Economics, 7th Edition PDF by By R. Glenn Hubbard and Anthony Patrick O’Brien


Economics, Seventh Edition

By R. Glenn Hubbard and Anthony Patrick O’Brien



Preface P-1

A Word of Thanks P-28

PART 1 Introduction

CHAPTER 1: Economics: Foundations and Models 2

Why Does Ford Assemble Cars in Both the United States and Mexico? 2

1.1 Three Key Economic Ideas 4

People Are Rational 5

People Respond to Economic Incentives 5

Apply the Concept: Does Health Insurance

Give People an Incentive to Become Obese? 5

Optimal Decisions Are Made at the Margin 7

Solved Problem 1.1: The Marginal Benefit and Marginal Cost of Speed Limits 7

1.2 The Economic Problem That Every Society Must Solve 8

What Goods and Services Will Be Produced? 9

How Will the Goods and Services Be Produced? 9

Who Will Receive the Goods and Services Produced? 9

Centrally Planned Economies versus Market Economies 10

The Modern “Mixed” Economy 10

Efficiency and Equity 11

1.3 Economic Models 12

The Role of Assumptions in Economic Models 12

Forming and Testing Hypotheses in Economic Models 13

Positive and Normative Analysis 14

Don’t Let This Happen to You: Don’t Confuse Positive Analysis with Normative Analysis 14

Economics as a Social Science 15

Apply the Concept: What Can Economics Contribute to the Debate over Tariffs? 15

1.4 Microeconomics and Macroeconomics 16

1.5 Economic Skills and Economics as a Career 16

1.6 A Preview of Important Economic Terms 17

Conclusion 19

An Inside Look: Is Manufacturing Returning to the United States? 20

*Chapter Summary and Problems 22

Key Terms, Summary, Review Questions, Problems and Applications, and Critical Thinking Exercises

Appendix: Using Graphs and Formulas 28

Graphs of One Variable 29

Graphs of Two Variables 30

Slopes of Lines 31

Taking into Account More Than Two Variables on a Graph 32

Positive and Negative Relationships 32

Determining Cause and Effect 34

Are Graphs of Economic Relationships Always Straight Lines? 35

Slopes of Nonlinear Curves 35

Formulas 36

Formula for a Percentage Change 37

Formulas for the Areas of a Rectangle and a Triangle 37

Summary of Using Formulas 38

Problems and Applications 38

CHAPTER 2: Trade-offs, Comparative Advantage, and the Market System 40

Managers at Tesla Motors Face Trade-offs 40

2.1 Production Possibilities Frontiers and Opportunity Costs 42

Graphing the Production Possibilities Frontier 42

Solved Problem 2.1: Drawing a Production Possibilities Frontier for Tesla Motors 44

Increasing Marginal Opportunity Costs 46

Economic Growth 47

2.2 Comparative Advantage and Trade 48

Specialization and Gains from Trade 48

Absolute Advantage versus Comparative Advantage 50

Comparative Advantage and the Gains from Trade 51

Don’t Let This Happen to You: Don’t Confuse Absolute Advantage and Comparative Advantage 51

Solved Problem 2.2: Comparative Advantage and the Gains from Trade 52

Apply the Concept: Comparative Advantage, Opportunity Cost, and Housework 53

2.3 The Market System 54

The Circular Flow of Income 55

The Gains from Free Markets 56 The Market Mechanism 56

Apply the Concept: A Story of the Market System in Action: How Do You Make an iPad? 57

The Role of the Entrepreneur in the Market System 59

The Legal Basis of a Successful Market System 59

Apply the Concept: Managers at Feeding America Use the Market Mechanism to Reduce Hunger 62

Conclusion 63

An Inside Look: Tesla Bets Big on Nevada Battery

Plant 64

Chapter Summary and Problems 66

CHAPTER 3: Where Prices Come From: The Interaction of Demand and Supply 72

How Smart Is Your Water? 72

3.1 The Demand Side of the Market 74

Demand Schedules and Demand Curves 74

The Law of Demand 75

What Explains the Law of Demand? 75

Holding Everything Else Constant: The Ceteris Paribus Condition 76

Variables That Shift Market Demand 76

Apply the Concept: Virtual Reality Headsets: Will a Substitute Fail for a Lack of Complements? 77

Apply the Concept: Millennials Shake Up the Markets for Soda, Groceries, Big Macs, and Running Shoes 78

A Change in Demand versus a Change in Quantity Demanded 81

Apply the Concept: Forecasting the Demand for Premium Bottled Water 81

3.2 The Supply Side of the Market 82

Supply Schedules and Supply Curves 83

The Law of Supply 83

Variables That Shift Market Supply 83

A Change in Supply versus a Change in Quantity Supplied 86

3.3 Market Equilibrium: Putting Demand and Supply Together 86

How Markets Eliminate Surpluses and Shortages 87

Demand and Supply Both Count 88

Solved Problem 3.3: Demand and Supply Both Count: A Tale of Two Letters 88

3.4 The Effect of Demand and Supply Shifts on Equilibrium 90

The Effect of Shifts in Demand on Equilibrium 90

The Effect of Shifts in Supply on Equilibrium 90

The Effect of Shifts in Demand and Supply over Time 90

Apply the Concept: Lower Demand for Orange Juice—But Higher Prices? 92

Solved Problem 3.4: Can We Predict Changes in the Price and Quantity of Organic Corn? 94

Shifts in a Curve versus Movements along a Curve 95

Don’t Let This Happen to You: Remember: A Change in a Good’s Price Does Not Cause the Demand or Supply Curve to Shift 96

Conclusion 97

An Inside Look: McDonald’s Looks for New Ways to Attract Customers 98

Chapter Summary and Problems 100

CHAPTER 4: Economic Efficiency, Government Price Setting, and Taxes 108

What Do Food Riots in Venezuela and the Rise of Uber in the United States Have in Common? 108

4.1 Consumer Surplus and Producer Surplus 110

Consumer Surplus 110

Apply the Concept: The Consumer Surplus from Uber 112

Producer Surplus 114

What Consumer Surplus and Producer Surplus Measure 115

4.2 The Efficiency of Competitive Markets 115

Marginal Benefit Equals Marginal Cost in Competitive Equilibrium 115

Economic Surplus 116

Deadweight Loss 117

Economic Surplus and Economic Efficiency 117

4.3 Government Intervention in the Market: Price Floors and Price Ceilings 118

Price Floors: Government Policy in Agricultural Markets 118

Apply the Concept: Price Floors in Labor Markets: The Debate over Minimum Wage Policy 119

Price Ceilings: Government Rent Control Policy in Housing Markets 121

Don’t Let This Happen to You: Don’t Confuse “Scarcity” with “Shortage” 122

Black Markets and Peer-to-Peer Sites 122

Solved Problem 4.3: What’s the Economic Effect of a Black Market in Renting Apartments? 123

The Results of Government Price Controls: Winners, Losers, and Inefficiency 124

Apply the Concept: Price Controls Lead to Economic Decline in Venezuela 124

Positive and Normative Analysis of Price Ceilings and Price Floors 126

4.4 The Economic Effect of Taxes 126

The Effect of Taxes on Economic Efficiency 126

Tax Incidence: Who Actually Pays a Tax? 127

Solved Problem 4.4: When Do Consumers

Pay All of a Sales Tax Increase? 128

Apply the Concept: Is the Burden of the Social

Security Tax Really Shared Equally between

Workers and Firms? 130

Conclusion 131

An Inside Look: Will Uber Be Required to Pay

British VAT? 132

Chapter Summary and Problems 134

Appendix: Quantitative Demand and Supply

Analysis 141

Demand and Supply Equations 141

Calculating Consumer Surplus and

Producer Surplus 142

Review Questions 144

Problems and Applications 144

PART 2 Markets in Action: Policy and


CHAPTER 5: Externalities, Environmental Policy,

and Public Goods 146

Why Does ExxonMobil Want to Pay a

Carbon Tax? 146

5.1 Externalities and Economic Efficiency 148

The Effect of Externalities 148

Externalities and Market Failure 150

What Causes Externalities? 151

5.2 Private Solutions to Externalities:

The Coase Theorem 151

The Economically Efficient Level of Pollution

Reduction 152

Apply the Concept: The Clean Air Act:

How a Government Policy Reduced

Infant Mortality 152

The Basis for Private Solutions to

Externalities 154

Don’t Let This Happen to You: Remember

That It’s the Net Benefit That Counts 154

Do Property Rights Matter? 155

The Problem of Transactions Costs 156

The Coase Theorem 156

Apply the Concept: How Can You Defend Your

Knees on a Plane Flight? 156

5.3 Government Policies to Deal with

Externalities 157

Imposing a Tax When There Is a Negative

Externality 157

Providing a Subsidy When There Is a Positive

Externality 158

Apply the Concept: Should the Government

Tax Cigarettes and Soda? 159

Solved Problem 5.3: Dealing with the

Externalities of Car Driving 160

Command-and-Control versus Market-Based

Approaches 162

The End of the Sulfur Dioxide Cap-and-Trade

System 163

Are Tradable Emission Allowances Licenses to

Pollute? 163

Apply the Concept: Should the United States

Enact a Carbon Tax to Fight Global

Warming? 163

5.4 Four Categories of Goods 165

The Demand for a Public Good 166

The Optimal Quantity of a Public Good 167

Solved Problem 5.4: Determining the Optimal

Level of Public Goods 169

Common Resources 170

Conclusion 173

Chapter Summary and Problems 174

CHAPTER 6: Elasticity: The Responsiveness of

Demand and Supply 182

Do Soda Taxes Work? 182

6.1 The Price Elasticity of Demand and Its

Measurement 184

Measuring the Price Elasticity of Demand 184

Elastic Demand and Inelastic Demand 185

An Example of Calculating Price Elasticities 185

The Midpoint Formula 186

Solved Problem 6.1: Calculating the Price

Elasticity of Demand 187

When Demand Curves Intersect, the Flatter Curve

Is More Elastic 188

Polar Cases of Perfectly Elastic and Perfectly

Inelastic Demand 188

Don’t Let This Happen to You: Don’t Confuse

Inelastic with Perfectly Inelastic 190

6.2 The Determinants of the Price Elasticity

of Demand 190

Availability of Close Substitutes 190

Passage of Time 191

Luxuries versus Necessities 191

Definition of the Market 191

Share of a Good in a Consumer’s Budget 191

Some Estimated Price Elasticities

of Demand 191

6.3 The Relationship between Price Elasticity of

Demand and Total Revenue 192

Elasticity and Revenue with a Linear

Demand Curve 193

Solved Problem 6.3: Price and Revenue Don’t

Always Move in the Same Direction 195

Apply the Concept: Why Does Amazon Care

about Price Elasticity? 196

6.4 Other Demand Elasticities 197

Cross-Price Elasticity of Demand 197

Income Elasticity of Demand 198

Apply the Concept: Price Elasticity, Cross-Price

Elasticity, and Income Elasticity in the Market

for Alcoholic Beverages 199

6.5 Using Elasticity to Analyze the Disappearing

Family Farm 199

Solved Problem 6.5: Using Price Elasticity to

Analyze the Effects of a Soda Tax 200

6.6 The Price Elasticity of Supply and Its

Measurement 202

Measuring the Price Elasticity of Supply 202

Determinants of the Price Elasticity of Supply 202

Apply the Concept: Why Are Oil Prices So

Unstable? 203

Polar Cases of Perfectly Elastic and Perfectly

Inelastic Supply 204

Using Price Elasticity of Supply to Predict Changes

in Price 206

Conclusion 207

Chapter Summary and Problems 209

CHAPTER 7: The Economics of Health Care 218

Where Will You Find Health Insurance? 218

7.1 The Improving Health of People in the

United States 220

Changes over Time in U.S. Health 221

Reasons for Long-Run Improvements in U.S.

Health 221

7.2 Health Care around the World 222

The U.S. Health Care System 222

Apply the Concept: The Increasing Importance

of Health Care in the U.S. Economy 224

The Health Care Systems of Canada, Japan, and the

United Kingdom 225

Comparing Health Care Outcomes around

the World 226

How Useful Are Cross-Country Comparisons of

Health Outcomes? 227

7.2 Information Problems and Externalities in the

Market for Health Care 228

Adverse Selection and the Market for “Lemons” 228

Asymmetric Information in the Market for Health

Insurance 229

Don’t Let This Happen to You: Don’t Confuse

Adverse Selection with Moral Hazard 230

Externalities in the Market for Health Care 231

Should the Government Run the Health

Care System? 233

7.3 The Debate over Health Care Policy in the

United States 234

The Rising Cost of Health Care 234

Apply the Concept: Are U.S. Firms Handicapped

by Paying for Their Employees’

Health Insurance? 236

Explaining Increases in Health Care Spending 237

The Continuing Debate over Health Care Policy 240

Solved Problem 7.4: Recent Trends in U.S.

Health Care 241

Apply the Concept: How Much Is That

MRI Scan? 243

Conclusion 245

Chapter Summary and Problems 246

PART 3 Firms in the Domestic and

International Economies

CHAPTER 8: Firms, the Stock Market, and

Corporate Governance 252

Is Snapchat the Next Facebook . . . or the

Next Twitter? 252

8.1 Types of Firms 254

Who Is Liable? Limited and Unlimited

Liability 254

Corporations Earn the Majority of Revenue and

Profits 255

Apply the Concept: Why Are Fewer Young

People Starting Businesses? 256

The Structure of Corporations and the

Principal–Agent Problem 257

8.2 How Firms Raise Funds 258

Sources of External Funds 258

Apply the Concept: The Rating Game: Are the

Federal Government or State Governments

Likely to Default on Their Bonds? 259

Stock and Bond Markets Provide Capital—and

Information 261

The Fluctuating Stock Market 262

Don’t Let This Happen to You: When Snap

Shares Are Sold, Snap Doesn’t Get

the Money 262

Apply the Concept: Why Are Many People Poor

Stock Market Investors? 264

Solved Problem 8.2: Why Does Warren Buffett

Like Mutual Funds? 265

8.3 Using Financial Statements to Evaluate a

Corporation 266

The Income Statement 266

The Balance Sheet 267

8.4 Recent Issues in Corporate Governance Policy 268

The Accounting Scandals of the Early 2000s 268

Corporate Governance and the Financial Crisis of

2007–2009 268

Government Regulation in Response to the

Financial Crisis 269

Did Principal–Agent Problems Help Cause the

2007–2009 Financial Crisis? 269

Apply the Concept: Should Investors Worry

about Corporate Governance at Snapchat? 270

Conclusion 272

Chapter Summary and Problems 273

Appendix: Tools to Analyze Firms’ Financial

Information 278

Using Present Value to Make Investment Decisions 278

Solved Problem 8A.1: How to Receive Your

Contest Winnings 280

Using Present Value to Calculate Bond Prices 281

Using Present Value to Calculate Stock Prices 282

A Simple Formula for Calculating Stock Prices 282

Going Deeper into Financial Statements 283

Analyzing Income Statements 284

Analyzing Balance Sheets 284

Review Questions 286

Problems and Applications 286

CHAPTER 9: Comparative Advantage and the

Gains from International Trade 288

President Trump, Oreo Cookies, and Free Trade 288

9.1 The United States in the International

Economy 290

The Importance of Trade to the U.S. Economy 291

U.S. International Trade in a World Context 292

9.2 Comparative Advantage in International Trade 292

A Brief Review of Comparative Advantage 293

Comparative Advantage and Absolute Advantage 293

9.3 How Countries Gain from International

Trade 294

Increasing Consumption through Trade 294

Solved Problem 9.3: The Gains from Trade 296

Why Don’t We See Complete Specialization? 297

Does Anyone Lose as a Result of International

Trade? 298

Don’t Let This Happen to You: Remember

That Trade Creates Both Winners and Losers 298

Apply the Concept: Who Gains and Who Loses

from U.S. Trade with China? 298

Where Does Comparative Advantage Come From? 301

9.4 Government Policies That Restrict

International Trade 302

Tariffs 303

Quotas and Voluntary Export Restraints 304

Measuring the Economic Effect of the

Sugar Quota 304

Solved Problem 9.4: Measuring the Economic

Effect of a Quota 306

The High Cost of Preserving Jobs with Tariffs

and Quotas 307

Apply the Concept: Smoot-Hawley, the Politics

of Tariffs, and the Cost of Protecting a

Vanishing Industry 307

Gains from Unilateral Elimination of Tariffs

and Quotas 309

Other Barriers to Trade 309

9.5 The Debate over Trade Policies and

Globalization 309

Why Do Some People Oppose the World Trade

Organization? 309

Apply the Concept: Protecting Consumer Health

or Protecting U.S. Firms from Competition? 312

Dumping 313

Positive versus Normative Analysis (Once Again) 313

Conclusion 314

Chapter Summary and Problems 315

PART 4 Microeconomic Foundations:

Consumers and Firms

CHAPTER 10: Consumer Choice and

Behavioral Economics 324

J.C. Penney Customers Didn’t Buy into

“Everyday Low Prices” 324

10.1 Utility and Consumer Decision Making 326

An Overview of the Economic Model of

Consumer Behavior 326

Utility 326

The Principle of Diminishing Marginal Utility 327

The Rule of Equal Marginal Utility per Dollar Spent 327

Solved Problem 10.1: Finding the Optimal Level

of Consumption 330

What if the Rule of Equal Marginal Utility per

Dollar Does Not Hold? 331

Don’t Let This Happen to You: Equalize

Marginal Utilities per Dollar 332

The Income Effect and Substitution Effect of a

Price Change 333

10.2 Where Demand Curves Come From 334

Apply the Concept: Are There Any Upward-

Sloping Demand Curves in the Real World? 336

10.3 Social Influences on Decision Making 337

The Effects of Celebrity Endorsements 337

Network Externalities 338

Does Fairness Matter? 339

Apply the Concept: Who Made the Most Prof it

from the Broadway Musical Hamilton? 341

Solved Problem 10.3: Why Doesn’t Tesla Charge

Its Employees to Park Their Cars? 343

10.4 Behavioral Economics: Do People Make

Rational Choices? 345

Pitfalls in Decision Making 345

Apply the Concept: A Blogger Who

Understands the Importance of Ignoring

Sunk Costs 346

“Nudges”: Using Behavioral Economics to

Guide Behavior 347

The Behavioral Economics of Shopping 348

Apply the Concept: J.C. Penney Meets

Behavioral Economics 349

Conclusion 351

Chapter Summary and Problems 352

Appendix: Using Indifference Curves and Budget

Lines to Understand Consumer Behavior 358

Consumer Preferences 358

Indifference Curves 358

The Slope of an Indifference Curve 359

Can Indifference Curves Ever Cross? 359

The Budget Constraint 360

Choosing the Optimal Consumption of Pizza

and Coke 361

Apply the Concept: Apple Determines the

Optimal Mix of iPhone Features 362

Deriving the Demand Curve 363

Solved Problem 10A.1: When Does a Price

Change Make a Consumer Better Off? 364

The Income Effect and the Substitution Effect of a

Price Change 365

How a Change in Income Affects Optimal

Consumption 367

The Slope of the Indifference Curve, the Slope

of the Budget Line, and the Rule of Equal

Marginal Utility per Dollar Spent 367

The Rule of Equal Marginal Utility per Dollar

Spent Revisited 368

Review Questions 370

Problems and Applications 370

CHAPTER 11: Technology, Production,

and Costs 372

Will the Cost of MOOCs Revolutionize

Higher Education? 372

11.1 Technology: An Economic Definition 374

Apply the Concept: Would You Please Be Quiet?

Technological Change at 374

11.2 The Short Run and the Long Run in

Economics 375

The Difference between Fixed Costs and

Variable Costs 375

Apply the Concept: Fixed Costs in the

Publishing Industry 376

Implicit Costs versus Explicit Costs 376

The Production Function 377

A First Look at the Relationship between

Production and Cost 378

11.3 The Marginal Product of Labor and the

Average Product of Labor 379

The Law of Diminishing Returns 379

Graphing Production 380

Apply the Concept: Adam Smith’s Famous

Account of the Division of Labor in a

Pin Factory 381

The Relationship between Marginal Product and

Average Product 381

An Example of Marginal and Average Values:

College Grades 382

11.4 The Relationship between Short-Run

Production and Short-Run Cost 383

Marginal Cost 383

Why Are the Marginal and Average Cost Curves

U Shaped? 383

Solved Problem 11.4: Calculating Marginal Cost

and Average Cost 385

11.5 Graphing Cost Curves 386

11.6 Costs in the Long Run 388

Economies of Scale 388

Long-Run Average Cost Curves for Automobile

Factories 389

Solved Problem 11.6: Using Long-Run

Average Cost Curves to Understand

Business Strategy 389

Apply the Concept: The Colossal River Rouge:

Diseconomies of Scale at Ford Motor

Company 391

Don’t Let This Happen to You: Don’t Confuse

Diminishing Returns with Diseconomies

of Scale 392

Conclusion 393

Chapter Summary and Problems 394

Appendix: Using Isoquants and Isocost Lines to

Understand Production and Cost 402

Isoquants 402

An Isoquant Graph 402

The Slope of an Isoquant 403

Isocost Lines 403

Graphing the Isocost Line 403

The Slope and Position of the Isocost Line 403

Choosing the Cost-Minimizing Combination

of Capital and Labor 405

Different Input Price Ratios Lead to Different

Input Choices 405

Solved Problem 11A.1: Firms Responding to

Differences in Input Price Ratios 406

Another Look at Cost Minimization 407

Solved Problem 11A.2: Determining the

Optimal Combination of Inputs 408

Apply the Concept: Do National Football

League Teams Behave Efficiently? 409

The Expansion Path 410

Review Questions 411

Problems and Applications 411

PART 5 Market Structure and Firm


CHAPTER 12: Firms in Perfectly Competitive

Markets 414

Are Cage-Free Eggs the Road to Riches? 414

12.1 Perfectly Competitive Markets 417

A Perfectly Competitive Firm Cannot Affect the

Market Price 417

The Demand Curve for the Output of a Perfectly

Competitive Firm 418

Don’t Let This Happen to You: Don’t Confuse

the Demand Curve for Farmer Parker’s Wheat

with the Market Demand Curve for Wheat 418

12.2 How a Firm Maximizes Profit in a Perfectly

Competitive Market 419

Revenue for a Firm in a Perfectly Competitive Market 420

Determining the Profit-Maximizing Level of Output 420

12.3 Illustrating Profit or Loss on the Cost

Curve Graph 422

Showing Profit on a Graph 423

Solved Problem 12.3: Determining Prof it-

Maximizing Price and Quantity 424

Don’t Let This Happen to You: Remember

That Firms Maximize Their Total Prof it, Not

Their Prof it per Unit 426

Illustrating When a Firm Is Breaking Even or

Operating at a Loss 426

Apply the Concept: Losing Money in the

Restaurant Business 427

12.4 Deciding Whether to Produce or to

Shut Down in the Short Run 428

The Supply Curve of a Firm in the Short Run 429

Solved Problem 12.4: When to Shut Down

a Farm 430

The Market Supply Curve in a Perfectly

Competitive Industry 431

12.5 “If Everyone Can Do It, You Can’t Make

Money at It”: The Entry and Exit of Firms in the

Long Run 432

Economic Profit and the Entry or Exit Decision 432

Long-Run Equilibrium in a Perfectly Competitive

Market 434

The Long-Run Supply Curve in a Perfectly

Competitive Market 436

Apply the Concept: In the Apple App Store,

Easy Entry Makes the Long Run

Pretty Short 437

Increasing-Cost and Decreasing-Cost

Industries 438

12.6 Perfect Competition and Economic

Efficiency 438

Productive Efficiency 438

Solved Problem 12.6: How Productive

Efficiency Benef its Consumers 439

Allocative Efficiency 440

Conclusion 441

Chapter Summary and Problems 442

CHAPTER 13: Monopolistic Competition:

The Competitive Model in a More Realistic

Setting 450

Will Panera’s “Pure Food” Advantage Last? 450

13.1 Demand and Marginal Revenue for a Firm

in a Monopolistically Competitive Market 452

The Demand Curve for a Monopolistically

Competitive Firm 452

Marginal Revenue for a Firm with a Downward-

Sloping Demand Curve 452

13.2 How a Monopolistically Competitive Firm

Maximizes Profit in the Short Run 454

Solved Problem 13.2: Does Minimizing Cost

Maximize Prof it at Apple? 456

13.3 What Happens to Profits in the Long Run? 457

How Does the Entry of New Firms Affect the

Profits of Existing Firms? 457

Don’t Let This Happen to You: Don’t Confuse

Zero Economic Profit with Zero Accounting

Prof it 458

Apply the Concept: Is “Clean Food” a Sustainable

Market Niche for Panera? 460

Is Zero Economic Profit Inevitable in the

Long Run? 461

Solved Problem 13.3: Red Robin Abandons

an Experiment in Fast-Casual Restaurants 461

13.4 Comparing Monopolistic Competition

and Perfect Competition 462

Excess Capacity under Monopolistic Competition 463

Is Monopolistic Competition Inefficient? 463

How Consumers Benefit from Monopolistic

Competition 464

Apply the Concept: One Way to Differentiate

Your Restaurant? Become a Ghost! 464

13.5 How Marketing Differentiates Products 465

Brand Management 466

Advertising 466

Defending a Brand Name 466

13.6 What Makes a Firm Successful? 466

Apply the Concept: Is Being the First Firm in

the Market a Key to Success? 467

Conclusion 469

Chapter Summary and Problems 470

CHAPTER 14: Oligopoly: Firms in Less

Competitive Markets 478

Apple, Spotify, and the Music Streaming

Revolution 478

14.1 Oligopoly and Barriers to Entry 480

Barriers to Entry 481

Apply the Concept: Got a Great Recipe for

Cookies? Don’t Try Selling Them in

Wisconsin or New Jersey 483

14.2 Game Theory and Oligopoly 484

A Duopoly Game: Price Competition between

Two Firms 485

Firm Behavior and the Prisoner’s Dilemma 486

Don’t Let This Happen to You: Don’t

Misunderstand Why Each Firm Ends Up

Charging a Price of $9.99 486

Solved Problem 14.2: Is Offering a College

Student Discount a Prisoner’s Dilemma for

Apple and Spotify? 487

Can Firms Escape the Prisoner’s Dilemma? 488

Apply the Concept: Are the Big Four Airlines

Colluding? 489

Cartels: The Case of OPEC 491

14.3 Sequential Games and Business Strategy 492

Deterring Entry 492

Solved Problem 14.3: Is Deterring Entry Always

a Good Idea? 494

Bargaining 495

14.4 The Five Competitive Forces Model 496

Competition from Existing Firms 496

The Threat from Potential Entrants 497

Competition from Substitute Goods or

Services 497

The Bargaining Power of Buyers 497

The Bargaining Power of Suppliers 497

Apply the Concept: Can We Predict Which Firms

Will Continue to Be Successful? 498

Conclusion 499

Chapter Summary and Problems 500

CHAPTER 15: Monopoly and Antitrust

Policy 506

A Monopoly on Lobster Dinners in Maine? 506

15.1 Is Any Firm Ever Really a Monopoly? 508

Apply the Concept: Is the NCAA a

Monopoly? 508

15.2 Where Do Monopolies Come From? 510

Government Action Blocks Entry 510

Apply the Concept: Does Hasbro Have a Monopoly

on Monopoly? 511

Control of a Key Resource 512

Apply the Concept: Are Diamond Prof its

Forever? The De Beers Diamond Monopoly 512

Network Externalities 513

Natural Monopoly 514

15.3 How Does a Monopoly Choose

Price and Output? 515

Marginal Revenue Once Again 515

Profit Maximization for a Monopolist 516

Solved Problem 15.3: Finding the Prof it-

Maximizing Price and Output for a

Cable Monopoly 518

Don’t Let This Happen to You: Don’t Assume

That Charging a Higher Price Is Always

More Prof itable for a Monopolist 519

15.4 Does Monopoly Reduce Economic

Efficiency? 519

Comparing Monopoly and Perfect Competition 519

Measuring the Efficiency Losses from

Monopoly 520

How Large Are the Efficiency Losses Due to

Monopoly? 521

Market Power and Technological Change 522

15.5 Government Policy toward Monopoly 522

Antitrust Laws and Antitrust Enforcement 522

Apply the Concept: Have Generic Drug Firms

Been Colluding to Raise Prices? 523

Mergers: The Trade-off between Market Power

and Efficiency 524

The Department of Justice and FTC Merger

Guidelines 526

Regulating Natural Monopolies 528

Solved Problem 15.5: What Should Your

College Charge for a MOOC? 529

Conclusion 530

Chapter Summary and Problems 531

CHAPTER 16: Pricing Strategy 538

Walt Disney Discovers the Magic of Big Data 538

16.1 Pricing Strategy, the Law of One Price,

and Arbitrage 540

Arbitrage 540

Solved Problem 16.1: Is Arbitrage Just a

Rip-off? 541

Why Don’t All Firms Charge the Same Price? 541

16.2 Price Discrimination: Charging Different

Prices for the Same Product 542

The Requirements for Successful Price

Discrimination 542

Don’t Let This Happen to You: Don’t Confuse

Price Discrimination with Other Types of

Discrimination 543

An Example of Price Discrimination 543

Solved Problem 16.2: How Apple Uses Price

Discrimination to Increase Prof its 544

Airlines: The Kings of Price Discrimination 545

Apply the Concept: Big Data and the Rise of

Dynamic Pricing 546

Perfect Price Discrimination 548

Price Discrimination across Time 549

Can Price Discrimination Be Illegal? 551

16.3 Other Pricing Strategies 551

Odd Pricing: Why Is the Price $2.99 Instead

of $3.00? 551

Why Do McDonald’s and Other Firms Use

Cost-Plus Pricing? 552

Apply the Concept: Cost-Plus Pricing in the

Publishing Industry 552

How Can Using Two-Part Tariffs Increase a

Firm’s Profit? 553

Conclusion 556

Chapter Summary and Problems 557

PART 6 Labor Markets, Public Choice,

and the Distribution of Income

CHAPTER 17: The Markets for Labor and Other

Factors of Production 562

Rio Tinto Mines with Robots 562

17.1 The Demand for Labor 564

The Marginal Revenue Product of Labor 564

Solved Problem 17.1: Hiring Decisions by a

Firm That Is a Price Maker 566

The Market Demand Curve for Labor 567

Factors That Shift the Market Demand Curve for

Labor 567

17.2 The Supply of Labor 568

The Market Supply Curve of Labor 569

Factors That Shift the Market Supply Curve

of Labor 569

17.3 Equilibrium in the Labor Market 570

The Effect on Equilibrium Wages of a Shift in

Labor Demand 571

Apply the Concept: Is Investing in a College

Education a Good Idea? 571

The Effect of Immigration on the U.S.

Labor Market 572

Apply the Concept: Will You Compete with a

Robot for a Job—Or Work with One? 574

17.4 Explaining Differences in Wages 577

Don’t Let This Happen to You: Remember

That Prices and Wages Are Determined

at the Margin 578

Apply the Concept: Technology and the Earnings

of “Superstars” 578

Compensating Differentials 579

Discrimination 580

Solved Problem 17.4: Is Passing “Comparable

Worth” Legislation a Good Way to

Close the Gap between Men’s and

Women’s Pay? 581

Apply the Concept: Does Greg Have an Easier

Time Finding a Job Than Jamal? 583

Labor Unions 585

17.5 Personnel Economics 585

Should Workers’ Pay Depend on How Much They

Work or on How Much They Produce? 586

Apply the Concept: A Better Way to Sell

Contact Lenses 587

Other Considerations in Setting Compensation

Systems 588

17.6 The Markets for Capital and Natural

Resources 588

The Market for Capital 588

The Market for Natural Resources 589

Monopsony 590

The Marginal Productivity Theory of

Income Distribution 591

Conclusion 591

Chapter Summary and Problems 592

CHAPTER 18: Public Choice, Taxes, and the

Distribution of Income 600

Should Your Small Business Be Taxed

Like Apple? 600

18.1 Public Choice 602

How Do We Know the Public Interest? Models

of Voting 602

Government Failure? 604

Is Government Regulation Necessary? 606

18.2 The Tax System 606

An Overview of the U.S. Tax System 607

Progressive and Regressive Taxes 608

Apply the Concept: Which Groups Pay the

Most in Federal Taxes? 609

Marginal and Average Income Tax Rates 610

The Corporate Income Tax 610

International Comparison of Corporate

Income Taxes 610

Evaluating Taxes 611

18.3 Tax Incidence Revisited: The Effect of Price

Elasticity 614

Don’t Let This Happen to You: Don’t Confuse

Who Pays a Tax with Who Bears the Burden

of the Tax 615

Apply the Concept: Do Corporations Really

Bear the Burden of the Federal Corporate

Income Tax? 615

Solved Problem 18.3: The Effect of Price

Elasticity on the Excess Burden of a Tax 616

18.4 Income Distribution and Poverty 617

Measuring the Income Distribution and

Measuring Poverty 617

Showing the Income Distribution with a

Lorenz Curve 619

Problems in Measuring Poverty and the

Distribution of Income 620

Solved Problem 18.4: What’s the Difference

between Income Mobility and Income

Inequality? 621

Explaining Income Inequality 623

Policies to Reduce Income Inequality 624

Apply the Concept: Who Are the 1 Percent,

and How Do They Earn Their Incomes? 626

Income Distribution and Poverty around

the World 627

Conclusion 629

Chapter Summary and Problems 630

PART 7 Macroeconomic Foundations

and Long-Run Growth

CHAPTER 19: GDP: Measuring Total Production

and Income 636

The Ford Motor Company Meets Macroeconomics 636

19.1 Gross Domestic Product Measures Total

Production 639

Measuring Total Production: Gross Domestic

Product 639

Solved Problem 19.1: Calculating GDP 640

Production, Income, and the Circular-Flow Diagram 640

Components of GDP 642

Don’t Let This Happen to You: Remember

What Economists Mean by Investment 643

An Equation for GDP and Some Actual Values 643

Apply the Concept: Microsoft’s Steve Ballmer

Uses the U.S. Constitution to Reorganize

Government Data 644

Measuring GDP Using the Value-Added Method 646

19.2 Does GDP Measure What We Want It

to Measure? 646

Shortcomings in GDP as a Measure of Total

Production 646

Apply the Concept: Why Do Many Developing

Countries Have Such Large Underground

Economies? 647

Shortcomings of GDP as a Measure of

Well-Being 648

19.3 Real GDP versus Nominal GDP 649

Calculating Real GDP 649

Solved Problem 19.3: Calculating Real GDP 649

Comparing Real GDP and Nominal GDP 650

The GDP Deflator 651

Apply the Concept: Did the Standard of Living

in Nigeria Almost Double Overnight? 652

19.4 Other Measures of Total Production and

Total Income 653

Gross National Product 653

National Income 653

Personal Income 654

Disposable Personal Income 654

The Division of Income 654

Conclusion 655

Chapter Summary and Problems 656

CHAPTER 20: Unemployment and Inflation 662

Why Would Boeing Cut Thousands of Jobs As the

Economy Expands? 662

20.1 Measuring the Unemployment Rate, the

Labor Force Participation Rate, and the

Employment–Population Ratio 664

The Household Survey 664

Solved Problem 20.1: What Happens if the BLS

Includes the Military? 666

Problems with Measuring the Unemployment

Rate 667

Trends in Labor Force Participation 668

Unemployment Rates for Different Groups 669

How Long Are People Typically Unemployed? 670

Apply the Concept: Eight Million Workers

Are Missing! 670

The Establishment Survey: Another Measure of

Employment 672

Revisions in the Establishment Survey

Employment Data: How Bad Was the 2007–2009

Recession? 673

Job Creation and Job Destruction over Time 673

20.2 Types of Unemployment 674

Frictional Unemployment and Job Search 674

Structural Unemployment 675

Cyclical Unemployment 675

Full Employment 676

Apply the Concept: How Should We Categorize

the Unemployment Resulting from Boeing’s

Layoffs? 676

20.3 Explaining Unemployment 677

Government Policies and the Unemployment Rate 677

Labor Unions 678

Efficiency Wages 679

20.4 Measuring Inflation 679

The Consumer Price Index 679

Is the CPI Accurate? 681

Don’t Let This Happen to You: Don’t Miscalculate

the Inflation Rate 681

The Producer Price Index 682

20.5 Using Price Indexes to Adjust for the Effects

of Inflation 682

Solved Problem 20.5: What Has Been Happening

to Real Wages in the United States? 683

20.6 Nominal Interest Rates versus Real Interest

Rates 685

20.7 Does Inflation Impose Costs on the Economy? 686

Inflation Affects the Distribution of Income 687

The Problem with Anticipated Inflation 687

The Problem with Unanticipated Inflation 688

Apply the Concept: What’s So Bad about

Falling Prices? 688

Conclusion 690

Chapter Summary and Problems 691

CHAPTER 21: Economic Growth, the Financial

System, and Business Cycles 702

Economic Growth and the Business Cycle at

Chevron Corporation 702

21.1 Long-Run Economic Growth 704

Apply the Concept: The Connection between

Economic Prosperity and Health 705

Calculating Growth Rates and the Rule of 70 707

What Determines the Rate of Long-Run Growth? 708

Solved Problem 21.1: Where Does Productivity

Come From? 709

Apply the Concept: Can India Sustain Its Rapid

Growth? 710

Potential GDP 712

21.2 Saving, Investment, and the

Financial System 713

An Overview of the Financial System 713

The Macroeconomics of Saving and Investment 714

The Market for Loanable Funds 716

Apply the Concept: Ebenezer Scrooge:

Accidental Promoter of Economic

Growth? 717

Solved Problem 21.2: Are Future Budget Def icits

a Threat to the Economy? 719

21.3 The Business Cycle 721

Some Basic Business Cycle Definitions 721

How Do We Know When the Economy Is in a

Recession? 722

What Happens during the Business Cycle? 723

Don’t Let This Happen to You: Don’t Confuse

the Price Level and the Inflation Rate 725

Will the U.S. Economy Return to Stability? 728

Conclusion 729

Chapter Summary and Problems 730

CHAPTER 22: Long-Run Economic Growth:

Sources and Policies 736

What Explains Slow Growth in Mexico? 736

22.1 Economic Growth over Time and around

the World 738

Economic Growth from 1,000,000 B.C.E. to the

Present 738

Apply the Concept: Why Did the Industrial

Revolution Begin in England? 739

Small Differences in Growth Rates Are Important 740

Why Do Growth Rates Matter? 741

Don’t Let This Happen to You: Don’t Confuse the

Average Annual Percentage Change with the

Total Percentage Change 741

“The Rich Get Richer and … ” 741

Apply the Concept: Is Income All That Matters? 742

22.2 What Determines How Fast Economies

Grow? 743

The Per-Worker Production Function 744

Which Is More Important for Economic Growth:

More Capital or Technological Change? 745

Technological Change: The Key to Sustaining

Economic Growth 745

Apply the Concept: What Explains the Economic

Failure of the Soviet Union? 746

Solved Problem 22.2: Using the Economic

Growth Model to Analyze the Failure of the

Soviet Economy 747

New Growth Theory 748

Joseph Schumpeter and Creative Destruction 750

22.3 Economic Growth in the United States 750

Economic Growth in the United States since 1950 750

Is the United States Headed for a Long Period of

Slow Growth? 751

22.4 Why Isn’t the Whole World Rich? 753

Catch-up: Sometimes but Not Always 754

Solved Problem 22.4: The Economic Growth

Model’s Prediction of Catch-Up 756

Why Haven’t Most Western European Countries,

Canada, and Japan Caught Up to the United States? 757

Why Don’t More Low-Income Countries

Experience Rapid Growth? 759

Apply the Concept: Why Hasn’t Mexico Grown

as Fast as China? 760

The Benefits of Globalization 762

22.5 Growth Policies 763

Enhancing Property Rights and the Rule of Law 763

Apply the Concept: Will China’s Standard of

Living Ever Exceed That of the

United States? 763

Improving Health and Education 765

Policies That Promote Technological Change 765

Policies That Promote Saving and Investment 765

Is Economic Growth Good or Bad? 766

Conclusion 767

Chapter Summary and Problems 768

PART 8 Short-Run Fluctuations

CHAPTER 23: Aggregate Expenditure and

Output in the Short Run 776

Fluctuating Demand Helps—and Hurts—Intel and

Other Firms 776

23.1 The Aggregate Expenditure Model 778

Aggregate Expenditure 778

The Difference between Planned Investment and

Actual Investment 779

Macroeconomic Equilibrium 779

Adjustments to Macroeconomic Equilibrium 780

23.2 Determining the Level of Aggregate

Expenditure in the Economy 781

Consumption 781

The Relationship between Consumption and

National Income 784

Income, Consumption, and Saving 786

Solved Problem 23.2: Calculating the Marginal

Propensity to Consume and the Marginal

Propensity to Save 787

Planned Investment 788

Apply the Concept: Is Student Loan Debt

Causing Fewer Young People to

Buy Houses? 789

Government Purchases 791

Net Exports 792

Apply the Concept: The iPhone Is Made in

China . . . or Is It? 794

23.3 Graphing Macroeconomic Equilibrium 794

Showing a Recession on the 45°-Line Diagram 798

The Important Role of Inventories 799

A Numerical Example of Macroeconomic

Equilibrium 799

Don’t Let This Happen to You: Don’t Confuse

Aggregate Expenditure with Consumption

Spending 800

Solved Problem 23.3: Determining

Macroeconomic Equilibrium 800

23.4 The Multiplier Effect 801

Apply the Concept: The Multiplier in Reverse:

The Great Depression of the 1930s 804

A Formula for the Multiplier 805

Summarizing the Multiplier Effect 806

Solved Problem 23.4: Using the Multiplier

Formula 807

The Paradox of Thrift 808

23.5 The Aggregate Demand Curve 808

Conclusion 810

Chapter Summary and Problems 811

Appendix: The Algebra of Macroeconomic

Equilibrium 818

Review Questions 819

CHAPTER 24: Aggregate Demand and

Aggregate Supply Analysis 820

The Fortunes of KB Home Follow the

Business Cycle 820

24.1 Aggregate Demand 822

Why Is the Aggregate Demand Curve Downward

Sloping? 822

Shifts of the Aggregate Demand Curve versus

Movements along It 824

The Variables That Shift the Aggregate

Demand Curve 824

Don’t Let This Happen to You: Understand

Why the Aggregate Demand Curve Is

Downward Sloping 825

Solved Problem 24.1: Movements along the

Aggregate Demand Curve or Shifts of

the Curve? 826

Apply the Concept: Which Components of

Aggregate Demand Changed the Most during

the 2007–2009 Recession? 828

24.2 Aggregate Supply 830

The Long-Run Aggregate Supply Curve 830

The Short-Run Aggregate Supply Curve 831

Apply the Concept: How Sticky Are Wages? 832

Shifts of the Short-Run Aggregate Supply

Curve versus Movements along It 834

Variables That Shift the Short-Run Aggregate

Supply Curve 834

24.3 Macroeconomic Equilibrium in the

Long Run and the Short Run 836

Recessions, Expansions, and Supply Shocks 837

Apply the Concept: Does It Matter What Causes

a Decline in Aggregate Demand? 838

Apply the Concept: How Long Is the Long Run

in Macroeconomics? 841

24.4 A Dynamic Aggregate Demand and

Aggregate Supply Model 843

What Is the Usual Cause of Inflation? 844

The Recession of 2007–2009 844

Solved Problem 24.4: Showing the Oil Shock of

1974–1975 on a Dynamic Aggregate Demand

and Aggregate Supply Graph 847

Conclusion 848

Chapter Summary and Problems 849

Appendix: Macroeconomic Schools of Thought 858

The Monetarist Model 858

The New Classical Model 859

The Real Business Cycle Model 859

The Austrian Model 860

Apply the Concept: Karl Marx: Capitalism’s

Severest Critic 860

PART 9 Monetary and Fiscal Policy

CHAPTER 25: Money, Banks, and the Federal

Reserve System 862

Does India Need Paper Currency? 862

25.1 What Is Money, and Why Do We Need It? 864

Barter and the Invention of Money 864

The Functions of Money 865

What Can Serve as Money? 866

Apply the Concept: Your Money Is No

Good Here! 867

25.2 How Is Money Measured in the United States

Today? 868

M1: A Narrow Definition of the Money Supply 868

M2: A Broad Definition of Money 869

Don’t Let This Happen to You: Don’t Confuse

Money with Income or Wealth 870

Solved Problem 25.2: The Def initions of

M1 and M2 870

What about Credit Cards and Debit Cards? 871

Apply the Concept: Are Bitcoins Money? 871

25.3 How Do Banks Create Money? 872

Bank Balance Sheets 872

Apply the Concept: Will Fintech Make It Easier

for You to Borrow? 873

Using T-accounts to Show How a Bank Can

Create Money 874

The Simple Deposit Multiplier 876

Don’t Let This Happen to You: Don’t Confuse

Assets and Liabilities 877

Solved Problem 25.3: Showing How Banks

Create Money 878

The Simple Deposit Multiplier versus the

Real-World Deposit Multiplier 880

25.4 The Federal Reserve System 881

The Establishment of the Federal

Reserve System 881

How the Federal Reserve Manages the

Money Supply 882

The “Shadow Banking System” and the Financial

Crisis of 2007–2009 885

25.5 The Quantity Theory of Money 887

Connecting Money and Prices: The Quantity

Equation 888

The Quantity Theory Explanation of Inflation 888

How Accurate Are Forecasts of Inflation Based

on the Quantity Theory? 889

High Rates of Inflation 890

Apply the Concept: The German Hyperinflation

of the Early 1920s 890

Conclusion 891

Chapter Summary and Problems 892

CHAPTER 26: Monetary Policy 900

Why Would a Bank Pay a Negative Interest Rate? 900

26.1 What Is Monetary Policy? 902

The Goals of Monetary Policy 902

26.2 The Money Market and the Fed’s Choice

of Monetary Policy Targets 904

Monetary Policy Targets 904

The Demand for Money 904

Shifts in the Money Demand Curve 905

How the Fed Manages the Money Supply:

A Quick Review 906

Equilibrium in the Money Market 906

A Tale of Two Interest Rates 908

Choosing a Monetary Policy Target 908

The Importance of the Federal Funds Rate 908

The Fed’s New Policy Tools 909

26.3 Monetary Policy and Economic Activity 910

How Interest Rates Affect Aggregate Demand 910

The Effects of Monetary Policy on Real GDP and

the Price Level 911

Apply the Concept: Too Low for Zero: Central

Banks, Quantitative Easing, and Negative

Interest Rates 912

Can the Fed Eliminate Recessions? 914

Fed Forecasts 915

Apply the Concept: Trying to Hit a Moving

Target: Making Policy with “Real-Time Data” 916

A Summary of How Monetary Policy Works 917

Don’t Let This Happen to You: Remember

That with Monetary Policy, It’s the Interest

Rates—Not the Money—That Counts 918

26.4 Monetary Policy in the Dynamic Aggregate

Demand and Aggregate Supply Model 918

The Effects of Monetary Policy on Real GDP and

the Price Level: A More Complete Account 919

Using Monetary Policy to Fight Inflation 920

Solved Problem 26.4: The Effects of Monetary Policy 921

26.5 A Closer Look at the Fed’s Setting of

Monetary Policy Targets 923

Should the Fed Target the Money Supply? 923

Why Doesn’t the Fed Target Both the Money

Supply and the Interest Rate? 923

The Taylor Rule 924

Solved Problem 26.5: Applying the Taylor Rule 925

Inflation Targeting 926

Apply the Concept: Should the Fed Worry

about the Prices of Food and Gasoline? 927

26.6 Fed Policies during the 2007–2009

Recession 928

The Inflation and Deflation of the Housing Market

Bubble 928

The Changing Mortgage Market 930

The Role of Investment Banks 930

Apply the Concept: The Wonderful World of

Leverage 931

The Fed and the Treasury Department Respond 932

Conclusion 934

Chapter Summary and Problems 935

CHAPTER 27: Fiscal Policy 944

Can Fiscal Policy Increase Economic Growth? 944

27.1 What Is Fiscal Policy? 946

What Fiscal Policy Is and What It Isn’t 946

Automatic Stabilizers versus Discretionary

Fiscal Policy 946

An Overview of Government Spending and Taxes 946

Apply the Concept: Is Spending on Social

Security and Medicare a Fiscal Time Bomb? 949

27.2 The Effects of Fiscal Policy on Real GDP

and the Price Level 951

Short-Run Expansionary and Contractionary

Fiscal Policy 951

Don’t Let This Happen to You: Don’t Confuse

Fiscal Policy and Monetary Policy 953

A Summary of How Fiscal Policy Affects

Aggregate Demand 953

27.3 Fiscal Policy in the Dynamic Aggregate

Demand and Aggregate Supply Model 954

27.4 The Government Purchases and Tax

Multipliers 955

The Effect of Changes in the Tax Rate 958

Taking into Account the Effects of Aggregate Supply 958

The Multipliers Work in Both Directions 959

Solved Problem 27.4: Fiscal Policy Multipliers 959

27.5 The Limits to Using Fiscal Policy to Stabilize the Economy 960

Apply the Concept: Why Was the Recession of

2007–2009 So Severe? 961

Does Government Spending Reduce

Private Spending? 962

Crowding Out in the Short Run 962

Crowding Out in the Long Run 964

Fiscal Policy in Action: Did the Stimulus Package

of 2009 Succeed? 964

27.6 Deficits, Surpluses, and Federal

Government Debt 967

How the Federal Budget Can Serve as an

Automatic Stabilizer 968

Apply the Concept: Did Fiscal Policy

Fail during the Great Depression? 969

Should the Federal Budget Always Be Balanced? 970

Solved Problem 27.6: The Greek Government

Confronts a Budget Def icit 971

The Federal Government Debt 972

Is Government Debt a Problem? 973

27.7 Long-Run Fiscal Policy and Economic

Growth 973

Explaining Long-Run Increases in Real GDP 973

How Can Fiscal Policy Affect Long-Run

Economic Growth? The Long-Run Effects of Tax Policy 974

Tax Simplification 975

The Economic Effects of Tax Reform 976

How Large Are Supply-Side Effects? 977

Apply the Concept: Will President Trump’s

Policy Proposals Raise the Rate of Economic Growth? 978

Conclusion 980

Chapter Summary and Problems 981

Appendix: A Closer Look at the Multiplier 989

An Expression for Equilibrium Real GDP 989

A Formula for the Government Purchases

Multiplier 990

A Formula for the Tax Multiplier 991

The “Balanced Budget” Multiplier 991

The Effects of Changes in Tax Rates on the

Multiplier 992

The Multiplier in an Open Economy 992

Problems and Applications 993

CHAPTER 28: Inflation, Unemployment, and

Federal Reserve Policy 994

The Fed Tries for a “Soft Landing,” while General

Motors and Toll Brothers Look On 994

28.1 The Discovery of the Short-Run Trade-off

between Unemployment and Inflation 996

Explaining the Phillips Curve with Aggregate

Demand and Aggregate Supply Curves 997

Is the Phillips Curve a Policy Menu? 998

Is the Short-Run Phillips Curve Stable? 998

The Long-Run Phillips Curve 998

The Role of Expectations of Future Inflation 999

Apply the Concept: Do Workers Understand

Inflation? 1000

28.2 The Short-Run and Long-Run Phillips

Curves 1001

Shifts in the Short-Run Phillips Curve 1002

How Does a Vertical Long-Run Phillips

Curve Affect Monetary Policy? 1003

Apply the Concept: Does the Natural Rate of

Unemployment Ever Change? 1004

Solved Problem 28.2: Changing Views of the

Phillips Curve 1005

28.3 Expectations of the Inflation Rate and

Monetary Policy 1006

The Implications of Rational Expectations for

Monetary Policy 1006

Is the Short-Run Phillips Curve Really Vertical? 1007

Real Business Cycle Models 1008

28.4 Federal Reserve Policy from the 1970s to

the Present 1008

The Effect of a Supply Shock on the Phillips Curve 1009

Paul Volcker and Disinflation 1010

Don’t Let This Happen to You: Don’t Confuse

Disinflation with Deflation 1011

Solved Problem 28.4: Using Monetary Policy

to Lower the Inflation Rate 1011

Alan Greenspan, Ben Bernanke, Janet Yellen, and

the Crisis in Monetary Policy 1013

Apply the Concept: Should the Fed Attempt to

Guide the Expectations of Investors? 1015

The Debate over the Fed’s Future 1017

Conclusion 1020

Chapter Summary and Problems 1021

PART 10 The International Economy

CHAPTER 29: Macroeconomics in an

Open Economy 1028

Amazon Deals with the Effects of a

Strong Dollar 1028

29.1 The Balance of Payments: Linking the

United States to the International Economy 1030

The Current Account 1030

The Financial Account 1032

The Capital Account 1032

Why Is the Balance of Payments Always Zero? 1032

Don’t Let This Happen to You: Don’t Confuse

the Balance of Trade, the Current Account

Balance, and the Balance of Payments 1033

Solved Problem 29.1: Understanding the

Arithmetic of the Balance of Payments 1034

29.2 The Foreign Exchange Market and Exchange Rates 1034

Apply the Concept: Exchange Rate Listings 1035

Equilibrium in the Market for Foreign Exchange 1036

How Do Shifts in Demand and Supply Affect the Exchange Rate? 1037

Some Exchange Rates Are Not Determined by

the Market 1038

How Movements in the Exchange Rate Affect

Exports and Imports 1039

Apply the Concept: Is a Strong Currency Good

for a Country? 1039

Don’t Let This Happen to You: Don’t Confuse

What Happens When a Currency

Appreciates with What Happens When It

Depreciates 1041

Solved Problem 29.2: Toyota Rides the

Exchange Rate Rollercoaster 1041

The Real Exchange Rate 1042

29.3 The International Sector and National

Saving and Investment 1043

Net Exports Equal Net Foreign Investment 1043

Domestic Saving, Domestic Investment, and

Net Foreign Investment 1044

Solved Problem 29.3: Arriving at the Saving

and Investment Equation 1044

29.4 The Effect of a Government Budget Deficit

on Investment 1046

Apply the Concept: Why Is the United States

Called the “World’s Largest Debtor”? 1047

29.5 Monetary Policy and Fiscal Policy in an

Open Economy 1048

Monetary Policy in an Open Economy 1049

Fiscal Policy in an Open Economy 1049

Conclusion 1050

Chapter Summary and Problems 1051

CHAPTER 30: The International

Financial System 1058

Bayer and the Great European Currency

Experiment 1058

30.1 Exchange Rate Systems 1060

Don’t Let This Happen to You: Remember

That Modern Currencies Are Fiat Money 1061

30.2 The Current Exchange Rate System 1061

The Floating Dollar 1061

What Determines Exchange Rates in the Long Run? 1062

Apply the Concept: The Big Mac Theory of

Exchange Rates 1063

Solved Problem 30.2: Calculating Purchasing

Power Parity Exchange Rates Using

Big Macs 1064

The Euro 1066

Apply the Concept: Greece and Germany:

Diverse Economies, Common Currency 1067

Pegging against the Dollar 1069

Apply the Concept: The Chinese Yuan:

The World’s Most Controversial Currency 1071

30.3 International Capital Markets 1073

Conclusion 1075

Chapter Summary and Problems 1076

Appendix: The Gold Standard and the Bretton

Woods System 1081

The Gold Standard 1081

The End of the Gold Standard 1081

The Bretton Woods System 1082

The Collapse of the Bretton Woods System 1083

Review Questions 1085

Problems and Applications 1085

Glossary G-1

Company Index I-1

Subject Index I-3


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