this page left intentionally blank Mankiw_Macro_FM.indd ii 04/19/12 6:47 PM MACROECONOMICS Mankiw_Macro_FM.indd i 04/19/12 6:47 PM this page left intentionally blank Mankiw_Macro_FM.indd ii 04/19/12 6:47 PM EIGHTH EDITION MACROECONOMICS N GREGORY MANKIW Harvard University Worth Publishers Mankiw_Macro_FM.indd iii 04/19/12 6:47 PM Senior Vice President, Editorial and Production: Catherine Woods Publisher: Charles Linsmeier Senior Acquisitions Editor: Sarah Dorger Executive Marketing Manager: Scott Guile Marketing Assistant: Julie Tompkins Developmental Editor: Jane E Tufts Digital Solutions Coordinator: Tom Acox Associate Media Editor: Lukia Kliossis Assistant Editor: Mary Melis Director of Print and Digital Development: Tracey Kuehn Associate Managing Editor: Lisa Kinne Photo Research Manager: Ted Szczepanski Art Director: Babs Reingold Cover and Text Designer: Kevin Kall Production Manager: Barbara Seixas Supplements Production Manager: Stacey Alexander Supplements Project Editor: Edgar Bonilla Composition: MPS Limited Printing and Binding: Quad/Graphics Cover Art: Jylian Gustlin, Fibonacci 48 Library of Congress Control Number: 2012933861 ISBN-13: 978-1-4292-4002-4 ISBN-10: 1-4292-4002-4 © 2013, 2010, 2007, 2003 by Worth Publishers All rights reserved Printed in the United States of America First printing 2012 Worth Publishers 41 Madison Avenue New York, NY 10010 www.worthpublishers.com Mankiw_Macro_FM.indd iv 04/19/12 6:47 PM Photo by Jordi Cabré about the author 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 Today, he regularly teaches both undergraduate and graduate courses in macroeconomics 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 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 Mankiw_Macro_FM.indd v 04/19/12 6:47 PM To Deborah Mankiw_Macro_FM.indd vi 04/19/12 6:47 PM 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 Political 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 Mankiw_Macro_FM.indd vii 04/19/12 6:47 PM brief contents Preface xxiii Supplements and Media xxxii part I Introduction Chapter The Science of Macroeconomics Chapter The Data of Macroeconomics 17 part II Classical Theory: The Economy in the Long Run 45 Chapter National Income: Where It Comes From and Where It Goes 47 Chapter The Monetary System: What It Is and How It Works 81 Chapter Inflation: Its Causes, Effects, and Social Costs 101 Chapter The Open Economy 133 Chapter Unemployment 177 Chapter 11 Aggregate Demand I: Building the IS–LM Model 303 Chapter 12 Aggregate Demand II: Applying the IS–LM Model 327 Chapter 13 The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime 355 Chapter 14 Aggregate Supply and the ShortRun Tradeoff Between Inflation and Unemployment 397 part V Topics in Macroeconomic Theory 427 Chapter 15 A Dynamic Model of Aggregate Demand and Aggregate Supply 429 Chapter 16 Understanding Consumer Behavior 465 Chapter 17 The Theory of Investment 497 part III Growth Theory: The Economy in the Very Long Run 203 Chapter Economic Growth I: Capital Accumulation and Population Growth 205 Chapter Economic Growth II: Technology, Empirics, and Policy 235 part VI Topics in Macroeconomic Policy 519 Chapter 18 Alternative Perspectives on Stabilization Policy 521 Chapter 19 Government Debt and Budget Deficits 543 Chapter 20 The Financial System: Opportunities and Dangers 569 part IV Business Cycle Theory: The Economy in the Short Run 271 Epilogue What We Know, What We Don’t 593 Chapter 10 Introduction to Economic Fluctuations 273 Glossary 601 Index 611 viii | Mankiw_Macro_FM.indd viii 04/19/12 6:47 PM 620 | I N D EX MPC See Marginal propensity to consume (MPC) MPK See Marginal product of capital (MPK) MPL See Marginal product of labor (MPL) Mugabe, Robert, 125 Multipliers government-purchases, 308–310, 309f, 313–314 money, 93 tax, 310–312, 311f Mundell, Robert A., 355 Mundell-Fleming model, 355–361, 361f with changing price level, 383–385, 384f, 385f goods market and IS* curve and, 358, 359f interest rate differentials in, 373–375, 374f key assumption of, 357 money market and LM* curve and, 358–360, 360f policy in, 371–372, 372t Municipal bonds, 67 Mussa, Michael, 125n Mutual funds, 572 Myopia, Ricardian equivalence and, 556 NAFTA See North American Free Trade Agreement (NAFTA) Nakamura, Emi, 284n National Bureau of Economic Research (NBER), 274, 275 National income, 30 components of, 30 distribution to factors of production, 51–63 division of, 56–58 National income accounting, 18 National income accounts identity, 27, 64 National saving, 70 Natural level of output, 289 Natural-rate hypothesis, 417–418 Natural rate of interest, 431, 434 Natural rate of unemployment, 177, 179f accuracy of estimates of, 413 NBER See National Bureau of Economic Research (NBER) Neoclassical model of investment, 498 Neoclassical theory of distribution, 51 Net capital outflow, 136–137 in large open economy, 166–168, 167f, 173–174, 174f Net exports, 27 definition of, 135 international flows of capital and goods and, 134–136 real exchange rate and, 151–153, 152f Mankiw_Macro_Index.indd 620 Net foreign investment, 136–137 Netherlands collective bargaining in, 186t exchange rate of, 370 government debt of, 545t Net investment, 502 Net national product (NNP), 30 Neumark, David, 184n Nevins, Alan, 189 Newton, Isaac, 257 New Zealand Big Mac price and exchange rate in, 161t central bank of, 533 inflation in, exchange rate and, 158f Nickell, Stephen, 197n Niger, population growth and income per person in, 228f Nigeria investment rate and income per person in, 216f underground economy in, 23 Nixon, Richard M., 4, 410 NNP See Net national product (NNP) Nominal exchange rate, determinants of, 156–158 Nominal GDP definition of, 24 real GDP versus, 23–24 Nominal interest rates, 66, 110 demand for money and, 114–116 inflation and, 111f, 111–112, 112f monetary-policy rule and, 434–435 in nineteenth century, 113 Nominal variables, 127 Nordhaus, William, 530n Normal goods, 475 North American Free Trade Agreement (NAFTA), 375 Norway Big Mac price and exchange rate in, 161t exchange rate of, 370 inflation in, exchange rate and, 158f investment rate and income per person in, 216f population growth and income per person in, 228f Obama, Barack, 4, 247 on China’s currency, 357, 383 health care reform and, 547 stimulus program under, 313–314, 349, 487, 546, 561, 582 Obstfeld, Maurice, 355n OECD See Organization for Economic Cooperation and Development (OECD) Office of Credit Ratings, 587 Office of the Comptroller of the Currency, 587 Of Money (Hume), 294 Oil prices, productivity slowdown and, 252 Okun, Arthur M., 277, 414n Okun’s law, 277f, 277–279, 278f, 417 100 percent experience rated unemployment insurance, 182 100-percent-reserve banking, 88 OPEC See Organization of Petroleum Exporting Countries (OPEC) Open economies, 64, 133–164 See also Exchange rates; International flows of capital and goods; Large open economies; Mundell-Fleming model; Small open economies large, United States as, 162–163 Mundell-Fleming model and, 355–361 Open-market operations, 85, 94 Optimization, 13, 474f, 474–475 Organization for Economic Cooperation and Development (OECD), 314 Organization of Petroleum Exporting Countries (OPEC), 408 productivity slowdown and, 252 supply shocks caused by, 298–299, 410–411 Oswald, Andrew J., 197n Output See also Gross domestic product (GDP); National income full-employment (natural) level of, 289 variability in, tradeoff between inflation variability and, 453–456, 454f Outside lag, 523 Outsiders, 187, 418 Paasche indexes, 33, 34 Pakistan Big Mac price and exchange rate in, 161t inflation in, exchange rate and, 158f investment rate and income per person in, 216f population growth and income per person in, 228f Parker, Jonathan A., 480n, 487n, 489n Partially experience rated unemployment insurance, 182 Peaks, 274 Percentage changes, arithmetic tricks for working with, 26 Permanent income, 484 Permanent-income hypothesis, 484–487 implications of, 485 Perry, George L., 41n, 121n Personal income, 30 20/04/12 10:25 PM I NDEX Peru Big Mac price and exchange rate in, 161t investment rate and income per person in, 216f Petersen, Bruce C., 510n Phelps, Edmund, 14, 217n, 408 Philippines, Big Mac price and exchange rate in, 161t Phillips, A W., 408 Phillips curve, 405–418, 432–433, 595–596 adaptive expectations and inflation inertia and, 408–409 causes of rising and falling inflation and, 409–411 derivation from aggregate supply curve, 406–408 disinflation and sacrifice ratio and, 414 hysteresis and natural-rate hypothesis and, 417–418 modern, history of, 408 rational expectations and disinflation and, 414–416 short-run, 412, 412f, 413f time inconsistency and, 539–541 Pigou, Arthur, 345 Pigou effect, 345 Planned expenditure, Keynesian cross and, 305–307, 306f Plosser, Charles I., 268n Poland Big Mac price and exchange rate in, 161t collective bargaining in, 186t Policymakers distrust of, 529–530 financial crisis of 2008-2009 and, 581 Political business cycle, 530 Political process distrust of, 529–530 government debt and, 563 Population growth, 224–231 effects of, 226–227, 227f international comparison of, 228f, 228–229 Kremerian model of, 230–231 Malthusian model of, 229–230 steady state with, 225–226, 226f Portugal government debt of, 545t population growth and income per person in, 228f PPP See Purchasing power parity (PPP) Precautionary saving, 483 Predetermined variables, 437 Preferences of consumers, 473f, 473–474 indifference curves and, 473f, 473–474 labor supply and, 199 liquidity, theory of, 317–320, 318f, 319f Mankiw_Macro_Index.indd 621 Prescott, Edward C., 14, 199, 230n, 267, 268n, 539n Present value, 472 Price(s) See also Consumer price index (CPI); Deflation; Disinflation; Hyperinflation; Inflation base-year, 24 current, future money and, 114–116, 115f factor, 51–52, 52f, 58 flexible versus sticky, 12–13 money and inflation and, 106–108, 107f, 108f relative See Relative prices rental, of capital, 499f, 499–500 sticky, 282t, 282–284, 283t Price levels, changing, MundellFleming model with, 383–385, 384f, 385f Price shocks, 296 Principles of Economics (Samuelson), 14 Principles of Political Economy and Taxation (Ricardo), 560 Prisoner of war camp, money in, 83 Private saving, 70 Production efficiency, factor accumulation versus, 241–242 Production firms, 499 Production function, 50 Cobb-Douglas, 58–61, 61f supply of goods and, 207, 208f Production smoothing, 514 Productivity of capital See Capital productivity of labor See Labor productivity total factor, 252 Profit accounting, 57 definition of, 53 economic, 57, 58 Protectionist trade policies, 155–156 Public policy, frictional unemployment and, 181–183 Public saving, 48, 70 Purchasing power parity (PPP), 159f, 159–162 Quantitative easing, 350 monetary base and, 95f, 95–96 Quantity equation, 102–103 Quantity theory of money, 102–108 constant velocity assumption and, 105 income and, 103–104 money, prices, and inflation and, 106–108, 107f, 108f money demand function and, 104–105 transactions and, 102–103 The Race Between Education and Technology (Goldin and Katz), 62 | 621 Radford, R A., 83n Raff, Daniel M G., 189n Random variables, 431 Random walk, 488, 508 Random-walk hypothesis, 487–489 Rao, Krishna, 460n Rating agencies, financial crisis of 2008-2009 and, 581 Rational expectations, 434 disinflation and, 414–416 Reagan, Ronald, 4, 146, 545 Real-business-cycle theory, 267 Real cost of capital, 501 Real exchange rate, 150–154 determinants of, 151–153, 152f policy influences on, 153–154 trade balance and, 151, 152f Real GDP, chain-weighted measures of, 25–26 definition of, 24 economic growth measurement using, 205, 206t nominal GDP versus, 23–24 in United States, 5f, 5–6 Real interest rates, 66, 110 consumption and, 476–477, 477f ex ante and ex post, 112–113 Fisher equation and, 431–432 housing demand and, 512 inventory investment and, 515 Real money balances, 104 Real rental price of capital, 56 Real variables, 126 Real wage, 55 Recessions, 6, 579 of 1982, 525–526 in United States (2001), 335–336 Regulation, of financial system, 587 Regulators, financial crisis of 20082009 and, 581 Reinhart, Carmen M., 581n Reis, Ricardo, 402n Relative prices, hyperinflation and, 122 Rental firms, 499 Rental price of capital, 499f, 499–500 Repetto, Andrea, 491n Republic of Congo, investment rate and income per person in, 216f Research and development, economic growth and, 256–257 Reserve(s), 88 excess, 95 fractional-reserve banking and, 88–90 interest on, 95 100-percent-reserve banking and, 88 Reserve Bank of New Zealand Act of 1989, 533–534 Reserve-deposit ratio, 89, 92 changing of, by Fed, 94–95 Reserve requirements, 94–95 04/20/12 12:18 PM 622 | I N D EX Residential investment, 497, 498f, 510–514 housing demand and, 511–512, 512f, 513f, 514 stock and flow and, 510–511, 511f Resolution authority, 585 Returns to scale, constant, 50 Revaluation, 370 Revenue Act of 1932, 344 Ricardian equivalence, 544, 554–560 basic logic of, 555–556 consumers and future taxes and, 556–559 Ricardo on, 560 traditional view of government debt versus, 559–560 Ricardo, David, 555, 560 Rigobon, Roberto, 36 Risk allocation of, 571–572 excessive, reducing, 586–587 systematic and idiosyncratic, 572 Risk aversion, 119, 571 Robinson, James, 250 Rockoff, Hugh, 120n Rodriguez-Clare, Andres, 241n Rogers, Will, 81 Rogoff, Kenneth S., 160, 161t, 162n, 355n, 581n Romer, Christina D., 528 Romer, David, 241n, 243, 246n, 403n Romer, Paul M., 247n, 254n Roosevelt, Franklin, 370 Rosen, Harvey, 554n Rotemberg, Julio, 401n, 460n Rules, for monetary policy, 532–533 Russia Big Mac price and exchange rate in, 161t collective bargaining in, 186t standard of living in, 206t Rwanda, investment rate and income per person in, 216f Sacerdote, Bruce, 199 Sachs, Jeffrey D., 242–243, 370n Sacrifice ratio, disinflation and, 414, 416t, 416–417 Sala-i-Martin, Xavier, 241n Samuelson, Paul A., 14, 506 Sargent, Thomas J., 123n, 415n Saudi Arabia, Big Mac price and exchange rate in, 161t “Save More Tomorrow” program, 491–492 Saving changes in, fiscal policy and, 72–74 economic growth and, 214f, 214–215 of elderly, 483 increasing, 491–492 international rates of, 215–217, 216f national, 70 Mankiw_Macro_Index.indd 622 precautionary, 483 private, 70 public, 48, 70 Saving rate changing, 245–246 economic growth and, 244–246 Sbordone, Argia, 460n Scale, returns to See Returns to scale Schumpeter, Joseph, 257, 258 Schwartz, Anna J., 107, 342n, 344 Seasonal adjustment, 31–32 Sectoral shift, 181 Secular stagnation, 468–469 Seigniorage, 109–110 Shadow banks, 583, 585 Shapiro, Matthew D., 35n, 505, 525n, 557n Shiller, Robert J., 117, 509n, 565n Shleifer, Andrei, 249n, 559n Shocks, 294 demand, 294, 295f, 295–296, 448f, 448–449, 450f to IS curve, spending hypothesis and, 343–344 in IS-LM model, 334–336 to LM curve, money hypothesis and, 344–345 recession of 2001 and, 335–336 supply See Supply shocks Shoeleather cost of inflation, 118, 122 Short run, long run versus, 281–282 Short-run aggregate supply curve (SRAS), 288, 290f, 290–292, 291f, 292f Short-run equilibrium, 322–323, 323f, 324f, 442–443, 443f monetary policy and, 329–331, 330f Short-run Phillips curve, 412, 412f, 413f Singapore Big Mac price and exchange rate in, 161t common-law system of, 249 economic growth of, 266–267 inflation and money growth in, 108 inflation in, exchange rate and, 158f Slemrod, Joel, 557n Small open economies, 139–149, 355–387 capital mobility and world interest rate and, 139–140 under fixed exchange rates, 365–372 under floating exchange rates, 361–365 impossible trinity and, 381f, 381–382 interest rate differentials and, 372–377 model of, 141–142, 142f Mundell-Fleming model and, 355– 361, 361f policy influences on trade balance and, 142–149 pros and cons of different exchangerate systems and, 377–380 reasons to assume, 140–141 speculative attacks, currency boards, and dollarization and, 380–381 Smith, Adam, 242, 249 Social costs of inflation, 116–121 expected inflation and, 117–119 hyperinflation and, 122 layman’s view and classical response and, 116–117 unexpected inflation and, 119–121 Social Security, 550–551 government debt and, 547, 548 inflation and, 119 Solow, Robert M., 14, 206n, 265, 267, 409 Solow growth model, 205–232 allocating investment and, 246–248 balanced growth and, 239–240 capital accumulation and See Capital accumulation convergence and, 240–241 economic policies to promote growth and, 243–253 efficiency of labor and, 236–237 encouraging technological progress and, 250–253, 251t factor accumulation versus production efficiency and, 241–242 free trade and, 242–243 Golden Rule level of capital and See Golden Rule level of capital institutions and, 248–250 population growth and See Population growth saving rate and, 244–246 technological progress in, 237–239, 238f, 238t Solow residual, 265 in short run, 267–268, 268f Solyndra, 248 Souleles, Nicholas S., 487n, 489n South Africa Big Mac price and exchange rate in, 161t inflation in, exchange rate and, 158f investment rate and income per person in, 216f South Korea Big Mac price and exchange rate in, 161t collective bargaining in, 186t economic growth of, 243, 266–267 financial crisis of 1997-1998 in, 376–377 inflation in, exchange rate and, 158f investment rate and income per person in, 216f population growth and income per person in, 228f trade deficit of, 145 Spain collective bargaining in, 186t government debt of, 545t 04/20/12 12:18 PM I NDE X investment rate and income per person in, 216f unemployment and inflation in, 418 unemployment rate in, 196 Speculative attacks, 380 Speculative bubbles, 576 Spending hypothesis, 343–344 Spiegelman, Robert G., 183n SRAS See Short-run aggregate supply curve (SRAS) Stabilization, balanced budgets versus fiscal policy and, 561 Stabilization policy, 294–299, 521–537, 597–598 active versus passive, 522–528 expectations and, 526–527 historical record and, 527–528 rule versus discretion for conducting, 529–536 shocks to aggregate demand and, 295f, 295–296 shocks to aggregate supply and, 296–299, 297f Stagflation, 296, 447 OPEC and, 298 Staiger, Douglas, 413 Standard of living See also Gross domestic product (GDP) determination of, 594 international differences in, 205, 206t Standard & Poor’s downgrading of Greek debt by, 588, 600 downgrading of U.S government debt by, 547, 548, 582 Statistical discrepancy, 30 Steady state Golden Rule level and See Golden Rule level of capital growth in capital stock and, 209– 211, 209f–211f, 213–214 numerical example of approaching, 211–213, 213f with population growth, 225–226, 226f with technological progress, 237– 238, 238f Steady-state consumption, 218f, 218–219 Steady-state level of capital, 210–211 Steinsson, Jón, 284n Sticky price(s), 12–13, 282t, 282–284, 283t Sticky-price model, 399–401 Stimulus program under Obama, 313– 314, 349, 487, 561, 582 Stock (quantity), 20, 20f Stock (security), 505, 571 Stock, James H., 413 Stock market as economic indicator, 506–507, 507f efficient markets hypothesis and, 507–509 Tobin’s q and, 505–507, 507f Mankiw_Macro_Index.indd 623 Stock-out avoidance, 514 Store of value, money as, 82 Structural unemployment, 183f, 183–189 efficiency wages and, 187–189 minimum-wage laws and, 184–186 unions and collective bargaining and, 186t, 186–187 Subprime borrowers, 348–349, 512, 513f, 514, 576 Substitution effect, 476–477 Summers, Lawrence H., 189n, 245n, 268n, 418n, 506n, 536n, 559n Supply of economy’s output, equilibrium in market for goods and services and, 69–70 of goods and services See Supply of goods and services of loanable funds, equilibrium in financial markets and, 70–71, 71f of money See Money supply Supply and demand model, 8–11, 9f, 10f Supply of goods and services, 50–51 capital accumulation and, 206–209, 208f Supply shocks, 294, 296–299, 297f adverse and favorable, 296 to aggregate supply, 444–447, 445f, 446f Fed accommodation of, 297 OPEC and, 298–299, 410–411 Supply-siders, 312, 554 Surpluses budget, 48, 68, 245 trade, 137 Sweden Big Mac price and exchange rate in, 161t central bank of, 533 collective bargaining in, 186t, 187 currency of, 379 exchange rate of, 370 inflation in, exchange rate and, 158f Switzerland Big Mac price and exchange rate in, 161t collective bargaining in, 186t government debt of, 544, 545t inflation and money growth in, 108 inflation in, exchange rate and, 158, 158f investment rate and income per person in, 216f unemployment rate in, 196 Systematic risk, 572 Taiwan Big Mac price and exchange rate in, 161t economic growth of, 266–267 Tambalotti, Andrea, 460n | 623 TARP See Troubled Assets Relief Program (TARP) Tasmania, population growth in, 230–231 Tax(es) Bush’s lowering of withholding for, 557 decreases in, changes in saving and, 74 earned income tax credit and, 185 future, consumers and, 556–559 hyperinflation and, 122 incentives and, 554 inflation, 102, 109 interest rate and, 67 investment and, 504–505 IS curve and, 329, 330f Tax cuts under George W Bush, 146, 312, 504–505 IS curve and, 312 of 1964, 486 Tax multiplier, 310–312, 311f Tax rebates, of 2008, 486–487 Tax Reform Act of 1986, 504 Tax smoothing, balanced budgets versus fiscal policy and, 561 Tax surcharge, of 1968, 486 Taylor, John B., 435, 447, 459 Taylor principle, 456–459, 458f Taylor rule, 435–437, 436f Tea Party Movement, 582 Technological externality, 247 Technological progress economic growth and, 264–265 encouraging, 250–253, 251t labor-augmenting, 237 opposition to, 257–258 Solow growth model and, 236–239, 238f, 238t TED spread, 578f, 578–579 Temin, Peter, 342n Term, interest rate and, 67 Term Auction Facility, 94 Terms of trade, 150 Terrorist attacks of 9/11/2001, 336 Thailand Big Mac price and exchange rate in, 161t financial crisis of 1997-1998 in, 376–377 investment rate and income per person in, 216f underground economy in, 23 Thaler, Richard H., 491–492, 492n Theory See Economic models; specific models Theory of liquidity preference, 317–320, 318f, 319f Time horizons, 281–285 Time inconsistency, 490 of discretionary policy, 530–532 tradeoff between inflation and unemployment and, 539–541 Tobacman, Jeremy, 491n 04/20/12 12:18 PM 624 | I N D EX Tobin, James, 14 Tobin’s q, 505–507, 507f Togo, investment rate and income per person in, 216f Total factor productivity, 252 Trade balanced, 137 free, economic growth and, 242–243 terms of, 150 Trade balances bilateral, irrelevance of, 139 definition of, 136 international flows of capital and goods and, 136–138, 137t policy influences on, 142–149 real exchange rate and, 151, 152f Trade deficits, 137 of South Korea, 145 of United States, 146, 147f, 148 Trade policy exchange rates and, 154–156, 156f fixed exchange rates and, 370–371, 371f floating exchange rates and, 364–365, 365f in large open economy, 172, 173f protectionist, 155–156 Trade surplus, 137 Transactions velocity of money, 102–103 Transitory income, 484 Trilemma of international finance, 381f, 381–382 Troubled Assets Relief Program (TARP), 584 Troughs, 274 Turkey Big Mac price and exchange rate in, 161t collective bargaining in, 186t Twin deficits, 146 Underground economy, 23 labor supply and, 199 Underwater homeowners, 349, 577 Unemployment, 177–201 cyclical, 406 duration of, 189–192, 191f European, rise in, 194–196, 195f frictional, 180–183 happiness and, 197 Okun’s law and, 277f, 277–279, 278f rate of See Unemployment rate rise of European leisure and, 198f, 198–199 structural, 183f, 183–189 tradeoff with inflation See Phillips curve transitions into and out of labor force and, 193, 194t Mankiw_Macro_Index.indd 624 in United States, 177, 178f, 189–194 variation within Europe, 196–197 Unemployment insurance, 181–183 in United States, 190–192, 191f Unemployment rate, 5, 36–41 definition of, 37 establishment survey and, 40–41 household survey and, 37–38, 38f labor-force participation trends and, 38–40, 39f natural, 177, 179f in United States, 6–7, 7f variation across demographic groups, 192t, 192–193 Unions collective bargaining and, 186t, 186–187 labor supply and, 199 United Kingdom Big Mac price and exchange rate in, 161t, 162 central bank of, 533 collective bargaining in, 186t currency of, 379 economic growth of, 251t, 253 exchange rate of, 370 government debt of, 545t investment rate and income per person in, 216f Phillips curve and, 408 population growth and income per person in, 228f unemployment in, 194, 195f wars and interest rates in during 1730-1920, 73f, 73–74 United States See also specific presidents’ names bank failures and money supply in 1930s in, 97t, 97–98 Big Mac price and exchange rate in, 161t, 162 collective bargaining in, 186t, 187 common-law system of, 249 CPI in, 36 economic growth of, 251t, 253, 265–266, 266t exchange rate of, 382 financial crisis of 2008-2009 in, 348–349 financing of American Revolution and, 109–110 GDP of, 28–29, 29t government debt of, 544, 545t, 545–547, 546f See also Government debt growing gap between rich and poor in, 62 historical performance of economy in, 5–7, 5f–7f income per capita in, 205 inflation in See U.S inflation investment rate and income per person in, 216, 216f labor force in, 199 labor-force participation rate in, 38–40, 39f as large, open economy, 162–163 minimum-wage workers in, 185–186 monetary base growth in, 95f, 95–96 population growth and income per person in, 228f ratio of labor income to total income in, 61, 61f recession of 2001 in, 335–336 standard of living in, 206t trade balance with China, 139 trade deficit of, 146, 147f, 148 underground economy in, 23 unemployment in, 177, 178f, 189–194 unemployment insurance in, 190–192, 191f unemployment rate in, 6–7, 7f, 196 wages in, 187 work hours in, 198, 198f U.S Department of Commerce, 18, 23 U.S inflation, 101 exchange rate and, 158 of 1970s, 459–460 rate of, 6, 6f unemployment and, 409–411 Unit of account, money as, 82 Uruguay, population growth and income per person in, 228f Used goods, in GDP, 21 Utility, 13 Value, money as store of, 82 Value added, GDP and, 22 Variables change in, 55 endogenous and exogenous, 8, 8f, 437 functions to express relationships among, 11 instrumental, 243 nominal, 127 predetermined, 437 random, 431 real, 126 Velde, François R., 293 Vietnam, economic growth of, 243 Vishny, Robert, 249n Volcker, Paul, 320, 411, 416, 417, 459, 562, 587 Volcker rule, 587 Wage(s) efficiency, 187–189 minimum, 184–186 real, 55 04/20/12 12:18 PM I NDE X Wage rigidity, 183 structural unemployment and, 183f, 183–189 Wagner, Richard, 563 Walmart, 258 Walsh, Kieran, 460n War(s), interest rates and, in United Kingdom, 73f, 73–74 Warner, Andrew, 242–243 Wascher, William, 184n Washington, George, 532 Watson, Mark W., 413 The Wealth of Nations (Smith), 242 Weil, David N., 230n, 241n, 246n, 254n Mankiw_Macro_Index.indd 625 Weinberg, Stephen, 491n West Germany, economic growth of, 251t Wicksell, Knut, 563 Wilcox, David W., 35n, 565n TheWizard of Oz (Baum), 120 Woodbury, Stephen A., 183n Woodford, Michael, 402n, 460n Worker quality, productivity slowdown and, 252–253 Work in process, 514 WorldCom, 336 World interest rate, capital mobility and, 139–140 | 625 Yap Island, money on, 84–85 Yellen, Janet, 188n Young, Alwyn, 267n Yunus, Muhammad, 574–575 Zambia, investment rate and income per person in, 216f Zeckhauser, Richard J., 245n Zero lower bound, 350 Zimbabwe hyperinflation in, 101, 125–126 investment rate and income per person in, 216f population growth and income per person in, 228f 04/20/12 12:18 PM this page left intentionally blank Mankiw_Macro_FM.indd ii 04/19/12 6:47 PM Real GDP Growth Percent –2 –4 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Department of Commerce Unemployment Rate Percent 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Department of Labor Mankiw_Macro_Endpaper.indd 02/05/12 3:22 PM Inflation Rate (GDP Deflator) Percent 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Department of Commerce Nominal Interest Rate (Three-Month Treasury Bills) Percent 15 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Federal Reserve Mankiw_Macro_Endpaper.indd 02/05/12 3:22 PM Percent of GDP Surplus U.S Federal Government Budget Deficit (Adjusted for Inflation) Deficit –2 –4 –6 –8 –10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: FRED, U.S Department of Commerce, and author’s calculations Money Growth (M2) Percent 14 12 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Federal Reserve Mankiw_Macro_Endpaper.indd 02/05/12 3:22 PM U.S Net Exports of Goods and Services Percent of GDP –1 –2 –3 –4 –5 –6 –7 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Department of Commerce U.S Trade-weighted Real Exchange Rate Index 130 120 110 100 90 80 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Federal Reserve Mankiw_Macro_Endpaper.indd 02/05/12 3:22 PM Real GDP Growth Percent –2 –4 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year 1995 2000 2005 2010 Year Source: U.S Department of Commerce Unemployment Rate Percent 10 1970 1975 1980 1985 1990 Source: U.S Department of Labor Mankiw_Macro_endpapers.indd 10/05/12 6:02 PM Inflation Rate (GDP Deflator) Percent 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Department of Commerce Nominal Interest Rate (Three-Month Treasury Bills) Percent 15 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Federal Reserve Mankiw_Macro_endpapers.indd 10/05/12 6:02 PM Percent of GDP Surplus U.S Federal Government Budget Deficit (Adjusted for Inflation) Deficit –2 –4 –6 –8 –10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Sources: FRED, U.S Department of Commerce, and author’s calculations Money Growth (M2) Percent 14 12 10 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: U.S Federal Reserve Mankiw_Macro_endpapers.indd 10/05/12 6:02 PM U.S Net Exports of Goods and Services Percent of GDP –1 –2 –3 –4 –5 –6 –7 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year 1995 2000 2005 2010 Year Source: U.S Department of Commerce U.S Trade-weighted Real Exchange Rate Index 130 120 110 100 90 80 1970 1975 1980 1985 1990 Source: U.S Federal Reserve Mankiw_Macro_endpapers.indd 10/05/12 6:02 PM [...]... previous editions suggests this text complements well a variety of approaches to the field Learning Tools I am pleased that students have found the previous editions of this book userfriendly I have tried to make this eighth edition even more so Case Studies Economics comes to life when it is applied to understanding actual events.Therefore, the numerous Case Studies (many new or revised in this edition) ... Nickerson did a great job preparing the index Deborah Mankiw, my wife and in-house editor, continued to be the first reader of new material, providing the right mix of criticism and encouragement Finally, I would like to thank my three children, Catherine, Nicholas, and Peter They helped immensely with this revision—both by providing a pleasant distraction and by reminding me that textbooks are written for... and sense of purpose This Book’s Approach Macroeconomists share a common body of knowledge, but they do not all have the same perspective on how that knowledge is best taught Let me begin this new edition by recapping four of my objectives, which together define this book’s approach to the field First, I try to offer a balance between short-run and long-run issues in macroeconomics All economists agree... New in the Eighth Edition? Economics instructors are vigilant in keeping their lectures up to date as the economic landscape changes Textbook authors cannot be less so This book is therefore updated about every three years Each revision reflects new events in the economy as well as new research about the best way to understand macroeconomic developments One significant change in this edition is that... banking system and promote recovery from a deep recession Understanding these policies requires a strong background in the details of the monetary system As a result, this edition covers the topic earlier in the book than did previous editions A complete treatment of the monetary system and the tools of monetary policy can now be found in Chapter 4 The biggest change in the book, however, is the addition... employment by discussing the dynamics of the labor market and the natural rate of unemployment It examines various causes of unemployment, including job search, minimum-wage laws, union power, and efficiency wages It also presents some important facts about patterns of unemployment Part Three, Growth Theory: The Economy in the Very Long Run Part Three makes the classical analysis of the economy dynamic by. .. debate over how policymakers should respond to short-run economic fluctuations It emphasizes two broad questions: Should monetary and fiscal policy be active or passive? Should policy be conducted by rule or by discretion? The chapter presents arguments on both sides of these questions Chapter 19 focuses on the various debates over government debt and budget deficits It gives a broad picture about the... Forecasting 522 524 Ignorance, Expectations, and the Lucas Critique The Historical Record 527 526 ᭤ CASE STUDY Is the Stabilization of the Economy a Figment of the Data? 18-2 Should Policy Be Conducted by Rule or by Discretion? 528 529 Distrust of Policymakers and the Political Process 529 The Time Inconsistency of Discretionary Policy 530 ᭤ CASE STUDY Alexander Hamilton Versus Time Inconsistency Rules for... difficult concepts, to provide additional information about the tools of economics, and to show how economics relates to our daily lives Several are new or revised in this edition Graphs Understanding graphical analysis is a key part of learning macroeconomics, and I have worked hard to make the figures easy to follow I often use comment boxes within figures that describe briefly and draw attention to the important... immediately test their understanding of its basic lessons by answering the Questions for Review Problems and Applications Every chapter includes Problems and Applications designed for homework assignments Some of these are numerical applications of the theory in the chapter Others encourage the student to go beyond the material in the chapter by addressing new issues that are closely related to the