Principles of Macroeconomics, 5th Edition PDF by Ben Bernanke, Nilss Olekalns, Robert Frank Kate, Antonovics and Ori Heffetz

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Principles of Macroeconomics, Fifth Edition

By Ben Bernanke, Nilss Olekalns, Robert Frank Kate, Antonovics and Ori Heffetz

Principles of Macroeconomics 5e

Contents In Full

Preface xiv

Assurance of learning xvi

AACSB statement xvi

About the Australian author xvii

About the US authors xvii

Acknowledgments xx

How to use this book xxi

Digital resources xxiv

PART 1

ISSUES IN MACROECONOMICS

CHAPTER 1

Macroeconomics: The bird’s-eye view of the

economy 5

Learning objectives (LO) 5

Setting the scene 5

The major macroeconomic issues 7

1.1.1 Economic growth and living standards 7

1.1.2 Productivity 9

1.1.3 Recessions and expansions 10

1.1.4 Unemployment 11

1.1.5 Inflation 12

1.1.6 Economic interdependence among nations 13

1.2 Macroeconomic policy 14

1.2.1 Types of macroeconomic policy 15

1.2.2 Positive versus normative analyses of macroeconomic

policy 15

1.3 Aggregation 16

1.4 Studying macroeconomics: A preview 18

Summary 19

Key terms 19

Review questions 19

Problems 20

References 20

CHAPTER 2

Measuring economic activity: Gross

domestic product and unemployment 21

Learning objectives (LO) 21

Setting the scene 21

2.1 Measuring economic activity: Gross domestic product and unemployment 22

2.1.1 GDP: The fine print 23

2.1.2 Final goods and services 26

2.1.3 Produced within a country during a given period 28

2.2 Methods for measuring GDP 29

2.2.1 The national income accounting identity 31

2.2.2 GDP and the incomes of capital and labour 32

2.3 Nominal GDP versus real GDP 34

2.4 Real GDP is not the same as economic wellbeing 36

2.4.1 Leisure time 36

2.4.2 Non-market economic activities 37

2.4.3 Environmental quality and resource depletion 38

2.4.4 Quality of life 38

2.4.5 Poverty and economic inequality 38

2.4.6 GDP is related to economic wellbeing 39

2.4.7 Availability of goods and services 39

2.4.8 Life expectancy 39

2.5 Unemployment and the unemployment rate 41

2.5.1 Measuring unemployment 41

2.5.2 The costs of unemployment 41

2.5.3 The duration of unemployment 42

2.5.4 The unemployment rate versus ‘true’ unemployment 43

Summary 44

Key terms 44

Review questions 45

Problems 45

References 47

CHAPTER 3

Measuring the price level and inflation 49

Learning objectives (LO) 49

Setting the scene 49

3.1 The consumer price index: Measuring the price level 50

3.2 Inflation 51

3.2.1 A common misperception about inflation 52

3.2.2 Adjusting for inflation 53

3.3 Does the CPI measure ‘true’ inflation? 56

3.3.1 The costs of inflation: Not what you think 57

3.4 The true costs of inflation 59

3.4.1 Shoe-leather costs 59

3.4.2 Noise in the price system 59

3.4.3 Distortions of the tax system 60

3.4.4 Unexpected redistribution of wealth 60

3.4.5 Interference with long-run planning 61

3.4.6 Menu costs 61

3.4.7 Hyperinflation 62

3.5 Inflation and interest rates 63

3.5.1 The real interest rate 64

3.6 Deflation 65

Summary 67

Key terms 68

Review questions 68

Problems 68

References 70

CHAPTER 4

Saving, investment and wealth 71

Learning objectives (LO) 71

Setting the scene 71

4.1 Saving and wealth 72

4.1.1 Stocks and flows 75

4.1.2 Capital gains and losses 76

4.2 Why do people save? 79

4.2.1 Saving and the real interest rate 79

4.2.2 Saving, self-control and demonstration effects 82

4.3 National saving and its components 84

4.3.1 The measurement of national saving 84

4.3.2 Private and public components of national saving 86

4.3.3 Public saving and the government budget 87

4.4 Is low household saving a problem? 91

4.5 Investment and capital formation 91

4.6 Saving, investment and financial markets 96

4.6.1 The effects of new technology 97

Summary 99

Key terms 100

Review questions 100

Problems 100

References 101

CHAPTER 5

Wages, employment and the labour market 103

Learning objectives (LO) 103

Setting the scene 103

5.1 The perfectly competitive model of the labour market 104

5.1.1 Wages and the demand for labour 105

5.1.2 Shifts in the demand for labour 108

5.1.3 The supply of labour 111

5.1.4 Shifts in the supply of labour 112

5.1.5 Equilibrium in the perfectly competitive model of the labour market 112

5.2 Explaining the trends in real wages and employment 114

5.2.1 Large increases in real wages in industrialized countries 114

5.2.2 Real wages growth and employment in Australia 115

5.2.3 Increasing wage inequality: The effects of globalisation and technological change 116

5.3 Unemployment 120

5.3.1 Types of unemployment and their costs 120

5.4 Impediments to full employment 122

5.4.1 Minimum wage laws 122

5.4.2 Labour unions 123

5.4.3 Unemployment benefits 123

5.4.4 Other government regulations 124

Summary 125

Key terms 126

Review questions 127

Problems 127

References 129

PART 2

SHORT-RUN MACROECONOMICS: THE ANALYSIS OF THE BUSINESS CYCLE

CHAPTER 6

Short-term economic fluctuations: An

introduction 135

Learning objectives (LO) 135

Setting the scene 135

6.1 Contractions and expansions 136

6.1.1 Some facts about short-term economic fluctuations 140

6.2 Output gaps and cyclical unemployment 144

6.2.1 Potential output and the output gap 145

6.2.2 The natural rate of unemployment 146

6.2.3 Okun’s law 148

6.3 Why do short-term fluctuations occur? A preview and a parable 149

Summary 153

Key terms 154

Review questions 154

Problems 155

References 155

CHAPTER 7

Spending and output in the short run 157

Learning objectives (LO) 157

Setting the scene 157

7.1 An introduction to the Keynesian model 159

7.2 Aggregate expenditure 161

7.2.1 Planned expenditure versus actual expenditure 161

7.2.2 Consumer spending and the economy 162

7.3 Planned aggregate expenditure and output 164

7.4 Short-run equilibrium output 166

7.5 Consumption and investment in the two-sector model 168

7.6 The 45-degree diagram 170

7.7 Withdrawals and injections 172

7.8 The four-sector model 175

7.9 Planned spending and the output gap 177 Page x

7.10 The multiplier 183

7.11 Stabilising planned spending: The role of fiscal and

monetary policies 185

Summary 186

Key terms 187

Review questions 187

Problems 187

References 188

CHAPTER 8

Fiscal policy 189

Learning objectives (LO) 189

Setting the scene 189

8.1 Government purchases and planned spending 190

8.2 Taxes, transfers and aggregate spending 195

8.3 Fiscal policy as a stabilisation tool: Three qualifications 199

8.3.1 Fiscal policy and the supply side 199

8.3.2 The problem of deficits 199

8.3.3 The relative inflexibility of fiscal policy 201

8.4 Contemporary fiscal policy 202

8.4.1 The distribution of income 202

8.4.2 Managing demographic change 205

8.4.3 Fiscal policy and the public debt 207

Summary 210

Key terms 211

Review questions 211

Problems 212

References 213

CHAPTER 9

Money, prices and the Reserve Bank 215

Learning objectives (LO) 215

Setting the scene 215

9.1 The financial system and the allocation of saving to productive uses 216

9.1.1 The banking system 216

9.1.2 Bonds and stocks 217

9.2 Bond markets, stock markets and the allocation of savings 221

9.2.1 The informational role of bond and stock markets 221

9.3 Money and its uses 224

9.3.1 Measuring money 225

9.4 Commercial banks and the creation of money 226

9.4.1 The money supply with both currency and deposits 229

9.5 Money and prices 230

9.5.1 Velocity 231

9.5.2 Money and inflation in the long run 231

9.6 The Reserve Bank of Australia 233

9.6.1 Influencing interest rates: Open-market operations

233

Summary 237

Key terms 238

Review questions 238

Problems 238

References 239

CHAPTER 10

The Reserve Bank and the economy 241

Learning objectives (LO) 241

Setting the scene 241

10.1 The Reserve Bank, interest rates and monetary policy 242

10.1.1 The implications of a change in monetary policy for the money supply 245

10.2 Can the Reserve Bank control real interest rates? 247

10.3 The effects of the Reserve Bank’s actions on the economy 248

10.3.1 Planned aggregate expenditure and the real interest rate 248

10.3.2 The Reserve Bank fights a recession 253

10.3.3 The Reserve Bank fights inflation 255

10.4 The Reserve Bank’s policy reaction function 260

10.5 Monetary policymaking: Art or science? 263

Summary 263

Key terms 264

Review questions 264

Problems 264

References 265

APPENDIX TO CHAPTER 10

Monetary policy in the basic Keynesian model 266

CHAPTER 11

Aggregate demand, aggregate supply and

inflation 269

Learning objectives (LO) 269

Setting the scene 270

11.1 Inflation, spending and output: aggregate demand curve 270

11.1.1 Inflation, the Reserve Bank and the aggregate demand curve 271

11.1.2 Other reasons for the downward slope of the aggregate demand curve 271

11.1.3 Shifts of the aggregate demand curve 272

11.1.4 Shifts of the aggregate demand curve versus movements along the aggregate demand curve 274

11.2 Inflation and supply decisions 275

11.2.1 Inflation inertia 276

11.2.2 Output gaps and inflation 278

11.3 The aggregate demand–aggregate supply diagram 281

11.4 The self-correcting economy 283

11.5 Sources of inflation 284

11.5.1 Excessive aggregate spending 284

11.5.2 Inflation shocks 285

11.6 Controlling inflation 291

Summary 296

Key terms 297

Review questions 297

Problems 298

APPENDIX TO CHAPTER 11

Algebra of aggregate demand and aggregate supply 300

Aggregate demand curve 300

Shifts of aggregate demand curve 301

Short-run equilibrium 302

Long-run equilibrium 302

References 302

CHAPTER 12

Macroeconomic policy 303

Learning objectives (LO) 303

Setting the scene 303

12.1 What is the role of stabilisation policy? 304

12.1.1 Stabilisation policy and demand shocks 304

12.1.2 Stabilisation policy and inflation shocks 305

12.2 Inflationary expectations and credibility 308

12.2.1 Central bank independence 308

12.2.2 Announcing a numerical inflation target 309

12.2.3 Central bank reputation 311

12.3 Fiscal policy and the supply side 311

12.4 Policymaking: Art or science? 314

Summary 315

Key terms 316

Review questions 316

Problems 316

References 317

PART 3

LONG RUN MACROECONOMICS: THE ANALYSIS OF ECONOMIC GROWTH

CHAPTER 13

The economy in the long run: An

introduction to economic growth 323

Learning objectives (LO) 323

Setting the scene 323

13.1 Introduction to economic growth 324

13.2 Economic growth and potential output 325

13.3 Growth rates and differences in living standards 329

13.3.1 Why ‘small’ differences in growth rates matter 330

13.4 Why nations become rich: The crucial role of average labour productivity 332

13.4.1 The determinants of average labour productivity 333

13.5 The costs of economic growth 342

13.6 Promoting economic growth 343

13.6.1 Policies to increase human capital 343

13.6.2 Policies that promote saving and investment 343

13.6.3 Policies that support research and development 343

13.6.4 The legal and political framework 344

13.6.5 The poorest countries: A special case? 344

13.7 Are there limits to growth? 345

Summary 348

Key terms 348

Review questions 349

Problems 349

References 351

CHAPTER 14

The production function approach to understanding growth 353

Learning objectives (LO) 353

Setting the scene 353

14.1 Economists and economic growth 355

14.2 The production function 355

14.2.1 Capital 358

14.2.2 Labour 360

14.2.3 Bringing labour and capital together: The production function 362

14.3 The Cobb–Douglas production function 366

14.4 Growth accounting 368

14.4.1 Economic growth and the factors of production 368

14.4.2 The sources of economic growth 369

Summary 374

Key terms 375

Review questions 375

Problems 375

References 376

CHAPTER 15

Saving, capital formation and comparative economic growth 377

Learning objectives (LO) 377

Setting the scene 378

15.1 Saving, investment and economic growth 378

15.1.1 Saving, investment and the income accounting identity 378

15.2 The neo-classical (Solow–Swan) model of economic growth 379

15.2.1 A diagrammatic treatment 382

15.2.2 Evidence 386

Summary 395

Key terms 395

Review questions 395

Problems 396

References 397

PART 4

OPEN-ECONOMY MACROECONOMICS

CHAPTER 16

International trade 403

Learning objectives (LO) 403

Setting the scene 403

16.1 Production and consumption possibilities and the benefits of trade 404

16.1.1 The production possibilities curve 404

16.1.2 Consumption possibilities with and without international trade 409

16.1.3 Comparative advantage and international trade 413

16.1.4 Sources of comparative advantage 417

16.2 A supply and demand perspective on trade 418

16.2.1 Winners and losers from trade 420

16.3 Protectionist policies: Tariffs and quotas 421

16.3.1 Tariffs 421

16.3.2 Quotas 423

16.3.3 The inefficiency of protectionism 425

Summary 426

Key terms 427

Review questions 427

Problems 427

References 429

CHAPTER 17

Exchange rates and the open economy 431

Learning objectives (LO) 431

Setting the scene 432

17.1 Nominal exchange rates 432

17.1.1 Flexible versus fixed exchange rates 435

17.2 The real exchange rate 436

17.3 The determination of the exchange rate 439

17.3.1 A simple theory of exchange rates: Purchasing power parity 439

17.3.2 Shortcomings of the PPP theory 441

17.4 The determination of the exchange rate: A supply and demand analysis 442

17.4.1 The supply of dollars 442

17.4.2 The demand for dollars 443

17.4.3 Equilibrium value of the dollar 443

17.4.4 Changes in the supply of dollars 443

17.4.5 Changes in the demand for dollars 445

17.5 Monetary policy and the exchange rate 445

17.5.1 The exchange rate as a tool of monetary policy 447

17.6 Fixed exchange rates 448

17.6.1 How to fix an exchange rate 448

17.6.2 Speculative attacks 451

17.6.3 Monetary policy and fixed exchange rates 453

17.7 Should exchange rates be fixed or flexible? 458

Summary 460

Key terms 461

Review questions 461

Problems 462

References 463

CHAPTER 18

The balance of payments: Net exports and

international capital flows 465

Learning objectives (LO) 465

Setting the scene 465

18.1 The balance of payments 466

18.1.1 The current account 467

18.1.2 The capital account 469

18.2 Capital flows and the relationship between the capital and the current accounts 471

18.2.1 Capital flows and the current account balance 471

18.3 The determinants of international capital flows 474

18.4 Saving, investment and capital inflows 475

18.5 The saving rate and the trade and current account deficits 478

Summary 480

Key terms 480

Review questions 480

Problems 480

References 481

PART 5

CONCLUDING THOUGHTS

CHAPTER 19

Macroeconomics: What have we learnt? 485

Learning objectives (LO) 485

Setting the scene 485

19.1 Lessons from the past 486

19.2 Schools of thought in macroeconomics 488

19.2.1 Keynesian economics 488

19.2.2 Monetarism 489

19.2.3 New classical macroeconomics 490

19.2.4 New Keynesian macroeconomics 490

19.2.5 Growth theory and the real business cycle school 491

19.3 Some concluding thoughts 492

Summary 492

Key terms 493

Review questions 493

Problems 493

References 494

Answers to concept checks 495

Glossary 509

Index 515

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