CHAPTER 1 What Is Macroeconomics? 1-1 How Macroeconomics Affects Our Everyday Lives Global Economic Crisis Focus: What Makes It Unique? 1-2 Defining Macroeconomics 1-3 Actual and Natural Real GDP 1-4 Macroeconomics in the Short Run and Long Run 1-5 CASE STUDY: How Does the Global Economic Crisis Compare to Previous Business Cycles? Global Economic Crisis Focus: How It Differs from 1982-83 1-6 Macroeconomics at the Extremes 1-7 Taming Business Cycles: Stabilization Policy International Perspective: Differences Between the United States and Europe Before and During the Global Economic Crisis Global Economic Crisis Focus: New Challenges for Monetary and Fiscal Policy 1-8 The "Internationalization" of Macroeconomics CHAPTER 2 The Measurement of Income, Prices, and Unemployment 2-1 Why We Care About Income 2-2 The Circular Flow of Income and Expenditure 2-3 What GDP Is, and What GDP Is Not [BOX]Where to Find the Numbers: A Guide to the Data 2-4 Components of Expenditure Global Economic Crisis Focus: Which Component of GDP Declined the Most in the Global Economic Crisis? 2-5 The "Magic" Equation and the Twin Deficits Global Economic Crisis Focus: Chicken or Egg in Recessions? 2-6 Where Does Household Income Come From? 2-7 Nominal GDP, Real GDP, and the GDP Deflator [BOX] How to Calculate Inflation, Real GDP Growth, or Any Other Growth Rate 2-8 Measuring Unemployment Understanding the Global Economic Crisis: The Ranks of the Hidden Unemployed APPENDIX TO CHAPTER 2: How We Measure Real GDP and the Inflation Rate CHAPTER 3 Income and Interest Rates: The Keynesian Cross Model and the IS Curve 3-1 Business Cycles and the Theory of Income Determination Global Economic Crisis Focus: What Were the Shocks That Made the 2008--09 Economic Crisis So Severe? 3-2 Income Determination, Unemployment, and the Price Level 3-3 Planned Expenditure Global Economic Crisis Focus: Financial Market Instability as the Main Cause of the Global Economic Crisis 3-4 The Economy In and Out of Equilibrium Understanding the Global Economic Crisis: How Changes in Wealth Influence Consumer Spending 3-5 The Multiplier Effect 3-6 Sources of Shifts in Planned Spending 3-7 How Can Monetary Policy Affect Planned Spending? 3-8 The Relation of Autonomous Planned Spending to the Interest Rate Understanding the Global Economic Crisis: A Central Explanation of Business Cycles Is the Volatility of Investment 3-9 The IS Curve 3-10 Conclusion: The Missing Relation [BOX] Learning About Diagrams: The IS Curve APPENDIX TO CHAPTER 3:Allowing for Income Taxes and Income-Dependent Net Exports CHAPTER 4 Strong and Weak Policy Effects in the IS-LM Model 4-1 Introduction: The Power of Monetary and Fiscal Policy 4-2 Income, the Interest Rate, and the Demand for Money 4-3 The LM Curve [BOX]Learning About Diagrams: The LM Curve 4-4 The IS Curve Meets the LM Curve Global Economic Crisis Focus: TITLE TO COME 4-5 Monetary Policy in Action 4-6 How Fiscal Expansion Can "Crowd Out" Private Investment Global Economic Crisis Focus: TITLE TO COME 4-7 Strong and Weak Effects of Monetary Policy Understanding the Global Economic Crisis:How Easy Money Helped to Create the Housing Bubble and Bust 4-8 Strong and Weak Effects of Fiscal Policy 4-9 Using Fiscal and Monetary Policy Together International Perspective: Monetary Policy Hits the Zero Lower Bound in Japan and the United States APPENDIX TO CHAPTER 4:The Elementary Algebra of the IS-LM Model CHAPTER 5 Financial Markets, Financial Regulation, and Economic Instability 5-1 Introduction: Financial Markets and Macroeconomics 5-2 CASE STUDY: Dimensions of the Global Economic Crisis 5-3 Financial Institutions, Balance Sheets, and Leverage 5-4 A Hardy Perennial: Bubbles and Crashes Understanding the Global Economic Crisis: Two Bubbles: 1927-29 in the Stock Market Versus 2000-06 in the Housing Market 5-5 Financial Innovation and the Subprime Mortgage Market 5-6 The IS-LM Model, Financial Markets, and the Monetary Policy Dilemma [BOX] Why Do Asset Purchases Reduce Interest Rates? Understanding the Global Economic Crisis: The IS-LM Summary of the Causes of the Global Economic Crisis 5-7 The Fed's New Instrument: Quantitative Easing 5-8 How the Crisis Became Worldwide and the Dilemma for Policymakers International Perspective: Weighing the Causes: Why Did Canada Perform Better? CHAPTER 6 The Government Budget, the Government Debt, and Limitations of Fiscal Policy 6-1 Introduction: Can Fiscal Policy Rescue Monetary Policy from Ineffectiveness? 6-2 The Pervasive Effects of the Government Budget 6-3 CASE STUDY:The Government Budget in Historical Perspective 6-4 Automatic Stabilization and Discretionary Fiscal Policy Global Economic Crisis Focus: Automatic Stabilization and Fiscal Stimulus in the Crisis 6-5 Government Debt Basic Concepts 6-6 Will the Government Remain Solvent? International Perspective: The Debt-GDP Ratio: How Does the United States Compare? 6-7 CASE STUDY: Historical Behavior of the Debt-GDP Ratio Since 1790 6-8 Factors Influencing the Multiplier Effect of a Fiscal Policy Stimulus 6-9 CASE STUDY: The Fiscal Policy Stimulus of 2008-11 6-10 Government Spending and Transfers to States/Localities Understanding the Global Economic Crisis: Comparing the Obama Stimulus with FDR's New Deal 6-11 Conclusion: Strengths and Limitations of Fiscal Policy CHAPTER 7 International Trade, Exchanges Rates, and Macroeconomic Policy 7-1 Introduction 7-2 The Current Account and Balance of Payments 7-3 Exchange Rates 7-4 The Market for Foreign Exchange 7-5 Real Exchange Rates and Purchasing Power Parity International Perspective: Big Mac Meets PPP 7-6 Exchange Rate Systems 7-7 CASE STUDY: Asia Intervenes with Buckets to Buy Dollars and Finance the U.S. Current Account Deficit-How Long Can This Continue? 7-8 Determinants of Net Exports 7-9 The Real Exchange Rate and Interest Rate 7-10 Effects of Monetary and Fiscal Policy with Fixed and Flexible Exchange Rates Global Economic Crisis Focus: Is the United States Prevented from Implementing a Fiscal Policy Stimulus by Its Flexible Exchange Rate? [BOX] Summary of Monetary and Fiscal Policy Effects in Open Economies 7-11 Conclusion: Economic Policy in the Open Economy CHAPTER 8 Aggregate Demand, Aggregate Supply, and the Great Depression 8-1 Combining Aggregate Demand with Aggregate Supply 8-2 Flexible Prices and the AD Curve 8-3 Shifting the Aggregate Demand Curve with Monetary and Fiscal Policy Global Economic Crisis Focus: The Crisis Was a Demand Problem Not Involving Supply [BOX] Learning About Diagrams: The AD Curve 8-4 Alternative Shapes of the Short-Run Aggregate Supply Curve 8-5 The Short-Run Aggregate Supply (SAS) Curve When the Nominal Wage Rate Is Constant [BOX] Learning About Diagrams: The SAS Curve 8-6 Fiscal and Monetary Expansion in the Short and Long Run [BOX] Summary of the Economy's Adjustment to an Increase in Aggregate Demand 8-7 Classical Macroeconomics: The Quantity Theory of Money and the Self-Correcting Economy 8-8 The Keynesian Revolution: The Failure of Self-Correction Global Economic Crisis Focus: The Zero Lower Bound as Another Source of Monetary Impotence 8-9 CASE STUDY: What Caused the Great Depression? International Perspective: Why Was the Great Depression Worse in the United States Than in Europe? CHAPTER 9 Inflation: Its Causes and Cures 9-1 Introduction 9-2 Real GDP, the Inflation Rate, and the Short-Run Phillips Curve 9-3 The Adjustment of Expectations [BOX] Learning About Diagrams: The Short-Run (SP) and Long-Run (LP) Phillips Curves 9-4 Nominal GDP Growth and Inflation 9-5 Effects of an Acceleration in Nominal GDP Growth 9-6 Expectations and the Inflation Cycle 9-7 Recession as a Cure for Inflation International Perspective: Did Disinflation in Europe Differ from That in the United States? Global Economic Crisis Focus: Policymakers Face the Perils of Deflation 9-8 The Importance of Supply Shocks [BOX] Types of Supply Shocks and When They Mattered 9-9 The Response of Inflation and the Output Ratio to a Supply Shock Understanding the Global Economic Crisis: The Role of Inflation During the Housing Bubble and Subsequent Economic Collapse 9-10 Inflation and Output Fluctuations: Recapitulation of Causes and Cures 9-11 How Is the Unemployment Rate Related to the Inflation Rate? APPENDIX TO CHAPTER 9: The Elementary Algebra of the SP-DG Model CHAPTER 10 The Goals of Stabilization Policy: Low Inflation and Low Unemployment Global Economic Crisis Focus: Inflation Versus Unemployment in the Crisis 10-1 The Costs and Causes of Inflation 10-2 Money and Inflation International Perspective: Money Growth and Inflation 10-3 Why Inflation Is Not Harmless Global Economic Crisis Focus: The Housing Bubble as Surprise Inflation Followed by Surprise Deflation [BOX] The Wizard of Oz as a Monetary Allegory 10-4 Indexation and Other Reforms to Reduce the Costs of Inflation [BOX] The Indexed Bond (TIPS) Protects Investors from Inflation 10-5 The Government Budget Constraint and the Inflation Tax Understanding the Global Economic Crisis: How a Large Recession Can Create a Large Fiscal Deficit 10-6 Starting and Stopping a Hyperinflation 10-7 Why the Unemployment Rate Cannot Be Reduced to Zero 10-8 Sources of Mismatch Unemployment Global Economic Crisis Focus: The Crisis Raises the Incidence of Structural Unemployment 10-10 The Costs of Persistently High Unemployment Understanding the Global Economic Crisis: Why Did Unemployment Rise Less in Europe Than in the United States After 2007? 10-11 Conclusion: Solutions to the Inflation and Unemployment Dilemma CHAPTER 11 The Theory of Economic Growth 11-1 The Importance of Economic Growth 11-2 Standards of Living as the Consequence of Economic Growth International Perspective: The Growth Experience of Seven Countries Over the Last Century 11-3 The Production Function and Economic Growth 11-4 Solow's Theory of Economic Growth 11-5 Technology in Theory and Practice 11-6 Puzzles That Solow's Theory Cannot Explain 11-7 Human Capital, Immigration, and the Solow Puzzles 11-8 Endogenous Growth Theory: How Is Technological Change Produced? 11-9 Conclusion: Are There Secrets of Growth? APPENDIX TO CHAPTER 11:General Functional Forms and the Production Function CHAPTER 12 The Big Questions of Economic Growth 12-1 Answering the Big Questions 12-2 The Standard of Living and Concepts of Productivity 12-3 The Failure of Convergence 12-4 Human Capital and Technology 12-5 Political Capital, Infrastructure, and Geography International Perspective: A Symptom of Poverty: Urban Slums in the Poor Cities International Perspective: Institutions Matter: South Korea Versus North Korea International Perspective: Growth Success and Failure in the Tropics 12-6 CASE STUDY: Uneven U.S. Productivity Growth Across Eras Global Economic Crisis Focus: Lingering Effects of the 2007-09 Recession on Long-Term Economic Growth 12-7 CASE STUDY: The Productivity Growth Contrast Between Europe and the United States 12-8 Conclusion on the Great Questions of Growth CHAPTER 13 The Goals, Tools, and Rules of Monetary Policy 13-1 The Central Role of Demand Shocks Global Economic Crisis Focus: The Weakness of Monetary Policy After 2008 Reveals a More General Problem 13-2 Stabilization Targets and Instruments in the Activists' Paradise [BOX]Rules Versus Activism in a Nutshell: The Optimism-Pessimism Grid 13-3 Policy Rules 13-4 Policy Pitfalls: Lags and Uncertain Multipliers 13-5 CASE STUDY: Was the Fed Responsible for the Great Moderation of 1986-2007? 13-6 Time Inconsistency, Credibility, and Reputation 13-7 CASE STUDY: The Taylor Rule and the Changing Fed Attitude Toward Inflation and Output Global Economic Crisis Focus: Taylor's Rule Confronts the Zero Lower Bound 13-8 Rules Versus Discretion: An Assessment International Perspective: The Debate About the Euro 13-9 CASE STUDY: Should Monetary Policy Target the Exchange Rate? CHAPTER 14 The Economics of Consumption Behavior 14-1 Consumption and Economic Stability 14-2 CASE STUDY: Main Features of U.S. Consumption Data 14-3 Background: The Conflict Between the Time-Series and Cross-Section Evidence 14-4 Forward-Looking Behavior: The Permanent-Income Hypothesis 14-5 Forward-Looking Behavior: The Life-Cycle Hypothesis Global Economic Crisis Focus: The Modigliani Theory Helps Explain the Crisis and Recession of 2007-09 14-6 Rational Expectations and Other Amendments to the Simple Forward-Looking Theories Understanding the Global Economic Crisis:Did Households Spend or Save the 2008 Economic Stimulus Payments? 14-7 Bequests and Uncertainty International Perspective: Why Do Some Countries Save So Much? 14-8 CASE STUDY: Did the Rise and Collapse of Household Assets Cause the Decline and Rise of the Household Saving Rate? 14-9 Why the Official Household Saving Data Are Misleading 14-10 Conclusion: Does Consumption Stabilize the Economy? CHAPTER 15 The Economics of Investment Behavior 15-1 Investment and Economic Stability 15-2 CASE STUDY: The Historical Instability of Investment 15-3 The Accelerator Hypothesis of Net Investment 15-4 CASE STUDY: The Simple Accelerator and the Postwar U.S. Economy 15-5 The Flexible Accelerator [BOX] Tobin's q: Does It Explain Investment Better Than the Accelerator or Neoclassical Theories? 15-6 The Neoclassical Theory of Investment Behavior 15-7 User Cost and the Role of Monetary and Fiscal Policy 15-8 Business Confidence and Speculation [BOX] Investment in the Great Depression and World War II International Perspective: The Level and Variability of Investment Around the World 15-9 Investment as a Source of Instability of Output and Interest Rates 15-10 Conclusion: Investment as a Source of Instability 545 CHAPTER 16 New Classical Macro and New Keynesian Macro 16-1 Introduction: Classical and Keynesian Economics, Old and New 16-2 Imperfect Information and the "Fooling Model" 16-3 The Lucas Model and the Policy Ineffectiveness Proposition 16-4 The Real Business Cycle Model 16-5 New Classical Macroeconomics: Limitations and Positive Contributions International Perspective: Productivity Fluctuations in the United States and Japan Global Economic Crisis Focus: The 2007-09 Crisis and the Real Business Cycle Model 16-6 Essential Features of the New Keynesian Economics 16-7 Why Small Nominal Rigidities Have Large Macroeconomic Effects 16-8 Coordination Failures and Indexation 16-9 Long-Term Labor Contracts as a Source of the Business Cycle 16-10 Assessment of the New Keynesian Model CHAPTER 17 Conclusion: Where We Stand 17-1 The Evolution of Events and Ideas Global Economic Crisis Focus: Can Economics Explain the Crisis or Does the Crisis Require New Ideas? 17-2 The Reaction of Ideas to Events, 1923-47 17-3 The Reaction of Ideas to Events, 1947-69 17-4 The Reaction of Ideas to Events, 1970-2010 Global Economic Crisis Focus: Termites Were Nibbling Away at the Prosperity of 2003-07 17-5 The Reaction of Ideas to Events in the World Economy 17-6 Macro Mysteries: Unsettled Issues and Debates International Perspective: How Does Macroeconomics Differ in the United States and Europe? APPENDIXES A International Annual Time Series Data for Selected Countries: 1960-2010 B Data Sources and Methods Glossary Index