Principles of Economics, 9th Edition PDF by N. Gregory Mankiw


Principles of Economics, 9th Edition
By N. Gregory Mankiw
Principles of Economics


Preface: To the Instructor v
Preface: To the Student xxxi

Part I Introduction 1
Chapter 1
Ten Principles of Economics 1
1-1 How People Make Decisions 2
1-1a Principle 1: People Face Trade-Offs 2
1-1b Principle 2: The Cost of Something Is What You Give
Up to Get It 3
1-1c Principle 3: Rational People Think at the Margin 4
1-1d Principle 4: People Respond to Incentives 5
1-2 How People Interact 6
1-2a Principle 5: Trade Can Make Everyone Better Off 7
1-2b Principle 6: Markets Are Usually a Good Way to
Organize Economic Activity 7
fYI: Adam Smith and the Invisible Hand 8
case sTudY: Adam Smith Would Have Loved Uber 9
1-2c Principle 7: Governments Can Sometimes Improve
Market Outcomes 9
1-3 How the Economy as a Whole Works 11
1-3a Principle 8: A Country’s Standard of Living Depends
on Its Ability to Produce Goods and Services 11
1-3b Principle 9: Prices Rise When the Government Prints
Too Much Money 11
1-3c Principle 10: Society Faces a Short-Run Trade-Off
between Inflation and Unemployment 12
1-4 Conclusion 13
Chapter in a Nutshell 14
Key Concepts 14
Questions for Review 14
Problems and Applications 14
Quick Quiz Answers 15

Chapter 2
Thinking Like an Economist 17
2-1 The Economist as Scientist 18
2-1a The Scientific Method: Observation, Theory, and
More Observation 18
2-1b The Role of Assumptions 19
2-1c Economic Models 19
Preface: To the Instructor v
Preface: To the Student xxxi
2-1d Our First Model: The Circular-Flow Diagram 20
2-1e Our Second Model: The Production Possibilities
Frontier 21
2-1f Microeconomics and Macroeconomics 24
2-2 The Economist as Policy Adviser 25
2-2a Positive versus Normative Analysis 25
In The news: Why Tech Companies Hire Economists 26
2-2b Economists in Washington 27
2-2c Why Economists’ Advice Is Not Always Followed 28
2-3 Why Economists Disagree 29
2-3a Differences in Scientific Judgments 29
2-3b Differences in Values 30
2-3c Perception versus Reality 30
ask The exPerTs: Ticket Resale 32
2-4 Let’s Get Going 32
Chapter in a Nutshell 33
Key Concepts 33
Questions for Review 33
Problems and Applications 34
Quick Quiz Answers 34
APPENDIX Graphing: A Brief Review 35
Graphs of a Single Variable 35
Graphs of Two Variables: The Coordinate System 36
Curves in the Coordinate System 37
Slope 39
Cause and Effect 41

Chapter 3
interdependence and the Gains
from Trade 45
3-1 A Parable for the Modern Economy 46
3-1a Production Possibilities 46
3-1b Specialization and Trade 48
3-2 Comparative Advantage: The Driving Force of
Specialization 50
3-2a Absolute Advantage 50
3-2b Opportunity Cost and Comparative Advantage 50
3-2c Comparative Advantage and Trade 52
3-2d The Price of the Trade 52
fYI: The Legacy of Adam Smith and David Ricardo 53
3-3 Applications of Comparative Advantage 54
3-3a Should LeBron James Mow His Own Lawn? 54
3-3b Should the United States Trade with
Other Countries? 54
3-4 Conclusion 55
ask The exPerTs: Trade between China and the
United States 55
In The news: Economics within a Marriage 56
Chapter in a Nutshell 56
Key Concepts 57
Questions for Review 57
Problems and Applications 58
Quick Quiz Answers 59
ParT II How Markets Work 61
ChaPTer 4
The market Forces of supply
and Demand 61
4-1 Markets and Competition 62
4-1a What Is a Market? 62
4-1b What Is Competition? 62
4-2 Demand 63
4-2a The Demand Curve: The Relationship between
Price and Quantity Demanded 63
4-2b Market Demand versus Individual Demand 64
4-2c Shifts in the Demand Curve 65
case sTudY: Two Ways to Reduce Smoking 68
4-3 Supply 69
4-3a The Supply Curve: The Relationship between
Price and Quantity Supplied 69
4-3b Market Supply versus Individual Supply 70
4-3c Shifts in the Supply Curve 71
4-4 Supply and Demand Together 73
4-4a Equilibrium 73
4-4b Three Steps to Analyzing Changes in Equilibrium 75
In The news: Price Increases after Disasters 80
4-5 Conclusion: How Prices Allocate Resources 81
ask The exPerTs: Price Gouging 82
Chapter in a Nutshell 82
Key Concepts 83
Questions for Review 83
Problems and Applications 84
Quick Quiz Answers 85
ChaPTer 5
Elasticity and its Application 87
5-1 The Elasticity of Demand 88
5-1a The Price Elasticity of Demand and Its Determinants 88
5-1b Computing the Price Elasticity of Demand 89
5-1c The Midpoint Method: A Better Way to Calculate
Percentage Changes and Elasticities 90
5-1d The Variety of Demand Curves 91
fYI: A Few Elasticities from the Real World 91
5-1e Total Revenue and the Price Elasticity of Demand 93
5-1f Elasticity and Total Revenue along a Linear
Demand Curve 94
5-1g Other Demand Elasticities 96
5-2 The Elasticity of Supply 97
5-2a The Price Elasticity of Supply and
Its Determinants 97
5-2b Computing the Price Elasticity of Supply 98
5-2c The Variety of Supply Curves 98
5-3 Three Applications of Supply, Demand, and Elasticity 100
5-3a Can Good News for Farming Be Bad News
for Farmers? 101
5-3b Why Did OPEC Fail to Keep the Price
of Oil High? 103
5-3c Does Drug Interdiction Increase or Decrease
Drug-Related Crime? 104
5-4 Conclusion 106
Chapter in a Nutshell 106
Key Concepts 107
Questions for Review 107
Problems and Applications 107
Quick Quiz Answers 108
ChaPTer 6
supply, Demand, and Government
Policies 109
6-1 Controls on Prices 110
6-1a How Price Ceilings Affect Market Outcomes 110
case sTudY: Lines at the Gas Pump 112
case sTudY: Rent Control in the Short Run and
the Long Run 113
ask The exPerTs: Rent Control 114
6-1b How Price Floors Affect Market Outcomes 114
case sTudY: The Minimum Wage 116
ask The exPerTs: The Minimum Wage 117
6-1c Evaluating Price Controls 118
6-2 Taxes 119
6-2a How Taxes on Sellers Affect Market Outcomes 119
In The news: Should the Minimum Wage
Be $15 an Hour? 120
6-2b How Taxes on Buyers Affect Market Outcomes 122
case sTudY: Can Congress Distribute the Burden of a
Payroll Tax? 124
6-2c Elasticity and Tax Incidence 125
case sTudY: Who Pays the Luxury Tax? 126
6-3 Conclusion 127
Chapter in a Nutshell 127
Key Concepts 128
Questions for Review 128
Problems and Applications 128
Quick Quiz Answers 130
ParT III Markets and
Welfare 131
ChaPTer 7
consumers, Producers, and the
Efficiency of markets 131
7-1 Consumer Surplus 132
7-1a Willingness to Pay 132
7-1b Using the Demand Curve to Measure
Consumer Surplus 133
7-1c How a Lower Price Raises Consumer Surplus 134
7-1d What Does Consumer Surplus Measure? 135
7-2 Producer Surplus 137
7-2a Cost and the Willingness to Sell 137
7-2b Using the Supply Curve to Measure Producer
Surplus 138
7-2c How a Higher Price Raises Producer Surplus 140
7-3 Market Efficiency 141
7-3a The Benevolent Social Planner 141
7-3b Evaluating the Market Equilibrium 142
case sTudY: Should There Be a Market
for Organs? 145
ask The exPerTs: Supplying Kidneys 145
In The news: How Ticket Resellers Help Allocate
Scarce Resources 146
7-4 Conclusion: Market Efficiency and Market Failure 147
Chapter in a Nutshell 148
Key Concepts 148
Questions for Review 149
Problems and Applications 149
Quick Quiz Answers 150
ChaPTer 8
Application: The costs of Taxation 151
8-1 The Deadweight Loss of Taxation 152
8-1a How a Tax Affects Market Participants 152
8-1b Deadweight Losses and the Gains from Trade 155
8-2 The Determinants of the Deadweight Loss 157
case sTudY: The Deadweight Loss Debate 158
8-3 Deadweight Loss and Tax Revenue as Taxes Vary 160
case sTudY: The Laffer Curve and Supply-Side
Economics 161
ask The exPerTs: The Laffer Curve 162
8-4 Conclusion 163
Chapter in a Nutshell 163
Key Concept 164
Questions for Review 164
Problems and Applications 164
Quick Quiz Answers 165
ChaPTer 9
Application: international Trade 167
9-1 The Determinants of Trade 168
9-1a The Equilibrium without Trade 168
9-1b The World Price and Comparative Advantage 169
9-2 The Winners and Losers from Trade 170
9-2a The Gains and Losses of an Exporting Country 170
9-2b The Gains and Losses of an Importing Country 171
9-2c The Effects of a Tariff 173
fYI: Import Quotas: Another Way to Restrict Trade 175
9-2d The Lessons for Trade Policy 175
9-2e Other Benefits of International Trade 176
In The news: Trade as a Tool for Economic
Development 178
9-3 The Arguments for Restricting Trade 178
9-3a The Jobs Argument 178
9-3b The National-Security Argument 179
9-3c The Infant-Industry Argument 180
9-3d The Unfair-Competition Argument 180
9-3e The Protection-as-a-Bargaining-Chip Argument 180
case sTudY: Trade Agreements and the World Trade
Organization 181
ask The exPerTs: Tariffs and Trade Deals 181
In The news: The Trade Policies of
President Trump 182
9-4 Conclusion 183
Chapter in a Nutshell 184
Key Concepts 184
Questions for Review 185
Problems and Applications 185
Quick Quiz Answers 186
ParT Iv The Economics of the
Public Sector 187
ChaPTer 10
Externalities 187
10-1 Externalities and Market Inefficiency 189
10-1a Welfare Economics: A Recap 189
10-1b Negative Externalities 190
10-1c Positive Externalities 191
case sTudY: Technology Spillovers, Industrial Policy,
and Patent Protection 192
10-2 Public Policies toward Externalities 193
10-2a Command-and-Control Policies: Regulation 193
ask The exPerTs: Vaccines 194
10-2b Market-Based Policy 1: Corrective Taxes
and Subsidies 194
case sTudY: Why Is Gasoline Taxed So Heavily? 195
10-2c Market-Based Policy 2: Tradable Pollution Permits 197
In The news: What Should We Do about
Climate Change? 198
ask The exPerTs: Carbon Taxes 200
10-2d Objections to the Economic Analysis
of Pollution 200
10-3 Private Solutions to Externalities 201
10-3a The Types of Private Solutions 201
10-3b The Coase Theorem 202
10-3c Why Private Solutions Do Not Always Work 203
In The news: The Coase Theorem in Action 204
10-4 Conclusion 204
Chapter in a Nutshell 205
Key Concepts 206
Questions for Review 206
Problems and Applications 206
Quick Quiz Answers 207
ChaPTer 11
Public Goods and common
Resources 209
11-1 The Different Kinds of Goods 210
11-2 Public Goods 212
11-2a The Free-Rider Problem 212
11-2b Some Important Public Goods 213
case sTudY: Are Lighthouses Public Goods? 214
11-2c The Difficult Job of Cost–Benefit Analysis 215
case sTudY: How Much Is a Life Worth? 215
11-3 Common Resources 217
11-3a The Tragedy of the Commons 217
11-3b Some Important Common Resources 218
ask The exPerTs: Congestion Pricing 218
case sTudY: Why the Cow Is Not Extinct 219
In The news: Social Media as a Common Resource 220
11-4 Conclusion: The Importance of Property Rights 221
Chapter in a Nutshell 222
Key Concepts 222
Questions for Review 222
Problems and Applications 223
Quick Quiz Answers 224
ChaPTer 12
The Design of the Tax system 225
12-1 An Overview of U.S. Taxation 226
12-1a Taxes Collected by the Federal Government 227
12-1b Taxes Collected by State and Local Governments 229
12-2 Taxes and Efficiency 230
12-2a Deadweight Losses 231
case sTudY: Should Income or Consumption
Be Taxed? 231
12-2b Administrative Burden 232
12-2c Marginal Tax Rates versus Average Tax Rates 233
12-2d Lump-Sum Taxes 233
ask The exPerTs: Top Marginal Tax Rates 233
12-3 Taxes and Equity 234
12-3a The Benefits Principle 235
12-3b The Ability-to-Pay Principle 235
case sTudY: How the Tax Burden Is Distributed 236
12-3c Tax Incidence and Tax Equity 238
case sTudY: Who Pays the Corporate
Income Tax? 238
12-4 Conclusion: The Trade-Off between Equity
and Efficiency 239
Chapter in a Nutshell 240
Key Concepts 240
Questions for Review 240
Problems and Applications 241
Quick Quiz Answers 241
ParT v Firm Behavior and
the Organization of
Industry 243

ChaPTer 13
The costs of Production 243
13-1 What Are Costs? 244
13-1a Total Revenue, Total Cost, and Profit 244
13-1b Costs as Opportunity Costs 244
13-1c The Cost of Capital as an Opportunity Cost 245
13-1d Economic Profit versus Accounting Profit 246
13-2 Production and Costs 247
13-2a The Production Function 247
13-2b From the Production Function to the
Total-Cost Curve 249
13-3 The Various Measures of Cost 250
13-3a Fixed and Variable Costs 251
13-3b Average and Marginal Cost 251
13-3c Cost Curves and Their Shapes 252
13-3d Typical Cost Curves 254
13-4 Costs in the Short Run and in the Long Run 256
13-4a The Relationship between Short-Run and Long-Run
Average Total Cost 256
13-4b Economies and Diseconomies of Scale 257
fYI: Lessons from a Pin Factory 258
13-5 Conclusion 258
Chapter in a Nutshell 259
Key Concepts 260
Questions for Review 260
Problems and Applications 260
Quick Quiz Answers 262
ChaPTer 14
Firms in competitive markets 263
14-1 What Is a Competitive Market? 264
14-1a The Meaning of Competition 264
14-1b The Revenue of a Competitive Firm 264
14-2 Profit Maximization and the Competitive Firm’s
Supply Curve 266
14-2a A Simple Example of Profit Maximization 266
14-2b The Marginal-Cost Curve and the Firm’s
Supply Decision 268
14-2c The Firm’s Short-Run Decision to Shut Down 270
14-2d Spilt Milk and Other Sunk Costs 271
case sTudY: Near-Empty Restaurants and Off-Season
Miniature Golf 272
14-2e The Firm’s Long-Run Decision to Exit or Enter
a Market 272
14-2f Measuring Profit in Our Graph for the
Competitive Firm 274
14-2g A Brief Recap 275
14-3 The Supply Curve in a Competitive Market 276
14-3a The Short Run: Market Supply with a Fixed Number
of Firms 276
14-3b The Long Run: Market Supply with Entry and Exit 276
14-3c Why Do Competitive Firms Stay in Business If They
Make Zero Profit? 278
14-3d A Shift in Demand in the Short Run and Long Run 279
14-3e Why the Long-Run Supply Curve Might
Slope Upward 279
14-4 Conclusion: Behind the Supply Curve 281
Chapter in a Nutshell 282
Key Concepts 282
Questions for Review 282
Problems and Applications 283
Quick Quiz Answers 285
ChaPTer 15
monopoly 287
15-1 Why Monopolies Arise 288
15-1a Monopoly Resources 289
15-1b Government-Created Monopolies 289
15-1c Natural Monopolies 290
15-2 How Monopolies Make Production and Pricing
Decisions 291
15-2a Monopoly versus Competition 291
15-2b A Monopoly’s Revenue 292
15-2c Profit Maximization 294
15-2d A Monopoly’s Profit 296
fYI: Why a Monopoly Does Not Have a Supply Curve 297
case sTudY: Monopoly Drugs versus Generic Drugs 297
15-3 The Welfare Cost of Monopolies 299
15-3a The Deadweight Loss 299
15-3b The Monopoly’s Profit: A Social Cost? 301
15-4 Price Discrimination 302
15-4a A Parable about Pricing 302
15-4b The Moral of the Story 303
15-4c The Analytics of Price Discrimination 304
15-4d Examples of Price Discrimination 305
In The news: Price Discrimination Reaches
the Supreme Court 306
15-5 Public Policy toward Monopolies 308
15-5a Increasing Competition with Antitrust Laws 308
15-5b Regulation 309
ask The exPerTs: Mergers 310
15-5c Public Ownership 310
15-5d Doing Nothing 311
15-6 Conclusion: The Prevalence of Monopolies 311
Chapter in a Nutshell 312
Key Concepts 313
Questions for Review 313
Problems and Applications 313
Quick Quiz Answers 316
ChaPTer 16
monopolistic competition 317
16-1 Between Monopoly and Perfect Competition 318
16-2 Competition with Differentiated Products 320
16-2a The Monopolistically Competitive Firm in the
Short Run 320
16-2b The Long-Run Equilibrium 322
16-2c Monopolistic versus Perfect Competition 323
16-2d Monopolistic Competition and the Welfare
of Society 324
16-3 Advertising 326
16-3a The Debate over Advertising 326
case sTudY: How Advertising Affects Prices 327
16-3b Advertising as a Signal of Quality 328
16-3c Brand Names 329
16-4 Conclusion 331
Chapter in a Nutshell 332
Key Concepts 332
Questions for Review 332
Problems and Applications 332
Quick Quiz Answers 333
ChaPTer 17
oligopoly 335
17-1 Markets with Only a Few Sellers 336
17-1a A Duopoly Example 336
17-1b Competition, Monopolies, and Cartels 336
17-1c The Equilibrium for an Oligopoly 338
17-1d How the Size of an Oligopoly Affects the Market
Outcome 339
ask The exPerTs: Market Share and Market Power 340
17-2 The Economics of Cooperation 341
17-2a The Prisoners’ Dilemma 341
17-2b Oligopolies as a Prisoners’ Dilemma 342
case sTudY: OPEC and the World Oil Market 343
17-2c Other Examples of the Prisoners’ Dilemma 344
17-2d The Prisoners’ Dilemma and the Welfare of Society 345
17-2e Why People Sometimes Cooperate 346
case sTudY: The Prisoners’ Dilemma Tournament 346
17-3 Public Policy toward Oligopolies 347
17-3a Restraint of Trade and the Antitrust Laws 347
case sTudY: An Illegal Phone Call 348
17-3b Controversies over Antitrust Policy 349
case sTudY: The Microsoft Case 351
In The news: Is Amazon the Next Antitrust Target? 352
17-4 Conclusion 353
Chapter in a Nutshell 354
Key Concepts 354
Questions for Review 354
Problems and Applications 354
Quick Quiz Answers 356
ParT vI The Economics of
Labor Markets 357
ChaPTer 18
The markets for the Factors of
Production 357
18-1 The Demand for Labor 358
18-1a The Competitive Profit-Maximizing Firm 358
18-1b The Production Function and the Marginal Product
of Labor 359
18-1c The Value of the Marginal Product and the Demand
for Labor 361
18-1d What Causes the Labor-Demand Curve to Shift? 362
fYI: Input Demand and Output Supply: Two Sides of the
Same Coin 363
18-2 The Supply of Labor 364
18-2a The Trade-Off between Work and Leisure 364
18-2b What Causes the Labor-Supply Curve to Shift? 365
18-3 Equilibrium in the Labor Market 366
ask The exPerTs: Immigration 366
18-3a Shifts in Labor Supply 366
18-3b Shifts in Labor Demand 368
case sTudY: Productivity and Wages 369
fYI: Monopsony 370
18-4 The Other Factors of Production: Land and Capital 370
18-4a Equilibrium in the Markets for Land and Capital 371
fYI: What Is Capital Income? 372
18-4b Linkages among the Factors of Production 372
case sTudY: The Economics of the Black Death 373
In The news: The Winners and Losers from
Immigration 374
18-5 Conclusion 374
Chapter in a Nutshell 376
Key Concepts 376
Questions for Review 376
Problems and Applications 376
Quick Quiz Answers 378
ChaPTer 19
Earnings and Discrimination 379
19-1 Some Determinants of Equilibrium Wages 380
19-1a Compensating Differentials 380
19-1b Human Capital 380
case sTudY: The Increasing Value of Skills 381
ask The exPerTs: Inequality and Skills 382
19-1c Ability, Effort, and Chance 382
case sTudY: The Benefits of Beauty 383
19-1d An Alternative View of Education: Signaling 383
19-1e The Superstar Phenomenon 384
19-1f Above-Equilibrium Wages: Minimum-Wage Laws,
Unions, and Efficiency Wages 385
In The news: Schooling as a Public Investment 386
19-2 The Economics of Discrimination 387
19-2a Measuring Labor-Market Discrimination 387
case sTudY: Is Emily More Employable than Lakisha? 389
19-2b Discrimination by Employers 389
case sTudY: Segregated Streetcars and the Profit Motive 390
19-2c Discrimination by Customers and Governments 391
case sTudY: Discrimination in Sports 391
19-2d Statistical Discrimination 392
19-3 Conclusion 393
Chapter in a Nutshell 394
Key Concepts 394
Questions for Review 394
Problems and Applications 395
Quick Quiz Answers 395
ChaPTer 20
income inequality and Poverty 397
20-1 Measuring Inequality 398
20-1a U.S. Income Inequality 398
20-1b Inequality Around the World 399
fYI: Incomes of the Super-Rich 400
20-1c The Poverty Rate 400
20-1d Problems in Measuring Inequality 403
In The news: Are We Winning the War on Poverty? 404
case sTudY: Alternative Measures of Inequality 404
20-1e Economic Mobility 405
20-2 The Political Philosophy of Redistributing Income 406
20-2a Utilitarianism 407
20-2b Liberalism 408
20-2c Libertarianism 409
20-3 Policies to Reduce Poverty 410
20-3a Minimum-Wage Laws 410
20-3b Welfare 411
20-3c Negative Income Tax 411
20-3d In-Kind Transfers 412
20-3e Antipoverty Programs and Work Incentives 413
In The news: International Differences in Income
Redistribution 414
20-4 Conclusion 416
Chapter in a Nutshell 416
Key Concepts 416
Questions for Review 417
Problems and Applications 417
Quick Quiz Answers 418
ParT vII Topics for Further
Study 419
ChaPTer 21
The Theory of consumer choice 419
21-1 The Budget Constraint: What a Consumer Can Afford 420
21-1a Representing Consumption Opportunities
in a Graph 420
21-1b Shifts in the Budget Constraint 421
21-2 Preferences: What a Consumer Wants 423
21-2a Representing Preferences with Indifference Curves 423
21-2b Four Properties of Indifference Curves 424
21-2c Two Extreme Examples of Indifference Curves 426
21-3 Optimization: What a Consumer Chooses 428
21-3a The Consumer’s Optimal Choices 428
21-3b How Changes in Income Affect the
Consumer’s Choices 429
fYI: Utility: An Alternative Way to Describe Preferences
and Optimization 430
21-3c How Changes in Prices Affect the Consumer’s
Choices 430
21-3d Income and Substitution Effects 432
21-3e Deriving the Demand Curve 433
21-4 Three Applications 435
21-4a Do All Demand Curves Slope Downward? 435
case sTudY: The Search for Giffen Goods 436
21-4b How Do Wages Affect Labor Supply? 436
case sTudY: Income Effects on Labor Supply: Historical
Trends, Lottery Winners, and the Carnegie
Conjecture 439
21-4c How Do Interest Rates Affect Household Saving? 440
21-5 Conclusion: Do People Really Think This Way? 443
Chapter in a Nutshell 443
Key Concepts 444
Questions for Review 444
Problems and Applications 444
Quick Quiz Answers 445
ChaPTer 22
Frontiers of microeconomics 447
22-1 Asymmetric Information 448
22-1a Hidden Actions: Principals, Agents, and Moral Hazard 448
fYI: Corporate Management 449
22-1b Hidden Characteristics: Adverse Selection and the
Lemons Problem 450
22-1c Signaling to Convey Private Information 450
case sTudY: Gifts as Signals 451
22-1d Screening to Uncover Private Information 452
22-1e Asymmetric Information and Public Policy 452
22-2 Political Economy 453
22-2a The Condorcet Voting Paradox 453
22-2b Arrow’s Impossibility Theorem 454
22-2c The Median Voter Is King 455
22-2d Politicians Are People Too 457
22-3 Behavioral Economics 458
22-3a People Aren’t Always Rational 458
22-3b People Care about Fairness 459
22-3c People Are Inconsistent over Time 460
ask The exPerTs: Behavioral Economics 461
In The news: Using Deviations from Rationality 462
22-4 Conclusion 464
Chapter in a Nutshell 464
Key Concepts 464
Questions for Review 465
Problems and Applications 465
Quick Quiz Answers 466
ParT vIII The Data of
Macroeconomics 467
ChaPTer 23
measuring a nation’s income 467
23-1 The Economy’s Income and Expenditure 468
23-2 The Measurement of GDP 470
23-2a “GDP Is the Market Value . . .” 470
23-2b “. . . of All . . . ” 470
23-2c “. . . Final . . . ” 471
23-2d “. . . Goods and Services . . . ” 471
23-2e “. . . Produced . . . ” 471
23-2f “. . . Within a Country . . . ” 471
23-2g “. . . In a Given Period of Time.” 471
fYI: Other Measures of Income 472
23-3 The Components of GDP 473
23-3a Consumption 473
23-3b Investment 473
23-3c Government Purchases 474
23-3d Net Exports 474
case sTudY: The Components of U.S. GDP 475
23-4 Real versus Nominal GDP 476
23-4a A Numerical Example 476
23-4b The GDP Deflator 477
case sTudY: A Half Century of Real GDP 478
23-5 Is GDP a Good Measure of Economic Well-Being? 480
case sTudY: International Differences in GDP and the
Quality of Life 481
In The news: Sex, Drugs, and GDP 482
23-6 Conclusion 483
Chapter in a Nutshell 484
Key Concepts 484
Questions for Review 484
Problems and Applications 484
Quick Quiz Answers 486
ChaPTer 24
measuring the cost of Living 487
24-1 The Consumer Price Index 488
24-1a How the CPI Is Calculated 488
fYI: What’s in the CPI’s Basket? 490
24-1b Problems in Measuring the Cost of Living 491
24-1c The GDP Deflator versus the Consumer Price Index 492
24-2 Correcting Economic Variables for the Effects
of Inflation 494
24-2a Dollar Figures from Different Times 494
fYI: Mr. Index Goes to Hollywood 495
case sTudY: Regional Differences in the Cost of Living 495
24-2b Indexation 497
24-2c Real and Nominal Interest Rates 497
case sTudY: Interest Rates in the U.S. Economy 499
24-3 Conclusion 500
Chapter in a Nutshell 501
Key Concepts 501
Questions for Review 501
Problems and Applications 502
Quick Quiz Answers 503
ParT Ix The Real Economy
in the Long Run 505
ChaPTer 25
Production and Growth 505
25-1 Economic Growth around the World 506
fYI: Are You Richer Than the Richest American? 508
25-2 Productivity: Its Role and Determinants 508
25-2a Why Productivity Is So Important 509
25-2b How Productivity Is Determined 509
fYI: The Production Function 511
case sTudY: Are Natural Resources a Limit
to Growth? 512
25-3 Economic Growth and Public Policy 513
25-3a Saving and Investment 513
25-3b Diminishing Returns and the Catch-Up Effect 513
25-3c Investment from Abroad 515
25-3d Education 516
25-3e Health and Nutrition 516
25-3f Property Rights and Political Stability 517
25-3g Free Trade 518
25-3h Research and Development 519
ask The exPerTs: Innovation and Growth 519
25-3i Population Growth 519
case sTudY: Why Is So Much of Africa Poor? 521
In The news: The Secret Sauce of American
Prosperity 524
25-4 Conclusion: The Importance of Long-Run Growth 524
Chapter in a Nutshell 525
Key Concepts 526
Questions for Review 526
Problems and Applications 526
Quick Quiz Answers 527
ChaPTer 26
saving, investment, and the
Financial system 529
26-1 Financial Institutions in the U.S. Economy 530
26-1a Financial Markets 530
26-1b Financial Intermediaries 532
26-1c Summing Up 534
26-2 Saving and Investment in the National Income Accounts 534
26-2a Some Important Identities 535
26-2b The Meaning of Saving and Investment 536
26-3 The Market for Loanable Funds 537
26-3a Supply and Demand for Loanable Funds 537
26-3b Policy 1: Saving Incentives 539
26-3c Policy 2: Investment Incentives 541
26-3d Policy 3: Government Budget Deficits and
Surpluses 542
ask The exPerTs: Fiscal Policy and Saving 543
case sTudY: The History of U.S. Government Debt 544
fYI: Financial Crises 546
26-4 Conclusion 547
Chapter in a Nutshell 547
Key Concepts 547
Questions for Review 548
Problems and Applications 548
Quick Quiz Answers 549
ChaPTer 27
The Basic Tools of Finance 551
27-1 Present Value: Measuring the Time Value of Money 552
fYI: The Magic of Compounding and the Rule of 70 554
27-2 Managing Risk 554
27-2a Risk Aversion 555
27-2b The Markets for Insurance 555
27-2c Diversification of Firm-Specific Risk 556
27-2d The Trade-Off between Risk and Return 557
27-3 Asset Valuation 559
27-3a Fundamental Analysis 559
fYI: Key Numbers for Stock Watchers 560
27-3b The Efficient Markets Hypothesis 560
case sTudY: Random Walks and Index Funds 561
ask The exPerTs: Diversified Investing 562
27-3c Market Irrationality 562
27-4 Conclusion 563
Chapter in a Nutshell 563
Key Concepts 564
Questions for Review 564
Problems and Applications 564
Quick Quiz Answers 565
ChaPTer 28
Unemployment 567
28-1 Identifying Unemployment 568
28-1a How Is Unemployment Measured? 568
case sTudY: Labor-Force Participation of Men and
Women in the U.S. Economy 571
28-1b Does the Unemployment Rate Measure What We
Want It to Measure? 572
28-1c How Long Are the Unemployed without Work? 574
28-1d Why Are There Always Some People Unemployed? 574
fYI: The Jobs Number 575
28-2 Job Search 576
28-2a Why Some Frictional Unemployment
Is Inevitable 576
28-2b Public Policy and Job Search 576
28-2c Unemployment Insurance 577
28-3 Minimum-Wage Laws 578
case sTudY: Who Earns the Minimum Wage? 579
28-4 Unions and Collective Bargaining 581
28-4a The Economics of Unions 581
28-4b Are Unions Good or Bad for the Economy? 582
28-5 The Theory of Efficiency Wages 583
28-5a Worker Health 583
28-5b Worker Turnover 584
28-5c Worker Quality 584
28-5d Worker Effort 584
case sTudY: Henry Ford and the Very Generous
$5-a-Day Wage 585
28-6 Conclusion 586
Chapter in a Nutshell 586
Key Concepts 587
Questions for Review 587
Problems and Applications 587
Quick Quiz Answers 588
ParT x Money and Prices
in the Long Run 589
ChaPTer 29
The monetary system 589
29-1 The Meaning of Money 590
29-1a The Functions of Money 590
29-1b The Kinds of Money 591
fYI: Cryptocurrencies: A Fad or the Future? 592
29-1c Money in the U.S. Economy 593
fYI: Why Credit Cards Aren’t Money 594
case sTudY: Where Is All the Currency? 594
29-2 The Federal Reserve System 595
29-2a The Fed’s Organization 595
29-2b The Federal Open Market Committee 596
29-3 Banks and the Money Supply 597
29-3a The Simple Case of 100-Percent-Reserve
Banking 597
29-3b Money Creation with Fractional-Reserve
Banking 598
29-3c The Money Multiplier 599
29-3d Bank Capital, Leverage, and the Financial Crisis of
2008–2009 600
29-4 The Fed’s Tools of Monetary Control 602
29-4a How the Fed Influences the Quantity of Reserves 602
29-4b How the Fed Influences the Reserve Ratio 604
29-4c Problems in Controlling the Money Supply 604
case sTudY: Bank Runs and the Money Supply 605
In The news: A Trip to Jekyll Island 606
29-4d The Federal Funds Rate 606
29-5 Conclusion 608
Chapter in a Nutshell 609
Key Concepts 609
Questions for Review 609
Problems and Applications 610
Quick Quiz Answers 611
ChaPTer 30
money Growth and inflation 613
30-1 The Classical Theory of Inflation 614
30-1a The Level of Prices and the Value of Money 615
30-1b Money Supply, Money Demand, and Monetary
Equilibrium 615
30-1c The Effects of a Monetary Injection 617
30-1d A Brief Look at the Adjustment Process 618
30-1e The Classical Dichotomy and Monetary Neutrality 619
30-1f Velocity and the Quantity Equation 620
case sTudY: Money and Prices during Four
Hyperinflations 622
30-1g The Inflation Tax 622
30-1h The Fisher Effect 624
30-2 The Costs of Inflation 626
30-2a A Fall in Purchasing Power? The Inflation Fallacy 626
30-2b Shoeleather Costs 627
30-2c Menu Costs 628
30-2d Relative-Price Variability and the Misallocation of
Resources 628
30-2e Inflation-Induced Tax Distortions 629
30-2f Confusion and Inconvenience 630
30-2g A Special Cost of Unexpected Inflation: Arbitrary
Redistributions of Wealth 631
30-2h Inflation Is Bad, but Deflation May Be Worse 631
case sTudY: The Wizard of Oz and the Free-Silver
Debate 632
In The news: Life During Hyperinflation 634
30-3 Conclusion 634
Chapter in a Nutshell 636
Key Concepts 636
Questions for Review 636
Problems and Applications 637
Quick Quiz Answers 637
ParT xI The Macroeconomics
of Open
Economies 639
ChaPTer 31
open-Economy macroeconomics:
Basic concepts 639
31-1 The International Flows of Goods and Capital 640
31-1a The Flow of Goods: Exports, Imports, and
Net Exports 640
case sTudY: The Increasing Openness of the
U.S. Economy 641
31-1b The Flow of Financial Resources: Net Capital Outflow 642
31-1c The Equality of Net Exports and Net Capital Outflow 643
31-1d Saving, Investment, and Their Relationship to the
International Flows 645
31-1e Summing Up 646
case sTudY: Is the U.S. Trade Deficit a National Problem? 647
ask The exPerTs: Trade Balances and Trade
Negotiations 648
31-2 The Prices for International Transactions: Real and
Nominal Exchange Rates 649
31-2a Nominal Exchange Rates 649
31-2b Real Exchange Rates 650
fYI: The Euro 651
31-3 A First Theory of Exchange-Rate Determination:
Purchasing-Power Parity 652
31-3a The Basic Logic of Purchasing-Power Parity 653
31-3b Implications of Purchasing-Power Parity 653
case sTudY: The Nominal Exchange Rate during a
Hyperinflation 655
31-3c Limitations of Purchasing-Power Parity 656
case sTudY: The Hamburger Standard 656
31-4 Conclusion 657
Chapter in a Nutshell 658
Key Concepts 658
Questions for Review 658
Problems and Applications 658
Quick Quiz Answers 659
ChaPTer 32
A macroeconomic Theory of the
open Economy 661
32-1 Supply and Demand for Loanable Funds and for
Foreign-Currency Exchange 662
32-1a The Market for Loanable Funds 662
32-1b The Market for Foreign-Currency Exchange 664
fYI: Purchasing-Power Parity as a Special Case 666
32-2 Equilibrium in the Open Economy 667
32-2a Net Capital Outflow: The Link between the
Two Markets 667
32-2b Simultaneous Equilibrium in Two Markets 668
fYI: Disentangling Supply and Demand 670
32-3 How Policies and Events Affect an
Open Economy 670
32-3a Government Budget Deficits 671
32-3b Trade Policy 673
ask The exPerTs: Deficits 673
32-3c Political Instability and Capital Flight 675
case sTudY: Capital Flows from China 677
In The news: Separating Fact from Fiction 678
ask The exPerTs: Currency Manipulation 678
32-4 Conclusion 680
Chapter in a Nutshell 680
Key Concepts 681
Questions for Review 681
Problems and Applications 681
Quick Quiz Answers 682
ParT xII Short-Run Economic
Fluctuations 683
ChaPTer 33
Aggregate Demand and Aggregate
supply 683
33-1 Three Key Facts about Economic Fluctuations 684
33-1a Fact 1: Economic Fluctuations Are Irregular
and Unpredictable 684
33-1b Fact 2: Most Macroeconomic Quantities Fluctuate
Together 686
33-1c Fact 3: As Output Falls, Unemployment Rises 686
33-2 Explaining Short-Run Economic Fluctuations 687
33-2a The Assumptions of Classical Economics 687
33-2b The Reality of Short-Run Fluctuations 687
33-2c The Model of Aggregate Demand and Aggregate Supply 688
33-3 The Aggregate-Demand Curve 689
33-3a Why the Aggregate-Demand Curve Slopes
Downward 689
33-3b Why the Aggregate-Demand Curve Might Shift 692
33-4 The Aggregate-Supply Curve 695
33-4a Why the Aggregate-Supply Curve Is Vertical in
the Long Run 695
33-4b Why the Long-Run Aggregate-Supply Curve
Might Shift 696
33-4c Using Aggregate Demand and Aggregate Supply
to Depict Long-Run Growth and Inflation 697
33-4d Why the Aggregate-Supply Curve Slopes Upward
in the Short Run 699
33-4e Why the Short-Run Aggregate-Supply Curve
Might Shift 702
33-5 Two Causes of Economic Fluctuations 704
33-5a The Effects of a Shift in Aggregate Demand 705
fYI: Monetary Neutrality Revisited 707
case sTudY: Two Big Shifts in Aggregate Demand: The
Great Depression and World War II 707
case sTudY: The Great Recession of 2008–2009 709
33-5b The Effects of a Shift in Aggregate Supply 711
case sTudY: Oil and the Economy 713
fYI: The Origins of the Model of Aggregate Demand and
Aggregate Supply 714
33-6 Conclusion 714
Chapter in a Nutshell 715
Key Concepts 715
Questions for Review 716
Problems and Applications 716
Quick Quiz Answers 717
ChaPTer 34
The influence of monetary and Fiscal
Policy on Aggregate Demand 719
34-1 How Monetary Policy Influences Aggregate Demand 720
34-1a The Theory of Liquidity Preference 721
34-1b The Downward Slope of the Aggregate-Demand Curve 723
fYI: Interest Rates in the Long Run and the Short Run 724
34-1c Changes in the Money Supply 725
34-1d The Role of Interest-Rate Targets in Fed Policy 727
case sTudY: Why the Fed Watches the Stock Market
(and Vice Versa) 727
34-1e The Zero Lower Bound 728
34-2 How Fiscal Policy Influences Aggregate Demand 730
34-2a Changes in Government Purchases 730
34-2b The Multiplier Effect 730
34-2c A Formula for the Spending Multiplier 731
34-2d Other Applications of the Multiplier Effect 732
34-2e The Crowding-Out Effect 733
34-2f Changes in Taxes 734
fYI: How Fiscal Policy Might Affect
Aggregate Supply 735
34-3 Using Policy to Stabilize the Economy 736
34-3a The Case for Active Stabilization Policy 736
case sTudY: Keynesians in the White House 737
ask The exPerTs: Economic Stimulus 737
In The news: How Large Is the Fiscal
Policy Multiplier? 738
34-3b The Case against Active Stabilization Policy 739
34-3c Automatic Stabilizers 741
34-4 Conclusion 742
Chapter in a Nutshell 742
Key Concepts 743
Questions for Review 743
Problems and Applications 743
Quick Quiz Answers 744
ChaPTer 35
The short-Run Trade-off between
inflation and Unemployment 745
35-1 The Phillips Curve 746
35-1a Origins of the Phillips Curve 746
35-1b Aggregate Demand, Aggregate Supply, and the
Phillips Curve 747
35-2 Shifts in the Phillips Curve: The Role
of Expectations 749
35-2a The Long-Run Phillips Curve 749
35-2b The Meaning of “Natural” 751
35-2c Reconciling Theory and Evidence 752
35-2d The Short-Run Phillips Curve 753
35-2e The Natural Experiment for the Natural-Rate
Hypothesis 754
35-3 Shifts in the Phillips Curve: The Role of
Supply Shocks 756
35-4 The Cost of Reducing Inflation 759
35-4a The Sacrifice Ratio 759
35-4b Rational Expectations and the Possibility of Costless
Disinflation 761
35-4c The Volcker Disinflation 762
35-4d The Greenspan Era 763
35-4e A Financial Crisis Takes Us for a Ride along the
Phillips Curve 764
35-5 Conclusion 766
Chapter in a Nutshell 766
Key Concepts 766
Questions for Review 767
Problems and Applications 767
Quick Quiz Answers 768
ParT xII Final Thoughts 769
ChaPTer 36
six Debates over macroeconomic
Policy 769
36-1 Should Monetary and Fiscal Policymakers Try to Stabilize
the Economy? 770
36-1a Pro: Policymakers Should Try to Stabilize
the Economy 770
36-1b Con: Policymakers Should Not Try to Stabilize
the Economy 770
36-2 Should the Government Fight Recessions with Spending
Hikes Rather Than Tax Cuts? 772
36-2a Pro: The Government Should Fight Recessions
with Spending Hikes 772
36-2b Con: The Government Should Fight Recessions
with Tax Cuts 773
36-3 Should Monetary Policy Be Made by Rule Rather Than by
Discretion? 775
36-3a Pro: Monetary Policy Should Be Made by Rule 775
36-3b Con: Monetary Policy Should Not Be Made by Rule 776
fYI: Inflation Targeting 777
36-4 Should the Central Bank Aim for Zero Inflation? 778
36-4a Pro: The Central Bank Should Aim for
Zero Inflation 778
36-4b Con: The Central Bank Should Not Aim for Zero
Inflation 779
In The news: A Central Bank Assesses Its Policy 780
36-5 Should the Government Balance Its Budget? 782
36-5a Pro: The Government Should Balance
Its Budget 782
36-5b Con: The Government Should Not Balance
Its Budget 783
36-6 Should the Tax Laws Be Reformed to Encourage
Saving? 785
36-6a Pro: The Tax Laws Should Be Reformed to Encourage
Saving 785
ask The exPerTs: Taxing Capital and Labor 786
36-6b Con: The Tax Laws Should Not Be Reformed to
Encourage Saving 786
36-7 Conclusion 787
Chapter in a Nutshell 788
Questions for Review 788
Problems and Applications 789
Quick Quiz Answers 789

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