Economics, 8th Edition
By Glenn Hubbard and Anthony Patrick O’Brien
Contents:
Preface 25
A Word of Thanks 52
PART 1 Introduction
CHAPTER 1: Economics: Foundations and Models 54
Does Apple Manufacture the iPhone in the
United States? 54
1.1 Three Key Economic Ideas 56
People Are Rational 57
People Respond to Economic Incentives 57
Apply the Concept: Would a Congressional
Bill Aimed at Increasing the Pay of Low-Wage Workers Backfire? 57
Optimal Decisions Are Made at the Margin 58
Solved Problem 1.1: The Marginal Benefit and Marginal
Cost of Delivering Packages
for Amazon 59
1.2 The Economic Problem That Every Society
Must Solve 60
What Goods and Services Will Be Produced? 60
How Will the Goods and Services Be Produced? 60
Who Will Receive the Goods and Services Produced? 61
Centrally Planned Economies versus Market Economies 61
The Modern “Mixed” Economy 62
Efficiency and Equity 62
1.3 Economic Models 63
The Role of Assumptions in Economic Models 64
Forming and Testing Hypotheses in Economic Models 64
Positive and Normative Analysis 65
Don’t Let This Happen to You: Don’t Confuse Positive
Analysis with Normative Analysis 66
Economics as a Social Science 66
Apply the Concept: What Can Economics
Contribute to the Debate over Tariffs? 66
1.4 Microeconomics and Macroeconomics 67
1.5 Economic Skills and Economics as a Career 68
1.6 A Preview of Important Economic Terms 69
Conclusion 71
An Inside Look: Are Tariffs Bringing Manufacturing
Jobs Back Home or Just Raising Prices? 72
*Chapter Summary and Problems 74
Key Terms, Summary, Review Questions, Problems and
Applications,
and Critical Thinking Exercises
Appendix: Using Graphs and Formulas 79
Graphs of One Variable 80
Graphs of Two Variables 81
Slopes of Lines 82
Taking into Account More Than Two Variables
on a Graph 83
Positive and Negative Relationships 83
Determining Cause and Effect 84
Are Graphs of Economic Relationships Always
Straight Lines? 85
Slopes of Nonlinear Curves 86
Formulas 87
Formula for a Percentage Change 88
Formulas for the Areas of a Rectangle and a Triangle 88
Summary of Using Formulas 89
Problems and Applications 90
CHAPTER 2: Trade-offs, Comparative
Advantage, and the Market System 92
Elon Musk and Tesla Motors Face a Trade-off 92
2.1 Production Possibilities Frontiers and
Opportunity Costs 94
Graphing the Production Possibilities Frontier 94
Solved Problem 2.1: Analyzing Trade-offs Using
a Production Possibilities Frontier for Tesla Motors 96
Increasing Marginal Opportunity Costs 98
Economic Growth 99
2.2 Comparative Advantage and Trade 99
Specialization and Gains from Trade 100
Absolute Advantage versus Comparative Advantage 102
Comparative Advantage and the Gains from Trade 103
Don’t Let This Happen to You: Don’t Confuse
Absolute Advantage and Comparative
Advantage 103
Solved Problem 2.2: Comparative Advantage
and the Gains from Trade 103
Apply the Concept: Comparative Advantage,
Opportunity Cost, and Housework 105
2.3 The Market System 106
The Circular Flow of Income 107
The Gains from Free Markets 108
The Market Mechanism 108
Apply the Concept: A Story of the Market
System in Action: How Do You Make an iPad? 109
The Role of the Entrepreneur in the Market System 111
The Legal Basis of a Successful Market System 111
Apply the Concept: What Is Socialism? 113
Conclusion 115
An Inside Look: A Plug-in Porsche? 116
Chapter Summary and Problems 118
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply 124
A Basketball Player Takes a Tumble—And So
Does Nike 124
3.1 The Demand Side of the Market 126
Demand Schedules and Demand Curves 126
The Law of Demand 127
What Explains the Law of Demand? 127
Holding Everything Else Constant: The Ceteris Paribus
Condition 128
Variables That Shift Market Demand 128
Apply the Concept: Millennials and Generation
Z Shake Up the Markets for Groceries,
Big Macs, and Running Shoes 130
A Change in Demand versus a Change in Quantity Demanded 131
Apply the Concept: Forecasting the Demand
for Athletic Shoes 132
3.2 The Supply Side of the Market 134
Supply Schedules and Supply Curves 134
The Law of Supply 135
Variables That Shift Market Supply 135
Apply the Concept: Fracking, the U.S. Oil Boom,
and Expected Oil Prices 136
A Change in Supply versus a Change in Quantity Supplied 137
3.3 Market Equilibrium: Putting Demand
and Supply Together 139
How Markets Eliminate Surpluses and Shortages 140
Demand and Supply Both Count 141
Solved Problem 3.3: Demand and Supply
Both Count: A Tale of Two Letters 141
3.4 The Effect of Demand and Supply Shifts
on Equilibrium 142
The Effect of Shifts in Demand on Equilibrium 142
The Effect of Shifts in Supply on Equilibrium 142
The Effect of Shifts in Demand and Supply over Time 143
Apply the Concept: Higher Demand for
Cobalt—But Lower Prices? 145
Solved Problem 3.4: Can We Predict Changes
in the Price and Quantity of Merino Wool? 146
Shifts in a Curve versus Movements along a Curve 147
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 148
Conclusion 149
An Inside Look: If the Shoe Fits . . . Print It? 150
Chapter Summary and Problems 152
CHAPTER 4: Economic Efficiency, Government
Price Setting, and Taxes 160
What Do Food Riots in Venezuela and the Rise
of Uber in the United States Have in Common? 160
4.1 Consumer Surplus and Producer Surplus 162
Consumer Surplus 162
Apply the Concept: The Consumer Surplus
from Uber 164
Producer Surplus 166
What Consumer Surplus and Producer
Surplus Measure 167
4.2 The Efficiency of Competitive Markets 167
Marginal Benefit Equals Marginal Cost in
Competitive Equilibrium 167
Economic Surplus 168
Deadweight Loss 169
Economic Surplus and Economic Efficiency 169
4.3 Government Intervention in the Market:
Price Floors and Price Ceilings 170
Price Floors: Government Policy in Agricultural Markets 170
Apply the Concept: Price Floors in Labor Markets:
The Debate over Minimum Wage Policy 171
Price Ceilings: Government Rent Control Policy
in Housing Markets 173
Don’t Let This Happen to You: Don’t Confuse
“Scarcity” with “Shortage” 174
Black Markets and Peer-to-Peer Sites 174
Solved Problem 4.3: What’s the Economic
Effect of a Black Market in Renting Apartments? 175
The Results of Government Price Controls:
Winners, Losers, and Inefficiency 176
Apply the Concept: Price Controls Lead
to Economic Crisis in Venezuela 176
Positive and Normative Analysis of Price
Ceilings and Price Floors 178
4.4 The Economic Effect of Taxes 178
The Effect of Taxes on Economic Efficiency 178
Tax Incidence: Who Actually Pays a Tax? 179
Solved Problem 4.4: Who Bears the Burden
of the Seattle Beverage Tax? 180
Apply the Concept: Is the Burden of the
Social Security Tax Really Shared Equally
between Workers and Firms? 183
Conclusion 185
An Inside Look: Uber Fights to Repeal
New York City Restrictions 186
Chapter Summary and Problems 188
Appendix: Quantitative Demand and Supply
Analysis 195
Demand and Supply Equations 195
Calculating Consumer Surplus and Producer Surplus 196
Review Questions 198
Problems and Applications 199
PART 2 Markets in Action: Policy and
Applications
CHAPTER 5: Externalities, Environmental Policy,
and Public Goods 200
Are NextEra Energy and Green Power the Future? 200
5.1 Externalities and Economic Efficiency 202
The Effect of Externalities 202
Externalities and Market Failure 204
What Causes Externalities? 205
5.2 Private Solutions to Externalities:
The Coase Theorem 205
The Economically Efficient Level of Pollution
Reduction 206
Apply the Concept: The Clean Air Act: How a
Government
Policy Reduced Infant Mortality 206
The Basis for Private Solutions to Externalities 208
Don’t Let This Happen to You: Remember
That It’s the Net Benefit That Counts 209
Do Property Rights Matter? 209
The Problem of Transactions Costs 210
The Coase Theorem 210
Apply the Concept: How Can You Defend
Your Knees on a Plane Flight? 210
5.3 Government Policies to Deal with Externalities 211
Imposing a Tax When There Is a Negative Externality 211
Providing a Subsidy When There Is a Positive
Externality 212
Apply the Concept: Should the Government
Tax Cigarettes and Soda? 213
Solved Problem 5.3: Are Congestion Fees
the Answer to Big City Traffic Problems? 214
Command-and-Control versus Market-Based
Approaches 216
The End of the Sulfur Dioxide Cap-and-Trade System 217
Are Tradable Emission Allowances Licenses
to Pollute? 217
Apply the Concept: Does the United States
Need a Green New Deal? 217
5.4 Four Categories of Goods 219
The Demand for a Public Good 220
The Optimal Quantity of a Public Good 222
Solved Problem 5.4: Determining the
Optimal Level of Public Goods 223
Common Resources 225
Conclusion 227
Chapter Summary and Problems 228
CHAPTER 6: Elasticity: The Responsiveness
of Demand and Supply 234
Do Soda Taxes Work? 234
6.1 The Price Elasticity of Demand and Its
Measurement 236
Measuring the Price Elasticity of Demand 236
Elastic Demand and Inelastic Demand 237
An Example of Calculating Price Elasticities 237
The Midpoint Formula 238
Solved Problem 6.1: Calculating the Price
Elasticity of Demand 239
When Demand Curves Intersect, the Flatter
Curve Is More Elastic 240
Polar Cases of Perfectly Inelastic and Perfectly Elastic
Demand 240
Don’t Let This Happen to You: Don’t Confuse
Inelastic with Perfectly Inelastic 242
6.2 The Determinants of the Price Elasticity
of Demand 242
Availability of Close Substitutes 242
Passage of Time 243
Luxuries versus Necessities 243
Definition of the Market 243
Share of a Good in a Consumer’s Budget 243
Some Estimated Price Elasticities of Demand 243
6.3 The Relationship between Price Elasticity of
Demand and Total Revenue 244
Elasticity and Revenue with a Linear Demand Curve 245
Solved Problem 6.3: Price and Revenue
Don’t Always Move in the Same Direction 247
Apply the Concept: Amazon and Netflix Test the
Price Elasticity of Demand for Their Services 248
6.4 Other Demand Elasticities 249
Cross-Price Elasticity of Demand 249
Income Elasticity of Demand 250
Apply the Concept: Price Elasticity, Cross-Price
Elasticity, and Income Elasticity in the Market
for Alcoholic Beverages 250
6.5 Using Elasticity to Analyze the Disappearing
Family Farm 251
Solved Problem 6.5: Using Price Elasticity
to Analyze the Effects of a Soda Tax 304
6.6 The Price Elasticity of Supply and Its
Measurement 253
Measuring the Price Elasticity of Supply 254
Determinants of the Price Elasticity of Supply 254
Apply the Concept: Why Are Oil Prices So Unstable? 254
Polar Cases of Perfectly Elastic and Perfectly
Inelastic Supply 256
Using Price Elasticity of Supply to Predict
Changes in Price 256
Conclusion 259
Chapter Summary and Problems 260
CHAPTER 7: The Economics of Health Care 268
Goodbye to Blue Cross and Blue Shield? 268
7.1 The Improving Health of People in the
United States 270
Changes over Time in U.S. Health 270
Reasons for Long-Run Improvements in U.S. Health 271
7.2 Health Care around the World 272
The U.S. Health Care System 272
Apply the Concept: The Increasing Importance
of Health Care in the U.S. Economy 274
The Health Care Systems of Canada, Japan, and the
United Kingdom 275
Comparing Health Care Outcomes around the World 276
How Useful Are Cross-Country Comparisons
of Health Outcomes? 277
7.3 Information Problems and Externalities
in the Market for Health Care 278
Adverse Selection and the Market for “Lemons” 278
Asymmetric Information in the Market for
Health Insurance 279
Don’t Let This Happen to You: Don’t Confuse
Adverse Selection with Moral Hazard 280
Externalities in the Market for Health Care 281
Should the Government Run the Health Care
System? 283
7.4 The Debate over Health Care Policy
in the United States 284
The Rising Cost of Health Care 284
Apply the Concept: Are U.S. Firms Handicapped
by Paying for Their Employees’ Health Insurance? 286
Explaining Increases in Health Care Spending 287
The Continuing Debate over Health Care Policy 290
Solved Problem 7.4: Recent Trends in
U.S. Health Care 291
Market-Based Reforms 292
Apply the Concept: Medicare for All? 293
Conclusion 295
Chapter Summary and Problems 296
PART 3 Firms in the Domestic and
International
Economies
CHAPTER 8: Firms, the Stock Market,
and Corporate Governance 302
Investing in Lyft, a Company That Has Never
Earned a Profit? 302
8.1 Types of Firms 304
Who Is Liable? Limited and Unlimited Liability 304
Corporations Earn the Majority of Revenue
and Profits 305
Apply the Concept: Why Are Fewer Young
People Starting Businesses? 306
The Structure of Corporations and the
Principal–Agent Problem 307
8.2 How Firms Raise Funds 308
Sources of External Funds 308
Apply the Concept: The Rating Game:
Are Federal, State, or City Governments
Likely to Default on Their Bonds? 309
Stock and Bond Markets Provide Capital—and
Information 311
The Fluctuating Stock Market 312
Don’t Let This Happen to You: When Lyft
Shares Are Sold, Lyft Doesn’t Get the Money 312
Why Is It So Hard to Beat the Market? 314
Apply the Concept: Why Would Anyone
Buy Lyft’s Stock? 315
Solved Problem 8.2: Why Does Warren
Buffett Like Mutual Funds? 316
8.3 Using Financial Statements to Evaluate
a Corporation 317
The Income Statement 317
The Balance Sheet 318
Problems in Corporate Governance 318
Apply the Concept: Should Investors
Worry about Corporate Governance at Lyft? 319
Conclusion 321
Chapter Summary and Problems 322
Appendix: Using Present Value 326
The Concept of Present Value 326
Solved Problem 8A.1: How to Receive Your
Contest Winnings 328
Using Present Value to Calculate Bond Prices 328
Using Present Value to Calculate Stock Prices 329
A Simple Formula for Calculating Stock Prices 329
Review Questions 330
Problems and Applications 330
Online Appendix: Income Statements and
Balance Sheets
CHAPTER 9: Comparative Advantage
and the Gains from International Trade 332
Being Careful What You Wish For: Trade Wars
and Whirlpool 332
9.1 The United States in the International Economy 334
The Importance of Trade to the U.S. Economy 335
U.S. International Trade in a World Context 336
9.2 Comparative Advantage in International Trade 337
A Brief Review of Comparative Advantage 337
Comparative Advantage and Absolute Advantage 337
9.3 How Countries Gain from International Trade 338
Increasing Consumption through Trade 339
Solved Problem 9.3: The Gains from Trade 340
Why Don’t We See Complete Specialization? 341
Does Anyone Lose as a Result of International Trade? 342
Don’t Let This Happen to You: Remember That
Trade Creates Both Winners and Losers 342
Apply the Concept: Who Gains and Who
Loses from U.S. Trade with China? 342
Where Does Comparative Advantage Come From? 345
9.4 Government Policies That Restrict
International Trade 346
Tariffs 347
Quotas and Voluntary Export Restraints 348
Measuring the Economic Effect of the Sugar Quota 348
Solved Problem 9.4: Measuring the Economic
Effect of a Quota 350
The High Cost of Preserving Jobs with Tariffs and Quotas 351
Apply the Concept: Smoot-Hawley, the Politics
of Tariffs, and the Cost of Protecting a Vanishing
Industry 351
Gains from Unilateral Elimination of Tariffs and Quotas 353
Other Barriers to Trade 353
9.5 The Debate over Trade Policies and Globalization 353
Why Do Some People Oppose the World Trade
Organization? 354
Dumping 356
Apply the Concept: The Trade War of 2018 357
Positive versus Normative Analysis (Once Again) 358
Conclusion 359
Chapter Summary and Problems 360
PART 4 Microeconomic Foundations:
Consumers and Firms
CHAPTER 10: Consumer Choice and
Behavioral Economics 368
What Happened to Sears and the Other
Department Stores? 368
10.1 Utility and Consumer Decision Making 370
An Overview of the Economic Model of
Consumer Behavior 370
Utility 370
The Principle of Diminishing Marginal Utility 371
The Rule of Equal Marginal Utility per Dollar Spent 371
Solved Problem 10.1: Finding the Optimal
Level of Consumption 374
What if the Rule of Equal Marginal Utility per
Dollar Does Not Hold? 375
Don’t Let This Happen to You: Equalize
Marginal Utilities per Dollar 376
The Income Effect and Substitution Effect of
a Price Change 377
Don’t Let This Happen to You: The Income
Effect Doesn’t Involve an Increase in Money
Income 377
10.2 Where Demand Curves Come From 379
Apply the Concept: Are There Any
Upward-Sloping Demand Curves in
the Real World? 380
10.3 Social Influences on Decision Making 381
The Effects of Celebrity Endorsements 382
Network Externalities 382
Does Fairness Matter? 383
Apply the Concept: Taylor Swift Tries
to Please Fans and Make Money 386
Solved Problem 10.3: Why Doesn’t Tesla
Charge Its Employees to Park Their Cars? 387
10.4 Behavioral Economics: Do People Make
Rational Choices? 389
Pitfalls in Decision Making 389
Apply the Concept: Sunk Costs and Sports
Teams 390
“Nudges”: Using Behavioral Economics to Guide
Behavior 391
The Behavioral Economics of Shopping 392
Apply the Concept: Trying to Use the Apple
Approach to Save J.C. Penney 393
Conclusion 395
Chapter Summary and Problems 396
Appendix: Using Indifference Curves and
Budget Lines to Understand Consumer Behavior 402
Consumer Preferences 402
Indifference Curves 402
The Slope of an Indifference Curve 403
Can Indifference Curves Ever Cross? 403
The Budget Constraint 404
Choosing the Optimal Consumption of Pizza
and Coke 405
Apply the Concept: Apple Determines
the Optimal Mix of iPhone Features 406
Deriving the Demand Curve 407
Solved Problem 10A.1: When Does a Price
Change Make a Consumer Better Off? 408
The Income Effect and the Substitution Effect
of a Price Change 409
How a Change in Income Affects Optimal
Consumption 411
The Slope of the Indifference Curve, the Slope
of the Budget Line, and the Rule of Equal
Marginal Utility per Dollar Spent 412
The Rule of Equal Marginal Utility per Dollar
Spent Revisited 412
Review Questions 414
Problems and Applications 414
CHAPTER 11: Technology, Production, and Costs 416
Fracking Lowers the Cost of Oil and Revolutionizes
the World Market 416
11.1 Technology: An Economic Definition 418
Apply the Concept: Oil Roughnecks Encounter
Robots and Drones 418
11.2 The Short Run and the Long Run in Economics 419
The Difference between Fixed Costs and
Variable Costs 419
Apply the Concept: Fixed Costs in the
Publishing Industry 420
Implicit Costs versus Explicit Costs 420
The Production Function 421
A First Look at the Relationship between
Production and Cost 421
11.3 The Marginal Product of Labor and
the Average Product of Labor 423
The Law of Diminishing Returns 423
Graphing Production 424
Apply the Concept: Adam Smith’s Famous Account
of the Division of Labor in a Pin Factory 425
The Relationship between Marginal Product
and Average Product 425
An Example of Marginal and Average Values:
College Grades 426
11.4 The Relationship between Short-Run
Production and Short-Run Cost 427
Marginal Cost 427
Why Are the Marginal and Average Cost Curves
U Shaped? 427
Solved Problem 11.4: Calculating Marginal
Cost and Average Total Cost 429
11.5 Graphing Cost Curves 430
11.6 Costs in the Long Run 432
Economies of Scale 432
Long-Run Average Cost Curves for Automobile
Factories 433
Solved Problem 11.6: Using Long-Run Average
Cost Curves to Understand a Business Merger 433
Apply the Concept: The Colossal River Rouge:
Diseconomies of Scale at Ford Motor Company 435
Don’t Let This Happen to You: Don’t Confuse
Diminishing
Returns with Diseconomies
of Scale 436
Conclusion 437
Chapter Summary and Problems 438
Online Appendix: Using Isoquants and Isocost
Lines to Understand Production and Cost
PART 5 Market Structure and Firm
Strategy
CHAPTER 12: Firms in Perfectly Competitive
Markets 446
Are Cage-Free Eggs the Road to Riches? 446
12.1 Perfectly Competitive Markets 449
A Perfectly Competitive Firm Cannot Affect
the Market Price 449
The Demand Curve for the Output of a Perfectly
Competitive
Firm 450
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 450
12.2 How a Firm Maximizes Profit in a Perfectly
Competitive
Market 451
Revenue for a Firm in a Perfectly Competitive Market 452
Determining the Profit-Maximizing Level of Output 452
12.3 Illustrating Profit or Loss on the Cost
Curve Graph 455
Showing Profit on a Graph 455
Solved Problem 12.3: Determining Prof it-
Maximizing Price and Quantity 456
Don’t Let This Happen to You: Remember That
Firms Maximize Their Total Prof it, Not Their
Prof it per Unit 458
Illustrating When a Firm Is Breaking Even
or Operating at a Loss 458
12.4 Deciding Whether to Produce or to
Shut Down in the Short Run 459
The Supply Curve of a Firm in the Short Run 459
Apply the Concept: What Does “Break Even”
Mean in the Oil Fields? 460
Solved Problem 12.4: When to Shut Down a Farm 462
The Market Supply Curve in a Perfectly Competitive
Industry 463
12.5 “If Everyone Can Do It, You Can’t Make Money
at It”: The Entry and Exit of Firms in the Long Run 464
Economic Profit and the Entry or Exit Decision 464
Long-Run Equilibrium in a Perfectly Competitive Market 466
The Long-Run Supply Curve in a Perfectly
Competitive Market 468
Apply the Concept: The Winding Path to
Long-Run Equilibrium in the Egg Market 469
Increasing-Cost and Decreasing-Cost Industries 470
12.6 Perfect Competition and Economic Efficiency 470
Productive Efficiency 470
Solved Problem 12.6: How Productive Efficiency
Benef
its Consumers 471
Allocative Efficiency 472
Conclusion 473
Chapter Summary and Problems 474
CHAPTER 13: Monopolistic Competition:
The Competitive Model in a More Realistic
Setting 482
The Coffee Industry: From Supermarket Cans
to Third Wave Coffeehouse 482
13.1 Demand and Marginal Revenue for a Firm
in a Monopolistically Competitive Market 484
The Demand Curve for a Monopolistically
Competitive Firm 484
Marginal Revenue for a Firm with a
Downward-Sloping Demand Curve 485
13.2 How a Monopolistically Competitive
Firm Maximizes Profit in the Short Run 487
Solved Problem 13.2: Does Minimizing
Cost Maximize Prof it at Apple? 488
13.3 What Happens to Profits in the Long Run? 490
How Does the Entry of New Firms Affect the
Profits of Existing Firms? 490
Don’t Let This Happen to You: Don’t Confuse Zero
Economic Profit with Zero Accounting Profit 492
Apply the Concept: Can Third Wave Coffeehouses
Remain Prof itable? 492
Is Zero Economic Profit Inevitable in the Long Run? 493
Solved Problem 13.3: The Profitability of Amazon Go 494
13.4 Comparing Monopolistic Competition
and Perfect Competition 495
Excess Capacity under Monopolistic Competition 495
Is Monopolistic Competition Inefficient? 496
How Consumers Benefit from Monopolistic
Competition 496
Apply the Concept: Are Ghost and Virtual
Restaurants the Wave of the Future? 496
13.5 How Marketing Differentiates Products 497
Brand Management 498
Advertising 498
Defending a Brand Name 498
13.6 What Makes a Firm Successful? 499
Apply the Concept: Is Being the First Firm
in the Market a Key to Success? 500
Conclusion 501
Chapter Summary and Problems 502
CHAPTER 14: Oligopoly: Firms in Less
Competitive Markets 510
Apple, Spotify, and the Music Streaming
Revolution 510
14.1 Oligopoly and Barriers to Entry 512
Barriers to Entry 513
Apply the Concept: Are Unlicensed Yoga
Instructors a Menace to Public Health? 515
14.2 Game Theory and Oligopoly 516
A Duopoly Game: Price Competition between
Two Firms 517
Firm Behavior and the Prisoner’s Dilemma 518
Don’t Let This Happen to You: Don’t
Misunderstand Why Each Firm Ends Up
Charging a Price of $9.99 518
Solved Problem 14.2: Is Offering a College
Student Discount a Prisoner’s Dilemma
for Apple and Spotify? 518
Can Firms Escape the Prisoner’s Dilemma? 520
Apply the Concept: Are the Big Four
Airlines Colluding? 521
Cartels: The Case of OPEC 522
14.3 Sequential Games and Business Strategy 524
Deterring Entry 524
Solved Problem 14.3: Is Deterring Entry
Always a Good Idea? 526
Bargaining 526
14.4 The Five Competitive Forces Model 528
Competition from Existing Firms 528
The Threat from Potential Entrants 528
Competition from Substitute Goods or Services 528
The Bargaining Power of Buyers 529
The Bargaining Power of Suppliers 529
Apply the Concept: Do Large Firms Live Forever? 529
Conclusion 531
Chapter Summary and Problems 532
CHAPTER 15: Monopoly and Antitrust Policy 538
The Monopoly in Your Mailbox 538
15.1 Is Any Firm Ever Really a Monopoly? 540
Apply the Concept: Has the USPS Outlived
Its Usefulness? 540
15.2 Where Do Monopolies Come From? 542
Government Action Blocks Entry 542
Apply the Concept: Does Hasbro Have
a Monopoly on Monopoly? 543
Control of a Key Resource 544
Apply the Concept: Are Diamond Prof its
Forever? The De Beers Diamond Monopoly 544
Network Externalities 545
Natural Monopoly 546
15.3 How Does a Monopoly Choose Price and
Output? 547
Marginal Revenue Once Again 547
Profit Maximization for a Monopolist 547
Solved Problem 15.3: Finding the Profit-Maximizing
Price and Output for a Cable Monopoly 549
Don’t Let This Happen to You: Don’t Assume
That Charging a Higher Price Is Always
More Prof itable for a Monopolist 550
15.4 Does Monopoly Reduce Economic
Efficiency? 551
Comparing Monopoly and Perfect Competition 551
Measuring the Efficiency Losses from Monopoly 552
How Large Are the Efficiency Losses Due to Monopoly? 553
Market Power and Technological Change 553
15.5 Price Discrimination: Charging Different
Prices for the Same Product 554
The Requirements for Successful Price Discrimination 554
An Example of Price Discrimination 554
Don’t Let This Happen to You: Don’t Confuse
Price Discrimination with Other Types
of Discrimination 555
Solved Problem 15.5: How Apple Uses
Price Discrimination to Increase Prof its 556
Airlines: The Kings of Price Discrimination 557
Big Data and Dynamic Pricing 558
Perfect Price Discrimination 560
Price Discrimination across Time 561
Can Price Discrimination Be Illegal? 562
15.6 Government Policy toward Monopoly 562
Antitrust Laws and Antitrust Enforcement 562
Mergers: The Trade-off between Market Power
and Efficiency 563
The Department of Justice and FTC Merger
Guidelines and the Herfindahl-Hirschman
Index of Concentration 564
Regulating Natural Monopolies 565
Apply the Concept: Should the Justice
Department Break Up Google, Amazon,
and Facebook? 566
Conclusion 568
Chapter Summary and Problems 569
PART 6 Labor Markets, Public Choice,
and the Distribution of Income
CHAPTER 16: The Markets for Labor
and Other Factors of Production 578
Great Hamburger? Thank a Robot 578
16.1 The Demand for Labor 580
The Marginal Revenue Product of Labor 580
Solved Problem 16.1: Hiring Decisions
by a Firm That Is a Price Maker 582
The Market Demand Curve for Labor 583
Factors That Shift the Market Demand Curve
for Labor 583
16.2 The Supply of Labor 584
The Market Supply Curve of Labor 585
Factors That Shift the Market Supply Curve
of Labor 585
16.3 Equilibrium in the Labor Market 586
The Effect on Equilibrium Wages of a Shift in
Labor Demand 587
Apply the Concept: Does It Matter Which
College You Attend? 587
The Effect of Immigration on the U.S. Labor Market 589
Apply the Concept: Will You Compete with
a Robot for a Job—Or Work with One? 591
16.4 Explaining Differences in Wages 593
Don’t Let This Happen to You: Remember That
Prices and Wages Are Determined
at the Margin 595
Apply the Concept: Technology and the Earnings
of “Superstars” 595
Compensating Differentials 596
Discrimination 596
Solved Problem 16.4: Is Passing “Comparable
Worth” Legislation a Good Way to Close
the Gap between Men’s and Women’s Pay? 598
Apply the Concept: Does Greg Have an Easier
Time Finding a Job Than Jamal? 599
Labor Unions 601
16.5 Personnel Economics 602
Should Workers’ Pay Depend on How Much
They Work or on How Much They Produce? 602
Apply the Concept: A Better Way to Sell
Contact Lenses 603
Other Considerations in Setting Compensation
Systems 604
16.6 The Markets for Capital and Natural
Resources 604
The Market for Capital 604
The Market for Natural Resources 605
Monopsony 605
The Marginal Productivity Theory of Income
Distribution 607
Conclusion 607
Chapter Summary and Problems 608
CHAPTER 17: Public Choice, Taxes,
and the Distribution of Income 616
Should Your Small Business Be Taxed Like Apple? 616
17.1 Public Choice 618
How Do We Know the Public Interest? Models
of Voting 618
Government Failure? 620
Is Government Regulation Necessary? 622
17.2 The Tax System 622
An Overview of the U.S. Tax System 623
Progressive and Regressive Taxes 624
Apply the Concept: Which Groups Pay
the Most in Federal Taxes? 625
Marginal and Average Income Tax Rates 626
The Corporate Income Tax 626
International Comparison of Corporate Income Taxes 626
Evaluating Taxes 627
Apply the Concept: Should the Federal
Government Begin to Tax Wealth? 630
17.3 Tax Incidence Revisited: The Effect of Price
Elasticity 631
Don’t Let This Happen to You: Don’t Confuse
Who Pays a Tax with Who Bears the Burden
of the Tax 632
Apply the Concept: Do Corporations Really Bear
the Burden of the Federal Corporate Income Tax? 632
Solved Problem 17.3: The Effect of Price
Elasticity on the Excess Burden of a Tax 633
17.4 Income Distribution and Poverty 634
Measuring the Income Distribution and
Measuring Poverty 634
Showing the Income Distribution with a Lorenz Curve 636
Problems in Measuring Poverty and the
Distribution of Income 637
Explaining Income Inequality 640
Policies to Reduce Income Inequality 641
Apply the Concept: Who Are the 1 Percent,
and How Do They Earn Their Incomes? 643
Poverty around the World 644
Conclusion 646
Chapter Summary and Problems 647
PART 7 Macroeconomic Foundations
and Long-Run Growth
CHAPTER 18: GDP: Measuring Total Production
and Income 654
Politics, Macroeconomics, and General Motors 654
18.1 Gross Domestic Product Measures Total
Production 657
Measuring Total Production: Gross Domestic
Product 657
Solved Problem 18.1: Calculating GDP 658
Production, Income, and the Circular-Flow
Diagram 658
Components of GDP 660
Don’t Let This Happen to You: Remember
What Economists Mean by Investment 661
An Equation for GDP and Some Actual Values 661
Apply the Concept: Microsoft’s Steve Ballmer
Uses the U.S. Constitution to Reorganize
Government Data 662
Measuring GDP Using the Value-Added Method 664
18.2 Does GDP Measure What We Want It
to Measure? 664
Shortcomings in GDP as a Measure of Total
Production 664
Apply the Concept: Why Do Many Developing
Countries Have Such Large Underground
Economies? 665
Shortcomings of GDP as a Measure of Well-Being 666
18.3 Real GDP versus Nominal GDP 667
Calculating Real GDP 668
Solved Problem 18.3: Calculating Real GDP 668
Comparing Real GDP and Nominal GDP 669
The GDP Deflator 670
18.4 Other Measures of Total Production and
Total Income 670
Gross National Product 671
National Income 671
Personal Income 671
Disposable Personal Income 671
The Division of Income 671
Apply the Concept: Should We Pay More
Attention to Gross Domestic Income? 673
Conclusion 674
Chapter Summary and Problems 675
CHAPTER 19: Unemployment and Inflation 682
Former Inmates and Stoughton Trailers Meet
in a High-Pressure Economy 682
19.1 Measuring the Unemployment Rate,
the Labor Force Participation Rate, and the
Employment–Population Ratio 684
The Household Survey 684
Solved Problem 19.1: What Happens if the BLS
Includes the Military? 686
Problems with Measuring the Unemployment Rate 687
Unemployment Rates for Different Groups 688
How Long Are People Typically Unemployed? 689
Trends in Labor Force Participation 689
Apply the Concept: How Large Is the Potential
U.S. Labor Force? 690
The Establishment Survey: Another Measure
of Employment 692
Revisions in the Establishment Survey Employment
Data: How Bad Was the 2007–2009 Recession? 693
Job Creation and Job Destruction over Time 694
19.2 Types of Unemployment 694
Frictional Unemployment and Job Search 694
Structural Unemployment 695
Cyclical Unemployment 696
Full Employment 696
Apply the Concept: Will Advances in Information
Technology Permanently Increase Structural
Unemployment? 696
19.3 Explaining Unemployment 698
Government Policies and the Unemployment Rate 698
Labor Unions 699
Efficiency Wages 700
19.4 Measuring Inflation 700
The Consumer Price Index 700
Is the CPI Accurate? 702
Don’t Let This Happen to You: Don’t Miscalculate
the Inflation Rate 702
The Producer Price Index 703
19.5 Using Price Indexes to Adjust for the Effects
of Inflation 703
Solved Problem 19.5: What Has Been Happening
to Real Wages in the United States? 704
19.6 Nominal Interest Rates versus Real Interest Rates 705
19.7 Does Inflation Impose Costs on the Economy? 707
Inflation Affects the Distribution of Income 708
The Problem with Anticipated Inflation 708
The Problem with Unanticipated Inflation 709
Apply the Concept: What’s So Bad about Falling Prices? 709
Conclusion 711
Chapter Summary and Problems 712
CHAPTER 20: Economic Growth, the Financial
System,
and Business Cycles 722
Millennials Experience the iPhone, Snapchat, . . .
and the Great Recession 722
20.1 Long-Run Economic Growth 724
Apply the Concept: The Connection between
Economic
Prosperity and Health 725
Calculating Growth Rates and the Rule of 70 727
What Determines the Rate of Long-Run Growth? 728
Solved Problem 20.1: Where Does Productivity
Come From? 729
Apply the Concept: Can India Sustain Its Rapid
Growth? 730
Potential GDP 732
20.2 Saving, Investment, and the Financial System 733
An Overview of the Financial System 733
The Macroeconomics of Saving and Investment 734
The Market for Loanable Funds 736
Apply the Concept: Ebenezer Scrooge: Accidental
Promoter of Economic Growth? 737
Solved Problem 20.2: Are Future Budget Deficits
a Threat to the Economy? 739
20.3 The Business Cycle 741
Some Basic Business Cycle Definitions 741
How Do We Know When the Economy Is in
a Recession? 742
What Happens during the Business Cycle? 743
Don’t Let This Happen to You: Don’t Confuse
the Price Level and the Inflation Rate 744
Has the U.S. Economy Returned to Stability? 748
Conclusion 749
Chapter Summary and Problems 750
CHAPTER 21: Long-Run Economic Growth:
Sources and Policies 756
Technological Change, Creative Destruction,
and Rising Living Standards 756
21.1 Economic Growth over Time and around
the World 758
Economic Growth from 1,000,000 b.c.e.
to the Present 758
Apply the Concept: Why Did the Industrial
Revolution Begin in England? 759
Small Differences in Growth Rates Are Important 760
The Problem with Slow Economic Growth 761
Don’t Let This Happen to You: Don’t Confuse
the Average Annual Percentage Change with
the Total Percentage Change 761
The Variation in per Capita Income around the World 761
Is Income All That Matters? 762
21.2 What Determines How Fast Economies Grow? 763
The Per-Worker Production Function 764
Which Is More Important for Economic Growth:
More Capital or Technological Change? 765
Technological Change: The Key to Sustaining
Economic Growth 765
Apply the Concept: What Explains the Economic
Failure
of the Soviet Union? 766
Solved Problem 21.2: Using the Economic
Growth Model to Analyze the Failure of
the Soviet Economy 767
New Growth Theory 768
Joseph Schumpeter and Creative Destruction 769
21.3 Economic Growth in the United States 770
Economic Growth in the United States since 1950 771
Is the United States Headed for a Long Period
of Slow Growth? 771
21.4 Why Isn’t the Whole World Rich? 773
Catch-up: Sometimes but Not Always 774
Solved Problem 21.4: The Economic Growth
Model’s Prediction of Catch-up 776
Why Haven’t Most Western European Countries,
Canada, and Japan Caught Up to the United States? 777
Why Don’t More Low-Income Countries Experience
Rapid Growth? 779
Apply the Concept: Why Hasn’t Mexico Grown
as Fast as China? 779
The Benefits of Globalization 782
21.5 Growth Policies 782
Enhancing Property Rights and the Rule of Law 783
Apply the Concept: Will China’s Standard of
Living Ever Exceed That of the United States? 783
Improving Health and Education 784
Policies That Promote Technological Change 785
Policies That Promote Saving and Investment 785
Apply the Concept: Is Sub-Saharan Africa
on the Road to Economic Growth? 786
Is Economic Growth Good or Bad? 787
Conclusion 788
Chapter Summary and Problems 789
PART 8 Short-Run Fluctuations
CHAPTER 22: Aggregate Expenditure and
Output in the Short Run 798
Glamping and Airstream’s Ride on the
Business Cycle 798
22.1 The Aggregate Expenditure Model 800
Aggregate Expenditure 800
The Difference between Planned Investment
and Actual Investment 801
Macroeconomic Equilibrium 801
Adjustments to Macroeconomic Equilibrium 802
22.2 Determining the Level of Aggregate
Expenditure in the Economy 803
Consumption 803
The Volatility of Consumer Spending on
Durables 805
The Relationship between Consumption and
National Income 808
Income, Consumption, and Saving 809
Solved Problem 22.2: Calculating the Marginal
Propensity to Consume and the Marginal
Propensity to Save 810
Planned Investment 811
Apply the Concept: Is Student Loan Debt
Causing Fewer Young People to Buy Houses? 812
Government Purchases 814
Net Exports 815
Apply the Concept: The iPhone Is Made in
China . . . or Is It? 816
22.3 Graphing Macroeconomic Equilibrium 817
Showing a Recession on the 45°-Line Diagram 820
The Important Role of Inventories 821
A Numerical Example of Macroeconomic
Equilibrium 822
Don’t Let This Happen to You: Don’t Confuse
Aggregate Expenditure with Consumption
Spending 823
Solved Problem 22.3: Determining
Macroeconomic Equilibrium 823
22.4 The Multiplier Effect 824
Apply the Concept: The Multiplier in Reverse:
The Great Depression of the 1930s 827
A Formula for the Multiplier 828
Summarizing the Multiplier Effect 829
Solved Problem 22.4: Using the Multiplier
Formula 830
The Paradox of Thrift 831
22.5 The Aggregate Demand Curve 831
Conclusion 834
Chapter Summary and Problems 835
Appendix: The Algebra of Macroeconomic
Equilibrium 842
Review Questions 843
CHAPTER 23: Aggregate Demand and
Aggregate Supply Analysis 844
General Motors Hopes the Economic Expansion
Doesn’t Die of Old Age 844
23.1 Aggregate Demand 846
Why Is the Aggregate Demand Curve Downward
Sloping? 846
Shifts of the Aggregate Demand Curve versus
Movements along It 848
The Variables That Shift the Aggregate Demand Curve 848
Don’t Let This Happen to You: Understand Why the
Aggregate Demand Curve Is Downward Sloping 849
Solved Problem 23.1: Movements along
the Aggregate Demand Curve or Shifts
of the Curve? 850
Apply the Concept: Which Components of
Aggregate Demand Changed the Most during
the 2007–2009 Recession? 851
23.2 Aggregate Supply 853
The Long-Run Aggregate Supply Curve 853
The Short-Run Aggregate Supply Curve 854
Apply the Concept: How Sticky Are Wages? 855
Shifts of the Short-Run Aggregate Supply Curve
versus Movements along It 857
Variables That Shift the Short-Run Aggregate
Supply Curve 857
23.3 Macroeconomic Equilibrium in the Long
Run and the Short Run 859
Recessions, Expansions, and Supply Shocks 860
Apply the Concept: Does It Matter What
Causes a Decline in Aggregate Demand? 861
Apply the Concept: Is the Business Cycle
Really a Cycle? 864
23.4 A Dynamic Aggregate Demand and
Aggregate Supply Model 866
What Is the Usual Cause of Inflation? 867
The Recession of 2007–2009 867
Solved Problem 23.4: Showing the Oil Shock
of 1974–1975 on a Dynamic Aggregate
Demand and Aggregate Supply Graph 870
Conclusion 871
Chapter Summary and Problems 872
Appendix: Macroeconomic Schools of Thought 880
The Monetarist Model 880
The New Classical Model 881
The Real Business Cycle Model 881
The Austrian Model 882
Apply the Concept: Karl Marx: Capitalism’s
Severest Critic 882
PART 9 Monetary and Fiscal Policy
CHAPTER 24: Money, Banks, and the Federal
Reserve System 884
Is Venmo the End of Money? 884
24.1 What Is Money, and Why Do
We Need It? 886
Barter and the Invention of Money 886
The Functions of Money 887
What Can Serve as Money? 888
Apply the Concept: Your Money Is No
Good Here! 889
24.2 How Is Money Measured in the
United States Today? 890
M1: A Narrow Definition of the Money Supply 890
M2: A Broad Definition of Money 891
Don’t Let This Happen to You: Don’t Confuse
Money with Income or Wealth 892
Solved Problem 24.2: The Def initions of
M1 and M2 892
What about Credit Cards and Debit Cards? 892
Apply the Concept: Are Bitcoins Money? 893
24.3 How Do Banks Create Money? 894
Bank Balance Sheets 894
Apply the Concept: Help for Young Borrowers:
Fintech or Ceilings on Interest Rates? 895
Using T-accounts to Show How a Bank Can
Create Money 897
The Simple Deposit Multiplier 899
Don’t Let This Happen to You: Don’t Confuse
Assets and Liabilities 900
Solved Problem 24.3: Showing How Banks
Create Money 900
The Simple Deposit Multiplier versus the
Real-World Deposit Multiplier 902
24.4 The Federal Reserve System 903
The Establishment of the Federal Reserve System 903
How the Federal Reserve Manages the Money Supply 905
The “Shadow Banking System” and the Financial
Crisis of 2007–2009 908
24.5 The Quantity Theory of Money 910
Connecting Money and Prices: The Quantity Equation 910
The Quantity Theory Explanation of Inflation 910
How Accurate Are Forecasts of Inflation Based
on the Quantity Theory? 911
High Rates of Inflation 912
Apply the Concept: The German Hyperinflation
of the Early 1920s 913
Conclusion 914
Chapter Summary and Problems 915
CHAPTER 25: Monetary Policy 922
Who Elected the Fed? 922
25.1 What Is Monetary Policy? 924
The Goals of Monetary Policy 924
25.2 The Money Market and the Fed’s Choice
of Monetary Policy Targets 926
Monetary Policy Targets 926
The Demand for Money 926
Shifts in the Money Demand Curve 927
How the Fed Manages the Money Supply:
A Quick Review 928
Equilibrium in the Money Market 928
A Tale of Two Interest Rates 930
Choosing a Monetary Policy Target 930
The Importance of the Federal Funds Rate 930
Managing the Federal Funds Rate Today 931
25.3 Monetary Policy and Economic Activity 932
How Interest Rates Affect Aggregate Demand 932
The Effects of Monetary Policy on Real GDP
and the Price Level 933
Apply the Concept: Quantitative Easing,
the Fed’s Balance Sheet, and Negative
Interest Rates in Europe 934
Can the Fed Eliminate Recessions? 936
Fed Forecasts 938
Apply the Concept: Trying to Hit a Moving
Target: Making Policy with “Real-Time Data” 938
A Summary of How Monetary Policy Works 940
Don’t Let This Happen to You: Remember
That with Monetary Policy, It’s the Interest
Rates—Not the Money—That Counts 940
25.4 Monetary Policy in the Dynamic Aggregate
Demand and Aggregate Supply Model 941
The Effects of Monetary Policy on Real GDP
and the Price Level: A More Complete Account 941
Using Monetary Policy to Fight Inflation 942
Solved Problem 25.4: The Effects of Monetary Policy 944
25.5 A Closer Look at the Fed’s Setting
of Monetary Policy Targets 945
Should the Fed Target the Money Supply? 945
Why Doesn’t the Fed Target Both the Money
Supply and the Interest Rate? 946
The Taylor Rule 947
Solved Problem 25.5: Applying the Taylor Rule 948
Inflation Targeting . . . or Nominal GDP Targeting? 949
Apply the Concept: Should the Fed Worry
about the Prices of Food and Gasoline? 950
25.6 Fed Policies during the 2007–2009 Recession 951
The Inflation and Deflation of the Housing
Market Bubble 951
The Changing Mortgage Market 952
The Role of Investment Banks 952
Apply the Concept: The Wonderful World
of Leverage 953
The Fed and the Treasury Department Respond 954
Conclusion 956
Chapter Summary and Problems 957
CHAPTER 26: Fiscal Policy 966
Can Fiscal Policy Increase Economic Growth? 966
26.1 What Is Fiscal Policy? 968
What Fiscal Policy Is and What It Isn’t 968
Automatic Stabilizers versus Discretionary
Fiscal Policy 968
An Overview of Government Spending and Taxes 968
Apply the Concept: Is Spending on Social
Security and Medicare a Fiscal Time Bomb? 971
26.2 The Effects of Fiscal Policy on Real GDP
and the Price Level 973
Short-Run Expansionary and Contractionary
Fiscal Policy 973
A Summary of How Fiscal Policy Affects Aggregate
Demand 975
Don’t Let This Happen to You: Don’t Confuse
Fiscal Policy and Monetary Policy 975
26.3 Fiscal Policy in the Dynamic Aggregate
Demand and Aggregate Supply Model 975
26.4 The Government Purchases and Tax
Multipliers 977
The Effect of Changes in the Tax Rate 980
Taking into Account the Effects of Aggregate Supply 980
The Multipliers Work in Both Directions 981
Solved Problem 26.4: Fiscal Policy Multipliers 981
26.5 The Limits to Using Fiscal Policy to Stabilize
the Economy 982
Apply the Concept: Why Was the Recession
of 2007–2009 So Severe? 982
Does Government Spending Reduce Private
Spending? 984
Crowding Out in the Short Run 984
Crowding Out in the Long Run 985
Fiscal Policy in Action: Did the Stimulus Package
of 2009 Succeed? 986
26.6 Deficits, Surpluses, and Federal
Government Debt 988
How the Federal Budget Can Serve as an
Automatic Stabilizer 989
Should the Federal Budget Always Be Balanced? 991
Solved Problem 26.6: The Italian Government
Confronts a Budget Def icit 991
The Federal Government Debt 992
Is Government Debt a Problem? 993
Apply the Concept: Modern Monetary Theory:
Should We Stop Worrying and Love the Debt? 993
26.7 Long-Run Fiscal Policy and Economic Growth 994
Explaining Long-Run Increases in Real GDP 995
How Can Fiscal Policy Affect Long-Run Economic
Growth? The Long-Run Effects of Tax Policy 996
Tax Simplification 997
The Economic Effects of Tax Reform 997
How Large Are Supply-Side Effects? 998
Apply the Concept: Will President Trump’s Fiscal
Policy Raise the Rate of Economic Growth? 999
Conclusion 1001
Chapter Summary and Problems 1002
Appendix: A Closer Look at the Multiplier 1010
An Expression for Equilibrium Real GDP 1010
A Formula for the Government Purchases
Multiplier 1011
A Formula for the Tax Multiplier 1012
The “Balanced Budget” Multiplier 1012
The Effects of Changes in Tax Rates on the Multiplier 1013
The Multiplier in an Open Economy 1013
Problem and Applications 1015
CHAPTER 27: Inflation, Unemployment,
and Federal Reserve Policy 1016
The Fed Deals with Inflation, Unemployment, . . .
and the President 1016
27.1 The Discovery of the Short-Run Trade-off
between Unemployment and Inflation 1018
Explaining the Phillips Curve with Aggregate
Demand and Aggregate Supply Curves 1019
Is the Phillips Curve a Policy Menu? 1020
Is the Short-Run Phillips Curve Stable? 1020
The Long-Run Phillips Curve 1020
The Role of Expectations of Future Inflation 1021
Apply the Concept: Do Workers Understand
Inflation? 1022
27.2 The Short-Run and Long-Run Phillips Curves 1023
Shifts in the Short-Run Phillips Curve 1024
How Does a Vertical Long-Run Phillips Curve
Affect Monetary Policy? 1025
Apply the Concept: Does the Natural Rate
of Unemployment Ever Change? 1026
Solved Problem 27.2: Changing Views of
the Phillips Curve 1027
27.3 Monetary Policy and Expectations of
the Inflation Rate 1028
The Implications of Rational Expectations
for Monetary Policy 1028
Is the Short-Run Phillips Curve Really
Vertical? 1029
Real Business Cycle Models 1030
27.4 Federal Reserve Policy from the 1970s
to the Present 1030
The Effect of a Supply Shock on the
Phillips Curve 1031
Paul Volcker and Disinflation 1032
Don’t Let This Happen to You: Don’t Confuse
Disinflation with Deflation 1033
Solved Problem 27.4: Using Monetary Policy
to Lower the Inflation Rate 1033
Recent Fed Chairs and the Debate over the Fed’s
Future 1035
Apply the Concept: Has the Phillips Curve
Disappeared? 1037
Should the Fed Be Independent of Congress and
the President? 1039
Conclusion 1042
Chapter Summary and Problems 1043
PART 10 The International Economy
CHAPTER 28: Macroeconomics in an Open
Economy 1050
Amazon Deals with a Fluctuating Dollar 1050
28.1 The Balance of Payments: Linking
the United States to the International
Economy 1052
The Current Account 1052
The Financial Account 1054
The Capital Account 1054
Why Is the Balance of Payments
Always Zero? 1054
Don’t Let This Happen to You: Don’t Confuse
the Trade Balance, the Current Account
Balance, and the Balance of Payments 1055
28.2 The Foreign Exchange Market and
Exchange Rates 1056
Equilibrium in the Market for Foreign Exchange 1056
Shifts in Demand and Supply in the Foreign
Exchange Market 1057
How Movements in the Exchange Rate Affect
Exports and Imports 1059
Apply the Concept: Is a Strong Currency
Good for a Country? 1060
Don’t Let This Happen to You: Don’t Confuse
What Happens When a Currency
Appreciates
with What Happens When It Depreciates 1061
Solved Problem 28.2: Toyota Rides the
Exchange Rate Rollercoaster 1061
The Real Exchange Rate 1062
Exchange Rates in the Long Run 1062
Apply the Concept: The Big Mac Theory
of Exchange Rates 1064
28.3 Exchange Rate Systems 1065
The Floating Dollar 1065
The Euro 1066
Pegging against the Dollar 1067
Apply the Concept: The Chinese Yuan:
The World’s Most Controversial Currency 1068
28.4 The International Sector and National
Saving and Investment 1070
Net Exports Equal Net Foreign Investment 1070
Domestic Saving, Domestic Investment,
and Net Foreign Investment 1070
Solved Problem 28.4: Arriving at the Saving
and Investment Equation 1071
28.5 The Effect of a Government Budget
Deficit on Investment 1072
28.6 Monetary Policy and Fiscal Policy in
an Open Economy 1074
Monetary Policy in an Open Economy 1074
Fiscal Policy in an Open Economy 1074
Conclusion 1075
Chapter Summary and Problems 1076
Online Appendix: The Gold Standard and
the Bretton Woods System
Glossary 1085
Company Index 1093
Subject Index 1096
Credits 1122