Economics, Third Edition
By Daron Acemoglu, David Laibson and John A. List
Contents:
PART I Introduction to Economics 36
Chapter 1: The Principles and Practice of Economics 36
1.1 The Scope of Economics 37
Economic Agents and Economic Resources 37
Definition of Economics 38
Positive Economics and Normative Economics 39
Microeconomics and Macroeconomics 40
1.2 Three Principles of Economics 40
1.3 The First Principle of Economics: Optimization 41
Trade-offs and Budget Constraints 42
Opportunity Cost 43
Cost-Benefit Analysis 44
Evidence-Based Economics: Is Facebook free? 45
1.4 The Second Principle of Economics: Equilibrium 47
The Free-Rider Problem 48
1.5 The Third Principle of Economics: Empiricism 49
1.6 Is Economics Good for You? 49
Summary 50
Key Terms 51
Questions 51
Evidence-Based Economics Problems 51
Problems 52
Chapter 2: Economic Science: Using Data and Models to Understand the World 54
2.1 The Scientific Method 55
Models and Data 56
An Economic Model 57
Evidence-Based Economics: How much more
does a worker with a 4-year college degree earn
compared to a worker with a high school degree? 58
Means and Medians 60
Argument by Anecdote 60
2.2 Causation and Correlation 61
The Red Ad Blues 61
Causation Versus Correlation 61
Choice & Consequence: Spend Now and Pay Later? 64
Experimental Economics and Natural Experiments 64
Evidence-Based Economics: What is the return to education? 65
2.3 Economic Questions and Answers 66
Summary 68
Key Terms 68
Questions 68
Evidence-Based Economics Problems 69
Problems 69
Appendix: Constructing and Interpreting Charts and Graphs 71
A Study about Incentives 71
Experimental Design 71
Describing Variables 72
Cause and Effect 74
Appendix Key Terms 77
Appendix Problems 77
Chapter 3: Optimization: Trying to Do the Best You Can 78
3.1 Optimization: Trying to Choose the Best Feasible Option 79
Choice & Consequence: Do People Actually Choose the Best Feasible Option? 80
3.2 Optimization Application: Renting the Optimal Apartment 80
Before and After Comparisons 83
3.3 Optimization Using Marginal Analysis 84
Marginal Cost 85
Evidence-Based Economics: How does location affect the rental cost of housing? 88
Summary 91
Key Terms 92
Questions 92
Evidence-Based Economics Problems 92
Problems 92
Chapter 4: Demand, Supply, and Equilibrium 96
4.1 Markets 97
4.2 How Do Buyers Behave? 99
Demand Curves 100
Willingness to Pay 100
From Individual Demand Curves to Aggregated
Demand Curves 101
Building the Market Demand Curve 102
Shifting the Demand Curve 103
Evidence-Based Economics: How much more
gasoline would people buy if its price were lower? 105
4.3 How Do Sellers Behave? 107
Supply Curves 107
Willingness to Accept 107
From the Individual Supply Curve to the Market Supply Curve 108
Shifting the Supply Curve 109
4.4 Supply and Demand in Equilibrium 111
Curve Shifting in Competitive Equilibrium 113
Letting the Data Speak: Technological Breakthroughs Drive Down the Equilibrium
Price of Oil 114
Letting the Data Speak: The Day Oil Became Garbage 115
4.5 What Would Happen If the Government Tried to Dictate the Price of Gasoline? 116
Choice & Consequence: The Unintended Consequences of Fixing Market Prices 118
Summary 119
Key Terms 120
Questions 120
Evidence-Based Economics Problems 121
Problems 121
PART II Foundations of Microeconomics 124
Chapter 5: Consumers and Incentives 124
5.1 The Buyer’s Problem 125
What You Like 125
Prices of Goods and Services 126
How Much Money You Have to Spend 126
Choice & Consequence: Absolutes Versus Percentages 126
5.2 Putting It All Together 128
Price Changes 130
Letting the Data Speak: Does $6 + $1 Always = $7? 131
Income Changes 131
5.3 From the Buyer’s Problem to the Demand Curve 132
5.4 Consumer Surplus 133
An Empty Feeling: Loss in Consumer Surplus When Price Increases 134
Evidence-Based Economics: Would a smoker quit the habit for $100 per month? 135
5.5 Demand Elasticities 138
The Price Elasticity of Demand 138
The Cross-Price Elasticity of Demand 143
The Income Elasticity of Demand 144
Letting the Data Speak: Should McDonald’s Be Interested in Elasticities? 145
Summary 145
Key Terms 146
Questions 146
Evidence-Based Economics Problems 147
Problems 148
Appendix: Representing Preferences with Indifference
Curves: Another Use of the Budget Constraint 150
Appendix Questions 153
Appendix Key Terms 153
Chapter 6: Sellers and
Incentives 154
6.1 Sellers in a Perfectly Competitive Market 155
6.2 The Seller’s Problem 155
Making the Goods: How Inputs Are Turned into Outputs 156
The Cost of Doing Business: Introducing Cost Curves 157
The Rewards of Doing Business: Introducing Revenue Curves 160
Putting It All Together: Using the Three
Components to Do the Best You Can 161
Choice & Consequence: Maximizing Total Profit, Not Per-Unit Profit 163
6.3 From the Seller’s Problem to the Supply Curve 164
Price Elasticity of Supply 164
Shutdown 165
Choice & Consequence: Marginal Decision Makers Ignore Sunk Costs 167
6.4 Producer Surplus 167
6.5 From the Short Run to the Long Run 169
Long-Run Supply Curve 170
Choice & Consequence: Visiting a Car Manufacturing Plant 170
6.6 From the Firm to the Market: Long-Run Competitive Equilibrium 171
Firm Entry 171
Firm Exit 173
Zero Profits in the Long Run 173
Economic Profit Versus Accounting Profit 174
Letting the Data Speak: The Effect of Uber
Driver Entry in the Long Run 175
Evidence-Based Economics: How would
an ethanol subsidy affect ethanol producers? 176
Summary 179
Key Terms 179
Questions 180
Evidence-Based Economics Problems 181
Problems 181
Appendix: When Firms Have Different Cost Structures 184
Chapter 7: Perfect Competition and the Invisible Hand 186
7.1 Perfect Competition and Efficiency 187
Social Surplus 188
Pareto Efficiency 190
7.2 Extending the Reach of the Invisible
Hand: From the Individual to the Firm 190
7.3 Extending the Reach of the Invisible
Hand: Allocation of Resources Across Industries 194
Letting the Data Speak: Adam Smith Visits the White House 197
7.4 Prices Guide the Invisible Hand 197
Deadweight Loss 199
Evidence-Based Economics: Do companies
like Uber make use of the invisible hand? 200
The Command Economy 204
Choice & Consequence: FEMA and Walmart After Katrina 205
The Central Planner 206
Choice & Consequence: Command and Control at Kmart 207
7.5 Equity and Efficiency 208
Evidence-Based Economics: Can markets composed
of only self-interested people maximize the overall well-being of society? 209
Summary 212
Key Terms 212
Questions 212
Evidence-Based Economics Problems 213
Problems 214
Chapter 8: Trade 216
8.1 The Production Possibilities Curve 217
Calculating Opportunity Cost 219
8.2 The Basis for Trade: Comparative Advantage 220
Specialization 221
Absolute Advantage 221
Choice & Consequence: An Experiment on Comparative Advantage 222
The Price of the Trade 223
8.3 Trade Between States 224
Choice & Consequence: Should LeBron James Paint His Own House? 225
Economy-Wide PPC 226
Comparative Advantage and Specialization Among States 227
8.4 Trade Between Countries 228
Determinants of Trade Between Countries 230
Exporting Nations: Winners and Losers 231
Letting the Data Speak: Fair Trade Products 231
Importing Nations: Winners and Losers 233
Where Do World Prices Come From? 234
Determinants of a Country’s Comparative Advantage 234
8.5 Arguments Against Free Trade 234
National Security Concerns 234
Fear of Globalization 235
Environmental and Resource Concerns 235
Infant Industry Arguments 235
The Effects of Tariffs 236
Choice & Consequence: Tariffs Affect Trade Between Firms 237
Evidence-Based Economics: Will free trade cause you to lose your job? 238
Summary 240
Key Terms 240
Questions 240
Evidence-Based Economics Problems 241
Problems 242
Chapter 9: Externalities andPublic Goods 244
9.1 Externalities 245
A “Broken” Invisible Hand: Negative Externalities 246
A “Broken” Invisible Hand: Positive Externalities 248
Pecuniary Externalities 250
Choice & Consequence: Coronavirus
Vaccination: Positive Externalities in Spots You
Never Imagined 250
9.2 Private Solutions to Externalities 251
Private Solution: Bargaining 251
The Coase Theorem 252
Private Solution: Doing the Right Thing 253
9.3 Government Solutions to Externalities 254
Government Regulation: Command-and-Control Policies 254
Evidence-Based Economics: How did the government lower the number of earthquakes in
Oklahoma? 255
Government Regulation: Market-Based Approaches 257
Corrective Taxes 257
Corrective Subsidies 258
Letting the Data Speak: How to Value Externalities 259
Letting the Data Speak: Pay as You Throw: Consumers Create Negative Externalities Too! 260
9.4 Public Goods 260
Government Provision of Public Goods 262
Choice & Consequence: The Free-Rider’s Dilemma 262
Private Provision of Public Goods 264
9.5 Common Pool Resource Goods 266
Choice & Consequence: Tragedy of the Commons 267
Choice & Consequence: The Race to Fish 268
Evidence-Based Economics: How can the
Queen of England lower her commute time to Wembley Stadium? 269
Summary 270
Key Terms 271
Questions 271
Evidence-Based Economics Problems 271
Problems 272
Chapter 10: The Government in the Economy: Taxation and Regulation 274
10.1 Taxation and Government Spending in the United States 275
Where Does the Money Come From? 276
Why Does the Government Tax and Spend? 278
Choice & Consequence: The Government Budget Constraint 279
Letting the Data Speak: Understanding Federal Income Tax Brackets 280
Letting the Data Speak: Reducing Inequality the Scandinavian Way 283
Taxation: Tax Incidence and Deadweight Losses 284
Choice & Consequence: The Deadweight Loss Depends on the Tax 287
10.2 Regulation 289
Direct Regulation 289
10.3 Government Failures 292
The Direct Costs of Bureaucracies 293
Corruption 293
Underground Economy 293
Choice & Consequence: Can Market
Regulation Save Rhinos from Extinction? 294
10.4 Equity Versus Efficiency 295
10.5 Consumer Sovereignty and Paternalism 297
The Debate 297
Evidence-Based Economics: What is the optimal size of government? 298
Letting the Data Speak: The Efficiency of Government
Versus Privately Run Expeditions 300
Choice & Consequence: Taxation and Innovation 300
Summary 301
Key Terms 301
Questions 301
Evidence-Based Economics Problems 302
Problems 302
Chapter 11: Markets for Factors of Production 306
11.1 The Competitive Labor Market 307
The Demand for Labor 308
11.2 The Supply of Labor: Your Labor- Leisure Trade-Off 310
Labor Market Equilibrium: Supply Meets Demand 312
Labor Demand Shifters 312
Choice & Consequence: Producing Web
Sites and Computer Programs 312
Letting the Data Speak: “Get Your Hot Dogs Here!” 313
Factors That Shift Labor Supply 314
Letting the Data Speak: Do Wages Really Go
Down If Labor Supply Increases? 315
11.3 Wage Inequality 316
Differences in Human Capital 316
Differences in Compensating Wage Differentials 317
Choice & Consequence: Paying for Worker Training 317
Discrimination in the Job Market 318
Changes in Wage Inequality over Time 319
Choice & Consequence: Compensating Wage Differentials 320
Letting the Data Speak: Broadband and Inequality 321
11.4 The Market for Other Factors of
Production: Physical Capital and Land 322
Letting the Data Speak: The Top 1 Percent Share and Capital Income 323
Evidence-Based Economics: Is there discrimination in the labor market? 325
Summary 326
Key Terms 327
Questions 327
Evidence-Based Economics Problems 327
Problems 328
Appendix: Monopsony in the Labor Market 330
PART III Market Structure 332
Chapter 12: Monopoly 332
12.1 Introducing a New Market Structure 333
12.2 Sources of Market Power 333
Legal Market Power 334
Natural Market Power 334
Control of Key Resources 335
Choice & Consequence: Barriers to Entry Lurk Everywhere 335
Economies of Scale 336
12.3 The Monopolist’s Problem 337
Revenue Curves 338
Price, Marginal Revenue, and Total Revenue 340
12.4 Choosing the Optimal Quantity and Price 341
Producing the Optimal Quantity 341
Setting the Optimal Price 342
How a Monopolist Calculates Profits 343
Does a Monopoly Have a Supply Curve? 344
12.5 The “Broken” Invisible Hand: The Cost of Monopoly 344
12.6 Restoring Efficiency 346
Three Degrees of Price Discrimination 347
Letting the Data Speak: Third-Degree
Price Discrimination in Action 349
12.7 Government Policy Toward Monopoly 349
The Microsoft Case 350
Price Regulation 351
Evidence-Based Economics: Can a monopoly ever be good for society? 351
Summary 354
Key Terms 354
Questions 354
Evidence-Based Economics Problems 355
Problems 355
Chapter 13: Game Theory and Strategic Play 358
13.1 Simultaneous-Move Games 359
Best Responses and the Prisoners’ Dilemma 360
Dominant Strategies and Dominant Strategy Equilibrium 361
Games Without Dominant Strategies 361
13.2 Nash Equilibrium 363
Finding a Nash Equilibrium 364
Choice & Consequence: Work or Surf? 365
13.3 Applications of Nash Equilibria 365
Tragedy of the Commons Revisited 366
Zero-Sum Games 366
13.4 How Do People Actually Play Such Games? 368
Game Theory in Penalty Kicks 368
Evidence-Based Economics: Is there value in putting
yourself in someone else’s shoes? 369
13.5 Extensive-Form Games 371
Backward Induction 372
First-Mover Advantage, Commitment, and Vengeance 373
Evidence-Based Economics: Is there value in
putting yourself in someone else’s shoes in extensive-form games? 374
Choice & Consequence: There Is More to Life Than Money 377
Summary 378
Key Terms 378
Questions 378
Evidence-Based Economics Problems 379
Problems 379
Chapter 14: Oligopoly and
Monopolistic Competition 382
14.1 Two More Market Structures 383
14.2 Oligopoly 384
The Oligopolist’s Problem 385
Oligopoly Model with Homogeneous Products 385
Doing the Best You Can: How Should You Price to Maximize Profits? 386
Oligopoly Model with Differentiated Products 387
Letting the Data Speak: Airline Price Wars 389
Collusion: Another Way to Keep Prices High 389
Letting the Data Speak: Apple Versus Samsung 390
Letting the Data Speak: To Cheat or Not to
Cheat: That Is the Question 392
Choice & Consequence: Collusion in Practice 394
14.3 Monopolistic Competition 394
The Monopolistic Competitor’s Problem 394
Doing the Best You Can: How a Monopolistic Competitor Maximizes Profits 395
Letting the Data Speak: Why Do Some Firms
Advertise and Some Don’t? 396
How a Monopolistic Competitor Calculates Profits 396
Long-Run Equilibrium in a Monopolistically Competitive Industry 397
14.4 The “Broken” Invisible Hand 399
Regulating Market Power 400
14.5 Summing Up: Four Market Structures 401
Letting the Podcast Speak: A Surprising
Duopoly: Democrats and Republicans 402
Evidence-Based Economics: How many firms
are necessary to make a market competitive? 403
Summary 405
Key Terms 405
Questions 405
Evidence-Based Economics Problems 406
Problems 406
PART IV Extending the M icroeconomic Toolbox 410
Chapter 15: Trade-offs Involving Time and Risk 410
15.1 Modeling Time and Risk 411
15.2 The Time Value of Money 412
Future Value and the Compounding of Interest 412
Borrowing Versus Lending 414
Present Value and Discounting 415
15.3 Time Preferences 417
Time Discounting 417
Preference Reversals 418
Choice & Consequence: Failing to Anticipate Preference Reversals 419
Evidence-Based Economics: Do people
exhibit a preference for immediate gratification? 419
15.4 Probability and Risk 420
Roulette Wheels and Probabilities 420
Independence and the Gambler’s Fallacy 421
Letting the Data Speak: Roulette Wheels and Elections 421
Expected Value 422
Extended Warranties 423
Choice & Consequence: Is Gambling Worthwhile? 423
15.5 Risk Preferences 424
Summary 425
Key Terms 426
Questions 426
Evidence-Based Economics Problem 426
Problems 426
Chapter 16: The Economics of Information 428
16.1 Asymmetric Information 429
Hidden Characteristics: Adverse Selection in the Used Car Market 430
Hidden Characteristics: Adverse Selection in the Health Insurance Market 431
Market Solutions to Adverse Selection: Signaling 432
Choice & Consequence: Are You Earning a Signal Right Now? 433
Evidence-Based Economics: Why do new
cars lose considerable value the minute they are driven off the lot? 433
Choice & Consequence: A Tale of a Tail 435
16.2 Hidden Actions: Markets with Moral Hazard 435
Letting the Data Speak: Moral Hazard on Your Bike 436
Market Solutions to Moral Hazard in the Labor
Market: Efficiency Wages 436
Letting the Podcast Speak: Tackling
Adverse Selection and Moral Hazard in the Workplace 437
Market Solutions to Moral Hazard in the Insurance
Market: “Putting Your Skin in the Game” 438
Letting the Data Speak: Designing
Incentives for Teachers 438
Evidence-Based Economics: Why is private
health insurance so expensive? 439
16.3 Government Policy in a World of
Asymmetric Information 440
Government Intervention and Moral Hazard 441
The Equity-Efficiency Trade-off 442
Crime and Punishment as a Principal–Agent Problem 442
Letting the Data Speak: Moral Hazard Among Job Seekers 442
Summary 443
Key Terms 443
Questions 443
Evidence-Based Economics Problems 444
Problems 444
Chapter 17: Auctions and Bargaining 446
17.1 Auctions 448
Types of Auctions 449
Open Outcry: English Auctions 450
Letting the Data Speak: To Snipe or Not to Snipe? 451
Open Outcry: Dutch Auctions 451
Sealed Bid: First-Price Auctions 453
Sealed Bid: Second-Price Auctions 453
The Revenue Equivalence Theorem 455
Evidence-Based Economics: How should
you bid in an eBay auction? 456
17.2 Bargaining 457
What Determines Bargaining Outcomes? 457
Bargaining in Action: The Ultimatum Game 458
Bargaining and the Coase Theorem 460
Evidence-Based Economics: Who determines
how the household spends its money? 461
Letting the Data Speak: Sex Ratios Change Bargaining Power Too 463
Summary 463
Key Terms 463
Questions 464
Evidence-Based Economics Problems 464
Problems 465
Chapter 18: Social Economics 468
18.1 The Economics of Charity and Fairness 469
The Economics of Charity 469
Letting the Data Speak: Do People Donate
Less When It’s Costlier to Give? 471
Letting the Data Speak: Why Do People Give to Charity? 472
The Economics of Fairness 473
Letting the Data Speak: Dictators in the Lab 476
Evidence-Based Economics: Do people care about fairness? 476
18.2 The Economics of Trust and Revenge 478
The Economics of Trust 478
The Economics of Revenge 480
Choice & Consequence: Does Revenge Have an Evolutionary Logic? 481
Letting the Podcast Speak: Sorry! I Should Apologize, but How? 482
18.3 How Others Influence Our Decisions 482
Where Do Our Preferences Come From? 482
The Economics of Peer Effects 483
Letting the Data Speak: Is Economics Bad for You? 483
Following the Crowd: Herding 484
Letting the Data Speak: Your Peers Affect Your Waistline 485
Choice & Consequence: Are You an Internet Explorer? 486
Summary 487
Key Terms 487
Questions 487
Evidence-Based Economics Problems 488
Problems 488
PART V Introduction to Macroeconomics 490
Chapter 19: The Wealth of Nations: Defining and Measuring
Macroeconomic Aggregates 490
19.1 Macroeconomic Questions 491
19.2 National Income Accounts:
Production = Expenditure = Income 493 Production 493
Expenditure 494
Income 494
Circular Flows 495
National Income Accounts: Production 496
National Income Accounts: Expenditure 498
Evidence-Based Economics: In the
United States, what is the total market value
of annual economic production? 500
Letting the Data Speak: Saving versus Investment 502
National Income Accounting: Income 503
19.3 What Isn’t Measured by GDP? 503
Physical Capital Depreciation 504
Home Production 504
The Underground Economy 505
Externalities 506
Gross Domestic Product versus Gross National Product 506
The Increase in Income Inequality 507
Leisure 507
Does GDP Buy Happiness? 508
19.4 Real versus Nominal 509
The GDP Deflator 511
The Consumer Price Index 513
Inflation 514
Adjusting Nominal Variables 514
Summary 515
Key Terms 515
Questions 516
Evidence-Based Economics Problems 516
Problems 517
Chapter 20: Aggregate Incomes 520
20.1 Inequality Around the World 521
Measuring Differences in GDP per Capita 521
Letting the Data Speak: The Big Mac Index 523
Cross-Country Differences in GDP per capita 523
GDP per Worker 524
Productivity 525
Incomes and the Standard of Living 526
Choice & Consequence: Dangers of Just
Focusing on GDP per Capita 527
20.2 Productivity and the Aggregate
Production Function 528
Productivity Differences 529
The Aggregate Production Function 529
Labor 530
Physical Capital and Land 530
Technology 530
Representing the Aggregate Production Function 530
20.3 The Role and Determinants of Technology 532
Technology 532
Dimensions of Technology 533
Letting the Data Speak: Moore’s Law 534
Choice & Consequence: Academic Misallocation in Nazi Germany 535
Letting the Data Speak: Efficiency of Production and Productivity at the Company Level 535
Entrepreneurship 536
Letting the Data Speak: Monopoly and GDP 536
Evidence-Based Economics: Why is the
average American so much richer than the average Indian? 537
Summary 539
Key Terms 539
Questions 539
Evidence-Based Economics Problems 540
Problems 540
Appendix: The Mathematics of Aggregate Production Functions 543
PART VI L ong-Run Growth and Development 546
Chapter 21: Economic Growth 546
21.1 The Power of Economic Growth 547
A First Look at U.S. Growth 547
Exponential Growth 549
Choice & Consequence: The Power of Exponential Growth 550
Patterns of Growth 551
Letting the Data Speak: Levels versus Growth 554
21.2 How Does a Nation’s Economy Grow? 556
Optimization: The Choice Between Saving and Consumption 556
What Brings Sustained Growth? 557
Choice & Consequence: Is Increasing the
Saving Rate Always a Good Idea? 558
Knowledge, Technological Change, and Growth 558
Letting the Data Speak: Technology and Life Expectancy 560
21.3 The History of Growth and Technology 560
Growth Before Modern Times 560
Letting the Data Speak: The Great Productivity Puzzle 561
Evidence-Based Economics: Why are you so
much more prosperous than your great-great grandparents were? 562
Malthusian Limits to Growth 565
The Industrial Revolution 565
Growth and Technology Since the Industrial Revolution 566
21.4 Growth, Inequality, and Poverty 566
Growth and Inequality 566
Growth and Poverty 566
Letting the Data Speak: Income Inequality in the United States 567
Choice & Consequence: Inequality versus Poverty 568
How Can We Reduce Poverty? 569
Summary 570
Key Terms 570
Questions 570
Evidence-Based Economics Problems 571
Problems 571
Appendix: The Solow Growth Model 573
The Three Building Blocks of the
Solow Model 573
Steady-State Equilibrium in the Solow Model 574
Determinants of GDP 575
Dynamic Equilibrium in the Solow Model 577
Sources of Growth in the Solow Model 578
Calculating Average (Compound)
Growth Rates 579
Appendix Key Terms 581
Appendix Problems 581
Chapter 22: Why Isn’t the Whole
World Developed? 582
22.1 Proximate Versus Fundamental Causes of Prosperity 583
Geography 584
Culture 585
Institutions 585
A Natural Experiment of History 586
22.2 Institutions and Economic Development 588
Inclusive and Extractive Economic Institutions 589
How Economic Institutions Affect Economic Outcomes 589
Letting the Data Speak: Democracy and Growth 590
Letting the Data Speak: Divergence and
Convergence in Eastern Europe 592
The Logic of Extractive Economic Institutions 595
Inclusive Economic Institutions and the Industrial Revolution 595
Letting the Data Speak: Blocking the Railways 596
Evidence-Based Economics: Are tropical
and semitropical areas condemned to poverty by their geographies? 597
22.3 Is Foreign Aid the Solution to World Poverty? 602
Choice & Consequence: Foreign Aid and Corruption 603
Summary 604
Key Terms 604
Questions 604
Evidence-Based Economics Problems 605
Problems 605
PART VII Equilibrium in the Macroeconomy 608
Chapter 23: Employment and Unemployment 608
23.1 Measuring Employment and Unemployment 609
Classifying Potential Workers 609
Calculating the Unemployment Rate 610
Trends in the Unemployment Rate 611
23.2 Equilibrium in the Labor Market 612
The Demand for Labor 612
Shifts in the Labor Demand Curve 614
The Supply of Labor 615
Shifts in the Labor Supply Curve 616
Letting the Data Speak: Who Is Unemployed? 617
Letting the Data Speak: Racial Disparities
in Unemployment and the Existence of Racial Discrimination 617
Equilibrium in a Competitive Labor Market 618
23.3 Why Is There Unemployment? 619
Voluntary Unemployment 619
Job Search and Frictional Unemployment 620
23.4 Wage Rigidity and Structural Unemployment 620
Minimum Wage Laws 621
Choice & Consequence: Luddites and Robots 622
Labor Unions and Collective Bargaining 623
Efficiency Wages 623
Choice & Consequence: Minimum Wage Laws and Employment 624
Downward Wage Rigidity 625
23.5 Cyclical Unemployment and the
Natural Rate of Unemployment 627
Evidence-Based Economics: How did unemployment and wages respond to the
COVID-19 pandemic in the United States? 628
Summary 630
Key Terms 631
Questions 631
Evidence-Based Economics Problems 631
Problems 632
Chapter 24: Credit Markets 636
24.1 What Is the Credit Market? 637
Borrowers and the Demand for Loans 637
Real and Nominal Interest Rates 638
The Credit Demand Curve 639
Saving Decisions 641
The Credit Supply Curve 641
Choice & Consequence: Why Do People Save? 643
Equilibrium in the Credit Market 644
Credit Markets and the Efficient Allocation of Resources 644
24.2 Banks and Financial Intermediation:
Putting Supply and Demand Together 645
Letting the Data Speak: Financing Start-ups 647
Assets and Liabilities on the Balance Sheet of a Bank 647
24.3 What Banks Do 649
Identifying Profitable Lending Opportunities 649
Maturity Transformation 650
Management of Risk 650
Bank Runs 652
Bank Regulation and Bank Solvency 652
Evidence-based Economics: How often do banks fail? 653
Choice & Consequence: Too Big to Fail 655
Choice & Consequence: Asset Price
Fluctuations and Bank Failures 656
Summary 657
Key Terms 657
Questions 658
Evidence-Based Economics Problems 658
Problems 659
Chapter 25: The Monetary System 662
25.1 Money 663
The Functions of Money 663
Types of Money 664
The Money Supply 664
Choice & Consequence: Non-Convertible
Currencies in U.S. History 665
25.2 Money, Prices, and GDP 666
Nominal GDP, Real GDP, and Inflation 666
The Quantity Theory of Money 666
25.3 Inflation 667
What Causes Inflation? 667
The Consequences of Inflation 668
The Social Costs of Inflation 669
The Social Benefits of Inflation 670
Evidence-Based Economics: What caused
the German hyperinflation of 1922–1923? 671
25.4 The Federal Reserve 672
The Central Bank and the Objectives of Monetary Policy 672
What Does the Central Bank Do? 673
25.5 Bank Reserves and the Plumbing of the Monetary System 674
Bank Reserves and Liquidity 675
The Demand Side of the Federal Funds Market 676
The Supply Side of the Federal Funds Market
and Equilibrium in the Federal Funds Market 677
Two Ways That the Fed Controls the Federal Funds Rate 678
Choice & Consequence: Obtaining Reserves Outside the Federal
Funds Market 681
The Fed’s Influence on the Money Supply and the Inflation Rate 681
The Relationship Between the Federal Funds
Rate and the Long-Term Real Interest Rate 682
Letting the Data Speak: Two Models of Inflation Expectations 683
Summary 686
Key Terms 687
Questions 687
Evidence-Based Economics Problems 688
Problems 688
PART VIII Short-Run Fluctuations and Macroeconomic Policy 690
Chapter 26: Short-Run Fluctuations 690
26.1 Economic Fluctuations and Business Cycles 691
Patterns of Economic Fluctuations 693
The Great Depression 695
26.2 Macroeconomic Equilibrium and Economic Fluctuations 697
Labor Demand and Fluctuations 697
Sources of Fluctuations 699
Letting the Data Speak: Unemployment
and the Growth Rate of Real GDP: Okun’s Law 700
Multipliers and Economic Fluctuations 704
Equilibrium in the Medium Run: Partial Recovery and Full Recovery 705
26.3 Modeling Expansions 709
Evidence-Based Economics: What caused the recession of 2007–2009? 710
Evidence-Based Economics: What caused the recession of 2020? 714
Summary 717
Key Terms 718
Questions 719
Evidence-Based Economics Problems 719
Problems 719
Chapter 27: Countercyclical Macroeconomic Policy 722
27.1 The Role of Countercyclical Policies in Economic Fluctuations 723
27.2 Countercyclical Monetary Policy 724
Controlling the Federal Funds Rate 725
Other Tools of the Fed 728
Expectations, Inflation, and Monetary Policy 729
Zero Lower Bound 729
Letting the Data Speak: Managing Expectations in Monetary Policy 730
Contractionary Monetary Policy: Reducing Inflation 732
Policy Trade-Offs 734
Choice & Consequence: Policy 734
Analysis of Expenditure-Based Fiscal Policy 738
Analysis of Taxation-Based Fiscal Policy 740
Letting the Data Speak: The Response of Consumption to Tax Cuts 742
Fiscal Policies That Directly Target the Labor Market 742
Policy Waste and Policy Lags 742
Letting the Data Speak: Hybrid Policies
That Involve Cooperation Between Fiscal
and Monetary Policymakers 743
Evidence-Based Economics: How much does government expenditure stimulate GDP? 745
Summary 746
Key Terms 747
Questions 747
Evidence-Based Economics Problems 747
Problems 748
PART IX M acroeconomics in a Global Economy 750
Chapter 28: Macroeconomics and International Trade 750
28.1 Why and How We Trade 751
Absolute Advantage and Comparative Advantage 751
Comparative Advantage and International Trade 754
Efficiency and Winners and Losers from Trade 755
How We Trade 757
Letting the Data Speak: Living in an Interconnected World 758
Choice & Consequence: Trade Policy and Politics 759
Trade Barriers: Tariffs 759
28.2 The Current Account and the Financial Account 760
Trade Surpluses and Trade Deficits 760
International Financial Flows 760
The Workings of the Current Account and
the Financial Account 762
28.3 International Trade, Technology
Transfer, and Economic Growth 765
Letting the Data Speak: From IBM to Lenovo 767
Evidence-Based Economics: Are
companies like Nike harming workers in Vietnam? 767
Summary 770
Key Terms 771
Questions 771
Evidence-Based Economics Problems 771
Problems 772
Chapter 29: Open Economy
Macroeconomics 774
29.1 Exchange Rates 775
Nominal Exchange Rates 775
Flexible, Managed, and Fixed Exchange Rates 776
29.2 The Foreign Exchange Market 778
How Do Governments Intervene in the Foreign Exchange Market? 780
Defending an Overvalued Exchange Rate 781
Choice & Consequence: Fixed Exchange Rates and Corruption 783
Evidence-Based Economics: How did George Soros make $1 billion? 784
29.3 The Real Exchange Rate and Exports 785
From the Nominal to the Real Exchange Rate 786
Co-Movement Between the Nominal and the Real Exchange Rates 787
The Real Exchange Rate and Net Exports 788
Letting the Data Speak: Why Did the
Chinese Authorities Keep the Yuan Undervalued? 789
29.4 GDP in the Open Economy 790
Revisiting Black Wednesday 790
Interest Rates, Exchange Rates, and Net Exports 791
Letting the Data Speak: The Costs of Fixed Exchange Rates 793
Summary 794
Key Terms 794
Questions 794
Evidence-Based Economics Problems 795
Problems 795
Endnotes 799
Glossary 807
Credits 820
Index 823