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PART Ⅰ INTRODUCTION1

CHAPTER 1 TEN PRINCIPLES OF ECONOMICS3

How People Make Decisions4

Principle #1：People Face Tradeoffs4

Principle #2：The Cost of Something Is What You Give Up to Get It5

Principle #3：Rational People Think at the Margin6

Principle #4：People Respond to Incentives7

How People Interact8

Principle #5：Trade Can Make Everyone Better Off8

Principle #6：Markets Are Usually a Good Way to Organize Economic Activity9

Principle #7：Governments Can Sometimes Improve Market Outcomes10

How the Economy as a Whole Works10

Principle #8：A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services11

Principle #9：Prices Rise When the Government Prints Too Much Money12

Principle #10：Society Faces a Short-Run Tradeoff between Inflation and Unemployment13

Conclusion13

Summary14

Key Concepts14

Questions for Review15

Problems and Applications15

CHAPTER 2 THINKING LIKE AN ECONOMIST17

The Economist as Scientist18

The Scientific Method：Observation，Theory，and More Observation19

The Role of Assumptions19

Economic Models20

Our First Model：The Circular-Flow Diagram21

Our Second Model：The Production Possibilities Frontier22

Microeconomics and Macroeconomics25

The Economist as Policymaker26

Positive versus Normative Analysis26

Economists in Washington27

Why Economists Disagree28

Differences in Scientific Judgments28

Differences in Values29

Charlatans and Cranks29

Perception versus Reality30

Let’s Get Going31

Summary32

Key Concepts32

Questions for Review32

Problems and Applications33

Appendix：Graphing——A Brief Review34

Graphs of a Single Variable34

Graphs of Two Variables：The Coordinate System34

Curves in the Coordinate System36

Slope and Elasticity39

Cause and Effect41

Omitted Variables41

Reverse Causality42

CHAPTER 3 INTERDEPENDENCE AND THE GAINS FROM TRADE45

A Parable for the Modern Economy46

Production Possibilities46

Specialization and Trade48

The Principle of Comparative Advantage50

Absolute Advantage51

Opportunity Cost and Comparative Advantage51

Comparative Advantage and Trade52

Applications of Comparative Advantage53

Should Michael Jordan Mow His Own Lawn？53

Should the United States Trade with Other Countries？54

FYI：The Legacy of Adam Smith and David Ricardo54

Conclusion55

Summary55

Key Concepts56

Questions for Review56

Problems and Applications56

PART Ⅱ SUPPLY AND DEMAND Ⅰ：HOW MARKETS WORK59

CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND61

Markets and Competition62

Competitive Markets62

Competition：Perfect and Otherwise62

Demand63

The Determinants of Individual Demand63

Price63

Income64

Prices of Related Goods64

Tastes64

Expectations64

The Demand Schedule and the Demand Curve64

Ceteris Paribus66

Market Demand versus Individual Demand66

Shifts in the Demand Curve68

CASE STUDY：Two Ways to Reduce the Quantity of Smoking Demanded69

Supply70

The Determinants of Individual Supply71

Price71

Input Prices71

Technology71

Expectations71

The Supply Schedule and the Supply Curve71

Market Supply versus Individual Supply72

Shifts in the Supply Curve73

Supply and Demand Together74

Equilibrium76

Three Steps to Analyzing Changes in Equilibrium78

Example：A Change in Demand78

Shifts in Curves versus Movements along Curves80

Example：A Change in Supply80

Example：A Change in Both Supply and Demand81

Conclusion：How Prices Allocate Resources81

IN THE NEWS：Supply，Demand，and the Price of Paper——Pulp Reality83

Summary84

Key Concepts85

Questions for Review85

Problems and Applications85

CHAPTER 5 ELASTICITY AND ITS APPLICATION89

The Elasticity of Demand90

The Price Elasticity of Demand and Its Determinants90

Necessities versus Luxuries90

Availability of Close Substitutes90

Definition of the Market90

Time Horizon91

Computing the Price Elasticity of Demand91

FYI：Calculating Elasticities Using the Midpoint Method92

The Variety of Demand Curves92

Total Revenue and the Price Elasticity of Demand94

CASE STUDY：Pricing Admission to a Museum96

The Income Elasticity of Demand96

FYI：Elasticity and Total Revenue along a Linear Demand Curve97

IN THE NEWS：On the Road with Elasticity——For Whom the Booth Tolls，Price Really Does Matter98

The Elasticity of Supply99

The Price Elasticity of Supply and Its Determinants99

Computing the Price Elasticity of Supply99

The Variety of Supply Curves100

Three Applications of Supply，Demand，and Elasticity102

Can Good News for Farming Be Bad News for Farmers？103

Why Did OPEC Fail to Keep the Price of Oil High？105

Does Drug Interdiction Increase or Decrease Drug-Related Crime？106

Conclusion108

Summary108

Key Concepts109

Questions for Review109

Problems and Applications109

CHAPTER 6 SUPPLY，DEMAND，AND GOVERNMENT POLICIES111

Controls on Prices112

How Price Ceilings Affect Market Outcomes112

CASE STUDY：Lines at the Gas Pump113

CASE STUDY：Rent Control in the Short Run and Long Run115

IN THE NEWS：Rent Control in New York City——Home Free：Some Rich and Famous of New York City Bask in Shelter of Rent Law116

How Price Floors Affect Market Outcomes117

CASE STUDY：The Minimum Wage118

Evaluating Price Controls120

Taxes121

How Taxes on Buyers Affect Market Outcomes122

How Taxes on Sellers Affect Market Outcomes123

CASE STUDY：Can Congress Distribute the Burden of a Payroll Tax？124

Elasticity and Tax Incidence125

CASE STUDY：Who Pays the Luxury Tax？127

Conclusion128

Summary128

Key Concepts128

Questions for Review128

Problems and Applications129

PART Ⅲ SUPPLY AND DEMAND Ⅱ：MARKETS AND WELFARE131

CHAPTER 7 CONSUMERS，PRODUCERS，AND THE EFFICIENCY OF MARKETS133

Consumer Surplus134

Willingness to Pay134

Using the Demand Curve to Measure Consumer Surplus135

How a Lower Price Raises Consumer Surplus138

What Does Consumer Surplus Measure？138

Producer Surplus140

Cost and the Willingness to Sell140

Using the Supply Curve to Measure Producer Surplus141

How a Higher Price Raises Producer Surplus143

Market Efficiency144

The Benevolent Social Planner144

FYI：The Invisible Hand of the Marketplace145

Evaluating the Market Equilibrium146

IN THE NEWS：Ticket Scalping——Tickets？Supply Meets Demand on Sidewalk148

Conclusion：Market Efficiency and Market Failure150

Summary151

Key Concepts151

Questions for Review151

Problems and Applications151

CHAPTER 8 APPLICATION：THE COSTS OF TAXATION155

The Deadweight Loss of Taxation156

How a Tax Affects Market Participants156

Welfare without a Tax157

Welfare with a Tax158

Changes in Welfare158

Deadweight Losses and the Gains from Trade159

The Determinants of the Deadweight Loss160

CASE STUDY：The Deadweight Loss of Taxes on Labor162

CASE STUDY：Henry George and the Tax on Land163

Deadweight Loss and Tax Revenue as Taxes Vary164

CASE STUDY：The Laffer Curve and Supply-Side Economics166

Conclusion168

IN THE NEWS：Should Ukraine Cut Tax Rates to Raise Tax Revenue？——A Big Tax Cut to Lift the Economy——Not Here，in Ukraine169

Summary170

Key Concepts170

Questions for Review170

Problems and Applications170

CHAPTER 9 APPLICATION：INTERNATIONAL TRADE173

The Determinants of Trade174

The Equilibrium without Trade174

The World Price and Comparative Advantage175

FYI：Comparing Prices and Comparative Advantage175

The Winners and Losers from Trade176

The Gains and Losses of an Exporting Country176

The Gains and Losses of an Importing Country179

The Effects of a Tariff181

The Effects of an Import Quota182

The Lessons for Trade Policy185

The Arguments for Restricting Trade186

The Jobs Argument186

The National-Security Argument187

The Infant-Industry Argument187

IN THE NEWS：NAFTA and Mexican Tomatoes——President Wins Tomato Accord for Floridians：Mexico Agrees to End Low-Price Shipments188

The Unfair-Competition Argument189

The Protection-as-a-Bargaining-Chip Argument189

CASE STUDY：GATT and the Multilateral Approach to Free Trade189

IN THE NEWS：A Chicken Invasion——U.S.Chicken in Every Pot？Nyet！ Russians Cry Foul190

Conclusion191

Summary192

Key Concepts192

Questions for Review193

Problems and Applications193

PART Ⅳ THE ECONOMICS OF THE PUBLIC SECTOR197

CHAPTER 10 EXTERNALITIES199

Externalities and Market Inefficiency201

Welfare Economics：A Recap201

Negative Externalities in Production202

Positive Externalities in Production203

CASE STUDY：The Debate over Technology Policy204

Externalities in Consumption205

Private Solutions to Externalities207

The Types of Private Solutions207

IN THE NEWS：An Outraged Citizen Speaks Out——Smnokers，Pick Up Your Butts208

The Coase Theorem208

Why Private Solutions Do Not Always Work209

Public Policies toward Externalities210

Regulation210

Pigovian Taxes and Subsidies211

Tradable Pollution Permits212

IN THE NEWS：Pollution Permits in Action——Smog Swapping：New Rules Harness Power of Free Markets to Curb Air Pollution214

Objections to the Economic Analysis of Pollution214

Conclusion216

Summary216

Key Concepts216

Questions for Review217

Problems and Applications217

CHAPTER 11 PUBLIC GOODS AND COMMON RESOURCES219

The Different Kinds of Goods220

Public Goods221

The Free-Rider Problem222

Some Important Public Goods222

National Defense222

Basic Research223

Programs to Fight Poverty223

CASE STUDY：Are Lighthouses Public Goods？224

The Difficult Job of Cost-Benefit Analysis225

CASE STUDY：How Much Is a Life Worth？225

Common Resources227

The Tragedy of the Commons227

CASE STUDY：Capitalism，Communism，and Collective Resources228

Some Important Common Resources229

Clean Air and Water229

Oil Pools229

Congested Roads229

IN THE NEWS：The Singapore Solution——Economics of Road Pricing230

Fish，Whales，and Other Wildlife231

CASE STUDY：Why the Cow Is Not Extinct232

IN THE NEWS：Should Yellowstone Charge as Much as Disney World？——Save the Parks，and Make a Profit232

Conclusion：The Importance of Property Rights233

Summary234

Key Concepts234

Questions for Review234

Problems and Applications234

CHAPTER 12 THE DESIGN OF THE TAX SYSTEM237

A Financial Overview of the U.S.Government238

The Federal Government238

Receipts238

Spending240

State and Local Government242

Receipts242

Spending243

Taxes and Efficiency243

Deadweight Losses244

CASE STUDY：Should Income or Consumption Be Taxed？245

Administrative Burden246

IN THE NEWS：Small Business and the Tax Laws——Obeying the Tax Laws：Small Business’s Burden247

Marginal Tax Rates versus Average Tax Rates248

Lump-Sum Taxes248

Taxes and Equity249

The Benefits Principle249

The Ability-to-Pay Principle250

Vertical Equity250

CASE STUDY：How the Burden of Taxes Is Distributed250

Horizontal Equity251

CASE STUDY：Horizontal Equity and the Marriage Tax252

Tax Incidence and Tax Equity253

CASE STUDY：Who Pays the Corporate Income Tax？254

CASE STUDY：The Flat Tax255

Conclusion：The Tradeoff between Equity and Efficiency257

Summary257

Key Concepts258

Questions for Review258

Problems and Applications258

PART Ⅴ FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY261

CHAPTER 13 THE COSTS OF PRODUCTION263

What Are Costs？264

Total Revenue，Total Cost，and Profit264

Costs as Opportunity Costs265

The Cost of Capital as an Opportunity Cost265

Economic Profit versus Accounting Profit266

Production and Costs267

The Production Function267

From the Production Function to the Total-Cost Curve269

The Various Measures of Cost270

Fixed and Variable Costs271

Average and Marginal Cost272

Cost Curves and Their Shapes273

Rising Marginal Cost273

U-Shaped Average Total Cost274

The Relationship between Marginal Cost and Average Total Cost274

Typical Cost Curves275

Costs in the Short Run and in the Long Run277

Conclusion278

Summary278

Key Concepts279

Questions for Review279

Problems and Applications279

CHAPTER 14 FIRMS IN COMPETITIVE MARKETS283

What Is a Competitive Market？284

The Meaning of Competition284

The Revenue of a Competitive Firm284

Profit Maximization and the Competitive Firm’s Supply Curve286

A Simple Example of Profit Maximization286

The Marginal-Cost Curve and the Firm’s Supply Decision287

The Firm’s Short-Run Decision to Shut Down288

CASE STUDY：Near-Empty Restaurants and Off-Season Miniature Golf290

FYI：Spilt Milk and Sunk Costs291

The Firm’s Long-Run Decision to Exit or Enter an Industry292

Measuring Profit in Our Graph for the Competitive Firm292

The Supply Curve in a Competitive Market294

Market Supply with a Fixed Number of Firms294

Market Supply with Entry and Exit295

FYI：Why Do Competitive Firms Stay in Business If They Make Zero Profit？296

A Shift in Demand in the Short Run and Long Run297

Why the Long-Run Supply Curve Might Slope Upward298

Conclusion：Behind the Supply Curve300

Summary300

Key Concepts301

Questions for Review301

Problems and Applications301

CHAPTER 15 MONOPOLY303

Why Monopolies Arise304

Monopoly Resources305

CASE STUDY：The DeBeers Diamond Monopoly305

Government-Created Monopolies306

Natural Monopolies306

How Monopolies Make Production and Pricing Decisions308

Monopoly versus Competition308

A Monopoly’s Revenue308

Profit Maximization311

FYI：Why a Monopoly Does Not Have a Supply Curve313

A Monopoly’s Profit313

CASE STUDY：Monopoly Drugs versus Generic Drugs314

The Welfare Cost of Monopoly315

The Deadweight Loss316

The Monopoly’s Profit：A Social Cost？318

Public Policy toward Monopolies319

Increasing Competition with Antitrust Laws319

Regulation320

IN THE NEWS：Boeing’s Market Power——Many Airlines Not Worried by Boeing-McDonnell Deal321

Public Ownership322

Doing Nothing323

Price Discrimination323

A Parable about Pricing323

IN THE NEWS：The Future of Electricity——The End of the Last Great Monopoly324

The Moral of the Story326

The Analytics of Price Discrimination327

Examples of Price Discrimination328

Movie Tickets328

Airline Prices329

Discount Coupons329

Financial Aid329

Quantity Discounts329

IN THE NEWS：Competing to Be the Best Monopolist——Let’s Play Monopoly330

Conclusion：The Prevalence of Monopoly332

Summary332

Key Concepts333

Questions for Review333

Problems and Applications333

CHAPTER 16 OLIGOPOLY337

Between Monopoly and Perfect Competition338

Markets with Only a Few Sellers339

A Duopoly Example340

Competition，Monopolies，and Cartels340

The Equilibrium for an Oligopoly341

How the Size of an Oligopoly Affects the Market Outcome342

CASE STUDY：OPEC and the World Oil Market344

IN THE NEWS：Squabbling in OPEC——OPEC Is Expected to Delay Action on New Oil Output by Iraq345

Game Theory and the Economies of Cooperation345

The Prisoners’ Dilemma346

Oligopolies as a Prisoners’ Dilemma347

Other Examples of the Prisoners’ Dilemma348

Arms Races348

IN THE NEWS：Modern Pirates——Ocean Shippers Break Ranks on Pricing349

Advertising350

Common Resources351

The Prisoners’ Dilemma and the Welfare of Society351

Why People Sometimes Cooperate352

CASE STUDY：The Prisoners’ Dilemma Tournament353

Public Policy toward Oligopolies354

Restraint of Trade and the Antitrust Laws354

CASE STUDY：An Illegal Phone Call355

Controversies over Antitrust Policy356

Resale Price Maintenance356

IN THE NEWS：Anticompetitive “R” Us？——Toys “R” Us Is Expecting U.S.Charges of Antitrust357

Tying358

Conclusion359

Summary359

Key Concepts359

Questions for Review359

Problems and Applications360

CHAPTER 17 MONOPOLISTIC COMPETITION363

Competition with Differentiated Products364

The Monopolistically Competitive Firm in the Short Run364

The Long-Run Equilibrium365

Monopolistic versus Perfect Competition367

Excess Capacity368

Markup over Marginal Cost368

Monopolistic Competition and the Welfare of Society369

FYI：Is Excess Capacity a Social Problem？370

Advertising371

The Debate over Advertising371

The Critique of Advertising371

The Defense of Advertising371

CASE STUDY：Advertising and the Price of Eyeglasses372

Advertising as a Signal of Quality373

Brand Names374

CASE STUDY：Brand Names under Communism375

IN THE NEWS：TV Networks as Brand Names——A TV Season When Image Is Everything376

Conclusion377

Summary377

Key Concepts377

Questions for Review378

Problems and Applications378

PART Ⅵ THE ECONOMICS OF LABOR MARKETS381

CHAPTER 18 THE MARKETS FOR THE FACTORS OF PRODUCTION383

A Firm’s Demand for Labor384

The Competitive Profit-Maximizing Firm385

The Production Function and the Marginal Product of Labor385

The Value of the Marginal Product and the Demand for Labor387

FYI：Input Demand and Output Supply：Two Sides of the Same Coin388

Labor-Market Equilibrium389

Marginal Productivity in Equilibrium389

Shifts in Labor Supply390

Shifts in Labor Demand391

CASE STUDY：Productivity and Wages392

The Other Factors of Production：Land and Capital394

Equilibrium in the Markets for Land and Capital394

FYI：The Various Forms of Capital Income396

Linkages among the Factors of Production396

CASE STUDY：The Economics of the Black Death397

Conclusion398

Summary398

Key Concepts399

Questions for Review399

Problems and Applications399

CHAPTER 19 EARNINGS AND DISCRIMINATION401

Some Determinants of Equilibrium Wages402

Compensating Differentials402

Human Capital403

CASE STUDY：The Increasing Value of Skills404

Ability，Effort，and Chance405

CASE STUDY：The Benefits of Beauty406

An Alternative View of Education：Signaling406

CASE STUDY：Human Capital，Natural Ability，and Compulsory School Attendance407

The Superstar Phenomenon408

The Economics of Discrimination409

Measuring Labor-Market Discrimination410

Discrimination by Employers411

CASE STUDY：Segregated Streetcars and the Profit Motive412

Discrimination by Customers and Governments412

CASE STUDY：Discrimination in Sports413

IN THE NEWS：Men，Women，and Wages——The Shrinking Pay Gap414

The Debate over Comparable Worth415

Conclusion416

Summary417

Key Concepts417

Questions for Review417

Problems and Applications418

CHAPTER 20 THE DISTRIBUTION OF INCOME421

The Measurement of Inequality422

U.S.Income Inequality422

CASE STUDY：The Women’s Movement and the Income Distribution424

CASE STUDY：Income Inequality around the World425

The Poverty Rate426

Problems in Measuring Inequality427

In-Kind Transfers428

The Economic Life Cycle428

Transitory versus Permanent Income428

IN THE NEWS：Is the Poverty Rate Correctly Measured？——Old Flaws Undermine New Poverty-Level Data429

Economic Mobility430

The Political Philosophy of Redistributing Income431

Utilitarianism431

Liberalism432

Libertarianism433

Policies to Reduce Poverty434

Minimum-Wage Laws435

Welfare435

IN THE NEWS：The 1996 Welfare Reform——What Makes the Welfare Bill a Winner436

Negative Income Tax436

In-Kind Transfers438

Antipoverty Programs and Work Incentives438

IN THE NEWS：Saving and Welfare——For Welfare Parents，Scrimping Is Legal，but Saving Is Out439

Conclusion440

Summary441

Key Concepts441

Questions for Review441

Problems and Applications442

PART Ⅶ ADVANCED TOPIC445

CHAPTER 21 THE THEORY OF CONSUMER CHOICE447

The Budget Constraint：What the Consumer Can Afford448

Preferences：What the Consumer Wants450

Representing Preferences with Indifference Curves450

Four Properties of Indifference Curves451

Two Extreme Examples of Indifference Curves453

Perfect Substitutes453

Perfect Complements454

FYI：Utility：An Alternative Way to Represent a Consumer’s Preferences455

Optimization：What the Consumer Chooses455

The Consumer’s Optimal Choices455

How Changes in Income Affect the Consumer’s Choices456

How Changes in Prices Affect the Consumer’s Choices457

Income and Substitution Effects458

Deriving the Demand Curve461

Four Applications462

Do All Demand Curves Slope Downward？462

How Do Wages Affect Labor Supply？463

CASE STUDY：Income Effects on Labor Supply：Historical Trends，Lottery Winners，and the Carnegie Conjecture466

How Do Interest Rates Affect Household Saving？467

Do the Poor Prefer to Receive Cash or In-Kind Transfers？469

Conclusion：Do People Really Think This Way？471

Summary471

Key Concepts472

Questions for Review472

Problems and Applications472

PART Ⅷ THE DATA OF MACROECONOMICS475

CHAPTER 22 MEASURING A NATION’S INCOME477

The Economy’s Income and Expenditure478

The Measurement of Gross Domestic Product480

“GDP Is the Market Value…”480

“…Of All…”480

“…Final…”481

“…Goods and Services…”481

“…Produced…”481

“…Within a Country…”481

“…In a Given Period of Time.”482

FYI：Three Other Measures of Income483

The Components of GDP483

Real versus Nominal GDP485

A Numerical Example485

The GDP Deflator487

CASE STUDY：Real GDP over Recent History487

GDP and Economic Well-Being488

CASE STUDY：International Differences in GDP and the Quality of Life490

Conclusion491

Summary491

Key Concepts492

Questions for Review492

Problems and Applications492

CHAPTER 23 MEASURING THE COST OF LIVING495

The Consumer Price Index496

How the Consumer Price Index Is Calculated496

FYI：What Is in the CPI’s Basket？498

Problems in Measuring the Cost of Living499

IN THE NEWS：Shopping for the CPI——Is the CPI Accurate？Ask the Federal Sleuths Who Get the Numbers500

IN THE NEWS：The CPI Commission——Prisoners of Faulty Statistics502

The GDP Deflator versus the Consumer Price Index502

Correcting Economic Variables for the Effects of Inflation505

Dollar Figures from Different Times505

IN THE NEWS：Mr.Index Goes to Hollywood——Winner and Still Champ506

Indexation506

Real and Nominal Interest Rates507

Conclusion508

Summary509

Key Concepts509

Questions for Review509

Problems and Applications510

PART Ⅸ THE REAL ECONOMY IN THE LONG RUN513

CHAPTER 24 PRODUCTION AND GROWTH515

Economic Growth around the World516

FYI：The Magic of Compounding and the Rule of 70518

Productivity：Its Role and Determinants518

Why Productivity Is So Important519

How Productivity Is Determined519

Physical Capital520

Human Capital520

Natural Resources520

CASE STUDY：Are Natural Resources a Limit to Growth？521

IN THE NEWS：Computers and Productivity——What Has the Computer Done for Us Lately？522

Technological Knowledge523

The Production Function524

Economic Growth and Public Policy525

The Importance of Saving and Investment525

Diminishing Returns and the Catch-Up Effect526

Investment from Abroad527

Education528

IN THE NEWS：The World Bank——World Bank Focusing on Areas Shunned by Western Business529

Property Rights and Political Stability530

CASE STUDY：What Causes Famine？531

Free Trade531

IN THE NEWS：The Sachs Solution to the African Problem——Growth in Africa：It Can Be Done532

The Control of Population Growth534

Research and Development535

CASE STUDY：The Productivity Slowdown535

Conclusion：The Importance of Long-Run Growth537

Summary538

Key Concepts538

Questions for Review538

Problems and Applications538

CHAPTER 25 SAVING，INVESTMENT，AND THE FINANCIAL SYSTEM541

Financial Institutions in the U.S.Economy542

Financial Markets542

The Bond Market542

The Stock Market543

Financial Intermediaries544

Banks544

FYI：How to Read the Newspaper’s Stock Tables545

Mutual Funds546

Summing Up547

Saving and Investment in the National Income Accounts547

Some Important Identities548

The Meaning of Saving and Investment549

The Market for Loanable Funds550

Supply and Demand for Loanable Funds550

Policy 1：Taxes and Saving552

Policy 2：Taxes and Investment554

Policy 3：Government Budget Deficits555

FYI：Ricardian Equivalence：An Alternative View of Government Budget Deficits556

CASE STUDY：Government Debt and Deficits in the United States557

Conclusion559

IN THE NEWS：The Balanced Budget Amendment—Balanced Budget：Bad Economics560

Summary561

Key Concepts562

Questions for Review562

Problems and Applications562

CHAPTER 26 THE NATURAL RATE OF UNEMPLOYMENT565

Identifying Unemployment566

How Is Unemployment Measured？566

CASE STUDY：Labor-Force Participation of Men and Women in the U.S.Economy570

Is Unemployment Measured Correctly？571

How Long Are the Unemployed without Work？572

Why Is There Unemployment？572

Minimum-Wage Laws573

IN THE NEWS：The Minimum-Wage Debate——Thesis：Rise in Wages Will Hurt Teenage Group574

Unions and Collective Bargaining575

The Economics of Unions576

Are Unions Good or Bad for the Economy？577

IN THE NEWS：The UAW’s Tradeoff——New Approach for Auto Union in Ford Accord——The Deal：No Job Cuts but Less Pay for Some578

The Theory of Efficiency Wages578

Worker Health579

Worker Turnover579

Worker Effort580

Worker Quality580

FYI：The Economics of Asymmetric Information581

CASE STUDY：Henry Ford and the Very Generous $5-a-Day Wage582

Job Search583

The Inevitability of Search Unemployment584

Public Policy and Job Search584

Unemployment Insurance585

Conclusion586

Summary586

Key Concepts586

Questions for Review587

Problems and Applications587

PART Ⅹ MONEY AND PRICES IN THE LONG RUN589

CHAPTER 27 THE MONETARY SYSTEM591

The Meaning of Money592

The Functions of Money592

The Kinds of Money593

IN THE NEWS：Money on the Island of Yap——Fixed Assets，or Why a Loan in Yap Is Hard to Roll Over594

Money in the U.S.Economy595

CASE STUDY：Where Is All the Currency？596

FYI：Credit Cards，Debit Cards，and Money597

The Federal Reserve597

The Fed’s Organization598

The Federal Open Market Committee598

Banks and the Money Supply599

The Simple Case of 100-Percent-Reserve Banking600

Money Creation with Fractional-Reserve Banking600

The Money Multiplier602

The Fed’s Tools of Monetary Control603

Open-Market Operations603

Reserve Requirements604

The Discount Rate604

Problems in Controlling the Money Supply604

CASE STUDY：Bank Runs and the Money Supply605

Conclusion606

Summary606

Key Concepts607

Questions for Review607

Problems and Applications607

CHAPTER 28 INFLATION：ITS CAUSES AND COSTS609

The Causes of Inflation610

The Level of Prices and the Value of Money611

Money Supply，Money Demand，and Monetary Equilibrium612

The Effects of a Monetary Injection613

A Brief Look at the Adjustment Process614

The Classical Dichotomy and Monetary Neutrality615

Velocity and the Quantity Equation616

CASE STUDY：Money and Prices during Four Hyperinflations618

The Inflation Tax619

IN THE NEWS：The Hyperinflation in Serbia——Special，Today Only：6 Million Dinars for a Snickers Bar620

The Fisher Effect621

The Costs of Inflation623

A Fall in Purchasing Power？The Inflation Fallacy623

Shoeleather Costs623

Menu Costs625

Relative-Price Variability and the Misallocation of Resources625

Inflation-Induced Tax Distortions625

Confusion and Inconvenience627

A Special Cost of Unexpected Inflation：Arbitrary Redistributions of Wealth628

IN THE NEWS：How to Protect Your Savings from Inflation——Inflation Fighters for the Long Term628

CASE STUDY：The Wizard of Oz and the Free-Silver Debate630

Conclusion631

Summary632

Key Concepts632

Questions for Review633

Problems and Applications633

PART Ⅺ THE MACROECONOMICS OF OPEN ECONOMIES635

CHAPTER 29 OPEN-ECONOMY MACROECONOMICS：BASIC CONCEPTS637

The International Flows of Goods and Capital638

The Flow of Goods：Exports，Imports，and Net Exports638

CASE STUDY：The Increasing Openness of the U.S.Economy639

The Flow of Capital：Net Foreign Investment641

IN THE NEWS：Capital Flows to Russia——Foreign Buyers Look to Russia：Despite Risks，Investors Coming Up with the Cash642

The Equality of Net Exports and Net Foreign Investment642

Saving，Investment，and Their Relationship to the International Flows643

IN THE NEWS：Flows between the Developing South and the Industrial North——Fantasy Economics644

CASE STUDY：Saving，Investment，and Net Foreign Investment of the United States646

The Prices for International Transactions：Real and Nominal Exchange Rates647

Nominal Exchange Rates648

Real Exchange Rates648

IN THE NEWS：A Dollar Depreciation and an Export Boom——Weak Dollar Makes U.S.World’s Bargain Bazaar650

A First Theory of Exchange-Rate Determination：Purchasing-Power Parity651

The Basic Logic of Purchasing-Power Parity652

Implications of Purchasing-Power Parity652

CASE STUDY：The Nominal Exchange Rate during a Hyperinflation654

Limitations of Purchasing-Power Parity655

Conclusion656

Summary656

Key Concepts656

Questions for Review656

Problems and Applications657

CHAPTER 30 A MACROECONOMIC THEORY OF THE OPEN ECONOMY659

Supply and Demand for Loanable Funds and for Foreign-Currency Exchange660

The Market for Loanable Funds660

The Market for Foreign-Currency Exchange662

FYI：Purchasing-Power Parity as a Special Case664

Equilibrium in the Open Economy664

Net Foreign Investment：The Link between the Two Markets664

Simultaneous Equilibrium in Two Markets665

FYI：The Classical Dichotomy Once Again667

How Policies and Events Affect an Open Economy668

Government Budget Deficits668

CASE STUDY：The Twin Deficits in the United States670

Trade Policy671

Political Instability and Capital Flight673

Conclusion676

Summary676

Key Concepts677

Questions for Review677

Problems and Applications677

PART Ⅻ SHORT-RUN ECONOMIC FLUCTUATIONS679

CHAPTER 31 AGGREGATE DEMAND AND AGGREGATE SUPPLY681

Three Key Facts about Economic Fluctuations682

Fact 1：Economic Fluctuations Are Irregular and Unpredictable682

Fact 2：Most Macroeconomic Quantities Fluctuate Together684

Fact 3：As Output Falls，Unemployment Rises684

FYI：Okun’s Law685

Explaining Short-Run Economic Fluctuations685

How the Short Run Differs from the Long Run686

The Basic Model of Economic Fluctuations686

The Aggregate-Demand Curve688

Why the Aggregate-Demand Curve Is Downward Sloping688

Pigou’s Wealth Effect689

Keynes’s Interest-Rate Effect689

Mundell-Fleming’s Exchange-Rate Effect689

Summary689

Why the Aggregate-Demand Curve Might Shift690

The Aggregate-Supply Curve691

Why the Aggregate-Supply Curve Is Vertical in the Long Run691

Why the Long-Run Aggregate-Supply Curve Might Shift692

Why the Aggregate-Supply Curve Is Upward Sloping in the Short Run693

The New Classical Misperceptions Theory694

The Keynesian Sticky-Wage Theory694

The New Keynesian Sticky-Price Theory694

Summary695

Why the Short-Run Aggregate-Supply Curve Might Shift695

Two Causes of Recession696

The Effects of a Shift in Aggregate Demand696

IN THE NEWS：How Consumers Shift Aggregate Demand——Consumers Get the Credit for Expanding Economy698

The Effects of a Shift in Aggregate Supply699

CASE STUDY：Oil and the Economy701

Conclusion：The Origins of Aggregate Demand and Aggregate Supply702

Summary703

Key Concepts703

Questions for Review704

Problems and Applications704

CHAPTER 32 THE INFLUENCE OF MONETARY AND FISCAL POLICY ON AGGREGATE DEMAND707

How Monetary Policy Influences Aggregate Demand708

The Theory of Liquidity Preference709

Money Supply709

Money Demand709

Equilibrium in the Money Market710

The Downward Slope of the Aggregate-Demand Curve712

Changes in the Money Supply712

Interest-Rate Targets and Fed Policy715

How Fiscal Policy Influences Aggregate Demand716

Changes in Government Purchases716

The Multiplier Effect717

FYI：A Formula for the Government-Purchases Multiplier718

The Crowding-Out Effect718

Changes in Taxes720

FYI：How Fiscal Policy Might Affect Aggregate Supply720

Using Policy to Stabilize the Economy721

The Case for Active Stabilization Policy721

CASE STUDY：Keynesians in the White House723

The Case against Active Stabilization Policy724

IN THE NEWS：The Independence of the Federal Reserve——Don’t Tread on the Fed724

Automatic Stabilizers726

The Economy in the Long Run and the Short Run727

FYI：The Long Run and the Short Run：An Algebraic Explanation728

Conclusion729

Summary729

Key Concepts730

Questions for Review730

Problems and Applications730

CHAPTER 33 THE SHORT-RUN TRADEOFF BETWEEN INFLATION AND UNEMPLOYMENT733

The Phillips Curve734

Origins of the Phillips Curve734

Aggregate Demand，Aggregate Supply，and the Phillips Curve735

IN THE NEWS：The Effects of Low Unemployment——Tighter Labor Market Widens Inflation Fears737

Shifts in the Phillips Curve：The Role of Expectations738

The Long-Run Phillips Curve738

Expectations and the Short-Run Phillips Curve741

The Natural Experiment for the Natural-Rate Hypothesis743

Shifts in the Phillips Curve：The Role of Supply Shocks745

The Cost of Reducing Inflation748

The Sacrifice Ratio748

Rational Expectations and the Possibility of Costless Disinflation749

The Volcker Disinflation750

The Greenspan Era752

IN THE NEWS：Unemployment and Its Natural Rate——Trying to Figure Out How Low Unemployment Can Go753

Conclusion754

Summary754

Key Concepts755

Questions for Review755

Problems and Applications755

PART ⅩⅢ FINAL THOUGHTS757

CHAPTER 34 FIVE DEBATES OVER MACROECONOMIC POLICY759

Resolved：Monetary and Fiscal Policymakers Should Try to Stabilize the Economy760

Pro：Policymakers Should Try to Stabilize the Economy760

Con：Policymakers Should Not Try to Stabilize the Economy760

Resolved：Monetary Policy Should Be Made by Rule Rather Than by Discretion762

Pro：Monetary Policy Should Be Made by Rule762

Con：Monetary Policy Should Not Be Made by Rule763

Resolved：The Central Bank Should Aim for Zero Inflation764

Pro：The Central Bank Should Aim for Zero Inflation764

Con：The Central Bank Should Not Aim for Zero Inflation765

Resolved：The Government Should Balance Its Budget767

Pro：The Government Should Balance Its Budget767

Con：The Government Should Not Balance Its Budget768

Resolved：The Tax Laws Should Be Reformed to Encourage Saving770

Pro：The Tax Laws Should Be Reformed to Encourage Saving770

Con：The Tax Laws Should Not Be Reformed to Encourage Saving771

Conclusion772

Summary773

Questions for Review773

Problems and Applications774

Glossary777

Credits783

Index785