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Macroeconomics: with study guide CD-ROM

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1. Verfasser:	Handa, Jagdish 1939- (VerfasserIn)
Format:	Buch
Sprache:	English
Veröffentlicht:	Singapore [u.a.] World Scientific 2011
Schlagworte:	Macroeconomics Makroökonomie Lehrbuch
Online-Zugang:	Inhaltsverzeichnis
Beschreibung:	XLIX, 561 S. graph. Darst. 1 CD-ROM (12 cm)
ISBN:	9789814289443 9814289442

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adam_text	Contents Dedication v Preface xxxv About the Author xliii Glossary of Symbols xlv Useful Mathematical Symbols and Formulae for Economics xlvii Part I Introduction to Macroeconomics 1 1. Output, Unemployment, and the Basic Concepts 3 1.1 Introduction to Macroeconomics ............................... 3 1.1.1 The nature of macroeconomic analysis ........................ 3 The classification of ¿roods in macroeconomics ..................... 4 Closed economy versus open economy analysis ..................... 4 Short-run macroeconomic theories, growth theories and business cycle theories ..... 4 1.2 The Classification of Economic Agents and Markets in Short-Run Macroeconomic Models 4 Box 1.1: The Analytical Devices of the Short-Run Versus Long-Run Analysis ... 6 Real Time Concepts: The Short Term and the Long Term ........... 6 1.3 Introduction to AD-AS Analysis ................................ 6 1.3.1 The supply of commodities .............................. 6 The long-run (equilibrium) aggregate supply of commodities ............. 6 The short-run aggregate supply of commodities .................... 7 1.3.2 The components of aggregate demand ....................... 8 1.3.3 The diagrammatic AD-AS analysis .......................... 8 The possibility of disequilibrium in the economy .................... 8 The actual aggregate supply of commodities ...................... 9 The impact of an increase in aggregate demand. ................... 9 The impact of an increase in the long-run productive capacity of the economy .... 10 The stability of equilibrium .............................. 10 viii Macroeconomics 1.4 The Relationship between Output, Employment, and Unemployment in the Economy . . 10 The labor force ..................................... 11 Unemployment ..................................... 11 1.5 Measures of National Output and Expenditures ........................ 12 1.5.1 Gross domestic product (GDP) ........................... 12 Fact Sheet 1.1: Global Trends in GDP Per Capita, 1950-2003 .......... 13 1.5.2 Gross national product (GNP) ............................ 13 1.5.3 Net domestic product (NDP) and net national product (NNP) .......... 14 Fact Sheet 1.2: Comparing GDP and GNP, 1965-2004.............. 14 1.5.4 Measuring GDP .................................... 14 Box 1.2: GDP per capita as a Measure of the Standard of Living .......... 17 GDP as a Measure of Welfare ........................... 18 1.6 Measuring the Price Level and the Rate of Inflation ...................... 18 1.6.1 Measures of the price level .............................. 18 1.6.2 The inflation rate ................................... 19 Fact Sheet 1.3: Inflation in Canada, 1915-2007 .................. 20 1.6.3 Core inflation ..................................... 20 Mathematical Box 1.1: Calculation of the Price Index and Growth Rates ..... 21 The construction of a price index: an illustration ................. 21 Differences between Laspeyres and Paasche indices ............... 22 Separating the rate of growth of nominal income into the real growth rate and the inflation rate ....................... 22 1.6.4 Deriving the rate of inflation from a price index ................... 24 Box 1.3: Mathematical Formulae to Learn ..................... 24 Fact Sheet 1.4: Measures of Inflation for the USA, 1960-2007.......... 25 1.6.5 Disinflation versus deflation ............................. 25 1.7 Nominal Versus Real Output .................................. 26 1.8 The Economic Relationship between Real Output and Inflation ............... 26 1.9 The Nature of Economic Relationships ............................ 27 Box 1.4: Definition of Equilibrium ......................... 27 Equilibrium conditions versus identities ...................... 27 Equilibrium versus disequilibrium ......................... 28 Stable versus unstable equilibrium ......................... 28 1.10 Exogenous and Endogenous Variables and the Concept of Shocks in Macroeconomics ....................................... 28 1.10.1 An illustration ..................................... 29 1.10.2 Shocks ......................................... 29 1.10.3 Multipliers ....................................... 29 Contents ix 1.11 Growth Theory ......................................... ЗО 1.11.1 Growth of the standard of living ...........................30 1.12 Business Cycle Theories .....................................30 Fact Sheet 1.5: Booms and Recessions in the USA Since 1960........... 31 Box 1.5: The Fundamental Role of Economics as a Science ............ 32 Theories/models in economics .......................... 33 Economics as the premier social science ..................... 33 1.13 Paradigms in Macroeconomics ............................., . . . 33 1.14 Economic and Political Systems: Organization of the Macroeconomy ............34 1.14.1 Capitalism ....................................... 34 1.14.2 Marxism and communism .............................. 34 1.14.3 Socialism ........................................ 35 1.15 Conclusions ........................................... 35 Key Concepts .......................................... 36 Critical Conclusions ....................................... 36 Review and Discussion Questions ............................... 37 Advanced and Technical Questions .............................. 38 2. Money, Prices, Interest Rates, and Fiscal Deficits 41 2.1 What Is Money and What Does It Do? ............................41 2.1.1 The functions of money ............................... 41 2.1.2 The practical definitions of money .......................... 42 2.2 Money Supply and Money Stock ................................ 42 2.3 The Nominal Versus the Real Value of the Money Supply .................. 43 2.4 Bonds and Stocks in Macroeconomics ............................. 44 2.5 The Definition of the Money Market in Macroeconomics .................. 44 2.6 A Brief History of the Definition of Money .......................... 45 2.7 The Current Definitions of Money and Related Concepts .................. 46 Extended Analysis Box 2.1: Current Meanings of the Symbols for the Monetary Aggregates in Selected Countries ................... 46 The monetary aggregates for USA ........................ 46 The monetary aggregates for the Canada ..................... 46 The monetary aggregates for the UK ....................... 47 Fact Sheet 2.1: Monetary Aggregates of the USA .................. 47 2.8 The Monetary Base and Bank Reserves ............................48 2.8.1 The relationship between the monetary base and the money supply ........49 2.9 The Quantity Equation .....................................49 2.9.1 The quantity equation in growth rates ........................50 2.9.2 The implications of the quantity equation for a persistently high inflation rate . . 50 Fact Sheet 2.2: Money Growth and Inflation in the USA, 1960-2008.......51 χ Macroeconomics 2.10 The Quantity Theory ...................................... 51 Extended Analysis Box 2.2: The Difference between the Quantity Theory and the Quantity Equation ............................ 52 2.10.1 The transactions approach to the quantity theory .................. 52 The adjustment period relevant to the quantity theory ................ 53 Is velocity constant over time! ............................. 53 Fact Sheet 2.3: Velocity of Money in the USA, 1960-2008 ............ 54 2.11 The Definitions of Monetary and Fiscal Policies ........................ 54 2.12 The Central Bank and Monetary Policy ............................ 55 2.13 The Economic Aspects of the Government and Fiscal Policy ................. 55 2.13.1 The financing of fiscal deficits/surpluses and changes in the money supply .... 56 The implications of the independence of the central bank from the government f or financing deficits .................................. 57 2.13.2 The public debt .................................... 57 2.13.3 The selective nature of government expenditures, taxes, and subsidies ....... 58 2.14 Interest Rates in the Economy ................................. 58 2.14.1 The Fisher equation on interest rates ......................... 58 Fact Sheet 2.4: Nominal and Real Interest Rates in the USA, 1982-2008..... 60 2.14.2 The concept of present discounted value (PDV) of a bond ............. 61 2.14.3 Bubbles in asset prices ................................ 62 The importance of asset bubbles for output and business cycles ............. 62 Box 2.1: The Determination of Stock Prices ..................... 63 Bubbles in house and land prices ......................... 63 A bubble in tulip bulb prices! ........................... 63 Conclusions ........................................... 64 Key Concepts .......................................... 65 Summary of Critical Conclusions ................................ 65 Review and Discussion Questions ............................... 65 Advanced and Technical Questions .............................. 66 3. Introduction to the Open Economy: Exchange Rates and the Balance of Payments 67 3.1 Exchange Rates ......................................... 68 3.1.1 Three concepts of exchange rates .......................... 68 The (nominal) exchange rate ............................. 68 The real exchange rate ................................. 68 The effective exchange rate ............................... 69 3.2 Fixed, Flexible, and Managed Exchanged Rates ........................ 70 3.3 Purchasing Power Parity (PPP) as a Theory of the Exchange Rate .............. 70 3.3.1 PPP at the level of a single commodity ........................ 70 Absolute PPP among countries ............................ 71 Extended Analysis Box 3.1: Does PPP Apply in the Real World? An Illustration ................................... 71 Contents xi 3.4 Relative PPP and Shifts in the Relative Efficiency of Economies ............... 72 3.4.1 Long-run changes in relative PPP .......................... 73 3.4.2 Short-run changes in relative PPP .......................... 74 3.4.3 Implications of short- run PPP for exchange rates and inflation rates ........ 74 Box 3.1: International Comparisons of Standards of Living in Terms of PPP ... 74 3.5 Interest Rate Parity (IRP) and the Determination of the Exchange Rate ........... 76 3.5.1 The benchmark IRP theory .............................. 76 3.5.2 The benchmark IRP as a determinant of the domestic interest rate ........ 77 3.5.3 The benchmark IRP as a theory of the exchange rate under flexible exchange rates ..................................... 77 3.5.4 The role of speculative returns to stocks in capital flows and IRP .......... 78 3.5.5 Extending IRP to incorporate risk factors and risk aversion ............. 78 Fact Sheet 3.1: Interest Rate Differentials Between Countries ........... 79 3.5.6 The relative importance of PPP and IRP in determining exchange rates ...... 79 3.6 The Balance of Payments .................................... 80 3.6.1 The components of the balance of payments .................... 82 Fact Sheet 3.2: United States Balance of Payments, 1976-2008.......... 82 3.6.2 Equilibrium in the balance of payments ....................... 83 3.6.3 The change in foreign exchange reserves ...................... 84 Fact Sheet 3.3: US Foreign Exchange Reserves and Balance of Payments, 2005-2008...................................... 84 Equilibrium in the balance of payments ...................... 84 Foreign exchange reserves and short-term bonds .................. 85 3.7 The Balance of Payments in an Accounting Sense ....................... 85 3.8 The Market for Foreign Exchange and the Changes in Foreign Exchange Reserves ..... 86 3.8.1 The demand and supply of foreign exchange .................... 86 3.8.2 Equilibrium in the foreign exchange market ..................... 87 Extended Analysis Box 3.2: The Demand and Supply of Foreign Exchange Stated in Foreign Currencies ....................... 87 3.9 The Market Determination of the Nominal Exchange Rate .................. 88 Fact Sheet 3.4: Exchange Rates against the US Dollar, 1980-2008........ 89 3.9.1 Hot money ...................................... 89 Box 3.2: National Policies on the Balance of Payments and Accumulation of Foreign Exchange Reserves ................... 89 3.10 The Persistence of Balance of Payments Deficits and Surpluses ................ 90 Conclusions ........................................... 90 Key Concepts .......................................... 91 xii Macroeconomics Summary of Critical Conclusions ................................91 Extended Analysis Box 3.1 .A: Comparison of the Actual and PPP Costs of the Big Mac ..........................................91 Review and Discussion Questions ...............................92 Advanced and Technical Questions ..............................92 Part II Short-run Macroeconomics 95 4. Determinants of Aggregate Demand: The Commodity Market of the Closed Economy 97 4.1 Symbols Used ..........................................97 4.2 The Commodity Sector of the Closed Economy .......................97 4.2.1 Uses of national income ...............................97 4.2.2 Sources of national expenditures ...........................99 4.2.3 Equilibrium in the commodity market ........................99 4.2.4 National saving ....................................99 4.2.5 The relationship between saving and investment ..................100 4.2.6 The (physical) capital stock ..............................100 Box 4.1: An Unjustified Oversimplification for a Modern Economy ........101 4.3 The Two Uses of Private Saving and the Drag of Deficits on Investment ..........101 4.4 Disequilibrium and the Role of Changes in Inventories in the Adjustment to Equilibrium .........................................102 4.4.1 The role of unintended changes in inventories ...................103 Extended Analysis Box 4.1: A Simplified Diagrammatic Analysis: The 45° Diagram ..................................103 4.4.2 Limitations of the 45° diagram for macroeconomic analysis ............105 4.5 For the Macroeconomic Analysis of the Closed Economy, Is There a National Income Identity and One Between National Saving and Investment? .......105 4.5.1 An accounting national income identity .......................105 Extended Analysis Box 4.2: The Distinction Between the Meanings of Investment in Macroeconomics .........................106 The actual change in the capital stock and the definitions of investment ..............................107 4.6 Demand Behavior in the Commodity Market .........................107 4.6.1 Consumption expenditures ..............................107 Fact Sheet 4.1: Consumption and Disposable Income in the USA, 1980-2008 . . 109 Fact Sheet 4.2: Interest Rates and Saving in the USA, 1985-2008.........110 4.6.2 The saving function ..................................109 Extended Analysis Box 4.3: The Dependence of Consumption on Wealth, Interest Rates ............................. Ш Contents xiii The concept of lifetime wealth as the present discounted value of future incomes .................................. Ill 4.6.3 Investment expenditures ...............................113 4.6.4 Government expenditures and tax revenues .....................115 Fact Sheet 4.3: Interest Rates and Investment in the USA, 1960-2008......114 Extended Analysis Box 4.4: Amore Realistic Investment Function ........115 The impact of business confidence on investment ................115 Fact Sheet 4.4: USA Fiscal Deficit, 1962-2008...................117 4.6.5 The commodity market and the price level .....................118 4.7 The Commodity Market Model: The IS Equation/Curve ..................118 The impact of investment fluctuations on income: a partial investment multiplier ............................119 Box 4.2: The Mechanism of the Investment Multiplier: An Illustration ......120 The impact of fiscal policy on income: partial fiscal policy multipliers ........120 Box 4.3: The Impact of a Balanced Budget: The Balanced Budget Multiplier . . . 121 A word of caution on IS multipliers ........................121 The IS curve .....................................122 Shifts in the IS curve versus movements along it ..................122 Extended Analysis Box 4.5: The Slope of the IS Curve ...............123 4.8 Conclusions ...........................................124 Key Concepts ..........................................124 Summary of Critical Conclusions ................................124 Review and Discussion Questions ...............................124 Advanced and Technical Questions ..............................125 5. Aggregate Demand in the Open Economy under an Interest Rate Target: Is-IRT Analysis 127 5.1 The Number of Goods and Markets in the Open Economy .................127 5.2 The Foreign Exchange Sector of the Open Economy and the Balance of Payments, Review ......................................128 5.2.1 Net interest payments and net transfer payments ..................130 5.2.2 Relationship between nominal and real interest rates ................130 5.3 The Commodity Market of the Open Economy ........................130 Fact Sheet 5.1: Components of Aggregate Demand for USA, Canada, and Thailand, 2007...................................132 5.3.1 The uses of private saving in the open economy ...................133 xiv Macroeconomìcs 5.3.2 Three gaps: saving, fiscal, and external ........................133 Fact Sheet 5.2: The uses of private saving in the USA, 1980-2008 ........134 5.3.3 Commodity market equilibrium and capital flows ..................135 Extended Analysis Box 5.1: Financing high levels of domestic investment during the development stages and foreign exchange crises ...................................135 Foreign exchange crises and debt forgiveness ...................136 5.3.4 The open economy IS relationship ..........................137 The complete model of *the commodity sector forthe open economy ...........138 Box 5.1: Derivation of the Open Economy is Equation ...............139 5.3.5 The open economy IS curve .............................141 5.3.6 Shifts in the open economy IS curve .........................142 Extended Analysis Box 5.2: The Mathematical Derivation of the Slope of the IS Curve ...................................142 Changes in the slope of the IS curve as the economy becomes more open ................................142 Comparing the magnitudes of the fiscal multipliers for open economies ................................143 The stability of aggregate demand in more open economies .....................................143 5.3.7 The impact of exchange rate changes on the IS curve ................143 5.4 The Formulation of Monetary Policy .............................145 Box 5.2: Money Supply, the Stock of Money and Their Relationship with the Interest Rate ...............................145 5.4.1 Monetary policy through interest rate targeting ...................146 5.4.2 Rules versus discretion in setting the target interest rate ..............147 5.4.3 Diagrammatic depiction of the interest rate target .................148 5.5 The Determination of Aggregate Demand under Interest Rate Targeting ..........148 5.5.1 Diagrammatic derivation of the AD curve ......................149 5.5.2 The downward slope of the AD curve in the open economy under an exogenous interest rate target: a reiteration ...................150 5.6 The Policy Multipliers for the Open Economy Aggregate Demand .............150 5.6.1 The impact of investment fluctuations on aggregate demand: the investment multiplier ...............................150 5.6.2 The impact of fiscal policy on aggregate demand: the fiscal multipliers ..................................151 5.6.3 The impact of monetary policy on aggregate demand: the target rate multiplier ...............................151 5.6.4 The distribution of incomes, consumption patterns, and the size of the multiplier ....................................151 Contents xv 5.6.5 The impact of exports on domestic aggregate demand ...............152 5.6.6 The lag in the impact of changes in the interesirate target .............152 5.7 Diagrammatic Analysis of Fiscal and Monetary Policies ....................152 5.8 The IS, IRT Curves and the Determination of Output: A Caveat ..............153 5.9 But What about the Monetary Sector and Its Money Demand and Supply Functions? .....................................153 5.9.1 The demand for money ................................153 5.9.2 Ensuring equilibrium in the money market under an interest rate target and the determination of the money supply ...............155 5.10 Managing Aggregate Demand in the Open Economy: Monetary and Fiscal Policies under Flexible Exchange Rates ............................155 5.10.1 The effectiveness of fiscal policy for the open economy under interest rate targeting .............................155 5.10.2 The effectiveness of monetary policy for the open economy under interest rate targeting .............................156 5.10.3 Limitations on the effectiveness of a policy of interest rate targeting ........157 5.11 Internal Versus External Balance ................................157 Extended Analysis Box 5.3: The Mundell-Fleming Model of the Open Economy ...................................158 5.12 Conclusions ...........................................158 Key Concepts ..........................................159 Summary of Critical Conclusions ................................159 Review and Discussion Questions ...............................159 Advanced and Technical Questions ..............................160 6. Aggregate Demand Under a Money Supply Operating Target: IS-LM Analysis 163 6.1 Monetary Policy .........................................163 6.1.1 Reasons for choosing interest rate targeting over money supply targeting, or vice versa ......................................164 Lags in the impact of money supply changes versus those of interest rate changes . . . 164 Instability of money demand .............................164 The informal financial sector and black money in developing economies .......164 6.1.2 Choosing the monetary aggregate as the target variable ..............165 6.2 The Demand for Money ....................................166 6.3 The Motives for Holding Money ................................167 6.3.1 The volatility of the speculative demand for money .................168 6.3.2 Other reasons for the volatility of the demand for money ..............168 6.4 The Standard Money Demand Function ............................168 Extended Analysis Box 6.1: Special Cases of Money Demand ...........169 6.4.1 Equilibrium in the money market ..........................171 Disequilibrium in the money market .........................171 6.5 The LM Equation ........................................172 6.5.1 The LM curve .....................................172 xvi Macroeconomics 6.5.2 Shifts in the LM curve ................................172 6.5.3 Shifts in the LM curve versus movements along it ..................174 6.5.4 Final comments on the LM curve ..........................174 Extended Analysis Box 6.2: The potential general shape of the LM cur ve .....174 6.6 Deriving the Aggregate Demand for Commodities by Combining the IS and LM Curves .....................................175 6.6.1 The IS equation for the commodity market equilibrium ..............175 6.6.2 The relationship between the nominal and real interest rates ............175 6.6.3 Diagrammatic determination of aggregate demand .................176 The IS, LM curves and the determination of output: a caveat ............177 6.7 The Impact of Expansionary Monetary and Fiscal Policies on Aggregate Demand .....177 6.8 Bringing Aggregate Supply into the Open Economy Analysis, a Preview of Chapters 7 to 9........................................178 6.8.1 The impact of an increase in aggregate demand on the quantity supplied and the price level ...................................178 6.8.2 The impact of monetary and fiscal policies on equilibrium output and price level in the open economy .........................178 The short-run impact of aggregate demand changes on output and the price level ...................................179 The long-run impact of aggregate demand changes on output and the price level ...................................179 6.8.3 Disequilibrium in the domestic economy and stabilization through monetary and fiscal policies ..............................179 6.8.4 Summation on the roles of monetary and fiscal policies under flexible exchange rates ............................. 180 Extended Analysis Box 6.3: The Mundell-Fleming Model of the Open Economy ................................ 180 6.9 The Central Bank s Control Over the Money Supply ..................... 181 6.10 The Central Bank s Instruments for Changing the Monetary Base .............. 182 6.10.1 Open market operations ...............................182 6.10.2 Shifting government deposits between the central bank and the commercial banks in Canada .......................................182 6.10.3 A mechanism for commercial banks to change the monetary base .........183 6.11 The Central Banks Control Over the Monetary Base Multiplier through Reserve Requirements .................................183 6.12 The Impact of Discount Rate Changes on the Economy ...................184 6.12.1 The central bank s discount rate and interest rate differentials in the economy . .184 6.13 The Determination of the Money Supply ...........................184 Extended Analysis Box 6.4: The Creation of Demand Deposits ..........185 6.14 A Common Money Supply Formula for Ml ..........................186 6.14.1 The monetary base multiplier ............................187 6.14.2 Numerical examples ..................................188 6.15 Conclusions ..................................... 188 Key Concepts ..........................................188 Contents xvii Critical Conclusions .......................................189 Appendix .......................................189 Determination of the LM curve ...........................189 Derivation of aggregate demand for the closed economy from its IS and LM equations ...................................189 Intuition .............................................190 Simplifying the AD equation for further analysis .......................191 Determination of the long-run price level under an exogenous money supply ........191 Derivation of aggregate demand for the open economy from its IS and LM equations .... 191 Review and Discussion Questions ...............................192 Advanced and Technical Questions ..............................193 7. Full-Employment Output and the Natural Bate of Unemployment 195 7.1 The Production Function ....................................196 Fact Sheet 7.1: Diminishing Marginal Product of Labor ..............197 Mathematical Box 7.1: Examples of Production Functions and the Derivation of the Marginal Product of Labor .........................198 The general procedure for deriving the MPL from the production function .......198 7.2 The Labor Market .......................................200 7.2.1 Demand for labor ...................................200 Diagrammatic analysis ................................201 7.2.2 Supply of labor ....................................201 Extended Analysis Box 7.1: The Intertemporal Analysis of Labor Supply .....203 The Backward Bending Labor Supply Curve Over Long Periods ....................................204 7.3 The Long-Run Equilibrium Levels of Employment and Output ...............205 7.3.1 The impact on long-run output of an increase in the price level or inflation rate . 206 7.3.2 The diagrammatic analysis of employment and output ...............206 The effect on output of an improvement in labor productivity .............206 7.3.3 The impact of aggregate demand on long-run output ...............206 The pursuit of fiscal policies ..............................207 The pursuit of expansionary monetary policies .....................207 7.3.4 The ineffectiveness of monetary and fiscal policies in LR equilibrium .......207 Mathematical Box 7.2: The Derivation of the Demand for Labor, Employment, and Output .............................207 The role of aggregate demand in determining output and the price level, an illustration .........................208 The impact of expansionary monetary and fiscal policies .............209 7.4 The Effects of an Increase in the MPL on LR Output and Employment ........................................209 7.4.1 Diagrammatic analysis of the impact of an improvement in technology on output and employment ...................................210 xviii Macroeconomics 7.5 The effects of an Increase in Labor Supply on LR Output, Employment and Price Level . . 210 Mathematical Box 7.3: The Effect of an Improvement in Technology .......211 7.6 Conclusions on Changes in the Equilibrium Levels of Employment and Output ......212 7.7 Full Employment and the Full-Employment Level of Output: Definitions and Conditions . 213 7.8 The Role of Supply-Side Policies in Changing Full-Employment Output ..........213 7.9 Stagflation ............................................214 Fact Sheet 7.2: The Price of Oil in the USA, 1960-2008..............214 Box 7.1: The Impact of Oil Price Shocks on Full Employment and Full-Employment Output in Oil Importing Countries ...........215 The impact of oil price increases on oil producing countries ...........216 Can expansionary monetary and fiscal policies eliminate this stagflation? .....................................216 Extended Analysis Box 7.2: The Role of Demand-Side Policies in Changing Full-Employment Output .............................216 An implicit assumption in the above conclusions .................217 7.10 Crowding Out of Investment by Fiscal Deficits, Given the LR Supply of Output in the Closed Economy ........................................217 7.11 The Actual Level of Output in the Economy .........................218 7.11.1 Changes in the actual rate of output over time ...................219 7.12 The Rate of Unemployment ..................................219 7.12.1 The LR equilibrium (natural) rate of unemployment ................220 Shifts in the natural rate of unemployment ......................220 The lack of impact of monetary and fiscal policies on the natural rate of unemployment ....................................221 7.13 The Long-Run Equilibrium (Natural) Rate of Interest ....................221 The ineffectiveness of monetary policy and inflation in changing the long-run real interest rate .........................................222 7.14 Conclusions ...........................................222 Key Concepts ..........................................223 Summary of Critical Conclusions ................................223 Review and Discussion Questions ...............................223 Advanced and Technical Questions ..............................224 8. Output in the Short Run: The Role of Expectations and Adjustment Costs 227 8.1 The Role of Uncertainty and Errors in Expectations .....................228 8.1.1 The theory of rational expectations .........................228 8.1.2 Random errors and their predictability ........................229 8.1.3 Application of rational expectations to monetary and fiscal policies ........229 8.2 Price Expectations and the Labor Market: Output and Employment in the Context of Wage Contracts ...............................229 8.2.1 Labor supply in wage negotiations during the first stage ..............230 8.2.2 Employment during the contract period (the production stage) ..........230 Contents xix 8.2.3 Diagrammatic analysis ................................231 The effect of a proportional increase in the expected and actual price levels ......232 Conclusions from the contract wage analysis of production ..............232 The expectations augmented employment and output supply curves ..........233 Implications of the expectations augmented employment and output supply equations for variations in employment and output over the business cycle ......233 Box 8.1: Errors in Price Expectations, the Duration of the Wage Contract and Cost-of-Living Clauses ............................234 8.3 Friedman s Expectations Augmented Employment and Output Rules ............234 Extended Mathematical Analysis Box 8.1: Labor Demand when There are Expectational Errors in the Context of Nominal Wage Contracts .......................235 The expectational equilibrium level of employment ....................................236 The impact of expectational errors on employment ....................................236 The Implications for Employment and Output of Wage Contracts with Expectational Errors in Prices ...........................237 8.4 Lucas Supply Rule with Errors in Price Expectations in Commodity Markets ........237 8.4.1 Firms responses to errors in expectations ......................239 Extended Analysis Box 8.2: Diagrammatic Analysis: Comparing the FSR and LSR Curves (FSR and LSR) and the LRAS Curve ....................................239 8.5 The Implications of the FSR and LSR for the Impact of Anticipated Demand Increases ................................240 8.6 The Implications of the FSR and the LSR for the Impact of Unanticipated Demand Increases ..............................241 8.6.1 The impact of revisions in anticipations and real time ................241 8.6.2 Practical aspects of the FSR and LSR analysis ....................242 Extended Analysis Box 8.3: The Implications of the FSR and LSR for the Impact of Monetary and Fiscal Policies ..................242 The Implications of Rational Expectations for Systematic Monetary and Fiscal Policies ....................243 The Scope for Monetary and Fiscal Policies for Stabilization when Private Demand is Volatile ..................244 The Scope for Monetary Policies and the Political Economy of the Government s Budget ......................245 8.7 FSR and LSR: The Impact of Anticipated Permanent Supply Changes on the Economy . . 245 xx Macroeconomics 8.8 The Impact of Unanticipated but Permanent Supply Changes on the Economy .......246 Box 8.2: Cost of Living Clauses ...........................247 8.9 The Short-and Long-Term Relationships between Output and Inflation ..........247 8.10 Empirical Validity of the FSR and the LSR..........................248 8.11 Types of Adjustment Costs and Their Impact on Output ...................248 8.11.1 Firms responses to increases in the demand for their products ...........249 8.12 Menu Costs and Price Stickiness as the Explanation of the SRAS Curve ...........249 8.12.1 Aggregate supply in the sticky-price hypothesis ...................251 8.12.2 Monetary policy and the sticky-price SRAS curve ..................252 8.13 Costs of Adjusting Employment: Implicit Contracts as an Explanation of the SRAS Curve .......................................252 8.13.1 Variations in work effort over the short term ....................253 Box 8.3: Work Effort in Restaurants During the Day ................253 Work Effort by Students over the Term and the Calendar Year .........253 8.13.2 The Flexibility of the Employment-Output Nexus in the Short Term .......254 Long-term labor contracts and labor hoarding ....................254 8.13.3 Okun s Rule: The Relationship between Unemployment and Output Changes .................................255 8.14 The Implications of Adjustment Costs for Persistence of Output and Employment Fluctuations Over the Business Cycle .............................256 8.15 Implications of Adjustment Costs for the Impact of Monetary and Fiscal Policies ......257 8.16 Stagflation and the Recessions of 1973-1975 and 1980 ...................257 Box 8.4: Empirical Evidence on Price Changes, Wage Contracts and Output Response ...............................257 8.17 Stylized Facts and Intuition on the Theories Explaining Variations in Output ........258 8.18 Conclusions ...........................................259 Key Concepts ..........................................260 Summary of Critical Conclusions ................................260 Review and Discussion Questions ...............................261 Advanced and Technical Questions ..............................263 9. Actual Output, Disequilibrium, and the Interaction among Markets 267 Fact Sheet 9.1: Money Growth and Output Growth in USA, 1960-2008.....269 9.1 The Relevance of Expectations on Variables Other Than Prices ...............269 9.2 Shocks to Aggregate Demand and Supply ...........................270 Examples of shocks to consumption ................................270 Examples of shocks to investment and net exports ........................271 Shocks to money demand and supply ...............................272 Shocks to the cost and availability of credit ...........................272 9.2.1 Shocks to the aggregate supply of commodities ...................272 9.3 An Analysis of the Disequilibrium Following a Demand Shock ................273 Contents xxi 9.3.1 The assumptions for disequilibrium analysis .....................273 Effective aggregate demand and supply ........................273 Extended Analysis Box 9.1: The Dynamics Required for the Maintenance of a Full-Employment Scenario ..........................274 9.3.2 A plausible dynamic scenario .............................275 Initial effects of the emergence of a demand deficiency ................275 Secondary effects of the demand deficiency .......................275 The transition from the old equilibrium to the new one ................275 Output-price adjustment function [Optional] ....................276 Box 9.1: The Nature and Critical Role of Expectations in Dynamic Adjustments . 276 9.4 Diagrammatic Analysis Following а Баїї in Aggregate Demand ................278 Effective demand for labor ...................................279 9.5 Disequilibrium with Flexible Prices and Wages ........................279 Extended Analysis Box 9.2: The Relative Rapidity of Commodity Markets in Adjusting Prices versus those by Firms and Consumers in Adjusting Production, Employment, and Prices ......................................279 The failure or sluggishness of the labor market in adjusting nominal wages versus the faster responses of firms and workers in adjusting employment and consumption ....................................280 9.6 If the Real-World, Real-Time Economy is not on its LRAS or SRAS Curve, Where will it be? ........................................281 9.7 Can the Economy Get Stuck Below Full Employment? ....................281 Impact of the disequilibrium on the long run: hysteresis .....................282 9.8 Optimal Monetary and Fiscal Policies for the Demand-Deficient Economy .........282 The use of expansionary monetary policies ............................282 Limits to the effectiveness of monetary policies in a demand-deficient recession ....................................283 The use of fiscal policy: increases in government expenditures and/or cuts in taxes .......283 The policy dilemma .......................................284 Fact Sheet 9.2: Economies in Disequilibrium: USA During the Great Depression ..................................284 Recapitulation of the roles of monetary and fiscal policies in a demand-deficient economy . . .286 Extended Analysis Box 9.3: Disagreements Among Economists on the Appropriate Policies in Real Time for a Real-World Economy ......................................287 9.9 Excess Demand18 in the Economy and Appropriate Policies .................287 9.10 Asymmetry in the Economy s Responses to Deficient and Excess Demand .........288 9.11 An Analysis of Disequilibrium Following a Supply Shock ...................288 xxii Macroeconomics 9.11.1 Supply shocks from labor productivity ........................288 The scope for monetary and fiscal policies .......................289 Box 9.2: Demand Shocks Emanating from Shifts in Long-Run Supply ......290 9.11.2 The impact of a decline in credit supply on the effective supply of commodities ................................290 9.12 Crowding-Out or Crowding-In of Investment by Fiscal Expenditures in a Demand-Deficient Economy? ...............................291 9.13 Disequilibrium (Involuntary Unemployment) in the Labor Market due to a High Real Wage ......................................291 Expansionary monetary policy as a means of lowering the real wage and restoring equilibrium in the labor market .................................292 Extended Analysis Box 9.4: Is the preceding demand-deficient analysis a reflection of market failure or of markets sluggishness in adjustment of prices and nominal wages? .....................293 9.14 The Dual Implications of a High Saving Rate .........................293 The paradox of a high saving rate — also known as the paradox of thrift ............293 9.15 Conclusions ...........................................294 Key Concepts ..........................................295 Summary of Critical Conclusions ................................295 Review and Discussion Questions ...............................296 Advanced and Technical Questions ..............................297 10. Employment, Unemployment, and Inflation 301 10.1 Definitions of the Labor Force and Labor Supply .......................301 10.1.1 Frictional unemployment and actual employment in labor market equilibrium ..............................302 The notions of matched labor supply and matched labor demand in the presence of frictional unemployment ......................304 10.1.2 Discouraged workers .................................304 10.1.3 Other determinants of the equilibrium level of unemployment ...........305 Box 10.1: The Labor Force Participation Rate ...................305 The non-employment rate .............................306 Shifts in labor force participation rates in recent decades ...............306 Fact Sheet 10.1: Participation Rates in Canada and the United States, Male and Female, 1980-2008................................307 10.2 The Components of Unemployment ..............................307 The diagrammatic depiction of the components of unemployment ........308 10.3 Involuntary Unemployment ..................................308 Involuntary unemployment due to a high real wage ......................309 Involuntary unemployment due to the emergence of a demand deficiency ............309 Involuntary unemployment due to a credit crisis ........................309 Contents xxiii The variation in the number of discouraged workers with the state of the economy .......309 10.4 The Actual Rate of Unemployment ..............................310 Fact Sheet 10.2: Unemployment Rates in Selected Countries, 1985-2008 . . . . 311 10.4.1 The division of unemployment into natural and cyclical unemployment ......312 10.4.2 Changes in the actual rate of unemployment over time ...............313 Short-run and long-run variations in the natural rate of unemployment ......313 Pact Sheet 10.4:....................................313 Estimating the natural rate of unemployment ....................314 Fact Sheet 10.5: Unemployment and Trend Unemployment in the United States, 1980-2008.............................314 10.5 Policies to Reduce Structural Unemployment .........................315 Extended Analysis Box 10.1: Changes in Structural Unemployment ........316 The impact of fiscal and monetary policies on structural unemployment .............................316 10.6 Policies to Reduce Frictional Unemployment .........................317 10.7 Measuring Involuntary Unemployment ............................317 Two ways of measuring involuntary unemployment .......................317 Monetary and fiscal policies to reduce involuntary unemployment ...............318 Box 10.2: Causes High Unemployment in Canada and Europe Relative to the USA ................................318 10.8 The Costs of Unemployment ..................................319 10.9 Relationship Between Unemployment and the Inflation Rate from the AD-AS Analysis . . 320 10.10 Phillips Curve (PC) .......................................321 10.10.1 Use of the Phillips curve as a policy trade-off ....................322 10.10.2 Instability of the Phillips curve ............................322 10.11 Deviations of the SR Equilibrium Unemployment Rate from the Natural One .......322 Fact Sheet 10.6: Historical Phillips Curves in the United States, 1960-1995 . . . 323 10.11.1 Friedman and the expectations augmented Phillips curve (EAPC) .........323 10.11.2 Expectational equilibrium and the natural rate ...................325 Extended Analysis Box 10.2: The Friedman AND Lucas Supply Rules .......325 Expectational errors and the commodity markets: The Lucas supply rule ...............................326 10.12 The Implications of the EAPC for Shifts in the Phillips Curve and for Policy ........326 The relationship between the Phillips curve and the EAPC ...................327 10.13 The EAPC and the Non-Accelerating Inflation Rate of Unemployment ...........328 10.14 The Implications of the EAPC for the Impact of Anticipated and Unanticipated Demand Increases ............................................. xxiv Macroeconomics 10.15 The Determinants of Inflation.................................328 Fact Sheet 10.7:....................................329 Another way of stating the determinants of inflation ......................330 10.16 The Costs of Inflation ......................................330 10.16.1 Inflation under perfect competition with fully anticipated inflation for all future periods: the costs of inflation in the analytical long-run case ............330 An intermediate scenario: anticipated inflation in the commodity and labor markets for some quarters ahead ......................332 10.16.2 The costs of unanticipated inflation .........................332 A caveat ........................................333 Box 10.3: The Impact of Hyperinflation on Long-Term Output Growth and the Standard of Living: Practical Experience in Contrast to Theory ......................................333 10.17 The Sacrifice Ratio .......................................334 Fact Sheet 10.8: Sacrifice Ratio in the United States, 1950-2008.........334 10.17.1 Gradualist versus Cold Turkey Policies of Disinflation ...............334 10.17.2 Indexation to the rate of inflation: should nominal wages and interest rates be indexed? ........................................335 10.18 Conclusions ...........................................335 Key Concepts ..........................................337 Summary of Critical Conclusions ................................337 Review and Discussion Questions ...............................338 Advanced and Technical Questions ..............................338 11. Paradigms in Macroeconomics 341 Stylized Facts on Money, Prices, and Output .........................342 11.1 An Analogy for the Two Main Paradigms in Macroeconomics ................343 11.1.1 The approach of the classical paradigm to the pathology of the economy .....344 11.1.2 The approach of the Keynesian paradigm to the pathology of the economy . . . .344 Extended Analysis Box 11.1: The Fundamental Assumptions of the Classical Paradigm ......................................345 11.2 Defining and Demarcating the Models of the Classical Paradigm ..............346 11.2.1 The traditional classical approach ...........................347 Extended Analysis Box 11.2: The Founders of the Classical Tradition in Macroeconomics ..................................34g David Hume (1711-1776)............................348 Adam Smith (1723-1790).............................348 David Ricardo (1772-1823)............................349 Contents xxv 11.2.2 The neoclassical model ................................349 Box 11.1: Some Major Misconceptions about Traditional Classical and Neoclassical Approaches in the Classical Paradigm ..............350 11.2.3 The 1970s monetarism ................................351 11.2.4 The modern classical model .............................352 11.2.5 The new classical model ...............................353 Extended Analysis Box 11.3: The Founders of the Classical Approach in the Modern Period ...............................353 Milton Friedman (1912-2006)..........................353 Robert Lucas (1937-) ...............................354 Extended Analysis Box 11.4: The Economic Contributions of Milton Friedman ................................355 11.2.6 Milton Friedman and the Keynesians ........................355 11.2.7 The relationship between the Monetarists and Friedman ..............356 11.2.8 Friedman and the modern classical school ......................356 11.3 The Keynesian Paradigm ....................................357 Extended Analysis Box 11.5: The Founders of the Keynesian Paradigm ......358 Knut Wickseil (1851-1926)............................358 John Maynard Keynes (1883-1946) .......................358 11.3.1 Development of the Keynesian schools after Keynes ................359 11.3.2 Frequent themes in the Keynesianparadigm .....................359 New Keynesian economics ...............................360 11.3.3 The variety of Keynesian models ...........................360 Monetary and fiscal policy effects in Keynesian models ................361 11.3.4 The critical role of dynamic analysis when aggregate demand falls .........361 Box 11.2: The Keynesian-Neoclassical Synthesis on Aggregate Demand ......362 11.4 The Reformulation of Keynesian Approaches .........................362 11.4.1 NeoKeynesian building blocks for the reformulation of Keynesian macroeconomics ............................362 11.4.2 Taylor rule and its incorporation into Keynesian macroeconomics .........363 11.4.3 The new Keynesian model ..............................363 11.5 The Credit and Economic Crisis of 2007-2010: Which Theory Can Explain It? ......364 11.6 Which Macroeconomic Paradigm Should One Believe In and Use? .............365 Box 11.3: The Anatomy of Two Quite Different Recessions: 1973-1975 and 2001-2002............................365 11.7 Paradigms and Policies .....................................366 11.7.1 Stabilization versus pro-active policies ........................366 11.7.2 Rules versus discretion in the pursuit of policies ...................366 11.8 The Role of the Government in the Macroeconomy .....................366 11.8.1 Evolution of ideas about the role of the government ................367 xxvi Macroeconomics 11.8.2 Classical and Keynesian approaches and the debates on the size of the government ............................368 11.9 Conclusions ...........................................368 Keynesian versus classical economics in relation to the real world and real time .......369 Key Concepts ..........................................370 Summary of Critical Conclusions ................................371 Review and Discussion Questions ...............................371 Advanced and Technical Questions ..............................372 Part III Topics in Open Economy Macroeconomics 373 12. The Foreign Exchange Market, IMF, and Globalization 375 12.1 Review of PPP ..........................................376 12.2 Review of Interest Rate Parity (IRP) Theory .........................377 12.2.1 IRP as a theory of the interest rate ..........................377 The importance of stock market returns for capital flows: a problem. for the IRP theory ...................................378 Fact Sheet 12.1: Interest Rate Differentials between Countries ...........378 Simplified form of the benchmark IRP for short-run analysis .............379 Covered versus uncovered IRP .............................379 12.2.2 IRP as a theory of the exchange rate .........................380 The inconsistency between the IRP s implications and common observations .....381 12.2.3 The impact of expectations on exchange rates ....................382 12.3 PPP and IRP Combined ....................................383 Long run analysis ........................................383 Short run analysis ........................................383 12.4 The Market for Foreign Exchange, a Review .........................384 Fact Sheet 12.2: Interest Rates and Net Capital Flows in the USA, 1985-2008 . . 386 12.4.1 The relationship between the balance of payments and (D$ — S$) .........386 12.4.2 Diagrammatic analysis ................................386 12.5 Demand and Supply Elasticities ................................388 12.6 The J Curve for the Value of Net Exports in Real Time ....................388 12.6.1 Limitations of the commodity-based exchange market analysis ...........390 12.6.2 Policy implications of the J curve ...........................390 Extended Analysis Box 12.1: The General Experience of Industrialized Countries and LDCs on the J Curve .......................391 Implications of the above analysis for movements of exchange rates under flexible exchange rates ..................391 12.7 Historical Experience with Flexible Versus Fixed Exchange Rates ..............392 12.8 Measures to Reduce Balance of Payments Deficits .......................393 12.9 The International Monetary Fund (IMF) ...........................394 Contents xxvii 12.9.1 The IMF and disequilibrium in the balance of payments of the member countries ...............................395 Extended Analysis Box 12.2: IMF Conditionality ..................395 For whose benefit are the IMF policies? ......................396 12.9.2 The IMF and capital flows ..............................396 12.9.3 Special drawing rights (SDRs) ............................397 Extended Analysis Box 12.3: The World s Demand for Liquidity .........397 Exchange and financial crises ...........................398 Is the IMF a central banker for the world? ....................398 Does the world economy need a central bank? ..................399 The rising demand for the IMF to create a world currency ......................................399 12.10 The International Transmission of Crises and Business Cycles ................400 12.11 Economic Globalization ....................................400 12.11.1 Causes of the push for global markets ........................401 12.11.2 Measures of the extent of globalization .......................402 12.11.3 Other aspects of globalization ............................403 12.11.4 Globalization and modernization ..........................403 12.11.5 The persistence of nationalistic mercantilism — globalization limited to truncated globalization ..............................404 12.11.6 The possibility of net losses from globalization ...................405 12.11.7 Effects of globalization on commodity and capital flows ..............405 12.12 Conclusions ...........................................406 Key Concepts ..........................................408 Summary of Critical Conclusions ................................408 Review and Discussion Questions ...............................409 Advanced and Technical Questions ..............................409 13. The Open Economy Under a Fixed Exchange Rate Regime 411 13.1 The Balance of Payments (BP) Equilibrium Curve Under Fixed Exchange Rates ......411 13.2 The IS-LM Model for the Open Economy Under Fixed Exchange Rates ..........413 13.2.1 The slope of the BP curve ..............................413 13.2.2 The relative slopes of the LM and BP curves ....................413 Extended Analysis Box 13.1: Differences between the IS-LM Diagrams for the Flexible and Fixed Exchange Rates ....................414 13.2.3 General equilibrium under fixed exchange rates, a diagrammatic treatment . . . .414 13.3 Managing Aggregate Demand in the Open Economy: Monetary and Fiscal Policies Under Fixed Exchange Rates ......................................415 13.3.1 The impact of an expansionary fiscal policy on aggregate demand .........416 xxviii Macroeconomics 13.3.2 The impact of an expansionary monetary policy on aggregate demand ......416 Extended Analysis Box 13.2: Monetary and Fiscal Policies in the Case of Interest-Insensitive Capital Flows and Fixed Exchange Rates ...................................417 13.4 Bringing Aggregate Supply into the IS-LM Analysis with a Fixed Exchange Rate ......418 13.5 Macroeconomic Equilibrium in the Small Open Economy with Full Employment and IRP 418 13.5.1 Fiscal policies under IRP and full employment ...................419 13.5.2 Monetary policy under IRP and full employment ..................419 13.6 PPP, the World Rate of Inflation and the Convergence in National Inflation Rates .....420 13.6.1 The world rate of inflation in the fixed exchange rate case .............420 Box 13.1: The impact of a large economy on smaller economies ..........421 13.7 Economic Blocs, Fixed Exchange Rates and the Convergence in Inflation Rates ......421 13.8 Disequilibrium in the Domestic Economy and Stabilization through Monetary and Fiscal Policies: The Fixed Exchange Rate Case with Interest Sensitive Capital Flows .....................................421 A caveat ........................................422 Extended Analysis Box 13.3: Disequilibrium in the Domestic Economy and Stabilization through Monetary and Fiscal Policies: The Fixed Exchange Rate Case with Interest Insensitive Capital Flows .........................422 13.9 The Need for Monetary and Fiscal Policies under Fixed Exchange Rates ..........423 13.9.1 Internal versus external balance ...........................423 13.9.2 Anote of caution on the use of monetary and fiscal policies ............424 13.10 The Effect of Relatively Different Improvements in Productivity at Home and Abroad under Fixed Exchange Rates .........................................424 13.11 The Political Economy of Exchange Rates: The Choice between Fixed and Flexible Exchange Rate Regimes .............................425 13.12 Other Tools for Handling Balance of Payments Deficits ...................426 Extended Analysis Box 13.4: The Gold Standard and the Gold Exchange Standard ......................................426 13.13 Summary of the Costs and Benefits of a Fixed Exchange Rate ................428 13.14 Dollarization ..........................................429 13.14.1 Dollarization and different productivity growth rates ................431 Extended Analysis Box 13.5: A Dual Currency System: Dollarization Along with a Separate National Currency .....................431 13.15 Currency Boards ........................................432 13.16 Conclusions ...........................................432 Key Concepts .........................................433 Summary of Critical Conclusions ................................433 Contents xxix Review and Discussion Questions............................... 434 Advanced and Technical Questions ..............................434 Part IV Growth Economics 437 14. Classical Growth Theory 439 Fact Sheet 14.1: Long-Term Real GDP Growth in Selected Countries, 1960-2003 ..................................... 439 Fact Sheet 14.2: Real GDP Growth Rates in the USA ...............440 Extended Analysis Box 14.1: Setting the Boundaries of Macroeconomic Growth Theory ..................................442 14.1 The Classical (Solow s) Growth Model s Assumptions ....................443 14.1.1 The technology of production ............................443 14.1.2 Saving, investment and the change in the capital stock ...............444 14.1.3 Labor force growth ..................................445 14.2 The Analysis of the Solow Model ...............................445 14.3 Diagrammatic Analysis of the Solow Model ..........................446 14.3.1 The SS growth rate of output ............................447 Extended Analysis Box 14.2: Variability of the Saving Rate .............448 14.3.2 The impact of shifts in the saving rate ........................448 Mathematical Box 14.1: Numerical example A ...................449 14.3.3 The impact of shifts in the labor force growth rate .................450 Mathematical Box 14.2: Numerical example В ...................451 14.4 The Growth Implications of a More General Production Function .............452 14.5 Convergence Versus Divergence in Output per capita among Countries ...........453 14.6 Assessing the Importance of Technical Change in the Solow Model16 ............454 14.6.1 Solow s estimates of the contribution of technical change to the improvement in living standards ...................................457 Mathematical Box 14.3: Numerical Examples on Technical Change ........457 14.6.2 The residual as the unexplained component of growth ...............458 Mathematical Box 14.4: Detailed Estimation of the Contributions to Economic Growth ...............................458 Estimating the returns to different educational levels ...............458 14.7 Some Empirical Findings on the Contributions to Growth ..................461 14.8 The Solow Growth Model with Exogenous Changes in the Quality of Labor ........461 14.8.1 Diagrammatic analysis ................................463 xxx Macroeconomics 14.8.2 The role of human capital in changing the quality of labor .............464 Extended Analysis Box 14.3: The Variability of the Labor Force Growth Rate ....................................465 14.8.3 Technical change with falling or negative labor force growth rates .........465 14.8.4 Shifts in participation rates ..............................466 Fact Sheet 14.3: Participation Rates in Canada and the USA, Male and Female, 1980-2008 ..................................... 466 Box 14.2: The Implications of Increases in the Labor Force Participation of Women .....................................467 14.9 SS Growth versus Level Effects of Exogenous Shifts .....................468 14.10 The Implications of the Solow Analyses for Policy ......................468 Fact Sheet 14.4: Real GDP Per Capita, 2003 Population Growth Rates ......469 Box 14.3: Historical Growth Patterns, Labor force Growth, and Technology Shifts .................................469 14.10.1 Malthus s theory of economic growth and the Malthusian stage ..........471 14.10.2 The post-Malthusian stage ..............................472 14.10.3 The modern growth stage ..............................472 14.11 Conclusions ...........................................473 Key Concepts ..........................................474 Summary of Critical Conclusions ................................474 Review and Discussion Questions ...............................474 Advanced and Technical Questions ..............................475 15. Advanced Topics in Growth Theory 481 15.1 Technology, Knowledge and Externalities ...........................482 15.1.1 The distinction between endogenous and exogenous technical change ......482 15.1.2 The definition of capital in endogenous growth theories ..............483 15.1.3 The externalities of new knowledge .........................483 Box 15.1: Inventions, Innovations, and Patents ...................484 Innovations versus inventions as forms of technical change ...........484 15.1.4 Patents and the protection of copyright, intellectual property and trade secrets . . 485 Recent changes in patent protection ..........................486 15.2 The Production of New Knowledge ..............................486 15.2.1 Diagrammatic analysis ................................488 15.3 The Dissemination of Knowledge Across Countries ......................488 15.4 Diagrammatic Analysis .....................................490 15.4.1 Growth rates and capital flows among countries ..................491 15.4.2 Convergence and divergence in living standards between countries ........491 Contents xxxi 15.4.3 Continuous growth in the advanced economies ...................492 Box 15.2: Foreign Aid and Investment — and Capital Drain ............492 15.5 The Historical Experience of Growth .............................492 Box 15.3: Economic Globalization and Endogenous Technical Change ......493 Technology Clusters ................................493 Globalization and Patents .............................494 15.6 Human Capital .........................................494 Box 15.4: The Innovative Process and Its Creative Destruction ..........494 15.7 The Implications of Endogenous Growth Theories for Macroeconomic Policies ......496 Extended Analysis Box 15.1: International Linkages and Growth .........497 15.8 The Importance of the Inflation Rate and the Quantity of Money for Growth .......498 Box 15.5: The Role of the Financial Sector in Growth: Some Conclusions from Economic History ..............................499 15.9 The Role of the Financial Sector in Growth: Recent Empirical Evidence ...........500 15.10 The Miracle of Economic Growth ...............................501 15.10.1 The miracle of growth and financial crises in the economic tigers .........501 15.10.2 The economic crisis of 2007-2010 in the USA ...................501 Extended Analysis Box 15.2: The Economic, Social, and Political Environment for Growth: Markets, Competition, Capitalism, and Entrepreneurship .........................502 15.11 Empirical Evidence on the Contributors to Growth ......................503 15.11.1 Empirical evidence on growth in recent decades ..................504 15.12 Conclusions ...........................................505 Conclusions from endogenous growth theory .........................505 Conclusions on money, the financial sector, and growth ...................506 Key Concepts ..........................................507 Summary of Critical Conclusions ................................507 Review and Discussion Questions ...............................508 Advanced and Technical Questions ..............................508 16. Business Cycles, Crises, and The International Transmission of Economic Activity 511 16.1 Recessions and Booms in Economic Activity .........................513 16.1.1 The popular statistical designation of a recession ..................513 16.1.2 Monetary and fiscal policies to combat a recession .................514 Fact Sheet 16.1: Output Gap in the United States (USA), 1980-2008......515 16.2 Business Cycles and the Growth Trend in Economic Activity .................516 Box 16.1: Eliminating the Trend from the Data ...................516 Deriving the trend rate of output .........................516 The unemployment rate as the proxy for the output gap .............517 xxxii Macroeconomics 16.3 Stylized Facts of Business Cycles ................................517 16.4 The Behavior of Variables Over the Business Cycle ......................518 16.4.1 Procyclical, acyclical, and countercyclical movements ................ 518 16.4.2 Leading, lagging, and coincident variables ...................... 518 16.4.3 The volatility of variables over time ......................... 519 16.5 Business Cycles, the Full Employment Assumption and the Classical and Keynesian Paradigms ....................................519 Box 16.2: Business Cycles and The Assumption of Full Employment .......521 16.6 The General ЛО-ЛЅ Theory of Business Cycles .......................521 Fact Sheet 16.2: The Structure of the AD-AS Model ................523 16.6.1 The propagation mechanism .............................523 Box 16.3: An Illustration of Technical Change Creating Cycles through Aggregate Demand Shifts .............................524 16.7 The Modern Classical Approach to Business Cycles ......................525 16.7.1 Real business cycle theory ..............................526 16.7.2 Policy implications of the RBC theories .......................528 16.8 Keynesian Explanations of the Business Cycle .........................528 16.8.1 The multiplier-accelerator model of aggregate demand ...............529 16.8.2 Limitations of the validity of the multiplier-accelerator model ...........530 Extended Analysis Box 16.1: A Taxonomy of the General Reasons for the Occurrence of Business Cycles .......................531 16.9 International Linkages Among National Business Cycles ...................532 16.9.1 A world business cycle ................................533 16.10 Crises in Economic Activity ...................................533 Fact Sheet 16.3: The Asian Crisis of the Mid-1990s ................533 16.11 Long-Term Effects of Recessions and Booms .........................535 16.11.1 The accumulation of human capital .........................535 16.11.2 The accumulation of physical capital .........................536 16.11.3 Technical change ...................................536 16.11.4 The longer-term effects of cyclical fluctuations through aggregate demand . . . .536 16.11.5 The longer-term impact of recessions and booms ..................537 16.11.6 The implications of hysteresis for policy .......................537 16.12 Money, Credit and Business Cycles ..............................538 16.12.1 Money supply and business cycles ..........................538 16.12.2 Credit and business cycles ..............................538 16.12.3 Economic crises ....................................540 16.12.4 Some instances of financial crises ...........................540 Contents xxxiii 16.13 The Relevance of Monetary and Fiscal Policies to Business Cycles ..............541 Box 16.4: Anatomy of the Financial and Economic Crisis of 2007-2010 in the World Economy ...............................542 The policy responses ................................543 16.14 Inflation and Unemployment ..................................543 16.15 Conclusions ...........................................545 Key Concepts ..........................................545 Summary of Critical Conclusions ................................546 Review and Discussion Questions ...............................546 Advanced and Technical Questions ..............................547 Index 549
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author	Handa, Jagdish 1939-
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discipline	Wirtschaftswissenschaften
format	Book
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genre_facet	Lehrbuch
id	DE-604.BV035849754
illustrated	Illustrated
indexdate	2024-07-09T22:06:05Z
institution	BVB
isbn	9789814289443 9814289442
language	English
oai_aleph_id	oai:aleph.bib-bvb.de:BVB01-018707838
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open_access_boolean
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physical	XLIX, 561 S. graph. Darst. 1 CD-ROM (12 cm)
publishDate	2011
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publishDateSort	2011
publisher	World Scientific
record_format	marc
spelling	Handa, Jagdish 1939- Verfasser (DE-588)137984243 aut Macroeconomics with study guide CD-ROM Jagdish Handa Singapore [u.a.] World Scientific 2011 XLIX, 561 S. graph. Darst. 1 CD-ROM (12 cm) txt rdacontent n rdamedia nc rdacarrier Macroeconomics Makroökonomie (DE-588)4037174-8 gnd rswk-swf (DE-588)4123623-3 Lehrbuch gnd-content Makroökonomie (DE-588)4037174-8 s DE-604 Digitalisierung UB Regensburg application/pdf http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=018707838&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA Inhaltsverzeichnis
spellingShingle	Handa, Jagdish 1939- Macroeconomics with study guide CD-ROM Macroeconomics Makroökonomie (DE-588)4037174-8 gnd
subject_GND	(DE-588)4037174-8 (DE-588)4123623-3
title	Macroeconomics with study guide CD-ROM
title_auth	Macroeconomics with study guide CD-ROM
title_exact_search	Macroeconomics with study guide CD-ROM
title_full	Macroeconomics with study guide CD-ROM Jagdish Handa
title_fullStr	Macroeconomics with study guide CD-ROM Jagdish Handa
title_full_unstemmed	Macroeconomics with study guide CD-ROM Jagdish Handa
title_short	Macroeconomics
title_sort	macroeconomics with study guide cd rom
title_sub	with study guide CD-ROM
topic	Macroeconomics Makroökonomie (DE-588)4037174-8 gnd
topic_facet	Macroeconomics Makroökonomie Lehrbuch
url	http://bvbr.bib-bvb.de:8991/F?func=service&doc_library=BVB01&local_base=BVB01&doc_number=018707838&sequence=000002&line_number=0001&func_code=DB_RECORDS&service_type=MEDIA
work_keys_str_mv	AT handajagdish macroeconomicswithstudyguidecdrom

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