TwelfTh ediTion Pr inciples of Macroeconomics This page intentionally left blank TwelfTh ediTion Pr incip les of Macroeconomics Karl E Case Wellesley College Ray C Fair Yale University Sharon M Oster Yale University Boston Columbus Indianapolis New York San Francisco Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo Vice President, Business Publishing: Donna Battista Editor-in-Chief: Adrienne D’Ambrosio AVP/Executive Editor: David Alexander Editorial Assistant: Michelle Zeng Vice President, Product Marketing: Maggie Moylan Director of Marketing, Digital Services and Products: Jeanette Koskinas Executive Field Marketing Manager: Adam Goldstein Executive Field Marketing Manager: Ramona Elmer Product Marketing Assistant: Jessica Quazza Team Lead, Program Management: Ashley Santora Program Manager: Lindsey Sloan Team Lead, Project Management: Jeff Holcomb Project Manager: Roberta Sherman Operations Specialist: Carol Melville Creative Director: Blair Brown Art Director: Jon Boylan Vice President, Director of Digital Strategy and Assessment: Paul Gentile Manager of Learning Applications: Paul DeLuca Digital Editor: Denise Clinton Director, Digital Studio: Sacha Laustsen Digital Studio Manager: Diane Lombardo Digital Studio Project Manager: Melissa Honig Digital Studio Project Manager: Robin Lazrus Digital Content Team Lead: Noel Lotz Digital Content Project Lead: Courtney Kamauf Full-Service Project Management and Composition: Integra Software Services, Inc Interior Designer: Integra Software Services, Inc Cover Designer: Jon Boylan Cover Art: Jon Boylan Printer/Binder: RR Donnelley, Roanoke Cover Printer: Phoenix Color Microsoft® and Windows® are registered trademarks of the Microsoft Corporation in the U.S.A and other countries This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation Copyright © 2017, 2014, 2012 by Pearson Education, Inc or its affiliates All Rights Reserved Manufactured in the United States of America This publication is protected by copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise For information regarding permissions, request forms, and the appropriate contacts within the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/ Acknowledgments of third-party content appear on the appropriate page within the text FRED® is a registered trademark and the FRED® Logo and ST LOUIS FED are trademarks of the Federal Reserve Bank of St Louis http://research.st.louisfed.org/fred2/ PEARSON, ALWAYS LEARNING, and MYECONLAB® are exclusive trademarks owned by Pearson Education, Inc or its affiliates in the U.S and/or other countries Unless otherwise indicated herein, any third-party trademarks that may appear in this work are the property of their respective owners, and any references to third-party trademarks, logos, or other trade dress are for demonstrative or descriptive purposes only Such references are not intended to imply any sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of such marks, or any relationship between the owner and Pearson Education, Inc or its affiliates, authors, licensees, or distributors Cataloging-in-Publication Data is on file at the LIbrary of Congress 10 ISBN 10: 0-13-407880-2 ISBN 13: 978-0-13-407880-9 About the Authors Karl E Case is Professor of Economics Emeritus at Wellesley College where he has taught for 34 years and served several tours of duty as Department Chair He is a Senior Fellow at the Joint Center for Housing Studies at Harvard University and a founding partner in the real estate research firm of Fiserv Case Shiller Weiss, which produces the S&P Case-Shiller Index of home prices He serves as a member of the Index Advisory Committee of Standard and Poor’s, and along with Ray Fair he serves on the Academic Advisory Board of the Federal Reserve Bank of Boston Before coming to Wellesley, he served as Head Tutor in Economics (director of undergraduate studies) at Harvard, where he won the Allyn Young Teaching Prize He was Associate Editor of the Journal of Economic Perspectives and the Journal of Economic Education, and he was a member of the AEA’s Committee on Economic Education Professor Case received his B.A from Miami University in 1968; spent three years on active duty in the Army, and received his Ph.D in Economics from Harvard University in 1976 Professor Case’s research has been in the areas of real estate, housing, and public finance He is author or coauthor of five books, including Principles of Economics, Economics and Tax Policy, and Property Taxation: The Need for Reform, and he has published numerous articles in professional journals For the last 25 years, his research has focused on real estate markets and prices He has authored numerous professional articles, many of which attempt to isolate the causes and consequences of boom and bust cycles and their relationship to regional and national economic performance Ray C Fair is Professor of Economics at Yale University He is a member of the Cowles Foundation at Yale and a Fellow of the Econometric Society He received a B.A in Economics from Fresno State College in 1964 and a Ph.D in Economics from MIT in 1968 He taught at Princeton University from 1968 to 1974 and has been at Yale since 1974 Professor Fair’s research has primarily been in the areas of macroeconomics and econometrics, with particular emphasis on macroeconometric model building He also has done work in the areas of finance, voting behavior, and aging in sports His publications include Specification, Estimation, and Analysis of Macroeconometric Models (Harvard Press, 1984); Testing Macroeconometric Models (Harvard Press, 1994); Estimating How the Macroeconomy Works (Harvard Press, 2004), and Predicting Presidential Elections and Other Things (Stanford University Press, 2012) Professor Fair has taught introductory and intermediate macroeconomics at Yale He has also taught graduate courses in macroeconomic theory and macroeconometrics Professor Fair’s U.S and multicountry models are available for use on the Internet free of charge The address is http://fairmodel.econ.yale.edu Many teachers have found that having students work with the U.S model on the Internet is a useful complement to an introductory macroeconomics course Sharon M Oster is the Frederic Wolfe Professor of Economics and Management and former Dean of the Yale School of Management Professor Oster joined Case and Fair as a coauthor in the ninth edition of this book Professor Oster has a B.A in Economics from Hofstra University and a Ph.D in Economics from Harvard University Professor Oster’s research is in the area of industrial organization She has worked on problems of diffusion of innovation in a number of different industries, on the effect of regulations on business, and on competitive strategy She has published a number of articles in these areas and is the author of several books, including Modern Competitive Analysis and The Strategic Management of Nonprofits Prior to joining the School of Management at Yale, Professor Oster taught for a number of years in Yale’s Department of Economics In the department, Professor Oster taught introductory and intermediate microeconomics to undergraduates as well as several graduate courses in industrial organization Since 1982, Professor Oster has taught primarily in the Management School, where she teaches the core microeconomics class for MBA students and a course in the area of competitive strategy Professor Oster also consults widely for businesses and nonprofit organizations and has served on the boards of several publicly traded companies and nonprofit organizations v This page intentionally left blank Brief Contents ParT i Introduction To Economics ParT iV The Scope and Method of Economics Further Macroeconomics Issues 264 The Economic Problem: Scarcity and Choice 22 14 Financial Crises, Stabilization, and Deficits 264 Demand, Supply, and Market Equilibrium 42 15 Household and Firm Behavior in the Macroeconomy: A Further Look 280 Demand and Supply Applications 72 ParT ii Concepts and Problems in Macroeconomics 90 Introduction to Macroeconomics 90 Measuring National Output and National Income 103 Unemployment, Inflation, and Long-Run Growth 123 ParT iii The Core of Macroeconomic Theory 139 Aggregate Expenditure and Equilibrium Output 141 The Government and Fiscal Policy 162 10 Money, the Federal Reserve, and the Interest Rate 187 11 The Determination of Aggregate Output, the Price Level, and the Interest Rate 214 16 Long-Run Growth 301 17 Alternative Views in Macroeconomics 317 ParT V The World Economy 332 18 International Trade, Comparative Advantage, and Protectionism 332 19 Open-Economy Macroeconomics: The Balance of Payments and Exchange Rates 356 20 Economic Growth in Developing Economies 382 ParT Vi Methodology 399 21 Critical Thinking about Research 399 Glossary Index 414 424 Photo Credits 440 12 Policy Effects and Cost Shocks in the AS/AD Model 231 13 The Labor Market in the Macroeconomy 245 vii This page intentionally left blank Contents ParT i Introduction To Economics 1 The Scope and Method of Economics why Study economics? To Learn a Way of Thinking To Understand Society To Be an Informed Citizen The Scope of economics Microeconomics and Macroeconomics Economics in PracticE iPod and the World The Diverse Fields of Economics The Method of economics Theories and Models Economics in PracticE Does Your Roommate Matter for Your Grades? Economic Policy an invitation 11 Summary 11 review Terms and Concepts 12 Problems 12 appendix: how to read and Understand Graphs 14 The Economic Problem: Scarcity and Choice 22 Scarcity, Choice, and opportunity Cost 23 Scarcity and Choice in a One-Person Economy 23 Scarcity and Choice in an Economy of Two or More 24 Economics in PracticE Frozen Foods and Opportunity Costs 25 The Production Possibility Frontier 29 Economics in PracticE Trade-Offs among the Rich and Poor 35 The Economic Problem 35 economic Systems and the role of Government 36 Command Economies 36 Laissez-Faire Economies: The Free Market 36 Mixed Systems, Markets, and Governments 37 looking ahead 38 Summary 38 review Terms and Concepts 38 Problems 39 Demand, Supply, and Market Equilibrium 42 firms and households: The Basic decisionMaking Units 43 input Markets and output Markets: The Circular flow 43 demand in Product/output Markets 45 Changes in Quantity Demanded versus Changes in Demand 45 Price and Quantity Demanded: The Law of Demand 46 Other Determinants of Household Demand 49 Economics in PracticE Have You Bought This Textbook? 50 Economics in PracticE On Sunny Days People Buy Convertibles! 51 Shift of Demand versus Movement along a Demand Curve 52 From Household Demand to Market Demand 53 Supply in Product/output Markets 55 Price and Quantity Supplied: The Law of Supply 56 Other Determinants of Supply 57 Shift of Supply versus Movement along a Supply Curve 58 From Individual Supply to Market Supply 59 Market equilibrium 60 Excess Demand 60 Excess Supply 62 Changes in Equilibrium 63 Economics in PracticE Quinoa 65 demand and Supply in Product Markets: a review 65 Economics in PracticE Why Do the Prices of Newspapers Rise? 66 looking ahead: Markets and the allocation of resources 67 Summary 67 review Terms and Concepts 68 Problems 69 ix 432 Index Interest rates, 201–203 as critical variable in money market, 96 effects of, on the economy, 369–372 effects on consumption, 284 Federal Reserve control over, 203–207, 219–220 planned aggregate expenditure and, 218–219 planned investment and, 147–148 raising, 206 relative, 369 short-term, 206, 207 size of multiplier and, 296 term structureof, 211–212 types of, 212–213 Intermediate goods, 104 International economics, International Monetary Fund (IMF), creation of, 360, 378 International sector, planned aggregate expenditure and, 360–362 International trade comparative advantage in, 333–342, 351 exchange rates in, 338–341, 356–357 free, 5, 346–347 growth of, 356 Heckscher-Ohlin theorem and, 341 importance of, to U.S economy, 332 protection in, 347–351 terms of trade in, 338 trade barriers in, 342–346 trade flows in, 341–342 trade surpluses and deficits in, 333 International Trade Commission, 342, 350 Inventions, 308 Inventories change in business, 108 desired level of, 291–292 optimal level of, 291–292 role of, 291 size of multiplier and, 296 Inventory investment, 291–292 Inventory-to-sales ratio, 293, 294 Inventory turnover ratio, 153 Investments, 28–29 actual, 147 determinants of planned, 148 financing, 265 housing, 287 inventory, 291–292 planned, and the interest rate, 147–148 planned versus actual, 147 plant-and-equipment, 292–293 Invisible hand, 67 iPhone, 332 iPods, IS curve, 219–220 shift of, 219 It’s a Wonderful Life (film), 193 J Japan automobile industry in, 341 industrial policy in, 304 negotiation of voluntary restraint with, 343 Jayanchandran, Seema, 384 J-curve effect, 370–371 Jensen, J Bradford, 343n Jensen, Robert, 34, 393 Jevons, William, 45n Jobs, protection in saving, 347–348 Johnson, Lyndon, 97 import restrictions and, 345 Johnson, Simon, 389 J.P Morgan Chase, 269 JPMorgan, 204 Justice, U.S Department of, Antitrust Division, 348 K Kahn, Lisa, 128 Karabardounis, L., 125n Katz, Lawrence, 404n Kennedy, John F., 97 import restrictions and, 345 Keynes, John Maynard, 97, 142, 143, 162, 238, 246, 289, 323 Keynesian economics, 318 debate between monetarism and, 321 Keynesian theory of consumption, 142–147, 282, 285–286 Khan, Mohsin, 308 Khandelwal, Amit, 344 Kindleberger, Charles, 344n Kortum, Samuel, 343n Kowalski, A., 405n Kraemer, Kenneth, Kremer, Michael, 395–396 Kroft, Kory, 251 Krueger, Alan, 311, 312, 407 Krugman, Paul, 342 Kuhn, Randall, 390n Kuznets, Simon, 112 L Labor, excess, 290 Labor demand curve, 246–247 Labor economics, Labor force, 124 women in the, 127, 217 Labor force participation rate, 124, 287–288 Labor market, 44, 95, 245–259 classical view of, 246–248 disequilibrium in, 324–325 Labor productivity, in the United States, 309–310 Labor productivity growth, 301 Labor supply constrained, 285 decisions and, 282–284 Index government effects on, 284–285 of household sector, 287–288 increase in, as source of economc growth, 303–305, 306–307 problem of cheap foreign, 348 unconstrained, 285 Labor supply curve, 247 Labor supply decision, 282–284 Laffer, Arthur, 322 Laffer curve, 322, 323 Lagakos, David, 389n Lagarde, Christine, 360 Laissez-faire economy, 36 Landefeld, J Steven, 112 Land market, 44 Lange, Fabian, 251 La Porta, Rafael, 306, 389n Law, economics and, Law of one price, 367–369 Laws Corn, 333, 342 minimum wage, 249 Least squares estimates, 410, 411 Legal tender, 190 Lehman Brothers, 269 Lender of last resort, 200 Lexus, 341 Li, Robin, 386 Liabilities, 194 Life-cycle theory of consumption, 281–282, 283 The Limits to Growth, 312–313 Linden, Greg, Liquidty property of money, 189 List, John, Literature, macroeconomics in, 98 Loaned up, 196 Long run fiscal policy effects in the, 233–234 Long-run aggregate supply (AS) curve, 225–226 potential output, natural rate of unemployment and, 257–259 Long-run growth, 123, 133–135, 301–313 from agriculture to industry, 302–303 disembodied technical change and, 308 embodied technical change and, 307–308 environmental and issues of sustainability and, 310–313 government strategy for, 304 increase in labor supply and, 303–305 increase in physical capital and, 305–306 increase in quality of the labor supply and, 306–307 labor productivity and, 309–310 sources of economic, 303–310 technical change and, 308 Lopez-de-Silanes, Florencio, 286, 389n Loss capital, 266 deadweight, 346 Lucas, Robert E., 325, 326 433 Lucas supply function, 325–326 policy implications of, 326 M M2 (broad money), 190, 191 Macroeconomics, 4–5, 6, 8, 90–100 aggregate output in, 95 alternative views in, 317–329 circular flow diagram in, 94–95 deflation in, 93 Federal Reserve in, 214 firms in, 214 goods-and-services market in, 95 history of, 97–99 household and firm behavior in, 280–297 household behavior in, 218n inflation in, 93, 100 labor market in, 95, 245–259 in literature, 98 money in, 188 money market in, 96 nonaccelerating inflation rate of unemployment and, 259 open-economy, 356–373 output growth in, 91–92 output level in, 214 role of the government in, 96–97 setting of wages and, 245 sticky wages and, 216 unemployment in, 93, 100 U.S economy since 1970 in, 95–96 Madrian, Brigitte, 146 Maduro, Nicholas, 93 Malthus, Thomas, 3, 45n, 303, 312–313 Managed floating system, 380 Marginal costs (MC), Marginalism, Marginal propensity to consume (MPC), 143 Marginal propensity to import (MPM), 361 Marginal propensity to save (MPS), 143–144 Marginal rate of transformation (MRT), 30 Market(s), 36 black, 77 capital, 44 constraints on, 75–79 efficient, financial, 96 goods, 140 goods-and-services, 95 housing, 264 input/factor, 44–45 input or factor, 44 labor, 44, 95, 245–259, 324–325 land, 44 money, 96 product, 65 product/output, 44–60 stock, 264, 266–268 434 Index Market clearing, rational expectations hypothesis and, 324–325 Market demand, 53–54 Market-determined exchange rates, 364 Market economy firms in, 289 Market equilibrium, 60–64, 73 Market supply, 59 Marshall, Alfred, 45n, 47 Marx, Karl, Mary Poppins (film), 193 Masterson, William Bat, 193 Mattel, McLain, Frank, 193 Meadows, Donella H., 312n Means of payment, money as, 188 Medium of exchange, money as, 188 Melitz, Marc, 343n Mendelsohn, Robert, 117 Menger, Carl, 45n MI (transactions money), 190, 191 Microeconomics, 4–5, 6, 410, 187, 312 inflation and, 129 Microfinance, 391–392 Microsoft, 37, 0, 265 Miguel, Ted, 395–396 Millennium Development Goals, 382, 384, 386 Millett, Bryce, 386n Minimum wage, 79 difference-in-differences in studying, 407 Minimum wage laws, 249 Mitsubishi, 37 Mixed systems, 37 Mobarak, Ahmed Mushfiq, 390n, 391n Models, 7–9 aggregate supply/aggregate demand, 220n alternative macroeconomic, 317–329 dynamic stochastic general equilibrium, 327 expressing, in words, graphs, and equationsw, Grameen, 392 testing, 8–9 Modigliani, Franco, 282n Monetarism, 318–321 debate with Keynesians and, 321 quantity theory of money in, 319–320 velocity of money in, 318–319 Monetary policy, 96–97, 162 effect on economy, 264 Fed control of, 234–235 Fed’s response to Z factors, 234–235 with fixed exchange rates, 372 with flexible exchange rates, 371 response lags for, 274 setting of, by FOMC, 198 shape of AD curve, 235 since 1970, 239–241 in supply-side economics, 321 time lags regarding, 271–274 zero interest rate bound, 235–237 Money commodity, 189–190 creation of, 195–197 defined, 188–189 demand for, 200–201 fiat, 189–190 liquidity property of, 189 M1 (transactions), 190, 191 M2 (broad), 190, 191 measuring supply of, in the U.S., 190–191 as medium of exchange, 188 quantity theory of, 319–320 role of banks in creating, 192–198 as store of value, 188–189 token, 190 as unit of account, 189 velocity of, 318–319 Money market, 96, 140 Morduch, Jonathan, 392n Morgan Stanley, 269 Mortgage-backed securities, 269 Morton, Melanie, 390, 391n Moser, Petra, 308n Moshi guohe, 393 Most-favored nation status, 345 Moving to Opportunity program, 404 Moyo, Dambisa, 385 Mugabe, Robert, 190 Muller, Nicholas, 117 Multiplier, 152–157 balanced-budget, 171–172, 183 deriving algebraically, 161 government spending, 168–169 open-economy, 361–362 size of, 296–297 in the real world, 157 tax, 170–171 Multiplier effects, 167–172, 218 Multiplier equation, 155, 157 Munshi, Kaivan, 386n Mutual absolute advantage, 334–335 N NASDAQ Composite, 267 National Bureau of Economic Research (NBER), 8, 95n, 112 National debt, 323 National defense protection and, 349–350 National income, 4, 109 National income and product accounts, 103 as achievement of the 20th century, 112 importance of, 103 variables in, 104 National security, protection in safeguarding, 348–349 Natural experiment, 394 Index Natural rate of unemployment, 129, 257–258 long-run aggregate supply curve, potential output and, 257–259 Near monies, 191 Negative relationship, 16 Negative wealth, 281 Neoclassical economics, 45n Net business transfer payments, 109–110 Net exports, 109 Net interest, 109 Net national product (NNP), 110 Net taxes, 163, 224, 232 Net worth, 49, 194 New classical economics, 234 New classical macroeconomics, 321, 323–338 development of, 323–324 Lucas supply function in, 325–326 rational expectations in, 324–326 evaluating, 327–328 New Keynesian economics, 327 real business cycle theory and, 327 Newspapers price(s) of, 66 New trade theory, 342 New York Federal Reserve Bank, Open Market Desk at, 220 New Zealand comparative advantage and, 336–337 production possibility frontier for, 335–336 terms of trade and, 338 Nixon, Richard, import restrictions and, 345 Nominal GDP, 111, 113–116 Nominal output, 113 Nominal wage rate, 283 Nonaccelerating inflation rate of unemployment (NAIRU), 258–259 Nondurable goods, 106 Nonlabor income, 284 wealth and, 283–284 Nonmarket activities, 283 Nonresidential investment, 108 Nonwage income, 284 Nordhaus, William, 112, 117 Normal goods, 311–312 Normal goods, 49 Normative economics, North American Free Trade Agreement (NAFTA), 345–346 Not in the labor force, 124 Notowidigdo, Matthew, 251 Null hypothesis, 408, 410, 411 O Obama, Barack, 4, 231 fiscal policy under, 174–175, 176, 239 Obstacles to trade, 342–343 Ockham’s razor, Ohlin, Bertil, 341 435 Oil, aggregate supply curve and, 217 Okun, Arthur, 295 Okun’s Law, 295 Open economy equilibrium output in an, 360–364 with flexible exchange rates, 364–372 Open-economy macroeconomics, 356–373 balance of payments in, 357–359 equilibrium output in, 360–364 open economy with flexible exchange rates in, 364–372 Open-economy multiplier, 361–362 Open Market Desk, 198, 203, 220 Open market operations, 198, 203, 220 Opportunity costs, 2, 24 frozen foods and, 25 law of increasing, 30–31 negative slope and, 30 Optimal level of inventories, 291–292 Organisation for Economic Co-operation and Development, 403n Organization for Co-operation and Development (OECD), 308 Organization of the Petroleum Exporting Countries (OPEC), 75 Origin, 15 Oster, Emily, 386n Output(s), 23 aggregate, 141 distribution of, 37 efficient mix of, 32 exclusion of, when produced abroad by domestically owned factors of production from gross domestic product, 105–106 Fed concern over price level than, 235 productivity growth and, 134–135 short-run relationship between unemployment and, 295–296 Output efficiency, 32 Output growth, 91–92, 133, 301 per-capita, 301 Outsourcing, 332 P Pande, Robini, 384 Paper transactions, exclusion, from gross domestic product, 105 Paradox of thrift, 156 Pareto, Vilfredo, 45n Peak, 91 Per-capita output growth, 133, 301 Perfect substitutes, 49 Permanent income, 282 Personal consumption expenditures, 106–107 Personal income, 111 Personal saving, 111 Peters, Christina, 390n Petillon, W F., 193 436 Index Phillips, A W., 253 Phillips Curve, 253, 295 aggregate supply and aggregate demand analysis and, 254–256 expectations and, 256–257 historical perspective of, 253–254 Physical capital, increase in, as source of economic growth, 304–306 Piketty, Thomas, 10 Planned aggregate expenditure, 149 interest rates and, 218–219 international sector and, 360–362 Planned investment, 147, 165 versus actual investment, 147 determinants of, 148 interest rate and, 147–148 Plant-and-equipment investment, 292–293 Policy economics, Pope, Devon, 51n Pope, Jaron, 51n Population growth, 303 Porter, Simon, 270n Positive economics, Positive relationship, 16 Positive wealth, 282 Post hoc, ego propter hoc, Potential GDP, 225–226, 226 Potential output, 226, 257 long-run aggregate supply curve, natural rate of unemployment and, 257–259 short-run equilibrium below, 226 Pounds, supply and demand for, 365–367 President’s Council of Economic Adfvisers, 97 Price(s) allocation of resources and, 79 exchange rates and, 371 import, 256 of newspapers, 66 quantity demanded and, 46–48 quantity supplied and, 56–57 of related products, 58 role in the consumption/labor supply decision, 283 sticky, 410, 327 Price ceiling, 75 Price feedback effect, 364 import and export prices and, 363–364 Price floor, 79 Price gouging, 77 Price levels Fed concern over as opposed to output, 235 size of multiplier and, 296 Price rationing, 62, 73–75 Price surprise, 326 Price system, 73–79 Price theory, 37 Prime rate, 213 Privately held federal debt, 177 Producer price indexes (PPIs), 130, 131 Product(s) prices of related, 58 Production, 23 cost of, 57–58 Production efficiency, 29 Production possibilities, graphical presentation of, 26–28 Production possibility frontier (PPF), 29, 302, 335–336 Productivity, 294 business cycle and, 294–295 Productivity growth, 133 output and, 134–135 Productivity problem, 310 The Productivity Problem: Alternatives for Action, 310 Product markets, demand and supply in, 65 Product/output markets, 44–45 demand in, 45–55 supply in, 55–60 Profit(s), 56 opportunities for, Promissory note, 96 Proprietors’ income, 109 Protection, 342, 347–351 in discouraging dependency, 349–350 environmental concerns and, 350 foreign labor and, 348 national security and, 348–349 protection of infant industries in, 350–351 in saving jobs, 347–348 unfair trade practices and, 348 Purchasing power parity theory, 367–369, 368 “Pure” fixed exchange rates, 378–379 p-values, 408, 410, 411 Q Quality demanded, 152n Quantitative analysis, Quantity demanded, 45 changes in, 45–46 price and, 46–48 Quantity supplied, 56, 152n price and, 56–57 Quantity theory of money, 319–320 testing, 319–320 Queuing, 75–76 Quinoa, 65 Quotas, 343 lifting of, 344 R Random experiments, 394, 402–403 Ratio coupons, 76–77 Rational expectations hypothesis, 324–326 formation of, 325 Lucas supply function in, 325–326 market clearing and, 324–325 Rationing alternative mechanisms for, 75–79 price, 62, 73–75 Index Ratios Reagan, Ronald deficit targeting and, 275 economic integration and, 345 gold standard and, 377 tax cuts under, 322, 323 Real business cycle theory, 327 new Keynesian economics and, 327 Real GDP, 111, 113–116 calculating, 113–114 exchange rate effects on, 370 Real interest rate, 132 Realized capital gains, 265 Real wage rate, 283 calculating, 283n Real wealth effect, 225 Recessions, 91, 92, 239 discouraged-worker effect in, 288 great, 410, 125 of 1974–1975, 318 of 1980–1982, 318, 322 predicting, 270 time use for the unemployed in a, 125 of 2000–2001, 269 of 2008–2009, 269, 270–271 Reciptrocal Trade Agreements Act (1934), 345 Recognition lags, 272–273 Regional economics, Regression analysis, 409–411 Regression discontinuity, 405 Relative interest rates, 369 Relative-wage explanation of unemployment, 251 Rental income, 109 Required reserve ratio, 195 Research, critical thinking about, 399–411 Reserves, 194–195 borrowed, 203 excess, 195 foreign exchange, 199 Residential investment, 108 Resource(s) allocation of, 67 prices and the allocation of, 79 Response lags, 272, 273 for fiscal policy, 273–274 for monetary policy, 274 Returns, diminishing, 303, 304, 305 Ricardo, David, 3, 24, 25, 26, 45n, 303, 333, 336–337, 351, 384 Robinson, James, 389 Romer, David, 220n Roommates, grades and, Roosevelt, Franklin D., 112 Rosenzweig, Mark, 386n Run on the Bank, 193, 194 S Sacerdote, Bruce, Sachs, Jeffrey, 385 437 Saez, Emmanuel, 285n Salient, 51 Samsung, 22 Samuelson, Paul, 112 Save More Tomorrow retirement plans, 146 Saving aggregate, 143 behavioral biases in, 146 personal, 111 Saving/investment approach to equilibrium, 151–152, 166–167 Savings accounts, 200–201 Scale economies, 343 Scarce, Scarcity in an economy or two or more, 24–29 in a one-person economy, 23–24 Schott, Peter, 344 Selection bias, 400–401, 403 Self-fulfilling, 256 Seltzman, Sam, 407n Serebryakov, Alexander Vladimirovitch, 202 Services, 106–107 Seva Mandir, 395 Shapiro, Jesse M., 25, 385, 404n Shapiro, Matthew, 282 Share of stock, 96, 265 Shea, Dennis, 146 Sherman Act (1890), 348 Shiller, Robert, 287 Shleifer, Andrei, 306, 389n Short, Luke, 193 Shortage, 60–62 Short run aggregate supply in the, 215–217 relationship between output and unemployment in, 295–296 unemployment rate and inflation in the, 252–257 Short-run equilibrium below potential output, 226 Short-term interest rates, 206, 207 Silva-Russo, Jorge, 51n Simple “Keysian” aggregate supply curve, 227, 230, 234 Slemrod, Joel, 282, 285n Slope, 16–18 negative, and opportunity cost, 30 Slump, 92 Smith, Adam, 3, 45n, 67, 384 Smoot-Hawley tariff, 343–344 Social goods See Public goods Social overhead capital, 388 Social Security benefits, 109, 285 Social welfare, GDP and, 116 Southeast Asia, export-led manufacturing in, 312 South Korea, industrial policy in, 304 Specialization, graphical presentation of gains from, 26–28 Sports tickets, rationing mechanisms for, 77–79 Stability, 10–11 Stabilization policy, 271 goals of, 271 438 Index Stagflation, 98–99, 237, 240 Standard and Poor’s 500 (S&P 500), 267 Standard of living, 301 Statistical discrepancy, 110, 359 Statistical significance, 408–409 Steel industry, national security and, 348–349 Steinbeck, John, 98, 129 Stewart, Jimmy, 193 Sticky prices, 410, 327 Sticky wages, 216, 245, 250 Stock market, 264 ”bubbles” in, 266 since 1948, 266–268 Stocks, 265 determining price of, 265–266 shares of common, 96, 265 Store of value, 188 money as, 188–189 Structural deficits, 179, 274 distinguishing between cyclical deficits and, 264 problems in, 264 Structural unemployment, 128–129, 246 Sub prime borrowers, 204 Sub-Saharan Africa, economic growth in, 303 Subsidies farm, 342 indirect taxes minus, 109 Substitution effect, 284 Substitutes, 49, 50 perfect, 49 Substitution effect of wage rate increase, 283 Supply determinants of, 57–59 excess, 62 law of, 56 market, 59 in product/output markets, 55–60, 65 Supply curve, 56–57 movement along a, 58 shift of a, 58 Supply schedule, 56 Supply shock, 217 Supply-side economics, 321–323 evaluating, 322–323 Laffer curve in, 322, 323 Supply-side inflation, 238 Surplus, 62 of government enterprises, 110 Survivor bias, 400 Sustainability, growth and the environment and, 310–313 T T Rowe Price, 146 T-accounts, 194–195, 196 Tariffs, 342 Tax(es) adding, to the consumption function, 165 alternative minimum, 178 corporate profits, 109 excise, 10 income, 284–285 net, 163, 224, 232 Taxes, income, 284–285 Tax evasion, 117 Tax multiplier, 170–171, 232 government spending and, 182–183, 185–186 Tax rebates, 282 Tax revenues, dependence on income, 183–186 Taylor, M Scott, 350n T-bills, 212 Technical change, 308–309 disembodied, 308 embodied, 307–308 Teenagers minimum wage laws and, 249 unemployment rate for, 126 Tefertiller, Casey, 193 Terms of trade, 338 Textbooks, purchase of, 50 Thaler, Richard, 146 Theories, testing, 8–9 Three-month Treasury Rate, 212 TIAA-CREF, 146 Time lags regarding monetary and fiscal policy, 271–274 types of, 272 Time series graph, 14–15 Time use, for the unemployed in a recession, 125 Tobin, James, 112 Token money, 190 Toshiba, Trade See International trade Trade barriers, 342–343 Trade deficit, 333, 358 Trade feedback effect, 363 Trade flows, explantations for observed, 341–342 Trade-offs, among the rich and poor, 35 Trade surplus, 333 Transfer payments, 94, 285 net business, 109–110 Transfers, 284–285 Trans Pacific Partnership, 345 Traveler’s checks, 191 Treasury bonds, notes, or bills, 96, 212 Trofimov, Yaroslav, 189 Trough, 92 Two-country/two-good world, trade and exchange rates in, 339–340 Tyndall Centre for Climate Change Research, 350 U Uber, Uncle Vanya (play), 202 Unconstrained labor supply, 285 Index Unemployment, 124 consequences of, 128, 129 costs of, 127–129, 245 cyclical, 128–129, 246 explaining existence of, 250–252 duration of, 126–127 frictional, 128–129, 246 getting job and, 251 in the Great Depression, 31, 246 measuring, 124–125 natural rate of, 129, 257–258 nonaccelerating inflation rate of, 258–259 relationship between inflation and, 245, 252–257 relative-wage explanation of, 251 short-run relationship between output and, 295–296 structural, 128–129, 246 time use for, in a recession, 125 Unemployment rates, 93, 117, 123, 124, 246 classical view of, 248 components of, 126–127 wide fluctuation in, 264 Unfair trade practices, 348 United Nations UN), Millennium Development Goals of, 310–313, 382, 384 United States globalization of economy in, 332 labor productivity in the, 309–310 structural deficit problems in, 264 Unit of account, 189 money as, 189 Urban economics, Uruguay Round, 344 U.S Treasury securities, 265 U.S.-Canadian Free Trade Agreement, 345 Used goods, exclusion, from gross domestic product, 105 Utility, 48 Wage rate classical view of, 246 effect of changes in, on labor supply, 283 nominal, 283 real, 283 Waldinger, Fabrian, 308n Walras, Leon, 45n Waugh, Michael, 389n Wealth, 49 negative, 281 nonlabor income and, 283–284 positive, 282 Wealth of Nations (Smith), Wei, Shang-Jin, 344 Weight, 113 Welfare benefits, 285 West, James, Wholesale price indexes, 130 William of Ockham, Williams, H., 405n Women in the labor force, 127, 217 Woolf, Virginia, 97 Words, expressing models in, World economy, interdependence of countries in, 373 World monetary systems, 376–380 fixed exchange rates and the Bretton Woods system, 378–379 gold standard, 376–378 problems with the Bretton Woods system, 379–380 “pure” fixed exchange rates, 378–379 World Trade Organization (WTO), 344–345 free trade policies of, 345, 350 V X Value added, 104 Vanguard, 146, 265 Variables, exogenous, 153 graphing two, 15 Velocity of money, 318–319 Veterans’ benefits, 285 Veterans’ disability stipends, 109 Vicious circle of poverty, 385 Vietnam, foreign direct investment in, 306 *Vishny, 306 Voena, Alessandra, 308n Volcker, Paul, 221, 240 Voluntary restraint, 343 negotiation with Japan, 343 W Wage(s) minimum, 79, 249 sticky, 216, 250, 245, 250 X-axis, 15, 29 X-intercept, 15 Xu, Eric, 386 Y Y-axis, 15, 29 Yellen, Janet, 97, 220, 221, 252 Y-intercept, 15 Yunus, Muhammad, 391, 392 Z Zero interest rate bound, 235–237 Z factors, 220, 221 Fed’s response to the, 234–235 Zilbotti, Fabrizio, 304n Zimbabwe currency debasement and, 190 foreign direct investment in, 306 439 Photo Credits Chapter 1: page 1, heeby/Fotolia; page 5, nenadmilosevic/Fotolia; page 9, James Woodson/Digital Vision/Getty Images Chapter 8: page 141, industrieblick/Fotolia; page 146, Nagy-Bagoly Arpad/123RF; page 153, Roberta Sherman Chapter 2: page 22, Richard Drew/AP Images; page 25, allesalltag/Alamy; page 35, Sharon Oster Chapter 9: page 162, Vlad G/Shutterstock; page 176, United States Government Chapter 3: page 42, Daniil Peshkov/123RF; page 50, Nicosan/Alamy; page 51, Phovoir/Alamy; page 65, Hughes Herve/Hemis/Alamy Chapter 4: page 72, RSBPhoto/Alamy; page 77, Liz Roll/FEMA; page 81, Arvind Garg/Alamy Chapter 5: page 90, WavebreakMediaMicro/ Fotolia; page 98 left, Edward Steichen/ Condé Nast Archive/Corbis; page 98 right, Russell Lee/Library of Congress Prints and Photographs Division [LC-USF34- 033703-D Chapter 6: page 103, Kadmy/Fotolia; page 107, David J Green - lifestyle 2/Alamy; page 112, Kheng Guan Toh/Shutterstock; page 117, Photobank/Fotolia Chapter 7: page 123, kstudija/Shutterstock; page 125, kzenon/123RF page 127, Photos.com; page 128, luxorphoto/Shutterstock; page 133, Patrizia Tilly/Shutterstock 440 Chapter 10: page 187, Dave Newman/Fotolia; page 189, Silva Vaughan-Jones/Shutterstock; page 193, National Archives and Records Administration; page 202, Geraint Lewis, Alamy Chapter 11: page 214, alexskopje/123RF; page 221, United States Government; page 223, Jason Stitt/123RF Chapter 12: page 231, wh1600/E+/Getty Images; page 238, Eleonora Dell’Aquila/123RF Chapter 13: page 245, Shutterstock; page 251, Vadim Guzhva/123RF Chapter 14: page 264, Sharon Oster; page 270, Trinette Reed/Blend Images/Getty Images Chapter 15: page 280, Digital Vision./ Photodisc/Getty Images; page 287, Andy Dean/Fotolia Chapter 16: page 301, Keng Po Leung/123RF; page 304, SeanPavonePhoto/Fotolia; page 308, National Archives and Records Administration, College Park, Md Chapter 17: page 317, bikeriderlondon/ Shutterstock; page 325, Chad McDermott/ Fotolia Chapter 18: page 332, mickyso/Fotolia; page 343, John Foxx Collection/Imagestate; page 344, 123RF; page 349, Timmary/ Fotolia Chapter 19: page 356, Samuel René Halifax/Fotolia; page 360, ruskpp/ Shutterstock Chapter 20: page 382, Niu Xiaolei/Xinhua/ Alamy; page 384, TheFinalMiracle/Fotolia; page 390, Zakir Hossain Chowdhury/ZUMA Press, Inc./Alamy; page 393, Aleksandar Todorovic/Fotolia Chapter 21: page 399, JackF/Fotolia; page 404, BlueSkyImages/Fotolia; page 405, Sean Pavone/Shutterstock; page 407, Tom Wang/ Fotolia This page intentionally left blank This page intentionally left blank This page intentionally left blank This page intentionally left blank This page intentionally left blank This page intentionally left blank ... foundation The themes of Principles of Macroeconomics, 12th edition, are the same themes of the first eleven editions The purposes of this book are to introduce the discipline of economics and to... Frederic Wolfe Professor of Economics and Management and former Dean of the Yale School of Management Professor Oster joined Case and Fair as a coauthor in the ninth edition of this book Professor Oster... 12th edition, as it was in the first edition, is to instill in students a fascination with both the functioning of the economy and the power and breadth of economics The first line of every edition