Economics, Fifth Edition PDF by Paul Krugman and Robin Wells


Economics, Fifth Edition

By Paul Krugman and Robin Wells
Economics, 5th edition



PART 1 What Is Economics?


‘An Engine for Growth and Discovery

A Dayi n the Megacity

The Invisible Hand

My Benefit, Your Cost

Good Times, Bad Times

Onward and Upward

‘An Engine for Discovery

Chapter 1

First Principles

Common Ground

Principles That Underlie Individual Choice: The Core of Economics

Principle #1: Choices Are Necessary Because Resources Are Scarce

Principle #2: The True Cost of Something Is Its Opportunity Cost

Principle #3: “How Much” Is a Decision at the Margin

Principle #4: People Usually Respond to Incentives, Exploiting Opportunities to Make

Themselves Better Off

For InquiMrindis nUsgin g Incentives to Break the Cycle of Poverty

ECONOMICS in Action Boy or Girl? It Depends on the Cost

Interaction: How Economies Work

Principle #5: There Are Gains from Trade

Principle #6: Markets Move Toward Equilibrium

Principle #7: Resources Should Be Used Efficiently to Achieve Society’s Goals

Principle #8: Markets Usually Lead to Efficiency

Principle #9: When Markets Don’t Achieve Efficiency, Government Intervention Can

Improve Society’s Welfare

ECONOMICS in Action The Fundamental Law of Traffic Congestion

Economy-Wide Interactions

Principle #10: One Person’s Spending Is Another Person’s Income

Principle #11: Overall Spending Sometimes Gets Out of Line with the Economy’s

Productive Capacity

Principle #12: Government Policies Can Change Spending

ECONOMICS in Action Adventures in Babysitting

BUSINESS CASE How Priceline Revolutionized the Travel Industry

Chapter 2

Economic Models: Trade-offs and Trade

From Kitty Hawk to Dreamliner

‘Models in Economics: Some Important Examples

For InquirMiindns gTh e Model That Ate the Economy

Trade-offs: The Production Possibility Frontier

Comparative Advantage and Gains from Trade

Comparative Advantage and International Trade, in Reality


Transactions: The Circular-Flow Diagram

ECONOMICS in Action Rich Nation, Poor Nation

Using Models

Positive versus Normative Economics

When and Why Economists Disagree

For InquirMinidsn Wghe n Economists Agree

ECONOMICS in Action Economists: What Are They Good For?

BUSINESS CASE Efficiency, Opportunity Cost, and the Logic of Lean Production

Appendix: Graphs in Economics

Getting the Picture

Graphs, Variables, and Economic Models

How Graphs Work

Two-Variable Graphs

Curves on a Graph

A Key Concept: The Slope of a Curve

The Slope of a Linear Curve

Horizontal and Vertical Curves and Their Slopes

The Slope of a Nonlinear Curve

Calculating the Slope Along a Nonlinear Curve

Maximum and Minimum Points

Calculating the Area Below or Above a Curve

Graphs That Depict Numerical information

Types of Numerical Graphs

Problems in Interpreting Numerical Graphs

PART 2 Supply and Demand

Chapter 3

supply and Demand

A Natural Gas Boom

Supply and Demand: A Model of a Competitive Market

‘The Demand Curve

The Demand Schedule and the Demand Curve


Shifts of the Demand Curve

Understanding Shifts of the Demand Curve

ECONOMICS in Action Beating the Traffic

The Supply Curve

The Supply Schedule and the Supply Curve

Shifts of the Supply Curve

Understanding Shifts of the Supply Curve

ECONOMICS in Action Only Creatures Small and Pampered

Supply, Demand, and Equilibrium

Finding the Equilibrium Price and Quantity

Why Do All Sales and Purchases in a Market Take Place at the Same Price?

Why Does the Market Price Fall If It Is Above the Equilibrium Price?

Why Does the Market Price Rise If It Is Below the Equilibrium Price?

Using Equilibrium to Describe Markets

ECONOMICS in Action The Price of Admission

Changes in Supply and Demand

What Happens When the Demand Curve Shifts

What Happens When the Supply Curve Shifts

simultaneous Shifts of Supply and Demand Curves

ECONOMICS in Action The Cotton Panic and Crash of 2011

Competitive Markets—and Others

BUSINESS CASE Uber Gives Riders a Lesson in Supply and Demand

Chapter 4

Consumer and Producer Surplus

Making Gains by the Book

Consumer Surplus and the Demand Curve

Willingness to Pay and the Demand Curve

Willingness to Pay and Consumer Surplus

How Changing Prices Affect Consumer Surplus

For InquirMiinndsg A Matter of Life and Death

ECONOMICS in Action When Money Isn’t Enough

Producer Surplus and the Supply Curve

Cost and Producer Surplus

How Changing Prices Affect Producer Surplus

ECONOMICS in Action High Times Down on the Farm

Consumer Surplus, Producer Surplus, and the Gains from Trade

The Gains from Trade

The Efficiency of Markets

Equity and Efficiency

ECONOMICS in Action Take the Keys, Please

A Market Economy

Why Markets Typically Work So Well

A Few Words of Caution

ECONOMICS in Action A Great Leap—Backward

BUSINESS CASE Ticket Prices and Music’s Reigning Couple, Jay-Z and Beyoncé

Chapter 5

Price Controls and Quotas: Meddling with Markets

Big City, Not So Bright Ideas

Why Governments Control Prices

Price Ceilings

‘Modeling a Price Ceiling

How a Price Ceiling Causes Inefficiency

For InquiMirndsi Wninngers , Losers, and Rent Control

For InquiMinrdsi Mnumbgai’ s Rent-Control Millionaires

So Why Are There Price Ceilings?

ECONOMICS in ActioWnhy Price Controls in Venezuela Proved Useless

Price Floors

How a Price Floor Causes Inefficiency

GLOBAL COMPARISON Check Out Our Low, Low Wages!

So Why Are There Price Floors?

ECONOMICS in Action The Rise and Fall of the Unpaid Intern

Controlling Quantities

The Anatomy of Quantity Controls

The Costs of Quantity Controls

ECONOMICS in Action Crabbing, Quotas, and Saving Lives in Alaska

BUSINESS CASE Why Taxi Medallion Lenders Are Feeling Like Roadkill

Chapter 6


Taken for a Ride

Defining and Measuring Elasticity

Calculating the Price Elasticity of Demand

An Alternative Way to Calculate Elasticities: The Midpoint Method

ECONOMICS in Action Estimating Elasticities

Interpreting the Price Elasticity of Demand

How Elastic Is Elastic?

Price Elasticity Along the Demand Curve

What Factors Determine the Price Elasticity of Demand?

ECONOMICS in Action Responding to Your Tuition Bill

Other Demand Elasticities

The Cross-Price Elasticity of Demand

The Income Elasticity of Demand

For InquirMiindsn gWil l China Save the U.S. Farming Sector?

GLOBAL COMPARISON Food’s Bite in World Budgets

ECONOMICS in Action Spending It

‘The Price Elasticity of Supply

‘Measuring the Price Elasticity of Supply

What Factors Determine the Price Elasticity of Supply?

ECONOMICS in Action China and the Global Commodities Glut of 2016

An Elasticity Menagerie

BUSINESS CASE The Airline Industry: Fly Less, Charge More

PART 3 Individuals and Markets

Chapter 7


The Founding Taxers

‘The Economics of Taxes: A Preliminary View

The Effect of an Excise Tax on Quantities and Prices

Price Elasticities and Tax Incidence

ECONOMICS in ActioWnho Pays the FICA?

‘The Benefits and Costs of Taxation

The Revenue from an Excise Tax

Tax Rates and Revenue

The Costs of Taxation

For Inquiring Minds French Tax Rates and L’Arc Latter

Elasticities and the Deadweight Loss of a Tax

ECONOMICS in Action Taxing Tobacco

‘Tax Fairness and Tax Efficiency

Two Principles of Tax Fairness

Equity versus Efficiency

ECONOMICS in Action Federal Tax Philosophy

Understanding the Tax System

Tax Bases and Tax Structure

Equity, Efficiency, and Progressive Taxation

Taxes in the United States

Different Taxes, Different Principles

GLOBAL COMPARISON You Think You Pay High Taxes?

For InquiMirndis nTaxgin g Income versus Taxing Consumption

ECONOMICS in Action State Tax Choices

BUSINESS CASE Microsoft’s Internal Carbon Tax

Chapter 8

International Trade

‘The Everywhere Phone

Comparative Advantage and International Trade

Production Possibilities and Comparative Advantage, Revisited

The Gains from International Trade

Comparative Advantage versus Absolute Advantage

GLOBAL COMPARISON Productivity and Wages Around the World

Sources of Comparative Advantage

For Inquiring Minds Increasing Returns to Scale and International Trade

ECONOMICS in Action How Hong Kong Lost Its Shirts

Supply, Demand, and International Trade

The Effects of Imports

The Effects of Exports

International Trade and Wages

ECONOMICS in Action Trade, Wages, and Land Prices in the Nineteenth Century

‘The Effects of Trade Protection

The Effects of a Tariff

The Effects of an Import Quota

ECONOMICS in Action Trade Protection in the United States

‘The Political Economy of Trade Protection

Arguments for Trade Protection

The Politics of Trade Protection

International Trade Agreements and the World Trade Organization

Challenges to Globalization

ECONOMICS in Action Solar Disputes

BUSINESS CASE Li & Fung: From Guangzhou to You

PART 4 Economics and Decision Making

Chapter 9

Decision Making by Individuals and Firms

Making Decisions in Good Times and Bad

Costs, Benefits, and Profits

Explicit versus Implicit Costs

Accounting Profit versus Economic Profit

Making “Either-Or” Decisions

ECONOMICS in Action Airbnb and the Rising Cost of Privacy

‘Making “How Much” Decisions: The Role of Marginal Analysis

Marginal Cost

Marginal Benefit

Marginal Analysis

GLOBAL COMPARISON House Sizes Around the World

A Principle with Many Uses

ECONOMICS in Action The Cost of a Life

Sunk Costs

ECONOMICS in Action Biotech: The World’s Biggest Loser

Behavioral Economics

Rational, but Human, Too

Irrationality: An Economist’s View

For Inquiring Minds In Praise of Hard Deadlines

Rational Models for Irrational People?

ECONOMICS in Action “The Jingle Mail Blues”

BUSINESS CASE J.C. Penney’s One-Price Strategy Upsets Its Customers

Chapter 9

Appendix: How to Make Decisions Involving Time: Understanding Present Value

How to Calculate the Present Value of a One-Year Project

How to Calculate the Present Value of Multiyear Projects

How to Calculate the Present Value of Projects with Revenues and Costs

PART 5 The Consumer

Chapter 10

The Rational Consumer

T he AbsolLuastt eBi te

Utility: Getting Satisfaction

Utility and Consumption

The Principle of Diminishing Marginal Utility

ECONOMICS in Action Is Salmon a Luxury? It Depends

Budgets and Optimal Consumption

Budget Constraints and Budget Lines

Optimal Consumption Choice

For Inquiring Minds Food for Thought on Budget Constraints

ECONOMICS in Action The Great Condiment Craze

Spending the Marginal Dollar

Marginal Utility per Dollar

Optimal Consumption

ECONOMICS in Action Buying Your Way Out of Temptation

From Utility to the Demand Curve

Marginal Utility, the Substitution Effect, and the Law of Demand

The Income Effect

ECONOMICS in Action Lower Gasoline Prices and the Urge to Splurge

BUSINESS CASE Freedom from Fries

Chapter 10

Appendix: Consumer Preferences and Consumer Choice

‘Mapping the Utility Function

Indifference Curves

Properties of Indifference Curves

Indifference Curves and Consumer Choice

The Marginal Rate of Substitution

The Tangency Condition

The Slope of the Budget Line

Prices and the Marginal Rate of Substitution

Preferences and Choices

Using Indifference Curves: Substitutes and Complements

Perfect Substitutes

Perfect Complements

Less Extreme Cases

Prices, Income, and Demand

The Effects of a Price Increase

Income and Consumption

Income and Substitution Effects

PART 6 The Production Decision

Chapter 11

Behind the Supply Curve: Inputs and Costs

‘The Farmer’s Margin

The Production Function

Inputs and Output

GLOBAL COMPARISON Wheat Yields Around the World

From the Production Function to Cost Curves

ECONOMICS in Action Finding the Optimal Team Size

‘Two Key Concepts: Marginal Cost and Average Cost

Marginal Cost

Average Total Cost

‘Minimum Average Total Cost

Does the Marginal Cost Curve Always Slope Upward?

ECONOMICS in Action Smart Grid Economics

Short-Run versus Long-Run Costs

Returns to Scale

Summing Up Costs: The Short and Long of It

ECONOMICS in Action How the Sharing Economy Reduces Fixed Cost

BUSINESS CASE Amazon’s Invasion of the Bots

Chapter 12

Perfect Competition and the Supply Curve

Deck the Halls

Perfect Competition

Defining Perfect Competition

Two Necessary Conditions for Perfect Competition

Free Entry and Exit

For InquiMirndis nWhgat’ s a Standardized Product?

ECONOMICS in Action Pay for Delay

Production and Profits

Using Marginal Analysis to Choose the Profit-Maximizing Quantity of Output

When Is Production Profitable?

The Short-Run Production Decision

Changing Fixed Cost

Summing Up: The Perfectly Competitive Firm’s Profitability and Production Conditions

ECONOMICS in Action Farmers Know How

‘The Industry Supply Curve

The Short-Run Industry Supply Curve

The Long-Run Industry Supply Curve

The Cost of Production and Efficiency in Long-Run Equilibrium

ECONOMICS in Action Thirsty? From Global Wine Glut to Shortage

BUSINESS CASE Bricks-and-Mortar Retailers Go Toe to Toe with Mobile Shopping Apps

PART 7 Market Structure: Beyond Perfect Competition

Chapter 13


Everybody Must Get Stones

‘Types of Market Structure

‘The Meaning of Monopoly

Monopoly: Our First Departure from Perfect Competition

What Monopolists Do

Why Do Monopolies Exist?


ECONOMICS in Action The Monopoly That Wasn’t: China and the Market for Rare Earths

How a Monopolist Maximizes Profit

The Monopolist’s Demand Curve and Marginal Revenue

The Monopolist’s Profit-Maximizing Output and Price

Monopoly versus Perfect Competition

Monopoly: The General Picture

ECONOMICS in Action Shocked by the High Price of Electricity

‘Monopoly and Public Policy

Welfare Effects of Monopoly

Preventing Monopoly

Dealing with Natural Monopoly

ECONOMICS in Action The (R)Evolution of the American High-Speed Internet Market

Price Discrimination

The Logic of Price Discrimination

Price Discrimination and Elasticity

Perfect Price Discrimination

ECONOMICS in Action Sales, Factory Outlets, and Ghost Cities

BUSINESS CASE Amazon and Hachette Go to War

Chapter 14


Regulators Give Bridgestone a Flat Tire

The Prevalence of Oligopoly

ECONOMICS in Action Is It a Beer-opoly or Not?

Understanding Oligopoly

A Duopoly Example

Collusion and Competition

ECONOMICS in Action The Case Against Chocolate Producers Melts

Games Oligopolists Play

The Prisoners’ Dilemma

For Inquiring Minds Prisoners of the Arms Race and the Resurgent Cold War

Overcoming the Prisoners’ Dilemma: Repeated Interaction and Tacit Collusion

ECONOMICS in Action The Demise of OPEC

Oligopoly in Practice

The Legal Framework

GLOBAL COMPARISON Contrasting Approaches to Antitrust Regulation

Tacit Collusion and Price Wars

Product Differentiation and Price Leadership

How Important Is Oligopoly?

ECONOMICS in Action The Price Wars of Christmas

BUSINESS CASE Virgin Atlantic Blows the Whistle .. . or Blows It?

Chapter 15

Monopolistic Competition and Product Differentiation

Fast-Food Differentiation

‘The Meaning of Monopolistic Competition

Large Numbers

Differentiated Products

Free Entry and Exit in the Long Run

‘Monopolistic Competition: In Sum

Product Differentiation

Differentiation by Style or Type

Differentiation by Location

Differentiation by Quality

Product Differentiation: In Sum

ECONOMICS in Action Abbondanza!

Understanding Monopolistic Competition

‘Monopolistic Competition in the Short Run

‘Monopolistic Competition in the Long Run

ECONOMICS in Action Hits and Flops in the App Store

‘Monopolistic Competition versus Perfect Competition

Price, Marginal Cost, and Average Total Cost

Is Monopolistic Competition Inefficient?

Controversies About Product Differentiation

The Role of Advertising

Brand Names

ECONOMICS in Action The Perfume Industry: Leading Consumers by the Nose

BUSINESS CASE The Dollar Shave Club: How to Avoid a Case of Razor Burn

PART 8 Microeconomics and Public Policy

Chapter 16


Trouble Underfoot

External Costs and Benefits

For InquiMirndis Tnalkging , Texting, and Driving

Pollution: An External Cost

The Socially Optimal Quantity of Pollution

Why a Market Economy Produces Too Much Pollution

Private Solutions to Externalities

ECONOMICS in Action How Much Does Your Electricity Really Cost?

Policies Toward Pollution

Environmental Standards

Emissions Taxes

GLOBAL COMPARISON Economic Growth and Greenhouse Gases in Six Countries

Tradable Emissions Permits

Comparing Environmental Policies with an Example

The Economics of Climate Change and the Great Energy Transition

ECONOMICS in Action Cap and Trade

Positive Externalities

Preserved Farmland: An External Benefit

Positive Externalities in Today’s Economy

ECONOMICS in Action The Impeccable Economic Logic of Early-Childhood Intervention


Network Externalities

The External Benefits of a Network Externality

ECONOMICS in Action The Microsoft Case

BUSINESS CASE Snapchat and Instagram: Not Your Grandmother’s Social Networking


Chapter 17

Public Goods and Common Resources

‘The Great Stink

Private Goods—and Others

Characteristics of Goods

Why Markets Can Supply Only Private Goods Efficiently

ECONOMICS in Action From Mayhem to Renaissance

Public Goods

Providing Public Goods

How Much of a Public Good Should Be Provided?

For InquiMirndis nVotgin g as a Public Good

GLOBAL COMPARISON Voting as a Public Good: The Global Perspective

Cost-Benefit Analysis

ECONOMICS in Action American Infrastructure Gets a D+

Common Resources

The Problem of Overuse

The Efficient Use and Maintenance of a Common Resource

For InquiMrinids nWghen Fertile Farmland Turned to Dust

ECONOMICS in Action Saving the Oceans with ITQs

Artificially Scarce Goods

ECONOMICS in Action Twenty-First Century Piracy

BUSINESS CASE Mauricedale Game Ranch and Hunting Endangered Animals to Save Them

Chapter 18

The Economics of the Welfare State

‘The Comofi Onbamgaca re

Poverty, Inequality, and Public Policy

The Logic of the Welfare State

The Problem of Poverty

For InquiMirndis nJusgtic e and the Welfare State

Economic Inequality

Economic Insecurity

GLOBAL COMPARISON Income, Redistribution, and Inequality in Rich Countries

ECONOMICS in Action Long-term Trends in Income Inequality in the United States

The U.S. Welfare State

Means-Tested Programs

Social Security and Unemployment Insurance

The Effects of the Welfare State on Poverty and Inequality

ECONOMICS in Action Welfare State Programs and Poverty Rates in the Great Recession,


‘The Economics of Health Care

The Need for Health Insurance

For Inquiring Minds A California Death Spiral

Government Health Insurance

Health Care in Other Countries

The Affordable Care Act

ECONOMICS in Action What Medicaid Does

‘The Debate over the Welfare State

Problems with the Welfare State

The Politics of the Welfare State

ECONOMICS in Action French Family Values

BUSINESS CASE Ruby Hill Farm: The ACA and Freedom to Farm

PART 9 Factor Markets and Risk

Chapter 19

Factor Markets and the Distribution of Income

The Value ofa Degree

‘The Economy’s Factors of Production

The Factors of Production

Why Factor Prices Matter: The Allocation of Resources

Factor Incomes and the Distribution of Income

For InquirMiindns gTh e Factor Distribution of Income and Social Change in the Industrial


ECONOMICS in Action The Factor Distribution of Income in the United States

‘Marginal Productivity and Factor Demand

Value of the Marginal Product

Value of the Marginal Product and Factor Demand

Shifts of the Factor Demand Curve

The Marginal Productivity Theory of Income Distribution

The Markets for Land and Capital

The Marginal Productivity Theory of Income Distribution

ECONOMICS in Action Help Wanted at Flex!

Is the Marginal Productivity Theory of Income Distribution Really True?

Wage Disparities in Practice

Marginal Productivity and Wage Inequality

Market Power

Efficiency Wages


For Inquiring Minds How Labor Works the German Way

So Does Marginal Productivity Theory Work?

ECONOMICS in Action Marginal Productivity and the “1%”

‘The Supply of Labor

Work versus Leisure

Wages and Labor Supply

For InquirMiindns gWh y You Can’t Find a Cab When It’s Raining

Shifts of the Labor Supply Curve

GLOBAL COMPARISON The Overworked American?

ECONOMICS in Action The Decline of the Summer Job

BUSINESS CASE Walmart Gives a Hike

Chapter 19

Appendix: Indifference Curve Analysis of Labor Supply

‘The Time Allocation Budget Line

‘The Effect of a Higher Wage Rate

Indifference Curve Analysis

Chapter 20

Uncertainty, Risk, and Private Information

Extreme Weather

The Economics of Risk Aversion

Expectations and Uncertainty

The Logic of Risk Aversion

For InquirMiindns gTh e Paradox of Gambling

Paying to Avoid Risk

ECONOMICS in Action Warranties

Buying, Selling, and Reducing Risk

Trading Risk

Making Risk Disappear: The Power of Diversification

For InquiMrindis nThgos e Pesky Emotions

The Limits of Diversification

ECONOMICS in Action When Lloyd’s Almost Lost It

Private Information: What You Don’t Know Can Hurt You

Adverse Selection: The Economics of Lemons

Moral Hazard

ECONOMICS in Action Franchise Owners Try Harder

BUSINESS CASE PURE—An Insurance Company That Withstands Hurricanes

PART 10 Introduction to Macroeconomics

Chapter 21

‘Macroeconomics: The Big Picture

Greek Tragedies

‘The Nature of Macroeconomics

Macroeconomic Questions

Macroeconomics: The Whole Is Greater Than the Sum of Its Parts

Macroeconomics: Theory and Policy

ECONOMICS in Action Fending Off Depression

‘The Business Cycle

Charting the Business Cycle

The Pain of Recession

For Inquiring Minds Defining Recessions and Expansions

Taming the Business Cycle

GLOBAL COMPARISON Slumps Across the Atlantic

ECONOMICS in Action Comparing Recessions

Long-Run Economic Growth

ECONOMICS in Action A Tale of Two Countries

Inflation and Deflation

The Causes of Inflation and Deflation

The Pain of Inflation and Deflation

ECONOMICS in Action A Fast (Food) Measure of Inflation

International Imbalances

ECONOMICS in Action Greece’s Costly Surplus

BUSINESS CASE The Business Cycle and the Decline of Montgomery Ward

Chapter 22

GDP and the CPI: Tracking the Macroeconomy

China Hits the Big Time

‘The National Accounts

Following the Money: The Expanded Circular-Flow Diagram

Gross Domestic Product

Calculating GDP

For InquirMiindns gOu r Imputed Lives

What GDP Tells Us

For Inquiring Minds Gross What?

Real GDP: A Measure of Aggregate Output

Calculating Real GDP

What Real GDP Doesn’t Measure

GLOBAL COMPARISON GDP and the Meaning of Life

ECONOMICS in Action Miracle in Venezuela?

Price Indexes and the Aggregate Price Level

Market Baskets and Price Indexes

The Consumer Price Index

Other Price Measures

ECONOMICS in Action Indexing to the CPI

BUSINESS CASE Betting on Bad Numbers

Chapter 23

Unemployment and Inflation


‘The Unemployment Rate

Defining and Measuring Unemployment

The Significance of the Unemployment Rate

Growth and Unemployment

ECONOMICS in Action Failure to Launch

The Natural Rate of Unemployment

Job Creation and Job Destruction

Frictional Unemployment

Structural Unemployment

The Natural Rate of Unemployment

Changes in the Natural Rate of Unemployment

ECONOMICS in Action Structural Unemployment in Spain

Inflation and Deflation

The Level of Prices Doesn’t Matter…

… But the Rate of Change of Prices Does

Winners and Losers from Inflation

Inflation Is Easy; Disinflation Is Hard

ECONOMICS in Action Israel’s Experience with Inflation


PART 11 Long-Run Economic Growth

Chapter 24

Long-Run Economic Growth


Comparing Economies Across Time and Space

Real GDP per Capita

Growth Rates

ECONOMICS in ActionAn Economic Breakthrough in Bangladesh

The Sources of Long-Run Growth

The Crucial Importance of Productivity

Explaining Growth in Productivity

Accounting for Growth: The Aggregate Production Function

What About Natural Resources?

ECONOMICS in Action The Rise, Fall, and Return of the Productivity Paradox

Why Growth Rates Differ

Explaining Differences in Growth Rates

The Role of Government in Promoting Economic Growth

For Inquiring Minds Inventing R&D

ECONOMICS in Action What’s the Matter with Italy?

Success, Disappointment, and Failure

East Asia’s Miracle

Latin America’s Disappointment

Africa’s Troubles and Promise

Left Behind by Growth?

ECONOMICS in Action Are Economies Converging?

Is World Growth Sustainable?

Natural Resources and Growth, Revisited

Economic Growth and the Environment

ECONOMICS in Action What Is the Cost of Limiting Carbon?

BUSINESS CASE Raising the Bar(code)

Chapter 25

Savings, Investment Spending, and the Financial System

Paying for a Hidden Empire

Matching Up Savings and Investment Spending

The Savings—Investment Spending Identity

The Market for Loanable Funds

For InquiMrindis nUsgin g Present Value

ECONOMICS in Action Sixty Years of U.S. Interest Rates

‘The Financial System

Three Tasks of a Financial System

Types of Financial Assets

Financial Intermediaries

GLOBAL COMPARISON Corporate Bonds in the United States and the Euro Area

ECONOMICS in Action Banks and the South Korean Miracle

Financial Fluctuations

The Demand for Stocks

For Inquiring Minds How Now, Dow Jones?

The Demand for Other Assets

Asset Price Expectations

For Inquiring Minds Behavioral Finance

Asset Prices and Macroeconomics

ECONOMICS in Action The Great American Housing Bubble

BUSINESS CASE Grameen Bank: Banking Against Poverty

PART 12 Short-Run Economic Fluctuations

Chapter 26

Income and Expenditure

H ard Timesin Helsinki

‘The Multiplier: An Informal Introduction

ECONOMICS in Action To Shale and Back

Consumer Spending

Current Disposable Income and Consumer Spending

Shifts of the Aggregate Consumption Function

ECONOMICS in Action Famous First Forecasting Failures

Investment Spending

  1. The Interest Rate and Investment Spending
  2. Expected Future Real GDP, Production Capacity, and Investment Spending
  3. Inventories and Unplanned Investment Spending

ECONOMICS in Action Interest Rates and U.S. Housing

‘The Income-Expenditure Model

Planned Aggregate Spending and Real GDP.

Income—Expenditure Equilibrium

The Multiplier Process and Inventory Adjustment

What About Exports and Imports?

ECONOMICS in Action Inventories and the End of a Recession

BUSINESS CASE What’s Good for America Is Good for GM.

Chapter 26

Appendix: Deriving the Multiplier Algebraically

Chapter 27

Aggregate Demand and Aggregate Supply

Different Generations, Different Policies

Aggregate Demand

Why Is the Aggregate Demand Curve Downward Sloping?

The Aggregate Demand Curve and the Income-Expenditure Model

Shifts of the Aggregate Demand Curve

Government Policies and Aggregate Demand

ECONOMICS in Action Moving Along the Aggregate Demand Curve, 1979-1980

Aggregate Supply

The Short-Run Aggregate Supply Curve

For InquiMirndis nWhgat’ s Truly Flexible, What’s Truly Sticky

Shifts of the Short-Run Aggregate Supply Curve

The Long-Run Aggregate Supply Curve

From the Short Run to the Long Run

ECONOMICS in Action Sticky Wages in the Great Recession

‘The AD-AS Model

Short-Run Macroeconomic Equilibrium

Shifts of Aggregate Demand: Short-Run Effects

Shifts of the SRAS Curve

Long-Run Macroeconomic Equilibrium

For InquiMirndsi Wnhegre’ s the Deflation?

ECONOMICS in Action Supply Shocks versus Demand Shocks in Practice

‘Macroeconomic Policy

Policy in the Face of Demand Shocks

For Inquiring Minds Keynes and the Long Run

Respondingto Supply Shocks

ECONOMICS in Action Is Stabilization Policy Stabilizing?

BUSINESS CASE Toyota Makes Its Move

PART 13 Stabilization Policy

Chapter 28

Fiscal Policy

‘SpOeur Wnay dOut iof na Recgessi on

Fiscal Policy: The Basics

Taxes, Purchases of Goods and Services, Government Transfers, and Borrowing

The Government Budget and Total Spending

Expansionary and Contractionary Fiscal Policy

Can Expansionary Fiscal Policy Actually Work?

A Cautionary Note: Lags in Fiscal Policy

ECONOMICS in Action A Tale of Two Stimuli

Fiscal Policy and the Multiplier

Multiplier Effects of an Increase in Government Purchases of Goods and Services

‘Multiplier Effects of Changes in Government Transfers and Taxes

How Taxes Affect the Multiplier

ECONOMICS in Action Austerity and the Multiplier

‘The Budget Balance

The Budget Balance as a Measure of Fiscal Policy

The Business Cycle and the Cyclically Adjusted Budget Balance

Should the Budget Be Balanced?

ECONOMICS in Action Trying to Balance Budgets in a Recession

Long-Run Implications of Fiscal Policy

Deficits, Surpluses, and Debt

Potential Dangers Posedby Rising Government Debt

GLOBAL COMPARISON The American Way of Debt

Deficits and Debt in Practice

For InquirMinidsn gWha t Happened to the Debt from World War II?

Implicit Liabilities

ECONOMICS in Action Reducing Implicit Liabilities

BUSINESS CASE Here Comes the Sun

Chapter 28

Appendix: Taxes and the Multiplier

Chapter 29

Money, Banking, and the Federal Reserve System

Not So Funny Money

The Meaning of Money

What Is Money?

Roles of Money


Types of Money

‘Measuring the Money Supply

For Inquiring Minds From Bucks to Bitcoin

ECONOMICS in Action The History of the Dollar

The Monetary Role of Banks

What Banks Do

The Problem of Bank Runs

Bank Regulation

ECONOMICS in Action It’s a Wonderful Banking System

Determining the Money Supply

How Banks Create Money

Reserves, Bank Deposits, and the Money Multiplier

‘The Money Multiplier in Reality

ECONOMICS in Action Multiplying Money Down

‘The Federal Reserve System

The Structure of the Fed

What the Fed Does: Reserve Requirements and the Discount Rate

Open-Market Operations

For InquirMinidsn gWho Gets the Interest on the Fed’s Assets?

The European Central Bank

ECONOMICS in Action The Fed’s Balance Sheet, Normal and Abnormal

The Evolution of the American Banking System

The Crisis in American Banking in the Early Twentieth Century

Respondingto Banking Crises: The Creation of the Federal Reserve

The Savings and Loan Crisis of the 1980s

Back to the Future: The Financial Crisis of 2008 and Its Aftermath

ECONOMICS in Action Financial Regulation After the Crisis

BUSINESS CASE The Perfect Gift: Cash or a Gift Card?

Chapter 30

‘Monetary Policy

‘The Most PowerfPeurslon in Government

The Demand for Money

The Opportunity Cost of Holding Money

The Money Demand Curve

Shifts of the Money Demand Curve

ECONOMICS in Action A Yen for Cash

Money and Interest Rates

The Equilibrium Interest Rate

Two Models of Interest Rates?

Monetary Policy and the Interest Rate

Long-Term Interest Rates

ECONOMICS in Action Up the Down Staircase

‘Monetary Policy and Aggregate Demand

Expansionary and Contractionary Monetary Policy

Monetary Policy in Practice

The Taylor Rule Method of Setting Monetary Policy

Inflation Targeting


The Zero Lower Bound Problem

ECONOMICS in Action What the Fed Wants, the Fed Gets

‘Money, Output, and Prices in the Long Run.

Short-Run and Long-Run Effects of an Increase in the Money Supply

Monetary Neutrality

Changes in the Money Supply and the Interest Rate in the Long Run

ECONOMICS in Action International Evidence of Monetary Neutrality

BUSINESS CASE Parking Your Money at PayPal

Chapter 30

Appendix: Reconciling the Two Models of the Interest Rate

The Interest Rate in the Short Run

The Interest Rate in the Long Run

Chapter 31

Inflation, Disinflation, and Deflation

B ria nSuitgcasei ton theg Ba nk

‘Money and Inflation

The Classical Model of Money and Prices

The Inflation Tax

The Logic of Hyperinflation

ECONOMICS in Action Zimbabwe’s Inflation

‘Moderate Inflation and Disinflation

The Output Gap and the Unemployment Rate

For InquiMrindis ng Okun’s Law

The Short-Run Phillips Curve

For InquirMiindns gTh e Aggregate Supply Curve and the Short-Run Phillips Curve

Inflation Expectations and the Short-Run Phillips Curve

ECONOMICS in Action The Phillips Curve in the Great Recession

Inflation and Unemployment in the Long Run

The Long-Run Phillips Curve

The Natural Rate of Unemployment, Revisited

GLOBAL COMPARISON Disinflation Around the World

The Costs of Disinflation

ECONOMICS in Action The Great Disinflation of the 1980s


Debt Deflation

Effects of Expected Deflation

ECONOMICS in Action Is Europe Turning Japanese?

BUSINESS CASE Dining and Dollars in Buenos Aires

PART 14 Events and Ideas

Chapter 32

Macroeconomics: Events and Ideas

Old Books and New Ideas

Classical Macroeconomics

Money and the Price Level

The Business Cycle

‘The Great Depression and the Keynesian Revolution

Keynes’s Theory

For InquirMiindsn gTh e Politics of Keynes

Policy to Fight Recessions

ECONOMICS in Action The End of the Great Depression

Challenges to Keynesian Economics

The Revival of Monetary Policy


Limits to Macroeconomic Policy: Inflation and the Natural Rate of Unemployment

The Political Business Cycle

ECONOMICS in Action The Fed’s Flirtation with Monetarism

Rational Expectations, Real Business Cycles, and New Classical Macroeconomics

Rational Expectations

Real Business Cycles

For Inquiring Minds Supply-Side Economics

ECONOMICS in Action The 1970s in Reverse

‘The Great Moderation Consensus

‘Modern Macroeconomics After the Great Recession

The Economic Environment Post Recession

Stimulus versus Austerity

The Fed’s Unconventional Monetary Policy

ECONOMICS in Action Japan’s Escape Attempt

PART 15 The International Economy

Chapter 33

International Macroeconomics

‘Switzerland Doesn’t Want Your Money

Capital Flows and the Balance of Payments

Balance of Payments Accounts

For Inquiring Minds GDP, GNP, and the Current Account

Modeling the Financial Account


Underlying Determinants of International Capital Flows

Two-Way Capital Elows

ECONOMICS in Action The Golden Age of Capital Flows

‘The Role of the Exchange Rate

Understanding Exchange Rates

The Equilibrium Exchange Rate

Inflation and Real Exchange Rates

Purchasing Power Parity

For Inquiring Minds Burgernomics

ECONOMICS in Action Strong Dollar Woes

Exchange Rate Policy

Exchange Rate Regimes

How Can an Exchange Rate Be Held Fixed?

The Exchange Rate Regime Dilemma

For Inquiring Minds From Bretton Woods to the Euro

ECONOMICS in Action China Pegs the Yuan

Exchange Rates and Macroeconomic Policy

Devaluation and Revaluation of Fixed Exchange Rates

Monetary Policy Under Floating Exchange Rates,

International Business Cycles

ECONOMICS in Action The Little Currency That Could

BUSINESS CASE A Yen for Japanese Cars

‘Macroeconomic Data Tables

Solutions to Check Your Understanding Questions



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