Income, Employment, and Economic Growth

, by Peterson, Wallace C.; Estenson, Paul S.

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ISBN: 9780393968545 | 0393968545
Cover: Hardcover
Copyright: 2/17/1996

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For more than thirty years, Wallace C. Peterson has stuck to his guns on two fronts: first that the best way to understand the macroeconomy is to master the Keynesian analytic framework and, second, that too much mathematics spoils the student's appreciation of basic macroeconomic concepts. Through the Keynesian framework, Professor Peterson has shown students how to interpret the macroeconomy and how to understand alternative economic perspectives.

Preface

xix

PART I Introduction and Measurement

(70)

1 An Overview of Macroeconomics

(27)

How Keynes Viewed the Economy's Behavior

(1)

Measuring the Economy's Performance

(1)

The National Output

(4)

Nominal versus Real GDP

(4)

Potential GDP

(1)

The Price Level

(5)

Index Numbers

(2)

Patterns of Price Changes

(2)

Employment and Unemployment

(3)

Labor Force Participation Rate

(1)

Fluctuations in Unemployment

(2)

The Trade Balance

(4)

The Trade Balance in Merchandise

(3)

Origins of Contemporary Macroeconomics

(6)

Say's Law of Markets

(1)

Economics as a Science

(1)

Quantity Theory of Money

(1)

Keynesian Theory

(2)

Monetarism: The Modern Quantity Theory

(1)

New Classical Economics

(1)

New Keynesian Economics

(1)

Post Keynesian Economics

(1)

Summary

(2)

2 Measuring the Economy's Performance

(41)

The Nature and Uses of National Income Accounting

(2)

Income and Wealth

(8)

The Concept of Income

(1)

The Circular Nature of Economic Activity

(2)

Using Models in Economics

(1)

The Concept of Wealth

(1)

The Capital Goods Component of Wealth

(1)

The Concept of Human Capital

(1)

Interactions between Income and Wealth

(2)

Output and Income Measures

(1)

Gross Domestic Product

(9)

Ex Ante and Ex Post Values

(2)

Simon Kuznets: Father of the GDP

(1)

Consumption Goods and Services (C)

(1)

Investment Goods (I)

(1)

Government Purchases of Goods and Services (G)

(2)

Transfer Expenditures (TR) and Taxes (TX)

(1)

Net Exports (X - M) or (I(f))

(1)

Final and Intermediate Goods and Services

(1)

Monetary Transactions and Productive Activity

(1)

Other Measures of Product and Income

(2)

Net National Product

(1)

National Income

(1)

Personal Income

(1)

Disposable Income

(1)

Price Indexes and Comparisons Over Time

(3)

Limitations Inherent in Aggregate Measures of Income and Product

(4)

Economic versus Social Values

(1)

Economic versus Social Costs

(1)

The Value of Leisure

(1)

Qualitative Changes in the National Output

(1)

The Composition of Output

(1)

Does GDP Measure Happiness?

(1)

The Distribution of the National Output

(1)

Income and Output per Capita

(1)

Employment and Unemployment

(6)

The Meaning of Maximum Employment

(2)

Problems in Measuring Unemployment

(3)

Employment and Output: The Production Function

(2)

Summary

(1)

Appendix

(4)

PART II The Basic Theory of Income and Employment

(138)

3 The Classical System

(27)

Functional Relationships in Economics

(2)

Classical Economics before Keynes

(4)

Three Propositions

(2)

Jean Baptiste Say

(1)

The Formal Classical Model

(8)

Some Microeconomic Foundations for Classical Analysis

(1)

The Labor Market

(3)

The Concept of Equilibrium

(1)

Say's Law and the Classical Theory of Interest

(1)

Saving, Investment, and the Rate of Interest

(2)

The Theory of the Price Level

(1)

The Complete Classical Model

(10)

A Classical Aggregate Supply and Aggregate Demand Model

(1)

The Classical Aggregate Supply Curve

(2)

The Classical Aggregate Demand Curve

(2)

The Complete Classical Model of Aggregate Supply and Demand

(1)

Real and Nominal Shocks in the Classical Model

(2)

Policy Implications of the Classical Theory

(1)

Classical Economics and the Great Depression

(1)

Summary

(1)

4 The Keynesian System

100

(42)

John Maynard Keynes: Architect of a Revolution

101

(1)

The Essence of the Income-Employment Problem

102

(1)

Keynesian Aggregate Supply

103

(9)

Aggregate Supply: A Real-World Example

106

(1)

The Ex Ante Aggregate Supply Curve

107

(5)

Keynesian Aggregate Demand

112

(7)

The Origin of Spending Decisions

112

(2)

Consumption Spending

114

(2)

Investment and Government Spending

116

(1)

Constructing the Keynesian Aggregate Demand Curve

117

(2)

The Equilibrium Level of Income and Employment

119

(10)

A Numerical Example

122

(1)

Characteristics of the Income Equilibrium

123

(1)

Changes in Income and Employment

124

(1)

The Keynesian Multiplier

125

(3)

Statics and Dynamics

128

(1)

The Keynesian Income-Expenditure Model Summarized

129

(1)

Bringing Economic Policy into the Analysis

129

(2)

A Keynesian-Classical Model

131

(8)

The Keynesian-Classical Aggregate Demand Curve

131

(1)

The Keynesian-Classical Aggregate Supply Curve

132

(2)

The Money Illusion and Aggregate Supply

134

(4)

Macroeconomic Equilibrium in a Keynesian-Classical Context

138

(1)

Comparing the Keynesian-Classical and Classical Views of Aggregate Demand and Aggregate Supply

139

(1)

Summary

140

(2)

5 Money and Interest in the Keynesian System

142

(32)

The Nature of Money

143

(4)

From Gold to Electronic Blips: A Capsule History of Money

144

(1)

The Functions of Money

145

(1)

Neutral versus Nonneutral Money

146

(1)

The Supply of Money

147

(4)

Money and Its Creation

148

(2)

Measuring the Nation's Money Supply

150

(1)

How Interest Rates Are Determined

151

(1)

The Loanable Funds Theory of Interest

151

(7)

Bond Prices and Interest Rates

152

(1)

The Supply Curve for Loanable Funds

153

(2)

The Demand Curve for Loanable Funds

155

(3)

The Liquidity Preference Theory of Interest

158

(4)

The Significance of Keynesian Interest Theory

161

(1)

Which Theory?

162

(1)

Interest Rates and Aggregate Demand

163

(9)

The Rate of Interest and Investment Spending

164

(3)

Interest Rates and the Trade Balance

167

(4)

Interest Rate Differentials and the Trade Balance

171

(1)

Summary

172

(2)

6 The IS-LM Model

174

(35)

Constructing the IS-LM Model

175

(1)

Sir John Hicks and the IS-LM Curves

176

(11)

Equilibrium in the Goods Sphere

177

(1)

The IS Curve

178

(2)

Equilibrium in the Monetary Sphere

180

(1)

The LM Curve

181

(5)

General Equilibrium

186

(1)

Expanding the IS-LM Model

187

(4)

Changes in the Equilibrium Values of Income and Interest

191

(3)

Shifts in the IS Curve

192

(2)

Shifts in the LM Curve

194

(1)

The Price Level and the IS-LM Model

194

(11)

The Price Level as an Exogenous Variable

195

(3)

The Keynes and Pigou Effects

198

(3)

The Price Level as an Endogenous Variable

201

(4)

Public Policy and the IS-LM Model

205

(2)

Summary

207

(2)

PART III Exploring the Foundations of Aggregate Demand and Aggregate Supply

209

(294)

7 Consumption, Saving, and the Multiplier

211

(49)

The Determinants of Consumption Expenditure

212

(12)

The Keynesian Consumption Function

213

(2)

Technical Attributes of the Consumption Function

215

(2)

The Saving Function

217

(2)

Are Americans Failing to Save Enough?

219

(1)

Empirical Verification

220

(4)

The Equilibrium Income Level

224

(4)

The Identity of Saving and Investment

228

(2)

The Theory of the Multiplier

230

(11)

The Formal Multiplier Process

234

(2)

Algebraic Statement of the Multiplier

236

(3)

Summary Remarks on the Theory of the Multiplier

239

(1)

Putting Theory into Practice: The 1964 Kennedy-Johnson Tax Cut

240

(1)

Consumption and the Multiplier in the IS-LM Model

241

(3)

Income, Consumption, and Saving in the Long Run

244

(1)

Expanded Theories of Consumption

245

(7)

The Relative Income Hypothesis

247

(1)

The Permanent Income Hypothesis

248

(1)

The Life-Cycle Income Hypothesis

249

(2)

Which Hypothesis?

251

(1)

Other Influences on Consumption

252

(6)

Attitudes toward Thrift

252

(1)

Asset Holdings by the Consumer

252

(3)

The Distribution of Income

255

(1)

The Rate of Interest

255

(1)

Price Changes and Consumer Expectations

256

(1)

Consumer Credit

257

(1)

A Concluding Comment

258

(1)

Summary

258

(2)

8 Investment and Finance

260

(45)

The Investment Decision

262

(4)

Investment and Expected Income

263

(1)

The Costs of Investment

264

(2)

The Basic Framework of Investment Theory

266

(13)

The Discount Formula

267

(2)

The Marginal Efficiency of Capital

269

(2)

Keynes's Investment Demand Schedule (Curve)

271

(2)

Shifts in the Keynesian Investment Demand Schedule (Curve)

273

(1)

The Shape of the Keynesian Investment Demand Schedule (Curve)

274

(5)

Current Income and Investment Expenditure

279

(5)

The Marginal Propensity to Invest and Equilibrium Income

281

(1)

Induced Investment Expenditure and the Multiplier

282

(2)

Investment and the IS-LM Model

284

(1)

The Acceleration Principle

285

(5)

A Practical Use for the Acceleration Principle

287

(1)

Limitations of the Acceleration Principle

288

(1)

The Flexible Accelerator Hypothesis

289

(1)

Theory and Reality

290

(2)

Financing Investment

292

(8)

Financial Instruments and Real Capital Assets

292

(1)

Pricing Financial Assets

293

(2)

Boom Conditions, Asset Values, and Investment Spending

295

(1)

Speculation versus Enterprise

296

(2)

The Supply Curve for Finance

298

(2)

Other Influences on the Investment Decision

300

(3)

The Role of Government

300

(1)

The Role of Technology

301

(1)

The Role of Market Structure

302

(1)

A Summary View

303

(1)

Summary

304

(1)

9 Public Expenditures, Taxes, and Finance

305

(44)

Government Purchases of Goods and Services and the Income Level

305

(7)

Government Expenditures and the Multiplier

309

(3)

Transfer Expenditures and the Income Level

312

(6)

Transfer Expenditures and the Multiplier

317

(1)

Taxes and the Income Level

318

(6)

Transfers, Taxes, and the Multiplier

321

(3)

Government and the IS-LM Model

324

(1)

The Federal Budget

325

(12)

The Full-(High-)Employment Budget

326

(4)

Structural and Cyclical Deficits

330

(1)

Built-in Stabilizers

331

(4)

The Balanced Budget Thesis

335

(2)

The Debt and the Deficit in the 1980s and Beyond

337

(4)

Gramm-Rudman-Hollings: A Balanced Budget by Fiat

339

(2)

The Role of Finance

341

(5)

Borrowing and the Crowding-out Phenomenon

342

(1)

Monetizing the Debt

342

(1)

The Checkered History of U.S. Income Taxes

343

(1)

Government Borrowing and the IS-LM Model

344

(1)

Budget Surpluses

345

(1)

Summary

346

(1)

Appendix

347

(2)

10 The International Economy

349

(51)

The Open Economy

351

(3)

The Nature of a Nation's Foreign Balance

354

(5)

The Structure of the Balance of Payments Statement

355

(1)

The Current Account

355

(2)

The Capital Account

357

(1)

International Equilibrium and the Balance of Payments

358

(1)

The Exchange Rate

359

(3)

Determination of the Exchange Rate

362

(8)

The Theory of Purchasing Power Parity

363

(3)

Real Interest Rate Differentials

366

(3)

Income Changes and Central Bank Intervention

369

(1)

Exports, Imports, and the Structure of Aggregate Demand

370

(2)

Income Equilibrium in an Open Economy

372

(4)

Foreign Trade and the Multiplier

376

(3)

Graphic Illustrations of the Multiplier in an Open Economy

379

(2)

Income Changes and the Export-Import Balance

381

(2)

Exchange Rates and the Export-Import Balance

383

(2)

The Balance of Payments Curve

385

(8)

Living beyond Our Means: Foreign Borrowing and the U.S. Economy

386

(3)

The Slope and Position of the Balance of Payments Curve

389

(1)

A General Equilibrium Model in an Open Economy

390

(3)

Recent Developments in International Macroeconomics

393

(4)

A Summary Comment on the Determination of Aggregate Demand

397

(1)

Summary

398

(2)

11 Money and Output

400

(55)

The Role of Money in Keynesian Theory

401

(1)

The Demand for Money

401

(10)

The Reasons for Holding Money

402

(2)

The Transactions and Precautionary Demands for Money

404

(2)

The Asset Demand for Money

406

(3)

The Total Demand for Money

409

(2)

Modifications to the Keynesian Conception of Money Demand

411

(3)

Some Empirical Findings

414

(2)

The Supply of Money

416

(8)

The Money Multiplier

417

(3)

Calculation of the Money Multiplier

420

(2)

The Money Supply: Exogenous or Endogenous?

422

(2)

Monetary Equilibrium

424

(1)

Money and Market Capitalism

425

(2)

The Modern Quantity Theory Challenge to Keynesian Economics

427

(1)

Origins of the Modern Quantity Theory

427

(14)

Guru for the Conservatives: Milton Friedman

430

(1)

The Basic Nature of the Monetarist Challenge

431

(2)

The Structure of Monetarist Theory

433

(2)

The Friedman Theory of the Demand for Money

435

(6)

Policy Implications of the Modern Quantity Theory

441

(2)

The Outcome of the Monetarist Challenge

443

(9)

What Causes Short-Term Changes in Aggregate Demand?

444

(2)

The Money Supply, Nominal GDP, and Inflation

446

(3)

Stability of the Demand for Money Function

449

(1)

The Interest Elasticity of the Demand for Money

450

(1)

The Central Bank's Control of the Money Supply

451

(1)

A Concluding Comment

452

(1)

Summary

453

(2)

12 Output, Employment, and Inflation

455

(48)

A Short History of the Price Level in the United States

456

(10)

The Rate of Inflation

459

(2)

What Is Wrong with Inflation?

461

(1)

Deflation and the Economy: A Mixed Blessing

462

(4)

The Inflationary Process

466

(6)

Demand-Pull Inflation

466

(2)

Cost-Push Inflation

468

(4)

Toward a Keynesian Theory of the Price Level

472

(10)

Prices in the Short Run

472

(6)

Prices in the Long Run

478

(4)

Output and Prices: Some Empirical Findings

482

(2)

The Phillips Curve

484

(7)

Challenges to the Phillips Curve Analysis

487

(4)

The Phillips Curve: Alternative Interpretations

491

(4)

Incomes Policy in the 1960s

495

(1)

Incomes Policy in the 1970s

496

(2)

The Future of Incomes Policies

498

(3)

Summary

501

(2)

PART IV Growth, Fluctuations, and Public Policy

503

(118)

13 Productivity and Growth

505

(40)

The Nature of Economic Growth

506

(1)

The Growth Record of the U.S. Economy

507

(1)

Economic Growth and the Production Function

508

(10)

Theoretical Sources of Economic Growth

511

(1)

Sources of Growth in the U.S. Economy

512

(2)

Measuring Potential Output

514

(4)

The Productivity Crisis

518

(5)

Why Has Productivity Growth Slowed?

520

(3)

The Productivity Crisis: What Can Be Done?

523

(2)

Theories of Economic Growth

525

(11)

Are Things Going to Get Better?

526

(1)

The Domar-Harrod Models

527

(4)

The Required Rate of Income Growth

531

(2)

Harrod's Approach to Economic Growth

533

(3)

Concluding Observations on the Domar-Harrod Analysis of Economic Growth

536

(1)

Neoclassical Growth Theory

537

(3)

Endogenous Growth Theory

540

(3)

Summary

543

(2)

14 Business Cycles and Forecasting

545

(31)

The Nature of the Business Cycle

547

(1)

Measuring the Business Cycle

548

(3)

Long Waves in Economic Life

551

(2)

What Happens in a Typical Business Cycle

553

(3)

Causes of the Business Cycle

556

(6)

External Causes

558

(2)

Internal Causes

560

(2)

The General Theory

562

(2)

The Political Business Cycle

564

(1)

Economic Forecasting

564

(2)

Methods of Forecasting

566

(6)

Extrapolation

566

(1)

The Consensus Approach

566

(1)

The Use of Indicators

567

(1)

The Baby Boomers Make Forecasting Easy

568

(3)

Econometric Models

571

(1)

The Effectiveness of Forecasting

572

(1)

Summary

573

(3)

15 Sixty-five Years of Macroeconomic Policy

576

(45)

The Principles of Economic Policy

577

(8)

Monetary Policy and Its Application

578

(2)

Fiscal Policy and Its Application

580

(2)

Theoretical Limits to Fiscal and Monetary Policies

582

(3)

Stabilization Policy in Historical Perspective

585

(29)

The Great Depression and World War II

585

(1)

What Caused the Great Depression and Why Did It Last So Long?

585

(2)

What Ended the Great Depression?

587

(2)

The Truman-Eisenhower Years

589

(1)

The Kennedy Era

590

(6)

Vietnam and Its Aftermath

596

(4)

The 1970s

600

(3)

The Reagan Revolution

603

(1)

A Critique of the Reagan Revolution

604

(5)

Jobs and Presidential Politics

609

(1)

The Bush and Clinton Administrations

610

(4)

The "Republican Revolution" and the Future of Macroeconomic Policy

614

(2)

Some General Observations on Macroeconomic Policy

616

(2)

Summary

618

(3)

PART V Alternative Perspectives on Macroeconomic Theory and Policy

621

(72)

16 The Rebirth of Classical Economics

623

(26)

The New Classical Economics: A Challenge to Keynes

623

(23)

The Theory of Rational Expectations

626

(3)

The Theory of Continuous Market Clearing

629

(1)

The Policy Implications of the New Classical Economics

630

(2)

Expectations in Keynes and in the New Classical Economics

632

(2)

The New Classical Economics and the Business Cycle

634

(3)

Real Business Cycles

637

(2)

Some Critical Observations

639

(3)

A Farewell to Armchair Economics

642

(4)

Supply-Side Economics

646

(1)

Summary

647

(2)

17 The New Keynesian Macroeconomics

649

(22)

New Keynesian Economics and the Aggregate Supply Curve

650

(2)

The Micro Foundations of New Keynesian Economics

652

(5)

A Contract-Based New Keynesian Model

652

(3)

Sticky Prices: Markup Pricing and Menu Costs

655

(2)

Efficiency Wage Theories of Involuntary Unemployment

657

(8)

Explanations for Efficiency Wages

659

(3)

The Empirical Evidence for Efficiency Wages

662

(3)

Interdependence and Macroeconomic Externalities

665

(1)

Credit Rationing and Aggregate Demand

666

(1)

The Policy Implications of the New Keynesian Economics

667

(1)

Summary

668

(3)

18 Post Keynesian Economics

671

(22)

Fundamental Concerns of the Post Keynesians

672

(11)

Rejection of Walrasian General Equilibrium Theory

672

(3)

The Economy and Historic Time

675

(1)

Uncertainty and Expectations

676

(3)

Institutions and the Economy

679

(4)

Minsky's Financial Instability Hypothesis

683

(8)

Essential Elements in How Market Capitalism Works

686

(2)

The Sequence of Events

688

(2)

Some Conclusions

690

(1)

Summary

691

(2)

A Glossary of Macroeconomic Terms

693

(10)

Index

703

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Income, Employment, and Economic Growth

Summary

Table of Contents

Supplemental Materials