Brief Principles of Macroeconomics, Ninth Edition
By N. Gregory Mankiw
Contents
Preface: To the Instructor v
Preface: To the Student xxii
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 xxii
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
Part III The Data of
Macroeconomics 87
Chapter 5
Measuring a Nation’s Income 87
5-1 The Economy’s Income and Expenditure 88
5-2 The Measurement of GDP 90
5-2a “GDP Is the Market Value . . .” 90
5-2b “. . . of All . . . ” 90
5-2c “. . . Final . . . ” 91
5-2d “. . . Goods and Services . . . ” 91
5-2e “. . . Produced . . . ” 91
5-2f “. . . Within a Country . . . ” 91
5-2g “. . . In a Given Period of Time.” 91
FYI: Other Measures of Income 92
5-3 The Components of GDP 93
5-3a Consumption 93
5-3b Investment 93
5-3c Government Purchases 94
5-3d Net Exports 94
Case Study: The Components of U.S. GDP 95
5-4 Real versus Nominal GDP 96
5-4a A Numerical Example 96
5-4b The GDP Deflator 97
Case Study: A Half Century of Real GDP 98
5-5 Is GDP a Good Measure of Economic Well-Being? 100
Case Study: International Differences in GDP and the
Quality of Life 101
In The News: Sex, Drugs, and GDP 102
5-6 Conclusion 103
Chapter in a Nutshell 104
Key Concepts 104
Questions for Review 104
Problems and Applications 104
Quick Quiz Answers 106
Chapter 6
Measuring the Cost of Living 107
6-1 The Consumer Price Index 108
6-1a How the CPI Is Calculated 108
FYI: What’s in the CPI’s Basket? 110
6-1b Problems in Measuring the Cost of Living 111
6-1c The GDP Deflator versus the Consumer
Price Index 112
6-2 Correcting Economic Variables for the Effects
of Inflation 114
6-2a Dollar Figures from Different Times 114
FYI: Mr. Index Goes to Hollywood 115
Case Study: Regional Differences in the
Cost of Living 115
6-2b Indexation 117
6-2c Real and Nominal Interest Rates 117
Case Study: Interest Rates in the U.S. Economy 119
6-3 Conclusion 120
Chapter in a Nutshell 121
Key Concepts 121
Questions for Review 121
Problems and Applications 122
Quick Quiz Answers 123
Part iv The Real Economy
in the Long Run 125
Chapter 7
Production and Growth 125
7-1 Economic Growth around the World 126
FYI: Are You Richer Than the Richest American? 128
7-2 Productivity: Its Role and Determinants 128
7-2a Why Productivity Is So Important 129
7-2b How Productivity Is Determined 129
FYI: The Production Function 131
Case Study: Are Natural Resources a Limit
to Growth? 132
7-3 Economic Growth and Public Policy 133
7-3a Saving and Investment 133
7-3b Diminishing Returns and the Catch-Up Effect 133
7-3c Investment from Abroad 135
7-3d Education 136
7-3e Health and Nutrition 136
7-3f Property Rights and Political Stability 137
7-3g Free Trade 138
7-3h Research and Development 139
ask the experts: Innovation and Growth 139
7-3i Population Growth 139
Case Study: Why Is So Much of Africa Poor? 141
In The News: The Secret Sauce of American Prosperity 144
7-4 Conclusion: The Importance of Long-Run Growth 144
Chapter in a Nutshell 145
Key Concepts 146
Questions for Review 146
Problems and Applications 146
Quick Quiz Answers 147
Chapter 8
Saving, Investment, and the
Financial System 149
8-1 Financial Institutions in the U.S. Economy 150
8-1a Financial Markets 150
8-1b Financial Intermediaries 152
8-1c Summing Up 154
8-2 Saving and Investment in the National Income
Accounts 154
8-2a Some Important Identities 155
8-2b The Meaning of Saving and Investment 156
8-3 The Market for Loanable Funds 157
8-3a Supply and Demand for Loanable Funds 157
8-3b Policy 1: Saving Incentives 159
8-3c Policy 2: Investment Incentives 161
8-3d Policy 3: Government Budget Deficits and
Surpluses 162
ask the experts: Fiscal Policy and Saving 163
Case Study: The History of U.S. Government Debt 164
FYI: Financial Crises 166
8-4 Conclusion 167
Chapter in a Nutshell 167
Key Concepts 167
Questions for Review 168
Problems and Applications 168
Quick Quiz Answers 169
Chapter 9
The Basic Tools of Finance 171
9-1 Present Value: Measuring the Time Value of Money 172
FYI: The Magic of Compounding and the Rule of 70 174
9-2 Managing Risk 174
9-2a Risk Aversion 175
9-2b The Markets for Insurance 175
9-2c Diversification of Firm-Specific Risk 176
9-2d The Trade-Off between Risk and Return 177
9-3 Asset Valuation 179
9-3a Fundamental Analysis 179
FYI: Key Numbers for Stock Watchers 180
9-3b The Efficient Markets Hypothesis 180
Case Study: Random Walks and Index Funds 181
ask the experts: Diversified Investing 182
9-3c Market Irrationality 182
9-4 Conclusion 183
Chapter in a Nutshell 183
Key Concepts 184
Questions for Review 184
Problems and Applications 184
Quick Quiz Answers 185
Chapter 10
Unemployment 187
10-1 Identifying Unemployment 188
10-1a How Is Unemployment Measured? 188
Case Study: Labor-Force Participation of Men and
Women in the U.S. Economy 191
10-1b Does the Unemployment Rate Measure What We
Want It to Measure? 192
10-1c How Long Are the Unemployed without
Work? 194
10-1d Why Are There Always Some People
Unemployed? 194
FYI: The Jobs Number 195
10-2 Job Search 196
10-2a Why Some Frictional Unemployment Is
Inevitable 196
10-2b Public Policy and Job Search 196
10-2c Unemployment Insurance 197
10-3 Minimum-Wage Laws 198
Case Study: Who Earns the Minimum Wage? 199
10-4 Unions and Collective Bargaining 201
10-4a The Economics of Unions 201
10-4b Are Unions Good or Bad for the Economy? 202
10-5 The Theory of Efficiency Wages 203
10-5a Worker Health 203
10-5b Worker Turnover 204
10-5c Worker Quality 204
10-5d Worker Effort 204
Case Study: Henry Ford and the Very Generous
$5-a-Day Wage 205
10-6 Conclusion 206
Chapter in a Nutshell 206
Key Concepts 207
Questions for Review 207
Problems and Applications 207
Quick Quiz Answers 208
Part v Money and Prices
in the Long Run 209
Chapter 11
The Monetary System 209
11-1 The Meaning of Money 210
11-1a The Functions of Money 210
11-1b The Kinds of Money 211
FYI: Cryptocurrencies: A Fad or the Future? 212
11-1c Money in the U.S. Economy 213
FYI: Why Credit Cards Aren’t Money 214
Case Study: Where Is All the Currency? 214
11-2 The Federal Reserve System 215
11-2a The Fed’s Organization 215
11-2b The Federal Open Market Committee 216
11-3 Banks and the Money Supply 217
11-3a The Simple Case of 100-Percent-Reserve
Banking 217
11-3b Money Creation with Fractional-Reserve
Banking 218
11-3c The Money Multiplier 219
11-3d Bank Capital, Leverage, and the Financial Crisis of
2008–2009 220
11-4 The Fed’s Tools of Monetary Control 222
11-4a How the Fed Influences the Quantity
of Reserves 222
11-4b How the Fed Influences the Reserve Ratio 224
11-4c Problems in Controlling the Money Supply 224
Case Study: Bank Runs and the Money Supply 225
In The News: A Trip to Jekyll Island 226
11-4d The Federal Funds Rate 226
11-5 Conclusion 228
Chapter in a Nutshell 229
Key Concepts 229
Questions for Review 229
Problems and Applications 230
Quick Quiz Answers 231
Chapter 12
Money Growth and Inflation 233
12-1 The Classical Theory of Inflation 234
12-1a The Level of Prices and the Value of Money 235
12-1b Money Supply, Money Demand, and Monetary
Equilibrium 235
12-1c The Effects of a Monetary Injection 237
12-1d A Brief Look at the Adjustment Process 238
12-1e The Classical Dichotomy and Monetary Neutrality 239
12-1f Velocity and the Quantity Equation 240
Case Study: Money and Prices during Four
Hyperinflations 242
12-1g The Inflation Tax 242
12-1h The Fisher Effect 244
12-2 The Costs of Inflation 246
12-2a A Fall in Purchasing Power? The Inflation
Fallacy 246
12-2b Shoeleather Costs 247
12-2c Menu Costs 248
12-2d Relative-Price Variability and the Misallocation of
Resources 248
12-2e Inflation-Induced Tax Distortions 249
12-2f Confusion and Inconvenience 250
12-2g A Special Cost of Unexpected Inflation: Arbitrary
Redistributions of Wealth 251
12-2h Inflation Is Bad, but Deflation May Be Worse 251
Case Study: The Wizard of Oz and the Free-Silver
Debate 252
In The News: Life During Hyperinflation 254
12-3 Conclusion 254
Chapter in a Nutshell 256
Key Concepts 256
Questions for Review 256
Problems and Applications 257
Quick Quiz Answers 257
Part vi The Macroeconomics
of Open
Economies 259
Chapter 13
Open-Economy Macroeconomics:
Basic Concepts 259
13-1 The International Flows of Goods and Capital 260
13-1a The Flow of Goods: Exports, Imports, and Net Exports 260
Case Study: The Increasing Openness of the
U.S. Economy 261
13-1b The Flow of Financial Resources: Net Capital
Outflow 262
13-1c The Equality of Net Exports and Net Capital
Outflow 263
13-1d Saving, Investment, and Their Relationship to the
International Flows 265
13-1e Summing Up 266
Case Study: Is the U.S. Trade Deficit a National
Problem? 267
ask the experts: Trade Balances and Trade
Negotiations 268
13-2 The Prices for International Transactions: Real and
Nominal Exchange Rates 269
13-2a Nominal Exchange Rates 269
13-2b Real Exchange Rates 270
FYI: The Euro 271
13-3 A First Theory of Exchange-Rate Determination:
Purchasing-Power Parity 272
13-3a The Basic Logic of Purchasing-Power Parity 273
13-3b Implications of Purchasing-Power Parity 273
Case Study: The Nominal Exchange Rate during a
Hyperinflation 275
13-3c Limitations of Purchasing-Power Parity 276
Case Study: The Hamburger Standard 276
13-4 Conclusion 277
Chapter in a Nutshell 278
Key Concepts 278
Questions for Review 278
Problems and Applications 278
Quick Quiz Answers 279
Chapter 14
A Macroeconomic Theory of the
Open Economy 281
14-1 Supply and Demand for Loanable Funds and for
Foreign-Currency Exchange 282
14-1a The Market for Loanable Funds 282
14-1b The Market for Foreign-Currency Exchange 284
FYI: Purchasing-Power Parity as a Special Case 286
14-2 Equilibrium in the Open Economy 287
14-2a Net Capital Outflow: The Link between the
Two Markets 287
14-2b Simultaneous Equilibrium in Two Markets 288
FYI: Disentangling Supply and Demand 290
14-3 How Policies and Events Affect an Open Economy 290
14-3a Government Budget Deficits 291
14-3b Trade Policy 293
ask the experts: Deficits 293
14-3c Political Instability and Capital Flight 295
Case Study: Capital Flows from China 297
In The News: Separating Fact from Fiction 298
ask the experts: Currency Manipulation 298
14-4 Conclusion 300
Chapter in a Nutshell 300
Key Concepts 301
Questions for Review 301
Problems and Applications 301
Quick Quiz Answers 302
Part vii Short-Run Economic
Fluctuations 303
Chapter 15
Aggregate Demand and Aggregate
Supply 303
15-1 Three Key Facts about Economic Fluctuations 304
15-1a Fact 1: Economic Fluctuations Are Irregular
and Unpredictable 304
15-1b Fact 2: Most Macroeconomic Quantities Fluctuate
Together 306
15-1c Fact 3: As Output Falls, Unemployment Rises 306
15-2 Explaining Short-Run Economic Fluctuations 307
15-2a The Assumptions of Classical Economics 307
15-2b The Reality of Short-Run Fluctuations 307
15-2c The Model of Aggregate Demand and Aggregate
Supply 308
15-3 The Aggregate-Demand Curve 309
15-3a Why the Aggregate-Demand Curve Slopes Downward 309
15-3b Why the Aggregate-Demand Curve Might Shift 312
15-4 The Aggregate-Supply Curve 315
15-4a Why the Aggregate-Supply Curve Is Vertical in
the Long Run 315
15-4b Why the Long-Run Aggregate-Supply Curve
Might Shift 316
15-4c Using Aggregate Demand and Aggregate
Supply to Depict Long-Run Growth and Inflation 317
15-4d Why the Aggregate-Supply Curve Slopes Upward
in the Short Run 319
15-4e Why the Short-Run Aggregate-Supply Curve Might Shift 322
15-5 Two Causes of Economic Fluctuations 324
15-5a The Effects of a Shift in Aggregate Demand 325
FYI: Monetary Neutrality Revisited 327
Case Study: Two Big Shifts in Aggregate Demand: The
Great Depression and World War II 327
Case Study: The Great Recession of 2008–2009 329
15-5b The Effects of a Shift in Aggregate Supply 331
Case Study: Oil and the Economy 333
FYI: The Origins of the Model of Aggregate Demand and
Aggregate Supply 334
15-6 Conclusion 334
Chapter in a Nutshell 335
Key Concepts 335
Questions for Review 336
Problems and Applications 336
Quick Quiz Answers 337
Chapter 16
The Influence of Monetary and Fiscal
Policy on Aggregate Demand 339
16-1 How Monetary Policy Influences Aggregate Demand 340
16-1a The Theory of Liquidity Preference 341
16-1b The Downward Slope of the Aggregate-Demand Curve 343
FYI: Interest Rates in the Long Run and the Short Run 344
16-1c Changes in the Money Supply 345
16-1d The Role of Interest-Rate Targets in Fed Policy 347
Case Study: Why the Fed Watches the Stock Market
(and Vice Versa) 347
16-1e The Zero Lower Bound 348
16-2 How Fiscal Policy Influences Aggregate Demand 350
16-2a Changes in Government Purchases 350
16-2b The Multiplier Effect 350
16-2c A Formula for the Spending Multiplier 351
16-2d Other Applications of the Multiplier Effect 352
16-2e The Crowding-Out Effect 353
16-2f Changes in Taxes 354
FYI: How Fiscal Policy Might Affect Aggregate Supply 355
16-3 Using Policy to Stabilize the Economy 356
16-3a The Case for Active Stabilization Policy 356
Case Study: Keynesians in the White House 357
ask the experts: Economic Stimulus 357
In The News: How Large Is the Fiscal Policy Multiplier? 358
16-3b The Case against Active Stabilization Policy 359
16-3c Automatic Stabilizers 361
16-4 Conclusion 362
Chapter in a Nutshell 362
Key Concepts 363
Questions for Review 363
Problems and Applications 363
Quick Quiz Answers 364
Chapter 17
The Short-
Run Trade-Off between
Inflation and Unemployment 365
17-1 The Phillips Curve 366
17-1a Origins of the Phillips Curve 366
17-1b Aggregate Demand, Aggregate Supply, and the
Phillips Curve 367
17-2 Shifts in the Phillips Curve: The Role of Expectations 369
17-2a The Long-Run Phillips Curve 369
17-2b The Meaning of “Natural” 371
17-2c Reconciling Theory and Evidence 372
17-2d The Short-Run Phillips Curve 373
17-2e The Natural Experiment for the Natural-Rate
Hypothesis 374
17-3 Shifts in the Phillips Curve: The Role of Supply Shocks 376
17-4 The Cost of Reducing Inflation 379
17-4a The Sacrifice Ratio 379
17-4b Rational Expectations and the Possibility of Costless
Disinflation 381
17-4c The Volcker Disinflation 382
17-4d The Greenspan Era 383
17-4e A Financial Crisis Takes Us for a Ride along the
Phillips Curve 384
17-5 Conclusion 386
Chapter in a Nutshell 386
Key Concepts 386
Questions for Review 387
Problems and Applications 387
Quick Quiz Answers 388
Part viii Final Thoughts 389
Chapter 18
Six Debates over Macroeconomic
Policy 389
18-1 Should Monetary and Fiscal Policymakers Try to Stabilize
the Economy? 390
18-1a Pro: Policymakers Should Try to Stabilize
the Economy 390
18-1b Con: Policymakers Should Not Try to Stabilize
the Economy 390
18-2 Should the Government Fight Recessions with Spending
Hikes Rather Than Tax Cuts? 392
18-2a Pro: The Government Should Fight Recessions
with Spending Hikes 392
18-2b Con: The Government Should Fight Recessions
with Tax Cuts 393
18-3 Should Monetary Policy Be Made by Rule Rather Than by
Discretion? 395
18-3a Pro: Monetary Policy Should Be Made by Rule 395
18-3b Con: Monetary Policy Should Not Be Made by Rule 396
FYI: Inflation Targeting 397
18-4 Should the Central Bank Aim for Zero Inflation? 398
18-4a Pro: The Central Bank Should Aim for Zero Inflation 398
18-4b Con: The Central Bank Should Not Aim for Zero
Inflation 399
In The News: A Central Bank Assesses Its Policy 400
18-5 Should the Government Balance Its Budget? 402
18-5a Pro: The Government Should Balance Its Budget 402
18-5b Con: The Government Should Not Balance Its Budget 403
18-6 Should the Tax Laws Be Reformed to Encourage Saving? 405
18-6a Pro: The Tax Laws Should Be Reformed to Encourage
Saving 405
ask the experts: Taxing Capital and Labor 406
18-6b Con: The Tax Laws Should Not Be Reformed to
Encourage Saving 406
18-7 Conclusion 407
Chapter in a Nutshell 408
Questions for Review 408
Problems and Applications 409
Quick Quiz Answers 409