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Copyright, ii
Preface, xvii
Part I. Introduction and Measurement Issues, 1
Chapter 1. Introduction, 3
What Is Macroeconomics?, 3
Gross Domestic Product, Economic Growth, and Business Cycles, 4
Macroeconomic Models, 8
Microeconomic Principles, 11
Disagreement in Macroeconomics, 12
What Do We Learn from Macroeconomic Analysis?, 13
Understanding Recent and Current Macroeconomic Events, 16
Aggregate Productivity, 16
Taxes, Government Spending, and the Government Deficit, 18
Interest Rates, 20
Business Cycles in the United States, 23
The Current Account Surplus and the Government Surplus, 25
Inflation, 27
Unemployment, 29
Chapter Summary, 32
Key Terms, 32
Questions for Review, 34
Problems, 35
Working with the Data, 36
Chapter 2. Measurement, 37
Measuring GDP: The National Income and Product Accounts, 37
The Product Approach, 39
The Expenditure Approach, 40
The Income Approach, 40
An Example with Inventory Investment, 42
An Example with International Trade, 42
Gross National Product, 43
What Does GDP Leave Out?, 43
The Components of Aggregate Expenditure, 44
Nominal and Real GDP and Price Indices, 46
Real GDP, 47
Measures of the Price Level, 49
Macroeconomics in Action: Comparing Real GDP across Countries and the Penn Effect, 53
Problems with Measuring Real GDP and the Price Level, 54
Macroeconomics in Action: The Boskin Commission and the Consumer Price Index, 56
Savings, Wealth, and Capital, 56
Labor Market Measurement, 58
Macroeconomics in Action: Measuring Unemployment and Labor Force Attachment, 59
Chapter Summary, 60
Key Terms, 61
Questions for Review, 62
Problems, 63
Working with the Data, 65
Chapter 3. Business Cycle Measurement, 67
Regularities in GDP Fluctuations, 67
Macroeconomics in Action: The Pitfalls of Macroeconomic Forecasting, 70
Comovement, 71
The Components of GDP, 76
Nominal Variables, 79
Macroeconomics in Action: The Correlation Between the Price Level and Aggregate Output Across Countries and Over Time, 83
Labor Market Variables, 84
Seasonal Adjustment, 86
Comovement Summary, 88
Chapter Summary, 88
Key Terms, 89
Questions for Review, 90
Problems, 90
Working with the Data, 93
Part II. A One-Period Model of the Macroeconomy, 97
Chapter 4. Consumer and Firm Behavior: The Work-Leisure Decision and Profit Maximization, 99
The Representative Consumer, 100
The Representative Consumer’s Preferences, 100
The Representative Consumer’s Budget Constraint, 105
Consumer Optimization, 109
Macroeconomics in Action: Labor Supply and Taxes in the G-7 Countries, 119
The Representative Firm, 121
The Effect of a Change in Total Factor Productivity on the Production Function, 125
Macroeconomics in Action: Henry Ford and Total Factor Productivity, 128
Theory Confronts the Data: Total Factor Productivity and the U.S. Aggregate Production Function, 129
The Profit Maximization Problem of the Representative Firm, 130
Chapter Summary, 133
Key Terms, 134
Questions for Review, 135
Problems, 136
Working with the Data, 138
Chapter 5. A Closed-Economy One-Period Macroeconomic Model, 139
Government, 139
Competitive Equilibrium, 140
Optimality, 147
Sources of Social Inefficiencies, 149
Theory Confronts the Data: How Do Markets in Pollution Rights Work?, 152
How to Use the Model, 153
Working with the Model: The Effects of a Change in Government Purchases, 155
Theory Confronts the Data: Government Spending in World War II, 157
Working with the Model: A Change in Total Factor Productivity, 158
Interpretation of the Model’s Predictions, 162
Theory Confronts the Data: Total Factor Productivity, Real GDP, and Energy Prices, 163
A Distorting Tax on Wage Income, Tax Rate Changes, and the Laffer Curve, 165
A Simplified One-Period Model with Proportional Income Taxation, 167
Theory Confronts the Data: Is the U.S. Economy on the Wrong Side of the Laffer Curve?, 173
Chapter Summary, 176
Key Terms, 176
Questions for Review, 177
Problems, 178
Working with the Data, 179
Part III. Economic Growth, 181
Chapter 6. Economic Growth: Malthus and Solow, 183
Economic Growth Facts, 184
The Malthusian Model of Economic Growth, 189
Analysis of the Steady State in the Malthusian Model, 193
How Useful Is the Malthusian Model of Economic Growth?, 198
The Solow Model: Exogenous Growth, 200
Consumers, 200
The Representative Firm, 201
Competitive Equilibrium, 201
Analysis of the Steady State, 205
Theory Confronts the Data: The Solow Growth Model, Investment Rates, and Population Growth, 212
Growth Accounting, 214
Solow Residuals, the Productivity Slowdown, and the Productivity Recovery, 216
A Growth Accounting Exercise, 218
Macroeconomics in Action: East Asian Miracles and Total Factor Productivity Growth, 220
Chapter Summary, 222
Key Terms, 224
Questions for Review, 224
Problems, 225
Working with the Data, 227
Chapter 7. Income Disparity Among Countries and Endogenous Growth, 229
Convergence, 230
Theory Confronts the Data: Is Income Per Worker Converging in the World?, 234
Endogenous Growth: A Model of Human Capital Accumulation, 236
The Representative Consumer, 237
The Representative Firm, 238
Competitive Equilibrium, 238
Economic Policy and Growth, 241
Convergence in the Endogenous Growth Model, 243
Macroeconomics in Action: Education and Growth, 245
Chapter Summary, 246
Key Terms, 247
Questions for Review, 247
Problems, 247
Working with the Data, 248
Part IV. Savings, Investment, and Government Deficits, 251
Chapter 8. A Two-Period Model: The Consumption–Savings Decision and Credit Markets, 253
A Two-Period Model of the Economy, 255
Consumers, 255
Theory Confronts the Data: Consumption Smoothing and the Stock Market, 270
Government, 279
Competitive Equilibrium, 280
The Ricardian Equivalence Theorem, 281
Ricardian Equivalence: A Numerical Example, 283
Ricardian Equivalence: A Graph, 284
Ricardian Equivalence and Credit Market Equilibrium, 285
Ricardian Equivalence and the Burden of the Government Debt, 286
What Happens When Ricardian Equivalence Does Not Hold? Social Security and Credit Market Imperfections, 288
Macroeconomics in Action: Transitions from Pay-As-You-Go to Fully Funded Social Security, 294
Theory Confronts the Data: George H. W. Bush and the Withholding Reduction, 298
Macroeconomics in Action: The Economic Growth and Tax Relief Reconciliation Act and National Saving, 299
Chapter Summary, 302
Key Terms, 304
Questions for Review, 305
Problems, 306
Working with the Data, 309
Chapter 9. A Real Intertemporal Model with Investment, 311
The Representative Consumer, 312
Current Labor Supply, 314
The Current Demand for Consumption Goods, 316
The Representative Firm, 318
Profits and Current Labor Demand, 319
The Representative Firm’s Investment Decision, 321
Theory Confronts the Data: Housing Booms and Busts, 326
Government, 329
Competitive Equilibrium, 330
The Current Labor Market and the Output Supply Curve, 330
The Current Goods Market and the Output Demand Curve, 335
The Complete Real Intertemporal Model, 339
Government Purchases Increase Temporarily: The Equilibrium Effects of an Increase in G, 341
Government Purchases Increase Permanently: The Equilibrium Effects of an Increase in Both G and G′, 343
Theory Confronts the Data: Investment Spending During World War II, 345
The Equilibrium Effects of a Decrease in the Current Capital Stock K, 346
The Equilibrium Effects of an Increase in Current Total Factor Productivity z, 349
The Equilibrium Effects of an Increase in Future Total Factor Productivity, z′, 350
Theory Confronts the Data: The “New Economy” Becomes Old Again, 352
Chapter Summary, 354
Key Terms, 356
Questions for Review, 357
Problems, 358
Working with the Data, 360
Part V. Money and Business Cycles, 361
Chapter 10. A Monetary Intertemporal Model: Money, Prices, and Monetary Policy, 363
What is Money?, 364
Measuring the Money Supply, 364
A Monetary Intertemporal Model, 365
Real and Nominal Interest Rates and the Fisher Relation, 367
Representative Consumer, 369
Representative Firm, 374
Government, 375
Competitive Equilibrium—The Complete Monetary Intertemporal Model, 376
A Level Increase in the Money Supply and Monetary Neutrality, 379
Short-Run Analysis in the Monetary Intertemporal Model: A Temporary Decrease in Total Factor Productivity, 384
Theory Confronts the Data: Changes in the Relative Price of Energy and the Price Level, 386
Shifts in Money Demand, 388
Monetary Policy: Targets and Policy Rules, 391
Money Supply Targeting, 395
Nominal Interest Rate Targeting, 396
The Taylor Rule, 397
Macroeconomics in Action: Should Monetary Policy Respond to Asset Prices?, 398
Chapter Summary, 399
Key Terms, 399
Questions for Review, 401
Problems, 401
Working with the Data, 402
Chapter 11. Market-Clearing Models of the Business Cycle, 403
The Real Business Cycle Model, 405
Real Business Cycles and the Behavior of the Money Supply, 409
Implications of Real Business Cycle Theory for Government Policy, 411
Critique of Real Business Cycle Theory, 412
The Segmented Markets Model, 413
Government Policy in the Segmented Markets Model, 418
A Critique of the Segmented Markets Model, 419
Theory Confronts the Data: Monetary Shocks, Real Shocks, and Post-1970 Recessions, 420
Macroeconomics in Action: Business Cycle Models and the Great Depression, 422
A Keynesian Coordination Failure Model, 423
The Coordination Failure Model: An Example, 426
Predictions of the Coordination Failure Model, 431
Policy Implications of the Coordination Failure Model, 432
Macroeconomics in Action: Are Business Cycles Disappearing?, 434
Critique of the Coordination Failure Model, 435
Chapter Summary, 436
Key Terms, 437
Questions for Review, 437
Problems, 438
Working with the Data, 439
Chapter 12. Keynesian Business Cycle Theory: Sticky Wages and Prices, 441
The Labor Market in the Sticky Wage Model, 442
The Sticky Wage Aggregate Supply Curve, 445
Factors Shifting the Sticky Wage Aggregate Supply Curve, 447
Aggregate Demand: The IS and LM Curves, 447
Shifts in the IS Curve, 450
Shifts in the LM Curve, 451
The Aggregate Demand Curve, 454
Shifts in the Aggregate Demand Curve, 454
The Complete Keynesian Sticky Wage Model, 458
The Nonneutrality of Money When Wages Are Sticky, 458
Theory Confronts the Data: Can Sticky Wages and Money Supply Fluctuations Explain Business Cycles?, 461
Macroeconomics in Action: Monetary Policy and the “Volcker Recession”, 463
Theory Confronts the Data: Keynesian Aggregate Demand Shocks as Causes of Business Cycles, 464
The Role of Government Policy in the Sticky Wage Model, 466
Macroeconomics in Action: George W. Bush, Alan Greenspan, and the Timing of the Effects of Fiscal and Monetary Policy, 473
A Keynesian Sticky Price Model, 475
Criticisms of Keynesian Sticky Wage and Sticky Price Models, 478
Macroeconomics in Action: How Sticky Are Nominal Prices?, 479
Chapter Summary, 480
Key Terms, 481
Questions for Review, 482
Problems, 482
Working with the Data, 484
Part VI. International Macroeconomics, 485
Chapter 13. International Trade in Goods and Assets, 487
A Two-Good Model of a Small Open Economy, 488
Competitive Equilibrium in the Small Open Economy Without Trade, 490
The Effects of Trade in the Small Open Economy, 492
A Change in the Terms of Trade: Effects on Production, Consumption, and Welfare, 496
Macroeconomics in Action: How Important Are Shocks to the Terms of Trade for Business Cycles?, 500
A Two-Period Small Open-Economy Model: The Current Account, 500
Theory Confronts the Data: Is a Current Account Deficit a Bad Thing?, 503
Theory Confronts the Data: The Twin Deficits, 505
Production, Investment, and the Current Account, 507
The Effects of an Increase in the World Real Interest Rate, 509
Temporary and Permanent Increases in Government Expenditure and the Effects on the Current Account, 510
The Effects of Increases in Current and Future Total Factor Productivity, 512
Current Account Deficits, Consumption, and Investment, 513
Chapter Summary, 515
Key Terms, 517
Questions for Review, 517
Problems, 518
Working with the Data, 519
Chapter 14. Money in the Open Economy, 521
The Nominal Exchange Rate, The Real Exchange Rate, and Purchasing Power Parity, 522
Theory Confronts the Data: The Big Mac Index and the PPP Relationship for the United States and Canada, 524
Flexible and Fixed Exchange Rates, 526
A Monetary Small Open-Economy Model with a Flexible Exchange Rate, 528
The Neutrality of Money with a Flexible Exchange Rate, 530
A Nominal Shock to the Domestic Economy from Abroad: p* Increases, 532
A Real Shock to the Domestic Economy from Abroad, 533
Macroeconomics in Action: The Asian Crisis, 534
A Monetary Small Open Economy with a Fixed Exchange Rate, 536
A Nominal Foreign Shock Under a Fixed Exchange Rate, 539
A Real Foreign Shock Under a Fixed Exchange Rate, 540
Exchange Rate Devaluation, 540
Flexible versus Fixed Exchange Rates, 543
Capital Controls, 545
The Capital Account and the Balance of Payments, 545
The Effects of Capital Controls, 546
Macroeconomics in Action: Do Capital Controls Work in Practice?, 550
Chapter Summary, 551
Key Terms, 551
Questions for Review, 553
Problems, 553
Working with the Data, 555
Part VII. Topics in Macroeconomics, 557
Chapter 15. Money, Inflation, and Banking, 559
Alternative Forms of Money, 560
Macroeconomics in Action: Commodity Money and Commodity-Backed Paper Money: Yap Stones and Playing Cards, 562
Money and the Absence of Double Coincidence of Wants: The Role of Commodity Money and Fiat Money, 563
Long-Run Inflation in the Monetary Intertemporal Model, 566
Optimal Monetary Policy: The Friedman Rule, 572
Macroeconomics in Action: Should the Fed Reduce the Inflation Rate to Zero or Less?, 575
Financial Intermediation and Banking, 576
Properties of Assets, 576
Financial Intermediation, 577
The Diamond–Dybvig Banking Model, 579
Macroeconomics in Action: Bank Failures and Banking Panics in the United States and Canada, 587
Chapter Summary, 588
Key Terms, 589
Questions for Review, 590
Problems, 591
Working with the Data, 592
Chapter 16. Unemployment: Search and Efficiency Wages, 593
The Behavior of the Unemployment Rate, the Participation Rate, and the Employment/Population Ratio in the United States, 594
Macroeconomics in Action: Unemployment and Employment in the United States and Europe, 599
A Search Model of Unemployment, 601
The Welfare of Employed and Unemployed Workers, 602
The Reservation Wage, 604
The Determination of the Unemployment Rate, 604
Macroeconomics in Action: Unemployment Insurance and Incentives, 611
The Efficiency Wage Model, 613
Optimization by the Firm: The Choice of Employment and the Efficiency Wage, 615
Labor Market Equilibrium in the Efficiency Wage Model, 617
The Efficiency Wage Model and Business Cycles, 618
Chapter Summary, 623
Key Terms, 624
Questions for Review, 624
Problems, 625
Working with the Data, 625
Chapter 17. Inflation, the Phillips Curve, and Central Bank Commitment, 627
The Phillips Curve, 628
The Friedman–Lucas Money Surprise Model and the Phillips Curve, 631
Understanding the Behavior of the Inflation Rate in the United States, 635
Macroeconomics in Action: Learning to Control Inflation in New Zealand: Inflation Targeting, 643
Macroeconomics in Action: Commitment to Low Inflation in Hong Kong, 646
Chapter Summary, 647
Key Terms, 648
Questions for Review, 648
Problems, 649
Working with the Data, 650
Appendix. Mathematical Appendix, 651
Chapter 4: Consumer and Firm Behavior, 651
The Representative Consumer, 651
The Representative Firm, 654
Problems, 655
Chapter 5: A Closed-Economy One-Period Macroeconomic Model, 655
Competitive Equilibrium, 655
Pareto Optimum, 656
Comparative Statics, 657
Problems, 658
Chapters 6 and 7: Economic Growth, 658
Explicit Results for the Solow Growth Model, 659
Problem, 660
Optimal Growth: Endogenous Consumption–Savings Decisions, 661
Problem, 664
Chapter 8: Two-Period Model, 664
The Consumer’s Optimization Problem, 664
Comparative Statics, 665
Problems, 667
Chapter 9: A Real Intertemporal Model with Investment, 667
Problem, 669
Chapter 10: A Monetary Intertemporal Model, 669
Problem, 673
Chapter 15: Money, Inflation, and Banking, 673
A Kiyotaki–Wright Monetary Search Model, 674
Problem, 676
The Diamond–Dybvig Banking Model, 676
Problems, 677
Chapter 16: Unemployment: Search and Efficiency Wages, 678
Problem, 680
Chapter 17: Inflation, the Phillips Curve, and Central Bank Commitment, 680
Problem, 681
Index, 683

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