Table of Contents
CHAPTER 1 What Is Macroeconomics?
1-1 How Macroeconomics Affects Our Everyday Lives
Global Economic Crisis Focus: What Makes It Unique?
1-2 Defining Macroeconomics
1-3 Actual and Natural Real GDP
1-4 Macroeconomics in the Short Run and Long Run
1-5 CASE STUDY: How Does the Global Economic Crisis Compare to Previous Business Cycles?
Global Economic Crisis Focus: How It Differs from 1982—83
1-6 Macroeconomics at the Extremes
1-7 Taming Business Cycles: Stabilization Policy
International Perspective: Differences Between the United States and Europe Before and During the Global Economic Crisis
Global Economic Crisis Focus: New Challenges for Monetary and Fiscal Policy
1-8 The “Internationalization” of Macroeconomics
CHAPTER 2 The Measurement of Income, Prices, and Unemployment
2-1 Why We Care About Income
2-2 The Circular Flow of Income and Expenditure
2-3 What GDP Is, and What GDP Is Not
[BOX]Where to Find the Numbers: A Guide to the Data
2-4 Components of Expenditure
Global Economic Crisis Focus: Which Component of GDP Declined the Most in the Global Economic Crisis?
2-5 The “Magic” Equation and the Twin Deficits
Global Economic Crisis Focus: Chicken or Egg in Recessions?
2-6 Where Does Household Income Come From?
2-7 Nominal GDP, Real GDP, and the GDP Deflator
[BOX] How to Calculate Inflation, Real GDP Growth, or Any Other Growth Rate
2-8 Measuring Unemployment
Understanding the Global Economic Crisis: The Ranks of the Hidden Unemployed
APPENDIX TO CHAPTER 2: How We Measure Real GDP and the Inflation Rate
CHAPTER 3 Income and Interest Rates: The Keynesian Cross Model and the IS Curve
3-1 Business Cycles and the Theory of Income Determination
Global Economic Crisis Focus: What Were the Shocks That Made the 2008—09 Economic Crisis So Severe?
3-2 Income Determination, Unemployment, and the Price Level
3-3 Planned Expenditure
Global Economic Crisis Focus: Financial Market Instability as the Main Cause of the Global Economic Crisis
3-4 The Economy In and Out of Equilibrium
Understanding the Global Economic Crisis: How Changes in Wealth Influence Consumer Spending
3-5 The Multiplier Effect
3-6 Sources of Shifts in Planned Spending
3-7 How Can Monetary Policy Affect Planned Spending?
3-8 The Relation of Autonomous Planned Spending to the Interest Rate
Understanding the Global Economic Crisis: A Central Explanation of Business Cycles Is the Volatility of Investment
3-9 The IS Curve
3-10 Conclusion: The Missing Relation
[BOX] Learning About Diagrams: The IS Curve
APPENDIX TO CHAPTER 3:Allowing for Income Taxes and Income-Dependent Net Exports
CHAPTER 4 Strong and Weak Policy Effects in the IS-LM Model
4-1 Introduction: The Power of Monetary and Fiscal Policy
4-2 Income, the Interest Rate, and the Demand for Money
4-3 The LM Curve
[BOX]Learning About Diagrams: The LM Curve
4-4 The IS Curve Meets the LM Curve
Global Economic Crisis Focus: TITLE TO COME
4-5 Monetary Policy in Action
4-6 How Fiscal Expansion Can “Crowd Out” Private Investment
Global Economic Crisis Focus: TITLE TO COME
4-7 Strong and Weak Effects of Monetary Policy
Understanding the Global Economic Crisis: How Easy Money Helped to Create the Housing Bubble and Bust
4-8 Strong and Weak Effects of Fiscal Policy
4-9 Using Fiscal and Monetary Policy Together
International Perspective: Monetary Policy Hits the Zero Lower Bound in Japan and the United States
APPENDIX TO CHAPTER 4:The Elementary Algebra of the IS-LM Model
CHAPTER 5 Financial Markets, Financial Regulation, and Economic Instability
5-1 Introduction: Financial Markets and Macroeconomics
5-2 CASE STUDY: Dimensions of the Global Economic Crisis
5-3 Financial Institutions, Balance Sheets, and Leverage
5-4 A Hardy Perennial: Bubbles and Crashes
Understanding the Global Economic Crisis: Two Bubbles: 1927—29 in the Stock Market Versus 2000—06 in the Housing Market
5-5 Financial Innovation and the Subprime Mortgage Market
5-6 The IS-LM Model, Financial Markets, and the Monetary Policy Dilemma
[BOX] Why Do Asset Purchases Reduce Interest Rates?
Understanding the Global Economic Crisis: The IS-LM Summary of the Causes of the Global Economic Crisis
5-7 The Fed’s New Instrument: Quantitative Easing
5-8 How the Crisis Became Worldwide and the Dilemma for Policymakers
International Perspective: Weighing the Causes: Why Did Canada Perform Better?
CHAPTER 6 The Government Budget, the Government Debt, and Limitations of Fiscal Policy
6-1 Introduction: Can Fiscal Policy Rescue Monetary Policy from Ineffectiveness?
6-2 The Pervasive Effects of the Government Budget
6-3 CASE STUDY:The Government Budget in Historical Perspective
6-4 Automatic Stabilization and Discretionary Fiscal Policy
Global Economic Crisis Focus: Automatic Stabilization and Fiscal Stimulus in the Crisis
6-5 Government Debt Basic Concepts
6-6 Will the Government Remain Solvent?
International Perspective: The Debt-GDP Ratio: How Does the United States Compare?
6-7 CASE STUDY: Historical Behavior of the Debt-GDP Ratio Since 1790
6-8 Factors Influencing the Multiplier Effect of a Fiscal Policy Stimulus
6-9 CASE STUDY: The Fiscal Policy Stimulus of 2008—11
6-10 Government Spending and Transfers to States/Localities
Understanding the Global Economic Crisis: Comparing the Obama Stimulus with FDR’s New Deal
6-11 Conclusion: Strengths and Limitations of Fiscal Policy
CHAPTER 7 International Trade, Exchanges Rates, and Macroeconomic Policy
7-2 The Current Account and Balance of Payments
7-3 Exchange Rates
7-4 The Market for Foreign Exchange
7-5 Real Exchange Rates and Purchasing Power Parity
International Perspective: Big Mac Meets PPP
7-6 Exchange Rate Systems
7-7 CASE STUDY: Asia Intervenes with Buckets to Buy Dollars and Finance the U.S. Current Account Deficit–How Long Can This Continue?
7-8 Determinants of Net Exports
7-9 The Real Exchange Rate and Interest Rate
7-10 Effects of Monetary and Fiscal Policy with Fixed and Flexible Exchange Rates
Global Economic Crisis Focus: Is the United States Prevented from Implementing a
Fiscal Policy Stimulus by Its Flexible Exchange Rate?
[BOX] Summary of Monetary and Fiscal Policy Effects in Open Economies
7-11 Conclusion: Economic Policy in the Open Economy
CHAPTER 8 Aggregate Demand, Aggregate Supply, and the Great Depression
8-1 Combining Aggregate Demand with Aggregate Supply
8-2 Flexible Prices and the AD Curve
8-3 Shifting the Aggregate Demand Curve with Monetary and Fiscal Policy
Global Economic Crisis Focus: The Crisis Was a Demand Problem Not Involving Supply
[BOX] Learning About Diagrams: The AD Curve
8-4 Alternative Shapes of the Short-Run Aggregate Supply Curve
8-5 The Short-Run Aggregate Supply (SAS) Curve When the Nominal Wage Rate Is Constant
[BOX] Learning About Diagrams: The SAS Curve
8-6 Fiscal and Monetary Expansion in the Short and Long Run
[BOX] Summary of the Economy’s Adjustment to an Increase in Aggregate Demand
8-7 Classical Macroeconomics: The Quantity Theory of Money and the Self-Correcting Economy
8-8 The Keynesian Revolution: The Failure of Self-Correction
Global Economic Crisis Focus: The Zero Lower Bound as Another Source
of Monetary Impotence
8-9 CASE STUDY: What Caused the Great Depression?
International Perspective: Why Was the Great Depression Worse in the United States
Than in Europe?
CHAPTER 9 Inflation: Its Causes and Cures
9-2 Real GDP, the Inflation Rate, and the Short-Run Phillips Curve
9-3 The Adjustment of Expectations
[BOX] Learning About Diagrams: The Short-Run (SP) and Long-Run (LP) Phillips Curves
9-4 Nominal GDP Growth and Inflation
9-5 Effects of an Acceleration in Nominal GDP Growth
9-6 Expectations and the Inflation Cycle
9-7 Recession as a Cure for Inflation
International Perspective: Did Disinflation in Europe Differ from That in the
Global Economic Crisis Focus: Policymakers Face the Perils of Deflation
9-8 The Importance of Supply Shocks
[BOX] Types of Supply Shocks and When They Mattered
9-9 The Response of Inflation and the Output Ratio to a Supply Shock
Understanding the Global Economic Crisis: The Role of Inflation During the Housing Bubble and Subsequent Economic Collapse
9-10 Inflation and Output Fluctuations: Recapitulation of Causes and Cures
9-11 How Is the Unemployment Rate Related to the Inflation Rate?
APPENDIX TO CHAPTER 9: The Elementary Algebra of the SP-DG Model
CHAPTER 10 The Goals of Stabilization Policy: Low Inflation and Low Unemployment
Global Economic Crisis Focus: Inflation Versus Unemployment in the Crisis
10-1 The Costs and Causes of Inflation
10-2 Money and Inflation
International Perspective: Money Growth and Inflation
10-3 Why Inflation Is Not Harmless
Global Economic Crisis Focus: The Housing Bubble as Surprise Inflation Followed by Surprise Deflation
[BOX] The Wizard of Oz as a Monetary Allegory
10-4 Indexation and Other Reforms to Reduce the Costs of Inflation
[BOX] The Indexed Bond (TIPS) Protects Investors from Inflation
10-5 The Government Budget Constraint and the Inflation Tax
Understanding the Global Economic Crisis: How a Large Recession Can Create a Large Fiscal Deficit
10-6 Starting and Stopping a Hyperinflation
10-7 Why the Unemployment Rate Cannot Be Reduced to Zero
10-8 Sources of Mismatch Unemployment
Global Economic Crisis Focus: The Crisis Raises the Incidence of Structural
10-10 The Costs of Persistently High Unemployment
Understanding the Global Economic Crisis: Why Did Unemployment Rise Less in Europe Than in the United States After 2007?
10-11 Conclusion: Solutions to the Inflation and Unemployment Dilemma
CHAPTER 11 The Theory of Economic Growth
11-1 The Importance of Economic Growth
11-2 Standards of Living as the Consequence of Economic Growth
International Perspective: The Growth Experience of Seven Countries Over the Last Century
11-3 The Production Function and Economic Growth
11-4 Solow’s Theory of Economic Growth
11-5 Technology in Theory and Practice
11-6 Puzzles That Solow’s Theory Cannot Explain
11-7 Human Capital, Immigration, and the Solow Puzzles
11-8 Endogenous Growth Theory: How Is Technological
11-9 Conclusion: Are There Secrets of Growth?
APPENDIX TO CHAPTER 11:General Functional Forms and the Production Function
CHAPTER 12 The Big Questions of Economic Growth
12-1 Answering the Big Questions
12-2 The Standard of Living and Concepts of Productivity
12-3 The Failure of Convergence
12-4 Human Capital and Technology
12-5 Political Capital, Infrastructure, and Geography
International Perspective: A Symptom of Poverty: Urban Slums in the Poor Cities
International Perspective: Institutions Matter: South Korea Versus North Korea
International Perspective: Growth Success and Failure in the Tropics
12-6 CASE STUDY: Uneven U.S. Productivity Growth Across Eras
Global Economic Crisis Focus: Lingering Effects of the 2007—09 Recession
on Long-Term Economic Growth
12-7 CASE STUDY: The Productivity Growth Contrast Between Europe and the United States
12-8 Conclusion on the Great Questions of Growth
CHAPTER 13 Money, Banks, and the Federal Reserve
13-1 Money as a Tool of Stabilization Policy
13-2 Definitions of Money
13-3 High-Powered Money and Determinants of the Money Supply
13-4 The Fed’s Three Tools for Changing the Money Supply
13-5 Theories of the Demand for Money
International Perspective: Plastic Replaces Cash, and the Cell Phone Replaces Plastic
13-6 Why the Federal Reserve “Sets” Interest Rates
CHAPTER 14 The Goals, Tools, and Rules of Monetary Policy
14-1 The Central Role of Demand Shocks
Global Economic Crisis Focus: The Weakness of Monetary Policy After 2008 Reveals a More General Problem
14-2 Stabilization Targets and Instruments in the Activists’ Paradise
[BOX]Rules Versus Activism in a Nutshell: The Optimism-Pessimism Grid
14-3 Policy Rules
14-4 Policy Pitfalls: Lags and Uncertain Multipliers
14-5 CASE STUDY: Was the Fed Responsible for the Great Moderation of 1986—2007?
14-6 Time Inconsistency, Credibility, and Reputation
14-7 CASE STUDY: The Taylor Rule and the Changing Fed Attitude Toward Inflation and Output
Global Economic Crisis Focus: Taylor’s Rule Confronts the Zero Lower Bound
14-8 Rules Versus Discretion: An Assessment
International Perspective: The Debate About the Euro
14-9 CASE STUDY: Should Monetary Policy Target the Exchange Rate?
CHAPTER 15 The Economics of Consumption Behavior
15-1 Consumption and Economic Stability
15-2 CASE STUDY: Main Features of U.S. Consumption Data
15-3 Background: The Conflict Between the Time-Series and Cross-Section Evidence
15-4 Forward-Looking Behavior: The Permanent-Income Hypothesis
15-5 Forward-Looking Behavior: The Life-Cycle Hypothesis
Global Economic Crisis Focus: The Modigliani Theory Helps Explain the Crisis and
Recession of 2007—09
15-6 Rational Expectations and Other Amendments to the Simple Forward-Looking Theories
Understanding the Global Economic Crisis:Did Households Spend or Save the 2008 Economic Stimulus Payments?
15-7 Bequests and Uncertainty
International Perspective: Why Do Some Countries Save So Much?
15-8 CASE STUDY: Did the Rise and Collapse of Household Assets Cause the Decline and Rise of the Household Saving Rate?
15-9 Why the Official Household Saving Data Are Misleading
15-10 Conclusion: Does Consumption Stabilize the Economy?
CHAPTER 16 The Economics of Investment Behavior
16-1 Investment and Economic Stability
16-2 CASE STUDY: The Historical Instability of Investment
16-3 The Accelerator Hypothesis of Net Investment
16-4 CASE STUDY: The Simple Accelerator and the Postwar U.S. Economy
16-5 The Flexible Accelerator
[BOX] Tobin’s q: Does It Explain Investment Better Than the Accelerator or Neoclassical Theories?
16-6 The Neoclassical Theory of Investment Behavior
16-7 User Cost and the Role of Monetary and Fiscal Policy
16-8 Business Confidence and Speculation
[BOX] Investment in the Great Depression and World War II
International Perspective: The Level and Variability of Investment Around the World
16-9 Investment as a Source of Instability of Output and Interest Rates
16-10 Conclusion: Investment as a Source of Instability 545
CHAPTER 17 New Classical Macro and New Keynesian Macro
17-1 Introduction: Classical and Keynesian Economics, Old and New
17-2 Imperfect Information and the “Fooling Model”
17-3 The Lucas Model and the Policy Ineffectiveness Proposition
17-4 The Real Business Cycle Model
17-5 New Classical Macroeconomics: Limitations and Positive Contributions
International Perspective: Productivity Fluctuations in the United States and Japan
Global Economic Crisis Focus: The 2007—09 Crisis and the Real Business Cycle Model
17-6 Essential Features of the New Keynesian Economics
17-7 Why Small Nominal Rigidities Have Large Macroeconomic Effects
17-8 Coordination Failures and Indexation
17-9 Long-Term Labor Contracts as a Source of the Business Cycle
17-10 Assessment of the New Keynesian Model
CHAPTER 18 Conclusion: Where We Stand
18-1 The Evolution of Events and Ideas
Global Economic Crisis Focus: Can Economics Explain the Crisis or Does the Crisis
Require New Ideas?
18-2 The Reaction of Ideas to Events, 1923—47
18-3 The Reaction of Ideas to Events, 1947—69
18-4 The Reaction of Ideas to Events, 1970—2010
Global Economic Crisis Focus: Termites Were Nibbling Away at the Prosperity of
18-5 The Reaction of Ideas to Events in the World Economy
18-6 Macro Mysteries: Unsettled Issues and Debates
International Perspective: How Does Macroeconomics Differ in the United States and Europe?
A Time Series Data for the U.S. Economy: 1875—2010
B International Annual Time Series Data for Selected Countries: 1960—2010
C Data Sources and Methods
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