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Abstract
For courses in Intermediate Macroeconomics.
A Unified Approach to Economic Theory
Demonstrating a balanced treatment of both classical and Keynesian economics, Macroecomomics presents macroeconomic theory in a big-picture way. Comprehensive coverage makes it easy for instructors to align chapters to fit their own syllabi, and the text helps instructors prepare students to analyze real macroeconomic data used by policy makers and researchers. This text uses a unified approach based on a single economics model that provides students with a clear understanding of macroeconomics and its classical and Keynesian assumptions. The Ninth Edition features new applications, boxes, and problems throughout and reflects recent events and developments in the field in light of recent crises in the United States and Europe.
MyEconLab® not included. Students, if MyEconLab is a recommended/mandatory component of the course, please ask your instructor for the correct ISBN and course ID. MyEconLab should only be purchased when required by an instructor. Instructors, contact your Pearson representative for more information.
MyEconLab is an online homework, tutorial, and assessment product designed to personalize learning and improve results. With a wide range of interactive, engaging, and assignable activities, students are encouraged to actively learn and retain tough course concepts.
Table of Contents
| Section Title | Page | Action | Price |
|---|---|---|---|
| Cover | Cover | ||
| Title Page | 3 | ||
| Copyright Page | 4 | ||
| About the Authors | 5 | ||
| Brief Contents | 6 | ||
| Detailed Contents | 7 | ||
| Preface | 15 | ||
| Chapter 1: Introduction to Macroeconomics | 29 | ||
| 1.1 What Macroeconomics is About | 29 | ||
| Long-Run Economic Growth | 30 | ||
| Business Cycles | 32 | ||
| Unemployment | 33 | ||
| Inflation | 34 | ||
| The International Economy | 35 | ||
| Macroeconomic Policy | 36 | ||
| Aggregation | 38 | ||
| 1.2 What Macroeconomists Do | 38 | ||
| Macroeconomic Forecasting | 38 | ||
| Macroeconomic Analysis | 39 | ||
| Macroeconomic Research | 39 | ||
| Data Development | 40 | ||
| In Touch with Data and Research: Developing and Testing an Economic Theory | 41 | ||
| 1.3 Why Macroeconomists Disagree | 42 | ||
| Classicals Versus Keynesians | 43 | ||
| A Unified Approach to Macroeconomics | 45 | ||
| Chapter 2: The Measurement and Structure of the National Economy | 50 | ||
| 2.1 National Income Accounting: The Measurement of Production, Income, and Expenditure | 50 | ||
| In Touch with Data and Research: The National Income and Product Accounts in Malaysia | 52 | ||
| Why the Three Approaches are Equivalent | 53 | ||
| 2.2 Gross Domestic Product | 54 | ||
| The Product Approach to Measuring GDP | 54 | ||
| In Touch with Data and Research: Natural Resources, the Environment, and the National Income Accounts | 57 | ||
| The Expenditure Approach to Measuring GDP | 58 | ||
| The Income Approach to Measuring GDP | 61 | ||
| 2.3 Saving and Wealth | 64 | ||
| Measures of Aggregate Saving | 65 | ||
| The Uses of Private Saving | 67 | ||
| Relating Saving and Wealth | 69 | ||
| 2.4 Real GDP, Price Indexes, and Inflation | 71 | ||
| Real GDP | 71 | ||
| Price Indexes | 73 | ||
| In Touch with Data and Research: The Computer Revolution and Chain-Weighted GDP | 74 | ||
| In Touch with Data and Research: CPI Inflation Versus Core Inflation | 76 | ||
| 2.5 Interest Rates | 80 | ||
| Chapter 3: Productivity, Output, and Employment | 89 | ||
| 3.1 How Much Does the Economy Produce? the Production Function | 90 | ||
| Application: The Production Function and Changes of Productivity in the European Union | 91 | ||
| The Shape of the Production Function | 93 | ||
| The Marginal Product of Capital | 94 | ||
| The Marginal Product of Labor | 95 | ||
| Supply Shocks | 98 | ||
| 3.2 The Demand for Labor | 99 | ||
| The Marginal Product of Labor and Labor Demand: An Example | 100 | ||
| A Change in the Wage | 102 | ||
| The Marginal Product of Labor and the Labor Demand Curve | 103 | ||
| Factors That Shift the Labor Demand Curve | 104 | ||
| Aggregate Labor Demand | 106 | ||
| 3.3 The Supply of Labor | 106 | ||
| The Income–Leisure Trade-Off | 107 | ||
| Real Wages and Labor Supply | 108 | ||
| The Labor Supply Curve | 110 | ||
| Aggregate Labor Supply | 111 | ||
| 3.4 Labor Market Equilibrium | 112 | ||
| Full-Employment Output | 114 | ||
| Application: Output, Employment, and the Real Wage During Oil Price Shocks | 115 | ||
| 3.5 Unemployment | 116 | ||
| Measuring Unemployment | 116 | ||
| Changes in Employment Status | 117 | ||
| In Touch with Data and Research: Labor Market Data In Kazakhstan | 118 | ||
| How Long are People Unemployed? | 119 | ||
| Application: Unemployment Duration and the 2007–2009 Recession | 120 | ||
| Why There Always are Unemployed People | 122 | ||
| In Touch with Data and Research: Alternative Measures of the Unemployment Rate | 123 | ||
| 3.6 Relating Output and Unemployment: Okun’s law | 125 | ||
| Appendix 3.A: The Growth Rate Form of Okun’s Law | 135 | ||
| Chapter 4: Consumption, Saving, and Investment | 136 | ||
| 4.1 Consumption and Saving | 137 | ||
| The Consumption and Saving Decision of an Individual | 138 | ||
| Effect of Changes in Current Income | 139 | ||
| Effect of Changes in Expected Future Income | 140 | ||
| Application: The Idiosyncrasy of Singapore Aggregate Consumption | 141 | ||
| Effect of Changes in Wealth | 144 | ||
| Effect of Changes in the Real Interest Rate | 144 | ||
| Fiscal Policy | 146 | ||
| In Touch with Data and Research: Interest Rates | 147 | ||
| Application: How Investors Respond to Tax Incentives | 151 | ||
| 4.2 Investment | 153 | ||
| The Desired Capital Stock | 154 | ||
| Changes in the Desired Capital Stock | 157 | ||
| Application: Measuring the Effects of Taxes on Investment | 160 | ||
| From the Desired Capital Stock to Investment | 161 | ||
| Investment in Inventories and Housing | 164 | ||
| In Touch with Data and Research: Investment and the Stock Market | 164 | ||
| 4.3 Goods Market Equilibrium | 166 | ||
| The Saving–Investment Diagram | 167 | ||
| Application: Macroeconomic Consequences of the Boom and Bust in Stock Prices | 171 | ||
| Appendix 4.A: A Formal Model of Consumption and Saving | 183 | ||
| Chapter 5: Saving and Investment in the Open Economy | 200 | ||
| 5.1 Balance of Payments Accounting | 201 | ||
| The Current Account | 201 | ||
| In Touch with Data and Research: The Balance of Payments Accounts in Malaysia | 203 | ||
| The Financial Account | 204 | ||
| The Relationship between the Current Account and the Financial Account | 205 | ||
| Net Foreign Assets and the Balance of Payments Accounts | 207 | ||
| Application: The United States as International Debtor | 208 | ||
| 5.2 Goods Market Equilibrium in an Open Economy | 210 | ||
| 5.3 Saving and Investment in a Small Open Economy | 212 | ||
| The Effects of Economic Shocks in a Small Open Economy | 215 | ||
| 5.4 Saving and Investment in Large Open Economies | 217 | ||
| Application: The Impact of Globalization on High-Income Economies | 219 | ||
| Application: Recent Trends in the U.S. Current Account Deficit | 221 | ||
| 5.5 Fiscal Policy and the Current Account | 223 | ||
| The Critical Factor: The Response of National Saving | 223 | ||
| The Government Budget Deficit and National Saving | 224 | ||
| Application: The Twin Deficits | 225 | ||
| Chapter 6: Long-Run Economic Growth | 235 | ||
| 6.1 The Sources of Economic Growth | 236 | ||
| Growth Accounting | 238 | ||
| Application: The Post-1973 Slowdown in Productivity Growth | 241 | ||
| 6.2 Long-Run Growth: The Solow Model | 245 | ||
| Setup of the Solow Model | 246 | ||
| The Fundamental Determinants of Long-Run Living Standards | 253 | ||
| Application: The Growth of China | 258 | ||
| 6.3 Endogenous Growth Theory | 260 | ||
| 6.4 Government Policies to Raise Long-Run Living Standards | 262 | ||
| Policies to Affect the Saving Rate | 262 | ||
| Policies to Raise the Rate of Productivity Growth | 262 | ||
| Chapter 7: The Asset Market, Money, and Prices | 269 | ||
| 7.1 What is Money? | 269 | ||
| In Touch with Data and Research: Money in a Prisoner-of-War Camp | 270 | ||
| The Functions of Money | 271 | ||
| In Touch with Data and Research: The Monetary Aggregates | 273 | ||
| In Touch with Data and Research: The Effect of Dollarization on the United States and Other Nations | 274 | ||
| 7.2 Portfolio Allocation and the Demand for Assets | 276 | ||
| Expected Return | 276 | ||
| Risk | 277 | ||
| Liquidity | 277 | ||
| Time to Maturity | 277 | ||
| Types of Assets and their Characteristics | 278 | ||
| In Touch with Data and Research: Capital Flows and Property Prices | 281 | ||
| Asset Demands | 283 | ||
| 7.3 The Demand for Money | 283 | ||
| The Price Level | 284 | ||
| Real Income | 284 | ||
| Interest Rates | 285 | ||
| The Money Demand Function | 285 | ||
| Other Factors Affecting Money Demand | 287 | ||
| Velocity and the Quantity Theory of Money | 289 | ||
| 7.4 Asset Market Equilibrium | 292 | ||
| Chapter 8: Business Cycles | 306 | ||
| 8.1 What is a Business Cycle? | 307 | ||
| 8.2 The American Business Cycle: The Historical Record | 309 | ||
| The Pre–World War I Period | 309 | ||
| The Great Depression and World War II | 309 | ||
| Post–World War II U.S. Business Cycles | 311 | ||
| The “Long Boom” | 312 | ||
| The Great Recession | 312 | ||
| Have American Business Cycles Become Less Severe? | 313 | ||
| 8.3 Business Cycle Facts | 316 | ||
| The Cyclical Behavior of Economic Variables: Direction and Timing | 316 | ||
| Production | 317 | ||
| Expenditure | 319 | ||
| Employment and Unemployment | 320 | ||
| Average Labor Productivity and the Real Wage | 324 | ||
| Money Growth and Inflation | 325 | ||
| Financial Variables | 326 | ||
| International Aspects of the Business Cycle | 327 | ||
| In Touch with Data and Research: Coincident and Leading Indexes | 328 | ||
| 8.4 Business Cycle Analysis: A Preview | 332 | ||
| In Touch with Data and Research: The Seasonal Cycle and the Business Cycle | 333 | ||
| Aggregate Demand and Aggregate Supply: A Brief Introduction | 334 | ||
| Chapter 9: The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis | 342 | ||
| 9.1 The FE Line: Equilibrium in the Labor Market | 343 | ||
| Factors That Shift the FE Line | 343 | ||
| 9.2 The IS Curve: Equilibrium in the Goods Market | 345 | ||
| Factors That Shift the IS Curve | 347 | ||
| 9.3 The LM Curve: Asset Market Equilibrium | 349 | ||
| The Interest Rate and the Price of a Nonmonetary Asset | 350 | ||
| The Equality of Money Demanded and Money Supplied | 350 | ||
| Factors That Shift the LM Curve | 353 | ||
| 9.4 General Equilibrium in the Complete IS–LM Model | 357 | ||
| Applying the IS–LM Framework: A Temporary Adverse Supply Shock | 358 | ||
| Application: The Oil Price Shock of 2008 | 360 | ||
| In Touch with Data and Research: Econometric Models and Macroeconomic Forecasts for Monetary Policy Analysis | 360 | ||
| 9.5 Price Adjustment and the Attainment of General Equilibrium | 362 | ||
| The Effects of a Monetary Expansion | 362 | ||
| Appendix 9.A: Worked-Out Numerical Exercise for Solving the IS–LM/AD–AS Model | 383 | ||
| Appendix 9.B: Algebraic Versions of the IS-LM/AD-AS Model | 386 | ||
| Chapter 10: Classical Business Cycle Analysis: Market-clearing Macroeconomics | 393 | ||
| 10.1 The Real Business Cycle Theory | 394 | ||
| Application: Calibrating the Business Cycle | 397 | ||
| 10.2 Fiscal Policy Shocks in the Classical Model | 404 | ||
| 10.3 Unemployment in the Classical Model | 408 | ||
| Jobless Recoveries | 410 | ||
| 10.4 Money in the Classical Model | 412 | ||
| Monetary Policy and the Economy | 412 | ||
| Monetary Nonneutrality and Reverse Causation | 413 | ||
| The Nonneutrality of Money: Additional Evidence | 414 | ||
| 10.5 The Misperceptions Theory and the Nonneutrality of Money | 415 | ||
| Monetary Policy and the Misperceptions Theory | 418 | ||
| Rational Expectations and the Role of Monetary Policy | 420 | ||
| In Touch with Data and Research: Are Price Forecasts Rational? | 422 | ||
| Appendix 10.A: Worked-Out Numerical Exercise for Solving the Classical AD–AS Model with Misperceptions | 431 | ||
| Appendix 10.B: An Algebraic Version of the Classical AD–AS Model with Misperceptions | 432 | ||
| Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity | 434 | ||
| 11.1 Real-Wage Rigidity | 435 | ||
| Some Reasons for Real-Wage Rigidity | 435 | ||
| The Efficiency Wage Model | 436 | ||
| Wage Determination in the Efficiency Wage Model | 437 | ||
| Employment and Unemployment in the Efficiency Wage Model | 438 | ||
| Efficiency Wages and the FE Line | 440 | ||
| In Touch with Data and Research: Efficiency Wages | 441 | ||
| 11.2 Price Stickiness | 442 | ||
| Appendix 11.A: Labor Contracts and Nominal-Wage Rigidity | 468 | ||
| Appendix 11.B: Worked-Out Numerical Exercise for Calculating the Multiplier in a Keynesian Model | 471 | ||
| Appendix 11.C: The Multiplier in the Keynesian Model | 473 | ||
| Chapter 12: Unemployment and Inflation | 475 | ||
| 12.1 Unemployment and Inflation: Is There a Trade-Off? | 475 | ||
| The Expectations-Augmented Phillips Curve | 478 | ||
| The Shifting Phillips Curve | 481 | ||
| 12.2 Macroeconomic Policy and the Phillips Curve | 486 | ||
| In Touch with Data and Research: The Lucas Critique | 487 | ||
| The Long-Run Phillips Curve | 488 | ||
| 12.3 The Problem of Unemployment | 489 | ||
| The Costs of Unemployment | 489 | ||
| The Long-Term Behavior of the Unemployment Rate | 490 | ||
| 12.4 The Problem of Inflation | 493 | ||
| The Costs of Inflation | 493 | ||
| In Touch with Data and Research: Indexed Contracts | 495 | ||
| 12.5 Fighting Inflation: The Role of Inflationary Expectations | 498 | ||
| In Touch with Data and Research: The Sacrifice Ratio | 500 | ||
| The U.S. Disinflation of the 1980s and 1990s | 502 | ||
| Chapter 13: Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy | 508 | ||
| 13.1 Exchange Rates | 509 | ||
| Nominal Exchange Rates | 509 | ||
| In Touch with Data and Research: Exchange Rates | 510 | ||
| Real Exchange Rates | 511 | ||
| Appreciation and Depreciation | 512 | ||
| Purchasing Power Parity | 513 | ||
| In Touch with Data and Research: McParity | 514 | ||
| The Real Exchange Rate and Net Exports | 516 | ||
| Application: The Value of the Hong Kong Dollar and Net Exports | 518 | ||
| 13.2 How Exchange Rates are Determined: A Supply-and-Demand Analysis | 520 | ||
| Macroeconomic Determinants of the Exchange Rate and Net Export Demand | 522 | ||
| 13.3 The IS–LM Model for an Open Economy | 524 | ||
| The Open-Economy IS Curve | 525 | ||
| Factors That Shift the Open-Economy IS Curve | 528 | ||
| The International Transmission of Business Cycles | 530 | ||
| 13.4 Macroeconomic Policy in an Open Economy with Flexible Exchange Rates | 531 | ||
| A Fiscal Expansion | 531 | ||
| A Monetary Contraction | 534 | ||
| 13.5 Fixed Exchange Rates | 536 | ||
| Fixing the Exchange Rate | 537 | ||
| Monetary Policy and the Fixed Exchange Rate | 539 | ||
| Fixed Versus Flexible Exchange Rates | 542 | ||
| Currency Unions | 543 | ||
| Application: Is Either the United States or Europe an Optimum Currency Area? | 544 | ||
| Appendix 13.A: Worked-Out Numerical Exercise for the Open-Economy IS–LM Model | 553 | ||
| Appendix 13.B: An Algebraic Version of the Open-Economy IS–LM Model | 556 | ||
| Chapter 14: Monetary Policy and the Federal Reserve System | 559 | ||
| 14.1 Principles of Money Supply Determination | 560 | ||
| Open-Market Operations | 562 | ||
| The Money Multiplier | 563 | ||
| Bank Runs | 566 | ||
| Application: The Money Multiplier During Severe Financial Crises | 567 | ||
| 14.2 Monetary Control in the United States | 572 | ||
| The Federal Reserve System | 572 | ||
| The Federal Reserve’s Balance Sheet and Open-Market Operations | 573 | ||
| Reserve Requirements | 575 | ||
| Discount Window Lending | 576 | ||
| Application: The Lender of Last Resort | 577 | ||
| Interest Rate on Reserves | 578 | ||
| 14.3 Setting Monetary Policy Targets | 578 | ||
| Targeting the Federal Funds Rate | 578 | ||
| 14.4 Making Monetary Policy in Practice | 582 | ||
| Lags in the Effects of Monetary Policy | 582 | ||
| Conducting Monetary Policy Under Uncertainty | 584 | ||
| Monetary Policy in the Great Recession | 586 | ||
| Application: Is There Really a Zero Lower Bound? | 587 | ||
| 14.5 The Conduct of Monetary Policy: Rules Versus Discretion | 592 | ||
| The Monetarist Case for Rules | 593 | ||
| Rules and Central Bank Credibility | 595 | ||
| The Taylor Rule | 596 | ||
| Other Ways to Achieve Central Bank Credibility | 599 | ||
| Chapter 15: Government Spending and Its Financing | 606 | ||
| 15.1 The Government Budget: Some Facts and Figures | 606 | ||
| Government Outlays | 606 | ||
| Taxes | 608 | ||
| Deficits and Surpluses | 612 | ||
| 15.2 Government Spending, Taxes, and the Macroeconomy | 614 | ||
| Fiscal Policy and Aggregate Demand | 614 | ||
| Government Capital Formation | 617 | ||
| Incentive Effects of Fiscal Policy | 617 | ||
| Application: Supply-Side Economics | 620 | ||
| 15.3 Government Deficits and Debt | 622 | ||
| The Growth of the Government Debt | 622 | ||
| Application: Social Security: How Can it be Fixed? | 624 | ||
| The Burden of the Government Debt on Future Generations | 626 | ||
| Budget Deficits and National Saving: Ricardian Equivalence Revisited | 627 | ||
| Departures from Ricardian Equivalence | 629 | ||
| In Touch with Data and Research: Measuring the Impact of Government Purchases on the Economy | 631 | ||
| 15.4 Deficits and Inflation | 632 | ||
| The Deficit and the Money Supply | 632 | ||
| Real Seignorage Collection and Inflation | 634 | ||
| Application: Quantitative Easing and Inflation | 638 | ||
| Appendix 15.A: The Debt–GDP Ratio | 644 | ||
| Appendix A: Some Useful Analytical Tools | 645 | ||
| A.1 Functions and Graphs | 645 | ||
| A.2 Slopes of Functions | 646 | ||
| A.3 Elasticities | 647 | ||
| A.4 Functions of Several Variables | 648 | ||
| A.5 Shifts of a Curve | 648 | ||
| A.6 Exponents | 649 | ||
| A.7 Growth Rate Formulas | 649 | ||
| Problems | 650 | ||
| Glossary | 652 | ||
| Name Index | 662 | ||
| Subject Index | 664 |