Principles of Macroeconomics, 13th Edition PDF by Karl E Case, Ray C Fair and Sharon M Oster

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Principles of Macroeconomics, Thirteenth Edition

By Karl E Case, Ray C Fair and Sharon M Oster

Principles of Macroeconomics, Thirteenth Edition

Contents

PART I Introduction to Economics 27

1 The Scope and Method

of Economics 27

Why Study Economics? 28

To Learn a Way of Thinking 28

ECONOMICS IN PRACTICE Rainfall and Schooling

in India 29

ECONOMICS IN PRACTICE Majoring in Economics

Makes You Less Vulnerable to a Recession! 30

To Understand Society 30

To Be an Informed Citizen 31

The Scope of Economics 31

Microeconomics and Macroeconomics 31

ECONOMICS IN PRACTICE How Italian Is a

Ferrari? 32

The Diverse Fields of Economics 33

The Method of Economics 34

Theories and Models 34

ECONOMICS IN PRACTICE Does Your Part-Time

Job Affect Your Academic Performance? 36

Economic Policy 36

An Invitation 38

Economic Skills and Economics as a Career 38

Summary 38 Review Terms and Concepts 39

Problems 39 Appendix: How to Read and Understand Graphs 41

2 The Economic Problem: Scarcity

and Choice 49

Scarcity, Choice, and Opportunity Cost 50

Scarcity and Choice in a One-Person

Economy 50

Scarcity and Choice in an Economy of Two or

More 51

ECONOMICS IN PRACTICE Frozen Foods and

Opportunity Costs 52

The Production Possibility Frontier 55

The Economic Problem 61

ECONOMICS IN PRACTICE Changing Consumption

Patterns in China 62

Economic Systems and the Role

of Government 62

Command Economies 62

Laissez-Faire Economies: The Free Market 63

Mixed Systems, Markets, and Governments 64

Looking Ahead 64

Summary 64 Review Terms and Concepts 65 Problems 65

3 Demand, Supply, and Market

Equilibrium 69

Firms and Households: The Basic

Decision-Making Units 70

Input Markets and Output Markets: The Circular

Flow 70

Demand in Product/Output Markets 72

Changes in Quantity Demanded versus Changes

in Demand 72

Price and Quantity Demanded: The Law

of Demand 73

Other Determinants of Household Demand 76

ECONOMICS IN PRACTICE Have You Bought This

Textbook? 77

ECONOMICS IN PRACTICE People Drink Tea on

Rainy Days 78

Shift of Demand versus Movement along

a Demand Curve 79

From Household Demand to Market Demand 80

Supply in Product/Output Markets 82

Price and Quantity Supplied: The Law of Supply 83

Other Determinants of Supply 84

Shift of Supply versus Movement along a Supply

Curve 85

From Individual Supply to Market Supply 86

Market Equilibrium 87

Excess Demand 87

Excess Supply 89

Market Equilibrium with Equations 90

Changes in Equilibrium 90

ECONOMICS IN PRACTICE Quinoa 93

Demand and Supply in Product Markets:

A Review 93

ECONOMICS IN PRACTICE “Shrinkflation” during

Festive Seasons 94

Looking Ahead: Markets and the Allocation

of Resources 95

Summary 95 Review Terms and Concepts 96 Problems 97

4 Demand and Supply

Applications 100

The Price System: Rationing and Allocating

Resources 101

Price Rationing 101

Constraints on the Market and Alternative

Rationing Mechanisms 103

ECONOMICS IN PRACTICE Why Do I Have to Pay More

for My Food? The Truth behind the Flood Crises 105

Prices and the Allocation of Resources 107

Price Floor 107

Supply and Demand Analysis: Tariffs (Tax) 108

ECONOMICS IN PRACTICE The Price Mechanism

at Work for Shakespeare 109

Supply and Demand and Market Efficiency 110

Consumer Surplus 110

Producer Surplus 111

Competitive Markets Maximize the Sum

of Producer and Consumer Surplus 112

Potential Causes of Deadweight Loss from

Under- and Overproduction 113

Looking Ahead 114

Summary 114 Review Terms and Concepts 114 Problems 115

PART II Concepts and Problems in

Macroeconomics 118

5 Introduction to

Macroeconomics 118

Macroeconomic Concerns 119

Output Growth 119

Unemployment 121

Inflation and Deflation 121

The Components of the Macroeconomy 122

The Circular Flow Diagram 122

The Three Market Arenas 123

The Role of the Government in

the Macroeconomy 124

A Brief History of Macroeconomics 125

ECONOMICS IN PRACTICE Macroeconomics in

Literature 126

The U.S. Economy since 1970 127

Summary 129 Review Terms and Concepts 129 Problems 129

6 Measuring National Output

and National Income 131

Gross Domestic Product 132

Final Goods and Services 132

Exclusion of Used Goods and Paper

Transactions 133

Exclusion of Output Produced Abroad

by Domestically Owned Factors of

Production 133

Calculating GDP 134

The Expenditure Approach 134

ECONOMICS IN PRACTICE Are Christie’s Brokerage

Services Counted in GDP? 135

ECONOMICS IN PRACTICE Estimating

Depreciation in the National Income and Product

Accounts 137

The Income Approach 138

Nominal versus Real GDP 140

ECONOMICS IN PRACTICE GDP: One of the Great

Inventions of the 20th Century 141

Calculating Real GDP 142

Calculating the GDP Deflator 143

The Problems of Fixed Weights 144

Limitations of the GDP Concept 144

GDP and Social Welfare 144

The Informal Economy 145

ECONOMICS IN PRACTICE An Alternative to GDP:

The Human Development Index 145

Gross National Income per Capita 146

Looking Ahead 147

Summary 147 Review Terms and Concepts 148 Problems 148

7 Unemployment, Inflation, and

Long-Run Growth 151

Unemployment 152

Measuring Unemployment 152

ECONOMICS IN PRACTICE Time Use for the

Unemployed in a Recession 153

Components of the Unemployment Rate 154

ECONOMICS IN PRACTICE Female Labor Force

Participation and Economic Development 155

The Costs of Unemployment 155

ECONOMICS IN PRACTICE The Consequences

of Unemployment Persist 156

Inflation and Deflation 157

The Consumer Price Index 157

The Costs of Inflation 159

What about Deflation? 161

ECONOMICS IN PRACTICE Chain-Linked Consumer

Price Index in the News 161

Long-Run Growth 162

Output and Productivity Growth 162

Looking Ahead 164

Summary 164 Review Terms and Concepts 164 Problems 165

PART III The Core of Macroeconomic

Theory 167

8 Aggregate Expenditure and

Equilibrium Output 169

The Keynesian Theory of Consumption 170

ECONOMICS IN PRACTICE Behavioral Biases in

Saving Behavior 174

Other Determinants of Consumption 174

Planned Investment (I) versus Actual

Investment 175

Planned Investment and the Interest Rate (r) 175

Other Determinants of Planned

Investment 176

The Determination of Equilibrium Output

(Income) 176

The Saving/Investment Approach to Equilibrium 179

Adjustment to Equilibrium 180

The Multiplier 180

ECONOMICS IN PRACTICE The Rise and Fall of

Nokia 181

The Multiplier Equation 183

ECONOMICS IN PRACTICE The Paradox of

Thrift 184

The Size of the Multiplier in the Real World 185

Looking Ahead 185

Summary 186 Review Terms and Concepts 186 Problems 186

Appendix: Deriving the Multiplier Algebraically 189

9 The Government and Fiscal

Policy 190

Government in the Economy 191

Government Purchases (G), Net Taxes (T),

and Disposable Income (Yd) 191

The Determination of Equilibrium Output

(Income) 193

Fiscal Policy at Work: Multiplier Effects 195

The Government Spending Multiplier 195

The Tax Multiplier 198

The Balanced-Budget Multiplier 199

The Federal Budget 201

The Budget in 2017 201

Fiscal Policy since 1993: The Clinton, Bush, Obama,

and Trump Administrations 202

ECONOMICS IN PRACTICE Regional Autonomy and

Government Budgeting in Spain 204

The Federal Government Debt 205

The Economy’s Influence on the Government

Budget 206

Automatic Stabilizers and Destabilizers 206

Full-Employment Budget 207

Looking Ahead 207

Summary 207 Review Terms and Concepts 208

Problems 208 EOC Questions 210 Appendix A 211

Appendix B 212 Appendix Summary 215

Appendix Problems 215

10 Money, the Federal Reserve,

and the Interest Rate 216

An Overview of Money 217

What Is Money? 217

ECONOMICS IN PRACTICE Don’t Kill the

Birds! 218

Commodity and Fiat Monies 218

Measuring the Supply of Money in the United

States 219

How Banks Create Money 221

A Historical Perspective: Goldsmiths 221

ECONOMICS IN PRACTICE A Run on the Bank:

George Bailey, Mary Poppins, Wyatt Earp 222

The Modern Banking System 223

The Creation of Money 224

The Money Multiplier 226

The Federal Reserve System 227

Functions of the Federal Reserve 228

The Demand for Money 229

Interest Rates and Security Prices 230

ECONOMICS IN PRACTICE Professor Serebryakov

Makes an Economic Error 231

How the Federal Reserve Controls the Interest

Rate 232

Tools Prior to 2008 232

Expanded Fed Activities Beginning in 2008 233

The Federal Reserve Balance Sheet 234

Tools After 2008 235

Looking Ahead 236

Summary 236 Review Terms and Concepts 237 Problems 237

Appendix 240 Appendix Problems 242

11 The Determination of

Aggregate Output, the Price

Level, and the Interest

Rate 243

The Aggregate Supply (AS) Curve 244

Aggregate Supply in the Short Run 244

Shifts of the Short-Run Aggregate Supply Curve 246

The Aggregate Demand (AD) Curve 247

Planned Aggregate Expenditure and the Interest

Rate 247

The Behavior of the Fed 248

ECONOMICS IN PRACTICE Central Bankers: Does

Personality Matter? 250

Deriving the AD Curve 251

ECONOMICS IN PRACTICE Central Banks and Price

Stability: Which Prices to Look At? 252

The Final Equilibrium 253

Other Reasons for a Downward-Sloping AD

Curve 254

The Long Run AS Curve 254

Potential GDP 255

ECONOMICS IN PRACTICE The Simple “Keynesian”

Aggregate Supply Curve 256

Summary 257 Review Terms and Concepts 257 Problems 257

12 Policy Effects and Cost Shocks

in the AS/AD Model 260

Fiscal Policy Effects 261

Fiscal Policy Effects in the Long Run 262

Monetary Policy Effects 263

The Fed’s Response to the Z Factors 263

Shape of the AD Curve When the Fed Cares More

About the Price Level than Output 263

What Happens When There Is a Zero Interest

Rate Bound? 264

Shocks to the System 265

Cost Shocks 265

ECONOMICS IN PRACTICE South African Prices

Surge as Cape Town Goes Dry 266

Demand-Side Shocks 267

Expectations 267

Monetary Policy since 1970 268

Inflation Targeting 269

Looking Ahead 270

Summary 270 Review Terms and Concepts 270 Problems 270

13 The Labor Market in the

Macroeconomy 273

The Labor Market: Basic Concepts 274

The Classical View of the Labor Market 274

The Classical Labor Market and the Aggregate

Supply Curve 276

The Unemployment Rate and the Classical

View 276

Explaining the Existence of Unemployment 276

Efficiency Wage Theory 277

Imperfect Information 277

Minimum Wage Laws 277

Explaining the Existence of Cyclical

Unemployment 278

Sticky Wages 278

ECONOMICS IN PRACTICE Evidence on Sticky

Wages 279

ECONOMICS IN PRACTICE How the Sharing

Economy Is Transforming the Job Market 280

An Open Question 280

The Short-Run Relationship between the

Unemployment Rate and Inflation 281

The Phillips Curve: A Historical Perspective 282

Aggregate Supply and Aggregate Demand Analysis

and the Phillips Curve 284

Expectations and the Phillips Curve 285

Inflation and Aggregate Demand 285

The Long-Run Aggregate Supply Curve, Potential

Output, and the Natural Rate

of Unemployment 286

The Nonaccelerating Inflation Rate

of Unemployment (NAIRU) 287

Looking Ahead 288

Summary 288 Review Terms and Concepts 289 Problems 289

PART IV Further Macroeconomics Issues 292

14 Financial Crises, Stabilization,

and Deficits 292

The Stock Market, the Housing Market, and

Financial Crises 293

Stocks and Bonds 293

Determining the Price of a Stock 293

The Stock Market Since 1948 295

Housing Prices Since 1952 296

Household Wealth Effects on the Economy 297

Financial Crises and the 2008 Bailout 297

ECONOMICS IN PRACTICE Predicting an Economy’s

Future 298

Time Lags Regarding Monetary and Fiscal

Policy 299

Recognition Lags 301

Implementation Lags 301

Response Lags 302

Summary 303

Government Deficit Issues 303

Deficit Targeting 303

Summary 305 Review Terms and Concepts 306 Problems 306

15 Household and Firm Behavior in

the Macroeconomy: A Further

Look 308

Households: Consumption and Labor Supply

Decisions 309

The Life-Cycle Theory of Consumption 309

The Labor Supply Decision 310

Interest Rate Effects on Consumption 312

Government Effects on Consumption and Labor

Supply: Taxes and Transfers 312

A Possible Employment Constraint on

Households 313

A Summary of Household Behavior 314

The Household Sector Since 1970 314

ECONOMICS IN PRACTICE Measuring Housing

Price Changes 315

Firms: Investment and Employment Decisions 317

Expectations and Animal Spirits 317

Excess Labor and Excess Capital Effects 318

Inventory Investment 319

A Summary of Firm Behavior 320

The Firm Sector Since 1970 320

Productivity and the Business Cycle 322

The Short-Run Relationship between Output

and Unemployment 323

The Size of the Multiplier 324

ECONOMICS IN PRACTICE Estimating Multipliers:

The Mafia Link 325

Summary 325 Review Terms and Concepts 327 Problems 327

16 Long-Run Growth 329

The Growth Process: From Agriculture

to Industry 330

Sources of Economic Growth 331

Increase in Labor Supply 331

ECONOMICS IN PRACTICE Government Strategy

for Growth 332

Increase in Physical Capital 333

Increase in the Quality of the Labor Supply

(Human Capital) 335

Increase in the Quality of Capital (Embodied

Technical Change) 335

ECONOMICS IN PRACTICE Germany’s Open Border

Policy 336

Disembodied Technical Change 336

More on Technical Change 337

U.S. Labor Productivity: 1952 I–2017 IV 338

Growth and the Environment and Issues

of Sustainability 339

Summary 341 Review Terms and Concepts 341 Problems 342

17 Alternative Views

in Macroeconomics 345

Keynesian Economics 346

Monetarism 346

The Velocity of Money 346

The Quantity Theory of Money 347

The Keynesian/Monetarist Debate 348

Supply-Side Economics 349

The Laffer Curve 349

Evaluating Supply-Side Economics 350

New Classical Macroeconomics 351

The Development of New Classical

Macroeconomics 351

Rational Expectations 352

ECONOMICS IN PRACTICE Brexit and Consumer

Expectations 353

Real Business Cycle Theory and New Keynesian

Economics 354

Evaluating the Rational Expectations

Assumption 355

Behavioral Macroeconomics 356

Testing Alternative Macroeconomic

Models 356

Summary 357 Review Terms and Concepts 358 Problems 358

PART V The World Economy 361

18 International Trade,

Comparative Advantage,

and Protectionism 361

Trade Surpluses and Deficits 362

The Economic Basis for Trade: Comparative

Advantage 362

Absolute Advantage versus Comparative

Advantage 363

Terms of Trade 367

Exchange Rates 368

The Sources of Comparative Advantage 370

The Heckscher-Ohlin Theorem 370

Other Explanations for Observed Trade

Flows 371

Trade Barriers: Tariffs, Export Subsidies,

and Quotas 371

ECONOMICS IN PRACTICE Globalization Improves

Firm Productivity 372

U.S. Trade Policies, GATT, and the WTO 373

ECONOMICS IN PRACTICE What Happens When

We Lift a Quota? 373

Free Trade or Protection? 375

The Case for Free Trade 375

The Case for Protection 377

ECONOMICS IN PRACTICE Reshaping the Global

Trade Order 379

An Economic Consensus 381

Summary 381 Review Terms and Concepts 382 Problems 382

19 Open-Economy Macroeconomics:

The Balance of Payments and

Exchange Rates 385

The Balance of Payments 386

The Current Account 386

The Financial Account 388

ECONOMICS IN PRACTICE Debtor and Creditor

Nations 389

Equilibrium Output (Income) in an Open

Economy 389

The International Sector and Planned Aggregate

Expenditure 389

Imports, Exports, and the Trade Feedback

Effect 392

Import and Export Prices and the Price Feedback

Effect 392

The Open Economy with Flexible Exchange

Rates 393

The Market for Foreign Exchange 394

Factors That Affect Exchange Rates 397

The Effects of Exchange Rates on the

Economy 399

An Interdependent World Economy 402

Summary 402 Review Terms and Concepts 403

Problems 403 Appendix: World Monetary Systems since 1900 405

Appendix Summary 410 Appendix Problems 410

20 Economic Growth in Developing

Economies 411

Life in the Developing Nations: Population

and Poverty 412

ECONOMICS IN PRACTICE What Can We Learn

from the Height of Children? 413

Economic Development: Sources

and Strategies 413

The Sources of Economic Development 414

ECONOMICS IN PRACTICE Corruption 416

Strategies for Economic Development 417

ECONOMICS IN PRACTICE Who You Marry May

Depend on the Rain 419

Two Examples of Development: China

and India 421

ECONOMICS IN PRACTICE Boosting Agricultural

Income through Digital Finance 422

Development Interventions 422

Random and Natural Experiments: Some New

Techniques in Economic Development 423

Education Ideas 423

Health Improvements 424

Summary 425 Review Terms and Concepts 425 Problems 426

PART VI Methodology 428

21 Critical Thinking about

Research 428

Selection Bias 429

Causality 430

Correlation versus Causation 430

Random Experiments 431

Regression Discontinuity 432

ECONOMICS IN PRACTICE Moving

to Opportunity 433

ECONOMICS IN PRACTICE Control Groups and

Experimental Economics 434

Difference-in-Differences 435

ECONOMICS IN PRACTICE Using Difference-in-

Differences to Study the Efficacy of Medical Insurance

in Japan 436

Statistical Significance 437

Regression Analysis 438

Summary 440 Review Terms and Concepts 440 Problems 441

Glossary 443

Index 453

Photo Credits 469

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