Macroeconomics, 3rd Edition PDF by Daron Acemoglu, David Laibson and John A List


Macroeconomics, Third Edition

By Daron Acemoglu, David Laibson and John A. List

Macroeconomics, 3rd Edition PDF by Daron Acemoglu, David Laibson and John A List


About the Authors 6

Preface 17

PART I Introduction to Economics

Chapter 1: The Principles and Practice of Economics 30

1.1 The Scope of Economics 31

Economic Agents and Economic Resources 31

Definition of Economics 32

Positive Economics and Normative Economics 33

Microeconomics and Macroeconomics 34

1.2 Three Principles of Economics 34

1.3 The First Principle of Economics: Optimization 35

Trade-offs and Budget Constraints 36

Opportunity Cost 37

Cost-Benefit Analysis 38

Evidence-Based Economics: Is Facebook free? 39

1.4 The Second Principle of Economics: Equilibrium 41

The Free-Rider Problem 42

1.5 The Third Principle of Economics: Empiricism 43

1.6 Is Economics Good for You? 43

Summary 44

Key Terms 45

Questions 45

Evidence-Based Economics Problems 45

Problems 46

Chapter 2: Economic Science: Using Data and Models to

Understand the World 48

2.1 The Scientific Method 49

Models and Data 50

An Economic Model 51

Evidence-Based Economics: How much more does a worker with a 4-year college degree earn compared to a worker

with a high school degree? 52

Means and Medians 54

Argument by Anecdote 54

2.2 Causation and Correlation 55

The Red Ad Blues 55

Causation Versus Correlation 55

Choice & Consequence: Spend Now and Pay Later? 58

Experimental Economics and Natural Experiments 58

Evidence-Based Economics: What is the return to education? 59

2.3 Economic Questions and Answers 60

Summary 62

Key Terms 62

Questions 62

Evidence-Based Economics Problems 63

Problems 63

Appendix: Constructing and Interpreting Charts and Graphs 65

A Study about Incentives 65

Experimental Design 65

Describing Variables 66

Cause and Effect 68

Appendix Key Terms 71

Appendix Problems 71

Chapter 3: Optimization: Trying to Do the Best You Can 72

3.1 Optimization: Trying to Choose the Best Feasible Option 73

Choice & Consequence: Do People Actually Choose the Best Feasible Option? 74

3.2 Optimization Application: Renting the Optimal Apartment 74

Before and After Comparisons 77

3.3 Optimization Using Marginal Analysis 78

Marginal Cost 79

Evidence-Based Economics: How does location affect the rental cost of housing? 82

Summary 85

Key Terms 86

Questions 86

Evidence-Based Economics Problems 86

Problems 86

Chapter 4: Demand, Supply, and Equilibrium 90

4.1 Markets 91

Competitive Markets 92

4.2 How Do Buyers Behave? 93

Demand Curves 94

Willingness to Pay 94

From Individual Demand Curves to Aggregated Demand Curves 95

Building the Market Demand Curve 96

Shifting the Demand Curve 97

Evidence-Based Economics: How much more gasoline would people buy if its price were lower? 99

4.3 How Do Sellers Behave? 101

Supply Curves 101

Willingness to Accept 101

From the Individual Supply Curve to the Market Supply Curve 102

Shifting the Supply Curve 103

4.4 Supply and Demand in Equilibrium 105

Curve Shifting in Competitive Equilibrium 107

Letting the Data Speak: Technological Breakthroughs Drive Down the Equilibrium Price of Oil 108

Letting the Data Speak: The Day Oil

Became Garbage 109

4.5 What Would Happen If the Government Tried to Dictate the Price of Gasoline? 110

Choice & Consequence: The Unintended Consequences of Fixing Market Prices 112

Summary 113

Key Terms 114

Questions 114

Evidence-Based Economics Problems 115

Problems 115

PART II Introduction to Macroeconomics

Chapter 5: The Wealth of Nations: Defining and Measuring Macroeconomic Aggregates 118

5.1 Macroeconomic Questions 119

5.2 National Income Accounts: Production = Expenditure = Income 121

Production 121

Expenditure 122

Income 122

Circular Flows 123

National Income Accounts: Production 124

National Income Accounts: Expenditure 126

Evidence-Based Economics: In the United States, what is the total market value of annual economic production? 128

Letting the Data Speak: Saving versus Investment 130

National Income Accounting: Income 131

5.3 What Isn’t Measured by GDP? 131

Physical Capital Depreciation 132

Home Production 132

The Underground Economy 133

Externalities 134

Gross Domestic Product versus Gross National Product 134

The Increase in Income Inequality 135

Leisure 135

Does GDP Buy Happiness? 136

5.4 Real versus Nominal 137

The GDP Deflator 139

The Consumer Price Index 141

Inflation 142

Adjusting Nominal Variables 142

Summary 143

Key Terms 143

Questions 144

Evidence-Based Economics Problems 144

Problems 145

Chapter 6: Aggregate Incomes 148

6.1 Inequality Around the World 149

Measuring Differences in GDP per Capita 149

Letting the Data Speak: The Big Mac Index 151

Cross-Country Differences in GDP per capita 151

GDP per Worker 152

Productivity 153

Incomes and the Standard of Living 154

Choice & Consequence: Dangers of Just Focusing on GDP per Capita 155

6.2 Productivity and the Aggregate Production Function 156

Productivity Differences 157

The Aggregate Production Function 157

Labor 158

Physical Capital and Land 158

Technology 158

Representing the Aggregate Production Function 158

6.3 The Role and Determinants of Technology 160

Technology 160

Dimensions of Technology 161

Letting the Data Speak: Moore’s Law 162

Choice & Consequence: Academic Misallocation in Nazi Germany 163

Letting the Data Speak: Efficiency of Production and Productivity at the

Company Level 163

Entrepreneurship 164

Letting the Data Speak: Monopoly and GDP 164

Evidence-Based Economics: Why is the average American so much richer than the average Indian? 165

Summary 167

Key Terms 167

Questions 167

Evidence-Based Economics Problems 168

Problems 168

Appendix: The Mathematics of Aggregate Production Functions 171

PART III Long-Run Growth

and Development

Chapter 7: Economic Growth 174

7.1 The Power of Economic Growth 175

A First Look at U.S. Growth 175

Exponential Growth 177

Choice & Consequence: The Power of Exponential Growth 178

Patterns of Growth 179

Letting the Data Speak: Levels versus Growth 182

7.2 How Does a Nation’s Economy Grow? 184

Optimization: The Choice Between Saving and Consumption 184

What Brings Sustained Growth? 185

Choice & Consequence: Is Increasing the Saving Rate Always a Good Idea? 186

Knowledge, Technological Change, and Growth 186

Letting the Data Speak: Technology and Life Expectancy 188

7.3 The History of Growth and Technology 188

Growth Before Modern Times 188

Letting the Data Speak: The Great Productivity Puzzle 189

Evidence-Based Economics: Why are you so much more prosperous than your great-grandparents were? 190

Malthusian Limits to Growth 193

The Industrial Revolution 193

Growth and Technology Since the Industrial Revolution 194

7.4 Growth, Inequality, and Poverty 194

Growth and Inequality 194

Growth and Poverty 194

Letting the Data Speak: Income Inequality in the United States 195

Choice & Consequence: Inequality versusn Poverty 196

How Can We Reduce Poverty? 197

Summary 198

Key Terms 198

Questions 198

Evidence-Based Economics Problems 199

Problems 199

Appendix: The Solow Growth Model 201

The Three Building Blocks of the Solow Model 201

Steady-State Equilibrium in the Solow Model 202

Determinants of GDP 203

Dynamic Equilibrium in the Solow Model 205

Sources of Growth in the Solow Model 206

Calculating Average (Compound) Growth Rates 207

Appendix Key Terms 209

Appendix Problems 209

Chapter 8: Why Isn’t the Whole World Developed? 210

8.1 Proximate Versus Fundamental Causes of Prosperity 211

Geography 212

Culture 213

Institutions 213

A Natural Experiment of History 214

8.2 Institutions and Economic Development 216

Inclusive and Extractive Economic Institutions 217

How Economic Institutions Affect Economic Outcomes 217

Letting the Data Speak: Democracy and Growth 218

Letting the Data Speak: Divergence and Convergence in Eastern Europe 220

The Logic of Extractive Economic Institutions 223

Inclusive Economic Institutions and the Industrial Revolution 223

Letting the Data Speak: Blocking the Railways 224

Evidence-Based Economics: Are tropical and semitropical areas condemned to poverty by their geographies? 225

8.3 Is Foreign Aid the Solution to World Poverty? 230

Choice & Consequence: Foreign Aid and Corruption 231

Summary 232

Key Terms 232

Questions 232

Evidence-Based Economics Problems 233

Problems 233

PART VI Equilibrium in the Macroeconomy

Chapter 9: Employment and Unemployment 236

9.1 Measuring Employment and Unemployment 237

Classifying Potential Workers 237

Calculating the Unemployment Rate 238

Trends in the Unemployment Rate 239

9.2 Equilibrium in the Labor Market 240

The Demand for Labor 240

Shifts in the Labor Demand Curve 242

The Supply of Labor 243

Shifts in the Labor Supply Curve 244

Letting the Data Speak: Who Is Unemployed? 245

Letting the Data Speak: Racial Disparities in Unemployment and the Existence of Racial Discrimination 245

Equilibrium in a Competitive Labor Market 246

9.3 Why Is There Unemployment? 247

Voluntary Unemployment 247

Job Search and Frictional Unemployment 248

9.4 Wage Rigidity and Structural Unemployment 248

Minimum Wage Laws 249

Choice & Consequence: Luddites and Robots 250

Labor Unions and Collective Bargaining 251

Efficiency Wages 251

Choice & Consequence: Minimum Wage Laws and Employment 252

Downward Wage Rigidity 253

9.5 Cyclical Unemployment and the Natural Rate of Unemployment 255

Evidence-Based Economics: How did unemployment and wages respond to the COVID-19 pandemic in the United

States? 256

Summary 258

Key Terms 259

Questions 259

Evidence-Based Economics Problems 259

Problems 260

Chapter 10: Credit Markets 264

10.1 What Is the Credit Market? 265

Borrowers and the Demand for Loans 265

Real and Nominal Interest Rates 266

The Credit Demand Curve 267

Saving Decisions 269

The Credit Supply Curve 269

Choice & Consequence: Why Do People Save? 271

Equilibrium in the Credit Market 272

Credit Markets and the Efficient Allocation of Resources 272

10.2 Banks and Financial Intermediation: Putting Supply and Demand Together 273

Letting the Data Speak: Financing Start-ups 275

Assets and Liabilities on the Balance Sheet of a Bank 275

10.3 What Banks Do 277

Identifying Profitable Lending Opportunities 277

Maturity Transformation 278

Management of Risk 278

Bank Runs 280

Bank Regulation and Bank Solvency 280

Evidence-based Economics: How often do banks fail? 281

Choice & Consequence: Too Big to Fail 283

Choice & Consequence: Asset Price Fluctuations and Bank Failures 284

Summary 285

Key Terms 285

Questions 286

Evidence-Based Economics Problems 286

Problems 287

Chapter 11: The Monetary System 290

11.1 Money 291

The Functions of Money 291

Types of Money 292

The Money Supply 292

Choice & Consequence: Non-Convertible Currencies in U.S. History 293

11.2 Money, Prices, and GDP 294

Nominal GDP, Real GDP, and Inflation 294

The Quantity Theory of Money 294

11.3 Inflation 295

What Causes Inflation? 295

The Consequences of Inflation 296

The Social Costs of Inflation 297

The Social Benefits of Inflation 298

Evidence-Based Economics: What caused the German hyperinflation of 1922–1923? 299

11.4 The Federal Reserve 300

The Central Bank and the Objectives of

Monetary Policy 300

What Does the Central Bank Do? 301

11.5 Bank Reserves and the Plumbing of the Monetary System 302

Bank Reserves and Liquidity 303

The Demand Side of the Federal Funds Market 304

The Supply Side of the Federal Funds Market and Equilibrium in the Federal Funds Market 305

Two Ways That the Fed Controls the Federal Funds Rate 306

Choice & Consequence: Obtaining Reserves Outside the Federal Funds Market 309

The Fed’s Influence on the Money Supply and the Inflation Rate 309

The Relationship Between the Federal Funds Rate and the Long-Term Real Interest Rate 310

Letting the Data Speak: Two Models of Inflation Expectations 311

Summary 314

Key Terms 315

Questions 315

Evidence-Based Economics Problems 316

Problems 316

PART V Short-Run Fluctuations and Macroeconomic Policy

Chapter 12: Short-Run Fluctuations 318

12.1 Economic Fluctuations and Business Cycles 319

Patterns of Economic Fluctuations 321

The Great Depression 323

12.2 Macroeconomic Equilibrium and Economic Fluctuations 325

Labor Demand and Fluctuations 325

Sources of Fluctuations 327

Letting the Data Speak: Unemployment and the Growth Rate of Real GDP: Okun’s Law 328

Multipliers and Economic Fluctuations 332

Equilibrium in the Medium Run: Partial Recovery and Full Recovery 333

12.3 Modeling Expansions 337

Evidence-Based Economics: What caused the recession of 2007–2009? 338

Evidence-Based Economics: What caused the recession of 2020? 342

Summary 345

Key Terms 346

Questions 347

Evidence-Based Economics Questions 347

Problems 347

Chapter 13: Countercyclical

Macroeconomic Policy 350

13.1 The Role of Countercyclical

Policies in Economic Fluctuations 351

13.2 Countercyclical Monetary Policy 352

Controlling the Federal Funds Rate 353

Other Tools of the Fed 356

Expectations, Inflation, and Monetary Policy 357

Zero Lower Bound 357

Letting the Data Speak: Managing Expectations in Monetary Policy 358

Contractionary Monetary Policy: Reducing Inflation 360

Policy Trade-Offs 362

Choice & Consequence: Policy Mistakes 362

13.3 Countercyclical Fiscal Policy 363

Fiscal Policy over the Business Cycle: Automatic and Discretionary Components 364

Analysis of Expenditure-Based Fiscal Policy 366

Analysis of Taxation-Based Fiscal Policy 368

Letting the Data Speak: The Response of Consumption to Tax Cuts 370

Fiscal Policies That Directly Target the Labor Market 370

Policy Waste and Policy Lags 370

Letting the Data Speak: Hybrid Policies

That Involve Cooperation Between Fiscal

and Monetary Policymakers 371

Evidence-Based Economics: How much

does government expenditure stimulate GDP? 373

Summary 374

Key Terms 375

Questions 375

Evidence-Based Economics Problems 375

Problems 376

PART VI M acroeconomics in a Global Economy

Chapter 14: Macroeconomics and International Trade 378

14.1 Why and How We Trade 379

Absolute Advantage and Comparative Advantage 379

Comparative Advantage and International Trade 382

Efficiency and Winners and Losers from Trade 383

How We Trade 385

Letting the Data Speak: Living in an Interconnected World 386

Choice & Consequence: Trade Policy and Politics 387

Trade Barriers: Tariffs 387

14.2 The Current Account and the Financial Account 388

Trade Surpluses and Trade Deficits 388

International Financial Flows 388

The Workings of the Current Account and the Financial Account 390

14.3 International Trade, Technology Transfer, and Economic Growth 393

Letting the Data Speak: From IBM to Lenovo 395

Evidence-Based Economics: Are

companies like Nike harming workers in Vietnam? 395

Summary 398

Key Terms 399

Questions 399

Evidence-Based Economics Problems 399

Problems 400

Chapter 15: Open Economy Macroeconomics 402

15.1 Exchange Rates 403

Nominal Exchange Rates 403

Flexible, Managed, and Fixed Exchange Rates 404

15.2 The Foreign Exchange Market 406

How Do Governments Intervene in the Foreign Exchange Market? 408

Defending an Overvalued Exchange Rate 409

Choice & Consequence: Fixed Exchange Rates and Corruption 411

Evidence-Based Economics: How did

George Soros make $1 billion? 412

15.3 The Real Exchange Rate and Exports 413

From the Nominal to the Real Exchange Rate 414

Co-Movement Between the Nominal and the Real Exchange Rates 415

The Real Exchange Rate and Net Exports 416

Letting the Data Speak: Why Did the Chinese Authorities Keep the Yuan Undervalued? 417

15.4 GDP in the Open Economy 418

Revisiting Black Wednesday 418

Interest Rates, Exchange Rates, and Net Exports 419

Letting the Data Speak: The Costs of Fixed Exchange Rates 421

Summary 422

Key Terms 422

Questions 422

Evidence-Based Economics Problems 423

Problems 423

Endnotes 427

Glossary 431

Credits 439

Index 440

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