Macroeconomics / Edition 8

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Written in an informal colloquial style, this student-friendly Principles of Macroeconomics textbook does not sacrifice intellectual depth in its quest for accessibility. The author’s primary concern is to instill “economic sensibility” in the student. Colander emphasizes the intellectual and historical context to which the economic models are applied.

Distinguishing features found within Colander’s text are:

• Cutting Edge and Modern

• Colloquial Style Narrative

• Focus on Policy

• Emphasis on the Importance of Institutions and History

• Focus on Modeling: Economics is a method of reasoning, not truths.

• Presents Alternative Perspectives in Economics

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Editorial Reviews

An accessible introductory text, with sections on thinking like an economist, macroeconomic problems, the macroeconomic framework, policy issues, and international policy issues. Pedagogical features include chapter summaries, key terms, review questions, exercises, Web questions, and boxed readings on concepts and real-world applications. This fourth edition is streamlined and reflects changes in the economy and the profession. There is expanded material on the digital revolution and globalization, and a new summary chapter. This edition also removes nonstandard terms and presentations, and focuses on a single model with fewer Keynesian/Classical distinctions. Colander teaches economics at Middlebury College. Annotation c. Book News, Inc., Portland, OR (
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Product Details

  • ISBN-13: 9780077247171
  • Publisher: McGraw-Hill Higher Education
  • Publication date: 10/19/2009
  • Edition description: Older Edition
  • Edition number: 8
  • Pages: 624
  • Product dimensions: 8.40 (w) x 9.90 (h) x 0.90 (d)

Table of Contents

1 Economics and Economic Reasoning 5
2 Supply and Demand 34
3 The Economic Organization of Society 59
4 U.S. Economic Institutions 79
5 An Introduction to the World Economy 107
6 Economic Growth, Business Cycles, Unemployment, and Inflation 135
7 National Income Accounting 157
8 The Classical School and the Macroeconomic Debate 183
9 The Keynesian Model of the Aggregate Economy 203
10 The Complete Keynesian Multiplier Model and Fiscal Policy 229
11 Financial Institutions 255
12 Money and Banking 276
13 The Federal Reserve System and Monetary Policy 296
14 The Evolution of Macroeconomic Thinking 317
15 Inflation and the Phillips Curve Trade-off 335
16 International Dimensions of Monetary and Fiscal Policies 353
17 Using Monetary and Fiscal Policies to Achieve Macroeconomic Goals 366
18 Deficits and Debt 381
19 Macroeconomics, Social Policy, and Economic Reasoning 401
20 International Trade 422
21 International Finance 442
22 Growth and the Economics of Developing Countries 466
23 Socialist Economies in Transition 484
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We recently received a call from a reporter who asked us to rate macroeconomic forecasters. Given our reputations, the reporter was expecting a negative rating. We told him that macroeconomic forecasters beat back-of-the-envelope forecasting S to 10 percent of the time. He said, "You're really down on macro forecasters, aren't you?" "No, not at all!" we answered. "Given the complicated nature of the macro economy, that's a very impressive record—one that makes it worthwhile for firms and governments to employ economic forecasters."


The above story reveals this textbook's approach. We start from the assumption that the economy is a complex system. This means, among other things, that the relationships within the economy are constantly evolving, and that the degree of understanding that we can achieve through deductive models, starting from first principles, is limited. However, we do not teach students the science of complexity, or even introduce it. Studying how a butterfly flapping its wings in Australia affects weather patterns in Vermont is a subject matter for other courses. Our desire is to give students a general understanding of the ideas that guide macro policy, given the complex nature of the macro economy.

Consistent with this view, we present macroeconomics as a set of policy insights embodied in simple models that policy makers use to reach decisions. If students want to understand recent debates about Fed policy or about the latest tax cut, they need to understand those macroeconomic models and the rules of thumb that underlie them.

This emphasis on policy is central to our approach toteaching macroeconomics. We teach a policy course that does not require a deep understanding of formal theory but rather a practical type of knowledge—a good sense of terminology, data, institutions, and models. The models provide the frameworks within which macroeconomic policy discussions take place. This, we believe, is the essence of the intermediate macroeconomics course. With our primarily policy-oriented book, we provide frameworks for discussing complicated economic issues. We show how macroeconomists give pragmatic policy advice—based on a combination of models and a sense of history and institutions—that is useful but is far from perfect.


Consistent with the approach we've taken in this book, we do not present models as simplifications of the Truth, with a capital "T." Instead, we present them as working tools, which, when used with an educated common sense, a good understanding of relevant institutions, and insights gained from considering economic issues deductively, provide a reasonable set of guidelines for policy. We treat models as frameworks for organizing thoughts, not representations of the Truth. For example, Chapters 8 and 9 present the IS/LM model and encourage students to use it as an important first step to understanding the economy in the short run. But they also remind students that, like any model, the IS/LM model cannot fully capture the complexity of the economy. It simply provides an initial framework.

This text provides the components necessary for using models right from the start. Instead of jumping directly into formal models, the first four chapters introduce students to the observed behavior and institutions of the economy, contemporary policy issues, and the short- and long-run frameworks that economists use to organize their thoughts about the economy.


We present growth and a discussion of the long run first, before the presentation of the short run. We do this not just because it is the modern approach; we do so because it makes sense. Over decades, long-run growth determines the wealth of nations. The study of growth and the long run gives students a sense of the power of markets, and provides a good starting point for a consideration of business cycles and short run models, which give students a sense of the pain that markets can cause.

We believe it is important for students to have this dual sense of markets. What we present is a story of how markets have delivered the goods better than alternative institutional structures. The markets in our story are not perfectly competitive markets—real world markets are never perfectly competitive. They are part of a broader institutional structure that involves government regulation, and policy that offsets the negative side effects of markets. Policy concerns the nature of that regulation and the institutional structure underlying markets.


This book is neither Keynesian nor Classical. It is simply a macroeconomics book. The Keynesian/Classical division that characterized earlier textbooks, and that still characterizes some books, is no longer useful in distinguishing modern debates in macro. We do present various viewpoints, but we give each a sympathetic interpretation. We emphasize that most policy makers and businesspeople use a variety of frameworks to help them understand what is happening in the economy, and most of them understand the limitations, as well as the strengths, of those frameworks. This openness to multiple viewpoints comes naturally because our own views of macroeconomic theory and policy differ, as we occasionally point out in the book's running narrative and in some of the boxes called The Briefing Room.


Because of the book's strong policy focus, it covers the political realities and institutions of macroeconomics in greater detail than many competing books. What we mean by political realities and institutions are such things as the budgetary process and the operating procedures of the Fed. It is our belief that political realities limit what economic policy makers can accomplish. If students are to understand macroeconomic policy, they must understand the institutions within which it is implemented and the political realities that influence those institutions. Although we discuss institutions of the economy throughout, Chapters 13 and 14 are devoted exclusively to the institutions of monetary and fiscal policy. These chapters give students a feel for the logistics of how policy makers act within institutions to formulate and ultimately implement policy.


In today's global economy, any modern text must consider issues within a global context. International concepts are not just relegated to chapters on exchange rates and trade. They are considered throughout the book. Chapter 1, for example, highlights the fact that policy makers set goals for international economic measures that are consistent with their domestic goals. Chapter 2 compares the U.S. economic experience to other OECD and developing countries, and Chapter 3 discusses the causes and cures of high European unemployment. Just about any chapter one chooses will have some international example or comparison.


The job of a textbook is not just to present the material clearly, but to help students organize their thoughts, facilitate good study habits, and do well in their courses. We've added a number of features to do just this.

Each chapter begins with Learning Objectives, which help guide the student's reading of the chapter. A Key Points section revisits these objectives at the end of the chapter.

Although you can find policy discussions within the running narrative of every chapter, to ensure that students understand the policy relevance of the discussion we conclude nearly all chapters with a Policy Perspective section that presents real-world policy issues, debates, and events in relation to the chapter's main topic. We have also placed notes in the margin to help students identify key concepts in the text.

The following are the topics covered in the book's Policy Perspective sections.

Policy Perspectives

  • Chapter 2 — How Long-Term Capital Management's inaccurate Treasury bond forecast nearly pushed the U.S. economy into recession.
  • Chapter 3 — The relationship between inflation and growth.
  • Chapter 4 — The uncertainty about which framework was most applicable to the U.S. economy in the late 1990s.
  • Chapter 5 — The saving and investment policies that follow from the neoclassical growth model.
  • Chapter 6 — Policies that follow from the extended Solow growth and new growth models.
  • Chapter 7 — Adjustment mechanisms under various exchange rate regimes.
  • Chapter 8 — How policy makers can use fiscal and monetary policies to offset shocks to the economy.
  • Chapter 9 — Why the Federal Reserve reversed course twice in three years to keep the U.S., economy on an even keel.
  • Chapter 10 — The Asian and Mexican currency crises.
  • Chapter 11 — Why the increase in the United States' real output went beyond potential output but did not generate increased inflation.
  • Chapter 12 — The importance of expectations in policy that has led economists to consider policy actions within a context of policy regimes and credibility.
  • Chapter 13 — Recent Fed policy actions.
  • Chapter 14 — Social Security and the long-term budget problem.

Periodic Executive Summaries provide a way for students to pause within a chapter and review their understanding of the main ideas. Though we expect students to read the entire book, these summaries are similar to the executive summaries many business people see at the top of memos they don't necessarily read entirely.

Within each chapter there are also two types of boxes—Q&A and The Briefing Room. These boxes present information that is not central to the narrative but that enhances and reinforces students' understanding of the material in the text.

Q&A boxes pose questions from a student's perspective and provide additional explanation of material in the text. An example is the Q&A in Chapter 1, "What exactly is a model?" This box describes the elements of a simple model.

The Briefing Room boxes "brief" students about real-world policy and provide commentary on text material. "Strategies To Lower European Unemployment," for example, presents policies European nations have undertaken to address their high unemployment rates.

We have found that many students have a hard time reading graphs. To help students, we have added call-out boxes to many graphs. These call-out boxes take the students step-by-step through the material that the graphs present. It's like having a tutor within the text.

The Key Points at the end of each chapter provide a summary of the chapter's main concepts and are based on the chapter's opening learning objectives.

A list of Key Terms appears at the end of each chapter, complete with a reference to the page where that term is defined.

Following the Key Terms are Questions for Thought and Review as well as Problems and Exercises. The Questions for Thought and Review help the student master all of the concepts in the chapter. The Problems and Exercises tend to be more involved and quantitative in nature, with some of them requiring Internet research. Chapter 15 concludes with a sample final exam. Answers to the even numbered end-of-chapter questions are on the textbook's Web site Answers to all the questions reside in the Instructor's Manual.


All the bells and whistles are important, but they don't mean a thing unless the students read the book. Our style of writing isn't the most "professorial" style, but it is one that students (we've been told) find enjoyable. (Actually, we didn't believe the students at first, but they repeated this appraisal after they had received their grade, which gave their statements more credibility.)


This book is shorter than most macroeconomic textbooks: 15 chapters divided into five parts. You can use it for a semester-long or quarter-long course. It is appropriate for a policy-oriented intermediate macroeconomics course or a macroeconomics course for MBA students. The following summary on the next page gives you a concise overview of the chapters and their contents to use in designing your course.


The book comes with a number of supplements that enhance the learning experience for both instructors and students.


Instructor's Manual

The Instructor's Manual, prepared by Rashid Al-Hmoud of Texas Tech University, takes the instructor carefully through the text's organization by providing an overview and outline of each chapter. It also includes additional case studies, follow-up exercises to those provided in the text, extra questions, and Internet links/exercises. In addition, the manual includes detailed answers to all of the end-of-chapter questions and problems.

Study Guide

The Study Guide, prepared by Jonathan Irons of Amherst College, summarizes the material in each chapter to enhance student comprehension. It provides chapter objectives, an overview, and an explanation of the different sections/topics in the chapter. "Tips and tricks" boxes give students helpful hints and reminders about chapter material.

Test Bank

The Test Bank, prepared by James DeVault of Lafayette College offers approximately 40 multiple-choice and 20 short answer problems per chapter for a total of 900 questions. The testbank provides the answer to each multiple-choice question as well as an explanation for that response.


Prentice Hall Test Manager, Version 4.1

This computerized version of the Test Bank allows instructors to design, save, and generate classroom tests. The test program permits instructors to edit, add, or delete questions from the test banks; edit existing graphics and create new graphics; analyze test results; and organize a database of tests and student results.

MyPHLIP Prentice Hall's Learning on the Internet Partnership/myPHLIP

myPHLIP is a content-rich, multidisciplinary Web site with Internet exercises, activities, and resources related specifically to Macroeconomics. It includes the following features:

In the News—Current events related to topics in each chapter, are supported by group activities, critical-thinking exercises, and discussion questions. These articles, from current news publications to economics-related publications, help show students the relevance of economics in today's world.

Internet Exercises—New Internet resources are added every two weeks by a team of economics professors to provide both the student and the instructor with the most current, up-to-date resources available.

Syllabus Manager—For the instructor, myPHLIP offers resources such as the answers to Current Events and Internet exercises, and a Faculty Lounge area including teaching tools and faculty chat rooms.

The Online Study Guide—prepared by Willem Thorbecke of George Mason University, offers students another opportunity to sharpen their problem-solving skills and to assess their understanding of the text material. The Online Study Guide contains 20 multiple-choice and three short answer questions per chapter. It grades each question submitted by the student, provides immediate feedback for correct and incorrect answers, and allows students to send results to is many as four e-mail addresses.

Downloadable Supplements—From the myPHLIP Web site, instructors can download supplements and lecture aids. Instructors should contact their Prentice Hall sales representative to get the necessary username and password to access the faculty resources on myPHLIP Downloadable supplements and lecture aids include:

  • The PowerPoint Presentation–This lecture presentation tool, prepared by Doris Bennett of Jacksonville State University, offers outlines and summaries of important text material, tables and graphs that build, and additional exercises.
  • Transparency Masters–A complete set of transparency masters for all of the figures and tables in the text.



Developed by educators, WebCT provides faculty with easy-to-use Internet tools to create online courses. Prentice Hall provides the content and enhanced features. For more information, please visit


Blackboard's single template and tools make it easy to create, manage, and use online course materials. Instructors can create online courses using Blackboard's capabilities, which include design, communication, testing, and other course management tools. For more information, please visit


This customizable, interactive online course management tool powered by Blackboard provides the most intuitive teaching and learning environment available. Instructors can communicate with students, distribute course material, and access student progress online. For further information, please visit

CourseCompass with Ebook

This online course package provides the features of CourseCompass along with an electronic version of the textbook. The addition of a digital textbook to CourseCompass gives instructors greater choice and flexibility as they design and build their courses. With this package, students can remain online and have access to their digital textbooks.

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