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Worth Publishers
Macroeconomics / Edition 7

Macroeconomics / Edition 7

by N. Gregory Mankiw
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  • Product Details

    ISBN-13: 2901429218879
    Publisher: Worth Publishers
    Publication date: 03/29/2010
    Edition description: Seventh Edition
    Pages: 608
    Product dimensions: 6.50(w) x 1.50(h) x 9.50(d)

    About the Author

    N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University. He began his study of economics at Princeton University, where he received an A.B. in 1980. After earning a Ph.D. in economics from MIT, he began teaching at Harvard in 1985 and was promoted to full professor in 1987. At Harvard, he has taught both undergraduate and graduate courses in macroeconomics. He is also author of the best-selling introductory textbook Principles of Economics (Cengage Learning).

    Professor Mankiw is a regular participant in academic and policy debates. His research ranges across macroeconomics and includes work on price adjustment, consumer behavior, financial markets, monetary and fiscal policy, and economic growth. In addition to his duties at Harvard, he has been a research associate of the National Bureau of Economic Research, a member of the Brookings Panel on Economic Activity, and an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York. From 2003 to 2005 he was chairman of the President’s Council of Economic Advisers.

    Professor Mankiw lives in Wellesley, Massachusetts, with his wife, Deborah; children, Catherine, Nicholas, and Peter; and their border terrier, Tobin.

    Table of Contents


    Prelude: Celebrating the 10th Edition


    Media and Resources

    Part I Introduction

    Chapter 1 The Science of Macroeconomics

      1. What Macroeconomist Study
      2. Case Study The Historical Performance of the U.S. Economy

      3. How Economist Think
      4. Theory as Model Building

        FYI Using Functions to Express Relationships Among Variables

        The Use of Multiple Models

        Prices: Flexible Versus Sticky

        Microeconomic Thinking and Macroeconomic Models

        FYI The Early Lives of Macroeconomists

      5. How this Book Proceeds

    Chapter 2

    The Data of Macroeconomics

    2-1 Measuring the Value of Economic Activity: Gross Domestic Product

    Income, Expenditure, and the Circular Flow

    FYI Stocks and Flows

    Rules for Computing GDP

    Real GDP Versus Nominal GDP

    The GDP Deflator

    Chain-Weighted Measures of Real GDP

    FYI Two Helpful Hints for Working with Percentage Changes

    The Components of Expenditure

    FYI What is Investment?

    Case Study GDP and Its Components

    Other Measures of Income

    Seasonal Adjustment

    2-2 Measuring the Cost of Living: The Consumer Price Index

    The Price of a Basket of Goods

    How the CPI Compares to the GDP and PCE Deflators

    Does the CPI Overstate Inflation?

    2-3 Measuring Joblessness: The Unemployment Rate

    The Household Survey

    Case Study Men, Women, and Labor-Force Participation

    The Establishment Survey

    2-4 Conclusion: From Economic Statistics to Economic Models

    Part II Classical Theory: The Economy in the Long Run

    Chapter 3 National Income: Where it Comes From and Where It Goes

    3-1 What Determines the Total Production of Goods and Services?

    The Factors of Production

    The Production Function

    The Supply of Goods and Services

    3-2 How Is National Income Distributed to the Factors of Production?

    Factor Prices

    The Decisions Facing a Competitive Firm

    The Firm’s Demand for Factors

    The Division of National Income

    Case Study The Black Death and Factor Prices

    The Cobb–Douglas Production Function

    Case Study Labor Productivity as the Key Determinant of Real Wages

    FYI The Growing Gap Between Rich and Poor

    3-3 What Determines the Demand for Goods and Services?



    FYI The Many Different Interest Rates

    Government Purchases

    3-4 What Brings the Supply and Demand for Goods and Services into Equilibrium?

    Equilibrium in the Market for Goods and Services: The Supply and Demand for the Economy’s Output

    Equilibrium in the Financial Markets: The Supply and Demand for Loanable Funds

    Changes in Saving: The Effects of Fiscal Policy

    Changes in Investment Demand

    3-5 Conclusion

    Chapter 4 The Monetary System: What It Is and How It Works

    4-1 What Is Money?

    The Functions of Money

    The Types of Money

    Case Study Money in a POW Camp

    The Development of Fiat Money

    Case Study Money and Social Conventions on the Island of Yap

    FYI Bitcoin: The Strange Case of Digital Money

    How the Quantity of Money Is Controlled

    How the Quantity of Money Is Measured

    FYI How Do Credit Cards and Debit Cards Fit into the Monetary System?

    4-2 The Role of Banks in the Monetary System

    100-Percent-Reserve Banking

    Fractional-Reserve Banking

    Bank Capital, Leverage, and Capital Requirements

    4-3 How Central Banks Influence the Money Supply

    A Model of the Money Supply

    The Instruments of Monetary Policy

    Case Study Quantitative Easing and the Exploding Monetary Base

    Problems in Monetary Control

    Case Study Bank Failures and the Money Supply in the 1930s

    4-4 Conclusion

    Chapter 5 Inflation: Its Causes, Effects, and Social Costs

    5-1 The Quantity Theory of Money

    Transactions and the Quantity Equation

    From Transactions to Income

    The Money Demand Function and the Quantity Equation

    The Assumption of Constant Velocity

    Money, Prices, and Inflation

    Case Study Inflation and Money Growth

    5-2 Seigniorage: The Revenue from Printing Money

    Case Study Paying for the American Revolution

    5-3 Inflation and Interest Rates

    Two Interest Rates: Real and Nominal

    The Fisher Effect

    Case Study Inflation and Nominal Interest Rates

    Two Real Interest Rates: Ex Ante and Ex Post

    5-4 The Nominal Interest Rate and the Demand for Money

    The Cost of Holding Money

    Future Money and Current Prices

    5-5 The Social Costs of Inflation

    The Layman’s View and the Classical Response

    Case Study What Economists and the Public Say About Inflation

    The Costs of Expected Inflation

    The Costs of Unexpected Inflation

    Case Study The Free Silver Movement, the Election of 1896, and The Wizard of Oz

    One Benefit of Inflation

    5-6 Hyperinflation

    The Costs of Hyperinflation

    The Causes of Hyperinflation

    Case Study Hyperinflation in Interwar Germany

    Case Study Hyperinflation in Zimbabwe

    5-7 Conclusion: The Classical Dichotomy

    Chapter 6 The Open Economy

    6-1 The International Flows of Capital and Goods

    The Role of Net Exports

    International Capital Flows and the Trade Balance

    International Flows of Goods and Capital: An Example

    The Irrelevance of Bilateral Trade Balances

    6-2 Saving and Investment in a Small Open Economy

    Capital Mobility and the World Interest Rate

    Why Assume a Small Open Economy?

    The Model

    How Policies Influence the Trade Balance

    Evaluating Economic Policy

    Case Study The U.S. Trade Deficit

    Case Study Why Doesn’t Capital Flow to Poor Countries?

    6-3 Exchange Rates

    Nominal and Real Exchange Rates

    The Real Exchange Rate and the Trade Balance

    The Determinants of the Real Exchange Rate

    How Policies Influence the Real Exchange Rate

    The Effects of Trade Policies

    The Determinants of the Nominal Exchange Rate

    Case Study Inflation and Nominal Exchange Rates

    The Special Case of Purchasing-Power Parity

    Case Study The Big Mac Around the World

    6-4 Conclusion: The United States as a Large Open Economy

    Appendix: The Large Open Economy

    Chapter 7 Unemployment and the Labor Market

    7-1 Job Loss, Job Finding, and the Natural Rate of Unemployment

    7-2 Job Search and Frictional Unemployment

    Causes of Frictional Unemployment

    Public Policy and Frictional Unemployment

    Case Study Unemployment Insurance and the Rate of Job Finding

    7-3 Real-Wage Rigidity and Structural Unemployment

    Minimum-Wage Laws

    Unions and Collective Bargaining

    Efficiency Wages

    Case Study Henry Ford’s $5 Workday

    7-4 Labor-Market Experience: The United States

    The Duration of Unemployment

    Case Study The Increase in U.S. Long-Term Unemployment and the Debate Over Unemployment Insurance

    Variation in the Unemployment Rate Across Demographic Groups

    Transitions Into and Out of the Labor Force

    Case Study The Decline in Labor-Force Participation: 2007 to 2017

    7-5 Labor-Market Experience: Europe

    The Rise in European Unemployment

    Unemployment Variation Within Europe

    The Rise of European Leisure

    7-6 Conclusion

    Part III Growth Theory: The Economy in the Very Long Run

    Chapter 8 Economic Growth I: Capital Accumulation and Population Growth

    8-1 The Accumulation of Capital

    The Supply and Demand for Goods

    Growth in the Capital Stock and the Steady State

    Approaching the Steady State: A Numerical Example

    Case Study The Miracle of Japanese and German Growth

    How Saving Affects Growth

    8-2 The Golden Rule Level of Capital

    Comparing Steady States

    Finding the Golden Rule Steady State: A Numerical Example

    The Transition to the Golden Rule Steady State

    8-3 Population Growth

    The Steady State With Population Growth

    The Effects of Population Growth

    Case Study Investment and Population Growth Around the World

    Alternative Perspectives on Population Growth

    8-4 Conclusion

    Chapter 9 Economic Growth II: Technology, Empirics, and Policy

    9-1 Technological Progress in the Solow Model

    The Efficiency of Labor

    The Steady State With Technological Progress

    The Effects of Technological Progress

    9-2 From Growth Theory to Growth Empirics

    Balanced Growth


    Factor Accumulation Versus Production Efficiency

    Case Study Good Management as a Source of Productivity

    9-3 Policies to Promote Growth

    Evaluating the Rate of Saving

    Changing the Rate of Saving

    Allocating the Economy’s Investment

    Case Study Industrial Policy in Practice

    Establishing the Right Institutions

    Case Study The Colonial Origins of Modern Institutions

    Supporting a Pro-growth Culture

    Encouraging Technological Progress

    Case Study Is Free Trade Good for Economic Growth?

    9-4 Beyond the Solow Model: Endogenous Growth Theory

    The Basic Model

    A Two-Sector Model

    The Microeconomics of Research and Development

    The Process of Creative Destruction

    9-5 Conclusion

    Appendix: Accounting for the Sources of Economic Growth

    Part IV Business Cycle Theory: The Economy in the Short Run

    Chapter 10 Introduction to Economic Fluctuations

    10-1 The Facts About the Business Cycle

    GDP and Its Components

    Unemployment and Okun’s Law

    Leading Economic Indicators

    10-2 Time Horizons in Macroeconomics

    How the Short Run and the Long Run Differ

    Case Study If You Want to Know Why Firms Have Sticky Prices, Ask Them

    The Model of Aggregate Supply and Aggregate Demand

    10-3 Aggregate Demand

    The Quantity Equation as Aggregate Demand

    Why the Aggregate Demand Curve Slopes Downward

    Shifts in the Aggregate Demand Curve

    10-4 Aggregate Supply

    The Long Run: The Vertical Aggregate Supply Curve

    The Short Run: The Horizontal Aggregate Supply Curve

    From the Short Run to the Long Run

    Case Study A Monetary Lesson from French History

    10-5 Stabilization Policy

    Shocks to Aggregate Demand

    Shocks to Aggregate Supply

    Case Study How OPEC Helped Cause Stagflation in the 1970s and Euphoria in the 1980s

    10-6 Conclusion

    Chapter 11 Aggregate Demand I: Building the IS–LM Model

    11-1 The Goods Market and the IS Curve

    The Keynesian Cross

    Case Study Cutting Taxes to Stimulate the Economy: The Kennedy and Bush Tax Cuts

    Case Study Increasing Government Purchases to Stimulate the Economy: The Obama Stimulus

    Case Study Using Regional Data to Estimate Multipliers

    The Interest Rate, Investment, and the IS Curve

    How Fiscal Policy Shifts the IS Curve

    11-2 The Money Market and the LM Curve

    The Theory of Liquidity Preference

    Case Study Does a Monetary Tightening Raise or Lower Interest Rates?

    Income, Money Demand, and the LM Curve

    How Monetary Policy Shifts the LM Curve

    11-3 Conclusion: The Short-Run Equilibrium

    Chapter 12 Aggregate Demand II: Applying the ISLM Model

    12-1 Explaining Fluctuations With the ISLM Model

    How Fiscal Policy Shifts the IS Curve and Changes the Short-Run Equilibrium

    How Monetary Policy Shifts the LM Curve and Changes the Short-Run Equilibrium

    The Interaction Between Monetary and Fiscal Policy

    Shocks in the ISLM Model

    Case Study The U.S. Recession of 2001

    What Is the Fed’s Policy Instrument—The Money Supply or the Interest Rate?

    12-2 IS–LM as a Theory of Aggregate Demand

    From the IS–LM Model to the Aggregate Demand Curve

    The IS–LM Model in the Short Run and Long Run

    12-3 The Great Depression

    The Spending Hypothesis: Shocks to the IS Curve

    The Money Hypothesis: A Shock to the LM Curve

    The Money Hypothesis Again: The Effects of Falling Prices

    Could the Depression Happen Again?

    Case Study The Financial Crisis and Great Recession of 2008 and 2009

    The Liquidity Trap (Also Known as the Zero Lower Bound)

    FYI The Curious Case of Negative Interest Rates

    12-4 Conclusion

    Chapter 13 The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime

    13-1 The Mundell–Fleming Model

    The Key Assumption: Small Open Economy with Perfect Capital Mobility

    The Goods Market and the IS* Curve

    The Money Market and the LM* Curve

    Putting the Pieces Together

    13-2 The Small Open Economy under Floating Exchange Rates

    Fiscal Policy

    Monetary Policy

    Trade Policy

    13-1 The Small Open Economy under Fixed Exchange Rates

    How a Fixed-Exchange-Rate System Works

    Case Study The International Gold Standard

    Fiscal Policy

    Monetary Policy

    Case Study Devaluation and the Recovery from the Great Depression

    Trade Policy

    Policy in the Mundell–Fleming Model: A Summary

    13-4 Interest Rate Differentials

    Country Risk and Exchange-Rate Expectations

    Differentials in the Mundell–Fleming Model

    Case Study International Financial Crisis: Mexico 1994–1995

    Case Study International Financial Crisis: Asia 1997–1998

    13-5 Should Exchange Rates Be Floating or Fixed?

    Pros and Cons of Different Exchange-Rate Systems

    Case Study The Debate Over the Euro

    Speculative Attacks, Currency Boards, and Dollarization

    The Impossible Trinity

    Case Study The Chinese Currency Controversy

    13-6 From the Short Run to the Long Run:The Mundell–Fleming Model With a Changing Price Level

    13-7 A Concluding Reminder

    Appendix: A Short-Run Model of the Large Open Economy

    Chapter 14 Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

    14-1 The Basic Theory of Aggregate Supply

    The Sticky-Price Model

    An Alternative Theory: The Imperfect-Information Model

    Case Study International Differences in the Aggregate Supply Curve


    14-2 Inflation, Unemployment, and the Phillips Curve

    Deriving the Phillips Curve from the Aggregate Supply Curve

    FYI The History of the Modern Phillips Curve

    Adaptive Expectations and Inflation Inertia

    Two Causes of Rising and Falling Inflation

    Case Study Inflation and Unemployment in the United States

    The Short-Run Tradeoff between Inflation and Unemployment

    FYI How Precise Are Estimates of the Natural Rate of Unemployment

    Disinflation and the Sacrifice Ratio

    Rational Expectations and the Possibility of Painless Disinflation

    Case Study The Sacrifice Ratio in Practice

    Hysteresis and the Challenge to the Natural-Rate Hypothesis

    14-3 Conclusion

    Appendix: The Mother of All Models

    Part V Topics in Macroeconomic Theory and Policy

    Chapter 15 A Dynamic Model of Economic Fluctuations

    15-1 Elements of the Model

    Output: The Demand for Goods and Services

    The Real Interest Rate: The Fisher Equation

    Inflation: The Phillips Curve

    Expected Inflation: Adaptive Expectations

    The Nominal Interest Rate: The Monetary-Policy Rule

    Case Study The Taylor Rule

    15-2 Solving the Model

    The Long-Run Equilibrium

    The Dynamic Aggregate Supply Curve

    The Dynamic Aggregate Demand Curve

    The Short-Run Equilibrium

    15-3 Using the Model

    Long-Run Growth

    FYI The Numerical Calibration and Simulation

    A Shock to Aggregate Supply

    A Shock to Aggregate Demand

    A Shift in Monetary Policy

    15-4 Two Applications: Lessons for Monetary Policy

    The Tradeoff Between Output Variability and Inflation Variability

    Case Study Different Mandates, Different Realities: The Fed Versus the ECB

    The Taylor Principle

    Case Study What Caused the Great Inflation?

    15-5 Conclusion: Toward DSGE Models

    Chapter 16 Alternative Perspectives on Stabilization Policy

    16-1 Should Policy Be Active or Passive?

    Lags in the Implementation and Effects of Policies

    The Difficult Job of Economic Forecasting

    Case Study Mistakes in Forecasting

    Ignorance, Expectations, and the Lucas Critique

    The Historical Record

    Case Study Is the Stabilization of the Economy a Figment of the Data?

    Case Study How Does Policy Uncertainty Affect the Economy?

    16-2 Should Policy Be Conducted by Rule or Discretion?

    Distrust of Policymakers and the Political Process

    The Time Inconsistency of Discretionary Policy

    Case Study Alexander Hamilton Versus Time Inconsistency

    Rules for Monetary Policy

    Case Study Inflation Targeting: Rule or Constrained Discretion?

    Case Study Central-Bank Independence

    16-3 Conclusion

    Appendix: Time Inconsistency and the Tradeoff Between Inflation and Unemployment

    Chapter 17 Government Debt and Budget Deficits

    17-1 The Size of the Government Debt

    Case Study The Troubling Long-Term Outlook for Fiscal Policy

    17-2 Measurement Problems

    Problem 1: Inflation

    Problem 2: Capital Assets

    Problem 3: Uncounted Liabilities

    Problem 4: The Business Cycle

    Summing Up

    17-3 The Traditional View of Government Debt

    FYI Taxes and Incentives

    17-4 The Ricardian View of Government Debt

    The Basic Logic of Ricardian Equivalence

    Consumers and Future Taxes

    Case Study George H. W. Bush’s Withholding Experiment

    Making a Choice

    FYI Ricardo on Ricardian Equivalence

    17-5 Other Perspectives on Government Debt

    Balanced Budgets versus Optimal Fiscal Policy

    Fiscal Effects on Monetary Policy

    Debt and the Political Process

    International Dimensions

    17-6 Conclusion

    Chapter 18 The Financial System: Opportunities and Dangers

    18-1 What Does the Financial System Do?

    Financing Investment

    Sharing Risk

    Dealing with Asymmetric Information

    Fostering Economic Growth

    FYI The Efficient Markets Hypothesis Versus Keynes’s Beauty Contest

    18-2 Financial Crises

    The Anatomy of a Crisis

    FYI The TED Spread

    Case Study Who Should Be Blamed for the Financial Crisis of 2008–2009?

    Policy Responses to a Crisis

    Policies to Prevent Crises

    Case Study The European Sovereign Debt Crisis

    18-3 Conclusion

    Chapter 19 The Microfoundations of Consumption and Investment

    19-1 What Determines Consumer Spending?

    John Maynard Keynes and the Consumption Function

    Franco Modigliani and the Life-Cycle Hypothesis

    Milton Friedman and the Permanent-Income Hypothesis

    Case Study The 1964 Tax Cut and the 1968 Tax Surcharge

    Case Study The Tax Rebates of 2008

    Robert Hall and the Random-Walk Hypothesis

    Case Study Do Predictable Changes in Income Lead to Predictable Changes in Consumption?

    David Laibson and the Pull of Instant Gratification

    Case Study How to Get People to Save More

    The Bottom Line on Consumption

    19-2 What Determines Investment Spending?

    The Rental Price of Capital

    The Cost of Capital

    The Cost-Benefit Calculus of Investment

    Taxes and Investment

    The Stock Market and Tobin’s q

    Case Study The Stock Market as an Economic Indicator

    Financing Constraints

    The Bottom Line on Investment

    19-3 Conclusion: The Key Role of Expectations

    Epilogue What We Know, What We Don’t

    The Four Most Important Lessons of Macroeconomics

    Lesson 1: In the long run, a country’s capacity to produce goods and services determines the standard of living of its citizens.

    Lesson 2: In the short run, aggregate demand influences the amount of goods and services that a country produces.

    Lesson 3: In the long run, the rate of money growth determines the rate of inflation, but it does not affect the rate of unemployment.

    Lesson 4: In the short run, policymakers who control monetary and fiscal policy face a tradeoff between inflation and unemployment.

    The Four Most Important Unresolved Questions of Macroeconomics

    Question 1: How should policymakers try to promote growth in the economy’s natural level of output?

    Question 2: Should policymakers try to stabilize the economy? If so, how?

    Question 3: How costly is inflation, and how costly is reducing inflation?

    Question 4: How big a problem are government budget deficits?




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