## Macroeconomics, Eighth Edition

By Olivier Blanchard

**Contents:**

Preface 13

About the Author 18

THE CORE

Introduction 19

Chapter 1 A Tour of the World 21

1-1 The Crisis 22

1-2 The Euro Area 24

Can European Unemployment Be Reduced? 26 • What Has the Euro Done for Its Members? 27

1-3 The United States 28

Do Policymakers Have the Tools to Handle the Next Recession? 30

How Worrisome Is Low Productivity Growth? 31

1-4 China 32

1-5 Looking Ahead 34

Appendix 1: Where to Find the Numbers 37

Appendix 2: What Do Macroeconomists Do? 37

Chapter 2 A Tour of the Book 39

2-1 Aggregate Output 40

GDP: Production and Income 40 Nominal and Real GDP 42 • GDP: Level versus Growth Rate 44

2-2 The Unemployment Rate 45

Why Do Economists Care about Unemployment? 46

2-3 The Inflation Rate 47 The GDP Deflator 47 • The Consumer Price Index 49 • Why Do Economists

Care about Inflation? 50

2-4 Output, Unemployment, and the

Inflation Rate: Okun’s Law and the

Phillips Curve 51

Okun’s Law 51 • The Phillips Curve 52

2-5 The Short Run, the Medium Run,

and the Long Run 53

2-6 A Tour of the Book 54

The Core 55 • Extensions 55

Back to Policy 55 • Epilogue 56

Appendix: The Construction of Real GDP

and Chain-Type Indexes 60

The Short Run 63

Chapter 3 The Goods Market 65

3-1 The Composition of GDP 66

3-2 The Demand for Goods 67

Consumption (C) 68

Investment (I) 70

Government Spending (G) 70

3-3 The Determination of Equilibrium Output 71

Using Algebra 72 • Using a

Graph 73 • Using Words 75 • How

Long Does It Take for Output to Adjust? 76

3-4 Investment Equals Saving: An

Alternative Way of Thinking about

Goods-Market Equilibrium 78

3-5 Is the Government Omnipotent? A Warning 80

Chapter 4 Financial Markets I 87

4-1 The Demand for Money 88

Deriving the Demand for Money 89

4-2 Determining the Interest Rate: I 91

Money Demand, Money Supply, and the Equilibrium Interest Rate 91 • Monetary Policy and Open Market Operations

93 Choosing Money or Choosing the Interest Rate? 95

4-3 Determining the Interest Rate: II 96

What Banks Do 96 • The Demand for and Supply of Central Bank Money 98 • The Demand for Central

Bank Money 98 • The Federal Funds Market and the Federal Funds Rate 99

4-4 The Liquidity Trap 101

Chapter 5 Goods and Financial Markets: The IS-LM Model 107

5-1 The Goods Market and the IS Relation 108

Investment, Sales, and the

Interest Rate 108 • Determining

Output 109 • Deriving the IS

Curve 111 • Shifts of the IS

Curve 111

5-2 Financial Markets and the LM Relation 112

Real Money, Real Income, and the Interest Rate 112 • Deriving the LM Curve 113

5-3 Putting the IS and LM Relations Together 114

Fiscal Policy 114 • Monetary Policy 116

5-4 Using a Policy Mix 116

5-5 How Does the IS-LM Model Fit the Facts? 120

Chapter 6 Financial Markets II: The Extended IS-LM Model 127

6-1 Nominal versus Real Interest Rates 128

Nominal and Real Interest Rates in the United States since 1978 130 • Nominal and Real Interest

Rates: The Zero Lower Bound and Deflation 131

6-2 Risk and Risk Premia 132

6-3 The Role of Financial Intermediaries 133

The Choice of Leverage 134 • Leverage and Lending 135

6-4 Extending the IS-LM Model 137

Financial Shocks and Policies 139

6-5 From a Housing Problem to a Financial Crisis 140

Housing Prices and Subprime Mortgages 140 • The Role of Financial

Intermediaries 141 • Macroeconomic

Implications 143 • Policy Responses 143 The Medium Run 151

Chapter 7 The Labor Market 153

7-1 A Tour of the Labor Market 154

The Large Flows of Workers 154

7-2 Movements in Unemployment 157

7-3 Wage Determination 159

Bargaining 160 • Efficiency

Wages 160 • Wages, Prices, and

Unemployment 162 • The Expected

Price Level 162 • The Unemployment

Rate 163 • The Other Factors 163

7-4 Price Determination 163

7-5 The Natural Rate of Unemployment 164

The Wage-Setting Relation 164 • The

Price-Setting Relation 165 • Equilibrium

Real Wages and Unemployment 166

7-6 Where We Go from Here 167

Appendix: Wage- and Price-Setting

Relations versus Labor Supply and Labor Demand 172

Chapter 8 The Phillips Curve, the Natural Rate of Unemployment, and Inflation 173

8-1 Inflation, Expected Inflation, and Unemployment 174

8-2 The Phillips Curve and Its Mutations 176

The Original Phillips Curve 176 • The

De-anchoring of Expectations 176 • The

Re-anchoring of Expectations 179

8-3 The Phillips Curve and the Natural Rate of Unemployment 180

8-4 A Summary and Many Warnings 182

Variations in the Natural Rate over Time 183 • Variations in the Natural Unemployment Rate across Countries 183 •

High Inflation and the Phillips Curve 184 • Deflation and the Phillips Curve 187

Appendix: Derivation of the Relation Between Inflation, Expected Inflation, and Unemployment 193

Chapter 9 From the Short to the Medium Run: The IS-LM-PC Model 195

9-1 The IS-LM-PC Model 196

9-2 From the Short to the Medium Run 199

9-3 Complications and How Things Can Go Wrong 201

The Zero Lower Bound and Deflation Spirals 202

9-4 Fiscal Consolidation Revisited 203

9-5 The Effects of an Increase in the Price of Oil 207

Effects on the Natural Rate of Unemployment 208

9-6 Conclusions 210

The Short Run versus the Medium Run 212 • Shocks and Propagation Mechanisms 212

The Long Run 217

Chapter 10 The Facts of Growth 219

10-1 Measuring the Standard of Living 220

10-2 Growth in Rich Countries since 1950 223

The Large Increase in the Standard

of Living since 1950 225 • The

Convergence of Output per Person 226

10-3 A Broader Look across Time and Space 227

Looking across Two Millennia 227

Looking across Countries 227

10-4 Thinking about Growth: A Primer 230

The Aggregate Production

Function 230 • Returns to Scale and

Returns to Factors 231 • Output per

Worker and Capital per Worker 231

The Sources of Growth 232

Chapter 11 Saving, Capital Accumulation, and Output 237

11-1 Interactions between Output and Capital 238

The Effects of Capital on Output 238

The Effects of Output on Capital

Accumulation 239 • Output

and Investment 239 • Investment and

Capital Accumulation 240

11-2 The Implications of Alternative Saving Rates 241

Dynamics of Capital and Output 241

The Saving Rate and Output 243

The Saving Rate and Consumption 246

11-3 Getting a Sense of Magnitudes 248

The Effects of the Saving Rate on Steady-

State Output 250 • The Dynamic

Effects of an Increase in the Saving

Rate 251 • The US Saving Rate and the Golden Rule 253

11-4 Physical versus Human Capital 254

Extending the Production Function 254

Human Capital, Physical Capital, and

Output 255 • Endogenous Growth 256

Appendix: The Cobb-Douglas Production

Function and the Steady State 259

Chapter 12 Technological Progress and Growth 261

12-1 Technological Progress and the Rate of Growth 262

Technological Progress and the Production Function 262 • Interactions

between Output and Capital 264 Dynamics of Capital and

Output 266 • Back to the Effects of the Saving Rate 267

12-2 The Determinants of Technological Progress 268

The Fertility of the Research Process 269

The Appropriability of Research Results 270 • Innovation versus Imitation 272

12-3 Institutions, Technological Progress, and Growth 273

Appendix: How to Measure Technological

Progress, and the Application to China 280

Chapter 13 The Challenges of Growth 283

13-1 The Future of Technological Progress 284

13-2 Robots and Unemployment 285

13-3 Growth, Churn, and Inequality 287

The Increase in Wage Inequality 289

The Causes of Increased Wage Inequality 290 • Inequality and the Top 1% 291 • Growth and Inequality 292

13-4 Climate Change and Global Warming 295

EXTENSIONS

Expectations 303

Chapter 14 Financial Markets and Expectations 305

14-1 Expected Present Discounted Values 306

Computing Expected Present

Discounted Values 306 • A General

Formula 307 • Using Present Values:

Examples 308 • Constant Interest

Rates 308 • Constant Interest Rates

and Payments 308 • Constant Interest

Rates and Payments Forever 309 • Zero

Interest Rates 309 • Nominal versus Real

Interest Rates and Present Values 309

14-2 Bond Prices and Bond Yields 310

Bond Prices as Present Values 312

Arbitrage and Bond Prices 313 • From

Bond Prices to Bond Yields 314

Reintroducing Risk 315 • Interpreting the Yield Curve 316

14-3 The Stock Market and Movements in Stock Prices 317

Stock Prices as Present Values 318 • The

Stock Market and Economic Activity 320

A Monetary Expansion and the Stock

Market 321 • An Increase in Consumer

Spending and the Stock Market 322

14-4 Risk, Bubbles, Fads, and Asset Prices 323

Stock Prices and Risk 324 • Asset

Prices, Fundamentals, and Bubbles 324

Appendix: Deriving the Expected Present

Discounted Value Using Real or Nominal

Interest Rates 330

Chapter 15 Expectations, Consumption, and Investment 331

15-1 Consumption 332

The Very Foresighted Consumer 332

An Example 333 • Toward a More

Realistic Description 334 • Putting

Things Together: Current Income,

Expectations, and Consumption 337

15-2 Investment 338 Investment and Expectations

of Profit 339 • Depreciation 339

The Present Value of Expected

Profits 339 • The Investment Decision 340 A Convenient Special

Case 342 • Current versus Expected

Profit 342 • Profit and Sales 344

15-3 The Volatility of Consumption and Investment 346

Appendix: Derivation of the Expected Present Value of Profits under Static Expectations 351

Chapter 16 Expectations, Output, and Policy 353

16-1 Expectations and Decisions: Taking Stock 354

Expectations, Consumption, and Investment Decisions 354 • Expectations and the IS Relation 354

16-2 Monetary Policy, Expectations, and Output 357

Monetary Policy Revisited 357

16-3 Deficit Reduction, Expectations, and Output 360

The Role of Expectations about the Future 361 • Back to the Current Period 361

The Open Economy 371

Chapter 17 Openness in Goods and Financial Markets 373

17-1 Openness in Goods Markets 374

Exports and Imports 374 • The Choice

between Domestic Goods and Foreign

Goods 376 • Nominal Exchange

Rates 376 • From Nominal to Real

Exchange Rates 377 • From Bilateral to

Multilateral Exchange Rates 381

17-2 Openness in Financial Markets 382 The Balance of Payments 383 • The

Choice between Domestic and Foreign Assets 385 • Interest Rates and Exchange Rates 387

17-3 Conclusions and a Look Ahead 389

Chapter 18 The Goods Market in an Open Economy 393

18-1 The IS Relation in the Open Economy 394

The Demand for Domestic Goods 394 • The Determinants of C, I, and G 394 • The Determinants of

Imports 395 • The Determinants of Exports 395 • Putting the Components Together 395

18-2 Equilibrium Output and the Trade Balance 397

18-3 Increases in Demand—Domestic or Foreign 398

Increases in Domestic Demand 398

Increases in Foreign Demand 400

Fiscal Policy Revisited 401

18-4 Depreciation, the Trade Balance, and Output 403

Depreciation and the Trade Balance: the Marshall-Lerner Condition 404 • The

Effects of a Real Depreciation 404 Combining Exchange Rate and Fiscal Policies 405

18-5 Saving, Investment, and the Current Account Balance 408

Appendix: Derivation of the Marshall-Lerner Condition 413

Chapter 19 Output, the Interest Rate, and the Exchange Rate 415

19-1 Equilibrium in the Goods Market 416

19-2 Equilibrium in Financial Markets 417

Domestic Bonds versus Foreign Bonds 417

19-3 Putting Goods and Financial Markets Together 420

19-4 The Effects of Policy in an Open Economy 422

The Effects of Monetary Policy in an Open

Economy 422 • The Effects of Fiscal

Policy in an Open Economy 423

19-5 Fixed Exchange Rates 427

Pegs, Crawling Pegs, Bands, the

EMS, and the Euro 427 • Monetary

Policy When the Exchange Rate Is

Fixed 428 • Fiscal Policy When the

Exchange Rate Is Fixed 429

Appendix: Fixed Exchange Rates, Interest Rates, and Capital Mobility 434

Chapter 20 Exchange Rate Regimes 437

20-1 The Medium Run 438

The IS Relation under Fixed

Exchange Rates 439 • Equilibrium

in the Short and the Medium

Run 439 • The Case for and against a Devaluation 440

20-2 Exchange Rate Crises under Fixed Exchange Rates 442

20-3 Exchange Rate Movements under Flexible Exchange Rates 445

Exchange Rates and the Current

Account 446 • Exchange Rates

and Current and Future Interest

Rates 447 • **Exchange Rate** Volatility 447

20-4 Choosing between Exchange Rate Regimes 448

Common Currency Areas 449 • Hard Pegs, Currency Boards, and Dollarization 451

Appendix 1: Deriving the IS Relation under Fixed Exchange Rates 457

Appendix 2: The Real Exchange Rate and Domestic and Foreign Real Interest Rates 457

Back to Policy 459

Chapter 21 Should Policymakers Be Restrained? 461

21-1 Uncertainty and Policy 462

How Much Do Macroeconomists

Actually Know? 462 • Should

Uncertainty Lead Policymakers to

Do Less? 464 • Uncertainty and

Restraints on Policymakers 464

21-2 Expectations and Policy 465

Hostage Takings and Negotiations

466 • Inflation and Unemployment

Revisited 466 • Establishing

Credibility 467 • Time Consistency and

Restraints on Policymakers 469

21-3 Politics and Policy 469 Games between Policymakers and

Voters 470 • Games between Policymakers

471 • Politics and Fiscal Restraints 472

Chapter 22 Fiscal Policy: A Summing Up 479

22-1 What We Have Learned 480

22-2 The Government Budget

Constraint: Deficits, Debt,

Spending, and Taxes 481

The Arithmetic of Deficits and

Debt 481 • Current versus Future

Taxes 483 • Full Repayment in

Year 2 483 • Full Repayment in

Year t 484 • Debt Stabilization

in Year 2 485 • The Evolution of the

Debt-to-GDP Ratio 486

22-3 Ricardian Equivalence, Cyclical Adjusted Deficits, and War Finance 488

Ricardian Equivalence 488 • Deficits,

Output Stabilization, and the Cyclically

Adjusted Deficit 489 • Wars and Deficits 490

22-4 The Dangers of High Debt 492 High Debt, Default Risk, and Vicious Cycles 492

Debt Default 494 • Money Finance 494

22-5 The Challenges Facing US Fiscal Policy Today 497

Chapter 23 Monetary Policy: A Summing Up 503

23-1 What We Have Learned 504

23-2 From Money Targeting to Inflation Targeting 505

Money Targeting 505 • Inflation Targeting

507 • The Interest Rate Rule 508

23-3 The Optimal Inflation Rate 509

The Costs of Inflation 509 • The

Benefits of Inflation 512 • The

Optimal Inflation Rate: The State of the Debate 513

23-4 Unconventional Monetary Policy 514

Monetary Policy since the End of the Liquidity Trap 515

23-5 Monetary Policy and Financial Stability 516

Liquidity Provision and Lender of Last Resort 517 • Macroprudential Tools 517

Chapter 24 Epilogue: The Story of Macroeconomics 525

24-1 Keynes and the Great Depression 526

24-2 The Neoclassical Synthesis 526

Progress on All Fronts 527 • Keynesians versus Monetarists 528

24-3 The Rational Expectations Critique 529

The Three Implications of Rational

Expectations 530 • The Integration of

Rational Expectations 531

24-4 Developments in Macroeconomics up to the 2009 Crisis 532

New Classical Economics and Real

Business Cycle Theory 533 • New

Keynesian Economics 533 • New

Growth Theory 534 • Toward an Integration 535

24-5 First Lessons for Macroeconomics after the Crisis 536

Appendix 1 An Introduction to the National Income and Product

Accounts A-1

Appendix 2 A Math Refresher A-7

Appendix 3 An Introduction to

Econometrics A-12

Glossary G-1

Index I-1

Credits C-1

Symbols Used in This Book S-1