Macroeconomics: Principles, Applications, and Tools / Edition 8

Macroeconomics: Principles, Applications, and Tools / Edition 8

by Arthur O'Sullivan, Steven Sheffrin, Stephen Perez

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ISBN-10: 0132948877

ISBN-13: 9780132948876

Pub. Date: 01/23/2013

Publisher: Pearson

For courses in the Principles of Economics.

Introduces Readers to the Basic Concepts of Economics with Timely, Engaging Stories and Applications

Readers hoping to gain a better understanding of economics and the world around them often leave with their questions unanswered. Macroconomics: Principles, Applications, and Tools


For courses in the Principles of Economics.

Introduces Readers to the Basic Concepts of Economics with Timely, Engaging Stories and Applications

Readers hoping to gain a better understanding of economics and the world around them often leave with their questions unanswered. Macroconomics: Principles, Applications, and Tools is built upon the author’s philosophy of using the basic concepts of economics to explain a wide variety of timely, engaging, real-world economic applications.

The Ninth Edition incorporates updated figures and data, while also emphasizing current topics of interest—including the severe economic downturn of recent years and the latest developments in economic thinking. It also includes newly refined Learning Objectives that introduce the concepts explored in each chapter, along with new applications and chapter-opening stories related to the most up-to-date developments in macroeconomics.

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Table of Contents

Preface     xiv
Introduction and Key Principles
Introduction: What Is Economics?     2
What Is Economics?     4
Positive Versus Normative Analysis     5
The Three Key Economic Questions: What, How, and Who?     6
Economic Models     6
Economic Analysis and Modern Problems     7
Economic View of Traffic Congestion     7
Economic View of Poverty in Africa     7
Economic View of Japan's Economic Problems     8
The Economic Way of Thinking     9
Use Assumptions to Simplify     9
Isolate Variables-Ceteris Paribus     9
Think at the Margin     10
Rational People Respond to Incentives     10
Pedalling for Television Time     11
Preview of Coming Attractions: Macroeconomics     11
To Understand Why Economies Grow     11
London Solves Its Congestion Problem     12
To Understand Economic Fluctuations     13
To Make Informed Business Decisions     13
Preview of Coming Attractions: Microeconomics     13
To Understand Markets and Predict Changes     13
To Make Personal and Managerial Decisions     14
To Evaluate PublicPolicies     14
Summary     15
Key Terms     15
Exercises     15
Using Graphs and Percentages     17
Using Graphs     17
Computing Percentage Changes and Using Equations     24
The Key Principles of Economics     28
The Principle of Opportunity Cost     30
The Cost of College     30
The Opportunity Costs of Time and Invested Funds     31
Opportunity Cost and the Production Possibilities Curve     31
The Marginal Principle     33
The Opportunity Cost of Military Spending     34
How Many Movie Sequels?     35
Renting College Facilities     36
Automobile Emissions Standards     36
Continental Airlines Uses the Marginal Principle     37
The Principle of Voluntary Exchange     37
Exchange and Markets     37
Online Games and Market Exchange     38
The Principle of Diminishing Returns     38
Tiger Woods and Weeds     39
Diminishing Returns from Sharing a Production Facility     39
Fertilizer and Crop Yields     40
The Real-Nominal Principle     40
The Declining Real Minimum Wage      41
Repaying Student Loans     42
Summary     43
Key Terms     43
Exercises     43
Economic Experiment     47
Exchange and Markets     48
Comparative Advantage and Exchange     50
Specialization and the Gains from Trade     50
Comparative Advantage Versus Absolute Advantage     52
The Division of Labor and Exchange     52
Comparative Advantage and International Trade     53
Moving Jobs to Different States and Different Countries     54
Movie Exports     54
Candy Cane Makers Move to Mexico for Cheap Sugar     55
Markets     56
Virtues of Markets     56
Markets in a Prisoner of War Camp     57
Market Failure and the Role of Government     58
Government Enforces the Rules of Exchange     59
Government Can Reduce Economic Uncertainty     60
Summary     61
Key Terms     61
Exercises     61
Demand, Supply, and Market Equilibrium     66
The Demand Curve     68
The Individual Demand Curve and the Law of Demand     68
From Individual Demand to Market Demand      69
The Supply Curve     70
The Individual Supply Curve and the Law of Supply     71
Why Is the Individual Supply Curve Positively Sloped?     72
From Individual Supply to Market Supply     73
Why Is the Market Supply Curve Positively Sloped?     74
Market Equilibrium: Bringing Demand and Supply Together     74
Excess Demand Causes the Price to Rise     75
Excess Supply Causes the Price to Drop     76
Market Effects of Changes in Demand     76
Change in Quantity Demanded Versus Change in Demand     76
Increases in Demand Shift the Demand Curve     77
Decreases in Demand Shift the Demand Curve     78
A Decrease in Demand Decreases the Equilibrium Price     80
Market Effects of Changes in Supply     80
Change in Quantity Supplied Versus Change in Supply     80
Increases in Supply Shift the Supply Curve     81
An Increase in Supply Decreases the Equilibrium Price     82
Decreases in Supply Shift the Supply Curve     83
A Decrease in Supply Increases the Equilibrium Price     83
Simultaneous Changes in Demand and Supply     84
Predicting and Explaining Market Changes     85
Applications of Demand and Supply     86
Hurricane Katrina and Baton Rouge Housing Prices     86
Ted Koppel Tries to Explain Lower Drug Prices     87
Electricity from the Wind     88
The Bouncing Price of Vanilla Beans     89
Platinum, Jewelry, Catalytic Converters     90
Summary     91
Key Terms     91
Exercices     91
Economic Experiment     96
The Basic Concepts in Macroeconomics
Measuring a Nation's Production and Income     98
The "Flip" Sides of Macroeconomic Activity: Production and Income     100
The Circular Flow of Production and Income     101
The Production Approach: Measuring a Nation's Macroeconomic Activity Using Gross Domestic Product     102
The Components of GDP     103
Putting It All Together: The GDP Equation     107
The Income Approach: Measuring a Nation's Macroeconomic Activity Using National Income     107
Measuring National Income     108
Measuring National Income Through Value Added     109
An Expanded Circular Flow     109
Using Value Added to Measure the True Size of Wal-Mart     110
A Closer Examination of Nominal and Real GDP     111
Measuring Real Versus Nominal GDP      111
How to Use the GDP Deflator     112
Fluctuations in GDP     113
GDP as a Measure of Welfare     114
Shortcomings of GDP as a Measure of Welfare     114
The NBER and the 2001 Recession     115
The Links Between Self-Reported Happiness and GDP     117
Summary     118
Key Terms     118
Exercises     118
Unemployment and Inflation     122
Examining Unemployment     124
How Is Unemployment Defined and Measured?     124
After Growing Sharply, Women's Labor Force Participation Has Leveled Off     125
Alternative Measures of Unemployment and Why They're Important     126
NEETS Are the New Discouraged Workers in Japan     127
Who Are the Unemployed?     128
Categories of Unemployment     128
Types of Unemployment: Cyclical, Frictional, and Structural     129
The Natural Rate of Unemployment     130
The Costs of Unemployment     130
Finding the Optimal Level of Unemployment Insurance     131
The Consumer Price Index and the Cost of Living     132
The CPI Versus the Chain Index for GDP     133
Problems in Measuring Changes in Prices      133
Inflation     134
Historical U.S. Inflation Rates     135
Using the CPI to Adjust Social Security Benefits     136
The Perils of Deflation     136
The Costs of Inflation     137
Anticipated Inflation     137
Unanticipated Inflation     137
Summary     138
Key Terms     139
Exercises     139
The Economy in the Long Run
The Economy at Full Employment     142
Wage and Price Flexibility and Full Employment     144
Understanding Full Employment     144
The Production Function     144
Wages and the Demand and Supply for Labor     147
Labor Market Equilibrium     147
Changes in Demand and Supply     147
Immigration Affects Both the Demand and Supply for Labor     149
Labor Market Equilibrium and Full Employment     149
Labor Supply Varies Across Countries and Time     151
Using the Full-Employment Model     151
Taxes and Potential Output     151
A Nobel Laureate Explains Why Europeans Work Less Than Americans or the Japanese     153
Real Business Cycle Theory     153
Dividing Output Among Competing Demands for GDP at Full Employment     155
International Comparisons     155
Crowding Out in a Closed Economy     156
Crowding Out in an Open Economy     158
Crowding In     158
Summary     158
Key Terms     159
Exercises     159
Why Do Economies Grow?     162
Economic Growth Rates     164
Measuring Economic Growth     164
Comparing the Growth Rates of Various Countries     166
Increased Growth Leads to Less Child Labor in Developing Countries     167
Are Poor Countries Catching Up?     167
Capital Deepening     168
Saving and Investment     169
Growth Need Not Cause Increased Inequality     170
How Do Population Growth, Government, and Trade Affect Capital Deepening?     171
Limits to Capital Deepening     172
The Key Role of Technological Progress     172
How Do We Measure Technological Progress?     173
Using Growth Accounting     173
How Growth in Singapore and Hong Kong Differed     174
Worldwide Factors Slowed U.S. Productivity Growth     174
The Internet and Information Technology Raised Productivity Throughout the Economy      176
What Causes Technological Progress?     176
Research and Development Funding     177
Monopolies That Spur Innovation     177
The Scale of the Market     178
Induced Innovations     178
Education, Human Capital, and the Accumulation of Knowledge     178
A Virtuous Circle: GDP and Health     179
New Growth Theory     180
A Key Governmental Role: Providing the Correct Incentives and Property Rights     180
Lack of Property Rights Hinders Growth in Peru     181
Summary     182
Key Terms     182
Exercises     183
A Model of Capital Deepening     186
Economic Fluctuations
Aggregate Demand and Aggregate Supply     190
Sticky Prices and Their Macroeconomic Consequences     192
Price Stickiness in Retail Catalogs     194
Understanding Aggregate Demand     194
What Is the Aggregate Demand Curve?     194
The Components of Aggregate Demand     195
Why the Aggregate Demand Curve Slopes Downward     195
Shifts in the Aggregate Demand Curve     196
How the Multiplier Makes the Shift Bigger     198
Understanding Aggregate Supply      200
The Long-Run Aggregate Supply Curve     201
The Short-Run Aggregate Supply Curve     202
Business Investment, Net Exports, and the 2001 Recession     203
Supply Shocks     204
How the U.S. Economy Has Coped with Oil Price Fluctuations     205
From the Short Run to the Long Run     205
Looking Ahead     207
Summary     207
Key Terms     207
Exercises     208
Fiscal Policy     210
The Role of Fiscal Policy     212
Fiscal Policy and Aggregate Demand     212
The Fiscal Multiplier     213
The Limits to Stabilization Policy     214
The Federal Budget     216
Federal Spending     216
Increasing Life Expectancy and Aging Populations Spur Costs of Entitlement Programs     218
Federal Revenues     219
The Federal Deficit and Fiscal Policy     220
Automatic Stabilizers     220
How Governments Use Budget Baselines to Forecast Deficits     221
Are Deficits Bad?     222
Fiscal Policy in U.S. History     222
The Depression Era     223
The Kennedy Administration     223
The Vietnam War Era     223
The Reagan Administration     224
The Clinton and George W. Bush Administrations     224
Surveys Show Much of the 2001 Tax Cuts Were Saved     225
Summary     226
Key Terms     227
Exercises     227
The Income-Expenditure Model     230
A Simple Income-Expenditure Model     232
Equilibrium Output     233
Adjusting to Equilibrium Output     234
The Consumption Function     235
Consumer Spending and Income     235
Changes in the Consumption Function     236
Rising Home Equity, the Wealth Effect, and Increased Consumer Spending     237
Equilibrium Output and the Consumption Function     238
Saving and Investment     239
Understanding the Multiplier     240
Increased Investment Spending Raises GDP After Natural Disasters     241
Government Spending and Taxation     242
Fiscal Multipliers     242
Using Fiscal Multipliers     244
John Maynard Keynes: A World Intellectual     246
Understanding Automatic Stabilizers     247
Exports and Imports     249
The Locomotive Effect: How Foreign Demand Affects a Country's Output     251
The Income-Expenditure Model and the Aggregate Demand Curve     252
Summary     253
Key Terms     254
Exercises     254
Economic Experiment     256
Formulas for Equilibrium Income and the Multiplier     257
Investment and Financial Markets     262
An Investment: A Plunge into the Unknown     264
Evaluating the Future     265
Energy Price Uncertainty Reduces Investment Spending     266
Understanding Present Value     266
Options for a Lottery Winner     268
Real and Nominal Interest Rates     269
Interest Rates Vary by Risk and Length of Loan     270
Understanding Investment Decisions     271
Investment and the Stock Market     272
How Financial Intermediaries Facilitate Investment     274
When Financial Intermediaries Malfunction     275
Fannie Mae and Freddie Mac Facilitate Homeownership: But Do They Increase Risk?     276
Summary     277
Key Terms     277
Exercises     278
Economic Experiment     279
Money, Banking, and Monetary Policy
Money and the Banking System      280
What Is Money?     282
Three Properties of Money     282
Different Types of Monetary Systems     283
Measuring Money in the U.S. Economy     284
More Than Half of U.S. Currency is Held Overseas     285
How Banks Create Money     286
A Bank's Balance Sheet: Where the Money Comes From and Where It Goes     286
How Banks Create Money     287
How the Money Multiplier Works     288
How the Money Multiplier Works in Reverse     289
A Banker's Bank: The Federal Reserve     290
The Structure of the Federal Reserve     290
Two Recent Major Leaders of the Federal Reserve Board     292
The Independence of the Federal Reserve     293
What the Federal Reserve Does During a Financial Crisis     293
Coping with a Stock Market Crash: Black Monday, 1987     293
The Financial System Under Stress: September 11, 2001     294
Summary     295
Key Terms     295
Exercises     295
Economic Experiment     298
Formula for Deposit Creation     299
The Federal Reserve and Monetary Policy     300
The Money Market     302
The Demand for Money      302
How the Federal Reserve Can Change the Money Supply     304
Open Market Operations     305
Other Tools of the Fed     305
How Interest Rates Are Determined: Combining the Demand and Supply of Money     306
Interest Rates and Bond Prices     307
Rising Interest Rates During an Economic Recovery     308
Interest Rates and How They Change Investment and Output (GDP)     310
Monetary Policy and International Trade     312
Monetary Policy Challenges for the Fed     313
Lags in Monetary Policy     313
The Effectiveness of Committees     314
Influencing Market Expectations: From the Federal Funds Rate to Interest Rates on Long-Term Bonds     315
Making the Federal Reserve More Transparent     316
Looking Ahead: From the Short Run to the Long Run     316
Summary     317
Key Terms     317
Exercises     317
Inflation, Unemployment, and Economic Policy
Modern Macroeconomics: From the Short Run to the Long Run     320
Linking the Short Run and the Long Run     322
The Difference Between the Short and Long Run     322
Wages and Prices and Their Adjustment over Time     322
How Wage and Price Changes Move the Economy Naturally Back to Full Employment     323
Returning to Full Employment from a Recession     324
Returning to Full Employment from a Boom     325
Economic Policy and the Speed of Adjustment     325
Liquidity Traps     327
Japan's Lost Decade     327
Political Business Cycles     328
Elections, Political Parties, and Voter Expectations     328
Understanding the Economics of the Adjustment Process     329
The Long-Run Neutrality of Money     330
Crowding Out in the Long Run     332
An Unfortunate Gamble     333
Classical Economics in Historical Perspective     334
Say's Law     334
Keynesian and Classical Debates     334
Summary     335
Key Terms     335
Exercises     336
The Dynamics of Inflation and Unemployment     338
Money Growth, Inflation, and Interest Rates     340
Inflation in a Steady State     340
How Changes in the Growth Rate of Money Affect the Steady State     341
Understanding the Expectations Phillips Curve: The Relationship Between Unemployment and Inflation     342
Are the Public's Expectations About Inflation Rational?     343
U.S. Inflation and Unemployment in the 1980s     344
Shifts in the Natural Rate of Unemployment in the 1990s     345
Regional Differences in Unemployment Increase the Natural Rate     346
How the Credibility of a Nation's Central Bank Affects Inflation     347
Increased Political Independence for the Bank of England Lowered Inflation Expectations     349
Inflation and the Velocity of Money     349
Inflation-Indexed Bonds in the United States     350
Hyperinflation     352
How Budget Deficits Lead to Hyperinflation     353
Summary     354
Key Terms     354
Exercises     355
Economic Experiment     357
Macroeconomic Policy Debates     358
Should We Balance the Federal Budget?     360
The Budget in Recent Decades     60
The Budget and Social Security     361
Five Debates About Deficits     362
New Methods to Measure the Long-Term Fiscal Imbalances for the United States     365
Should the Fed Target Inflation?     366
Two Debates About Inflation Targeting     367
Bernanke on Inflation Targeting     368
Should We Tax Consumption Rather Than Income?      369
Two Debates About Consumption Taxation     370
The Flat Tax is a Tax on Consumption     372
Summary     373
Key Terms     373
Exercises     373
The International Economy
International Trade and Public Policy     376
Benefits from Specialization and Trade     378
Production Possibilities Curve     378
Comparative Advantage and the Terms of Trade     379
The Consumption Possibilities Curve     380
How Free Trade Affects Employment     381
Protectionist Policies     382
Import Bans     382
Quotas and Voluntary Export Restraints     382
Responses to Protectionist Policies     384
The Impact of Tariffs on the Poor     384
What Are the Rationales for Protectionist Policies?     385
To Shield Workers from Foreign Competition     385
To Nurture Infant Industries     385
Measuring the Costs of Protecting Jobs     386
To Help Domestic Firms Establish Monopolies in World Markets     386
Protection for Candle Makers     387
A Brief History of International Tariff and Trade Agreements     388
Ongoing Trade Negotiations      389
Recent Policy Debates and Trade Agreements     389
Are Foreign Producers Dumping Their Products?     389
Do Trade Laws Inhibit Environmental Protection?     390
Do Outsourcing and Trade Cause Inequality?     391
Why Do People Protest Against Free Trade?     392
Summary     393
Key Terms     393
Exercises     393
The World of International Finance     396
How Exchange Rates Are Determined     398
What Are Exchange Rates?     398
How Demand and Supply Determine Exchange Rates     399
Changes in Demand or Supply     400
Real Exchange Rates and Purchasing Power Parity     401
The Current Account, the Financial Account, and the Capital Account     403
Big Macs and Purchasing Power Parity     404
Rules for Calculating the Current, Financial, and Capital Accounts     405
Fixed and Flexible Exchange Rates     407
Fixing the Exchange Rate     407
World Savings and U.S. Current Account Deficits     408
Fixed Versus Flexible Exchange Rates     408
The U.S. Experience with Fixed and Flexible Exchange Rates     410
Exchange Rate Systems Today     411
The First Decade of the Euro     411
Managing Financial Crises     412
The Argentinean Financial Crisis     413
Summary     414
Key Terms     414
Exercises     415
Economic Experiment     416
Glossary     417
Photo Credits     424
Index     425

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