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Page 1: PART - GBV
Page 2: PART - GBV

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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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