Campbell R. McConnell University of Nebraska Stanley L Brue Pacific Lutheran University Sean M. Flynn Scripps College A. C J McGraw-Hill Irwim
Campbell R. McConnellUniversity of Nebraska
Stanley L BruePacific Lutheran University
Sean M. FlynnScripps College
A.C
JMcGraw-HillIrwim
?£• List of Key Graphs
Preface
Reviewers
XIH
XIV
xxiv
PART ONE
To the Student
to Economics amd
Chapter 1
Limits, ADternatives, and Choices 3
The Economic Perspective 4Scarcity and Choice / Purposeful Behavior / MarginalAnalysis: Comparing Benefits and CostsConsider This: Free for All? 4Consider This: Fast-Food Lines 5
Theories, Principles, and Models 5
Microeconomics and Macroeconomics 6Microeconomics / Macroeconomics / Positive andNormative Economics
Individual's Economizing Problem 7Limited Income / Unlimited Wants / A Budget LineConsider This: Did Gates,Winfrey, and Rodriguez Make BadChokes? 9
Society's Economizing Problem 10Scarce Resources / Resource Categories
Production Possibilities Model //Production Possibilities Table / Production PossibilitiesCurve / Law of Increasing OpportunityCosts / Optimal AllocationConsider This: The Economics of War 14
Unemployment, Growth, and the Future 14A Growing Economy / Present Choices and FuturePossibilities / A Qualification: International Trade
Last Word: Pitfalls to Sound Economic Reasoning 16
Chapter 1 Appendix: Graphs and Their Meaning 22
Chapter 2
The Market System and the Circular Flow 29
Economic Systems 30The Command System / The Market System
Characteristics of the Market System 30Private Property / Freedom of Enterprise and Choice /Self-Interest / Competition / Markets and Prices /Technology and Capital Goods / Specialization /Use of Money / Active, but Limited, Government
Five Fundamental Questions 34What Wil l Be Produced? / How Will the Goods and ServicesBe Produced? / Who Will Get the Output? / How Will theSystem Accommodate Change? / How Will the SystemPromote Progress?Consider This: McHits and McMisses 35
The "Invisible Hand" 38
Contents
The Demise o f the Command SystemsThe Coordination Problem / The Incentive ProblemConsider This: TheTwo Koreas 39
The Circular Flow ModelHouseholds / Businesses / Product Market /Resource MarketLast Word: Shuffling the Deck 41
PART TWOPrice, Quantity, amd Efficiency
38
40
Chapter 5
46
Chapter 3
Demand, Supply, and Market Equilibrium 47
Markets 48
Demand 48Law of Demand / The Demand Curve / MarketDemand / Changes in Demand / Changes in QuantityDemanded
Supply 53Law of Supply / The Supply Curve / Market Supply /Determinants of Supply / Changes in Supply /
Changes in Quantity Supplied
Market Equilibrium 56
Equilibrium Price and Quantity / Rationing Function ofPrices / Efficient Allocation / Changes in Supply, Demand,and EquilibriumConsider This: Ticket Scalping: A Burn Rap! 58
Consider This: Salsa and Coffee Beans 61
A p p l i c a t i o n : G o v e r n m e n t - S e t Pr ices 61Price Ceilings on Gasoline / Rent Controls /Price Floors on Wheat
Last Word: A Legal Market for Human Organs? 62
Chapter 3 Appendix: Addit ional Examples of
Supply and Demand 69
Chapter 4
75
76
Elasticity
Price Elasticity o f DemandThe Price-Elasticity Coefficient and Formula /Interpretations of Ed I The Total-Revenue Test / PriceElasticity and the Total-Revenue Curve / Determinants ofPrice Elasticity of Demand / Applications of Price Elasticity ofDemandConsider This: A Bit of a Stretch 78
Price Elasticity o f SupplyPrice Elasticity of Supply: The Market Period / PriceElasticity of Supply: The Short Run / Price Elasticity ofSupply: The Long Run / Applications of Price Elasticity ofSupply
Cross Elasticity and Income Elasticity of DemandCross Elasticity of Demand / Income Elasticity of DemandLast Word: Elasticity and Pricing Power: Why DifferentConsumers Pay Different Prices 86
87
Market Failures: Public Goods and Externalities 92
Market Failures in Competit ive Markets 93Demand-Side Market Failures / Supply-SideMarket Failures
Efficiently Functioning Markets 93Consumer Surplus / Producer Surplus / EfficiencyRevisited / Efficiency Losses (or Deadweight Losses)
Publ ic Goods 99Private Goods Characteristics / Public GoodsCharacteristics / Optimal Quantity of a Public Good /Demand for Public Goods / Comparing MB and MC /Cost-Benefit Analysis / Quasi-Public Goods /The Reallocation ProcessConsider This: Street Entertainers 100Consider This: Art for Art's Sake 101
Externalities 104Negative Externalities / Positive Externalities /Government Intervention / Society's Optimal Amount ofExternality ReductionConsider This: The Fable of the Bees 106
Government's Role in the Economy 109Last Word: Carbon Dioxide Emissions, Cap and Trade, andCarbon Taxes 110
PART THREE
Microeconomics of Product Markets 115
Chapter 6
Consumer Behavior 776
Law o f Diminishing Marginal Ut i l i ty 117Terminology / Total Utility and Marginal Utility /Marginal Utility and DemandConsider This: Vending Machines and Marginal Utility 11 7
Theory o f Consumer Behavior 118Consumer Choice and the Budget Constraint /Utility-Maximizing Rule / Numerical Example /Algebraic Generalization
Ut i l i ty Maximizat ion and the Demand Curve 122Deriving the Demand Schedule and Curve / Income andSubstitution Effects
Applications and Extensions 123iPods / The Diamond-Water Paradox / Opportunity Costand the Value of Time / Medical Care Purchases /Cash and Noncash Gifts
Prospect Theory 125Losses and Shrinking Packages / Framing Effects andAdvertising / Anchoring and Credit Card Bills /Mental Accounting and Overpriced Warranties /The Endowment Effect and Market TransactionsConsider This: Rising Consumption and the HedonicTreadmill 126Last Word: Nudging PeopleToward Better Decisions 128
Chapter 6 Appendix: Indifference Curve Analysis 133
Contents I)
Chapter 7
Businesses and the Costs of Production 140
Economic Costs 141Explicit and Implicit Costs / Accounting Profit and NormalProfit / Economic Profit / Short Run and Long Run
Short-Run Production Relationships 144Law of Diminishing ReturnsConsider This: Diminishing Returns from Study 144
Short-Run Production Costs 147Fixed, Variable, and Total Costs / Per-Unit, or Average,Costs / Marginal Cost / Shifts of the Cost Curves
Long-Run Production Costs 152Firm Size and Costs / The Long-Run Cost Curve /Economies and Diseconomies of Scale / Minimum EfficientScale and Industry Structure
Applications and Illustrations 157Rising Gasoline Prices / Successful Start-Up Firms /TheVerson Stamping Machine / The Daily Newspaper /Aircraft and Concrete PlantsLast Word: Don't Cry over Sunk Costs 158
Chapter 8
Pure Competition in the Short Run 763
Four Market Models 164
Pure Competition: Characteristics and
Occurrence 164
Demand as Seen by a Purely Competitive Seller 165Perfectly Elastic Demand / Average,Total, and MarginalRevenue
Profit Maximization in the Short Run: Total-Revenue-
Total-Cost Approach 166
Profit Maximization in the Short Run:
Marginal-Revenue-Marginal-Cost Approach 167
Profit-Maximizing Case / Loss-Minimizing Case /Shutdown CaseConsider This: The StillThere Motel 173
Marginal Cost and Short-Run Supply 173Generalized Depiction / Diminishing Returns, ProductionCosts, and Product Supply / Changes in Supply / Firm andIndustry: Equilibrium PriceLast Word: fixed Costs: Digging Yourself Out of a Hole 177
Chapter 9
Pure Competition in the Long Run 181
The Long Run in Pure Competition 182Profit Maximization in the Long Run / Goal of OurAnalysis / Long-Run Equilibrium / Long-Run Supply for aConstant-Cost Industry / Long-Run Supply for an Increasing-Cost Industry / Long-Run Supply for a Decreasing-CostIndustry
Pure Competition and Efficiency 186Productive Efficiency:? = Minimum ATC / AllocativeEfficiency:? = MC / Maximum Consumer and ProducerSurplus / Dynamic Adjustments / "Invisible Hand" Revisited
Technological Advance and Competition 189Creative DestructionConsider This: Running a Company Is Hard Business / 90Last Word: Efficiency Gains from Entry: The Case of GenericDrugs 191
Chapter 10
Pure Monopoly 194
An Introduction to Pure Monopoly 195Examples of Monopoly / Dual Objectives of theStudy of Monopoly
Barriers to Entry 195Economies of Scale / Legal Barriers to Entry: Patents andLicenses / Ownership or Control of Essential Resources /Pricing and Other Strategic Barriers to Entry
Monopoly Demand 197Marginal Revenue Is Less Than Price / The Monopolist Is aPrice Maker / The Monopolist Sets Prices in the ElasticRegion of Demand
Output and Price Determination 200Cost Data / MR = MC Rule / No Monopoly SupplyCurve / Misconceptions Concerning Monopoly Pricing /Possibility of Losses by Monopolist
Economic Effects of Monopoly 203Price, Output, and Efficiency / Income Transfer / CostComplications / Assessment and Policy Options
Price Discrimination 207Conditions / Examples of Price Discrimination /Graphical AnalysisConsider This: Price Discrimination at the Ballpark 208
Regulated Monopoly 209Socially Optimal Price: P = MC / Fair-Return Price: P =ATC / Dilemma of RegulationLast W o r d : De Beers Diamonds: Are Monopolies Forever? 212
Chapter 11
Monopolistic Competition and Oligopoly 276
Monopolistic Competition 216Relatively Large Number of Sellers / DifferentiatedProducts / Easy Entry and Exit / Advertising /Monopolistically Competitive Industries
Price and Output in Monopolistic Competition 219The Firm's Demand Curve / The Short Run:Profit or Loss / The Long Run: Only a Normal Profit
Monopolistic Competition and Efficiency 221Neither Productive nor Allocative Efficiency / ExcessCapacity
Product Variety 222Benefits of Product Variety / Further Complexity
Oligopoly 223A Few Large Producers / Homogeneous or DifferentiatedProducts / Control over Price, but Mutual Interdependence /Entry Barriers / Mergers / Oligopolistic IndustriesConsider This: Creative Strategic Behavior 224
xxx Contents
Oligopoly Behavior: A Game Theory Overview 226Mutual Interdependence Revisited / Collusion /Incentive to CheatConsider This: The Prisoner's Dilemma 227
Three Oligopoly Models 228Kinked-Demand Theory: Noncollusive Oligopoly / Cartelsand Other Collusion / Price Leadership Model
Oligopoly and Advertising 234Positive Effects of Advertising / Potential NegativeEffects of Advertising
$ Oligopoly and Efficiency 235Productive and Allocative Efficiency / QualificationsLast Word: Oligopoly in the Beer Industry 236
Chapter 11 Appendix: AdditionalGame Theory Applications 241
WEB Chapter 11 www.mcconnelH 9e.com
Technology, R&D, and Efficiency 246
Invention, Innovation, and Diffusion 1IW-2Invention / Innovation / Diffusion / R&DExpenditures / Modern View of Technological Advance
Role of Entrepreneurs and Other Innovators IIW-4Forming Start-Ups / Innovating within Existing Firms /Anticipating the Future / Exploiting University andGovernment Scientific Research
A Firm's Optimal Amount of R&-D IIW-5Interest-Rate Cost of Funds / Expected Rateof Return / Optimal R&D Expenditures
Increased Profit via Innovation IIW-8Increased Revenue via Product Innovation / Reduced Costvia Process Innovation
Imitation and R&-D Incentives IIW-10Benefits of Being FirstConsider This: Trade Secrets / IW-12
Role of Market Structure IIW-13Market Structure and Technological Advance / Inverted-UTheory of R&D / Market Structure and TechnologicalAdvance: The Evidence
Technological Advance and Efficiency IIW-15Productive Efficiency / Allocative Efficiency / CreativeDestruction
Last Word: On the Path to the PersonalComputer and Internet IIW-16
PART FOUR
Microeconomics of Resource Markets 247
Chapter 12
The Demand for Resources
Significance of Resource PricingMarginal Productivity Theory of Resource Demand
Resource Demand as a Derived Demand / Marginal RevenueProduct / Rule for Employing Resources: MRP =MRC / MRP as Resource Demand Schedule /
249249
Resource Demand under Imperfect Product MarketCompetition / Market Demand for a ResourceConsider This: Superstars 253
Determinants of Resource Demand 253Changes in Product Demand / Changes in Productivity /Changes in the Prices of Other Resources / OccupationalEmployment Trends
Elasticity of Resource Demand 256
Optimal Combination of Resources 258The Least-Cost Rule / The Profit-Maximizing Rule /Numerical Illustration
Marginal Productivity Theory of IncomeDistribution 260
Last Word: Input Substitution: The Case of ATMs 261
Chapter 13
266
267
267
Wage Determination
Labor, Wages, and Earnings
General Level of WagesRole of Productivity / Real Wages and Productivity /Long-Run Trend of Real Wages
A Purely Competitive Labor MarketMarket Demand for Labor / Market Supply of Labor /Labor Market Equilibrium
Monopsony ModelUpsloping Labor Supply to Firm / MRC Higher Than theWage Rate / Equilibrium Wage and Employment /Examples of Monopsony Power
Three Union ModelsDemand-Enhancement Model / Exclusive or Craft UnionModel / Inclusive or Industrial Union Model / WageIncreases and Job Loss
Bilateral Monopoly ModelIndeterminate Outcome of Bilateral Monopoly /Desirability of Bilateral Monopoly
The Minimum-Wage ControversyCase against the Minimum Wage / Case for the MinimumWage / Evidence and Conclusions
Wage DifferentialsMarginal Revenue Productivity / Noncompeting Groups /Compensating Differences / Market ImperfectionsConsider This: My Entire Life 280
Pay for PerformanceThe Principal-Agent Problem Revisited / Addenda: NegativeSide Effects of Pay for PerformanceLast Word: Are Chief Executive Officers (CEOs) Overpaid? 283
Chapter 13 Appendix: Labor Unions and TheirImpacts
269
271
273
275
276
277
281
287
248 Chapter 14
Rent, Interest, and Profit
Economic RentPerfectly Inelastic Supply / Equilibrium Rent and Changes inDemand / Productivity Differences and RentDifferences / Land Rent:A Surplus Payment / Land
293
294
Contents xxxi
Ownership: Fairness versus Allocative Efficiency /Application: A Single Tax on Land
Interest 297Money Is Not a Resource / Interest Rates and InterestIncome / Range of Interest Rates / Pure Rate of Interest /Loanable Funds Theory of Interest Rates / Extending theModel / Time-Value of Money / Role of InterestRates / Application: Usury LawsConsider This: That Is Interest 301
Economic Profit 304Entrepreneurship and Profit / Insurable and UninsurableRisks / Sources of Uninsurable Risks / Profit asCompensation for Bearing Uninsurable Risks / Sources ofEconomic Profit / Profit Rations Entrepreneurship /Entrepreneurs, Profits, and Corporate StockholdersConsider This: Apple CEO Steve Jobs 305Last Word: Determining the Price of Credit 306
Income Shares 308
Chapter 15
312
313
Natural Resource and Energy Economics
Resource Supplies: Doom or Boom?Population Growth / Resource Consumption per PersonConsider This: Can Governments Raise Birthrates? 314
Energy EconomicsEfficient Energy Use / Running Out of Energy!Consider This: Developing/Uternative Fuel Sources Is Both Riskyand Costly 320
Natural Resource EconomicsUsing Present Values to Evaluate Future PossibilitiesNonrenewable Resources
Present Use versus Future Use / Incomplete Property RightsLead to Excessive Present Use / Application: ConflictDiamonds
Renewable ResourcesElephant Preservation / Forest Management / OptimalForest Harvesting / Optimal Fisheries Management / Policiesto Limit Catch SizesLast Word: Is Economic Growth Bad for the Environment? 330
PART FIVE
Microeconomics of Government
Chapter 16
317
321321322
325
Public Finance: Expendituresand Taxes
Government and the Circular FlowGovernment Finance
Government Purchases and Transfers /Government Revenues
Federal FinanceFederal Expenditures / Federal Tax Revenues
State and Local FinanceState Finances / Local FinancesConsider This: State Lotteries: A Good Bet? 342
336
337338
339
341
Local, State, and Federal Employment 342Apportioning the Tax Burden 344
Benefits Received versus Ability to Pay /Progressive, Proportional, and Regressive TaxesConsider This: The VAT: A Very Alluring Tax? 346
Tax Incidence and Efficiency Loss 347Elasticity and Tax Incidence /Efficiency Loss of a Tax
Probable Incidence of U.S. Taxes 350Personal IncomeTax / PayrollTaxes /
Corporate IncomeTax / Sales and Excise Taxes /Property TaxesLast Word: Taxation and Spending: Redistribution versusRecycling 350
The U.S. Tax Structure 353
Chapter 17Asymmetric Information, Voting, andPublic Choice
Information FailuresInadequate Buyer Information about Sellers /Inadequate Seller Information about Buyers /QualificationConsider This: "Lemons" 360
Public Choice TheoryRevealing Preferences throughMajority Voting
Inefficient Voting Outcomes / Paradox ofVoting /Median-Voter Model
Government FailureRepresentative Democracy and the Principal-AgentProblem / Clear Benefits, Hidden Costs /Limited and Bundled Choice / Bureaucracy andInefficiency / Corruption / Imperfect InstitutionsConsiderThis: Mohair and the Collective Action Problem 366Last Word: "Government Failure" in the News 370
PART SIX
MocroecoDDomic Issues amd Policies
357
358
361
362
365
373
335 Chapter 18Antitrust Policy and RegulationThe Antitrust Laws
Historical Background / Sherman Act of 1890 /Clayton Act of 1914 / Federal Trade CommissionAct of 1914 / Celler-KefauverActof 1950
Antitrust Policy: Issues and ImpactsIssues of Interpretation / Issues of Enforcement /Effectiveness of Antitrust LawsConsiderThis: Of Catfish and Art (and OtherThings inCommon) 381
Industrial RegulationNatural Monopoly / Problems with IndustrialRegulation / Legal Cartel Theory
Deregulation
374
375
376
38I
383
Contents
Social Regulation 384Distinguishing Features / The Optimal Level of SocialRegulation / Two RemindersLast Word: United States v. Microsoft 386
Chapter 19 _ _ _Agriculture: Economics and Policy 391
Economics of Agriculture 392The Short Run: Price and Income Instability / The Long Run:
f. A Declining Industry / Farm-Household IncomeConsiderThis: Risky Business 396
Economics of Farm Policy 398Rationale for Farm Subsidies / Background:The ParityConcept / Economics of Price Supports / Reduction ofSurplusesConsiderThis: Putting Corn inYour GasTank 401
Criticisms and Politics 402Criticisms of the Parity Concept / Criticisms of thePrice-Support System / The Politics of Farm PolicyLast Word: The Sugar Program: A Sweet Deal 404
Recent Farm Policies 405Freedom to Farm Act of 1996 / The Food, Conservation, andEnergy Act of 2008
Chapter 20Income Inequality, Poverty, 470and DiscriminationFacts about Income Inequality 411
Distribution by Income Category / Distribution by Quintiles(Fifths) / The Lorenz Curve and Gini Ratio / Income Mobility:The Time Dimension / Effect of Government Redistribution
Causes of Income Inequality 414Ability / Education and Training / Discrimination /Preferences and Risks / Unequal Distribution of Wealth /Market Power / Luck, Connections, and Misfortune
Income Inequality over Time 415Rising Income Inequality since 1970 / Causes of GrowingInequalityConsiderThis: Laughing at Shrek 417
Equality versus Efficiency 417The Case for Equality: Maximizing Total Utility /The Case for Inequality: Incentives and Efficiency /The Equality-Efficiency Trade-offC o n s i d e r T h i s : Slicing the Pizza 419
The Economics of Poverty 419Definition of Poverty / Incidence of Poverty /Poverty Trends / Measurement Issues
The U.S. Income-Maintenance System 421Social Insurance Programs / Public Assistance Programs
Discrimination 424Economic Analysis of Discrimination 424
Taste-for-Discrimination Model / StatisticalDiscrimination / Occupational Segregation: The CrowdingModel / Cost to Society as Well as to IndividualsLast Word: U.S. Family Wealth and Its Distribution 428
Chapter 21Health Care 433The Health Care Industry 434The U.S. Emphasis on Private Health Insurance 434
Twin Problems: Costs and Access 434High and Rising: Health Care Costs . 435
Health Care Spending / Quality of Care: Are We Healthier? /Economic Implications of Rising costs / Too Much Spending?
Limited Access 438Why the Rapid Rise in Costs? 439
Peculiarities of the Health Care Market / The IncreasingDemand for Health Care / Role of Health Insurance /Supply Factors in Rising Health Care Prices /Relative ImportanceConsiderThis: Cancer Fight Goes Nuclear 445
Cost Containment: Altering Incentives 445Deductibles and Copayments / Health Savings Accounts /Managed Care / Medicare and DRG / Limits on MalpracticeAwards
The Patient Protection and Affordable Care Act 447Major Provisions / Objections and AlternativesLast Word: Singapore's Efficient and Effective Health CareSystem 448
Chapter 22Immigration 454Number of Immigrants 455
Legal Immigrants / Illegal Immigrants
The Decision to Migrate 456Earnings Opportunities / Moving Costs / Factors AffectingCosts and Benefits
Economic Effects of Immigration 458Personal Gains / Impacts on Wage Rates, Efficiency, andOutput / Income Shares / Complications andModifications / Fiscal Impacts / Research FindingsConsiderThis: Stars and Stripes 459
The Illegal Immigration Debate 463Employment Effects / Wage Effects / Price Effects / FiscalImpacts on Local and State Governments / Other ConcernsLast Word: Immigration Reform: The Beaten Path to the CurrentStalemate 466
Optimal Immigration 467
PART SEVENGDP, Growth, and Instability 471
Chapter 23An Introduction to Macroeconomics 472
Performance and Policy 473The Miracle of Modern Economic Growth 474
Saving, Investment, and Choosing between Present and FutureConsumption / Banks and Other Financial InstitutionsConsiderThis: Economic versus Financial Investment 476
Contents xxxiii
Uncertainty, Expectations, and Shocks 476Demand Shocks and Flexible Prices / Demand Shocks andSticky PricesConsiderThis: The Great Recession 479
How Sticky Are Prices? 480Last Word: Inventory Management and the Business Cycle 480
Categorizing Macroeconomic Models UsingPrice Stickiness 482
Chapter 24Measuring Domestic Output andNational Income 485
486
486
Assessing the Economy's PerformanceGross Domestic Product
A Monetary Measure / Avoiding Multiple Counting /GDP Excludes Nonproduction Transactions / Two Ways ofLooking at GDP: Spending and Income
The Expenditures Approach 488Personal Consumption Expenditures (C) / Gross PrivateDomestic Investment (lg) I Government Purchases (G) /Net Exports (Xn) / Putting It All Together: GDP = C +/e + G + Xn
ConsiderThis: Stocks versus Flows 491
The Income Approach 492Compensation of Employees / Rents / Interest /Proprietors' Income / Corporate Profits / Taxes onProduction and Imports / From National Income to GDP
Other National Accounts 494Net Domestic Product / National Income / PersonalIncome / Disposable Income / The Circular Flow Revisited
Nominal GDP versus Real GDP 497Adjustment Process in a One-Product Economy / AnAlternative Method / Real-World Considerations and Data
Shortcomings of GDP 499Nonmarket Activities / Leisure / Improved ProductQuality / The Underground Economy / GDP and theEnvironment / Composition and Distribution of Output /Noneconomic Sources of Well-BeingLast Word: Magical Mystery Tour 501
Chapter 25
Economic Growth 505
Economic Growth 506Growth as a Goal / Arithmetic of Growth / Growth in theUnited States
Modern Economic Growth 508The Uneven Distribution of Growth / Catching Up Is PossibleConsiderThis: Economic Growth Rates Matter! 510
Institutional Structures That Promote Growth 511C o n s i d e r T h i s : Patents and Innovation 512
Determinants of Growth 512Supply Factors / Demand Factor / Efficiency Factor
Production Possibilities Analysis 513Growth and Production Possibilities /Labor and Productivity
Accounting for Growth 514Labor Inputs versus Labor Productivity / TechnologicalAdvance / Quantity of Capital / Education andTraining / Economies of Scale and Resource AllocationConsiderThis: Women, the Labor Force, and Economic Growth 5 / 6
The Rise in the Average Rate of Productivity Growth 518Reasons for the Rise in the Average Rate of ProductivityGrowth / Implications for Economic Growth /Skepticism about Longevity / What Can We Conclude?
Is Growth Desirable and Sustainable? 521The Antigrowth View / In Defense of Economic GrowthLast Word: Economic Growth in China 522
Chapter 26Business Cycles, Unemployment, and Inflation 526The Business Cycle 527
Phases of the Business Cycle / Causation: A First Glance /Cyclical Impact: Durables and Nondurables
Unemployment 529Measurement of Unemployment / Types of Unemployment /Definition of Full Employment / Economic Cost ofUnemployment / NoneconomicCosts / International Comparisons
Inflation 535Meaning of Inflation / Measurement of Inflation / Facts ofInflation / Types of Inflation / Complexities / Core InflationConsiderThis: Clipping Coins 537
Redistribution Effects of Inflation 538Who Is Hurt by Inflation? / Who Is Unaffected or Helped byInflation? / Anticipated Inflation / Other Redistribution Issues
Does Inflation Affect Output? 541Cost-Push Inflation and Real Output / Demand-Pull Inflationand Real Output / HyperinflationLast Word: The Stock Market and the Economy 542
PART EIGHT
Macroeconomic Models andFiscal Policy 546
Chapter 27Basic Macroeconomic Relationships 547
The Income-Consumption andIncome-Saving Relationships 548
The Consumption Schedule / The Saving Schedule /Average and Marginal Propensities / NonincomeDeterminants of Consumption and Saving /Other Important ConsiderationsConsiderThis: The Great Recession and the Paradox of Thrift 554
The Interest-Rate-InvestmentRelationship 555
Expected Rate of Return / The Real Interest Rate /Investment Demand Curve / Shifts of the InvestmentDemand Curve / Instability of InvestmentConsiderThis: The Great Recession and the Investment Riddle 560
xxxiv Contents
The Multiplier Effect 560Rationale / The Multiplier and the Marginal Propensities /How Large Is the Actual Multiplier Effect?Last Word: Squaring the Economic Circle 563
Chapter 28The Aggregate ExpendituresModel 567
Assumptions and Simplifications 568
^Consumption and Investment Schedules 568Equilibrium GDP: C + lg = GDP 569
Tabular Analysis / Graphical Analysis
Other Features of Equilibrium GDP 572Saving Equals Planned Investment / No Unplanned Changesin Inventories
Changes in Equilibrium GDP and the Multiplier 573Adding International Trade 574
Net Exports and Aggregate Expenditures / The Net ExportSchedule / Net Exports and Equilibrium GDP / InternationalEconomic Linkages
Adding the Public Sector 578Government Purchases and Equilibrium GDP / Taxation andEquilibrium GDP
Equilibrium versus Full-Employment GDP 581Recessionary Expenditure Gap / Inflationary ExpenditureGap / Application: The Recession of 2007-2009Last Word: Say's Law, the Great Depression, and Keynes 584
Chapter 29Aggregate Demand andAggregate Supply 589
Aggregate Demand 590Aggregate Demand Curve
Changes in Aggregate Demand 591Consumer Spending / Investment Spending / GovernmentSpending / Net Export Spending
Aggregate Supply 594Aggregate Supply in the Immediate Short Run / AggregateSupply in the Short Run / Aggregate Supply in the LongRun / Focusing on the Short Run
Changes in Aggregate Supply 597Input Prices / Productivity / Legal-InstitutionalEnvironment
Equilibrium and Changes in Equilibrium 600Increases in AD: Demand-Pull Inflation / Decreases in AD:Recession and Cyclical Unemployment / Decreases in AS:Cost-Push Inflation / Increases in AS: Full Employment withPrice-Level StabilityConsiderThis: Ratchet Effect 603Last Word: Has the Impact of Oil Prices Diminished? 605
Chapter 29 Appendix: The Relationship of theAggregate Demand Curve to the AggregateExpenditures Model 610
Chapter 30Fiscal Policy, Deficits, and Debt 673Fiscal Policy and the AD-AS Model 614
Expansionary Fiscal Policy / ContractionaryFiscal Policy / Policy Options: G or T?
Built-in Stability 617Automatic or Built-in Stabilizers
Evaluating Fiscal Policy 619Cyclically Adjusted Budget / Recent U.S. Fiscal Policy /Budget Deficits and Projections
Problems, Criticisms, and Complications 623Problems of Timing / Political Considerations /Future Policy Reversals / Offsetting State and LocalFinance / Crowding-Out Effect / Current Thinkingon Fiscal Policy
The U.S. Public Debt 625Ownership / Debt and GDP / InternationalComparisons / Interest Charges
False Concerns 627Bankruptcy / Burdening Future Generations
Substantive Issues 628Income Distribution / Incentives / Foreign-Owned PublicDebt / Crowding-Out Effect RevisitedLast Word: The Social Security and MedicareShortfalls 630
PART NINE
Money, Banking, and MonetaryPolicy 635
Chapter 31Money, Banking, and FinancialInstitutions
The Functions of MoneyThe Components of the Money Supply
Money Definition MI / Money Definition M2ConsiderThis: Are Credit Cards Money? 640
What "Backs" the Money Supply?Money as Debt / Value of Money / Money andPrices / Stabilizing Money's Purchasing Power
The Federal Reserve and the Banking SystemHistorical Background / Board of Governors /The 12 Federal Reserve Banks / FOMC / Commercial Banksand Thrifts / Fed Functions and the Money Supply /Federal Reserve Independence
The Financial Crisis of 2007 and 2008The Mortgage Default Crisis / Securitization /Failures and Near-Failures of Financial Firms /The Treasury Bailout: TARP / The Fed's Lender-of-Last-Resort Activities
The Postcrisis U.S. Financial ServicesIndustry
Last Word: Electronic Banking 651
636
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643
646
649
Contents xxxv
Chapter 32
Money Creation 655
The Fractional Reserve System 656Illustrating the Idea: The Goldsmiths / SignificantCharacteristics of Fractional Reserve Banking
A Single Commercial Bank 657Transaction I: Creating a Bank / Transaction 2:AcquiringProperty and Equipment / Transaction 3:Accepting Deposits /Transaction 4: Depositing Reserves in a Federal ReserveBank / Transaction 5: Clearing a Check Drawn against the Bank
Money-Creating Transactions of a Commercial Bank 660Transaction 6: Granting a Loan / Transaction 7: BuyingGovernment Securities / Profits, Liquidity, and the FederalFunds Market
The Banking System: Multiple-Deposit Expansion 663The Banking System's Lending Potential / The MonetaryMultiplier / Reversibility: The Multiple Destruction of MoneyLast Word: The Bank Panics of 1930-1933 666
Chapter 33
Interest Rates and Monetary Policy 670
Interest Rates 671The Demand for Money / The Equilibrium Interest Rate /Interest Rates and Bond Prices
The Consolidated Balance Sheet of theFederal Reserve Banks
Assets / Liabilities
Tools of Monetary PolicyOpen-Market Operations / The Reserve Ratio /The Discount Rate / Term Auction Facility /Relative Importance
Targeting the Federal Funds RateExpansionary Monetary Policy / Restrictive MonetaryPolicy / The Taylor RuleConsiderThis: The Fed as a Sponge 683
Monetary Policy, Real GDP and the Price LevelCause-Effect Chain / Effects of an Expansionary MonetaryPolicy / Effects of a Restrictive Monetary Policy
Monetary Policy: Evaluation and IssuesRecent U.S. Monetary Policy / Problems and ComplicationsConsiderThis: Up, Up, and Away 689
The "Big Picture"Last Word: The "Big Picture" 690
Chapter 34
Financial Economics 697
Financial Investment 698Present Value 698
Compound Interest / The PresentValue Model /Applications
Some Popular Investments 701Stocks / Bonds / Mutual Funds / Calculating InvestmentReturns / Asset Prices and Rates of Return
673
675
680
684
688
692
Arbitrage 703Risk 704
Diversification / Comparing Risky Investments /Relationship of Risk and Average Expected Rates of Return /The Risk-Free Rate of Return
The Security Market Line 708Security Market Line: ApplicationsConsiderThis: Ponzi Schemes 7/0Last Word: Index Funds versus Actively Managed Funds 712
PART TEN
Extensions and issyes 776
Chapter 35
Extending the Analysis ofAggregate Supply 717
From Short Run to Long Run 718Short-Run Aggregate Supply / Long-Run AggregateSupply / Long-Run Equilibrium in the AD-AS Model
Applying the Extended AD-AS Model 720Demand-Pull Inflation in the Extended AD-AS Model /Cost-Push Inflation in the Extended AD-AS Model /Recession and the Extended AD-AS Model / EconomicGrowth with Ongoing Inflation
The Inflation-Unemployment Relationship 724The Phillips Curve / Aggregate Supply Shocks andthe Phillips Curve
The Long-Run Phillips Curve 728Short-Run Phillips Curve / Long-Run Vertical PhillipsCurve / Disinflation
Taxation and Aggregate Supply 730Taxes and Incentives to Work / Incentives to Save andInvest / The Laffer Curve / Criticisms of the LafferCurve / Rebuttal and EvaluationConsiderThis: Sherwood Forest 732Last Word: Do Tax Increases Reduce Real GDP? 733
Chapter 36
Current Issues in Macro Theoryand Policy 737
What Causes Macro Instability? 738Mainstream View / Monetarist View / Real-Business-CycleView / Coordination FailuresConsiderThis: Too Much Money? 741
Does the Economy "Self-Correct"? 742New Classical View of Self-Correction / Mainstream View ofSelf-Correction
Rules or Discretion? 745In Support of Policy Rules / In Defense of DiscretionaryStabilization Policy / Policy SuccessesConsiderThis: On the Road Again 746
Summary of Alternative Views 750Last Word: The Taylor Rule: Could a Robot ReplaceBen Bernanke? 749
xxxvi Contents
PART ELEVEN
international Economics
Chapter 37
753
International Trade 754
Some Key Trade Facts 755The Economic Basis for Trade 756
Comparative Advantage 756- Two Isolated Nations / Specializing Based on Comparative
Advantage / Terms of Trade / Gains from Trade /Trade with Increasing Costs / The Case for Free TradeConsiderThis: A CPA and a House Painter 757ConsiderThis: Misunderstanding the Gains fromTrade 762
Supply and Demand Analysis of Exports and Imports 764Supply and Demand in the United States / Supply andDemand in Canada / Equilibrium World Price, Exports, andImports
Trade Barriers and Export Subsidies 767Economic Impact of Tariffs / Economic Impact of Quotas /Net Costs of Tariffs and QuotasConsiderThis: Buy American? 767
The Case for Protection: A Critical Review 770Military Self-Sufficiency Argument / Diversification-for-Stability Argument / Infant Industry Argument /Protection-against-Dumping Argument /Increased Domestic Employment Argument /Cheap Foreign Labor Argument
Multilateral Trade Agreements and Free-Trade Zones 772General Agreement on Tariffs and Trade / World TradeOrganization / The European Union / North American FreeTrade Agreement
Trade Adjustment Assistance 774
Offshoring of Jobs 774Last Word: Petition of the Candlemakers, 1845 775
Chapter 38
The Balance off Payments, ExchangeRates, and Trade Deficits
International Financial TransactionsThe Balance of Payments
Current Account / Capital and Financial Account /Why the Balance? / Official Reserves, Payments Deficits, andPayments Surpluses
780
781
781
Flexible Exchange Rates 785Depreciation and Appreciation / Determinants of ExchangeRates / Flexible Rates and the Balance ofPayments / Disadvantages of Flexible Exchange Rates
Fixed Exchange Rates 790Use of Official Reserves / Trade Policies / ExchangeControls and Rationing / Domestic MacroeconomicAdjustments
The Current Exchange Rate System:The Managed Float 792
Recent U. S. Trade Deficits 794Causes of the Trade Deficits / Implications ofU.S.Trade DeficitsLast Word: Speculation in Currency Markets 796
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The Economics of Developing Countries 39W-1
The Rich and the Poor 39W-2Classifications / Comparisons / Growth, Decline, andIncome Gaps / The Human Realities of Poverty
Obstacles to Economic Development 39W-4Natural Resources / Human Resources / CapitalAccumulation / Technological Advance / Sociocultural andInstitutional Factors
The Vicious Circle 39W-IIThe Role of Government 39W-I2
A Positive Role / Public Sector Problems
The Role of Advanced Nations 39W-I4Expanding Trade / Admitting Temporary Workers /Discouraging Arms Sales / Foreign Aid: Public Loans andGrants / Flows of Private CapitalLast Word: Famine in Africa 39W-I6
Glossary G
Credits C-lIndex IND