Economics - GBV · Tastes and Preferences 124/TheLawof Diminishing Marginal Utility 125 Measuring...
Transcript of Economics - GBV · Tastes and Preferences 124/TheLawof Diminishing Marginal Utility 125 Measuring...
Economics:Eighth Edition
William A. McEachernUniversity of Connecticut
SOUTH-WESTERNCENGAGE Learning-
Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States
Part 1 Introduction to Economics ^1 The Art and Science of Economic Analysis
2 Economic Tools and Economic Systems
3 Economic Decision Makers
4 Demand, Supply, and Markets
Part 2 Introduction to the Market System5 Elasticity of Demand and Supply
6 Consumer Choice and Demand
7 Production and Cost in the Firm
Part 3 Market Structure and Pricing8 Perfect Competition
9 Monopoly
10 Monopolistic Competition and Oligopoly
Part 4 Resources Markets11 Resource Markets
12 Labor Markets and Labor Unions
13 Capital, Interest, and Corporate Finance
14 Transaction Costs, Imperfect Information, and Market Behavior
Part 5 Market Failure and Public Policy15 Economic Regulation and Antitrust Policy
16 Public Goods and Public Choice
17 Externalities and the Environment
18 Income Distribution and Poverty
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Chapter Number in
Macroeconomics MicroeconomicsA Contemporary A Contemporary
Introduction Introduction
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Brief Contents vii
Part 6 Fundamentals of Macroeconomics19 Introduction to Macroeconomics
20 Productivity and Growth
21 Tracking the U.S. Economy
22 Unemployment and Inflation
23 Aggregate Expenditure
24 Aggregate Expenditure and Aggregate Demand !
25 Aggregate Supply
Part 7 Fiscal and Monetary Policy26 Fiscal Policy
27 Federal Budgets and Public Policy
28 Money and the Financial System
29 Banking and the Money Supply
30 Monetary Theory and Policy
31 Macro Policy Debate: Active or Passive?
Part 8 The International Setting32 International Trade
33 International Finance
34 Developing and Transitional Economics
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cPart 1 Introduction to Economics L
Chapter 1
The Art and Science of Economic Analysis 1
The Economic Problem: Scarce Resources, UnlimitedWants 2
Resources-2/Goods and Services 3/Economic Decision Makers 4/A Simple Circular-Flow Model 4
The Art of Economic Analysis 6
Rational Self-interest 6/Choice Requires Time and Information 6/Economic Analysis is Marginal Analysis II Microeconomics andMacroeconomics 7
The Science of Economic Analysis 8
The Role of Theory 8/The Scientific Method 8/Normative VersusPositive 10/Economists Tell Stories 11/Case Study A Yen for VendingMachines 11/Predicting Average Behavior 12/Some Pitfalls of FaultyEconomic Analysis 12/ If Economists Are So Smart, Why Aren't TheyRich? 13/Case Study: College Major and Annual Earnings 14
Appendix: Understanding Graphs 20
Drawing Graphs 20/The Slopes of Straight Lines 21/The Slope, Unitsof Measurement and Marginal Analysis 21/The Slopes of CurvedLines 22/Line Shirts 24
Chapter 2Economic Tools and Economic Systems
Choice and Opportunity Cost
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Opportunity Cost 28/ Case Study: The Opportunity Cost of College 28/Opportunity Cost Is Subjective 30/Sunk Cost and Choice 31
Compare Advantage, Specialization, and Exchange 31
The Law of Comparative Advantage 32/ Absolute Advantage VersusComparative Advantage 32/ Specialization and Exchange 33/Division of Labor and Gains from Specialization 34
The Economy's Production Possibilities 34
Efficiency and the Production Possibilities Frontier 35/ Inefficient andUnattainable Production 35/The Shape of the Production Possibilities
Frontier 36/What Can Shift the Production Possibilities Frontier? 37/Case Study: Rules of the Game and Economic Development 39/What We Learn from the PPF 41
Economic Systems 41
Three Questions Every Economic System Must Answer 41 / PureCapitalism 42/ Pure Command System 43/ Mixed and TransitionalEconomies 44/ Economies Based on Custom or Religion 45
Chapter 3Economic Decision Makers 49
The Household 50
The Evolution of the Household 50/Household Maximize Utility 50/Households as Resource Supplier 51/ Households as Demanders ofGoods and Services 52
The Firm 52
The Evolution of the Firm 52/Types of Firms 53/Cooperatives 53/Not-for-Profit Organizations 56/ Case Study: User-GeneratedProducts 56/ Why Does Household Production Still Exist? 57/Case Study: The Electronic Cottage 58
The Government 59
The Role of Government 59/The Size and Growth of Government 62/Sources of Government Revenue 63/Tax Principles and TaxIncidence 63
The Rest of the World 65
International Trade 66/Exchange Rates 66/Trade Restrictions 66
Chapter 4Demand, Supply, and Markets 71
Demand 72
The Law of Demand 72/The Demand Schedule and Demand Curve 73
Shifts of the Demand Curve . 75
Changes in Consumer Income 75/ Changes in the Prices of OtherGoods 76/Changes in Consumer Expectations 76/Changes in theNumber of Composition of Consumers 77/Changes in ConsumerTastes 77
VIII
Contents IX
Shifts of the Supply Curve 79
Changes in Technology 79/ Changes in the Prices of RelevantResources 80/Changes in the Prices of Alternative Goods 80/Changes in Producer Expectations 80/ Changes in the Number ofProducers 81
Demand and Supply Create a Market 81
Markets 81/Market Equilibrium 82
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Changes in Equilibrium Price and Quantity v. _-83
Shifts of the Demand Curve 83/Shifts of the Supply Curve 84/Simultaneous Shifts of Demand and Supply Curves 85/Case Study: The Market for Professional Basketball 87
Disequilibrium 88
Price Floors 88/Price Ceilings 89/Case Study: Rent Ceilings inNew York City 90
Conclusion 91
Part 2 Introduction to the Market System
Chapter 5Elasticity of Demand and Supply 97
Price Elasticity of Demand 98
Calculating Price Elasticity of Demand 98/ Categories of Price Elasticityof Demand 100/Elasticity and Total Revenue 100/Price Elasticity andthe Linear Demand Curve 101/Constant-Elasticity DemandCurves 102
Determinants of the Price Elasticity of Demand 104
Availability of Substitutes 104/Share of the Consumer's BudgetSpent on the Good 105/Length of Adjustment Period 105/ElasticityEstimates 107/Case Study Deterring Young Smokers 108
Price Elasticity of Supply 109
Constant Elasticity Supply Curves 110/ Determinants of Supply Elasticity 111
Other Elasticity Measures 112
Income Elasticity of Demand 112/ Case Study: The Market for Foodand the "Farm Problem" 17/Cross-Price Elasticity of Demand 115
Conclusion
Chapter 6Consumer Choice and Demand
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Utility Analysis 124
Tastes and Preferences 124/TheLawof Diminishing Marginal Utility 125
Measuring Utility 126
Units of Utility 126/ Utility Maximization in a World WithoutScarcity 127/ Utility Maximization in a World of Scarcity 128/Utility-Maximizing Conditions 129/ Case Study: Water, Water,Everywhere 129/ Marginal Utility and the Law of Demand 130/Consumer Surplus 132/Market Demand and ConsumerSurplus 134/Case Study: The Marginal Value of FreeMedical Care 135
The Role of Time in Demand
Conclusion
Appendix: Indifference Curves and UtilityMaximization
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Consumer Preferences 141/The Budget Line 143/ConsumerEquilibrium at the Tangency 144/Effects of a Change in Price 145/Income and Substitution Effects 145
Chapter 7Product ion and Cost in the Firm 149
Cost and Profit 150
Explicit and Implicit Costs 150/Alternative Measures of Profit 151
Production in the Short Run 152
Fixed and Variable resources 152/The Law of Diminishing MarginalReturns 152/The Total and Marginal Product Curves 154
Costs in the Short Run 154
Total Cost and Marginal Cost in the Short Run 154/ Average Costin the Short Run 158/ The Relationship Between Marginal Cost andAverage Cost 158
Costs in the Long Run 160
Economics of Scale 160/Diseconomies of Scale 161/TheLong-Run Average Cost Curve 161/ Case Study: Scale Economiesand Diseconomies at the Movies 163/ Economies and Diseconomiesof Scale at the Firm Level 164/ Case Study: Scale Economies andDiseconomies at McDonald's 164
Conclusion 165
Appendix: A Close Look at Production and Cost 169
The Production Function and Efficiency 169/lsoquants 169/lsocostLines 171/The Choice of Input Combinations 172/The ExpansionPath 172
Contents
Part 3 Market Structure and Pricing
Chapter 8Perfect Competition
An Introduction of Perfect Competition
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Perfectly Competitive Market Structure 176/ Demand Under PerfectCompetition 177
Short-Run Profit Maximization ; 178
Total Revenue Minus Total Cost 178/ Marginal Revenue EqualsMarginal Cost 179/Economic Profit in the Short Run 181
Minimizing Short-Run Losses 181
Fixed Cost and Minimizing Losses 181/ Marginal Revenue EqualsMarginal Cost 182/Shutting Down in the Short-Run 184
The Firm and Industry Short-Run Supply Curves 184
The Short-Run Firm Supply Curve 185/ The Short-Run IndustrySupplyCurve 186/Firm Supply and Market Equilibrium 186/Case Study: Auction Markets 187
Perfect Competit ion in the Long Run 188
Zero Economic Profit in the Long Run 189/ The Long-Run Adjustmentto a Change in Demand 190
The Long-Run Industry Supply Curve 192
Constant-Cost Industries 193/Increasing-Cost Industries 193
Perfect Competit ion and Efficiency 195
Productive Efficiency: Making Stuff Right 195/ Allocative Efficiency:Making the Right Stuff 195/ What's So Perfect About PerfectCompetition? 196/Case Study: Experimental Economics 197
Conclusion
Chapter 9Monopoly
Barriers to Entry
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Demand, Average Revenue, and Marginal Revenue 208/The Gains and Loss from Selling One More Unit 209/Revenue Schedules 209/Revenue Curves 210
The Firm's Costs and Profit Maximization 212
Profit Maximization 212/ Short-Run Losses and the ShutdownDecision 214/Long-Run Profit Maximization 216
Monopoly and the Allocation of Resources 216
Price and Output Under Perfect Competition 216/ Price and OutputUnder Monopoly 216/ Allocative and Distributive Effects 217
Problems Estimating the Deadweight 216
Why the Deadweight Loss of Monopoly Might Be Lower 218/Why the Deadweight Loss Might Be Higher 218/ Case Study:The Mall Monopoly 219
Price Discrimination 220
Conditions for Price Discrimination 220/ A Model of PriceDiscrimination 221/Examples of Price Discrimination 222/PerfectPrice Discrimination: The Monopolist's Dream 222
Conclusion 224
Chapter 10Monopolistic Competition and Oligopoly^ 227
Monopolistic Competition 228
Characteristics of Monopolistic Competition 228/ Short-Run ProfitMaximization or Loss Minimization 229/ Zero Economic Profitin the Long Run 231/ Case Study: Fast Forward to CreativeDeconstruction 232/ Monopolistic Competition and PerfectCompetition Compared 233
An Introduction to Oligopoly 235
Varieties of Oligopoly 235/Economies of Scale 236/The High Cost ofEntry 236/ Crowding Out the Competition 237
Models of Oligopoly 238
Legal Restrictions 204/Economies of Scale 205/Control of EssentialResources 205/ Case Study: Is a Diamond Forever? 206
Collusion and Cartels 238/Price Leadership 240/Game Theory 241/Comparison of Oligopoly and Perfect Competition 245/Case Study: Timely Fashions Boost Profit for Zara 246
Conclusion 247
Revenue for the Monopolist 208
Contents XI
Part 4 Resource Markets
Chapter 11Resource Markets
The Once-Over
Resource Demand 252/ Resource Supply 252
The Demand and Supply of Resources
Present Value and Discounting 302
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The Market Demand for Resources 253/ Case Study: Lumber Pricesand Housing Markets 254/The Market Supply of Resources 255/Temporary and Permanent Resources Price Differences 255/Opportunity Cost and Economic Rent 257
A Closer Look at Resource Demand 260
The Firm's Demand for a Resource 260/ Marginal RevenueProduct 260/Marginal Resource Cost 262/Changes in ResourceDemand 264/The Optimal Use of More Than One Resource 265/Case Study:The McMinimum Wage 266
Conclusion 267
Chapter 12Labor Markets and Labor Unions 271
Labor Supply 272
Labor Supply and Utility Maximization 272/ Wages and IndividualLabor Supply 274/Nonwage Determinants of Labor Supply 276/Market Supply of Labor 278/Why Wages Differ 278/Case Study:Winner-Take-All Labor Markets 281
Present Value of Payment One Year Hence 302/ Present Value forPayments in Later years 303/Present Value of an Income Stream 303/Present Value of an Annuity 304/Case Study: The Million-DollarLottery? 304
Corporate Finance 305
Corporate Stock and Retained Earnings 306/Corporate Bonds 306/Securities Exchanges 307
Conclusion 307
Chapter 14Transaction Costs, Imperfect Information, and MarketBehavior 311
Rationale for the Firm and its Scope of Operation 312
The Firm Reduces Transaction Costs 312/The Boundaries of theFirm 313/Case Study:TheTrendToward Outsourcing 316/Economies of Scope 317
Market Behavior with Imperfect Information 318
Optimal Search with Imperfect Information 318/The Winner's Curse 320
Asymmetric Information in Product Markets 320
Hidden Characteristics: Adverse Selection 321/ Hidden Actions:The Principal-Agent Problem 321/ Asymmetric Information inInsurance Markets 322/Coping with Asymmetric Information 323
Unions and Collective Bargaining
Types of Unions 282/ Collective Bargaining, Mediation, andArbitration 283/The Strike 283
282 Asymmetric Information in Labor Markets
Adverse Selection in Labor Markets 324/ Signaling andScreening 324/Case Study: Reputation of a Big Mac 325
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Union Wages and Employment 283 Conclusion 326
Inclusive, or Industrial, Unions: Negotiating a Higher IndustryWage 284/Exclusive; or Craft, Unions: Reducing Labor Supply 286/Increasing Demand for Union Labor 287/ Recent Trends in UnionMembership 288/Case Study: Dock Unions Thrive 289
Conclusion 290
Chapter 13Capital, Interest, and Corporate Finance 293
The Role of Time in Production and Consumption 294
Production, Saving, and Time 294/ Consumption, Saving, andTime 295/Optimal Investment 295/Case Study: The Value of aGood Idea—Intellectual Property 298/The Market for LoanableFunds 299/ Why Interest Rates Differ 300
Part 5 Market Failure and Public Policy
Chapter 15Types of Government Regulation
Regulating a Natural Monopoly
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Unregulated Profit Maximization 331/ Setting Price Equal To MarginalCost 332/ Subsidizing the Natural Monopolist 332/ Setting Price Equalto Average Cost 333/The Regulatory Dilemma 333
Alternative Theories of Economic Regulation
Producers' Special Interest in Economic Regulation 334/Case Study: Airline Regulation and Deregulation 334
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Antitrust Law and Enforcement 336
Origins of Antitrust Policy 336/Antitrust Enforcement 337/Per Se Illegality and the Rule of Reason 337/ Mergers and PublicPolicy 338/Merger Waves 339
Chapter 16Public Goods and Public Choice 349
Public Goods 350
Private Goods, Public Goods, and In Between 350/ Optimal Provisionof Public Goods 351/Paying for Public Goods 353 V~ •• — '
Public Choice in Representative Democracy 353
Median-Voter Model 353/ Special Interest and Rational Ignorance 354/Distribution of Benefits and Costs 355/ Rent Seeking 359/ Case Study:Campaign Finance Reform 360/The Underground Economy 361
Bureaucracy and Representative Democracy 362
Ownership and Funding of Bureaus 362/ Ownership andOrganizational Behavior 362/ Bureaucratic Objectives 363/ Privateversus Public Production 364
Conclusion 365
Chapter 17Externalities and the Environment 369
Externalities and the Common-Pool Problem 370
Renewable Resources 370/ Resolving the Common-Pool Problem 371
Optimal Level of Pollution 372
External Costs with Fixed Technology 372/ External Costs with VariableTechnology 374/Case Study: The Lungs of the Planet 376/The Coase Theorem 377/ Markets for Pollution Rights 378/Pollution Rights and Public Choice 380
Environmental Protection
Air Pollution 381/Water Pollution 384/Hazardous Waste and theSuperfund 384/Solid Waste: "Paper or Plastic?" 385
Positive Externalities
Conclusion
Chapter 18Income Distribution and Poverty
The Distribution of Household Income
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Income Distribution byQuintiles 394/The LorenzCurve 394/WhyIncomes Differ 396/A College Education Pays More 397/CaseStudy: Marital Sorting and Income Inequality 398/ Problems withDistribution Benchmarks 399
Redistribution Programs 397
Official Poverty Level 399/Programs to Help the Poor 401
Who Are the Poor? 404
Poverty and Age 404/Poverty and Public Choice 404/TheFeminization of Poverty 405/ Poverty and Discrimination 408/Affirmative Action 408
Unintended Consequences of Income Assistance 409
Welfare Reform 410
Recent Reforms 410
Conclusion 413
Part 6 Fundamentals of Macroeconomics 417
Chapter 19Introduction to Macroeconomics
The National Economy
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What's Special about the National Economy? 418/The Human Bodyand the U.S. Economy 419/ Knowledge and Performance 419
Economic Fluctuations and Growth 420
U.S. Economic Fluctuations 420/ Leading Economic Indicators 423
Aggregate Demand and Aggregate Supply 425
Aggregate Output and the Price Level 425/ Aggregate DemandCurve 425/Aggregate Supply Curve 427/Equilibrium 427
Brief History of the U.S. Economy 428
The Great Depression and Before 428/ The Age of Keynes: After theGreat Depression to the Early 1970s 429/Stagflation: 1973-1980 430/Normal Times Since 1980 431/Case Study: Nearly Eight Decades ofReal GDP and Price Levels 432
Conclusion
Chapter 20Productivity and Growth
Theory of Productivity and Growth
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Growth and the Production Possibilities Frontier 438/ What isProductivity? 440/ Labor Productivity 440/ Per-Worker ProductionFunction 441/Technological Change 442/Rules of the Game 443
Productivity and Growth in Practice
Education and Economic Development 444/ U.S. LaborProductivity 445/Slowdown and Rebound in Productivity
444
Contents XIII
Growth 446/ Case Study: Computers, the Internet, andProductivity Growth 447/Output per Capita 449/InternationalComparisons 450
Other Issues of Technology and Growth 451
Does Technological Change Lead to Unemployment? 451/ Researchand Development 452/ Industrial Policy 454/ Do EconomiesConverge? 455/Case Study: Income and Happiness 456
Conclusion 457
Chapter 21Tracking the U.S. Economy 461
The Product of a Nation 462
National Income Accounts 462/GDP Based on the ExpenditureApproach 463/ GDP Based on Income Approach 464
Circular Flow of Income and Expenditure 465
Income Half of the Circular Flow 465/ Expenditure Half of the CircularFlow 467/ Leakages Equal Injections 468
Inflation 497
Limitations of National Income Accounting 468
Some Production is not Included in GDP 468/ Leisure, Quality, andVariety 469/ What's Gross about Gross Domestic Product? 469/ GDPDoes Not Reflect All Costs 470/GDP and Economic Welfare 470
Accounting for Price Changes 470
Price Indexes 471/ Problems with the CPI 472/ Case Study: PriceCheck on Aisle 2 472/The GDP Price Index 474/ Moving from FixedWeights to Chain Weights 475
Conclusion
Appendix: National Income Accounts
National Income
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Personal and Disposable Income 481/Summary of National IncomeAccounts 482
Summary Income Statement of the Economy 482
Chapter 22Unemployment and Inflation 485
Unemployment 486
Measuring Unemployment 486/ Labor Force ParticipationRate 487/Unemployment over Time 488/Unemployment inVarious Groups 489/ Unemployment Varies Across Occupations andRegions 492/Sources of Unemployment 492/The Meaning of FullEmployment 494/ Unemployment Compensation 495/ InternationalComparisons of Unemployment 495/ Problems with OfficialUnemployment Figures 496
Case Study: Hyperinflation in Brazil 497/Two Sources of Inflation 498/A Historical Look at Inflation and the Price Level 499/ AnticipatedVersus Unanticipated Inflation 501/The Transaction Costs of VariableInflation 501/Inflation Obscures Relative Price Changes 501/Inflation Across Metropolitan Areas 502/ International Comparisonsof Inflation 502/ Inflation and Interest Rates 503/ Why is InflationUnpopular? 505
Conclusion
Chapter 23Aggregate Expenditure
Consumption
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A First Look at Consumption and Income 510/The ConsumptionFunction 511/ Marginal Propensities to Consume and to Save 511/MPC, MPS, and the Slope of the Consumption and SavingFunctions 512/ Nonincome Determinants of Consumption 513/Case Study: The Life-Cycle Hypothesis 517
Investment 518
The Demand for Investment 518/From Micro to Macro 519/Investment and Disposable Income 520/Nonincome Determinantsof Investment 520/ Case Study: Investment Varies Much More thanConsumption 522
Government 523
Government Purchase Function 523/Net Taxes 523
Net Exports 524
Net Exports and Income 524/ Nonincome Determinants of NetExports 524
Composition of Aggregate Expenditure 525
Conclusion 526
Appendix: Variable Net Exports 529
Net Exports and Income 529/ Shifts of Net Exports 530
Chapter 24Aggregate Expenditure and Aggregate Demand 531
Aggregate Expenditure and Income 532
The Components of Aggregate Expenditure 532/ Real GDPDemanded 533/What if Spending Exceeds Read GPD? 534/What ifReal GPD Exceeds Spending? 534
The Simple Spending Multiplier 534
An Increase in Spending 535/ Using the Simple Spending Multiplier 537/Case Study: The Ripple Effect on the Economy of 9/11 538
XIV Contents
The Aggregate Demand Curve
A Higher Price Level 539/A Lower Price Level 541/The Multiplierand Shifts in Aggregate Demand 541/ Case Study: Falling WealthTriggered Japan's Recession 543
539 Including Aggregate Supply 575
Discretionary Fiscal Policy to Close a Contractionary Gap 575/Discretionary Fiscal Policy to Close an Expansionary Gap 577/TheMultiplier and the Time Horizon 578
Conclusion 544
Appendix A: Variable Net Exports Revisited 546
Net Exports and the Spending Multiplier 547/ A Change in.Autonomous Spending 547/ Appendix A Question 547 ^
Appendix B: The Algebra of Income and Expenditure 549
The Aggregate Expenditure Line 549/ A More General Form ofIncome and Expenditure 549/ Varying Net Exports 550/ Appendix BQuestion 550
Chapter 25Aggregate Supply
Aggregate Supply in the Short Run
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Labor and Aggregate Supply 552/ Potential Output and the NaturalRate of Unemployment 553/ Actual Price Level is Higher thanExpected 553/ Why Costs Rise When Output Exceeds Potential 554/An Actual Price Level Lower Than Expected 555/The Short-RunAggregate Supply Curve 555
From the Short Run to the Long Run 556
Closing an Expansionary Gap 556/Closing a Contractionary Gap 558/Tracing Potential Output 560/Wage Flexibility and Employment 560/Case Study: U.S. Output Gaps and Wage Flexibility 562
Shifts of the Aggregate Supply Curve 564
Aggregate Supply Increases 564/ Decreases in Aggregate Supply 566/Case Study: Why is Unemployment So High in Europe? 567
Conclusion 568
The Evolution of Fiscal Policy 578
Prior to the Great Depression 578/The Great Depression andWorld War II 579/ Automatic Stabilizers 580/ From the GoldenAge to Stagflation 581/ Fiscal Policy and the Natural Rate ofUnemployment 581/ Case Study: Fiscal Policy and PresidentialElections 582/ Lags in Fiscal Policy 583/ Discretionary Fiscal Policyand Permanent Income 583/The Feedback Effects of Fiscal Policy onAggregate Supply 584/ Case Study:The Supply-Side Experiment 584/Since 1990: From Deficits to Surpluses Back to Deficits 585
Conclusion 586
Appendix: The Algebra of Demand-Side Equilibrium 589
Net Tax Multiplier 589/The Multiplier when both G and NTChange 589/The Multiplier with a Proportional Income Tax 590/Including Variable Net Exports 590/Appendix Questions 591
Chapter 27Federal Budgets and Public Policy
The Federal Budget Process
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The Presidential and Congressional 595/ Problems with the FederalBudget Process 595/ Possible Budget Reforms 596
The Fiscal Impact of the Federal Budget 597
The Rationale for Deficits 597/ Budget Philosophies and Deficits 597/Federal Deficits Since the Birth of the Nation 598/Why Have DeficitsPersisted? 599/ Deficits, Surpluses, Crowding Out, and CrowdingIn 599/The Twin Deficits 600/ The Short-Lived Budget Surplus 600/Case Study: Reforming Social Security and Medicare 602/ TheRelative Size of the Public Sector 603
The National Debt 604
Part 7 Fiscal and Monetary Policy
Chapter 26Fiscal Policy 571
Theory of Fiscal Policy ' 572
Fiscal Policy Tools 572/Changes in Government Purchases 572/Changes in Net Taxes 573
Measuring the National Debt 605/ International Perspective on PublicDebt 605/ Interest on the National Debt 606/ Who Bears the Burdenof the Debt? 607/Crowding Out and Capital Formation 608/Case Study: An Intergenerational View of Deficits and Debt 609
Conclusion
Chapter 28Money and the Financial System
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Contents XV
The Evolution of Money 616
Barter and the Double Coincidence of Wants 616/The EarliestMoney and its Functions 616/Properties of the Ideal Money 618/Coins 618/Case Study: The Hassle of Small Changes 619/Moneyand Banking 620/ Representative Money and Fiat Money 621/The Value of Money 622/When Money Performs Poorly 622/CaseStudy: When Monetary Systems Break Down 623
Financial Institutions in the United States 624
Commercial Banks and Thrifts 624/Birth of the Fed 625/,Powers ofthe Federal Reserve System 625/ Banking Troubles During the GreatDepression 626/ Banks Lost Deposits When Inflation Increases 628/Banking Deregulation 629/ Saving Banks on the Ropes 629/Commercial Banks Were Failing Too 630/ U.S. Banking StructureToday 631/Top Banks in America and the World 632
Conclusion
Chapter 29Banking and the Money Supply
Money Aggregates
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Narrow Definition of Money: Ml 638/Case Study: Faking It 639/Broader Definition of Money: M2 640/ Credit Cards and Debit Cards:What's the Difference? 640
How Banks Work 642
Banks Are Financial Intermediaries 642/Starting a Bank 643/Reserve Accounts 644/Liquidity Versus Profitability 644
How Banks Create Money 645
Creating Money Through Excess Reserves 645/A Summary of theRounds 647/ Reserve Requirements and Money Expansion 648/Limitations on Money Expansion 649/ Multiple Contraction of theMoney Supply 649/ Case Study: Banking on the Net '650
The Fed's Tools of Monetary Control 651
Open-Market Operations and the Federal Funds Rate 651/TheDiscount Rate 652/ Reserve Requirements 652/ Coping with FinancialCrises 652/The Fed is a Money Machine 653
Money and Aggregate Demand in the Short Run 663
Interest Rates and Investment 663/ Adding the Short-RunAggregate Supply Curve 665/ Case Study:Targeting the FederalFunds Rate 666
Money and Aggregate Demand in the Long Run 668
The Equation Exchange 668/ The Quantity Theory of MoneyWhat Determines the Velocity of Money? 670/ How Stable isVelocity? 671/Case Study: The Money Supply and InflationAround the World 673
Targets for Monetary Policy 674
Contrasting Policies 674/Targets Before 1982 676/Targets After1982 676/International Considerations 676
Conclusion 677
Chapter 31Macro Policy Debate: Active or Passive? 681
Active Policy Versus Passive Policy 682
Closing a Concretionary Gap 682/Closing an Expansionary Gap 684/Problems with Active Policy 685/The Problem of Lags 685/A Review of Policy Perspectives 687/ Case Study: Active VersusPassive Presidential Candidates 687
The Role of Expectations 689
Monetary Policy and Inflation Expectations 689/ AnticipatingMonetary Policy 690/Policy Credibility 692/ Case Study: CentralBank Independence and Price Stability 693
Policy Rules Versus Discretion 694
Limitations on Discretion 694/ Rules and Rational Expectations 695
The Phillips Curve 696
The Phillips Framework 696/The Short-Run Phillips Curve 697/TheLong-Run Phillips Curve 699/The Natural Rate Hypothesis 700/Evidence of the Phillips Curve 700
Conclusion 654Conclusion 701
Chapter 30Monetary Theory and Policy
The Demand and Supply of Money
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The Demand for Money 660/Money Demand and Interest Rates 661/The Supply of Money and the Equilibrium Interest Rate 662
Part 8 The International Setting
Chapter 32International Trade
The Gains from Trade
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A Profile of Exports and Imports 706/ Production PossibilitiesWithout Trade 707/Consumption Possibilities Based onComparative Advantage 709/ Reasons for InternationalSpecialization 711
Trade Restrictions and Welfare Loss 712
Consumer Surplus and Producer Surplus from Market Exchange 713/Tariffs 714/Import Quotas 715/Quotas in Practice 717/Tariffs andQuotas Compared 718/Other Trade Restrictions 718/Freer Tradeby Multilateral Agreement 718/The World Trade Organization 718/Case Study: Doha Round and Round 000/Common Markets 719__
Arguments for Trade Restrictions 721
National Defense Argument 721/Infant Industry Argument 722/Antidumping Argument 722/Jobs and Income Argument 722/Declining Industries Argument 723/ Problem with TradeProtection 724/Case Study: Steel Tariffs 724
Conclusion 725
Chapter 33
International Finance 729
Balance of Payments 730
International Economic Transactions 730/The Merchandise TradeBalance 730/ Balance on Goods and Services 732/ Net InvestmentIncome 732/Unilateral Transfers 733/The Financial Account 733/Deficits and Surpluses 734
Foreign Exchange Rates and Markets 735
Foreign Exchange 735/The Demand for Foreign Exchange 736/The Supply of Foreign Exchange 737/ Determining the ExchangeRate 737/Arbitrageurs and Speculators 738/Purchasing PowersParity 739/ Case Study:The Big Mac Index 740/ Flexible ExchangeRates 741/Fixed Exchange Rates 741
Development of the International Monetary System 742
The Bretton Woods Agreement 742/The Demise of the BrettonWoods System 743/The Current System: Managed Float 743/Case Study: What about China? 744
Chapter 34
Developing and Transitional Economies
Worlds Apart
749
750
Developing and Industrial Economies 750/ Health and Nutrition 751/High Birth Rates 753/Women in Developing Countries 755
Productivity: Key to Development 755
Low Labor Productivity 755/Technology and Education 756/Inefficient Use of Labor 756/Natural Resources 757/FinancialInstitutions 757/Capital Infrastructure 758/EntrepreneurialAbility 758/Rules of the Game 759/Case Study: The PoorestBillion 761/Income Distribution Within Countries 762
International Trade and Development 762
Trade Problems for Developing Countries 762/ Migration and theBrain Drain 763/ Import Substitution Versus Export Promotion 763/Trade Liberalization and Special Interests 764
Foreign Aid and Economic Development 765
Foreign Aid 765/ Does Foreign Aid Promote EconomicDevelopment? 765
Transitional Economies 766
Types of Economic Systems 766/ Enterprises and Soft BudgetConstraints 767/Case Study: Property Rights and Resource Use 768
Markets and Institutions 769
Institutions and Economic Development 769/The Big Bang VersusGradualism 770/ Privatization 770/ Institutional Requirements ofEfficient Markets 771
Conclusion
Glossary
Index
772
777
791
Conclusion 745