17 BS Questions for Review 17 Quick Check Multiple Choice 17 Problems and Applications 18

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1 Contents Preface: To the Student xi l-3b Principle 9: Prices Rise When the Government Prints Too xiii MuchMoney 13 The News: WhyYou Should Study 14 l-3c Principle 10: Society Faces a between Inflation and BS Questions for Review 17 Quick Check Multiple Choice 17 Problems and Applications 18 Introduction 1 Thinking an Economist 2-1 The Economist as Scientist 20 Scientific Method: Observation, and More Observation 20 Role Assumptions Our First Model: The Diagram 22 Our Second Model: The Possibilities Frontier 24 and Macroeconomics The Economist as Policy Adviser 27 CHAPTER 1 2-2a Positive versus Normative Analysis 28 Economists in Washington 28 Of 3 2-2c Why Is Not Always Followed How People Make Decisions 4 Economists Disagree 30 Principle 1: People Face Trade-offs 4 Differences in Scientific Judgments 30 Principle 2: The Cost of Is Give to Differences c Perception versus Reality 31 Principle 3: Rational People Think at the Margin 6 News: Actual Economists and Virtual 33 Principle 4: People Respond to Incentives Let's Get Going 34 Case Study: The Incentive Effects of Prices 8 Summary People Interact 9 KeyConcepts 34 l-2a Principle 5: Trade Can Make Everyone Better Off 9 Questions for Review 35 l-2b Principle 6: Markets Are Usually a Good Way to Organize Quick Check Multiple Choice 35 Economic Activity 10 Problems and Applications 35 Market A Brief Review Graphs of a Single Variable 37 Adam Smith and the Hand 11. Graphs Variables: The Coordmate System How the Economy as a Works 13 Curves in the Coordinate System 39 l-3a Principle 8: Standard of Living Depends on Its 41 Ability to Produce Goods and Services 13 Cause and Effect 43 Mankiw, N. Gregory Principles of economics 2015 digitalisiert durch: IDS Basel BernXIX

2 XX CONTENTS Demand Curve: The Relationship between Price and Interdependence and the Gains from b Market Demand versus Individual Demand c Shifts in the Demand Curve A Parable for the Modern Economy 48 Case Study: Two Ways to Reduce the of Smoking Possibilities 48 Demanded 71 Specialization and Trade SUDDIV Comparative Advantage: The Driving Force of 4-3a The Supply Curve: The Relationship between Price and Specialization 52 Quantity Supplied a Absolute Advantage b Market Supply versus Individual Supply b Cost and Comparative Advantage c Shifts in the Supply Curve c Comparative Advantage and Trade The Price Trade a 77 FYI: The Legacy of Adam Smith and David Ricardo 55 Changes in Equilibrium Applications of Comparative Advantage 55 How Prices Resources a Tom Brady Mow His Own Lawn? 55 after Disasters 84 The News: within a Marriage 56 Should the United States Trade with 57 Summary 84 Key Concepts Conclusion 58 Questions for Review 86 Summary 59 Quick Check Multiple Choice 86 KeyConcepts 59 Problems and Applications 87 Questions for Review 59 Quick Check Multiple Choice 59 c Problems and Applications 60 CHAPTER 5 Part II How Markets Work 63 Elasticity and Its Application The Elasticity of Demand 90 Price Elasticity of Demand and Its Determinants 90 Computing the Price Elasticity of Demand 91 The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities 91 The Variety of Demand Curves 92 Total Revenue and the Price Elasticity of Demand 94 FYI: A Few Elasticities from the Real World 94 Elasticity and Total Revenue a Linear Demand Curve 96 Elasticities The Elasticity of Supply 98 Price Elasticity of Supply and Its Determinants b Computing the Price Elasticity of Supply 99 The Variety of Supply Curves Three Applications of Supply, Demand, and Elasticity a Can Good News for Farming Be Bad News for Farmers? 102 the High? 104 I 5-3c Does Drug Interdiction Increase or Decrease Drug- CHAPTER 4 Related Crime? 105 j The Market Forces of Supply and CR 65 Summary 107 KeyConcepts Markets and Competition 66 Questions for Review 108 What Is a Market? 66 Quick Check Multiple Choice 108 Competition? 66 Problems and Applications 109

3 CONTENTS CHAPTFR fi How a Lower Price Raises Consumer Surplus 138 What Does Consumer Surplus Measure? 139 Supply, Demand, and Government Willingness b the Supply Curve to Measure Producer 6-1 Controls on Prices 112 Surplus Ceilings c How a Higher Price Raises Producer Surplus 143 Case Study: Lines at the Gas Pump 114 Case Study: Rent Control in the Short Run and the Run 115 Market Efficiency 144 The Benevolent Social Planner 145 How Affect Market Outcomes b the Market Equilibrium 146 Case Study: The Minimum Wage 117 News: The Invisible Hand Can Car 148 Evaluating Price Controls 119 Case Study: Market in Organs? 148 The News: Venezuela versus the Market Conclusion: Market Efficiency and Market Failure Summary 151 Seilers Affect Market Outcomes Outcomes 123 Questions for Review 151 Case Study: Can Congress the of Quick Check Multiple Choice Problems and Applications c Elasticity Tax Incidence 126 Case Study: Who Pays the 128 CHAPTER 8-3 Conclusion 128 Summary 129 The Costs Taxation 155 Key Concepts 129 Questions for Review 129 Quick Check Multiple Choice 129 Problems and Applications 130 Markets and 8-1 The Deadweight Loss of Taxation How Tax Affects Market Participants 157 Deadweight Losses and the from Trade The Determinants of the Deadweight Loss 160 Case Study: The Deadweight Loss Debate Deadweight Loss and Tax Revenue as Taxes Vary 163 Case Study: The Laffer Curve and 164 The News: Tax Debate Conclusion 168 Summary 168 Key Concept Questions for Review 168 Quick Check Multiple Choice 169 Problems and Applications 169 CHAPTER 9 Application: International Trade 9-1 The Determinants of Trade 172 Equilibrium Trade 172 The World Price and Comparative Advantage lf PI TP 1 Losers from Trade 174 Losses of an Exporting Country 174 CHAPTER 7 Gains and Losses of an Country c The Effects of a Tariff 177 FYI: Import Quotas: Another Way to Restrict Trade 179 The Lessons for Trade Policy 179 Of of International Trade 180 The News: Threats to Free Trade Consumer Surplus Trade The News: Should the from Free Trade the Measure Consumer Losers? 183 Surplus 137

4 xxii CONTENTS Jobs Argument b The Theorem 209 Argument c Work 211 The News: about Free Trade Conclusion 211 Argument d The Argument 186 The Protection-as-a-Bargaining-Chip Argument 186 Case Study: Trade Agreements the World Trade Key Concepts Questions for Review.... Organization 213 Problems and Applications Conclusion 188 Summary 189 KeyConcepts 189 I I Questions for 189 and Quick Check Multiple Choice 189 Problems and Applications 190 Part IV The Economies of the Sector 193 CHAPTER 12 CHAPTER 10 The Different Kinds of Goods Public Goods 218 The Free-Rider Problem 218 ll-2b Some Public Goods 218 Case Study: Are Lighthouses Public Goods?. 221 Difficult Job of Cost-Benefit Analysis 221 Case Study: How Much Is a Life Common Resources 223 Tragedy of the Commons 223 The News: The Case for Toll Roads 224 Some Important Common Resources 225 Case Study: Why the Cow Is Not Extinct 227 Conclusion: The Importance of Property Rights 228 Summary 228 Key Concepts 229 Questions for Review 229 Quick Check Multiple Choice 229 The Design of the Tax System 233 A Financial Overview of the U.S. Government Government Externalities and Market Inefficiency 197 Case State Study: and The Local Fiscal Challenge Ahead Weifare Economies: A Recap Taxes and Efficiency 242 Negative Externalities 198 Externalities a Deadweight Losses 243 The News: The Externalities of Country 200 Case Study: Technology Spillovers, Industrial Policy, and Administrative 244 Patent Protection c Marginal Tax Rates versus Tax Rates d Taxes Public Policies toward Externalities a Policies: Regulation Taxes and Equity b Market-Based Policy 1: Corrective Taxes and Subsidies 203 Is Gasoline Heavily? 204 Principle c 205 Case Study: How the Tax Is d Pollution c Tax Incidence and Equity 249 Climate Change? 208 The News: Expenditures Private Solutions to Externalities a The of Private Solutions 208 Case Study: Who Pays the Corporate Income Tax? 250 Conclusion: The Trade-off between Equity and Efficiency 252

5 CONTENTS Summary 253 Quick Check Multiple Choice 275 Key Concepts 253 Problems and Applications 276 Questions for Review 253 Quick Check Multiple Choice Problems and Applications 254 Firm the Organization of Industry 257 CHAPTER 13 The CoStS Of 259 Summary What Are Costs? 260 and Profit 260 Costs as Opportumty Costs 260 The Cost of Capital as an Cost 261 Economic Profit versus Accounting Profit 262 Firms in Competitive Markets What a Competitive Market? 280 The Meaning of Competition 280 The Revenue of a Competitive Firm Profit and the Competitive Supply Curve a A Simple Example of Profit Maximization b The Curve and the Firm's Supply Decision c The Firm's Short-Run Decision to Shut Down d Milk and Other Sunk Costs 286 Case Study: Near-Empty Restaurants and Off-Season Golf 287 Firm's Long-Run Decision to Exit or Enter a Market f Measuring Profit in Our Graph for the Competitive Firm The Supply Curve in a Competitive Market 289 Short Run: Market Supply with a Fixed of Firms b The Long Run: Market Supply with Entry and Exit c Why Do Competitive Firms Stay in Business They Make Zero Profit? d A in Demand in the Short Run and Long Run e Why the Long-Run Supply Curve Might Upward Conclusion: Behind the Supply Curve 295 Key Concepts 296 Questions for Review 296 Quick Check Multiple Choice 296 Problems and Applications 297 Production Costs 263 CHAPTER I a The Production Function b From the Production Function to the Monopoly 299 Curve Why Monopolies Arise The Various Measures of Cost 265 Resources a Fixed andvariable Costs 266 Monopolies b Average and Marginal Cost 267 Natural Monopolies c Cost Curves and Their Shapes 268 Monopolies Make Production and Pricing Cost Curves 270 Decisions Costs in the Short Run and in the Long Run a Monopoly versus Competition 303 The Relationship between Short-Run and Long-Run 15-2b A Revenue 304 Average Total Cost c Profit Maximization b Economies and Diseconomies of Scale d A Monopoly's Profit 308 FYI: Lessons from a Pin 273 FYI: Why a Monopoly Does Not Have a Supply Curve 308 Case Study: versus Generic Drugs Conclusion 274 Summary 274 Weifare Cost of Monopolies a The Deadweight Loss 311 Questions for Review 275 A Social Cost? 313

6 CONTENTS 15-4 Price 314 Case Study: OPEC and the World Market a AParable Pricing c ofthe 356 The Moral Story 315 The and the Weifare of Society c The Analytics of Price Discrimination e Why People Sometimes Cooperate d Examples of Price Discrimination 317 Case Study: The Tournament 359 The News: Price Discrimination in Higher Education 318 Public Policy toward Oligopolies Public Policy toward Monopolies a Restraint oftrade and the Antitrust Laws a Increasing Competition with Antitrust Laws 319 Case Study: An Illegal Phone Call b Regulation 319 Controversies over Antitrust Policy c Public Ownership 321 Case Study: The Microsoft Case 363 Nothing Conclusion Conclusion: The Prevalence of Monopolies 322 The News: Should the N.C.A.A. Be Taken to Court? 365 Summary 323 Summary 366 KeyConcepts 323 KeyConcepts 366 Questions for Review 323 Questions for Review 366 Quick Check Multiple Choice 324 Quick Check Multiple Choice 366 Problems and Applications 324 Problems and Applications 367 CHAPTER 16 Monopolistic Competition Between Monopoly and Perfect Competition Competition with Differentiated Products 332 Competitive the Short _ Run 332 The Long-Run Equilibrium c Monopolistic versus Perfect Competition d Monopolistic Competition and the Weifare of Society 336 The News: Variety as a Market Failure Debate Advertising Case Study: Advertising and the Price of Eyeglasses b Advertising as a Signal of Quality c Brand 342 The Summary Questions for Review 345 Quick Check Multiple Choice 345 Problems and Applications 345 CHAPTER 18 The Markets for the Factors of CHAPTER 17 Production Labor 374 The Competitive Firm Markets with a Few Seilers 348 Production Function and the Marginal Product of 348 Labor 375 Competition, Monopolies, and Cartels 349 The Value of the Marginal Product and the Demand for The News: Public Price Fixing 350 Labor 377 Equilibrium for an Oligopoly 351 What Causes the Curve to 378 How the Size of an Affects the Market FYI: Demand and Output Supply: Two Sides of the Same The of Cooperation The Supply of Labor 380 The a The Trade-off between Work and Leisure b Oligopolies as a b What Causes the Curve to Shift? 380

7 CONTENTS XXV 18-3 Equilibrium in the Labor Market 381 Problems in Measuring Inequality a Shifts in Labor Supply 381 Case Study: Alternative Measures of Inequality b Demand 383 Economic Mobility 420 The News: The of Immigration 384 Income FYI: b The Other Factors of Production: Land and Capital c Libertarianism Policies to Reduce Poverty b among the Factors of Production 388 Case Study: The Black Death c Income Tax Conclusion 390 Transfers 426 Summary e Antipoverty Programs and Work Incentives 427 Key Concepts 390 The News: International Differences in Income Questions for Review 428 Quick Check Multiple Choice Conclusion 428 Problems and Applications 391 Summary 430 CHAPTER 19 Key Concepts 430 Quick Check Multiple Choice 430 Earnings and Discrimination 395 Problems Applications Some Determinants of Equilibrium Wages 396 a Compensating 396 Human Capital 396 Case Study: The of Skills 397 The News: Higher Education as an Investment 398 Ability, Effort, and Chance 399 Case Study: The Benefits of Beauty 400 An Alternative View of Education: Signaling 401 le The Superstar Phenomenon 402 Minimum-Wage Laws, and Efficiency Wages The Economies of Discrimination a Measuring Labor-Market Discrimination 403 Case Study: Is More Employable than Lakisha? b Discrimination by Employers 405 Case Study: Segregated Streetcars and the Profit Motive c Discrimination by Customers and Governments 406 Case Study: Discrimination in Sports 407 The News: Gender Differences Questions for Review 410 Quick Check Multiple Choice 410 Problems and Applications 411 CHAPTER 21 Topics for Further The Theory of Consumer Choice 435 CHAPTER The Budget Constraint: What the Consumer Can Income Inequality and Poverty The of Inequality 414 Preferences: What the Consumer Wants 437 U.S. Income Inequality a Representing Preferences with Indifference Curves 438 Inequality around the World b Properties of Indifference Curves 439 The Poverty Rate 417 Extreme Examples Indifference Curves 440

8 XXVi CONTENTS 21-3 Optimization: What the Consumer Chooses 442 Consumer's Optimal Choices 442 FYI: Utility: An Alternative Way to Describe Preferences and Optimization b How Changes in Income Affect the Consumer's Choices 444 How Changes in Prices Affect the Consumer's Choices d Income and Substitution Effects e Deriving the Demand Curve 448 Three ications 449 Do All Demand Curves Downward? 449 Case Study: The Search for Giffen Goods 450 How Do Wages Affect Labor Supply? 450 Case Study: Income Effects on Labor Supply: Historical Trends, Lottery Winners, and the Carnegie Conjecture 453 How Do Interest Rates Affect Household Part The Data of Conclusion: Really Think Way? 456 Summary CS 481 Key Concepts 457 Questions for Review 457 Quick Check Multiple Choice 458 CHAPTER 23 Problems and Applications 458 Measuring a Nation's Income 483 CHAPTER 22 Income and Expenditure 484 Frontiers of Microeconomics 22-1 Information 462 Hidden Actions: Principals, Agents, 23-2 The of GDP 486 Is the Value..." c" Hazard 462 Goods and Services..." 487 FYI: Corporate Management e"... Produced..." 487 Hidden Characteristics: Adverse Selection and " the Problem g"... In a Given Period of Time." 487 Signaling to Convey Private Information The of GDP 488 Case Study: Gifts as Signals 465 FYI: Other Measures of Income 489 Private Information a Consumption 489 Asymmetrie Information and Public Policy 466 Investment Political Economy c Government Purchases 490 Paradox 467 Net Exports b Theorem 468 Components of U.S. GDP Real versus Nominal GDP d Politicians Are People Too 471 The News: The BEA Changes the Definitions of 22-3 Economies 471 Investment and GDP 492 Rational a A 492 Case Left-DigitBias b The GDP b People Care about c People Are Inconsistent Time GDP a Good Measure of Economic 496 The News: Can Brain Science Improve Economies? 476 Study: International Differences in GDP and the 22-4 Conclusion 476 of Life 497 Summary 478 Underground Economy 498 Kev ConceDts 478 Measuring Macroeconomic Well-Being 500 Questions for Review Conclusion 500 Quick Check Multiple Choice 478 Summary 502 Problems and Applications 479 Key Concepts 502

9 CONTENTS xxvii Questions for Review Productivity: Role and Determinants 526 Quick Check Multiple Choice 502 FYI: RicherThan the Richest American? 526 Problems and Applications a Why Productivity Is So Important b How Productivity Is Determined 527 FYI: A Is a Thousand Statistics 528 CHAPTER 24 FYI: The Production Function 531 Measuring the Cost of Living The Consumer Price 25-3 Economic Growth and Public Policy a Saving and Investment the Catch-Up Effect c Investment Abroad 535 Problems in Measuring the Cost of Living d Education 536 The News: Monitoring Inflation in the Internet Age 510 Health and Nutrition 536 The GDP versus the Consumer Price Property Rights and Political Stability 537 Index 512 The News: Does Food Aid Help or Hurt? Correcting Economic Variables for the Effects of 25-3g Free Trade 539 Inflation 513 Research and Development 540 Dollar Figures Times i Population Growth b Indexation 514 News: One Economist's Answer 542 FYI: Mr. Index Goes to Hollywood Conclusion: The Importance of Long-Run Growth c Real and Nominal Interest Rates 515 Summary 545 Case Study: Interest Rates in the U.S. Economy 517 Concepts Conclusion 518 Questions for Review 545 Summary 518 Quick Check Multiple Choice 545 Key Concepts 519 Problems and Applications 546 Questions for Review 519 Quick Check Multiple Choice 519 CHAPTER 26 Problems and Applications 519 Part IX The Real Economy in the Long Run 521 Saving, Investment, and the Financial System Financial Institutions in the U.S. Economy 548 Financial Markets 548 Financial Intermediaries 550 FYI: Key Numbers for Stock Watchers The News: Should Equity in Themselves? Saving and Investment in the National Income Accounts a Some Important Identities b The Meaning of Saving and Investment The Market for Loanable Funds a Supply and Demand for Loanable Funds b Policy 1: Saving Incentives c Policy 2: Investment Incentives d Policy 3: Government Budget Deficits and Surpluses 561 Case Study: The History of U.S. Government Debt 563 FYI: Financial Crises Conclusion 565 Summary 566 CHAPTER 25 Key Concepts 566 Questions for Review 566 GrOWth 523 Quick Check Multiple Choice Economic Growth around the World 524 Applications 567

10 xxviii CONTENTS CHAPTER 27 The Basic Case Study: Henry Ford and the Very Generous $5-a-Day 27-1 Present Value: Measuring the Time Value of Money Conclusion 604 FYI: The Magic of Compounding and the of Summary 604 Key Concepts Managing Risk 572 Questions for Review 605 Risk Aversion 572 Quick Check Multiple Choice 605 Markets for Insurance 573 Problems and Applications c Diversification of Risk d The Trade-off between Risk and Return Asset Valuation a Fundamental Analysis b The Efficient Markets Hypothesis 577 Case Study: Random and Index Funds c Market Irrationality 579 The News: Is the Efficient Markets Hypothesis Kaput? Conclusion 581 Summary 581 Key Concepts 581 Questions for Review Quick Check Multiple Choice 582 Problems and Applications 582 CHAPTER 28 Unemployment 585 Part X Money and Prices in How Is Unemployment Measured? 586 Case Study: Labor-Force Participation of Men and Women I fi CT in the Economy 589 Does the Unemployment Rate Measure What We Want 590 How Long Are the Unemployed without Work? 592 CHAPTER Some People 609 Unemployed? 592 FYI: The Jobs The Meaning of Money 610. Money Job Search 593,.,, Money The 612 Public Policy Job Search 594 Money the U.S. Economy 613 Unemployment Insurance 595 FYI: Why Credit Cards Aren't Money Case Study: Where Is AU the Currency? Minimum-Wage Laws The Federal Reserve System and Collective Bargaining 598 Organization 615 FYI: Who Earns the Minimum Wage? 599 The Federal Open Market 616 Unions Banks and the Money Supply b Are Unions Good or Bad for the Economy? The Theory of Wages 601 Banking a Worker Health b Money Creation with Fractional-Reserve 28-5bWorkerTurnover 602 Banking 618 Quality c The Money Multiplier 619

11 29-3d Bank Capital, Leverage, and the Financial Crisis of The Fed's Tools of Monetary Control a How the Fed Influences the Quantity of Reserves b How the Fed Influences the Reserve Ratio c Problems in Controlling the Money Supply 624 Case Study: Bank Runs and the Money Supply 625 The News: Bernanke on the Fed's Toolbox d The Federal Funds Rate Conclusion 629 Summary 629 Key Concepts 629 Questions for Review 630 Quick Check Multiple Choice 630 Problems and Applications 630 CONTENTS CHAPTER 30 Part XI The Money Growth and Inflation 633 Of The Classical Theory of Inflation 634 Prices Money 635 CHAPTER 31 Money Supply, Money Demand, and Monetary Open-Economy Macroeconomics: Basic The Effects Injection 637 Process 638 Classical and Monetary The International of Goods and Capital The Flow of Goods: Exports, Imports, and Net Velocity and the Quantity Equation 640 Exports 660 Case Study: Money and Prices during Four Case Study: The Increasing Openness of the U.S. Hyperinflations 642 Economy 661 Tax 642 The News: The Changing Nature of U.S. Exports 662 The Fisher Effect 644 The How of Financial Resources: Net Capital FYI: Hyperinflation in Zimbabwe 644 Outflow The Costs of Inflation 646 Power? The Fallacy 647 and Net Capital Outflow 665 Shoeleather Costs 647 Investment, Relationship to the Costs 648 International d Relative-PriceVariability and the Misallocation of Sumrrung Up 667 Resources 648 Case Study: U.S. Trade National Problem? e Distortions The Prices for International Transactions: Real and Nominal 30-2f Confusion and Inconvenience 650 Exchange Rates g A Special Cost of Unexpected Arbitrary Nominal Exchange Rates 670 Redistributions Wealth 651 FYI: The Euro h Inflation Is Bad, But Deflation May Be Worse 652-2b Real Exchange Rates 672 Case Study: The Wizard ofoz D b 652 Theory of Exchange-Rate Determination: Power Parity Conclusion 654 Logic of Parity 674 Summary 654 Implications Parity 674 Key Concepts 654 Case Study: The Nominal Exchange Rate during a Questions for Review 655 Hyperinflation 676 Quick Check Multiple Choice 655 Limitations of Purchasing-Power Parity 677 Problems and Applications 655 Case Study: The Hamburger Standard 677

12 XXX CONTENTS KeyConcepts 679 I Questions for Review 679 Quick Check Multiple Choice 679 Problems and Applications 680 CHAPTER 33 Short-Run Economic 32 Aggregate Demand and Aggregate 707 A Macroeconomic Theory of the Open Economy Three Key Facts about Economic Fluctuations 708 Fact 1: Economic Fluctuations Are and 32-1 Supply and Demand for Loanable Funds and for Foreign- Unpredictable 708 Currency Exchange 684 Fact 2: Most Macroeconomic Quantities Market for Loanable Funds 684 Together 710 The Market for Foreign-Currency Output Falls, Unemployment Rises 710 Exchange 686 Explaining Short-Run Economic Fluctuations 710 FYI: Purchasing-Power Parity as a Special Case 688 The of Classical Equilibrium in the Open Economy 689 of Short-Run Fluctuations a Net Capital Outflow: The Link between the Two News: The Social Influences of Economic Markets b Equilibrium Two Markets 690 Aggregate Demand and Aggregate FYI: Supply and Demand 692 Supply How Policies and Events Affect an Open Curve 714 Economy a Why the Aggregate-Demand Curve Slopes 32-3a Government Budget Deficits 692 Downward b Trade Policy b Why the Aggregate-Demand Curve Might c and Flight The Aggregate-Supply Curve 719 Case Study: Capital from China 699 Why the Aggregate-Supply Curve Vertical in the Long The News: Is a Currency Always in a Nation's 720 Interest? b Why the Long-Run Aggregate-Supply Curve Might 32-4 Conclusion 700 Summary 702 Demand and Aggregate Supply to Key Concepts 702 Depict Long-Run Growth and Inflation 722 Questions for Review 702 Aggregate-Supply Curve Slopes Upward in the Quick Check Multiple Choice 702 Problems and Applications 703 Short Run e Why the Short-Run Aggregate-Supply Curve Might Shift Two Causes of Economic Fluctuations a The Effects of a Shift in Aggregate Demand 729 FYI: Monetary Neutrality Revisited 731 Case Study: Two Big Shifts in Aggregate Demand: The Great Depression and World War II 732 Case Study: The Recession of The News: What Have We Learned? b The Effects of a Shift in Aggregate Supply 736 Case Study: and the Economy 738 FYI: The Origins Model of Aggregate Demand and Aggregate Supply Conclusion 740 Summary 740 Key Concepts Questions for Review 741 Quick Check Multiple Choice 742 Problems and Applications 742

13 CONTENTS xxxi CHAPTER 34 Inflation 782 Ratio 783 The Of Rational Expectations and the of Costless Aggregate Demand 745 TOC How Monetary Policy Influences Aggregate Demand The Theory of Liquidity Preference e A Financial Crisis Takes Us for a Ride the Phillips The Downward of the Aggregate-Demand Curve 788 Curve Conclusion 789 FYI: Interest Rates the Run and the Short Run 750 Summarv 790 Changes in the Money Supply 751 Key Concepts 790 The Role of Targets in Fed Policy 753 Questions for Review 790 FYI: The Zero Lower Bound Case Study: Why the Fed the Stock Market Problems Check and Multiple Applications Choice 790 (andviceversa) How Fiscal Policy Influences Aggregate Demand a Changes in Government Purchases b The Multiplier Effect c A Formula for the Spending Multiplier d Other Applications of the Multiplier Effect e The Crowding-Out Effect f Changes in Taxes 759 FYI: How Fiscal Policy Might Affect Aggregate Supply Policy to Stabilize the Economy a The Case for Active Stabilization Policy 761 Case Study: Keynesians in the White House 762 The News: How Large Is the Fiscal Policy Multiplier? b The Case against Active Stabilization Policy c Automatic Stabilizers Conclusion 765 Summary 766 Key Concepts 766 Questions for Review 766 Quick Check Multiple Choice 767 Problems and Applications 767 Final Thoughts 793 CHAPTER 35 CHAPTER 36 The between Inflation and Unemployment 769 over Macroeconomic Policy The Phillips Curve 770 Origins Phillips Curve Should Monetary and Fiscal Try to Stabilize Aggregate Demand, Aggregate Supply and the Phillips the Economy? 796 Curve 771 Pro: Policymakers Try..... to Stabilize the Economy Shifts the Phillips Curve: The Rote of Natural 775 The News: Will the Keep Interest Evidence 776 Short-Run Phillips Curve e The Natural Experiment for the 36-2 Should the Government Fight Recessions with Hypothesis 778 Spending Hikes Rather Than Tax Cuts? a Pro: The Government Should Fight Recessions with 35-3 Shifts the Curve: The Role of Supply Shocks 780

14 CONTENTS 36-2b Con: The Government Should Fight Recessions The News: What an American Fiscal Crisis Look Cuts 800 Like? Should Monetary Policy Be Made by Rather Than by 36-6 Should the Tax Laws Be Reformed to Encourage Discretion? 802 Saving? a Pro: Monetary Policy Should Be Made by Rule a Pro: The Tax Laws Should Be Reformed to Encourage 36-3b Con: Monetary Policy Should Not Be Made by Rule 803 Saving 812 FYI: Inflation Targeting b Con: The Tax Laws Should Not Be Reformed to 36-4 Should the Central Bank for Zero Inflation? 804 Encourage Saving 813 The Central Bank Zero 36-7 Conclusion 814 Inflation 805 Summary b Con: The Central Bank Should Not Aim for Zero Questions for Review 815 Inflation 806 Quick Check Multiple Choice 815 The News: What Is the Optimal Inflation Rate? 807 Problems and Applications Should the Government Balance Its Budget? 808 Glossarv a Pro: The Government Should Balance Its Budget 808. Con: The Government Should Not Balance Its Budget 809