Essentials of Economics, 10th Edition
By Gregory Mankiw
Contents:
Preface: To the Instructor v
Part I Introduction 1
Chapter 1
Ten Principles of Economics 1
1-1 How People Make Decisions 2
1-1a Principle 1: People Face Trade-Offs 2
1-1b Principle 2: The Cost of Something Is What You
Give Up to Get It 3
1-1c Principle 3: Rational People Think at the Margin 4
1-1d Principle 4: People Respond to Incentives 5
1-2 How People Interact 6
1-2a Principle 5: Trade Can Make Everyone Better Off 6
1-2b Principle 6: Markets Are Usually a Good Way
to Organize Economic Activity 7
FYI: Adam Smith and the Invisible Hand 8
Case Study: Adam Smith Would Have Loved Uber 8
1-2c Principle 7: Governments Can Sometimes
Improve Market Outcomes 9
1-3 How the Economy as a Whole Works 11
1-3a Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services 11
1-3b Principle 9: Prices Rise When the Government Prints
Too Much Money 11
1-3c Principle 10: Society Faces a Short-Run Trade-Off
between Inflation and Unemployment 12
1-4 Conclusion 13
Chapter in a Nutshell 14
Key Concepts 14
Questions for Review 14
Problems and Applications 14
Quick Quiz Answers 15
Chapter 2
Thinking Like an Economist 17
2-1 The Economist as Scientist 18
2-1a The Scientific Method: Observation, Theory,
and More Observation 18
2-1b The Role of Assumptions 19
2-1c Economic Models 19
2-1d Our First Model: The Circular-Flow Diagram 20
2-1e Our Second Model: The Production
Possibilities Frontier 22
2-1f Microeconomics and Macroeconomics 24
2-2 The Economist as Policy Adviser 25
In the News: Why Tech Companies Hire Economists 26
2-2a Positive versus Normative Analysis 26
2-2b Economists in Washington 28
2-2c Why Economists’ Advice Is Often Not Followed 29
2-3 Why Economists Disagree 30
2-3a Differences in Scientific Judgments 30
2-3b Differences in Values 30
2-3c Perception versus Reality 31
Ask the Experts: Ticket Resale 31
2-4 Let’s Get Going 32
Chapter in a Nutshell 32
Key Concepts 33
Questions for Review 33
Problems and Applications 33
Quick Quiz Answers 34
APPENDIX Graphing: A Brief Review 35
Graphs of a Single Variable 35
Graphs of Two Variables: The Coordinate System 36
Curves in the Coordinate System 37
Slope 39
Cause and Effect 41
Chapter 3
Interdependence and the Gains
from Trade 45
3-1 A Parable for the Modern Economy 46
3-1a Production Possibilities 46
3-1b Specialization and Trade 48
3-2 Comparative Advantage: The Driving Force
of Specialization 50
3-2a Absolute Advantage 50
3-2b Opportunity Cost and Comparative Advantage 50
3-2c Comparative Advantage and Trade 52
3-2d The Price of the Trade 52
FYI: The Legacy of Adam Smith and David Ricardo 53
3-3 Applications of Comparative Advantage 53
3-3a Should Naomi Osaka Mow Her Own Lawn? 54
3-3b Should the United States Trade
with Other Countries? 54
3-4 Conclusion 55
Ask the Experts: Trade between China and the
United States 55
In the News: Economics within a Marriage 56
Chapter in a Nutshell 56
Key Concepts 57
Questions for Review 57
Problems and Applications 58
Quick Quiz Answers 59
Part II How Markets Work 61
Chapter 4
The Market Forces of Supply and
Demand 61
4-1 Markets and Competition 62
4-1a What Is a Market? 62
4-1b What Is Competition? 62
4-2 Demand 63
4-2a The Demand Curve: The Relationship between
Price and Quantity Demanded 63
4-2b Market Demand versus Individual Demand 64
4-2c Shifts in the Demand Curve 65
Case Study: Two Ways to Reduce Smoking 68
4-3 Supply 69
4-3a The Supply Curve: The Relationship between
Price and Quantity Supplied 69
4-3b Market Supply versus Individual Supply 70
4-3c Shifts in the Supply Curve 70
4-4 Supply and Demand Together 73
4-4a Equilibrium 73
4-4b Three Steps to Analyzing Changes in Equilibrium 75
In the News: Price Increases after Disasters 80
4-5 Conclusion: How Prices Allocate Resources 82
Ask the Experts: Price Gouging 82
Chapter in a Nutshell 83
Key Concepts 83
Questions for Review 84
Problems and Applications 84
Quick Quiz Answers 85
Chapter 5
Elasticity and Its Application 87
5-1 The Elasticity of Demand 88
5-1a The Price Elasticity of Demand and Its Determinants 88
5-1b The Price Elasticity of Demand, with Numbers 89
5-1c The Midpoint Method: A Better Way to Calculate
Percentage Changes and Elasticities 89
5-1d The Variety of Demand Curves 90
5-1e Total Revenue and the Price Elasticity of Demand 91
FYI: A Few Elasticities from the Real World 91
5-1f Elasticity and Total Revenue along
a Linear Demand Curve 94
5-1g Other Demand Elasticities 96
5-2 The Elasticity of Supply 97
5-2a The Price Elasticity of Supply and Its Determinants 97
5-2b The Price Elasticity of Supply, with Numbers 98
5-2c The Variety of Supply Curves 98
5-3 Three Applications of Supply, Demand, and Elasticity 100
5-3a Can Good News for Farming Be Bad News
for Farmers? 101
5-3b Why Has OPEC Failed to Keep the Price of
Oil High? 103
5-3c Does Drug Interdiction Increase or Decrease
Drug-Related Crime? 104
In the News: Elasticity of Supply and Demand
in the Ride-share Market 106
5-4 Conclusion 108
Chapter in a Nutshell 108
Key Concepts 108
Questions for Review 108
Problems and Applications 109
Quick Quiz Answers 110
Chapter 6
Supply, Demand, and Government
Policies 111
6-1 The Surprising Effects of Price Controls 112
6-1a How Price Ceilings Affect Market Outcomes 112
Case Study: How to Create Long Lines
at the Gas Pump 114
Case Study: Why Rent Control Causes Housing Shortages,
Especially in the Long Run 115
Ask the Experts: Rent Control 116
6-1b How Price Floors Affect Market Outcomes 116
Case Study: Controversies over the Minimum Wage 118
Ask the Experts: The Minimum Wage 120
6-1c Evaluating Price Controls 120
6-2 The Surprising Study of Tax Incidence 121
6-2a How Taxes on Sellers Affect Market Outcomes 121
In the News: Should the Minimum Wage
Be $15 an Hour? 122
6-2b How Taxes on Buyers Affect Market Outcomes 124
Case Study: Can Congress Distribute the Burden
of a Payroll Tax? 126
6-2c Elasticity and Tax Incidence 127
Case Study: Who Pays the Luxury Tax? 128
6-3 Conclusion 129
Chapter in a Nutshell 129
Key Concepts 130
Questions for Review 130
Problems and Applications 130
Quick Quiz Answers 131
Part III Markets and
Welfare 133
Chapter 7
Consumers, Producers, and the
Efficiency of Markets 133
7-1 Consumer Surplus 134
7-1a Willingness to Pay 134
7-1b Using the Demand Curve to Measure
Consumer Surplus 135
7-1c How a Lower Price Raises Consumer Surplus 137
7-1d What Does Consumer Surplus Measure? 138
7-2 Producer Surplus 139
7-2a Cost and the Willingness to Sell 139
7-2b Using the Supply Curve to Measure Producer Surplus 140
7-2c How a Higher Price Raises Producer Surplus 141
7-3 Market Efficiency 143
7-3a Benevolent Social Planners 143
7-3b Evaluating the Market Equilibrium 144
Ask the Experts: Supplying Kidneys 146
Case Study: Should There Be a Market for Organs? 146
7-4 Conclusion: Market Efficiency and Market Failure 147
In the News: How Ticket Resellers Help Allocate
Scarce Resources 148
Chapter in a Nutshell 150
Key Concepts 150
Questions for Review 150
Problems and Applications 150
Quick Quiz Answers 152
Chapter 8
Application: The Costs of Taxation 153
8-1 The Deadweight Loss of Taxation 154
8-1a How a Tax Affects Market Participants 154
8-1b Deadweight Losses and the Gains from Trade 157
8-2 The Determinants of the Deadweight Loss 158
Case Study: The Deadweight Loss Debate 160
8-3 Deadweight Loss and Tax Revenue as Taxes Vary 162
Case Study: The Laffer Curve and Supply-Side
Economics 163
Ask the Experts: The Laffer Curve 164
8-4 Conclusion 165
Chapter in a Nutshell 165
Key Concept 166
Questions for Review 166
Problems and Applications 166
Quick Quiz Answers 167
Chapter 9
Application: International Trade 169
9-1 The Determinants of Trade 170
9-1a The Equilibrium without Trade 170
9-1b The World Price and Comparative Advantage 171
9-2 The Winners and Losers from Trade 171
9-2a The Gains and Losses of an Exporting Country 172
9-2b The Gains and Losses of an Importing Country 173
9-2c The Effects of a Tariff 175
FYI: Import Quotas: Another Way to Restrict Trade 177
9-2d The Lessons for Trade Policy 177
9-2e Other Benefits of International Trade 178
9-3 The Arguments for Restricting Trade 179
9-3a The Jobs Argument 180
9-3b The National-Security Argument 180
9-3c The Infant-Industry Argument 180
9-3d The Unfair-Competition Argument 181
9-3e The Protection-as-a-Bargaining-Chip Argument 181
Case Study: Trade Agreements and the World Trade
Organization 181
Ask the Experts: Trade Deals and Tariffs 181
In the News: Trade as a Tool for Economic Development 182
9-4 Conclusion 184
Chapter in a Nutshell 185
Key Concepts 185
Questions for Review 185
Problems and Applications 186
Quick Quiz Answers 187
Part IV The Economics
of the Public Sector 189
Chapter 10
Externalities 189
10-1 Externalities and Market Inefficiency 191
10-1a Welfare Economics: A Recap 191
10-1b Negative Externalities 192
10-1c Positive Externalities 193
Case Study: Technology Spillovers, Industrial Policy,
and Patent Protection 194
10-2 Public Policies toward Externalities 195
10-2a Command-and-Control Policies: Regulation 195
10-2b Market-Based Policy 1: Corrective Taxes
and Subsidies 196
Ask the Experts: Covid Vaccines 196
Case Study: Why Is Gasoline Taxed So Heavily? 197
10-2c Market-Based Policy 2: Tradable Pollution Permits 199
10-2d Objections to the Economic Analysis of Pollution 201
Case Study: Climate Change and Carbon Taxes 201
Ask the Experts: Carbon Taxes 202
10-3 Private Solutions to Externalities 203
10-3a The Types of Private Solutions 203
10-3b The Coase Theorem 204
10-3c Why Private Solutions Do Not Always Work 205
In the News: The Coase Theorem in Action 206
10-4 Conclusion 206
Chapter in a Nutshell 207
Key Concepts 208
Questions for Review 208
Problems and Applications 208
Quick Quiz Answers 209
Chapter 11
Public Goods and Common
Resources 211
11-1 The Different Kinds of Goods 212
11-2 Public Goods 214
11-2a The Free-Rider Problem 214
11-2b Some Important Public Goods 214
Case Study: Are Lighthouses Public Goods? 216
11-2c The Difficult Job of Cost–Benefit Analysis 217
Case Study: How Much Is a Life Worth? 217
11-3 Common Resources 218
11-3a The Tragedy of the Commons 218
11-3b Some Important Common Resources 219
Ask the Experts: Congestion Pricing 220
Case Study: Why the Cow Is Not Extinct 221
In the News: Road Pricing 222
11-4 Conclusion: Property Rights and Government Action 222
Chapter in a Nutshell 224
Key Concepts 224
Questions for Review 224
Problems and Applications 224
Quick Quiz Answers 226
Part V Firm Behavior and the
Organization of Industry 227
Chapter 12
The Costs of Production 227
12-1 What Are Costs? 228
12-1a Total Revenue, Total Cost, and Profit 228
12-1b Why Opportunity Costs Matter 228
12-1c The Cost of Capital Is an Opportunity Cost 229
12-1d Economists and Accountants Measure Profit
Differently 229
12-2 Production and Costs 231
12-2a The Production Function 231
12-2b From the Production Function
to the Total-Cost Curve 233
12-3 The Many Measures of Cost 234
12-3a Fixed and Variable Costs 235
12-3b Average and Marginal Cost 235
12-3c Cost Curves and Their Shapes 236
12-3d Typical Cost Curves 238
12-4 Costs in the Short Run and in the Long Run 240
12-4a The Relationship between Short-Run and Long-Run
Average Total Cost 240
12-4b Economies and Diseconomies of Scale 241
FYI: Lessons from a Pin Factory 241
12-5 Conclusion 242
Chapter in a Nutshell 243
Key Concepts 243
Questions for Review 243
Problems and Applications 244
Quick Quiz Answers 245
Chapter 13
Firms in Competitive Markets 247
13-1 What Is a Competitive Market? 248
13-1a The Meaning of Competition 248
13-1b The Revenue of a Competitive Firm 248
13-2 Profit Maximization and the Competitive
Firm’s Supply Curve 250
13-2a A Simple Example of Profit Maximization 250
13-2b The Marginal-Cost Curve and the Firm’s Supply
Decision 252
13-2c The Firm’s Short-Run Decision to Shut Down 254
13-2d Spilt Milk and Other Sunk Costs 255
Case Study: Near-Empty Restaurants and Off-Season
Miniature Golf 256
13-2e The Firm’s Long-Run Decision to Exit
or Enter a Market 257
13-2f Measuring Profit in Our Graph for the
Competitive Firm 257
13-2g A Brief Recap 259
13-3 The Supply Curve in a Competitive Market 260
13-3a The Short Run: Market Supply with a Fixed
Number of Firms 260
13-3b The Long Run: Market Supply with Entry and Exit 260
13-3c Why Do Competitive Firms Stay in Business If They
Make Zero Profit? 262
13-3d A Shift in Demand in the Short Run and Long
Run 263
13-3e Why the Long-Run Supply Curve Might Slope
Upward 263
13-4 Conclusion: Behind the Supply Curve 265
Chapter in a Nutshell 266
Key Concepts 266
Questions for Review 266
Problems and Applications 267
Quick Quiz Answers 269
Chapter 14
Monopoly 271
14-1 Why Monopolies Arise 272
14-1a Monopoly Resources 273
14-1b Government-Created Monopolies 273
14-1c Natural Monopolies 274
14-2 How Monopolies Make Production and Pricing
Decisions 275
14-2a Monopoly versus Competition 275
14-2b A Monopoly’s Revenue 276
14-2c Profit Maximization 278
FYI: Why a Monopoly Does Not Have a Supply Curve 280
14-2d A Monopoly’s Profit 280
Case Study: Monopoly Drugs versus Generic Drugs 281
14-3 The Welfare Cost of Monopolies 283
14-3a The Deadweight Loss 283
14-3b The Monopoly’s Profit: A Social Cost? 285
14-4 Price Discrimination 286
14-4a A Parable about Pricing 286
14-4b The Moral of the Story 287
14-4c The Analytics of Price Discrimination 288
14-4d Examples of Price Discrimination 289
14-5 Public Policy toward Monopolies 290
14-5a Increasing Competition with Antitrust Laws 291
14-5b Regulation 291
Ask the Experts: Mergers and Competition 292
14-5c Public Ownership 293
14-5d Above All, Do No Harm 293
In the News: Will the Biden Administration Expand the Scope
of Antitrust Policy? 294
14-6 Conclusion: The Prevalence of Monopolies 294
Chapter in a Nutshell 296
Key Concepts 297
Questions for Review 297
Problems and Applications 297
Quick Quiz Answers 300
Part VI The Data of
Macroeconomics 301
Chapter 15
Measuring a Nation’s Income 301
15-1 The Economy’s Income and Expenditure 302
15-2 The Measurement of GDP 304
15-2a “GDP Is the Market Value . . .” 304
15-2b “. . . of All . . .” 304
15-2c “. . . Final . . .” 305
15-2d “. . . Goods and Services . . .” 305
15-2e “. . . Produced . . .” 305
15-2f “. . . Within a Country . . .” 305
15-2g “. . . In a Given Period.” 305
FYI: Other Measures of Income 306
15-3 The Components of GDP 307
15-3a Consumption 307
15-3b Investment 307
15-3c Government Purchases 308
15-3d Net Exports 308
Case Study: The Components of U.S. GDP 309
15-4 Real versus Nominal GDP 310
15-4a A Numerical Example 310
15-4b The GDP Deflator 311
Case Study: A Half Century of Real GDP 312
15-5 Is GDP a Good Measure of Economic Well-Being? 314
Case Study: International Differences in GDP and the
Quality of Life 315
In the News: Sex, Drugs, and GDP 316
15-6 Conclusion 317
Chapter in a Nutshell 318
Key Concepts 318
Questions for Review 318
Problems and Applications 318
Quick Quiz Answers 320
Chapter 16
Measuring the Cost of Living 321
16-1 The Consumer Price Index 322
16-1a How the CPI Is Calculated 322
FYI: What’s in the CPI’s Basket? 324
16-1b Problems in Measuring the Cost of Living 325
16-1c The GDP Deflator versus the Consumer Price
Index 326
16-2 Correcting Economic Variables for the
Effects of Inflation 328
16-2a Dollar Figures from Different Times 328
FYI: Mr. Index Goes to Hollywood 329
Case Study: Regional Differences in the Cost of
Living 329
16-2b Indexation 331
16-2c Real and Nominal Interest Rates 331
Case Study: Interest Rates in the U.S. Economy 332
16-3 Conclusion 334
Chapter in a Nutshell 335
Key Concepts 335
Questions for Review 335
Problems and Applications 336
Quick Quiz Answers 337
Part VII The Real Economy
in the Long Run 339
Chapter 17
Production and Growth 339
17-1 Economic Growth around the World 340
FYI: Are You Richer Than the Richest American? 342
17-2 Productivity: Its Role and Determinants 342
17-2a Why Productivity Is So Important 343
17-2b How Productivity Is Determined 343
FYI: The Production Function 345
Case Study: Are Natural Resources a Limit
to Growth? 346
17-3 Economic Growth and Public Policy 347
17-3a Saving and Investment 347
17-3b Diminishing Returns and the Catch-Up Effect 347
17-3c Investment from Abroad 349
17-3d Education 350
17-3e Health and Nutrition 350
17-3f Property Rights and Political Stability 351
17-3g Free Trade 352
17-3h Research and Development 352
17-3i Population Growth 353
Ask the Experts: Innovation and Growth 353
Case Study: Why Is So Much of Africa Poor? 355
In the News: The Secret Sauce of American Prosperity 358
17-4 Conclusion: The Importance of Long-Run Growth 358
Chapter in a Nutshell 359
Key Concepts 360
Questions for Review 360
Problems and Applications 360
Quick Quiz Answers 361
Chapter 18
Saving, Investment, and the Financial
System 363
18-1 Financial Institutions in the U.S. Economy 364
18-1a Financial Markets 364
18-1b Financial Intermediaries 366
18-1c Summing Up 368
18-2 Saving and Investment in the National Income Accounts 368
18-2a Some Important Identities 369
18-2b The Meaning of Saving and Investment 370
18-3 The Market for Loanable Funds 371
18-3a Supply and Demand for Loanable Funds 371
18-3b Policy 1: Saving Incentives 373
18-3c Policy 2: Investment Incentives 375
Case Study: The Decline in Real Interest Rates
from 1984 to 2020 376
18-3d Policy 3: Government Budget Deficits and Surpluses 377
Case Study: The History of U.S. Government Debt 379
Ask the Experts: Fiscal Policy and Saving 379
FYI: Financial Crises 381
18-4 Conclusion 382
Chapter in a Nutshell 382
Key Concepts 382
Questions for Review 383
Problems and Applications 383
Quick Quiz Answers 384
Chapter 19
The Basic Tools of Finance 385
19-1 Present Value: Measuring the Time Value of Money 386
FYI: The Magic of Compounding and the Rule of 70 388
19-2 Managing Risk 388
19-2a Risk Aversion 389
19-2b The Markets for Insurance 389
19-2c Diversification of Firm-Specific Risk 390
19-2d The Trade-Off between Risk and Return 391
19-3 Asset Valuation 393
19-3a Fundamental Analysis 393
FYI: Key Numbers for Stock Watchers 394
19-3b The Efficient Markets Hypothesis 394
Case Study: Random Walks and Index Funds 395
Ask the Experts: Diversified Investing 396
In the News: The Perils of Investing with
a Y Chromosome 396
19-3c Market Irrationality 397
19-4 Conclusion 398
Chapter in a Nutshell 399
Key Concepts 399
Questions for Review 399
Problems and Applications 399
Quick Quiz Answers 400
Chapter 20
Unemployment 401
20-1 Identifying Unemployment 402
20-1a How Is Unemployment Measured? 402
Case Study: Labor-Force Participation of Women
and Men in the U.S. Economy 405
20-1b Does the Unemployment Rate Measure What
We Want It to Measure? 406
20-1c How Long Are the Unemployed without Work? 406
20-1d Why Are There Always Some People
Unemployed? 408
FYI: The Jobs Number 408
20-2 Job Search 409
20-2a Why Some Frictional Unemployment Is Inevitable 409
20-2b Public Policy and Job Search 410
20-2c Unemployment Insurance 410
20-3 Minimum-Wage Laws 412
Case Study: Who Earns the Federal Minimum Wage? 413
20-4 Unions and Collective Bargaining 414
20-4a The Economics of Unions 414
20-4b Are Unions Good or Bad for the Economy? 415
FYI: Mismatch as a Source of Structural Unemployment 416
20-5 The Theory of Efficiency Wages 417
20-5a Worker Health 417
20-5b Worker Turnover 417
20-5c Worker Quality 417
20-5d Worker Effort 418
20-5e Worker Morale 418
Case Study: Henry Ford and the Amazing
$5-a-Day Wage 418
In the News: Efficiency Wages in Practice 420
20-6 Conclusion 420
Chapter in a Nutshell 421
Key Concepts 422
Questions for Review 422
Problems and Applications 422
Quick Quiz Answers 423
Part VIII Money and Prices in
the Long Run 425
Chapter 21
The Monetary System 425
21-1 The Meaning of Money 426
21-1a The Functions of Money 426
21-1b The Kinds of Money 427
FYI: Cryptocurrencies: A Fad or the Future? 428
21-1c Money in the U.S. Economy 428
FYI: Why Credit Cards Aren’t Money 429
Case Study: Where Is All the Currency? 430
21-2 The Federal Reserve System 430
21-2a The Fed’s Organization 430
21-2b The Federal Open Market Committee 431
21-3 Banks and the Money Supply 432
21-3a The Simple Case of 100-Percent-Reserve Banking 432
21-3b Money Creation with Fractional-
Reserve Banking 433
21-3c The Money Multiplier 434
21-3d Bank Capital, Leverage, and the Financial Crisis
of 2008–2009 435
21-4 The Fed’s Tools of Monetary Control 437
21-4a How the Fed Influences the Quantity
of Reserves 438
21-4b How the Fed Influences the Reserve Ratio 439
21-4c Problems in Controlling the Money Supply 440
Case Study: Bank Runs and the Money Supply 441
21-4d The Federal Funds Rate 442
In the News: A Trip to Jekyll Island 442
21-5 Conclusion 444
Chapter in a Nutshell 445
Key Concepts 445
Questions for Review 445
Problems and Applications 446
Quick Quiz Answers 447
Chapter 22
Money Growth and Inflation 449
22-1 The Classical Theory of Inflation 450
22-1a The Level of Prices and the Value of Money 451
22-1b Money Supply, Money Demand, and Monetary
Equilibrium 451
22-1c The Effects of a Monetary Injection 452
22-1d A Brief Look at the Adjustment Process 453
22-1e The Classical Dichotomy and Monetary Neutrality 455
22-1f Velocity and the Quantity Equation 456
Case Study: Money and Prices during Four
Hyperinflations 458
22-1g The Inflation Tax 459
22-1h The Fisher Effect 460
22-2 The Costs of Inflation 462
22-2a A Fall in Purchasing Power? The Inflation Fallacy 462
22-2b Shoeleather Costs 463
22-2c Menu Costs 464
22-2d Relative-Price Variability and the Misallocation of
Resources 464
22-2e Inflation-Induced Tax Distortions 465
22-2f Confusion and Inconvenience 466
22-2g A Special Cost of Unexpected Inflation: Arbitrary
Redistributions of Wealth 467
22-2h Inflation Is Bad, but Deflation May Be Worse 467
Case Study: The Wizard of Oz and the Free-Silver
Debate 468
In the News: Life during Hyperinflation 470
22-3 Conclusion 470
Chapter in a Nutshell 472
Key Concepts 472
Questions for Review 472
Problems and Applications 472
Quick Quiz Answers 473
Part IX Short-Run Economic
Fluctuations 475
Chapter 23
Aggregate Demand and Aggregate
Supply 475
23-1 Three Key Facts about Economic Fluctuations 476
23-1a Fact 1: Economic Fluctuations Are Irregular
and Unpredictable 476
23-1b Fact 2: Most Macroeconomic Quantities
Fluctuate Together 478
23-1c Fact 3: As Output Falls, Unemployment Rises 478
23-2 Explaining Short-Run Economic Fluctuations 479
23-2a The Assumptions of Classical Economics 479
23-2b The Reality of Short-Run Fluctuations 479
23-2c The Model of Aggregate Demand and Aggregate
Supply 480
23-3 The Aggregate-Demand Curve 481
23-3a Why the Aggregate-Demand Curve
Slopes Downward 481
23-3b Why the Aggregate-Demand Curve Might Shift 484
23-4 The Aggregate-Supply Curve 486
23-4a Why the Aggregate-Supply Curve Is Vertical in
the Long Run 487
23-4b Why the Long-Run Aggregate-Supply
Curve Might Shift 488
23-4c Using Aggregate Demand and Aggregate Supply to
Depict Long-Run Growth and Inflation 489
23-4d Why the Aggregate-Supply Curve Slopes Upward in
the Short Run 490
23-4e Why the Short-Run Aggregate-Supply
Curve Might Shift 494
23-5 Two Causes of Economic Fluctuations 495
23-5a The Effects of a Shift in Aggregate Demand 496
FYI: Monetary Neutrality Revisited 499
Case Study: Two Big Shifts in Aggregate Demand: The Great
Depression and World War II 499
Case Study: The Great Recession of 2008–2009 500
23-5b The Effects of a Shift in Aggregate Supply 502
Case Study: Oil and the Economy 504
FYI: The Origins of the Model of Aggregate Demand and
Aggregate Supply 505
Case Study: The Covid Recession of 2020 506
In the News: The Strange Downturn of 2020 506
23-6 Conclusion 509
Chapter in a Nutshell 509
Key Concepts 510
Questions for Review 510
Problems and Applications 510
Quick Quiz Answers 512
Chapter 24
The Influence of Monetary and Fiscal
Policy on Aggregate Demand 513
24-1 How Monetary Policy Influences Aggregate Demand 514
24-1a The Theory of Liquidity Preference 515
FYI: Interest Rates in the Long Run and
the Short Run 517
24-1b The Downward Slope of the Aggregate-Demand
Curve 518
24-1c Changes in the Money Supply 519
24-1d The Role of Interest-Rate Targets in Fed Policy 520
Case Study: Why the Fed Watches the Stock Market (and
Vice Versa) 521
24-1e The Zero Lower Bound 522
24-2 How Fiscal Policy Influences Aggregate Demand 523
24-2a Changes in Government Purchases 523
24-2b The Multiplier Effect 524
24-2c A Formula for the Spending Multiplier 524
24-2d Other Applications of the Multiplier Effect 526
24-2e The Crowding-Out Effect 526
24-2f Changes in Taxes 528
FYI: How Fiscal Policy Might Affect Aggregate Supply 529
24-3 Using Policy to Stabilize the Economy 529
24-3a The Case for Active Stabilization Policy 530
Case Study: Keynesians in the White House 531
24-3b The Case against Active Stabilization Policy 531
Ask the Experts: Economic Stimulus 531
24-3c Automatic Stabilizers 533
24-4 Conclusion 534
Chapter in a Nutshell 534
Key Concepts 534
Questions for Review 535
Problems and Applications 535
Quick Quiz Answers 536
Glossary 537
Index 543