Macroeconomics Principles and Policy

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ISBN: 9780030268588 | 0030268583
Cover: Paperback
Copyright: 8/2/1999

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Since introducing the aggregate supply/aggregate demand model as a fundamental tool for learning economics in the first edition of their textbook, William Baumol and Alan Blinder have, for over two decades, led the teaching and learning of economics with their authoritative and timely discussion of the field. Now in its eighth edition, Macroeconomics: Principles and Policy remains a time-tested tool in teaching and learning the ever-evolving field of economics.

About the Authors

Preface

PART I Getting Acquainted with Economics

(90)

What is Economics

(14)

Ideas for Beyond the Final Exam

(5)

How Much Does It Really Cost

(1)

Attempts to Repeal the Laws of Supply and Demand---The Market Strikes Back

(1)

The Surprising Principle of Comparative Advantage

(1)

Trade Is a Win-Win Situation

(1)

The Importance of Thinking at the Margin

(1)

Externalities: A Shortcoming of the Market Cured by Market Methods

(1)

Why the Costs of Education and Medical Care Keep Growing

(1)

The Trade-off between Efficiency and Equality

(1)

The Short-Run Trade-off between Inflation and Unemployment

(1)

Inflation Distorts Measurements

(1)

Why Was It Important to Reduce the Budget Deficit

(1)

Productivity Growth Is (Almost) Everything in the Long Run

(1)

Epilogue

(1)

Inside the Economist's Tool Kit

(6)

Economics as a Discipline

(1)

The Need for Abstraction

(2)

The Role of Economic Theory

(1)

What Is an Economic Model

(1)

Reasons for Disagreements: Imperfect Information and Value Judgments

(1)

Common Sense: Useful but Dangerous

(1)

Summary

(1)

Key Terms

(1)

Questions for Review

(1)

The Use and Misuse of Graphs

(14)

Graphs Used in Economic Analysis

(1)

What's Wrong With This Graph

(5)

Two-Variable Diagrams

(2)

The Definition and Measurement of Slope

(2)

Rays through the Origin and 45° Lines

(1)

Squeezing Three Dimensions into Two: Contour Maps

(1)

Perils in the Interpretation of Graphs

(4)

The Interpretation of Growth Trends

(1)

Distorting Trends by Choice of the Time Period

(2)

Dangers of Omitting the Origin: The Puzzle Solved

(3)

Unreliability of Steepness and Choice of Units

(2)

Summary

(1)

Key Terms

(1)

Questions for Review

(1)

The Economy: Myth and Reality

(20)

The American Economy: A Thumbnail Sketch

(5)

A Private Enterprise Economy

(2)

A Relatively ``Closed'' Economy

(1)

A Growing Economy ... but with Inflation

(2)

Bumps along the Growth Path: Recessions

(1)

The Inputs: Labor and Capital

(4)

The American Workforce: Who Is in It

(1)

The American Workforce: What It Does

(2)

The American Workforce: What It Earns

(1)

Capital and Its Earnings

(1)

The Outputs: What Does America Produce

(1)

The Central Role of Business Firms

(1)

Measuring Economic Progress

(2)

What's Missing from the Picture? Government

(4)

The Government as Referee

(1)

The Government as Business Regulator

(1)

Government Expenditures

(1)

Taxes in America

(1)

The Government as Redistributor

(1)

Conclusion: The Mixed Economy

(1)

Summary

(1)

Key Terms

(1)

Questions for Review

(1)

Scarcity and Choice: The Economic Problem

(16)

What to do with the Budget Surplus

(1)

Scarcity, Choice, and Opportunity Cost

(2)

Opportunity Cost and Money Cost

(1)

Scarcity and Choice for a Single Firm

(2)

The Production Possibilities Frontier

(1)

The Principle of Increasing Costs

(1)

Scarcity and Choice for the Entire Society

(1)

Scarcity and Choice Elsewhere in the Economy

(1)

Allocating the Budget Surplus

(2)

Application: Economic Growth in the United States and the Asian ``Tigers''

(2)

The Concept of Efficiency

(1)

The Three Coordination Tasks of any Economy

(1)

Specialization Fosters Efficient Resource Allocation

(2)

The Wonders of the Division of Labor

(1)

The Amazing Principle of Comparative Advantage

(1)

Specialization Leads to Exchange

(1)

Markets, Prices, and the Three Coordination Tasks

(1)

Last Word: Don't Confuse Ends with Means

(1)

Summary

(1)

Key Terms

(1)

Questions for Review

(2)

Supply and Demand: An Initial Look

(24)

What in the World Happened to those Asian Currencies

(1)

The Invisible Hand

(2)

Demand and Quantity Demanded

(3)

The Demand Schedule

(1)

The Demand Curve

(1)

Shifts of the Demand Curve

(2)

Supply and Quantity Supplied

(4)

The Supply Schedule and the Supply Curve

(2)

Shifts of the Supply Curve

(2)

Supply and Demand Equilibrium

(3)

The Law of Supply and Demand

(1)

Effects of Demand Shifts on Supply-Demand Equilibrium

(1)

Application: The Fall of the Rupiah

(2)

Supply Shifts and Supply-Demand Equilibrium

(1)

Application: Who Really Pays That Tax

(1)

Fighting the Invisible Hand: The Market Fights Back

(5)

Restraining the Market Mechanism: Price Ceilings

(1)

Case Study: Rent Controls in New York City

(2)

Restraining the Market Mechanism: Price Floors

(1)

Case Study: Sugar Price Supports

(1)

A Can of Worms

(1)

A Simple but Powerful Lesson

(1)

Summary

(1)

Key Terms

(1)

Questions for Review

(3)

PART II The Macroeconomy: Aggregate Supply and Demand

(120)

The Realm of Macroeconomics

(20)

How did we Grow so Fast

(1)

Drawing a Line Between Macroeconomics and Microeconomics

(2)

Aggregation and Macroeconomics

(1)

Foundations of Aggregation

(1)

The Line of Demarcation Revisited

(1)

Supply and Demand Reinterpreted Through a Macroeconomic Lens

(1)

A Quick Review

(1)

Moving to Macroeconomic Aggregates

(1)

Inflation

(1)

Recession and Unemployment

(1)

Economic Growth

(1)

Gross Domestic Product

(4)

Money as the Measuring Rod: Real versus Nominal GDP

(1)

What Gets Counted in GDP

(1)

Limitations of the GDP: What GDP Is Not

(2)

The Economy on a Roller Coaster

101

(7)

Growth, But with Fluctuations

101

(2)

Inflation and Deflation

103

(1)

The Great Depression

103

(2)

From World War II to 1973

105

(1)

The Great Stagflation, 1973--1980

106

(1)

Reaganomics and Its Aftermath

106

(1)

Clintonomics: Deficit Reduction and ``The Best Economy in 30 Years''

107

(1)

The Problem of Macroeconomic Stabilization: A Sneak Preview

108

(2)

Combating Unemployment

109

(1)

Combating Inflation

109

(1)

Does It Really Work

109

(1)

Summary

110

(1)

Key Terms

111

(1)

Questions for Review

111

(2)

The Goals of Macroeconomic Policy

113

(28)

The Goal Of Economic Growth

114

(1)

Is More Growth Always Better

114

(1)

The Capacity to Produce: Potential GDP

115

(1)

Alternative Measures of Economic Growth

116

(1)

The U.S. Productivity Slowdown: Is America on the Decline

117

(1)

Explanations for the Productivity Slowdown

118

(1)

Lagging Investment

118

(1)

High Energy Prices

118

(1)

Workforce Skills

119

(1)

A Technological Slowdown

119

(1)

The Costs Of Unemployment

119

(2)

The Human Costs of High Unemployment

121

(1)

Counting the Unemployed: The Official Statistics

122

(1)

Types of Unemployment

123

(1)

How Much Employment is ``Full Employment''

124

(1)

Unemployment Insurance: The Invaluable Cushion

124

(2)

The Costs Of Inflation

126

(1)

Inflation: The Myth and the Reality

126

(3)

Inflation and Real Wages

126

(1)

The Illusion of Traditional ``Fair'' Prices

127

(1)

The Importance of Relative Prices

127

(2)

Inflation as a Redistributor of Income and Wealth

129

(1)

Real Versus Nominal Interest Rates

129

(1)

Inflation Distorts Measurements

130

(2)

Confusing Real and Nominal Interest Rates

131

(1)

Public Utility Regulation

131

(1)

The Malfunctioning Tax System

131

(1)

Usury Laws

131

(1)

Other Costs of Inflation

132

(1)

The Costs of Low Versus High Inflation

132

(1)

Low Inflation Does not Necessarily Lead to High Inflation

133

(2)

Summary

135

(1)

Key Terms

135

(1)

Questions for Review

135

(1)

How Statisticians Measure Inflation

136

(1)

Index Numbers for Inflation

136

(1)

The Consumer Price Index

136

(1)

How to Use a Price Index to ``Deflate'' Monetary Figures

137

(1)

The GDP Deflator

138

(1)

Summary

138

(1)

Key Terms

138

(1)

Questions for Review

139

(2)

Income and Spending: The Powerful Consumer

141

(20)

Demand Management and the Ornery Consumer

142

(1)

Aggregate Demand, Domestic Product, and National Income

143

(1)

The Circular Flow of Spending, Production, and Income

144

(2)

Consumer Spending and Income: The Important Relationship

146

(2)

The Consumption Function and the Marginal Propensity to Consume

148

(2)

Movements Along Versus Shifts of the Consumption Function

150

(2)

Other Determinants of Consumer Spending

150

(2)

Why Tax Policy Failed in 1975

152

(1)

How Predictable is Consumer Behavior

153

(1)

Summary

154

(1)

Key Terms

154

(1)

Questions to Review

155

(1)

National Income Accounting

155

(1)

Defining GDP: Exceptions to the Rules

155

(1)

GDP as the Sum of Final Goods and Services

156

(1)

GDP as the Sum of All Factor Payments

156

(2)

GDP as the Sum of Values Added

158

(1)

Summary

159

(1)

Key Terms

160

(1)

Questions for Review

160

(1)

Demand-Side Equilibrium: Unemployment or Inflation

161

(18)

Why Does the Market Permit Unemployment

162

(1)

The Extreme Variability of Investment

163

(2)

Business Confidence and Expectations about the Future

163

(1)

The Level and Growth of Demand

164

(1)

Technical Change and Product Innovation

164

(1)

The Real Rate of Interest

164

(1)

Tax Provisions

165

(1)

The Determinants of Net Exports

165

(1)

National Incomes

165

(1)

Relative Prices and Exchange Rates

166

(1)

Equilibrium on the Demand Side of the Economy

166

(5)

The Meaning of Equilibrium GDP

167

(1)

Constructing the Expenditure Schedule

168

(2)

The Mechanics of Income Determination

170

(1)

The Aggregate Demand Curve

171

(2)

Demand-Side Equilibrium and Full Employment

173

(1)

The Coordination of Saving and Investment

174

(2)

Summary

176

(1)

Key Terms

177

(1)

Questions for Review

177

(1)

The Simple Algebra of Income Determination

177

(1)

Questions for Review

178

(1)

Changes on the Demand Side: Multiplier Analysis

179

(16)

Would Cutting Taxes Work in Japan

180

(1)

The Magic of the Multiplier

180

(4)

Demystifying the Multiplier: How It Works

181

(1)

Algebraic Statement of the Multiplier

182

(2)

The Multiplier: A General Concept

184

(2)

The Multiplier Effect of Consumer Spending

184

(1)

Other Multipliers

185

(1)

The Multiplier in Reverse

186

(1)

The Paradox of Thrift

186

(1)

Tax Cutting in Japan

187

(1)

The Multiplier and the Aggregate Demand Curve

188

(1)

Summary

189

(1)

Key Terms

189

(1)

Questions for Review

189

(1)

The Simple Algebra of the Multiplier

190

(1)

The Multiplier with Variable Imports

190

(2)

Summary

192

(1)

Questions for Review

193

(2)

Supply-Side Equilibrium: Unemployment and Inflation

195

(16)

How Could Inflation Fall While the Economy Boomed

196

(1)

The Aggregate Supply Curve

196

(3)

Why the Aggregate Supply Curve Slopes Upward

196

(1)

Shifts of the Aggregate Supply Curve

197

(2)

Equilibrium of Aggregate Demand and Supply

199

(1)

Recessionary and Inflationary Gaps Revisited

200

(2)

Adjusting to a Recessionary Gap: Deflation or Unemployment

202

(1)

Does the Economy Have a Self-Correcting Mechanism

203

(1)

An Example from Recent History: Disinflation in the 1990s

203

(1)

Adjusting to an Inflationary Gap: Inflation

203

(3)

Demand Inflation and Stagflation

204

(1)

A Recent Example

205

(1)

Stagflation from a Supply Shock

206

(1)

Explaining the Roaring Nineties

206

(1)

Inflation and the Multiplier

207

(1)

A Role for Stabilization Policy

208

(1)

Summary

209

(1)

Key Terms

209

(1)

Questions for Review

209

(2)

PART III Fiscal and Monetary Policy

211

(130)

Managing Aggregate Demand: Fiscal Policy

213

(20)

How to Stimulate Japan's Economy

214

(1)

Income Taxes and the Consumption Schedule

214

(3)

The Multiplier Revisited

217

(2)

Automatic Stabilizers

218

(1)

Multipliers for Tax Policy

219

(1)

The Japanese Economy

219

(1)

Government Transfer Payments

220

(1)

Planning Expansionary Fiscal Policy

220

(2)

Planning Contractionary Fiscal Policy

222

(1)

The Choice Between Spending Policy and Tax Policy

222

(1)

Some Harsh Realities

223

(1)

The Idea Behind Supply-Side Tax Cuts

224

(1)

Some Files in the Ointment

225

(2)

Toward an Assessment of Supply-Side Economics

226

(1)

Two Sides to the Supply Side

227

(1)

Summary

228

(1)

Key Terms

228

(1)

Questions for Review

228

(1)

Algebraic Treatment of Fiscal Policy and Aggregate Demand

229

(4)

Questions for Review

231

(2)

Money and the Banking System

233

(22)

What Caused the Biggest ``Bank Run'' in History

234

(1)

The Nature of Money

235

(3)

Barter versus Monetary Exchange

235

(1)

The Conceptual Definition of Money

236

(1)

What Serves as Money

236

(2)

How the Quantity of Money is Measured

238

(2)

239

(1)

239

(1)

Other Definitions of the Money Supply

240

(1)

The Banking System

240

(4)

How Banking Began

241

(2)

Principles of Bank Management: Profits versus Safety

243

(1)

Bank Regulation

244

(1)

The Origins of the Money Supply

244

(2)

How Bankers Keep Books

244

(2)

Banks and Money Creation

246

(5)

The Limits to Money Creation by a Single Bank

246

(2)

Multiple Money Creation by a Series of Banks

248

(2)

The Process in Reverse: Multiple Contractions of the Money Supply

250

(1)

Why the Deposit Creation Formula is Oversimplified

251

(1)

The Asian Bank Run Explained

252

(1)

The Need for Monetary Policy

252

(1)

Summary

253

(1)

Key Terms

253

(1)

Questions for Review

254

(1)

Monetary Policy and the National Economy

255

(20)

Just Why is Alan Greenspan so Important

256

(1)

Money and Income: The Important Difference

257

(1)

America's Central Bank: The Federal Reserve System

257

(3)

Origins and Structure

257

(1)

The Independence of the Fed

258

(2)

Controlling the Money Supply: Open Market Operations

260

(3)

Open Market Operations, Bond Prices, and Interest Rates

262

(1)

Other Methods of Monetary Control

263

(2)

Lending to Banks

264

(1)

Changing Reserve Requirements

265

(1)

Supply-Demand Analysis of the Money Market

265

(3)

The Money Supply Mechanism

265

(1)

The Demand for Money

266

(1)

Equilibrium in the Money Market

267

(1)

How Monetary Policy Works

268

(1)

Investment and Interest Rates

269

(1)

Monetary Policy and Total Expenditure

269

(1)

Money and the Price Level in the Keynesian Model

270

(2)

Application: Why the Aggregate Demand Curve Slopes Downward

271

(1)

From Models to Policy Debates

272

(1)

Summary

272

(1)

Key Terms

273

(1)

Questions for Review

273

(2)

The Debate Over Monetary Policy

275

(22)

Should we Forsake Stabilization Policy

276

(1)

Velocity and the Quantity Theory of Money

276

(5)

The Determinants of Velocity

278

(2)

Monetarism: The Quantity Theory Modernized

280

(1)

Fiscal Policy, Interest Rates, and Velocity

281

(2)

Application: The Multiplier Formula Revisited

283

(1)

Application: Deficit Reduction and Investment

283

(1)

Debate: Should Stabilization Policy Rely on Fiscal or Monetary Policy

283

(2)

Debate: Should the Fed Control the Money Supply or Control Interest Rates

285

(3)

Two Imperfect Alternatives

286

(1)

What Has the Fed Actually Done

286

(2)

Debate: The Shape of the Aggregate Supply Curve

288

(2)

Debate: Should the Government Intervene

290

(2)

Lags and the Rules-versus-Discretion Debate

291

(1)

Dimensions of the Rules-Versus-Discretion Debate

292

(2)

How Fast Does the Economy's Self-Correcting Mechanism Work

292

(1)

How Long Are the Lags in Stabilization Policy

292

(1)

How Accurate Are Economic Forecasts

292

(1)

The Size of Government

292

(1)

Uncertainties Caused by Government Policy

293

(1)

A Political Business Cycle

293

(1)

What Should be Done

294

(1)

Summary

294

(1)

Key Terms

295

(1)

Questions for Review

295

(2)

Deficits, Monetary Policy, and Growth

297

(22)

Are Smaller Deficits Good or Bad for Growth

298

(1)

Should the Budget be Balanced

298

(2)

The Importance of the Policy Mix

299

(1)

Deficits and Debt: Terminology and Facts

300

(2)

Some Facts about the National Debt

300

(2)

Interpreting the Budget Deficit

302

(4)

The Structural Deficit

302

(2)

Inflation Accounting for Interest Payments

304

(1)

Conclusion: What Happened after 1981

305

(1)

Bogus Arguments About the Burden of the Debt

306

(2)

Budget Deficits and Inflation

308

(2)

The Monetization Issue

309

(1)

Deficits, Interest Rates, and Crowding Out

310

(2)

The Bottom Line

312

(1)

The True Burden of the National Debt: Slower Growth

312

(1)

Resolving the Issue of Deficits and Growth

313

(2)

The Importance of the Policy Mix

314

(1)

The Economics and Politics of the U.S. Budget Deficit

315

(1)

Summary

316

(1)

Key Terms

317

(1)

Questions for Review

317

(2)

The Phillips Curve and Economic Growth

319

(22)

Is the Trade-Off Between Inflation and Unemployment a Relic of the Past

320

(1)

Demand-Side Inflation Versus Supply-Side Inflation: A Review

320

(1)

Applying the Model to a Growing Economy

321

(1)

Demand-Side Inflation and the Phillips Curve

322

(3)

Supply-Side Inflation and the Collapse of the Phillips Curve

325

(1)

Explaining the 1990s

325

(1)

Why Inflation and Unemployment Both Declined

326

(1)

What the Phillips Curve is not

326

(3)

Fighting Unemployment with Fiscal and Monetary Policy

328

(1)

What Should Be Done

329

(1)

The Costs of Inflation and Unemployment

329

(1)

The Slope of the (Short-Run) Phillips Curve

329

(1)

The Efficiency of the Economy's Self-Correcting Mechanism

329

(1)

Inflationary Expectations and the Phillips Curve

330

(2)

The Theory of Rational Expectations

332

(2)

What Are Rational Expectations

332

(1)

Rational Expectations and the Trade-off

333

(1)

An Evaluation

334

(1)

Why Economists (And Politicians) Disagree

334

(1)

The Dilemma of Demand Management

335

(1)

The Trade-off between Inflation and Unemployment

335

(1)

Attempts to Reduce the Natural Rate of Unemployment

335

(2)

Indexing

337

(1)

Summary

338

(1)

Key Terms

338

(1)

Questions for Review

338

(3)

PART IV The United States in the World Economy

341

(58)

International Trade and Comparative Advantage

343

(22)

How can Americans Compete with ``Cheap Foreign Labor''

344

(1)

Why Trade

345

(1)

Mutual Gains from Trade

346

(1)

International Versus International Trade

346

(1)

Political Factors in International Trade

347

(1)

The Many Currencies Involved in International Trade

347

(1)

Impediments to Mobility of Labor and Capital

347

(1)

The Law of Comparative Advantage

347

(4)

The Arithmetic of Comparative Advantage

348

(1)

The Graphics of Comparative Advantage

349

(2)

Comparative Advantage Exposes the Fallacy of ``Cheap Foreign Labor''

351

(1)

Supply-Demand Equilibrium and Pricing in World Trade

352

(1)

Tariffs, Quotas, and Other Interferences with Trade

353

(3)

How Tariffs and Quotas Work

354

(2)

Tariffs versus Quotas

356

(1)

Why Inhibit Trade

356

(3)

Gaining a Price Advantage

356

(1)

Protecting Particular Industries

357

(2)

Other Arguments for Protection

359

(2)

National Defense and Other Noneconomic Considerations

359

(1)

The Infant-Industry Argument

359

(1)

Strategic Trade Policy

359

(2)

Can Cheap Imports Hurt a Country

361

(1)

A Last Look at the ``Cheap Foreign Labor'' Argument

362

(1)

Summary

362

(1)

Key Terms

363

(1)

Questions for Review

363

(2)

The International Monetary System: Order or Disorder

365

(20)

What Happened to the Asian Tigers

366

(1)

What Are Exchange Rates

366

(2)

Exchange Rate Determination in a Free Market

368

(4)

The Purchasing-Power Parity Theory: The Long Run

368

(2)

Economic Activity and Exchange Rates: The Medium Run

370

(1)

Interest Rates and Exchange Rates: The Short Run

371

(1)

Market Determination of Exchange Rates: Summary

372

(1)

Fixed Exchange Rates and the Balance of Payments

372

(3)

Defining the Balance of Payments in Practice

374

(1)

A Bit of History: The Gold Standard and the Bretton Woods System

375

(1)

The Classical Gold Standard

375

(1)

The Bretton Woods System

375

(1)

Adjustment Mechanisms Under Fixed Exchange Rates

376

(1)

Why Try to Fix Exchange Rates

377

(1)

The Current ``Nonsystem''

378

(4)

The Role of the IMF

379

(1)

The Volatile Dollar

379

(1)

The Dawn of the Euro

380

(2)

The Fate of the Asian Tigers

382

(1)

Summary

382

(1)

Key Terms

383

(1)

Questions of Review

383

(2)

Exchange Rates and the Macroeconomy

385

(14)

Should the Yen Rise or Fall

386

(1)

International Trade, Exchange Rates, and Aggregate Demand

386

(2)

Relative Prices, Exports, and Imports

387

(1)

The Effects of Changes in Exchange Rates

387

(1)

Aggregate Supply in an Open Economy

388

(1)

The Macroeconomic Effects of Exchange Rates

389

(1)

Interest Rates and International Capital Flows

390

(1)

Fiscal and Monetary Policies in an Open Economy

390

(2)

Fiscal Policy Revisited

391

(1)

Monetary Policy Revisited

392

(1)

International Aspects of Deficit Reduction

392

(2)

The Loose Link between the Budget Deficit and the Trade Deficit

393

(1)

Is The Trade Deficit a Problem

394

(1)

On Curing the Trade Deficit

395

(2)

Change the Mix of Fiscal and Monetary Policy

395

(1)

More Rapid Economic Growth Abroad

395

(1)

Raise Domestic Saving or Reduce Domestic Investment

395

(1)

Protectionism

396

(1)

Conclusion: No Nation is an Island

397

(1)

The Yen's Effect on Smaller Asian Economics

397

(1)

Summary

397

(1)

Key Terms

398

(1)

Questions for Review

398

(1)

Glossary

399

(8)

Index

407

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Macroeconomics Principles and Policy

Summary

Table of Contents

Supplemental Materials