Macroeconomics: Principles and Policy, 14th Edition PDF by William J. Baumol, Alan S. Blinder, and John L. Solow

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MACROECONOMICS: PRINCIPLES and POLICY, Fourteenth Edition

By William J. Baumol, Alan S. Blinder, and John L. Solow

Macroeconomics Principles And Policy

Table of Contents:

Preface xix

About the Authors xxi

Part 1 Getting Acquainted with Economics 1

Chapter 1 What Is Economics? 3

1-1 Ideas for Beyond the Final Exam 3

1-1a Idea 1: How Much Does It Really Cost? 4

1-1b Idea 2: Attempts to Repeal the Laws of Supply and Demand—The Market Strikes Back 4

1-1c Idea 3: The Surprising Principle of Comparative Advantage 5

1-1d Idea 4: Trade Is a Win–Win Situation 5

1-1e Idea 5: Government Policies Can Limit Economic Fluctuations—But Don’t Always Succeed 5

1-1f Idea 6: The Short-Run Trade-Off between Inflation and Unemployment 6

1-1g Idea 7: Productivity Growth Is (Almost) Everything in the Long Run 6

1-1h Epilogue 6

1-2 Inside the Economist’s Tool Kit 7

1-2a Economics as a Discipline 7

1-2b The Need for Abstraction 7

1-2c The Role of Economic Theory 8

1-2d What Is an Economic Model? 10

1-2e Reasons for Disagreements: Imperfect Information and Value Judgments 11

Summary 12

Key Terms 12

Discussion Questions 12

Appendix Using Graphs: A Review 12

Graphs Used in Economic Analysis 12

Two-Variable Diagrams 13

The Definition and Measurement of Slope 13

Rays through the Origin and 45° Lines 15

Squeezing Three Dimensions into Two: Contour Maps 16

Summary 17

Key Terms 17

Test Yourself 18

Chapter 2 The Economy: Myth and Reality 19

2-1 The American Economy: A Thumbnail Sketch 19

2-1a A Private-Enterprise Economy 21

2-1b A Relatively “Closed” Economy 21

2-1c A Growing Economy . . . 22

2-1d But with Bumps along the Growth Path 23

2-2 The Inputs: Labor and Capital 23

2-2a The American Workforce: Who Is in It? 23

2-2b The American Workforce: What Does It Do? 27

2-2c The American Workforce: What Does It Earn? 27

2-2d Capital and Its Earnings 28

2-3 The Outputs: What Does America Produce? 29

2-4 The Central Role of Business Firms 30

2-5 What’s Missing from the Picture? Government 31

2-5a The Government as Referee 32

2-5b The Government as Business Regulator 32

2-5c Government Expenditures 32

2-5d Taxes in America 33

2-5e The Government as Redistributor 33

2-6 Conclusion: It’s a Mixed Economy 34

Summary 35

Key Terms 35

Discussion Questions 35

Chapter 3 The Fundamental Economic Problem: Scarcity and Choice 36

Issue: What to Do about the Federal Budget? 36

3-1 Scarcity, Choice, and Opportunity Cost 37

3-1a Opportunity Cost and Money Cost 38

3-1b Optimal Choice: Not Just Any Choice 38

3-2 Scarcity and Choice for a Single Firm 39

3-2a The Production Possibilities Frontier 39

3-2b The Principle of Increasing Costs 41

3-3 Scarcity and Choice for The Entire Society 41

3-3a Scarcity and Choice Elsewhere in the Economy 42

Issue Revisited: Agreeing on a Federal Budget 43

3-4 The Three Coordination Tasks of Any Economy 43

3-5 The Concept of Efficiency 43

3-6 T ask 1. How the Market Fosters Efficient Resource Allocation 45

3-6a The Wonders of the Division of Labor 45

3-6b The Amazing Principle of Comparative Advantage 45

3-6c The Arithmetic of Comparative Advantage and Trade 46

3-6d The Graphics of Comparative Advantage and Trade 48

3-7 Task 2. Market Exchange and Deciding How Much of Each Good

to Produce 49

3-8 T ask 3. How to Distribute the Economy’S Outputs among Consumers 50

3-9 Looking Ahead 51

Summary 51

Key Terms 52

Test Yourself 52

Discussion Questions 53

Chapter 4 Supply and Demand: An Initial Look 54Puzzle:

What Happened to Oil Prices? 54

4-1 The Invisible Hand 55

4-2 Demand and Quantity Demanded 56

4-2a The Demand Schedule 56

4-2b The Demand Curve 57

4-2c Shifts of the Demand Curve 57

4-3 Supply and Quantity Supplied 60

4-3a The Supply Schedule and the Supply Curve 61

4-3b Shifts of the Supply Curve 61

4-4 Supply and Demand Equilibrium 63

4-4a The Law of Supply and Demand 65

4-5 Effects of Demand Shifts on Supply-Demand Equilibrium 65

4-6 Supply Shifts and Supply-Demand Equilibrium 67

Puzzle Resolved: Those Volatile Oil Prices 68

4-6a Application: Who Really Pays That Tax? 69

4-6b Speculation 70

4-7 Battling the Invisible Hand: The Market Fights Back 71

4-7a Restraining the Market Mechanism: Price Ceilings 71

4-7b Case Study: Rent Controls in New York City 72

Policy Debate Economic Aspects of the War on Drugs 72

4-7c Restraining the Market Mechanism: Price Floors 73

4-7d Case Study: Farm Price Supports and the Case of Sugar Prices 74

4-7e A Can of Worms 75

4-8 A Simple But Powerful Lesson 76

Summary 76

Key Terms 77

Test Yourself 77

Discussion Questions 79

Part 2 The Macroeconomy: Aggregate Supply and Demand 81

Chapter 5 An Introduction to Macroeconomics 83

Issue: How Did the Housing Bust Lead to the Great Recession? 83

5-1 D rawing a Line Between Macroeconomics and Microeconomics 84

5-1a Aggregation and Macroeconomics 84

5-1b The Foundations of Aggregation 84

5-1c The Line of Demarcation Revisited 85

5-2 Supply and Demand in Macroeconomics 85

5-2a A Quick Review 85

5-2b Moving to Macroeconomic Aggregates 86

5-2c Inflation 86

5-2d Recession and Unemployment 86

5-2e Economic Growth 86

5-3 Gross Domestic Product 87

5-3a Money as the Measuring Rod: Real versus Nominal GDP 88

5-3b What Gets Counted in GDP? 88

5-3c Limitations of the GDP: What GDP Is Not 89

5-4 The Economy on a Roller Coaster 91

5-4a Growth, but with Fluctuations 91

5-4b Inflation and Deflation 92

5-4c The Great Depression 93

5-4d From World War II to 1973 95

5-4e The Great Stagflation, 1973–1981 96

5-4f Reaganomics and Its Aftermath 96

5-4g Clintonomics: Deficit Reduction and the “New Economy” 97

5-4h Tax Cuts and the Bush Economy 97

5-4i Obamanomics and the Great Recession 98

5-4j What Is Trumponomics? 98

Issue Revisited: How Did the Housing Bust Lead to the Great Recession? 98

5-5 T he Problem of Macroeconomic Stabilization: A Sneak Preview 99

5-5a Combating Unemployment 99

5-5b Combating Inflation 99

5-5c Does It Really Work? 100

Summary 100

Key Terms 101

Test Yourself 101

Discussion Questions 102

Chapter 6 The Goals of Macroeconomic Policy 103

6-1 The Goal of Economic Growth 104

Issue: Is Faster Growth Always Better? 105

6-2 T he Capacity to Produce: Potential GDP and the Production Function 105

6-3 The Growth Rate of Potential GDP 107

Issue Revisited: Is Faster Growth Always Better? 108

6-4 The Goal of Low Unemployment 109

6-5 The Human Costs of High Unemployment 109

6-6 Counting the Unemployed: The Official Statistics 111

6-7 Types of Unemployment 112

Policy Debate Does the Minimum Wage Cause Unemployment? 112

6-8 How much Employment is “Full Employment”? 113

6-9 Unemployment Insurance: The Invaluable Cushion 113

6-10 The Goal of Low Inflation 114

6-10a Inflation and Real Wages 114

6-10b The Importance of Relative Prices 116

6-11 Inflation as a Redistributor of Income and Wealth 117

6-12 Real Versus Nominal Interest Rates 117

6-13 Inflation Distorts Measurements 118

6-13a Confusing Real and Nominal Interest Rates 118

6-13b The Malfunctioning Tax System 119

6-14 Other Costs of Inflation 119

6-15 The Costs of Low Versus High Inflation 120

6-16 L ow Inflation does not Necessarily Lead to High Inflation 121

Summary 122

Key Terms 123

Test Yourself 123

Discussion Questions 123

Appendix How Statisticians Measure Inflation 124

Index Numbers for Inflation 124

The Consumer Price Index 124

Using a Price Index to “Deflate” Monetary Figures 125

Using a Price Index to Measure Inflation 125

The GDP Deflator 126

Summary 126

Key Terms 126

Test Yourself 126

Chapter 7 Economic Growth: Theory and Policy 128

Puzzle: Why Does College Education Keep Getting More Expensive? 129

7-1 The Three Pillars of Productivity Growth 129

7-1a Capital 129

7-1b Technology 130

7-1c Labor Quality: Education and Training 130

7-2 Levels, Growth Rates, and the Convergence Hypothesis 131

7-3 Growth Policy: Encouraging Capital Formation 133

7-4 Growth Policy: Improving Education and Training 136

7-5 Growth Policy: Spurring Technological Change 137

7-6 Recent Productivity Performance in the United States 138

7-6a The Productivity Slowdown, 1973–1995 138

7-6b The Productivity Speed-up, 1995–2010 140

7-6c The Productivity Slowdown Since 2010 141

Puzzle Resolved: Why the Relative Price of College Tuition Keeps Rising 141

7-7 Growth in the Developing Countries 142

7-7a The Three Pillars Revisited 142

7-7b Some Special Problems of Developing Countries 144

7-8 From the Long Run to the Short Run 145

Summary 145

Key Terms 145

Test Yourself 146

Discussion Questions 146

Chapter 8 Aggregate Demand and the Powerful Consumer 147

Issue: Demand Management and the Ornery Consumer 148

8-1 A ggregate Demand, Domestic Product, and National Income 148

8-2 T he Circular Flow of Spending, Production, and Income 149

8-3 C onsumer Spending and Income: The Important Relationship 151

8-4 T he Consumption Function and the Marginal Propensity to Consume 154

8-5 Factors that Shift the Consumption Function 155

Policy Debate Using the Tax Code to Spur Saving 157

Issue Revisited: Why Temporary Tax Cuts Have Only Modest Effects on Spending 157

8-6 The Extreme Variability of Investment 158

8-7 The Determinants of Net Exports 159

8-7a National Incomes 159

8-7b Relative Prices and Exchange Rates 160

8-8 How Predictable is Aggregate Demand? 160

Summary 161

Key Terms 161

Test Yourself 162

Discussion Questions 162

Appendix National Income Accounting 162

Defining GDP: Exceptions to the Rules 162

GDP as the Sum of Final Goods and Services 163

GDP as the Sum of All Factor Payments 164

GDP as the Sum of Values Added 165

Summary 167

Key Terms 167

Test Yourself 167

Discussion Questions 168

Chapter 9 Demand-Side Equilibrium: Unemployment or Inflation? 169

Issue: Why Does the Market Permit High Unemployment? 169

9-1 The Meaning of Equilibrium GDP 170

9-2 The Mechanics of Income Determination 171

9-3 The Aggregate Demand Curve 174

9-4 Demand-Side Equilibrium and Full Employment 176

9-5 The Coordination of Saving and Investment 178

9-6 Changes on the Demand Side: Multiplier Analysis 179

9-6a The Magic of the Multiplier 179

9-6b Demystifying the Multiplier: How It Works 181

9-6c Algebraic Statement of the Multiplier 182

9-7 The Multiplier Is a General Concept 183

9-8 The Multiplier and the Aggregate Demand Curve 185

Summary 186

Key Terms 186

Test Yourself 187

Discussion Questions 188

Appendix A The Simple Algebra of Income Determination and the Multiplier 188

Test Yourself 189

Discussion Questions 189

Appendix B The Multiplier with Variable Imports 190

Summary 192

Test Yourself 192

Chapter 10 Bringing in the Supply Side: Unemployment and Inflation? 193

Puzzle: What Causes Stagflation? 193

10-1 The Aggregate Supply Curve 194

10-1a Why the Aggregate Supply Curve Slopes Upward 194

10-1b Shifts of the Aggregate Supply Curve 195

10-2 Equilibrium of Aggregate Demand and Supply 197

10-3 Inflation and the Multiplier 198

10-4 Recessionary and Inflationary Gaps Revisited 199

10-5 A djusting to a Recessionary Gap: Deflation or Unemployment? 201

10-5a Why Nominal Wages and Prices Won’t Fall (Easily) 201

10-5b Does the Economy Have a Self-Correcting Mechanism? 203

10-5c An Example from Recent History: Deflation Worries in the United States 203

10-6 Adjusting to an Inflationary Gap: Inflation 203

10-6a Demand Inflation and Stagflation 204

10-6b A U.S. Example 204

10-7 Stagflation from a Supply Shock 205

10-8 Applying the Model to a Growing Economy 206

10-8a Demand-Side Fluctuations 208

10-8b Supply-Side Fluctuations 209

Puzzle resolved: Explaining Stagflation 210

10-9 A Role for Stabilization Policy 210

Summary 211

Key Terms 211

Test Yourself 211

Discussion Questions 212

Part 3 Fiscal and Monetary Policy 213

Chapter 11 Managing Aggregate Demand: Fiscal Policy 215

Issue: Did the U.S. Need a Tax Cut in 2018? 215

11-1 Income Taxes and the Consumption Schedule 216

11-2 The Multiplier Revisited 217

11-2a The Tax Multiplier 217

11-2b Income Taxes and the Multiplier 217

11-2c Automatic Stabilizers 219

11-2d Government Transfer Payments 219

Issue Revisited: The Tax Cut Debate in 2017 220

11-3 Planning Expansionary Fiscal Policy 220

11-4 Planning Contractionary Fiscal Policy 221

11-5 The Choice Between Spending Policy and Tax Policy 221

Issue Redux: Aggregate Demand and the Tax Cuts of 2017 222

11-6 Some Harsh Realities 223

11-7 The Idea Behind Supply-Side Tax Cuts 223

11-7a Some Flies in the Ointment 225

Issue: The Partisan Debate Once More 226

11-7b Toward an Assessment of Supply-Side Economics 226

Summary 227

Key Terms 228

Test Yourself 228

Discussion Questions 228

Appendix A Graphical Treatment of Taxes and Fiscal Policy 229

Multipliers for Tax Policy 231

Summary 231

Key Terms 231

Test Yourself 232

Discussion Questions 232

Appendix B Algebraic Treatment of Taxes and Fiscal Policy 232

Test Yourself 234

Chapter 12 Money and the Banking System 235

Issue: Why Are Banks So Heavily Regulated? 235

12-1 The Nature of Money 236

12-1a Barter versus Monetary Exchange 237

12-1b The Conceptual Definition of Money 237

12-1c What Serves as Money? 238

12-2 How the Quantity of Money is Measured 240

12-2a M1 240

12-2b M2 240

12-2c Other Definitions of the Money Supply 241

12-3 The Banking System 241

12-3a How Banking Began 241

12-3b Principles of Bank Management: Profits versus Safety 243

12-3c Bank Regulation 244

12-3d Deposit Insurance 244

12-3e Bank Supervision 245

12-3f Reserve Requirements 245

12-4 Systemic Risk and the “Too Big to Fail” Doctrine 245

12-5 The Origins of the Money Supply 247

12-5a How Bankers Keep Books 247

12-6 Banks and Deposit Creation 248

12-6a The Limits to Deposit Creation by a Single Bank 248

12-6b Multiple Deposit Creation by a Series of Banks 249

12-6c The Process in Reverse: Multiple Contraction of Bank Deposits 251

12-7 Why the Deposit-Creation Formula is Oversimplified 252

12-8 The Need for Monetary Policy 253

Summary 254

Key Terms 255

Test Yourself 255

Discussion Questions 255

Chapter 13 Monetary Policy: Conventional and Unconventional 257

Issue: Why Resort to “Unconventional” Monetary Policies? 257

13-1 Money and Income: The Important Difference 258

13-2 America’s Central Bank: The Federal Reserve System 258

13-2a Origins and Structure 258

13-2b Central Bank Independence 259

13-3 Implementing Monetary Policy in Normal Times: Open-Market

Operations 260

13-3a The Market for Bank Reserves 261

13-3b The Mechanics of an Open-Market Operation 262

13-3c Open-Market Operations, Bond Prices, and Interest Rates 264

13-3d Which Interest Rate? 264

13-4 Other Instruments of Monetary Policy 266

13-4a Lending to Banks 266

13-4b Changing Reserve Requirements 268

13-4c Quantitative Easing 268

13-5 How Monetary Policy Works in Normal Times 269

13-5a Investment and Interest Rates 269

13-5b Monetary Policy and Total Expenditure 270

13-6 Money and the Price Level 271

13-7 Application: Why the Aggregate Demand Curve Slopes Downward 272

13-8 Unconventional Monetary Policies 273

13-9 From Financial Distress to Recession 273

13-10 From Models to Policy Debates 275

Summary 274

Key Terms 275

Test Yourself 275

Discussion Questions 276

Chapter 14 The Financial Crisis and the Great Recession 277

Issue: Did the Fiscal Stimulus Work? 277

14-1 Roots of the Crisis 278

14-2 Leverage, Profits, and Risk 279

14-3 The Housing Price Bubble and the Subprime Mortgage Crisis 280

14-4 From the Housing Bubble to the Financial Crisis 282

14-5 From the Financial Crisis to the Great Recession 285

14-6 Hitting Bottom and Recovering 289

Issue Revisited: Did the Fiscal Stimulus Work? 289

14-7 Lessons from the Financial Crisis 289

Summary 290

Key Terms 291

Test Yourself 291

Discussion Questions 291

Chapter 15 The Debate Over Monetary and Fiscal Policy 292

Issue: Should We Forsake Stabilization Policy? 292

15-1 Velocity and The Quantity Theory of Money 293

15-1a Some Determinants of Velocity 295

15-1b Monetarism: The Quantity Theory Modernized 295

15-2 Debate: Should The Fed Use Unconventional Monetary Policies? 296

Policy Debate: Does Money Growth Always Cause Inflation? 296

15-3 Debate: Should Policymakers Fight Asset Price Bubbles? 299

15-4 Debate: Should We Rely on Fiscal or Monetary Policy? 300

15-5 Debate: The Shape of The Aggregate Supply Curve 302

15-6 Debate: Should The Government Intervene At All? 304

15-6a Lags and the Rules-versus-Discretion Debate 305

15-7 Dimensions of The Rules-Versus-Discretion Debate 305

15-7a How Fast Does the Economy’s Self-Correcting Mechanism Work? 206

15-7b How Long Are the Lags in Stabilization Policy? 306

15-7c How Accurate Are Economic Forecasts? 306

15-7d The Size of Government 306

15-7e Uncertainties Caused by Government Policy 307

15-7f A Political Business Cycle? 307

Issue Revisited: What Should Be Done? 309

Summary 309

Key Terms 310

Test Yourself 310

Discussion Questions 311

Chapter 16 Budget Deficits in the Short and Long Run 312

Issue: Is the Federal Government Budget Deficit Too Large? 312

16-1 Should the Budget Always Be Balanced? The Short Run 313

16-2 The Importance of the Policy Mix 314

16-2a The Multiplier Formula Revisited 315

16-2b The Government Budget and Investment 315

16-3 Deficits and Debt: Terminology and Facts 317

16-3a Some Facts about the National Debt 317

16-4 Interpreting the Budget Deficit or Surplus 319

16-4a The Structural Deficit or Surplus 319

16-4b Conclusion: What’s Happened to the Deficit? 320

16-5 Why Is the National Debt Considered a Burden? 321

16-6 Budget Deficits and Inflation 322

16-6a The Monetization Issue 323

16-7 Debt, Interest Rates, and Crowding Out 324

16-7a The Bottom Line 325

16-8 The Main Burden of the National Debt: Slower Growth 326

Issue Revisited: Is the Budget Deficit Still Too Large? 327

16-9 The Economics And Politics of the U.S. Budget Deficit 328

Summary 329

Key Terms 330

Test Yourself 330

Discussion Questions 330

Chapter 17 The Trade-Off Between Inflation and Unemployment 331

Issue: Is the Trade-Off between Inflation and Unemployment a Relic of the Past? 331

17-1 Demand-Side Inflation Versus Supply-Side Inflation: A Review 332

17-2 Origins of the Phillips Curve 333

17-3 Supply-Side Inflation and the Collapse of the Phillips Curve 335

17-3a Explaining the Fabulous Late 1990s 335

Issue Revisited: Why Inflation and Unemployment Both Declined 336

17-4 What the Phillips Curve is not 336

17-5 Fighting Unemployment with Fiscal and Monetary Policy 338

17-6 What Should Be done? 339

17-6a The Costs of Inflation and Unemployment 339

17-6b The Slope of the Short-Run Phillips Curve 339

17-6c The Efficiency of the Economy’s Self-Correcting Mechanism 339

17-7 Inflationary Expectations and the Phillips Curve 340

17-8 The Theory of Rational Expectations 342

17-8a What Are Rational Expectations? 342

17-8b Rational Expectations and the Trade-Off 343

17-8c An Evaluation 344

17-9 Why Economists (and Politicians) Disagree 344

17-10 The Dilemma of Demand Management 345

17-11 Attempts to Improve the Trade-Off 345

17-11a Reducing the Natural Rate of Unemployment 345

17-11b Indexing Contracts for Inflation 346

Summary 347

Key Terms 347

Test Yourself 348

Discussion Questions 348

Part 4 The United States in the World Economy 349

Chapter 18 International Trade and Comparative Advantage 351

Issue: How Can Americans Compete with “Cheap Foreign Labor”? 352

18-1 Why Trade? 352

18-1a Mutual Gains from Trade 353

18-2 International Versus Intranational Trade 354

18-2a Political Factors in International Trade 354

18-2b The Many Currencies Involved in International Trade 354

18-2c Impediments to Mobility of Labor and Capital 354

18-3 The Principle of Comparative Advantage 355

18-4 The Arithmetic of Comparative Advantage 355

18-4a The Graphics of Comparative Advantage 356

18-4b Must Specialization Be Complete? 359

Issue Revisited: Comparative Advantage Exposes the “Cheap Foreign Labor” Fallacy 359

18-5 Tariffs, Quotas, and Other Interferences with Trade 359

18-5a Tariffs versus Quotas 361

18-6 Why Inhibit Trade? 362

18-6a Gaining a Price Advantage for Domestic Firms 362

18-6b Protecting Particular Industries 362

18-6c National Defense and Other Noneconomic Considerations 363

18-6d The Infant-Industry Argument 364

18-6e Strategic Trade Policy 364

18-7 Can Cheap Imports Hurt a Country? 365

Issue Resolved: Last Look at the “Cheap Foreign Labor” Argument 366

Summary 367

Key Terms 368

Test Yourself 368

Discussion Questions 368

Appendix Supply, Demand, and Pricing in World Trade 369

How Tariffs and Quotas Work 370

Summary 371

Test Yourself 371

Chapter 19 The International Monetary System: Order or Disorder? 372

Puzzle: Has the Value of the Dollar Really Sagged? 372

19-1 What are Exchange Rates? 373

19-2 Exchange Rate Determination in a Free Market 374

19-2a Interest Rates and Exchange Rates: The Short Run 376

19-2b Economic Activity and Exchange Rates: The Medium Run 376

19-2c The Purchasing-Power Parity Theory: The Long Run 377

19-2d Market Determination of Exchange Rates: Summary 378

19-3 When Governments Fix Exchange Rates: The Balance of Payments 379

19-4 A Bit of History: The Gold Standard and the Bretton Woods System 381

19-4a The Classical Gold Standard 381

19-4b The Bretton Woods System 382

19-5 Adjustment Mechanisms Under Fixed Exchange Rates 382

19-6 Why Try To Fix Exchange Rates? 383

19-7 The Current “Nonsystem” 384

19-7a The Role of the International Monetary Fund 385

19-7b The Volatile Dollar 385

19-7c The Birth and Adolescence of the Euro 386

Puzzle Resolved: Why the Dollar Rose, Then Fell, Then Rose 387

Summary 388

Key Terms 389

Test Yourself 389

Discussion Questions 389

Chapter 20 Exchange Rates and the Macroeconomy 391

Issue: Is a Cheaper Currency a Blessing? 392

20-1 International Trade, Exchange Rates, and Aggregate Demand 392

20-1a Relative Prices, Exports, and Imports 393

20-1b The Effects of Changes in Exchange Rates 393

20-2 Aggregate Supply in an Open Economy 394

20-3 The Macroeconomic Effects of Exchange Rates 395

20-3a Interest Rates and International Capital Flows 396

20-4 Fiscal and Monetary Policies in an Open Economy 396

20-4a Fiscal Policy Revisited 396

20-4b Monetary Policy Revisited 398

20-5 International Aspects of Deficit Reduction 398

20-5a The Loose Link between the Budget Deficit and the Trade Deficit 399

20-6 Should We Worry About the Trade Deficit? 400

20-7 On Curing the Trade Deficit 400

20-7a Change the Mix of Fiscal and Monetary Policy 400

20-7b More Rapid Economic Growth Abroad 401

20-7c Raise Domestic Saving or Reduce Domestic Investment 401

20-7d Protectionism 402

20-8 Conclusion: No Nation is an Island 402

Issue Revisited: Is a Cheaper Currency a Blessing? 403

Summary 403

Key Terms 404

Test Yourself 404

Discussion Questions 404

Part 5 The Economy Today 405

Chapter 21 Contemporary Issues in the U.S. Economy 407

21-1 Can We Grow Much Faster Than 2 Percent A Year? 407

21-2 Who Loses From Globalization? 409

21-3 Are Trade Wars “Good And Easy To Win”? 411

21-4 Where Is The National Debt Headed? 412

21-5 Has The Phillips Curve Disappeared? 414

Summary 415

Key Terms 415

Discussion Questions 415

Appendix 416

Glossary 428

Index 434

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