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CONTENTS PART ONE 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, www.mcconnell16.com) 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 Appreciation 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 PART TWO 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 Comparisons 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 PART THREE 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 PART FOUR 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 PART FIVE 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 PART SIX 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, www.mcconnell16.com) 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, www.mcconnell16.com) 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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