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GREGORY MANKIW Harvard University A Macmillan Education Imprint New York Vice President, Content Management: Catherine Woods Vice President, Editorial, Sciences, and Social Sciences: Charles Linsmeier Publisher: Shani Fisher Developmental Editor: Jane E. Tufts Editorial Assistant: Carlos Marin Marketing Manager: Thomas Digiano Marketing Assistant: Alexander Kaufman Media Editor: Lukia Kliossis Director, Content Management Enhancement: Tracey Kuehn Managing Editor: Lisa Kinne Project Editor: Julio Espin Photo Editor: Robin Fadool Director of Design, Content Management: Diana Blume Cover and Text Designer: Kevin Kall Senior Production Supervisor: Paul Rohloff Composition: TSI evolve, Inc. Printing and Binding: RR Donnelley Cover Art: Sharon Paster Library of Congress Control Number: 2015935681 ISBN-13: 978-1-4641-8289-1 ISBN-10: 1-4641-8289-2 © 2016, 2013, 2010, 2007 by Worth Publishers All rights reserved. Printed in the United States of America First printing Worth Publishers 41 Madison Avenue New York, NY 10010 www.worthpublishers.com About the Author hy p a gr o ot h P é br a C di or J N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard University. He began his study of economics at Princeton University, where he received an A.B. in 1980. After earning a Ph.D. in economics from MIT, he began teaching at Harvard in 1985 and was promoted to full professor in 1987. At Harvard, he has taught both undergraduate and graduate courses in macro- economics. He is also author of the best-selling introductory textbook Principles of Economics (Cengage Learning). Professor Mankiw is a regular participant in academic and policy debates. His research ranges across macroeconomics and includes work on price adjustment, consumer behavior, financial markets, monetary and fiscal policy, and economic growth. In addition to his duties at Harvard, he has been a research associate of the National Bureau of Economic Research, a member of the Brookings Panel on Economic Activity, and an adviser to the Congressional Budget Office and the Federal Reserve Banks of Boston and New York. From 2003 to 2005 he was chairman of the President’s Council of Economic Advisers. Professor Mankiw lives in Wellesley, Massachusetts, with his wife, Deborah; children, Catherine, Nicholas, and Peter; and their border terrier, Tobin. | v To Deborah T hose branches of politics, or of the laws of social life, on which there exists a collection of facts sufficiently sifted and methodized to form the beginning of a science should be taught ex professo. Among the chief of these is Political Economy, the sources and conditions of wealth and material prosperity for aggregate bodies of human beings. . . . The same persons who cry down Logic will generally warn you against Politi- cal Economy. It is unfeeling, they will tell you. It recognises unpleasant facts. For my part, the most unfeeling thing I know of is the law of gravitation: it breaks the neck of the best and most amiable person without scruple, if he forgets for a single moment to give heed to it. The winds and waves too are very unfeeling. Would you advise those who go to sea to deny the winds and waves—or to make use of them, and find the means of guarding against their dangers? My advice to you is to study the great writers on Political Economy, and hold firmly by whatever in them you find true; and depend upon it that if you are not selfish or hardhearted already, Political Economy will not make you so. John Stuart Mill, 1867