McConnell С., Campbell R. Macroeconomics: principles, problems, and policies, 17th ed
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Contents
xxi
xxi
Contents
List of Key Graphs vi
Preface vii
Contributors xv
PART ONE
Introduction to Economics and
the Economy
To the Student 2
Chapter 1
Limits, Alternatives, and Choices 3
The Economic Perspective 4
Scarcity and Choice / Purposeful Behavior /
Marginal Analysis: Benefits and Costs
Consider This: Free for All? 4
Consider This: Fast-Food Lines 5
Theories, Principles, and Models 5
Macroeconomics and Microeconomics 6
Macroeconomics / Microeconomics / Positive and
Normative Economics
Individuals’ Economizing Problem 7
Limited Income / Unlimited Wants /
A Budget Line
Consider This: Did Gates, Winfrey, and Rodriguez Make
Bad Choices? 9
Society’s Economizing Problem 10
Scarce Resources / Resource Categories
Production Possibilities Model 11
Production Possibilities Table / Production Possibilities
Curve / Law of Increasing Opportunity Cost / Optimal Allocation
Consider This: The Economics of War 14
Unemployment, Growth, and the Future 14
A Growing Economy / Present Choices and Future Possibilities /
A Qualification: International Trade
Last Word: Pitfalls to Sound Economic Reasoning 16
Chapter 1 Appendix: Graphs and Their Meaning 21
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Chapter 2
The Market System and the Circular Flow 28
Economic Systems 29
The Command System / The Market System
Characteristics of the Market System 29
Private Property / Freedom of Enterprise and Choice /
Self-Interest / Competition / Markets and Prices / Technology
and Capital Goods / Specialization / Use of Money / Active, but
Limited, Government
Consider This: Buy American? 33
Five Fundamental Questions 34
What Will Be Produced? / How Will the Goods
and Services Be Produced? / Who Will Get
the Output? / How Will the System Accommodate
Change? / How Will the System Promote Progress?
Consider This: McHits and McMisses 34
The “Invisible Hand” 37
The Demise of the Command System 38
The Coordination Problem / The Incentive Problem
The Circular Flow Model 38
Resource Market / Product Market
Last Word: Shuffling the Deck 40
Chapter 3
Demand, Supply, and Market Equilibrium 44
Markets 45
Demand 45
Law of Demand / The Demand Curve /
Market Demand / Change in Demand /
Changes in Quantity Demanded
Supply 50
Law of Supply / The Supply Curve /
Market Supply / Determinants of Supply /
Changes in Supply / Changes in Quantity Supplied
Market Equilibrium 53
Equilibrium Price and Quantity / Rationing Function of
Prices / Efficient Allocation / Changes in Supply, Demand,
and Equilibrium
Consider This: Ticket Scalping: A Bum Rap! 55
Application: Government-Set Prices 57
Price Ceilings on Gasoline / Rent Controls /
Price Floors on Wheat
Consider This: Salsa and Coffee Beans 58
Last Word: A Legal Market for Human Organs? 60
Chapter 4
The U.S. Economy: Private and Public Sectors 65
Households as Income Receivers 66
The Functional Distribution of Income /
The Personal Distribution of Income
Households as Spenders 67
Personal Taxes / Personal Saving /
Personal Consumption Expenditures
The Business Population 68
Legal Forms of Businesses 68
Advantages of Corporations /
The Principal-Agent Problem
Consider This: Unprincipled Agents 70
The Public Sector: Government’s Role 71
Providing the Legal Structure /
Maintaining Competition / Redistributing Income
Reallocating Resources / Promoting Stability /
Government’s Role: A Qualification
Consider This: Street Entertainers 74
The Circular Flow Revisited 75
Government Finance 75
Government Purchases and Transfers
Federal Finance 77
Federal Expenditures / Federal Tax Revenues
State and Local Finance 80
State Finances / Local Finances
Last Word: Financing Social Security 78
Chapter 5
The United States in the Global Economy 84
International Linkages 85
The United States and World Trade 85
Volume and Pattern / Rapid Trade Growth /
Participants in International Trade
Specialization and Comparative Advantage 89
Comparative Advantage: Production Possibilities Analysis
Consider This: A CPA and House Painter 90
The Foreign Exchange Market 92
Dollar-Yen Market / Changing Rates: Depreciation and
Appreciation
Consider This: A Ticket to Ride 93
Government and Trade 95
Trade Impediments and Subsidies /
Why Government Trade Interventions? /
Costs to Society
Multilateral Trade Agreements and Free-Trade Zones 96
Reciprocal Trade Agreements Act /
General Agreement on Tariffs and Trade /
World Trade Organization / The European Union /
North American Free Trade Agreement
Global Competition 99
Last Word: Petition of the Candlemakers, 1845 100
CONTENTS
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PART TWO
Macroeconomic Measurement and
Basic Concepts
Chapter 6
Measuring Domestic Output and
National Income 105
Assessing the Economy’s Performance 106
Gross Domestic Product 106
A Monetary Measure / Avoiding Multiple Counting /
GDP Excludes Nonproduction Transactions /
Two Ways of Looking at GDP: Spending and Income
The Expenditures Approach 108
Personal Consumption Expenditures ( C ) / Gross Private
Domestic Investment ( I
g
) / Government Purchases ( G ) /
Net Exports ( X
n
) / Putting It All Together: GDP
C I
g
G X
n
Consider This: Stock Answers about Flows 110
The Income Approach 111
Compensation of Employees / Rents / Interest /
Proprietors’ Income / Corporate Profits /
Taxes on Production and Imports / From National
Income to GDP
Other National Accounts 113
Net Domestic Product / National Income /
Personal Income / Disposable Income /
The Circular Flow Revisited
Nominal GDP versus Real GDP 116
Adjustment Process in a One-Product Economy /
An Alternative Method / Real-World Considerations
and Data
Shortcomings of GDP 118
Nonmarket Activities / Leisure / Improved Product Quality /
The Underground Economy / GDP and the Environment /
Composition and Distribution of Output / Noneconomic
Sources of Well-Being
Last Word: Magical Mystery Tour 120
Chapter 7
Introduction to Economic Growth
and Instability 124
Economic Growth 125
Growth as a Goal / Arithmetic of Growth /
Main Sources of Growth / Growth in the United States /
Relative Growth Rates
The Business Cycle 127
Phases of the Business Cycle / Causation: A First Glance /
Cyclical Impact: Durables and Nondurables
Unemployment 129
Measurement of Unemployment / Types of
Unemployment / Definition of Full Employment /
Economic Cost of Unemployment / Noneconomic Costs /
International Comparisons
Consider This: Why Is the Unemployment Rate in
Europe So High? 134
Inflation 134
Meaning of Inflation / Measurement of Inflation /
Facts of Inflation / Types of Inflation / Complexities
Consider This: Clipping Coins 137
Redistribution Effects of Inflation 137
Who Is Hurt by Inflation? / Who Is Unaffected or
Helped by Inflation? / Anticipated Inflation / Addenda
Does Inflation Affect Output? 140
Cost-Push Inflation and Real Output /
Demand-Pull Inflation and Real Output / Hyperinflation
Last Word: The Stock Market and the Economy 142
Chapter 8
Basic Macroeconomic Relationships 146
The Income-Consumption and Income-Saving
Relationships 147
The Consumption Schedule / The Saving Schedule /
Average and Marginal Propensities / Nonincome
Determinants of Consumption and Saving /
Other Important Considerations
Consider This: What Wealth Effect? 153
The Interest-Rate–Investment Relationship 153
Expected Rate of Return / The Real Interest Rate /
Investment Demand Curve / Shifts of the Investment
Demand Curve / Instability of Investment
The Multiplier Effect 158
Rationale / The Multiplier and the Marginal Propensities /
How Large Is the Actual Multiplier Effect?
Last Word: Squaring the Economic Circle 160
PART THREE
Macroeconomic Models and Fiscal Policy
Chapter 9
The Aggregate Expenditures Model 166
Simplifications 167
Consumption and Investment Schedules 167
Equilibrium GDP: C I
g
GDP 168
Tabular Analysis / Graphical Analysis
Other Features of Equilibrium GDP 170
Saving Equals Planned Investment / No Unplanned
Changes in Inventories
CONTENTS
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Changes in Equilibrium GDP and the Multiplier 172
Adding International Trade 173
Net Exports and Aggregate Expenditures /
The Net Export Schedule / Net Exports and
Equilibrium GDP / International Economic Linkages
Adding the Public Sector 175
Government Purchases and Equilibrium GDP /
Taxation and Equilibrium GDP
Equilibrium versus Full-Employment GDP 179
Recessionary Expenditure Gap / Inflationary Expenditure Gap
Application: The U.S. Recession of 2001 / Application:
U.S. Inflation in the Late 1980s / Application: Full-Employment
Output with Large Negative Net Exports
Limitations of the Model 183
Last Word: Say’s Law, the Great Depression, and Keynes 182
Chapter 10
Aggregate Demand and Aggregate Supply 187
Aggregate Demand 188
Aggregate Demand Curve
Changes in Aggregate Demand 189
Consumer Spending / Investment Spending /
Government Spending / Net Export Spending
Aggregate Supply 192
Aggregate Supply in the Long Run / Aggregate
Supply in the Short Run
Changes in Aggregate Supply 193
Input Prices / Productivity / Legal-Institutional
Environment
Equilibrium and Changes in Equilibrium 196
Increases in AD: Demand-Pull Inflation /
Decreases in AD: Recession and Cyclical Unemployment /
Decreases in AS: Cost-Push Inflation /
Increases in AS: Full Employment with Price-Level Stability
Consider This: Ratchet Effect 200
Last Word: Has the Impact of Oil Prices Diminished? 201
Chapter 10 Appendix: The Relationship of the Aggregate
Demand Curve to the Aggregate Expenditures Model 205
Derivation of the Aggregate Demand Curve
from the Aggregate Expenditures Model 205
Aggregate Demand Shifts and the
Aggregate Expenditures Model 206
Chapter 11
Fiscal Policy, Deficits, and Debt 208
Fiscal Policy and the AD-AS Model 209
Expansionary Fiscal Policy / Contractionary Fiscal Policy /
Policy Options: G or T ?
Built-In Stability 212
Automatic or Built-In Stabilizers
Evaluating Fiscal Policy 213
Standardized Budget / Recent U.S. Fiscal Policy /
Budget Deficits and Projections /
Social Security Considerations
Problems, Criticisms, and Complications 216
Problems of Timing / Political Considerations / Future
Policy Reversals / Offsetting State and Local Finance /
Crowding-Out Effect / Current Thinking on Fiscal Policy
The Public Debt 218
Ownership / Debt and GDP / International
Comparisons / Interest Charges
False Concerns 220
Bankruptcy / Burdening Future Generations
Substantive Issues 221
Income Distribution / Incentives / Foreign-Owned
Public Debt / Crowding-Out Effect Revisited
Last Word: The Leading Indicators 223
PART FOUR
Money, Banking, and Monetary Policy
Chapter 12
Money and Banking 228
The Functions of Money 229
The Components of the Money Supply 229
Money Definition M 1 / Money Definition M 2 /
Money Definition MZM
Consider This: Are Credit Cards Money? 232
What “Backs” the Money Supply? 232
Money as Debt / Value of Money / Money and
Prices / Stabilizing Money’s Purchasing Power
The Federal Reserve and the Banking System 234
Historical Background / Board of Governors /
The 12 Federal Reserve Banks / FOMC /
Commercial Banks and Thrifts / Fed Functions and
the Money Supply / Federal Reserve Independence
Recent Developments in Money and Banking 238
The Relative Decline of Banks and Thrifts /
Consolidation among Banks and Thrifts / Convergence of
Services Provided by Financial Institutions /
Globalization of Financial Markets / Electronic Payments
Last Word: The Global Greenback 241
Chapter 13
Money Creation 244
The Fractional Reserve System 245
Illustrating the Idea: The Goldsmiths / Significant
Characteristics of Fractional Reserve Banking
CONTENTS
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A Single Commercial Bank 245
Transaction 1: Creating a Bank /
Transaction 2: Acquiring Property and Equipment /
Transaction 3: Accepting Deposits /
Transaction 4: Depositing Reserves in a Federal Reserve Bank /
Transaction 5: Clearing a Check Drawn against the Bank /
Money-Creating Transactions of a Commercial Bank 249
Transaction 6: Granting a Loan /
Transaction 7: Buying Government Securities /
Profits, Liquidity, and the Federal Funds Market
The Banking System: Multiple-Deposit Expansion 251
The Banking System’s Lending Potential /
The Monetary Multiplier / Reversibility: The
Multiple Destruction of Money
Last Word: The Bank Panics of 1930 to 1933 255
Chapter 14
Interest Rates and Monetary Policy 258
Interest Rates 259
The Demand for Money / The Equilibrium Interest Rate /
Interest Rates and Bond Prices
The Consolidated Balance Sheet of the
Federal Reserve Banks 261
Assets / Liabilities
Tools of Monetary Policy 263
Open-Market Operations / The Reserve Ratio /
The Discount Rate / Relative Importance
Targeting the Federal Funds Rate 267
Expansionary Monetary Policy / Restrictive
Monetary Policy / The Taylor Rule
Consider This: The Fed as a Sponge 269
Monetary Policy, Real GDP, and the Price Level 271
Cause-Effect Chain / Effects of an Expansionary
Monetary Policy / Effects of a Restrictive
Monetary Policy
Monetary Policy: Evaluation and Issues 274
Recent U.S. Monetary Policy / Problems and Complications /
“Artful Management” or “Inflation Targeting”?
Consider This: Pushing on a String 275
The “Big Picture” 279
Last Word: For the Fed, Life Is a Metaphor 278
WEB Chapter 14 www.mcconnell17.com
Financial Economics 283
Financial Investment 14W-2
Present Value
14W-2
Compound Interest / The Present Value Model /
Applications
Some Popular Investments 14W-5
Stocks / Bonds / Mutual Funds / Calculating
Investment Returns / Asset Prices and Rates of Return
Arbitrage 14W-7
Risk 14W-8
Diversification / Comparing Risky Investments /
Relationship of Risk and Average Expected Rates of Return /
The Risk-Free Rate of Return
The Security Market Line 14W-11
Consider This: Does Ethical Investing Increase
Returns? 14W-13
An Increase in the Risk-Free Rate 14W-14
Last Word: Why Do Index Funds Beat Actively
Managed Funds? 14W-15
PART FIVE
Long-Run Perspectives and
Macroeconomic Debates
Chapter 15
Extending the Analysis of Aggregate Supply 285
From Short Run to Long Run 286
Short-Run Aggregate Supply / Long-Run
Aggregate Supply / Long-Run Equilibrium in the
AD-AS Model
Applying the Extended AD-AS Model 288
Demand-Pull Inflation in the Extended AD-AS Model /
Cost-Push Inflation in the Extended AD-AS Model /
Recession and the Extended AD-AS Model
The Inflation-Unemployment Relationship 290
The Phillips Curve / Aggregate Supply Shocks and
the Phillips Curve
The Long-Run Phillips Curve 294
Short-Run Phillips Curve / Long-Run Vertical
Phillips Curve / Disinflation
Taxation and Aggregate Supply 295
Taxes and Incentives to Work / Incentives to Save and Invest /
The Laffer Curve / Criticisms of the Laffer Curve /
Rebuttal and Evaluation
Consider This: Sherwood Forest 297
Last Word: Tax Cuts for Whom? A Supply-Side Anecdote 298
Chapter 16
Economic Growth 302
Ingredients of Growth 303
Supply Factors / Demand Factor / Efficiency Factor
Production Possibilities Analysis 303
Growth and Production Possibilities / Labor and
Productivity / Growth in the AD-AS Model
CONTENTS
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US. Economic Growth Rates 306
Consider This: Economic Growth Rates Matter! 307
Accounting for Growth 307
Labor Inputs versus Labor Productivity /
Technological Advance / Quantity of Capital /
Education and Training / Economies of Scale and Resource
Allocation / Other Factors
Consider This: Women, the Labor Force, and Economic Growth 308
The Productivity Acceleration: A New Economy? 311
Reasons for the Productivity Acceleration /
Implications: More-Rapid Economic Growth /
Skepticism about Permanence / What Can We Conclude?
Is Growth Desirable and Sustainable? 314
The Antigrowth View / In Defense of Economic Growth
Last Word: Economic Growth in China 316
WEB Chapter 16 www.mcconnell17.com
The Economics of Developing Countries 319
The Rich and the Poor 16W-2
Classifications / Comparisons / Growth, Decline,
and Income Gaps / The Human Realities of Poverty
Obstacles to Economic Development 16W-4
Natural Resources / Human Resources /
Capital Accumulation / Technological Advance /
Sociocultural and Institutional Factors
The Vicious Circle 16W-10
The Role of Government 16W-11
A Positive Role / Public Sector Problems
The Role of Advanced Nations 16W-12
Expanding Trade / Foreign Aid: Public Loans and Grants /
Flows of Private Capital
Where from Here? 16W-15
DVC Policies for Promoting Growth / IAC Policies for
Fostering DVC Growth
Last Word: Famine in Africa 16W-16
Chapter 17
Disputes over Macro Theory and Policy 320
Some History: Classical Economics and Keynes 321
The Classical View / The Keynesian View
What Causes Macro Instability? 322
Mainstream View / Monetarist View /
Real-Business-Cycle View / Coordination Failures
Does the Economy “Self-Correct”? 326
New Classical View of Self-Correction / Mainstream View
of Self-Correction
Rules or Discretion? 330
In Support of Policy Rules / In Defense of Discretionary
Stabilization Policy /
Increased Macro Stability
Consider This: On the Road Again 330
Summary of Alternative Views 334
Last Word: The Taylor Rule: Could a Robot Replace
Ben Bernanke? 333
PART SIX
International Economics
Chapter 18
International Trade 339
Some Key Facts 340
The Economic Basis for Trade 340
Comparative Advantage: Graphical Analysis 341
Two Isolated Nations / Specializing Based on
Comparative Advantage / Terms of Trade /
Gains from Trade / Trade with Increasing Costs /
The Case for Free Trade
Supply and Demand Analysis of Exports and Imports 346
Supply and Demand in the United States /
Supply and Demand in Canada / Equilibrium
World Price, Exports, and Imports
Trade Barriers 349
Economic Impact of Tariffs / Economic Impact of Quotas /
Net Costs of Tariffs and Quotas
The Case for Protection: A Critical Review 352
Military Self-Sufficiency Argument / Diversification-for-
Stability Argument / Infant Industry Argument / Protection-
against-Dumping Argument / Increased Domestic
Employment Argument / Cheap Foreign Labor Argument /
Trade Adjustment Assistance
Consider This: Shooting Yourself in the Foot 352
Offshoring 355
The World Trade Organization
356
Last Word: The WTO Protests 356
CONTENTS
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Chapter 19
Exchange Rates, the Balance of Payments,
and Trade Deficits 360
Financing International Trade 361
U.S. Export Transaction / U.S. Import Transaction
The Balance of Payments 361
Current Account / Capital and Financial Account /
Payments, Deficits, and Surpluses
Flexible Exchange Rates 364
Depreciation and Appreciation / Determinants of
Exchange Rates / Flexible Rates and the Balance of
Payments / Disadvantages of Flexible Exchange Rates
Consider This: The Big Mac Index 367
Fixed Exchange Rates 369
Use of Reserves / Trade Policies / Exchange Controls
and Rationing / Domestic Macroeconomic Adjustments
International Exchange-Rate Systems 371
The Gold Standard: Fixed Exchange Rates /
The Bretton Woods System /
The Current System: The Managed Float
Recent U.S. Trade Deficits 375
Causes of the Trade Deficits / Implications of U.S. Trade
Deficits
Last Word: Speculation in Currency Markets 376
Glossary G-1
Index
IND
CONTENTS
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PART ONE
Introduction to Economics and
the Economy
1 LIMITS, ALTERNATIVES, AND CHOICES
2 THE MARKET SYSTEM AND THE
CIRCULAR FLOW
3 DEMAND, SUPPLY, AND MARKET
EQUILIBRIUM
4 THE U.S. ECONOMY: PRIVATE AND
PUBLIC SECTORS
5 THE UNITED STATES IN THE GLOBAL
ECONOMY
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To the Student
T
his book and its ancillaries contain several
features designed to help you learn economics:
• Web buttons A glance through the book
reveals many pages with symbols in the mar-
gins. These “buttons” alert you to helpful
learning aids available with the book. The graph but-
ton denotes “Interactive Graphs” found at the text’s
Web site, www.mcconnell17.com . Brief exercises
have you interact with the graphs, for example, by
clicking on a specific curve and dragging it to a new
location. These exercises will enhance your under-
standing of the underlying concepts. The light-bulb
button symbolizes “Worked Problems.” Numeric
problems are presented and then solved, side-by-side,
step-by-step. Seeing how the problems are worked
will help you solve similar problems on quizzes and
exams. The egg button stands for “Origin of the
Idea.” Each of these pieces traces a particular idea to
the person or persons who first developed it.
Chapter 1 reviews graphs and slopes of curves. You
may want to read it before starting Chapter 1.
• Reviews Each chapter contains two or three Quick
Reviews and an end-of-chapter summary. These
reviews will help you focus on essential ideas and
study for exams.
• Key terms and Key Graphs Key terms are set in
boldface type within the chapters, listed at the end of
each chapter, and again defined in the glossary at the
end of the book. Graphs with special relevance are
labeled Key Graphs, and each includes a multiple-
choice Quick Quiz. Your instructor may or may not
emphasize all of these figures, but you should pay
special attention to those that are discussed in class;
you can be certain there will be exam questions on
them.
• Consider This and Last Word boxes Many chapters
include a Consider This box. These brief pieces pro-
vide commonplace analogies, examples, and stories
that help you understand and remember central eco-
nomic ideas. Each chapter concludes with a Last
Word box. Some of them are revealing applications
of economic ideas; others are short case studies.
While it is tempting to ignore in-text boxes, don’t.
Most are fun to read, and all will improve your grasp
of economics.
• Questions A comprehensive list of study questions is
located at the end of each chapter. Several of the
questions are designated Key Questions and are an-
swered in the Study Guide and also at our Internet
site. Also at the Internet site are three multiple-
choice quizzes for each chapter.
• Study Guide We enthusiastically recommend the
Study Guide accompanying this text. This “portable
tutor” contains not only a broad sampling of various
kinds of questions but a host of useful learning aids.
Software-driven tutorials (Aplia, for example) are also
available with the text.
Our two main goals are to help you understand and
apply economics and help you improve your analytical
skills. An understanding of economics will enable you to
comprehend a whole range of economic, social, and po-
litical problems that otherwise would seem puzzling and
perplexing. Also, your study will enhance reasoning skills
that are highly prized in the workplace.
Good luck with your study. We think it will be well
worth your effort.
Origin of the
Idea
Worked
Problems
Interactive
Graphs
After reading a chapter, thumb back through it to
note the Web buttons and the number that follows
them. On the home page of our Internet site select Stu-
dent Edition and use the pull-down list under “Choose
one” to find the Web button content for each chapter.
• Other Internet aids Our Internet site contains many
other aids. In the Student Edition you will find self-
testing multiple-choice quizzes, links to relevant
news articles, and much more. For those of you with
very strong mathematics background, be sure to note
the “See the Math” section on the Web site. There
you will find nearly 50 notes that develop the algebra
and, in a few cases, the calculus that underlie the eco-
nomic concepts.
• Appendix on graphs Be assured, however, that you
will need only basic math skills to do well in the prin-
ciples course. In particular, you will need to be com-
fortable with basic graphical analysis and a few
quantitative concepts. The appendix at the end of
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