Macroeconomics Private And Public Choice, 17th Edition PDF James D Gwartney, Richard L Stroup, Russell S Sobel and David A Mcpherson


Macroeconomics Private And Public Choice, 17th Edition

By James D. Gwartney, Richard L. Stroup, Russell S. Sobel and David A. Mcpherson

Macroeconomics Private And Public Choice, 17e


Preface xvii

Acknowledgments xxiii

About the Authors xxv

Part 1 The Economic Way of Thinking 1

Chapter 1 The Economic Approach 2

1-1 What Is Economics About? 3

1-1a Scarcity and Poverty Are Not the Same 5

1-1b Scarcity Necessitates Rationing 6

1-1c The Method of Rationing Influences the Nature of Competition 6

1-2 The Economic Way of Thinking 6

1-2a Eight Guideposts to Economic Thinking 7

1-3 Positive and Normative Economics 12

1-4 Pitfalls to Avoid in Economic Thinking 13

1-4a Violation of the Ceteris Paribus Condition Can Lead One to Draw the Wrong Conclusion 13

1-4b Good Intentions Do Not Guarantee Desirable Outcomes 13

1-4c Association Is Not Causation 14

1-4d The Fallacy of Composition: What’s True for One Might Not Be True for All 15

Key Points 15

Critical Analysis Questions 16

Chapter 2 Some Tools of the Economist 17

2-1 What Shall We Give Up? 18

2-1a Opportunity Cost 18

2-1b Opportunity Cost and the Real World 18

2-2 Trade Creates Value 19

2-2a Transaction Costs—A Barrier to Trade 20

2-2b The Middleman as a Cost Reducer 21

2-3 The Importance of Property Rights 22

2-3a Private Ownership and Markets 24

2-4 Production Possibilities Curve 26

2-4a Shifting the Production Possibilities Curve Outward 28

2-4b Production Possibilities and Economic Growth 31

2-5 Trade, Output, and Living Standards 32

2-5a Gains from Specialization and Division of Labor 32

2-5b Gains from Mass Production Methods 33

2-5c Gains from Innovation 34

2-6 Human Ingenuity, Entrepreneurship, and the Creation of Wealth 34

2-7 Economic Organization 35

2-7a Market Organization 35

2-7b Political Organization 37

Key Points 37

Critical Analysis Questions 38

Addendum 39

Comparative Advantage, Specialization, and Gains from Trade 39

Part 2 Markets and Government 41

Chapter 3 Demand, Supply, and the Market Process 42

3-1 Consumer Choice and the Law of Demand 43

3-1a The Market Demand Schedule 44

3-1b Consumer Surplus 45

3-1c Responsiveness of Quantity Demanded to Price Changes: Elastic and Inelastic

Demand Curves 46

3-2 Changes in Demand versus Changes in Quantity Demanded 47

3-3 Producer Choice and the Law of Supply 50

3-3a The Role of Profits and Losses 52

3-3b Market Supply Schedule 52

3-3c Producer Surplus 53

3-3d Responsiveness of Quantity Supplied to Price Changes: Elastic and Inelastic

Supply Curves 54

3-4 Changes in Supply versus Changes in Quantity Supplied 55

3-5 How Market Prices Are Determined: Demand and Supply Interact 57

3-5a Market Equilibrium 57

3-5b Efficiency and Market Equilibrium 59

3-6 How Markets Respond to Changes in Demand and Supply 60

3-7 Entrepreneurship, Profit, and the Dynamics of Market Competition 63

3-8 Invisible Hand Principle 65

3-8a Prices and Market Order 65

3-8b Competition and Property Rights 67

Key Points 67

Critical Analysis Questions 68

Chapter 4 Demand and Supply: Applications and Extensions 70

4-1 The Link between Resource and Product Markets 71

4-2 The Economics of Price Controls 72

4-2a The Impact of Price Ceilings 72

4-2b Rent Control: A Closer Look at a Price Ceiling 75

4-2c The Impact of Price Floors 76

4-2d Minimum Wage: A Closer Look at a Price Floor 77

4-3 Black Markets and the Importance of the Legal Structure 80

4-4 The Impact of a Tax 80

4-4a The Deadweight Loss Caused by Taxes 82

4-4b Actual versus Statutory Incidence 82

4-4c Elasticity and the Incidence of a Tax 84

4-4d Elasticity and the Deadweight Loss 85

4-5 Tax Rates, Tax Revenues, and the Laffer Curve 85

4-6 The Impact of a Subsidy 88

4-6a Elasticity and the Benefit of Government Subsidy Programs 88

4-6b Real-World Subsidy Programs 89

Key Points 91

Critical Analysis Questions 91

Chapter 5 Difficult Cases for the Market, and the Role of Government 93

5-1 A Closer Look at Economic Efficiency 94

5-1a If It’s Worth Doing, It’s Worth Doing Imperfectly 95

5-2 Thinking About the Economic Role of Government 96

5-2a Protective Function of Government 96

5-2b Productive Function of Government 96

5-3 Potential Shortcomings of the Market 97

5-3a Lack of Competition 97

5-3b Externalities—A Failure to Account for All Costs and Benefits 98

5-3c External Costs 99

5-3d What Should Be Done About External Costs? 100

5-3e External Benefits 101

5-3f Expanding the Scope of a Project and Capturing External Benefits 102

5-3g Public Goods and Why they Pose a Problem for the Market 104

5-3h Potential Information Problems 105

5-3i Information as a Profit Opportunity 106

5-4 Market and Government Failure 108

Key Points 109

Critical Analysis Questions 109

Chapter 6 The Economics of Political Action 110

6-1 The Size and Growth of the U.S. Government 111

6-2 Similarities and Differences between Political and Market Allocation 113

6-3 Political Decision-Making: An Overview 114

6-3a Incentives Confronted by the Voter 115

6-3b Incentives Confronted by the Politician 116

6-3c Incentives Confronted by the Government Bureaucrat 117

6-4 When the Political Process Works Well 118

6-5 When the Political Process Works Poorly 120

6-5a Special-Interest Effect 120

6-5b Shortsightedness Effect 123

6-5c Rent-seeking 124

6-5d Inefficiency of Government Operations 125

6-6 Political Favoritism, Crony Capitalism, and Government Failure 125

6-7 The Economic Way of Thinking about Markets and Government 128

Key Points 129

Critical Analysis Questions 129

Part 3 Core Macroeconomics 131

Chapter 7 Taking the Nation’s Economic Pulse 132

7-1 GDP—A Measure of Output 133

7-1a What Counts toward GDP? 133

7-1b Dollars Are the Common Denominator for GDP 135

7-2 GDP as a Measure of Both Output and Income 135

7-2a Deriving GDP by the Expenditure Approach 136

7-2b Deriving GDP by the Resource Cost–Income Approach 138

7-2c The Relative Size of GDP Components 139

7-2d The COVID-19 Pandemic and GDP 140

7-3 Adjusting for Price Changes and Deriving Real GDP 140

7-3a Key Price Indexes: The Consumer Price Index and the GDP Deflator 141

7-3b Using the GDP Deflator to Derive Real GDP 142

7-4 Problems with GDP as a Measuring Rod 145

7-4a Nonmarket Production 145

7-4b Underground Economy 146

7-4c Leisure and Human Costs 146

7-4d Quality Variation and the Introduction of New Goods 146

7-4e Harmful Side Effects and Economic “Bads” 147

7-4f GDP Understates Well-Being in the Information Age 147

7-5 Differences in GDP over Time 149

7-6 The Great Contribution of GDP 150

Key Points 153

Critical Analysis Questions 153

Addendum 155

The Construction of a Price Index 155

Chapter 8 Economic Fluctuations, Unemployment, and Inflation 156

8-1 Swings in the Economic Pendulum 157

8-1a A Hypothetical Business Cycle 157

8-2 Economic Fluctuations and the Labor Market 159

8-2a The Labor Force Participation and Unemployment Rates 160

8-2b Employment Fluctuations and Trends: The Historical Record 161

8-2c Dynamic Change and Reasons for Unemployment 163

8-3 Three Types of Unemployment 164

8-3a Frictional Unemployment 165

8-3b Structural Unemployment 166

8-3c Cyclical Unemployment 167

8-4 Full Employment and the Natural Rate of Unemployment 168

8-5 Actual and Potential GDP 169

8-6 The Effects of Inflation 170

8-6a Unanticipated and Anticipated Inflation 171

8-6b Why Does Inflation Adversely Affect the Economy? 171

8-6c What Causes Inflation? 172

Key Points 172

Critical Analysis Questions 173

Chapter 9 An Introduction to Basic Macroeconomic Markets 175

9-1 Understanding Macroeconomics: Our Game Plan 176

9-2 Four Key Markets: Resources, Goods and Services, Loanable Funds, and

Foreign Exchange 176

9-3 Aggregate Demand for Goods and Services 178

9-3a Why Does the Aggregate Demand Curve Slope Downward? 179

9-3b The Downward-Sloping Aggregate Demand Curve: A Summary 180

9-4 Aggregate Supply of Goods and Services 181

9-4a Aggregate Supply in the Short Run 181

9-4b Aggregate Supply in the Long Run 182

9-5 Equilibrium in the Goods and Services Market 184

9-5a Equilibrium in the Short Run 184

9-5b Equilibrium in the Long Run 184

9-5c Long-Run Equilibrium, Potential Output, and Full Employment 185

9-5d What Happens When the Economy’s Output Differs from Its Long-Run Potential? 186

9-6 Resource Market 187

9-7 Loanable Funds Market 188

9-7a Does Inflation Help Borrowers? 190

9-7b Loanable Funds Market, Interest Rates, and Bond Prices 191

9-7c Global Loanable Funds Market 191

9-8 Foreign Exchange Market 192

9-9 Long-Run Equilibrium 195

Key Points 195

Critical Analysis Questions 196

Chapter 10 Dynamic Change, Economic Fluctuations, and the AD–AS Model 197

10-1 Anticipated and Unanticipated Changes 198

10-2 Factors that Shift Aggregate Demand 198

10-3 Shifts in Aggregate Supply 201

10-3a Changes in Long-Run Aggregate Supply 202

10-3b Changes in Short-Run Aggregate Supply 203

10-4 Steady Economic Growth and Anticipated Changes in Long-Run Aggregate Supply 204

10-5 Unanticipated Changes and Market Adjustments 205

10-5a Unanticipated Increases in Aggregate Demand 205

10-5b Unanticipated Reductions in Aggregate Demand 207

10-5c Unanticipated Increases in Short-Run Aggregate Supply 208

10-5d Unanticipated Reductions in Short-Run Aggregate Supply 209

10-6 The Price Level, Inflation, and the AD–AS Model 210

10-7 Unanticipated Changes, Recessions, and Booms 210

10-7a Expansions and Recessions: The Historical Record 212

10-7b Using the AD–AS Model to Think About the Business Cycle and the Great

Recession of 2008–2009 212

Key Points 214

Critical Analysis Questions 215

Chapter 11 Fiscal Policy: The Keynesian View and the Historical

Development of Macroeconomics 217

11-1 The Great Depression, Economic Instability, and the Development of

Keynesian Economics 218

11-1a The Great Depression and Keynesian Economics 218

11-1b Output, Employment, and Keynesian Equilibrium 218

11-1c The Multiplier and Economic Instability 219

11-1d Adding Realism to the Multiplier 221

11-1e Keynes and Economic Instability: A Summary 221

11-2 The Federal Budget and Fiscal Policy 222

11-3 Fiscal Policy and the Good News of Keynesian Economics 222

11-3a Using the Budget to Promote Stability 223

11-3b Fiscal Policy Changes and Problems of Timing 225

11-3c Automatic Stabilizers 226

11-4 Saving, Spending, Debt, and the Impact of Fiscal Policy 227

Key Points 229

Critical Analysis Questions 230

Chapter 12 Fiscal Policy, Incentives, and Secondary Effects 231

12-1 Fiscal Policy, Borrowing, and the Crowding-Out Effect 232

12-1a Do Global Financial Markets Minimize the Crowding-Out Effect? 233

12-2 Fiscal Policy, Future Taxes, and the New Classical Model 234

12-2a Is Job Creation a Good Reason to Support a Government Spending Program? 236

12-3 Political Incentives and the Effective Use of Discretionary Fiscal Policy 237

12-4 Is Discretionary Fiscal Policy an Effective Stabilization Tool? 237

12-5 The Supply-Side Effects of Fiscal Policy 238

12-5a Why Do High Tax Rates Decrease Output? 239

12-5b How Important Are the Supply-Side Effects? 239

12-6 Fiscal Policy and Recovery from Recessions 242

12-6a Will Fiscal Stimulus Speed Recovery? 242

12-6b Tax Cuts versus Spending Increases 242

12-7 U.S. Fiscal Policy: 1990–2019 243

Key Points 246

Critical Analysis Questions 246

Chapter 13 Money and the Banking System 248

13-1 What Is Money? 249

13-1a Money as a Medium of Exchange 249

13-1b Money as a Store of Value 249

13-1c Money as a Unit of Account 249

13-2 How the Supply of Money Affects Its Value 250

13-3 How Is the Money Supply Measured? 250

13-3a The M1 Money Supply 250

13-3b The Broader M2 Money Supply 251

13-3c Credit Cards versus Money 252

13-4 The Business of Banking 252

13-4a Fractional Reserve Banking 253

13-4b Bank Runs, Bank Failures, and Deposit Insurance 254

13-5 How Banks Create Money by Extending Loans 254

13-5a The Actual Deposit Expansion Multiplier 256

13-6 The Federal Reserve System 256

13-6a Structure of the Fed 256

13-6b How the Fed Controls the Money Supply 259

13-6c Recent Fed Policy, the Monetary Base, and the Money Supply 261

13-6d The Fed and the Treasury 265

13-7 Ambiguities in the Meaning and Measurement of the Money Supply 266

Key Points 267

Critical Analysis Questions 268

Chapter 14 Modern Macroeconomics and Monetary Policy 270

14-1 Impact of Monetary Policy: A Brief Historical Background 271

14-2 The Demand and Supply of Money 271

14-2a The Equilibrium between Money Demand and Money Supply 273

14-3 How Does Monetary Policy Affect the Economy? 274

14-3a The Effects of an Unanticipated Expansionary Monetary Policy 276

14-3b The Effects of an Unanticipated Restrictive Monetary Policy 277

14-3c Shifts in Monetary Policy and Economic Stability 278

14-4 Monetary Policy in the Long Run 279

14-4a The Quantity Theory of Money 279

14-4b Long-Run Impact of Monetary Policy: The Modern View 280

14-4c Money and Inflation 282

14-5 Money, Economic Stability, and Proper Monetary Policy 282

14-5a Time Lags, Monetary Shifts, and Economic Stability 282

14-5b Monetary Policy and Price Stability 283

14-6 Recent Low Interest Rates and Monetary Policy 284

14-7 Interest Rates, Velocity of Money, and Monetary Policy 287

Key Points 289

Critical Analysis Questions 290

Chapter 15 Macroeconomic Policy, Economic Stability, and the Federal Debt 291

15-1 Economic Fluctuations: The Past 100 Years 292

15-2 Can Discretionary Policy Promote Economic Stability? 292

15-2a The Time Lag Problem 293

15-3 Forecasting Tools and Macro Policy 293

15-3a Index of Leading Indicators 294

15-3b Computer Forecasting Models 295

15-3c Market Signals as Forecasting Tools 296

15-3d Is Accurate Forecasting Feasible? 296

15-4 How Are Expectations Formed? 296

15-5 Macro Policy Implications of Adaptive and Rational Expectations 298

15-6 The Phillips Curve: The View of the 1960s versus Today 299

15-6a Expectations and the Modern View of the Phillips Curve 301

15-7 The Growing Federal Debt and Economic Stability 303

15-7a Deficits, Surpluses, and the National Debt 303

15-7b Who Owns the National Debt? 305

15-7c How Does Debt Financing Influence Future Generations? 306

15-7d Why Is Deficit Spending So Difficult to Control? 306

15-7e Have Federal Debt Obligations Grown to a Dangerous Level? 307

15-8 Perspective on Recent Macroeconomic Policy and Economic Instability 308

Key Points 309

Critical Analysis Questions 309

Chapter 16 Creating an Environment for Growth and Prosperity 311

16-1 Why Is Economic Growth Important? 312

16-1a The Impact of Sustained Economic Growth 312

16-2 Sources of Economic Growth and High Incomes 313

16-2a Gains from Trade 313

16-2b Entrepreneurship, Technology, and the Discovery of Better Ways of Doing Things 315

16-2c Investment in Physical and Human Capital 316

16-3 What Institutions and Policies Will Promote Growth? 317

16-3a Legal System: Secure Property Rights, Rule of Law, and Even-Handed

Enforcement of Contracts 318

16-3b Competitive Markets 319

16-3c Stable Money and Prices 319

16-3d Avoidance of Regulations that Restrict Trade and Entry into Markets 319

16-3e Avoidance of High Tax Rates 320

16-3f Trade Openness 321

16-4 Economic Freedom as a Measure of Sound Institutions 322

16-5 Institutions, Policies, and Economic Performance 323

16-5a Economic Freedom and Per Capita Income 324

16-5b Economic Freedom and Growth of Per Capita Income 325

16-5c Economic Freedom and the Poverty Rate 326

16-5d Economic Freedom and Life Expectancy 326

16-5e Economic Freedom and Environmental Quality 327

16-6 Economic Freedom and Per Capita Income: How Strong is the Linkage? 327

Key Points 330

Critical Analysis Questions 330

Addendum 332

The 2018 Economic Freedom of the World Country Rankings and Ratings 332

Chapter 17 The Economics of Development 335

17-1 The Economic Record of the Last 1000 Years 336

17-2 Theories of Development 337

17-2a Malthusian Theory of Development 337

17-2b Colonialism, European Settlements, and Institutions 338

17-2c Neoclassical Production Function Theory of Development 338

17-2d Geography and Development 339

17-3 The Transportation-Communication Revolution 341

17-4 The Transportation-Communication Revolution and Economic Development 343

17-5 The Transportation-Communication Revolution and the Historic Economic

Progress of the Past 50 Years 347

17-5a Growth of High-Income and Developing Countries During the Past

Half-Century 348

17-5b Countries With the Best and Worst Growth Records 349

17-5c Dramatic Reduction in the Worldwide Poverty Rate 350

17-6 The Transportation-Communication Revolution versus the Industrial Revolution 351

17-7 The Future of Economic Development 352

Key Points 353

Critical Analysis Questions 354

Part 4 International Economics 355

Chapter 18 Gaining from International Trade 356

18-1 The Trade Sector of the United States 357

18-2 Gains from Specialization and Trade 358

18-2a How Trade Expands Consumption Possibilities 360

18-2b Some Real-World Considerations 362

18-3 Supply, Demand, and International Trade 363

18-4 The Economics of Trade Restrictions 365

18-4a The Economics of Tariffs 365

18-4b The Economics of Quotas 367

18-4c Exchange Rate Controls as a Trade Restriction 368

18-5 Why Do Nations Adopt Trade Restrictions? 368

18-5a The National-Defense Argument 369

18-5b The Infant-Industry Argument 369

18-5c The Antidumping Argument 369

18-5d Special Interests and the Politics of Trade Restrictions 370

18-6 Do More Open Economies Perform Better? 371

18-7 Trade Barriers and Popular Trade Fallacies 372

18-7a Trade Fallacy 1: Trade Restrictions that Limit Imports Save Jobs and Expand

Employment 372

18-7b Trade Fallacy 2: Free Trade with Low-Wage Countries Like Mexico and China will

Reduce the Wages of Americans 374

18-8 Institutions and the Changing Nature of Global Trade 374

Key Points 376

Critical Analysis Questions 376

Chapter 19 International Finance and the Foreign Exchange Market 378

19-1 Foreign Exchange Market 379

19-2 Determinants of the Exchange Rate 381

19-3 Why Do Exchange Rates Change? 382

19-3a Changes in Income 383

19-3b Differences in Rates of Inflation 383

19-3c Changes in Interest Rates 384

19-3d Changes in the Business and Investment Climate 385

19-4 International Finance and Alternative Exchange Rate Regimes 386

19-4a Fixed Rate, Unified Currency System 386

19-4b Pegged Exchange Rate Regime 387

19-5 Balance of Payments 388

19-5a Current-Account Transactions 389

19-5b Balance on Current Account 390

19-5c Capital-Account Transactions 391

19-5d Official Reserve Account 391

19-5e The Balance of Payments Must Balance 392

19-6 Exchange Rates, Current Account Balance, and Capital Inflow 392

Key Points 395

Critical Analysis Questions 395

Part 5 Applying the Basics: Special Topics in Economics 397

Special Topic 1: Government Spending and Taxation 398

Special Topic 2: The Economics of Social Security 413

Special Topic 3: The Stock Market: Its Function, Performance, and Potential as an

Investment Opportunity 423

Special Topic 4: Keynes and Hayek: Contrasting Views on Sound Economics and the

Role of Government 434

Special Topic 5: The 2020 COVID-19 Recession: Cause, Response, and Implications

for the Future 441

Special Topic 6: The Great Recession of 2008–2009: Causes and Response 449

Special Topic 7: Lessons from the Great Depression 463

Appendix A General Business and Economics Indicators for the United States 477

Appendix B Answers to Selected Critical Analysis Questions 484

Glossary 495

Index 504

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