PART Ⅰ INTRODUCTION 1
CHAPTER 1 TEN PRINCIPLES OF ECONOMICS 3
How People Make Decisions 4
Principle #1：People Face Tradeoffs 4
Principle #2：The Cost of Something Is What You Give Up to Get It 5
Principle #3：Rational People Think at the Margin 6
Principle #4：People Respond to Incentives 7
How People Interact 8
Principle #5：Trade Can Make Everyone Better Off 8
Principle #6：Markets Are Usually a Good Way to Organize Economic Activity 9
Principle #7：Governments Can Sometimes Improve Market Outcomes 10
How the Economy as a Whole Works 10
Principle #8：A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services 11
Principle #9：Prices Rise When the Government Prints Too Much Money 12
Principle #10：Society Faces a Short-Run Tradeoff between Inflation and Unemployment 13
Conclusion 13
Summary 14
Key Concepts 14
Questions for Review 15
Problems and Applications 15
CHAPTER 2 THINKING LIKE AN ECONOMIST 17
The Economist as Scientist 18
The Scientific Method：Observation，Theory，and More Observation 19
The Role of Assumptions 19
Economic Models 20
Our First Model：The Circular-Flow Diagram 21
Our Second Model：The Production Possibilities Frontier 22
Microeconomics and Macroeconomics 25
The Economist as Policymaker 26
Positive versus Normative Analysis 26
Economists in Washington 27
Why Economists Disagree 28
Differences in Scientific Judgments 28
Differences in Values 29
Charlatans and Cranks 29
Perception versus Reality 30
Let’s Get Going 31
Summary 32
Key Concepts 32
Questions for Review 32
Problems and Applications 33
Appendix：Graphing——A Brief Review 34
Graphs of a Single Variable 34
Graphs of Two Variables：The Coordinate System 34
Curves in the Coordinate System 36
Slope and Elasticity 39
Cause and Effect 41
Omitted Variables 41
Reverse Causality 42
CHAPTER 3 INTERDEPENDENCE AND THE GAINS FROM TRADE 45
A Parable for the Modern Economy 46
Production Possibilities 46
Specialization and Trade 48
The Principle of Comparative Advantage 50
Absolute Advantage 51
Opportunity Cost and Comparative Advantage 51
Comparative Advantage and Trade 52
Applications of Comparative Advantage 53
Should Michael Jordan Mow His Own Lawn？ 53
Should the United States Trade with Other Countries？ 54
FYI：The Legacy of Adam Smith and David Ricardo 54
Conclusion 55
Summary 55
Key Concepts 56
Questions for Review 56
Problems and Applications 56
PART Ⅱ SUPPLY AND DEMAND Ⅰ：HOW MARKETS WORK 59
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 61
Markets and Competition 62
Competitive Markets 62
Competition：Perfect and Otherwise 62
Demand 63
The Determinants of Individual Demand 63
Price 63
Income 64
Prices of Related Goods 64
Tastes 64
Expectations 64
The Demand Schedule and the Demand Curve 64
Ceteris Paribus 66
Market Demand versus Individual Demand 66
Shifts in the Demand Curve 68
CASE STUDY：Two Ways to Reduce the Quantity of Smoking Demanded 69
Supply 70
The Determinants of Individual Supply 71
Price 71
Input Prices 71
Technology 71
Expectations 71
The Supply Schedule and the Supply Curve 71
Market Supply versus Individual Supply 72
Shifts in the Supply Curve 73
Supply and Demand Together 74
Equilibrium 76
Three Steps to Analyzing Changes in Equilibrium 78
Example：A Change in Demand 78
Shifts in Curves versus Movements along Curves 80
Example：A Change in Supply 80
Example：A Change in Both Supply and Demand 81
Conclusion：How Prices Allocate Resources 81
IN THE NEWS：Supply，Demand，and the Price of Paper——Pulp Reality 83
Summary 84
Key Concepts 85
Questions for Review 85
Problems and Applications 85
CHAPTER 5 ELASTICITY AND ITS APPLICATION 89
The Elasticity of Demand 90
The Price Elasticity of Demand and Its Determinants 90
Necessities versus Luxuries 90
Availability of Close Substitutes 90
Definition of the Market 90
Time Horizon 91
Computing the Price Elasticity of Demand 91
FYI：Calculating Elasticities Using the Midpoint Method 92
The Variety of Demand Curves 92
Total Revenue and the Price Elasticity of Demand 94
CASE STUDY：Pricing Admission to a Museum 96
The Income Elasticity of Demand 96
FYI：Elasticity and Total Revenue along a Linear Demand Curve 97
IN THE NEWS：On the Road with Elasticity——For Whom the Booth Tolls，Price Really Does Matter 98
The Elasticity of Supply 99
The Price Elasticity of Supply and Its Determinants 99
Computing the Price Elasticity of Supply 99
The Variety of Supply Curves 100
Three Applications of Supply，Demand，and Elasticity 102
Can Good News for Farming Be Bad News for Farmers？ 103
Why Did OPEC Fail to Keep the Price of Oil High？ 105
Does Drug Interdiction Increase or Decrease Drug-Related Crime？ 106
Conclusion 108
Summary 108
Key Concepts 109
Questions for Review 109
Problems and Applications 109
CHAPTER 6 SUPPLY，DEMAND，AND GOVERNMENT POLICIES 111
Controls on Prices 112
How Price Ceilings Affect Market Outcomes 112
CASE STUDY：Lines at the Gas Pump 113
CASE STUDY：Rent Control in the Short Run and Long Run 115
IN THE NEWS：Rent Control in New York City——Home Free：Some Rich and Famous of New York City Bask in Shelter of Rent Law 116
How Price Floors Affect Market Outcomes 117
CASE STUDY：The Minimum Wage 118
Evaluating Price Controls 120
Taxes 121
How Taxes on Buyers Affect Market Outcomes 122
How Taxes on Sellers Affect Market Outcomes 123
CASE STUDY：Can Congress Distribute the Burden of a Payroll Tax？ 124
Elasticity and Tax Incidence 125
CASE STUDY：Who Pays the Luxury Tax？ 127
Conclusion 128
Summary 128
Key Concepts 128
Questions for Review 128
Problems and Applications 129
PART Ⅲ SUPPLY AND DEMAND Ⅱ：MARKETS AND WELFARE 131
CHAPTER 7 CONSUMERS，PRODUCERS，AND THE EFFICIENCY OF MARKETS 133
Consumer Surplus 134
Willingness to Pay 134
Using the Demand Curve to Measure Consumer Surplus 135
How a Lower Price Raises Consumer Surplus 138
What Does Consumer Surplus Measure？ 138
Producer Surplus 140
Cost and the Willingness to Sell 140
Using the Supply Curve to Measure Producer Surplus 141
How a Higher Price Raises Producer Surplus 143
Market Efficiency 144
The Benevolent Social Planner 144
FYI：The Invisible Hand of the Marketplace 145
Evaluating the Market Equilibrium 146
IN THE NEWS：Ticket Scalping——Tickets？Supply Meets Demand on Sidewalk 148
Conclusion：Market Efficiency and Market Failure 150
Summary 151
Key Concepts 151
Questions for Review 151
Problems and Applications 151
CHAPTER 8 APPLICATION：THE COSTS OF TAXATION 155
The Deadweight Loss of Taxation 156
How a Tax Affects Market Participants 156
Welfare without a Tax 157
Welfare with a Tax 158
Changes in Welfare 158
Deadweight Losses and the Gains from Trade 159
The Determinants of the Deadweight Loss 160
CASE STUDY：The Deadweight Loss of Taxes on Labor 162
CASE STUDY：Henry George and the Tax on Land 163
Deadweight Loss and Tax Revenue as Taxes Vary 164
CASE STUDY：The Laffer Curve and Supply-Side Economics 166
Conclusion 168
IN THE NEWS：Should Ukraine Cut Tax Rates to Raise Tax Revenue？——A Big Tax Cut to Lift the Economy——Not Here，in Ukraine 169
Summary 170
Key Concepts 170
Questions for Review 170
Problems and Applications 170
CHAPTER 9 APPLICATION：INTERNATIONAL TRADE 173
The Determinants of Trade 174
The Equilibrium without Trade 174
The World Price and Comparative Advantage 175
FYI：Comparing Prices and Comparative Advantage 175
The Winners and Losers from Trade 176
The Gains and Losses of an Exporting Country 176
The Gains and Losses of an Importing Country 179
The Effects of a Tariff 181
The Effects of an Import Quota 182
The Lessons for Trade Policy 185
The Arguments for Restricting Trade 186
The Jobs Argument 186
The National-Security Argument 187
The Infant-Industry Argument 187
IN THE NEWS：NAFTA and Mexican Tomatoes——President Wins Tomato Accord for Floridians：Mexico Agrees to End Low-Price Shipments 188
The Unfair-Competition Argument 189
The Protection-as-a-Bargaining-Chip Argument 189
CASE STUDY：GATT and the Multilateral Approach to Free Trade 189
IN THE NEWS：A Chicken Invasion——U.S.Chicken in Every Pot？Nyet！ Russians Cry Foul 190
Conclusion 191
Summary 192
Key Concepts 192
Questions for Review 193
Problems and Applications 193
PART Ⅳ THE ECONOMICS OF THE PUBLIC SECTOR 197
CHAPTER 10 EXTERNALITIES 199
Externalities and Market Inefficiency 201
Welfare Economics：A Recap 201
Negative Externalities in Production 202
Positive Externalities in Production 203
CASE STUDY：The Debate over Technology Policy 204
Externalities in Consumption 205
Private Solutions to Externalities 207
The Types of Private Solutions 207
IN THE NEWS：An Outraged Citizen Speaks Out——Smnokers，Pick Up Your Butts 208
The Coase Theorem 208
Why Private Solutions Do Not Always Work 209
Public Policies toward Externalities 210
Regulation 210
Pigovian Taxes and Subsidies 211
Tradable Pollution Permits 212
IN THE NEWS：Pollution Permits in Action——Smog Swapping：New Rules Harness Power of Free Markets to Curb Air Pollution 214
Objections to the Economic Analysis of Pollution 214
Conclusion 216
Summary 216
Key Concepts 216
Questions for Review 217
Problems and Applications 217
CHAPTER 11 PUBLIC GOODS AND COMMON RESOURCES 219
The Different Kinds of Goods 220
Public Goods 221
The Free-Rider Problem 222
Some Important Public Goods 222
National Defense 222
Basic Research 223
Programs to Fight Poverty 223
CASE STUDY：Are Lighthouses Public Goods？ 224
The Difficult Job of Cost-Benefit Analysis 225
CASE STUDY：How Much Is a Life Worth？ 225
Common Resources 227
The Tragedy of the Commons 227
CASE STUDY：Capitalism，Communism，and Collective Resources 228
Some Important Common Resources 229
Clean Air and Water 229
Oil Pools 229
Congested Roads 229
IN THE NEWS：The Singapore Solution——Economics of Road Pricing 230
Fish，Whales，and Other Wildlife 231
CASE STUDY：Why the Cow Is Not Extinct 232
IN THE NEWS：Should Yellowstone Charge as Much as Disney World？——Save the Parks，and Make a Profit 232
Conclusion：The Importance of Property Rights 233
Summary 234
Key Concepts 234
Questions for Review 234
Problems and Applications 234
CHAPTER 12 THE DESIGN OF THE TAX SYSTEM 237
A Financial Overview of the U.S.Government 238
The Federal Government 238
Receipts 238
Spending 240
State and Local Government 242
Receipts 242
Spending 243
Taxes and Efficiency 243
Deadweight Losses 244
CASE STUDY：Should Income or Consumption Be Taxed？ 245
Administrative Burden 246
IN THE NEWS：Small Business and the Tax Laws——Obeying the Tax Laws：Small Business’s Burden 247
Marginal Tax Rates versus Average Tax Rates 248
Lump-Sum Taxes 248
Taxes and Equity 249
The Benefits Principle 249
The Ability-to-Pay Principle 250
Vertical Equity 250
CASE STUDY：How the Burden of Taxes Is Distributed 250
Horizontal Equity 251
CASE STUDY：Horizontal Equity and the Marriage Tax 252
Tax Incidence and Tax Equity 253
CASE STUDY：Who Pays the Corporate Income Tax？ 254
CASE STUDY：The Flat Tax 255
Conclusion：The Tradeoff between Equity and Efficiency 257
Summary 257
Key Concepts 258
Questions for Review 258
Problems and Applications 258
PART Ⅴ FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY 261
CHAPTER 13 THE COSTS OF PRODUCTION 263
What Are Costs？ 264
Total Revenue，Total Cost，and Profit 264
Costs as Opportunity Costs 265
The Cost of Capital as an Opportunity Cost 265
Economic Profit versus Accounting Profit 266
Production and Costs 267
The Production Function 267
From the Production Function to the Total-Cost Curve 269
The Various Measures of Cost 270
Fixed and Variable Costs 271
Average and Marginal Cost 272
Cost Curves and Their Shapes 273
Rising Marginal Cost 273
U-Shaped Average Total Cost 274
The Relationship between Marginal Cost and Average Total Cost 274
Typical Cost Curves 275
Costs in the Short Run and in the Long Run 277
Conclusion 278
Summary 278
Key Concepts 279
Questions for Review 279
Problems and Applications 279
CHAPTER 14 FIRMS IN COMPETITIVE MARKETS 283
What Is a Competitive Market？ 284
The Meaning of Competition 284
The Revenue of a Competitive Firm 284
Profit Maximization and the Competitive Firm’s Supply Curve 286
A Simple Example of Profit Maximization 286
The Marginal-Cost Curve and the Firm’s Supply Decision 287
The Firm’s Short-Run Decision to Shut Down 288
CASE STUDY：Near-Empty Restaurants and Off-Season Miniature Golf 290
FYI：Spilt Milk and Sunk Costs 291
The Firm’s Long-Run Decision to Exit or Enter an Industry 292
Measuring Profit in Our Graph for the Competitive Firm 292
The Supply Curve in a Competitive Market 294
Market Supply with a Fixed Number of Firms 294
Market Supply with Entry and Exit 295
FYI：Why Do Competitive Firms Stay in Business If They Make Zero Profit？ 296
A Shift in Demand in the Short Run and Long Run 297
Why the Long-Run Supply Curve Might Slope Upward 298
Conclusion：Behind the Supply Curve 300
Summary 300
Key Concepts 301
Questions for Review 301
Problems and Applications 301
CHAPTER 15 MONOPOLY 303
Why Monopolies Arise 304
Monopoly Resources 305
CASE STUDY：The DeBeers Diamond Monopoly 305
Government-Created Monopolies 306
Natural Monopolies 306
How Monopolies Make Production and Pricing Decisions 308
Monopoly versus Competition 308
A Monopoly’s Revenue 308
Profit Maximization 311
FYI：Why a Monopoly Does Not Have a Supply Curve 313
A Monopoly’s Profit 313
CASE STUDY：Monopoly Drugs versus Generic Drugs 314
The Welfare Cost of Monopoly 315
The Deadweight Loss 316
The Monopoly’s Profit：A Social Cost？ 318
Public Policy toward Monopolies 319
Increasing Competition with Antitrust Laws 319
Regulation 320
IN THE NEWS：Boeing’s Market Power——Many Airlines Not Worried by Boeing-McDonnell Deal 321
Public Ownership 322
Doing Nothing 323
Price Discrimination 323
A Parable about Pricing 323
IN THE NEWS：The Future of Electricity——The End of the Last Great Monopoly 324
The Moral of the Story 326
The Analytics of Price Discrimination 327
Examples of Price Discrimination 328
Movie Tickets 328
Airline Prices 329
Discount Coupons 329
Financial Aid 329
Quantity Discounts 329
IN THE NEWS：Competing to Be the Best Monopolist——Let’s Play Monopoly 330
Conclusion：The Prevalence of Monopoly 332
Summary 332
Key Concepts 333
Questions for Review 333
Problems and Applications 333
CHAPTER 16 OLIGOPOLY 337
Between Monopoly and Perfect Competition 338
Markets with Only a Few Sellers 339
A Duopoly Example 340
Competition，Monopolies，and Cartels 340
The Equilibrium for an Oligopoly 341
How the Size of an Oligopoly Affects the Market Outcome 342
CASE STUDY：OPEC and the World Oil Market 344
IN THE NEWS：Squabbling in OPEC——OPEC Is Expected to Delay Action on New Oil Output by Iraq 345
Game Theory and the Economies of Cooperation 345
The Prisoners’ Dilemma 346
Oligopolies as a Prisoners’ Dilemma 347
Other Examples of the Prisoners’ Dilemma 348
Arms Races 348
IN THE NEWS：Modern Pirates——Ocean Shippers Break Ranks on Pricing 349
Advertising 350
Common Resources 351
The Prisoners’ Dilemma and the Welfare of Society 351
Why People Sometimes Cooperate 352
CASE STUDY：The Prisoners’ Dilemma Tournament 353
Public Policy toward Oligopolies 354
Restraint of Trade and the Antitrust Laws 354
CASE STUDY：An Illegal Phone Call 355
Controversies over Antitrust Policy 356
Resale Price Maintenance 356
IN THE NEWS：Anticompetitive “R” Us？——Toys “R” Us Is Expecting U.S.Charges of Antitrust 357
Tying 358
Conclusion 359
Summary 359
Key Concepts 359
Questions for Review 359
Problems and Applications 360
CHAPTER 17 MONOPOLISTIC COMPETITION 363
Competition with Differentiated Products 364
The Monopolistically Competitive Firm in the Short Run 364
The Long-Run Equilibrium 365
Monopolistic versus Perfect Competition 367
Excess Capacity 368
Markup over Marginal Cost 368
Monopolistic Competition and the Welfare of Society 369
FYI：Is Excess Capacity a Social Problem？ 370
Advertising 371
The Debate over Advertising 371
The Critique of Advertising 371
The Defense of Advertising 371
CASE STUDY：Advertising and the Price of Eyeglasses 372
Advertising as a Signal of Quality 373
Brand Names 374
CASE STUDY：Brand Names under Communism 375
IN THE NEWS：TV Networks as Brand Names——A TV Season When Image Is Everything 376
Conclusion 377
Summary 377
Key Concepts 377
Questions for Review 378
Problems and Applications 378
PART Ⅵ THE ECONOMICS OF LABOR MARKETS 381
CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION 383
A Firm’s Demand for Labor 384
The Competitive Profit-Maximizing Firm 385
The Production Function and the Marginal Product of Labor 385
The Value of the Marginal Product and the Demand for Labor 387
FYI：Input Demand and Output Supply：Two Sides of the Same Coin 388
Labor-Market Equilibrium 389
Marginal Productivity in Equilibrium 389
Shifts in Labor Supply 390
Shifts in Labor Demand 391
CASE STUDY：Productivity and Wages 392
The Other Factors of Production：Land and Capital 394
Equilibrium in the Markets for Land and Capital 394
FYI：The Various Forms of Capital Income 396
Linkages among the Factors of Production 396
CASE STUDY：The Economics of the Black Death 397
Conclusion 398
Summary 398
Key Concepts 399
Questions for Review 399
Problems and Applications 399
CHAPTER 19 EARNINGS AND DISCRIMINATION 401
Some Determinants of Equilibrium Wages 402
Compensating Differentials 402
Human Capital 403
CASE STUDY：The Increasing Value of Skills 404
Ability，Effort，and Chance 405
CASE STUDY：The Benefits of Beauty 406
An Alternative View of Education：Signaling 406
CASE STUDY：Human Capital，Natural Ability，and Compulsory School Attendance 407
The Superstar Phenomenon 408
The Economics of Discrimination 409
Measuring Labor-Market Discrimination 410
Discrimination by Employers 411
CASE STUDY：Segregated Streetcars and the Profit Motive 412
Discrimination by Customers and Governments 412
CASE STUDY：Discrimination in Sports 413
IN THE NEWS：Men，Women，and Wages——The Shrinking Pay Gap 414
The Debate over Comparable Worth 415
Conclusion 416
Summary 417
Key Concepts 417
Questions for Review 417
Problems and Applications 418
CHAPTER 20 THE DISTRIBUTION OF INCOME 421
The Measurement of Inequality 422
U.S.Income Inequality 422
CASE STUDY：The Women’s Movement and the Income Distribution 424
CASE STUDY：Income Inequality around the World 425
The Poverty Rate 426
Problems in Measuring Inequality 427
In-Kind Transfers 428
The Economic Life Cycle 428
Transitory versus Permanent Income 428
IN THE NEWS：Is the Poverty Rate Correctly Measured？——Old Flaws Undermine New Poverty-Level Data 429
Economic Mobility 430
The Political Philosophy of Redistributing Income 431
Utilitarianism 431
Liberalism 432
Libertarianism 433
Policies to Reduce Poverty 434
Minimum-Wage Laws 435
Welfare 435
IN THE NEWS：The 1996 Welfare Reform——What Makes the Welfare Bill a Winner 436
Negative Income Tax 436
In-Kind Transfers 438
Antipoverty Programs and Work Incentives 438
IN THE NEWS：Saving and Welfare——For Welfare Parents，Scrimping Is Legal，but Saving Is Out 439
Conclusion 440
Summary 441
Key Concepts 441
Questions for Review 441
Problems and Applications 442
PART Ⅶ ADVANCED TOPIC 445
CHAPTER 21 THE THEORY OF CONSUMER CHOICE 447
The Budget Constraint：What the Consumer Can Afford 448
Preferences：What the Consumer Wants 450
Representing Preferences with Indifference Curves 450
Four Properties of Indifference Curves 451
Two Extreme Examples of Indifference Curves 453
Perfect Substitutes 453
Perfect Complements 454
FYI：Utility：An Alternative Way to Represent a Consumer’s Preferences 455
Optimization：What the Consumer Chooses 455
The Consumer’s Optimal Choices 455
How Changes in Income Affect the Consumer’s Choices 456
How Changes in Prices Affect the Consumer’s Choices 457
Income and Substitution Effects 458
Deriving the Demand Curve 461
Four Applications 462
Do All Demand Curves Slope Downward？ 462
How Do Wages Affect Labor Supply？ 463
CASE STUDY：Income Effects on Labor Supply：Historical Trends，Lottery Winners，and the Carnegie Conjecture 466
How Do Interest Rates Affect Household Saving？ 467
Do the Poor Prefer to Receive Cash or In-Kind Transfers？ 469
Conclusion：Do People Really Think This Way？ 471
Summary 471
Key Concepts 472
Questions for Review 472
Problems and Applications 472
PART Ⅷ THE DATA OF MACROECONOMICS 475
CHAPTER 22 MEASURING A NATION’S INCOME 477
The Economy’s Income and Expenditure 478
The Measurement of Gross Domestic Product 480
“GDP Is the Market Value…” 480
“…Of All…” 480
“…Final…” 481
“…Goods and Services…” 481
“…Produced…” 481
“…Within a Country…” 481
“…In a Given Period of Time.” 482
FYI：Three Other Measures of Income 483
The Components of GDP 483
Real versus Nominal GDP 485
A Numerical Example 485
The GDP Deflator 487
CASE STUDY：Real GDP over Recent History 487
GDP and Economic Well-Being 488
CASE STUDY：International Differences in GDP and the Quality of Life 490
Conclusion 491
Summary 491
Key Concepts 492
Questions for Review 492
Problems and Applications 492
CHAPTER 23 MEASURING THE COST OF LIVING 495
The Consumer Price Index 496
How the Consumer Price Index Is Calculated 496
FYI：What Is in the CPI’s Basket？ 498
Problems in Measuring the Cost of Living 499
IN THE NEWS：Shopping for the CPI——Is the CPI Accurate？Ask the Federal Sleuths Who Get the Numbers 500
IN THE NEWS：The CPI Commission——Prisoners of Faulty Statistics 502
The GDP Deflator versus the Consumer Price Index 502
Correcting Economic Variables for the Effects of Inflation 505
Dollar Figures from Different Times 505
IN THE NEWS：Mr.Index Goes to Hollywood——Winner and Still Champ 506
Indexation 506
Real and Nominal Interest Rates 507
Conclusion 508
Summary 509
Key Concepts 509
Questions for Review 509
Problems and Applications 510
PART Ⅸ THE REAL ECONOMY IN THE LONG RUN 513
CHAPTER 24 PRODUCTION AND GROWTH 515
Economic Growth around the World 516
FYI：The Magic of Compounding and the Rule of 70 518
Productivity：Its Role and Determinants 518
Why Productivity Is So Important 519
How Productivity Is Determined 519
Physical Capital 520
Human Capital 520
Natural Resources 520
CASE STUDY：Are Natural Resources a Limit to Growth？ 521
IN THE NEWS：Computers and Productivity——What Has the Computer Done for Us Lately？ 522
Technological Knowledge 523
The Production Function 524
Economic Growth and Public Policy 525
The Importance of Saving and Investment 525
Diminishing Returns and the Catch-Up Effect 526
Investment from Abroad 527
Education 528
IN THE NEWS：The World Bank——World Bank Focusing on Areas Shunned by Western Business 529
Property Rights and Political Stability 530
CASE STUDY：What Causes Famine？ 531
Free Trade 531
IN THE NEWS：The Sachs Solution to the African Problem——Growth in Africa：It Can Be Done 532
The Control of Population Growth 534
Research and Development 535
CASE STUDY：The Productivity Slowdown 535
Conclusion：The Importance of Long-Run Growth 537
Summary 538
Key Concepts 538
Questions for Review 538
Problems and Applications 538
CHAPTER 25 SAVING，INVESTMENT，AND THE FINANCIAL SYSTEM 541
Financial Institutions in the U.S.Economy 542
Financial Markets 542
The Bond Market 542
The Stock Market 543
Financial Intermediaries 544
Banks 544
FYI：How to Read the Newspaper’s Stock Tables 545
Mutual Funds 546
Summing Up 547
Saving and Investment in the National Income Accounts 547
Some Important Identities 548
The Meaning of Saving and Investment 549
The Market for Loanable Funds 550
Supply and Demand for Loanable Funds 550
Policy 1：Taxes and Saving 552
Policy 2：Taxes and Investment 554
Policy 3：Government Budget Deficits 555
FYI：Ricardian Equivalence：An Alternative View of Government Budget Deficits 556
CASE STUDY：Government Debt and Deficits in the United States 557
Conclusion 559
IN THE NEWS：The Balanced Budget Amendment—Balanced Budget：Bad Economics 560
Summary 561
Key Concepts 562
Questions for Review 562
Problems and Applications 562
CHAPTER 26 THE NATURAL RATE OF UNEMPLOYMENT 565
Identifying Unemployment 566
How Is Unemployment Measured？ 566
CASE STUDY：Labor-Force Participation of Men and Women in the U.S.Economy 570
Is Unemployment Measured Correctly？ 571
How Long Are the Unemployed without Work？ 572
Why Is There Unemployment？ 572
Minimum-Wage Laws 573
IN THE NEWS：The Minimum-Wage Debate——Thesis：Rise in Wages Will Hurt Teenage Group 574
Unions and Collective Bargaining 575
The Economics of Unions 576
Are Unions Good or Bad for the Economy？ 577
IN THE NEWS：The UAW’s Tradeoff——New Approach for Auto Union in Ford Accord——The Deal：No Job Cuts but Less Pay for Some 578
The Theory of Efficiency Wages 578
Worker Health 579
Worker Turnover 579
Worker Effort 580
Worker Quality 580
FYI：The Economics of Asymmetric Information 581
CASE STUDY：Henry Ford and the Very Generous $5-a-Day Wage 582
Job Search 583
The Inevitability of Search Unemployment 584
Public Policy and Job Search 584
Unemployment Insurance 585
Conclusion 586
Summary 586
Key Concepts 586
Questions for Review 587
Problems and Applications 587
PART Ⅹ MONEY AND PRICES IN THE LONG RUN 589
CHAPTER 27 THE MONETARY SYSTEM 591
The Meaning of Money 592
The Functions of Money 592
The Kinds of Money 593
IN THE NEWS：Money on the Island of Yap——Fixed Assets，or Why a Loan in Yap Is Hard to Roll Over 594
Money in the U.S.Economy 595
CASE STUDY：Where Is All the Currency？ 596
FYI：Credit Cards，Debit Cards，and Money 597
The Federal Reserve 597
The Fed’s Organization 598
The Federal Open Market Committee 598
Banks and the Money Supply 599
The Simple Case of 100-Percent-Reserve Banking 600
Money Creation with Fractional-Reserve Banking 600
The Money Multiplier 602
The Fed’s Tools of Monetary Control 603
Open-Market Operations 603
Reserve Requirements 604
The Discount Rate 604
Problems in Controlling the Money Supply 604
CASE STUDY：Bank Runs and the Money Supply 605
Conclusion 606
Summary 606
Key Concepts 607
Questions for Review 607
Problems and Applications 607
CHAPTER 28 INFLATION：ITS CAUSES AND COSTS 609
The Causes of Inflation 610
The Level of Prices and the Value of Money 611
Money Supply，Money Demand，and Monetary Equilibrium 612
The Effects of a Monetary Injection 613
A Brief Look at the Adjustment Process 614
The Classical Dichotomy and Monetary Neutrality 615
Velocity and the Quantity Equation 616
CASE STUDY：Money and Prices during Four Hyperinflations 618
The Inflation Tax 619
IN THE NEWS：The Hyperinflation in Serbia——Special，Today Only：6 Million Dinars for a Snickers Bar 620
The Fisher Effect 621
The Costs of Inflation 623
A Fall in Purchasing Power？The Inflation Fallacy 623
Shoeleather Costs 623
Menu Costs 625
Relative-Price Variability and the Misallocation of Resources 625
Inflation-Induced Tax Distortions 625
Confusion and Inconvenience 627
A Special Cost of Unexpected Inflation：Arbitrary Redistributions of Wealth 628
IN THE NEWS：How to Protect Your Savings from Inflation——Inflation Fighters for the Long Term 628
CASE STUDY：The Wizard of Oz and the Free-Silver Debate 630
Conclusion 631
Summary 632
Key Concepts 632
Questions for Review 633
Problems and Applications 633
PART Ⅺ THE MACROECONOMICS OF OPEN ECONOMIES 635
CHAPTER 29 OPEN-ECONOMY MACROECONOMICS：BASIC CONCEPTS 637
The International Flows of Goods and Capital 638
The Flow of Goods：Exports，Imports，and Net Exports 638
CASE STUDY：The Increasing Openness of the U.S.Economy 639
The Flow of Capital：Net Foreign Investment 641
IN THE NEWS：Capital Flows to Russia——Foreign Buyers Look to Russia：Despite Risks，Investors Coming Up with the Cash 642
The Equality of Net Exports and Net Foreign Investment 642
Saving，Investment，and Their Relationship to the International Flows 643
IN THE NEWS：Flows between the Developing South and the Industrial North——Fantasy Economics 644
CASE STUDY：Saving，Investment，and Net Foreign Investment of the United States 646
The Prices for International Transactions：Real and Nominal Exchange Rates 647
Nominal Exchange Rates 648
Real Exchange Rates 648
IN THE NEWS：A Dollar Depreciation and an Export Boom——Weak Dollar Makes U.S.World’s Bargain Bazaar 650
A First Theory of Exchange-Rate Determination：Purchasing-Power Parity 651
The Basic Logic of Purchasing-Power Parity 652
Implications of Purchasing-Power Parity 652
CASE STUDY：The Nominal Exchange Rate during a Hyperinflation 654
Limitations of Purchasing-Power Parity 655
Conclusion 656
Summary 656
Key Concepts 656
Questions for Review 656
Problems and Applications 657
CHAPTER 30 A MACROECONOMIC THEORY OF THE OPEN ECONOMY 659
Supply and Demand for Loanable Funds and for Foreign-Currency Exchange 660
The Market for Loanable Funds 660
The Market for Foreign-Currency Exchange 662
FYI：Purchasing-Power Parity as a Special Case 664
Equilibrium in the Open Economy 664
Net Foreign Investment：The Link between the Two Markets 664
Simultaneous Equilibrium in Two Markets 665
FYI：The Classical Dichotomy Once Again 667
How Policies and Events Affect an Open Economy 668
Government Budget Deficits 668
CASE STUDY：The Twin Deficits in the United States 670
Trade Policy 671
Political Instability and Capital Flight 673
Conclusion 676
Summary 676
Key Concepts 677
Questions for Review 677
Problems and Applications 677
PART Ⅻ SHORT-RUN ECONOMIC FLUCTUATIONS 679
CHAPTER 31 AGGREGATE DEMAND AND AGGREGATE SUPPLY 681
Three Key Facts about Economic Fluctuations 682
Fact 1：Economic Fluctuations Are Irregular and Unpredictable 682
Fact 2：Most Macroeconomic Quantities Fluctuate Together 684
Fact 3：As Output Falls，Unemployment Rises 684
FYI：Okun’s Law 685
Explaining Short-Run Economic Fluctuations 685
How the Short Run Differs from the Long Run 686
The Basic Model of Economic Fluctuations 686
The Aggregate-Demand Curve 688
Why the Aggregate-Demand Curve Is Downward Sloping 688
Pigou’s Wealth Effect 689
Keynes’s Interest-Rate Effect 689
Mundell-Fleming’s Exchange-Rate Effect 689
Summary 689
Why the Aggregate-Demand Curve Might Shift 690
The Aggregate-Supply Curve 691
Why the Aggregate-Supply Curve Is Vertical in the Long Run 691
Why the Long-Run Aggregate-Supply Curve Might Shift 692
Why the Aggregate-Supply Curve Is Upward Sloping in the Short Run 693
The New Classical Misperceptions Theory 694
The Keynesian Sticky-Wage Theory 694
The New Keynesian Sticky-Price Theory 694
Summary 695
Why the Short-Run Aggregate-Supply Curve Might Shift 695
Two Causes of Recession 696
The Effects of a Shift in Aggregate Demand 696
IN THE NEWS：How Consumers Shift Aggregate Demand——Consumers Get the Credit for Expanding Economy 698
The Effects of a Shift in Aggregate Supply 699
CASE STUDY：Oil and the Economy 701
Conclusion：The Origins of Aggregate Demand and Aggregate Supply 702
Summary 703
Key Concepts 703
Questions for Review 704
Problems and Applications 704
CHAPTER 32 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND 707
How Monetary Policy Influences Aggregate Demand 708
The Theory of Liquidity Preference 709
Money Supply 709
Money Demand 709
Equilibrium in the Money Market 710
The Downward Slope of the Aggregate-Demand Curve 712
Changes in the Money Supply 712
Interest-Rate Targets and Fed Policy 715
How Fiscal Policy Influences Aggregate Demand 716
Changes in Government Purchases 716
The Multiplier Effect 717
FYI：A Formula for the Government-Purchases Multiplier 718
The Crowding-Out Effect 718
Changes in Taxes 720
FYI：How Fiscal Policy Might Affect Aggregate Supply 720
Using Policy to Stabilize the Economy 721
The Case for Active Stabilization Policy 721
CASE STUDY：Keynesians in the White House 723
The Case against Active Stabilization Policy 724
IN THE NEWS：The Independence of the Federal Reserve——Don’t Tread on the Fed 724
Automatic Stabilizers 726
The Economy in the Long Run and the Short Run 727
FYI：The Long Run and the Short Run：An Algebraic Explanation 728
Conclusion 729
Summary 729
Key Concepts 730
Questions for Review 730
Problems and Applications 730
CHAPTER 33 THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT 733
The Phillips Curve 734
Origins of the Phillips Curve 734
Aggregate Demand，Aggregate Supply，and the Phillips Curve 735
IN THE NEWS：The Effects of Low Unemployment——Tighter Labor Market Widens Inflation Fears 737
Shifts in the Phillips Curve：The Role of Expectations 738
The Long-Run Phillips Curve 738
Expectations and the Short-Run Phillips Curve 741
The Natural Experiment for the Natural-Rate Hypothesis 743
Shifts in the Phillips Curve：The Role of Supply Shocks 745
The Cost of Reducing Inflation 748
The Sacrifice Ratio 748
Rational Expectations and the Possibility of Costless Disinflation 749
The Volcker Disinflation 750
The Greenspan Era 752
IN THE NEWS：Unemployment and Its Natural Rate——Trying to Figure Out How Low Unemployment Can Go 753
Conclusion 754
Summary 754
Key Concepts 755
Questions for Review 755
Problems and Applications 755
PART ⅩⅢ FINAL THOUGHTS 757
CHAPTER 34 FIVE DEBATES OVER MACROECONOMIC POLICY 759
Resolved：Monetary and Fiscal Policymakers Should Try to Stabilize the Economy 760
Pro：Policymakers Should Try to Stabilize the Economy 760
Con：Policymakers Should Not Try to Stabilize the Economy 760
Resolved：Monetary Policy Should Be Made by Rule Rather Than by Discretion 762
Pro：Monetary Policy Should Be Made by Rule 762
Con：Monetary Policy Should Not Be Made by Rule 763
Resolved：The Central Bank Should Aim for Zero Inflation 764
Pro：The Central Bank Should Aim for Zero Inflation 764
Con：The Central Bank Should Not Aim for Zero Inflation 765
Resolved：The Government Should Balance Its Budget 767
Pro：The Government Should Balance Its Budget 767
Con：The Government Should Not Balance Its Budget 768
Resolved：The Tax Laws Should Be Reformed to Encourage Saving 770
Pro：The Tax Laws Should Be Reformed to Encourage Saving 770
Con：The Tax Laws Should Not Be Reformed to Encourage Saving 771
Conclusion 772
Summary 773
Questions for Review 773
Problems and Applications 774
Glossary 777
Credits 783
Index 785