The macro economy today 13e y schiller

Beyond the content in the book, students can connect to a wealth of online tools: • Connect real-world examples to life with YouTube activities and Video Cases* • Connect with feedback

all students Core economic concepts are clearly defi ned and connected to real-world policy issues

and current events The consistent underlying themes of market vs government, balanced

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Current.

Economics happens all around us every day and The Macro Economy Today provides the most

up-to-date content available by keeping current with today’s economy and relating it to core concepts

• Latest coverage of the Great Recession, Credit Crisis and Fiscal Stimulus policies

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Connected.

The Macro Economy Today keeps students connected to the real world, and gives them ample

opportunity to apply and practice what they’re learning Beyond the content in the book, students

can connect to a wealth of online tools:

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• Connect with feedback through end-of-chapter problems and Expanded Feedback*

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McGraw-Hill is proud to offer a new mobile study app for

students learning economics from Schiller’s The Macro Economy

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McGraw-Hill is proud to offer a new mobile study app for

students learning economics from Schiller’s The Macro Economy

Today 13th edition The Study Econ app that accompanies your textbook will allow you to study on the go… whether you’re waiting for a class to start, sitting on a bus, or just lounging on the couch

Features of the Study Econ mobile app include:

Flashcards of every key term and definition from the textbook, customizable by chapter.

Basic math review for those pesky formulas we sometimes forget For example, how do you calculate a percent increase? Not sure? Well, it’s in the app!

Customizable self-quizzes that allow for more practice and feedback.

Common mistakes and pitfalls are included to help master key concepts.

Various games which help make learning key terms and concepts more engaging and fun!

Visit your mobile app store and try Study Econ today! Search

“Study Econ” and download Schiller’s The Macro Economy Today

The Study Econ mobile app was built with the student in mind

You are on the go, and your study tools should be, too!

Would you like to be more efficient when studying for exams?

Do you need more help understanding graphs?

STUDENTS GET:

• Easy online access to homework, tests, and

quizzes assigned by your instructor.

• Immediate feedback on how you’re doing

(No more wishing you could call your instructor

at 1 a.m.)

• Quick access to lectures, practice materials,

eBook, and more (All the material you need to

be successful is right at your fi ngertips.)

• A Self-Quiz and Study tool that assesses

your knowledge and recommends specifi c

readings, supplemental study materials,

and additional practice work.*

*Available with select McGraw-Hill titles.

Want to get better grades? (Who doesn’t?)

Prefer to do your homework online? (After all, you are online anyway…)

Need a better way to study before the big test?

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The McGraw-Hill Series Economics

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Schiller, Bradley R., 1943–

The macro economy today / Bradley R Schiller, Cynthia Hill, Sherri Wall.—13th ed.

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Includes index.

ISBN 978-0-07-741647-8 (alk paper)

ISBN 0-07-741647-3 (alk paper)

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A B O U T T H E A U T H O R S

Bradley R Schiller has over four decades of experience teaching introductory economics

at the University of Nevada, American University, the University of California (Berkeley

and Santa Cruz), and the University of Maryland He has given guest lectures at more than

300 colleges ranging from Fresno, California, to Istanbul, Turkey Dr Schiller’s unique

contribution to teaching is his ability to relate basic principles to current socioeconomic

problems, institutions, and public policy decisions This perspective is evident throughout

The Macro Eco n omy Today

Dr Schiller derives this policy focus from his extensive experience as a Washington

consultant He has been a consultant to most major federal agencies, many congressional

committees, and political candidates In addition, he has evaluated scores of government

programs and helped design others His studies of poverty, discrimination, training

pro-grams, tax reform, pensions, welfare, Social Security, and lifetime wage patterns have

appeared in both professional journals and popular media Dr Schiller is also a frequent

commentator on economic policy for television and radio, and his commentary has

appeared in The Wall Street Journal, The Washington Post, The New York Times, and Los

Angeles Times, among other major newspapers

Dr Schiller received his Ph.D from Harvard and his B.A degree, with great distinction,

from the University of California (Berkeley) He is now a professor of economics at the

University of Nevada in Reno, where he hosts McGraw-Hill’s annual West Coast Teaching

Economics Conference On his days off, Brad is on the tennis courts, the ski slopes, or the

crystal-blue waters of Lake Tahoe

Cynthia D Hill is a professor of economics at Idaho State University, where she has

dedi-cated herself to helping students develop as thinkers and scholars Her academic research

is primarily focused on economic education and the advancement of classroom pedagogy

Over the past decade Professor Hill has undertaken many administrative roles, which focus

on student success and educational advancement These positions include director of the

University Honors Program, director of the Center for Teaching and Learning, and

cur-rently the position of executive director of the Student Success Center

Professor Hill has won numerous teaching and public service awards over her 14-year

tenure at Idaho State University, including the Carnegie Foundation for the Advancement of

Teaching Idaho Professor of the Year, two-time Master Teacher, five-time Most Influential

Professor, two-time Outstanding Public Servant, and Distinguished Public Servant She

earned her bachelor’s degree from the University of Montana and her Ph.D from Washington

State University

Sherri L Wall has taught economics in the School of Management at the University of

Alaska—Fairbanks since 2006 She is the founding faculty advisor for two student

organiza-tions at UAF: SWEET (Students Who Enjoy Economic Thinking) and SIFE (Students in

Free Enterprise) The UAF SIFE team has won three Regional championships, and in 2011,

were 2nd runner up in the opening round of competition at the National Exposition Sherri

was a finalist in the Market-Based Management Institute’s Economic Communicators

con-test at the Association of Private Enterprise Conference in 2008 In that same year, she was

recognized as Outstanding Faculty Member of the year by the UAF student body, and in

2010, Outstanding Student Organization Advisor

Sherri has a Master’s of Science in Resource and Applied Economics, and is completing

her Ph.D through a National Science Foundation fellowship Her research interests include

economic issues of climate change in Alaska, institutional economics and economic

educa-tion She has presented her research at universities and conferences around the world In

her spare time, she finds great utility in the outdoor recreational opportunities in Alaska,

including flying with her husband, hiking, fishing, hunting, skiing, and trail running

vii

©Kelly Atlee Photography.

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P R E F A C E

The Great Recession of 2008–2009 lingered for far too long But that devastating ence had at least one positive effect: it revitalized interest in economics People wanted to know how a modern economy could stumble so badly And why it took so long to recover

experi-Public debates about economic theory became increasingly intense and partisan thing from Keynesian theory to environmental regulation became the subject of renewed scrutiny These debates increased the demand for economic analysis and for principles instruction as well Indeed, one could argue that the Great Recession proved that econom-ics instruction is an inferior good: as the economy contracts, the demand for economics courses increases

While we might take offense at the thought of producing an inferior good, we should certainly rise to the occasion This means bringing the real world into the classroom as never before: tying theoretical controversies about macro stability to both the ongoing busi-ness cycle and the intensely partisan policy debates about cause and effect; and getting students

to appreciate why and how economic issues were the central focus of the 2012 election campaigns

The Macro Economy Today has always been a policy-driven introduction to economic

principles Indeed, that is one of its most distinctive features This 13 th edition continues that tradition, with even more fervor It challenges students to think more critically about the dominant policy issues of the day Take solar energy, for example Students over-whelmingly embrace the potential of “clean” solar energy to replace “dirty” fossil fuels, thereby saving the environment, breaking the power of “Big Oil,” and achieving energy independence But what about opportunity costs? Economists preach that there is neither

a “free lunch” nor “free” solar panel The first chapter of this text tries to get students thinking more like economists—that is, about resource constraints and implied trade-offs The same critical thinking is applied in Chapter 1 to the “guns versus butter” debate that soaring budget deficits have brought to the fore once again (that is, which to cut)

Then there is the renewed debate over “taxes on the rich,” which relates both to equality (what is a “fair” distribution of the deficit–cutting burden) and to efficiency (production and investment disincentives)

A section titled, “The Economy Tomorrow” at the end of every chapter focuses on these kinds of front-page policy issues But the real-world emphasis of this text is not confined

to that feature Every chapter has an array of In the News and World View boxes that offer real-world illustrations of basic economic principles And the body of the text itself is per-meated with actual companies, products, people, and policy issues that students will recog-nize There are no mythical widgets or Jack & Jill water companies in this textbook Stu-dents will see and appreciate the links between core principles and real-life events They will also learn and remember those principles far longer

DIFFERENTIATING FEATURES

The policy-driven focus of The Macro Economy Today clearly differentiates it from

other principles texts Other texts may claim real-world content, but none comes close

to the empirical perspectives of this text Beyond this unique approach, The Macro

Economy Today offers a combination of features that no other text matches, including

the following

Most principles texts moved away from the short-run business cycles to more emphasis

on long-run macro dynamics about 10–15 years ago Many even suggested the business cycle was dead Now they know they missed the boat And so do the students who have

to read those texts and wonder why there is so little discussion of the macro events that

Macro Focus on Short-Run Cycles

viii

P R E F A C E ix

have created so much economic and political turmoil The Macro Economy Today is one

of the few textbooks that puts greater emphasis on short-run cyclicality than on long-run

stability

Another pedagogical advantage of The Macro Economy Today is its use of a single

framework for teaching all macro perspectives Other principles texts continue to

pres-ent both the Keynesian Cross framework and the aggregate demand/supply (AD/AS)

framework This two-model approach is neither necessary nor efficient All of the core

ideas of Keynesian theory, including the multiplier, can be illustrated in the AD/AS

framework Keynes never drew the “Keynesian” cross and would not use it today,

espe-cially in view of the superiority of the AD/AS model in conveying his ideas And we

all know that the Keynesian cross is of no use in illustrating the short-run trade-off

between inflation and full employment that bedevils policy makers and even defines

our concept of full employment Why overburden students with a two-model approach

that confuses them and eats scarce instruction time? Instructors who adopt this text’s

one-model approach are invariably impressed with how much more efficient and

effec-tive it is

We all know there is no such thing as a pure market-driven economy and that markets

operate on the fringe even in the most centralized economics So “markets versus

government” is not an all-or-nothing proposition It is still a central theme, however, in

the real world Should the government assume more responsibility for managing the

economy—or will less intervention generate better macro outcomes? Public opinion is

clear: as the accompanying News reveals, three out of four Americans have a negative

view of federal intervention The challenge for economics instructors is to enunciate

principles that help define the boundaries of public and private sector activity When do

we expect market failure to occur? How and why do we anticipate that government

intervention might result in gover n ment failure ? Can we get students to think critically

about these central issues? The Macro Economy Today certainly tries, aided by scores of

real-world illustrations

One-Model Macro

Markets versus Government Theme

market failure : An imperfection in the market mechanism that prevents optimal outcomes

government failure :

Government intervention that fails to improve economic outcomes

Government Failure ?

An August 2011 Washington Post poll asked a cross-section of Americans the following question:

Source: The Washington Post, © August 9, 2011 All rights reserved Used with permission

Analysis : “Government failure” occurs when government intervention fails to improve

economic outcomes—that is, solve economics problems Three out of four Americans

expect such failures to occur

Question: “In general, when the government in Washington decides to solve economics

problems, how much confidence do you have that the problem actually will

The staples of introductory economics are fully covered in The Macro Economy Today

Beyond the core chapters, however, there is always room for additional coverage In fact, authors reveal their uniqueness in their choice of such chapters Those choices tend to be more abstract in competing texts, offering “extra” chapters on pubic choice, behavioral economics, economics of information, uncertainty, and asymmetric information All of these are interesting and important, but entail opportunity costs that are particularly high at

the principles level The menu in The Macro Economy Today is more tailored to the

dimen-sions and issues of the world around us Chapter 2, for example, depicts the dimendimen-sions of the U.S economy in a comparative global framework Where else are students going to

learn that China is not the world’s largest economy, that U.S workers are the most

produc-tive, or that income inequality is more severe in poor nations than rich ones?

The same empirical foundation is apparent in the chapters on unemployment (6) and inflation (7) We economists take for granted that these are central macroeconomic prob-lems But students have little personal experience with either problem and even less appre-

ciation of their significance Chapters 6 and 7 try to bridge this gap by discussing why

unemployment and inflation are such central concerns, that is, kinds of socioeconomic harm they inflict The intent here is to help students understand and embrace our economic goals before we ask them to explore potential solutions

Chapter 18 on “Theory versus Reality” offers yet another unique perspective on economics It confronts the perennial question students ask: “If economic theory is so great, why is the economy so messed up?” Chapter 18 answers this questions by reviewing the goal conflicts, measurement problems, design issues, and implementation obstacles that constrain even the best macro policies

“Global perspective,” along with “real-world” content is promised by just about every

prin-ciples author The Macro Economy Today actually delivers on that promise This is

mani-festly evident in the titles of Chapter 2 (global comparisons) and Chapter 21 (global erty) The global perspective is also easy to discern in the boxed World View features embedded in every chapter More subtle, but at least as important, is the portrayal of an open economy from the get-go While some texts start with a closed economy—or worse still, a closed, private economy—and then add international dimensions as an afterthought,

The Macro Eco n omy Today depicts an open economy from start to finish These global

linkages are a vital dimension of macro issues (e.g., cyclical instability, monetary control)

YouTube content has come to The Macro Economy Today ! Students are always checking

things out on YouTube and even forwarding occasional videos they think relate to

econom-ics So we decided to integrate YouTube videos into The Macro Economy Today Professors

Sherri Wall (University of Alaska—Fairbanks) and Cindy Hill (Idaho State University) identified scores of YouTube videos that do, indeed, illustrate basic economic concepts These were then annotated to explain that economic content, highlighting key terms from the text

Sherri and Cindy also provided questions to test student comprehension of the economic

principles covered The result is a new and exciting student supplement to The Macro

Economy Today —a catalog of chapter-specific, engaging, and instructive YouTube videos

They are available in the book-specific Connect software system and the book-specific

Online Learning Center

Every edition of The Macro Economy Today introduces a wealth of new content and

peda-gogy This is critical for a text that prides itself on currency of policy issues, institutions, and empirical perspectives Every page, every example, and all the data have been reviewed for

currency and updated where needed Beyond this general upgrade, previous users of The

Macro Economy Today will notice some specific revisions, including the following

Each chapter ends with a feature called “The Economy Tomorrow” that challenges students

to apply key concepts to current policy issues The new Economy Tomorrow features range

Unique Topic Coverage

Global Perspective

YouTube Content!

New “Economy Tomorrow” Topics

P R E F A C E xi

from “Harnessing the Sun” (the opportunity costs of solar energy) in Chapter 1 to “Policing

World Trade” (international trade disputes) in Chapter 19

The boxed World Views in each chapter are designed to showcase the global reach of

eco-nomic principles There are various new World Views in the 13th edition, including the

2010-2011 surge in oil prices (supply and demand shifts) in Chapter 3, the $100 trillion

Zimbabwean banknote (the ravages of hyperinflation) in Chapter 7, and China’s monetary

restraint in Chapter 15 All of the World Views are annotated, are referred to in the body of

the text, and often are the subject of end-of-chapter questions These added dimensions

help ensure that students will actually read the boxed material

The boxed In the News features highlight domestic applications of basic principles In

Chapter 3 alone there are three new ones on selling human organs (supply and demand);

the BP oil spill and shrimp prices (supply shift); and ticket scalping (disequilibrium prices)

The News in Chapter 4 about firefighters watching a house burn to the ground in Tennessee

is a vivid introduction to the concepts of public goods and externalities Some of my new

favorites are the depiction of the 2008–2009 multiplier process as it spread despair beyond

the housing industry (p 213) and the avowed reluctance of banks to lend money despite

burgeoning reserves (p 322)

At the end of every chapter there are both questions for discussion and a separate set of

numerical and graphing problems The problem set is designed so that students can

answer and submit manually if desired The same problems are also embedded in the

course management system Connect to facilitate online submissions, automatic grading, and

course monitoring Both the questions for discussion and problems utilize tables, graphs,

and boxed material from the body of the chapter, requiring the students to read and

pro-cess core content As a result, the end of chapter material has to be updated along with

the text itself

We are pleased to welcome Cynthia Hill (Idaho State University) and Sherri Wall

(Univer-sity of Alaska—Fairbanks) to the author team Both are active instructors at their respective

institutions and are dedicated to teaching and using technology as an innovative part of

their courses Cindy and Sherri have been brought into the Schiller franchise as digital

coauthors They have made important contributions to the 13th edition, including revising

the end-of-chapter content, streamlining learning objective pedagogy, and most notably

updating the technology features of the text Working directly with the content in

McGraw-Hill’s homework management system, Connect, they have each created algorithmic

prob-lems, provided datasets, and accuracy–checked the content, ensuring correct and accurate

material

YouTube Videos The YouTube videos added to The Macro Economy Today’s

instruc-tional package is the most visible contribution to this edition made by Cindy and Sherri

These short, engaging videos are annotated to highlight basic economic concepts They can

be used independently by students or used as visual aids in the classroom In either case,

they will enhance the learning experience

CHAPTER-BY-CHAPTER CHANGES

The Macro Economy Today , 13th edition, features improved and expanded learning

objec-tives, end-of-chapter content, and up-to-date material and data reflecting today’s economy

in every chapter Changes include the following

Chapter 1 focuses on respective powers of market and government to fashion economic

outcomes, reinforcing the market versus government theme of the text A new discussion

of normative versus positive analysis, an In the News article on unemployment in 2011, and

illustrations of opportunity cost have been added, including a new Economy Tomorrow

section discussing solar power and the opportunity costs of development

New “World Views”

New “In the News”

sch16473_fm_i-xxxii.indd Page xi 11/30/11 12:36 PM user-f494 /Volume/208/MH01587/sch16473_disk1of1/0077416473/sch16473_pagefiles

Chapter 2 is thoroughly updated with global and domestic comparison data, such as comparative output (GDP); GDP per capita around the world; GDP growth versus popula-tion growth; the education gap between rich and poor nations; the income share of the rich;

U.S output and population growth; and U.S distribution of income

Chapter 3 emphasizes comparative advantage and specialization and features In the News and World View articles such as AT&T’s price cuts on the iPhone to illustrate the law

of demand; BP’s oil spill and its effects on shrimp prices to show supply-curve shifts; ticket scalping to exemplify market shortages; the 2011 gasoline price surge to demonstrate changing equilibrium; and the selling of human organs to describe a zero price ceiling

Chapter 4’s revisions include updated domestic data, new In the News and World View articles on fire protection in regards to public goods and the free-rider dilemma, externali-ties described by deaths due to secondhand smoke, and a new Economy Tomorrow section

on public choice theory in “right-sizing government.”

Chapter 5 streamlines the discussion on real versus nominal GDP, includes updated GDP data for 2010, and has a revised World View on the subject of global living standards

Chapter 6 covers an explicit analysis of “inflationary flashpoint” that describes full ment showcases the new key term and definition of “inflationary flashpoint,” New In the News articles on structural unemployment and the unemployment rate have been added

Chapter 7 highlights the new key term “inflationary flashpoint” from the previous ter, and associates this topic in a new Economy Tomorrow section about the virtues of inflation, which includes a new article about U.K inflation and inflationary expectations

chap-This chapter also illustrates inflation and hyperinflation in the In The News and World View pieces about the 2010–2011 tuition hikes and Zimbabwe’s $100 trillion banknote

Chapter 8 adds further coverage of the Great Recession with discussions of GDP decline in a new In the News article and a revised Economy Tomorrow section focusing

on “Obama-nomics.”

Chapter 9 introduces a new key term, “autonomous consumption,” helping to simplify the discussion of consumer spending New In the News articles discuss New York State’s spending cuts in reaction to the recession and U.S leading indicators predicting the eco-nomic outlook

Chapter 10 integrates 2007–2009 investment data and In the News examples concerning residential construction and consumer spending to illustrate and streamline the multiplier process

Chapter 11 lists new CBO estimates of Obama’s stimulus effects and includes an ple of inflationary pressures in a new World View on U.K inflation

Chapter 12 incorporates the CBO decomposition of deficit into cyclical and structural ponents and identifies ownership and burdens of the national debt This chapter also covers the

com-2011 budget ceiling crisis and the debate on the com-2011 deficit/debt in a new In the News article

Chapter 13 expands the discussion of bank bailouts and includes a recent In the News article about CD rates relating to money supply (M1 and M2)

Chapter 14 focuses on the federal handling in the 2008 credit crisis, reviews the 2010–

2011 “quantitative easing” strategy, and illustrates China’s 2011 increase in reserve ments as an example of the central bank slowing economic growth

Chapter 15 uses the “Bernanke rule” to quantify equivalence of fiscal and monetary policies; discusses constraints on the effectiveness of the 2008–2011 monetary stimulus;

and features new In the News and World View articles about the Fed’s 2009–2011 massive bond purchases to stimulate economic activity, the bank’s reluctance to lend in 2010–2011, and China’s 2010-2011 monetary restraint to stabilize inflation

Chapter 16 highlights new estimates of costs and benefits of infrastructure development, Obama’s 2011 executive order requiring the rebalance between regulation and economic growth, and current In the News and World View articles about the regulation of lead con-tent used in toys potentially imposing additional costs for sellers and Japan’s tsunami/

earthquake-induced AS shift

Chapter 17 includes updated comparisons of global production and a new World View section on the IMF’s fear of raised interest rates and crowding out private investment

P R E F A C E xiii

Chapter 18 has extended coverage and discussion on the 2009–2011 stimulus

poli-cies, including QE1, QE2, and budget deals; coverage of the July 2011 deficit ceiling

debate; new global performance comparisons throughout the chapter; more emphasis

on the absence of “shovel ready” federal spending; new use of the key term

“inflation-ary flashpoint;” and an In the News article on the belated NBER dating of the Great

Recession

Chapter 19 includes updated export ratio and trade balances data New World View

and In the News articles explore tariffs on Chinese tires and sugar import quotas, discuss

the Mexican trucking dispute, and focus on “Policing World Trade” in the Economy

Tomorrow section

Chapter 20 contains updated data on foreign exchange rates, 2010 data for the U.S

bal-ance of payment summary statement and a World View about China’s deliberate attempt to

keep the value of the yuan low by purchasing foreign currency

Chapter 21 is thoroughly updated with global data such as poverty thresholds and

popu-lation, income distribution, foreign aid, growth rates, agriculture share of total output and

productivity, and business climates

EFFECTIVE PEDAGOGY

Despite the abundance of real-world applications, this is at heart a principles text, not a

compendium of issues Good theory and interesting applications are not mutually exclusive

This is a text that wants to teach economics, not just increase awareness of policy issues To

that end, The Macro Economy Today provides a logically organized and uncluttered

theo-retical structure for macro and international theory What distinguishes this text from others

on the market is that it conveys theory in a lively, student-friendly manner

Student comprehension of core theory is facilitated with careful, consistent, and effective

pedagogy This distinctive pedagogy includes the following features:

Chapter Learning Objectives Each chapter contains a set of chapter-level learning

objectives Students and professors can be confident that the organization of each chapter

surrounds common themes outlined by three to five learning objectives listed on the first

page of each chapter End-of-chapter material, including the chapter summary, discussion

questions, and student problem sets, is tagged to these learning objectives, as is the

supple-mentary material, which includes the Test Bank, and Instructor’s Resource Manual

Self-Explanatory Graphs and Tables Graphs are completely labeled, colorful, and

posi-tioned on background grids as the graph on the next page illustrates Because students often

enter the principles course as graph-phobics, graphs are frequently accompanied by

synchro-nized tabular data Every table is also annotated This shouldn’t be a product-differentiating

feature but, sadly, it is Putting a table in a textbook without an annotation is akin to writing a

cluster of numbers on the board, then leaving the classroom without any explanation

Reinforced Key Concepts Key terms are defined in the margin when they first appear

and, unlike in other texts, redefined in the margin as necessary in subsequent chapters

Website references are directly tied to the book’s content, not hung on like ornaments

End-of-chapter discussion questions use tables, graphs, and boxed news stories from the text,

reinforcing key concepts, and are linked to the chapter’s learning objectives

Boxed and Annotated Applications In addition to the real-world applications that

run through the body of the text, the new design of The Macro Economy Today

inter-sperses boxed domestic (In the News) and global (World View) case studies

intertextu-ally for further understanding and reference Although nearly every text on the market

now offers boxed applications, The Macro Economy Today’ s presentation is distinctive

First, the sheer number of In the News and World View boxes is unique Second, and

more important, every boxed application is referenced in the body of the text Third,

Clean, Clear Theory

Concept Reinforcement

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FIGURE 3.3

Shifts vs Movements

A demand curve shows how a

con-sumer responds to price changes

If the determinants of demand stay

constant, the response is a

move-ment along the curve to a new

quantity demanded In this case,

the quantity demanded increases

from 5 (point d1), to 12 (point g1),

when price falls from $35 to $20 per

hour.

If the determinants of demand

change, the entire demand curve

shifts In this case, a rise in income

increases demand With more

income, Tom is willing to buy

12 hours at the initial price of

$35 (point d2), not just the 5 hours

he demanded before the lottery win

Shift in demand

D2 : increased demand

D1 : initial demand

Movement along curve

$50

40 35 30 25 20 15 10 5 0 45

Demand shifts when

tastes, income, other goods,

Gas Prices High—and Might Get Higher

NEW YORK (CNNMoney)—Strong worldwide oil mand and lack of supply are to blame for steadily rising gasoline prices in the United States, an oil industry group said Friday .

Felmy said worldwide oil demand in 2010 hit a record

of more than 87 million barrels a day, driven largely by strong growth in India, China, and the Middle East.

Supply, meanwhile, was constricted by the drilling moratorium in the Gulf of Mexico following the BP disaster, slow production growth in non- OPEC countries, and OPEC production controls .

Over the last year, prices are up 39 cents a gallon or 14 percent Crude oil is up by a similar percentage, currently trading at just under $90 a barrel.

—Steve Hargreaves Source: CNNMoney.com, January 21, 2011 © 2011 Time Inc Used under license.

Analysis: Equilibrium prices change whenever market demand or supply curves shift In this

case, both curves are shifting, and the equilibrium price is rising.

W O R L D V I E W

P R E F A C E xv

every News and World View comes with a brief, self-contained explanation as the

previ-ous example illustrates Fourth, the News and World View boxes are the explicit subject

of the end-of-chapter discussion questions and student problem set exercises In

combi-nation, these distinctive features assure that students will actually read the boxed

appli-cations and discern their economic content The Test Bank provides subsets of questions

tied to the News and World View boxes so that instructors can confirm student use of

this feature

Photos and Cartoons The text presentation is also enlivened with occasional photos and

cartoons that reflect basic concepts The photos on page 40 are much more vivid testimony

to the extremes of inequality than the data in Figure 2.3 (p 39) Every photo and cartoon is

annotated and referenced in the body of the text These visual features are an integral part

of the presentation, not diversions

The one adjective invariably used to describe The Macro Economy Today is “readable.”

Professors often express a bit of shock when they realize that students actually enjoy

read-ing the book (Well, not as much as a Stephen Kread-ing novel, but a whole lot better than most

textbooks they’ve had to plow through.) The writing style is lively and issue-focused

Unlike any other textbook in the market, every boxed feature, every graph, every table, and

every cartoon is explained and analyzed Every feature is also referenced in the text, so

students actually learn the material rather than skipping over it Because readability is

ulti-mately in the eye of the beholder, you might ask a couple of students to read and compare

a parallel chapter in The Macro Economy Today and in another text This is a test The

Macro Economy Today usually wins

I firmly believe that students must work with key concepts in order to really learn them

Weekly homework assignments are de rigueur in my own classes To facilitate

home-work assignments, I have prepared the student problem set , which includes built-in

numerical and graphing problems that build on the tables, graphs, and boxed material

that align with each chapter’s learning objectives Grids for drawing graphs are also

pro-vided Students cannot complete all the problems without referring to material in the

chapter This increases the odds of students actually reading the chapter, the tables, and

the boxed applications

The student problem set at the end of each chapter is reproduced in the online student

tutorial software ( Connect ® Economics, discussed in the following pages) This really helps

students transition between the written material and online supplements It also means

that the online assignments are totally book specific

Readability

Student Problem Set

Gene Alexander, USDA Natural Resources Conservation Service/DAL

© Santokh Kochar/Getty Images/DAL

Analysis: An abundance of capital equipment and advanced technology make American farmers and workers far more productive than workers

in poor nations.

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NEW AND IMPROVED SUPPLEMENTS

Test Bank. William Aldridge of the University of Alabama—Tuscaloosa and Diane

Keenan of Cerritos College, with the help of Mack Bean of Franklin Pierce University and Steve Abid of Grand Rapids Community College, have thoroughly revised the Test Bank for the Thirteenth edition This team assures a high level of quality and consis-tency of the test questions and the greatest possible correlation with the content of the text All questions are coded according to chapter learning objectives, AACSB Assur-ance of Learning, and Bloom’s Taxonomy guidelines The computerized Test Bank is available in EZ Test, a flexible and easy-to-use electronic testing program that accom-modates a wide range of question types including user-created questions Tests created

in EZ Test can be exported for use with course management systems such as WebCT, BlackBoard, or PageOut The program is available for Windows, Macintosh, and Linux environments

PowerPoint Presentations Mike Cohick of Collin College, with the help of Susan Glanz of Saint John’s University, created new presentation slides for the Thirteenth edition

Developed using Microsoft PowerPoint software, these slides are a step-by-step review of the key points in the book’s 21 chapters They are equally useful to the student in the class-room as lecture aids or for personal review at home or the computer lab The slides use animation to show students how graphs build and shift

Digital Image Library All of the text’s tables and graphs have been reproduced as color images on the website for instructor access

Instructor’s Resource Manual Jan Ojdana of the University of Cincinnati, with the help

of Stephanie Campbell of Mineral Area College, has prepared the Instructor’s Resource

Manual The Instructor’s Resource Manual is available online, and it includes chapter

sum-maries and outlines, “lecture launchers” to stimulate class discussion, and media exercises

to extend the analysis

News Flashes As up-to-date as The Macro Economy Today is, it can’t foretell the

future As the future becomes the present, however, I write two-page News Flashes describing major economic events and relating them to specific text references These News Flashes provide good lecture material and can be copied for student use Adopters

of The Macro Eco n omy Today have the option of receiving News Flashes via fax or

mail They’re also available on the Schiller website Four to six News Flashes are sent

to adopters each year (Contact your local McGraw-Hill/Irwin sales representative to get on the mailing list.)

At the instructor’s discretion, students have access to the News Flashes In addition, the following supplements can facilitate learning

Built-in Student Problem Set The built-in student problem set is found at the end of

every chapter of The Macro Economy Today Each chapter has 8 to 10 numerical and

graph-ing problems tied to the content of the text Graphgraph-ing grids are provided The answer blanks are formatted to facilitate grading and all answers are contained in the end-of-chapter

Solution’s Manual For convenience, the student problem set pages can also be found on

the textbook’s website in exactly the same order and format This facilitates either manual

or electronic retrieval of homework assignments

Study Econ Mobile App McGraw-Hill is proud to offer a new mobile study app for

students learning economics from Schiller The Macro Economy Today, 13 th edition The

features of the Study Econ app include flashcards for all key terms, a basic math review, customizable self-quizzes, common mistakes, and games For additional information, please refer to the back inside cover of this book Visit your mobile app store and download

a trial version of the Schiller Study Econ app today!

Instructor Aids

Student Aids

P R E F A C E xvii

DISTINCTIVE WEB SUPPORT

The Thirteenth edition of The Macro Economy Today continues to set the pace for web

applications and support of the principles course

A mini website directory is provided in each chapter’s marginal Web Analysis boxes,

cre-ated and updcre-ated by Mark Wilson of West Virginia University Institute of Technology

These URLs aren’t random picks; they were selected because they let students extend and

update adjacent in-text discussions

The Macro Economy Today’ s website now includes even more features that both

instruc-tors and students will find engaging and instructive The Online Learning Center is

user-friendly Upon entering the site at www.mhhe.com/schiller13e, students and

instructors will find detailed information on the new edition and links to the specific site

for the version of the book they are using

Proceeding into the Student Center, students will find lots of brand-new interactive study

material Mark Wilson, with the help of Rondi Schei of Portland State University, has

revised 10 grading multiple-choice questions per chapter, which are ideal for

self-quizzing before a test In addition, they have enhanced the Auxiliary Problem Sets for the

site through updating the problems for added practice Professors can assign these extra

problems as homework or students can access them for additional skills practice Answers

can be found on the password-protected Instructor’s Edition of the website Mark and

Rondi have also revised and created new Web Activities for each chapter On top of all that,

students have access to my periodic News Flashes along with my e-mail address to ask me

any questions directly, under “ask Brad.”

The password-protected Instructor Center includes some wonderful resources for

instructors who want to include more interactive student activities in their courses The

downloadable Instructor’s Resource Manual, end-of-chapter Solution Manual, Test Bank,

PowerPoints, Auxiliary Problem Sets and answers, Web-Based Activities and answers, and

YouTube Activity answers are available to provide guidance for instructors who collect

these assignments and grade them

Premium Content The Online Learning Center now offers students the opportunity to

purchase Premium Content Like an electronic study guide, the OLC Premium Content

enables students to download Schiller-exclusive iPod content including podcasts by Brad

Schiller, Paul Solman videos, and chapter summaries—all accessible through the student’s

MP3 device

Less Managing More Teaching Greater Learning McGraw-Hill Connect ® Economics

is an online assignment and assessment solution that connects students with the tools and

resources they’ll need to achieve success

McGraw-Hill Connect ® Economics helps prepare students for their future by enabling

faster learning, more efficient studying, and higher retention of knowledge

Connect ® Economics offers a number of powerful tools and features to make managing

assign-ments easier, so faculty can spend more time teaching With Connect ® Economics, students

can engage with their coursework anytime and anywhere, making the learning process more

accessible and efficient Connect ® Economics offers you the features described below

Simple Assignment Management With Connect ® Economics, creating assignments is

easier than ever, so you can spend more time teaching and less time managing The

assign-ment manageassign-ment function enables you to

• Create and deliver assignments easily with selectable end-of-chapter questions and test

bank items

• Streamline lesson planning, student progress reporting, and assignment grading to

make classroom management more efficient than ever

• Go paperless with the eBook and online submission and grading of student assignments

Web Analysis Boxes

Online Learning Center www.mhhe.

Smart Grading When it comes to studying, time is precious Connect ® Economics helps

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it, where they need it When it comes to teaching, your time also is precious The grading function enables you to

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Instructor Library The Connect ® Economics Instructor Library is your repository for

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any asset that enhances your lecture The Connect ® Economics Instructor Library includes

• Auxiliary Problem Sets and answers

• Web-Based Activities and answers

• YouTube Activity answers

• Digital Image Library

• Video Cases

• Logic Cases

Student Library The Connect ® Economics Student Library is the place for students to

access additional resources The Student Library

• Offers students quick access to lectures, practice materials, eBooks, and more

• Provides instant practice material and study questions, easily accessible on-the-go

• Gives students access to the Self-Quiz and Study described below

Self-Quiz and Study The Self-Quiz and Study (SQS), updated by Tim Kochanski of Portland State University with the help of Rondi Schei, connects each student to the learn-ing resources needed for success in the course For each chapter, students

• Take a practice test to initiate the Self-Quiz and Study

• Immediately upon completing the practice test, see how their performance compares to content by sections within chapters

• Receive a Study Plan that recommends specific readings from the text, supplemental study material, and practice work that will improve their understanding and mastery of each learning objective

Diagnostic and Adaptive Learning of Concepts. LearnSmart Students want to make

the best use of their study time The LearnSmart adaptive self-study technology within

Connect ® Economics provides students with a seamless combination of practice,

assess-ment, and remediation for every concept in the textbook LearnSmart’s intelligent software adapts to every student response and automatically delivers concepts that advance the stu-dent’s understanding while reducing time devoted to the concepts already mastered The result for every student is the fastest path to mastery of the chapter concepts LearnSmart

• Applies an intelligent concept engine to identify the relationships between concepts and to serve new concepts to each student only when he or she is ready

• Adapts automatically to each student, so students spend less time on the topics they understand and practice more those they have yet to master

P R E F A C E xix

• Provides continual reinforcement and remediation, but gives only as much guidance as

students need

• Integrates diagnostics as part of the learning experience

• Enables you to assess which concepts students have efficiently learned on their own,

thus freeing class time for more applications and discussion

Student Progress Tracking Connect ® Economics keeps instructors informed about

how each student, section, and class is performing, allowing for more productive use of

lecture and office hours The progress-tracking function enables you to

• View scored work immediately and track individual or group performance with

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• Collect data and generate reports required by many accreditation organizations, such

as AACSB

Lecture Capture Increase the attention paid to lecture discussion by decreasing the

attention paid to note taking For an additional charge Lecture Capture offers new ways for

students to focus on the in-class discussion, knowing they can revisit important topics later

Lecture Capture enables you to

• Record and distribute your lecture with a click of button

• Record and index PowerPoint presentations and anything shown on your computer so

it is easily searchable, frame by frame

• Offer access to lectures anytime and anywhere by computer, iPod, or mobile device

• Increase intent listening and class participation by easing students’ concerns about

note-taking Lecture Capture will make it more likely you will see students’ faces, not the tops of their heads

McGraw-Hill Connect ® Plus Economics McGraw-Hill reinvents the textbook learning

experience for the modern student with Connect ® Plus Economics A seamless

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In short, Connect ® Economics offers you and your students powerful tools and features that

optimize your time and energies, enabling you to focus on course content, teaching, and

student learning Connect ® Economics also offers a wealth of content resources for both

instructors and students This state-of-the-art, thoroughly tested system supports you in

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For more information about Connect, go to www.mcgrawhillconnect.com , or contact

your local McGraw-Hill sales representative

Tegrity Campus is a service that makes class time available 24/7 by automatically capturing

every lecture in a searchable format for students to review when they study and complete

assignments With a simple one-click start-and-stop process, you capture all computer

screens and corresponding audio Students can replay any part of any class with

easy-to-use browser-based viewing on a PC or Mac

Educators know that the more students can see, hear, and experience class resources,

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key moments by using Tegrity Campus’s unique search feature This search helps students

efficiently find what they need, when they need it, across an entire semester of class

Tegrity Campus:

Lectures 24/7

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recordings Help turn all your students’ study time into learning moments immediately supported by your lecture

To learn more about Tegrity, watch a 2-minute Flash demo at http://tegritycampus.

Each test bank question for The Macro Economy Today maps to a specific chapter

learn-ing outcome/objective listed in the text You can use our test bank software, EZ Test and EZ

Test Online, or Connect ® Economics to easily query for learning outcomes/objectives that

directly relate to the learning objectives for your course You can then use the reporting features of EZ Test to aggregate student results in similar fashion, making the collection and presentation of assurance of learning data simple and easy

The McGraw-Hill Companies is a proud corporate member of AACSB International

Understanding the importance and value of AACSB accreditation, The Macro Economy

Today , 13th edition, recognizes the curricula guidelines detailed in the AACSB standards

for business accreditation by connecting selected questions in the text and the test bank to the six general knowledge and skill guidelines in the AACSB standards

The statements contained in The Macro Economy Today , 13th edition, are provided only

as a guide for the users of this textbook The AACSB leaves content coverage and ment within the purview of individual schools, the mission of the school, and the faculty

assess-While The Macro Economy Today , 13th edition, and the teaching package make no claim

of any specific AACSB qualification or evaluation, we have labeled within The Macro

Eco n omy Today , 13th edition, selected questions according to the six general knowledge

and skills areas

At McGraw-Hill, we understand that getting the most from new technology can be ing That’s why our services don’t stop after you purchase our products You can e-mail our Product Specialists 24 hours a day to get product-training online Or you can search our knowledge bank of Frequently Asked Questions on our support website For Customer Sup-

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CourseSmart is a new way for faculty to find and review eTextbooks It’s also a great option for students who are interested in accessing their course materials digitally

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Finding your eBook is easy Visit www.CourseSmart.com and search by title, author, or

ISBN

ACKNOWLEDGMENTS

This Thirteenth edition is unquestionably the finest edition of The Macro Economy Today,

and I am deeply grateful to all those people who helped develop it Marianne Musni was

my faithful, fastidious, and cheerful development editor, who checked every word and feature in the text, prompting scores of corrections Harvey Yep, the Project Manager, once again did an exceptional job in assuring that every page of the text was visually pleasing, properly formatted, error-free, and timely produced Douglas Reiner served as the Publisher,

Learning Ready

AACSB Statement

McGraw-Hill Customer Experience

Support Team

Los Angeles Valley College

Mauro Cristian Amor

Walter Francis Boyle

Fayetteville Technical Community College

Sheila Amin Gutierrez de Pineres

University of Texas at Dallas

Jonatan Jelen

City College of New York

Hyojin Jeong

Lakeland Community College

Barbara Heroy John

offering sage advice and savvy leadership Scott Smith joined the team as editor late in the

game but contributed as well The design team, led by Matt Baldwin, created a vibrant

pal-lette of colors and features that enhanced The Macro Economy Today ’s readability My

thanks to all of them and their supporting staff

Special appreciation is extended to Cindy Hill and Sherri Wall, who together assumed

responsibility for the digital content of the teaching package The chapter-specific library of

annotated YouTube videos is their most visible contribution to this Thirteenth edition But

their efforts in integrating and upgrading the learning objectives, discussion questions, and

problem sets in both the print and digital platforms will yield even greater pedagogical value

I also want to express my heartfelt thanks to the professors who have shared their

reac-tions (both good and bad) with me Direct feedback from users and reviewers has always

been a great source of continuing improvements in The Macro Economy Today:

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Stanley Robert Mitchell

McLennan Community College

Stephen K Nodine

Tri-County Technical College

Phacharaphot Nuntramas

San Diego State University

Seth Ari Roberts

Frederick Community College

Michael J Ryan

Western Michigan University

Craig F Santicola

Westmoreland County Community College

Texas A&M University-Corpus Christi

Irina Nikolayevna Strelnikova

Red Rocks Community College

Michael Swope

Wayne County Community College

Gary Lee Taylor

South Dakota State University

Sam Houston State University

Kenneth Lewis Weimer

Kellogg Community College

Selin Yalcindag

Mercyhurst College

Erik Zemljic

Kent State University

Finally, I’d like to thank all the professors and students who are going to use The Macro

Economy Today as an introduction to economics principles I welcome any responses (even

the bad ones) you’d like to pass on for future editions

—Bradley R Schiller

PREFACE VIII

PART 1: THE ECONOMIC CHALLENGE

CHAPTER 1: ECONOMICS: THE CORE ISSUES 2

Appendix: Using Graphs 22

CHAPTER 2: THE U.S ECONOMY: A GLOBAL VIEW 30 CHAPTER 3: SUPPLY AND DEMAND 45

CHAPTER 4: THE ROLE OF GOVERNMENT 70

PART 2: MEASURING MACRO OUTCOMES

CHAPTER 5: NATIONAL INCOME ACCOUNTING 92 CHAPTER 6: UNEMPLOYMENT 113

CHAPTER 7: INFLATION 132

PART 3: CYCLICAL INSTABILITY

CHAPTER 8: THE BUSINESS CYCLE 154 CHAPTER 9: AGGREGATE DEMAND 178

Appendix: The Keynesian Cross 199

CHAPTER 10: SELF-ADJUSTMENT OR INSTABILITY? 207

PART 4: FISCAL POLICY TOOLS

CHAPTER 11: FISCAL POLICY 228 CHAPTER 12: DEFICITS AND DEBT 250

PART 5: MONETARY POLICY OPTIONS

CHAPTER 13: MONEY AND BANKS 276 CHAPTER 14: THE FEDERAL RESERVE SYSTEM 296 CHAPTER 15: MONETARY POLICY 314

PART 6: SUPPLY-SIDE OPTIONS

CHAPTER 16: SUPPLY-SIDE POLICY: SHORT-RUN OPTIONS 340 CHAPTER 17: GROWTH AND PRODUCTIVITY: LONG-RUN POSSIBILITIES 365

MACRO

C O N T E N T S I N B R I E F

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PART 7: POLICY CONSTRAINTS

CHAPTER 18: THEORY VERSUS REALITY 386

PART 8: INTERNATIONAL ECONOMICS

CHAPTER 19: INTERNATIONAL TRADE 411 CHAPTER 20: INTERNATIONAL FINANCE 438 CHAPTER 21: GLOBAL POVERTY 458

Glossary G-1 Index I-1 Reference Tables T-1

INTERNATIONAL

PREFACE VIII

PART 1: THE ECONOMIC CHALLENGE

CHAPTER 1: ECONOMICS: THE CORE

Three Basic Decisions 12

The Mechanisms of Choice 13

What Economics Is All About 18

Summary 21

Appendix: Using Graphs 22

THE ECONOMY TOMORROW:

Harnessing the Sun 20

IN THE NEWS

Job Market Loses Momentum 11

WORLD VIEW

Chronic Food Shortage Shows Despite Efforts by

North Korea to Hide It 10 Rocket Launch Cost Enough to End Famine in

North Korea for a Year 10 Market Reliance vs Government

Reliance? 15 Index of Economic Freedom 16

CHAPTER 2: THE U.S ECONOMY:

A GLOBAL VIEW 30

What America Produces 31

How America Produces 35

For Whom America Produces 38

Summary 41

THE ECONOMY TOMORROW:

Ending Global Poverty 41

WORLD VIEW

Comparative Output (GDP) 31

GDP per Capita around the

World 32 The Education Gap between Rich and

Poor Nations 36 Income Share of the Rich 40

C O N T E N T S

CHAPTER 3: SUPPLY AND DEMAND 45

Market Participants 46 The Circular Flow 47 Demand 48

Supply 55 Equilibrium 59 Market Outcomes 63 Summary 66

THE ECONOMY TOMORROW:

Deadly Shortages: The Organ-Transplant Market 64

IN THE NEWS

AT&T Cuts Price on iPhone 3GS to $49 51Seafood Prices Rise on BP Oil Spill 58Students Struggle to Find Final Four Tickets 61Study: People Would Donate Kidneys for Payment 66

WORLD VIEW

Gas Prices High—and Might Get Higher 63

CHAPTER 4: THE ROLE OF GOVERNMENT 70

Market Failure 71 Growth of Government 78 Taxation 79

Government Failure 82 Summary 86

THE ECONOMY TOMORROW:

Measures of Output 93 The Uses of Output 101

xxv

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Measures of Income 102

The Flow of Income 106

Summary 109

THE ECONOMY TOMORROW:

The Quality of Life 107

IN THE NEWS

A Lot Going On under the Table 96

Material Wealth vs Social Health 109

The Human Costs 119

Defining Full Employment 121

The Historical Record 125

Summary 128

THE ECONOMY TOMORROW:

Outsourcing Jobs 126

IN THE NEWS

Unemployment Benefits Not for Everyone 119

How Unemployment Affects the Family 120

Carpentry Work Crashing Down: Construction Is among

Industries That Aren’t Rebounding after Recession 122

Unemployment Rate Hits 10.2 Percent,

The Goal: Price Stability 143

The Historical Record 145

Causes of Inflation 146

Protective Mechanisms 146

Summary 149

THE ECONOMY TOMORROW:

The Virtues of Inflation 148

IN THE NEWS

Rise in College Costs Hits Public Schools Hardest 134

Ignoring Cell Phones Biases CPI Upward 144

WORLD VIEW

Zimbabwe to Introduce $100 Trillion Banknote 138

U.K Inflation Soars 148

PART 3: CYCLICAL INSTABILITY

CHAPTER 8: THE BUSINESS CYCLE 154

Stable or Unstable? 155 Historical Cycles 157

A Model of the Macro Economy 162 Aggregate Demand and Supply 163 Competing Theories of Short-Run Instability 170

Long-Run Self-Adjustment 172 Summary 175

THE ECONOMY TOMORROW:

Coping with Recession: 2008–9 173

Government and Net Export Spending 192 Macro Failure 194

Summary 198 Appendix: The Keynesian Cross 199

THE ECONOMY TOMORROW:

Anticipating AD Shifts 197

IN THE NEWS

Livin’ Large 181 News Release: Personal Income and Outlays 186 Consumer Confidence Index at All-Time Low 187 Cuomo to Cut New York State Spending by

$8.86 Billion, Fire 9,800 Workers 192U.S Leading Indicators Index Increases More Than Forecast 198

WORLD VIEW

Panasonic Slashes Spending 191

CHAPTER 10: SELF-ADJUSTMENT OR

INSTABILITY? 207

Leakages and Injections 208

The Multiplier Process 212

Macro Equilibrium Revisited 218

Adjustment to an Inflationary GDP Gap 220

Summary 224

THE ECONOMY TOMORROW:

Maintaining Consumer Confidence 222

IN THE NEWS

Deflation 211

Housing Starts Fall to 10-Year Low in July 213

U.S GDP Down 3.8% in Q4, Biggest Drop

Since 1982 215 Job Losses Surge As U.S Downturn Accelerates 216

Hard-Hit Families Finally Start Saving, Aggravating

Nation’s Economic Woes 223

WORLD VIEW

Crisis in Europe and U.S Hurts Asian Economies 217

PART 4: FISCAL POLICY TOOLS

CHAPTER 11: FISCAL POLICY 228

Taxes and Spending 229

Fiscal Stimulus 230

Fiscal Restraint 240

Fiscal Guidelines 243

Summary 247

THE ECONOMY TOMORROW:

The Concern for Content 245

IN THE NEWS

$787b Stimulus Bill Approved 234

Just How Stimulating Are Those Checks? 238

Economy Is Already Feeling the Impact of Federal

Government’s Spending Cuts 242

WORLD VIEW

U.K Inflation Soars 232

China Sets Big Stimulus Plan in Bid to Jump-Start

Growth 235

CHAPTER 12: DEFICITS AND DEBT 250

Budget Effects of Fiscal Policy 251

Economic Effects of Deficits 258

Economic Effects of Surpluses 260

The Accumulation of Debt 261

Who Owns the Debt? 264 Burden of the Debt 265 External Debt 268 Deficit and Debt Limits 269 Summary 271

THE ECONOMY TOMORROW:

Dipping into Social Security 270

Budget Imbalances Common 253

PART 5: MONETARY POLICY OPTIONS

CHAPTER 13: MONEY AND BANKS 276

What Is “Money”? 277 The Money Supply 278 Creation of Money 281 The Money Multiplier 287 Banks and the Circular Flow 289 Summary 292

THE ECONOMY TOMORROW:

Bank Bailouts 291

IN THE NEWS

CD Yields Stay Unchanged 280

WORLD VIEW

The Cashless Society 277

CHAPTER 14: THE FEDERAL RESERVE SYSTEM 296

Structure of the Fed 297 Monetary Tools 298 Increasing the Money Supply 307 Decreasing the Money Supply 309 Summary 311

THE ECONOMY TOMORROW:

Is the Fed Losing Control? 309

IN THE NEWS

Fed Cuts Deposit-Reserve Requirements 300 Treasury Prices Fall As Refunding Weighs 304 U.S Federal Reserve Cuts Interest Rates to Historic Low 306

C O N T E N T S xxvii

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WORLD VIEW

China Hikes Reserve Requirements Again 309

CHAPTER 15: MONETARY POLICY 314

The Money Market 315

Interest Rates and Spending 319

Policy Constraints 321

The Monetarist Perspective 326

The Concern for Content 331

Summary 335

THE ECONOMY TOMORROW:

Which Lever to Pull? 331

IN THE NEWS

Fed Cut Means Lower Rates for

Consumers 318

Fed to Pump $1.2 Trillion into Markets 320

Prices Are Low! Mortgages Are Cheap! But You Can’t

Rising Rates Haven’t Thwarted Consumers 325

PART 6: SUPPLY-SIDE OPTIONS

CHAPTER 16: SUPPLY-SIDE POLICY:

SHORT-RUN OPTIONS 340

Aggregate Supply 341

Shape of the AS Curve 341

Shifts of the AS Curve 345

THE ECONOMY TOMORROW:

PART 7: POLICY CONSTRAINTS

CHAPTER 18: THEORY VERSUS REALITY 386

Policy Tools 387 Idealized Uses 391 The Economic Record 393 Why Things Don’t Always Work 395 Summary 408

THE ECONOMY TOMORROW:

Hands On or Hands Off? 405

WORLD VIEW

Comparative Macro Performance 394

PART 8: INTERNATIONAL ECONOMICS

CHAPTER 19: INTERNATIONAL TRADE 412

U.S Trade Patterns 413

THE ECONOMY TOMORROW:

Policing World Trade 433

IN THE NEWS

California Grape Growers Protest Mixing

Foreign Wine 424 End the Import Quotas on Sugar 431

NAFTA Reallocates Labor: Comparative Advantage

at Work 434

WORLD VIEW

Export Ratios 414

China Accuses Corning of “Dumping” 426

Meat Imports “Threaten” Farmers 427

U.S to Impose Tariff on Tires from China 428

“Beggar-Thy-Neighbor” Policies in the 1930s 429

Mexico Retaliates for Loss of Truck Program 432

CHAPTER 20: INTERNATIONAL FINANCE 438

Exchange Rates: The Global Link 439

Analysis: China’s $3 Trillion in Reserves More BaneThan Boon 451

CHAPTER 21: GLOBAL POVERTY 458

American Poverty 459 Global Poverty 460 Goals and Strategies 462 Income Redistribution 462 Economic Growth 465 Summary 477

THE ECONOMY TOMORROW:

Unleashing Entrepreneurship 476

WORLD VIEW

Glaring Inequalities 463 The Way We Give 465 The Female “Inequality Trap” 467 Dying for a Drink of Clean Water 468 Muhammad Yunus: Microloans 470 Jeffrey Sachs: Big Money, Big Plans 471 Chávez Sets Plans for Nationalization 473 African Sugar Production Ramps Up 476

The Economic Challenge

People around the world want a better life Whether rich

or poor, everyone strives for a higher standard of living

Ultimately, the performance of the economy determines who attains that goal

output are determined and how the interplay of market forces and government intervention utilize and expand those limits

1

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Economics:

The Core Issues

States is the Commander in Chief of the armed forces

The president has the ultimate responsibility to decide

when and how America’s military forces will be deployed

He issues the orders that military officers must carry out

He is given credit for military successes and blame for

mil-itary failures He can’t “pass the buck” down the line of

command

Less recognized is the president’s role as “Economist in

Chief.” The president is held responsible not just for the

military security of the United States, but for its economic

security as well Although he doesn’t have the command

powers in the economic arena that he has in the military

arena, people expect him to take charge of the economy

They expect the Economist in Chief to keep the economy

growing, to create jobs for everyone who wants one, and to

prevent prices from rising too fast Along the way, they

expect the Economist in Chief to protect the environment,

assure economic justice for all, and protect America’s

posi-tion in the global economy

That is a tall order, especially in view of the president’s

limited constitutional powers to make economic policy

deci-sions and the array of forces that shape economic outcomes

But no matter Voters will hold the Economist in Chief

responsible for economic misfortunes, whether or not he is

able to single-handedly prevent them That’s why President

Obama was so worried about his reelection prospects in

2012 The Great Recession of 2008–2010 left millions of Americans jobless, homeless, and hopeless They had voted for Obama in 2008 on the promise of better economic times

In 2012 their disappointments threatened President Obama’s reelection

What everyone ultimately wants is a prosperous and ing economy: an economy in which people can find good jobs, enjoy rising living standards and wealth, pursue the education they desire, and enjoy the creature comforts of a prosperous economy And we want to enjoy all these material comforts while protecting the environment, caring for the poor, and pur-suing world peace

We may know what we want, but how do we get it? Is “the economy” some sort of perpetual motion machine that will keep churning out more goods and services every year? Clearly not During the Great Recession of 2008–2010 the economy churned out less output, eliminated jobs, and reduced living standards and wealth A lot of college graduates had to move back home when they couldn’t find jobs What went wrong?

Are there mechanical defects in the economic machine? If so, can they be fixed?

Why didn’t the Economist in Chief fix these problems? What powers does a president have to prevent economic downturns?

If governments had enough power to shape economic comes, why would we ever suffer economic setbacks? Would the government—led by the Economist in Chief—really make such colossal mistakes?

After reading this chapter, you should know

LO1-1 How scarcity creates opportunity costs

LO1-2 What the production-possibilities curve

represents

LO1-3 The three core economic questions that

every society must answer

LO1-4 How market and government approaches

to economic problems differ

1

L E A R N I N G O B J E C T I V E S

“The Economist in Chief”

C H A P T E R 1 : E C O N O M I C S : T H E C O R E I S S U E S 3

Just raising these questions begs the fundamental issue of what makes an economy tick

How are prices, wages, employment, and other economic outcomes actually determined?

Does Wall Street run the system? How about selfish, greedy capitalists? Or maybe foreign

nations? Are incompetent bureaucrats and self-serving politicians the root of our

occa-sional woes? Who, in fact, calls the shots?

The goal of this course is to understand how the economy works To that end, we

want to determine how markets —the free-wheeling exchange of goods and services—

shape economic outcomes—everything from the price of this textbook to the national

unemployment rate Then we want to examine the role that government can and does

play in (re)shaping economic performance Once we’ve established this foundation,

we’ll be in a better position to evaluate what the Economist in Chief can do—and what

he should do We’ll also better understand how we ourselves can make better economic

decisions

We’ll start our inquiry with some harsh realities In a world of unlimited resources,

we could have all the goods we desired We’d have time to do everything we wanted and

enough money to buy everything we desired We could produce enough to make

every-one rich while protecting the environment and exploring the universe The Economist in

Chief could deliver everything voters asked for Unfortunately, we don’t live in that

utopia: we live in a world of limited resources So we have to make difficult decisions

about how best to use our time, our money, and our resources The Economist in Chief

has to decide how best to use the nation’s limited resources These are economic

decisions

In this first chapter we’ll examine how the problem of limited resources arises and the

kinds of choices it forces us to make As we’ll see, three core choices confront every

nation:

• WHAT to produce with our limited resources

• HOW to produce the goods and services we select

• FOR WHOM goods and services are produced—that is, who should get them

We also have to decide who should answer these questions Should people take care of

their own health and retirement, or should the government provide a safety net of health

care and pensions? Should the government regulate airfares or let the airlines set prices?

Should Microsoft decide what features get included in a computer’s operating system, or

should the government make that decision? Should Facebook decide what personal

information is protected, or should the government make that decision? Should interest

rates be set by private banks alone, or should the government try to control interest rates?

The battle over who should answer the core questions is often as contentious as the

ques-tions themselves

THE ECONOMY IS US

To learn how the economy works, let’s start with a simple truth: the economy is us “The

economy” is simply an abstraction referring to the grand sum of all our production and

consumption activities What we collectively produce is what the economy produces;

what we collectively consume is what the economy consumes In this sense, the concept

of “the economy” is no more difficult than the concept of “the family.” If someone tells

you that the Jones family has an annual income of $42,000, you know that the reference

is to the collective earnings of all the Joneses Likewise, when someone reports that the

nation’s income is $15 trillion per year—as it now is—we should recognize that the

reference is to the grand total of everyone’s income If we work fewer hours or get paid

less, both family income and national income decline The “meaningless statistics” (see

the cartoon on the next page) often cited in the news are just a summary of our collective

market behavior

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The same relationship between individual behavior and aggregate behavior applies to cific outputs If we as individuals insist on driving cars rather than taking public transporta-tion, the economy will produce millions of cars each year and consume vast quantities of oil

spe-In a slightly different way, the economy produces billions of dollars of military hardware to satisfy our desire for national defense In each case, the output of the economy reflects the collective behavior of the 310 million individuals who participate in the U.S economy

We may not always be happy with the output of the economy But we can’t ignore the link between individual action and collective outcomes If the highways are clogged and the air

is polluted, we can’t blame someone else for the transportation choices we made If we’re disturbed by the size of our military arsenal, we must still accept responsibility for our choices (or nonchoices, if we failed to vote) In either case, we continue to have the option

of reallocating our resources We can create a different outcome the next day, month, or year

SCARCITY: THE CORE PROBLEM

Although we can change economic outcomes, we can’t have everything we want If you go

to the mall with $20 in your pocket, you can buy only so much The money in your pocket

sets a limit to your spending

The output of the entire economy is also limited The limits in this case are set not by the amount of money in people’s pockets, but by the resources available for producing goods and services Everyone wants more housing, new schools, better transit systems, and a new car We also want to explore space and bring safe water to the world’s poor But even a country as rich as the United States can’t produce everything people want So, like every

other nation, we have to grapple with the core problem of scarcity —the fact that there

aren’t enough resources available to satisfy all our desires

Factors of Production

The resources used to produce goods and services are called factors of production The

four basic factors of production are

• Land

• Labor

• Capital

• Entrepreneurship

scarcity: Lack of enough

resources to satisfy all desired

uses of those resources.

factors of production:

Resource inputs used to

produce goods and services,

such as land, labor, capital, and

entrepreneurship.

Analysis: Many people think of economics as dull statistics But economics is really

about human behavior—how people decide to use scarce resources and how those decisions affect market outcomes

C H A P T E R 1 : E C O N O M I C S : T H E C O R E I S S U E S 5

These are the inputs needed to produce desired outputs To produce this textbook, for

exam-ple, we needed paper, printing presses, a building, and lots of labor We also needed people

with good ideas who could put it together To produce the education you’re getting in this

class, we need not only a textbook but a classroom, a teacher, a blackboard, and maybe a

computer as well Without factors of production, we simply can’t produce anything

Land. The first factor of production, land, refers not just to the ground but to all natural

resources Crude oil, water, air, and minerals are all included in our concept of “land.”

Labor. Labor too has several dimensions It’s not simply a question of how many bodies

there are When we speak of labor as a factor of production, we refer to the skills and

abilities to produce goods and services Hence both the quantity and the quality of human

resources are included in the “labor” factor

Capital. The third factor of production is capital In economics the term capital refers to

final goods produced for use in further production The residents of fishing villages in

southern Thailand, for example, braid huge fishing nets The sole purpose of these nets is

to catch more fish The nets themselves become a factor of production in obtaining the final

goods (fish) that people desire Thus they’re regarded as capital Blast furnaces used to

make steel and desks used to equip offices are also capital inputs

Entrepreneurship. The more land, labor, and capital available, the greater the amount of

potential output A farmer with 10,000 acres, 12 employees, and six tractors can grow more

crops than a farmer with half those resources But there’s no guarantee that he will The

farmer with fewer resources may have better ideas about what to plant, when to irrigate, or

how to harvest the crops It’s not just a matter of what resources you have but also of how

well you use them This is where the fourth factor of production— entrepreneurship —

comes in The entrepreneur is the person who sees the opportunity for new or better

prod-ucts and brings together the resources needed for producing them If it weren’t for

entre-preneurs, Thai fishers would still be using sticks to catch fish Without entrepreneurship,

farmers would still be milking their cows by hand If someone hadn’t thought of a way to

miniaturize electronic circuits, you wouldn’t be able to text your friends

The role of entrepreneurs in economic progress is a key issue in the market versus

gov-ernment debate The British economist John Maynard Keynes argued that free markets

unleash the “animal spirits” of entrepreneurs, propelling innovation, technology, and

growth Critics of government regulation argue that government interference in the

market-place, however well intentioned, tends to stifle those very same animal spirits

Limits to Output

No matter how an economy is organized, there’s a limit to how much it can produce The

most evident limit is the amount of resources available for producing goods and services

One reason the United States can produce so much is that it has nearly 4 million square

miles of land Tonga, with less than 300 square miles of land, will never produce as much

The United States also has a population of over 300 million people That’s a lot less than

China (1.4 billion ) but far larger than 200 other nations (Tonga has a population of less than

125,000) So an abundance of raw resources gives us the potential to produce a lot of

output But that greater production capacity isn’t enough to satisfy all our desires We’re

constantly scrambling for additional resources to build more houses, make better movies,

and provide more health care That imbalance between available resources and our wish list

is one of the things that makes the job of Economist in Chief so difficult

The science of economics helps us frame these choices In a nutshell, economics is

the study of how people use scarce resources How do you decide how much time to

spend studying? How does Google decide how many workers to hire? How does Ford

decide whether to use its factories to produce sport utility vehicles or sedans? What

capital: Final goods produced for use in the production of other goods, such as equipment and structures

entrepreneurship: The assembling of resources to produce new or improved products and technologies

economics: The study of how best to allocate scarce resources among competing uses

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