TITLE : MACROECONOMICS. 2ND ED.

This second edition presents a substantially revised version of our book. All chapters have been revised to refleet the results of new researeh, new data, readers' comments and suggestions, and our own attempts to improve the text.

There are major changes in the chapters on aggregate supply (Chapter 11) and on the open economy (Chapters 18 and 19). These chapters have been rewritten both to simplify the exposition and to give more space and emphasis to important developments. Thus Chapter 11 deals more extensively with supply shocks, and the open economy section has an expanded discussion of adjustment problems in inflationary economies. The distinction between real and nominal interest rates has been given more emphasis in this edition, particularly in Chapter 13. Chapter 10 has been expanded to include a description and analysis of the Great Depression of the 1930s.

The result of these revisions, we believe, is a text that is substantially improved over the first edition but one that is recognizably the same book. Our overriding objective is still to explain important points of analysis as carefully, thoroughly, and simply as possible, in order to make clear the relevance of macroeconomic theory to the understanding of the behavior of the economy.

We have been delighted with the success of the first edition and are grateful to the many readers who have given us suggestions for improving the text. Sinee we have been unable to accept all their suggestions, none of them should be held responsible for the deficiencies we hope they are fewer obtained in this edition. Among those who have given advice are: Andrew Abel, Elizabeth Allison, Richard Anderson, Franeis Bator, Olivier Blanehard, Thomas Bonsor, Cary Brown, Carl Christ, Allan Drazen, Robert Eisner, George Feiwel, Rendigs Fels, Jeffrey Frankel, Benjamin Friedman, Dennis Hanseman, John Kareken, Edi Karni, David Kendriek, David Laidler, Kathleen Langley, Joram Mayshar, Erwin Miller, Frederie Mishkin, Edward Offenbacher, Lueas Papademos, Don Patinkin, Don Riehter, Thomas Russell, Walter Salant, Masaki Shinbo, Robert Solow, Michael Spiro, Richard Startz, Houston Stokes, Larry Summers, Peter Temin, and Miehael Veall. We benefited, too, from eomments and suggestions made by reviewers of the second edition: James Dugan, Michael Edgmand, Hajime Miyazaki, Aris Protopapadakis, and Stephen Van der Ploeg.

A totally revised version of the Instructor's Manual, prepared by us, is available on request from MeGraw Hill. A Study Guide prepared by Riehard Startz of the University of Pennsylvania is now available to aceompany this edition. The Study Guide eontains a wide range of questions, starting from the very easy and progressing in each chapter to material that will challenge the more advanced student. It is a great help in studying, particularly since active learning is so important.

We have once more been fortunate in the assistanee we have had. David Modest provided outstanding research assistance and moral support. Carolyn Dedutis did most of the typing.

Rudiger Dornbusch Stanley Fischer Our aim in writing this book has been to explain how modern macroeconomies is used in understanding important economic issues, and to help the reader analyze macroeconomic problems for her or himself. The book provides full coverage of basic macroeconomies, such as national income accounting, aggregate demand, and IS-LM analysis. It goes beyond the standard coverage in presenting also the theory of aggregate supply, the interesting and vitally important topics of inflation and unemployment, and a detailed treatment of basic open-economy macroeconomies. No important topic has been omitted because it is too difficult, but we have taken great pains to make nothing more difficult than it need be.

The book is policy- and issue-oriented, and this orientation is emphasized in a number of ways. Any presentation of macroeconomies and economic policy has to ask why, with all the theory we have at our disposal, recent economic performance has been so poor. We discuss problems of economic policy making directly in Chapters 9 and 15. Then in Chapters 10 and 16 we apply our basic macro theory to study the behavior of the economy in the 1960s and 1970s, respectively. Policy making and its problems are also emphasized by our continual referenees to economic events, issues, and dilemmas in the postwar United States economy, as we elucidate the relevance of the theoretical material. Finally, policy considerations are emphasized in that a full chapter is devoted to a discussion of the public sector budget and its financing. That chapter discusses not only the facts about government spending, taxes, and the national debt but also considers how the debt is financed, the meaning of the burden of the national debt, and the relationship between government budget deficits and inflation.

Macroeconomies is less cut-and-dried than microeconomic. That makes it unsatisfying if you are looking for definite answers to all economic problems, but should also make it more interesting because you have to think hard and critically about the material being presented. We have not hesitated to indicate where we think theories are incomplete. We unfortunately cannot guarantee that you will not at some future time have to unlearn something you learned from this book, but we hope you will have been warned.

Because the state of macroeconomies is not settled, and because it is so intimately tied up with policy making, the field is often seen as one in which anything goes and in whieh opposing Monetarist and Keynesian schools contend on almost every point. That is simply untrue. There are substantial areas of agreement among almost all macroeconomists but it is less interesting to discuss points of agreement once you have understood them than to argue about disagreements. However, we do not emphasize the Keynesian-Monetarist debate in this book, preferring to diseuss substantive matters and mentioning alternative views where relevant. Some prepublication reviewers of the book labeled us Keynesians and others called us Monetarists. We are quite happy to be known as neither or both.

HOW TO USE THE BOOK

To the Student:

Because we have not shied away from important topics even if they are difficult, parts of the book require careful reading. There is no mathematics except simple algebra. Some of the analysis, however, involves sustained reasoning. Careful reading should therefore pay off in enhanced understanding. Chapter 1 gives you suggestions on how to learn from this book. The single most important suggestion is that you learn actively. Some of the chapters (sueh as Chapter 9) are suitable for bedtime reading, but most are not. Use pencil and paper to be sure you are following the argument. See if you can find reasons to disagree with arguments we make. Work the problem sets! Be sure you understand the points contained in the summaries to each chapter. Follow the economic news in the press, and see how that relates to what you are learning. Try to follow the logic of the budget or any economic packages the administration may present. Occasionally, the chairpersons of the Federal Reserve Board or the Council of Economic Advisers testify before the Congress. Read what they have to say, and see if it makes sense to you.

Rudiger Dornbusch Stanley Fischer