Macroeconomics. Short-Run Economic Fluctuations. Stabilization Policy. Introduction to. Macroeconomics. Long-Run Economic Growth

Transcription

1 Paul Krugman, Robin Wells Macroeconomics Preface xvi PART 1 What Is Economics? Introduction The Ordinary Business of Life 1 Chapter 1 First Principles 5 Chapter 2 Economic Models: Trade-offs and Trade 25 Appendix Graphs in Economics 49 PART 2 Supply and Demand Chapter 3 Supply and Demand 65 Chapter 4 Price Controls and Quotas: Meddling with Markets 101 Chapter5 International Trade 127 Appendix Consumer and Producer Surplus 159 PART 3 Introduction to Macroeconomics Chapter 6 Macroeconomics: The Big Picture 165 Chapter 7 GDP and CPI: Tracking the Macroeconomy 187 Chapter 8 Unemployment and Inflation 213 Long-Run Economic Growth PART 4 Chapter 9 Long-Run Economic Growth 241 chapter 10 Appendix Savings, Investment Spending, and the Financial System 275 Toward A Fuller Understanding of Present Value 308 PART 5 Short-Run Economic Fluctuations Chapter 11 Income and Expenditure 311 Appendix Deriving the Multiplier Algebraically 339 Chapter 12 PART 6 Aggregate Demand and Aggregate Supply 341 Stabilization Policy Chapter 13 Fiscal Policy 377 Appendix Taxes and the Multiplier 408 Chapter 14 Money, Banking, and the Federal Reserve System 411 Chapter 15 Monetary Policy 447 Appendix Chapter 16 Reconciling the Two Models of the Interest Rate 472 Inflation, Disinflation, and Deflation 475 Chapter 17 Crises and Consequences 501 PART 7 Events and Ideas Chapter 18 Macroeconomics: Events and Ideas 525 PART 8 The Open Economy Chapter 19 Open-Economy Macroeconomics 549 Macroeconomic Data Tables M-1 Solutions to "Check Your Understanding" Questions S-1 Glossary G-1 Index 1-1 viii

2 Preface xvi PARTI What Is Economics? INTRODUCTION ANY GIVEN SUNDAY 1 The Invisible Hand 2 My Benefit, Your COST 3 Good Times, Bad Times 3 Onward and Upward 4 An Engine for Discovery 4 The Ordinary Business of Life CHAPTER 1 First Principles...5 COMMON GROUND 5 Principles That Underlie Individual Choice: The Core of Economics б Principle #1: Choices are necessary because resources are scarce 6 Principle #2: The true cost of something is its opportunity cost 7 Principle #3: "How much" is a decision at the margin 3 Principle #4: People usually respond to incentives, exploiting opportunities to make themselves better off 9 FOR INQUIRING MINDS: Cashing in at School 10 ECONOMICS >INACTION Boy or Girl? It Depends on the Cost 10 Interaction: How Economies Work Principle #5: There are gains from trade 12 Principle #6: Markets move toward equilibrium 13 FOR INQUIRING MINDS: Choosing Sides 14 Principle #7: Resources should be used efficiently to achieve society's goals 14 Principle #8: Markets usually lead to efficiency 15 Principle #9: When markets don't achieve efficiency, government intervention can improve society's welfare 16 ECONOMICS >INACTION Restoring Equilibrium on the Freeways 17 Economy-Wide Interactions 18 Principle #10: One person's spending is another person's income 18 Principle #11: Overall spending sometimes gets out of line with the economy's productive capacity 18 Principle #12: Government policies can change spending 19 ECONOMICS >IN ACTION Adventures in Babysitting 19 BUSINESS How Priceline.com Revolutionized the Travel CASE * Industry 21 n IX CHAPTER 2 Economic Models: Trade-offs and Trade FROM KITTY HAWK TO DREAMLINER 25 Models in Economics: Some Important Examples 26 FOR INQUIRING MINDS: The Model That Ate the Economy 27 Trade-offs: The production possibility frontier 27 Comparative advantage and gains from trade 33 Comparative advantage and international trade, in reality 36 GLOBAL COMPARISON: Pajama Republics 37 Transactions: The circular-flow diagram 37 ECONOMICS >INACTION Rich Nation, Poor Nation 39 Using Models 40 Positive versus normative economics 40 When and why economists disagree 41 FOR INQUIRING MINDS: When Economists Agree 42 ECONOMICS > IN ACTION Economists, Beyond the Ivory Tower 42 BUSINESS Efficiency, Opportunity Costs, and the Logic * of Lean Production at Boeing 44 CHAPTER 2 APPENDIX Graphs in Economics...49 Getting the Picture 49 Graphs, Variables, and Economic Models 49 How Graphs Work 49 Two-variable graphs 49 Curves on a graph 51 A Key Concept: The Slope of a Curve 52 The slope of a linear curve 52 Horizontal and vertical curves and their slopes The slope of a nonlinear curve 54 Calculating the slope along a nonlinear curve 54 Maximum and minimum points 57 Calculating the Area Below or Above a Curve 57 Graphs That Depict Numerical Information 58 Types of numerical graphs 59 Problems in interpreting numerical graphs 60 PART 2 Supply and Demand CHAPTER 3 Supply and Demand BLUE JEAN BLUES 65 Supply and Demand: A Model of a Competitive Market 66

3 X The Demand Curve 66 The demand schedule and the demand curve 67 GLOBAL COMPARISON: Pay More, Pump Less 68 Shifts of the demand curve 68 Understanding shifts of the demand curve 70 ECONOMICS > IN ACTION Beating the Traffic 74 The Supply Curve 76 The supply schedule and the supply curve 76 Shifts of the supply curve 77 Understanding shifts of the supply curve 78 ECONOMICS >IN ACTION Only Creatures Small and Pampered 81 Supply, Demand, and Equilibrium 83 Finding the equilibrium price and quantity 84 Why do all sales and purchases in a market take place at the same price? 85 Why does the market price fall if it is above the equilibrium price? 85 Why does the market price rise if it is below the equilibrium price? 86 Using equilibrium to describe markets 86 ECONOMICS > IN ACTION The Price of Admission 87 Changes in Supply and Demand 88 What happens when the demand curve shifts 88 What happens when the supply curve shifts 89 Simultaneous shifts of supply and demand curves 90 FOR INQUIRING MINDS: Tribulations on the Runway 92 ECONOMICS >IN ACTION The Rice Run of Competitive markets and others 94 BUSINESS The Chicago Board of Trade 95 CHAPTER 4 Price Controls and Quotas: Meddling with Markets 101 BIG CITY, NOT-SO-BRIGHT IDEAS 101 Why Governments Control Prices 102 Price Ceilings 102 Modeling a price ceiling 103 How a price ceiling causes inefficiency 104 FOR INQUIRING MINDS: Rent Control, Mumbai Style 107 So why are there price ceilings? 107 ECONOMICS >INACTION Hunger and Price Controls in Venezuela 108 Price Floors 109 How a price floor causes inefficiency 111 So why are there price floors? 113 GLOBAL COMPARISON: Check Out Our Low, Low Wages! 113 ECONOMICS >INACTION "Black Labor" in Southern Europe 114 Controlling Quantities 115 The anatomy of quantity controls 116 The costs of quantity controls 118 ECONOMICS >IN ACTION The Clams of Jersey Shore 120 BUSINESS Medallion Financial: Cruising Right CASE Along 121 CHAPTER 5 International Trade 127 CAR PARTS AND SUCKING SOUNDS 127 Comparative Advantage and International Trade 128 Production possibilities and comparative advantage, revisited 129 The gains from international trade 131 Comparative advantage versus absolute advantage 132 GLOBAL COMPARISON: Productivity and Wages Around the World 133 Sources of comparative advantage 134 FOR INQUIRING MINDS: Increasing Returns to Scale and International Trade 136 ECONOMICS >INACTION Skill and Comparative Advantage 136 Supply, Demand, and International Trade 137 The effects of imports 138 The effects of exports 140 International trade and wages 142 ECONOMICS >IN ACTION Trade, Wages, and Land Prices in the Nineteenth Century 143 The Effects of Trade Protection 144 The effects of a tariff 144 The effects of an import quota 146 ECONOMICS >INACTION Trade Protection in the United States 147 The Political Economy of Trade Protection 148 Arguments for trade protection 148 The politics of trade protection 149 International trade agreements and the World Trade Organization 149 FOR INQUIRING MINDS: Tires Under Pressure 151 New challenges to globalization 151 ECONOMICS > IN A CTION Beefing Up Exports 152 BUSINESS Li & Fung: From Guangzhou to You 154 CHAPTER 5 APPENDIX СОNSUMER and Producer Surplus Consumer Surplus and the Demand Curve 159 Willingness to pay and the demand curve 159 Willingness to pay and consumer surplus 160

4 XI Producer Surplus and The Supply Curve 161 Cost and producer surplus 161 The Gains from Trade 163 PART 3 Introduction to Macroeconomics CHAPTER 6 Macroeconomics: The Big Picture.165 HOOVERVILLES 165 The Nature of Macroeconomics 166 Macroeconomic questions 166 Macroeconomics: the whole is greater than the sum of its parts 166 Macroeconomics: theory and policy 167 ECONOMICS >IN ACTION Feeding Off Depression 168 The Business Cycle 169 Charting the business cycle 170 The pain of recession 171 FOR INQUIRING MINDS: Defining Recessions and Expansions 172 Taming the business cycle 173 GLOBAL COMPARISON: International Business Cycles 173 ECONOMICS >INACTION Comparing Recessions 174 Long-Run Economic Growth 174 FOR INQUIRING MINDS: When Did Long-Run Growth Start? 176 ECONOMICS >INACTION A Tale of Two Countries 176 Inflation and Deflation 177 The causes of inflation and deflation The pain of inflation and deflation 178 ECONOMICS > IN ACTION A Fast (Food) Measure of Inflation 179 International Imbalances 179 ECONOMICS >IN ACTION Baltic Balancing Act 180 BUSINESS What's Good for America is Good for CASE General Motors 182 CHAPTER 7 GOP and CPI: Tracking the Macroeconomy THE NEW #2 187 The National Accounts 188 The circular-flow diagram, revisited and expanded 188 Gross domestic product 181 Calculating GDP 192 jfor INQUIRING MINDS: Our Imputed Lives 193 FOR INQUIRING MINDS: Gross What? 196 What GDP tells us 196 ECONOMICS >IN ACTION Creating the National Accounts 197 Real GOP: A Measure of Aggregate Output 198 Calculating real GDP 190 What real GDP doesn't measure 199 GLOBAL COMPARISON: GDP and the Meaning of Life 200 ECONOMICS >INACTION Miracle in Venezuela? 201 Price Indexes and the Aggregate Price Level 202 Market baskets and price indexes 202 The consumer price index 203 Other price measures 204 ECONOMICS >INACTION Indexing to the CPI 205 BUSINESS Getting a Jump on GDP 207 CHAPTER 8 Unemployment and Inflation, 213 A VERY BRITISH DILEMMA 213 The Unemployment Rate 214 Defining and measuring unemployment 214 The significance of the unemployment rate 215 Growth and unemployment 217 ECONOMICS >INACTION Failure to Launch 219 The Natural Rate of Unemployment 220 Job creation and job destruction 220 Frictional unemployment 221 Structural unemployment 222 The natural rate of unemployment GLOBAL COMPARISON: Unemployment Around the OECD 225 Changes in the natural rate of unemployment 226 ECONOMICS > IN ACTION Structural Unemployment in East Germany 227 Inflation and Deflation 228 The level of prices doesn't matter But the rate of change of prices does 229 Winners and losers from inflation 232 Inflation is easy; disinflation is hard 233 ECONOMICS > IN ACTION Israel's Experience with Inflation 234 BUSINESS A Monster Slump 235 PART4 Long-Run Economic Growth CHAPTER 9 Long-Run Economic Growth 241 TALL TALES 241 Comparing Economies Across Time and Space 242 Real GDP per capita 242 Growth rates 244 ECONOMICS > IN ACTION India Takes Off 245

5 XII The Sources of Long-Run Growth 246 The crucial importance of productivity 246 Explaining growth in productivity 247 Accounting for growth: The aggregate production function 248 What about natural resources? 251 ECONOMICS >IN ACTION The Information Technology Paradox 252 Why Growth Rates Differ 253 Explaining differences in growth rates 254 FOR INQUIRING MINDS: Inventing R&D 255 The role of government in promoting economic growth 256 GLOBAL COMPARISON: Old Europe and New Technology 256 FOR INQUIRING MINDS: The New Growth Theory 258 ECONOMICS > IN ACTION The Brazilian Breadbasket 258 Success, Disappointment, and Failure 259 East Asia's miracle Latin America's disappointment 261 Africa's troubles and promise 261 ECONOMICS >INACTION Are Economies Converging? 262 Is World Growth Sustainable? 264 Natural resources and growth, revisited 264 Economic growth and the environment 266 ECONOMICS > IN ACTION The Cost of Climate Protection 268 BUSINESS Big Box Boom 269 CHAPTER 10 Savings, Investment Spending, and the Financial System FUNDS FOR FACEBOOK 275 Matching Up Savings and Investment Spending 276 The savings-investment spending identity 276 GLOBAL COMPARISON: America's Low Savings 280 FOR INQUIRING MINDS: Who Enforces the Accounting? 280 The market for loanable funds 281 FOR INQUIRING MINDS: Using Present Value 282 ECONOMICS >INACTION Fifty Years of U.S. Interest Rates 289 The Financial System 291 Three tasks of a financial system 291 Types of financial assets 293 Financial intermediaries 235 ECONOMICS >INACTION Banks and the South Korean Miracle 297 Financial Fluctuations 298 The demand for stocks 298 FOR INQUIRING MINDS: HOW Now, DOW Jones? 298 The demand for other assets 299 Asset price expectations 300 FOR INQUIRING MINDS: Behavioral Finance 301 Asset prices and macroeconomics 302 ECONOMICS >INACTION The Great American Housing Bubble 302 CHAPTER 10 APPENDIX Toward a Fuller Understanding of Present Value.308 How to Calculate the Present Value of One-Year Projects 308 How to Calculate the Present Value of Multiyear Projects 308 How to Calculate the Present Value of Projects with Revenues and Costs 309 PART 5 Short-Run Economic Fluctuations CHAPTER 11 Income and Expenditure FROM BOOM TO BUST 311 The Multiplier: An Informal Introduction 312 ECONOMICS > IN ACTION The Multiplier and the Great Depression 314 Consumer Spending 315 Current disposable income and consumer spending 315 Shifts of the aggregate consumption function ECONOMICS > IN ACTION Famous First Forecasting Failures 320 Investment Spending 321 The interest rate and investment spending 322 Expected future real GDP, production capacity, and investment spending 323 Inventories and unplanned investment spending 224 ECONOMICS >INACTION Interest Rates and the U.S. Housing Boom 525 The Income-Expenditure Model 326 Planned aggregate spending and real GDP 327 Income-expenditure equilibrium 328 The multiplier process and inventory adjustment 331 ECONOMICS >INACTION Inventories and the End of a Recession 334 BUSINESS Making it Throuqh in Muskegon 33S CASE CHAPTER 11 APPENDIX Deriving the Multiplier Algebraically 339 CHAPTER 12 Aggregate Demand and Aggregate Supply 341 SHOCKS TO THE SYSTEM 341

6 xiii Aggregate Demand 342 Why is the aggregate demand curve downward sloping? 343 The aggregate demand curve and the incomeexpenditure model 344 Shifts of the aggregate demand curve 346 Government policies and aggregate demand 348 ECONOMICS >IN ACTION Moving Along the Aggregate Demand Curve, Aggregate Supply 350 The short-run aggregate supply curve 350 FOR INQUIRING MINDS: What's Truly Flexible, What's Truly Sticky 353 Shifts of the short-run aggregate supply curve 353 The long-run aggregate supply curve 356 From the short run to the long run 358 ECONOMICS >IN ACTION Prices and Output During the Great Depression 359 The АО-AS Model 360 Short-run macroeconomic equilibrium 360 Shifts of aggregate demand: Short-run effects 361 Shifts of the SRAS curve 362 GLOBAL COMPARISON: Supply Shocks of Twenty-first Century 364 Long-run macroeconomic equilibrium 364 FOR INQUIRING MINDS: Where's the Deflation? 366 ECONOMICS >INACTION Supply Shocks versus Demand Shocks in Practice 367 Macroeconomic Policy 368 FOR INQUIRING MINDS: Keynes and the Long Run 369 Policy in the face of demand shocks 369 Responding to supply shocks 370 ECONOMICS > IN ACTION Is Stabilization Policy Stabilizing? 371 BUSINESS United in Pain 372 CASE» PART6 Stabilization Policy CHAPTER 13 Fiscal Policy 377 TO STIMULATE OR NOT TO STIMULATE? 377 Fiscal Policy: The Basics 378 Taxes, purchases of goods and services, government transfers, and borrowing 378 The government budget and total spending 380 Expansionary and contractionary fiscal policy 380 Can expansionary fiscal policy actually work? 382 A cautionary note: lags in fiscal policy 383 ECONOMICS > IN ACTION What Was in the Recovery Act? 384 Fiscal Policy and The Multiplier 385 Multiplier effects of an increase in government purchases of goods and services 385 Multiplier effects of changes in government transfers and taxes 386 How taxes affect the multiplier 387 ECONOMICS >INACTION Multipliers and the Obama Stimulus 388 The Budget Balance 389 The budget balance as a measure of fiscal policy 390 The business cycle and the cyclically adjusted budget balance 390 Should the budget be balanced? 393 ECONOMICS > IN ACTION Europe's Search for a Fiscal Rule 393 Long-Run Implications of Fiscal Policy 394 Deficits, surpluses, and debt 395 GLOBAL COMPARISON: The American Way of Debt 396 Problems posed by rising government debt 397 Deficits and debt in practice 398 FOR INQUIRING MINDS: What Happened to the Debt from World War II? 399 Implicit liabilities 399 ECONOMICS > IN ACTION Austerity Dilemmas 401 BUSINESS«Priming the Pumps 403 CASE CHAPTER 13 APPENDIX Taxes and the Multiplier 408 CHAPTER 14 Money, Banking, and the Federal Reserve System 411 FUNNY MONEY 411 The Meaning of Money 412 What is money? 412 Roles of money 413 GLOBAL COMPARISON: The Big Moneys 413 Types of money 414 Measuring the money supply 415 FOR INQUIRING MINDS: What's with All the Currency? 416 ECONOMICS >INACTION The History of the Dollar 417 The Monetary Role of Banks 418 What banks do 418 The problem of bank runs 419 Bank regulation 420 ECONOMICS > IN ACTION It's a Wonderful Banking System 421 Determining the Money Supply 422 How banks create money 422 Reserves, bank deposits, and the money multiplier 424 The money multiplier in reality 425 ECONOMICS >INACTION Multiplying Money Down 426 The Federal Reserve System 427 The structure of the fed 427

7 XIV What the fed does: Reserve requirements and the discount rate 428 Open-market operations 429 FOR INQUIRING MINDS: Who Gets the Interest on the Fed's Assets? 431 The European central bank 431 ECONOMICS >IN ACTION The Fed's Balance Sheet, Normal and Abnormal 432 The Evolution of the American Banking System 433 The crisis in American banking in the early twentieth century 434 Responding to banking crises: The creation of the Federal Reserve 435 The savings and loan crisis of the 1980s 436 Back to the future: The financial crisis of ? ECONOMICS >INACTION Regulation after the 2008 Crisis 440 BUSINESS The Perfect Gift: Cash or Gift Card? 441 CHAPTER 15 Monetary Policy 447 PERSON OF THE YEAR 447 The Demand for Money 448 The opportunity cost of holding money 448 The money demand curve 450 Shifts of the money demand curve 450 ECONOMICS >IN ACTION A Yen for Cash 452 Money and Interest Rates 453 The equilibrium interest rate 453 Two models of interest rates? 454 Monetary policy and the interest rate 455 Long-term interest rates 456 ECONOMICS > IN ACTION The Fed Reverses Course 457 Monetary Policy and Aggregate Demand 458 Expansionary and contractionary monetary policy 458 Monetary policy in practice 459 The Taylor Rule Method of setting monetary policy 459 Inflation targeting 460 GLOBAL COMPARISON: Inflation Targets 461 The zero lower bound problem 462 ECONOMICS > IN ACTION What the Fed Wants, the Fed Gets 462 Money, Output, and Prices in the Long Run 463 Short-run and long-run effects of an increase in the money supply 464 Monetary neutrality 465 Changes in the money supply and the interest rate in the long run 465 ECONOMICS >INACTION International Evidence of Monetary Neutrality 466 BUSINESS PIMCO Bets Cheap Money 468 CHAPTER 15 APPENDIX Reconciling the Two Models of the Interest Rate The Interest Rate in the Short Run 472 The Interest Rate in the Long Run 473 CHAPTER 16 Inflation, Disinflation, and Deflation 475 BRINGING A SUITCASE TO THE BANK 475 Money and Inflation 476 The classical model of money and prices 476 The inflation tax 478 The logic of hyperinflation 479 ECONOMICS >INACTION Zimbabwe's Inflation 481 Moderate Inflation and Disinflation 481 The output gap and the unemployment rate 482 FOR INQUIRING MINDS: Okun'S Law 484 The short-run Phillips curve 484 FOR INQUIRING MINDS: The Aggregate Supply Curve and the Short-Run Phillips Curve 486 Inflation expectations and the short-run Phillips curve 487 ECONOMICS >IN ACTION From the Scary Seventies to the Nifty Nineties 489 Inflation and Unemployment in the Long Run 489 The long-run Phillips curve 490 The natural rate of unemployment, revisited 491 The costs of disinflation 491 GLOBAL COMPARISON: Disinflation around the World 492 ECONOMICS > IN ACTION The Great Disinflation of the 1980s 492 Deflation 494 Debt deflation 494 Effects of expected deflation 494 ECONOMICS >IN ACTION The Deflation Scare of BUSINESS Licenses to Print Money 497 CHAPTER 17 Crises and Consequences 501 FROM PURVEYOR WORLDS 501 OF DRY GOODS TO DESTROYER OF Banking: Benefits and Dangers 502 The trade-off between rate of return and liquidity 503 The purpose of banking 503 Bank runs redux 504 ECONOMICS >INACTION Bad Day at Northern Rock 505 Banking Crises and Financial Panics 506 The logic of banking crises 506 Historical banking crises: The age of panics 507 Modern banking crises 508 ECONOMICS > IN ACTION Erin Go Broke 509

8 XV The Consequences of Banking Crises 510 Banking crises, recessions, and recovery 510 Why are banking-crisis recessions so bad? 511 Governments step in 513 ECONOMICS > IN ACTION Banks and the Great Depression 514 The 2008 Crisis and ITS Aftermath 515 Severe crisis, slow recovery 515 Aftershocks in Europe 517 The stimulus-austerity debate 518 The lesson of the post-crisis slump 519 ECONOMICS >IN ACTION Austerity Britain 519 Regulation in The Wake of The Crisis 519 ECONOMICS >IN ACTION Bent Breaks the Buck 521 PART 7 Events and Ideas CHAPTER 18 Macroeconomics: Events and Ideas 525 A TALE OF TWO SLUMPS 525 Classical Macroeconomics 526 Money and the price level 526 The business cycle 526 ECONOMICS >IN ACTION When Did the Business Cycle Begin? 526 The Great Depression and The Keynesian Revolution 52? Keynes's theory 528 FOR INQUIRING MINDS: The Politics of Keynes 529 Policy To fight recessions 530 ECONOMICS >IN ACTION The End of the Great Depression 530 Challenges To Keynesian Economics 531 The revival of monetary policy 521 Monetarism 532 Inflation and the natural rate of unemployment 534 The political business cycle 53S ECONOMICS >IN ACTION The Fed's Flirtation with Monetarism 536 Rational Expectations, Real Business Cycles, and New Classical Macroeconomics 536 Rational expectations 537 Real business cycles 538 FOR INQUIRING MINDS: Supply-Side Economics 538 ECONOMICS >IN ACTION Total Factor Productivity and the Business Cycle 539 Consensus and Conflict in Modern Macroeconomics 540 Question 1: Is expansionary monetary policy helpful in fighting recessions? 540 Question 2: Is expansionary fiscal policy effective in fighting recessions? 541 Question 3: Can monetary and/or fiscal policy reduce unemployment in the long run? 541 Question 4: Should fiscal policy be used in a discretionary way? 541 Question 5: Should monetary policy be used in a discretionary way? 542 The clean little secret of macroeconomics 542 ECONOMICS >IN ACTION An Irish Role Model? 544 PART 8 The Open Economy CHAPTER 19 Open-Economy Macroeconomics SWITZERLAND DOESN'T WANT YOUR MONEY 549 Capital Flows and The Balance of Payments 550 Balance of payments accounts 550 FOR INQUIRING MINDS: GDP, GNP, and the Current Account 553 Modeling the financial account 554 GLOBAL COMPARISON: Big Surpluses 555 Underlying determinants of international capital flows 557 FOR INQUIRING MINDS: A Global Savings Glut? 558 Two-way capital flows SS8 ECONOMICS >INACTION The Golden Age of Capital Flows 559 The Role of the Exchange Rate 560 Understanding exchange rates 580 The equilibrium exchange rate 561 Inflation and real exchange rates S64 Purchasing power parity 566 FOR INQUIRING MINDS: Burgemomics 566 ECONOMICS >INACTION Low-Cost America 567 Exchange Rate Policy 568 Exchange rate regimes 569 How can an exchange rate be held fixed? 56S The exchange rate regime dilemma 571 FOR INQUIRING MINDS: From Bretton Woods to the Euro 572 ECONOMICS >IN ACTION China Pegs the Yuan 573 Exchange Rates and Macroeconomic Policy 573 Devaluation and revaluation of fixed exchange rates 574 Monetary policy under floating exchange rates 574 International business cycles 576 ECONOMICS > IN ACTION The Joy of a Devalued Pound 576 BUSINESS War of the Earthmovers 578 CASE Macroeconomic Data Tables M-1 Solutions to "Check Your Understanding" Questions S-1 Glossary G-1 Index I-1