McConnell С., Campbell R. Macroeconomics: principles, problems, and policies, 17th ed
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Index IND-5
Economics
classical view, 321–322
definition, 4
disagreements in, 320
of international trade, 339–346
Keynesian view, 322, 333
macroeconomics, 6
microeconomics, 6–7
monetarism, 323–325, 334
new classical school, 326–328
normative, 7
positive, 7
rational expectations theory,
326–328, 333
scientific method, 5–6
supply-side, 295–299
Economics of war, 14
Economic stability, 74
Economic systems
command system, 29
communism, 29
definition, 29
demise of command systems, 38
differences in, 29
Index of Economic Freedom, 30
market system, 29
socialism, 29
Economies of scale
and economic growth, 309–310
increasing returns from,
312–313
Economist, 367
Economists
on fiscal policy, 218
on monetary policy, 218
on policy options, 211
rejection of Phillips curve, 292
view of monetary policy, 275
Economizing problem
definition, 7
of individuals
budget line, 9–10
limited income, 7
unlimited wants,
7–8
of society
resource categories, 10–11
scarce resources, 10
Economy
assessing performance of
in circular flow model,
114–116
GDP, 106–113
national income, 112, 113
national income accounting,
106
net domestic product, 113
nominal vs. real GDP,
116–118
personal income, 113–114
relationship between
measures, 114
shortcomings of GDP, 118–121
built-in stabilizers, 212–213
causes of instability, 322–326
circular flow model, 38–41
closed, 95
effect of offshoring, 355
index of leading indicators, 223
and international specialization,
18
open, 89
position of Laffer curve, 297
potential output, 131
present choices and future
possibilities, 16–18
role of government
and circular flow model, 75–76
dealing with market failure,
72–74
income redistribution, 71–72
maintaining competition, 71
promoting stability, 74–75
providing legal structure, 71
qualification on, 74–75
resource reallocation, 72–74
sectors of, 114
self-correcting, 326–327
and stock market, 142
Education
and economic growth, 309
effect of unemployment, 133
global perspective, 310
perceived decline in, 309
as positive externality, 72
state and local expenditures, 80
Efficiency factors
definition, 303
production possibilities
analysis, 304
Efficiency loss, 351–352
Efficiency of market system, 37
Efficiency wages, 199, 329
Efficient allocation, 55–56
Electronic money, 240
Electronic payments, 239–240
Employee compensation, 111
Employment
and business cycle causes, 128
equilibrium levels, 177
increased by NAFTA, 98
insider-outsider theory, 329
Enron Corporation, 70
Enste, Dominick, 119
Entrepreneurial ability, 10
Entrepreneurs
and capital accumulation, 37
freedom of enterprise, 30
functions, 10
Environment
and economic growth, 126, 315
and GDP, 119
Environmental standards,
356–357
Equation
aggregate expenditures, 323
linear relationship, 24
purchasing power, 233–234
Equation of exchange, 323
Equilibrium, 196
Equilibrium, changes in
cost-push inflation, 199–200
demand-pull inflation, 196–198
full employment and price
stability, 200–202
recession and unemployment,
198–199
Equilibrium domestic price, 346
Equilibrium Fed funds rate, 268
Equilibrium GDP
aggregate expenditures, 168
and aggregate expenditures
model, 205–206
changes in, 172
definition, 169
disequilibrium, 169
versus full-employment GDP
full-employment output, 181
inflationary expenditure gap,
179–180
recessionary expenditure
gap, 179
U.S. inflation of late 1980s, 181
U.S. recession of 2001,
180–181
government purchases, 176
graphical analysis, 169–170
and monetary policy, 272
net exports and, 173–175
possible levels of, 168–169
real domestic output, 168
saving equals investment, 171
tabular analysis, 168
taxation and, 175–176
unplanned changes in
inventories, 171–172
Equilibrium interest rate
definition, 272
and demand for money, 261
Equilibrium price, 53–54
in competitive markets, 56
complex supply and demand
cases, 56–57
effect of change in demand, 56
effect of change in supply, 56
exports and imports, 346–349
interest rate as, 261
and price ceilings, 58
and price floors, 59
Equilibrium price level, 196
Equilibrium quantity, 53–54
in competitive markets, 56
complex supply and demand
cases, 56–57
effect of change in demand, 56
effect of change in supply, 56
Equilibrium real output, 196
Equilibrium world price, 346
determining, 349
Ethanol, 195–196
Ethnicity, effect of
unemployment, 133
Euro, 89
Europe
in international trade, 89
medieval coin clipping, 137
unemployment rate, 134
European Union, 313
drawbacks, 89
EuroZone, 98
import licenses, 350
membership, 98
as trade bloc, 98
EuroZone, 98
Excess capacity, 191
Excess demand, 54–55
Excess reserves, 248
and failure to lend, 275
Federal funds, 267–268
increasing, 272
lending of, 251
and money multiplier, 253–254
in multiple-deposit expansion,
251–254
Excess supply, 54
Exchange
by barter, 32, 43
facilitated by money, 32–33
facilitated by private
property, 30
money as medium of, 229
Exchange controls
objections to, 370
operation of, 370
Exchange rate fluctuations, 376
Exchange-rate risk, 376–377
for holding dollars, 241
Exchange rates
adjustable-peg system, 372–373
appreciation, 365
Big Mac index, 367
in Bretton Woods system,
372–373
changes in, 94
definition, 92
depreciation, 365
determinants
changes in taste, 365
generalizations on, 365
income changes, 365
interest rates, 367
price-level changes, 366–367
speculation, 367
and devaluation, 372
dollar-yen market, 93–94
effect on aggregate demand,
191–192
exchange controls, 370
in export transaction, 361
fixed, 369–371
flexible, 364–369
function of, 92–93
global perspective, 92
with gold standard, 371–372
in import transaction, 361
in international trade, 157
managed float, 373–375
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IND-6 Index
Exchange rates —Cont.
and price of imported resources,
195
and purchasing power parity
theory, 366–367
systems, 365
for United States dollar, 360
Exchange-rate stability, 371
Exchange-rate volatility, 374
Exchange ratio
domestic, 342
and specialization, 345
world, 343
Excise taxes, 80
protective tariffs, 95
tariffs, 349–350
Excludability of private goods, 73
Executive pay, 70
Expansion, 127–128
Expansionary fiscal policy; see
Fiscal policy
Expansionary monetary
policy, 268
and banking system, 275
effects of, 272–273
Expectations; see also Consumer
expectations
determinant of saving and
consumption, 151
and shift in investment demand
curve, 156–157
variability of, 158
Expected rate of return, 153–154
and future business conditions,
156–157
investment demand curve,
154–155
Expected return, 191
Expenditures approach to GDP
definition, 108
government purchases, 109–110
gross private domestic
investment, 108–109
net exports, 110
personal consumption
expenditures, 108
total expenditures, 110–111
Exports
and dollar depreciation, 175
equilibrium world price, 349
and foreign purchases
effect, 189
global perspective, 340
as increase in demand, 191
national comparisons, 86, 88
percentage of GDP, 85, 86
of services, 88
supply and demand analysis
Canada, 348–349
equilibrium world price, 349
United States, 346–348
of U.S. trade, 87
voluntary export restrictions, 350
Export subsidies, 95
Export supply curve
Canada, 348–349
United States, 347
Export transaction, 361
Extended AD-AS model, 285–299
applying
cost-push inflation, 289–290
demand-pull inflation, 288–289
recession, 290
economic growth in, 305–306
inflation-unemployment
relationship, 290–294
long-run aggregate supply, 287
long-run equilibrium, 287–288
long-run Phillips curve, 294–295
short-run aggregate supply,
286–287
from short run to long run,
286–288
taxation and aggregate supply,
295–299
Externalities
correcting for negative
externalities, 72
correcting for positive
externalities, 73
definition, 72
and GDP, 119
negative, 72
positive, 72
External public debt, 221
ExxonMobil, 68, 69, 70
Factors of production
categories of, 10
changes in, 341
definition, 11
and full-employment
output, 193
marginal cost, 50
Fallacy of composition, 16–17, 354
Farm commodity prices, 64
Fast-food lines, 5
Favoritism, 370
Federal Deposit Insurance
Corporation, 233, 237n, 238,
248, 255
Federal finance
expenditures, 77
intergovernmental grants, 80
tax revenues, 77–80
Federal funds market, 251
Federal funds rate, 251
expansionary monetary
policy, 268
historic lows, 274
restrictive monetary policy,
268–269
set by FOMC, 268
Taylor rule, 270, 331
in U.S. 1996–2006, 269
Federal Open Market Committee
and Fed funds rate, 268
functions, 236
operations of, 267–269
Taylor rule, 270
Federal Reserve Act of 1913, 235
Federal Reserve Bank of New
York City, 236
Federal Reserve Bank of St. Louis,
231
Federal Reserve Banks, 231, 233
as central bank, 235, 261
check clearing, 248–249
consolidated balance sheet
assets on, 262
liabilities on, 262–263
issuance of currency, 236
lender of last resort, 236, 266
loans to commercial banks,
266–267
post-terrorist-attack loans, 236
quasi-public banks, 235–236
Federal Reserve districts map, 236
Federal Reserve Notes, 230, 237
creation of, 244
outstanding, 262–263
Federal Reserve System, 74,
187–188
Board of Governors, 235
and cause of Great Depression,
324–325
control of bank lending, 248
expansionary monetary policy
2004–2005, 334
Federal Open Market
Committee, 236
Federal Reserve Banks, 235–236
Fedwire, 240
functions, 237–238
historical background, 235
independence of, 238
inflation targeting, 275–279, 330
influence of chairman, 258
interest rate cuts in 2001, 202
as monetary authority, 234
monetary rule,
330–331
and national banks, 237
open market operations, 236
overissuance of money, 136
ownership of public debt, 219
policy goals, 258
and price stability, 201
recent monetary policy, 274
regulation of banks and thrifts,
237
reserve ratio, 247
targeting Federal funds rate,
267–271
and Taylor rule, 333
tools of monetary policy
discount rate, 266–267
open market operations,
263–265
relative importance of
each, 267
reserve ratio, 265–266
Web site, 162, 243
Federal tax revenues
corporate income tax, 80
excise taxes, 80
payroll taxes, 80
personal income tax, 78–79
sources, 77
Fedwire, 240
Feenberg, Daniel, 213n
Fidelity, 238
Final goods, 106
Financial account, 363–364
Financial assets, 259
Financial flows, 85
Financial institutions
in China, 316
largest in U.S., 237
world’s largest, 237
Financial services industry
consolidations, 239
convergence of services, 239
decline of banks and thrifts,
238–239
electronic payments, 239–240
globalization of, 239
major categories,
238
Financial Services Modernization
Act of 1999, 239
Financing of corporations, 68–69
Firms, 68
use of dumping, 353
Fiscal agent, 237
Fiscal policy, 209–217
and AD-AS model, 209
advantages of monetary policy
over, 274
balanced budget proposal,
331–332
built-in stabilizers, 212–213
consumption smoothing, 217
contractionary, 210–211, 214
budget surplus from, 211
combined spending and tax
increases, 211
decreased government
spending, 211
tax increases, 211
countercyclical, 208, 218
crowding-out effect, 217–218
current thinking on, 218
discretionary, 332
evaluation of
deficit projections, 215–216
recent U.S. policy, 214–215
Social Security problems, 216
standardized budget, 213–214
expansionary, 214
budget deficits from, 209
combined spending and tax
reductions, 210
crowding-out effect, 217–218
definition, 209
increased government
spending, 209–210
monetarist opposition to, 332
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Index IND-7
spending combined with tax
reductions, 210
success of, 334
tax reductions, 210
in U.S. in 1990s, 215
future reversals, 217
to maintain exchange rates,
371
offsetting state/local finance,
217
and Phillips curve, 292
political considerations, 217
pro-cyclical, 217
and purchasing power, 234
in rational expectations theory,
332
state and local, 217
timing problems
administrative lag, 217
operational lag, 217
recognition lag, 216–217
view of economists, 218
Fischer, Stanley, 141n
Fixed exchange rates, 365,
369–371
currency interventions, 370
exchange controls, 370
with gold standard, 371–372
and rationing, 370
stabilization policies for, 371
trade policies, 370
Fixed-income receivers, 138
Fixed resources assumption, 11
Fixed technology assumption, 11
Fixed-wage contacts, 286
FleetBoston Financial, 239
Flexible exchange rates, 364–369
appreciation, 366
and balance of payments,
367–369
Big Mac index and, 367
depreciation, 366
determinants
changes in tastes, 365
income changes, 365
interest rates,
367
price-level changes, 366–367
purchasing power parity
theory, 366–367
speculation, 367
disadvantages
diminished trade, 369
instability, 369
terms-of-trade-changes, 369
uncertainty, 369
and managed float, 374
Flexible-income receivers, 139
Floating exchange rate system,
365
FOMC; see Federal Open Market
Committee
Ford Focus, 8
Ford Motor Company, 70, 94,
106, 313
Foreign exchange market, 92–94,
361
and changing rates, 94
dollar-yen market, 93–94
manipulation of, 370
speculation in, 376–377
Foreign-owned public debt, 221
Foreign purchases effect, 189
Foreign sector, 114
45-degree reference line
and consumption, 147–148
and saving, 148–149
For whom to produce, 35–36
Fractional reserve banking system,
245
France
economic growth, 126–127
misery index, 293
unemployment rate, 134
Franklin, Benjamin, 309
Freedom of choice, 30
basis of competition, 31
Freedom of enterprise, 30
Freedom of market system, 37
Free products, 4
Free-rider problem
for public goods, 73
and street entertainers, 74
Free trade
case for, 346
versus infant industry argument,
353
Free-trade zones, 313
European Union, 98
NAFTA, 98
Frictional unemployment, 130
Friedman, Milton, 238, 330n
Full employment
definition, 130–131
effect of increase in aggregate
demand, 196–198
and increase in aggregate supply,
200–202
Keynesian view, 322
reliance on spending, 141
Full employment assumption, 11
Full-employment budget,
213–214
Full-employment deficit, 213
Full-employment GDP, 213
and contractionary fiscal policy,
210–211
versus equilibrium GDP
inflationary expenditure gap,
179–180
large negative exports,
180–181
recessionary expenditure gap,
179
U.S. inflation of late 1980s, 181
U.S. recession of 2001,
180–181
from expansionary monetary
policy, 273
Full-employment output, 286–287
below of above, 193
in long-run aggregate supply
curve, 192
and recessions, 209
in short run, 193
Full employment policy, 74
Full employment rate of
unemployment, 130–131
Functional distribution of income,
66
Future and Its Enemies (Postrel), 40
Future business conditions, 191
Futures market, 377
Gains from speculation, 91–92
Gains from trade, 91–92, 343–345
added output, 345
government misunderstanding
of, 95
improved options, 344–345
trading possibilities line, 343–344
Gasoline price ceiling, 58–59
Gates, Bill, 8, 9
GDP gap, 210–211
long- vs. short-run, 288
negative, 201
Okun’s law, 131
positive, 196
in recession, 290
without deflation, 198–199
GDP price index, 116–117
compared to consumer price
index, 135
graph of, 132
for selected years, 118
G8 nations, 339, 360
Gender, effect of unemployment,
133
General Agreement on Tariffs and
Trade,
97
Generalizations, 6
General Motors, 70
General Theory of Employment,
Interest, and Money (Keynes),
182
Geographical demand for labor,
130
Geographic specialization, 32
Gerber baby food, 85
Germany
economic growth, 126–127
hyperinflation, 141, 234
misery index, 293
unemployment rate, 134
Global competition, 99, 313
Global economy, 84–85
Globalization
definition, 99
of financial markets, 239
Global perspective
average income, 8
average propensity to consume,
150
balance of payments, 363
central banks, 262
comparative exports, 88
comparative GDP, 111
economic growth, 127
exchange rates, 92
growth competitiveness index,
314
index of economic freedom, 30
inflation rates, 135
investment expenditures, 157
misery index, 293
net exports of goods, 175
public debt, 219–220
standardized budget, 215
tax revenues as percentage of
output, 77
test scores, 310
top 12 globalized nations, 99
underground economy, 119
unemployment rate, 135
world exports, 340
world’s largest financial
institutions, 237
Gold, 245
in Bretton Woods system, 373
as international money, 370
and money supply, 233
sales of, 373
Golden State, 238
Golden West, 238
Goldsmiths, 245
Gold standard
collapse of, 372
domestic stabilization policies,
371–372
gold flows, 371
operation of, 371
Goods; see also Consumer goods
attainable/unattainable, 8–9
capital-intensive, 341
complementary, 49
defense vs. civilian, 14
durable, 68, 108
final, 106
independent, 49
inferior, 49
intermediate, 106
labor-intensive, 341
land-intensive, 341
luxuries, 7–8
in market system, 29
monetary measure of, 106
necessities, 7–8
nondurable, 68, 108
normal, 48
private, 73
public, 73
quasi-public, 73
substitutes, 49
superior, 48
unrelated, 49
Goods and services flows, 85
Google, Inc., 312
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CONFIRMING PAGES
IND-8 Index
Government
in aggregate expenditures
model, 175–177
government purchases, 176
taxation, 176–177
in circular flow model, 75–76
in command economy, 29
role in economy
in circular flow model, 75–76
dealing with market failure,
72–74
income redistribution, 71–72
maintaining competition, 71
promoting stability, 74
providing legal structure, 71
qualification on, 74–75
resource reallocation, 72–74
role in market system, 29, 33
Government favoritism, 370
Government finance
federal level, 76–80
local level, 80
purchases and transfers,
75–76
state level, 80
Government intervention, 71
cause of European
unemployment, 134
currency devaluation, 372
monetarist view, 323
strategic trade policy, 352
in trade
costs to society, 96
export subsidies, 95
impediments and subsidies, 95
import quotas, 95
misunderstanding gains from
trade, 95
nontariff barriers, 95
political considerations, 95–96
reasons for, 95–96
tariffs, 95
trade adjustment assistance,
354–355
Government purchases
data sources, 120
and equilibrium GDP, 176
in GDP, 109–110
percentage of output, 75–76
Government regulation, 196
Government securities, 219
distribution of, 221
held by Federal Reserve Banks,
262
in open market operations
purchases, 263–264
sale of, 264–265
purchased by banks, 250–251
Government-set prices, 57–61
price ceilings, 58–59
price floors, 59–61
rent controls, 59
Government spending
areas of, 77
combined with tax decreases, 211
combined with tax reductions,
210
with contractionary fiscal
policy, 211
determinant of aggregate
demand, 191
with expansionary fiscal policy,
209–210
federal level, 77
and full employment, 213
intergovernmental grants, 80
by local government, 80
local level, 80
as policy option, 211
size of, 76
Social Security problems, 78–79
state level, 80
by states, 80
in U.S. 2005, 181
Graham, Frank G., 234n
Graphical expression, 6
Graphs
AD-AS model
price level, 276–277
real output, 276–277
stabilization policies, 276–277
analysis of equilibrium GDP,
169–170
circular flow model, 39
construction of, 21–22
consumption schedule, 149
definition, 21
demand for money, 260
dependent variables, 22–23
direct relationships, 22
equilibrium GDP, 170, 197
equilibrium interest rate, 260
equilibrium price level, 197
equilibrium price/quantity, 54
gains from trade, 344
horizontal axis, 21
independent variables, 22–23
inflationary expenditure gap,
180
inverse relationships, 22
investment demand, 270
investment demand curve, 155
market for foreign currency, 366
monetary policy and equilibrium
GDP, 270–271
other-things-equal assumption,
23
production possibilities curve, 12
recessionary expenditure gap, 180
saving schedule, 149
slope of a line, 23–24
slope of a nonlinear curve, 24–25
supply of money, 260
trading possibilities line, 344
vertical axis, 21
vertical intercept, 24
Great Depression, 17, 109
bank panics, 255
economists in, 285
end of gold standard, 372
federal spending in, 217
and Keynes, 182
monetarist view, 324–325
severity of, 128
Smoot-Hawley Tariff, 96, 354
unemployment rate, 130
Greenspan, Alan, 187–188, 258,
275
Gross Domestic Product; see also
Equilibrium GDP ; GDP
gap ; GDP price index ; Real
GDP
above-equilibrium, 171
actual and potential, 132
avoiding multiple counting,
106–107
below-equilibrium, 171
changing composition of, 201
in circular flow model, 114–116
compared to national income,
112
definition, 106
disequilibrium, 160
effect of oil prices, 201
exclusions
financial transactions, 107
nonproduction transactions,
107
secondhand sales, 107
expenditures approach
government purchases,
109–110
gross private domestic
investment, 108–109
net exports, 110
personal consumption
expenditures, 108
total expenditures, 110–111
exports as percentage of, 85, 86
global perspective, 111
growth in capitalist countries,
302
growth without inflation,
200–202
income approach
corporate profits, 112
employee compensation, 111
interest, 111
from national to income GDP,
112–113
proprietors’ income, 112
rents, 111
taxes on production and
imports, 112
investment exceeds leakage of
savings, 171
investment expenditures as
percentage of, 157
leakages of saving exceeds
investment, 171
as monetary measure, 106
and money supply, 324
and net domestic product, 113
net tax revenues, 212
nominal vs. real, 116–118
potential, 131
and public debt, 219
real-world data considerations,
117–118
in recent fiscal policy, 214–215
shortcomings
composition and distribution
of output, 119
environment, 119
improved product quality, 119
leisure, 118–119
noneconomic sources of
well-being, 121
nonmarket activities, 118
underground economy, 119
Social Security percentage
of, 78
and standardized budget,
213–214
and tax receipts, 212–213
two ways of looking at, 108
U.S. trade as percentage of, 86
Gross investment, 109, 110
Gross private domestic
investment
changes in inventories, 109
gross vs. net, 109
items in, 108–109
noninvestment transactions, 109
Growth accounting
economies of scale, 309–310
education and training, 309
labor inputs vs. productivity,
307–308
quantity of capital, 309
resource allocation, 310
risk takers, 311
social-cultural-political
environment, 310–311
technological advance, 308–309
work attitudes, 311
Growth competitiveness index,
314
Health care spending, 77
Hedging, 377
Hellman, Paul, 279
Heterogeneous output value, 106
Hispanics, unemployment rate,
133
Hitler, Adolf, 133–134
Honda Civic, 8
Honda Motors, 94, 106
Hooker, Mark A., 201
Horizontal aggregate supply
curve, 322
Horizontal axis, 21
Hours of work, 304
Household debt
determinant of aggregate
demand, 190
and saving vs. consumption, 152
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Index IND-9
Households
with demand-pull inflation, 141
effects of recession, 128
expectations, 151
as income receivers
functional distribution of
income, 66
kinds of income, 66
personal distribution of
income, 66–67
nonincome determinants of
consumption, 151–152
nonincome determinants of
saving, 151–152
in product market, 41
quintiles, 66
real interest rate and, 151–152
as resource market, 39–41
as spenders
consumption expenditures,
67–68
personal saving, 67
personal taxes, 67
wealth, 151
Housing Sales Survey, 120
Housing Starts Survey, 120
How to produce, 35
HSBC Group, 237
Human capital, 309
Hyperinflation, 141, 234
Hypothesis, 5–6
Hypothesis testing, 6
IMF; see International Monetary
Fund
Import demand curve
Canada, 348–349
United States, 347–348
Imported resources, 194–195
Import licenses, 350
Import quotas, 95, 350; see also
Protectionism
costs to society, 96
economic impact, 351
net costs of, 351–352
Imports
effect of tariffs, 351
equilibrium world price, 349
and foreign purchases effect, 189
job creation from, 354
supply and demand analysis
Canada, 348–349
equilibrium world price, 349
United States, 346–348
taxes on, 112
of U.S. trade, 87
varying with national income,
173n
Import transaction, 361
Incentives
critique of Laffer curve, 297
of market system, 37
as problem in command
systems, 38
and public debt, 221
and taxes
saving and investment, 296
work vs. leisure, 296
Income; see also Disposable
income ; National income
break-even, 148–150
and business cycle causes, 128
and change in demand, 48–49
change in expectations about, 49
determinant of aggregate
demand, 190
equilibrium levels, 177
exchange rates and changes in,
365
expectations about future, 151
functional distribution, 66
global perspective, 8
limited, 7
nominal vs. real, 137–138
per capita in China, 316
personal, 113–114
personal distribution, 66
quintiles, 66
redistribution effects of
inflation, 137–138
sources of, 36
Income approach to GDP
corporate profits, 112
definition, 108
employee compensation, 111
interest, 111
and national income, 112–113
proprietors’ income, 112
rents, 111
taxes on production and
imports, 112
Income changes, 10
Income-consumption
relationships
average propensities, 150–151
changes among schedules, 152
consumption schedule, 148
nonincome determinants,
151–152
real GDP, 152
saving shekel, 148–150
schedule shifts, 152
stability, 152
and taxes, 152
Income distribution, 221
Income effect, 46
and price level, 188
Income inequality, 66
Income-maintenance programs, 77
Income redistribution
effects of inflation, 137–138
by government, 71–72
by market intervention, 71
by taxation, 71
transfer payments, 71
Income-saving relationships
average propensities, 150–151
changes among schedules, 152
consumption schedule, 148
nonincome determinants,
151–152
real GDP, 152
saving schedule, 148–150
schedule shifts, 152
stability, 152
and taxes, 152
Income tax
corporate, 80
personal, 78–79
of U.S. households, 67
Increasing returns
definition, 312
learning by doing, 313
network effects, 313
simultaneous consumption,
312–313
specialized inputs, 312
spreading development costs, 312
Independent goods, 49
Independent variables
definition, 22–23
and horizontal axis, 21
Index of Economic Freedom, 30
Index of leading indicators, 223
stock prices in, 142
Individual demand, 46
cause of changes in, 47–49
versus market demand, 47
Industry, 68
Infant industry argument
counterarguments, 353
strategic trade policy, 353
Inferior goods, 49
Infinite slope, 24
Inflation
and acceptability of money, 234
anticipated, 138, 139–140
arbitrariness, 140
in China, 316
complexities of, 136–137
and contractionary fiscal policy,
210–211
cost-of-living adjustments, 139
cost-push, 136
definition, 134
and deflation, 140
demand-pull, 136
and disinflation, 295
economic growth without,
200–202
effect of aggregate supply
shocks, 293
effect on output
cost-push inflation, 140
demand-pull inflation,
140
expectations of, 190
facts of, 135–136
government policies for, 74
hyperinflation, 141
long-run Phillips curve,
294–295
measurement of, 134–135
and monetary rule, 330
and nominal wages, 286
redistribution effects
anticipations, 138
nominal vs. real income,
137–138
restrictive monetary policy for,
268–269, 273
short-run Phillips curve, 294
and stock market values, 142
in Taylor rule, 270
those unaffected by
debtors, 139
flexible-income receivers, 139
unanticipated, 138
in U.S. in late 1980s, 181
victims of
creditors, 138
fixed-income receivers, 138
savers, 138
zero inflation proponents, 141
Inflation-adjusted rate of return,
154
Inflationary expenditure gap,
179–180
Inflation equilibrium, 326
Inflation premium, 139–140
Inflation rate
in consumer price index, 134–135
determining, 135
global perspective, 135
rule of 70, 135
in U.S. 1960–2005, 292
in U.S. 1980 vs. 1990, 124
Inflation targeting, 275–279, 330
Inflation-unemployment
relationship
aggregate supply shocks and
Phillips curve, 293–294
disinflation, 295
generalizations, 290
long-run Phillips curve,
294–295
Phillips curve, 291–292
short-run Phillips curve, 294
stagflation, 293
Information technology, 312
Information technology flows, 85
Infrastructure, 309
ING Group, 237
Initial claims for unemployment
insurance, 223
Injections, 171
taxation, 178–179
Innovation, irregularity of, 157–158
Input prices
and changes in aggregate supply,
194–195
classical view, 321
of domestic resources, 194
of imported resources, 194–195
and market power, 195
Inputs
in command systems, 38
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CONFIRMING PAGES
IND-10 Index
Inputs—Cont.
for economic growth, 126
specialized, 312
Insider-outsider theory, 329
Instability
causes of
coordination failures, 325–326
mainstream view, 322–323
monetarist view, 323–325
real-business-cycle
theory, 325
and flexible exchange rates, 369
Insurance companies, 238
Intel Corporation, 99, 312
Intellectual property rights, 30
in China, 316
Interest, 66
definition, 259
in GDP, 111
on public debt, 77, 220
Interest-rate effect, 189
Interest-rate–investment
relationship
expected rate of return, 153
instability of investment,
157–158
investment demand curve,
154–155
real interest rate, 153–154
shift of investment demand
curve, 156–157
Interest rates
and bond prices, 261
demand for money
asset demand, 259
total demand, 259–261
transactions demand, 259
discount rate, 237, 266–267
effect of expansionary monetary
policy, 272–273
effect of restrictive monetary
policy, 273
equilibrium, 261
and exchange rates, 367
Fed funds rate, 267–271
and inflation premium, 139–140
and investment, 272
nominal, 154
nominal vs. real,
139
prime rate, 268
real, 153–154
Interest-rate spread, 223
Intergovernmental grants, 80
Intermediate goods, 106
Internal Revenue Service, 119
and barter exchange, 43
International economic linkages,
84
exchange rates, 175
prosperity abroad, 175
tariffs, 175
International equilibrium, 349
International Labor
Organization, 357
International Monetary Fund, 364
bailouts by, 374
borrowing from, 373
creation of, 372
current role, 372
devaluation under, 373
pegged exchange rates, 372–373
International money
gold, 370
United States dollar, 373
International specialization, 18
International trade, 84–85, 339–
358; see also Trade barriers
absolute advantage, 90, 341
in aggregate expenditures model
net exports, 173–175
net exports and equilibrium
GDP, 173–175
net export schedule, 173
aided by specialization, 32
balance of payments, 361–364
beggar-my-neighbor policy, 354
in Bretton Woods system,
372–373
case for free trade, 346
case for protection, 352–355
and changes in factors of
production, 341
and communications technology,
88
comparative advantage, 90–92,
341–343
constant cost assumption, 341
costs of intervention, 96
decline in tariffs, 88
dependence of U.S., 86–87
distorted, 370
economic basis, 340–341
equilibrium world price, 349
and exchange controls, 370
expansion by China, 316
financial impact, 88
financing of, 361
with fixed exchange rates, 369–371
with flexible exchange rates,
364–369
and foreign exchange market,
92–94
free trade zones, 98
gains from trade, 343–345
global competition, 99
with gold standard, 371–372
government intervention, 95–96
impediments and subsidies,
95
with increasing costs, 345–346
key facts on, 340
with managed float, 373–375
most-favored-nation clauses, 97
multilateral agreements, 96–98
offshoring, 355
participants
recent additions, 89
U.S., Japan, and Europe,
88–89
patterns, 87–88
and production possibilities
curve, 18, 341–346
rapid growth in U.S., 88
reasons for, 340–341
reasons for intervention, 95–96
and resource distribution, 341
shifting patterns of, 355
specialization, 89–90 ,
342–343
specialty niches, 341
and stabilization policies, 371
supply and demand analysis,
346–349
terms of trade, 343
and trade policies, 370
trade wars, 352
trading possibilities line,
343–344
and transportation technology, 88
U.S. volume, 85–86
and World Trade Organization,
356
Internet, 16, 313
Internet banking, 239
Internet bubble, 181
Intrinsic value, 230, 233
Inventories
positive and negative changes in,
109
unplanned changes, 171–172
Inverse relationship, 22
Investment; see also Interest-rate–
investment relationship
after-tax returns, 296
components, 153
data sources, 120
decline in recessions, 209
effect of tax rates, 296
with expansionary monetary
policy, 273
as factor of production, 10
with flexible exchange rates, 369
gross private domestic, 108–109
in infrastructure, 309
as injection, 171
instability
durability of capital goods, 157
innovation irregularity, 157–158
variability of expectations, 158
variability of profits, 158
Keynesian view, 322
MB MC rule, 155
and monetary policy, 272
net private domestic, 109
planned, 167
real vs. financial, 109
with restrictive monetary policy,
273
in U.S. in 2005, 181
volatility of, 157
Investment demand curve,
154–157, 167
and crowding-out effect, 222
and expected rate of return,
154–155
in Japan, 275
shifts in
acquisition costs, 156
business expectations, 156–157
business taxes, 156
maintenance costs, 156
operating costs, 156
stock of capital goods, 156
technological advance, 156
Investment effect, 142
Investment expenditures
and aggregate demand curve, 272
cause of instability, 323
and crowding-out effect, 218, 332
determinant of aggregate
demand, 190–191
expected returns, 191
interest-rate effect, 189
multiplier effect, 158–162
percentage of GDP, 157
from profit motive, 153
and public debt, 221–222
real interest rate and, 190–191
Investment rate, 376
Investment schedule
in aggregate expenditures,
167–168
and changes in equilibrium
GDP, 172
Investors, 69
Invisible hand thesis, 37
Iraq war, 14, 201
Italy
economic growth, 126–127
misery index, 293
unemployment rate, 134
Japan
economic growth, 126–127
hyperinflation, 141
import licenses, 350
in international trade, 89
labor-intensive goods, 341
misery index, 293
monetary policy, 275
recession in, 275
strategic trade policy, 353
Japanese yen, 93–94
Job loss
and international trade, 355
from offshoring, 355
Jobs
increased by offshoring, 355
protectionist argument, 353–354
Job seekers, 131
Job turnover, 329
Job vacancies, 131
JP Morgan Chase, 237, 238, 239
Kemper, 238
Keynes, John Maynard, 166, 182,
285, 321, 325
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CONFIRMING PAGES
Index IND-11
Keynesian cross model, 166
Keynesian view; see also
Mainstream view
horizontal aggregate supply
curve, 322
versus monetarism, 330
summary of, 334
unstable aggregate demand, 322
Kinko’s, 240
Krugman, Paul, 352
Labor
as factor of production, 10
inputs vs. productivity, 307–308
and marginal cost, 50
Labor demand
geographic changes, 130
skill obsolescence, 130
Labor flows, 85
Labor force
changes in composition, 130
composition of, 129
educational attainment, 309
and full employment, 130–131
increase 1953–2005, 308
net increase, 304
in U.S. 2005, 129
women in, 308
Labor force participation rate, 304
for women, 308
Labor Force Statistics, 20
Labor-intensive goods, 341
Labor market
in Europe, 134
and natural rate of
unemployment, 131
Labor productivity
definition, 304
determination of, 304
growth 1953–2004, 308
hours of work, 304
versus inputs, 307–308
projected growth, 308
of women, 308
Labor standards issue, 356
Labor supply
and aggregate supply curve, 194
and changes in aggregate
supply, 194
Labor unions, 356–357
Laffer, Arthur, 296, 297
Laffer curve
criticisms of, 297–299
description, 296–297
Lags
in fiscal policy, 216–217
in monetary policy, 274–275
Laissez-faire capitalism, 29
classical vs. Keynesian views,
321
Land
as factor of production, 10
prices and aggregate supply
curve, 194
Land-intensive goods, 341
Law of demand, 46
apparent violations of, 58
income effect, 46
substitution effect, 46
Law of increasing opportunity
costs
definition, 12–13
economic rationale, 13
slope of curve, 13
Law of supply, 50
apparent violations of, 58
Leakages, 171
taxation, 178–179
Learning by doing, 32, 313
Least-cost production, 35
Legal-institutional environment
business taxes, 195–196
government regulation, 196
subsidies, 195–196
Legal structure, 71
Legal tender, 233
Lehman Brothers, 238
Leisure
and GDP, 118–119
and increase in real GDP, 126
opportunity cost of, 296
Lender of last resort, 236, 265
Lending
effect of reserve ratio, 265–266
inflation premium, 139–140
Lerner, Abba, 330n
Lexus, 8
Liabilities
of banks, 245–246
checkable deposits, 248
of Federal Reserve Banks
Federal Reserve Notes
outstanding, 262–263
reserves of commercial
banks, 262
Treasury deposits, 262
Limited income, 7
Limited liability, 68–69
Linear relationship, 22
Linear relationship equation, 24
Liquid assets
money, 229
near monies, 231
Liquidity
of commercial banks,
251
scramble for, 255
Living standards, 125, 307, 315n
and cheap foreign labor, 354
Loaded terminology, 16
Loans
to commercial banks, 262
by Fed to banks, 266–267
as money creation, 249–250
prime interest rate, 268
zero-interest, 199
Local government
finances, 80
fiscal policy, 217
Long-range aggregate supply
curve, 305
Long run, 285
aggregate supply in, 192
definition, 286
Long-run aggregate supply curve,
192, 287
Long-run equilibrium, 287–288
Long-run Phillips curve
and disinflation,
295
versus short-run curve, 294
vertical, 294–295
Long-run vertical Phillips curve,
294–295
Loss, 34
Lotteries, 80
Lump-sum tax, 176
Luxuries, 7–8
M1 definition of money
checkable deposits, 230–231
currency, 229–230
exclusions from, 231
M2 definition of money, 231
Macroeconomic relationships
income-consumption, 147–153
income-saving, 147–153
interest-rate–investment,
153–158
multiplier effect, 158–162
Macroeconomics, 6
Macroeconomy, classical vs.
Keynesian views, 321–322
Madagascar, 125
Mainstream view
adaptive expectations, 327
causes of instability
aggregate supply shocks, 323
investment spending changes,
323
contrast with classical view,
324–325
discretionary fiscal policy, 332
discretionary monetary policy,
332
policy successes, 334
of self-correction
downward inflexibility of
wages, 329
efficiency wage theory, 329
graphical analysis, 328–329
insider-outsider relationship,
329
summary of, 334
Maintenance costs, 156
Malaysia, 89
Managed floating exchange rates
concerns with, 374–375
definition, 373
and flexible exchange rates, 374
and G8 nations, 374
support for, 374
Manufacturing costs, 50
Marginal analysis, 5
Marginal benefit, 5; see also
MBMC rule
from investment, 153
Marginal cost, 5, 50; see also
MBMC rule
of investment, 153
Marginal propensity to
consume, 150
with contractionary fiscal policy,
210
with expansionary fiscal policy,
209–210
and multiplier, 159, 161, 189
as slope, 151
Marginal propensity to save, 150
and multiplier, 161
as slope, 151
Marginal tax rate, 78–79
Bush administration cuts,
298–299
Clinton administration
increases, 298
incentives to save and invest,
296
in Laffer curve, 296–299
reductions, 215
work incentives, 296
Marginal utility, diminishing, 46
Market(s), 29
definition, 31
functions of, 45
for human organs, 60–61
in rational expectations theory,
235
Market basket of goods and
services
for consumer price index, 135
for price index, 116–117
Market-clearing price, 53
Market demand, 46–47, 48–49
Market equilibrium
and changes in supply and
demand, 56–57
efficient allocation, 55–56
equilibrium price, 53–55
equilibrium quantity, 53–55
and price controls, 57–61
rationing function of prices, 55
Market failure, 33
externalities, 72–73
to provide public goods, 73
quasi-public goods, 73
Market for money, 272
Market intervention, 71
Market power, 195
Market supply, 50–51
Market system
accommodating change, 36
arrangement of world’s
resources, 40
capital accumulation, 37
capital goods, 31–32
characteristics, 29–33
and China, 316
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CONFIRMING PAGES
IND-12 Index
Market system—Cont.
circular flow model, 38–41
classical economists on, 182
as communications system, 35
competition in, 31, 71
consumer sovereignty, 34
creative destruction, 36–37
definition, 29
disposition of output, 35–36
division of labor, 32
efficiency of, 37
five fundamental questions, 34 –37
freedom in, 37
freedom of choice, 30
freedom of enterprise, 30
how will goods be produced, 35
incentives for growth, 310–311
incentives in, 37
invisible hand thesis, 37
legal structure, 71
limited government, 33
markets and prices, 31
monetarist view, 323
private property, 29–30
productive efficiency, 304
promotion of progress, 36–37
self-interest in, 30–31
specialization, 32
technological advance, 36–37
technology, 31–32
use of money, 32–33
what will be produced, 34–35
Market value of output, 118
Massachusetts Mutual, 238
MasterCard, 232, 239, 240
MB MC rule
and economics of war, 14
on investment projects, 155
for optimal resource allocation,
13–14
McDonald’s Corporation, 34, 99
Medicare tax, 78, 80
Medium of exchange, 32, 229
effect of inflation, 234
transactions demand for money,
259
Menu costs, 199
Mercedes, 8
Mergers and acquisitions, 239
Merrill Lynch, 238
Mexico, production possibilities
analysis, 90–91
Microchip, 312
Microeconomics, 6–7
Microsoft Corporation, 9, 99, 312
antitrust case, 71
Military self-sufficiency argument,
352
Mill, John Stuart, 182
Miller Brewing, 85
Minimum wage, 199
in Europe, 134
Mitsubishi, 89
Mizuho Financial, 237
Models, 6
graphs for illustrating, 21–25
Monetarism
equation of exchange, 323
on fiscal policy, 331–332
on government intervention,
323
main issues, 323
monetary cause of instability,
324–325
on monetary rule, 331
summary of, 334
velocity of money, 323–324
versus Keynesianism, 330
Monetary measure, 106
Monetary policy
advantages over fiscal policy, 274
artful management, 275–277
cause-effect chain
equilibrium GDP, 272
investment, 272
market for money, 272
cause of instability, 324–325
components, 258
discretionary, 332
effects of expansionary policy,
272–273
effects of restrictive policy, 273
and equilibrium GDP, 272
expansionary, 268
and Fed independence, 274
and gold standard, 372
inflation targeting, 275–279
in Japan, 275
Keynesian vs. monetarist views,
330
to maintain exchange rates, 371
monetary rule, 330–331
and Phillips curve, 292
problems and complications
cyclical asymmetry, 275
lags, 274–275
and purchasing power, 234
real GDP and price level,
271–272
recent, 274
targeting Federal funds rate,
267–271
Taylor rule, 333
tools of
discount rate, 266–267
open market activities, 263–265
relative importance of each, 267
reserve ratio, 265–266
view of economists, 218
Monetary rule, 330–331
new, 333
rejection of, 332
Monetary units, 229
Money; see also Demand for
money
versus barter, 32
classical view, 321–322
compared to credit cards, 232
as debt, 232–233
definition, 32
disadvantage of holding, 259
electronic, 240
former kinds of, 229
during inflation, 234
medium of exchange, 32, 229
nominal interest rate, 139
paper, 33
purchasing power, 233–234
store of value, 229
token money, 229–231
unit of account, 229
uses of, 32–33
value of
acceptability, 233
legal tender, 233
relative scarcity, 233
velocity of, 323–324
Money capital, 153
Money creation
buying government securities,
250–251
effect of reserve ratio, 266
and Fed funds rate, 251
by goldsmiths, 245
from granting loans, 249–250
by multiple-deposit expansion,
251–254
outcome, 254
Money destruction, 254
Money flows, 41
Money market deposit account, 231
Money market mutual funds, 231,
232
Money multiplier, 253–254
Money supply
backed by government, 232–234
and business cycles, 128
and credit cards, 232
and debt, 232–233
decline in, 265
and demand-pull inflation, 136
effect on aggregate demand, 324
effect on real interest rate, 191
equation of exchange, 323
expanded by commercial banks,
252–253
in expansionary monetary policy,
268
and Federal Reserve System
functions, 237–238
and gold, 233
with gold standard, 372
in Great Depression, 255,
324–325
increase in, 264
in index of leading indicators,
223
interest-rate effect, 189
Keynesian vs. classical views,
324–325
leading to inflation, 234
M1 definition, 229–231
M2 definition, 231
and market for money, 272
means of decreasing, 273
means of increasing, 272
with monetary rule, 330–331
MZM definition, 231–232
and nominal GDP, 324
outcome of expansion, 254
in real-business-cycle theory, 325
results of increase in, 273
stabilizing purchasing power, 234
useful definitions, 232
velocity of money, 324
Monopoly, 71
deterred by free trade, 346
Monsanto, 99
Morale, 199
Morgan, Theodore, 141n
Most-favored-nation clauses, 97
Multilateral trade agreements
General Agreement on Tariffs
and Trade, 97
most-favored-nation clauses, 97
Reciprocal Trade Agreements
Act, 97
World Trade Organization,
97–98
Multinational corporations, 89
Multiplant firms, 68
Multiple counting, 106–107
Multiple-deposit expansion
system, 251–254
Multiplier
in AD-AS model, 198
Art Buchwald on, 162
changes in, 172
definition, 158
and marginal propensities, 161
and marginal propensity to
consume, 189
and real GDP, 158–159
tabular illustration, 159
Multiplier effect
definition, 158
of government spending,
209–210
in monetary policy, 273
rationale, 159–161
size of, 161–162
Mutual fund companies, 231
functions, 239
largest, 238
Mutual savings banks, 231, 238
MZM definition of money,
231–232
NAFTA; see North American Free
Trade Agreement
National bank holiday, 255
National banks, 237
National Credit Union
Administration, 233, 238,
248
National defense spending, 77
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CONFIRMING PAGES
Index IND-13
National income, 113
compared to GDP, 112
components, 113
and consumption of fixed
capital, 112–113
corporate profits, 112
definition, 112
employee compensation, 111
interest, 111
and net foreign factor income, 112
proprietors’ income, 112
rents, 111
statistical discrepancy in, 112
taxes on production and
imports, 112
National income abroad, 191
National income accounting
adjustments to, 114
in circular flow model, 114–116
definition, 106
relationship between measures,
114
National income accounts
government purchases, 109–110
gross private domestic
investment, 108–109
net exports, 110
personal consumption
expenditures, 108
total expenditures, 110–111
National Income and Product
Accounts, 106
National Monetary Commission,
235
Natural monopolies, 71
Natural rate of unemployment,
130–131
decline in, 131
Near monies, 231
Necessities, 7–8
Negative externalities
correcting for, 72
definition, 72
Negative net exports, 173–175
Negative slope, 23
Nestlé, 89
Net domestic product, 113
Net exports
and aggregate expenditures, 173
data sources, 120
definition, 173
and equilibrium GDP
net negative exports, 173–175
positive net exports, 173
global perspective, 175
in GDP, 110
negative, 173–175
negative with full-employment
output, 181
positive, 173
Net export schedule, 173
Net export spending
determinant of aggregate
demand, 191–192
exchange rate effects, 191–192
and national income abroad, 191
Net foreign factor income, 112
Net investment, 109, 110
Net investment income, 363
Net private domestic investment,
109
Net tax revenues, 212
Network effects, 313
Net worth of banks, 245–246
New Balance, 46
New classical economics, 326
on fiscal policy, 331–332
on self-correction
anticipated price level changes,
328
graphical analysis, 326–327
speed of adjustment, 327
unanticipated price level
changes, 327–328
New Economy, 314
and business cycle, 314
conclusions about, 314
global competition, 313
implications, 313–314
increasing returns, 312–313
information technology, 312
microchip, 312
and recession of 2001, 202
skepticism about, 314
start-up firms, 312
New York City rent controls, 59
New York Life, 238
New York Stock Exchange, 45
Nike, Inc., 46
Nikon, 94
Nissan Motors, 94
No-free-lunch thesis, 4
Nominal GDP
adjusting
dividing by price index, 116–117
GDP price index, 116–117
definition, 116
determinant of demand for
money, 259
for selected years, 118
and total money demand curve,
260–261
Nominal income, 137–138
rising with inflation, 139
Nominal interest rate, 139, 154
Nominal profit, 192
Nominal wage, 193
and disinflation, 295
in long run, 287
long-run Phillips curve,
294–295
unresponsive to price changes,
286
Nondiscretionary spending, 209
Nondurable goods, 68, 108
in business cycle, 128
Noneconomic costs of
unemployment, 133–134
Nonexcludability of public goods,
73
Nonfinancial transactions, 107
Noninvestment transactions, 109
Nonlinear curve, 24–25
Nonmarket activities, 118
Nonproduction transactions
private transfer payments, 107
public transfer payments, 107
stock market transactions, 107
Nonrivalry of public goods, 73
Nontariff trade barriers, 95, 350
Normal goods, 48
Normative economics, 7
North American Free Trade
Agreement, 313
North Korea, 29
Not in the labor force, 130
NOW accounts, 231
Number of buyers, 48
Number of sellers, 52
Occupations, 133
Office of Thrift Supervision, 237
Official reserves
in Bretton Woods system, 373
of central banks, 364
to maintain exchange rates,
370
U.S. dollars, 373
Offshoring, 355
Oil imports, 340
Oil prices, 199–200, 293
cause of trade deficits, 376
effect on GDP, 201
Okun, Arthur, 131
Okun’s law, 131
On-the-job training, 309
OPEC; see Organization of
Petroleum Exporting
Countries
Open economy, 89
aggregate expenditures model,
173–175
Open market operations, 236
purchase of securities
from commercial banks, 263
from public, 263–264
restrictive monetary policy, 269
sales of securities, 264–265
to commercial banks, 265
to public, 265
Operating costs, 156
Operational lag
in fiscal policy, 217
in monetary policy, 274–275
Opportunity cost, 12
and budget line, 9
of college attendance, 9
definition, 4
in free trade, 346
in international trade, 343
law of increasing opportunity
costs, 12–13
of leisure, 296
in marginal analysis, 5
Opportunity-cost ratio, 342
Optimal allocation, 13–14
Oracle Corporation, 312
Organization of Petroleum
Exporting Countries, 87, 88,
140, 201
market power, 195
oil imports from, 340
oil price increases in
1970s–1980s, 293
Organ transplants, 60–61
Other-things-equal assumption, 6
demand and prices, 45
in graphs, 23
income and saving, 147
and law of demand, 46
Output
and business cycle causes, 128
with changes in aggregate
supply, 193–196
classical view, 321
in command systems, 29, 38
composition and distribution of,
119
decline to offset disequilibrium,
169
effect of inflation, 140–141
equilibrium levels, 177
full-employment, 182
GDP gap, 131
heterogeneous, 106
increasing returns, 312–313
in least-cost production, 35
long-run aggregate supply
curve, 192
market value, 118
means of increasing, 126
Okun’s law, 131
per-unit production costs, 136
in recession, 290
Say’s law, 182
short-run aggregate supply
curve, 193
of U.S. businesses, 69
value added to, 107
value of in U.S., 65
Output approach to GDP, 108
Outsourcing, 355
Paper money, 33, 229–230
acceptability of, 233
legal tender, 233
Partnerships, 68
Part-time employment, 129
Part-time jobs, 308
Pay for performance, 74
PayPal, 240
Payroll taxes, 80
Peak, 127
Pegged exchange rates, 369–371,
372–373
Pension funds, 238
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Pensions and income security
spending, 77
PepsiCo, 6
Per capita income
in China, 316
global perspective, 8
Personal consumption
expenditures, 67–68, 108
Personal distribution of income,
66–67
Personal income, 113–114
Personal income tax
federal, 78–79
of states, 80
Personal saving, 67, 147
Personal taxes, 67
determinant of aggregate
demand, 190
Per-unit production costs, 136, 195
calculating, 195
causes of increase in, 195–196
and changes in aggregate supply,
194
in cost-push inflation, 289
effect of reducing,
195
reduced in recession, 293
in short run, 193
Petition of the Candlemakers
(Bastiat), 100
Pfizer, Inc., 68
Phillips, A. W., 291
Phillips curve
aggregate supply shocks and,
292–293
definition, 291
and disinflation, 295
as inflation-unemployment
tradeoff, 291–292
long-run, 294–295
short-run, 294
and stagflation, 293
Planned investment, 167
in aggregate expenditures
model, 168
and inventory changes, 171–172
saving equal to, 171
Plant, 68
Plant and equipment, 309
Policy dilemma, 289–290
Policy makers
policy dilemma, 289–290
use of national income accounts,
106
Policy rules
balanced budget, 331–332
monetary rule, 330–331
Taylor rule, 330
Political business cycles, 217
Politics
of fiscal policy, 217
of protectionism, 95–96
Pollution, 72, 315
and GDP, 119
Positive economics, 7
Positive externalities
correcting for, 73
definition, 72
Positive net exports, 173
Positive slope, 23
Post hoc fallacy, 17
Postrel, Virginia, 40
Potential GDP, 131, 331
versus actual GDP, 132
Potential output, 131
economy at, 286–287
Price(s); see also Equilibrium price
classical view, 321
and consumer tastes, 35
and demand, 45–46
on demand curve, 46
and distribution of output, 35–36
domestic resources, 194
downward inflexibility, 199
effect of shortage, 54–55
effect of surplus, 54
effect of tariffs/quotas, 350–351
expectations about future, 151
in hyperinflation, 141
imported resources, 194–195
income effect, 46
and inflation, 74
in inflation, 134
Keynesian view, 322
in law of supply, 50
and market power, 195
in market system, 31
menu costs, 199
monetarist view, 323
in monetary units, 229
and money
inflation and acceptability of,
234
purchasing power, 233–234
and quantity demanded, 46
ratchet effect on, 200, 211
in rational expectations theory,
328
rationing function, 55
set by government, 57–61
substitution effect, 46
terms of trade, 343
and ticket scalping, 55
Price ceilings
black market result, 59
definition, 58
on gasoline, 58–59
graphical analysis, 58
rationing problem, 58–59
rent controls, 59
Price discrimination, 353
Price floors
additional consequences, 60–61
definition, 59
graphical analysis, 59–60
surpluses from, 59–60
Price index
base year, 117
chain-type annual weights, 118
definition, 116–117
dividing nominal GDP by, 117
real-world considerations and
data, 117–118
Price level
in AD-AS model, 276–277
in aggregate demand curve, 188
and aggregate expenditures
model, 205–206
and aggregate supply shocks,
293
anticipated changes, 327, 328
and changes in aggregate
demand, 189–192
with changes in aggregate
supply, 193–196
classical view, 322
contractionary fiscal policy, 211
in cost-push inflation, 136,
289–290
with deflation, 140, 198
in demand-pull inflation, 136,
289
effects in long run, 287
effects of short-run changes,
286–287
and foreign purchases effect, 189
income effect, 188
and increase in aggregate supply,
200–202
in long run, 286
in long-run aggregate supply
curve, 192
missing in aggregate
expenditures model, 183
and monetary policy, 271–272
nominal wages unresponsive to
changes, 286
and purchasing power, 233–234
ratchet effect, 200, 211
in real-balances effect, 189
in recession, 209, 290
in short-run aggregate supply
curve, 193
stability, 234
substitution effect, 188
unanticipated changes, 327–328
wage adjustments to, 192–193
Price-level changes, 366–367
Price level surprises, 327–328
Price of unrelated goods, 49
Price-quantity principle, 6
Prices of other goods, 52
Price stability, 201
Price wars, 199
Primary dealers, 263
Prime interest rate, 268
in U.S. 1996–2006, 269
Principal-agent problem, 69–70
Principals, 70
Principle of comparative
advantage, 343
Private banks, 237
Private goods, 73
Private property
definition, 30
and freedom of choice, 30
in market system, 29–30
Private sector
business population, 68–70
households, 66–68
Private transfer payments, 107
Pro-cyclical fiscal policy, 217
Producer expectations, 52
Production
in command systems, 29
defense vs. civilian goods, 14
effect of tariffs, 350–351
least-cost, 35
marginal cost, 50
to offset disequilibrium, 160
problems in command systems,
38
Say’s law, 182
substitution in, 52
taxes on, 112
value-added in stages of, 107
Production acceleration, 311–314
conclusions on, 314
implications, 313–314
reasons for
global competition, 313
increasing returns, 312–313
information technology, 312
microchip, 312
start-up firms, 312
skepticism about, 314
Production capacity, 304
Production costs; see Costs of
production
Production decisions, 34–35
Production possibilities curve
and comparative advantage,
341–346
definition, 11–12
and economic growth, 15–16
law of increasing opportunity
costs, 12–13
optimal resource allocation,
13–14
present choices and future
possibilities, 16–18
slope of, 13
unemployment in, 14–15
United States and Brazil,
342–346
Production possibilities model
and aggregate supply, 305
assumptions, 11
of comparative advantage, 90–92
economic growth, 303–305
in AD-AS model, 305–306
in extended AD-AS model,
305–306
growth and productive
possibilities, 303–304
labor productivity, 304
economics of war, 14
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