Contents
Preface
A Quick Review of Graphs
PART I: Foundations of Economics
Chapter 1: The Core Principles of Economics
1.1 A Principled Approach to Economics
The Economic Approach
A Systematic Framework for Making Decisions
1.2 The Cost-Benefit Principle
Quantifying Costs and Benefits
Interpreting the DATA:
What’s the benefit you get from Google?
Maximize Your Economic Surplus
Focus on Costs and Benefits, Not How They’re Framed
Applying the Cost-Benefit Principle
EVERYDAY Economics:
The true cost of car ownership
1.3 The Opportunity Cost Principle
Opportunity Costs Reflect Scarcity
EVERYDAY Economics:
The opportunity cost is the road not taken
Calculating Your Opportunity Costs
EVERYDAY Economics:
The true cost of college
The “Or What?” Trick
How Entrepreneurs Think About Opportunity Cost
You Should Ignore Sunk Costs
Applying the Opportunity Cost Principle
The Production Possibility Frontier
Recap: Evaluating Either/Or Decisions
1.4 The Marginal Principle
When Is the Marginal Principle Useful?
Using the Rational Rule to Maximize Your Economic Surplus
Applying the Rational Rule
1.5 The Interdependence Principle
Interdependency One: Dependencies Between Your Own Choices
Interdependency Two: Dependencies Between People (or Businesses)
Interdependency Three: Dependencies Between Markets
Interdependency Four: Dependencies Over Time
What Else?
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 2: Demand: Thinking Like a Buyer
2.1 Individual Demand: What You Want, at Each Price
An Individual Demand Curve
The Law of Demand
2.2 Your Decisions and Your Demand Curve
Choosing the Best Quantity to Buy
The Rational Rule for Buyers
How Realistic Is This Theory of Demand?
2.3 Market Demand: What the Market Wants
From Individual Demand to Market Demand
The Market Demand Curve Is Downward-Sloping
Movements Along the Demand Curve
2.4 What Shifts Demand Curves?
The Interdependence Principle and Shifting Demand Curves
Six Factors Shifting the Demand Curve
Interpreting the DATA:
Which retailers do well in a recession?
EVERYDAY Economics:
How you can have an influence—indirectly
EVERYDAY Economics:
How thinking about the future saves you money
EVERYDAY Economics:
What determines the language we speak, the computer programs we use, and the cars we drive?
2.5 Shifts versus Movements Along Demand Curves
Movements Along the Demand Curve
Shifts in Demand
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 3: Supply: Thinking Like a Seller
3.1 Individual Supply: What You Sell, at Each Price
An Individual Supply Curve
The Law of Supply
3.2 Your Decisions and Your Individual Supply Curve
Setting Prices in Competitive Markets
Choosing the Best Quantity to Supply
The Rational Rule for Sellers in Competitive Markets
Rising Marginal Cost Explains Why Your Supply Curve Is Upward-Sloping
EVERYDAY Economics:
The diminishing marginal product of homework
How Realistic Is This Theory of Supply?
3.3 Market Supply: What the Market Sells
From Individual Supply to Market Supply
The Market Supply Curve Is Upward-Sloping
Movements Along the Supply Curve
3.4 What Shifts Supply Curves?
The Interdependence Principle and Shifting Supply Curves
Five Factors Shifting the Supply Curve
3.5 Shifts versus Movements Along Supply Curves
Movements Along the Supply Curve
Shifts in Supply
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 4: Equilibrium: Where Supply Meets Demand
4.1 Understanding Markets
What Is a Market?
How Markets Are Organized
4.2 Equilibrium
Supply Equals Demand
EVERYDAY Economics:
Why is water cheap, while diamonds are expensive?
Getting to Equilibrium
Figuring Out Whether Markets Are in Equilibrium
EVERYDAY Economics:
Smart parking meters
4.3 Predicting Market Changes
Shifts in Demand
Shifts in Supply
Predicting Market Outcomes
When Both Supply and Demand Shift
Interpreting Market Data
Interpreting the DATA:
How did the advent of e-books change the publishing industry?
Interpreting the DATA:
Why do house sales boom during the summer, but house prices don’t?
Interpreting the DATA:
How did 9/11 affect the market for Manhattan office space?
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
PART II: Analyzing Markets
Chapter 5: Elasticity: Measuring Responsiveness
5.1 Price Elasticity of Demand
Measuring Responsiveness of Demand
Interpreting the DATA:
Why the minimum wage debate is all about elasticity
Determinants of the Price Elasticity of Demand
EVERYDAY Economics:
Should you search harder for bargains on perishable or storable goods?
Calculating the Price Elasticity of Demand
5.2 How Businesses Use Demand Elasticity
Elasticity and Revenue
Interpreting the DATA:
Why corn farmers are happier during droughts
Elasticity and Business Strategy
Interpreting the DATA:
Why Amazon fought for lower e-book prices
EVERYDAY Economics:
Why inelastic demand means that the war on drugs is a losing battle
5.3 Other Demand Elasticities
Cross-Price Elasticity of Demand
Interpreting the DATA:
Is music streaming good for musicians?
Income Elasticity of Demand
5.4 Price Elasticity of Supply
Measuring Responsiveness of Supply
Determinants of the Price Elasticity of Supply
Calculating the Price Elasticity of Supply
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 6: When Governments Intervene in Markets
6.1 How Taxes and Subsidies Change Market Outcomes
A Tax on Sellers
A Tax on Buyers
The Statutory Burden and Tax Incidence
EVERYDAY Economics:
Who pays for your Social Security?
The Economic Burden of Taxes
A Three-Step Recipe for Evaluating Taxes
Analyzing Subsidies
Interpreting the DATA:
How much of that Pell Grant do you really get?
6.2 Price Regulations
Price Ceilings: When Regulation Forces Lower Prices
EVERYDAY Economics:
Are anti-price gouging laws a good idea?
Interpreting the DATA:
Why is there a shortage of kidney donors?
Price Floors: When Regulation Forces Higher Prices
EVERYDAY Economics:
Why do farmers like price floors?
6.3 Quantity Regulations
Quotas
EVERYDAY Economics:
How Uber and Lyft undermined government taxi quotas
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 7: Welfare and Efficiency
7.1 Evaluating Public Policies
Positive and Normative Policy Analysis
Efficiency and Equity
7.2 Measuring Economic Surplus
Consumer Surplus
Interpreting the DATA:
Consumer surplus on the internet
Producer Surplus
EVERYDAY Economics:
The producer surplus of work
Voluntary Exchange and Gains from Trade
7.3 Market Efficiency
Question One: Who Makes What?
Question Two: Who Gets What?
Question Three: How Much Gets Bought and Sold?
7.4 Market Failure and Deadweight Loss
Market Failure
Deadweight Loss
Market Failure versus Government Failure
7.5 Beyond Economic Efficiency
Critiques of Economic Efficiency
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 8: Gains from Trade
8.1 Gains from Trade
8.2 Comparative Advantage
Introducing Comparative Advantage
Comparative Advantage in Action
EVERYDAY Economics:
Should the best drummer play the drums?
Markets Facilitate Gains from Trade
Interpreting the DATA:
How shifting comparative advantage explains changes in family life
Comparative Advantage Drives International Trade
EVERYDAY Economics:
The international trade controversy in my garden
8.3 Prices Are Signals, Incentives, and Information
Role One: A Price Is a Signal
Role Two: A Price Is an Incentive
Role Three: A Price Aggregates Information
EVERYDAY Economics:
Use markets to pick a better bracket
8.4 How Managers Can Harness Market Forces
Internal Markets Allocate Resources
EVERYDAY Economics:
Getting into the classes you want
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
PART III: Applications and Policy Issues
Chapter 9: International Trade
9.1 Comparative Advantage Is the Foundation of International Trade
Comparative Advantage and International Trade
What Gets Traded?
Interpreting the DATA:
Global trade is rising because of declining trade costs
Choosing Your Trading Partners: Sources of Comparative Advantage
Interpreting the DATA:
What inputs are relatively abundant in the United States?
EVERYDAY Economics:
Using comparative advantage at home
9.2 How International Trade Shapes the Economy
The World Market
The Effects of Imports
Imports Raise Economic Surplus
The Effects of Exports
Exports Raise Economic Surplus
Who Wins, and Who Loses? The Politics of International Trade
9.3 The Debate About International Trade
Five Arguments for Limiting International Trade
An Intuitive Approach to the International Trade Debate
9.4 International Trade Policy
Tools of Trade Policy
Current Trade Policy
9.5 Effects of Globalization
Globalization and the Labor Market
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 10: Externalities and Public Goods
10.1 Identifying Externalities
Types of Externalities
The Conflict Between Private Interest and Society’s Interest
10.2 The Externality Problem
The Rational Rule for Society
Consequences of Negative Externalities
EVERYDAY Economics:
The hazards of splitting the bill
Consequences of Positive Externalities
EVERYDAY Economics:
Why you don’t work out, eat healthy, study, or save enough
10.3 Solving Externality Problems
Solution One: Private Bargaining and the Coase Theorem
Solution Two: Corrective Taxes and Subsidies
Solution Three: Cap and Trade
Solution Four: Laws, Rules, and Regulations
EVERYDAY Economics:
What do international arms treaties, campaign spending limits, anti-doping rules, and school uniforms have in common?
10.4 Public Goods and the Tragedy of the Commons
Public Goods and the Free-Rider Problem
Solution Five: Government Support for Public Goods
Solution Six: Assign Ownership Rights for Common Resource Problems
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 11: The Labor Market
11.1 The Labor Market: Supply and Demand at Work
11.2 Labor Demand: Thinking Like an Employer
How Many Workers Should You Hire at What Price?
The Rational Rule for Employers
Analyzing Labor Demand Shifts
Will Robots Take Your Job?
Interpreting the DATA:
The long-run effects of the minimum wage
EVERYDAY Economics:
Why studying economics is a good idea
11.3 Labor Supply: How to Balance Work and Leisure
Your Individual Labor Supply: Allocating Your Time Between Labor and Leisure
The Rational Rule for Workers
Interpreting the DATA:
Does the individual labor supply curve slope up or down?
The Extensive Margin: Choose Whether or Not to Work
Choosing Your Occupation
The Market Labor Supply Curve
Analyzing Labor Supply Shifts
11.4 Changing Economic Conditions and Labor Market Equilibrium
A Three-Step Recipe
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 12: Wages, Workers, and Management
12.1 Labor Demand: What Employers Want
Human Capital
EVERYDAY Economics:
Does going to college really matter?
EVERYDAY Economics:
Which interests should you tell employers about?
Efficiency Wages
The Market for Superstars
Interpreting the DATA:
Why is chief executive pay so high?
12.2 Labor Supply: What Workers Want
Compensating Differentials
Interpreting the DATA:
How much is a life worth?
12.3 Institutional Factors That Explain Why Wages Vary
Government Regulations
Unions and Workers’ Bargaining Power
Monopsony and Employers’ Bargaining Power
EVERYDAY Economics:
The importance of asking for a raise
12.4 How Discrimination Affects Wages
Measuring Discrimination
Interpreting the DATA:
How large is the gender wage gap?
Types of Discrimination
Interpreting the DATA:
Orchestrating impartiality
EVERYDAY Economics:
Statistical discrimination on campus
12.5 Personnel Economics
Ensure Your Workers Have the Right Skills for the Job
Motivate Your Workers with Incentives
Shape Your Corporate Culture
EVERYDAY Economics:
Why charitable work is unpaid
Offer the Right Benefits
Attract the Best Workers
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 13: Inequality, Social Insurance, and Redistribution
13.1 Measuring Inequality
Income Inequality
Alternative Measures of Inequality
Interpreting the DATA:
Why do people disagree about the extent of inequality?
13.2 Poverty
Defining Poverty
Absolute versus Relative Poverty
Interpreting the DATA:
The lives of the poor
The Incidence of Poverty in the United States
13.3 Social Insurance, the Social Safety Net, and Redistributive Taxation
The Social Safety Net
EVERYDAY Economics:
Why parents give gifts rather than cash
Social Insurance Programs
EVERYDAY Economics:
Insuring against bad decisions?
EVERYDAY Economics:
How marriage provides insurance
The Tax System
13.4 The Debate About Income Redistribution
The Economic Logic of Redistribution
The Costs of Redistribution: The Leaky Bucket
EVERYDAY Economics:
When earning extra money doesn’t pay off
The Trade-off Between Efficiency and Equality
Fairness and Redistribution
Interpreting the DATA:
What explains differences in social spending?
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
PART IV: Market Structure and Business Strategy
Chapter 14: Market Structure and Market Power
14.1 Monopoly, Oligopoly, and Monopolistic Competition
Perfect Competition
Monopoly: No Direct Competitors
Oligopoly: Only a Few Strategic Competitors
Monopolistic Competition: Many Competitors Selling Differentiated Products
Market Structure Determines Market Power
Five Key Insights into Imperfect Competition
14.2 Setting Prices When You Have Market Power
Your Firm Demand Curve
Your Marginal Revenue Curve
The Rational Rule for Sellers
14.3 The Problem with Market Power
Market Power Leads to Worse Outcomes
Increasing Competition Can Lead to Better Outcomes
14.4 Public Policy to Restrain Market Power
Laws to Ensure Competition Thrives
Interpreting the DATA:
Was the American Airlines merger anticompetitive?
Laws to Minimize the Harm from Exercising Market Power
EVERYDAY Economics:
Phone calls in prison
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 15: Entry, Exit, and Long-Run Profitability
15.1 Revenues, Costs, and Economic Profits
Economic Profit versus Accounting Profit
Average Revenue, Average Cost, and Your Profit Margin
15.2 Free Entry and Exit in the Long Run
Entry Decreases Demand and Your Profits
Exit Increases Demand and Your Profits
Economic Profits Tend to Zero
EVERYDAY Economics:
How free entry and exit shapes your chances of getting a table, how crowded your local surfing spot is, which classes are crowded, and where you’ll move after college
Price Equals Average Cost
Interpreting the DATA:
Entry and exit are powerful forces
Interpreting the DATA:
Is the mere threat of entry sufficient to lower prices?
15.3 Barriers to Entry
Demand-Side Strategies: Create Customer Lock-In
Supply-Side Strategies: Develop Unique Cost Advantages
Regulatory Strategy: Government Policy
Entry Deterrence Strategies: Convince Your Rivals You’ll Crush Them
Overcoming Barriers to Entry
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 16: Business Strategy
16.1 The Five Forces That Determine Business Profitability
Five Forces Framework
Force One—Existing Competitors: Intensity and Type of Existing Competition
Force Two—Potential Competitors: Threat of Entry
Force Three—Competitors in Other Markets: Threat of Potential Substitutes
Force Four—Bargaining Power of Suppliers
Force Five—Bargaining Power of Buyers
Recap: The Five Forces and the Path Ahead
16.2 Non-Price Competition: Product Positioning
The Importance of Product Differentiation
Positioning Your Product
Interpreting the DATA:
Why are political parties so similar?
EVERYDAY Economics:
Can you make a dent in the airplane market?
The Role of Advertising
16.3 Bargaining Power of Buyers and Sellers
Bargaining Power
EVERYDAY Economics:
How to save money on household repairs
The Hold-Up Problem
Contract Theory
What Should You Make, and What Should You Buy?
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 17: Sophisticated Pricing Strategies
17.1 Price Discrimination
Price Discrimination
Interpreting the DATA:
How much price discrimination is there at college?
The Efficiency of Price Discrimination
Interpreting the DATA:
Is college tuition really skyrocketing?
Conditions for Price Discrimination
17.2 Group Pricing
EVERYDAY Economics:
How to be a savvy online shopper
Setting Group Prices
Interpreting the DATA:
Group pricing controversies
How to Segment Your Market
Interpreting the DATA:
Why the same drugs cost less for Fido than for Freddy
EVERYDAY Economics:
Pay less for graduate school
17.3 The Hurdle Method
Alternative Versions and Timing
Shopping Around
EVERYDAY Economics:
Beating Amazon at its own game
EVERYDAY Economics:
You can haggle more often than you might realize
Extra Hassle, Bad Service, and Imperfect Goods
Quantity Discounts
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 18: Game Theory and Strategic Choices
18.1 How to Think Strategically
Introducing Game Theory
The Four Steps for Making Good Strategic Decisions
18.2 The Prisoner’s Dilemma and the Challenge of Cooperation
Understanding the Prisoner’s Dilemma
Nash Equilibrium
The Prisoner’s Dilemma and the Failure of Cooperation
Examples of the Prisoner’s Dilemma
EVERYDAY Economics:
Can game theory help get money out of politics?
18.3 Multiple Equilibria and the Problem of Coordination
Coordination Games
Examples of Coordination Games
Anti-Coordination Games
Good and Bad Equilibria
Solving Coordination Problems
18.4 Advanced Strategy: First and Second Mover Advantages
Games That Play Out over Time
Using Tree Logic
First-Mover Advantage versus Second-Mover Advantage
Interpreting the DATA:
How Walmart’s price-matching policy leads to higher prices
18.5 Advanced Strategy: Repeated Games and Punishments
Collusion and the Prisoner’s Dilemma
Finitely Repeated Games
Indefinitely Repeated Games
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
PART V: Advanced Decisions
Chapter 19: Decisions Involving Uncertainty
19.1 Risk Aversion
Understanding Risk
Diminishing Marginal Utility
The Risk-Reward Trade-off
Interpreting the DATA:
The risk-reward trade-off
EVERYDAY Economics:
How risk averse are you?
Expected Utility
19.2 Reducing Risk
Strategy One: Risk Spreading—Transforming Big Risks into Small Risks
EVERYDAY Economics:
Why you should never take the extended warranty
Strategy Two: Diversification
EVERYDAY Economics:
Put your money in index funds to easily diversify your savings
Strategy Three: Insurance
Strategy Four: Hedging—Offsetting Risks
EVERYDAY Economics:
Why you shouldn’t hold stock in your employer
Strategy Five: Gathering Information to Reduce Risk
EVERYDAY Economics:
Reducing the risk of college
19.3 Behavioral Economics: How People Make Mistakes Around Uncertainty
Overconfidence
Problems Assessing Probability
Problems Evaluating Payoffs
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 20: Decisions Involving Private Information
20.1 Adverse Selection When Sellers Know More Than Buyers
Hidden Quality and the Risk of Getting a Lemon
EVERYDAY Economics:
Why you should consider buying a used car from a relative or friend
Adverse Selection and Your Ability to Buy High-Quality Products
Solutions to Adverse Selection of Sellers
20.2 Adverse Selection When Buyers Know More Than Sellers
Hidden Quality and the Risk of Getting High-Cost Customers
Interpreting the DATA:
Adverse selection in Harvard’s health insurance plans
Solutions to Adverse Selection of Buyers
EVERYDAY Economics:
Will you soon pay more if you are a bad driver?
20.3 Moral Hazard: The Problem of Hidden Actions
Hidden Actions and Your Decisions
EVERYDAY Economics:
Another reason insurance companies want to monitor your driving
Moral Hazard in Relationships: The Principal-Agent Problem
Solving Moral Hazard Problems
Interpreting the DATA:
How hygiene grade cards for restaurants protect diners from foodborne illness
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
PART VI: Macroeconomic Foundations and the Long Run
Chapter 21: Sizing Up the Economy Using GDP
21.1 GDP and the Macroeconomy
From Microeconomics to Macroeconomics
The Circular Flow
Digging into the Definition of GDP
21.2 GDP Measures Total Spending, Output, and Income
Perspective One: GDP Measures Total Spending
Perspective Two: GDP Is Total Output
Perspective Three: GDP Measures Total Income
Recap: Three Perspectives on GDP
21.3 What GDP Captures and What It Misses
Limitations of GDP
Interpreting the DATA:
Measuring the shadow economy
EVERYDAY Economics:
Would you rather live in the United States or in France?
GDP as a Measure of Living Standards
EVERYDAY Economics:
Visualizing differences across countries
21.4 Real and Nominal GDP
Real and Nominal GDP
How to Calculate Real GDP
21.5 Millions, Billions, and Trillions
The Problem of Big Numbers
Four Strategies for Scaling Big Numbers
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 22: Economic Growth
22.1 Economic Growth Facts
Economic Growth Since 1 Million
B.C.
Economic Growth Over the Past Two Centuries
22.2 The Ingredients of Economic Growth
The Production Function
Ingredient One: Labor and Total Hours Worked
Ingredient Two: Human Capital
Ingredient Three: Capital Accumulation
New Recipes for Combining Ingredients: Technological Progress
Interpreting the DATA:
The falling cost of light
22.3 The Analytics of Economic Growth
Analyzing the Production Function
Capital Accumulation and the Solow Model
Technological Progress
EVERYDAY Economics:
Innovative companies make time for new ideas
22.4 Public Policy: Why Institutions Matter for Growth
Property Rights
Government Stability
Efficiency of Regulation
Government Policy to Encourage Innovation
Interpreting the DATA:
How did the United States get so rich?
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 23: Unemployment
23.1 Employment and Unemployment
The Employed and the Unemployed
Labor Force Participation
Interpreting the DATA:
Why did women’s labor force participation rise in the twentieth century while men’s declined?
The Unemployment Rate
23.2 The Dynamics of the Labor Market
Labor Market Flows
Alternative Measures of Unemployment
23.3 Understanding Unemployment
Types of Unemployment
Frictional Unemployment: It Takes Time to Find a Job
EVERYDAY Economics:
Why you should ask your friends to help you find work
Structural Unemployment: When Wages Are Stuck Above the Equilibrium Wage
Institutions: Additional Causes of Structural Unemployment
Recap: Frictional and Structural Unemployment
23.4 The Costs of Unemployment
The Economic Costs of Unemployment
The Social Costs of Unemployment
Protecting Yourself from the Harmful Effects of Unemployment
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 24: Inflation and Money
24.1 Measuring Inflation
The Price of a Basket of Goods and Services
Constructing the Consumer Price Index and Measuring Inflation
The Challenges of Measuring the True Cost of Living
24.2 Different Measures of Inflation
Consumer Prices
Business Prices
24.3 Adjusting for the Effects of Inflation
Comparing Dollars over Time
Real and Nominal Variables
Real and Nominal Interest Rates
Overcoming Money Illusion
EVERYDAY Economics:
How to beat money illusion by negotiating for a real raise
24.4 The Role of Money and the Costs of Inflation
The Functions of Money
The Costs of Hyperinflation
The Costs of Expected Inflation
The Costs of Unexpected Inflation
EVERYDAY Economics:
The costs of grade inflation
The Inflation Fallacy
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
PART VII: Micro Foundations of Macroeconomics
Chapter 25: Consumption and Saving
25.1 Consumption, Saving, and Income
Consumption and Income
Interpreting the DATA:
Why consumption is so high in the United States
Saving and Income
25.2 The Micro Foundations of Consumption
Choosing How Much to Spend and How Much to Save
The Rational Rule for Consumers
Consumption Smoothing
EVERYDAY Economics:
How to run a marathon, enjoy a bag of cookies, and survive the weekend
Permanent Income Hypothesis
25.3 The Macroeconomics of Consumption
The Relationship Between Consumption and Income
Interpreting the DATA:
What is your permanent income?
Adding Behavioral Economics and Credit Constraints to Our Analysis
25.4 What Shifts Consumption?
Consumption Shifter One: Real Interest Rates
Consumption Shifter Two: Expectations
Consumption Shifter Three: Taxes
Consumption Shifter Four: Wealth
25.5 Saving
Saving Motive One: Changing Income over the Life Cycle
Saving Motive Two: Changing Needs over the Life Cycle
Saving Motive Three: Bequests
Saving Motive Four: Precautionary Saving
EVERYDAY Economics:
Preparing for the unexpected
Smart Saving Strategies
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 26: Investment
26.1 Macroeconomic Investment
Defining Investment
Types of Investment
Investment Is a Key Economic Variable
26.2 Tools to Analyze Investments
Investment Tool One: Compounding
EVERYDAY Economics:
The extraordinary power of compound interest
Investment Tool Two: Discounting
Real versus Nominal Interest Rates
26.3 Making Investment Decisions
How to Evaluate an Investment Opportunity
The Rational Rule for Investors
EVERYDAY Economics:
Your decision to invest in education
An Alternative Perspective: The User Cost of Capital
EVERYDAY Economics:
The true cost of car ownership
26.4 The Macroeconomics of Investment
The Real Interest Rate and Investment
Factors That Shift the Investment Line
26.5 The Market for Loanable Funds
Supply and Demand of Loanable Funds
Shifts in the Supply of Loanable Funds
Shifts in the Demand for Loanable Funds
Interpreting the DATA:
Secular stagnation and the declining real interest rate
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 27: The Financial Sector
27.1 Banks
What Do Banks Do?
EVERYDAY Economics:
Build a good credit score
Bank Runs
Shadow Banks and the Financial Crisis
27.2 The Bond Market
What Does the Bond Market Do?
Evaluating Risks
27.3 The Stock Market
What Do Stocks Do?
Comparing Stocks and Bonds
Understanding Stock Market Data
27.4 What Drives Financial Prices?
Valuing Stocks
EVERYDAY Economics:
How much should you pay for that house?
The Efficient Markets Hypothesis
The Value of Expert Advice
EVERYDAY Economics:
How to invest like an economist
Financial Bubbles
EVERYDAY Economics:
What do houses, tulips, and alpacas have in common with the stock market?
27.5 Personal Finance
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 28: International Finance and the Exchange Rate
28.1 International Trade and Global Financial Flows
International Trade
Global Financial Flows
28.2 Exchange Rates
Exchanging U.S. Dollars for Foreign Currencies
EVERYDAY Economics:
What’s that currency called?
Exchange Rates and the Price of Foreign Goods
Interpreting the DATA:
Tracking the value of the U.S. dollar
28.3 Supply and Demand of Currencies
The Market for U.S. Dollars
EVERYDAY Economics:
How to keep exchange rates straight
Shifts in Currency Demand
Shifts in Currency Supply
Forecasting Exchange Rate Movements
Government Intervention in Foreign Exchange Markets
28.4 The Real Exchange Rate and Net Exports
Real Exchange Rate and Competitiveness
The Real Exchange Rate Determines Net Exports
28.5 The Balance of Payments
The Current Account and The Financial Account
EVERYDAY Economics:
The global consequences of buying a kimono
Saving, Investment, and the Current Account
Current Account Controversies
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
PART VIII: The Business Cycle
Chapter 29: Business Cycles
29.1 Macroeconomic Trends and Cycles
Trend Growth and the Output Gap
Interpreting the DATA:
Recessions create a lot of unhappiness
Business Cycles Are Not Cycles
Interpreting the DATA:
Has there been a Great Moderation?
29.2 Common Characteristics of Business Cycles
Recessions Are Short and Sharp; Expansions Are Long and Gradual
The Business Cycle Is Persistent
The Business Cycle Impacts Many Parts of the Economy
Okun’s Rule of Thumb Links the Output Gap and the Unemployment Rate
29.3 Analyzing Macroeconomic Data
The Basics of Macroeconomic Data
Top 10 Economic Indicators
Interpreting the DATA:
Why do financial markets sometimes rise after a good employment report, and other times fall?
Tracking the Economy: An Economy Watcher’s Guide
EVERYDAY Economics:
How to better understand your favorite company, your GPA, and your health
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 30:
IS-MP
Analysis: Interest Rates and Output
30.1 Aggregate Expenditure
Aggregate Expenditure and Short Run Fluctuations
The Demand-Driven Short Run and the Supply-Driven Long Run
30.2 The
IS
Curve: Output and the Real Interest Rate
Aggregate Expenditure and Interest Rates
The
IS
Curve Describes the Link Between the Real Interest Rate and the Output Gap
How to Use the
IS
Curve
Interpreting the DATA:
What caused the early 1980s recession?
30.3 The
MP
Curve: What Determines the Interest Rate
The Federal Reserve
The Risk Premium
EVERYDAY Economics:
Why you pay different interest rates on different loans
The
MP
Curve
Interpreting the DATA:
Measuring financial risk
30.4 The
IS-MP
Framework
IS-MP
Equilibrium
Fluctuating Demand and Business Cycles
Interpreting the DATA:
Tracking waves of optimism and pessimism
EVERYDAY Economics:
How the economy is just like a concert
Analyzing Monetary Policy
Analyzing Fiscal Policy and the Multiplier
30.5 Macroeconomic Shocks
Spending Shocks Shift the
IS
Curve
Financial Shocks Shift the
MP
Curve
Predicting Economic Changes
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 31: The Phillips Curve and Inflation
31.1 Three Inflationary Forces
Inflationary Force One: Inflation Expectations
Inflationary Force Two: Demand-Pull Inflation
Inflationary Force Three: Supply Shocks and Cost-Push Inflation
Understanding Inflation
31.2 Inflation Expectations
Why Inflation Expectations Matter
Interpreting the DATA:
Inflation expectations lead actual inflation
Measuring Inflation Expectations
EVERYDAY Economics:
The average of many economists beats any individual
31.3 The Phillips Curve
Demand-Pull Inflation
The Phillips Curve Framework
EVERYDAY Economics:
How Uber is like the Phillips curve
The Phillips Curve in the United States
An Alternative Illustration: The Labor Market Phillips Curve
31.4 Supply Shocks Shift the Phillips Curve
How Supply Shocks Shift the Phillips Curve
Phillips Curve Shifter One: Input Prices
Phillips Curve Shifter Two: Productivity
Phillips Curve Shifter Three: Exchange Rates
Shifts versus Movements Along the Phillips Curve
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 32: The Fed Model: Linking Interest Rates, Output, and Inflation
32.1 The Fed Model
The Fed Model Combines the
IS, MP
, and Phillips Curves
Forecasting Economic Outcomes
Three Types of Macroeconomic Shocks
32.2 Analyzing Macroeconomic Shocks
A Recipe for Analyzing Macroeconomic Shocks
Analyzing Financial Shocks
Analyzing Spending Shocks
Analyzing Supply Shocks
Interpreting the DATA:
How a trade war can cause a supply shock
EVERYDAY Economics:
What economic forecasters actually do
32.3 Diagnosing the Causes of Macroeconomic Changes
A Brief Recap
A Diagnosis Tool
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 33: Aggregate Demand and Aggregate Supply
33.1 The
AD-AS
Framework
Introducing Aggregate Demand and Aggregate Supply
Macroeconomic versus Microeconomic Forces
33.2 Aggregate Demand
Aggregate Expenditure
Why Aggregate Demand Is Downward-Sloping
Analyzing Aggregate Demand
Aggregate Demand Shifters
EVERYDAY Economics:
How a recession is like a bad night’s sleep
33.3 Aggregate Supply
Why Aggregate Supply Is Upward-Sloping
Analyzing Aggregate Supply
Shifts in Aggregate Supply
Interpreting the DATA:
How a trade war shifted the aggregate supply curve
33.4 Macroeconomic Shocks and Countercyclical Policy
Monetary Policy
Fiscal Policy and the Multiplier
Forecasting Macroeconomic Outcomes
33.5 Aggregate Supply in the Short Run and the Long Run
Aggregate Supply in the Long Run with Flexible Prices
Aggregate Supply in the Very Short Run with Fixed Prices
Aggregate Supply in the Short Run and Medium Run with Sticky Prices
Getting from the Very Short Run to the Long Run
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
PART IX: Macroeconomic Policy
Chapter 34: Monetary Policy
34.1 The Federal Reserve
The Federal Reserve System
The Federal Open Market Committee
Interpreting the DATA:
How good are the Fed’s forecasts?
34.2 The Fed’s Policy Goals and Decision-Making Framework
The Fed’s Dual Mandate: Stable Prices and Maximum Sustainable Employment
Interpreting the DATA:
Has the Fed succeeded in meeting its inflation target?
How the Fed Chooses the Interest Rate
34.3 How the Fed Sets Interest Rates
The Overnight Market for Interbank Loans
The Impact of Changing the Federal Funds Rate on the Rest of the Economy
EVERYDAY Economics:
The Fed just lowered interest rates. Does that mean it’s a good time to borrow?
34.4 Unconventional Monetary Policy
Monetary Policy Choices When Nominal Interest Rates Are Zero
Lender of Last Resort
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Chapter 35: Government Spending, Taxes, and Fiscal Policy
35.1 The Government Sector
Government Spending
Government Revenue
Hidden Government Spending: Tax Expenditures
EVERYDAY Economics:
How much is that employment benefit worth?
Regulation
35.2 Fiscal Policy
A Countercyclical Force
Interpreting the DATA:
Can a one-time tax cut boost spending during a recession?
Interpreting the DATA:
Did discretionary fiscal policy work in the 2007–2009 Great Recession?
Automatic Stabilizers
Fiscal Policy and Monetary Policy Interactions
35.3 Government Deficits and Debt
Government Budget Deficits
Government Debt
Reasons Not to Worry About the Debt
EVERYDAY Economics:
Will Social Security be there for you when you retire?
Reasons to Worry About Government Debt
Tying It Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Appendix A: A Closer Look at Aggregate Expenditure and the Multiplier
A.1 Aggregate Expenditure and Income
Aggregate Expenditure
Aggregate Expenditure Rises with Income
How to Use the Aggregate Expenditure Line
A.2 Macroeconomic Equilibrium and the Keynesian Cross
Aggregate Expenditure in Macroeconomic Equilibrium
Shifts in Aggregate Expenditure
Predicting the State of the Economy
A.3 The Multiplier
The Multiplier Effect
The Size of the Multiplier
EVERYDAY Economics:
Beware of developers bearing economic impact studies
Interpreting the DATA:
How big is the multiplier?
Tying it Together
Chapter at a Glance
Key Concepts
Discussion and Review Questions
Study Problems
Glossary
Index