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Table of Contents

Contents

Prelude: Celebrating the 10^th Edition

Preface

Media and Resources

Part I Introduction

Chapter 1 The Science of Macroeconomics

1. What Macroeconomist Study

Case Study The Historical Performance of the U.S. Economy

2. How Economist Think

Theory as Model Building

FYI Using Functions to Express Relationships Among Variables

The Use of Multiple Models

Prices: Flexible Versus Sticky

Microeconomic Thinking and Macroeconomic Models

FYI The Early Lives of Macroeconomists

3. How this Book Proceeds

Chapter 2

The Data of Macroeconomics

2-1 Measuring the Value of Economic Activity: Gross Domestic Product

Income, Expenditure, and the Circular Flow

FYI Stocks and Flows

Rules for Computing GDP

Real GDP Versus Nominal GDP

The GDP Deflator

Chain-Weighted Measures of Real GDP

FYI Two Helpful Hints for Working with Percentage Changes

The Components of Expenditure

FYI What is Investment?

Case Study GDP and Its Components

Other Measures of Income

Seasonal Adjustment

2-2 Measuring the Cost of Living: The Consumer Price Index

The Price of a Basket of Goods

How the CPI Compares to the GDP and PCE Deflators

Does the CPI Overstate Inflation?

2-3 Measuring Joblessness: The Unemployment Rate

The Household Survey

Case Study Men, Women, and Labor-Force Participation

The Establishment Survey

2-4 Conclusion: From Economic Statistics to Economic Models

Part II Classical Theory: The Economy in the Long Run

Chapter 3 National Income: Where it Comes From and Where It Goes

3-1 What Determines the Total Production of Goods and Services?

The Factors of Production

The Production Function

The Supply of Goods and Services

3-2 How Is National Income Distributed to the Factors of Production?

Factor Prices

The Decisions Facing a Competitive Firm

The Firm’s Demand for Factors

The Division of National Income

Case Study The Black Death and Factor Prices

　The Cobb–Douglas Production Function

Case Study Labor Productivity as the Key Determinant of Real Wages

FYI The Growing Gap Between Rich and Poor

3-3 What Determines the Demand for Goods and Services?

Consumption

Investment

FYI The Many Different Interest Rates

Government Purchases

3-4 What Brings the Supply and Demand for Goods and Services into Equilibrium?

Equilibrium in the Market for Goods and Services: The Supply and Demand for the Economy’s Output

Equilibrium in the Financial Markets: The Supply and Demand for Loanable Funds

Changes in Saving: The Effects of Fiscal Policy

Changes in Investment Demand

3-5 Conclusion

Chapter 4 The Monetary System: What It Is and How It Works

4-1 What Is Money?

The Functions of Money

The Types of Money

Case Study Money in a POW Camp

The Development of Fiat Money

Case Study Money and Social Conventions on the Island of Yap

FYI Bitcoin: The Strange Case of Digital Money

How the Quantity of Money Is Controlled

How the Quantity of Money Is Measured

FYI How Do Credit Cards and Debit Cards Fit into the Monetary System?

4-2 The Role of Banks in the Monetary System

100-Percent-Reserve Banking

Fractional-Reserve Banking

Bank Capital, Leverage, and Capital Requirements

4-3 How Central Banks Influence the Money Supply

A Model of the Money Supply

The Instruments of Monetary Policy

Case Study Quantitative Easing and the Exploding Monetary Base

Problems in Monetary Control

Case Study Bank Failures and the Money Supply in the 1930s

4-4 Conclusion

Chapter 5 Inflation: Its Causes, Effects, and Social Costs

5-1 The Quantity Theory of Money

Transactions and the Quantity Equation

From Transactions to Income

The Money Demand Function and the Quantity Equation

The Assumption of Constant Velocity

Money, Prices, and Inflation

Case Study Inflation and Money Growth

5-2 Seigniorage: The Revenue from Printing Money

Case Study Paying for the American Revolution

5-3 Inflation and Interest Rates

Two Interest Rates: Real and Nominal

The Fisher Effect

Case Study Inflation and Nominal Interest Rates

Two Real Interest Rates: Ex Ante and Ex Post

5-4 The Nominal Interest Rate and the Demand for Money

The Cost of Holding Money

Future Money and Current Prices

5-5 The Social Costs of Inflation

The Layman’s View and the Classical Response

Case Study What Economists and the Public Say About Inflation

The Costs of Expected Inflation

The Costs of Unexpected Inflation

Case Study The Free Silver Movement, the Election of 1896, and The Wizard of Oz

One Benefit of Inflation

5-6 Hyperinflation

The Costs of Hyperinflation

The Causes of Hyperinflation

Case Study Hyperinflation in Interwar Germany

Case Study Hyperinflation in Zimbabwe

5-7 Conclusion: The Classical Dichotomy

Chapter 6 The Open Economy

6-1 The International Flows of Capital and Goods

The Role of Net Exports

International Capital Flows and the Trade Balance

International Flows of Goods and Capital: An Example

The Irrelevance of Bilateral Trade Balances

6-2 Saving and Investment in a Small Open Economy

Capital Mobility and the World Interest Rate

Why Assume a Small Open Economy?

The Model

How Policies Influence the Trade Balance

Evaluating Economic Policy

Case Study The U.S. Trade Deficit

Case Study Why Doesn’t Capital Flow to Poor Countries?

6-3 Exchange Rates

Nominal and Real Exchange Rates

The Real Exchange Rate and the Trade Balance

The Determinants of the Real Exchange Rate

How Policies Influence the Real Exchange Rate

The Effects of Trade Policies

The Determinants of the Nominal Exchange Rate

Case Study Inflation and Nominal Exchange Rates

The Special Case of Purchasing-Power Parity

Case Study The Big Mac Around the World

6-4 Conclusion: The United States as a Large Open Economy

Appendix: The Large Open Economy

Chapter 7 Unemployment and the Labor Market

7-1 Job Loss, Job Finding, and the Natural Rate of Unemployment

7-2 Job Search and Frictional Unemployment

Causes of Frictional Unemployment

Public Policy and Frictional Unemployment

Case Study Unemployment Insurance and the Rate of Job Finding

7-3 Real-Wage Rigidity and Structural Unemployment

Minimum-Wage Laws

Unions and Collective Bargaining

Efficiency Wages

Case Study Henry Ford’s $5 Workday

7-4 Labor-Market　Experience: The United States

The Duration of Unemployment

Case Study The Increase in U.S. Long-Term Unemployment and the Debate Over Unemployment Insurance

Variation in the Unemployment Rate Across Demographic Groups

Transitions Into and Out of the Labor Force

Case Study The Decline in Labor-Force Participation: 2007 to 2017

7-5 Labor-Market Experience: Europe

The Rise in European Unemployment

Unemployment Variation Within Europe

The Rise of European Leisure

7-6 Conclusion

Part III Growth Theory: The Economy in the Very Long Run

Chapter 8 Economic Growth I: Capital Accumulation and Population Growth

8-1 The Accumulation of Capital

The Supply and Demand for Goods

Growth in the Capital Stock and the Steady State

Approaching the Steady State: A Numerical Example

Case Study The Miracle of Japanese and German Growth

How Saving Affects Growth

8-2 The Golden Rule Level of Capital

Comparing Steady States

Finding the Golden Rule Steady State: A Numerical Example

The Transition to the Golden Rule Steady State

8-3 Population Growth

The Steady State With Population Growth

The Effects of Population Growth

Case Study Investment and Population Growth Around the World

Alternative Perspectives on Population Growth

8-4 Conclusion

Chapter 9 Economic Growth II:　Technology, Empirics, and Policy

9-1 Technological Progress in the Solow Model

The Efficiency of Labor

The Steady State With　Technological Progress

The Effects of　Technological Progress

9-2 From Growth Theory to Growth Empirics

Balanced Growth

Convergence

Factor Accumulation Versus Production Efficiency

Case Study Good Management as a Source of Productivity

9-3 Policies to Promote Growth

Evaluating the Rate of Saving

Changing the Rate of Saving

Allocating the Economy’s Investment

Case Study Industrial Policy in Practice

Establishing the Right Institutions

Case Study The Colonial Origins of Modern Institutions

Supporting a Pro-growth Culture

Encouraging　Technological Progress

Case Study Is Free Trade Good for Economic Growth?

9-4 Beyond the Solow Model: Endogenous Growth Theory

The Basic Model

A Two-Sector Model

The Microeconomics of Research and Development

The Process of Creative Destruction

9-5 Conclusion

Appendix: Accounting for the Sources of Economic Growth

Part IV Business Cycle Theory: The Economy in the Short Run

Chapter 10 Introduction to Economic Fluctuations

10-1 The Facts About the Business Cycle

GDP and Its Components

Unemployment and Okun’s Law

Leading Economic Indicators

10-2 Time Horizons in Macroeconomics

How the Short Run and the Long Run Differ

Case Study If You Want to Know Why Firms Have Sticky Prices, Ask Them

The Model of Aggregate Supply and Aggregate Demand

10-3 Aggregate Demand

The Quantity Equation as Aggregate Demand

Why the Aggregate Demand Curve Slopes Downward

Shifts in the Aggregate Demand Curve

10-4 Aggregate Supply

The Long Run: The Vertical Aggregate Supply Curve

The Short Run: The Horizontal Aggregate Supply Curve

From the Short Run to the Long Run

Case Study A Monetary Lesson from French History

10-5 Stabilization Policy

Shocks to Aggregate Demand

Shocks to Aggregate Supply

Case Study How OPEC Helped Cause Stagflation in the 1970s and Euphoria in the 1980s

10-6 Conclusion

Chapter 11 Aggregate Demand I: Building the IS–LM Model

11-1 The Goods Market and the IS Curve

The Keynesian Cross

Case Study Cutting Taxes to Stimulate the Economy: The Kennedy and Bush Tax Cuts

Case Study Increasing Government Purchases to Stimulate the Economy: The Obama Stimulus

Case Study Using Regional Data to Estimate Multipliers

The Interest Rate, Investment, and the IS Curve

How Fiscal Policy Shifts the　IS　Curve

11-2 The Money Market and the　LM　Curve

The Theory of Liquidity Preference

Case Study Does a Monetary Tightening Raise or Lower Interest Rates?

Income, Money Demand, and the　LM　Curve

How Monetary Policy Shifts the　LM　Curve

11-3 Conclusion: The Short-Run Equilibrium

Chapter 12 Aggregate Demand II: Applying the　IS–LM　Model

12-1 Explaining Fluctuations With the IS–LM　Model

How Fiscal Policy Shifts the　IS　Curve and Changes the Short-Run Equilibrium

How Monetary Policy Shifts the　LM　Curve and Changes the Short-Run Equilibrium

The Interaction Between Monetary and Fiscal Policy

Shocks in the　IS–LM　Model

Case Study The U.S. Recession of 2001

What Is the Fed’s Policy Instrument—The Money Supply or the Interest Rate?

12-2 IS–LM　as a Theory of Aggregate Demand

From the　IS–LM　Model to the Aggregate Demand Curve

The　IS–LM　Model in the Short Run and Long Run

12-3 The Great Depression

The Spending Hypothesis: Shocks to the　IS　Curve

The Money Hypothesis: A Shock to the　LM　Curve

The Money Hypothesis Again: The Effects of Falling Prices

Could the Depression Happen Again?

Case Study The Financial Crisis and Great Recession of 2008 and 2009

The Liquidity Trap (Also Known as the Zero Lower Bound)

FYI The Curious Case of Negative Interest Rates

12-4 Conclusion

Chapter 13 The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime

13-1 The Mundell–Fleming Model

The Key Assumption: Small Open Economy with Perfect Capital Mobility

The Goods Market and the　IS* Curve

The Money Market and the　LM* Curve

Putting the Pieces　Together

13-2 The Small Open Economy under Floating Exchange Rates

Fiscal Policy

Monetary Policy

Trade Policy

13-1 The Small Open Economy under Fixed Exchange Rates

How a Fixed-Exchange-Rate System Works

Case Study The International Gold Standard

Fiscal Policy

Monetary Policy

Case Study Devaluation and the Recovery from the Great Depression

Trade Policy

Policy in the Mundell–Fleming Model: A Summary

13-4 Interest Rate Differentials

Country Risk and Exchange-Rate Expectations

Differentials in the Mundell–Fleming Model

Case Study International Financial Crisis: Mexico 1994–1995

Case Study International Financial Crisis: Asia 1997–1998

13-5 Should Exchange Rates Be Floating or Fixed?

Pros and Cons of Different Exchange-Rate Systems

Case Study The Debate Over the Euro

Speculative Attacks, Currency Boards, and Dollarization

The Impossible Trinity

Case Study The Chinese Currency Controversy

　13-6 From the Short Run to the Long Run:The Mundell–Fleming Model With a Changing Price Level

13-7 A Concluding Reminder

Appendix: A Short-Run Model of the Large Open Economy

Chapter 14 Aggregate Supply and the Short-Run　Tradeoff Between Inflation and Unemployment

14-1 The Basic Theory of Aggregate Supply

The Sticky-Price Model

An Alternative Theory: The Imperfect-Information Model

Case Study International Differences in the Aggregate Supply Curve

Implications

14-2　Inflation,　Unemployment, and the Phillips Curve

Deriving the Phillips Curve from the Aggregate Supply Curve

FYI The History of the Modern Phillips Curve

Adaptive Expectations and Inflation Inertia

Two Causes of Rising and Falling Inflation

Case Study Inflation and Unemployment in the United States

The Short-Run Tradeoff between Inflation and Unemployment

FYI How Precise Are Estimates of the Natural Rate of Unemployment?

Disinflation and the Sacrifice Ratio

Rational Expectations and the Possibility of Painless Disinflation

Case Study The Sacrifice Ratio in Practice

Hysteresis and the Challenge to the Natural-Rate Hypothesis

14-3 Conclusion

Appendix: The Mother of All Models

Part V Topics in Macroeconomic Theory and Policy

Chapter 15 A Dynamic Model of Economic Fluctuations

15-1　Elements of the Model

Output: The Demand for Goods and Services

The Real Interest Rate: The Fisher Equation

Inflation: The Phillips Curve

Expected Inflation: Adaptive Expectations

The Nominal Interest Rate: The Monetary-Policy Rule

Case Study The Taylor Rule

15-2 Solving the Model

The Long-Run Equilibrium

The Dynamic Aggregate Supply Curve

The Dynamic Aggregate Demand Curve

The Short-Run Equilibrium

15-3 Using the Model

Long-Run Growth

FYI The Numerical Calibration and Simulation

A Shock to Aggregate Supply

A Shock to Aggregate Demand

A Shift in Monetary Policy

15-4 Two Applications: Lessons for Monetary Policy

The Tradeoff Between Output Variability and Inflation Variability

Case Study Different Mandates, Different Realities: The Fed Versus the ECB

The　Taylor Principle

Case Study What Caused the Great Inflation?

15-5 Conclusion:　Toward DSGE Models

Chapter 16 Alternative Perspectives on Stabilization Policy

16-1 Should Policy Be Active or Passive?

Lags in the Implementation and Effects of Policies

The Difficult Job of Economic Forecasting

Case Study Mistakes in Forecasting

Ignorance, Expectations, and the Lucas Critique

The Historical Record

Case Study Is the Stabilization of the Economy a Figment of the Data?

Case Study How Does Policy Uncertainty Affect the Economy?

16-2 Should Policy Be Conducted by Rule or Discretion?

Distrust of Policymakers and the Political Process

The Time Inconsistency of Discretionary Policy

Case Study Alexander Hamilton Versus Time Inconsistency

Rules for Monetary Policy

Case Study Inflation Targeting: Rule or Constrained Discretion?

Case Study Central-Bank Independence

16-3 Conclusion

Appendix: Time Inconsistency and the Tradeoff Between Inflation and Unemployment

Chapter 17 Government Debt and Budget Deficits

17-1 The Size of the Government Debt

Case Study The Troubling Long-Term Outlook for Fiscal Policy

17-2 Measurement Problems

Problem 1: Inflation

Problem 2: Capital Assets

Problem 3: Uncounted Liabilities

Problem 4: The Business Cycle

Summing Up

17-3 The Traditional View of Government Debt

FYI Taxes and Incentives

17-4 The Ricardian View of Government Debt

The Basic Logic of Ricardian Equivalence

Consumers and Future Taxes

Case Study George H. W. Bush’s Withholding Experiment

Making a Choice

FYI Ricardo on Ricardian Equivalence

17-5 Other Perspectives on Government Debt

Balanced Budgets versus Optimal Fiscal Policy

Fiscal Effects on Monetary Policy

Debt and the Political Process

International Dimensions

17-6 Conclusion

Chapter 18 The Financial System: Opportunities and Dangers

18-1 What Does the Financial System Do?

Financing Investment

Sharing Risk

Dealing with Asymmetric Information

Fostering Economic Growth

FYI The Efficient Markets Hypothesis Versus Keynes’s Beauty Contest

18-2 Financial Crises

The Anatomy of a Crisis

FYI The TED Spread

Case Study Who Should Be Blamed for the Financial Crisis of 2008–2009?

Policy Responses to a Crisis

Policies to Prevent Crises

Case Study The European Sovereign Debt Crisis

18-3 Conclusion

Chapter 19 The Microfoundations of Consumption and Investment

19-1 What Determines Consumer Spending?

John Maynard Keynes and the Consumption Function

Franco Modigliani and the Life-Cycle Hypothesis

Milton Friedman and the Permanent-Income Hypothesis

Case Study The 1964 Tax Cut and the 1968 Tax Surcharge

Case Study The Tax Rebates of 2008

Robert Hall and the Random-Walk Hypothesis

Case Study Do Predictable Changes in Income Lead to Predictable Changes in Consumption?

David Laibson and the Pull of Instant Gratification

Case Study How to Get People to Save More

The Bottom Line on Consumption

19-2 What Determines Investment Spending?

The Rental Price of Capital

The Cost of Capital

The Cost-Benefit Calculus of Investment

Taxes and Investment

The Stock Market and Tobin’s q

Case Study The Stock Market as an Economic Indicator

Financing Constraints

The Bottom Line on Investment

19-3 Conclusion: The Key Role of Expectations

Epilogue What We Know, What We Don’t

The Four Most Important Lessons of Macroeconomics

Lesson 1: In the long run, a country’s capacity to produce goods and services determines the standard of living of its citizens.

Lesson 2: In the short run, aggregate demand influences the amount of goods and services that a country produces.

Lesson 3: In the long run, the rate of money growth determines the rate of inflation, but it does not affect the rate of unemployment.

Lesson 4: In the short run, policymakers who control monetary and fiscal policy face a tradeoff between inflation and unemployment.

The Four Most Important Unresolved Questions of Macroeconomics

Question 1: How should policymakers try to promote growth in the economy’s natural level of output?

Question 2: Should policymakers try to stabilize the economy? If so, how?

Question 3: How costly is inflation, and how costly is reducing inflation?

Question 4: How big a problem are government budget deficits?

Conclusion

Glossary

Index

Authors

N. Gregory Mankiw

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. At Harvard, he has taught 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, a trustee of the Urban Institute, and an adviser to the 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.

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