Table of contents for Macroeconomics : principles, problems, and policies / Campbell R. McConnell, Stanley L. Brue.

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An Introduction to Economics and
the Economy
To the Student 2
1 The Nature and Method of
Economics 3
The Economic Perspective 3
Scarcity and Choice / Rational Behavior / Marginalism:
Benefits and Costs
Consider This: Free for All? 4
Why Study Economics? 5
Economics for Citizenship / Professional and
Personal Applications
Economic Methodology 6
Theoretical Economics / Policy Economics
Macroeconomics and Microeconomics 9
Macroeconomics / Microeconomics / Positive and
Normative Economics
Pitfalls to Sound Reasoning 10
Biases / Loaded Terminology / Definitions / Fallacy of
Composition / Causation Fallacies
A Look Ahead 12
Last Word: Fast-Food Lines: An Economic
Perspective 12
Appendix Chapter 1: Graphs and Their Meaning 15
Construction of a Graph / Direct and Inverse Relationships /
Dependent and Independent Variables / Other Things Equal /
Slope of a Line / Vertical Intercept / Equation of a Linear
Relationship / Slope of a Nonlinear Curve
2 The Economizing Problem 22
The Foundation of Economics 22
Unlimited Wants / Scarce Resources
Economics: Employment and Efficiency 24
Full Employment: Using Available Resources / Full Production:
Using Resources Efficiently / Production Possibilities Table /
Production Possibilities Curve / Law of Increasing Opportunity
Cost / Allocative Efficiency Revisited
Unemployment, Growth, and the Future 28
Unemployment and Productive Inefficiency / A Growing Economy /
A Qualification: International Trade / Examples and Applications
Consider This: A Matter of Degrees:
Is College Worth the Cost? 32
Economic Systems 33
The Market System / The Command System
The Circular Flow Model 34
Last Word: September 11, 2001, and the War on
Terrorism 35
3 Individual Markets: Demand
and Supply 39
Markets 39
Demand 40
Law of Demand / The Demand Curve / Market Demand /
Change in Demand / Changes in Quantity Demanded
Supply 45
Law of Supply / The Supply Curve / Determinants of Supply /
Changes in Supply / Changes in Quantity Supplied
Supply and Demand: Market Equilibrium 48
Surpluses / Shortages / Equilibrium Price and Quantity /
Rationing Function of Prices / Changes in Supply, Demand,
and Equilibrium / A Reminder: ?Other Things Equal?
Consider This: The Cutting Edge 50
Application: Government-Set Prices 52
Price Ceilings and Shortages / Price Floors and Surpluses
Last Word: Ticket Scalping: A Bum Rap? 55
3Web Applications and Extensions of Supply
and Demand Analysis 59
(Web Chapter,
Changes in Supply and Demand 3W-1
Lettuce / American Flags / Pink Salmon / Gasoline / Sushi
Preset Prices 3W-4
Olympic Figure Skating Finals / Olympic Curling Preliminaries
Consider This: Taking Back a ?Gift? 3W-5
Nonpriced Goods:The American Bison 3W-6
Consumer and Producer Surplus 3W-7
Consumer Surplus / Producer Surplus / Efficiency
Revisited / Efficiency Losses
Last Word: Efficiency Gains from Generic Drugs 3W-11
4 The Market System 60
Characteristics of the Market System 60
Private Property / Freedom of Enterprise and Choice / Self-
Interest / Competition / Markets and Prices / Reliance on
Technology and Capital Goods / Specialization / Use of
Money / Active, but Limited, Government
The Market System at Work 64
What Will Be Produced? / How Will the Goods and Services
Be Produced? / Who Will Get the Goods and Services? / How
Will the System Accommodate Change?
Consider This: McHits and McMisses 66
Competition and the ?Invisible Hand? 69
Last Word: Shuffling the Deck 70
5 The U.S. Economy: Private and
Public Sectors 73
Households as Income Receivers 73
The Functional Distribution of Income / The Personal
Distribution of Income
Households as Spenders 74
Personal Taxes / Personal Saving / Personal
Consumption Expenditures
The Business Population 75
Legal Forms of Businesses 76
Advantages and Disadvantages / The
Principal-Agent Problem
The Public Sector: Government?s Role 79
Providing the Legal Structure / Maintaining Competition /
Redistributing Income / Reallocating Resources / Promoting
Stability / Government?s Role: A Qualification
Consider This: Street Entertainers 82
The Circular Flow Revisited 83
Government Finance 84
Government Purchases and Transfers
Federal Finance 85
Federal Expenditures / Federal Tax Revenues
State and Local Finance 87
State Finances / Local Finances / Fiscal Federalism
Last Word: The Financing of Corporations 88
6 The United States in the
Global Economy 91
International Linkages 91
The United States and World Trade 92
Volume and Pattern / Rapid Trade Growth /
Participants in International Trade
Specialization and Comparative Advantage 96
Basic Principle / Comparative Costs / Terms of Trade /
Gains from Specialization and Trade
The Foreign Exchange Market 99
Dollar-Yen Market / Changing Rates: Depreciation and
Consider This: A Ticket to Ride 100
Government and Trade 101
Trade Impediments and Subsidies / Why Government
Trade Interventions? / Costs to Society
Multilateral Trade Agreements and
Free-Trade Zones 103
Reciprocal Trade Agreements Act / General Agreement on
Tariffs and Trade / World Trade Organization / The European
Union / North American Free Trade Agreement
Global Competition 106
Last Word: Petition of the Candlemakers, 1845 106
Macroeconomic Measurement and
Basic Concepts
7 Measuring Domestic Output and
National Income 112
Assessing the Economy?s Performance 112
Gross Domestic Product 112
A Monetary Measure / Avoiding Multiple Counting /
GDP Excludes Nonproduction Transactions / Two Ways
of Looking at GDP: Spending and Income
The Expenditures Approach 115
Personal Consumption Expenditures (C) / Gross
Private Domestic Investment (Ig ) / Government Purchases
(G) / Net Exports (Xn ) / Putting It All
Together: GDP _ C _ Ig _ G _ Xn
Consider This: Stock Answers about Flows 117
The Income Approach 118
Compensation of Employees / Rents / Interest /
Proprietors? Income / Corporate Profits / From
National Income to GDP
Other National Accounts 120
Net Domestic Product / National Income / Personal Income /
Disposable Income / The Circular Flow Revisited
Nominal GDP versus Real GDP 123
Adjustment Process in a One-Product Economy / An
Alternative Method / Real-World Considerations and Data
Shortcomings of GDP 125
Nonmarket Activities / Leisure / Improved Product
Quality / The Underground Economy / GDP and the
Environment / Composition and Distribution of
Output / Noneconomic Sources of Well-Being
Last Word: Feeding the GDP Accounts 127
8 Introduction to Economic Growth
and Instability 131
Economic Growth 131
Growth as a Goal / Arithmetic of Growth / Main Sources of
Growth / Growth in the United States / Relative Growth Rates
The Business Cycle 133
Phases of the Business Cycle / Causation: A First Glance /
Cyclical Impact: Durables and Nondurables
Unemployment 135
Measurement of Unemployment / Types of Unemployment /
Definition of Full Employment / Economic Cost of
Unemployment / Noneconomic Costs / International
Inflation 141
Meaning of Inflation / Measurement of Inflation / Facts of
Inflation / Types of Inflation / Complexities
Consider This: Clipping Coins 143
Redistribution Effects of Inflation 144
Who Is Hurt by Inflation? / Who Is Unaffected or
Helped by Inflation? / Anticipated Inflation / Addenda
Effects of Inflation on Output 147
Cost-Push Inflation and Real Output / Demand-Pull Inflation
and Real Output / Hyperinflation and Breakdown
Last Word: The Stock Market and the Economy 149
9 Basic Macroeconomic Relationships 152
The Income-Consumption and Income-Saving
Relationships 152
The Consumption Schedule / The Saving Schedule / Average
and Marginal Propensities / Nonincome Determinants of
Consumption and Saving / Terminology, Shifts, and Stability
Consider This: What Wealth Effect? 159
The Interest-Rate?Investment
Relationship 159
Expected Rate of Return / The Real Interest Rate /
Investment Demand Curve / Shifts of the Investment
Demand Curve / Instability of Investment
The Multiplier Effect 164
Rationale / The Multiplier and the Marginal Propensities /
How Large Is the Actual Multiplier Effect?
Last Word: Squaring the Economic Circle 167
Macroeconomic Models and
Fiscal Policy
10 The Aggregate Expenditures
Model 172
Simplifications 172
Consumption and Investment Schedules 172
Equilibrium GDP: C _ Ig _ GDP 173
Tabular Analysis / Graphical Analysis
Other Features of Equilibrium GDP 176
Saving Equals Planned Investment / No Unplanned Changes
in Inventories
Changes in Equilibrium GDP and the
Multiplier 177
Adding International Trade 179
Net Exports and Aggregate Expenditures / The Net
Export Schedule / Net Exports and Equilibrium GDP /
International Economic Linkages
Adding the Public Sector 182
Government Purchases and Equilibrium GDP / Taxation and
Equilibrium GDP
Equilibrium versus Full-Employment GDP 185
Recessionary Gap / Application:The U.S. Recession of
2001 / Inflationary Gap / Application: U.S. Inflation
in the Late 1980s
Limitations of the Model 187
Last Word: Say?s Law, the Great Depression,
and Keynes 188
11 Aggregate Demand and
Aggregate Supply 193
Aggregate Demand 193
Aggregate Demand Curve / Determinants of
Aggregate Demand
Aggregate Supply 197
Aggregate Supply in the Long Run / Aggregate Supply in the
Short Run / Determinants of Aggregate Supply
Equilibrium and Changes in Equilibrium 201
Increases in AD: Demand-Pull Inflation / Decreases in AD:
Recession and Cyclical Unemployment / Decreases in AS:
Cost-Push Inflation / Increases in AS: Full Employment with
Price-Level Stability
Consider This: Ratchet Effect 205
Last Word: Why Is Unemployment in Europe
So High? 207
Appendix Chapter 11:The Relationship of the
Aggregate Demand Curve to the Aggregate
Expenditures Model 211
Deriving the Aggregate Demand Curve from the Aggregate
Expenditures Model / Aggregate Demand Shifts and the
Aggregate Expenditures Model
12 Fiscal Policy 214
Legislative Mandates 214
Fiscal Policy and the AD-AS Model 215
Expansionary Fiscal Policy / Contractionary Fiscal
Policy / Financing of Deficits and Disposing of
Surpluses / Policy Options: G or T
Built-In Stability 218
Automatic or Built-In Stabilizers
Evaluating Fiscal Policy 220
Full-Employment Budget / Recent U.S. Fiscal Policy
Problems, Criticisms, and Complications 223
Problems of Timing / Political Considerations / Future Policy
Reversals / Offsetting State and Local Finance / Crowding-Out
Effect / Fiscal Policy in the Open Economy
Last Word: The Leading Indicators 227
Current Thinking on Fiscal Policy 228
Money, Banking, and Monetary Policy
13 Money and Banking 232
The Functions of Money 232
The Supply of Money 233
Money Definition M1 / Money Definition M2 /
Money Definition M3
Consider This: Are Credit Cards Money? 236
What ?Backs? the Money Supply? 236
Money as Debt / Value of Money / Money and Prices /
Stabilization of Money?s Value
The Demand for Money 238
Transactions Demand, Dt / Asset Demand, Da /
Total Money Demand, Dm
The Money Market 240
Adjustment to a Decline in the Money Supply / Adjustment to
an Increase in the Money Supply
The Federal Reserve and the Banking
System 242
Historical Background / Board of Governors / FOMC /
The 12 Federal Reserve Banks / Commercial Banks and
Thrifts / Fed Functions and the Money Supply / Federal
Reserve Independence
Recent Developments in Money and
Banking 245
The Relative Decline of Banks and Thrifts / Consolidation
among Banks and Thrifts / Convergence of Services Provided
by Financial Institutions / Globalization of Financial Markets /
Electronic Transactions
Last Word: The Global Greenback 248
14 How Banks and Thrifts Create
Money 252
The Balance Sheet of a Commercial Bank 252
Prologue:The Goldsmiths 252
A Single Commercial Bank 253
Formation of a Commercial Bank / Money-Creating
Transactions of a Commercial Bank / Profits, Liquidity,
and the Federal Funds Market
The Banking System: Multiple-Deposit
Expansion 260
The Banking System?s Lending Potential / The Monetary
Multiplier / Some Modifications / Need for
Monetary Control
Last Word: The Bank Panics of 1930 to 1933 265
15 Monetary Policy 268
Consolidated Balance Sheet of the Federal
Reserve Banks 268
Assets / Liabilities
Tools of Monetary Policy 270
Open-Market Operations / The Reserve Ratio / The Discount
Rate / Easy Money and Tight Money / Relative Importance
Monetary Policy, Real GDP, and the
Price Level 276
Cause-Effect Chain / Effects of an Easy Money Policy /
Effects of a Tight Money Policy
Monetary Policy in Action 279
The Focus on the Federal Funds Rate / Recent Monetary
Policy / Problems and Complications / ?Artful Management?
or ?Inflation Targeting?? / Monetary Policy and the
International Economy
Consider This: Pushing on a String 282
The ?Big Picture? 286
Last Word: For the Fed, Life Is a Metaphor 287
Long-Run Perspectives and
Macroeconomic Debates
16 Extending the Analysis of
Aggregate Supply 292
From Short Run to Long Run 292
Short-Run Aggregate Supply / Long-Run Aggregate Supply /
Equilibrium in the Extended AD-AS Model
Applying the Extended AD-AS Model 295
Demand-Pull Inflation in the Extended AD-AS Model / Cost-
Push Inflation in the Extended AD-AS Model / Recession and
the Extended AD-AS Model
The Inflation-Unemployment Relationship 297
The Phillips Curve / Aggregate Supply Shocks and the
Phillips Curve
The Long-Run Phillips Curve 300
Short-Run Phillips Curve / Long-Run Vertical Phillips
Curve / Disinflation
Taxation and Aggregate Supply 302
Taxes and Incentives to Work / Incentives to Save and
Invest / The Laffer Curve / Criticisms of the Laffer Curve /
Rebuttal and Evaluation
Consider This: Sherwood Forest 304
Last Word: Has the Impact of Oil Prices
Diminished? 305
17 Economic Growth 308
Ingredients of Growth 308
Supply Factors / Demand Factor / Efficiency Factor
Production Possibilities Analysis 309
Growth and Production Possibilities / Labor and
Productivity / Growth in the AD-AS Model
U.S. Economic Growth Rates 312
Accounting for Growth 312
Labor Inputs versus Productivity / Technological Advance /
Quantity of Capital / Education and Training / Economies of
Scale and Resource Allocation / Other Factors
Consider This: Economic Growth Rates Matter! 313
The Productivity Acceleration:
A New Economy? 316
Reasons for the Productivity Acceleration / Macroeconomic
Implications / Skepticism about Permanence / What Can
We Conclude?
Is Growth Desirable and Sustainable? 320
The Antigrowth View / In Defense of Economic Growth
Last Word: Women and Economic Growth 322
18 Deficits, Surpluses, and
the Public Debt 325
Deficits, Surpluses, and Debt: Definitions 325
Budget Philosophies 325
Annually Balanced Budget / Cyclically Balanced
Budget / Functional Finance
The Public Debt: Facts and Figures 326
Causes / Quantitative Aspects / Social Security Considerations
False Concerns 329
Bankruptcy / Burdening Future Generations
Substantive Issues 330
Income Distribution / Incentives / Foreign-Owned Public Debt/
Crowding Out and the Stock of Capital
Deficits and Surpluses: 1992?2012 332
From Deficits to Surpluses / What to Do with the Surpluses? /
Back to Deficits in 2002 / The Tax Cuts of 2003
Last Word: The Long-Run Fiscal Imbalance:
Social Security 334
19 Disputes over Macro Theory and
Policy 338
Some History: Classical Economics
and Keynes 338
The Classical View / The Keynesian View
What Causes Macro Instability? 340
Mainstream View / Monetarist View / Real-Business-Cycle
View / Coordination Failures
Does the Economy ?Self-Correct?? 344
New Classical View of Self-Correction / Mainstream
View of Self-Correction
Rules or Discretion? 347
In Support of Policy Rules / In Defense of Discretionary
Stabilization Policy / Increased Macro Stability
Consider This: On the Road Again 348
Summary of Alternative Views 350
Last Word: The Taylor Rule: Could a Robot Replace
Alan Greenspan? 351
International Economics and
the World Economy
20 International Trade 356
Some Key Facts 356
The Economic Basis for Trade 357
Comparative Advantage: Graphical
Analysis 358
Two Isolated Nations / Specializing Based on Comparative
Advantage / Terms of Trade / Gains from Trade / Trade with
Increasing Costs / The Case for Free Trade
Supply and Demand Analysis of Exports and
Imports 363
Supply and Demand in the United States / Supply
and Demand in Canada / Equilibrium World Price,
Exports, and Imports
Trade Barriers 366
Economic Impact of Tariffs / Economic Impact of
Quotas / Net Costs of Tariffs and Quotas / Impact
on Income Distribution
The Case for Protection: A Critical Review 369
Military Self-Sufficiency Argument / Increased Domestic
Employment Argument / Diversification-for-Stability Argument /
Infant Industry Argument / Protection-against-Dumping
Argument / Cheap Foreign Labor Argument / A Summing Up
Consider This: Shooting Yourself in the Foot 370
Last Word: The WTO Protests 372
The World Trade Organization 373
21 Exchange Rates, the Balance of
Payments, and Trade Deficits 377
Financing International Trade 377
U.S. Export Transaction / U.S. Import Transaction
The Balance of Payments 378
Current Account / Capital Account / Official Reserves
Account / Payments, Deficits, and Surpluses
Flexible Exchange Rates 381
Depreciation and Appreciation / Determinants of Exchange
Rates / Flexible Rates and the Balance of Payments /
Disadvantages of Flexible Exchange Rates
Consider This: The Big Mac Index 383
Fixed Exchange Rates 386
Use of Reserves / Trade Policies / Exchange Controls and
Rationing / Domestic Macroeconomic Adjustments
International Exchange-Rate Systems 388
The Gold Standard: Fixed Exchange Rates / The Bretton
Woods System / The Current System:The Managed Float
Recent U.S.Trade Deficits 392
Causes of the Trade Deficits / Implications of
U.S.Trade Deficits
Last Word: Speculation in Currency Markets 394
22Web The Economics of Developing
Countries 397
(Web Chapter,
The Rich and the Poor 22W-1
Classifications / Comparisons / Growth, Decline, and
Income Gaps / The Human Realities of Poverty
Obstacles to Economic Development 22W-3
Natural Resources / Human Resources / Capital
Accumulation / Technological Advance / Sociocultural and
Institutional Factors
The Vicious Circle 22W-10
Role of Government 22W-11
A Positive Role / Public Sector Problems
Role of Advanced Nations 22W-12
Expanding Trade / Foreign Aid: Public Loans
and Grants / Flows of Private Capital
Where from Here? 22W-15
DVC Policies for Promoting Growth / IAC Policies for
Fostering DVC Growth
Last Word: Famine in Africa 22W-16
23Web Transition Economies: Russia and
China 398
(Web Chapter,
Ideology and Institutions 23W-1
State Ownership and Central Planning 23W-2
Planning Goals and Techniques
Problems with Central Planning 23W-3
The Coordination Problem / The Incentive Problem
Collapse of the Soviet Economy 23W-5
Declining Growth / Poor Product Quality / Lack of Consumer
Goods / Large Military Burden / Agricultural Drag
The Russian Transition to a Market
System 23W-6
Privatization / Price Reform / Promotion of Competition /
Making the Ruble Fully Convertible / Price-Level Stabilization /
Other Major Problems / Recent Revival
Market Reforms in China 23W-10
Agricultural and Rural Reform / Reform of Urban Industries /
Special Economic Zones / Development of Supporting
Institutions / Transformation of the SOEs
Outcomes and Prospects 23W-11
Positive Outcomes of Reform / Problems
Conclusion 23W-13
Last Word: Police Smash Down Smirnov?s
Doors 23W-14
Glossary G-1
Index I-1

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