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Copyright, vi
Preface, xx
Part One Introduction, 1
1 The Nature of Economics, 1
The Power of Economic Analysis, 2
Defining Economics, 2
Microeconomics versus Macroeconomics, 3
The Economic Person: Rational Self-Interest, 3
Example: Earthly Rewards of Religiosity, 4
Example: “Neuroeconomics” Evaluates Rational Choice, 5
E-Commerce Example: The New Online Dating Incentive: Health Insurance, 5
Example: The Perceived Value of Gifts, 6
Economics as a Science, 7
Example: Getting Directions, 8
Policy Example: How Empirical Evidence Aids in Thwarting Terrorism, 9
Positive versus Normative Economics, 10
You Are There: Herding Alpacas Toward a Tax Break, 11
Issues and Applications: Risking Life and Limb on Mumbai Commuter Trains, 12
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 14
Problems, 15
Economics on the Net, 17
Answers to Quick Quizzes, 17
Appendix A Reading and Working with Graphs, 18
Direct and Inverse Relationships, 18
Constructing a Graph, 19
Graphing Numbers in a Table, 20
The Slope of a Line (A Linear Curve), 21
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 25
Problems, 26
2 Scarcity and the World of Trade-Offs, 27
Scarcity, 28
Policy Example: Schooling Admirals in Entrepreneurship, 29
Wants and Needs, 30
Scarcity, Choice, and Opportunity Cost, 30
International Example: The Significant Opportunity Cost of a Second of Time, 31
The World of Trade-Offs, 32
Policy Example: The U.S. Military Confronts a Trade-Off, 33
The Choices Society Faces, 34
International Example: Making Death Illegal—At Least, Inside City Limits, 35
Economic Growth and the Production Possibilities Curve, 38
The Trade-Off Between the Present and the Future, 39
Specialization and Greater Productivity, 40
E-Commerce Example: A Comparative Advantage in Grocery Shopping, 42
Comparative Advantage and Trade Among Nations, 43
You Are There: Specializing in Providing Baggage-Free Business Trips, 44
Issues and Applications: Specialization and Division of Labor at the Speedway, 45
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 46
Problems, 48
Economics on the Net, 50
Answers to Quick Quizzes, 50
3 Demand and Supply, 51
Demand, 52
Example: College Students Face Higher Relative Prices, 53
E-Commerce Example: Adjusting the Price of Broadband Service for Quality, 54
The Demand Schedule, 55
Shifts in Demand, 58
E-Commerce Example: Video Bloggers Generate a Takeoff in Toy Helicopter Demand, 59
Example: Diamonds May Not Really Be Forever, 60
The Law of Supply, 62
The Supply Schedule, 63
Example: Mining Production’s Direct Response to Higher Prices for Minerals, 63
Shifts in Supply, 66
E-Commerce Example: Digital Imaging Boosts the Supply of Dentistry Services, 67
Example: Integrating Poisons into Pharmaceuticals Production, 68
International Policy Example: Government Subsidies Generate More Train Traffic in Europe, 68
Example: Keeping Price Expectations Updated with Forecasts of Forecasts, 69
Putting Demand and Supply Together, 70
Example: In Nursing, Quantity Demanded Exceeds Quantity Supplied, 73
Policy Example: Should Shortages in the Ticket Market Be Solved by Scalpers?, 73
You Are There: Beetle Factories Respond to Higher Demand for Weed-Eating Bugs, 75
Issues and Applications: Why Are People Eating More?, 75
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 77
Problems, 79
Economics on the Net, 81
Answers to Quick Quizzes, 81
4 Extensions of Demand and Supply Analysis, 82
The Price System and Markets, 83
E-Commerce Example: Cellphone Services Reduce the Transaction Costs of Dating, 84
E-Commerce Example: Helping People Keep Up with the Flood of Online Videos, 84
Changes in Demand and Supply, 85
Example: The Rising Price of Using Old Songs as Video Background Music, 86
Example: A Hot Market for a Cooling Element, 87
The Rationing Function of Prices, 88
Example: Summer Internships for Sale, 89
The Policy of Government-Imposed Price Controls, 90
International Example: The Global Black Market for Marathon Entry Numbers, 91
The Policy of Controlling Rents, 92
Example: Zero-Priced Seats at Graduation Ceremonies Become Hot Items, 93
Price Floors in Agriculture, 94
Policy Example: King Cotton Receives Royal Government Subsidies, 96
Price Floors in the Labor Market, 97
Quantity Restrictions, 98
You Are There: Finding a Spanish Instructor in the Midst of a Teacher Shortage, 99
Issues and Applications: Effects of the $0 Price Ceiling in the Market for Kidneys, 100
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 102
Problems, 103
Economics on the Net, 105
Answers to Quick Quizzes, 106
5 Public Spending and Public Choice, 107
What a Price System Can and Cannot Do, 108
Correcting for Externalities, 108
Example: Billboards That Catch Drivers’ Eyes, Sometimes for Too Long, 109
Policy Example: Incentives Coax Senior Citizens from Behind the Wheel, 112
The Other Economic Functions of Government, 113
E-Commerce Example: Is the “Nu” Internet Domain a Public Good?, 115
The Political Functions of Government, 116
International Policy Example: China’s Government Struggles with How to Regard Tobacco, 117
Public Spending and Transfer Programs, 118
Policy Example: If the Government Doesn’t Pay for It, Physicians Don’t Do It, 121
E-Commerce Example: The Minuscule Payoff from Public School Internet Subsidies, 122
Collective Decision Making: The Theory of Public Choice, 123
International Example: Why a Synonym for “Big Oil” Is “Big Government”, 125
You Are There: Aiming to Prevent Cost from Exceeding Value per Dollar in Higher Education, 126
Issues and Applications: An Ethanol Bonanza, or an Ethanol Boondoggle?, 126
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 128
Problems, 130
Economics on the Net, 133
Answers to Quick Quizzes, 133
6 Funding the Public Sector, 134
Paying for the Public Sector, 135
Policy Example: States Consider Shifting Tax Gears to Satisfy Budget Constraints, 135
Systems of Taxation, 136
Policy Example: The Same Tax Rate, but Different Tax Bases for Different People, 136
The Most Important Federal Taxes, 138
Policy Example: State-Sponsored Gambling—Voluntary but Regressive Taxation, 138
International Policy Example: Defying One Agency, Illegal Immigrants Pay Taxes to Another, 139
Tax Rates and Tax Revenues, 142
Policy Example: Connecticut’s “Death Tax” May Induce Changes in Residency, 143
International Policy Example: How Iceland Slashed a Tax Rate and Boosted Tax Revenues, 145
Taxation from the Point of View of Producers and Consumers, 146
Financing Social Security, 148
You Are There: For This Physician, the Tax Rate Is Too High to Justify Working, 151
Issues and Applications: Progressive Income Taxation in the United States, 152
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 154
Problems, 156
Economics on the Net, 158
Answers to Quick Quizzes, 158
Part Two Introduction to Macroeconomics and Economic Growth, 159
7 The Macroeconomy: Unemployment and Inflation, 159
Unemployment, 160
Example: Why Older Men May Be More Anxious Than in Years Past, 162
The Major Types of Unemployment, 164
International Example: How Illegal Aliens Affect Measured U.S. Cyclical Unemployment, 165
Full Employment and the Natural Rate of Unemployment, 166
Inflation and Deflation, 167
Example: Why Women Are Confronting Higher Inflation Than Men, 168
Policy Example: Are Seasonal Adjustments to the CPI Causing Seasonal Inflation?, 170
Anticipated versus Unanticipated Inflation, 172
Changing Inflation and Unemployment: Business Fluctuations, 174
Example: A Flawless Leading Indicator Suddenly Reveals a Flaw, 176
You Are There: Staying Employed in Denmark—at the Taxpayers’ Expense, 176
Issues and Applications: Explaining the Downtrend in Labor Force Participation, 177
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 179
Problems, 181
Economics on the Net, 183
Answers to Quick Quizzes, 183
8 Measuring the Economy’s Performance, 184
The Simple Circular Flow, 185
National Income Accounting, 187
International Policy Example: Greece Pays a Price for Broadening Its GDP Definition, 190
Two Main Methods of Measuring GDP, 191
International Example: How Easter Complicates Measuring Mexican GDP Growth, 193
Example: The Upward Bias in Gross Domestic Income Relative to GDP, 196
Other Components of National Income Accounting, 197
Distinguishing Between Nominal and Real Values, 200
Example: Correcting GDP for Price Index Changes, 1999–2009, 200
Comparing GDP Throughout the World, 203
International Example: Purchasing Power Parity Comparisons of World Incomes, 203
You Are There: Housework’s Exclusion from GDP Is Not Gender Neutral, 204
Issues and Applications: Is U.S. Fixed Investment Understated?, 205
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 207
Problems, 209
Economics on the Net, 212
Answers to Quick Quizzes, 212
9 Global Economic Growth and Development, 213
How Do We Define Economic Growth?, 214
International Example: Growth Rates Around the World, 216
Policy Example: Are Growth Rates in China and India Overstated?, 217
International Example: An Upswing in Global Economic Growth, 219
Productivity Increases: The Heart of Economic Growth, 220
Example: Explaining the U.S. Lead in Labor Productivity Growth, 220
Saving: A Fundamental Determinant of Economic Growth, 221
International Example: Saving and Growth in China, 222
New Growth Theory and the Determinants of Growth, 223
International Example: A Story of Different Choices Regarding Trade—and Economic Growth, 225
Immigration, Property Rights, and Growth, 227
Economic Development, 229
You Are There: An Invention Becomes a Market Innovation—by Accident, 233
Issues and Applications: Governments Get Serious About “Child Support”, 233
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 235
Problems, 236
Economics on the Net, 238
Answers to Quick Quizzes, 238
Part Three Real GDP Determination and Fiscal Policy, 239
10 Real GDP and the Price Level in the Long Run, 239
Output Growth and the Long-Run Aggregate Supply Curve, 240
International Example: Will a “Brain Drain” Flatten Germany’s Trend Growth Path?, 242
Total Expenditures and Aggregate Demand, 243
Shifts in the Aggregate Demand Curve, 246
Long-Run Equilibrium and the Price Level, 248
Causes of Inflation, 250
International Example: For Greenland, a Warming Climate Is Good Economic News, 250
Example: Does Sustained Low Inflation Depress Real GDP?, 252
You Are There: Another Day’s Battle with Inflation in Zimbabwe, 253
Issues and Applications: Is U.S. Long-Run Real GDP Growth Declining?, 254
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 256
Problems, 258
Economics on the Net, 260
Answers to Quick Quizzes, 260
11 Classical and Keynesian Macro Analyses, 261
The Classical Model, 262
International Example: In a Global Economy, World Saving Equals World Investment, 265
Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve, 268
Example: Are the U.S. and European SRAS Curves Horizontal?, 270
Output Determination Using Aggregate Demand and Aggregate Supply: Fixed versus Changing Price Levels in the Short Run, 271
Shifts in the Aggregate Supply Curve, 272
Policy Example: The Aggregate Supply Impact of Cuts in U.S. Marginal Tax Rates, 274
Consequences of Changes in Aggregate Demand, 275
Explaining Short-Run Variations in Inflation, 276
You Are There: Putting More Weight on Stability Than Growth in Denmark, 279
Issues and Applications: Higher Oil Prices and (Usually) U.S. Recessionary Gaps, 280
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 282
Problems, 284
Economics on the Net, 286
Answers to Quick Quizzes, 286
12 Consumption, Real GDP, and the Multiplier, 287
Some Simplifying Assumptions in a Keynesian Model, 288
Determinants of Planned Consumption and Planned Saving, 290
Example: Explaining the Low U.S. “Saving Rate”, 293
Example: Consumption Effects of Changes in Housing versus Financial Wealth, 295
Determinants of Investment, 296
Determining Equilibrium Real GDP, 298
Example: The Rise and Decline of IT Investment’s Share of Total Investment, 298
Keynesian Equilibrium with Government and the Foreign Sector Added, 302
The Multiplier, 305
How a Change in Real Autonomous Spending Affects Real GDP When the Price Level Can Change, 307
The Relationship Between Aggregate Demand and the C + I + G + X Curve, 308
You Are There: Listen to the German Chancellor: It’s Time to Go Shopping!, 310
Issues and Applications: The Diminishing Effect of Interest Rate Changes on U.S. Real Consumption Spending, 311
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 312
Problems, 314
Economics on the Net, 316
Answers to Quick Quizzes, 316
Appendix B The Keynesian Model and the Multiplier, 317
13 Fiscal Policy, 318
Discretionary Fiscal Policy, 319
International Policy Example: Struggling to Boost Government Spending in Peru, 320
Possible Offsets to Fiscal Policy, 322
Policy Example: Policy Example: Direct Expenditure Offsets in Florida Insurance Coverage, 325
Policy Example: A Laffer Curve in the Mid-2000s?, 327
Discretionary Fiscal Policy in Practice: Coping with Time Lags, 328
Automatic Stabilizers, 329
What Do We Really Know About Fiscal Policy?, 330
You Are There: A Derailed Effort to Move Toward Accounting for the Laffer Curve, 331
Issues and Applications: Does Government Spending Crowd Out Private Health Care Expenditures?, 332
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 333
Problems, 335
Economics on the Net, 337
Answers to Quick Quizzes, 338
Appendix C Fiscal Policy: A Keynesian Perspective, 339
Changes in Government Spending, 339
Changes in Taxes, 340
The Balanced-Budget Multiplier, 340
The Fixed Price Level Assumption, 341
Problems, 341
14 Deficit Spending and the Public Debt, 342
Public Deficits and Debts: Flows versus Stocks, 343
Government Finance: Spending More Than Tax Collections, 344
Evaluating the Rising Public Debt, 346
Policy Example: What Was the U.S. Treasury Thinking?, 348
International Example: Who Is Most Likely to Buy U.S. Government Bonds “Indirectly”?, 350
Federal Budget Deficits in an Open Economy, 351
Growing U.S. Government Deficits: Implications for U.S. Economic Performance, 352
Policy Example: A Short-Run Deficit-Boosting Stimulus Is Set to Give Way to Deficit-Fighting Tax Increases, 355
You Are There: Facing a Future Medicare Meltdown?, 358
Policy Example: Should Entitlement “Trust Funds” Be Included in Deficits and the Net Public Debt?, 358
Issues and Applications: Are the Budget and Trade Deficits Twins or Distant Cousins?, 359
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 361
Problems, 363
Economics on the Net, 364
Answers to Quick Quizzes, 364
Part Four Money, Stabilization, and Growth, 365
15 Money, Banking, and Central Banking, 365
The Functions of Money, 367
E-Commerce Example: A Web Site That Specializes in Identifying Double Coincidences of Wants, 367
International Example: Why Musical Chairs in the U.S. Treasury Make the $100 Bill a Weaker Store of Value Abroad, 368
Properties of Money, 369
International Example: A Virtual Money Becomes Widely Acceptable in China, 370
Defining Money, 371
Financial Intermediation and Banks, 374
E-Commerce Example: Watch Out Banks! Here Come Zopa and Circleone, 375
Federal Deposit Insurance, 378
The Federal Reserve System: The U.S. Central Bank, 382
E-Commerce Example: Private Electronic Check Clearing May Clear Out the Fed, 385
You Are There: Would You Like Your Change in Fives, Tens, Melvilles, or Rockwells?, 386
Issues and Applications: The Crash of 2008 and the Decline of Investment Banking, 387
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 389
Problems, 391
Economics on the Net, 393
Answers to Quick Quizzes, 393
16 Money Creation, the Demand for Money, and Monetary Policy, 394
Banks and Money, 395
Policy Example: Interest on Reserves at Federal Reserve Banks, 396
The Relationship Between Total Reserves and Total Deposits, 397
Money Expansion by the Banking System, 400
Example: Why the Decline in Clearing of Paper Checks Is Bad News for Airplane Pilots, 400
E-Commerce Example: What Goes on Inside Envelope-Free Automated Teller Machines, 403
The Money Multiplier, 406
The Demand for Money, 410
How the Fed Influences Interest Rates, 412
You Are There: Scanning Checks Benefits a Bank’s Small-Business Customer, 415
Issues and Applications: Together, Bankers Cry, “Please Deposit Your Cash!”, 415
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 418
Problems, 420
Economics on the Net, 421
Answers to Quick Quizzes, 421
17 Domestic and International Dimensions of Monetary Policy, 422
Effects of an Increase in the Money Supply, 423
Open Economy Transmission of Monetary Policy, 425
Monetary Policy and Inflation, 427
International Policy Example: Paying Attention to Money Supply Growth Rates in Europe, 428
Monetary Policy in Action: The Transmission Mechanism, 429
The Way Fed Policy Is Currently Implemented, 432
Policy Example: Reading the Tea Leaves of Fed Policy Statements, 434
Selecting the Federal Funds Rate Target, 435
You Are There: It’s Time for the FOMC to Make a Tough Call, 437
Policy Example: Supplementing the Taylor Rule with the Taylor Principle, 437
Issues and Applications: The Fed Tackles a Credit Crisis, 438
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 440
Problems, 442
Economics on the Net, 444
Answers to Quick Quizzes, 444
Appendix D Monetary Policy: A Keynesian Perspective, 445
Increasing the Money Supply, 445
Decreasing the Money Supply, 446
Arguments Against Monetary Policy, 446
Problems, 446
18 Stabilization in an Integrated World Economy, 448
Active versus Passive Policymaking, 449
The Natural Rate of Unemployment, 449
Example: The U.S. Natural Rate of Unemployment, 450
Policy Example: When It Comes to Inflation, the Fed Keeps Its Eyes Off the Headlines, 456
Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles, 457
Example: Does the United States Face a Stagflation Threat?, 462
Modern Approaches to Justifying Active Policymaking, 463
Is There a New Keynesian Phillips Curve?, 465
Summing Up: Economic Factors Favoring Active versus Passive Policymaking, 468
Example: Measurement Issues Complicate Assessing the Speed of U.S. Price Adjustment, 468
You Are There: Inflation Targeting Catches On—Except at the Fed, 470
Issues and Applications: Are U.S. Inflation Expectations Rising?, 470
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 473
Problems, 474
Economics on the Net, 476
Answers to Quick Quizzes, 476
19 Policies and Prospects for Global Economic Growth, 477
Labor Resources and Economic Growth, 478
International Example: In Indonesia, Cutting Back on Policing Might Enhance Growth, 480
Capital Goods and Economic Growth, 481
International Example: Small Lenders Meet with Big Successes—If Governments Do Not Put Them Out of Business, 483
Private International Financial Flows as a Source of Global Growth, 484
International Institutions and Policies for Global Growth, 487
International Example: The IMF Rethinks Nations’ Voting Shares, 488
You Are There: A Microlender Succeeds in India—In Part by Avoiding Overexposure to Water Buffalo, 491
Issues and Applications: Private International Investment: Source of Instability or Engine of Economic Growth?, 492
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 495
Problems, 496
Economics on the Net, 499
Answers to Quick Quizzes, 499
Part Eight Global Economics, 838
33 Comparative Advantage and the Open Economy, 838
The Worldwide Importance of International Trade, 839
International Example: Have Seafood, Will Travel, 839
Why We Trade: Comparative Advantage and Mutual Gains from Exchange, 840
International Example: The Comparative Advantage of Desert Dairies, 841
International Example: China Discovers a New Comparative Advantage, 846
The Relationship Between Imports and Exports, 847
International Competitiveness, 848
Example: How “Transfer Points” Contribute to U.S. Competitiveness, 848
Arguments Against Free Trade, 849
E-Commerce Example: Canadian Consumers Cheat to Watch U.S. TV Programming, 850
Policy Example: Paying More for U.S.-Grown Charitable Food Donations, 851
Ways to Restrict Foreign Trade, 852
International Trade Organizations, 854
You Are There: How Visa Rules Protect U.S. Pop Stars from a British Invasion, 857
Issues and Applications: Higher Shipping Costs: A Barrier to Trade or a By-Product of Its Growth?, 858
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 859
Problems, 861
Economics on the Net, 862
Answers to Quick Quizzes, 862
34 Exchange Rates and the Balance of Payments, 863
The Balance of Payments and International Capital Movements, 864
Determining Foreign Exchange Rates, 871
International Example: Going Loony over an Appreciating Loonie, 872
The Gold Standard and the International Monetary Fund, 878
Fixed versus Floating Exchange Rates, 879
International Example: Measuring the Value of Zimbabwe’s Dollar, 881
You Are There: Literally Betting the House on an Exchange Rate, 884
Issues and Applications: The Current Account Deficit for One Group of Nations Is the Current Account Surplus for Another, 884
Summary: What You Should Know/Key Terms and Key Figures/Where to Go to Practice, 887
Problems, 888
Economics on the Net, 890
Answers to Quick Quizzes, 890
Answers to Odd-Numbered Problems, A-1
Glossary, G-1
Index, I-1
Photo Credits, C-1
Our National Income Accounts and Real GDP Since 1929, IFC-1
Macroeconomic Principles, IBC-1

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