Macroeconomics Principles - 2012 Book Archive

907 Pages·2012·32.11 MB·English

Macroeconomics
Principles
v. 2.0
This is the bookMacroeconomics Principles(v. 2.0).
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Table of Contents
About the Authors................................................................................................................. 1
Acknowledgments................................................................................................................. 3
Preface..................................................................................................................................... 6
Chapter 1: Economics: The Study of Choice.................................................................... 9
Defining Economics.....................................................................................................................................10
The Field of Economics................................................................................................................................18
The Economists’ Tool Kit.............................................................................................................................28
Review and Practice.....................................................................................................................................36
Chapter 2: Confronting Scarcity: Choices in Production ........................................... 40
Factors of Production..................................................................................................................................42
The Production Possibilities Curve............................................................................................................50
Applications of the Production Possibilities Model.................................................................................68
Review and Practice.....................................................................................................................................83
Chapter 3: Demand and Supply........................................................................................ 92
Demand.........................................................................................................................................................94
Supply..........................................................................................................................................................108
Demand, Supply, and Equilibrium............................................................................................................120
Review and Practice...................................................................................................................................138
Chapter 4: Applications of Demand and Supply......................................................... 146
Putting Demand and Supply to Work......................................................................................................148
Government Intervention in Market Prices: Price Floors and Price Ceilings.....................................159
The Market for Health-Care Services......................................................................................................169
Review and Practice...................................................................................................................................177
Chapter 5: Macroeconomics: The Big Picture............................................................. 182
Growth of Real GDP and Business Cycles.................................................................................................186
Price-Level Changes...................................................................................................................................196
Unemployment...........................................................................................................................................212
Review and Practice...................................................................................................................................223
Chapter 6: Measuring Total Output and Income........................................................ 228
Measuring Total Output............................................................................................................................230
Measuring Total Income............................................................................................................................247
GDP and Economic Well-Being.................................................................................................................256
Review and Practice...................................................................................................................................265
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Chapter 7: Aggregate Demand and Aggregate Supply.............................................. 271
Aggregate Demand.....................................................................................................................................273
Aggregate Demand and Aggregate Supply: The Long Run and the Short Run....................................285
Recessionary and Inflationary Gaps and Long-Run Macroeconomic Equilibrium .............................299
Review and Practice...................................................................................................................................312
Chapter 8: Economic Growth.......................................................................................... 319
The Significance of Economic Growth.....................................................................................................321
Growth and the Long-Run Aggregate Supply Curve..............................................................................331
Determinants of Economic Growth..........................................................................................................341
Review and Practice...................................................................................................................................350
Chapter 9: The Nature and Creation of Money........................................................... 356
What Is Money?..........................................................................................................................................358
The Banking System and Money Creation..............................................................................................368
The Federal Reserve System.....................................................................................................................384
Review and Practice...................................................................................................................................393
Chapter 10: Financial Markets and the Economy...................................................... 398
The Bond and Foreign Exchange Markets...............................................................................................400
Demand, Supply, and Equilibrium in the Money Market......................................................................412
Review and Practice...................................................................................................................................429
Chapter 11: Monetary Policy and the Fed.................................................................... 435
Monetary Policy in the United States......................................................................................................437
Problems and Controversies of Monetary Policy...................................................................................450
Monetary Policy and the Equation of Exchange.....................................................................................463
Review and Practice...................................................................................................................................474
Chapter 12: Government and Fiscal Policy.................................................................. 481
Government and the Economy.................................................................................................................483
The Use of Fiscal Policy to Stabilize the Economy..................................................................................494
Issues in Fiscal Policy.................................................................................................................................504
Review and Practice...................................................................................................................................512
Chapter 13: Consumption and the Aggregate Expenditures Model....................... 518
Determining the Level of Consumption...................................................................................................519
The Aggregate Expenditures Model.........................................................................................................532
Aggregate Expenditures and Aggregate Demand...................................................................................555
Review and Practice...................................................................................................................................563
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Chapter 14: Investment and Economic Activity......................................................... 570
The Role and Nature of Investment.........................................................................................................572
Determinants of Investment.....................................................................................................................582
Investment and the Economy...................................................................................................................592
Review and Practice...................................................................................................................................597
Chapter 15: Net Exports and International Finance.................................................. 603
The International Sector: An Introduction.............................................................................................605
International Finance................................................................................................................................616
Exchange Rate Systems.............................................................................................................................628
Review and Practice...................................................................................................................................639
Chapter 16: Inflation and Unemployment................................................................... 645
Relating Inflation and Unemployment....................................................................................................647
Explaining Inflation–Unemployment Relationships..............................................................................656
Inflation and Unemployment in the Long Run.......................................................................................665
Review and Practice...................................................................................................................................678
Chapter 17: A Brief History of Macroeconomic Thought and Policy..................... 685
The Great Depression and Keynesian Economics...................................................................................687
Keynesian Economics in the 1960s and 1970s.........................................................................................697
Macroeconomics for the 21st Century.....................................................................................................711
Review and Practice...................................................................................................................................725
Chapter 18: Inequality, Poverty, and Discrimination............................................... 729
Income Inequality......................................................................................................................................732
The Economics of Poverty.........................................................................................................................743
The Economics of Discrimination............................................................................................................760
Review and Practice...................................................................................................................................769
Chapter 19: Economic Development............................................................................. 775
The Nature and Challenge of Economic Development...........................................................................778
Population Growth and Economic Development....................................................................................793
Keys to Economic Development...............................................................................................................803
Review and Practice...................................................................................................................................813
Chapter 20: Socialist Economies in Transition........................................................... 816
The Theory and Practice of Socialism......................................................................................................818
Socialist Systems in Action.......................................................................................................................826
Economies in Transition: China and Russia............................................................................................834
Review and Practice...................................................................................................................................848
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Appendix A: Graphs in Economics................................................................................. 850
How to Construct and Interpret Graphs..................................................................................................851
Nonlinear Relationships and Graphs without Numbers........................................................................868
Using Graphs and Charts to Show Values of Variables..........................................................................876
Appendix B: Extensions of the Aggregate Expenditures Model.............................. 888
The Algebra of Equilibrium.......................................................................................................................889
The Aggregate Expenditures Model and Fiscal Policy...........................................................................893
Review and Practice...................................................................................................................................899
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About the Authors
Libby Rittenberg
Libby Rittenberg has been a professor of economics at Colorado College in Colorado
Springs since 1989. She teaches principles of economics, intermediate
macroeconomic theory, comparative economic systems, and international political
economy. She received her B. A. in economics-mathematics and Spanish from
Simmons College and her Ph.D. in economics from Rutgers University.
Prior to joining the faculty at Colorado College, she
taught at Lafayette College and at the Rutgers
University Graduate School of Management. She served
as a Fulbright Scholar in Istanbul, Turkey, and as a
research economist at Mathematica, Inc., in Princeton,
New Jersey.
Dr. Rittenberg specializes in the internationally
oriented areas of economics, with numerous articles in journals and books on
comparative and development economics. Much of her work focuses on transition
issues and on the Turkish economy.
She has been very involved in study abroad education and has directed programs in
central Europe and Turkey.
Tim Tregarthen
There is one word that captures the essence of Dr. Timothy Tregarthen—inspiring.
Tim was first diagnosed with multiple sclerosis (MS) in 1975. Yet, he continued a
remarkable academic career of teaching and research. In 1996, he published the
first edition of his principles of economics textbook to great acclaim, and it became
widely used in colleges around the country. That same year, MS made him
wheelchair-bound. The disease forced his retirement from teaching at the
University of Colorado at Colorado Springs in 1998. He lost the use of his arms in
2001 and has been quadriplegic ever since. In 2002, Tim’s doctor expected him to
die.
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About the Authors
He was placed in the Pikes Peak Hospice program and was twice given his last rites
by his priest. UCCS Chancellor Shockley-Zalabak says, “I really thought that Tim
would die in hospice. That’s what the doctors told me, and I really believed that. I
remember one day they called me and told me to try to come see him. They didn't
expect him to live through the night.”
Not only did he live through the night, but he eventually recovered to the point
that he moved from hospice to a long-term care facility. There, he never let his
disease get him down. In fact, he turned back to his love of writing and teaching for
inspiration. He obtained a voice-activated computer, recruited a coauthor, Libby
Rittenberg of Colorado College, and turned his attention to revising his principles of
economics book.Unnamed Publisheris honored to publish a new, first-edition
relaunch of this wonderful book, and is proud to bring Tim’s incredible talents as a
teacher back to life for future generations of students to learn from.
In addition to completing the rewrite of his textbook, Tim recently completed an
autobiography about the 32 years he has had MS, titledSuffering, Faith, and
Wildflowers. He is nearing completion of a novel, Cool Luck, based on the life of a
friend. It is the story of a young couple facing the husband’s diagnosis of ALS—Lou
Gehrig’s disease. Remarkably, in 2007, he was able to return to the classroom at
UCCS, where he had taught economics for 27 years. In January of 2009, Tim married
Dinora Montenegro (now Dinora Tregarthen); the couple lives in San Gabriel,
California.
Perhaps Tim’s approach to life is best summed up by an observation by UCCS
English Professor Thomas Naperierkowski: “One of the remarkable things is, heck, I
can wake up with a headache and be a pretty grouchy character, but given his
physical trials, which he faces every minute of his life these days, I’ve never seen
him grouchy, I’ve never seen him cranky.” Carry on, Tim.
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Acknowledgments
The authors would like to thank to the following individuals who reviewed the text
and whose contributions were invaluable in shaping the final product:
Carlos Aguilar El Paso Community College
Jeff Ankrom Wittenberg University
Lee Ash Skagit Valley Community College
Randall Bennett Gonzaga University
Joseph Calhoun Florida State University
Richard Cantrell Western Kentucky University
Gregg Davis Flathead Valley Community College
Kevin Dunagan Oakton Community College
Mona El Shazly Columbia College
Jose Esteban Palomar College
Maurita Fawls Portland Community College
Fred Foldvary Santa Clara University
Richard Fowles University of Utah
Doris Geide-
Weber State University
Stevenson
Sarmila Ghosh University of Scranton, Kania School of Management
David Gordon Illinois Valley Community College
Clinton Greene University of Missouri–St. Louis
James Holcomb University of Texas at El Paso
Phil Holleran Mitchell Community College
Yu Hsing Southeastern Louisiana University
Thomas Hyclak Lehigh University
Bruce Johnson Centre College
James Kahiga Georgia Perimeter College
Andrew Kohen James Madison University
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Acknowledgments
Monaco Kristen California State University–Long Beach
Mark Maier Glendale Community College
David McClough Bowling Green State University
Ann McPherren Huntington University
John Min Northern Virginia Community College
Campbell University, Lundy-Fetterman School of
Shahriar Mostashari
Business
Francis Mummery Fullerton College
Robert Murphy Boston College
Kathryn Nantz Fairfield University
Paul Okello Tarrant County College–South Campus
Nicholas Peppes St. Louis Community College
Ramoo Ratha Diablo Valley College
Teresa Riley Youngstown State University
Michael Robinson Mount Holyoke College
Anirban Sengupta Texas A&M University
John Solow The University of Iowa
John Somers Portland Community College
Charles Staelin Smith College
Richard Stratton The University of Akron
Kay E. Strong Bowling Green State University–Firelands
Della Sue Marist College
John Vahaly University of Louisville
Robert Whaples Wake Forest University
Mark Wheeler Western Michigan University
Leslie Wolfson The Pingry School
Sourushe Zandvakili University of Cincinnati
We would like to extend a special thank you to the following instructors who class
tested the text in their courses:
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