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Money, the Financial System, and the Economy, Sixth Edition

by R. Glenn Hubbard

Publisher: Prentice Hall

Copyright Year: 2008

Publishing Date: 2007/07/13

eText ISBN-10: 0-321-54864-7

eText ISBN-13: 978-0-321-54864-1

Print ISBN-10: 0-321-42670-3

Print ISBN-13: 978-0-321-42670-3

Course: Money and Banking/Monetary Theory

Pages: 768

eTextbook $86.67

(180 day subscription)

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Table of Contents | Description

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ABOUT THIS TITLE - TABLE OF CONTENTS

The Addison-Wesley Series in Economics, ii

About the Author, xxxi

Part One. Introduction, 1

Chapter 1. Introducing Money and the Financial System, 2

Getting Started, 2

The Financial System and the Economy, 3

Financial Markets, 5

Other times, other places . . . The Only Thing Constant in the Financial System Is Change, 5

Financial Institutions, 6

Consider this . . . Is the Financial System Truly Global?, 6

Economic Analysis as a Tool, 8

Developing an Economic Approach, 8

Applying an Economic Approach, 9

Review Questions, 10

Analytical Problems, 11

Data Questions, 11

Chapter 2. Money and the Payments System, 12

Meeting the Needs of Exchange with Money, 12

Government Allocation, 13

What Can Serve as Money?, 16

The Payments System, 17

Other times, other places . . . Is the Euro a Success?, 17

Commodity Money, 18

Consider this . . . What’s Money? Ask a Taxi Driver!, 18

Electronic Funds and Electronic Cash, 19

Measuring the Money Supply, 21

Measuring Monetary Aggregates, 22

Selecting Monetary Aggregates, 23

Using the news . . . Finding Up-to-Date Information on Money, 23

Moving from theory to practice . . . Plastic Promise, The Economist, 5/6/06, 26

Review Questions, 28

Analytical Problems, 28

Data Questions, 29

Appendix: Calculating Price Indexes, 30

Chapter 3. Overview of the Financial System, 31

What Is the Purpose of the Financial System?, 31

Key Services Provided by the Financial System, 33

Risk Sharing, 34

Information, 35

Financial Markets in the Financial System, 36

Matching Savers and Borrowers: Debt and Equity, 36

Providing Risk-Sharing, Liquidity, and Information Services, 37

Financial Intermediaries in the Financial System, 40

Matching Savers and Borrowers, 40

Providing Risk-Sharing, Liquidity, and Information Services, 40

Case Study Where Do Households Put Their Savings?, 41

Competition and Change in the Financial System, 42

Financial Innovation, 43

Changes in Financial Integration and Globalization, 43

Consider this . . . Financial Innovation: Home Mortgages or Rock Star Bonds?, 44

Financial Regulation, 45

Provision of Information, 45

Other times, other places . . . The Growth of International Bond and Stock Markets, 45

Maintenance of Financial Stability, 46

Advancement of Other Policy Objectives, 46

Effects of Regulation, 47

Review Questions, 49

Moving from theory to practice . . . U.S. Savings, Foreign Affairs, May-June/06, 50

Analytical Problems, 52

Data Questions, 52

Appendix: Financial Instruments, 53

Part Two. Interest Rates, 59

Chapter 4. Interest Rates and Rates of Return, 60

Comparing Debt Instruments, 60

Timing of Payments, 60

Present Value, 63

Consider this . . . Can They STRIP? Creating New Financial Instruments, 63

Using Yield to Maturity as a Yardstick, 65

Bond Yields and Prices, 70

Why Can Price and Face Value Differ?, 70

How Are Bond Yields and Prices Related?, 72

Consider this . . . Who Will Buy Those Fabulous Fifties?, 72

Using the news . . . Keeping Up with Bond Prices and Yields, 74

Finding the Total Rate of Return, 75

Real Versus Nominal Interest Rates, 76

Other times, other places . . . Principal Derailed: Inflation and Long-Term Bond Prices, 77

Moving from theory to practice . . . Javanomics, The Washington Post, 6/18/05, 80

Review Questions, 82

Analytical Problems, 82

Data Questions, 84

Chapter 5. The Theory of Portfolio Allocation, 85

Determinants of Portfolio Choice, 85

Expected Returns on Assets, 87

Risk Associated with Asset Returns, 88

Liquidity of Assets, 89

Costs of Acquiring Information, 90

Case Study How Much Risk Should You Tolerate in Your Portfolio?, 90

Advantages of Diversification, 91

Putting It All Together: Explaining Portfolio Allocation, 94

Case Study Modeling Risk Premiums in Financial Markets, 95

Other times, other places . . . Are Investors (Globally) Well Diversified?, 96

Review Questions, 97

Moving from theory to practice . . . In a Sentimental Mood, The Economist, 6/1/06, 98

Analytical Problems, 100

Data Questions, 101

Chapter 6. Determining Market Interest Rates, 102

Supply and Demand in the Bond Market and Loanable Funds, 102

The Demand Curve, 103

The Supply Curve, 104

Market Equilibrium, 105

Explaining Changes in Equilibrium Interest Rates, 107

Shifts in Bond Demand, 107

Consider this . . . Where Do Savings Come From?, 110

Shifts in Bond Supply, 113

Using the Model to Explain Changes in Interest Rates, 116

Other times, other places . . . Do Interest Rates Rise During Wartime?, 116

Back to the Bond Market’s Votes, 120

The International Capital Market and the Interest Rate, 120

Small Open Economy, 121

Large Open Economy, 123

Moving from theory to practice . . . Japan Inflation-Linked Bonds, The Asian Wall Street Journal, 3/23/05, 124

Review Questions, 127

Analytical Problems, 127

Data Questions, 129

Chapter 7. Risk Structure and Term Structure of Interest Rates, 130

Risk Structure of Interest Rates, 130

Default Risk, 130

Using the news . . . Using Bond Yields to Assess Risk, 132

Information Costs, 136

Using the Risk Structure for Forecasting, 141

Term Structure of Interest Rates, 141

Consider this . . . Will a Consumption Tax Kill Munis’ Allure?, 141

Segmented Markets Theory, 142

Other times, other places . . . Asian Flu for European Bonds?, 142

Using the news . . . How to Read the Yield Curve, 143

Expectations Theory, 144

Preferred Habitat Theory, 147

Using the Term Structure for Forecasting, 148

Consider this . . . Can the Treasury Change the Shape of the Yield Curve?, 150

Moving from theory to practice . . . Investors Re-evaluate the Predictive Power of Bonds, Financial Times, 2/9/06, 152

Review Questions, 154

Analytical Problems, 155

Data Questions, 156

Part Three. Financial Markets, 157

Chapter 8. The Foreign-Exchange Market and Exchange Rates, 158

Exchange Rates and Trade, 158

Nominal Versus Real Exchange Rates, 159

Foreign-Exchange Markets, 161

Determining Long-Run Exchange Rates, 162

Supply and Demand, 162

Economic Fundamentals and Long-Run Exchange Rate Trends, 163

Using the news . . . Reading Exchange Rates, 164

The Law of One Price and the Purchasing Power Parity Theory, 165

Does the Theory Match Reality?, 166

Determining Short-Run Exchange Rates, 167

Comparing Expected Returns on Domestic and Foreign Assets, 168

Foreign-Exchange Market Equilibrium, 170

Interest Rate Parity, 172

Exchange Rate Fluctuations, 173

Changes in Domestic Real Interest Rates, 174

Changes in Domestic Expected Inflation, 174

Case Study Should You Bank on International Investment?, 175

Changes in Foreign Interest Rates, 176

Changes in the Expected Future Exchange Rate, 177

Currency Premiums in Foreign-Exchange Markets, 179

A (Big) New Kid on the Block: The Euro, 180

Other times, other places . . . Interest and Exchange Rates in the 1980s, 180

Moving from theory to practice . . . McCurrencies, The Economist, 5/27/06, 182

Review Questions, 184

Analytical Problems, 184

Data Questions, 185

Chapter 9. Derivative Securities and Derivative Markets, 186

Forward Transactions and Derivatives, 186

Futures Pricing, 188

Using the news . . . Reading Financial Futures Listings, 189

Using Futures to Manage Risk, 190

Options Pricing, 194

Using the news . . . Reading Options Listings, 194

Using Options to Manage Risk, 195

Other times, other places . . . Futures Trading, Index Arbitrage, and the Stock Market Crash of 1987, 196

Interest Rate Swaps, 197

Currency Swaps, 198

Credit Derivatives, 199

Benefits of Derivative Markets for the Financial System, 199

Standardization and Liquidity, 199

Case Study Citron Pressed—The Orange County Fiasco, 200

Anonymous Trading and Information, 201

Case Study Barings Lost—The Queen’s Banker Goes Bust, 201

Review Questions, 203

Moving from theory to practice . . . Home with Hedges, The Economist, 4/22/06, 204

Analytical Problems, 206

Data Questions, 207

Chapter 10. Information and Financial Market Efficiency, 208

Rational Expectations, 208

The Efficient Markets Hypothesis, 210

Determining an Asset’s Expected Price, 211

Price Fluctuations, 212

Investment Strategies, 214

Consider this . . . How Should 9/11 Affect U.S. Stock Prices?, 214

Actual Efficiency in Financial Markets, 216

Other times, other places . . . Charting the Civil War with the Gold Market, 216

Pricing Anomalies, 217

Mean Reversion, 218

Excessive Volatility, 218

Market Efficiency and the Crash of 1987, 219

Case Study What Goes Up . . ., 220

Value Investing Versus Efficient Markets, 222

Costs of Inefficiency in Financial Markets, 223

Costs of Excessive Price Fluctuations, 223

Information Costs, 224

Review Questions, 225

Analytical Problems, 225

Moving from theory to practice . . . In Search of a Golden Egg, The Economist, 1/1/05, 226

Data Questions, 228

Chapter 11. Reducing Transactions Costs and Information Costs, 229

Obstacles to Matching Savers and Borrowers, 229

Transactions Costs, 230

Asymmetric Information and Information Costs, 230

Adverse Selection, 231

“Lemons Problems” in Financial Markets, 232

Reducing Information Costs, 232

Moral Hazard, 234

Moral Hazard in Equity Financing, 234

Case Study Recent Regulatory Changes to Improve Information Disclosure, 235

Consider this . . . Are Stock Market Signals Affected by Adverse Selection?, 236

Moral Hazard in Debt Financing, 237

Consider this . . . Can Falling Prices Raise Information Costs?, 238

Information Costs and Financial Intermediaries, 239

Financial Intermediaries and Adverse Selection, 239

Financial Intermediaries and Moral Hazard, 240

Other times, other places . . . Investor Protection and Economic Growth, 242

Review Questions, 243

Analytical Problems, 243

Moving from theory to practice . . . The Trial of Sarbanes-Oxley, The Economist, 4/22/06, 244

Data Questions, 246

Part Four. Financial Institutions, 247

Chapter 12. What Financial Institutions Do, 248

Securities Market Institutions, 249

Information: Investment Banking, 249

Liquidity and Risk Sharing: Secondary Markets, 251

Using the news . . . A Tombstone for Something New?, 252

Investment Institutions, 254

Mutual Funds, 254

Finance Companies, 256

Contractual Saving: Insurance Companies, 257

Principles of Insurance Management, 258

Consider this . . . Can Investors Keep “Captives” at Bay?, 259

Life Insurance Companies, 260

Property and Casualty Insurance Companies, 261

Regulation of Insurance Companies and Recent Trends, 262

Contractual Saving: Pension Funds, 263

Ownership of Pension Funds Assets, 264

Funding of Pension Plans, 264

Regulation of Private Pension Plans, 265

Public Pension Plans, 265

Recent Trends, 265

Depository Institutions, 266

Commercial Banks, 266

Savings Institutions, 267

Credit Unions, 267

Government Financial Institutions, 268

Direct Role: Federal Credit Agencies, 268

Indirect Role: Loan Guarantees, 269

Recent Trends, 270

Case Study What Kind of Financial Institution Is a Hedge Fund?, 270

Financial Institutions: Blurring the Lines, 271

Case Study What Kind of Financial Institution Is a Venture Capital Fund?, 271

Moving from theory to practice . . . The Future of the Trading Floor, Financial Times, 3/7/06, 274

Review Questions, 276

Analytical Problems, 276

Data Questions, 277

Chapter 13. The Business of Banking, 278

How Banks Earn Profits, 279

Bank Liabilities, 279

Bank Assets, 281

Bank Net Worth, 282

Bank Failure, 283

Determining Bank Profits, 283

Consider this . . . How Do Banks Account for Loan Losses?, 284

The Relationship Between Banks and Savers, 285

Managing Moral Hazard, 286

Managing Liquidity Risk, 287

The Relationship Between Banks and Borrowers, 290

Managing Credit Risk, 290

Consider this . . . When Is Credit-Risk Analysis “Discrimination”?, 291

Managing Interest Rate Risk, 293

Expanding the Boundaries of Banking, 296

Opportunities and Financial Innovation, 296

Off-Balance-Sheet Activities, 297

Consider this . . . Grading Bank Derivatives: Extra Credit?, 300

Moving from theory to practice . . . Microlending in India, The Wall Street Journal, 5/15/06, 302

Review Questions, 304

Analytical Problems, 304

Data Questions, 305

Appendix: Measuring the Duration of Bank Assets and Liabilities, 306

Chapter 14. The Banking Industry, 308

Origins of Today’s U.S. Banking Industry, 309

Who Regulates Banks, 309

Chartering and Examination, 310

Other times, other places . . . Lessons from the Free Banking Period, 310

Regulating Commercial Banks, 311

Regulating Savings Institutions, 311

Regulating Credit Unions, 311

Why the Banking Industry Is Regulated, 312

The Cost of a Bank Run, 313

Government Intervention in the Banking Industry, 314

Lender of Last Resort, 315

Federal Deposit Insurance, 316

Restrictions on Banking Industry Competition, 321

Consider this . . . Is Bank Consolidation Good for Business?, 322

The Banking Industry in Other Countries, 327

Japanese Banking, 328

Case Study Is Banking a Declining Industry?, 329

German Banking, 331

Integration of European Banking, 332

Chinese Banking, 333

Moving from theory to practice . . . Rethinking the Community Reinvestment Act, The Economist, 3/5/05, 334

Review Questions, 336

Analytical Problems, 337

Data Questions, 337

Chapter 15. Banking Regulation: Crisis and Response, 338

The Pattern of Regulation, 338

Lender of Last Resort, 339

The Great Depression, 339

Success in More Recent Years, 340

Consider this . . . How Does a Lender of Last Resort Protect the Payments System?, 341

Concluding Remarks, 342

Anticompetitive Bank Regulation, 342

The Credit Crunch of 1966, 344

Banks’ Response, 344

Regulatory Response, 345

Concluding Remarks, 346

The U.S. Deposit Insurance Crisis of the 1980s, 347

Beginning of the Crisis: Worsening Conditions in S&Ls, 347

Financial System Response, 348

Regulatory Response: The S&L Bailout, 349

The Widening Crisis: Commercial Banks, 351

Options for Regulatory Reform, 352

Current Issues in Regulatory Reform, 356

Concluding Remarks, 356

Lessons from Banking Regulation for Other Institutions, 357

Insurance Regulation, 357

Other times, other places . . . The Cycle of Crisis and Response: Russia and Japan, 358

Pension Fund Regulation, 359

Moving from theory to practice . . . China’s Growing Banking Problem, The Economist, 5/20/06, 360

Review Questions, 362

Analytical Problems, 363

Data Questions, 364

Chapter 16. Banking in the International Economy, 365

Organization of International Banks, 365

Overseas Organization of U.S. Banks, 366

Organization of Foreign Banks in the United States, 367

Leaders in Global Banking, 368

Managing Exchange Rate Risk, 369

Consider this . . . Why Did Closing BCCI Take So Long?, 369

Services Provided by International Banks, 370

Reducing Transactions Costs, 370

Providing Information Services, 371

The Rise of Euromarkets, 373

Euromarket Customers, 375

Loans in Euromarkets, 375

Financial Regulation in International Banking, 376

Capital Requirements, 376

Deposit Insurance, 377

Other times, other places . . . Do Sovereigns Default?, 377

Central Bank Intervention, 378

International Coordination, 378

Consider this . . . Is the Global Expansion of Deposit Insurance Healthy?, 379

Moving from theory to practice . . . New Language of Islamic Banking, Financial Times, 10/20/04, 380

Review Questions, 382

Analytical Problems, 382

Data Questions, 383

Part Five. The Money Supply Process and Monetary Policy, 385

Chapter 17. The Money Supply Process, 386

The Fed and the Monetary Base, 386

The Fed’s Liabilities, 387

The Fed’s Assets, 388

How the Fed Changes the Monetary Base, 388

Comparing Open Market Operations and Discount Loans, 393

The Simple Deposit Multiplier, 394

Multiple Deposit Expansion, 394

Consider this . . . What Are the Origins of Multiple Deposit Expansion?, 396

Multiple Deposit Contraction, 399

The Money Multiplier and Decisions of the Nonbank Public, 400

Determinants of Portfolio Choice, 401

Concluding Remarks, 402

Bank Behavior: Excess Reserves and Discount Loans, 403

Excess Reserves, 404

Discount Loans, 405

Deriving the Money Multiplier and the Money Supply, 406

Other times, other places . . . The Money Multiplier and Money Supply During the Early 1930s, 408

Case Study Using the Money Supply Equation to Predict Money Growth, 409

Moving from theory to practice . . . The Fed and the Monetary Base: Cooling Inflationary Pressures, The Washington Post, 6/30/06, 412

Review Questions, 414

Analytical Problems, 415

Data Questions, 417

Appendix: The Money Supply Process for M2, 417

Chapter 18. Changes in the Monetary Base, 419

Balance Sheet of the Federal Reserve System, 419

The Fed’s Assets, 419

The Fed’s Liabilities, 421

Determining the Monetary Base, 421

Changes in the Monetary Base, 422

Determinants That Increase the Monetary Base, 423

Using the news . . . Federal Reserve Data and Change in the Monetary Base, 424

Determinants That Decrease the Monetary Base, 426

Concluding Remarks, 427

The Federal Budget Deficit and the Monetary Base, 427

Alternative Strategies, 428

Other times, other places . . . Dealing with the Debt: The Treasury–Federal Reserve Accord, 429

The Government Budget Constraint and the Monetary Base, 431

Review Questions, 432

Analytical Problems, 433

Moving from theory to practice . . . Liquidity and the Monetary Base, Bloomberg News, 11/24/06, 434

Data Questions, 436

Chapter 19. Organization of Central Banks, 437

Power Sharing in the Federal Reserve System, 437

Creation of the System, 437

Federal Reserve Banks, 438

Member Banks, 440

Board of Governors, 441

Federal Open Market Committee, 441

Power and Authority Within the Fed, 442

How the Fed Operates, 444

Handling External Pressure, 444

Examples of Treasury–Fed Conflict, 444

Factors That Motivate the Fed, 445

Consider this . . . Importance of Selecting a Fed Chairman, 446

Fed Independence, 447

Other times, other places . . . Conflicts Between the Treasury and the Central Bank in Japan over Independence, 448

Central Bank Independence Outside the United States, 449

Review Questions, 451

Moving from theory to practice . . . Bernanke’s Fed Communicates with the Markets, Financial Times, 7/3/06, 452

Analytical Problems, 454

Data Questions, 455

Chapter 20. Monetary Policy Tools, 456

Open Market Operations, 456

Implementing Open Market Operations, 457

Open Market Operations Versus Other Policy Tools, 458

Fed Watching and FOMC Directives, 459

Consider this . . . A Day’s Work at the Open Market Trading Desk, 459

Open Market Operations in Other Countries, 460

Consider this . . . How Do You Decode FOMC Statements?, 460

Discount Policy, 461

Using the Discount Window, 461

Benefits of Discount Policy, 462

Drawbacks of Discount Policy as a Monetary Policy Tool, 463

Discount Policy in Other Countries, 463

Reserve Requirements, 464

Changes in Reserve Requirements, 464

Measurement and Compliance, 465

Criticism of Reserve Requirements, 465

Other times, other places . . . An Early Mistake in Setting Reserve Requirements, 466

Reserve Requirements in Other Countries, 467

Fed Watching: Analyzing the Policy Tools, 468

The Federal Funds Market, 468

Open Market Operations, 469

Changes in the Discount Rate, 469

Changes in Reserve Requirements, 470

Other Disturbances of the Monetary Base, 470

The Federal Funds Rate and Monetary Policy, 471

Concluding Remarks, 473

Moving from theory to practice . . . Fed Raises Rates, The Wall Street Journal, 5/11/06, 474

Review Questions, 476

Analytical Problems, 476

Data Questions, 477

Chapter 21. The Conduct of Monetary Policy, 478

Goals of Monetary Policy, 478

Price Stability, 479

High Employment, 479

Economic Growth, 480

Financial Market and Institution Stability, 480

Interest Rate Stability, 480

Foreign-Exchange Market Stability, 480

Problems in Achieving Monetary Policy Goals, 481

Using Targets to Meet Goals, 482

Monetary Aggregates and Interest Rates as Targets, 483

Selecting Intermediate Targets, 485

Selecting Operating Targets, 487

The Monetary Policy Record, 488

Early Interest in Targets: 1951–1970, 488

Experimenting with Monetary Targets: 1970–1979, 489

De-emphasizing Interest Rates: 1979–1982, 490

Policy After 1982: Back to Interest Rates, 491

Increasing International Concerns: The 1980s and 1990s, 492

Clarifying Objectives and Communication: The 2000s, 493

Other times, other places . . . Does the Conduct of Monetary Policy Respond to Political Pressures?, 493

Concluding Remarks, 494

Reevaluating Fed Targeting Policy, 494

Alternative Intermediate Targets, 494

The Taylor Rule, 495

The Future of Targeting, 496

Case Study Is Inflation Targeting a Good Idea?, 497

International Comparison of Monetary Policy Conduct, 498

Review Questions, 501

Moving from theory to practice . . . The Weeds of Destruction, The Economist, 5/6/06, 502

Analytical Problems, 504

Data Questions, 504

Chapter 22. The International Financial System and Monetary Policy, 505

Foreign-Exchange Intervention and the Money Supply, 505

Foreign-Exchange Intervention and the Exchange Rate, 508

Unsterilized Intervention, 508

Sterilized Intervention, 510

Capital Controls, 510

Recent Interventions, 511

Balance of Payments, 511

Case Study Do Sterilized Interventions Affect the Exchange Rate?, 512

The Current Account, 513

Using the news . . . The U.S. Balance of Payments, 513

The Financial Account, 514

Official Settlements, 515

Relationships Among the Accounts, 515

Exchange Rate Regimes and the International Financial System, 516

Fixed Exchange Rates and the Gold Standard, 516

Adapting Fixed Exchange Rates: The Bretton Woods System, 518

Consider this . . . Are the IMF and the World Bank Obsolete?, 519

Central Bank Intervention After Bretton Woods, 524

Fixed Exchange Rates in Europe, 525

Other times, other places . . . Speculative Attack: 1990s Style, 527

Case Study Financial Collapse in Mexico, 528

How Successful Are Fixed Exchange Rates Likely to Be in the Long Run?, 529

Case Study Financial Collapse in Asia, 529

Consider this . . . Back to the (Currency) Drawing Board, 530

Review Questions, 531

Moving from theory to practice . . . Euro Blues, The Economist, 4/29/06, 532

Analytical Problems, 534

Data Questions, 535

Part Six. The Financial System and the Macroeconomy, 537

Chapter 23. The Demand for Money, 538

Transactions Motives, 538

Real Money Balances, 539

Velocity and the Demand for Real Balances, 539

Changes in Velocity over Time, 541

Consider this . . . The Money Growth Slowdown in the Early 1990s: Was Velocity the Culprit?, 541

Portfolio Allocation Motives, 545

Motives for Holding Money: Keynes’s Liquidity Preference Theory, 546

Broader Portfolio Factors: Friedman’s Money Demand Model, 547

Comparing the Two Models: Keynes Versus Friedman, 548

Explaining Money Demand, 548

The Money Demand Function, 549

Measuring Money Demand, 550

Other times, other places . . . The Case of the Missing Money, 551

Moving from theory to practice . . . The Issing Link, The Economist, 3/26/06, 552

Review Questions, 554

Analytical Problems, 555

Data Questions, 556

Chapter 24. Linking the Financial System and the Economy: The IS-LM-FE Model, 557

A Model for Goods and Asset Markets: Assumptions, 557

The IS Curve, 558

Saving, Investment, and Aggregate Demand, 558

Determinants of National Saving, 559

Determinants of National Investment, 560

Constructing the IS Curve, 561

The IS Curve for an Open Economy, 562

Consider this . . . Are Savings Internationally Mobile?, 564

Shifts of the IS Curve, 565

Determining Output: The Full Employment Line, 565

Other times, other places . . . The Gulf War and “Confidence”, 566

The LM Curve, 568

Asset Market Equilibrium, 568

Constructing the LM Curve, 569

Shifts of the LM Curve, 571

The Financial System and the Economy: The IS-LM-FE Model, 574

Using the Model to Explain the Economy’s Equilibrium, 575

Restoring Equilibrium: Price-Level Adjustment, 577

Money, Output, and Prices in the Long Run, 579

Moving from theory to practice . . . Excess Savings or Excess Liquidity? The Economist, 8/13/05, 580

Review Questions, 582

Analytical Problems, 583

Data Questions, 584

Appendix: Derivation of the IS Curve, 585

Chapter 25. Aggregate Demand and Aggregate Supply, 588

The Aggregate Demand Curve, 588

Deriving the Aggregate Demand Curve, 588

Shifts of the Aggregate Demand Curve, 590

Consider this . . . Do Tax Cuts Stimulate Aggregate Demand?, 591

The Aggregate Supply Curve, 593

Short-Run Aggregate Supply Curve, 593

Long-Run Aggregate Supply Curve, 598

Shifts in the Short-Run Aggregate Supply Curve, 598

Shifts in the Long-Run Aggregate Supply Curve, 599

Equilibrium in Aggregate Demand and Aggregate Supply, 600

Other times, other places . . . Shock Therapy and Aggregate Supply in Poland, 600

Short-Run Equilibrium, 601

Long-Run Equilibrium, 602

Consider this . . . Can Shifts in Aggregate Demand Affect Output in the Long Run?, 603

The Real Business Cycle View, 604

Economic Fluctuations in the United States, 605

Shocks to Aggregate Demand, 1964–1969, 605

Supply Shocks, 1973–1975 and 1995–2005, 605

Credit Crunch and Aggregate Demand, 1990–1991, 606

Investment and the 2001 Recession, 607

Are Investment Incentives Inflationary?, 607

Moving from theory to practice . . . Bernanke Warns Inflation Remains a Significant Risk, The Wall Street Journal, 11/29/06, 608

Review Questions, 610

Analytical Problems, 611

Data Questions, 612

Chapter 26. Money and Output in the Short Run, 613

Tracking Money and Output Movements in the Short Run, 613

The Real Business Cycle Model, 614

Money and Output: The New Classical Model, 617

Money and Output: The New Keynesian Model, 618

Consider this . . . Can One Size Fit All in Europe?, 620

Should Public Policy Stabilize Economic Fluctuations?, 621

Case Study How Does Money Affect Aggregate Demand in the New Keynesian View?, 621

The Real Business Cycle and New Classical Views, 622

The New Keynesian View, 622

Other times, other places . . . Yasushi Mieno and the Stabilization Policy Debate in Japan, 624

Explaining Events of the 1980s, 1990s, and Early 2000s, 625

Effects of Policy Shifts in the Early 1980s, 625

Effects of Policy Shifts in the Early 1990s, 627

The Early 2000s and Concluding Remarks, 628

Review Questions, 629

Moving from theory to practice . . . A Tale of Two Banks, The Economist, 1/11/07, 630

Analytical Problems, 632

Data Questions, 633

Chapter 27. Information Problems and Channels for Monetary Policy, 635

Macroeconomic Costs of Information Problems, 636

Information Problems in Lending: Role of Financial Intermediaries, 636

Information Problems in Lending: Role of Net Worth, 637

Consequences of a Drop in Bank Lending, 637

Consequences of a Fall in Borrowers’ Net Worth, 639

Financial Panics, 639

Credit Controls and Credit Crunches, 640

Other times, other places . . . The Global Banking Crisis and the Great Depression, 641

Expanded Channels for Monetary Policy, 642

The Money Channel: Monetary Policy and Interest Rates, 642

The Bank Lending Channel: Monetary Policy and Banks, 643

Money Channel and Bank Channel Predictions, 643

The Balance Sheet Channel: Monetary Policy and Net Worth, 646

Validity of the Bank Lending and Balance Sheet Channels, 648

Consider this . . . Was There a Credit Crunch During the 1990–1991 Recession?, 650

Implications for Public Policy, 651

Review Questions, 653

Analytical Problems, 653

Moving from theory to practice . . . Priced to Perfection, The Economist, 7/1/06, 654

Data Questions, 656

Chapter 28. Inflation: Causes and Consequences, 657

Explaining Price Level Changes, 657

Causes of Price Level Changes, 658

Causes of Price Level Fluctuations, 659

Sustained Changes in the Price Level: Inflation, 661

Costs of Inflation, 663

Expected Inflation, 663

Unexpected Inflation, 664

Inflation Uncertainty, 665

Inflation and Monetary Policy, 666

Cost-Push Inflation, 666

Demand-Pull Inflation, 667

Costs of Reducing Inflation, 668

New Classical Disinflation: Reducing Inflation Cold Turkey, 669

New Keynesian Disinflation: Reducing Inflation Gradually, 670

Central Bank Credibility, 671

Strategies for Building Credibility, 671

Other times, other places . . . Central Bank Credibility in the United States and Japan, 672

Rules Versus Discretion, 674

Consider this . . . Can Credibility Enhance Central Bank Flexibility?, 675

Price Controls and Credibility, 676

Review Questions, 677

Moving from theory to practice . . . Inflation Nation, The Wall Street Journal, 5/23/06, 678

Analytical Problems, 680

Data Questions, 681

Appendix: Inflation Versus Unemployment: The Phillips Curve, 682

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ABOUT THIS TITLE - DESCRIPTION

Hubbard demonstrates how we use economic tools to understand financial markets and institutions. In doing so, he helps students learn to interpret current events, predict future developments, and make better economic decisions. The Sixth Edition continues to offer clear, concise discussions of the theory and the latest data, policy discussions, and real-world applications.

Preview online! An interactive tour of Money, the Financial System, and the Economy is available here.

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