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Contents Preface Introduction 1 Chapter 1 A Tour of the World 3 1-1 The United States 4 Has the United States Entered a New Economy? 5 Should You Worry about the U.S. Budget Deficit? 7 1-2 The European Union 8 How Can European Unemployment Be Reduced? 10 What Will the Euro Do for Europe? 11 1-3 Japan 12 What Triggered the Slump? 13 How Will Japan Recover? 15 1-4 Looking Ahead 15 Appendix: Where to Find the Numbers? 19 Chapter 2 A Tour of the Book 21 2-1 Aggregate Output 22 GDP: Production and Income 22 Nominal and Real GDP 24 2-2 The Other Major Macroeconomic Variables 28 The Unemployment Rate 28 The Inflation Rate 31 2-3 The Short Run, the Medium Run, the Long Run 34 2-4 A Tour of the Book 35 The Core 35 Extensions 36 Back to Policy 36 Epilogue 37 Appendix: The Construction of Real GDP and Chain-Type Indexes 40 The Core 43 The Short Run 43 Chapter 3 The Goods Market 45 3-1 The Composition of GDP 46 3-2 The Demand for Goods 48 Consumption (C) 48 Investment (I) 50 Government Spending (G) 50 3-3 The Determination of Equilibrium Output 50 Using Algebra 51 Using a Graph 52 Using Words 55 How Long Does It Take for Output to Adjust? 55 3-4 Investment Equals Saving: An Alternative Way of Thinking about Goods-Market Equilibrium 58 3-5 Is the Government Omnipotent? A Warning 60 Chapter 4 Financial Markets 65 4-1 The Demand for Money 66 Deriving the Demand for Money 68 4-2 The Determination of the Interest Rate. I 69 Money Demand, Money Supply, and the Equilibrium Interest Rate 69 Monetary Policy and Open Market Operations 73 Open Market Operations 74 Choosing Money or Choosing the Interest Rate? 75 Money, Bonds, and Other Assets 76 4-3 The Determination of Interest Rate. II* 76 What Banks Do 76 The Supply and the Demand for Central Bank Money 77 4-4 Two Alternative Ways of Looking at the Equilibrium* 82 The Federal Funds Market and the Federal Funds Rate 82 The Supply of Money, the Demand for Money, and the Money Multiplier 83 Chapter 5 Goods and Financial Markets: The IS-LM Model 89 5-1 The Goods Market and the IS Relation 90 Investment, Sales, and the Interest Rate 90 Determining Output 91 Deriving the IS Curve 92 Shifts of the IS Curve 94 5-2 Financial Markets and the LM Relation 94 Real Money, Real Income, and the Interest Rate 95 Deriving the LM Curve 95 Shifts of the LM Curve 97 5-3 Putting the IS and the LM Relations Together 98 Fiscal Policy, Activity, and the Interest Rate 99 Monetary Policy, Activity, and the Interest Rate 101 5-4 Using a Policy Mix 103 5-5 How Does the IS-LM Model Fit the Facts? 107 The Medium Run 115 Chapter 6 The Labor Market 117 6-1 A Tour of the Labor Market 118 The Large Flows of Workers 118 6-2 Movements in Unemployment 120 6-3 Wage Determination 124 Bargaining 125 Efficiency Wages 125 Wages, Prices, and Unemployment 126 6-4 Price Determination 128 6-5 The Natural Rate of Unemployment 129 The Wage-Setting Relation 129 The Price-Setting Relation 129 Equilibrium Real Wages and Unemployment 130 From Unemployment to Employment 132 From Employment to Output 132 6-6 Where We Go From Here 133 Appendix: Wage- and Price-Setting Relations versus Labor Supply and Labor Demand 137 Chapter 7 Putting All Markets Together: The AS-AD Model 139 7-1 Aggregate Supply 140 7-2 Aggregate Demand 142 7-3 Equilibrium in the Short Run and in the Medium Run 145 Equilibrium in the Short Run 145 From the Short Run to the Medium Run 146 7-4 The Effects of a Monetary Expansion 148 The Dynamics of Adjustment 148 Going Behind the Scenes 149 The Neutrality of Money 151 7-5 A Decrease in the Budget Deficit 151 Deficit Reduction, Output, and the Interest Rate 153 Budget Deficits, Output, and Investment 154 7-6 Changes in the Price of Oil 155 Effects on the Natural Rate of Unemployment 156 The Dynamics of Adjustment 157 7-7 Conclusions 159 The Short Run versus the Medium Run 159 Shocks and Propagation Mechanisms 160 Where We Go From Here: Output, Unemployment, and Inflation 160 Chapter 8 The Natural Rate of Unemployment and the Phillips Curve 165 8-1 Inflation, Expected Inflation, and Unemployment 166 8-2 The Phillips Curve 167 The Early Incarnation 167 Mutations 168 Back to the Natural Rate of Unemployment 172 8-3 A Summary and Many Warnings 173 Variations in the Natural Rate Across Countries 174 Variations in the Natural Rate Over Time 176 High Inflation and the Phillips Curve Relation 176 Deflation and the Phillips Curve Relation 180 Appendix: From the Aggregate Supply Relation to a Relation Between Inflation, Expected Inflation, and Unemployment 183 Chapter 9 Inflation, Activity, and Nominal Money Growth 185 9-1 Output, Unemployment, and Inflation 186 Okun's Law 186 The Phillips Curve 188 The Aggregate Demand Relation 188 9-2 The Effects of Money Growth 190 The Medium Run 191 The Short Run 192 9-3 Disinflation 193 A First Pass 193 Expectations and Credibility: The Lucas Critique 195 Nominal Rigidities and Contracts 196 The Long Run Chapter 10 The Facts of Growth 10-1 Growth in Rich Countries Since 1950 The Large Increase in the Standard of Living Since 1950 The Decrease in Growth Rates Since the Mid-1970s The Convergence of Output per Capita 10-2 A Broader Look Across Time and Space Looking Across Two Millennia Looking Across Countries 10-3 Thinking About Growth: A Primer The Aggregate Production Function Returns to Scale and Returns to Factors Output per Worker and Capital per Worker The Sources of Growth Chapter 11 Saving, Capital Accumulation, and Output 11-1 Interactions Between Output and Capital The Effects of Capital on Output The Effects of Output on Capital Accumulation 11-2 The Implications of Alternative Saving Rates Dynamics of Capital and Output Steady-State Capital and Output The Saving Rate and Output The Saving Rate and Consumption 11-3 Getting a Sense of Magnitudes The Effects of the Saving Rate on Steady-State Output The Dynamic Effects of an Increase in the Saving Rate The U.S. Saving Rate and the Golden Rule 11-4 Physical Versus Human Capital Extending the Production Function Human Capital, Physical Capital, and Output Endogenous Growth Appendix: The Cobb-Douglas Production Function and the Steady State Chapter 12 Technological Progress and Growth 12-1 Technological Progress and the Rate of Growth Technological Progress and the Production Function Interactions Between Output and Capital Dynamics of Capital and Output The Effects of the Saving Rate 12-2 The Determinants of Technological Progress The Fertility of the Research Process The Appropriability of Research Results 12-3 The Facts of Growth Revisited Capital Accumulation Versus Technological Progress Fluctuations in the Pace of Technological Progress 12-4 Institutions and Growth Appendix: Constructing a Measure of Technological Progress Chapter 13 Technological Progress, Wages, and Unemployment 13-1 Productivity, Output, and Unemployment in the Short Run Technological Progress, Aggregate Supply, and Aggregate Demand The Empirical Evidence 13-2 Productivity and the Natural Rate of Unemployment Price Setting and Wage Setting Revisited The Natural Rate of Unemployment The Empirical Evidence 13-3 Technological Progress and Distribution Effects The Increase in Wage Inequality The Causes of Increased Wage Inequality Extensions Expectations Chapter 14 Expectations: The Basic Tools 14-1 Nominal Versus Real Interest Rates Nominal and Real Interest Rates in the United States Since 1978 14-2 Expected Present Discounted Values Computing Expected Present Discounted Values Using Present Values: Examples Nominal Versus Real Interest Rates, and Present Values 14-3 Nominal and Real Interest Rates, and the IS-LM Model 14-4 Money Growth, Inflation, Nominal and Real Interest Rates Revisiting the IS-LM Model Nominal and Real Interest Rates in the Short Run Nominal and Real Interest Rates in the Medium Run From the Short to the Medium Run Evidence on the Fisher Hypothesis Appendix: Deriving the Expected Present Discounted Value Using Real or Nominal Interest Rates Chapter 15 Financial Markets and Expectations 15-1 Bond Prices and Bond Yields Bond Prices as Present Values Arbitrage and Bond Prices From Bond Prices to Bond Yields Interpreting the Yield Curve The Yield Curve and Economic Activity 15-2 The Stock Market and Movements in Stock Prices Stock Prices as Present Values The Stock Market and Economic Activity 15-3 Bubbles, Fads, and Stock Prices Appendix: Arbitrage and Stock Prices Chapter 16 Expectations, Consumption, and Investment 16-1 Consumption The Very Foresighted Consumer An Example Toward a More Realistic Description Putting Things Together: Current Income, Expectations, and Consumption 16-2 Investment Investment and Expectations of Profit A Convenient Special Case Current Versus Expected Profit Profit and Sales 16-3 The Volatility of Consumption and Investment Appendix: Derivation of the Expected Present Value of Profits Under Static Expectations Chapter 17 Expectations, Output, and Policy 17-1 Expectations and Decisions: Taking Stock Expectations, Consumption, and Investment Decisions Expectations and the IS Relation The LM Relation Revisited 17-2 Monetary Policy, Expectations, and Output Monetary Policy Revisited 17-3 Deficit Reduction, Expectations, and Output The Role of Expectations About the Future Back to the Current Period The Open Economy Chapter 18 Openness in Goods and Financial Markets 18-1 Openness in Goods Markets Exports and Imports The Choice Between Domestic Goods and Foreign Goods Nominal Exchange Rates From Nominal to Real Exchange Rates From Bilateral to Multilateral Exchange Rates 18-2 Openness in Financial Markets The Balance of Payments The Choice Between Domestic and Foreign Assets Interest Rates and Exchange Rates 18-3 Conclusions and a Look Ahead Chapter 19 The Goods Market in an Open Economy 19-1 The IS Relation in the Open Economy The Demand for Domestic Goods 19-2 Equilibrium Output and the Trade Balance 19-3 Increases in Demand, Domestic or Foreign Increases in Domestic Demand Increases in Foreign Demand Fiscal Policy Revisited 19-4 Depreciation, the Trade Balance, and Output Depreciation and the Trade Balance: The Marshall-Lerner Condition The Effects of a Depreciation Combining Exchange-Rate and Fiscal Policies 19-5 Looking at Dynamics: The J-Curve 19-6 Saving, Investment, and the Trade Balance Appendix 1: Multipliers: Belgium Versus the United States Appendix 2: Derivation of the Marshall-Lerner Condition Chapter 20 Output, the Interest Rate, and the Exchange Rate 20-1 Equilibrium in the Goods Market 20-2 Equilibrium in Financial Markets Money Versus Bonds Domestic Bonds Versus Foreign Bonds 20-3 Putting Goods and Financial Markets Together 20-4 The Effects of Policy in an Open Economy The Effects of Fiscal Policy in an Open Economy The Effects of Monetary Policy in an Open Economy 20-5 Fixed Exchange Rates Pegs, Crawling Pegs, Bands, the EMS, and the Euro Pegging the Exchange Rate, and Monetary Control Fiscal Policy Under Fixed Exchange Rates Appendix: Fixed Exchange Rates, Interest Rates, and Capital Mobility Chapter 21 Exchange Rate Regimes 21-1 The Medium Run Aggregate Demand Under Fixed Exchange Rates Equilibrium in the Short Run and in the Medium Run The Case for and Against a Devaluation 21-2 Exchange Rate Crises Under Fixed Exchange Rates 21-3 Exchange Rate Movements under Flexible Exchange Rates Exchange Rates and the Current Account Exchange Rates, and Current and Future Interest Rates Exchange Rate Volatility 21-4 Choosing Between Exchange Rate Regimes Common Currency Areas Hard Pegs, Currency Boards, and Dollarization Appendix 1: The Real Exchange Rate, and Domestic and Foreign Real Interest Rates Appendix 2: Deriving Aggregate Demand Under Fixed Exchange Rates Pathologies Chapter 22 Depressions and Slumps 22-1 Disinflation, Deflation, and the Liquidity Trap The Nominal Interest Rate, the Real Interest Rate, and Expected Inflation The Liquidity Trap Putting Things Together: The Liquidity Trap and Deflation 22-2 The Great Depression The Initial Fall in Spending The Contraction in Nominal Money The Adverse Effects of Deflation The Recovery 22-3 The Japanese Slump The Rise and Fall of the Nikkei The Failure of Monetary and Fiscal Policy The Recovery Chapter 23 High Inflation 23-1 Budget Deficits and Money Creation 23-2 Inflation and Real Money Balances 23-3 Deficits, Seignorage, and Inflation The Case of Constant Nominal Money Growth Dynamics and Increasing Inflation Hyperinflation and Economic Activity 23-4 How Do Hyperinflations End? The Elements of a Stabilization Program Can Stabilization Programs Fail? The Costs of Stabilization 23-5 Conclusions Back to Policy Chapter 24 Should Policy Makers Be Restrained? 24-1 Uncertainty and Policy How Much Do Macroeconomists Actually Know? Should Uncertainty Lead Policy Makers to Do Less? Uncertainty and Restraints on Policy Makers 24-2 Expectations and Policy Hostage Takings and Negotiations Inflation and Unemployment Revisited Establishing Credibility Time Consistency and Restraints on Policy Makers 24-3 Politics and Policy Games Between Policy Makers and Voters Games Between Policy Makers Politics and Fiscal Restraints Chapter 25 Monetary Policy: A Summing Up 25-1 The Optimal Inflation Rate The Costs of Inflation The Benefits of Inflation The Optimal Inflation Rate: The Current Debate 25-2 The Design of Monetary Policy Money Growth Targets and Target Ranges Money Growth and Inflation Revisited Inflation Targeting Interest Rate Rules 25-3 The Fed in Action The Mandate of the Fed The Organization of the Fed The Instruments of Monetary Policy The Implementation of Policy Chapter 26 Fiscal Policy: A Summing Up 26-1 The Government Budget Constraint The Arithmetic of Deficits and Debt Current Versus Future Taxes The Evolution of the Debt-to-GDP Ratio 26-2 Four Issues in Fiscal Policy Ricardian Equivalence Deficits, Output Stabilization, and the Cyclically Adjusted Deficit Wars and Deficits The Dangers of Very High Debt 26-3 The U.S. Budget: Current Numbers and Future Prospects Current Numbers Medium-Run Budget Projections The Long-Run Challenges: Low Saving, Aging, and Medical Care Epilogue Chapter 27 Epilogue: The Story of Macroeconomics 27-1 Keynes and the Great Depression 27-2 The Neoclassical Synthesis Progress on All Fronts Keynesians Versus Monetarists 27-3 The Rational Expectations Critique The Three Implications of Rational Expectations The Integration of Rational Expectations 27-4 Current Developments New Classical Economics and Real Business Cycle Theory New Keynesian Economics New Growth Theory 27-5 Common Beliefs Appendix 1 An Introduction to National Income and Product Accounts Appendix 2 A Math Refresher Appendix 3 An Introduction to Econometrics Glossary Index
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