Principles Of Economics Hardcover - 2009

Clear and easily understood text that outlines the principles of economics.

Details

• Title Principles Of Economics
• Author N. Gregory Mankiw
• Binding Hardcover
• Edition 5th ed.
• Pages 904
• Publisher South-Western College Pub, ^^ In Stock: We Ship At Once Fr. Il Usa;
• Date 2009
• ISBN 9780324589979
• Library of Congress Catalog Number 2008934555
• Dewey Decimal Code 330

Preface: To the Instructor viiPreface: To the Student xixIntroduction 1Ten Principles of Economics 3How People Make Decisions 4People Face Trade-offs 4The Cost of Something Is What You Give Up to Get It 5Rational People Think at the Margin 6People Respond to Incentives 7How People Interact 8Trade Can Make Everyone Better Off 8Markets Are Usually a Good Way to Organize Economic Activity 9Governments Can Sometimes Improve Market Outcomes 10FYI: Adam Smith and the Invisible Hand 10How the Economy as a Whole Works 11A Country's Standard of Living Depends on Its Ability to Produce Goods and Services 12Prices Rise When the Government Prints Too Much Money 12Society Faces a Short-Run Trade-off between Inflation and Unemployment 13FYI: How to Read This Book 14Conclusion 14Summary 15Key Concepts 15Questions for Review 16Problems and Applications 16Thinking Like an Economist 19TheEconomist as Scientist 20The Scientific Method: Observation, Theory and More Observation 20The Role of Assumptions 21Economic Models 22Our First Model: The Circular-Flow Diagram 22Our Second Model: The Production Possibilities Frontier 24Microeconomics and Macroeconomics 26FYI: Who Studies Economics? 27The Economist as Policy Adviser 28Positive versus Normative Analysis 28Economists in Washington 29In the News: Super Bowl Economics 30Case Study: Mr. Mankiw Goes to Washington 31Why Economists Disagree 32Differences in Scientific Judgments 32Differences in Values 33Perception versus Reality 33Let's Get Going 34In the News: Why You Should Study Economics 35Summary 36Key Concepts 36Questions for Review 36Problems and Applications 36Graphing: A Brief Review 38Graphs of a Single Variable 38Graphs of Two Variables: The Coordinate System 39Curves in the Coordinate System 40Slope 42Cause and Effect 44Interdependence and the Gains From Trade 47A Parable for the Modern Economy 48Production Possibilities 48Specialization and Trade 50Comparative Advantage: The Driving Force of Specialization 52Absolute Advantage 52Opportunity Cost and Comparative Advantage 52Comparative Advantage and Trade 54FYI: The Legacy of Adam Smith and David Ricardo 55Applications of Comparative Advantage 55Should Tiger Woods Mow His Own Lawn? 55In the News: Evolution and Economics 56Should the United States Trade with Other Countries? 56Conclusion 58Summary 58Key Concepts 59Questions for Review 59Problems and Applications 59How Markets Work 61The Market Forces of Supply and Demand 63Markets and Competition 64What Is a Market? 64What Is Competition? 64Demand 65The Demand Curve: The Relationship between Price and Quantity Demanded 65Market Demand versus Individual Demand 66Shifts in the Demand Curve 67Case Study: Two Ways to Reduce the Quantity of Smoking Demanded 69Supply 71The Supply Curve: The Relationship between Price and Quantity Supplied 71Market Supply versus Individual Supply 71Shifts in the Supply Curve 72Supply and Demand Together 75Equilibrium 75Three Steps to Analyzing Changes in Equilibrium 77In the News: Political Unrest Shifts the Supply Curve 81Conclusion: How Prices Allocate Resources 82Summary 84Key Concepts 84Questions for Review 85Problems and Applications 85Elasticity and its Application 89The Elasticity of Demand 90The Price Elasticity of Demand and Its Determinants 90Computing the Price Elasticity of Demand 91The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities 92The Variety of Demand Curves 93Total Revenue and the Price Elasticity of Demand 93Elasticity and Total Revenue along a Linear Demand Curve 95In the News: On the Road with Elasticity 98Other Demand Elasticities 98The Elasticity of Supply 99The Price Elasticity of Supply and Its Determinants 100Computing the Price Elasticity of Supply 100The Variety of Supply Curves 100Three Applications of Supply, Demand, and Elasticity 103Can Good News for Farming Be Bad News for Farmers? 103Why Did OPEC Fail to Keep the Price of Oil High? 105Does Drug Interdiction Increase or Decrease Drug-Related Crime? 107Conclusion 108Summary 109Key Concepts 109Questions for Review 109Problems and Applications 110Supply, Demand, and Government Policies 113Controls on Prices 114How Price Ceilings Affect Market Outcomes 114Case Study: Lines at the Gas Pump 116Case Study: Rent Control in the Short Run and Long Run 117How Price Floors Affect Market Outcomes 118In the News: Rent Control in New York 120Case Study: The Minimum Wage 120Evaluating Price Controls 123Taxes 124How Taxes on Buyers Affect Market Outcomes 124How Taxes on Sellers Affect Market Outcomes 126Case Study: Can Congress Distribute the Burden of a Payroll Tax? 128Elasticity and Tax Incidence 129Case Study: Who Pays the Luxury Tax? 129Conclusion 131Summary 131Key Concepts 132Questions for Review 132Problems and Applications 132Markets and Welfare 135Consumers, Producers, and the Efficiency of Markets 137Consumer Surplus 138Willingness to Pay 138Using the Demand Curve to Measure Consumer Surplus 139How a Lower Price Raises Consumer Surplus 140What Does Consumer Surplus Measure? 142Producer Surplus 143Cost and the Willingness to Sell 143Using the Supply Curve to Measure Producer Surplus 144How a Higher Price Raises Producer Surplus 146Market Efficiency 147The Benevolent Social Planner 147Evaluating the Market Equilibrium 148In the News: Ticket Scalping 151Case Study: Should There Be a Market in Organs? 152In the News: The Miracle of the Market 153Conclusion: Market Efficiency and Market Failure 154Summary 155Key Concepts 155Questions for Review 155Problems and Applications 156Application: The Costs of Taxation 159The Deadweight Loss of Taxation 160How a Tax Affects Market Participants 161Deadweight Losses and the Gains from Trade 163The Determinants of the Deadweight Loss 165Case Study: The Deadweight Loss Debate 165Deadweight Loss and Tax Revenue as Taxes Vary 167FYI: Henry George and the Land Tax 169Case Study: The Laffer Curve and Supply-Side Economics 170In the News: On the Way to France 171Conclusion 172Summary 173Key Concept 173Questions for Review 173Problems and Applications 173Application: International Trade 177The Determinants of Trade 178The Equilibrium without Trade 178The World Price and Comparative Advantage 179The Winners and Losers from Trade 179The Gains and Losses of an Exporting Country 180The Gains and Losses of an Importing Country 181In the News: Cheap Clothes from China 183The Effects of a Tariff 184FYI: Import Quotas: Another Way to Restrict Trade 186The Lessons for Trade Policy 186The Arguments for Restricting Trade 187FYI: Other Benefits of International Trade 188The Jobs Argument 188In the News: Offshore Outsourcing 189The National-Security Argument 190The Infant-Industry Argument 190The Unfair-Competition Argument 191The Protection-as-a-Bargaining-Chip Argument 191Case Study: Trade Agreements and the World Trade Organization 192In the News: Globalization 193Conclusion 194Summary 195Key Concepts 195Questions for Review 196Problems and Applications 196The Economics of the Public Sector 201Externalities 203Externalities and Market Inefficiency 204Welfare Economics: A Recap 205Negative Externalities 206Positive Externalities 207Case Study: Technology Spillovers, Industrial Policy, and Patent Protection 208Private Solutions to Externalities 209The Types of Private Solutions 209The Coase Theorem 210Why Private Solutions Do Not Always Work 211Public Policies toward Externalities 212Command-and-Control Policies: Regulation 212Market-Based Policy 1: Corrective Taxes and Subsidies 213In the News: Conserving Fuel 214Case Study: Why Is Gasoline Taxed So Heavily? 215Market-Based Policy 2: Tradable Pollution Permits 216In the News: Controlling Carbon 218Objections to the Economic Analysis of Pollution 219Conclusion 219Summary 220Key Concepts 220Questions for Review 220Problems and Applications 221Public Goods and Common Resources 223The Different Kinds of Goods 224Public Goods 225The Free-Rider Problem 226Some Important Public Goods 226Case Study: Are Lighthouses Public Goods? 228The Difficult Job of Cost-Benefit Analysis 229Case Study: How Much Is a Life Worth? 230Common Resources 231The Tragedy of the Commons 231Some Important Common Resources 232In the News: A Solution to City Congestion 233Case Study: Why the Cow Is Not Extinct 234In the News: Should Yellowstone Charge as Much as Disney World? 235Conclusion: The Importance of Property Rights 236Summary 236Key Concepts 237Questions for Review 237Problems and Applications 237The Design of the Tax System 241A Financial Overview of the U.S. Government 242The Federal Government 242Case Study: The Fiscal Challenge Ahead 246State and Local Government 248Taxes and Efficiency 249Deadweight Losses 250Case Study: Should Income or Consumption Be Taxed? 250Administrative Burden 251Marginal Tax Rates versus Average Tax Rates 252Case Study: Iceland's Natural Experiment 252Lump-Sum Taxes 253Taxes and Equity 253The Benefits Principle 254The Ability-to-Pay Principle 254Case Study: How the Tax Burden Is Distributed 255In the News: Tax Reform around the World 257Case Study: Horizontal Equity and the Marriage Tax 257Tax Incidence and Tax Equity 259Case Study: Who Pays the Corporate Income Tax? 259Conclusion: The Trade-off between Equity and Efficiency 260Summary 261Key Concepts 261Questions for Review 261Problems and Applications 262Firm Behavior and the Organization of Industry 265The Costs of Production 267What Are Costs? 268Total Revenue, Total Cost, and Profit 268Costs as Opportunity Costs 268The Cost of Capital as an Opportunity Cost 269Economic Profit versus Accounting Profit 270Production and Costs 271The Production Function 271From the Production Function to the Total-Cost Curve 273The Various Measures of Cost 274Fixed and Variable Costs 275Average and Marginal Cost 276Cost Curves and Their Shapes 277Typical Cost Curves 278Costs in the Short Run and in the Long Run 280The Relationship between Short-Run and Long-Run Average Total Cost 280Economies and Diseconomies of Scale 281FYI: Lessons from a Pin Factory 282Conclusion 282Summary 283Key Concepts 284Questions for Review 284Problems and Applications 285Firms in Competitive Markets 289What Is a Competitive Market? 290The Meaning of Competition 290The Revenue of a Competitive Firm 290Profit Maximization and the Competitive Firm's Supply Curve 292A Simple Example of Profit Maximization 292The Marginal-Cost Curve and the Firm's Supply Decision 293The Firm's Short-Run Decision to Shut Down 295Spilt Milk and Other Sunk Costs 297Case Study: Near-Empty Restaurants and Off-season Miniature Golf 298The Firm's Long-Run Decision to Exit or Enter a Market 298Measuring Profit in Our Graph for the Competitive Firm 299The Supply Curve in a Competitive Market 301The Short Run: Market Supply with a Fixed Number of Firms 301The Long Run: Market Supply with Entry and Exit 302Why Do Competitive Firms Stay in Business If They Make Zero Profit? 303A Shift in Demand in the Short Run and Long Run 304Why the Long-Run Supply Curve Might Slope Upward 304Conclusion: Behind the Supply Curve 306Summary 307Key Concepts 307Questions for Review 307Problems and Applications 308Monopoly 311Why Monopolies Arise 312Monopoly Resources 313Case Study: The DeBeers Diamond Monopoly 313Government-Created Monopolies 313Natural Monopolies 314How Monopolies Make Production and Pricing Decisions 315Monopoly versus Competition 316A Monopoly's Revenue 317Profit Maximization 318A Monopoly's Profit 320FYI: Why a Monopoly Does Not Have a Supply Curve 321Case Study: Monopoly Drugs versus Generic Drugs 322The Welfare Cost of Monopoly 323The Deadweight Loss 323The Monopoly's Profit: A Social Cost? 325Public Policy toward Monopolies 326Increasing Competition with Antitrust Laws 326Regulation 327Public Ownership 328Doing Nothing 329Price Discrimination 329In the News: Public Transport and Private Enterprise 330A Parable about Pricing 330The Moral of the Story 332The Analytics of Price Discrimination 333Examples of Price Discrimination 334Conclusion: The Prevalence of Monopoly 335In the News: TKTS and Other Schemes 336Summary 338Key Concepts 339Questions for Review 339Problems and Applications 340Oligopoly 345Between Monopoly and Perfect Competition 346Markets with Only a Few Sellers 347In the News: The Growth of Oligopoly 348A Duopoly Example 348Competition, Monopolies, and Cartels 349The Equilibrium for an Oligopoly 350In the News: The Global Fight against Cartels 351How the Size of an Oligopoly Affects the Market Outcome 352Game Theory and the Economics of Cooperation 353The Prisoners' Dilemma 354Oligopolies as a Prisoners' Dilemma 355Case Study: OPEC and the World Oil Market 356Other Examples of the Prisoners' Dilemma 357The Prisoners' Dilemma and the Welfare of Society 359Why People Sometimes Cooperate 359Case Study: The Prisoners' Dilemma Tournament 360Public Policy toward Oligopolies 360Restraint of Trade and the Antitrust Laws 361Case Study: An Illegal Phone Call 361Controversies over Antitrust Policy 362Case Study: The Microsoft Case 364Conclusion 365In the News: Antitrust in the New Economy 366Summary 367Key Concepts 367Questions for Review 367Problems and Applications 368Monopolistic Competition 373Competition with Differentiated Products 374The Monopolistically Competitive Firm in the Short Run 374The Long-Run Equilibrium 375Monopolistic versus Perfect Competition 377Monopolistic Competition and the Welfare of Society 379FYI: Is Excess Capacity a Social Problem? 380Advertising 380The Debate over Advertising 381Case Study: Advertising and the Price of Eyeglasses 382Advertising as a Signal of Quality 382FYI: Galbraith versus Hayek 383Brand Names 384Conclusion 386Summary 387Key Concept 387Questions for Review 387Problems and Applications 388The Economics of Labor Markets 391The Markets for the Factors of Production 393The Demand for Labor 394The Competitive Profit-Maximizing Firm 394The Production Function and the Marginal Product of Labor 395The Value of the Marginal Product and the Demand for Labor 397What Causes the Labor-Demand Curve to Shift? 398FYI: Input Demand and Output Supply: Two Sides of the Same Coin 399FYI: The Luddite Revolt 400The Supply of Labor 401The Trade-off between Work and Leisure 401What Causes the Labor-Supply Curve to Shift? 401Equilibrium in the Labor Market 402Shifts in Labor Supply 402Shifts in Labor Demand 404Case Study: Productivity and Wages 405FYI: Monopsony 406The Other Factors of Production: Land and Capital 406Equilibrium in the Markets for Land and Capital 407FYI: What Is Capital Income? 408Linkages among the Factors of Production 408Case Study: The Economics of the Black Death 409Conclusion 410Summary 410Key Concepts 410Questions for Review 411Problems and Applications 411Earnings and Discrimination 413Some Determinants of Equilibrium Wages 414Compensating Differentials 414Human Capital 414Case Study: The Increasing Value of Skills 415Ability Effort, and Chance 416In the News: The Loss of Manufacturing Jobs 417Case Study: The Benefits of Beauty 418An Alternative View of Education: Signaling 419The Superstar Phenomenon 419In the News: Are Elite Colleges Worth the Cost? 420Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages 421The Economics of Discrimination 422Measuring Labor-Market Discrimination 422Case Study: Is Emily More Employable than Lakisha? 424Discrimination by Employers 424Case Study: Segregated Streetcars and the Profit Motive 425Discrimination by Customers and Governments 426Case Study: Discrimination in Sports 426Conclusion 427Summary 428Key Concepts 428Questions for Review 428Problems and Applications 429Income Inequality and Poverty 431The Measurement of Inequality 432U.S. Income Inequality 432Inequality around the World 433The Poverty Rate 434In the News: The Global Distribution of Income 435Problems in Measuring Inequality 437Economic Mobility 438The Political Philosophy of Redistributing Income 439Utilitarianism 439Liberalism 440Libertarianism 441Policies to Reduce Poverty 442Minimum-Wage Laws 442Welfare 443In the News: Hurricane Katrina and Its Aftermath 444Negative Income Tax 444In-Kind Transfers 445In the News: Child Labor 446Antipoverty Programs and Work Incentives 447Conclusion 449Summary 450Key Concepts 450Questions for Review 450Problems and Applications 451Topics for Further Study 453The Theory of Consumer Choice 455The Budget Constraint: What the Consumer Can Afford 456Preferences: What the Consumer Wants 457Representing Preferences with Indifference Curves 458Four Properties of Indifference Curves 459Two Extreme Examples of Indifference Curves 460Optimization: What the Consumer Chooses 462The Consumer's Optimal Choices 462FYI: Utility: An Alternative Way to Describe Preferences and Optimization 463How Changes in Income Affect the Consumer's Choices 464How Changes in Prices Affect the Consumer's Choices 465Income and Substitution Effects 466Deriving the Demand Curve 468Three Applications 469Do All Demand Curves Slope Downward? 469How Do Wages Affect Labor Supply? 471Case Study: Income Effects on Labor Supply: Historical Trends, Lottery Winners, and the Carnegie Conjecture 472How Do Interest Rates Affect Household Saving? 474Conclusion: Do People Really Think This Way? 477Summary 478Key Concepts 478Questions for Review 478Problems and Applications 479Frontiers of Microeconomics 483Asymmetric Information 484Hidden Actions: Principals, Agents, and Moral Hazard 484Case Study: Corporate Management 485Hidden Characteristics: Adverse Selection and the Lemons Problem 486In the News: The Fruits of Moral Hazard 487Signaling to Convey Private Information 487Case Study: Gifts as Signals 488Screening to Induce Information Revelation 489Asymmetric Information and Public Policy 489Political Economy 490The Condorcet Voting Paradox 490Arrow's Impossibility Theorem 491The Median Voter Is King 492In the News: Farm Policy and Politics 494Politicians Are People Too 494Behavioral Economics 496People Aren't Always Rational 496People Care about Fairness 497People Are Inconsistent over Time 498Conclusion 499In the News: The Psychology of Saving 500Summary 501Key Concepts 501Questions for Review 501Problems and Applications 501The Data of Macroeconomics 505Measuring a Nation's Income 507The Economy's Income and Expenditure 508The Measurement of Gross Domestic Product 510"GDP Is the Market Value..." 510"...Of All..." 510"...Final..." 511"...Goods and Services..." 511"...Produced..." 511"...Within a Country..." 511"...In a Given Period of Time" 511The Components of GDP 512Consumption 512FYI: Other Measures of Income 513Investment 513Government Purchases 514Net Exports 514Case Study: The Components of U.S. GDP 515Real versus Nominal GDP 515A Numerical Example 516The GDP Deflator 517Case Study: Real GDP over Recent History 518In the News: GDP Lightens Up 519In the News: The Underground Economy 520Is GDP a Good Measure of Economic Well-Being? 520Case Study: International Differences in GDP and the Quality of Life 522Case Study: Who Wins at the Olympics? 523Conclusion 524Summary 525Key Concepts 525Questions for Review 525Problems and Applications 526Measuring the Cost of Living 529The Consumer Price Index 530How the Consumer Price Index Is Calculated 530Problems in Measuring the Cost of Living 532FYI: What Is in the CPI's Basket? 533In the News: Accounting for Quality Change 534The GDP Deflator versus the Consumer Price Index 536Correcting Economic Variables for the Effects of Inflation 538Dollar Figures from Different Times 538Case Study: Mr. Index Goes to Hollywood 539Indexation 539Real and Nominal Interest Rates 540Case Study: Interest Rates in the U.S. Economy 541Conclusion 542Summary 543Key Concepts 544Questions for Review 544Problems and Applications 544The Real Economy in the Long Run 547Production and Growth 549Economic Growth around the World 550FYI: A Picture Is Worth a Thousand Statistics 552FYI: Are You Richer Than the Richest American? 554Productivity: Its Role and Determinants 554Why Productivity Is So Important 554How Productivity Is Determined 555FYI: The Production Function 557Case Study: Are Natural Resources a Limit to Growth? 557Economic Growth and Public Policy 558Saving and Investment 559Diminishing Returns and the Catch-Up Effect 559Investment from Abroad 561Education 562Health and Nutrition 562In the News: Promoting Human Capital 563Property Rights and Political Stability 564Free Trade 565Research and Development 566Population Growth 566In the News: Rich Farmers versus the World's Poor 567In the News: Foreign Aid 568Conclusion: The Importance of Long-Run Growth 571Summary 571Key Concepts 572Questions for Review 572Problems and Applications 572Saving, Investment, and the Financial System 575Financial Institutions in the U.S. Economy 576Financial Markets 576Financial Intermediaries 578FYI: How to Read the Newspaper's Stock Tables 579Summing Up 581Saving and Investment in the National Income Accounts 581Some Important Identities 582The Meaning of Saving and Investment 583The Market for Loanable Funds 584Supply and Demand for Loanable Funds 584Saving Incentives 586Investment Incentives 587Government Budget Deficits and Surpluses 588Case Study: The History of U.S. Government Debt 590Conclusion 592Summary 593Key Concepts 593Questions for Review 593Problems and Applications 594The Basic Tools of Finance 597Present Value: Measuring the Time Value of Money 598FYI: The Magic of Compounding and the Rule of 70 600Managing Risk 600Risk Aversion 600The Markets for Insurance 601FYI: The Peculiarities of Health Insurance 602Diversification of Firm-Specific Risk 603The Trade-off between Risk and Return 604Asset Valuation 605Fundamental Analysis 606The Efficient Markets Hypothesis 606Case Study: Random Walks and Index Funds 607In the News: Nobel Caliber Investment Advice 608Market Irrationality 609Conclusion 609Summary 610Key Concepts 610Questions for Review 610Problems and Applications 611Unemployment 613Identifying Unemployment 614How Is Unemployment Measured? 614Case Study: Labor-Force Participation of Men and Women in the U.S. Economy 617Does the Unemployment Rate Measure What We Want It To? 618In the News: The Rise of Adult Male Joblessness 620How Long Are the Unemployed without Work? 620Why Are There Always Some People Unemployed? 622Job Search 623Why Some Frictional Unemployment Is Inevitable 623Public Policy and Job Search 623In the News: German Unemployment 624Unemployment Insurance 626Minimum-Wage Laws 627FYI: Who Earns the Minimum Wage? 628Unions and Collective Bargaining 629The Economics of Unions 629Are Unions Good or Bad for the Economy? 630In the News: Should You Join a Union? 631The Theory of Efficiency Wages 632Worker Health 632Worker Turnover 632Worker Quality 633Worker Effort 633Case Study: Henry Ford and the Very Generous (dollar)5-a-Day Wage 634Conclusion 634Summary 635Key Concepts 635Questions for Review 636Problems and Applications 636Money and Prices in the Long Run 639The Monetary System 641The Meaning of Money 642The Functions of Money 642The Kinds of Money 643In the News: The History of Money 644Money in the U.S. Economy 645FYI: Credit Cards, Debit Cards, and Money 647Case Study: Where Is All the Currency? 647The Federal Reserve System 648The Fed's Organization 648The Federal Open Market Committee 649Banks and the Money Supply 650The Simple Case of 100-Percent-Reserve Banking 650Money Creation with Fractional-Reserve Banking 651The Money Multiplier 652The Fed's Tools of Monetary Control 653Problems in Controlling the Money Supply 655Case Study: Bank Runs and the Money Supply 655FYI: The Federal Funds Rate 656Conclusion 657Summary 657Key Concepts 658Questions for Review 658Problems and Applications 658Money Growth and Inflation 661The Classical Theory of Inflation 662The Level of Prices and the Value of Money 662Money Supply, Money Demand, and Monetary Equilibrium 663The Effects of a Monetary Injection 664A Brief Look at the Adjustment Process 665The Classical Dichotomy and Monetary Neutrality 667Velocity and the Quantity Equation 668Case Study: Money and Prices during Four Hyperinflations 670The Inflation Tax 671In the News: The German Hyperinflation 672The Fisher Effect 673The Costs of Inflation 675A Fall in Purchasing Power? The Inflation Fallacy 676Shoeleather Costs 676Menu Costs 677Relative-Price Variability and the Misallocation of Resources 678Inflation-Induced Tax Distortions 678Confusion and Inconvenience 680A Special Cost of Unexpected Inflation: Arbitrary Redistributions of Wealth 680Case Study: The Wizard of Oz and the Free-Silver Debate 681In the News: How to Protect Your Savings from Inflation 682Conclusion 684Summary 685Key Concepts 685Questions for Review 685Problems and Applications 686The Macroeconomics of Open Economies 689Open-Economy Macroeconomics: Basic Concepts 691The International Flows of Goods and Capital 692The Flow of Goods: Exports, Imports, and Net Exports 692Case Study: The Increasing Openness of the U.S. Economy 693The Flow of Financial Resources: Net Capital Outflow 694The Equality of Net Exports and Net Capital Outflow 695Saving, Investment, and Their Relationship to the International Flows 696In the News: Americans Rely on Capital Flows from Abroad 697Summing Up 698Case Study: Is the U.S. Trade Deficit a National Problem? 699The Prices for International Transactions: Real and Nominal Exchange Rates 701Nominal Exchange Rates 701Real Exchange Rates 702FYI: The Euro 703A First Theory of Exchange-Rate Determination: Purchasing-Power Parity 704The Basic Logic of Purchasing-Power Parity 705Implications of Purchasing-Power Parity 705Case Study: The Nominal Exchange Rate during a Hyperinflation 707In the News: The Starbucks Index 708Limitations of Purchasing-Power Parity 708Case Study: The Hamburger Standard 710Conclusion 711Summary 711Key Concepts 711Questions for Review 712Problems and Applications 712A Macroeconomic Theory of the Open Economy 715Supply and Demand for Loanable Funds and for Foreign-Currency Exchange 716The Market for Loanable Funds 716The Market for Foreign-Currency Exchange 718FYI: Purchasing-Power Parity as a Special Case 720Equilibrium in the Open Economy 720Net Capital Outflow: The Link between the Two Markets 720Simultaneous Equilibrium in Two Markets 721FYI: Disentangling Supply and Demand 723How Policies and Events Affect an Open Economy 724Government Budget Deficits 724In the News: The U.S. Trade Deficit 726Trade Policy 727Political Instability and Capital Flight 729Case Study: Could Capital Flee from the United States? 731Conclusion 732Summary 733Key Concepts 733Questions for Review 734Problems and Application 734Short-Run Economic Fluctuations 737Aggregate Demand and Aggregate Supply 739Three Key Facts about Economic Fluctuations 740Economic Fluctuations Are Irregular and Unpredictable 740Most Macroeconomic Quantities Fluctuate Together 740As Output Falls, Unemployment Rises 742Explaining Short-Run Economic Fluctuations 742The Assumptions of Classical Economics 742In the News: Offbeat Indicators 743The Reality of Short-Run Fluctuations 744The Model of Aggregate Demand and Aggregate Supply 744The Aggregate-Demand Curve 746Why the Aggregate-Demand Curve Slopes Downward 746Why the Aggregate-Demand Curve Might Shift 749The Aggregate-Supply Curve 750Why the Aggregate-Supply Curve Is Vertical in the Long Run 751Why the Long-Run Aggregate-Supply Curve Might Shift 752Using Aggregate Demand and Aggregate Supply to Depict Long-Run Growth and Inflation 754Why the Aggregate-Supply Curve Slopes Upward in the Short Run 755Why the Short-Run Aggregate-Supply Curve Might Shift 758Two Causes of Economic Fluctuations 760The Effects of a Shift in Aggregate Demand 761FYI: Monetary Neutrality Revisited 763Case Study: Two Big Shifts in Aggregate Demand: The Great Depression and World War II 764Case Study: The Recession of 2001 765FYI: The Origins of Aggregate Demand and Aggregate Supply 766The Effects of a Shift in Aggregate Supply 767Case Study: Oil and the Economy 769FYI: The Macroeconomic Impact of Hurricane Katrina 770Conclusion 771Summary 771Key Concepts 772Questions for Review 772Problems and Applications 773The Influence of Monetary and Fiscal Policy on Aggregate Demand 777How Monetary Policy Influences Aggregate Demand 778The Theory of Liquidity Preference 779The Downward Slope of the Aggregate-Demand Curve 781FYI: Interest Rates in the Long Run and the Short Run 782Changes in the Money Supply 784The Role of Interest-Rate Targets in Fed Policy 785Case Study: Why the Fed Watches the Stock Market (and Vice Versa) 786How Fiscal Policy Influences Aggregate Demand 787Changes in Government Purchases 787The Multiplier Effect 787A Formula for the Spending Multiplier 788Other Applications of the Multiplier Effect 789The Crowding-Out Effect 790Changes in Taxes 791FYI: How Fiscal Policy Might Affect Aggregate Supply 792Using Policy to Stabilize the Economy 793The Case for Active Stabilization Policy 793Case Study: Keynesians in the White House 794The Case against Active Stabilization Policy 795Automatic Stabilizers 796Conclusion 796Summary 797Key Concepts 797Questions for Review 798Problems and Applications 798The Short-Run Trade-Off Between Inflation and Unemployment 801The Phillips Curve 802Origins of the Phillips Curve 802Aggregate Demand, Aggregate Supply, and the Phillips Curve 803Shifts in the Phillips Curve: The Role of Expectations 805The Long-Run Phillips Curve 805The Meaning of "Natural" 808Reconciling Theory and Evidence 808The Short-Run Phillips Curve 809The Natural Experiment for the Natural-Rate Hypothesis 811In the News: How to Keep Expected Inflation Low 813Shifts in the Phillips Curve: The Role of Supply Shocks 814The Cost of Reducing Inflation 816The Sacrifice Ratio 817Rational Expectations and the Possibility of Costless Disinflation 818The Volcker Disinflation 819The Greenspan Era 821In the News: The Case for Inflation Targeting 822Case Study: Why Were Inflation and Unemployment So Low at the End of the 1990s? 822Conclusion 824Summary 825Key Concepts 826Questions for Review 826Problems and Applications 827Final Thoughts 831Five Debates Over Macroeconomic Policy 833Should Monetary and Fiscal Policymakers Try to Stabilize the Economy? 834Pro: Policymakers Should Try to Stabilize the Economy 834Con: Policymakers Should Not Try to Stabilize the Economy 834In the News: The Fine-Tuning of George W. Bush 836Should Monetary Policy Be Made by Rule Rather Than by Discretion? 836Pro: Monetary Policy Should Be Made by Rule 837In the News: Inflation Targeting as a Rule for Monetary Policy 838Con: Monetary Policy Should Not Be Made by Rule 840Should the Central Bank Aim for Zero Inflation? 841Pro: The Central Bank Should Aim for Zero Inflation 841Con: The Central Bank Should Not Aim for Zero Inflation 842In the News: The Optimal Rate of Inflation 843Should the Government Balance Its Budget? 844Pro: The Government Should Balance Its Budget 844Con: The Government Should Not Balance Its Budget 845In the News: Dealing with Deficits 846Should the Tax Laws Be Reformed to Encourage Saving? 848Pro: The Tax Laws Should Be Reformed to Encourage Saving 848In the News: Tax Reform 850Con: The Tax Laws Should Not Be Reformed to Encourage Saving 850Conclusion 851Summary 852Questions for Review 853Problems and Applications 853Quick Quiz Answers 857Glossary 873Index 879