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McCONNELL
BRUE
FLYNN
McCONNELL
BRUE
FLYN'l
McCONNELL
BRUE
FLYNN
Go to www.mcconneIl18e.com for sample chapters, the text preface, and more information.
For instructors teaching a one-semester Micro-Macro survey course, we
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MACROECONOMICS: BRIEF EDITION
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Library of Congress Cataloging-in-Publication Data
McConnell, Campbell R.
Macroeconomics: brief edition I Campbell R. McConnell, Stanley L. Brue, Sean M.
Flynn. - 1st ed.
p. cm. - (The McGraw-Hill series economics)
Includes index.
ISB -13: 978-0-07-72 3097- 5 (alk. paper)
ISBN-I0: 0-07-723097-3 (alk. paper)
1. Macroeconomics. I. Brue, Stanley L., 1945- II. Flynn, Sean Masaki. III. Title.
HBI72.5.M37422010
339-dc22
2009000129
www.mhhe.com
Dedication
To Mem, to Terri and Craig, and
to past instructors
About the Authors
Campbell R. McConnell
earned his Ph.D. from the
University of Iowa after
receiving degrees from
Cornell College and the
University of Illinois. He
taught at the University of
ebraska-Lincoln from 1953
until his retirement in 1990.
I He is coauthor of Economics,
eighteenth edition (McGraw-
Hill/Irwin); Contempormy Labor Economics, eighth
edition (McGraw-Hillllrwin); and Essentials of
Economics, second edition (McGraw-Hillllrwin) and
has edited readers for the principles and labor
econom.ics courses. He is a recipient of both the
Un.iversity of ebraska Distinguished Teaching
Award and the James A. Lake Academ.ic Freedom
Award and is past president of the Midwest Econom-
ics Association. Professor McCOlmell was awarded an
honorary Doctor of Laws degree from Cornell
College in 1973 and received its Distinguished
AchievementAward in 1994. His primary areas of
interest are labor economics and economic education.
He has an extensive collection of jazz recordings and
enjoys readiJ1g jazz history.
Stanley L. Brue did his
lli1dergraduate work at
Augustana College (S.D.) and
received its Distingu.ished
Achievement Award in 1991.
He received his Ph.D. from
the University of Nebraska-
Lincoln. He is a professor at
Pacific Lutheran University,
where he has been honored
as a recipient of the Burl.ington
Northern Faculty Achievement Award. Professor
Brne has also received the national Leavey Award for
excellence in economic education. He has served as
vii
viii
national president and chair of the Board of Trustees
of Omicron Delta Epsilon International Economics
Honorary. He is coauthor of Economics, eighteenth
edition (McGraw-HilllIrwin); Economic Scenes, fifth
edition (Prentice-Hall); Contemporary Labor Economics,
eighth edition (McGraw-HilllIrwin); Essentials of
Economics, second edition (McGraw-HilllIrwin); and
The Evolution ofEconomic Thougbt, seventh edition
(South-Western). For relaxation, he enjoys interna-
tional u'avel, attending sporting events, and skiing
with family and friends.
Sean M. Flynn did his
undergraduate work at the
University of Southern
California before completing
his Ph.D. at u.c. Berkeley,
where he served as the Head
Graduate Student InSU'uctor
for the Deparunent of
Economics after receiving the
Outstanding Graduate
Student InsU'uctor Award. He
teaches at Vassar College in Poughkeepsie, New York
and is also the author of Economics for Dummies
(Wiley) and co-author of Economics, eighteenth
edition (McGraw-HilllIrwin) and Essentials ofEconomics,
second edition (McGraw-HilllIrwin). His research
interests include finance and behavioral economics.
An accomplished martial artist, he has represented
the United States in international aikido tournaments
and is the author of Undentrmding Shodokan Aikido
(Shodokan Press). Other hobbies include running,
traveling, and enjoying ethnic food.
Welcome a NewText
and a New Author
Welcome to MacTOeconomics, Brief Edition, 1e, the new
trimmed and edited version of Economics, 18e, the nation's
best-selling economics textbook. In the tradition of the
market-leading text Economics: PToble771s, PTinciples, and
Policies, the cover for the BTief Edition includes a photo-
graph of steps. The photo is a metaphor for the step-by-
step approach that we use to present basic economic
principles. It also represents the simplicity, beauty, and
power of basic economic models. We have chosen a
highly modern photo to reflect the addition of our new
coauthor, Sean M. Flynn, who has helped modernize the
content of the book from cover to cover. Sean did his un-
dergraduate work at USC, received his Ph.D. from u.c.
Berkeley (in 2002), teaches principles at Vassar, and is the
author of Economics fOT Dummies. We are greatly pleased
to have Sean working on tlle text, since he shares our
commitment to present economics in a way that is under-
standable to all.
Fundamental Objectives
We have tllree main goals for Macroeconomics, Brief
Edition:
Help the beginning student master the principles essential
for understanding the economjzing problem, specific
economic issues, and the policy alternatives.
Help the student understand and apply the econornic
perspective and reason accurately and objectively about
economic matters.
Promote a lasting student interest in economics anc! the
economy.
Integrated, Distinct Book
Although MacToeconomics, B1'ief Edition is a spin-off of
MacToeconomics, 18e, it is not a cut-and-paste book that
simply eliminates several chapters of Macroeconomics, 18e
and reorders and renumbers the retained content. \Ve
can prepare such books via custom publjcatioll. Instead,
the BTiefEdition is a very concise, highly integrated mac-
roeconomics textbook that is distinct in purpose, style,
and coverage from Economics, 18e and its Micro and
Macro splits.
Distinguishing Features
Macroeconomics, BTief Edition includes several features that
encourage students to read and retain the content.
State-of-the-Art Design
and Pedagogy
The BTief Edition incorporates a single-column design
with a host of pedagogical aids, including a strategically
placed "To tlle Student" statement, chapter opening ob-
jectives, definitions in the margins, combined ta bles and
graphs, complete chapter summaries, lists of key terms,
carefully constructed study questions, connections to
our Web site, an appendix on graphs and a Web appen-
dix on additional examples of demand and supply, and an
extensive glossary.
Focus on Core Models
MacToecon07nics, BriefEdition shortens and simplifies expla-
nations where appropriate but stresses tlle importance of
tlle economic perspective, including explaining and apply-
ing core economic models. Our strategy is to develop a
limited set of essential models, illustrate them Witll analo-
gies or anecdotes, explain tllenl tllOroughly, and apply
them to real-world situations. Eliminating wll1ecessary
graphs and elaborations makes perfect sense in a brief edi-
tion, but cutting explanations of the truly fundamental
graphs does not. In dealing with tlle basics, brevity at tlle
expense of clarity is false economy.
vVe created a student-oriented textbook that draws on
the methodological su-engtlls of tlle discipline and helps
students improve their analytical reasoning skills.
Regardless of students' eventual occupations, they will dis-
cover tllat such skills are highly valuable in their
workplaces.
Illustrating the Idea
Numerous analogies, examples, and anecdotes are in-
cluded throughout the book to help drive home central
economic ideas in a lively, colorful, and easy-to-remem-
bel' way. For instance, a piece on Bill Gates, Oprah
Winfrey, and Alex Rodriquez illustrates the importance
of opportunity costs in decision-making. A.l"t in tlle pub-
lic square brings clarity to public goods and the free-
rider problem. A discussion of credit cards helps explain
what money is and is not. The practices of sixteenth cen-
tury goldsmiths demonstrate fractional reserve banking,
and a story about a CPA and a painter walks students
through the idea of comparative advantage. These brief
vignettes flow directly from tlle preceding content and
segue to tlle content that follows, rather than being
"boxed off" away from the flow and therefore easily
overlooked.
ix
x IPreface
G3.1
02.2
Supply and Demand
Specialization/division of labor
INTERACTIVE GRAPHS
Interactive Graphs These pieces (developed under
the supervision of orris Peterson) depict major graphs and
U1Struct students to shift the curves, observe the outcomes,
and derive relevant gen-
eralizations. This hands-
on graphworkwill greatly
reinforce the main graphs
and their meanulg.
Origin of the Ideas These brief histories, written
by Randy Grant of Linfield College (OR), examine tlle
origins of major ideas identified ill the book. Students will
find it interesting to learn about tlle economists who first
developed such ideas as
opportunity costs, equi-
librium price, elasticity,
creative destruction, and
comparative advantage.
Global Snapshots
Global Sl1apsbot pieces show bar charts and line graphs tllat
compare data for a particular year or other time period
among selected nations. Examples of tllese lists and com-
parisons include income per capita, the uldex of economic
freedom, the differing economic status of North Korea
and South Korea, annual growth rates of selected nations,
publicly held debt as percentages of GDP, comparative ex-
ports, and so forth. These Global Snapshots join other sig-
nificant international content to help convey that the
United States operates in a global economy.
Supplements for Students
Online Learning Center
At www.mccOlmeUbriefInacrole.com students have
access to several learning aids. Along with the Interactive
Graphs, Worked Problems, and Origin of tlle Idea pieces,
the student portion of the Web site includes Web-based
study questions, self-gradiJlg quizzes, and PowerPoult pre-
sentations. For math-minded srudents, there is a "See the
Math" section, written by Norris Peterson, where the math-
ematical details of tlle concepts in the text can be explored.
Applying the Analysis
A glance though this book's pages will demonstrate that
this is an application-oriented textbook. Applying tbe
Al1a6,sis pieces immediately follow the development of
economic analysis and are part of the flow of the chapters,
rather than segregated from the main body discussion in a
traditional boxed format. For example, the basics of the
economic perspective are applied to why customers choose
the shortest checkout liJles. McDonald's sandwich
"McI-Lts" and "McMisses" over the years apply the con-
cept of consumer sovereignty. The idea of inflation is rein-
forced with an application to historical episodes of
hyperinflation, the graphics of fiscal policy are followed by
a discussion ofrecent fiscal policy, and the Federal Reserve's
role in the economy is demonstrated through an applica-
tion of its responses to the mortgage debt crisis and the
slowdown of the economy. These and many other applica-
tions clearly demonstrate the relevance and usefulness of
mastering the basic economic principles and models to be-
ginning students.
Photo Ops
Photo sets wlder the title Pboto Op are included throughout
tlle book to add visual interest, break up tlle density, and
highlight important distinctions. Just a few of tlle many ex-
amples are sets of photos to illustrate tlle various types of
economic resources; photos of durable goods, nondurable
goods, and services to distinguish types of consumer spend-
Ulg; and photos of lumber aJld newly constructed homes to
drive home tlle difference between intermediate and final
goods. Other photo sets illustTate normal versus ulferior
goods, complements versus substitutes in consumption,
public versus private investment, aJld more.
Web Buttons
The in-text Web buttons (or indicators) merit special men-
tion. Three differing colors of rectang'ular indicators ap-
pear tllroughout tlle book, informing readers that
complementary content on a subject can be fowld at our
Web site, www.mcconneUbriefInacrole.com. Scattered
tllroughout the text you'll see:
W 1.1
Budget Lines
WORKED PROBLEMS
Worked Problems Written by Norris Peterson of
Pacific Lutlleran University, these pieces consist of side-
by-side computational questions and computational pro-
cedures used to derive
tlle answers. From a stu-
dent perspective, tlley
provide "cookbook" help
for problem solving.
Premium Content
The Premium Content, available at tlle Online Learning
Center, offers a range of dynamic study aids to tlle student.
Premium Content enables students to srudy and self-test
on ilieir computer or on tlle go.
One of the world's leading experts on economic
education-William liValstad of the University of 1 ebraska
CourseSmart
l ~ d r l l $'Ild'l (Jl{,{)")C Sit <.lft
I
at Lincoln-has prepared the Stll{0' Guide. Each chapter
contains an inu'oductory statement, a checklist of
behavioral objectives, an oudine, a list of important terms,
fill-in questions, problems and projects, objective
questions, and discussion questions. The text's glossary is
repeated in the Study Guide so dlat dIe student does not
have to go back and fordl between books. Many students
will find this "digital tutor" indispensable.
Jarrated PowerPoint presentations enable students to see
key concepts and hear the explanation simultaneously.
The Solman Videos, a set of more than 250 minutes of
video created by Paul Solman of The Ne7vs Hom' witb Jim
Lebrer; cover core economic concepts such as elasticity,
dereg11Iation, and perfect competition.
Chapter quizzes can be purchased and downloaded to an
iPod, mp3 player, or desktop computer.
McGraw-Hill Connect Economics
Connect Economics is a complete, online supplement sys-
tem that duplicates and expands upon the textbook's end-of
chapter material and test banks. Nearly all the questions
from the text, including the numer-
f:I comect" ous graphing exercises, are pre-
Ieconomics sented in an autogradable format
and tied to the text's learning objec-
tives. Insu-uctors may edit existing questions and author en-
tirely new problems. COlmect Economics can be used for
student practice, homework, quizzes, and formal examina-
tions. Detailed grade reports enable instructors to see how
each student performs on a particular problem, a full assign-
ment, and in the context of the overall class. The Connect
Economics grade reports can be easily integrated with
WebCT and Blackboard. Connect Economics is also avail-
able with an integrated online version of the textbook. With
a single access code, students can read the eBook, work
through practice problems, do homework, and take exams.
CourseSmart eTextbook For roughly half the
cost of a print book you can reduce your impact on the envi-
rOlmlent by buying McCOlmell, Brue, and Flytm's
A1acroeconomics, Brief Edition eText. CourseSmart eText-
books, available in a standard online reader, retain the exact
content and look of dIe print text, plus offer the advantage
of digital navigation, to which students are accustomed.
Students can search the text, highlight, take notes, and use
e-mail tools tosharenoteswith their classmates. CourseSmart
also includes tech support in case help is ever needed. To
buy Macroeconomics, Bt'iefEdition as 311 eText or learn more
about this digital solution,
visit www.CourseSmart.
com and search by title,
autll0r, or ISBN.
Preface Ixi
Supplements for Instructors
Instructor's Manual
Darlene De Vera of De Anza College has prepared tlle
Instructor's Manual. It includes chapter learning objec-
tives, outlines, and summaries; numerous teaching sugges-
tions; discussions of "student stumbling blocks;" listings of
data and visual aid sources witll suggestions for classroom
use; and answers to the end-of-chapter study questions.
Available in MS Word on tlle instructor's side of tlle vVeb
site and on tlle Instructor's Resource CD, the manual en-
ables instructors to print portions of the contents, com-
plete with tlleir own additions and alterations, for use as
student handouts or in whatever ways tlley wish. This ca-
pability includes printing answers to the end-of-chapter
questions.
Test Bank
The Macroeconomics, Brief Edition Test Bank, originally
written by William Walstad and newly compiled and up-
dated by Mohammad Bajwa of Northampton Community
College, contains multiple choice and true-false ques-
tions. Each question is tied to a learning objective, topic,
and AACSBAssurance ofLearning and Bloom's Taxonomy
guidelines. ""Vhile crafting tests in EZTest Online, in-
structors can use the whole chapter, scramble questions,
and narrow the group by selecting the criteria. The Test
Bank is also availa ble in MS Word on the instructor's side
of the Web site.
PowerPoints
Galina Hale, Economist, Federal Reserve Bank of San
Francisco, created tllese in-depth slides to accompany lec-
tures. The slides highlight all the main points of each chap-
ter and include key figures and tables from the text. Each
slide is tied to a learning objective.
Digital Image Library
Every graph and table in the text is available on the Web
site. These figures allow instructors to create their own
PowerPoint presentations and lecture materials.
Online Learning Center
The password-protected instructor's side of tlle Online
Learning Center, www.mccollilellbrieftnacrole.com.
holds all of tlle inSUllctor resource materials. There, in-
SU'uctors may find tlle Instructor's Manual, Test B31lk,
PowerPoint presentations, Digital Image Library, and in-
formation on CPS by eInstruction or tlle "clicker" system.
xii IPreface
Acknowledgments
We give special thanks to Randy Grant ofLinfield College,
who not only wrote the Origin of the Idea pieces on our
Web site but also served as the content coordinator for
MacToeconomics, B7
c
ief Edition. Professor Grant modified
and seamlessly incorporated appropriate new content and
revisions that the authors made in the eighteenth edition
of Economics into this first edition of the B7'ief Editio17. He
also updated the tables and other information in
MaC'roeconomics, Brief Edition and made various improve-
ments that he deemed helpful or were suggested to him by
the authors, reviewers, and publisher.
We also want to acknowledge Norris Peterson of
Pacific Lutheran University, who created the See the Math
pieces and the new Worked Problem pieces on our Web
site. Professor Peterson also oversaw the development of
the Interactive Graph pieces that are on the site. Finally,
we wish to acknowledge William Walstad and Tom
Barbiero (the coauthor of the Canadian edition of
Economics) for their ongoing ideas and insights.
We are greatly indebted to an all-star group of profes-
sionals at McGraw-Hill-in particular Douglas Reiner,
Elizabeth Clevenger, Anne Hilbert, Noelle Fox, Harvey
Yep, Melissa Larmon, and Brent Gordon for their publish-
ing and marketing expertise. We tl1ank Keri Johnson for
her selection of Photo Op images. Cara Hawthorne pro-
vided tl1e vibrant interior design and cover.
Stanley L. Brue
Sean M. Flynn
Campbell R. McConnell
PART ONE
Introduction /
1 Limits, Alternatives, and Choices 3
Appendix: Graphs and Their Meaning 24
2 The Market System and the Circular Flow 30
PARTTWO
Price, Quantity, and Efficiency 50
3 Demand, Supply, and Market Equilibrium 5/
Appendix 3W: Additional Examples of Supply and
Demand
4 Public Goods and Externalities 73
.' " :: " \,' ", 'I' ~ ~ " ' : ; : '"
Brief Contents
PART FOUR
Money, Banking, and Monetary Policy
9 Money and Banking
10 Interest Rates and Monetary Policy
PART FIVE
Long-Run Considerations and
International Economics
11 Long-Run Aggregate Supply and Aggregate
Demand
12 International Trade and Exchange Rates
/93
/94
223
244
245
267
PARTTHREE
GOp' Growth, and Instability
5 GOP and Economic Growth
6 Business Cycles, Unemployment, and Inflation
7 Aggregate Demand and Aggregate Supply
8 Fiscal Policy, Deficits, and Debt
96
97
/25
/44
/69
Glossary 294
Index 307
xiii
PART ONE
Introduction
Chapter I
Limits, Alternatives, and Choices 3
The Economic Perspective 4
Scarcity and Choice 4
Illustrating the Idea Did Gates, Winfrey, and Rodriquez Make
Bad Choices? 4
Purposeful Behavior 5 / Marginalism: Benefits and Costs 5
Applying the Analysis Fast-Food Lines 6
Theories, Principles, and Models 7
Microeconomics and Macroeconomics 7
Microeconomics 8 / Macroeconomics 8
Individual's Economic Problem 8
Limited Income 9 / Unlimited Wants 9 / A Budget Line 10
Society's Economic Problem /2
Scarce Resources 12 / Resource Categories 12
Production Possibilities Model 14
Production Possibilities Table 14 / Production Possibilities
Curve IS/Law of Increasing Opportunity Costs 15 /
Optimal Allocation 16
Applying the Analysis The Economics of War 17
Unemployment, Growth, and the Future 18
A Gr-owing Economy 18
Applying the Analysis Information Technology and
Biotechnology 20
Present Choices and Future Possibilities 20
Summary 22
Terms and Concepts 22
Study Questions 22
Web-Based Questions 23
Chapter I Appendix:
Graphs and Their Meaning 24
Chapter 2
The Market System and the Circular Flow 30
Economic Systems 31
The Command System 31 / The Market System 31
Characteristics of the Market System 32
Private Property 32 / Freedom of Enterprise and Choice
33 / Self-Interest 33 / Competition 33 / Markets and Prices
35 / Technology and Capital Goods 36 / Specialization
35 I Use of Money 37 I Active. but Limited. Government 38
Four Fundamental Questions 38
What Will Be Produced? 38
Applying the Analysis McHits and McMisses 39
HowWili the Goods and Services Be Produced? 39 I Who
Will Get the Output? 39 / How Will the System Promote
Progress? 40
Applying the Analysis The "Invisible Hand" 'II
Applying the Analysis The Demise of the Command
Systems 4/
The Circular Flow Model 43
Resource Market 43 / Product Market 43
Applying the Analysis Some Facts about U.S. Businesses 44
Applying the Analysis Some Facts about U.S. Households 46
Contents Ixv
Summary 48
Terms and Concepts 48
Study Questions 48
Web-Based Questions 49
PARTTWO
Price, Quantity, and Efficiency
Government's Role: A Qualification
Summary 93
Terms and Concepts 94
Study Questions 94
Web-Based Questions 95
PARTTHREE
GOp' Growth, and Instability
93
Summary 122
Terms and Concepts 123
Study Questions 123
Web-Based Questions f 24
Chapter 6
Business Cycles, Unemployment, and Inflation /25
Business Cycles /26
Causes of Business Cycles 126 I Cyclical Impact: Dur'ables
and Nondurables 128
Applying the Analysis Stock Prices and Macroeconomic
Instability 129
97
98
103
104
100
Gross Domestic Product
A Monetary Measure 98 / Avoiding Multiple Counting 98 /
Excluding Secondhand Sales 99
Measuring GDP
Per'sonal Consumption Expenditures (C) 100 / Gross Private
Domestic Investment (/
g
) 100 / Government Purchases (G)
/0/ / Net Exports (X
n
) 101 / Adding It Up: GDP = C + I
g
+ G + X
n
102
Nominal GDP versus Real GDP
Applying the Analysis The Underground Economy 104
Economic Growth
Growth as a Goal 105 / Arithmetic of Growth J06
Illustrating the Idea Growth Rates Matter! 106
Growth in the United States 107
Ingredients of Growth 108
Supply Factors /08 / Demand Factor 108 I Efficiency Factor /09
Production Possibilities Analysis 109
Growth and Production Possibilities 109 / Inputs and
Productivity I 10
Accounting for Growth III
Labor Inputs versus Labor Productivity I I I / Technological
Advance f 12 / Quantity of Capital 112 / Education and
Training f J3 / Economies of Scale and Resource Allocation
114 / Institutional Structures That Promote Growth
/ 15 / Other Factors I 15
The Recent Productivity Acceleration 116
Reasons for the Productivity Acceleration I f 7 / Implication:
More Rapid Economic Growth I /9 I Skepticism about
Permanence 119 / What Can We Conclude? 120
Is Growth Desirable and Sustainable? 120
The Antigrowth View 120 / In Defense of Economic
Growth f 21
Chapter 5
GDP and Economic Growth
61
75
79
66
64
89
5/
52
57
73
74 Private Goods
Profitable Provision 74 / Efficient Allocation 74
Public Goods
Illustrating the Idea Art for Art's Sake 76
Optimal Quantity of a Public Good 77 / Measuring Demand
77 / Comparing Marginal Benefit and Marginal Cost 78
Applying the Analysis Cost-Benefit Analysis 78
Externalities
Negative Externalities 80 / Positive Externalities
80 / Individual Bargaining: Coase Theorem 82
Illustrating the Idea A ForestTa/e 82
Liability Rules and Lawsuits 83 / Government Intervention 83
Applying the Analysis Lojack: A Case of Positive
Externalities 86
A Market-Based Approach 87
Applying the Analysis Reducing Greenhouse Gases 88
Financing the Public Sector: Taxation
Apportioning the Tax Burden 89 / Benefits Received versus
Ability to Pay 90 / Progressive, Proportional, and Regressive
Taxes 91 / Tax Progressivity in the United States 91
Chapter 4
Public Goods and Externalities
Chapter 3
Demand, Supply, and Market Equilibrium
Demand
Law of Demand 52 / The Demand Curve 53 / Market
Demand 53 / Changes in Demand 55 / Changes in Quantity
Demanded 57
Supply
Law of Supply 58 / Market Supply 58 / Determinants of
Supply 59 / Changes in Supply 59 / Changes in Quantity
Supplied 60
Market Equilibrium
Equilibrium Price and Quantity 61 / Rationing Function of
Prices 62
Applying the Analysis Ticket Scalping 63
Changes in Demand, Supply, and Equilibrium
Changes in Demand 64 / Changes in Supply 64 / Complex
Cases 64
Government-Set Prices
Applying the Analysis Price Ceilings on Gasoline 66
Applying the Analysis Rent Controls 67
Applying the Analysis Price Floors on Wheat 68
Summary 70
Terms and Concepts 71
Study Questions 71
Web-Based Questions 72
Chapter 3 Web Appendix:
Additional Examples of Supply and Demand
}.'VI IContents
Unemployment
Measurement of Unemployment 130 I Types of
Unemployment /3/ I Definition of Full Employment
/32 I Economic Cost of Unemployment 132 I International
Comparisons /33
Inflation
Meaning of Inflation /33 I Measul"ement of Inflation /33 I
Facts of Inflation /35 I Types of Inflation /36
Illustrating the Idea Clipping Coins 136
Redistribution Effects of Inflation
Who Is Hurt by Inflation? /38 I Who Is Unaffected or
Helped by Inflation? /39 I Anticipated Inflation /39
Does Inflation Affect Output?
Cost-Push Inflation and Real Output 140 I Demand-Pull
Inflation and Real Output 140
Applying the Analysis /4/
Summary /42
Terms and Concepts /42
Study Questions /42
Web-Based Questions /43
Chapter 7
Aggregate Demand and Aggregate Supply
Aggregate Demand
Changes in Aggregate Demand
Consumer Spending /46
Applying the Analysis Whot Wealth Effect? /47
Investment Spending /48 I Government Spending
149 I Net Export Spending /50
Aggregate Supply
Aggregate Supply in the Immediate Short Run
/5/ I Aggregate Supply in the Short Run /52 I Aggregate
Supply in the Long Run /54 I Focusing on the Short
Run 155
Changes in Aggregate Supply
Input Prices 156 I Productivity /58 I Legal-Institutional
Environment 158
Equilibrium Price Level and Real GDP
Changes in the Price Level and Real GDP /59
Applying the Analysis /60
Applying the Analysis Cost-Push 16/
Downwal"d Price-Level Inflexibility /62
Illustrating the Idea The Ratchet Effect /63
Applying the Analysis Recession and Cyclical
Unemplayment 164
The Multiplier Effect 165 I Self-Correction? /65
Summary 166
Terms and Concepts 167
Study Questions 167
Web-Based Questions 168
Chapter 8
Fiscal Policy, Deficits, and Debt
Fiscal Policy and the AD-AS Model
Expansionary Fiscal Policy I 70 I Contractionary Fiscal Policy
Built-In Stability
Automatic or Built-In Stabilizers /73 I Economic
Importance /74
/30
/33
/37
/40
144
/45
/45
/5/
/56
/58
169
/70
171
/73
Evaluating Fiscal Policy
Applying the Analysis Recent U.S. Fiscal Policy 177
Problems, Criticisms, and Complications
Problems of Timing /79 I Political Considerations
/80 I Future Policy Reversals /80 I Offsetting State and
Local Finance /8/ I Crowding-Out Effect /8/ I Current
Thinking on Fiscal Policy /82
The Public Debt
Ownership 182 I Debt and GDP 183 I International
Comparisons 183 I Interest Charges 183
False Concerns
Bankruptcy 185 I Burdening Future Generations /85
Substantive Issues
Income Distribution 186 I Incentives 186 I Foreign-
Owned Public Debt 186 I Crowding Out Revisited 186
The Long-Run Fiscal Imbalance: Social Security
The Future Funding Shortfall /88 I Policy Options /90
Summary 190
Terms and Concepts /91
Study Questions 192
Web-Based Questions 192
PART FOUR
Money, Banking, and Monetary Policy
Chapter 9
Money and Banking
The Functions of Money
The Components of the Money Supply
Money Definition: MI /96 I Money Definition: M2 199
What "Backs" the Money Supply?
Value of Money 200
Illustrating the Idea Are Credit Cards Money? 20 I
Money and Prices 202
The Federal Reserve and the Banking System
Board of Governors 203 I The 12 Federal Reserve Banks
203 I FOMC 205 I Commercial Banks and Thrifts
205 I Fed Functions and Responsibilities 205 I Federal
Reserve Independence 207
The Fractional Reserve System
Illustrating the Idea The Goldsmiths 207
A Single Commercial Bank
Transaction I: Creating a Bank 209 I Transaction 2:Acquiring
Property and Equipment 209 I Transaction 3:Accepting
Deposits 2 I 0 I Transaction 4: DepOSiting Reserves in a
Federal Reserve Bank 210 I Transaction 5: Clearing a Check
Drawn against the Bank 2/2 I Transaction 6: Granting a Loan
(Creating Money) 2/3
The Banking System: Multiple-Deposit Expansion
The Banking System's Lending Potential 216 I The Monetary
Multiplier 218 I Revel"sibility:The Multiple Destruction of
Money 218
Applying the Analysis The Bank Panics of /930 to 1933 218
Summary 220
Terms and Concepts 220
Study Questions 221
Web-Based Questions 222
/74
/79
/82
/85
/86
/88
194
/95
/96
/99
203
207
208
2/5
Chapter 10
Interest Rates and Monetary Policy 223
Interest Rates 224
The Demand for Money 224 I The Equilibrium Interest
Rate 227
Illustrating the Idea That Is Interest 227
Tools of Monetary Policy 227
Open-Mar-ket Operations 228 I The Reserve Ratio
229 I The Discount Rate 230 I Term Auction Facility
230 I Relative Importance 23/ I Easy Money and Tight
Money 231
Monetary Policy, Real GDp, and the Price Level 233
Cause-Effect Chain 233 I Effects of an Easy Money Policy
235 I Effects of a Tight Money Policy 236
Monetary Policy in Action 237
The Focus on the Federal Funds Rate 237
Applying the Analysis Recent U.S. Monetary Policy 239
Problems and Complications 240
Illustrating the Idea Pushing on a String 240
Applying the Analysis The Mortgage Debt Crisis:The Fed
Responds 241
Summary 242
Terms and Concepts 243
Study Questions 243
Web-Based Questions 243
PART FIVE
International Economics
Chapter II
Long-Run Aggregate Supply and Aggregate
Demand 245
From Short Run to Long Run 246
Short-Run Aggregate Supply 246 I Long-Run Aggregate
Supply 247
Long-Run Equilibrium in the AD-AS Model 248
Applying the Analysis Demand-Pullinration in the Long-Run
AD-AS Model 249
Applying the Analysis Cost-Push Inration in the Long-Run
AD-AS Model 250
Applying the Analysis Recession in the Long-Run AD-AS Model 25/
Economic Growth and Ongoing Inflation 252
The Inflation-Unemployment Relationship 255
Short-Run Trade-Off: The Phillips Curve 255 I Aggregate
Supply Shocks and Shifts of the Phillips Curve 257 I No
Long-Run Inflation-Unemployment Trade-Off 258
I
xvii
Contents
Taxation and Aggregate Supply 261
The Laffer- Curve 262
Illustrating the Idea Sherwood Forest 263
Criticisms, Rebuttals, and Assessment 263
Summary 265
Ter-ms and Concepts 265
Study Questions 265
Web-Based Questions 266
Chapter 12
International Trade and Exchange Rates 267
Trade Facts 268
Comparative Advantage and Specialization 269
Illustrating the Idea ACPA and a House Painter 270
Comparative Advantage: Production Possibilities Analysis
27/ I Trade with Increasing Costs 273
The Foreign Exchange Market 275
Exchange Rates 276 I Depreciation and Appreciation
277 I Deter-minants of Exchange Rates 278
Government and Trade 279
Trade Protections and Subsidies 279 I Economic Impact of
Tariffs 280 I Net Costs ofTariffs 28/ I So Why
Gover-nment Trade Protections? 281
Illustrating the Idea Buy American? 282
Three Arguments for Protection 283
Incr-eased Domestic EmploymentArgument 283 I Cheap
Foreign Labor Argument 283 I Protection-against-Dumping
Argument 284
Trade Adjustment Assistance 285
Applying the Analysis Is Offshoring ofJobs Bad? 286
Multilateral Trade Agreements and Free-Trade Zones 286
General Agreement on Tariffs and Trade 287 I World Trade
Organization 287 I European Union 287 I North American
Free Trade Agreement 288
U.S. Trade Deficits 288
Causes of the Tr-ade Deficits 288 I Implications of U.S. Trade
Deficits 289
Summary 291
Terms and Concepts 29/
Study Questions 292
Web-Based Questions 293
Glossary 294
Index 307