Principles Of Economics, 8th Edition PDF by Robert H Frank, Ben S Bernanke, Kate Antonovics and Ori Heffetz

By

Principles Of Economics, Eighth Edition

By Robert H. Frank, Ben S. Bernanke, Kate Antonovics and Ori Heffetz

Principles Of Economics, 8th Edition PDF by Robert H Frank, Ben S Bernanke, Kate Antonovics and Ori Heffetz

Contents:

PART I Introduction

Chapter 1 Thinking Like an Economist 1

Economics: Studying Choice in a World of Scarcity 2

Applying the Cost-Benefit Principle 3

Economic Surplus 4

Opportunity Cost 4

The Role of Economic Models 5

Three Important Decision Pitfalls 6

Pitfall 1: Measuring Costs and Benefits as

Proportions rather than Absolute Dollar

Amounts 6

Pitfall 2: Ignoring Implicit Costs 7

Pitfall 3: Failing to Think at the Margin 8

Normative Economics versus Positive Economics 13

Economics: Micro and Macro 13

The Approach of This Text 14

Economic Naturalism 14

THE ECONOMIC NATURALIST 1.1 15

THE ECONOMIC NATURALIST 1.2 15

THE ECONOMIC NATURALIST 1.3 16

Summary 17 • Core Principles 17 • Key Terms 17

  • Review Questions 18 • Problems 18 • Answers to

Self-Tests 19 • Appendix: Working with Equations,

Graphs, and Tables 20

Chapter 2 Comparative Advantage 31

Exchange and Opportunity Cost 32

The Principle of Comparative Advantage 33

THE ECONOMIC NATURALIST 2.1 35

Sources of Comparative Advantage 36

THE ECONOMIC NATURALIST 2.2 36

Comparative Advantage and Production Possibilities 37

The Production Possibilities Curve 37

How Individual Productivity Affects the Slope and

Position of the PPC 40

The Gains from Specialization and Exchange 41

A Production Possibilities Curve for a Many-Person

Economy 43

A Note on the Logic of the Fruit Picker’s Rule 44

Factors That Shift the Economy’s Production

Possibilities Curve 45

Why Have Some Countries Been Slow to Specialize? 46

Can We Have Too Much Specialization? 47

Comparative Advantage and Outsourcing 48

THE ECONOMIC NATURALIST 2.3 48

Outsourcing 48

THE ECONOMIC NATURALIST 2.4 49

Summary 51 • Core Principles 51

  • Key Terms 51 • Review Questions 52
  • Problems 52 • Answers to Self-Tests 53

Chapter 3 Supply and Demand 55

What, How, and for Whom? Central Planning

versus the Market 57

Buyers and Sellers in Markets 58

The Demand Curve 59

The Supply Curve 60

Market Equilibrium 62

Rent Controls Reconsidered 65

Pizza Price Controls? 67

Predicting and Explaining Changes in Prices

and Quantities 68

Shifts in Demand 69

THE ECONOMIC NATURALIST 3.1 71

Shifts in the Supply Curve 72

THE ECONOMIC NATURALIST 3.2 75

Four Simple Rules 75

THE ECONOMIC NATURALIST 3.3 78

Efficiency and Equilibrium 78

Cash on the Table 79

Smart for One, Dumb for All 80

THE ECONOMIC NATURALIST 3.4 81

Summary 82 • Core Principles 83

  • Key Terms 83 • Review Questions 83
  • Problems 83 • Answers to Self-Tests 85
  • Appendix: The Algebra of Supply and Demand 86

PART 2 Competition and the Invisible Hand

Chapter 4 Elasticity 89

Price Elasticity of Demand 90

Price Elasticity Defined 90

Determinants of Price Elasticity of Demand 92

Substitution Possibilities 92

Budget Share 92

Time 92

Some Representative Elasticity Estimates 93

Using Price Elasticity of Demand 94

THE ECONOMIC NATURALIST 4.1 94

THE ECONOMIC NATURALIST 4.2 94

A Graphical Interpretation of Price Elasticity 95

Price Elasticity Changes along a Straight-Line

Demand Curve 97

Two Special Cases 98

Elasticity and Total Expenditure 99

Income Elasticity and Cross-Price Elasticity of Demand 103

The Price Elasticity of Supply 104

Determinants of Supply Elasticity 106

Flexibility of Inputs 107

Mobility of Inputs 107

Ability to Produce Substitute Inputs 107

Time 107

THE ECONOMIC NATURALIST 4.3 108

Unique and Essential Inputs: The Ultimate

Supply Bottleneck 110

Summary 110 • Key Terms 111 • Review

Questions 111 • Problems 112 • Answers to

Self-Tests 113 • Appendix: The Midpoint Formula 114

Chapter 5 Demand 115

The Law of Demand 116

The Origins of Demand 116

Needs versus Wants 117

THE ECONOMIC NATURALIST 5.1 117

Translating Wants into Demand 118

Measuring Wants: The Concept of Utility 118

Allocating a Fixed Income between Two Goods 121

The Rational Spending Rule 125

Income and Substitution Effects Revisited 125

Applying the Rational Spending Rule 127

Substitution at Work 127

THE ECONOMIC NATURALIST 5.2 128

THE ECONOMIC NATURALIST 5.3 128

THE ECONOMIC NATURALIST 5.4 129

The Importance of Income Differences 129

THE ECONOMIC NATURALIST 5.5 130

Individual and Market Demand Curves 130

Horizontal Addition 130

Demand and Consumer Surplus 132

Calculating Consumer Surplus 132

Summary 135 • Key Terms 135 • Review

Questions 135 • Problems 135 • Answers to

Self-Tests 137 • Appendix: Indifference Curves 138

Chapter 6 Perfectly Competitive Supply 151

Thinking about Supply: The Importance of

Opportunity Cost 152

Individual and Market Supply Curves 154

Profit-Maximizing Firms in Perfectly Competitive Markets 155

Profit Maximization 155

The Demand Curve Facing a Perfectly

Competitive Firm 156

Production in the Short Run 157

Some Important Cost Concepts 158

Choosing Output to Maximize Profit 159

A Note on the Firm’s Shutdown Condition 160

Average Variable Cost and Average Total Cost 161

A Graphical Approach to Profit Maximization 161

Price = Marginal Cost: The Maximum-Profit

Condition 163

The “Law” of Supply 164

Determinants of Supply Revisited 166

Technology 166

Input Prices 166

The Number of Suppliers 166

Expectations 166

Changes in Prices of Other Products 166

Applying the Theory of Supply 167

THE ECONOMIC NATURALIST 6.1 167

Supply and Producer Surplus 170

Calculating Producer Surplus 170

Summary 171 • Key Terms 172 • Review Questions 172

  • Problems 172 • Answers to Self-Tests 174

Chapter 7 Efficiency, Exchange, and the Invisible

Hand in Action 175

The Central Role of Economic Profit 176

Three Types of Profit 176

The Invisible Hand Theory 179

Two Functions of Price 179

Responses to Profits and Losses 179

The Importance of Free Entry and Exit 185

Economic Rent versus Economic Profit 186

The Invisible Hand in Action 188

The Invisible Hand at the Supermarket and on the

Freeway 188

THE ECONOMIC NATURALIST 7.1 188

The Invisible Hand and Cost-Saving Innovations 188

The Distinction between an Equilibrium and a

Social Optimum 189

Smart for One, Dumb for All 190

THE ECONOMIC NATURALIST 7.2 190

Market Equilibrium and Efficiency 191

Efficiency Is Not the Only Goal 193

Why Efficiency Should Be the First Goal 194

The Cost of Preventing Price Adjustments 195

Price Ceilings 195

Price Subsidies 198

Summary 200 • Key Terms 201 • Review Questions 201

  • Problems 201 • Answers to Self-Tests 203

PART 3 Market Imperfections

Chapter 8 Monopoly, Oligopoly, and

Monopolistic Competition 205

Perfect and Imperfect Competition 206

Different Forms of Imperfect Competition 206

Monopolistic Competition 206

Oligopoly 207

The Essential Difference between Perfectly and

Imperfectly Competitive Firms 208

Five Sources of Market Power 209

Exclusive Control over Important Inputs 209

Patents and Copyrights 209

Government Licenses or Franchises 209

Economies of Scale and Natural Monopolies 210

Network Economies 210

Economies of Scale and the Importance of

Start-Up Costs 211

THE ECONOMIC NATURALIST 8.1 213

Profit Maximization for the Monopolist 214

Marginal Revenue for the Monopolist 214

The Monopolist’s Profit-Maximizing

Decision Rule 216

Being a Monopolist Doesn’t Guarantee

an Economic Profit 218

Why the Invisible Hand Breaks Down under

Monopoly 218

Using Discounts to Expand the Market 220

Price Discrimination Defined 220

THE ECONOMIC NATURALIST 8.2 221

How Price Discrimination Affects Output 221

The Hurdle Method of Price Discrimination 224

Is Price Discrimination a Bad Thing? 226

Examples of Price Discrimination 227

THE ECONOMIC NATURALIST 8.3 228

Public Policy toward Natural Monopoly 228

State Ownership and Management 229

State Regulation of Private Monopolies 229

Exclusive Contracting for Natural Monopoly 230

Vigorous Enforcement of Antitrust Laws 230

Summary 232 • Key Terms 232 • Review

Questions 233 • Problems 233 • Answers to

Self-Tests 235 • Appendix: The Algebra of

Monopoly Profit Maximization 236

Chapter 9 Games and Strategic Behavior 239

Using Game Theory to Analyze Strategic Decisions 240

The Three Elements of a Game 240

Nash Equilibrium 242

The Prisoner’s Dilemma 244

The Original Prisoner’s Dilemma 244

The Economics of Cartels 245

THE ECONOMIC NATURALIST 9.1 245

Tit-for-Tat and the Repeated Prisoner’s

Dilemma 247

THE ECONOMIC NATURALIST 9.2 248

THE ECONOMIC NATURALIST 9.3 249

Games in Which Timing Matters 250

Credible Threats and Promises 252

Monopolistic Competition When Location Matters 254

THE ECONOMIC NATURALIST 9.4 254

Commitment Problems 256

Solving Commitment Problems with Psychological

Incentives 258

Are People Fundamentally Selfish? 259

Preferences as Solutions to Commitment

Problems 259

Summary 260 • Key Terms 260 • Review

Questions 261 • Problems 261 • Answers to

Self-Tests 264

Chapter 10 An Introduction to Behavioral

Economics 265

Judgmental Heuristics or Rules of Thumb 267

Availability 267

Representativeness 267

Regression to the Mean 268

THE ECONOMIC NATURALIST 10.1 269

Anchoring and Adjustment 269

Misinterpretation of Contextual Clues 270

The Psychophysics of Perception 270

The Difficulty of Actually Deciding 271

Impulse-Control Problems 272

THE ECONOMIC NATURALIST 10.2 273

Loss Aversion and Status Quo Bias 275

THE ECONOMIC NATURALIST 10.3 276

Beyond Narrow Self-Interest 277

The Present-Aim Standard of Rationality 278

The Adaptive Rationality Standard 278

Concerns about Fairness 281

Concerns about Relative Position 282

THE ECONOMIC NATURALIST 10.4 285

THE ECONOMIC NATURALIST 10.5 286

Summary 289 • Key Terms 290 • Review

Questions 290 • Problems 290 • Answers to

Self-Tests 291

Chapter 11 Externalities, Property Rights,

and the Environment 293

External Costs and Benefits 294

How Externalities Affect Resource Allocation 294

How Do Externalities Affect Supply

and Demand? 295

The Coase Theorem 297

Remedies for Externalities 302

Laws and Regulations 302

THE ECONOMIC NATURALIST 11.1 303

THE ECONOMIC NATURALIST 11.2 303

The Optimal Amount of Negative Externalities

Is Not Zero 304

Compensatory Taxes and Subsidies 304

THE ECONOMIC NATURALIST 11.3 306

Property Rights and the Tragedy of the Commons 306

The Problem of Unpriced Resources 306

The Effect of Private Ownership 309

When Private Ownership Is Impractical 310

THE ECONOMIC NATURALIST 11.4 310

THE ECONOMIC NATURALIST 11.5 310

Harvesting Timber on Remote Public Land 311

Harvesting Whales in International Waters 311

Controlling Multinational Environmental

Pollution 311

Positional Externalities 311

Payoffs That Depend on Relative

Performance 312

THE ECONOMIC NATURALIST 11.6 312

Positional Arms Races and Positional Arms

Control Agreements 313

Campaign Spending Limits 313

Roster Limits 314

Arbitration Agreements 314

Mandatory Starting Dates for Kindergarten 314

Social Norms as Positional Arms Control

Agreements 314

Nerd Norms 314

Fashion Norms 314

Norms of Taste 315

Norms against Vanity 315

Using Price Incentives in Environmental

Regulation 316

Taxing Pollution 316

Auctioning Pollution Permits 318

Climate Change and Carbon Taxes 319

Summary 321 • Key Terms 322 • Review

Questions 322 • Problems 322 • Answers to

Self-Tests 324

PART 4 Economics of Public Policy

Chapter 12 The Economics of Information 325

How the Middleman Adds Value 326

The Optimal Amount of Information 328

The Cost-Benefit Test 328

The Free-Rider Problem 328

THE ECONOMIC NATURALIST 12.1 329

THE ECONOMIC NATURALIST 12.2 329

Two Guidelines for Rational Search 330

The Gamble Inherent in Search 331

The Commitment Problem When Search Is Costly 332

Asymmetric Information 333

The Lemons Model 333

The Credibility Problem in Trading 335

The Costly-to-Fake Principle 336

THE ECONOMIC NATURALIST 12.3 336

THE ECONOMIC NATURALIST 12.4 337

Conspicuous Consumption as a Signal

of Ability 337

THE ECONOMIC NATURALIST 12.5 338

Statistical Discrimination 339

THE ECONOMIC NATURALIST 12.6 339

Disappearing Political Discourse 340

THE ECONOMIC NATURALIST 12.7 340

THE ECONOMIC NATURALIST 12.8 342

Insurance 343

Adverse Selection 343

Moral Hazard 344

The Problem with Health Care Provision through

Private Insurance 344

The Affordable Care Act of 2010 345

Summary 346 • Key Terms 347

  • Review Questions 347 • Problems 347
  • Answers to Self-Tests 348

Chapter 13 Labor Markets, Poverty, and

Income Distribution 349

The Economic Value of Work 350

The Equilibrium Wage and Employment Levels 353

The Demand Curve for Labor 353

The Supply Curve of Labor 353

Market Shifts 354

Explaining Differences in Earnings 355

Human Capital Theory 355

Labor Unions 355

THE ECONOMIC NATURALIST 13.1 357

Compensating Wage Differentials 357

THE ECONOMIC NATURALIST 13.2 358

Discrimination in the Labor Market 358

Discrimination by Employers 358

Discrimination by Others 359

Other Sources of the Wage Gap 359

Winner-Take-All Markets 360

THE ECONOMIC NATURALIST 13.3 360

Recent Trends in Inequality 361

Is Income Inequality a Moral Problem? 362

Methods of Income Redistribution 363

Welfare Payments and In-Kind Transfers 364

Means-Tested Benefit Programs 364

The Negative Income Tax 365

Minimum Wages 365

The Earned-Income Tax Credit 366

Public Employment for the Poor 368

A Combination of Methods 369

Summary 370 • Key Terms 370 • Review

Questions 370 • Problems 371 • Answers to

Self-Tests 372

Chapter 14 Public Goods and Tax Policy 373

Government Provision of Public Goods 374

Public Goods versus Private Goods 374

Paying for Public Goods 376

THE ECONOMIC NATURALIST 14.1 378

The Optimal Quantity of a Public Good 379

The Demand Curve for a Public Good 379

Private Provision of Public Goods 380

Funding by Donation 381

Development of New Means to Exclude

Nonpayers 381

Private Contracting 381

Sale of By-Products 381

THE ECONOMIC NATURALIST 14.2 381

Laws, Regulations, and the Question of

Centralization 384

Externalities and Property Rights 384

Local, State, or Federal? 384

Sources of Inefficiency in the Political Process 385

Pork Barrel Legislation 385

THE ECONOMIC NATURALIST 14.3 386

THE ECONOMIC NATURALIST 14.4 386

Rent-Seeking 387

Starve the Government? 389

What Should We Tax? 390

Summary 392 • Key Terms 392 • Review

Questions 393 • Problems 393 • Answers to

Self-Tests 395

PART 5 International Trade

Chapter 15 International Trade and

Trade Policy 397

Comparative Advantage as a Basis for Trade 398

Production and Consumption Possibilities and

the Benefits of Trade 399

The Two-Worker Production Possibilities

Curve 399

The Many-Worker Production Possibilities

Curve 402

Consumption Possibilities with and without

International Trade 404

A Supply and Demand Perspective on Trade 407

Winners and Losers from Trade 410

THE ECONOMIC NATURALIST 15.1 410

Protectionist Policies: Tariffs and Quotas 412

Tariffs 412

Quotas 414

THE ECONOMIC NATURALIST 15.2 416

The Inefficiency of Protectionism 417

THE ECONOMIC NATURALIST 15.3 417

Summary 418 • Key Terms 419 • Review

Questions 419 • Problems 420 • Answers to

Self-Tests 421 • Chapter 15 Appendix: An Algebraic

Approach to Trade Analysis (included at the back of the book)

PART 6 Macroeconomic: Issues and Data

Chapter 16 Macroeconomics: The Bird’s-Eye View

of the Economy 423

The Major Macroeconomic Issues 425

Economic Growth and Living Standards 425

Productivity 427

Recessions and Expansions 428

Unemployment 428

Inflation 430

Economic Interdependence among Nations 431

Macroeconomic Policy 432

Types of Macroeconomic Policy 432

Positive versus Normative Analyses of

Macroeconomic Policy 433

Aggregation 434

Studying Macroeconomics: A Preview 437

Summary 438 • Key Terms 438 • Review

Questions 438 • Problems 439 • Answers to

Self-Tests 439

Chapter 17 Measuring Economic Activity:

GDP and Unemployment 441

Gross Domestic Product: Measuring the

Nation’s Output 442

Market Value 443

Final Goods and Services 445

Produced in a Country during a Given

Period 448

Methods for Measuring GDP 449

The Expenditure Method for Measuring GDP 449

GDP and the Incomes of Capital and Labor 452

Nominal GDP versus Real GDP 455

THE ECONOMIC NATURALIST 17.1 457

Real GDP and Economic Well-Being 457

Why Real GDP Isn’t the Same as Economic

Well-Being 458

Leisure Time 458

THE ECONOMIC NATURALIST 17.2 458

Nonmarket Economic Activities 459

Environmental Quality and Resource Depletion 459

Quality of Life 459

Poverty and Economic Inequality 460

But GDP Is Related to Economic Well-Being 460

Availability of Goods and Services 460

Health and Education 461

THE ECONOMIC NATURALIST 17.3 462

Unemployment and the Unemployment Rate 463

Measuring Unemployment 463

The Costs of Unemployment 465

The Duration of Unemployment 466

The Unemployment Rate versus “True”

Unemployment 466

Summary 467 • Key Terms 468 • Review

Questions 468 • Problems 468 • Answers to

Self-Tests 470

Chapter 18 Measuring the Price Level

and Inflation 471

The Consumer Price Index and Inflation 472

Inflation 475

Adjusting for Inflation 476

Deflating a Nominal Quantity 476

Indexing to Maintain Buying Power 479

THE ECONOMIC NATURALIST 18.1 480

Does the CPI Measure “True” Inflation? 481

The Costs of Inflation: Not What You Think 483

The True Costs of Inflation 484

“Noise” in the Price System 484

Distortions of the Tax System 485

“Shoe-Leather” Costs 486

Unexpected Redistributions of Wealth 486

Interference with Long-Term Planning 487

Hyperinflation 487

Inflation and Interest Rates 489

Inflation and the Real Interest Rate 489

The Fisher Effect 492

Summary 493 • Key Terms 493 • Review

Questions 494 • Problems 494 • Answers to

Self-Tests 495

PART 7 The Economy in the Long Run

Chapter 19 Economic Growth, Productivity,

and Living Standards 497

The Remarkable Rise in Living Standards:

The Record 499

Why “Small” Differences in Growth Rates

Matter 501

Why Nations Become Rich: The Crucial Role of Average

Labor Productivity 503

The Determinants of Average Labor Productivity 505

Human Capital 505

THE ECONOMIC NATURALIST 19.1 506

Physical Capital 507

Land and Other Natural Resources 509

Technology 510

THE ECONOMIC NATURALIST 19.2 511

Entrepreneurship and Management 512

THE ECONOMIC NATURALIST 19.3 513

The Political and Legal Environment 513

The Costs of Economic Growth 515

Promoting Economic Growth 515

Policies to Increase Human Capital 516

THE ECONOMIC NATURALIST 19.4 516

Policies That Promote Saving and

Investment 516

Policies That Support Research and

Development 517

The Legal and Political Framework 517

The Poorest Countries: A Special Case? 517

Are There Limits to Growth? 518

Summary 520 • Key Terms 521 • Review

Questions 521 • Problems 521 • Answers to

Self-Tests 523

Chapter 20 The Labor Market: Workers, Wages,

and Unemployment 525

Five Important Labor Market Trends 526

Trends in Real Wages 526

Trends in Employment and

Unemployment 527

Supply and Demand in the Labor Market 528

Wages and the Demand for Labor 528

Shifts in the Demand for Labor 530

THE ECONOMIC NATURALIST 20.1 534

The Supply of Labor 534

Shifts in the Supply of Labor 536

Explaining the Trends in Real Wages

and Employment 536

Large Increases in Real Wages in

Industrialized Countries 537

Real Wage Growth in the United States Has

Stagnated since the Early 1970s, while Employment

Growth Has Been Rapid 537

Increasing Wage Inequality: The Effects of

Globalization and Technological Change 539

Globalization 539

Technological Change 541

THE ECONOMIC NATURALIST 20.2 543

Unemployment 544

Types of Unemployment and Their Costs 545

Frictional Unemployment 545

Structural Unemployment 546

Cyclical Unemployment 546

Impediments to Full Employment 546

Summary 549 • Key Terms 549 • Review

Questions 550 • Problems 550 • Answers to

Self-Tests 551

Chapter 21 Saving and Capital Formation 553

Saving and Wealth 554

Stocks and Flows 555

Capital Gains and Losses 556

THE ECONOMIC NATURALIST 21.1 557

Why Do People Save? 559

THE ECONOMIC NATURALIST 21.2 559

Saving and the Real Interest Rate 560

Saving, Self-Control, and Demonstration Effects 562

THE ECONOMIC NATURALIST 21.3 563

National Saving and Its Components 565

The Measurement of National Saving 565

Private and Public Components of

National Saving 567

Public Saving and the Government Budget 568

Is Low Household Saving a Problem? 570

Investment and Capital Formation 571

Saving, Investment, and Financial Markets 573

THE ECONOMIC NATURALIST 21.4 576

Summary 578 • Key Terms 578 • Review

Questions 579 • Problems 579 • Answers to

Self-Tests 580

Chapter 22 Money, Prices, and

the Federal Reserve 583

Money and Its Uses 584

THE ECONOMIC NATURALIST 22.1 585

Measuring Money 586

Commercial Banks and the Creation of Money 587

The Money Supply with Both Currency and

Deposits 590

The Federal Reserve System 592

The History and Structure of the Federal

Reserve System 593

Controlling the Money Supply: Open-Market

Operations 593

The Fed’s Role in Stabilizing Financial Markets: Banking Panics 595

THE ECONOMIC NATURALIST 22.2 595

Money and Prices 598

Velocity 598

Money and Inflation in the Long Run 599

Summary 601 • Key Terms 602 • Review

Questions 602 • Problems 602 • Answers to

Self-Tests 603

Chapter 23 Financial Markets and International

Capital Flows 605

The Financial System and the Allocation of Saving

to Productive Uses 606

The Banking System 607

THE ECONOMIC NATURALIST 23.1 608

Bonds and Stocks 608

Bonds 609

Stocks 610

Bond Markets, Stock Markets, and the Allocation of Savings 613

The Informational Role of Bond and

Stock Markets 613

Risk Sharing and Diversification 614

THE ECONOMIC NATURALIST 23.2 615

International Capital Flows 616

Capital Flows and the Balance of Trade 617

The Determinants of International

Capital Flows 619

Saving, Investment, and Capital Inflows 620

The Saving Rate and the Trade Deficit 622

THE ECONOMIC NATURALIST 23.3 623

Summary 625 • Key Terms 625 • Review

Questions 625 • Problems 626 • Answers to Self-Tests 627

PART 8 The Economy in the Short Run

Chapter 24 Short-Term Economic Fluctuations: An Introduction 629

THE ECONOMIC NATURALIST 24.1 630

Recessions and Expansions 631

THE ECONOMIC NATURALIST 24.2 633

Some Facts about Short-Term Economic Fluctuations 634

Output Gaps and Cyclical Unemployment 637

Potential Output 637

The Output Gap 638

The Natural Rate of Unemployment and Cyclical Unemployment 639

THE ECONOMIC NATURALIST 24.3 640

Okun’s Law 642

THE ECONOMIC NATURALIST 24.4 643

Why Do Short-Term Fluctuations Occur? A Preview

and a Tale 644

Alice’s Ice Cream Store: A Tale about Short-Run

Fluctuations 645

Summary 646 • Key Terms 647 • Review

Questions 647 • Problems 647 • Answers to

Self-Tests 648

Chapter 25 Spending and Output in the

Short Run 649

The Keynesian Model’s Crucial Assumption: Firms Meet

Demand at Preset Prices 651

THE ECONOMIC NATURALIST 25.1 652

Planned Aggregate Expenditure 653

Planned Spending versus Actual Spending 653

Consumer Spending and the Economy 655

THE ECONOMIC NATURALIST 25.2 656

Planned Aggregate Expenditure and Output 657

Short-Run Equilibrium Output 660

Finding Short-Run Equilibrium Output: Numerical Approach 661

Finding Short-Run Equilibrium Output: Graphical Approach 662

Planned Spending and the Output Gap 664

THE ECONOMIC NATURALIST 25.3 666

The Multiplier 667

Stabilizing Planned Spending: The Role of Fiscal Policy 668

Government Purchases and Planned Spending 668

THE ECONOMIC NATURALIST 25.4 670

Taxes, Transfers, and Aggregate Spending 671

THE ECONOMIC NATURALIST 25.5 673

Fiscal Policy as a Stabilization Tool: Three Qualifications 674

Fiscal Policy and the Supply Side 675

The Problem of Deficits 675

The Relative Inflexibility of Fiscal Policy 675

Summary 676 • Key Terms 677 • Review

Questions 678 • Problems 678 • Answers to

Self-Tests 679 • Appendix A: An Algebraic

Solution of the Basic Keynesian Model 681 • Appendix B:

The Multiplier in the Basic Keynesian Model 684

Chapter 26 Stabilizing the Economy: The Role of

the Fed 687

The Federal Reserve and Interest Rates:

The Basic Model 688

The Demand for Money 689

Macroeconomic Factors That Affect the Demand

for Money 692

The Money Demand Curve 693

THE ECONOMIC NATURALIST 26.1 694

The Supply of Money and Money Market Equilibrium 696

How the Fed Controls the Nominal Interest Rate 697

The Role of the Federal Funds Rate in Monetary Policy 699

Can the Fed Control the Real Interest Rate? 700

The Federal Reserve and Interest Rates: A Closer Look 701

Can the Fed Fully Control the Money Supply? 701

Affecting Bank Reserves through Open-Market Operations 702

Affecting Bank Reserves through Discount Window Lending 702

Setting and Changing Reserve Requirements 702

Excess Reserves: The Norm since 2008 703

Do Interest Rates Always Move Together? 704

The Zero Lower Bound and the Need for

“Unconventional” Monetary Policy 705

Quantitative Easing 705

Forward Guidance 705

Interest on Reserves and the New Tools of

Monetary Policy 706

The Effects of Federal Reserve Actions on the

Economy 708

Planned Aggregate Expenditure and the Real

Interest Rate 708

The Fed Fights a Recession 711

THE ECONOMIC NATURALIST 26.2 712

The Fed Fights Inflation 713

THE ECONOMIC NATURALIST 26.3 714

THE ECONOMIC NATURALIST 26.4 715

THE ECONOMIC NATURALIST 26.5 715

The Feds Policy Reaction Function 717

THE ECONOMIC NATURALIST 26.6 717

Monetary Policymaking: Art or Science? 720

Summary 720 • Key Terms 722 • Review

Questions 722 • Problems 722 • Answers to

Self-Tests 724 • Appendix: Monetary Policy in the Basic Keynesian Model 725

Chapter 27 Aggregate Demand, Aggregate Supply, and Inflation 727

Inflation, Spending, and Output: The Aggregate

Demand Curve 728

Inflation, the Fed, and Why the AD Curve Slopes

Downward 729

Other Reasons for the Downward Slope of

the AD Curve 730

Factors That Shift the Aggregate Demand

Curve 730

Changes in Spending 731

Changes in the Fed’s Policy Reaction Function 732

Shifts of the AD Curve versus Movements along the AD Curve 732

Inflation and Aggregate Supply 734

Inflation Inertia 735

Inflation Expectations 735

Long-Term Wage and Price Contracts 736

The Output Gap and Inflation 737

No Output Gap: Y = Y* 738

Expansionary Gap: Y > Y* 738

Recessionary Gap: Y < Y* 738

The Aggregate Demand–Aggregate Supply Diagram 739

The Self-Correcting Economy 741

Sources of Inflation 742

Excessive Aggregate Spending 742

THE ECONOMIC NATURALIST 27.1 744

Inflation Shocks 745

THE ECONOMIC NATURALIST 27.2 746

Shocks to Potential Output 748

THE ECONOMIC NATURALIST 27.3 749

Controlling Inflation 751

THE ECONOMIC NATURALIST 27.4 753

THE ECONOMIC NATURALIST 27.5 754

Summary 756 • Key Terms 757 • Review

Questions 757 • Problems 758 • Answer to

Self-Test 759 • Appendix: The Algebra of

Aggregate Demand and Aggregate Supply 762

PART 9 The International Economy

Chapter 28 Exchange Rates and the Open

Economy 765

Exchange Rates 767

Nominal Exchange Rates 767

Flexible versus Fixed Exchange Rates 769

The Real Exchange Rate 769

THE ECONOMIC NATURALIST 28.1 772

The Determination of the Exchange Rate in the Long Run 773

A Simple Theory of Exchange Rates: Purchasing Power Parity (PPP) 773

Shortcomings of the PPP Theory 775

The Determination of the Exchange Rate in the Short Run 776

The Foreign Exchange Market: A Supply and Demand Analysis 777

The Supply of Dollars 777

The Demand for Dollars 778

The Equilibrium Value of the Dollar 778

Changes in the Supply of Dollars 779

Changes in the Demand for

Dollars 780

THE ECONOMIC NATURALIST 28.2 780

Monetary Policy and the Exchange Rate 781

THE ECONOMIC NATURALIST 28.3 782

The Exchange Rate as a Tool of Monetary

Policy 783

Fixed Exchange Rates 783

How to Fix an Exchange Rate 784

Speculative Attacks 787

Monetary Policy and the Fixed Exchange Rate 788

THE ECONOMIC NATURALIST 28.4 789

THE ECONOMIC NATURALIST 28.5 790

THE ECONOMIC NATURALIST 28.6 790

Should Exchange Rates Be Fixed or

Flexible? 792

THE ECONOMIC NATURALIST 28.7 793

Summary 794 • Key Terms 795 • Review

Questions 795 • Problems 796 • Answers to

Self-Tests 797

Glossary G-1

Index I-1

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