Economics, 8th Edition PDF by Glenn Hubbard and Anthony Patrick O’Brien


Economics, 8th Edition

By Glenn Hubbard and Anthony Patrick O’Brien

Economics, 8th Edition


Preface 25

A Word of Thanks 52

PART 1 Introduction

CHAPTER 1: Economics: Foundations and Models 54

Does Apple Manufacture the iPhone in the

United States? 54

1.1 Three Key Economic Ideas 56

People Are Rational 57

People Respond to Economic Incentives 57

Apply the Concept: Would a Congressional

Bill Aimed at Increasing the Pay of Low-Wage Workers Backfire? 57

Optimal Decisions Are Made at the Margin 58

Solved Problem 1.1: The Marginal Benefit and Marginal

Cost of Delivering Packages

for Amazon 59

1.2 The Economic Problem That Every Society

Must Solve 60

What Goods and Services Will Be Produced? 60

How Will the Goods and Services Be Produced? 60

Who Will Receive the Goods and Services Produced? 61

Centrally Planned Economies versus Market Economies 61

The Modern “Mixed” Economy 62

Efficiency and Equity 62

1.3 Economic Models 63

The Role of Assumptions in Economic Models 64

Forming and Testing Hypotheses in Economic Models 64

Positive and Normative Analysis 65

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

Analysis with Normative Analysis 66

Economics as a Social Science 66

Apply the Concept: What Can Economics

Contribute to the Debate over Tariffs? 66

1.4 Microeconomics and Macroeconomics 67

1.5 Economic Skills and Economics as a Career 68

1.6 A Preview of Important Economic Terms 69

Conclusion 71

An Inside Look: Are Tariffs Bringing Manufacturing

Jobs Back Home or Just Raising Prices? 72

*Chapter Summary and Problems 74

Key Terms, Summary, Review Questions, Problems and


and Critical Thinking Exercises

Appendix: Using Graphs and Formulas 79

Graphs of One Variable 80

Graphs of Two Variables 81

Slopes of Lines 82

Taking into Account More Than Two Variables

on a Graph 83

Positive and Negative Relationships 83

Determining Cause and Effect 84

Are Graphs of Economic Relationships Always

Straight Lines? 85

Slopes of Nonlinear Curves 86

Formulas 87

Formula for a Percentage Change 88

Formulas for the Areas of a Rectangle and a Triangle 88

Summary of Using Formulas 89

Problems and Applications 90

CHAPTER 2: Trade-offs, Comparative

Advantage, and the Market System 92

Elon Musk and Tesla Motors Face a Trade-off 92

2.1 Production Possibilities Frontiers and

Opportunity Costs 94

Graphing the Production Possibilities Frontier 94

Solved Problem 2.1: Analyzing Trade-offs Using

a Production Possibilities Frontier for Tesla Motors 96

Increasing Marginal Opportunity Costs 98

Economic Growth 99

2.2 Comparative Advantage and Trade 99

Specialization and Gains from Trade 100

Absolute Advantage versus Comparative Advantage 102

Comparative Advantage and the Gains from Trade 103

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

Absolute Advantage and Comparative

Advantage 103

Solved Problem 2.2: Comparative Advantage

and the Gains from Trade 103

Apply the Concept: Comparative Advantage,

Opportunity Cost, and Housework 105

2.3 The Market System 106

The Circular Flow of Income 107

The Gains from Free Markets 108

The Market Mechanism 108

Apply the Concept: A Story of the Market

System in Action: How Do You Make an iPad? 109

The Role of the Entrepreneur in the Market System 111

The Legal Basis of a Successful Market System 111

Apply the Concept: What Is Socialism? 113

Conclusion 115

An Inside Look: A Plug-in Porsche? 116

Chapter Summary and Problems 118

CHAPTER 3: Where Prices Come From:

The Interaction of Demand and Supply 124

A Basketball Player Takes a Tumble—And So

Does Nike 124

3.1 The Demand Side of the Market 126

Demand Schedules and Demand Curves 126

The Law of Demand 127

What Explains the Law of Demand? 127

Holding Everything Else Constant: The Ceteris Paribus

Condition 128

Variables That Shift Market Demand 128

Apply the Concept: Millennials and Generation

Z Shake Up the Markets for Groceries,

Big Macs, and Running Shoes 130

A Change in Demand versus a Change in Quantity Demanded 131

Apply the Concept: Forecasting the Demand

for Athletic Shoes 132

3.2 The Supply Side of the Market 134

Supply Schedules and Supply Curves 134

The Law of Supply 135

Variables That Shift Market Supply 135

Apply the Concept: Fracking, the U.S. Oil Boom,

and Expected Oil Prices 136

A Change in Supply versus a Change in Quantity Supplied 137

3.3 Market Equilibrium: Putting Demand

and Supply Together 139

How Markets Eliminate Surpluses and Shortages 140

Demand and Supply Both Count 141

Solved Problem 3.3: Demand and Supply

Both Count: A Tale of Two Letters 141

3.4 The Effect of Demand and Supply Shifts

on Equilibrium 142

The Effect of Shifts in Demand on Equilibrium 142

The Effect of Shifts in Supply on Equilibrium 142

The Effect of Shifts in Demand and Supply over Time 143

Apply the Concept: Higher Demand for

Cobalt—But Lower Prices? 145

Solved Problem 3.4: Can We Predict Changes

in the Price and Quantity of Merino Wool? 146

Shifts in a Curve versus Movements along a Curve 147

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 148

Conclusion 149

An Inside Look: If the Shoe Fits . . . Print It? 150

Chapter Summary and Problems 152

CHAPTER 4: Economic Efficiency, Government

Price Setting, and Taxes 160

What Do Food Riots in Venezuela and the Rise

of Uber in the United States Have in Common? 160

4.1 Consumer Surplus and Producer Surplus 162

Consumer Surplus 162

Apply the Concept: The Consumer Surplus

from Uber 164

Producer Surplus 166

What Consumer Surplus and Producer

Surplus Measure 167

4.2 The Efficiency of Competitive Markets 167

Marginal Benefit Equals Marginal Cost in

Competitive Equilibrium 167

Economic Surplus 168

Deadweight Loss 169

Economic Surplus and Economic Efficiency 169

4.3 Government Intervention in the Market:

Price Floors and Price Ceilings 170

Price Floors: Government Policy in Agricultural Markets 170

Apply the Concept: Price Floors in Labor Markets:

The Debate over Minimum Wage Policy 171

Price Ceilings: Government Rent Control Policy

in Housing Markets 173

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

“Scarcity” with “Shortage” 174

Black Markets and Peer-to-Peer Sites 174

Solved Problem 4.3: What’s the Economic

Effect of a Black Market in Renting Apartments? 175

The Results of Government Price Controls:

Winners, Losers, and Inefficiency 176

Apply the Concept: Price Controls Lead

to Economic Crisis in Venezuela 176

Positive and Normative Analysis of Price

Ceilings and Price Floors 178

4.4 The Economic Effect of Taxes 178

The Effect of Taxes on Economic Efficiency 178

Tax Incidence: Who Actually Pays a Tax? 179

Solved Problem 4.4: Who Bears the Burden

of the Seattle Beverage Tax? 180

Apply the Concept: Is the Burden of the

Social Security Tax Really Shared Equally

between Workers and Firms? 183

Conclusion 185

An Inside Look: Uber Fights to Repeal

New York City Restrictions 186

Chapter Summary and Problems 188

Appendix: Quantitative Demand and Supply

Analysis 195

Demand and Supply Equations 195

Calculating Consumer Surplus and Producer Surplus 196

Review Questions 198

Problems and Applications 199

PART 2 Markets in Action: Policy and


CHAPTER 5: Externalities, Environmental Policy,

and Public Goods 200

Are NextEra Energy and Green Power the Future? 200

5.1 Externalities and Economic Efficiency 202

The Effect of Externalities 202

Externalities and Market Failure 204

What Causes Externalities? 205

5.2 Private Solutions to Externalities:

The Coase Theorem 205

The Economically Efficient Level of Pollution

Reduction 206

Apply the Concept: The Clean Air Act: How a


Policy Reduced Infant Mortality 206

The Basis for Private Solutions to Externalities 208

Don’t Let This Happen to You: Remember

That It’s the Net Benefit That Counts 209

Do Property Rights Matter? 209

The Problem of Transactions Costs 210

The Coase Theorem 210

Apply the Concept: How Can You Defend

Your Knees on a Plane Flight? 210

5.3 Government Policies to Deal with Externalities 211

Imposing a Tax When There Is a Negative Externality 211

Providing a Subsidy When There Is a Positive

Externality 212

Apply the Concept: Should the Government

Tax Cigarettes and Soda? 213

Solved Problem 5.3: Are Congestion Fees

the Answer to Big City Traffic Problems? 214

Command-and-Control versus Market-Based

Approaches 216

The End of the Sulfur Dioxide Cap-and-Trade System 217

Are Tradable Emission Allowances Licenses

to Pollute? 217

Apply the Concept: Does the United States

Need a Green New Deal? 217

5.4 Four Categories of Goods 219

The Demand for a Public Good 220

The Optimal Quantity of a Public Good 222

Solved Problem 5.4: Determining the

Optimal Level of Public Goods 223

Common Resources 225

Conclusion 227

Chapter Summary and Problems 228

CHAPTER 6: Elasticity: The Responsiveness

of Demand and Supply 234

Do Soda Taxes Work? 234

6.1 The Price Elasticity of Demand and Its

Measurement 236

Measuring the Price Elasticity of Demand 236

Elastic Demand and Inelastic Demand 237

An Example of Calculating Price Elasticities 237

The Midpoint Formula 238

Solved Problem 6.1: Calculating the Price

Elasticity of Demand 239

When Demand Curves Intersect, the Flatter

Curve Is More Elastic 240

Polar Cases of Perfectly Inelastic and Perfectly Elastic

Demand 240

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

Inelastic with Perfectly Inelastic 242

6.2 The Determinants of the Price Elasticity

of Demand 242

Availability of Close Substitutes 242

Passage of Time 243

Luxuries versus Necessities 243

Definition of the Market 243

Share of a Good in a Consumer’s Budget 243

Some Estimated Price Elasticities of Demand 243

6.3 The Relationship between Price Elasticity of

Demand and Total Revenue 244

Elasticity and Revenue with a Linear Demand Curve 245

Solved Problem 6.3: Price and Revenue

Don’t Always Move in the Same Direction 247

Apply the Concept: Amazon and Netflix Test the

Price Elasticity of Demand for Their Services 248

6.4 Other Demand Elasticities 249

Cross-Price Elasticity of Demand 249

Income Elasticity of Demand 250

Apply the Concept: Price Elasticity, Cross-Price

Elasticity, and Income Elasticity in the Market

for Alcoholic Beverages 250

6.5 Using Elasticity to Analyze the Disappearing

Family Farm 251

Solved Problem 6.5: Using Price Elasticity

to Analyze the Effects of a Soda Tax 304

6.6 The Price Elasticity of Supply and Its

Measurement 253

Measuring the Price Elasticity of Supply 254

Determinants of the Price Elasticity of Supply 254

Apply the Concept: Why Are Oil Prices So Unstable? 254

Polar Cases of Perfectly Elastic and Perfectly

Inelastic Supply 256

Using Price Elasticity of Supply to Predict

Changes in Price 256

Conclusion 259

Chapter Summary and Problems 260

CHAPTER 7: The Economics of Health Care 268

Goodbye to Blue Cross and Blue Shield? 268

7.1 The Improving Health of People in the

United States 270

Changes over Time in U.S. Health 270

Reasons for Long-Run Improvements in U.S. Health 271

7.2 Health Care around the World 272

The U.S. Health Care System 272

Apply the Concept: The Increasing Importance

of Health Care in the U.S. Economy 274

The Health Care Systems of Canada, Japan, and the

United Kingdom 275

Comparing Health Care Outcomes around the World 276

How Useful Are Cross-Country Comparisons

of Health Outcomes? 277

7.3 Information Problems and Externalities

in the Market for Health Care 278

Adverse Selection and the Market for “Lemons” 278

Asymmetric Information in the Market for

Health Insurance 279

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

Adverse Selection with Moral Hazard 280

Externalities in the Market for Health Care 281

Should the Government Run the Health Care

System? 283

7.4 The Debate over Health Care Policy

in the United States 284

The Rising Cost of Health Care 284

Apply the Concept: Are U.S. Firms Handicapped

by Paying for Their Employees’ Health Insurance? 286

Explaining Increases in Health Care Spending 287

The Continuing Debate over Health Care Policy 290

Solved Problem 7.4: Recent Trends in

U.S. Health Care 291

Market-Based Reforms 292

Apply the Concept: Medicare for All? 293

Conclusion 295

Chapter Summary and Problems 296

PART 3 Firms in the Domestic and



CHAPTER 8: Firms, the Stock Market,

and Corporate Governance 302

Investing in Lyft, a Company That Has Never

Earned a Profit? 302

8.1 Types of Firms 304

Who Is Liable? Limited and Unlimited Liability 304

Corporations Earn the Majority of Revenue

and Profits 305

Apply the Concept: Why Are Fewer Young

People Starting Businesses? 306

The Structure of Corporations and the

Principal–Agent Problem 307

8.2 How Firms Raise Funds 308

Sources of External Funds 308

Apply the Concept: The Rating Game:

Are Federal, State, or City Governments

Likely to Default on Their Bonds? 309

Stock and Bond Markets Provide Capital—and

Information 311

The Fluctuating Stock Market 312

Don’t Let This Happen to You: When Lyft

Shares Are Sold, Lyft Doesn’t Get the Money 312

Why Is It So Hard to Beat the Market? 314

Apply the Concept: Why Would Anyone

Buy Lyft’s Stock? 315

Solved Problem 8.2: Why Does Warren

Buffett Like Mutual Funds? 316

8.3 Using Financial Statements to Evaluate

a Corporation 317

The Income Statement 317

The Balance Sheet 318

Problems in Corporate Governance 318

Apply the Concept: Should Investors

Worry about Corporate Governance at Lyft? 319

Conclusion 321

Chapter Summary and Problems 322

Appendix: Using Present Value 326

The Concept of Present Value 326

Solved Problem 8A.1: How to Receive Your

Contest Winnings 328

Using Present Value to Calculate Bond Prices 328

Using Present Value to Calculate Stock Prices 329

A Simple Formula for Calculating Stock Prices 329

Review Questions 330

Problems and Applications 330

Online Appendix: Income Statements and

Balance Sheets

CHAPTER 9: Comparative Advantage

and the Gains from International Trade 332

Being Careful What You Wish For: Trade Wars

and Whirlpool 332

9.1 The United States in the International Economy 334

The Importance of Trade to the U.S. Economy 335

U.S. International Trade in a World Context 336

9.2 Comparative Advantage in International Trade 337

A Brief Review of Comparative Advantage 337

Comparative Advantage and Absolute Advantage 337

9.3 How Countries Gain from International Trade 338

Increasing Consumption through Trade 339

Solved Problem 9.3: The Gains from Trade 340

Why Don’t We See Complete Specialization? 341

Does Anyone Lose as a Result of International Trade? 342

Don’t Let This Happen to You: Remember That

Trade Creates Both Winners and Losers 342

Apply the Concept: Who Gains and Who

Loses from U.S. Trade with China? 342

Where Does Comparative Advantage Come From? 345

9.4 Government Policies That Restrict

International Trade 346

Tariffs 347

Quotas and Voluntary Export Restraints 348

Measuring the Economic Effect of the Sugar Quota 348

Solved Problem 9.4: Measuring the Economic

Effect of a Quota 350

The High Cost of Preserving Jobs with Tariffs and Quotas 351

Apply the Concept: Smoot-Hawley, the Politics

of Tariffs, and the Cost of Protecting a Vanishing

Industry 351

Gains from Unilateral Elimination of Tariffs and Quotas 353

Other Barriers to Trade 353

9.5 The Debate over Trade Policies and Globalization 353

Why Do Some People Oppose the World Trade

Organization? 354

Dumping 356

Apply the Concept: The Trade War of 2018 357

Positive versus Normative Analysis (Once Again) 358

Conclusion 359

Chapter Summary and Problems 360

PART 4 Microeconomic Foundations:

Consumers and Firms

CHAPTER 10: Consumer Choice and

Behavioral Economics 368

What Happened to Sears and the Other

Department Stores? 368

10.1 Utility and Consumer Decision Making 370

An Overview of the Economic Model of

Consumer Behavior 370

Utility 370

The Principle of Diminishing Marginal Utility 371

The Rule of Equal Marginal Utility per Dollar Spent 371

Solved Problem 10.1: Finding the Optimal

Level of Consumption 374

What if the Rule of Equal Marginal Utility per

Dollar Does Not Hold? 375

Don’t Let This Happen to You: Equalize

Marginal Utilities per Dollar 376

The Income Effect and Substitution Effect of

a Price Change 377

Don’t Let This Happen to You: The Income

Effect Doesn’t Involve an Increase in Money

Income 377

10.2 Where Demand Curves Come From 379

Apply the Concept: Are There Any

Upward-Sloping Demand Curves in

the Real World? 380

10.3 Social Influences on Decision Making 381

The Effects of Celebrity Endorsements 382

Network Externalities 382

Does Fairness Matter? 383

Apply the Concept: Taylor Swift Tries

to Please Fans and Make Money 386

Solved Problem 10.3: Why Doesn’t Tesla

Charge Its Employees to Park Their Cars? 387

10.4 Behavioral Economics: Do People Make

Rational Choices? 389

Pitfalls in Decision Making 389

Apply the Concept: Sunk Costs and Sports

Teams 390

“Nudges”: Using Behavioral Economics to Guide

Behavior 391

The Behavioral Economics of Shopping 392

Apply the Concept: Trying to Use the Apple

Approach to Save J.C. Penney 393

Conclusion 395

Chapter Summary and Problems 396

Appendix: Using Indifference Curves and

Budget Lines to Understand Consumer Behavior 402

Consumer Preferences 402

Indifference Curves 402

The Slope of an Indifference Curve 403

Can Indifference Curves Ever Cross? 403

The Budget Constraint 404

Choosing the Optimal Consumption of Pizza

and Coke 405

Apply the Concept: Apple Determines

the Optimal Mix of iPhone Features 406

Deriving the Demand Curve 407

Solved Problem 10A.1: When Does a Price

Change Make a Consumer Better Off? 408

The Income Effect and the Substitution Effect

of a Price Change 409

How a Change in Income Affects Optimal

Consumption 411

The Slope of the Indifference Curve, the Slope

of the Budget Line, and the Rule of Equal

Marginal Utility per Dollar Spent 412

The Rule of Equal Marginal Utility per Dollar

Spent Revisited 412

Review Questions 414

Problems and Applications 414

CHAPTER 11: Technology, Production, and Costs 416

Fracking Lowers the Cost of Oil and Revolutionizes

the World Market 416

11.1 Technology: An Economic Definition 418

Apply the Concept: Oil Roughnecks Encounter

Robots and Drones 418

11.2 The Short Run and the Long Run in Economics 419

The Difference between Fixed Costs and

Variable Costs 419

Apply the Concept: Fixed Costs in the

Publishing Industry 420

Implicit Costs versus Explicit Costs 420

The Production Function 421

A First Look at the Relationship between

Production and Cost 421

11.3 The Marginal Product of Labor and

the Average Product of Labor 423

The Law of Diminishing Returns 423

Graphing Production 424

Apply the Concept: Adam Smith’s Famous Account

of the Division of Labor in a Pin Factory 425

The Relationship between Marginal Product

and Average Product 425

An Example of Marginal and Average Values:

College Grades 426

11.4 The Relationship between Short-Run

Production and Short-Run Cost 427

Marginal Cost 427

Why Are the Marginal and Average Cost Curves

U Shaped? 427

Solved Problem 11.4: Calculating Marginal

Cost and Average Total Cost 429

11.5 Graphing Cost Curves 430

11.6 Costs in the Long Run 432

Economies of Scale 432

Long-Run Average Cost Curves for Automobile

Factories 433

Solved Problem 11.6: Using Long-Run Average

Cost Curves to Understand a Business Merger 433

Apply the Concept: The Colossal River Rouge:

Diseconomies of Scale at Ford Motor Company 435

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


Returns with Diseconomies

of Scale 436

Conclusion 437

Chapter Summary and Problems 438

Online Appendix: Using Isoquants and Isocost

Lines to Understand Production and Cost

PART 5 Market Structure and Firm


CHAPTER 12: Firms in Perfectly Competitive

Markets 446

Are Cage-Free Eggs the Road to Riches? 446

12.1 Perfectly Competitive Markets 449

A Perfectly Competitive Firm Cannot Affect

the Market Price 449

The Demand Curve for the Output of a Perfectly


Firm 450

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 450

12.2 How a Firm Maximizes Profit in a Perfectly


Market 451

Revenue for a Firm in a Perfectly Competitive Market 452

Determining the Profit-Maximizing Level of Output 452

12.3 Illustrating Profit or Loss on the Cost

Curve Graph 455

Showing Profit on a Graph 455

Solved Problem 12.3: Determining Prof it-

Maximizing Price and Quantity 456

Don’t Let This Happen to You: Remember That

Firms Maximize Their Total Prof it, Not Their

Prof it per Unit 458

Illustrating When a Firm Is Breaking Even

or Operating at a Loss 458

12.4 Deciding Whether to Produce or to

Shut Down in the Short Run 459

The Supply Curve of a Firm in the Short Run 459

Apply the Concept: What Does “Break Even”

Mean in the Oil Fields? 460

Solved Problem 12.4: When to Shut Down a Farm 462

The Market Supply Curve in a Perfectly Competitive

Industry 463

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

at It”: The Entry and Exit of Firms in the Long Run 464

Economic Profit and the Entry or Exit Decision 464

Long-Run Equilibrium in a Perfectly Competitive Market 466

The Long-Run Supply Curve in a Perfectly

Competitive Market 468

Apply the Concept: The Winding Path to

Long-Run Equilibrium in the Egg Market 469

Increasing-Cost and Decreasing-Cost Industries 470

12.6 Perfect Competition and Economic Efficiency 470

Productive Efficiency 470

Solved Problem 12.6: How Productive Efficiency


its Consumers 471

Allocative Efficiency 472

Conclusion 473

Chapter Summary and Problems 474

CHAPTER 13: Monopolistic Competition:

The Competitive Model in a More Realistic

Setting 482

The Coffee Industry: From Supermarket Cans

to Third Wave Coffeehouse 482

13.1 Demand and Marginal Revenue for a Firm

in a Monopolistically Competitive Market 484

The Demand Curve for a Monopolistically

Competitive Firm 484

Marginal Revenue for a Firm with a

Downward-Sloping Demand Curve 485

13.2 How a Monopolistically Competitive

Firm Maximizes Profit in the Short Run 487

Solved Problem 13.2: Does Minimizing

Cost Maximize Prof it at Apple? 488

13.3 What Happens to Profits in the Long Run? 490

How Does the Entry of New Firms Affect the

Profits of Existing Firms? 490

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

Economic Profit with Zero Accounting Profit 492

Apply the Concept: Can Third Wave Coffeehouses

Remain Prof itable? 492

Is Zero Economic Profit Inevitable in the Long Run? 493

Solved Problem 13.3: The Profitability of Amazon Go 494

13.4 Comparing Monopolistic Competition

and Perfect Competition 495

Excess Capacity under Monopolistic Competition 495

Is Monopolistic Competition Inefficient? 496

How Consumers Benefit from Monopolistic

Competition 496

Apply the Concept: Are Ghost and Virtual

Restaurants the Wave of the Future? 496

13.5 How Marketing Differentiates Products 497

Brand Management 498

Advertising 498

Defending a Brand Name 498

13.6 What Makes a Firm Successful? 499

Apply the Concept: Is Being the First Firm

in the Market a Key to Success? 500

Conclusion 501

Chapter Summary and Problems 502

CHAPTER 14: Oligopoly: Firms in Less

Competitive Markets 510

Apple, Spotify, and the Music Streaming

Revolution 510

14.1 Oligopoly and Barriers to Entry 512

Barriers to Entry 513

Apply the Concept: Are Unlicensed Yoga

Instructors a Menace to Public Health? 515

14.2 Game Theory and Oligopoly 516

A Duopoly Game: Price Competition between

Two Firms 517

Firm Behavior and the Prisoner’s Dilemma 518

Don’t Let This Happen to You: Don’t

Misunderstand Why Each Firm Ends Up

Charging a Price of $9.99 518

Solved Problem 14.2: Is Offering a College

Student Discount a Prisoner’s Dilemma

for Apple and Spotify? 518

Can Firms Escape the Prisoner’s Dilemma? 520

Apply the Concept: Are the Big Four

Airlines Colluding? 521

Cartels: The Case of OPEC 522

14.3 Sequential Games and Business Strategy 524

Deterring Entry 524

Solved Problem 14.3: Is Deterring Entry

Always a Good Idea? 526

Bargaining 526

14.4 The Five Competitive Forces Model 528

Competition from Existing Firms 528

The Threat from Potential Entrants 528

Competition from Substitute Goods or Services 528

The Bargaining Power of Buyers 529

The Bargaining Power of Suppliers 529

Apply the Concept: Do Large Firms Live Forever? 529

Conclusion 531

Chapter Summary and Problems 532

CHAPTER 15: Monopoly and Antitrust Policy 538

The Monopoly in Your Mailbox 538

15.1 Is Any Firm Ever Really a Monopoly? 540

Apply the Concept: Has the USPS Outlived

Its Usefulness? 540

15.2 Where Do Monopolies Come From? 542

Government Action Blocks Entry 542

Apply the Concept: Does Hasbro Have

a Monopoly on Monopoly? 543

Control of a Key Resource 544

Apply the Concept: Are Diamond Prof its

Forever? The De Beers Diamond Monopoly 544

Network Externalities 545

Natural Monopoly 546

15.3 How Does a Monopoly Choose Price and

Output? 547

Marginal Revenue Once Again 547

Profit Maximization for a Monopolist 547

Solved Problem 15.3: Finding the Profit-Maximizing

Price and Output for a Cable Monopoly 549

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

That Charging a Higher Price Is Always

More Prof itable for a Monopolist 550

15.4 Does Monopoly Reduce Economic

Efficiency? 551

Comparing Monopoly and Perfect Competition 551

Measuring the Efficiency Losses from Monopoly 552

How Large Are the Efficiency Losses Due to Monopoly? 553

Market Power and Technological Change 553

15.5 Price Discrimination: Charging Different

Prices for the Same Product 554

The Requirements for Successful Price Discrimination 554

An Example of Price Discrimination 554

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

Price Discrimination with Other Types

of Discrimination 555

Solved Problem 15.5: How Apple Uses

Price Discrimination to Increase Prof its 556

Airlines: The Kings of Price Discrimination 557

Big Data and Dynamic Pricing 558

Perfect Price Discrimination 560

Price Discrimination across Time 561

Can Price Discrimination Be Illegal? 562

15.6 Government Policy toward Monopoly 562

Antitrust Laws and Antitrust Enforcement 562

Mergers: The Trade-off between Market Power

and Efficiency 563

The Department of Justice and FTC Merger

Guidelines and the Herfindahl-Hirschman

Index of Concentration 564

Regulating Natural Monopolies 565

Apply the Concept: Should the Justice

Department Break Up Google, Amazon,

and Facebook? 566

Conclusion 568

Chapter Summary and Problems 569

PART 6 Labor Markets, Public Choice,

and the Distribution of Income

CHAPTER 16: The Markets for Labor

and Other Factors of Production 578

Great Hamburger? Thank a Robot 578

16.1 The Demand for Labor 580

The Marginal Revenue Product of Labor 580

Solved Problem 16.1: Hiring Decisions

by a Firm That Is a Price Maker 582

The Market Demand Curve for Labor 583

Factors That Shift the Market Demand Curve

for Labor 583

16.2 The Supply of Labor 584

The Market Supply Curve of Labor 585

Factors That Shift the Market Supply Curve

of Labor 585

16.3 Equilibrium in the Labor Market 586

The Effect on Equilibrium Wages of a Shift in

Labor Demand 587

Apply the Concept: Does It Matter Which

College You Attend? 587

The Effect of Immigration on the U.S. Labor Market 589

Apply the Concept: Will You Compete with

a Robot for a Job—Or Work with One? 591

16.4 Explaining Differences in Wages 593

Don’t Let This Happen to You: Remember That

Prices and Wages Are Determined

at the Margin 595

Apply the Concept: Technology and the Earnings

of “Superstars” 595

Compensating Differentials 596

Discrimination 596

Solved Problem 16.4: Is Passing “Comparable

Worth” Legislation a Good Way to Close

the Gap between Men’s and Women’s Pay? 598

Apply the Concept: Does Greg Have an Easier

Time Finding a Job Than Jamal? 599

Labor Unions 601

16.5 Personnel Economics 602

Should Workers’ Pay Depend on How Much

They Work or on How Much They Produce? 602

Apply the Concept: A Better Way to Sell

Contact Lenses 603

Other Considerations in Setting Compensation

Systems 604

16.6 The Markets for Capital and Natural

Resources 604

The Market for Capital 604

The Market for Natural Resources 605

Monopsony 605

The Marginal Productivity Theory of Income

Distribution 607

Conclusion 607

Chapter Summary and Problems 608

CHAPTER 17: Public Choice, Taxes,

and the Distribution of Income 616

Should Your Small Business Be Taxed Like Apple? 616

17.1 Public Choice 618

How Do We Know the Public Interest? Models

of Voting 618

Government Failure? 620

Is Government Regulation Necessary? 622

17.2 The Tax System 622

An Overview of the U.S. Tax System 623

Progressive and Regressive Taxes 624

Apply the Concept: Which Groups Pay

the Most in Federal Taxes? 625

Marginal and Average Income Tax Rates 626

The Corporate Income Tax 626

International Comparison of Corporate Income Taxes 626

Evaluating Taxes 627

Apply the Concept: Should the Federal

Government Begin to Tax Wealth? 630

17.3 Tax Incidence Revisited: The Effect of Price

Elasticity 631

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

Who Pays a Tax with Who Bears the Burden

of the Tax 632

Apply the Concept: Do Corporations Really Bear

the Burden of the Federal Corporate Income Tax? 632

Solved Problem 17.3: The Effect of Price

Elasticity on the Excess Burden of a Tax 633

17.4 Income Distribution and Poverty 634

Measuring the Income Distribution and

Measuring Poverty 634

Showing the Income Distribution with a Lorenz Curve 636

Problems in Measuring Poverty and the

Distribution of Income 637

Explaining Income Inequality 640

Policies to Reduce Income Inequality 641

Apply the Concept: Who Are the 1 Percent,

and How Do They Earn Their Incomes? 643

Poverty around the World 644

Conclusion 646

Chapter Summary and Problems 647

PART 7 Macroeconomic Foundations

and Long-Run Growth

CHAPTER 18: GDP: Measuring Total Production

and Income 654

Politics, Macroeconomics, and General Motors 654

18.1 Gross Domestic Product Measures Total

Production 657

Measuring Total Production: Gross Domestic

Product 657

Solved Problem 18.1: Calculating GDP 658

Production, Income, and the Circular-Flow

Diagram 658

Components of GDP 660

Don’t Let This Happen to You: Remember

What Economists Mean by Investment 661

An Equation for GDP and Some Actual Values 661

Apply the Concept: Microsoft’s Steve Ballmer

Uses the U.S. Constitution to Reorganize

Government Data 662

Measuring GDP Using the Value-Added Method 664

18.2 Does GDP Measure What We Want It

to Measure? 664

Shortcomings in GDP as a Measure of Total

Production 664

Apply the Concept: Why Do Many Developing

Countries Have Such Large Underground

Economies? 665

Shortcomings of GDP as a Measure of Well-Being 666

18.3 Real GDP versus Nominal GDP 667

Calculating Real GDP 668

Solved Problem 18.3: Calculating Real GDP 668

Comparing Real GDP and Nominal GDP 669

The GDP Deflator 670

18.4 Other Measures of Total Production and

Total Income 670

Gross National Product 671

National Income 671

Personal Income 671

Disposable Personal Income 671

The Division of Income 671

Apply the Concept: Should We Pay More

Attention to Gross Domestic Income? 673

Conclusion 674

Chapter Summary and Problems 675

CHAPTER 19: Unemployment and Inflation 682

Former Inmates and Stoughton Trailers Meet

in a High-Pressure Economy 682

19.1 Measuring the Unemployment Rate,

the Labor Force Participation Rate, and the

Employment–Population Ratio 684

The Household Survey 684

Solved Problem 19.1: What Happens if the BLS

Includes the Military? 686

Problems with Measuring the Unemployment Rate 687

Unemployment Rates for Different Groups 688

How Long Are People Typically Unemployed? 689

Trends in Labor Force Participation 689

Apply the Concept: How Large Is the Potential

U.S. Labor Force? 690

The Establishment Survey: Another Measure

of Employment 692

Revisions in the Establishment Survey Employment

Data: How Bad Was the 2007–2009 Recession? 693

Job Creation and Job Destruction over Time 694

19.2 Types of Unemployment 694

Frictional Unemployment and Job Search 694

Structural Unemployment 695

Cyclical Unemployment 696

Full Employment 696

Apply the Concept: Will Advances in Information

Technology Permanently Increase Structural

Unemployment? 696

19.3 Explaining Unemployment 698

Government Policies and the Unemployment Rate 698

Labor Unions 699

Efficiency Wages 700

19.4 Measuring Inflation 700

The Consumer Price Index 700

Is the CPI Accurate? 702

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

the Inflation Rate 702

The Producer Price Index 703

19.5 Using Price Indexes to Adjust for the Effects

of Inflation 703

Solved Problem 19.5: What Has Been Happening

to Real Wages in the United States? 704

19.6 Nominal Interest Rates versus Real Interest Rates 705

19.7 Does Inflation Impose Costs on the Economy? 707

Inflation Affects the Distribution of Income 708

The Problem with Anticipated Inflation 708

The Problem with Unanticipated Inflation 709

Apply the Concept: What’s So Bad about Falling Prices? 709

Conclusion 711

Chapter Summary and Problems 712

CHAPTER 20: Economic Growth, the Financial


and Business Cycles 722

Millennials Experience the iPhone, Snapchat, . . .

and the Great Recession 722

20.1 Long-Run Economic Growth 724

Apply the Concept: The Connection between


Prosperity and Health 725

Calculating Growth Rates and the Rule of 70 727

What Determines the Rate of Long-Run Growth? 728

Solved Problem 20.1: Where Does Productivity

Come From? 729

Apply the Concept: Can India Sustain Its Rapid

Growth? 730

Potential GDP 732

20.2 Saving, Investment, and the Financial System 733

An Overview of the Financial System 733

The Macroeconomics of Saving and Investment 734

The Market for Loanable Funds 736

Apply the Concept: Ebenezer Scrooge: Accidental

Promoter of Economic Growth? 737

Solved Problem 20.2: Are Future Budget Deficits

a Threat to the Economy? 739

20.3 The Business Cycle 741

Some Basic Business Cycle Definitions 741

How Do We Know When the Economy Is in

a Recession? 742

What Happens during the Business Cycle? 743

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

the Price Level and the Inflation Rate 744

Has the U.S. Economy Returned to Stability? 748

Conclusion 749

Chapter Summary and Problems 750

CHAPTER 21: Long-Run Economic Growth:

Sources and Policies 756

Technological Change, Creative Destruction,

and Rising Living Standards 756

21.1 Economic Growth over Time and around

the World 758

Economic Growth from 1,000,000 b.c.e.

to the Present 758

Apply the Concept: Why Did the Industrial

Revolution Begin in England? 759

Small Differences in Growth Rates Are Important 760

The Problem with Slow Economic Growth 761

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

the Average Annual Percentage Change with

the Total Percentage Change 761

The Variation in per Capita Income around the World 761

Is Income All That Matters? 762

21.2 What Determines How Fast Economies Grow? 763

The Per-Worker Production Function 764

Which Is More Important for Economic Growth:

More Capital or Technological Change? 765

Technological Change: The Key to Sustaining

Economic Growth 765

Apply the Concept: What Explains the Economic


of the Soviet Union? 766

Solved Problem 21.2: Using the Economic

Growth Model to Analyze the Failure of

the Soviet Economy 767

New Growth Theory 768

Joseph Schumpeter and Creative Destruction 769

21.3 Economic Growth in the United States 770

Economic Growth in the United States since 1950 771

Is the United States Headed for a Long Period

of Slow Growth? 771

21.4 Why Isn’t the Whole World Rich? 773

Catch-up: Sometimes but Not Always 774

Solved Problem 21.4: The Economic Growth

Model’s Prediction of Catch-up 776

Why Haven’t Most Western European Countries,

Canada, and Japan Caught Up to the United States? 777

Why Don’t More Low-Income Countries Experience

Rapid Growth? 779

Apply the Concept: Why Hasn’t Mexico Grown

as Fast as China? 779

The Benefits of Globalization 782

21.5 Growth Policies 782

Enhancing Property Rights and the Rule of Law 783

Apply the Concept: Will China’s Standard of

Living Ever Exceed That of the United States? 783

Improving Health and Education 784

Policies That Promote Technological Change 785

Policies That Promote Saving and Investment 785

Apply the Concept: Is Sub-Saharan Africa

on the Road to Economic Growth? 786

Is Economic Growth Good or Bad? 787

Conclusion 788

Chapter Summary and Problems 789

PART 8 Short-Run Fluctuations

CHAPTER 22: Aggregate Expenditure and

Output in the Short Run 798

Glamping and Airstream’s Ride on the

Business Cycle 798

22.1 The Aggregate Expenditure Model 800

Aggregate Expenditure 800

The Difference between Planned Investment

and Actual Investment 801

Macroeconomic Equilibrium 801

Adjustments to Macroeconomic Equilibrium 802

22.2 Determining the Level of Aggregate

Expenditure in the Economy 803

Consumption 803

The Volatility of Consumer Spending on

Durables 805

The Relationship between Consumption and

National Income 808

Income, Consumption, and Saving 809

Solved Problem 22.2: Calculating the Marginal

Propensity to Consume and the Marginal

Propensity to Save 810

Planned Investment 811

Apply the Concept: Is Student Loan Debt

Causing Fewer Young People to Buy Houses? 812

Government Purchases 814

Net Exports 815

Apply the Concept: The iPhone Is Made in

China . . . or Is It? 816

22.3 Graphing Macroeconomic Equilibrium 817

Showing a Recession on the 45°-Line Diagram 820

The Important Role of Inventories 821

A Numerical Example of Macroeconomic

Equilibrium 822

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

Aggregate Expenditure with Consumption

Spending 823

Solved Problem 22.3: Determining

Macroeconomic Equilibrium 823

22.4 The Multiplier Effect 824

Apply the Concept: The Multiplier in Reverse:

The Great Depression of the 1930s 827

A Formula for the Multiplier 828

Summarizing the Multiplier Effect 829

Solved Problem 22.4: Using the Multiplier

Formula 830

The Paradox of Thrift 831

22.5 The Aggregate Demand Curve 831

Conclusion 834

Chapter Summary and Problems 835

Appendix: The Algebra of Macroeconomic

Equilibrium 842

Review Questions 843

CHAPTER 23: Aggregate Demand and

Aggregate Supply Analysis 844

General Motors Hopes the Economic Expansion

Doesn’t Die of Old Age 844

23.1 Aggregate Demand 846

Why Is the Aggregate Demand Curve Downward

Sloping? 846

Shifts of the Aggregate Demand Curve versus

Movements along It 848

The Variables That Shift the Aggregate Demand Curve 848

Don’t Let This Happen to You: Understand Why the

Aggregate Demand Curve Is Downward Sloping 849

Solved Problem 23.1: Movements along

the Aggregate Demand Curve or Shifts

of the Curve? 850

Apply the Concept: Which Components of

Aggregate Demand Changed the Most during

the 2007–2009 Recession? 851

23.2 Aggregate Supply 853

The Long-Run Aggregate Supply Curve 853

The Short-Run Aggregate Supply Curve 854

Apply the Concept: How Sticky Are Wages? 855

Shifts of the Short-Run Aggregate Supply Curve

versus Movements along It 857

Variables That Shift the Short-Run Aggregate

Supply Curve 857

23.3 Macroeconomic Equilibrium in the Long

Run and the Short Run 859

Recessions, Expansions, and Supply Shocks 860

Apply the Concept: Does It Matter What

Causes a Decline in Aggregate Demand? 861

Apply the Concept: Is the Business Cycle

Really a Cycle? 864

23.4 A Dynamic Aggregate Demand and

Aggregate Supply Model 866

What Is the Usual Cause of Inflation? 867

The Recession of 2007–2009 867

Solved Problem 23.4: Showing the Oil Shock

of 1974–1975 on a Dynamic Aggregate

Demand and Aggregate Supply Graph 870

Conclusion 871

Chapter Summary and Problems 872

Appendix: Macroeconomic Schools of Thought 880

The Monetarist Model 880

The New Classical Model 881

The Real Business Cycle Model 881

The Austrian Model 882

Apply the Concept: Karl Marx: Capitalism’s

Severest Critic 882

PART 9 Monetary and Fiscal Policy

CHAPTER 24: Money, Banks, and the Federal

Reserve System 884

Is Venmo the End of Money? 884

24.1 What Is Money, and Why Do

We Need It? 886

Barter and the Invention of Money 886

The Functions of Money 887

What Can Serve as Money? 888

Apply the Concept: Your Money Is No

Good Here! 889

24.2 How Is Money Measured in the

United States Today? 890

M1: A Narrow Definition of the Money Supply 890

M2: A Broad Definition of Money 891

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

Money with Income or Wealth 892

Solved Problem 24.2: The Def initions of

M1 and M2 892

What about Credit Cards and Debit Cards? 892

Apply the Concept: Are Bitcoins Money? 893

24.3 How Do Banks Create Money? 894

Bank Balance Sheets 894

Apply the Concept: Help for Young Borrowers:

Fintech or Ceilings on Interest Rates? 895

Using T-accounts to Show How a Bank Can

Create Money 897

The Simple Deposit Multiplier 899

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

Assets and Liabilities 900

Solved Problem 24.3: Showing How Banks

Create Money 900

The Simple Deposit Multiplier versus the

Real-World Deposit Multiplier 902

24.4 The Federal Reserve System 903

The Establishment of the Federal Reserve System 903

How the Federal Reserve Manages the Money Supply 905

The “Shadow Banking System” and the Financial

Crisis of 2007–2009 908

24.5 The Quantity Theory of Money 910

Connecting Money and Prices: The Quantity Equation 910

The Quantity Theory Explanation of Inflation 910

How Accurate Are Forecasts of Inflation Based

on the Quantity Theory? 911

High Rates of Inflation 912

Apply the Concept: The German Hyperinflation

of the Early 1920s 913

Conclusion 914

Chapter Summary and Problems 915

CHAPTER 25: Monetary Policy 922

Who Elected the Fed? 922

25.1 What Is Monetary Policy? 924

The Goals of Monetary Policy 924

25.2 The Money Market and the Fed’s Choice

of Monetary Policy Targets 926

Monetary Policy Targets 926

The Demand for Money 926

Shifts in the Money Demand Curve 927

How the Fed Manages the Money Supply:

A Quick Review 928

Equilibrium in the Money Market 928

A Tale of Two Interest Rates 930

Choosing a Monetary Policy Target 930

The Importance of the Federal Funds Rate 930

Managing the Federal Funds Rate Today 931

25.3 Monetary Policy and Economic Activity 932

How Interest Rates Affect Aggregate Demand 932

The Effects of Monetary Policy on Real GDP

and the Price Level 933

Apply the Concept: Quantitative Easing,

the Fed’s Balance Sheet, and Negative

Interest Rates in Europe 934

Can the Fed Eliminate Recessions? 936

Fed Forecasts 938

Apply the Concept: Trying to Hit a Moving

Target: Making Policy with “Real-Time Data” 938

A Summary of How Monetary Policy Works 940

Don’t Let This Happen to You: Remember

That with Monetary Policy, It’s the Interest

Rates—Not the Money—That Counts 940

25.4 Monetary Policy in the Dynamic Aggregate

Demand and Aggregate Supply Model 941

The Effects of Monetary Policy on Real GDP

and the Price Level: A More Complete Account 941

Using Monetary Policy to Fight Inflation 942

Solved Problem 25.4: The Effects of Monetary Policy 944

25.5 A Closer Look at the Fed’s Setting

of Monetary Policy Targets 945

Should the Fed Target the Money Supply? 945

Why Doesn’t the Fed Target Both the Money

Supply and the Interest Rate? 946

The Taylor Rule 947

Solved Problem 25.5: Applying the Taylor Rule 948

Inflation Targeting . . . or Nominal GDP Targeting? 949

Apply the Concept: Should the Fed Worry

about the Prices of Food and Gasoline? 950

25.6 Fed Policies during the 2007–2009 Recession 951

The Inflation and Deflation of the Housing

Market Bubble 951

The Changing Mortgage Market 952

The Role of Investment Banks 952

Apply the Concept: The Wonderful World

of Leverage 953

The Fed and the Treasury Department Respond 954

Conclusion 956

Chapter Summary and Problems 957

CHAPTER 26: Fiscal Policy 966

Can Fiscal Policy Increase Economic Growth? 966

26.1 What Is Fiscal Policy? 968

What Fiscal Policy Is and What It Isn’t 968

Automatic Stabilizers versus Discretionary

Fiscal Policy 968

An Overview of Government Spending and Taxes 968

Apply the Concept: Is Spending on Social

Security and Medicare a Fiscal Time Bomb? 971

26.2 The Effects of Fiscal Policy on Real GDP

and the Price Level 973

Short-Run Expansionary and Contractionary

Fiscal Policy 973

A Summary of How Fiscal Policy Affects Aggregate

Demand 975

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

Fiscal Policy and Monetary Policy 975

26.3 Fiscal Policy in the Dynamic Aggregate

Demand and Aggregate Supply Model 975

26.4 The Government Purchases and Tax

Multipliers 977

The Effect of Changes in the Tax Rate 980

Taking into Account the Effects of Aggregate Supply 980

The Multipliers Work in Both Directions 981

Solved Problem 26.4: Fiscal Policy Multipliers 981

26.5 The Limits to Using Fiscal Policy to Stabilize

the Economy 982

Apply the Concept: Why Was the Recession

of 2007–2009 So Severe? 982

Does Government Spending Reduce Private

Spending? 984

Crowding Out in the Short Run 984

Crowding Out in the Long Run 985

Fiscal Policy in Action: Did the Stimulus Package

of 2009 Succeed? 986

26.6 Deficits, Surpluses, and Federal

Government Debt 988

How the Federal Budget Can Serve as an

Automatic Stabilizer 989

Should the Federal Budget Always Be Balanced? 991

Solved Problem 26.6: The Italian Government

Confronts a Budget Def icit 991

The Federal Government Debt 992

Is Government Debt a Problem? 993

Apply the Concept: Modern Monetary Theory:

Should We Stop Worrying and Love the Debt? 993

26.7 Long-Run Fiscal Policy and Economic Growth 994

Explaining Long-Run Increases in Real GDP 995

How Can Fiscal Policy Affect Long-Run Economic

Growth? The Long-Run Effects of Tax Policy 996

Tax Simplification 997

The Economic Effects of Tax Reform 997

How Large Are Supply-Side Effects? 998

Apply the Concept: Will President Trump’s Fiscal

Policy Raise the Rate of Economic Growth? 999

Conclusion 1001

Chapter Summary and Problems 1002

Appendix: A Closer Look at the Multiplier 1010

An Expression for Equilibrium Real GDP 1010

A Formula for the Government Purchases

Multiplier 1011

A Formula for the Tax Multiplier 1012

The “Balanced Budget” Multiplier 1012

The Effects of Changes in Tax Rates on the Multiplier 1013

The Multiplier in an Open Economy 1013

Problem and Applications 1015

CHAPTER 27: Inflation, Unemployment,

and Federal Reserve Policy 1016

The Fed Deals with Inflation, Unemployment, . . .

and the President 1016

27.1 The Discovery of the Short-Run Trade-off

between Unemployment and Inflation 1018

Explaining the Phillips Curve with Aggregate

Demand and Aggregate Supply Curves 1019

Is the Phillips Curve a Policy Menu? 1020

Is the Short-Run Phillips Curve Stable? 1020

The Long-Run Phillips Curve 1020

The Role of Expectations of Future Inflation 1021

Apply the Concept: Do Workers Understand

Inflation? 1022

27.2 The Short-Run and Long-Run Phillips Curves 1023

Shifts in the Short-Run Phillips Curve 1024

How Does a Vertical Long-Run Phillips Curve

Affect Monetary Policy? 1025

Apply the Concept: Does the Natural Rate

of Unemployment Ever Change? 1026

Solved Problem 27.2: Changing Views of

the Phillips Curve 1027

27.3 Monetary Policy and Expectations of

the Inflation Rate 1028

The Implications of Rational Expectations

for Monetary Policy 1028

Is the Short-Run Phillips Curve Really

Vertical? 1029

Real Business Cycle Models 1030

27.4 Federal Reserve Policy from the 1970s

to the Present 1030

The Effect of a Supply Shock on the

Phillips Curve 1031

Paul Volcker and Disinflation 1032

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

Disinflation with Deflation 1033

Solved Problem 27.4: Using Monetary Policy

to Lower the Inflation Rate 1033

Recent Fed Chairs and the Debate over the Fed’s

Future 1035

Apply the Concept: Has the Phillips Curve

Disappeared? 1037

Should the Fed Be Independent of Congress and

the President? 1039

Conclusion 1042

Chapter Summary and Problems 1043

PART 10 The International Economy

CHAPTER 28: Macroeconomics in an Open

Economy 1050

Amazon Deals with a Fluctuating Dollar 1050

28.1 The Balance of Payments: Linking

the United States to the International

Economy 1052

The Current Account 1052

The Financial Account 1054

The Capital Account 1054

Why Is the Balance of Payments

Always Zero? 1054

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

the Trade Balance, the Current Account

Balance, and the Balance of Payments 1055

28.2 The Foreign Exchange Market and

Exchange Rates 1056

Equilibrium in the Market for Foreign Exchange 1056

Shifts in Demand and Supply in the Foreign

Exchange Market 1057

How Movements in the Exchange Rate Affect

Exports and Imports 1059

Apply the Concept: Is a Strong Currency

Good for a Country? 1060

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

What Happens When a Currency


with What Happens When It Depreciates 1061

Solved Problem 28.2: Toyota Rides the

Exchange Rate Rollercoaster 1061

The Real Exchange Rate 1062

Exchange Rates in the Long Run 1062

Apply the Concept: The Big Mac Theory

of Exchange Rates 1064

28.3 Exchange Rate Systems 1065

The Floating Dollar 1065

The Euro 1066

Pegging against the Dollar 1067

Apply the Concept: The Chinese Yuan:

The World’s Most Controversial Currency 1068

28.4 The International Sector and National

Saving and Investment 1070

Net Exports Equal Net Foreign Investment 1070

Domestic Saving, Domestic Investment,

and Net Foreign Investment 1070

Solved Problem 28.4: Arriving at the Saving

and Investment Equation 1071

28.5 The Effect of a Government Budget

Deficit on Investment 1072

28.6 Monetary Policy and Fiscal Policy in

an Open Economy 1074

Monetary Policy in an Open Economy 1074

Fiscal Policy in an Open Economy 1074

Conclusion 1075

Chapter Summary and Problems 1076

Online Appendix: The Gold Standard and

the Bretton Woods System

Glossary 1085

Company Index 1093

Subject Index 1096

Credits 1122

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