part - gbv
TRANSCRIPT
PART I Introduction1 Five Foundations of Economics 4
2 Model Building and Gains from Trade 26
Appendix 2A: Graphs in Economics 58
PART 11 The Role of Markets3 The Market at Work: Supply and Demand 72
Appendix 3A: Changes in Both Demandand Supply 108
4 Elasticity 114
5 Market Outcomes and Tax Incidence 154
6 Price Controls 188
7 Market Inefficiencies: Externalities and Public Goods 218
PART III The Theory of the Firm8 Business Costs and Production 250
9 Firms in a Competitive Market 280
10 Understanding Monopoly 312
11 Price Discrimination 342
12 Monopolistic Competition and Advertising 366
13 Oligopoly and Strategic Behavior 396
PART IV Labor Markets and Earnings14 The Demand and Supply of Resources 434
15 Income, Inequality, and Poverty 470
PART V Special Topics in Microeconomics16 Consumer Choice 510
Appendix 16A: Indifference Curve Analysis 530
17 Behavioral Economics and Risk Taking 544
18 Health Insurance and Health Care 568
PART VI Macroeconomic Basics19 Introduction to Macroeconomics and Gross
Domestic Product 600
20 Unemployment 638
21 The Price Level and Inflation 668
22 Savings, Interest Rates, and the Market for Loanable Funds 704
23 Financial Markets and Securities 732
PART VII The Long and Short of Macroeconomics24 Economic Growth and the Wealth of
Nations 760
25 Growth Theory 796
26 The Aggregate Demand-Aggregate Supply Model 828
27 Recessions, Expansions, and the Debate over How to Manage Them 864
Appendix 27A: The Aggregate Expenditures Model 889
PART VIII Fiscal Policy28 Federal Budgets: The Tools of Fiscal Policy 908
29 Fiscal Policy 936
PART IX Monetary Policy30 Money and the Federal Reserve 968
31 Monetary Policy 1000
PART X International Economics32 International Trade 1036
33 International Finance 1064
Brief Contents vii
Preface xxxiA ckn o wie dgm en fs About the Authors
xlvlii
PART E Introduction
' ,G QUESTIONS 7
What Is Economics? 7
Microeconomics and Macroeconomics 8
What Are Five Foundations ofEconomics? 8
ECONOMICS IN THE MEDIA: Scarcity: Nation Just Wants to Be Safe, Happy, Rich, Comfortable, Entertained at All Times 9
Incentives 10
PRACTICE WHAT YOU KNOW: M icroeconomics and Macroeconomics: The Big Picture 10
ECONOMICS IN THE REAL WORLD: Why Are There so Many Dashboard Cameras in Russia? 12
Trade-Offs 13
Opportunity Cost 14
PRACTICE WHAT YOU KNOW: The Opportunity Cost of Attending College 15
ECONOMICS IN THE REAL WORLD: How Long Would You Wait in Line on Black Friday to Save $300? 16
Marginal Thinking 17
Trade 17
Conclusion 20
SNAPSHOT: Five Foundations of Economics 21
ECONOMICS FOR LIFE: So You Wanna Be a Billionaire? Study Economics 22
ANSWERING THE BIG QUESTIONS 23
Concepts You Should Know 24Questions for Review 24Study Problems 24Solved Problems 25
2 Model Baildi ' and Gains
SIG QUESTIONS 28
How Do Economists Study theEconomy? 28
The Scientific Method in Economics 28
Positive and Normative Analysis 29
Economic Models 30
PRACTICE WHAT YOU KNOW: Positive versus Normative Statements 32
viii Contents
What Is a Production PossibilitiesFrontier? 33
The Production Possibilities Frontier andOpportunity Cost 35
The Production Possibilities Frontier andEconomic Growth 36
PRACTICE WHAT YOU KNOW: The Production Possibilities Frontier: Bicycles and Cars 38
What Are the Benefits of Specialization and Trade? 39
Gains from Trade 39
Comparative Advantage 42
Finding the Right Price to Facilitate Trade 43
ECONOMICS IN THE MEDIA: Specialization: How to Make a $1,500 Sandwich in Only Six Months 44
PRACTICE WHAT YOU KNOW: Opportunity Cost 45
ECONOMICS IN THE REAL WORLD: WhyLeBron James Has Someone Else Help Him Move 46
What Is the Trade-Off between Having More Now and Having More Later? 46
ECONOMICS IN THE MEDIA: Opportunity Cost: Xbox or Playstation? 47
Consumer Goods, Capital Goods, andInvestment 47
ECONOMICS IN THE MEDIA: The Trade-Off between the Short Run and the Long Run: A Knight’s Tale 49
PRACTICE WHAT YOU KNOW: Trade-Offs 51
ECONOMICS IN THE REAL WORLD: Ziferblat Café Understands Incentives 51
Conclusion 51
ECONOMICS FOR LIFE: Why Men Should Do More Housework 52
ANSWERING THE BIG QUESTIONS 53
Concepts You Should Know 54Questions for Review 54Study Problems 54Solved Problems 56
Appendix 2A: Graphs in Economics 58
Graphs That Consist of One Variable 58
Time-Series Graphs 60
Graphs That Consist of Two Variables 60
The Slope of a Curve 62
Formulas for the Area of a Rectangle and a Triangle 65
Cautions in Interpreting NumericalGraphs 66
Concepts You Should Know 69Study Problems 69Solved Problem 69
PAKT U The Role of Markets
BIG QUESTIONS 74
What Are the Fundamentals of Markets? 74
Competitive Markets 75
Imperfect Markets 76
What Determines Demand? 76
Contents x
PRACTICE WHAT YOU KNOW: Markets and the Nature of Competition 77
The Demand Curve 77
Market Demand 79
Shifts of the Demand Curve 79
ECONOMICS IN THE MEDIA: Shifting the Demand Curve: The Hudsucker Proxy 84
PRACTICE WHAT YOU KNOW: Shift of the Curve or Movement along the Curve? 85
What Determines Supply? 87
The Supply Curve 87
Market Supply 88
Shifts of the Supply Curve 90
ECONOMICS IN THE REAL WORLD: Why Do the Prices of New Electronics Always Drop? 93
PRACTICE WHAT YOU KNOW: Ice Cream: Supply and Demand 94
How Do Supply and Demand Interact to Create Equilibrium? 95
Supply, Demand, and Equilibrium 95
PRACTICE WHAT YOU KNOW: Bacon: Supply and Demand 97
ECONOMICS FOR LIFE: Bringing Supply and Demand Together: Advice for Buying Your First Home 100
Conclusion 102
ANSWERING THE BIG QUESTIONS 102
Concepts You Shou/d Know 104Questions for Review 104Study Problems 104Solved Problems 106
Appendix 3A: Changes in Both Demand and Supply 108
PRACTICE WHAT YOU KNOW: When Supply and Demand Both Change: Hybrid Cars 111
ECONOMICS IN THE REAL WORLD: Polar Vortex Economics 112
Questions for Review 113Study Problems 113Solved Problem 113
< ? 114
BIG QUESTIONS 116
What Is the Price Elasticity of Demand, and What Are Its Determinants? 116
Determinants of the Price Elasticity of Demand 117
Computing the Price Elasticity of Demand 120
PRACTICE WHAT YOU KNOW: Price Elasticity of Demand 121
ECONOMICS IN THE MEDIA: Price Elasticity of Demand: The Big Bang Theory 122
Graphing the Price Elasticity of Demand 124
Price Elasticity of Demand and Total Revenue 130
ECONOMICS IN THE REAL WORLD: Price Elasticity of Demand: The Nutella Riots of 2018 133
PRACTICE WHAT YOU KNOW: Price Elasticity of Demand 134
SNAPSHOT: Price Elasticity of Demand 136
ECONOMICS IN THE MEDIA: Price Elasticity of Demand and Total Revenues: Shark Tank: Vurtego Pogo 137
How Do Changes in Income and the Prices of Other Goods Affect Elasticity? 137
Income Elasticity 137
Cross-Price Elasticity 139
PRACTICE WHAT YOU KNOW: Cross-PriceElasticity of Demand 140
ECONOMICS IN THE REAL WORLD: Tennis,Anyone? 141
PRACTICE WHAT YOU KNOW: IncomeElasticity 142
What Is the Price Elasticity of Supply? 142
Determinants of the Price Elasticity ofSupply 143
The Flexibility of Producers 144
Time and the Adjustment Process 144
PRACTICE WHAT YOU KNOW: The Price Elasticity of Supply 146
How Do the Price Elasticities of Demand and Supply Relate to Each Other? 146
x Contents
ECONOMICS FOR LIFE: Price Elasticity of Supply and Demand: Buying Your First Car 148
PRACTICE WHAT YOU KNOW: Elasticity: Trick or Treat Edition 149
Conclusion 149
ANSWERING THE BIG QUESTIONS 149
Concepts You Should Know 151Questions for Review 151Study Problems 151Solved Problems 153
5 ”2 ? L"* ‘r ' C ~ T 8 1^4
BIG QUESTIONS 156
What Are Consumer Surplus and Producer Surplus? 156
Consumer Surplus 157
Using Demand Curves to IllustrateConsumer Surplus 158
Producer Surplus 159
Using Supply Curves to Illustrate Producer Surplus 160
PRACTICE WHAT YOU KNOW: Consumer and Producer Surplus: Trendy Fashion 162
When Is a Market Efficient? 162
The Efficiency-Equity Debate 164
ECONOMICS IN THE MEDIA: Efficiency: Ac/am Ruins Everything: Why Gift Giving Makes No Economic Sense 165
PRACTICE WHAT YOU KNOW: Total Surplus:How Would Lower Consumer Income Affect Urban Outfitters? 166
Why Do Taxes Create Deadweight Loss in Otherwise Efficient Markets? 167
Tax Incidence 167
Deadweight Loss 170
ECONOMICS IN THE MEDIA: Is Soda Demand Elastic or Inelastic? Parks and Recreation: Soda Tax 171
ECONOMICS IN THE REAL WORLD: The Short- Lived Luxury Tax 177
Balancing Deadweight Loss and Tax Revenues 177
PRACTICE WHAT YOU KNOW: Deadweight Loss of Taxation: The Politics of Tax Rates 178
SNAPSHOT: Unusual Taxes 180
Conclusion 181
ECONOMICS FOR LIFE: Excise Taxes Are Almost Impossible to Avoid 182
ANSWERING THE BIG QUESTIONS 183
Concepts You Should Know 184Questions for Review 184Study Problems 184Solved Problems 187
188
BIG QUESTIONS 190
When Do Price Ceilings Matter? 190
Understanding Price Ceilings 190
The Effect of Price Ceilings 192
Price Ceilings in the Long Run 192
ECONOMICS IN THE MEDIA: Price Ceilings: Slumdog Millionaire 195
PRACTICE WHAT YOU KNOW: Price Ceilings: Ridesharing 196
What Effects Do Price Ceilings Have on Economic Activity? 196
Rent Control 196
Price Gouging 198
When Do Price Floors Matter? 199
PRACTICE WHAT YOU KNOW: Price Ceilings: Student Rental Apartments 200
Understanding Price Floors 201
The Effect of Price Floors 201
Price Floors in the Long Run 204
PRACTICE WHAT YOU KNOW: Price Floors: Fair-Trade Coffee 205
ECONOMICS IN THE MEDIA: UnintendedConsequences 206
Contents xi
What Effects Do Price Floors Have on Economic Activity? 206
The Minimum Wage 206
The Minimum Wage Is SometimesNonbinding 208
SNAPSHOT: Minimum Wage: Always the Same? 209
ECONOMICS IN THE REAL WORLD: Why Is Sugar Cheaper in Canada, When Canada Doesn’t Grow Sugarcane? 210
PRACTICE WHAT YOU KNOW: Price Ceilings and Price Floors: Would a Price Control on Internet Access Be Binding? 211
ECONOMICS FOR LIFE: Price Gouging: DisasterPreparedness 213
Conclusion 214ANSWERING THE BIG QUESTIONS 214
Concepts You Should Know 215Questions for Review 215Study Problems 215Solved Problems 217
BIG QUESTIONS 220
What Are Externalities, and How Do They Affect Markets? 220
The Third-Party Problem 221
ECONOMICS IN THE REAL WORLD: Express Lanes Use Dynamic Pricing to Ease Congestion 224
PRACTICE WHAT YOU KNOW: Externalities:Fracking 227
What Are Private Goods and PublicGoods? 227
Private Property 228
Private and Public Goods 230
ECONOMICS IN THE REAL WORLD: Group Work 232
PRACTICE WHAT YOU KNOW: Are Parks Public Goods? 234
What Are the Challenges of Providing Nonexcludable Goods? 235
Cost-Benefit Analysis 235
ECONOMICS IN THE REAL WORLD: Internet Piracy 236
Common Resources and the Tragedy of theCommons 236
Possible Solutions to the Tragedy of theCommons 238
ECONOMICS IN THE REAL WORLD: The Great Pacific Garbage Patch 239
PRACTICE WHAT YOU KNOW: CommonResources: Why Do Tailgaters Trash ParkingLots? 240
Conclusion 240
ECONOMICS IN THE MEDIA: Tragedy of the Commons: South Park and Water Parks 241
ECONOMICS FOR LIFE: Buying Used Can Be Good for Your Wallet and for the Environment 242
ANSWERING THE BIG QUESTIONS 243
Concepts You Should Know 244Questions for Review 244Study Problems 244Solved Problems 246
xil Contents
PAKT 0! The Theory of the Firm
BIG QUESTIONS 252
How Are Profits and Losses Calculated? 252
Calculating Profit and Loss 252
Explicit Costs and Implicit Costs 253
Accounting Profit versus Economic Profit 254
PRACTICE WHAT YOU KNOW: AccountingProfit versus Economic Profit: Calculating Summer Job Profits 256
How Much Should a Firm Produce? 256
ECONOMICS IN THE MEDIA: Keeping Costs Down: incredibles 2 257
The Production Function 257
Diminishing Marginal Product 260
What Costs Do Firms Consider in the Short Run and the Long Run? 261
PRACTICE WHAT YOU KNOW: DiminishingReturns; Snow Cone Production 261
Costs in the Short Run 262
ECONOMICS IN THE MEDIA: Costs in the Short Run: Ocean’s 8 267
Costs in the Long Run 268
ECONOMICS IN THE MEDIA: Economies ofScale: The Big Bang Theory: The Work Song Nanocluster 271
ECONOMICS IN THE REAL WORLD: Economies of Scale 272
PRACTICE WHAT YOU KNOW: Marginal Cost: The True Cost of Admission to UniversalStudios 272
Conclusion 273
ECONOMICS FOR LIFE: How Much Does It Cost toRaise a Child? 274
ANSWERING THE BIG QUESTIONS 275
Concepts You Should Know 276Questions for Review 276Study Problems 276Sofved Problems 279
BIG QUESTIONS 282
How Do Competitive Markets Work? 282
ECONOMICS IN THE REAL WORLD: Aalsmeer Flower Auction 284
How Do Firms Maximize Profits? 285
PRACTICE WHAT YOU KNOW: Price Takers: Mall Food Courts 285
ECONOMICS IN THE MEDIA: Competitive Markets: The Simpsons: Mr. Plow 286
The Profit-Maximizing Rule 286
Deciding How Much to Produce in a Competitive Market 288
The Firm in the Short Run 290
SNAPSHOT: Sunk Costs: If You Build It, They Will Come 292
The Firm’s Short-Run Supply Curve 293
Sunk Costs 293
The Firm’s Long-Run Supply Curve 294
PRACTICE WHAT YOU KNOW: The Profit-Maximizing Rule: Show Me the Money! 295
Contents xi
ECONOMICS IN THE REAL WORLD: Toys “R” Us, Changes in Technology, and the Dynamic Nature of Change 296
What Does the Supply Curve Look Like in Perfectly Competitive Markets? 297
The Short-Run Market Supply Curve 297
The Long-Run Market Supply Curve 297
How the Market Adjusts in the Long Run: An Example 300
ECONOMICS IN THE MEDIA: Entry and Exit: / Love Lucy 304
PRACTICE WHAT YOU KNOW: Long-Run Profits: How Much Can a Firm Expect to Make? 305
Conclusion 305ECONOMICS FOR LIFE: Tips from the Sharks for Becoming a Millionaire 306
ANSWERING THE BIG QUESTIONS 307
Concepts You Shou/d Know 308Questions for Review 308Study Probfems 308Sofved Problems 311
BiG QUESTIONS 314
How Are Monopolies Created? 314
Natural Barriers 315
Government-Created Barriers 316
ECONOMICS IN THE REAL WORLD: Pfizer’s Lipitor 317
ECONOMICS IN THE MEDIA: Characteristics of Monopoly: The Office: Princess Unicorn 318
How Much Do Monopolies Charge, and How Much Do They Produce? 318
PRACTICE WHAT YOU KNOW: Monopoly: Can You Spot the Monopolist? 319
ECONOMICS IN THE MEDIA: Barriers to Entry: Forrest Gump 320
The Profit-Maximizing Rule for the Monopolist 321
ECONOMICS IN THE REAL WORLD: TheBroadband Monopoly 325
PRACTICE WHAT YOU KNOW: Monopoly Profits: How Much Do Monopolists Make? 326
What Are the Problems with, and Solutions for, Monopoly? 326
The Problems with Monopoly 326
Solutions to the Problems of Monopoly 329
PRACTICE WHAT YOU KNOW: Problems with Monopoly: Coffee Consolidation 330
ECONOMICS IN THE MEDIA: Monopoly Power: Breaking Bad 331
Conclusion 334
ECONOMICS FOR LIFE: Playing Monopoly like an Economist 335
ANSWERING THE BIG QUESTIONS 336
Concepts You Should Know 338Questions for Review 338Study Problems 338Solved Problems 340
BIG QUESTIONS 344
What Is Price Discrimination? 344
Conditions for Price Discrimination 345
One Price versus Price Discrimination 345
ECONOMICS IN THE MEDIA: Perfect Price Discrimination: Legally Blonde 348
The Welfare Effects of Price Discrimination 349
ECONOMICS IN THE REAL WORLD: Santa Fe, New Mexico: Using Negative Incentives as Price Discrimination 350
ECONOMICS IN THE REAL WORLD: OutletMalls—If You Build It, They Will Come 352
PRACTICE WHAT YOU KNOW: Price Discrimination: Taking Economics to New Heights 353
How Is Price Discrimination Practiced? 355
Price Discrimination at the Movies 355
xiv Contents
Price Discrimination on Campus 356
SNAPSHOT: Now Playing: Economies! 358
PRACTICE WHAT YOU KNOW: Price Discrimination in Practice: Everyday Examples 359
ECONOMICS IN THE MEDIA: Price Discrimination:Jurassic Park 360
Conclusion 360ECONOMICS FOR LIFE: Gender-Based PriceDiscrimination 361
ANSWERING THE BIG QUESTIONS 362
Concepts You Should Know 363Questions for Review 363Study Problems 363Solved Problems 364
BIG QUESTIONS 368
What Is Monopolistic Competition? 368Product Differentiation 369
PRACTICE WHAT YOU KNOW: ProductDifferentiation: Would You Recognize a Monopolistic Competitor? 370
What Are the Differences among Monopolistic Competition, Competitive Markets, and Monopoly? 371
Monopolistic Competition in the Short Run and the Long Run 371
Monopolistic Competition and CompetitiveMarkets 374
Monopolistic Competition, Inefficiency, and Social Welfare 376
ECONOMICS IN THE MEDIA: ProductDifferentiation: Superior Donuts 378
PRACTICE WHAT YOU KNOW: Markup: Punch Pizza versus Pizza Hut 379
Why Is Advertising Prevalent in MonopolisticCompetition? 379
Why Firms Advertise 380
Advertising in Different Markets 380
ECONOMICS IN THE MEDIA: Advertising: Mad Men 383
SNAPSHOT: Advertising and the Super Bowl 384
ECONOMICS IN THE REAL WORLD: WhatHappened to Sears? 385
The Negative Effects of Advertising 385
PRACTICE WHAT YOU KNOW: Advertising: Brands versus Generics 387
ECONOMICS IN THE REAL WORLD: The Federal Trade Commission versus 1-800 Contacts 389
ECONOMICS FOR LIFE: Product Differentiation: Would You Buy a Franchise? 390
Conclusion 391
ANSWERING THE BIG QUESTIONS 391
Concepts You Should Know 393Questions for Review 393Study Problems 393Solved Problems 394
396
BÎG QUESTIONS 398
What Is Oligopoly? 398
Measuring the Concentration of Industries 399
Collusion and Cartels in a Simple Duopoly Example 400
ECONOMICS IN THE REAL WORLD: OPEC: An International Cartel 403
Oligopoly with More Than Two Firms 403
PRACTICE WHAT YOU KNOW: Oligopoly: Can You Recognize the Oligopolist? 404
How Does Game Theory Explain Strategic Behavior? 405
Strategic Behavior and the Dominant Strategy 406
Duopoly and the Prisoner’s Dilemma 407
xvContents
ECONOMICS IN THE MEDIA: Nash Equilibrium: A Brilliant Madness and A Beautiful Mind 408
Advertising and Game Theory 409
ECONOMICS IN THE MEDIA: Prisoner’s Dilemma: Why Do Superheroes Fight? 410
ECONOMICS IN THE REAL WORLD: The Cold War 411
SNAPSHOT: Airlines in the Prisoner’s Dilemma 412
Escaping the Prisoner’s Dilemma in theLong Run 413
ECONOMICS IN THE MEDIA: The Long-Run Benefits of Cooperation: The Evolution of Trust 414
Sequential Games 415
A Caution about Game Theory 415
ECONOMICS IN THE MEDIA: Sequential Games:Why Did Rachel Let Eleanor Win a Game of Mahjong? 417
How Do Government Policies Affect Oligopoly Behavior? 419
Antitrust Policy 419
PRACTICE WHAT YOU KNOW: Dominant Strategy: To Advertise or Not—That Is the Question! 420
Predatory Pricing 422
PRACTICE WHAT YOU KNOW: Predatory Pricing: Price Wars 422
What Are Network Externalities? 423
PRACTICE WHAT YOU KNOW: Examples of Network Externalities 424
ECONOMICS IN THE REAL WORLD: New York City Taxis 425
Conclusion 425
ECONOMICS FOR LIFE: How Oligopolies Shape Our Lives as Consumers 426
ANSWERING THE BIG QUESTIONS 427
Concepts You Should Know 428Questions for Review 428Study Problems 428Solved Problems 431
u IV Labor Markets and Earnings
BIG QUESTIONS 436
What Are the Factors of Production? 437
PRACTICE WHAT YOU KNOW: Derived Demand: Tip Income 437
Where Does the Demand for LaborCome From? 438
The Marginal Product of Labor 438
Changes in the Demand for Labor 440
PRACTICE WHAT YOU KNOW: Value of the Marginal Product of Labor: Flower Barrettes 442
ECONOMICS IN THE MEDIA: Changes in the Demand for Labor: Wall*E 443
Where Does the Supply of LaborCome From? 443The Labor-Leisure Trade-Off 444
ECONOMICS IN THE REAL WORLD: TheLabor-Leisure Trade-Off 445
Changes in the Supply of Labor 446
xvi Contents
ECONOMICS IN THE REAL WORLD: Supply of Labor 448
What Are the Determinants of Demand and Supply in the Labor Market? 448
PRACTICE WHAT YOU KNOW: The LaborSupply Curve: What Would You Do with a Big Raise? 448
How Does the Market for Labor Reach Equilibrium? 449
ECONOMICS IN THE REAL WORLD: Where Are the Nurses? 450
Change and Equilibrium in the Labor Market 450
Outsourcing 452
ECONOMICS IN THE REAL WORLD: International Surrogacy 452
Monopsony 455
PRACTICE WHAT YOU KNOW: Changes in Labor Demand 456
What Role Do Land and Capital Play in Production? 456
The Market for Land 456
ECONOMICS IN THE MEDIA; Value of the Marginal Product of Labor: Moneyball 458
The Market for Capital 459
When to Use More Labor, Land, or Capital 460
SNAPSHOT: Outsourcing 461
ECONOMICS IN THE REAL WORLD: Skilled Work without the Worker 462
Conclusion 462
PRACTICE WHAT YOU KNOW: Bang for the Buck: When to Use More Capital or More Labor 463
ECONOMICS FOR LIFE: Will Your Future Job Be Automated? 464
ANSWERING THE BIG QUESTIONS 465
Concepts You Should Know 466Questions for Review 466Study Problems 466Solved Problems 468
15 income, Inequality, andPoverty 470
BIG QUESTIONS 472
What Are the Determinants of Wages? 472
The Nonmonetary Determinants of Wages 473
ECONOMICS IN THE REAL WORLD: Does Education Really Pay? 474
Wage Discrimination 477
PRACTICE WHAT YOU KNOW: Efficiency Wages: Which Company Pays an Efficiency Wage? 478
ECONOMICS IN THE REAL WORLD: The Effects of Beauty on Earnings 480
ECONOMICS IN THE REAL WORLD: WageInequality: What Uber Can Teach Us about the Gender Pay Gap 483
Winner-Take-All 484
What Causes Income Inequality? 485
Factors That Lead to Income Inequality 485
Measuring Income Inequality 487
Income Mobility 492
SNAPSHOT: Income Inequality around the World 493
ECONOMICS IN THE MEDIA: Income Mobility; The Simpsons: Examining all of Homer’s Jobs 494
PRACTICE WHAT YOU KNOW: Income Inequality: The Beginning and End of Inequality 495
ECONOMICS IN THE MEDIA: Income Inequality; Capital in the Twenty-First Century 496
How Do Economists Analyze Poverty? 497The Poverty Rate 497
Poverty Policy 498
ECONOMICS IN THE MEDIA: Poverty: The Hunger Games 500
Problems with Traditional Aid 501
ECONOMICS IN THE REAL WORLD: Muhammad Yunus and the Grameen Bank 501
PRACTICE WHAT YOU KNOW: Samaritan's Dilemma: Does Welfare Cause Unemployment? 502
Contents xvii
ECONOMICS FOR LIFE: It’s Expensive toBe Poor 503
Conclusion 504
THE biG QUESTIONS 504
Concepts You Should Know 506Questions for Review 506Study Problems 506Solved Problems 507
PW V Special Topics in Microeconomics
512
How Do Economists Model Consumer Satisfaction? 512ECONOMICS IN THE REAL WORLD: Happiness Index 513
SNAPSHOT: The OECD Better Life Index 514
Total Utility and Marginal Utility 515
Diminishing Marginal Utility 516
PRACTICE WHAT YOU KNOW: Diminishing Marginal Utility 516
How Do Consumers Optimize Their Purchasing Decisions? 518
Consumer Purchasing Decisions 518
Marginal Thinking with More Than Two Goods 520
Price Changes and the Consumer Optimum 521
ECONOMICS IN THE REAL WORLD: Would You Pay $149 for a Drink at Starbucks? 522
What Is the Diamond-Water Paradox? 522
PRACTICE WHAT YOU KNOW: ConsumerOptimum 523
Conclusion 524
ECONOMICS IN THE MEDIA: The Diamond-Water Paradox: Super Size Me 525
ECONOMICS FOR LIFE: Worth It 526
ANSWERING THE BIG QUESTIONS 527
Concepts You Should Know 528Questions for Review 528Study Problems 528Solved Problems 529
Appendix 16A: Indifference CurveAnalysis 530
Indifference Curves 530
Economic “Goods” and “Bads” 531
The Budget Constraint 532
Properties of Indifference Curves 533
Indifference Curves Are Typically Bowed Inward 533
Indifference Curves Cannot Be Thick 534
Indifference Curves Cannot Intersect 535
Extreme Preferences: Perfect Substitutes and Perfect Complements 536
Using Indifference Curves to Illustrate the Consumer Optimum 538
Using Indifference Curves to Illustrate the Real-Income and Substitution Effects 539
Separating the Substitution Effect from theReal-Income Effect 540
Conclusion 542
Concepts You Should Know 543Questions for Review 543
xviii Contents
Study Problems 543Solved Problem 543
3 -r-r-- 33-- ;
r ~’ £ '7 ‘ c1 ” 7?? ’ " j 544
BIG QUESTIONS 546
How Do Economists Explain Irrational Behavior? 546
Misperceptions of Probabilities 547
ECONOMICS IN THE MEDIA: Misperceptions of Probabilities: The Big Bang Theory: The Septum Deviation 549
ECONOMICS IN THE REAL WORLD: HowBehavioral Economics Helps to Explain Stock Price Volatility 550
PRACTICE WHAT YOU KNOW: Gambler’s Fallacy or Hot Hand Fallacy? Patterns on Exams 551
Inconsistencies in Decision-Making 552
ECONOMICS IN THE MEDIA: Framing: inside Out 553
ECONOMICS IN THE REAL WORLD: Are You an Organ Donor? 553
SNAPSHOT: Opt-Out Is Optimal 555
Judgments about Fairness 556
ECONOMICS IN THE REAL WORLD: Unfair Pay Matters to Capuchin Monkeys 557
What Is the Role of Risk in Decision- Making? 557
Preference Reversals 558
ECONOMICS IN THE MEDIA: Preference Reversals: “Mine” 559
Prospect Theory 560
PRACTICE WHAT YOU KNOW: Risk Aversion: Risk-Taking Behavior 561
ECONOMICS IN THE REAL WORLD: Why Are There Cold Openings at the Box Office? 562
ECONOMICS FOR LIFE: Bounded Rationality: How to Guard Yourself against Crime 563
Conclusion 564
ANSWERING THE BIG QUESTIONS 564
Concepts You Should Know 565Questions for Review 565Study Problems 565Solved Problems 566
IC’ 7’ Lc’l?. C'T 568
BIG QUESTIONS 570
What Are the Important Issues in the Healthcare Industry? 571
The History of U.S. Health Care 571
Healthcare Expenditures 572
Diminishing Returns 573
Who’s Who in Health Care, and How Does Insurance Work? 574
Medical Costs 577
PRACTICE WHAT YOU KNOW: Physical Fitness 577
How Does Asymmetric Information Affect Healthcare Delivery? 578
Adverse Selection 578
The Principal-Agent Problem 578
ECONOMICS IN THE MEDIA: Moral Hazard: “King-Size Homer” 579
Behavioral Dynamics in Healthcare Delivery 579
PRACTICE WHAT YOU KNOW: Asymmetric Information 580
How Do Demand and Supply Contribute to High Medical Costs? 581
Healthcare Demand 581
ECONOMICS IN THE MEDIA: Health Insurance: Superstore 582
Healthcare Supply 583
PRACTICE WHAT YOU KNOW: Demand for Health Care: How Would Universal Health Care Alter the Demand for Medical Care? 585
Contents xix
How Do Incentives Influence the Quality of Health Care? 586
Single-Payer versus Private Health Care 586
SNAPSHOT: Health: United States vs.Canada 587
ECONOMICS IN THE REAL WORLD: Healthcare Efficiency 588
The Human Organ Shortage 589
ECONOMICS IN THE REAL WORLD: Selling Ova to Pay for College 591
PRACTICE WHAT YOU KNOW: Human OrganShortage: Liver Transplants 591
ECONOMICS IN THE MEDIA: The Human OrganBlack Market: Law & Order: Special Victims Unit 592
Conclusion 592
ECONOMICS FOR LIFE: Obamacare: APrimer 593
iE BIG QUESTIONS 594
Concepts You Should Know 596Questions for Review 596Study Problems 596Solved Problems 597
[p’ÂEW V[ Macroeconomic Basics
a
BIG QuESTiOMS 602
How Is Macroeconomics Different from Microeconomics? 602
What Does GDP Tell Us about the Economy? 603
Production Equals Income 603
Three Uses of GDP Data 604
How Is GDP Computed? 609
PRACTICE WHAT YOU KNOW: Three Uses of GDP Data: GDP as an Economic Barometer 610
Counting Market Values 610
Including Goods and Services 611
Including Only Final Goods and Services 612
Within a Country 613
From a Particular Time Period 614
Looking at GDP as Different Types of Expenditures 614
Real GDP: Adjusting GDP for Price Changes 617
Growth Rates 619
What Are Some Shortcomings of GDP Data? 620ECONOMICS IN THE MEDIA: “GDP, OMGI”: The Indicator from Planet Money 621
Nonmarket Goods 621
PRACTICE WHAT YOU KNOW: Computing Real and Nominal GDP Growth: GDP Growth in Mexico 622
Underground Economy 623
ECONOMICS IN THE REAL WORLD: Sex, Drugs, and GDP in Europe 623
Quality of the Environment 625
SNAPSHOT: Looking at GDP in the United States 626
ECONOMICS IN THE MEDIA: The Underground Economy: Breaking Bad 628
xx Contents
Leisure Time 628
GDP and Happiness 629
Why Do Economists Continue to Rely on GDP Data? 630
PRACTICE WHAT YOU KNOW: Shortcomings of GDP Data: Use Caution in Interpreting GDP as an Economic Barometer 631
ECONOMICS FOR LIFE: Economic GrowthStatistics: Deciphering Data Reports 632
Conclusion 633
ANSWERING THE BIG QUESTIONS 633
Concepts You Should Know 634Questions for Review 634Study Problems 634Solved Problems 636
7" C . 638
BIG QUESTIONS 640
What Are the Major Reasons for Unemployment? 641
Structural Unemployment 642
ECONOMICS IN THE REAL WORLD: Most Americans Don’t Want Farmwork 644
ECONOMICS IN THE MEDIA: StructuralUnemployment: The Office 645
Frictional Unemployment 645
ECONOMICS IN THE REAL WORLD: Employment, Spanish Style 647
Cyclical Unemployment 648
The Natural Rate of Unemployment 649
What Can We Learn from the Employment Data? 650
PRACTICE WHAT YOU KNOW: Three Types of Unemployment: Which Type Is It? 651
The Unemployment Rate 651
Other Labor Market Indicators 655
SNAPSHOT: Unemployment and the LaborForce 658
PRACTICE WHAT YOU KNOW: Unemployment and Labor Force Participation Rates: Can You Compute the Rates? 660
Conclusion 660
ECONOMICS FOR LIFE: Finish Your Degree! 661
ANSWERING THE BIG QUESTIONS 662
Concepts You Should Know 663Questions for Review 663
663665
3 3 ~ ~ r Z " "
668
670
How Is Inflation Measured? 670
The Consumer Price Index (CPI) 671
ECONOMICS IN THE REAL WORLD: Sleuthing for Prices 674
Measuring Inflation Rates 675
ECONOMICS IN THE REAL WORLD: Prices Don’t All Move Together 676
Using the CPI to Compare Dollar Values over Time 677
SNAPSHOT: The Pieces of the CPI 678
ECONOMICS IN THE REAL WORLD: Which Movies Are Most Popular? 679
The Accuracy of the CPI 681
ECONOMICS IN THE MEDIA: Equating Dollar Values through Time: Austin Powers: international Man of Mystery 683
ECONOMICS IN THE REAL WORLD: The Billion Prices Project 685
PRACTICE WHAT YOU KNOW: Using the CPI to Equate Prices over Time: How Cheap Were the First Super Bowl Tickets? 686
What Problems Does Inflation Bring? 686
Shoe-Leather Costs 687
Money Illusion 687
Menu Costs 688
Study ProblemsSolved Problems
BIG QUESTIONS
Contents xxi
Price Confusion 690
Tax Distortions 691
695
Conclusion 696
698
700702
O
709Interest Rates as a Reward for Saving
710Interest Rates as a Cost of Borrowing
711How Inflation Affects Interest Rates
Income and Wealth 713
Time Preferences 714
Study ProblemsSolved Problems
The Reasons Why Governments Inflate the Money Supply
PRACTICE WHAT YOU KNOW: Interest Rates andQuantity Supplied and Demanded: U.S. Interest Rates Have Fallen 713
ECONOMICS IN THE MEDIA: Time Preferences:Confessions of a Shopaholic 718
X ‘P _
ECONOMICS FOR LIFE: Inflation Devalues Dollars: Preparing Your Future for Inflation 697
The Equation of Exchange 694
Future Price Level Uncertainty 689
What Is the Cause of Inflation? 693
What Factors Shift the Supply of Loanable Funds? 713
PRACTICE WHAT YOU KNOW: Problems withInflation: How Big Is Your Raise in Real Terms? 692
Consumption Smoothing 715
Wealth Redistribution 690
Concepts You Should Know 699Questions for Review 699
What Is the Loanable Funds Market? 706BIG QUESTIONS 706
NSWERING THE BIG QUESTION
ECONOMICS IN THE REAL WORLD: Do Americans Save Enough? 718
What Factors Shift the Demand for Loanable Funds? 719
PRACTICE WHAT YOU KNOW: Time Preferences: War in Syria 720
Productivity of Capital 720
Investor Confidence 721
Government Borrowing 721
PRACTICE WHAT YOU KNOW; Demand forLoanable Funds: SpongeBob and Loanable Funds 722
How Do We Apply the Loanable Funds Market Model? 723
Equilibrium 723
PRACTICE WHAT YOU KNOW: Working with the Loanable Funds Model: Foreign Savings in the United States 724
A Decrease in the Demand for Loanable Funds 725
A Decrease in the Supply of Loanable Funds 725
ECONOMICS FOR LIFE: Compound Interest: When Should You Start Saving for Retirement? 727
Conclusion 728
ANSWERING THE BIG QUESTIONS 728
Concepts You Should Know 729Questions for Review 729Study Problems 729Solved Problems 731
BIG QUESTIONS 734
How Do Financial Markets Help theEconomy? 734Direct and Indirect Financing 734
The Importance of Financial Markets 736
ECONOMICS IN THE REAL WORLD: Should We Bail out Big Banks? 736
xxii Contents
PRACTICE WHAT YOU KNOW: Direct versusIndirect Finance: Which Is It? 737
What Are the Key Financial Tools for the Macroeconomy? 737
Bonds 737
Stocks 742
Secondary Markets 743
ECONOMICS IN THE REAL WORLD: Stock MarketIndices: Dow Jones versus S&P 744
Treasury Securities 745
SNAPSHOT: The Dow Jones Industrial Average 746
Home Mortgages 748
Securitization 749
PRACTICE WHAT YOU KNOW: The Effects of Foreign Investment: What If We Limit Foreign Ownership of Our National Debt? 751
ECONOMICS IN THE MEDIA: Direct Finance: The Big Short 752
Conclusion 752
ECONOMICS FOR LIFE: Long-Run Returns for Stocks versus Bonds 753
ANSWERING THE BIG QUESTIONS 754
Concepts You Should Know 755Questions for Review 755Study Problems 755Solved Problems 757
PART VBI The Long and Short of Macroeconomics
BIG QUESTIONS 762
Why Does Economic Growth Matter? 762
Some Ugly Facts 763
Learning from the Past 764
ECONOMICS IN THE REAL WORLD: One ChildWho Needs Economic Progress 768
Measuring Economic Growth 768
ECONOMICS IN THE REAL WORLD: How Does 2% Growth Affect Average People? 772
PRACTICE WHAT YOU KNOW: ComputingEconomic Growth in Brazil 775
SNAPSHOT: Economic Growth, 1950-2016 776
ECONOMICS IN THE MEDIA: “The Magic Washing Machine” 778
How Do Resources and Technology Contribute to Economic Growth? 779
Resources 779
Technology 781
PRACTICE WHAT YOU KNOW: Resources: Growth Policy 782
What Institutions Foster EconomicGrowth? 784
Private Property Rights 784
Political Stability and the Rule of Law 785
ECONOMICS IN THE REAL WORLD: What Can Parking Violations Teach Us about International Institutions? 786
Competitive and Open Markets 787
Efficient Taxes 787
Stable Money and Prices 788
PRACTICE WHAT YOU KNOW: Institutions: Can You Guess This Country? 788
ECONOMICS FOR LIFE: Learning More and Helping Alleviate Global Poverty 789
Contents xxii
How Are Some Economists Testing New Ideas? 790
Conclusion 790
ANSWERING THE BIG QUESTIONS 791
Concepts You Should Know 792Questions for Review 792Study Problems 792Solved Problems 795
7 *7 5 2 ' r 795
BÎG QUESTIONS 798
How Do Macroeconomic Theories Evolve? 798
The Evolution of Growth Theory 799
What Is the Solow Growth Model? 800
A Nation’s Production Function 800
Diminishing Marginal Products 803
Implications of the Solow Model 806
PRACTICE WHAT YOU KNOW: Changes in Resources: Natural Disasters 808
How Does Technology Affect Growth? 810
Technology and the Production Function 810
Exogenous Technological Change 811
Policy Implications of the Solow Model 812
PRACTICE WHAT YOU KNOW: Technological Innovations: How Is the Production Function Affected? 813
ECONOMICS IN THE MEDIA: Technological Change: Modem Marvels 814
Why Are Institutions the Key to Economic Growth? 815The Role of Institutions 815
Institutions Determine Incentives 816
ECONOMICS IN THE REAL WORLD: Chile: A Modern Growth Miracle 819
PRACTICE WHAT YOU KNOW: Solow Growth Theory versus New Growth Theory: What Policy Is Implied? 821
ECONOMICS FOR LIFE: Institutions of Growth: Applying for a Patent 822
824826
I 828
838
What Is Aggregate Supply? 839
Long-Run Aggregate Supply 841
Short-Run Aggregate Supply 843
Study ProblemsSolved Problems
Adjustments to Shifts in Long-Run AggregateSupply 852
Adjustments to Shifts in Short-Run AggregateSupply 853
ECONOMICS IN THE MEDIA: Changes in Wealth: Dumb and Dumber 837
ECONOMICS IN THE REAL WORLD: The Drought of 2012 Led to Many Higher Prices 854
PRACTICE WHAT YOU KNOW: Aggregate Demand: Shifts in Aggregate Demand versus Movements along the Aggregate Demand Curve
How Does the Aggregate Demand-AggregateSupply Model Help Us Understand theEconomy? 850
PRACTICE WHAT YOU KNOW: Long-RunAggregate Supply and Short-Run Aggregate Supply:Which Curve Shifts? 849
Equilibrium in the Aggregate Demand-AggregateSupply Model 850
What Is the Aggregate Demand-Aggregate Supply Model? 830
SNAPSHOT: The Business Cycle 844
The Slope of the Aggregate Demand Curve 833
What Is Aggregate Demand? 832
Shifts in Aggregate Demand 836
Conclusion 822
Concepts You Should Know 824Questions for Review 824
xxiv Contents
Adjustments to Shifts in Aggregate Demand 855
PRACTICE WHAT YOU KNOW: Using theAggregate Demand-Aggregate Supply Model: The Japanese Earthquake and Tsunami of 2011 857
Conclusion 858
ANSWERING THE BIG QUESTIONS 858
Concepts You Should Know 860Questions for Review 860Study Problems 860Solved Problems 862
and t ae 3 abate over Hoi to i ïana^e Them 864
BIG QUESTIONS 866
Why Do Recessions Occur? 866
Declines in Aggregate Demand 866
Declines in Aggregate Supply 868
What Happened during the Great Recession and the Great Depression? 870
The Great Recession 870
PRACTICE WHAT YOU KNOW: The Great Recession: What Made It “Great”? 875
The Great Depression 876
ECONOMICS IN THE REAL WORLD: Understanding the Great Depression in Today’s Context 880
What Are the Big Disagreements inMacroeconomics? 881
Classical Economics 881
Keynesian Economics 882
PRACTICE WHAT YOU KNOW: The Big Debates:Guess Which View 884
ECONOMICS IN THE MEDIA: The Big Disagreements in Macroeconomics: “Fear the Boom and theBust” 885
Conclusion 886
ANSWERING THE BIG QUESTIONS 886
Concepts You Should Know 887Questions for Review 887Study Problems 887Solved Problem 888
Appendix 27A: The Aggregate Expenditures Model 889
The Components of AggregateExpenditures 889
Consumption 889
Investment 891
An Economy without Government Spending or Net Exports 893
Equilibrium without Government Spending orNet Exports 894
Aggregate Expenditures with Government Spending and Net Exports 896
PRACTICE WHAT YOU KNOW: Spending and Equilibrium in a Small Economy 899
What Are the Implications of the AE Model? 8991. Spending Determines Equilibrium Output and Income in the Economy 899
2. Equilibrium Can Occur Away from FullEmployment 901
3. The Spending Multiplier 902
Conclusion 903
Concepts You Should Know 904Questions for Review 904Study Problem 904Solved Problem 905
Contents XXV
mmr Wl Fiscal Policy
28 feeler ai Ihifgetsî TheTools of fiscal Policy sos
B!G C3UE3TÎONS 910
How Does the Government Spend? 910
Government Outlays 910
Social Security and Medicare 913
PRACTICE WHAT YOU KNOW: Mandatory versus Discretionary Spending 914
ECONOMICS IN THE REAL WORLD: Are There Simple Fixes to the Social Security and Medicare Funding Problems? 916
Spending and Current Fiscal Issues 917
How Does the Government Tax? 918
Sources of Tax Revenue 918
Taxes on Workers’ Wages 919
Historical Income Tax Rates 921
PRACTICE WHAT YOU KNOW: Government Revenue: Federal Taxes 922
How Are Taxes Distributed across Income Levels in the United States? 923
What Are Budget Deficits? 924
Deficits 924
Deficits versus Debt 926
ECONOMICS IN THE REAL WORLD: The Tax Cuts and Jobs Act of 2017 928
Foreign Ownership of U.S. Federal Debt 929
PRACTICE WHAT YOU KNOW: Federal Budgets: The U.S. Debt Crisis 930
Conclusion 931
ECONOMICS FOR LIFE: Budgeting for Your Take-Home Pay 932
ANSWERING THE BIG QUESTIONS 933
Concepts You Shou/d Know 934Questions for Review 934Study Problems 935Solved Problems 935
936
BIG QUESTîONS 938
What Is Fiscal Policy? 938
Expansionary Fiscal Policy 939
Contractionary Fiscal Policy 943
Multipliers 945
ECONOMICS IN THE MEDIA: Spending Multiplier: Pay It Forward 948
PRACTICE WHAT YOU KNOW: Expansionary Fiscal Policy: Shovel-Ready Projects 949
What Are the Shortcomings of Fiscal Policy? 949
Time Lags 950
ECONOMICS IN THE REAL WORLD: Recognizing Lags 951
Crowding-Out 952
ECONOMICS IN THE REAL WORLD: Did Government Spending Really Surge in 2009? 953
Savings Shifts 954
PRACTICE WHAT YOU KNOW: Crowding-Out: Does Fiscal Policy Lead to More Aggregate Demand? 954
What Is Supply-Side Fiscal Policy? 956
The Supply-Side Perspective 956
Marginal Income Tax Rates 958
xxvi Contents
PRACTICE WHAT YOU KNOW: Supply Side versus Demand Side: The Bush Tax Cuts 960
ECONOMICS FOR LIFE: Planning for Your Future Taxes 961
Conclusion 961
ANSWERING THE BIG QUESTIONS 962
Concepts You Should Know 963Questions for Review 963Study Problems 963Solved Problems 965
PART 5X Monetary Policy
BIG QUESTIONS 970
What Is Money? 970
Three Functions of Money 970
ECONOMICS IN THE REAL WORLD: The Evolution of Prison Money 973
Measuring the Quantity of Money 973
ECONOMICS IN THE REAL WORLD:Cryptocurrency Is Money, Too 975
PRACTICE WHAT YOU KNOW: The Definition of Money 976
How Do Banks Create Money? 977
The Business of Banking 977
ECONOMICS IN THE REAL WORLD: Twenty-First- Century Bank Run 981
How Banks Create Money 982
How Does the Federal Reserve Control the Money Supply? 985
The Many Jobs of the Federal Reserve 985
PRACTICE WHAT YOU KNOW: Fractional Reserve Banking: The B-Money Bank 985
ECONOMICS IN THE MEDIA: Moral Hazard: Wall Street: Money Never Sleeps 988
Monetary Policy Tools 988
PRACTICE WHAT YOU KNOW: Federal Reserve Terminology 989
ECONOMICS IN THE REAL WORLD: ExcessReserves Climbed in the Wake of the Great Recession 993
SNAPSHOT: Show Me the Money! 994
Conclusion 995
ANSWERING THE BIG QUESTIONS 996
Concepts You Should Know 997Questions for Review 997Study Problems 997Solved Problems 999
QI T/t ß *OJL X . J ' X. 'Uuu
BIG QUESTIONS 1002
What Is the Effect of Monetary Policy in the Short Run? 1002
An Overview of Monetary Policy in the Short Run 1002
Expansionary Monetary Policy 1003
ECONOMICS IN THE REAL WORLD: Monetary Policy Responses to the Great Recession 1005
Contractionary Monetary Policy 1008
Contents xxvii
ECONOMICS IN THE REAL WORLD: Monetary Policy’s Contribution to the Great Depression 1009
PRACTICE WHAT YOU KNOW: Expansionary versus Contractionary Monetary Policy: Monetary Policy in the Short Run 1010
Why Doesn’t Monetary Policy AlwaysWork? 1011
Long-Run Adjustments 1011
Adjustments in Expectations 1013
Aggregate Supply Shifts and the GreatRecession 1014
PRACTICE WHAT YOU KNOW: MonetaryPolicy Isn’t Always Effective: Why Couldn’tMonetary Policy Pull Us out of the Great Recession? 1015
What Is the Phillips Curve? 1016The Traditional Short-Run Phillips Curve 1016
The Long-Run Phillips Curve 1018
Expectations and the Phillips Curve 1019
A Modern View of the Phillips Curve 1021
Implications for Monetary Policy 1023
ECONOMICS IN THE MEDIA: Expectations: The Invention of Lying 1024
ECONOMICS IN THE REAL WORLD: Federal Reserve Press Conferences 1025
SNAPSHOT: Inflation and Unemployment: Is There a Phillips Curve? 1026
PRACTICE WHAT YOU KNOW: Monetary Policy:Expectations 1027
Conclusion 1027
ECONOMICS FOR LIFE: How to Protect Yourself from Inflation 1028
ANSWERING THE BIG QUESTIONS 1029
Concepts You Should Know 1030Questions for Review 1030Study Problems 1030Solved Problems 1033
PARî il X International Economics
Is Globalization for Real? 1038
Growth in World Trade 1039
ECONOMICS IN THE REAL WORLD: Nicaragua Is Focused on Trade 1040
Trends in U.S. Trade 1040
Major Trading Partners of the United States 1042
PRACTICE WHAT YOU KNOW: Trade in Goods and Services: Deficit or Surplus? 1043
How Does International Trade Help theEconomy? 1044
Comparative Advantage 1044
Other Advantages of Trade 1047
PRACTICE WHAT YOU KNOW: OpportunityCost and Comparative Advantage: Determining Comparative Advantage 1048
What Are the Effects of Tariffs andQuotas? 1050
Tariffs 1050
SNAPSHOT: Major U.S. Trade Partners, 2018 1052
ECONOMICS IN THE MEDIA: Tariffs: A Parody:Remy: “Banana” (Free-Trade “Havana” Parody) 1054
xxviii Contents
ECONOMICS IN THE REAL WORLD: U.S-China Trade War 1054
Quotas 1055
ECONOMICS IN THE REAL WORLD: Inexpensive Shoes Face the Highest Tariffs 1056
Reasons Given for Trade Barriers 1057
ECONOMICS IN THE MEDIA: Free Trade: Star Wars Episode I: The Phantom Menace 1058
PRACTICE WHAT YOU KNOW: Tariffs and Quotas: The Winners and Losers from Trade Barriers 1059
ECONOMICS FOR LIFE: The Impact of Tariffs on Domestic Prices 1060
Conclusion 1061
ANSWERING THE BIG QUESTIONS 1061
Concepts You Shou/d Know 1062Questions for Review 1062Study Probiems 1062Solved Problems 1063
r .6 1064
BIG QUESTIONS 1066
Why Do Exchange Rates Rise and Fall? 1066
Characteristics of Foreign Exchange Markets 1067
The Demand for Foreign Currency 1070
The Supply of Foreign Currency 1071
Applying Our Model of Exchange Rates 1071
ECONOMICS IN THE REAL WORLD: Chinese Export Growth Slows 1077
PRACTICE WHAT YOU KNOW: The Bahamian Dollar Is Pegged to the U.S. Dollar 1077
What Is Purchasing Power Parity? 1078
The Law of One Price 1078
Purchasing Power Parity and Exchange Rates 1080
ECONOMICS IN THE MEDIA: Impossible Exchange Rates: EuroTrip 1081
ECONOMICS IN THE REAL WORLD: The Big Mac Index 1081
Why PPP Does Not Hold Perfectly 1082
PRACTICE WHAT YOU KNOW: The Law of One Price: What Should the Price Be? 1083
What Causes Trade Deficits? 1084
Balance of Payments 1084
PRACTICE WHAT YOU KNOW: Current Account versus Capital Account Entries 1089
The Causes of Trade Deficits 1089
Conclusion 1092
ANSWERING THE BIG QUESTIONS 1093
Concepts You Should Know 1094Questions for Review 1094Study Problems 1094Solved Problems 1095
Glossary A-1
Credits A-11
Index A-17
Contents xxix