Part One Introduction 1
Chapter 1 The Science of Macroeconomics 3
1-1 Why Study Macroeconomics？ 3
CASE STUDY 1-1 Presidential Elections and the Economy 5
1-2 How Economists Think 6
The Use of Economic Models 6
FYI Using Functions to Express Relationships Among Variables 9
The Role of Microeconomics in Macroeconomics 10
Eclectic Macroeconomics 11
Prices：Flexible versus Sticky 11
1-3 How This Book Proceeds 12
Chapter 2 The Data of Macroeconomics 15
2-1 Measuring the Value of Economic Activity：Gross National Product 16
Income，Expenditure，and the Circular Flow 16
FYI Stocks and Flows 18
Some Rules for Computing GNP 19
The Treatment of Inventories 19
Adding Apples and Oranges 19
Intermediate Goods and Value-Added 20
Housing Services and Other Imputations 20
Real GNP versus Nominal GNP 21
CASE STUDY 2-1 Real GNP in the United States 22
The GNP Deflator 23
Other Statistics in the National Income Accounts 24
The Components of Expenditure 24
CASE STUDY 2-2 GNP and Its Components 25
Alternative Measures of Income 26
CAS ESTUDY 2-3 The Seasonal Cycle and Seasonal Adjustment 28
2-2 Measuring the Cost of Living：The Consumer Price Index 29
The Price of a Basket of Goods 29
The CPI versus the GNP Deflator 30
CASESTUDY 2-4 The Inflation of 1978-1981 32
2-3 Measuring Joblessness：The Unemployment Rate 33
CASESTUDY 2-5 Unemployment，GNP，and Okun’s Law 35
2-4 Conclusion：From Economic Statistics to Economic Models 37
Part Two The Economy in the Long Run 41
Chapter 3 National Income：Its Production，Distribution，and Allocation 42
3-1 The Production of Goods and Services 44
The Factors of Production 44
The Production Function 45
The Fixed Supply of Goods and Services 45
3-2 Distributing National Income to the Factors of Production 46
Factor Prices 46
The Problem Facing the Competitive Firm 47
The Firm’s Demand for Factors 48
The Marginal Product of Labor 48
From the Marginal Product of Labor to Labor Demand 49
The Marginal Product of Capital and Capital Demand 51
The Division of National Income 51
CASESTUDY 3-1 The Black Death and Factor Prices 53
CASESTUDY 3-2 The Senator，the Mathematician，and the Constancy of Factor Shares 53
3-3 The Demand for Goods and Services 56
Consumption 56
CASESTUDY 3-3 The Consumption Function in U.S.Data 58
Investment 58
FYI What Is Investment？ 61
Government Purchases 61
3-4 Equilibrium and the Interest Rate 62
Equilibrium in the Market for Goods and Services：The Supply and Demand for the Economy’s Output 63
Equilibrium in the Financial Markets：The Supply and Demand for Loanable Funds 64
Changes in Saving：The Effects of Fiscal Policy 65
An Increase in Government Purchases 66
CASESTUDY 3-4 Wars and Interest Rates in the United Kingdom，1730-1920 67
A Decrease in Taxes 68
CASESTUDY 3-5 Fiscal Policy in the 1980s 69
Changes in Investment Demand 69
FYI The Identification Problem 72
3-5 Conclusion 74
Chapter 4 Economic Growth 77
4-1 The Accumulation of Capital 79
The Supply and Demand for Goods 79
The Supply of Goods and the Production Function 79
The Demand for Goods and the Consumption Function 80
The Steady-State Level of Capital 81
Approaching the Steady State 84
Approaching the Steady State：A Numerical Example 84
CASESTUDY 4-1 Japanese and German Postwar Economic Growth 86
Changes in the Saving Rate 87
CASESTUDY 4-2 Saving in Rich and Poor Countries 88
4-2 The Golden Rule Level of Capital 89
Comparing Steady States 89
Comparing Steady States：A Numerical Example 91
The Transition to the Golden Rule Steady State 93
Starting With More Capital Than in the Golden Rule 93
Starting With Less Capital Than in the Golden Rule 94
4-3 Population Growth 96
The Steady State With Population Growth 96
The Effects of Population Growth 98
CASESTUDY 4-3 Population Growth in Rich and Poor Countries 99
4-4 Technological Progress 100
The Efficiency of Labor 100
The Steady State With Technological Progress 100
The Effects of Technological Progress 101
CASESTUDY 4-4 Steady-State Growth in the United States 102
4-5 Saving，Growth，and Economic Policy 103
Evaluating the Rate of Saving 103
Changing the Rate of Saving 104
CASESTUDY 4-5 Social Security and Saving 105
Encouraging Technological Progress 105
CASESTUDY 4-6 The Worldwide Slowdown in Economic Growth 106
4-6 Conclusion：Beyond the Solow Model 107
Appendix：Accounting for the Sources of Economic Growth 112
Increases in the Factors of Production 112
Increases in Capital 112
Increases in Labor 113
Increases in Capital and Labor 113
Technological Progress 114
The Sources of Growth in the United States 116
Chapter 5 Unemployment 118
5-1 Job Loss，Job Finding，and the Natural Rate of Unemployment 119
5-2 Job Search and Frictional Unemployment 121
Public Policy and Frictional Unemployment 122
CASESTUDY 5-1 Interwar British Unemployment 123
CASESTUDY 5-2 Unemployment Insurance and the Rate of Job Finding 124
5-3 Real-Wage Rigidity and Wait Unemployment 126
Minimum-Wage Laws 127
CASESTUDY 5-3 The Minimum Wage and the Working Poor 128
Unions and Collective Bargaining 128
CASESTUDY 5-4 Unionization and Unemployment in the United States and Canada 129
Efficiency Wages 130
CASESTUDY 5-5 Henry Ford’s $5 Workday 131
5-4 Patterns of Unemployment 132
The Duration of Unemployment 132
Variation in the Unemployment Rate Across Demographic Groups 133
The Upward Trend in Unemployment 134
Transitions Into and Out of the Labor Force 136
5-5 Conclusion 137
Chapter 6 Inflation 140
6-1 What Is Money？ 141
The Functions of Money 141
The Types of Money 142
CASE STUDY 6-1 Money in a POW Camp 143
How Fiat Money Evolves 144
CASE STUDY 6-2 Money on the Island of Yap 144
How the Quantity of Money Is Controlled 145
How the Quantity of Money Is Measured 146
6-2 The Quantity Theory of Money 147
Transactions and the Quantity Equation 147
From Transactions to Income 148
The Money Demand Function and the Quantity Equation 149
The Assumption of Constant Velocity 150
Money，Prices，and Inflation 150
FYI Products and Percentage Changes 151
CASESTUDY 6-3 A Century of Money Growth and Inflation 152
6-3 Seigniorage：The Revenue From Printing Money 152
CASESTUDY 6-4 Paying for the American Revolution 154
6-4 Inflation and Interest Rates 154
Two Interest Rates：Real and Nominal 155
The Fisher Effect 155
CASESTUDY 6-5 Inflation and Nominal Interest Rates 156
Two Real Interest Rates：Ex Ante and Ex Post 157
CASESTUDY 6-6 Nominal Interest Rates in the Nineteenth Century 157
6-5 The Nominal Interest Rate and the Demand for Money 158
The Cost of Holding Money 158
Future Money and Current Prices 159
How to Stop a Hyperinflation 160
CASESTUDY 6-7 Hyperinflation in Interwar Germany 162
6-6 The Social Costs of Inflation 164
Expected Inflation 164
CASESTUDY 6-8 Life During the Bolivian Hyperinflation 166
Unexpected Inflation 166
CASESTUDY 6-9 The Free Silver Movement，the Election of 1896，and the Wizard of Oz 168
The Level and Variability of Inflation 169
6-7 Conclusion：The Classical Dichotomy 169
Appendix：The Impact of Current and Future Money on the Price Level 173
Chapter 7 The Open Economy 176
7-1 National Income Accounting in an Open Economy 178
The Role of Net Exports 178
GNP versus GDP 180
The Capital Account and the Current Account 181
7-2 The International Flows of Capital and Goods 183
A Model of the Small Open Economy 183
How Policies Influence the Capital Account and the Current Account 185
Fiscal Policy at Home 185
CASESTUDY 7-1 The Twin Deficits of the 1980s 186
Fiscal Policy Abroad 188
Shifts in Investment Demand 188
Evaluating Economic Policy 189
7-3 Exchange Rates 190
Nominal and Real Exchange Rates 190
The Nominal Exchange Rate 190
FYI How Newspapers Report the Exchange Rate 191
The Real Exchange Rate 192
The Real Exchange Rate and Net Exports 193
CASESTUDY 7-2 How Business Firms Respond to the Exchange Rate 194
The Determinants of the Real Exchange Rate 194
How Policies Influence the Real Exchange Rate 196
Fiscal Policy at Home 196
Fiscal Policy Abroad 196
Shifts in Investment Demand 197
The Effects of Trade Policies 198
The Determinants of the Nominal Exchange Rate 199
CASESTUDY 7-3 Inflation and Nominal Exchange Rates 200
The Special Case of Purchasing-Power Parity 201
CASESTUDY 7-4 The Big Mac Around the World 203
7-4 Conclusion：The United States as a Large Open Economy 204
Appendix：A Model of the Large Open Economy 208
The Flow of Capital From Abroad 208
The Elements of the Model 209
The Effects of Economic Policies 211
Part Three The Economy in the Short Run 213
Chapter 8 Introduction to Economic Fluctuations 214
8-1 How the Short Run and Long Run Differ 215
CASESTUDY 8-1 The Puzzle of Sticky Magazine Prices 217
8-2 Aggregate Demand 217
The Quantity Equation as Aggregate Demand 218
Why the Aggregate Demand Curve Slopes Downward 218
Shifts in the Aggregate Demand Curve 219
8-3 Aggregate Supply 220
The Long Run：The Vertical Aggregate Supply Curve 221
The Short Run：The Horizontal Aggregate Supply Curve 222
From the Short Run to the Long Run 224
CASESTUDY 8-2 Gold，Greenbacks，and the Contraction of the 1870s 226
8-4 Stabilization Policy 226
Shocks to Aggregate Demand 227
CASESTUDY 8-3 Velocity and the 1982 Recession 228
Shocks to Aggregate Supply 229
CASESTUDY 8-4 How OPEC Helped Cause Stagflation in the 1970s and Euphoria in the 1980s 231
8-5 Conclusion 233
Chapter 9 Aggregate Demand Ⅰ 235
9-1 The Goods Market and the IS Curve 237
The Keynesian Cross 237
Planned Expenditure 237
The Economy in Equilibrium 238
Fiscal Policy and the Multiplier：Government Purchases 240
Fiscal Policy and the Multiplier：Taxes 243
CASESTUDY 9-1 Kennedy，Keynes，and the 1964 Tax Cut 244
The Interest Rate，Investment，and the IS Curve 244
How Fiscal Policy Shifts the IS Curve 246
A Loanable-Funds Interpretation of the IS Curve 247
The Simple Algebra of the IS Curve 248
9-2 The Money Market and the LM Curve 250
The Theory of Liquidity Preference 250
CASESTUDY 9-2 Paul Volcker，Tight Money，and Rising Interest Rates 254
Income，Money Demand，and the LM Curve 254
How Monetary Policy Shifts the LM Curve 255
A Quantity-Equation Interpretation of the LM Curve 257
The Simple Algebra of the LM Curve 258
9-3 Conclusion：The Short-Run Equilibrium 259
Chapter 10 Aggregate Demand Ⅱ 263
10-1 Explaining Fluctuations With the IS-LM Model 264
Changes in Fiscal Policy 264
Changes in Monetary Policy 265
The Interaction Between Monetary and Fiscal Policy 266
CASESTUDY 10-1 Policy Analysis With Macroeconometric Models 268
Shocks in the IS-LM Model 269
10-2 IS-LM as a Theory of Aggregate Demand 270
From the IS-LM Model to the Aggregate Demand Curve 270
The Simple Algebra of the Aggregate Demand Curve 273
CASESTUDY 10-2 The Effectiveness of Monetary and Fiscal Policy 274
The IS-LM Model in the Short Run and Long Run 275
10-3 The Great Depression 277
The Spending Hypothesis：Shocks to the IS Curve 278
The Money Hypothesis：A Shock to the LM Curve 280
The Money Hypothesis Again：The Effects of Falling Prices 280
The Stabilizing Influences of Deflation 281
The Destabilizing Influences of Deflation 281
Could the Depression Happen Again？ 283
10-4 Conclusion 283
Chapter 11 Aggregate Supply 287
11-1 Four Models of Aggregate Supply 288
The Sticky-Wage Model 288
The Worker-Misperception Model 291
CASE STUDY 11-1 The Cyclical Behavior of the Real Wage 294
The Imperfect-Information Model 295
The Sticky-Price Model 296
CASESTUDY 11-2 International Differences in the Aggregate Supply Curve 299
Summary and Implications 300
11-2 Inflation，Unemployment，and the Phillips Curve 302
From Aggregate Supply to Phillips Curve 303
FYI The History of the Phillips Curve 304
Expectations and Inflation Inertia 305
The Two Causes of Rising and Falling Inflation 305
CASESTUDY 11-3 Inflation and Unemployment in the United States 306
The Short-Run Tradeoff Between Inflation and Unemployment 307
Disinflation and the Sacrifice Ratio 308
Rational Expectations and Painless Disinflation 309
CASESTUDY 11-4 The Cost of Paul Volcker’s Disinflation 311
11-3 Recent Developments：New Keynesian Economics 312
Small Menu Costs and Aggregate Demand Externalities 313
The Staggering of Wages and Prices 314
Recessions as Coordination Failure 315
CASESTUDY 11-5 Experimental Evidence on Coordination Games 316
Hysteresis and the Challenge to the Natural-Rate Hypothesis 317
CASESTUDY 11-6 Unemployment in the United Kingdom in the 1980s 318
11-4 Conclusion 319
Chapter 12 The Macroeconomic Policy Debate 322
12-1 Should Policy Be Active or Passive？ 323
Lags in the Implementation and Effects of Policies 324
CASESTUDY 12-1 Profit Sharing as an Automatic Stabilizer 325
The Difficult Job of Economic Forecasting 326
CASESTUDY 12-2 Two Episodes in Economic Forecasting 326
Ignorance，Expectations，and the Lucas Critique 328
The Historical Record 329
CASESTUDY 12-3 Is the Stabilization of the Economy a Figment of the Data？ 329
12-2 Should Policy Be Conducted by Rule or by Discretion？ 330
Distrust of Policymakers and the Political Process 331
CASESTUDY 12-4 The Economy Under Republican and Democratic Presidents 332
The Time Inconsistency of Discretionary Policy 333
CASESTUDY 12-5 Alexander Hamilton versus Time Inconsistency 335
Rules for Monetary Policy 336
Rules for Fiscal Policy 337
CASESTUDY 12-6 The Debt-GNP Ratio Over Two Hundred Years 338
12-3 Conclusion：Making Policy in an Uncertain World 339
Appendix：Time Inconsistency and the Tradeoff Between Inflation and Unemployment 342
Chapter 13 The Open Economy in the Short Run 345
13-1 The Mundell-Fleming Model 346
Components of the Model 346
The Model on a Y-r Graph 347
The Model on a Y-e Graph 349
13-2 The Small Open Economy Under Floating Exchange Rates 352
Fiscal Policy 352
Monetary Policy 353
CASESTUDY 13-1 The Rise in the Dollar，1979-1982 354
Trade Policy 354
13-3 The Small Open Economy Under Fixed Exchange Rates 356
How a Fixed Exchange-Rate System Works 356
CASESTUDY 13-2 The International Gold Standard 358
Fiscal Policy 359
Monetary Policy 359
Trade Policy 361
Summary of the Mundell-Fleming Model 362
13-4 Should Exchange Rates Be Floating or Fixed？ 362
CASESTUDY 13-3 The European Monetary System 364
13-5 A Concluding Reminder 364
Appendix：A Short-Run Model of the Large Open Economy 368
Fiscal Policy 370
Monetary Policy 370
A Rule of Thumb 373
Chapter 14 The Theory of Real Business Cycles 374
14-1 A Review of the Economy Under Flexible Prices 375
14-2 A Real-Business-Cycle Model 377
Intertemporal Substitution and Labor Supply 377
Real Aggregate Supply and Real Aggregate Demand 378
Changes in Fiscal Policy 379
Shocks to Technology 380
14-3 The Debate Over Real-Business-Cycle Theory 382
The Importance of Technology Shocks 382
CASESTUDY 14-1 The Solow Residual and the Business Cycle 383
The Interpretation of Unemployment 384
CASESTUDY 14-2 Looking for Intertemporal Substitution 385
The Neutrality of Money 386
The Flexibility of Wages and Prices 386
FYI What Is New Classical Economics？ 387
14-4 Conclusion 388
Part Four More on the Microeconomics Behind Macroeconomics 391
Chapter 15 Consumption 392
15-1 John Maynard Keynes and the Consumption Function 393
Keynes’s Conjectures 393
The Early Empirical Successes 395
Secular Stagnation，Simon Kuznets，and the Consumption Puzzle 395
15-2 Irving Fisher and Intertemporal Choice 397
The Intertemporal Budget Constraint 397
Consumer Preferences 400
Optimization 401
How Changes in Income Affect Consumption 402
How Changes in the Real Interest Rate Affect Consumption 403
CASESTUDY 15-1 Consumption and the Real Interest Rate 404
Constraints on Borrowing 405
CASESTUDY 15-2 The High Japanese Saving Rate 408
15-3 Franco Modigliani and the Life-Cycle Hypothesis 409
The Hypothesis 409
Implications 410
CASESTUDY 15-3 The Consumption and Saving of the Elderly 412
CASESTUDY 15-4 Saving and the Fear of Nuclear War 412
15-4 Milton Friedman and the Permanent-Income Hypothesis 414
The Hypothesis 414
Implications 415
CASESTUDY 15-5 The 1964 Tax Cut and the 1968 Tax Surcharge 416
Rational Expectations and Consumption 417
CASESTUDY 15-6 Do Consumers Anticipate Future Income？ 418
15-5 Conclusion 419
Chapter 16 Two Views of Government Debt 423
16-1 The Traditional View of Government Debt 424
16-2 The Ricardian View of Government Debt 426
The Basic Logic of Ricardian Equivalence 426
The Government Budget Constraint 427
16-3 Consumers and Future Taxes 429
Myopia 430
Borrowing Constraints 430
Future Generations 432
CASESTUDY 16-1 Why Do Parents Leave Bequests？ 433
16-4 Conclusion：Making a Choice 433
Appendix：Is the Government Budget Deficit Correctly Measured？ 436
Measurement Problem No.1：Inflation 436
Measurement Problem No.2：Capital Assets 437
Measurement Problem No.3：Uncounted Liabilities 438
Whither the Budget Deficit？ 439
Chapter 17 Investment 440
17-1 Business Fixed Investment 441
The Rental Price of Capital 442
The Cost of Capital 443
The Determinants of Investment 445
Taxes and Investment 448
CASESTUDY 17-1 The Swedish Investment Funds System 449
The Stock Market and Tobin’s q 450
Financing Constraints 451
17-2 Residential Investment 452
The Stock Equilibrium and the Flow Supply 452
Changes in Housing Demand 453
FYI What Price House Can You Afford？ 454
CASESTUDY 17-2 Taxes，Babies，and the Housing Boom of the 1970s 455
17-3 Inventory Investment 456
Reasons for Holding Inventories 456
CASESTUDY 17-3 Seasonal Fluctuations and Production Smoothing 457
The Accelerator Model of Inventories 458
CASESTUDY 17-4 The Evidence for the Accelerator Model 458
Inventories and the Real Interest Rate 459
17-4 Conclusion 460
Chapter 18 Money Supply and Money Demand 463
18-1 Money Supply 463
100-Percent-Reserve Banking 464
Fractional-Reserve Banking 465
A Model of the Money Supply 467
The Three Instruments of Monetary Policy 469
CASESTUDY 18-1 Bank Failures and the Money Supply in the 1930s 470
18-2 Money Demand 472
Portfolio Theories of Money Demand 472
CASESTUDY 18-2 Currency and the Underground Economy 474
Transactions Theories of Money Demand 474
The Baumol-Tobin Model of Cash Management 474
CASESTUDY 18-3 Empirical Studies of Money Demand 478
18-3 Conclusion：Microeconomic Models for Macroeconomics 479
Epilogue What We Know，What We Don’t 482
The Four Most Important Lessons of Macroeconomics 482
Lesson No.1：In the long run，a country’s capacity to produce goods and services determines the standard of living of its citizens 483
Lesson No.2：In the short run，aggregate demand influences the amount of goods and services that a country produces 483
Lesson No.3：In the long run，the rate of money growth determines the rate of inflation，but it does not affect the rate of unemployment 483
Lesson No.4：In the short run，policymakers who control monetary and fiscal policy face a tradeoff between inflation and unemployment 484
The Four Most Important Unresolved Questions of Macroeconomics 485
Question No.1：How should policymakers try to raise the economy’s natural rate of output？ 485
Question No.2：Should policymakers try to stabilize the economy？ 486
Question No.3：How costly is inflation，and how costly is reducing inflation？ 486
Question No.4：What are the consequences of government budget deficits？ 487
Glossary 489
Index 499