Includes bibliographical references and index.

Contents
Preface
Introduction 1
Chapter 1 A Tour of the World 3
1-1 The United States 4
Has the United States Entered a New Economy? 5
Should You Worry about the U.S. Budget Deficit? 7
1-2 The European Union 8
How Can European Unemployment Be Reduced? 10
What Will the Euro Do for Europe? 11
1-3 Japan 12
What Triggered the Slump? 13
How Will Japan Recover? 15
1-4 Looking Ahead 15
Appendix: Where to Find the Numbers? 19
Chapter 2 A Tour of the Book 21
2-1 Aggregate Output 22
GDP: Production and Income 22
Nominal and Real GDP 24
2-2 The Other Major Macroeconomic Variables 28
The Unemployment Rate 28
The Inflation Rate 31
2-3 The Short Run, the Medium Run, the Long Run 34
2-4 A Tour of the Book 35
The Core 35
Extensions 36
Back to Policy 36
Epilogue 37
Appendix: The Construction of Real GDP and Chain-Type Indexes
40
The Core 43
The Short Run 43
Chapter 3 The Goods Market 45
3-1 The Composition of GDP 46
3-2 The Demand for Goods 48
Consumption (C) 48
Investment (I) 50
Government Spending (G) 50
3-3 The Determination of Equilibrium Output 50
Using Algebra 51
Using a Graph 52
Using Words 55
How Long Does It Take for Output to Adjust? 55
3-4 Investment Equals Saving: An Alternative Way of Thinking
about Goods-Market Equilibrium 58
3-5 Is the Government Omnipotent? A Warning 60
Chapter 4 Financial Markets 65
4-1 The Demand for Money 66
Deriving the Demand for Money 68
4-2 The Determination of the Interest Rate. I 69
Money Demand, Money Supply, and the Equilibrium Interest Rate
69
Monetary Policy and Open Market Operations 73
Open Market Operations 74
Choosing Money or Choosing the Interest Rate? 75
Money, Bonds, and Other Assets 76
4-3 The Determination of Interest Rate. II* 76
What Banks Do 76
The Supply and the Demand for Central Bank Money 77
4-4 Two Alternative Ways of Looking at the Equilibrium* 82
The Federal Funds Market and the Federal Funds Rate 82
The Supply of Money, the Demand for Money, and the Money
Multiplier 83
Chapter 5 Goods and Financial Markets: The IS-LM Model 89
5-1 The Goods Market and the IS Relation 90
Investment, Sales, and the Interest Rate 90
Determining Output 91
Deriving the IS Curve 92
Shifts of the IS Curve 94
5-2 Financial Markets and the LM Relation 94
Real Money, Real Income, and the Interest Rate 95
Deriving the LM Curve 95
Shifts of the LM Curve 97
5-3 Putting the IS and the LM Relations Together 98
Fiscal Policy, Activity, and the Interest Rate 99
Monetary Policy, Activity, and the Interest Rate 101
5-4 Using a Policy Mix 103
5-5 How Does the IS-LM Model Fit the Facts? 107
The Medium Run 115
Chapter 6 The Labor Market 117
6-1 A Tour of the Labor Market 118
The Large Flows of Workers 118
6-2 Movements in Unemployment 120
6-3 Wage Determination 124
Bargaining 125
Efficiency Wages 125
Wages, Prices, and Unemployment 126
6-4 Price Determination 128
6-5 The Natural Rate of Unemployment 129
The Wage-Setting Relation 129
The Price-Setting Relation 129
Equilibrium Real Wages and Unemployment 130
From Unemployment to Employment 132
From Employment to Output 132
6-6 Where We Go From Here 133
Appendix: Wage- and Price-Setting Relations versus Labor Supply
and Labor Demand 137
Chapter 7 Putting All Markets Together: The AS-AD Model 139
7-1 Aggregate Supply 140
7-2 Aggregate Demand 142
7-3 Equilibrium in the Short Run and in the Medium Run 145
Equilibrium in the Short Run 145
From the Short Run to the Medium Run 146
7-4 The Effects of a Monetary Expansion 148
The Dynamics of Adjustment 148
Going Behind the Scenes 149
The Neutrality of Money 151
7-5 A Decrease in the Budget Deficit 151
Deficit Reduction, Output, and the Interest Rate 153
Budget Deficits, Output, and Investment 154
7-6 Changes in the Price of Oil 155
Effects on the Natural Rate of Unemployment 156
The Dynamics of Adjustment 157
7-7 Conclusions 159
The Short Run versus the Medium Run 159
Shocks and Propagation Mechanisms 160
Where We Go From Here: Output, Unemployment, and Inflation 160
Chapter 8 The Natural Rate of Unemployment and the Phillips Curve
165
8-1 Inflation, Expected Inflation, and Unemployment 166
8-2 The Phillips Curve 167
The Early Incarnation 167
Mutations 168
Back to the Natural Rate of Unemployment 172
8-3 A Summary and Many Warnings 173
Variations in the Natural Rate Across Countries 174
Variations in the Natural Rate Over Time 176
High Inflation and the Phillips Curve Relation 176
Deflation and the Phillips Curve Relation 180
Appendix: From the Aggregate Supply Relation to a Relation
Between Inflation, Expected Inflation, and Unemployment 183
Chapter 9 Inflation, Activity, and Nominal Money Growth 185
9-1 Output, Unemployment, and Inflation 186
Okun's Law 186
The Phillips Curve 188
The Aggregate Demand Relation 188
9-2 The Effects of Money Growth 190
The Medium Run 191
The Short Run 192
9-3 Disinflation 193
A First Pass 193
Expectations and Credibility: The Lucas Critique 195
Nominal Rigidities and Contracts 196
The Long Run
Chapter 10 The Facts of Growth
10-1 Growth in Rich Countries Since 1950
The Large Increase in the Standard of Living Since 1950
The Decrease in Growth Rates Since the Mid-1970s
The Convergence of Output per Capita
10-2 A Broader Look Across Time and Space
Looking Across Two Millennia
Looking Across Countries
10-3 Thinking About Growth: A Primer
The Aggregate Production Function
Returns to Scale and Returns to Factors
Output per Worker and Capital per Worker
The Sources of Growth
Chapter 11 Saving, Capital Accumulation, and Output
11-1 Interactions Between Output and Capital
The Effects of Capital on Output
The Effects of Output on Capital Accumulation
11-2 The Implications of Alternative Saving Rates
Dynamics of Capital and Output
Steady-State Capital and Output
The Saving Rate and Output
The Saving Rate and Consumption
11-3 Getting a Sense of Magnitudes
The Effects of the Saving Rate on Steady-State Output
The Dynamic Effects of an Increase in the Saving Rate
The U.S. Saving Rate and the Golden Rule
11-4 Physical Versus Human Capital
Extending the Production Function
Human Capital, Physical Capital, and Output
Endogenous Growth
Appendix: The Cobb-Douglas Production Function and the Steady
State
Chapter 12 Technological Progress and Growth
12-1 Technological Progress and the Rate of Growth
Technological Progress and the Production Function
Interactions Between Output and Capital
Dynamics of Capital and Output
The Effects of the Saving Rate
12-2 The Determinants of Technological Progress
The Fertility of the Research Process
The Appropriability of Research Results
12-3 The Facts of Growth Revisited
Capital Accumulation Versus Technological Progress
Fluctuations in the Pace of Technological Progress
12-4 Institutions and Growth
Appendix: Constructing a Measure of Technological Progress
Chapter 13 Technological Progress, Wages, and Unemployment
13-1 Productivity, Output, and Unemployment in the Short Run
Technological Progress, Aggregate Supply, and Aggregate Demand
The Empirical Evidence
13-2 Productivity and the Natural Rate of Unemployment
Price Setting and Wage Setting Revisited
The Natural Rate of Unemployment
The Empirical Evidence
13-3 Technological Progress and Distribution Effects
The Increase in Wage Inequality
The Causes of Increased Wage Inequality
Extensions
Expectations
Chapter 14 Expectations: The Basic Tools
14-1 Nominal Versus Real Interest Rates
Nominal and Real Interest Rates in the United States Since 1978
14-2 Expected Present Discounted Values
Computing Expected Present Discounted Values
Using Present Values: Examples
Nominal Versus Real Interest Rates, and Present Values
14-3 Nominal and Real Interest Rates, and the IS-LM Model
14-4 Money Growth, Inflation, Nominal and Real Interest Rates
Revisiting the IS-LM Model
Nominal and Real Interest Rates in the Short Run
Nominal and Real Interest Rates in the Medium Run
From the Short to the Medium Run
Evidence on the Fisher Hypothesis
Appendix: Deriving the Expected Present Discounted Value Using
Real or Nominal Interest Rates
Chapter 15 Financial Markets and Expectations
15-1 Bond Prices and Bond Yields
Bond Prices as Present Values
Arbitrage and Bond Prices
From Bond Prices to Bond Yields
Interpreting the Yield Curve
The Yield Curve and Economic Activity
15-2 The Stock Market and Movements in Stock Prices
Stock Prices as Present Values
The Stock Market and Economic Activity
15-3 Bubbles, Fads, and Stock Prices
Appendix: Arbitrage and Stock Prices
Chapter 16 Expectations, Consumption, and Investment
16-1 Consumption
The Very Foresighted Consumer
An Example
Toward a More Realistic Description
Putting Things Together: Current Income, Expectations, and
Consumption
16-2 Investment
Investment and Expectations of Profit
A Convenient Special Case
Current Versus Expected Profit
Profit and Sales
16-3 The Volatility of Consumption and Investment
Appendix: Derivation of the Expected Present Value of Profits Under
Static Expectations
Chapter 17 Expectations, Output, and Policy
17-1 Expectations and Decisions: Taking Stock
Expectations, Consumption, and Investment Decisions
Expectations and the IS Relation
The LM Relation Revisited
17-2 Monetary Policy, Expectations, and Output
Monetary Policy Revisited
17-3 Deficit Reduction, Expectations, and Output
The Role of Expectations About the Future
Back to the Current Period
The Open Economy
Chapter 18 Openness in Goods and Financial Markets
18-1 Openness in Goods Markets
Exports and Imports
The Choice Between Domestic Goods and Foreign Goods
Nominal Exchange Rates
From Nominal to Real Exchange Rates
From Bilateral to Multilateral Exchange Rates
18-2 Openness in Financial Markets
The Balance of Payments
The Choice Between Domestic and Foreign Assets
Interest Rates and Exchange Rates
18-3 Conclusions and a Look Ahead
Chapter 19 The Goods Market in an Open Economy
19-1 The IS Relation in the Open Economy
The Demand for Domestic Goods
19-2 Equilibrium Output and the Trade Balance
19-3 Increases in Demand, Domestic or Foreign
Increases in Domestic Demand
Increases in Foreign Demand
Fiscal Policy Revisited
19-4 Depreciation, the Trade Balance, and Output
Depreciation and the Trade Balance: The Marshall-Lerner Condition
The Effects of a Depreciation
Combining Exchange-Rate and Fiscal Policies
19-5 Looking at Dynamics: The J-Curve
19-6 Saving, Investment, and the Trade Balance
Appendix 1: Multipliers: Belgium Versus the United States
Appendix 2: Derivation of the Marshall-Lerner Condition
Chapter 20 Output, the Interest Rate, and the Exchange Rate
20-1 Equilibrium in the Goods Market
20-2 Equilibrium in Financial Markets
Money Versus Bonds
Domestic Bonds Versus Foreign Bonds
20-3 Putting Goods and Financial Markets Together
20-4 The Effects of Policy in an Open Economy
The Effects of Fiscal Policy in an Open Economy
The Effects of Monetary Policy in an Open Economy
20-5 Fixed Exchange Rates
Pegs, Crawling Pegs, Bands, the EMS, and the Euro
Pegging the Exchange Rate, and Monetary Control
Fiscal Policy Under Fixed Exchange Rates
Appendix: Fixed Exchange Rates, Interest Rates, and Capital
Mobility
Chapter 21 Exchange Rate Regimes
21-1 The Medium Run
Aggregate Demand Under Fixed Exchange Rates
Equilibrium in the Short Run and in the Medium Run
The Case for and Against a Devaluation
21-2 Exchange Rate Crises Under Fixed Exchange Rates
21-3 Exchange Rate Movements under Flexible Exchange Rates
Exchange Rates and the Current Account
Exchange Rates, and Current and Future Interest Rates
Exchange Rate Volatility
21-4 Choosing Between Exchange Rate Regimes
Common Currency Areas
Hard Pegs, Currency Boards, and Dollarization
Appendix 1: The Real Exchange Rate, and Domestic and Foreign Real
Interest Rates
Appendix 2: Deriving Aggregate Demand Under Fixed Exchange
Rates
Pathologies
Chapter 22 Depressions and Slumps
22-1 Disinflation, Deflation, and the Liquidity Trap
The Nominal Interest Rate, the Real Interest Rate, and Expected Inflation
The Liquidity Trap
Putting Things Together: The Liquidity Trap and Deflation
22-2 The Great Depression
The Initial Fall in Spending
The Contraction in Nominal Money
The Adverse Effects of Deflation
The Recovery
22-3 The Japanese Slump
The Rise and Fall of the Nikkei
The Failure of Monetary and Fiscal Policy
The Recovery
Chapter 23 High Inflation
23-1 Budget Deficits and Money Creation
23-2 Inflation and Real Money Balances
23-3 Deficits, Seignorage, and Inflation
The Case of Constant Nominal Money Growth
Dynamics and Increasing Inflation
Hyperinflation and Economic Activity
23-4 How Do Hyperinflations End?
The Elements of a Stabilization Program
Can Stabilization Programs Fail?
The Costs of Stabilization
23-5 Conclusions
Back to Policy
Chapter 24 Should Policy Makers Be Restrained?
24-1 Uncertainty and Policy
How Much Do Macroeconomists Actually Know?
Should Uncertainty Lead Policy Makers to Do Less?
Uncertainty and Restraints on Policy Makers
24-2 Expectations and Policy
Hostage Takings and Negotiations
Inflation and Unemployment Revisited
Establishing Credibility
Time Consistency and Restraints on Policy Makers
24-3 Politics and Policy
Games Between Policy Makers and Voters
Games Between Policy Makers
Politics and Fiscal Restraints
Chapter 25 Monetary Policy: A Summing Up
25-1 The Optimal Inflation Rate
The Costs of Inflation
The Benefits of Inflation
The Optimal Inflation Rate: The Current Debate
25-2 The Design of Monetary Policy
Money Growth Targets and Target Ranges
Money Growth and Inflation Revisited
Inflation Targeting
Interest Rate Rules
25-3 The Fed in Action
The Mandate of the Fed
The Organization of the Fed
The Instruments of Monetary Policy
The Implementation of Policy
Chapter 26 Fiscal Policy: A Summing Up
26-1 The Government Budget Constraint
The Arithmetic of Deficits and Debt
Current Versus Future Taxes
The Evolution of the Debt-to-GDP Ratio
26-2 Four Issues in Fiscal Policy
Ricardian Equivalence
Deficits, Output Stabilization, and the Cyclically Adjusted Deficit
Wars and Deficits
The Dangers of Very High Debt
26-3 The U.S. Budget: Current Numbers and Future Prospects
Current Numbers
Medium-Run Budget Projections
The Long-Run Challenges: Low Saving, Aging, and Medical Care
Epilogue
Chapter 27 Epilogue: The Story of Macroeconomics
27-1 Keynes and the Great Depression
27-2 The Neoclassical Synthesis
Progress on All Fronts
Keynesians Versus Monetarists
27-3 The Rational Expectations Critique
The Three Implications of Rational Expectations
The Integration of Rational Expectations
27-4 Current Developments
New Classical Economics and Real Business Cycle Theory
New Keynesian Economics
New Growth Theory
27-5 Common Beliefs
Appendix 1 An Introduction to National Income and Product Accounts
Appendix 2 A Math Refresher
Appendix 3 An Introduction to Econometrics
Glossary
Index