Macroeconomics: Principles for a Changing World, 4th Edition PDF by Eric P Chiang

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Macroeconomics: Principles for a Changing World, Fourth Edition

By Eric P Chiang

Macroeconomics: Principles for a Changing World, 4th Edition

Contents

Exploring Economics

BY THE NUMBERS Economics as a Career

What Is Economics About?

Why Should One Study Economics?

Microeconomics Versus Macroeconomics

Economic Theories and Reality

Model Building

Ceteris Paribus: All Else Held Constant

Efficiency Versus Equity

ISSUE Do Economists Ever Agree on Anything?

Positive Versus Normative Questions

Key Principles of Economics

Principle 1: Economics Is Concerned With Making Choices With Limited Resources

Principle 2: When Making Decisions, One Must Take Into Account Tradeoffs and Opportunity Costs

Principle 3: Specialization Leads to Gains for All Involved

Principle 4: People Respond to Incentives, Both Good and Bad

ISSUE Would a City Change Its Name for a Game Show?

Principle 5: Rational Behavior Requires Thinking on the Margin

Principle 6: Markets Are Generally Efficient; When They Aren’t, Government Can Sometimes Correct the Failure

Principle 7: Economic Growth, Low Unemployment, and Low Inflation Are Economic Goals That Do Not Always

Coincide

Principle 8: Institutions and Human Creativity Help Explain the Wealth of Nations

AROUND THE WORLD Nunavut: Land of Abundance and Scarcity

Summing It All Up: Economics Is All Around Us

ADAM SMITH (1723–1790)

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

APPENDIX

Working With Graphs and Formulas

Graphs and Data

Time Series

Scatter Plots

Pie Charts

Bar Charts

Simple Graphs Can Pack In a Lot of Information

A Few Simple Rules for Reading Graphs

Graphs and Models

Linear Relationships

Computing the Slope of a Linear Line

Nonlinear Relationships

Computing the Slope of a Nonlinear Curve

Ceteris Paribus, Simple Equations, and Shifting Curves

Ceteris Paribus: All Else Equal

Simple Linear Equations

Shifting Curves

Correlation Is Not Causation

Production, Economic Growth, and Trade

BY THE NUMBERS Growth, Productivity, and Trade Are Key to Our Prosperity

Basic Economic Questions and Production

Basic Economic Questions

Economic Systems

Resources and Production

Land

Labor

Capital

Entrepreneurial Ability

Production and Efficiency

AROUND THE WORLD Ironbridge: The Beginnings of the Industrial Revolution

Production Possibilities and Economic Growth

Production Possibilities

Opportunity Cost

Increasing Opportunity Costs

Economic Growth

Expanding Resources

Technological Change

Summarizing the Sources of Economic Growth

ISSUE Is the Ocean the Next Frontier? Land Reclamation and Underwater Cities

Specialization, Comparative Advantage, and Trade

Absolute and Comparative Advantage

The Gains from Trade

Practical Constraints on Trade

ISSUE Do We Really Specialize in That? Comparative Advantage in the United States and China

DAVID RICARDO (1772–1823)

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Supply and Demand

BY THE NUMBERS The World of Markets

Markets

ISSUE Do Markets Exist for Everyone, Including Dogs and Cats?

The Price System

Demand

Willingness-to-Pay: The Building Block of Market Demand

The Law of Demand: The Relationship Between Quantity Demanded and Price

The Demand Curve

Determinants of Demand

Tastes and Preferences

Income

Prices of Related Goods

The Number of Buyers

Expectations About Future Prices, Incomes, and Product Availability

Changes in Demand Versus Changes in Quantity Demanded

Supply

The Law of Supply: The Relationship Between Quantity Supplied and Price

The Supply Curve

Market Supply Curves

Determinants of Supply

Production Technology

Costs of Resources

Prices of Related Commodities

Expectations

Number of Sellers

Taxes and Subsidies

Changes in Supply Versus Changes in Quantity Supplied

Market Equilibrium

Moving to a New Equilibrium: Changes in Supply and Demand

Predicting the New Equilibrium When One Curve Shifts

ISSUE Two-Buck Chuck: Will People Drink $2-a-Bottle Wine?

Predicting the New Equilibrium When Both Curves Shift

AROUND THE WORLD Tokyo Disneyland: Is THAT the Line for Space Mountain?!

ALFRED MARSHALL (1842–1924)

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Markets and Government

BY THE NUMBERS Price Controls and Supports in the Economy Today

Consumer and Producer Surplus: A Tool for Measuring Economic

Efficiency

Using Consumer and Producer Surplus: The Gains from Trade

The Consequences of Deviating from Market Equilibrium

When Prices Exceed Equilibrium

When Prices Fall Below Equilibrium

NOBEL PRIZE: PAUL A. SAMUELSON (1915–2009)

Market Failure

Lack of Competition

Information Is Not Shared by All Parties

AROUND THE WORLD Singapore: Resolving Traffic Jams and Reducing Pollution Using Price

Controls

The Existence of External Benefits or Costs

The Existence of Public Goods

Market Efficiency Versus Equity

Price Ceilings and Price Floors

Price Ceilings

Price Floors

ISSUE Are Price Gouging Laws Good for Consumers?

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Introduction to Macroeconomics

BY THE NUMBERS A Slow and Steady Macroeconomic Recovery

Business Cycles

Defining Business Cycles

Dating Business Cycles

Alternative Measures of the Business Cycle

National Activity Index

Leading Economic Index

Yield Curve

ISSUE The End of the Recession . . . It Does Not Feel Like It

National Income Accounting

The Core of the NIPA

The Circular Flow Diagram

Spending and Income: Looking at GDP in Two Ways

NOBEL PRIZE: SIMON KUZNETS (1901–1985)

Gross Domestic Product

The Expenditures (Spending) Approach to Calculating GDP

Personal Consumption Expenditures

Gross Private Domestic Investment

Government Purchases

Net Exports of Goods and Services

Summing Aggregate Expenditures

The Income Approach to Calculating GDP

Compensation of Employees

Proprietors’ Income

Corporate Profits

Rental Income

Net Interest

Miscellaneous Adjustments

Summing Up Income Measures

GDP and Our Standard of Living

Different Ways of Comparing GDP Across Countries

Population and GDP per Capita

Environmental Quality

AROUND THE WORLD Costa Rica: Pura Vida and Happiness Without a High Level of GDP

Nonmarket Activities and the Informal Economy

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Measuring Inflation and Unemployment

BY THE NUMBERS The Twin Evils of Inflation and Unemployment

Inflation

What Causes Inflation?

Measuring Inflation: Consumer Price Index, Producer Price Index, and GDP Deflator

The Consumer Price Index

The Producer Price Index

The GDP Deflator

Adjusting for Inflation: Escalating and Deflating Series (Nominal Versus Real Values)

Escalator Clauses

Deflating Series: Nominal Versus Real Values

The Effect of Overstating Inflation

The Consequences of Inflation

Hyperinflation

ISSUE The Consequences of Counterfeit Money on Inflation

Unemployment

The Historical Record

Defining and Measuring Unemployment

Employed

Unemployed

Labor Force

Monthly Employment Surveys

The Household Survey

The Payroll Survey

Employment Trends

Weekly Jobs Report

Relationship Between Employment and the Unemployment Rate

Problems with Unemployment Statistics

Underemployment and Marginally Attached Workers

AROUND THE WORLD The Boom and Bust of Dickinson, North Dakota

Unemployment and the Economy

Types of Unemployment

Frictional Unemployment

Structural Unemployment

Cyclical Unemployment

Defining Full Employment

The Natural Rate of Unemployment

Changes in the Unemployment Rate Around the Natural Rate

Jobless Recoveries Prolong Unemployment Above the Natural Rate

ISSUE Why Do Unemployment Rates Differ So Much Within the United States?

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Economic Growth

BY THE NUMBERS Why Should We Care About Economic Growth?

Why Is Economic Growth Important?

How Is Economic Growth Measured?

Small Differences in Growth Lead to Large Differences in Income Over Time

Power of Compounding Growth Rates

Rule of 70

ISSUE Can Economic Growth Bring a Billion People Out of Poverty?

Thinking About Short-Run and Long-Run Economic Growth

Short-Run Versus Long-Run Growth

Short-Run Growth Involves a Fixed Capacity

Long-Run Growth Involves Expanding Capacity

Factors of Production

Production Function

Applying the Production Function: Achieving Economic Growth

Achieving More Land or Natural Resources

Growth of the Labor Force

Increasing the Quality of the Labor Force

Increasing the Capital-to-Labor Ratio

THOMAS MALTHUS (1766–1834)

Improvements in Technology and Ideas

Including Everything Else: Total Factor Productivity

AROUND THE WORLD Kazakhstan: The Next Destination of Growth and Trade

The Role of Government in Promoting Economic Growth

Government as a Contributor to Physical Capital, Human Capital, and Technology

Physical Capital: Public Capital and Private Investment

Human Capital: Public Education and Financial Aid

Technology: Government R&D Centers and Federal Grants

Government as a Facilitator of Economic Growth

Enforcement of Contracts

Protection of Property Rights

Stable Financial System

Government as a Promoter of Free and Competitive Markets

Competitive Markets and Free Trade

Economic Freedom

ISSUE Did Economic Growth Peak a Century Ago? Prospects for Future Growth

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Aggregate Expenditures

BY THE NUMBERS The Role of Spending in the Economy

Aggregate Expenditures

Some Simplifying Assumptions

Consumption and Saving

Average Propensities to Consume and Save

Marginal Propensities to Consume and Save

Other Determinants of Consumption and Saving

Investment

Investment Demand

Aggregate Investment Schedule

The Simple Aggregate Expenditures Model

Macroeconomic Equilibrium in the Simple Model

JOHN MAYNARD KEYNES (1883–1946)

The Multiplier

The Multiplier Works in Both Directions

Paradox of Thrift

ISSUE Do High Savings Rates Increase the Risk of a Long Recession?

AROUND THE WORLD Brazil’s Beco Do Batman: How Graffiti Revived a Neighborhood

The Full Aggregate Expenditures Model

Adding Government Spending and Taxes

Tax Changes and Equilibrium

The Balanced Budget Multiplier

Adding Net Exports

Recessionary and Inflationary Gaps

Recessionary Gap

Inflationary Gap

ISSUE Was Keynes Right About the Great Depression?

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Aggregate Demand and Supply

BY THE NUMBERS The Sheer Size of Aggregate Demand and Aggregate Supply

Aggregate Demand

Why Is the Aggregate Demand Curve Negatively Sloped?

The Wealth Effect

Export Price Effect

Interest Rate Effect

Determinants of Aggregate Demand

Consumer Spending

Investment

Government Spending and Net Exports

AROUND THE WORLD Myanmar: Opening a Country to a Boom in Aggregate Demand

Aggregate Supply

Long Run

Determinants of Long-Run Aggregate Supply

Short Run

Determinants of Short-Run Aggregate Supply

Input Prices

Productivity

Taxes and Regulation

Market Power of Firms

Inflationary Expectations

Macroeconomic Equilibrium

The Spending Multiplier

The Great Depression

Demand-Pull Inflation

Cost-Push Inflation

ISSUE Why Didn’t Stimulus Measures Over the Past Decade Lead to Inflation?

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

APPENDIX

Deriving the Aggregate Demand Curve

Fiscal Policy and Debt

BY THE NUMBERS Your Government and Its Financial Operation

Fiscal Policy and Aggregate Demand

Discretionary and Mandatory Spending

Discretionary Fiscal Policy

Government Spending

Taxes

Transfers

Expansionary and Contractionary Fiscal Policy

Fiscal Policy and Aggregate Supply

Infrastructure Spending

Reducing Tax Rates

Expanding Investment and Reducing Regulations

AROUND THE WORLD Qatar: A Nation Built for the Future

Implementing Fiscal Policy

Automatic Stabilizers

Fiscal Policy Timing Lags

The Government’s Bias Toward Borrowing and Away from Taxation

Financing the Federal Government

Defining Deficits and the National Debt

Balanced Budget Amendments

ISSUE How Big Is the Economic Burden of Interest Rates on the National Debt?

Financing Debt and Deficits

Why Is the Public Debt So Important?

Is the Size of the Public Debt a Problem?

Does It Matter If Foreigners Hold a Significant Portion of the Public Debt?

Does Government Debt Crowd Out Consumption and Investment?

How Will the National Debt Affect Our Future? Are We Doomed?

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Saving, Investment, and the Financial System

BY THE NUMBERS The Financial System and Its Sheer Size and Scope

What Is Money?

The Functions of Money

Medium of Exchange

Unit of Account

Store of Value

Defining the Money Supply

AROUND THE WORLD Using Plastic Money (Literally) in Australia

Narrowly Defined Money: M1

A Broader Definition: M2

The Market for Loanable Funds

Supply and Demand for Loanable Funds

Shifts in the Supply of Loanable Funds

Economic Outlook

Incentives to Save

Income or Asset Prices

Government Deficits

Shifts in the Demand for Loanable Funds

Investment Tax Incentives

Technological Advances

Regulations

Product Demand

Business Expectations

The Financial System

The Bridge Between Savers and Borrowers

The Roles of Financial Institutions

Reducing Information Costs

Reducing Transaction Costs

Diversifying Assets to Reduce Risk

Types of Financial Assets

Bond Prices and Interest Rates

Stocks and Investment Returns

Financial Tools for a Better Future

Short-Term Borrowing

The Power (or Danger) of Compounding Interest

Risk Assessment and Asset Allocation

Saving for the Future: Employer-Based Programs

To Contribute or Not to Contribute?

In What Assets Should One Invest?

Other Retirement Savings Tools: Social Security, Pensions, and IRAs

Social Security

Pension Plans

ISSUE Can a Stock Market Crash Increase Long-Term Savings?

Individual Retirement Arrangements (IRAs)

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Money Creation and the Federal Reserve

BY THE NUMBERS Banks and the Federal Reserve

How Banks Create Money

Creating Money as If Out of Thin Air

Fractional Reserve Banking System

The Money Creation Process

The Money Multiplier and Its Leakages

Bank Reserves and the Money Multiplier

Money Leakages

Bank Leakages

Leakages by Individuals and Businesses

The Effect of Foreign Currency Holdings

What Is the Actual Money Multiplier in the Economy?

AROUND THE WORLD The Rise and Fall of the Famous (and Infamous) Swiss Bank Account

The Federal Reserve System

The Structure of the Federal Reserve

The Board of Governors

Federal Reserve Banks

Federal Open Market Committee

The Fed as Lender of Last Resort

The Federal Reserve at Work: Tools, Targets, and Policy Lags

Reserve Requirements

Discount Rate

Open Market Operations

The Federal Funds Target

Monetary Policy Lags

Information Lags

Recognition Lags

Decision Lags

ISSUE What Can the Fed Do When Interest Rates Reach 0%?

Implementation Lags

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Monetary Policy

BY THE NUMBERS Monetary Policy in Action

What Is Monetary Policy?

The Twin Goals of Monetary Policy

Examples of Monetary Policy in Action

Why Is the Interest Rate So Important to the Economy?

When Is It Optimal to Loosen or Tighten Monetary Policy?

Expansionary Monetary Policy

Contractionary Monetary Policy

Monetary Theories

The Short Run Versus the Long Run: What’s the Difference?

The Long Run: The Classical Theory

IRVING FISHER (1867–1947)

Short-Run Effects of Monetary Policy

Money Illusion and Sticky Wages and Prices

Keynesian Model

Monetarist Model

NOBEL PRIZE: MILTON FRIEDMAN (1912–2006)

Summary of the Effectiveness of Monetary Policy

Monetary Policy and Economic Shocks

Demand Shocks

Supply Shocks

Implications for Short-Run Monetary Policy

Modern Monetary Policy

Rules Versus Discretion

The Federal Funds Target and the Taylor Rule

A Recap of the Fed’s Policy Tools

Transparency and the Federal Reserve

ISSUE The Record of the Fed’s Performance

New Monetary Policy Challenges

The Fed: Dealing with an Economic Crisis Not Seen in 80 Years

The Eurozone Crisis and the Role of the European Central Bank

ISSUE The Challenges of Monetary Policy with Regional Differences in Economic Performance

AROUND THE WORLD Why Would a Country Give Up Its Monetary Policy?

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Macroeconomic Policy: Challenges in a Global Economy

BY THE NUMBERS The Long Road Back: The Great Recession and the Jobless Recovery

The Great Recession and Macroeconomic Policy

From the Housing Bubble to the Financial Crisis

Subprime Mortgages and Collateralized Debt Obligations

Collapsing Financial Markets

The Government’s Policy Response

The Financial Crisis and Its Effects

Effectiveness of Macroeconomic Policy: Phillips Curves and Rational Expectations

Unemployment and Inflation: Phillips Curves

Productivity, Prices, and Wages

The Importance of Inflationary Expectations

Inflationary Expectations and the Phillips Curve

The Long-Run Phillips Curve

Accelerating Inflation

Returning Inflation to Normal Levels

NOBEL PRIZE: ROBERT LUCAS

Rational Expectations and Policy Formation

Policy Implications of Rational Expectations

A Critique of Rational Expectations

Macroeconomic Issues That Confront Our Future

Are Recoveries Becoming “Jobless Recoveries”?

Will Rising Debt and Future Debt Obligations Lead to Inflation?

Rising Future Debt Obligations: Health Care and Social Security

The Cost of Financing Debt

The Effects of Debt on Inflation

ISSUE Inflating Our Way Out of Debt: Is This an Effective Approach?

Will Globalization Lead to Increased Obstacles to Economic Growth?

AROUND THE WORLD Life on the Autobahn: Germany’s Role in European Growth and Stability

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

International Trade

BY THE NUMBERS International Trade

The Gains from Trade

Absolute and Comparative Advantage

Gains from Trade

Practical Constraints on Trade

ISSUE The Challenge of Measuring Imports and Exports in a Global Economy

The Terms of Trade

Determining the Terms of Trade

The Impact of Trade

How Trade Is Restricted

Effects of Tariffs and Quotas

ISSUE Do Foreign Trade Zones Help or Hurt American Consumers and Workers?

Arguments Against Free Trade

Traditional Economic Arguments

Infant Industry Argument

Antidumping

Low Foreign Wages

National Defense Argument

Recent Globalization Concerns

Trade and Domestic Employment

Trade and the Environment

Trade and Its Effect on Working Conditions in Developing Nations

AROUND THE WORLD Can One Country’s Festival Disrupt World Trade?

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Open Economy Macroeconomics

BY THE NUMBERS The Foreign Exchange Market

The Balance of Payments

The Current Account

Imports and Exports

Income

Transfers

The Capital Account

Exchange Rates

Defining Exchange Rates

Nominal Exchange Rates

Real Exchange Rates

Purchasing Power Parity

Exchange Rate Determination

A Market for Foreign Exchange

Flexible Exchange Rates

Currency Appreciation and Depreciation

Determinants of Exchange Rates

Exchange Rates and the Current Account

Changes in Inflation Rates

Changes in Domestic Disposable Income

Exchange Rates and the Capital Account

Interest Rate Changes

Expected Exchange Rate Changes

Exchange Rates and Aggregate Supply and Demand

ISSUE Would a Stronger Chinese Yuan Be Good for Americans?

Monetary and Fiscal Policy in an Open Economy

Fixed and Flexible Exchange Rate Systems

Pegging Exchange Rates Under a Flexible Exchange Rate System

Policies Under Fixed Exchange Rates

Policies Under Flexible Exchange Rates

AROUND THE WORLD Hyder, Alaska: An American Town That Uses the Canadian Dollar

NOBEL PRIZE: ROBERT MUNDELL

Chapter Summary

KEY CONCEPTS

QUESTIONS AND PROBLEMS

ANSWERS TO QUESTIONS IN CHECKPOINTS

Sources for By the Numbers

Glossary

Index

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