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CONTENTS PART I Introduction and Measurement Issues 19 Chapter1 Introduction 20 WhatIsMacroeconomics? 20 GrossDomesticProduct,EconomicGrowth, andBusinessCycles 21 MacroeconomicModels 25 MicroeconomicPrinciples 28 DisagreementinMacroeconomics 29 WhatDoWeLearnfromMacroeconomicAnalysis? 30 UnderstandingRecentandCurrentMacroeconomicEvents 33 ChapterSummary 51 Problems 53 KeyTerms 51 WorkingwiththeData 54 QuestionsforReview 52 Chapter2 Measurement 55 MeasuringGDP:TheNationalIncomeandProductAccounts 55 NominalandRealGDPandPriceIndices 64 MACROECONOMICS INACTION:ComparingRealGDPAcross CountriesandthePennEffect 72 MACROECONOMICS INACTION:HousePricesandGDP Measurement 73 Savings,Wealth,andCapital 75 LaborMarketMeasurement 76 MACROECONOMICS INACTION:AlternativeMeasuresofthe UnemploymentRate 78 ChapterSummary 80 Problems 82 KeyTerms 80 WorkingwiththeData 85 QuestionsforReview 82 Chapter3 Business Cycle Measurement 86 RegularitiesinGDPFluctuations 86 3 4 Contents MACROECONOMICS INACTION:EconomicForecastingandthe FinancialCrisis 89 Comovement 90 TheComponentsofGDP 96 NominalVariables 99 LaborMarketVariables 102 MACROECONOMICS INACTION:JoblessRecoveries 104 SeasonalAdjustment 106 MACROECONOMICS INACTION:TheGreatModerationandthe 2008–2009Recession 107 ComovementSummary 109 ChapterSummary 110 Problems 112 KeyTerms 110 WorkingwiththeData 112 QuestionsforReview 111 PART II A One-Period Model of the Macroeconomy 113 Chapter4 Consumer and Firm Behavior: The Work–Leisure Decision and Profit Maximization 114 TheRepresentativeConsumer 115 TheRepresentativeFirm 134 MACROECONOMICS INACTION:HowElasticisLabor Supply? 135 MACROECONOMICS INACTION:HenryFordandTotalFactor Productivity 145 THEORYCONFRONTS THEDATA:TotalFactorProductivityandthe U.S.AggregateProductionFunction 146 ChapterSummary 149 Problems 152 KeyTerms 150 WorkingwiththeData 154 QuestionsforReview 151 Chapter5 A Closed-Economy One-Period Macroeconomic Model 155 Government 156 CompetitiveEquilibrium 156 Optimality 163 WorkingwiththeModel:TheEffectsofaChangeinGovernment Purchases 169 THEORYCONFRONTS THEDATA:GovernmentSpendinginWorld WarII 171 WorkingwiththeModel:AChangeinTotalFactor Productivity 172 Contents 5 THEORYCONFRONTS THEDATA:TotalFactorProductivity,Real GDP,andEnergyPrices 177 MACROECONOMICS INACTION:GovernmentExpendituresandthe AmericanRecoveryandReinvestmentActof2009 180 ADistortingTaxonWageIncome,TaxRateChanges,andtheLaffer Curve 184 AModelofPublicGoods:HowLargeShouldtheGovernment Be? 191 ChapterSummary 195 Problems 197 KeyTerms 195 WorkingwiththeData 199 QuestionsforReview 196 Chapter6 Search and Unemployment 200 LaborMarketFacts 201 MACROECONOMICS INACTION:UnemploymentandEmployment intheUnitedStatesandEurope 205 ADiamond-Mortensen-PissaridesModelofSearch andUnemployment 207 WorkingwiththeDMPModel 217 MACROECONOMICS INACTION:UnemploymentInsuranceand Incentives 219 THEORYCONFRONTS THEDATA:Productivity,Unemployment,and RealGDPintheUnitedStatesandCanada:The2008–2009 Recession 225 AKeynesianDMPModel 227 MACROECONOMICS INACTION:TheNaturalRateof Unemploymentandthe2008–2009Recession 231 ChapterSummary 232 Problems 234 KeyTerms 233 WorkingwiththeData 235 QuestionsforReview 233 PART III Economic Growth 237 Chapter7 Economic Growth: Malthus and Solow 238 EconomicGrowthFacts 239 TheMalthusianModelofEconomicGrowth 244 TheSolowModel:ExogenousGrowth 255 THEORYCONFRONTS THEDATA:TheSolowGrowthModel, InvestmentRates,andPopulationGrowth 268 MACROECONOMICS INACTION:ResourceMisallocationandTotal FactorProductivity 270 6 Contents MACROECONOMICS INACTION:RecentTrendsinEconomic GrowthintheUnitedStates 271 GrowthAccounting 272 MACROECONOMICS INACTION:DevelopmentAccounting 279 ChapterSummary 281 Problems 283 KeyTerms 282 WorkingwiththeData 285 QuestionsforReview 282 Chapter8 Income Disparity Among Countries and Endogenous Growth 286 Convergence 287 THEORYCONFRONTS THEDATA:IsIncomePerWorkerConverging intheWorld? 292 MACROECONOMICS INACTION:MeasuringEconomicWelfare:Per CapitaIncome,IncomeDistribution,Leisure, andLongevity 293 EndogenousGrowth:AModelofHumanCapital Accumulation 294 MACROECONOMICS INACTION:EducationandGrowth 303 ChapterSummary 305 Problems 306 KeyTerms 305 WorkingwiththeData 307 QuestionsForReview 305 PART IV Savings, Investment, and Government Deficits 309 Chapter9 A Two-Period Model: The Consumption–Savings Decision and Credit Markets 310 ATwo-PeriodModeloftheEconomy 311 THEORYCONFRONTS THEDATA:ConsumptionSmoothingandthe StockMarket 327 TheRicardianEquivalenceTheorem 339 MACROECONOMICS INACTION:TheEconomicGrowthandTax ReliefReconciliationActandNationalSaving 349 THEORYCONFRONTS THEDATA:GovernmentFinancing Arithmetic:AreGovernmentBudgetDeficitsSustainable? 351 ChapterSummary 354 Problems 357 KeyTerms 355 WorkingwiththeData 359 QuestionsforReview 356 Chapter10 Credit Market Imperfections: Credit Frictions, Financial Crises, and Social Security 360 CreditMarketImperfectionsandConsumption 362 Contents 7 CreditMarketImperfections,AsymmetricInformation,andthe FinancialCrisis 365 THEORYCONFRONTS THEDATA:AsymmetricInformationand InterestRateSpreads 367 CreditMarketImperfections,LimitedCommitment, andtheFinancialCrisis 369 THEORYCONFRONTS THEDATA:TheHousingMarket,Collateral, andConsumption 372 THEORYCONFRONTS THEDATA:LowRealInterestRatesandthe FinancialCrisis 379 SocialSecurityPrograms 381 MACROECONOMICS INACTION:TransitionsfromPay-As-You-Go toFullyFundedSocialSecurity 387 ChapterSummary 388 Problems 390 KeyTerms 389 WorkingwiththeData 392 QuestionsforReview 389 Chapter11 A Real Intertemporal Model with Investment 393 TheRepresentativeConsumer 394 TheRepresentativeFirm 400 THEORYCONFRONTS THEDATA:InvestmentandtheInterestRate Spread 412 Government 414 CompetitiveEquilibrium 415 TheEquilibriumEffectsofaTemporaryIncreaseinG:Stimulus,the Multiplier,andCrowdingOut 426 MACROECONOMICS INACTION:TheTotalGovernmentSpending Multiplier:Barrovs.Romer 430 TheEquilibriumEffectsofaDecreaseintheCurrentCapital StockK 432 TheEquilibriumEffectsofanIncreaseinCurrentTotalFactor Productivityz 433 TheEquilibriumEffectsofanIncreaseinFutureTotalFactor œ Productivity,z :NewsAbouttheFutureandAggregate EconomicActivity 436 THEORYCONFRONTS THEDATA:News,theStockMarket,and InvestmentExpenditures 437 CreditMarketFrictionsandtheFinancialCrisis 439 THEORYCONFRONTS THEDATA:InterestRateSpreadsand AggregateEconomicActivity 441 SectoralShocksandLaborMarketMismatch 443 8 Contents THEORYCONFRONTS THEDATA:TheBehaviorofRealGDP, Employment,andLaborProductivityinthe1981–1982and 2008–2009Recessions 446 ChapterSummary 449 Problems 451 KeyTerms 450 WorkingwiththeData 453 QuestionsforReview 450 PART V Money and Business Cycles 455 Chapter12 Money, Banking, Prices, and Monetary Policy 456 WhatIsMoney? 457 AMonetaryIntertemporalModel 458 ALevelIncreaseintheMoneySupplyandMonetary Neutrality 472 ShiftsinMoneyDemand 475 THEORYCONFRONTS THEDATA:InstabilityintheMoneyDemand Function 478 TheShort-RunNon-NeutralityofMoney:Friedman–LucasMoney SurpriseModel 480 TheZeroLowerBoundandQuantitativeEasing 490 MACROECONOMICS INACTION:EmpiricalEvidenceon QuantitativeEasing 493 ChapterSummary 496 Problems 499 KeyTerms 497 WorkingwiththeData 500 QuestionsforReview 498 Chapter13 Business Cycle Models with Flexible Prices and Wages 501 TheRealBusinessCycleModel 503 AKeynesianCoordinationFailureModel 511 MACROECONOMICS INACTION:BusinessCycleModelsandthe GreatDepression 512 ANewMonetaristModel:FinancialCrisesandDeficient Liquidity 522 MACROECONOMICS INACTION:UncertaintyandBusiness Cycles 532 ChapterSummary 533 Problems 535 KeyTerms 534 WorkingwiththeData 536 QuestionsforReview 534 Chapter14 New Keynesian Economics: Sticky Prices 537 TheNewKeynesianModel 539 TheNonneutralityofMoneyintheNewKeynesianModel 541 Contents 9 THEORYCONFRONTS THEDATA:CantheNewKeynesianModel UnderFluctuationsintheInterestRateTargetExplainBusiness Cycles? 543 THEORYCONFRONTS THEDATA:KeynesianAggregateDemand ShocksasCausesofBusinessCycles 544 TheRoleofGovernmentPolicyintheNewKeynesianModel 546 TotalFactorProductivityShocksintheNewKeynesian Model 549 MACROECONOMICS INACTION:TheTimingoftheEffectsofFiscal andMonetaryPolicy 550 TheLiquidityTrapandStickyPrices 553 MACROECONOMICS INACTION:NewKeynesianModels,theZero LowerBound,andQuantitativeEasing 555 CriticismsofKeynesianModels 557 MACROECONOMICS INACTION:HowStickyAreNominal Prices? 558 ChapterSummary 559 Problems 561 KeyTerms 560 WorkingwiththeData 562 QuestionsforReview 560 PART VI International Macroeconomics 563 Chapter15 International Trade in Goods and Assets 564 ATwo-PeriodSmallOpen-EconomyModel:TheCurrent Account 565 THEORYCONFRONTS THEDATA:IsaCurrentAccountDeficitaBad Thing? 569 Production,Investment,andtheCurrentAccount 573 MACROECONOMICS INACTION:TheWorld“SavingsGlut” 580 ChapterSummary 581 Problems 583 KeyTerms 582 WorkingwiththeData 584 QuestionsforReview 582 Chapter16 Money in the Open Economy 585 TheNominalExchangeRate,theRealExchangeRate, andPurchasingPowerParity 586 THEORYCONFRONTS THEDATA:ThePPPRelationshipforthe UnitedstatesandCanada 588 FlexibleandFixedExchangeRates 588 AMonetarySmallOpen-EconomyModelwithaFlexibleExchange Rate 591