Economics, Seventh Edition
By R. Glenn Hubbard and Anthony Patrick O’Brien
Contents:
Preface P-1
A Word of Thanks P-28
PART 1 Introduction
CHAPTER 1: Economics: Foundations and Models 2
Why Does Ford Assemble Cars in Both the United States and Mexico? 2
1.1 Three Key Economic Ideas 4
People Are Rational 5
People Respond to Economic Incentives 5
Apply the Concept: Does Health Insurance
Give People an Incentive to Become Obese? 5
Optimal Decisions Are Made at the Margin 7
Solved Problem 1.1: The Marginal Benefit and Marginal Cost of Speed Limits 7
1.2 The Economic Problem That Every Society Must Solve 8
What Goods and Services Will Be Produced? 9
How Will the Goods and Services Be Produced? 9
Who Will Receive the Goods and Services Produced? 9
Centrally Planned Economies versus Market Economies 10
The Modern “Mixed” Economy 10
Efficiency and Equity 11
1.3 Economic Models 12
The Role of Assumptions in Economic Models 12
Forming and Testing Hypotheses in Economic Models 13
Positive and Normative Analysis 14
Don’t Let This Happen to You: Don’t Confuse Positive Analysis with Normative Analysis 14
Economics as a Social Science 15
Apply the Concept: What Can Economics Contribute to the Debate over Tariffs? 15
1.4 Microeconomics and Macroeconomics 16
1.5 Economic Skills and Economics as a Career 16
1.6 A Preview of Important Economic Terms 17
Conclusion 19
An Inside Look: Is Manufacturing Returning to the United States? 20
*Chapter Summary and Problems 22
Key Terms, Summary, Review Questions, Problems and Applications, and Critical Thinking Exercises
Appendix: Using Graphs and Formulas 28
Graphs of One Variable 29
Graphs of Two Variables 30
Slopes of Lines 31
Taking into Account More Than Two Variables on a Graph 32
Positive and Negative Relationships 32
Determining Cause and Effect 34
Are Graphs of Economic Relationships Always Straight Lines? 35
Slopes of Nonlinear Curves 35
Formulas 36
Formula for a Percentage Change 37
Formulas for the Areas of a Rectangle and a Triangle 37
Summary of Using Formulas 38
Problems and Applications 38
CHAPTER 2: Trade-offs, Comparative Advantage, and the Market System 40
Managers at Tesla Motors Face Trade-offs 40
2.1 Production Possibilities Frontiers and Opportunity Costs 42
Graphing the Production Possibilities Frontier 42
Solved Problem 2.1: Drawing a Production Possibilities Frontier for Tesla Motors 44
Increasing Marginal Opportunity Costs 46
Economic Growth 47
2.2 Comparative Advantage and Trade 48
Specialization and Gains from Trade 48
Absolute Advantage versus Comparative Advantage 50
Comparative Advantage and the Gains from Trade 51
Don’t Let This Happen to You: Don’t Confuse Absolute Advantage and Comparative Advantage 51
Solved Problem 2.2: Comparative Advantage and the Gains from Trade 52
Apply the Concept: Comparative Advantage, Opportunity Cost, and Housework 53
2.3 The Market System 54
The Circular Flow of Income 55
The Gains from Free Markets 56 The Market Mechanism 56
Apply the Concept: A Story of the Market System in Action: How Do You Make an iPad? 57
The Role of the Entrepreneur in the Market System 59
The Legal Basis of a Successful Market System 59
Apply the Concept: Managers at Feeding America Use the Market Mechanism to Reduce Hunger 62
Conclusion 63
An Inside Look: Tesla Bets Big on Nevada Battery
Plant 64
Chapter Summary and Problems 66
CHAPTER 3: Where Prices Come From: The Interaction of Demand and Supply 72
How Smart Is Your Water? 72
3.1 The Demand Side of the Market 74
Demand Schedules and Demand Curves 74
The Law of Demand 75
What Explains the Law of Demand? 75
Holding Everything Else Constant: The Ceteris Paribus Condition 76
Variables That Shift Market Demand 76
Apply the Concept: Virtual Reality Headsets: Will a Substitute Fail for a Lack of Complements? 77
Apply the Concept: Millennials Shake Up the Markets for Soda, Groceries, Big Macs, and Running Shoes 78
A Change in Demand versus a Change in Quantity Demanded 81
Apply the Concept: Forecasting the Demand for Premium Bottled Water 81
3.2 The Supply Side of the Market 82
Supply Schedules and Supply Curves 83
The Law of Supply 83
Variables That Shift Market Supply 83
A Change in Supply versus a Change in Quantity Supplied 86
3.3 Market Equilibrium: Putting Demand and Supply Together 86
How Markets Eliminate Surpluses and Shortages 87
Demand and Supply Both Count 88
Solved Problem 3.3: Demand and Supply Both Count: A Tale of Two Letters 88
3.4 The Effect of Demand and Supply Shifts on Equilibrium 90
The Effect of Shifts in Demand on Equilibrium 90
The Effect of Shifts in Supply on Equilibrium 90
The Effect of Shifts in Demand and Supply over Time 90
Apply the Concept: Lower Demand for Orange Juice—But Higher Prices? 92
Solved Problem 3.4: Can We Predict Changes in the Price and Quantity of Organic Corn? 94
Shifts in a Curve versus Movements along a Curve 95
Don’t Let This Happen to You: Remember: A Change in a Good’s Price Does Not Cause the Demand or Supply Curve to Shift 96
Conclusion 97
An Inside Look: McDonald’s Looks for New Ways to Attract Customers 98
Chapter Summary and Problems 100
CHAPTER 4: Economic Efficiency, Government Price Setting, and Taxes 108
What Do Food Riots in Venezuela and the Rise of Uber in the United States Have in Common? 108
4.1 Consumer Surplus and Producer Surplus 110
Consumer Surplus 110
Apply the Concept: The Consumer Surplus from Uber 112
Producer Surplus 114
What Consumer Surplus and Producer Surplus Measure 115
4.2 The Efficiency of Competitive Markets 115
Marginal Benefit Equals Marginal Cost in Competitive Equilibrium 115
Economic Surplus 116
Deadweight Loss 117
Economic Surplus and Economic Efficiency 117
4.3 Government Intervention in the Market: Price Floors and Price Ceilings 118
Price Floors: Government Policy in Agricultural Markets 118
Apply the Concept: Price Floors in Labor Markets: The Debate over Minimum Wage Policy 119
Price Ceilings: Government Rent Control Policy in Housing Markets 121
Don’t Let This Happen to You: Don’t Confuse “Scarcity” with “Shortage” 122
Black Markets and Peer-to-Peer Sites 122
Solved Problem 4.3: What’s the Economic Effect of a Black Market in Renting Apartments? 123
The Results of Government Price Controls: Winners, Losers, and Inefficiency 124
Apply the Concept: Price Controls Lead to Economic Decline in Venezuela 124
Positive and Normative Analysis of Price Ceilings and Price Floors 126
4.4 The Economic Effect of Taxes 126
The Effect of Taxes on Economic Efficiency 126
Tax Incidence: Who Actually Pays a Tax? 127
Solved Problem 4.4: When Do Consumers
Pay All of a Sales Tax Increase? 128
Apply the Concept: Is the Burden of the Social
Security Tax Really Shared Equally between
Workers and Firms? 130
Conclusion 131
An Inside Look: Will Uber Be Required to Pay
British VAT? 132
Chapter Summary and Problems 134
Appendix: Quantitative Demand and Supply
Analysis 141
Demand and Supply Equations 141
Calculating Consumer Surplus and
Producer Surplus 142
Review Questions 144
Problems and Applications 144
PART 2 Markets in Action: Policy and
Applications
CHAPTER 5: Externalities, Environmental Policy,
and Public Goods 146
Why Does ExxonMobil Want to Pay a
Carbon Tax? 146
5.1 Externalities and Economic Efficiency 148
The Effect of Externalities 148
Externalities and Market Failure 150
What Causes Externalities? 151
5.2 Private Solutions to Externalities:
The Coase Theorem 151
The Economically Efficient Level of Pollution
Reduction 152
Apply the Concept: The Clean Air Act:
How a Government Policy Reduced
Infant Mortality 152
The Basis for Private Solutions to
Externalities 154
Don’t Let This Happen to You: Remember
That It’s the Net Benefit That Counts 154
Do Property Rights Matter? 155
The Problem of Transactions Costs 156
The Coase Theorem 156
Apply the Concept: How Can You Defend Your
Knees on a Plane Flight? 156
5.3 Government Policies to Deal with
Externalities 157
Imposing a Tax When There Is a Negative
Externality 157
Providing a Subsidy When There Is a Positive
Externality 158
Apply the Concept: Should the Government
Tax Cigarettes and Soda? 159
Solved Problem 5.3: Dealing with the
Externalities of Car Driving 160
Command-and-Control versus Market-Based
Approaches 162
The End of the Sulfur Dioxide Cap-and-Trade
System 163
Are Tradable Emission Allowances Licenses to
Pollute? 163
Apply the Concept: Should the United States
Enact a Carbon Tax to Fight Global
Warming? 163
5.4 Four Categories of Goods 165
The Demand for a Public Good 166
The Optimal Quantity of a Public Good 167
Solved Problem 5.4: Determining the Optimal
Level of Public Goods 169
Common Resources 170
Conclusion 173
Chapter Summary and Problems 174
CHAPTER 6: Elasticity: The Responsiveness of
Demand and Supply 182
Do Soda Taxes Work? 182
6.1 The Price Elasticity of Demand and Its
Measurement 184
Measuring the Price Elasticity of Demand 184
Elastic Demand and Inelastic Demand 185
An Example of Calculating Price Elasticities 185
The Midpoint Formula 186
Solved Problem 6.1: Calculating the Price
Elasticity of Demand 187
When Demand Curves Intersect, the Flatter Curve
Is More Elastic 188
Polar Cases of Perfectly Elastic and Perfectly
Inelastic Demand 188
Don’t Let This Happen to You: Don’t Confuse
Inelastic with Perfectly Inelastic 190
6.2 The Determinants of the Price Elasticity
of Demand 190
Availability of Close Substitutes 190
Passage of Time 191
Luxuries versus Necessities 191
Definition of the Market 191
Share of a Good in a Consumer’s Budget 191
Some Estimated Price Elasticities
of Demand 191
6.3 The Relationship between Price Elasticity of
Demand and Total Revenue 192
Elasticity and Revenue with a Linear
Demand Curve 193
Solved Problem 6.3: Price and Revenue Don’t
Always Move in the Same Direction 195
Apply the Concept: Why Does Amazon Care
about Price Elasticity? 196
6.4 Other Demand Elasticities 197
Cross-Price Elasticity of Demand 197
Income Elasticity of Demand 198
Apply the Concept: Price Elasticity, Cross-Price
Elasticity, and Income Elasticity in the Market
for Alcoholic Beverages 199
6.5 Using Elasticity to Analyze the Disappearing
Family Farm 199
Solved Problem 6.5: Using Price Elasticity to
Analyze the Effects of a Soda Tax 200
6.6 The Price Elasticity of Supply and Its
Measurement 202
Measuring the Price Elasticity of Supply 202
Determinants of the Price Elasticity of Supply 202
Apply the Concept: Why Are Oil Prices So
Unstable? 203
Polar Cases of Perfectly Elastic and Perfectly
Inelastic Supply 204
Using Price Elasticity of Supply to Predict Changes
in Price 206
Conclusion 207
Chapter Summary and Problems 209
CHAPTER 7: The Economics of Health Care 218
Where Will You Find Health Insurance? 218
7.1 The Improving Health of People in the
United States 220
Changes over Time in U.S. Health 221
Reasons for Long-Run Improvements in U.S.
Health 221
7.2 Health Care around the World 222
The U.S. Health Care System 222
Apply the Concept: The Increasing Importance
of Health Care in the U.S. Economy 224
The Health Care Systems of Canada, Japan, and the
United Kingdom 225
Comparing Health Care Outcomes around
the World 226
How Useful Are Cross-Country Comparisons of
Health Outcomes? 227
7.2 Information Problems and Externalities in the
Market for Health Care 228
Adverse Selection and the Market for “Lemons” 228
Asymmetric Information in the Market for Health
Insurance 229
Don’t Let This Happen to You: Don’t Confuse
Adverse Selection with Moral Hazard 230
Externalities in the Market for Health Care 231
Should the Government Run the Health
Care System? 233
7.3 The Debate over Health Care Policy in the
United States 234
The Rising Cost of Health Care 234
Apply the Concept: Are U.S. Firms Handicapped
by Paying for Their Employees’
Health Insurance? 236
Explaining Increases in Health Care Spending 237
The Continuing Debate over Health Care Policy 240
Solved Problem 7.4: Recent Trends in U.S.
Health Care 241
Apply the Concept: How Much Is That
MRI Scan? 243
Conclusion 245
Chapter Summary and Problems 246
PART 3 Firms in the Domestic and
International Economies
CHAPTER 8: Firms, the Stock Market, and
Corporate Governance 252
Is Snapchat the Next Facebook . . . or the
Next Twitter? 252
8.1 Types of Firms 254
Who Is Liable? Limited and Unlimited
Liability 254
Corporations Earn the Majority of Revenue and
Profits 255
Apply the Concept: Why Are Fewer Young
People Starting Businesses? 256
The Structure of Corporations and the
Principal–Agent Problem 257
8.2 How Firms Raise Funds 258
Sources of External Funds 258
Apply the Concept: The Rating Game: Are the
Federal Government or State Governments
Likely to Default on Their Bonds? 259
Stock and Bond Markets Provide Capital—and
Information 261
The Fluctuating Stock Market 262
Don’t Let This Happen to You: When Snap
Shares Are Sold, Snap Doesn’t Get
the Money 262
Apply the Concept: Why Are Many People Poor
Stock Market Investors? 264
Solved Problem 8.2: Why Does Warren Buffett
Like Mutual Funds? 265
8.3 Using Financial Statements to Evaluate a
Corporation 266
The Income Statement 266
The Balance Sheet 267
8.4 Recent Issues in Corporate Governance Policy 268
The Accounting Scandals of the Early 2000s 268
Corporate Governance and the Financial Crisis of
2007–2009 268
Government Regulation in Response to the
Financial Crisis 269
Did Principal–Agent Problems Help Cause the
2007–2009 Financial Crisis? 269
Apply the Concept: Should Investors Worry
about Corporate Governance at Snapchat? 270
Conclusion 272
Chapter Summary and Problems 273
Appendix: Tools to Analyze Firms’ Financial
Information 278
Using Present Value to Make Investment Decisions 278
Solved Problem 8A.1: How to Receive Your
Contest Winnings 280
Using Present Value to Calculate Bond Prices 281
Using Present Value to Calculate Stock Prices 282
A Simple Formula for Calculating Stock Prices 282
Going Deeper into Financial Statements 283
Analyzing Income Statements 284
Analyzing Balance Sheets 284
Review Questions 286
Problems and Applications 286
CHAPTER 9: Comparative Advantage and the
Gains from International Trade 288
President Trump, Oreo Cookies, and Free Trade 288
9.1 The United States in the International
Economy 290
The Importance of Trade to the U.S. Economy 291
U.S. International Trade in a World Context 292
9.2 Comparative Advantage in International Trade 292
A Brief Review of Comparative Advantage 293
Comparative Advantage and Absolute Advantage 293
9.3 How Countries Gain from International
Trade 294
Increasing Consumption through Trade 294
Solved Problem 9.3: The Gains from Trade 296
Why Don’t We See Complete Specialization? 297
Does Anyone Lose as a Result of International
Trade? 298
Don’t Let This Happen to You: Remember
That Trade Creates Both Winners and Losers 298
Apply the Concept: Who Gains and Who Loses
from U.S. Trade with China? 298
Where Does Comparative Advantage Come From? 301
9.4 Government Policies That Restrict
International Trade 302
Tariffs 303
Quotas and Voluntary Export Restraints 304
Measuring the Economic Effect of the
Sugar Quota 304
Solved Problem 9.4: Measuring the Economic
Effect of a Quota 306
The High Cost of Preserving Jobs with Tariffs
and Quotas 307
Apply the Concept: Smoot-Hawley, the Politics
of Tariffs, and the Cost of Protecting a
Vanishing Industry 307
Gains from Unilateral Elimination of Tariffs
and Quotas 309
Other Barriers to Trade 309
9.5 The Debate over Trade Policies and
Globalization 309
Why Do Some People Oppose the World Trade
Organization? 309
Apply the Concept: Protecting Consumer Health
or Protecting U.S. Firms from Competition? 312
Dumping 313
Positive versus Normative Analysis (Once Again) 313
Conclusion 314
Chapter Summary and Problems 315
PART 4 Microeconomic Foundations:
Consumers and Firms
CHAPTER 10: Consumer Choice and
Behavioral Economics 324
J.C. Penney Customers Didn’t Buy into
“Everyday Low Prices” 324
10.1 Utility and Consumer Decision Making 326
An Overview of the Economic Model of
Consumer Behavior 326
Utility 326
The Principle of Diminishing Marginal Utility 327
The Rule of Equal Marginal Utility per Dollar Spent 327
Solved Problem 10.1: Finding the Optimal Level
of Consumption 330
What if the Rule of Equal Marginal Utility per
Dollar Does Not Hold? 331
Don’t Let This Happen to You: Equalize
Marginal Utilities per Dollar 332
The Income Effect and Substitution Effect of a
Price Change 333
10.2 Where Demand Curves Come From 334
Apply the Concept: Are There Any Upward-
Sloping Demand Curves in the Real World? 336
10.3 Social Influences on Decision Making 337
The Effects of Celebrity Endorsements 337
Network Externalities 338
Does Fairness Matter? 339
Apply the Concept: Who Made the Most Prof it
from the Broadway Musical Hamilton? 341
Solved Problem 10.3: Why Doesn’t Tesla Charge
Its Employees to Park Their Cars? 343
10.4 Behavioral Economics: Do People Make
Rational Choices? 345
Pitfalls in Decision Making 345
Apply the Concept: A Blogger Who
Understands the Importance of Ignoring
Sunk Costs 346
“Nudges”: Using Behavioral Economics to
Guide Behavior 347
The Behavioral Economics of Shopping 348
Apply the Concept: J.C. Penney Meets
Behavioral Economics 349
Conclusion 351
Chapter Summary and Problems 352
Appendix: Using Indifference Curves and Budget
Lines to Understand Consumer Behavior 358
Consumer Preferences 358
Indifference Curves 358
The Slope of an Indifference Curve 359
Can Indifference Curves Ever Cross? 359
The Budget Constraint 360
Choosing the Optimal Consumption of Pizza
and Coke 361
Apply the Concept: Apple Determines the
Optimal Mix of iPhone Features 362
Deriving the Demand Curve 363
Solved Problem 10A.1: When Does a Price
Change Make a Consumer Better Off? 364
The Income Effect and the Substitution Effect of a
Price Change 365
How a Change in Income Affects Optimal
Consumption 367
The Slope of the Indifference Curve, the Slope
of the Budget Line, and the Rule of Equal
Marginal Utility per Dollar Spent 367
The Rule of Equal Marginal Utility per Dollar
Spent Revisited 368
Review Questions 370
Problems and Applications 370
CHAPTER 11: Technology, Production,
and Costs 372
Will the Cost of MOOCs Revolutionize
Higher Education? 372
11.1 Technology: An Economic Definition 374
Apply the Concept: Would You Please Be Quiet?
Technological Change at Segment.com 374
11.2 The Short Run and the Long Run in
Economics 375
The Difference between Fixed Costs and
Variable Costs 375
Apply the Concept: Fixed Costs in the
Publishing Industry 376
Implicit Costs versus Explicit Costs 376
The Production Function 377
A First Look at the Relationship between
Production and Cost 378
11.3 The Marginal Product of Labor and the
Average Product of Labor 379
The Law of Diminishing Returns 379
Graphing Production 380
Apply the Concept: Adam Smith’s Famous
Account of the Division of Labor in a
Pin Factory 381
The Relationship between Marginal Product and
Average Product 381
An Example of Marginal and Average Values:
College Grades 382
11.4 The Relationship between Short-Run
Production and Short-Run Cost 383
Marginal Cost 383
Why Are the Marginal and Average Cost Curves
U Shaped? 383
Solved Problem 11.4: Calculating Marginal Cost
and Average Cost 385
11.5 Graphing Cost Curves 386
11.6 Costs in the Long Run 388
Economies of Scale 388
Long-Run Average Cost Curves for Automobile
Factories 389
Solved Problem 11.6: Using Long-Run
Average Cost Curves to Understand
Business Strategy 389
Apply the Concept: The Colossal River Rouge:
Diseconomies of Scale at Ford Motor
Company 391
Don’t Let This Happen to You: Don’t Confuse
Diminishing Returns with Diseconomies
of Scale 392
Conclusion 393
Chapter Summary and Problems 394
Appendix: Using Isoquants and Isocost Lines to
Understand Production and Cost 402
Isoquants 402
An Isoquant Graph 402
The Slope of an Isoquant 403
Isocost Lines 403
Graphing the Isocost Line 403
The Slope and Position of the Isocost Line 403
Choosing the Cost-Minimizing Combination
of Capital and Labor 405
Different Input Price Ratios Lead to Different
Input Choices 405
Solved Problem 11A.1: Firms Responding to
Differences in Input Price Ratios 406
Another Look at Cost Minimization 407
Solved Problem 11A.2: Determining the
Optimal Combination of Inputs 408
Apply the Concept: Do National Football
League Teams Behave Efficiently? 409
The Expansion Path 410
Review Questions 411
Problems and Applications 411
PART 5 Market Structure and Firm
Strategy
CHAPTER 12: Firms in Perfectly Competitive
Markets 414
Are Cage-Free Eggs the Road to Riches? 414
12.1 Perfectly Competitive Markets 417
A Perfectly Competitive Firm Cannot Affect the
Market Price 417
The Demand Curve for the Output of a Perfectly
Competitive Firm 418
Don’t Let This Happen to You: Don’t Confuse
the Demand Curve for Farmer Parker’s Wheat
with the Market Demand Curve for Wheat 418
12.2 How a Firm Maximizes Profit in a Perfectly
Competitive Market 419
Revenue for a Firm in a Perfectly Competitive Market 420
Determining the Profit-Maximizing Level of Output 420
12.3 Illustrating Profit or Loss on the Cost
Curve Graph 422
Showing Profit on a Graph 423
Solved Problem 12.3: Determining Prof it-
Maximizing Price and Quantity 424
Don’t Let This Happen to You: Remember
That Firms Maximize Their Total Prof it, Not
Their Prof it per Unit 426
Illustrating When a Firm Is Breaking Even or
Operating at a Loss 426
Apply the Concept: Losing Money in the
Restaurant Business 427
12.4 Deciding Whether to Produce or to
Shut Down in the Short Run 428
The Supply Curve of a Firm in the Short Run 429
Solved Problem 12.4: When to Shut Down
a Farm 430
The Market Supply Curve in a Perfectly
Competitive Industry 431
12.5 “If Everyone Can Do It, You Can’t Make
Money at It”: The Entry and Exit of Firms in the
Long Run 432
Economic Profit and the Entry or Exit Decision 432
Long-Run Equilibrium in a Perfectly Competitive
Market 434
The Long-Run Supply Curve in a Perfectly
Competitive Market 436
Apply the Concept: In the Apple App Store,
Easy Entry Makes the Long Run
Pretty Short 437
Increasing-Cost and Decreasing-Cost
Industries 438
12.6 Perfect Competition and Economic
Efficiency 438
Productive Efficiency 438
Solved Problem 12.6: How Productive
Efficiency Benef its Consumers 439
Allocative Efficiency 440
Conclusion 441
Chapter Summary and Problems 442
CHAPTER 13: Monopolistic Competition:
The Competitive Model in a More Realistic
Setting 450
Will Panera’s “Pure Food” Advantage Last? 450
13.1 Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market 452
The Demand Curve for a Monopolistically
Competitive Firm 452
Marginal Revenue for a Firm with a Downward-
Sloping Demand Curve 452
13.2 How a Monopolistically Competitive Firm
Maximizes Profit in the Short Run 454
Solved Problem 13.2: Does Minimizing Cost
Maximize Prof it at Apple? 456
13.3 What Happens to Profits in the Long Run? 457
How Does the Entry of New Firms Affect the
Profits of Existing Firms? 457
Don’t Let This Happen to You: Don’t Confuse
Zero Economic Profit with Zero Accounting
Prof it 458
Apply the Concept: Is “Clean Food” a Sustainable
Market Niche for Panera? 460
Is Zero Economic Profit Inevitable in the
Long Run? 461
Solved Problem 13.3: Red Robin Abandons
an Experiment in Fast-Casual Restaurants 461
13.4 Comparing Monopolistic Competition
and Perfect Competition 462
Excess Capacity under Monopolistic Competition 463
Is Monopolistic Competition Inefficient? 463
How Consumers Benefit from Monopolistic
Competition 464
Apply the Concept: One Way to Differentiate
Your Restaurant? Become a Ghost! 464
13.5 How Marketing Differentiates Products 465
Brand Management 466
Advertising 466
Defending a Brand Name 466
13.6 What Makes a Firm Successful? 466
Apply the Concept: Is Being the First Firm in
the Market a Key to Success? 467
Conclusion 469
Chapter Summary and Problems 470
CHAPTER 14: Oligopoly: Firms in Less
Competitive Markets 478
Apple, Spotify, and the Music Streaming
Revolution 478
14.1 Oligopoly and Barriers to Entry 480
Barriers to Entry 481
Apply the Concept: Got a Great Recipe for
Cookies? Don’t Try Selling Them in
Wisconsin or New Jersey 483
14.2 Game Theory and Oligopoly 484
A Duopoly Game: Price Competition between
Two Firms 485
Firm Behavior and the Prisoner’s Dilemma 486
Don’t Let This Happen to You: Don’t
Misunderstand Why Each Firm Ends Up
Charging a Price of $9.99 486
Solved Problem 14.2: Is Offering a College
Student Discount a Prisoner’s Dilemma for
Apple and Spotify? 487
Can Firms Escape the Prisoner’s Dilemma? 488
Apply the Concept: Are the Big Four Airlines
Colluding? 489
Cartels: The Case of OPEC 491
14.3 Sequential Games and Business Strategy 492
Deterring Entry 492
Solved Problem 14.3: Is Deterring Entry Always
a Good Idea? 494
Bargaining 495
14.4 The Five Competitive Forces Model 496
Competition from Existing Firms 496
The Threat from Potential Entrants 497
Competition from Substitute Goods or
Services 497
The Bargaining Power of Buyers 497
The Bargaining Power of Suppliers 497
Apply the Concept: Can We Predict Which Firms
Will Continue to Be Successful? 498
Conclusion 499
Chapter Summary and Problems 500
CHAPTER 15: Monopoly and Antitrust
Policy 506
A Monopoly on Lobster Dinners in Maine? 506
15.1 Is Any Firm Ever Really a Monopoly? 508
Apply the Concept: Is the NCAA a
Monopoly? 508
15.2 Where Do Monopolies Come From? 510
Government Action Blocks Entry 510
Apply the Concept: Does Hasbro Have a Monopoly
on Monopoly? 511
Control of a Key Resource 512
Apply the Concept: Are Diamond Prof its
Forever? The De Beers Diamond Monopoly 512
Network Externalities 513
Natural Monopoly 514
15.3 How Does a Monopoly Choose
Price and Output? 515
Marginal Revenue Once Again 515
Profit Maximization for a Monopolist 516
Solved Problem 15.3: Finding the Prof it-
Maximizing Price and Output for a
Cable Monopoly 518
Don’t Let This Happen to You: Don’t Assume
That Charging a Higher Price Is Always
More Prof itable for a Monopolist 519
15.4 Does Monopoly Reduce Economic
Efficiency? 519
Comparing Monopoly and Perfect Competition 519
Measuring the Efficiency Losses from
Monopoly 520
How Large Are the Efficiency Losses Due to
Monopoly? 521
Market Power and Technological Change 522
15.5 Government Policy toward Monopoly 522
Antitrust Laws and Antitrust Enforcement 522
Apply the Concept: Have Generic Drug Firms
Been Colluding to Raise Prices? 523
Mergers: The Trade-off between Market Power
and Efficiency 524
The Department of Justice and FTC Merger
Guidelines 526
Regulating Natural Monopolies 528
Solved Problem 15.5: What Should Your
College Charge for a MOOC? 529
Conclusion 530
Chapter Summary and Problems 531
CHAPTER 16: Pricing Strategy 538
Walt Disney Discovers the Magic of Big Data 538
16.1 Pricing Strategy, the Law of One Price,
and Arbitrage 540
Arbitrage 540
Solved Problem 16.1: Is Arbitrage Just a
Rip-off? 541
Why Don’t All Firms Charge the Same Price? 541
16.2 Price Discrimination: Charging Different
Prices for the Same Product 542
The Requirements for Successful Price
Discrimination 542
Don’t Let This Happen to You: Don’t Confuse
Price Discrimination with Other Types of
Discrimination 543
An Example of Price Discrimination 543
Solved Problem 16.2: How Apple Uses Price
Discrimination to Increase Prof its 544
Airlines: The Kings of Price Discrimination 545
Apply the Concept: Big Data and the Rise of
Dynamic Pricing 546
Perfect Price Discrimination 548
Price Discrimination across Time 549
Can Price Discrimination Be Illegal? 551
16.3 Other Pricing Strategies 551
Odd Pricing: Why Is the Price $2.99 Instead
of $3.00? 551
Why Do McDonald’s and Other Firms Use
Cost-Plus Pricing? 552
Apply the Concept: Cost-Plus Pricing in the
Publishing Industry 552
How Can Using Two-Part Tariffs Increase a
Firm’s Profit? 553
Conclusion 556
Chapter Summary and Problems 557
PART 6 Labor Markets, Public Choice,
and the Distribution of Income
CHAPTER 17: The Markets for Labor and Other
Factors of Production 562
Rio Tinto Mines with Robots 562
17.1 The Demand for Labor 564
The Marginal Revenue Product of Labor 564
Solved Problem 17.1: Hiring Decisions by a
Firm That Is a Price Maker 566
The Market Demand Curve for Labor 567
Factors That Shift the Market Demand Curve for
Labor 567
17.2 The Supply of Labor 568
The Market Supply Curve of Labor 569
Factors That Shift the Market Supply Curve
of Labor 569
17.3 Equilibrium in the Labor Market 570
The Effect on Equilibrium Wages of a Shift in
Labor Demand 571
Apply the Concept: Is Investing in a College
Education a Good Idea? 571
The Effect of Immigration on the U.S.
Labor Market 572
Apply the Concept: Will You Compete with a
Robot for a Job—Or Work with One? 574
17.4 Explaining Differences in Wages 577
Don’t Let This Happen to You: Remember
That Prices and Wages Are Determined
at the Margin 578
Apply the Concept: Technology and the Earnings
of “Superstars” 578
Compensating Differentials 579
Discrimination 580
Solved Problem 17.4: Is Passing “Comparable
Worth” Legislation a Good Way to
Close the Gap between Men’s and
Women’s Pay? 581
Apply the Concept: Does Greg Have an Easier
Time Finding a Job Than Jamal? 583
Labor Unions 585
17.5 Personnel Economics 585
Should Workers’ Pay Depend on How Much They
Work or on How Much They Produce? 586
Apply the Concept: A Better Way to Sell
Contact Lenses 587
Other Considerations in Setting Compensation
Systems 588
17.6 The Markets for Capital and Natural
Resources 588
The Market for Capital 588
The Market for Natural Resources 589
Monopsony 590
The Marginal Productivity Theory of
Income Distribution 591
Conclusion 591
Chapter Summary and Problems 592
CHAPTER 18: Public Choice, Taxes, and the
Distribution of Income 600
Should Your Small Business Be Taxed
Like Apple? 600
18.1 Public Choice 602
How Do We Know the Public Interest? Models
of Voting 602
Government Failure? 604
Is Government Regulation Necessary? 606
18.2 The Tax System 606
An Overview of the U.S. Tax System 607
Progressive and Regressive Taxes 608
Apply the Concept: Which Groups Pay the
Most in Federal Taxes? 609
Marginal and Average Income Tax Rates 610
The Corporate Income Tax 610
International Comparison of Corporate
Income Taxes 610
Evaluating Taxes 611
18.3 Tax Incidence Revisited: The Effect of Price
Elasticity 614
Don’t Let This Happen to You: Don’t Confuse
Who Pays a Tax with Who Bears the Burden
of the Tax 615
Apply the Concept: Do Corporations Really
Bear the Burden of the Federal Corporate
Income Tax? 615
Solved Problem 18.3: The Effect of Price
Elasticity on the Excess Burden of a Tax 616
18.4 Income Distribution and Poverty 617
Measuring the Income Distribution and
Measuring Poverty 617
Showing the Income Distribution with a
Lorenz Curve 619
Problems in Measuring Poverty and the
Distribution of Income 620
Solved Problem 18.4: What’s the Difference
between Income Mobility and Income
Inequality? 621
Explaining Income Inequality 623
Policies to Reduce Income Inequality 624
Apply the Concept: Who Are the 1 Percent,
and How Do They Earn Their Incomes? 626
Income Distribution and Poverty around
the World 627
Conclusion 629
Chapter Summary and Problems 630
PART 7 Macroeconomic Foundations
and Long-Run Growth
CHAPTER 19: GDP: Measuring Total Production
and Income 636
The Ford Motor Company Meets Macroeconomics 636
19.1 Gross Domestic Product Measures Total
Production 639
Measuring Total Production: Gross Domestic
Product 639
Solved Problem 19.1: Calculating GDP 640
Production, Income, and the Circular-Flow Diagram 640
Components of GDP 642
Don’t Let This Happen to You: Remember
What Economists Mean by Investment 643
An Equation for GDP and Some Actual Values 643
Apply the Concept: Microsoft’s Steve Ballmer
Uses the U.S. Constitution to Reorganize
Government Data 644
Measuring GDP Using the Value-Added Method 646
19.2 Does GDP Measure What We Want It
to Measure? 646
Shortcomings in GDP as a Measure of Total
Production 646
Apply the Concept: Why Do Many Developing
Countries Have Such Large Underground
Economies? 647
Shortcomings of GDP as a Measure of
Well-Being 648
19.3 Real GDP versus Nominal GDP 649
Calculating Real GDP 649
Solved Problem 19.3: Calculating Real GDP 649
Comparing Real GDP and Nominal GDP 650
The GDP Deflator 651
Apply the Concept: Did the Standard of Living
in Nigeria Almost Double Overnight? 652
19.4 Other Measures of Total Production and
Total Income 653
Gross National Product 653
National Income 653
Personal Income 654
Disposable Personal Income 654
The Division of Income 654
Conclusion 655
Chapter Summary and Problems 656
CHAPTER 20: Unemployment and Inflation 662
Why Would Boeing Cut Thousands of Jobs As the
Economy Expands? 662
20.1 Measuring the Unemployment Rate, the
Labor Force Participation Rate, and the
Employment–Population Ratio 664
The Household Survey 664
Solved Problem 20.1: What Happens if the BLS
Includes the Military? 666
Problems with Measuring the Unemployment
Rate 667
Trends in Labor Force Participation 668
Unemployment Rates for Different Groups 669
How Long Are People Typically Unemployed? 670
Apply the Concept: Eight Million Workers
Are Missing! 670
The Establishment Survey: Another Measure of
Employment 672
Revisions in the Establishment Survey
Employment Data: How Bad Was the 2007–2009
Recession? 673
Job Creation and Job Destruction over Time 673
20.2 Types of Unemployment 674
Frictional Unemployment and Job Search 674
Structural Unemployment 675
Cyclical Unemployment 675
Full Employment 676
Apply the Concept: How Should We Categorize
the Unemployment Resulting from Boeing’s
Layoffs? 676
20.3 Explaining Unemployment 677
Government Policies and the Unemployment Rate 677
Labor Unions 678
Efficiency Wages 679
20.4 Measuring Inflation 679
The Consumer Price Index 679
Is the CPI Accurate? 681
Don’t Let This Happen to You: Don’t Miscalculate
the Inflation Rate 681
The Producer Price Index 682
20.5 Using Price Indexes to Adjust for the Effects
of Inflation 682
Solved Problem 20.5: What Has Been Happening
to Real Wages in the United States? 683
20.6 Nominal Interest Rates versus Real Interest
Rates 685
20.7 Does Inflation Impose Costs on the Economy? 686
Inflation Affects the Distribution of Income 687
The Problem with Anticipated Inflation 687
The Problem with Unanticipated Inflation 688
Apply the Concept: What’s So Bad about
Falling Prices? 688
Conclusion 690
Chapter Summary and Problems 691
CHAPTER 21: Economic Growth, the Financial
System, and Business Cycles 702
Economic Growth and the Business Cycle at
Chevron Corporation 702
21.1 Long-Run Economic Growth 704
Apply the Concept: The Connection between
Economic Prosperity and Health 705
Calculating Growth Rates and the Rule of 70 707
What Determines the Rate of Long-Run Growth? 708
Solved Problem 21.1: Where Does Productivity
Come From? 709
Apply the Concept: Can India Sustain Its Rapid
Growth? 710
Potential GDP 712
21.2 Saving, Investment, and the
Financial System 713
An Overview of the Financial System 713
The Macroeconomics of Saving and Investment 714
The Market for Loanable Funds 716
Apply the Concept: Ebenezer Scrooge:
Accidental Promoter of Economic
Growth? 717
Solved Problem 21.2: Are Future Budget Def icits
a Threat to the Economy? 719
21.3 The Business Cycle 721
Some Basic Business Cycle Definitions 721
How Do We Know When the Economy Is in a
Recession? 722
What Happens during the Business Cycle? 723
Don’t Let This Happen to You: Don’t Confuse
the Price Level and the Inflation Rate 725
Will the U.S. Economy Return to Stability? 728
Conclusion 729
Chapter Summary and Problems 730
CHAPTER 22: Long-Run Economic Growth:
Sources and Policies 736
What Explains Slow Growth in Mexico? 736
22.1 Economic Growth over Time and around
the World 738
Economic Growth from 1,000,000 B.C.E. to the
Present 738
Apply the Concept: Why Did the Industrial
Revolution Begin in England? 739
Small Differences in Growth Rates Are Important 740
Why Do Growth Rates Matter? 741
Don’t Let This Happen to You: Don’t Confuse the
Average Annual Percentage Change with the
Total Percentage Change 741
“The Rich Get Richer and … ” 741
Apply the Concept: Is Income All That Matters? 742
22.2 What Determines How Fast Economies
Grow? 743
The Per-Worker Production Function 744
Which Is More Important for Economic Growth:
More Capital or Technological Change? 745
Technological Change: The Key to Sustaining
Economic Growth 745
Apply the Concept: What Explains the Economic
Failure of the Soviet Union? 746
Solved Problem 22.2: Using the Economic
Growth Model to Analyze the Failure of the
Soviet Economy 747
New Growth Theory 748
Joseph Schumpeter and Creative Destruction 750
22.3 Economic Growth in the United States 750
Economic Growth in the United States since 1950 750
Is the United States Headed for a Long Period of
Slow Growth? 751
22.4 Why Isn’t the Whole World Rich? 753
Catch-up: Sometimes but Not Always 754
Solved Problem 22.4: The Economic Growth
Model’s Prediction of Catch-Up 756
Why Haven’t Most Western European Countries,
Canada, and Japan Caught Up to the United States? 757
Why Don’t More Low-Income Countries
Experience Rapid Growth? 759
Apply the Concept: Why Hasn’t Mexico Grown
as Fast as China? 760
The Benefits of Globalization 762
22.5 Growth Policies 763
Enhancing Property Rights and the Rule of Law 763
Apply the Concept: Will China’s Standard of
Living Ever Exceed That of the
United States? 763
Improving Health and Education 765
Policies That Promote Technological Change 765
Policies That Promote Saving and Investment 765
Is Economic Growth Good or Bad? 766
Conclusion 767
Chapter Summary and Problems 768
PART 8 Short-Run Fluctuations
CHAPTER 23: Aggregate Expenditure and
Output in the Short Run 776
Fluctuating Demand Helps—and Hurts—Intel and
Other Firms 776
23.1 The Aggregate Expenditure Model 778
Aggregate Expenditure 778
The Difference between Planned Investment and
Actual Investment 779
Macroeconomic Equilibrium 779
Adjustments to Macroeconomic Equilibrium 780
23.2 Determining the Level of Aggregate
Expenditure in the Economy 781
Consumption 781
The Relationship between Consumption and
National Income 784
Income, Consumption, and Saving 786
Solved Problem 23.2: Calculating the Marginal
Propensity to Consume and the Marginal
Propensity to Save 787
Planned Investment 788
Apply the Concept: Is Student Loan Debt
Causing Fewer Young People to
Buy Houses? 789
Government Purchases 791
Net Exports 792
Apply the Concept: The iPhone Is Made in
China . . . or Is It? 794
23.3 Graphing Macroeconomic Equilibrium 794
Showing a Recession on the 45°-Line Diagram 798
The Important Role of Inventories 799
A Numerical Example of Macroeconomic
Equilibrium 799
Don’t Let This Happen to You: Don’t Confuse
Aggregate Expenditure with Consumption
Spending 800
Solved Problem 23.3: Determining
Macroeconomic Equilibrium 800
23.4 The Multiplier Effect 801
Apply the Concept: The Multiplier in Reverse:
The Great Depression of the 1930s 804
A Formula for the Multiplier 805
Summarizing the Multiplier Effect 806
Solved Problem 23.4: Using the Multiplier
Formula 807
The Paradox of Thrift 808
23.5 The Aggregate Demand Curve 808
Conclusion 810
Chapter Summary and Problems 811
Appendix: The Algebra of Macroeconomic
Equilibrium 818
Review Questions 819
CHAPTER 24: Aggregate Demand and
Aggregate Supply Analysis 820
The Fortunes of KB Home Follow the
Business Cycle 820
24.1 Aggregate Demand 822
Why Is the Aggregate Demand Curve Downward
Sloping? 822
Shifts of the Aggregate Demand Curve versus
Movements along It 824
The Variables That Shift the Aggregate
Demand Curve 824
Don’t Let This Happen to You: Understand
Why the Aggregate Demand Curve Is
Downward Sloping 825
Solved Problem 24.1: Movements along the
Aggregate Demand Curve or Shifts of
the Curve? 826
Apply the Concept: Which Components of
Aggregate Demand Changed the Most during
the 2007–2009 Recession? 828
24.2 Aggregate Supply 830
The Long-Run Aggregate Supply Curve 830
The Short-Run Aggregate Supply Curve 831
Apply the Concept: How Sticky Are Wages? 832
Shifts of the Short-Run Aggregate Supply
Curve versus Movements along It 834
Variables That Shift the Short-Run Aggregate
Supply Curve 834
24.3 Macroeconomic Equilibrium in the
Long Run and the Short Run 836
Recessions, Expansions, and Supply Shocks 837
Apply the Concept: Does It Matter What Causes
a Decline in Aggregate Demand? 838
Apply the Concept: How Long Is the Long Run
in Macroeconomics? 841
24.4 A Dynamic Aggregate Demand and
Aggregate Supply Model 843
What Is the Usual Cause of Inflation? 844
The Recession of 2007–2009 844
Solved Problem 24.4: Showing the Oil Shock of
1974–1975 on a Dynamic Aggregate Demand
and Aggregate Supply Graph 847
Conclusion 848
Chapter Summary and Problems 849
Appendix: Macroeconomic Schools of Thought 858
The Monetarist Model 858
The New Classical Model 859
The Real Business Cycle Model 859
The Austrian Model 860
Apply the Concept: Karl Marx: Capitalism’s
Severest Critic 860
PART 9 Monetary and Fiscal Policy
CHAPTER 25: Money, Banks, and the Federal
Reserve System 862
Does India Need Paper Currency? 862
25.1 What Is Money, and Why Do We Need It? 864
Barter and the Invention of Money 864
The Functions of Money 865
What Can Serve as Money? 866
Apply the Concept: Your Money Is No
Good Here! 867
25.2 How Is Money Measured in the United States
Today? 868
M1: A Narrow Definition of the Money Supply 868
M2: A Broad Definition of Money 869
Don’t Let This Happen to You: Don’t Confuse
Money with Income or Wealth 870
Solved Problem 25.2: The Def initions of
M1 and M2 870
What about Credit Cards and Debit Cards? 871
Apply the Concept: Are Bitcoins Money? 871
25.3 How Do Banks Create Money? 872
Bank Balance Sheets 872
Apply the Concept: Will Fintech Make It Easier
for You to Borrow? 873
Using T-accounts to Show How a Bank Can
Create Money 874
The Simple Deposit Multiplier 876
Don’t Let This Happen to You: Don’t Confuse
Assets and Liabilities 877
Solved Problem 25.3: Showing How Banks
Create Money 878
The Simple Deposit Multiplier versus the
Real-World Deposit Multiplier 880
25.4 The Federal Reserve System 881
The Establishment of the Federal
Reserve System 881
How the Federal Reserve Manages the
Money Supply 882
The “Shadow Banking System” and the Financial
Crisis of 2007–2009 885
25.5 The Quantity Theory of Money 887
Connecting Money and Prices: The Quantity
Equation 888
The Quantity Theory Explanation of Inflation 888
How Accurate Are Forecasts of Inflation Based
on the Quantity Theory? 889
High Rates of Inflation 890
Apply the Concept: The German Hyperinflation
of the Early 1920s 890
Conclusion 891
Chapter Summary and Problems 892
CHAPTER 26: Monetary Policy 900
Why Would a Bank Pay a Negative Interest Rate? 900
26.1 What Is Monetary Policy? 902
The Goals of Monetary Policy 902
26.2 The Money Market and the Fed’s Choice
of Monetary Policy Targets 904
Monetary Policy Targets 904
The Demand for Money 904
Shifts in the Money Demand Curve 905
How the Fed Manages the Money Supply:
A Quick Review 906
Equilibrium in the Money Market 906
A Tale of Two Interest Rates 908
Choosing a Monetary Policy Target 908
The Importance of the Federal Funds Rate 908
The Fed’s New Policy Tools 909
26.3 Monetary Policy and Economic Activity 910
How Interest Rates Affect Aggregate Demand 910
The Effects of Monetary Policy on Real GDP and
the Price Level 911
Apply the Concept: Too Low for Zero: Central
Banks, Quantitative Easing, and Negative
Interest Rates 912
Can the Fed Eliminate Recessions? 914
Fed Forecasts 915
Apply the Concept: Trying to Hit a Moving
Target: Making Policy with “Real-Time Data” 916
A Summary of How Monetary Policy Works 917
Don’t Let This Happen to You: Remember
That with Monetary Policy, It’s the Interest
Rates—Not the Money—That Counts 918
26.4 Monetary Policy in the Dynamic Aggregate
Demand and Aggregate Supply Model 918
The Effects of Monetary Policy on Real GDP and
the Price Level: A More Complete Account 919
Using Monetary Policy to Fight Inflation 920
Solved Problem 26.4: The Effects of Monetary Policy 921
26.5 A Closer Look at the Fed’s Setting of
Monetary Policy Targets 923
Should the Fed Target the Money Supply? 923
Why Doesn’t the Fed Target Both the Money
Supply and the Interest Rate? 923
The Taylor Rule 924
Solved Problem 26.5: Applying the Taylor Rule 925
Inflation Targeting 926
Apply the Concept: Should the Fed Worry
about the Prices of Food and Gasoline? 927
26.6 Fed Policies during the 2007–2009
Recession 928
The Inflation and Deflation of the Housing Market
Bubble 928
The Changing Mortgage Market 930
The Role of Investment Banks 930
Apply the Concept: The Wonderful World of
Leverage 931
The Fed and the Treasury Department Respond 932
Conclusion 934
Chapter Summary and Problems 935
CHAPTER 27: Fiscal Policy 944
Can Fiscal Policy Increase Economic Growth? 944
27.1 What Is Fiscal Policy? 946
What Fiscal Policy Is and What It Isn’t 946
Automatic Stabilizers versus Discretionary
Fiscal Policy 946
An Overview of Government Spending and Taxes 946
Apply the Concept: Is Spending on Social
Security and Medicare a Fiscal Time Bomb? 949
27.2 The Effects of Fiscal Policy on Real GDP
and the Price Level 951
Short-Run Expansionary and Contractionary
Fiscal Policy 951
Don’t Let This Happen to You: Don’t Confuse
Fiscal Policy and Monetary Policy 953
A Summary of How Fiscal Policy Affects
Aggregate Demand 953
27.3 Fiscal Policy in the Dynamic Aggregate
Demand and Aggregate Supply Model 954
27.4 The Government Purchases and Tax
Multipliers 955
The Effect of Changes in the Tax Rate 958
Taking into Account the Effects of Aggregate Supply 958
The Multipliers Work in Both Directions 959
Solved Problem 27.4: Fiscal Policy Multipliers 959
27.5 The Limits to Using Fiscal Policy to Stabilize the Economy 960
Apply the Concept: Why Was the Recession of
2007–2009 So Severe? 961
Does Government Spending Reduce
Private Spending? 962
Crowding Out in the Short Run 962
Crowding Out in the Long Run 964
Fiscal Policy in Action: Did the Stimulus Package
of 2009 Succeed? 964
27.6 Deficits, Surpluses, and Federal
Government Debt 967
How the Federal Budget Can Serve as an
Automatic Stabilizer 968
Apply the Concept: Did Fiscal Policy
Fail during the Great Depression? 969
Should the Federal Budget Always Be Balanced? 970
Solved Problem 27.6: The Greek Government
Confronts a Budget Def icit 971
The Federal Government Debt 972
Is Government Debt a Problem? 973
27.7 Long-Run Fiscal Policy and Economic
Growth 973
Explaining Long-Run Increases in Real GDP 973
How Can Fiscal Policy Affect Long-Run
Economic Growth? The Long-Run Effects of Tax Policy 974
Tax Simplification 975
The Economic Effects of Tax Reform 976
How Large Are Supply-Side Effects? 977
Apply the Concept: Will President Trump’s
Policy Proposals Raise the Rate of Economic Growth? 978
Conclusion 980
Chapter Summary and Problems 981
Appendix: A Closer Look at the Multiplier 989
An Expression for Equilibrium Real GDP 989
A Formula for the Government Purchases
Multiplier 990
A Formula for the Tax Multiplier 991
The “Balanced Budget” Multiplier 991
The Effects of Changes in Tax Rates on the
Multiplier 992
The Multiplier in an Open Economy 992
Problems and Applications 993
CHAPTER 28: Inflation, Unemployment, and
Federal Reserve Policy 994
The Fed Tries for a “Soft Landing,” while General
Motors and Toll Brothers Look On 994
28.1 The Discovery of the Short-Run Trade-off
between Unemployment and Inflation 996
Explaining the Phillips Curve with Aggregate
Demand and Aggregate Supply Curves 997
Is the Phillips Curve a Policy Menu? 998
Is the Short-Run Phillips Curve Stable? 998
The Long-Run Phillips Curve 998
The Role of Expectations of Future Inflation 999
Apply the Concept: Do Workers Understand
Inflation? 1000
28.2 The Short-Run and Long-Run Phillips
Curves 1001
Shifts in the Short-Run Phillips Curve 1002
How Does a Vertical Long-Run Phillips
Curve Affect Monetary Policy? 1003
Apply the Concept: Does the Natural Rate of
Unemployment Ever Change? 1004
Solved Problem 28.2: Changing Views of the
Phillips Curve 1005
28.3 Expectations of the Inflation Rate and
Monetary Policy 1006
The Implications of Rational Expectations for
Monetary Policy 1006
Is the Short-Run Phillips Curve Really Vertical? 1007
Real Business Cycle Models 1008
28.4 Federal Reserve Policy from the 1970s to
the Present 1008
The Effect of a Supply Shock on the Phillips Curve 1009
Paul Volcker and Disinflation 1010
Don’t Let This Happen to You: Don’t Confuse
Disinflation with Deflation 1011
Solved Problem 28.4: Using Monetary Policy
to Lower the Inflation Rate 1011
Alan Greenspan, Ben Bernanke, Janet Yellen, and
the Crisis in Monetary Policy 1013
Apply the Concept: Should the Fed Attempt to
Guide the Expectations of Investors? 1015
The Debate over the Fed’s Future 1017
Conclusion 1020
Chapter Summary and Problems 1021
PART 10 The International Economy
CHAPTER 29: Macroeconomics in an
Open Economy 1028
Amazon Deals with the Effects of a
Strong Dollar 1028
29.1 The Balance of Payments: Linking the
United States to the International Economy 1030
The Current Account 1030
The Financial Account 1032
The Capital Account 1032
Why Is the Balance of Payments Always Zero? 1032
Don’t Let This Happen to You: Don’t Confuse
the Balance of Trade, the Current Account
Balance, and the Balance of Payments 1033
Solved Problem 29.1: Understanding the
Arithmetic of the Balance of Payments 1034
29.2 The Foreign Exchange Market and Exchange Rates 1034
Apply the Concept: Exchange Rate Listings 1035
Equilibrium in the Market for Foreign Exchange 1036
How Do Shifts in Demand and Supply Affect the Exchange Rate? 1037
Some Exchange Rates Are Not Determined by
the Market 1038
How Movements in the Exchange Rate Affect
Exports and Imports 1039
Apply the Concept: Is a Strong Currency Good
for a Country? 1039
Don’t Let This Happen to You: Don’t Confuse
What Happens When a Currency
Appreciates with What Happens When It
Depreciates 1041
Solved Problem 29.2: Toyota Rides the
Exchange Rate Rollercoaster 1041
The Real Exchange Rate 1042
29.3 The International Sector and National
Saving and Investment 1043
Net Exports Equal Net Foreign Investment 1043
Domestic Saving, Domestic Investment, and
Net Foreign Investment 1044
Solved Problem 29.3: Arriving at the Saving
and Investment Equation 1044
29.4 The Effect of a Government Budget Deficit
on Investment 1046
Apply the Concept: Why Is the United States
Called the “World’s Largest Debtor”? 1047
29.5 Monetary Policy and Fiscal Policy in an
Open Economy 1048
Monetary Policy in an Open Economy 1049
Fiscal Policy in an Open Economy 1049
Conclusion 1050
Chapter Summary and Problems 1051
CHAPTER 30: The International
Financial System 1058
Bayer and the Great European Currency
Experiment 1058
30.1 Exchange Rate Systems 1060
Don’t Let This Happen to You: Remember
That Modern Currencies Are Fiat Money 1061
30.2 The Current Exchange Rate System 1061
The Floating Dollar 1061
What Determines Exchange Rates in the Long Run? 1062
Apply the Concept: The Big Mac Theory of
Exchange Rates 1063
Solved Problem 30.2: Calculating Purchasing
Power Parity Exchange Rates Using
Big Macs 1064
The Euro 1066
Apply the Concept: Greece and Germany:
Diverse Economies, Common Currency 1067
Pegging against the Dollar 1069
Apply the Concept: The Chinese Yuan:
The World’s Most Controversial Currency 1071
30.3 International Capital Markets 1073
Conclusion 1075
Chapter Summary and Problems 1076
Appendix: The Gold Standard and the Bretton
Woods System 1081
The Gold Standard 1081
The End of the Gold Standard 1081
The Bretton Woods System 1082
The Collapse of the Bretton Woods System 1083
Review Questions 1085
Problems and Applications 1085
Glossary G-1
Company Index I-1
Subject Index I-3
Credits C-1IEF CONTENTS