Note
Chained-Dollar Real Gdp 550
■ Economics In Action, 545
■ At Issue, 544
■ Economics In The News, 546
Chapter 22 ◆ Monitoring Jobs And Inflation 557
Employment And Unemployment 558
Why Unemployment Is A Problem 558
Current Population Survey 559
Three Labor Market Indicators 559
Other Definitions Of Unemployment 561
Most Costly Unemployment 562
Alternative Measures Of Unemployment 562
Unemployment And Full Employment 563
Frictional Unemployment 563
Structural Unemployment 563
Cyclical Unemployment 563
“Natural” Unemployment 563
Real Gdp And Unemployment Over The Cycle 564
The Price Level, Inflation, And Deflation 566
Why Inflation And Deflation Are Problems 566
The Consumer Price Index 567
Reading The Cpi Numbers 567
Constructing The Cpi 567
Measuring The Inflation Rate 568
Distinguishing High Inflation From A High
Price Level 569
The Biased Cpi 569
Consequences And Magnitude Of Bias 570
Alternative Price Indexes 570
Core Inflation 571
■ Economics In Action, 558, 565, 570
■ Economics In The News, 572
Part Seven Wrap-Up ◆
Monitoring Macroeconomic Performance The Big Picture 579
Talking With
Dave Donaldson 580
Part Eight
Macroeconomic Trends 581
Chapter 23 ◆ Economic Growth 581
The Basics Of Economic Growth 582
Calculating Growth Rates 582
Economic Growth Versus Business Cycle Expansion 582
The Magic Of Sustained Growth 583
Applying The Rule Of 70 584
Long-Term Growth Trends 585
Long-Term Growth In The U.S. Economy 585
Real Gdp Growth In The World Economy 586
How Potential Gdp Grows 588
What Determines Potential Gdp? 588
What Makes Potential Gdp Grow? 590
Why Labor Productivity Grows 593
Preconditions For Labor Productivity Growth 593
Physical Capital Growth 593
Human Capital Growth 594
Technological Advances 594
Is Economic Growth Sustainable? Theories,
Evidence, And Policies 597
Classical Growth Theory 597
Neoclassical Growth Theory 597
New Growth Theory 598
New Growth Theory Versus Malthusian Theory 600
Sorting Out The Theories 600
The Empirical Evidence On The Causes Of Economic Growth 600
Policies For Achieving Faster Growth 600
■ Economics In Action, 587, 594, 595
■ Economics In The News, 596, 602
Part Eight
Macroeconomic Trends 581
Chapter 23 ◆ Economic Growth 581
The Basics Of Economic Growth 582
Calculating Growth Rates 582
Economic Growth Versus Business Cycle
Expansion 582
The Magic Of Sustained Growth 583
Applying The Rule Of 70 584
Long-Term Growth Trends 585
Long-Term Growth In The U.S. Economy 585
Real Gdp Growth In The World Economy 586
How Potential Gdp Grows 588
What Determines Potential Gdp? 588
What Makes Potential Gdp Grow? 590
Why Labor Productivity Grows 593
Preconditions For Labor Productivity
Growth 593
Physical Capital Growth 593
Human Capital Growth 594
Technological Advances 594
Is Economic Growth Sustainable? Theories,
Evidence, And Policies 597
Classical Growth Theory 597
Neoclassical Growth Theory 597
New Growth Theory 598
New Growth Theory Versus Malthusian
Theory 600
Sorting Out The Theories 600
The Empirical Evidence On The Causes Of
Economic Growth 600
Policies For Achieving Faster Growth 600
■ Economics In Action, 587, 594, 595
■ Economics In The News, 596, 602
Chapter 24 ◆ Finance, Saving, And
Investment 609
Financial Markets And Financial
Institutions 610
Finance And Money 610
Capital And Financial Capital 610
Capital And Investment 610
Wealth And Saving 610
Financial Capital Markets 611
Financial Institutions 612
Funds That Finance Investment 614
Financial Decisions And Risks 616
The Time Value Of Money 616
Net Present Value 616
The Decision Rule 616
Financial Risk: Insolvency And Illiquidity 616
Market Risk: Interest Rates And Asset Prices 617
Getting Real 617
The Loanable Funds Market 618
The Demand For Loanable Funds 618
The Supply Of Loanable Funds 618
Equilibrium In The Loanable Funds Market 619
Changes In Demand And Supply 620
Government In The Loanable Funds
Market 622
A Government Budget Surplus 622
A Government Budget Deficit 622
■ Economics In Action, 612, 613, 615, 620
■ Economics In The News, 624
Chapter 25 ◆ Money, The Price Level,
And Inflation 631
What Is Money? 632
Medium Of Exchange 632
Unit Of Account 632
Store Of Value 633
Money In The United States Today 633
Depository Institutions 635
Types Of Depository Institutions 635
What Depository Institutions Do 635
Economic Benefits Provided By Depository
Institutions 636
How Depository Institutions Are Regulated 636
Financial Technology 638
The Federal Reserve System 639
The Structure Of The Fed 639
The Fed’s Balance Sheet 640
The Fed’s Policy Tools 640
How Banks Create Money 642
Creating Deposits By Making Loans 642
The Money Creation Process 643
The Money Multiplier 644
The Money Market 646
The Demand For Money 646
Changes In The Demand For Money 646
The Supply Of Money 647
Money Market Equilibrium 648
The Quantity Theory Of Money 650
Mathematical Note
The Money Multiplier 654
■ Economics In Action, 633, 638, 641, 644, 650
■ At Issue, 637
■ Economics In The News, 645, 652
Chapter 26 ◆ The Exchange Rate
And The Balance
Of Payments 661
The Foreign Exchange Market 662
Trading Currencies 662
Exchange Rates 662
Questions About The U.S. Dollar Exchange
Rate 662
An Exchange Rate Is A Price 662
The Demand For One Money Is The Supply
Of Another Money 663
Demand In The Foreign Exchange Market 663
Demand Curve For U.S. Dollars 664
Supply In The Foreign Exchange Market 665
Supply Curve For U.S. Dollars 665
Market Equilibrium 666
Changes In The Demand For U.S. Dollars 666
Changes In The Supply Of U.S. Dollars 667
Changes In The Exchange Rate 668
Arbitrage, Speculation, And Market
Fundamentals 670
Arbitrage 670
Speculation 671
Market Fundamentals 672
Exchange Rate Policy 673
Flexible Exchange Rate 673
Fixed Exchange Rate 673
Crawling Peg 674
Financing International Trade 676
Balance Of Payments Accounts 676
Borrowers And Lenders 678
The Global Loanable Funds Market 678
Debtors And Creditors 679
Is U.S. Borrowing For Consumption? 679
Current Account Balance 680
Net Exports 680
Where Is The Exchange Rate? 681
■ Economics In Action, 663, 669, 671, 674,
677, 681
■ Economics In The News, 682
Part Eight Wrap-Up ◆
Understanding Macroeconomic Trends
Expanding The Frontier 689
Talking With
Xavier Sala-I-Martin 690
Part Nine
Macroeconomic Fluctuations 691
Chapter 27 ◆ Aggregate Supply And
Aggregate Demand 691
Aggregate Supply 692
Quantity Supplied And Supply 692
Long-Run Aggregate Supply 692
Short-Run Aggregate Supply 693
Changes In Aggregate Supply 694
Aggregate Demand 696
The Aggregate Demand Curve 696
Changes In Aggregate Demand 697
Explaining Macroeconomic Trends And
Fluctuations 700
Short-Run Macroeconomic Equilibrium 700
Long-Run Macroeconomic Equilibrium 700
Economic Growth And Inflation In The As-Ad
Model 701
The Business Cycle In The As-Ad Model 702
Fluctuations In Aggregate Demand 704
Fluctuations In Aggregate Supply 705
Macroeconomic Schools Of Thought 706
The Classical View 706
The Keynesian View 706
The Monetarist View 707
The Way Ahead 707
■ Economics In Action, 698, 701, 702
■ Economics In The News, 708
Chapter 28 ◆ Expenditure
Multipliers 715
Fixed Prices And Expenditure Plans 716
Expenditure Plans 716
Consumption And Saving Plans 716
Marginal Propensities To Consume And Save 718
Slopes And Marginal Propensities 718
Consumption As A Function Of Real Gdp 719
Import Function 719
Real Gdp With A Fixed Price Level 720
Aggregate Planned Expenditure 720
Actual Expenditure, Planned Expenditure, And
Real Gdp 721
Equilibrium Expenditure 722
Convergence To Equilibrium 723
The Multiplier 724
The Basic Idea Of The Multiplier 724
The Multiplier Effect 724
Why Is The Multiplier Greater Than 1? 725
The Size Of The Multiplier 725
The Multiplier And The Slope Of The Ae
Curve 726
Imports And Income Taxes 727
The Multiplier Process 727
Business Cycle Turning Points 728
The Multiplier And The Price Level 729
Adjusting Quantities And Prices 729
Aggregate Expenditure And Aggregate
Demand 729
Deriving The Aggregate Demand Curve 729
Changes In Aggregate Expenditure And Aggregate
Demand 730
Equilibrium Real Gdp And The Price Level 731
Mathematical Note
The Algebra Of The Keynesian Model 736
■ Economics In Action, 719, 728
■ Economics In The News, 734
Chapter 29 ◆ The Business Cycle,
Inflation, And
Deflation 745
The Business Cycle 746
Mainstream Business Cycle Theory 746
Real Business Cycle Theory 747
Inflation Cycles 751
Demand-Pull Inflation 751
Cost-Push Inflation 753
Expected Inflation 755
Forecasting Inflation 756
Inflation And The Business Cycle 756
Deflation 757
What Causes Deflation? 757
What Are The Consequences Of Deflation? 759
How Can Deflation Be Ended? 759
The Phillips Curve 760
The Short-Run Phillips Curve 760
The Long-Run Phillips Curve 760
■ Economics In Action, 748, 758, 761
■ Economics In The News, 762
Part Nine Wrap-Up ◆
Understanding Macroeconomic Fluctuations
Boom And Bust 769
Talking With
Emi Nakamura 770
Part Ten
Macroeconomic Policy 771
Chapter 30 ◆ Fiscal Policy 771
The Federal Budget 772
The Institutions And Laws 772
Highlights Of The 2022 Budget 773
The Budget In Historical Perspective 774
Budget Balance And Debt 776
State And Local Budgets 777
Supply-Side Effects Of Fiscal Policy 778
Full Employment And Potential Gdp 778
The Effects Of The Income Tax 778
Taxes On Expenditure And The Tax Wedge 779
Taxes And The Incentive To Save And Invest 780
Tax Revenues And The Laffer Curve 781
The Supply-Side Debate 781
Generational Effects Of Fiscal Policy 782
Generational Accounting And Present Value 782
The Social Security Time Bomb 782
Generational Imbalance 783
International Debt 783
Fiscal Stimulus 784
Automatic Fiscal Policy And Cyclical And
Structural Budget Balances 784
Discretionary Fiscal Stimulus 787
■ Economics In Action, 777, 779, 786, 788
■ Economics In The News, 790
Chapter 31 ◆ Monetary Policy 797
Monetary Policy Objectives And Framework 798
Monetary Policy Objectives 798
Operational “Stable Prices” Goal 799
Operational “Maximum Employment” Goal 799
Responsibility For Monetary Policy 800
The Conduct Of Monetary Policy 800
The Monetary Policy Instruments 800
Monetary Policy Decisions 801
Hitting The Federal Funds Rate Target 803
Monetary Policy Transmission 805
Quick Overview 805
Changes In Interest Rates 806
Changes In Money And Loans 806
Changes In Real Gdp, Unemployment,
And Inflation 807
The Change In Aggregate Demand, Real Gdp,
And The Price Level 807
The Fed Fights Recession 808
The Fed Fights Inflation 810
Loose Links And Long And Variable Lags 811
Policy Strategies And Clarity 812
Financial Crisis: Cure And Prevention 814
The Anatomy Of The Financial Crisis 814
The Fed’s Policy Actions In Crisis 814
Congress’s Policy Actions In Crisis 814
Macroprudential Regulation 815
■ Economics In Action, 812
■ At Issue, 804
■ Economics In The News, 816
Part Ten Wrap-Up ◆
Understanding Macroeconomic Policy
Tradeoffs And Free Lunches 823
Talking With
Stephanie Schmitt-Grohé 824
Glossary G-1
Index I-1
Credits C-1
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