Preface xiii

Introduction and National Income Accounting 1

1 Introduction

1-1 Macroeconomics Encapsulated in Three Models 4

1-2 To Reiterate . . . 10

1-3 Outline and Preview of the Text 17

1-4 Prerequisites and Recipes 17

2 National Income Accounting

2-1 The Production of Output and Payments to Factors of Production 20

2-2 Outlays and Components of Demand 23

2-3 Some Important Identities 27

2-4 Measuring Gross Domestic Product 30

2-5 Inflation and Price Indexes 32

2-6 Interest Rates and Real Interest Rates 36

2-7 Where to Grab a Look at the Data 38

Growth, Aggregate Supply and Demand, and policy

3 Growth and Accumulation

3-1 Growth Accounting 46

3-2 Empirical Estimates of Growth 49

3-3 Growth Theory: The Neoclassical Model 53

4 Growth and Policy

4-1 Growth Theory: Endogenous Growth 66

4-2 Growth Policy 73

5 Aggregate Supply and Demand

5-1 The Aggregate Supply Curve 87

5-2 The Aggregate Demand Curve 90

5-3 Aggregate Demand Policy Under Alternative Supply Assumptions 92

5-4 Supply-Side Economics 94

6 Aggregate Supply: Wages, Prices, and Unemployment

6-1 The Aggregate Supply Curve and the Price Adjustment Mechanism 99

6-2 Inflation and Unemployment 102

6-4 The Rational Expectations Revolution 110

6-5 The Wage-Unemployment Relationship: Why Are Wages Sticky? 111

6-6 From Phillips Curve to the Aggregate Supply Curve 116

6-7 Supply Shocks 118

7 The Anatomy Of Inflation and Unemployment

7-1 Unemployment 128

7-2 Inflation 129

7-3 The Anatomy of Unemployment 129

7-4 Full Employment 135

7-5 The Costs of Unemployment 144

7-6 The Costs of Inflation 145

7-7 Inflation and Indexation: Inflation-Proofing the Economy 150

7-8 Is a Little Inflation Good for the Economy? 153

7-9 Political Business Cycle Theory 154

8 Policy

8-1 Policy: Working Backward 161

8-2 Lags in the Effects of Policy 161

8-3 Expectations and Reactions 167

8-4 Uncertainty and Economic Policy 169

8-5 Dynamic Policy and Information Feedback 172

8-6 Activist Policy 173

First Models

9 Income and Spending

9-1 Aggregate Demand and Equilibrium Output 189

9-2 The Consumption Function and Aggregate Demand 190

9-3 The Multiplier 195

9-4 The Government Sector 199

9-5 The Budget 203

9-6 The Full-Employment Budget Surplus 206

10 Money, Interest, and Income

10-1 The Goods Market and the IS Curve 217

10-2 The Money Market and the LM Curve 225

10-3 Equilibrium in the Goods and Money Markets 231

10-4 Deriving the Aggregate Demand Schedule 233

10-5 A Formal Treatment of the IS-LM Model 235

11 Monetary and Fiscal Policy

11-1 Monetary Policy 242

11-2 Fiscal Policy and Crowding Out 249

11-3 The Composition of Output and the Policy Mix 254

11-4 The Policy Mix in Action 258

12 International Linkages

12-1 The Balance of Payments and Exchange Rates 269

12-2 The Exchange Rate in the Long Run 276

12-3 Trade in Goods, Market Equilibrium, and the Balance of Trade 278

12-4 Capital Mobility 281

12-5 The Mundell-Fleming Model: Perfect Capital Mobility Under Fixed Exchange Rates

12-6 Perfect Capital Mobility and Flexible Exchange Rates 287

Behavioral Foundations

13 Consumption and Saving

13-1 The Life-Cycle—Permanent-Income Theory of Consumption & Saving 305

13-2 Consumption Under Uncertainty: The Modern Approach 309

13-3 Further Aspects of Consumption Behavior 314

14 Investment Spending 324

14-1 The Stock Demand for Capital and the Flow of Investment 328

14-2 Investment Subsectors–Business Fixed, Residential, and Inventory 337

14-3 Investment and Aggregate Supply 347

15 The Demand for Money

15-1 Components of the Money Stock 354

15-2 The Functions of Money 357

15-3 The Demand for Money: Theory 359

15-4 Empirical Evidence 363

15-5 The Income Velocity of Money 367

16 The Fed, Money, and Credit

16-1 Money Stock Determination: The Money Multiplier 375

16-2 The Instruments of Monetary Control 379

16-3 The Money Multiplier and Bank Loans 383

16-4 Control of the Money Stock and Control of the Interest Rate 384

16-5 Money Stock and Interest Rate Targets 385

16-6 Money, Credit, and Interest Rates 388

16-7 Which Targets for the Fed? 389

17 Financial Markets

17-1 Interest Rates: Long-Term and Short 397

17-2 The Random Walk of Stock Prices 403

17-3 Exchange Rates and Interest Rates 407

Big Events, International Adjustments, and Advanced Topics

18 Big Events: The Economics of Depression, Hyperinflation, and Deficits

18-1 The Great Depression: The Facts 413

18-2 The Great Depression: The Issues and Ideas 419

18-3 Money and Inflation in Ordinary Business Cycles 421

18-4 Hyperinflation 426

18-5 Deficits, Money Growth, and the Inflation Tax 434

18-6 Budget Deficits: Facts and Issues 439

18-7 Social Security 446

19 International Adjustment and Interdependence

19-1 Adjustment Under Fixed Exchange Rates 455

19-2 Exchange Rate Changes and Trade Adjustment: Empirical Issues 466

19-3 The Monetary Approach to the Balance of Payments 470

19-4 Flexible Exchange Rates, Money, and Prices 474

19-5 Interest Differentials and Exchange Rate Expectations 480

19-6 Exchange Rate Fluctuations and Interdependence 483

19-7 The Choice of Exchange Rate Regimes 488

20 Advanced Topics

20-1 An Overview of the New Macroeconomics 496

20-2 The Rational Expectations Revolution 501

20-3 The Microeconomics of the Imperfect Information AS Curve 508

20-5 Real Business Cycle Theory 516

20-6 A New Keynesian Model of Sticky Nominal Prices 519

Glossary 525

Index 545