TITLE : MACROECONOMICS: THEORY, PERFORMANCE, AND POLICY. 2ND ED.

 
PREFACE  vii
 
Part I Fundamentals of Macroeconomics
 
1 The Macroeconomy  4
1.1 Recent Performance of the Macroeconomy 4
    Employment 7, Inftation 8, Interest Rates 9
1.2 Explaining Fluctuations: Flexible or Sticky Prices? 11
1.3 Recent Advances in Macroeconomics 14
    Price Adjustment 15, Rational Expectations 16, HOWDID TODAY'S
    MACROECONOMISTS COME TO STUDY ECONOMICS? 17
1.4 The Macroeconomic Model Used in This Book 18
    Review and Practice 19
    Major Points 19, Key Terms and Concepts 20, Questions for
    Discussion and Review 20, Problems 20
 
2 Measuring Economic Performance: Output and Income	23
2.1 Gross National Product 23
2.2 Measuring GNP through Spending 24
    Consumption 25, Investment 25, Government Purchases 27, Imports
and
    Exports 27, The Recent Record 28, BRINGING ASTRONOMICAL NUMBERS
    DOWN TO EARTH 29, Which Spending Items Should Be Included? 30,
Real
    GNP 30, QUARTERLY GNP STATISTICS AND RECESSIONS 31, COMPUTING
    GROWTH RATES 33
2.3 Measuring GNP through Production: Value Added 33
2.4 Measuring GNP through Income 35
2.5 Saving and Investment 38
    Saving and Investment in an Open Economy 39, Saving and Ckanges in
    Assets 41
2.6 Transactions with the Rest of the World: The Balance of Payments
    Accounts and the Exchange Rate 42
    Balance of Payments Accounts 43, The Exchange Rate 44
    Review and Practice 46 Major Points 46, Key Terms and Concepts 46,
    Questions for Discussion and Review 47, Problems 47
 
3 Monitoring the Economy: Inflation and Employment	51
3.1 Measuring Inflation 51
    Price Indexes 52, Deftators 54
3.2 Measuring Employment, Unemployment, and Wages 55
    Hours per Week and Total Hours 56, Unemployment 57, Okun's Law 59,
    THE LABOR MARKET IN THE 1960s AND THE 1980s 60, Wages 61
3.3 Productivity 62
    Review and Practice 64
    Major Points 64, Key Terms and Concepts 65, Questions for
    Discussion and Review 65, Problems 65
 
4 Spending Balance  68
4.1 An Overview 69
    A Firm's Response to Changes in Demand 69, An Example: General
    Motors 71
4.2 Consumption and Income 72
    The Income Identity 72, The Consumption Function 73, GRAPHS,
    SLOPES, AND INTERCEPTS VERSUS ALGEBRA AND COEFFICIENTS 75
4.3 The Point of Balance of Income and Spending 76
    Graphical Analysis of Spending Balance 77, Algebraic Solution 79,
    DOES A TAX CUT PAY FOR ITSELFi 80, How Spend ing Balance Is
    Maintained 81, The Multiplier 82
4.4 Spending Balance with Foreign Trade 87
    Exports and Imports 87, THE DECLINE OF THE MULTIPLIER 89 Review
and
    Practice 90 Major Points 90, Key Terms and Concepts 91, Questions
    for Discussion and Review 91, Problems 91
 
5 Financial Markets and Aggregate Demand  94
5.1 Investment and the Interest Rate 94
    The Investment Demand Function 95, The Meaning and Interpretation
    of R 97, PORTFOLIO INVESTMENT AND MACRO INVESTMENT 98
5.2 Net Exports and the Interest Rate 99
5.3 The Money Market and the Interest Rate 100
    The Demand for Money 100, The Money Supply 102
5.4 The IS-EM Model 103
    The IS Curve 105,tThe LM Curve 107, Algebraic Derivation of the IS
    and LM Curves 110, Finding Income Y and the Interest Rate R 112
5.5 Policy in the IS-LM Model 113
    Monetary Policy 113, Fiscal Policy 114, IS-LM IN THE BUSINESS
PACES
    115, The President and the Fed 116, The Relative Effectiveness of
    Monetary and Fiscal Policy 116, The lS-LM lnterpretation 117
5.6 The Aggregate Demand Curve 119
    Monetary and Fiscal Policy 122
    Review and Practice 123
    Major Points 123, Keg Terms and Concepts 123, Questions for
    Discussion and Review 123, Problems 124
 
6 Aggregate Supply and Price Adjustment  127
6.1 Aggregate Supply 127
    Labor 128, Capital 128, Technology 129, Potential GNP 129
6.2 Price Stickiness and the Determination of Output in the Short
    Run 132 Determination of Output 132, HOW THE REAL BUSINESS CYCLE
    SCHOOL VIEWS SUPPLY 134, Determination of Unemployment 135
6.3 Price Adjustment 137
    Relative Price Setting and Imperfect Information 137, What
    Determines Expected Inflation? 140
6.4 Combining Aggregate Demand and Price Adjustment 143
    HICH TECH MACRO CRAPHICS 145, Algebraic Derivation 148
    Review and Practice 150
    Major Points 150, Key Terms and Concepts 150, Questions for
    Discussion and Review 150, Problems 151
 
7 Macroeconomic Policy: A First Look 154
7.1 Shocks and Disturbances to the Economy 155
    Shocks to Aggregate Demand 155, Analyzing the Effects of Aggregate
    Demand Shocks 156, Shocks to the Price Level 158, THREE OIL PRICE
    SHOCKS 160
7.2 Responding to Aggregate Demand Shocks: Stabilization Policy 161
    When Do Macroeconomists Disagree about Stabilization Policy? 162
7.3 Responding to Price Shocks 165
7.4 Macroeconomic Policy as a Rule 167
    Why Focus on Policy Rules7 169
7.5 Disinflation 170
    Setting Policy to Hit a Target Level of GNP 171, Alternative
    Disinflation Paths 173, OTHER SCHOOLS OF THOUCHT ON
    DISINFLATION 177
7.6 Monetary versus Fiscal Policy 178
    Review and Practice 179
    Major Points 179, Key Terms and Concepts 180, Questions for
    Discussion and Review 180, Problems 180
 
Part II The Micro Foundations of Aggregate Demand
 
8 Consumption Demand  187
8.1 Fluctuations in GNP, Consumption, and Income 188
    GNP and Personal Disposable Income 190, The Relation between Real
    Disposable Income and Consumption 191
8.2 Defects in the Simple Keynesian Consumption Function 192
    The Effect of Consumption Errors on Forecasting and Policy 194,
    Short-Run versus Long-Run Marginal Propensity to Consume 194
8.3 The Forward-Looking Theory of Consumption 197
    The Intertemporal Budget Constraint 198, Preferences: Steady
Rather
    than Erratic Consumption 200, Preferences: How Large an
Inheritance
    for the Next Generation? 201, The Marginal Propensity to Consume
    Out of Temporary versus Permanent Changes in Income 202,
    Anticipated versus Unanticipated Changes in Income 204
8.4 How Well Does the Forward-Looking Theory Work? 204
    The Short-Run and Long-Run MPC: A Rough Check of the Theory 205,
    WHY IS THE SAVING RATE HICHER IN JAPAN THAN IN THE UNITED STATES?
    206 And Modigliani: Do Assets Matter for Consumption? 207,
    Friedman: Does Past Income Matter for Consumption? 207, Where Do
We
    Stand Now? 208, DOES CONSUMPTION TAKE A RANDOM WALK? 209, Defects
    in the Forward-Looking Model 212
8.5 Real Interest Rates, Consumption, and Saving 214
    Effect of Real Interest Rates on Work 215
8.6 Consumption and the IS Curve 216
    The Slope of the IS Curve 216, Shifts in the Curve Due to Tax
    Changes 217
    Review and Practice 217
    Major Points 217, Key Terms and Concepts 218, Questions for
    Discussion and Review 218, Problems 219
Appendix: A Graphical Approach to Consumption Planning 222
 
9 Investment Demand 224
9.1 Fluctuations in Investment Spending 224
9.2 How a Business Looks at the Investment Decision 227
    Determination of the Rental Price of Capital 231, The Rental Price
    and the Decision to Buy New Capital Goods 233, Expected Changes in
    the Future Price of Capital 234
9.3 The Investment Function 234
    Depreciation and Gross Investment 236, Lags in the Investment
    Process 237,
    The Aggregate Investment Demand Function 238
9.4 Taxes and Investment 239
    Permanent Tax Changes 239, THE EFFECT OF THE TAX REFORM ACT OF
1986
    ON THE RENTAL PRICE OF CAPITAL 240, Anticipated Tax Changes 241
9.5 Residential Investment 243
    Housing Investment and Monetary Policy 243
9.6 Inventory Investment 245
9.7 The Investment Function and the IS Curve 247
    Review and Practice 249
    Major Points 249, Key Terms and Concepts 249, Questions for
    Discussion and Review 250, Problems 250
Appendix A: Capital Budgeting and the Rental Price of Capital 254
Appendix B: Tobin's q and the Rental Price of Capital 256
 
10 The Foreign Trade Balance and the Exchange Rate  259
10.1 Foreign Trade and Aggregate Demand 260
10.2 The Exchange Rate 262
     The Exchange Rate and Relative Prices 263
10.3 The Determinants of Net Exports 265
     The Effect of the Exchange Rate 265, The Effect of Income 266,
The
     Net Export Function 266
10.4 The Exchange Rate and the Interest Rate 268
10.5 The IS Curve and Economic Policy in an Open Economy 271
     Algebraic Derivation of the Open-Economy IS Curve 271, Effects of
     Monetary and Fiscal Policy 272, THEBUDGETDEFICITAND THE TRADE
     DEFICIT 272, Price Adjustment 274
10.6 The Exchange Rate and the Price Level 274
10.7 Protectionism versus Free Trade 276
     Macroeconomic Effects of Protectionism 277, U.S.
     COMPETITIVENESS  278
10.8 Stabilizing the Exchange Rate 279
     Review and Practice 282
     Major Points 282, Key Terms and Concepts 282, Questions for
     Discussion and Review 283, Problems 283
     Appendix: The Interest Rate and the Exchange
     Rate under Rational Expectations 286
     Interest Rate Parity 286, Testing Interest Rate Parity Using
     Futures Marhets 287, The Exchange Rate and Its Expected
     Depreciation 289, The Interest Rate Differential and the U.S.
     Interest Rate 291
 
11 The Government's Budget Deficit and Aggregate Demand	295
11.1 Government Budgets 296
     The Federal Government Budget and Deficit 296, State and Local
     Government Budgets 297
11.2 Fluctuations in the Deficit: Purchases, Transfers, and Taxes 298
     INDEXING THE TAX BRACKETS 303
11.3 The Effects of the Government Deficit 304
     Cyclical versus Structural Deficits 304, HOW THE ECONOMY DESTROYS
     BUDGET PROJECTIONS 306, Have Deficits Been Related to Interest
     Rates in Recent U.S. History? 307, The Def cit and the Explosion
     of Government Debt 308, Ricardian Equivalence 310,
DEFICITCONTROL:
     THE GRAMMRUDMAN-HOLLINGS APPROACH 311
11.4 The Government and the IS Curve 313
     Review and Practice 314
     Major Points 314, Key Terms and Concepts 314, Questions for
     Discussion and Review 314, Problems 315
 
12 The Monetary System 319
12.1 The Elements of a Monetary System 320
12.2 Money Supply: How the Fed Controls It 322
     Required Reserves and Excess Reserves 326, Borrowed Reserves and
     the Discount Rate 327, The Federal Open-Market Committee 328,
     MONEY ANNOUNCEMENTS, EXPECTATIONS, AND INTEREST RATES 329,
     Distinguishing between Monetary and Fiscal Policy 330, FINANCING
     GOVERNMENT THROUGH THE PRINTING PRESS 331
12.3 The Demand for Money: Currency and Checking
     Deposits 331
     What Are the Opportunity Costs of Holding Funds as MoneyP 332,
The
     Transactions Demand for Money: An Inventory Theory 334, Money as
a
     Store of Wealth 336, The Demand for Checking Deposits to Pay for
     Banking Services 337, Demand Functions for Money 338, VELOCITY
AND
     MONEY DEMAND 342
12.4 The LM Curve and the Fed's Policy Rule for the Monetary Base 343
     Money Supply (M1) Target 344, Interest Rate Target 345, GNP
     Target 346
12.5 How the Fed's Rule Determines the Effect of Fiscal Policy 346
12.6 Unavoidable Shocks to the IS Curve and LM Curve 348
12.7 Lags in the Effect of Monetary Policy 350
12.8 Coordinated Fiscal and Monetary Policy 351
     Review and Practice 352
     Major Points 352, Key Terms and Concepts 353, Questions for
     Discussion and Review 353, Problems 354
 
Part III The Micro Foundations of Aggregate Supply and Price
Adjustment
 
13 Aggregate Supply and Economic Growth 359
13.1 The Microeconomics of the Labor and Capital Markets 360
     The Demand for Labor 361, The Supply of Labor 362, MICROECONOMIC
     ESTIMATES OF INCOME AND SUBSTITUTION EFFECTS IN LABOR SUPPLY 362,
     Employment with Flexible Wages and Prices 364
13.2 The Natural Rate of Unemployment 366
     Measuring the Natural Rate of Unemployment 367
13.3 Long-Term Economic Growth 369
13.4 Policies to Stimulate Growth 370
     Policies to Improve Productivity 371, Policies to Stimulate
     Capital Formation 371, Policies to Increase Labor Supply 373
13.5 Monetary and Fiscal Policy in a Full-Employment Economy 375
     Fiscal Policy in the Classical Model 375, Monetary Policy in the
     Classical Model 377
13.6 Long-Run Output Growth and Inflation 378
     Review and Practice 380
     Major Points 380, Key Terms and Concepts 380, Questions for
     Discussion and Review 381, Problems 381
Appendix A: Deriving the Growth Formula 383
Appendix B: The Algebra of Rational Expectations in the Classical
IS-LM
            Model 384
 
14 New Classical Theory	387
14.1 Real Business-Cycle Theories 389
     Shifts in Labor Demand 390, Shifts in Labor Supply 391
14.2 Imperfect Information: The New Classical Theory 392
     The Firm's Information about the Price Level 393, The Firm's
     Information about the Price Level: A More Sophisticated View 394,
     The Lucas Supply Curve 398
14.3 Policy Implication of the Imperfect Information Model 400
     NEW CLASSICAL THEORY IN WASHINCTON 403
14.4 Does the Imperfect Information Theory Explain the Departures? 404
     Review and Practice 408
     Major Points 408, Key Terms and Concepts 409, Questions for
     Disccussion and Review 409, Problems 410
 
15 The Theory of Wage and Price Rigidities 413
15.1 Wage Determination 413
     Wage Determination in the Large Union Sector 414, Wage
     Determination in the Non-Union Sector 418, Why Are Wages Set for
     Long Periods with Few Contingencies? 420, Why Is Wage Setting
     Staggered ? 422
15.2 Price Determination 423
     Why Do Firms Set Prices as a Fixed Markup over Costs? 425,
Factual
     and Theoretical Rationales for Wage and Price Rigidities: An
     Assessment 428,
     WHAT DOES A UNION LABOR CONTRACT LOOK LIKE? 429
15.3 Policy Implications 431
     Disinflation and the Real Effects of Monetary Policy 432
15.4 A Simple Model of Staggered Wage Setting 435
     Review and Practice 438
     Major Points 438, Key Terms and Concepts 438, Questions for
     Discussion	and Review 439, Problems 439
     Appendix: Contract Theory: An Extension of Auction Market
     Theory 441 The Auction Market Model: A Review 442, The Optimal
     Contract Model 444
 
16 Aggregate Dynamics and Price Adjustment	448
16.1 The Wage-Price Process as a Whole 448
16.2 Changes in the Coefficients of the Price-Adjustment Model 450
	 The Effect of Wage Indexing 450, Length and Severity of Business
	 Cycles 451
16.3 Models of the Expected Inflation Term 452
	 Changes in the Model of Expected Inftation 453, Example 1: Effect
     of a One-Year Stimulus 454, Example 2: Effect of a Materials
Price
     Shock 455, Example 3: Effect of a One-Year Inflation 456, Example
     4: Effect of Extended High Output 457
16.4 The Combined Operation of Price Adjustment and Aggregate
     Demand 460
     Example 1: Recovery from a Demand-Deficient Recession 461,
Example
     2: Recovery from Stagy?ation 463, Example 3: A Boom 464, Example
     4: An Oil Price Shoch 466
16.5 Inflation-Output Loops in the United States, Germany, and the
     United Kingdom 467
     WHY ARE OUTPUT FLUCTUATIONS IN JAPAN SO SMALL ? 469
     Review and Practice 470
     Major PSints 470, Key Terms and Concepts 471, Questions for
     Discussion and Review 471, Problems 472
 
Part IV Macroeconomic Policy Evaluation
 
17 Designing and Maintaining a Good Macro Policy  477
17.1 General Principles of Macro Policy Analysis 477
17.2 Instruments and Targets 483
17.3 Uncertainty and Timing Considerations 484
17.4 The Benefits of Full Employment and Price Stability 485
     Why Is Inflation Undesirable? 487, Costs of Output Loss and
     Unemployment 490
17.5 The Policy Frontier between Inflation Loss and Unemployment
17.6 The Optimal Policy for Dealing with Price Shocks 496
     The Message for Policy Makers 497, Nominal GNP Targeting: A
     Reasonable Way to Express Policy? 498, WHAT WOULD AN OPTIMAL
     POLICY HAVE BEEN IN 1979-86? 499
17.7 Changing the Policy Frontier 501
     Streamline the Labor Market 501, Improve Indexation 503, Avoid
     Government Price Shocks 503, Controls and Incentives 504, Trade
     Policy 505
     Review and Practice 506
     Major Points 506, Key Terms and Concepts 507, Questions for
     Discussion and Review 507, Problems 508
 
18 Macroeconomic Policy in the World Economy	511
18.1 The International Monetary System 512
     The Bretton Woods System 513, Inflation Differentials and Parity
     Adjustments 515, The Devaluation of the Dollar and the Collapse
of
     Bretton Woods 517, The Current System 519, Alternative Models:
     Macro Policy Analysis in the World 522
18.2 Macro Policy in an Economy with Sticky Prices: The Case of a
     Fixed Exchange Rate 522
     Central Bank Activities with Fixed Rates 523, Sterilized
     Intervention 524, Capital or Exchange Controls 525
18.3 Macro Policy in a Classical Open Econmy  525
     A Small Classical Economy with a Fixed Exchange Rate 526, A Small
     Classical Economy with a Floating Exchange Rate  530, World
     Inflation with Floating Exchange Rates  530
18.4 International Macro Policy Coordination  532
     THE ANNUAL ECONOMIC SUMMITS 535
     Riview and Practice  536
     Major Points 536, Key Terms and Concepts 536, Questions for
     Discussion and Review  536, Problems  537
Appendix: "Overshooting" of Exchange Rates with Sticky Prices and
     Rational Expectations  539
 
Index 543