CHAPTER 1 What Is Macroeconomics?

1-1 How Macroeconomics Affects Our Everyday Lives

Global Economic Crisis Focus: What Makes It Unique?

1-2 Defining Macroeconomics

1-3 Actual and Natural Real GDP

1-4 Macroeconomics in the Short Run and Long Run

1-5 CASE STUDY: How Does the Global Economic Crisis Compare to Previous Business Cycles?

Global Economic Crisis Focus: How It Differs from 1982—83

1-6 Macroeconomics at the Extremes

1-7 Taming Business Cycles: Stabilization Policy

International Perspective: Differences Between the United States and Europe Before and During the Global Economic Crisis

Global Economic Crisis Focus: New Challenges for Monetary and Fiscal Policy

1-8 The “Internationalization” of Macroeconomics

CHAPTER 2 The Measurement of Income, Prices, and Unemployment

2-1 Why We Care About Income

2-2 The Circular Flow of Income and Expenditure

2-3 What GDP Is, and What GDP Is Not

[BOX]Where to Find the Numbers: A Guide to the Data

2-4 Components of Expenditure

Global Economic Crisis Focus: Which Component of GDP Declined the Most in the Global Economic Crisis?

2-5 The “Magic” Equation and the Twin Deficits

Global Economic Crisis Focus: Chicken or Egg in Recessions?

2-6 Where Does Household Income Come From?

2-7 Nominal GDP, Real GDP, and the GDP Deflator

[BOX] How to Calculate Inflation, Real GDP Growth, or Any Other Growth Rate

2-8 Measuring Unemployment

Understanding the Global Economic Crisis: The Ranks of the Hidden Unemployed

APPENDIX TO CHAPTER 2: How We Measure Real GDP and the Inflation Rate

CHAPTER 3 Income and Interest Rates: The Keynesian Cross Model and the IS Curve

3-1 Business Cycles and the Theory of Income Determination

Global Economic Crisis Focus: What Were the Shocks That Made the 2008­—09 Economic Crisis So Severe?

3-2 Income Determination, Unemployment, and the Price Level

3-3 Planned Expenditure

Global Economic Crisis Focus: Financial Market Instability as the Main Cause of the Global Economic Crisis

3-4 The Economy In and Out of Equilibrium

Understanding the Global Economic Crisis: How Changes in Wealth Influence Consumer Spending

3-5 The Multiplier Effect

3-6 Sources of Shifts in Planned Spending

3-7 How Can Monetary Policy Affect Planned Spending?

3-8 The Relation of Autonomous Planned Spending to the Interest Rate

Understanding the Global Economic Crisis: A Central Explanation of Business Cycles Is the Volatility of Investment

3-9 The IS Curve

3-10 Conclusion: The Missing Relation

[BOX] Learning About Diagrams: The IS Curve

APPENDIX TO CHAPTER 3:Allowing for Income Taxes and Income-Dependent Net Exports

CHAPTER 4 Strong and Weak Policy Effects in the IS-LM Model

4-1 Introduction: The Power of Monetary and Fiscal Policy

4-2 Income, the Interest Rate, and the Demand for Money

4-3 The LM Curve

[BOX]Learning About Diagrams: The LM Curve

4-4 The IS Curve Meets the LM Curve

Global Economic Crisis Focus: TITLE TO COME

4-5 Monetary Policy in Action

4-6 How Fiscal Expansion Can “Crowd Out” Private Investment

Global Economic Crisis Focus: TITLE TO COME

4-7 Strong and Weak Effects of Monetary Policy

Understanding the Global Economic Crisis: How Easy Money Helped to Create the Housing Bubble and Bust

4-8 Strong and Weak Effects of Fiscal Policy

4-9 Using Fiscal and Monetary Policy Together

International Perspective: Monetary Policy Hits the Zero Lower Bound in Japan and the United States

APPENDIX TO CHAPTER 4:The Elementary Algebra of the IS-LM Model

CHAPTER 5 Financial Markets, Financial Regulation, and Economic Instability

5-1 Introduction: Financial Markets and Macroeconomics

5-2 CASE STUDY: Dimensions of the Global Economic Crisis

5-3 Financial Institutions, Balance Sheets, and Leverage

5-4 A Hardy Perennial: Bubbles and Crashes

Understanding the Global Economic Crisis: Two Bubbles: 1927—29 in the Stock Market Versus 2000—06 in the Housing Market

5-5 Financial Innovation and the Subprime Mortgage Market

5-6 The IS-LM Model, Financial Markets, and the Monetary Policy Dilemma

[BOX] Why Do Asset Purchases Reduce Interest Rates?

Understanding the Global Economic Crisis: The IS-LM Summary of the Causes of the Global Economic Crisis

5-7 The Fed’s New Instrument: Quantitative Easing

5-8 How the Crisis Became Worldwide and the Dilemma for Policymakers

International Perspective: Weighing the Causes: Why Did Canada Perform Better?

CHAPTER 6 The Government Budget, the Government Debt, and Limitations of Fiscal Policy

6-1 Introduction: Can Fiscal Policy Rescue Monetary Policy from Ineffectiveness?

6-2 The Pervasive Effects of the Government Budget

6-3 CASE STUDY:The Government Budget in Historical Perspective

6-4 Automatic Stabilization and Discretionary Fiscal Policy

Global Economic Crisis Focus: Automatic Stabilization and Fiscal Stimulus in the Crisis

6-5 Government Debt Basic Concepts

6-6 Will the Government Remain Solvent?

International Perspective: The Debt-GDP Ratio: How Does the United States Compare?

6-7 CASE STUDY: Historical Behavior of the Debt-GDP Ratio Since 1790

6-8 Factors Influencing the Multiplier Effect of a Fiscal Policy Stimulus

6-9 CASE STUDY: The Fiscal Policy Stimulus of 2008—11

6-10 Government Spending and Transfers to States/Localities

Understanding the Global Economic Crisis: Comparing the Obama Stimulus with FDR’s New Deal

6-11 Conclusion: Strengths and Limitations of Fiscal Policy

CHAPTER 7 International Trade, Exchanges Rates, and Macroeconomic Policy

7-1 Introduction

7-2 The Current Account and Balance of Payments

7-3 Exchange Rates

7-4 The Market for Foreign Exchange

7-5 Real Exchange Rates and Purchasing Power Parity

International Perspective: Big Mac Meets PPP

7-6 Exchange Rate Systems

7-7 CASE STUDY: Asia Intervenes with Buckets to Buy Dollars and Finance the U.S. Current Account Deficit–How Long Can This Continue?

7-8 Determinants of Net Exports

7-9 The Real Exchange Rate and Interest Rate

7-10 Effects of Monetary and Fiscal Policy with Fixed and Flexible Exchange Rates

Global Economic Crisis Focus: Is the United States Prevented from Implementing a

Fiscal Policy Stimulus by Its Flexible Exchange Rate?

[BOX] Summary of Monetary and Fiscal Policy Effects in Open Economies

7-11 Conclusion: Economic Policy in the Open Economy

CHAPTER 8 Aggregate Demand, Aggregate Supply, and the Great Depression

8-1 Combining Aggregate Demand with Aggregate Supply

8-2 Flexible Prices and the AD Curve

8-3 Shifting the Aggregate Demand Curve with Monetary and Fiscal Policy

Global Economic Crisis Focus: The Crisis Was a Demand Problem Not Involving Supply

[BOX] Learning About Diagrams: The AD Curve

8-4 Alternative Shapes of the Short-Run Aggregate Supply Curve

8-5 The Short-Run Aggregate Supply (SAS) Curve When the Nominal Wage Rate Is Constant

[BOX] Learning About Diagrams: The SAS Curve

8-6 Fiscal and Monetary Expansion in the Short and Long Run

[BOX] Summary of the Economy’s Adjustment to an Increase in Aggregate Demand

8-7 Classical Macroeconomics: The Quantity Theory of Money and the Self-Correcting Economy

8-8 The Keynesian Revolution: The Failure of Self-Correction

Global Economic Crisis Focus: The Zero Lower Bound as Another Source

of Monetary Impotence

8-9 CASE STUDY: What Caused the Great Depression?

International Perspective: Why Was the Great Depression Worse in the United States

Than in Europe?

CHAPTER 9 Inflation: Its Causes and Cures

9-1 Introduction

9-2 Real GDP, the Inflation Rate, and the Short-Run Phillips Curve

9-3 The Adjustment of Expectations

[BOX] Learning About Diagrams: The Short-Run (SP) and Long-Run (LP) Phillips Curves

9-4 Nominal GDP Growth and Inflation

9-5 Effects of an Acceleration in Nominal GDP Growth

9-6 Expectations and the Inflation Cycle

9-7 Recession as a Cure for Inflation

International Perspective: Did Disinflation in Europe Differ from That in the

United States?

Global Economic Crisis Focus: Policymakers Face the Perils of Deflation

9-8 The Importance of Supply Shocks

[BOX] Types of Supply Shocks and When They Mattered

9-9 The Response of Inflation and the Output Ratio to a Supply Shock

Understanding the Global Economic Crisis: The Role of Inflation During the Housing Bubble and Subsequent Economic Collapse

9-10 Inflation and Output Fluctuations: Recapitulation of Causes and Cures

9-11 How Is the Unemployment Rate Related to the Inflation Rate?

APPENDIX TO CHAPTER 9: The Elementary Algebra of the SP-DG Model

CHAPTER 10 The Goals of Stabilization Policy: Low Inflation and Low Unemployment

Global Economic Crisis Focus: Inflation Versus Unemployment in the Crisis

10-1 The Costs and Causes of Inflation

10-2 Money and Inflation

International Perspective: Money Growth and Inflation

10-3 Why Inflation Is Not Harmless

Global Economic Crisis Focus: The Housing Bubble as Surprise Inflation Followed by Surprise Deflation

[BOX] The Wizard of Oz as a Monetary Allegory

10-4 Indexation and Other Reforms to Reduce the Costs of Inflation

[BOX] The Indexed Bond (TIPS) Protects Investors from Inflation

10-5 The Government Budget Constraint and the Inflation Tax

Understanding the Global Economic Crisis: How a Large Recession Can Create a Large Fiscal Deficit

10-6 Starting and Stopping a Hyperinflation

10-7 Why the Unemployment Rate Cannot Be Reduced to Zero

10-8 Sources of Mismatch Unemployment

Global Economic Crisis Focus: The Crisis Raises the Incidence of Structural

Unemployment

10-10 The Costs of Persistently High Unemployment

Understanding the Global Economic Crisis: Why Did Unemployment Rise Less in Europe Than in the United States After 2007?

10-11 Conclusion: Solutions to the Inflation and Unemployment Dilemma

CHAPTER 11 The Theory of Economic Growth

11-1 The Importance of Economic Growth

11-2 Standards of Living as the Consequence of Economic Growth

International Perspective: The Growth Experience of Seven Countries Over the Last Century

11-3 The Production Function and Economic Growth

11-4 Solow’s Theory of Economic Growth

11-5 Technology in Theory and Practice

11-6 Puzzles That Solow’s Theory Cannot Explain

11-7 Human Capital, Immigration, and the Solow Puzzles

11-8 Endogenous Growth Theory: How Is Technological

Change Produced?

11-9 Conclusion: Are There Secrets of Growth?

APPENDIX TO CHAPTER 11:General Functional Forms and the Production Function

CHAPTER 12 The Big Questions of Economic Growth

12-1 Answering the Big Questions

12-2 The Standard of Living and Concepts of Productivity

12-3 The Failure of Convergence

12-4 Human Capital and Technology

12-5 Political Capital, Infrastructure, and Geography

International Perspective: A Symptom of Poverty: Urban Slums in the Poor Cities

International Perspective: Institutions Matter: South Korea Versus North Korea

International Perspective: Growth Success and Failure in the Tropics

12-6 CASE STUDY: Uneven U.S. Productivity Growth Across Eras

Global Economic Crisis Focus: Lingering Effects of the 2007—09 Recession

on Long-Term Economic Growth

12-7 CASE STUDY: The Productivity Growth Contrast Between Europe and the United States

12-8 Conclusion on the Great Questions of Growth

CHAPTER 13 Money, Banks, and the Federal Reserve

13-1 Money as a Tool of Stabilization Policy

13-2 Definitions of Money

13-3 High-Powered Money and Determinants of the Money Supply

13-4 The Fed’s Three Tools for Changing the Money Supply

13-5 Theories of the Demand for Money

International Perspective: Plastic Replaces Cash, and the Cell Phone Replaces Plastic

13-6 Why the Federal Reserve “Sets” Interest Rates

CHAPTER 14 The Goals, Tools, and Rules of Monetary Policy

14-1 The Central Role of Demand Shocks

Global Economic Crisis Focus: The Weakness of Monetary Policy After 2008 Reveals a More General Problem

14-2 Stabilization Targets and Instruments in the Activists’ Paradise

[BOX]Rules Versus Activism in a Nutshell: The Optimism-Pessimism Grid

14-3 Policy Rules

14-4 Policy Pitfalls: Lags and Uncertain Multipliers

14-5 CASE STUDY: Was the Fed Responsible for the Great Moderation of 1986—2007?

14-6 Time Inconsistency, Credibility, and Reputation

14-7 CASE STUDY: The Taylor Rule and the Changing Fed Attitude Toward Inflation and Output

Global Economic Crisis Focus: Taylor’s Rule Confronts the Zero Lower Bound

14-8 Rules Versus Discretion: An Assessment

International Perspective: The Debate About the Euro

14-9 CASE STUDY: Should Monetary Policy Target the Exchange Rate?

CHAPTER 15 The Economics of Consumption Behavior

15-1 Consumption and Economic Stability

15-2 CASE STUDY: Main Features of U.S. Consumption Data

15-3 Background: The Conflict Between the Time-Series and Cross-Section Evidence

15-4 Forward-Looking Behavior: The Permanent-Income Hypothesis

15-5 Forward-Looking Behavior: The Life-Cycle Hypothesis

Global Economic Crisis Focus: The Modigliani Theory Helps Explain the Crisis and

Recession of 2007—09

15-6 Rational Expectations and Other Amendments to the Simple Forward-Looking Theories

Understanding the Global Economic Crisis: Did Households Spend or Save the 2008 Economic Stimulus Payments?

15-7 Bequests and Uncertainty

International Perspective: Why Do Some Countries Save So Much?

15-8 CASE STUDY: Did the Rise and Collapse of Household Assets Cause the Decline and Rise of the Household Saving Rate?

15-9 Why the Official Household Saving Data Are Misleading

15-10 Conclusion: Does Consumption Stabilize the Economy?

CHAPTER 16 The Economics of Investment Behavior

16-1 Investment and Economic Stability

16-2 CASE STUDY: The Historical Instability of Investment

16-3 The Accelerator Hypothesis of Net Investment

16-4 CASE STUDY: The Simple Accelerator and the Postwar U.S. Economy

16-5 The Flexible Accelerator

[BOX] Tobin’s q: Does It Explain Investment Better Than the Accelerator or Neoclassical Theories?

16-6 The Neoclassical Theory of Investment Behavior

16-7 User Cost and the Role of Monetary and Fiscal Policy

16-8 Business Confidence and Speculation

[BOX] Investment in the Great Depression and World War II

International Perspective: The Level and Variability of Investment Around the World

16-9 Investment as a Source of Instability of Output and Interest Rates

16-10 Conclusion: Investment as a Source of Instability 545

CHAPTER 17 New Classical Macro and New Keynesian Macro

17-1 Introduction: Classical and Keynesian Economics, Old and New

17-2 Imperfect Information and the “Fooling Model”

17-3 The Lucas Model and the Policy Ineffectiveness Proposition

17-4 The Real Business Cycle Model

17-5 New Classical Macroeconomics: Limitations and Positive Contributions

International Perspective: Productivity Fluctuations in the United States and Japan

Global Economic Crisis Focus: The 2007—09 Crisis and the Real Business Cycle Model

17-6 Essential Features of the New Keynesian Economics

17-7 Why Small Nominal Rigidities Have Large Macroeconomic Effects

17-8 Coordination Failures and Indexation

17-9 Long-Term Labor Contracts as a Source of the Business Cycle

17-10 Assessment of the New Keynesian Model

CHAPTER 18 Conclusion: Where We Stand

18-1 The Evolution of Events and Ideas

Global Economic Crisis Focus: Can Economics Explain the Crisis or Does the Crisis

Require New Ideas?

18-2 The Reaction of Ideas to Events, 1923—47

18-3 The Reaction of Ideas to Events, 1947—69

18-4 The Reaction of Ideas to Events, 1970—2010

Global Economic Crisis Focus: Termites Were Nibbling Away at the Prosperity of

2003—07

18-5 The Reaction of Ideas to Events in the World Economy

18-6 Macro Mysteries: Unsettled Issues and Debates

International Perspective: How Does Macroeconomics Differ in the United States and Europe?

APPENDIXES

A Time Series Data for the U.S. Economy: 1875—2010

B International Annual Time Series Data for Selected Countries: 1960—2010

C Data Sources and Methods

Glossary

Index