Eighth Edition MACROECONOMICS - Pearson Education

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Eighth EditionMACROECONOMICSOlivier BlanchardA01 BLAN7899 08 SE FM.indd 114/11/19 5:20 PM

Please contact pport with any queries on this content.Microsoft and/or its respective suppliers make no representations about the suitability of the informationcontained in the documents and related graphics published as part of the services for any purpose. All suchdocuments and related graphics are provided “as is” without warranty of any kind. Microsoft and/or itsrespective suppliers hereby disclaim all warranties and conditions with regard to this information, includingall warranties and conditions of merchantability, whether express, implied or statutory, fitness for a particularpurpose, title and non-infringement. In no event shall Microsoft and/or its respective suppliers be liable forany special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data orprofits, whether in an action of contract, negligence or other tortious action, arising out of or in connectionwith the use or performance of information available from the services.The documents and related graphics contained herein could include technical inaccuracies or typographicalerrors. Changes are periodically added to the information herein. Microsoft and/or its respective suppliers maymake improvements and/or changes in the product(s) and/or the program(s) described herein at any time.Partial screen shots may be viewed in full within the software version specified.Microsoft and Windows are registered trademarks of the Microsoft Corporation in the U.S.A. and othercountries. This book is not sponsored or endorsed by or affiliated with the Microsoft Corporation.Copyright 2021, 2017, 2013 by Pearson Education, Inc. or its affiliates, 221 River Street, Hoboken, NJ07030. All Rights Reserved. Manufactured in the United States of America. This publication is protected bycopyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storagein a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying,recording, or otherwise. For information regarding permissions, request forms, and the appropriate contactswithin the Pearson Education Global Rights and Permissions department, please visit www.pearsoned.com/permissions/.Acknowledgments of third-party content appear on the appropriate page within the text and on the Creditspage at the end of the book, which constitutes an extension of this copyright page.Cover Photo: Thinkstock/Stockbyte/Getty ImagesPEARSON, ALWAYS LEARNING, and MYLAB are exclusive trademarks owned by Pearson Education, Inc. orits affiliates in the U.S. and/or other countries.Unless otherwise indicated herein, any third-party trademarks, logos, or icons that may appear in this workare the property of their respective owners, and any references to third-party trademarks, logos, icons, orother trade dress are for demonstrative or descriptive purposes only. Such references are not intended to implyany sponsorship, endorsement, authorization, or promotion of Pearson’s products by the owners of suchmarks, or any relationship between the owner and Pearson Education, Inc., or its affiliates, authors, licensees,or distributors.Library of Congress Cataloging-in-Publication DataName: Blanchard, Olivier (Olivier J.), author.Title: Macroeconomics / Olivier Blanchard.Description: Eighth Edition. Hoboken : Pearson, [2021] Revised edition ofMacroeconomics, [2017]Identifiers: LCCN 2019015670 ISBN 9780134897899 ISBN 0134897897Subjects: LCSH: Macroeconomics.Classification: LCC HB172.5 .B573 2019 DDC 339—dc23 LC record availableat CodeISBN 10:    0-13-489789-7ISBN 13: 978-0-13-489789-9A01 BLAN7899 08 SE FM.indd 214/11/19 5:20 PM

To NoelleA01 BLAN7899 08 SE FM.indd 314/11/19 5:20 PM

Flexible OrganizationMacroeconomics, eighth edition is organized around two central parts: A core and a set of two major e xtensions.The text’s flexible organization emphasizes an integrated view of macroeconomics, while enabling professors tofocus on the theories, models, and applications that they deem central to their particular course.The flowchart below quickly illustrates how the chapters are organized and fit within the book’s overall structure.For a more detailed explanation of the Flexible Organization, and for an extensive list of Alternative Course Outlines, see pages xiii–xiv in the preface.INTRODUCTIONA Tour of the World Chapter 1A Tour of the Book Chapter 2THE COREThe Short RunThe Goods Market Chapter 3Financial Markets I Chapter 4Goods and Financial Markets: The IS-LM Model Chapter 5Financial Markets II: The Extended IS-LM Model Chapter 6The Medium RunThe Labor Market Chapter 7The Phillips Curve, the Natural Rate ofUnemployment, and Inflation Chapter 8From the Short to the Medium Run: The IS-LMPC Model Chapter 9The Long RunThe Facts of Growth Chapter 10Saving, Capital Accumulation, and Output Chapter 11Technological Progress and Growth Chapter 12The Challenges of Growth Chapter 13EXPECTATIONSTHE OPEN ECONOMYFinancial Markets and Expectations Chapter 14Expectations, Consumption, and Investment Chapter 15Expectations, Output, and Policy Chapter 16EXTENSIONSOpenness in Goods and Financial Markets Chapter 17The Goods Market in an Open Economy Chapter 18Output, the Interest Rate, and the Exchange Rate Chapter 19Exchange Rate Regimes Chapter 20BACK TO POLICYShould Policymakers Be Restrained? Chapter 21Fiscal Policy: A Summing Up Chapter 22Monetary Policy: A Summing Up Chapter 23EPILOGUEThe Story of Macroeconomics Chapter 24A01 BLAN7899 08 SE FM.indd 414/11/19 5:20 PM

Brief ContentsTHE COREIntroduction 1Chapter 1Chapter 2A Tour of the World 3A Tour of the Book 19EXTENSIONSExpectations 285Chapter 14Chapter 15The Short Run 43Chapter 3Chapter 4Chapter 5Chapter 6The Goods Market 45Financial Markets I 67 Goods and Financial Markets: TheIS-LM Model 87 Financial Markets II: The ExtendedIS-LM Model 109The Medium Run 133Chapter 7Chapter 8Chapter 9The Labor Market 135 The Phillips Curve, the Natural Rateof Unemployment, and Inflation 155 From the Short to the Medium Run:The IS-LM-PC Model 177The Long Run 199Chapter 10Chapter 11Chapter 12Chapter 13The Facts of Growth 201 Saving, Capital Accumulation, andOutput 219 Technological Progress andGrowth 243The Challenges of Growth 265Chapter 16 inancial Markets andFExpectations 287 Expectations, Consumption,and Investment 313 Expectations, Output, andPolicy 335The Open Economy 353Chapter 17Chapter 18Chapter 19Chapter 20 penness in Goods and FinancialOMarkets 355 The Goods Market in an OpenEconomy 375 Output, the Interest Rate, and theExchange Rate 397Exchange Rate Regimes 419Back to Policy 441Chapter 21Chapter 22Chapter 23Chapter 24 hould Policymakers BeSRestrained? 443Fiscal Policy: A Summing Up 461 Monetary Policy: A SummingUp 485 Epilogue: The Story ofMacroeconomics 507vA01 BLAN7899 08 SE FM.indd 514/11/19 5:20 PM

ContentsPreface xiiiAbout the AuthorxviiiAppendix: The Construction of Real GDPand Chain-Type Indexes 40THE COREIntroduction 1Chapter 1A Tour of the World 31-1 The Crisis 41-2 The United States 6The Short Run 43Chapter 33-1 The Composition of GDP 463-2 The Demand for Goods 47Do Policymakers Have the Tools toHandle the Next Recession? 7 HowWorrisome Is Low Productivity Growth? 8Consumption (C) 48 Investment (I) 50 Government Spending (G) 501-3 The Euro Area 93-3 The Determination of EquilibriumOutput 51Can European Unemployment BeReduced? 11 What Has the EuroDone for Its Members? 12Using Algebra 52 Using aGraph 53 Using Words 55 HowLong Does It Take for Output toAdjust? 561-4 China 131-5 Looking Ahead 15Appendix 1: Where to Find the Numbers 18Appendix 2: What Do MacroeconomistsDo? 18Chapter 23-4 Investment Equals Saving: AnAlternative Way of Thinking aboutGoods-Market Equilibrium 583-5 Is the Government Omnipotent?A Warning 60A Tour of the Book 192-1 Aggregate Output 20GDP: Production and Income 20 Nominal and Real GDP 22 GDP:Level versus Growth Rate 242-2 The Unemployment Rate 25Why Do Economists Care aboutUnemployment? 262-3 The Inflation Rate 27The GDP Deflator 27 The ConsumerPrice Index 29 Why Do EconomistsCare about Inflation? 302-4 Output, Unemployment, and theInflation Rate: Okun’s Law and thePhillips Curve 31Okun’s Law 31 The Phillips Curve 322-5 The Short Run, the Medium Run,and the Long Run 332-6 A Tour of the Book 34The Core 35 Extensions 35 Back to Policy 35 Epilogue 36The Goods Market 45Chapter 4Financial Markets I 674-1 The Demand for Money 68Deriving the Demand forMoney 694-2 Determining the InterestRate: I 71Money Demand, Money Supply,and the Equilibrium InterestRate 71 Monetary Policyand Open Market Operations 73 Choosing Money orChoosing the Interest Rate? 754-3 Determining the InterestRate: II 76What Banks Do 76 The Demand forand Supply of Central BankMoney 78 The Demand for CentralBank Money 78 The Federal FundsMarket and the Federal Funds Rate 794-4 The Liquidity Trap 81viA01 BLAN7899 08 SE FM.indd 614/11/19 5:20 PM

Chapter 5 oods and Financial Markets: TheGIS-LM Model 87Bargaining 142 EfficiencyWages 142 Wages, Prices, andUnemployment 144 The ExpectedPrice Level 144 The UnemploymentRate 145 The Other Factors 1455-1 The Goods Market and the ISRelation 88Investment, Sales, and theInterest Rate 88 DeterminingOutput 89 Deriving the ISCurve 91 Shifts of the ISCurve 917-4 Price Determination 1457-5 The Natural Rate ofUnemployment 146The Wage-Setting Relation 146 ThePrice-Setting Relation 147 EquilibriumReal Wages and Unemployment 1485-2 Financial Markets and the LMRelation 927-6 Where We Go from Here 149Appendix: Wage- and Price-SettingRelations versus Labor Supply and LaborDemand 154Real Money, Real Income, and theInterest Rate 92 Deriving the LMCurve 935-3 Putting the IS and LM RelationsTogether 94Fiscal Policy 94 Monetary Policy 96Chapter 85-4 Using a Policy Mix 965-5 How Does the IS-LM Model Fitthe Facts? 102Chapter 68-1 Inflation, Expected Inflation, andUnemployment 1568-2 The Phillips Curve and ItsMutations 158 inancial Markets II: TheFExtended IS-LM Model 109The Original Phillips Curve 158 TheDe-anchoring of Expectations 158 TheRe-anchoring of Expectations 1616-1 Nominal versus Real InterestRates 110Nominal and Real Interest Ratesin the United States since1978 112 Nominal and Real InterestRates: The Zero Lower Bound andDeflation 1138-3 The Phillips Curve and the NaturalRate of Unemployment 1628-4 A Summary and ManyWarnings 1646-2 Risk and Risk Premia 1146-3 The Role of FinancialIntermediaries 115Variations in the Natural Rate overTime 165 Variations in the NaturalUnemployment Rate acrossCountries 165 High Inflation and thePhillips Curve 166 Deflation and thePhillips Curve 169The Choice of Leverage 116 Leverageand Lending 1176-4 Extending the IS-LM Model 119Appendix: Derivation of the RelationBetween Inflation, Expected Inflation,and Unemployment 175Financial Shocks and Policies 1216-5 From a Housing Problem to aFinancial Crisis 122Housing Prices and SubprimeMortgages 122 The Role of FinancialIntermediaries 123 MacroeconomicImplications 125 Policy Responses 125The Medium Run 133Chapter 7The Labor Market 1357-1 A Tour of the Labor Market 136The Large Flows of Workers 1367-2 Movements in Unemployment 1397-3 Wage Determination 141 he Phillips Curve, the NaturalTRate of Unemployment, andInflation 155Chapter 9 rom the Short to the MediumFRun: The IS-LM-PC Model 1779-1 The IS-LM-PC Model 1789-2 From the Short to the MediumRun 1819-3 Complications and How Things CanGo Wrong 183The Zero Lower Bound and DeflationSpirals 1849-4 Fiscal Consolidation Revisited 1859-5 The Effects of an Increase in the Priceof Oil 188ContentsA01 BLAN7899 08 SE FM.indd 7vii14/11/19 5:20 PM

Effects on the Natural Rate ofUnemployment 1899-6 Conclusions 191The Short Run versus the MediumRun 193 Shocks and PropagationMechanisms 193Appendix: The Cobb-Douglas ProductionFunction and the Steady State 241Chapter 1212-1 Technological Progress and the Rateof Growth 244Technological Progress and theProduction Function 244 Interactionsbetween Output and Capital 246 Dynamics of Capital andOutput 248 Back to the Effectsof the Saving Rate 249The Long Run 199Chapter 10The Facts of Growth 20110-1 Measuring the Standard ofLiving 20210-2 Growth in Rich Countries since1950 20512-2 The Determinants of TechnologicalProgress 250The Large Increase in the Standardof Living since 1950 207 TheConvergence of Output per Person 208The Fertility of the Research Process 251 The Appropriability of ResearchResults 252 Innovation versus Imitation 25410-3 A Broader Look across Timeand Space 20912-3 Institutions, Technological Progress,and Growth 255Appendix: How to Measure TechnologicalProgress, and the Application to China 262Looking across Two Millennia 209 Looking across Countries 20910-4 Thinking about Growth:A Primer 212The Aggregate ProductionFunction 212 Returns to Scale andReturns to Factors 213 Output perWorker and Capital per Worker 213 The Sources of Growth 214Chapter 11Chapter 13The Increase in Wage Inequality 271 The Causes of Increased WageInequality 272 Inequality and the Top1% 274 Growth and Inequality 27511-1 Interactions between Output andCapital 22011-2 The Implications of Alternative SavingRates 223Dynamics of Capital and Output 223 The Saving Rate and Output 225 The Saving Rate and Consumption 22811-3 Getting a Sense of Magnitudes 230The Effects of the Saving Rate on SteadyState Output 232 The DynamicEffects of an Increase in the SavingRate 233 The US Saving Rate and theGolden Rule 23511-4 Physical versus Human Capital 236Extending the Production Function 236 Human Capital, Physical Capital, andOutput 237 Endogenous Growth 238viiiA01 BLAN7899 08 SE FM.indd 8The Challenges of Growth 26513-1 The Future of Technological Progress 26613-2 Robots and Unemployment 26713-3 Growth, Churn, and Inequality 269 aving, Capital Accumulation, andSOutput 219The Effects of Capital on Output 220 The Effects of Output on CapitalAccumulation 221 Outputand Investment 221 Investment andCapital Accumulation 222 echnological Progress andTGrowth 24313-4 Climate Change and GlobalWarming 278EXTENSIONSExpectations 285Chapter 14 inancial Markets andFExpectations 28714-1 Expected Present DiscountedValues 288Computing Expected PresentDiscounted Values 288 A GeneralFormula 289 Using Present Values:Examples 290 Constant InterestRates 290 Constant Interest Ratesand Payments 290 Constant InterestRates and Payments Forever 291 ZeroInterest Rates 291 Nominal versus RealInterest Rates and Present Values 291Contents14/11/19 5:20 PM

14-2 Bond Prices and Bond Yields 29216-3 Deficit Reduction, Expectations, andOutput 342Bond Prices as Present Values 294 Arbitrage and Bond Prices 295 FromBond Prices to Bond Yields 296 Reintroducing Risk 297 Interpretingthe Yield Curve 29814-3 The Stock Market and Movements inStock Prices 299Stock Prices as Present Values 300 TheStock Market and Economic Activity 302 A Monetary Expansion and the StockMarket 303 An Increase in ConsumerSpending and the Stock Market 304The Role of Expectations about theFuture 343 Back to the CurrentPeriod 343The Open Economy 353Chapter 1717-1 Openness in Goods Markets 356Exports and Imports 356 The Choicebetween Domestic Goods and Foreign Goods 358 Nominal ExchangeRates 358 From Nominal to RealExchange Rates 359 From Bilateral toMultilateral Exchange Rates 36314-4 Risk, Bubbles, Fads, and AssetPrices 305Stock Prices and Risk 306 AssetPrices, Fundamentals, and Bubbles 306Appendix: Deriving the Expected PresentDiscounted Value Using Real or NominalInterest Rates 312Chapter 1517-2 Openness in Financial Markets 364The Balance of Payments 365 TheChoice between Domestic and ForeignAssets 367 Interest Rates andExchange Rates 369 Expectations, Consumption,and Investment 31317-3 Conclusions and a Look Ahead 37115-1 Consumption 314The Very Foresighted Consumer 314 An Example 315 Toward a MoreRealistic Description 316 PuttingThings Together: Current Income,Expectations, and Consumption 31915-2 Investment 320Investment and Expectationsof Profit 320 Depreciation 321 The Present Value of ExpectedProfits 321 The Investment Decision 322 A Convenient SpecialCase 322 Current versus ExpectedProfit 324 Profit and Sales 32615-3 The Volatility of Consumption andInvestment 328Appendix: Derivation of the ExpectedPresent Value of Profits under StaticExpectations 333Chapter 16 xpectations, Output, andEPolicy 33516-1 Expectations and Decisions: TakingStock 336Expectations, Consumption, and Investment Decisions 336 Expectations andthe IS Relation 33616-2 Monetary Policy, Expectations, andOutput 339Monetary Policy Revisited 339 penness in Goods and FinancialOMarkets 355Chapter 18 he Goods Market in an OpenTEconomy 37518-1 The IS Relation in the OpenEconomy 376The Demand for DomesticGoods 376 The Determinants of C,I, and G 376 The Determinants ofImports 377 The Determinants ofExports 377 Putting the ComponentsTogether 37718-2 Equilibrium Output and the TradeBalance 37918-3 Increases in Demand—Domestic orForeign 380Increases in Domestic Demand 380 Increases in Foreign Demand 382 Fiscal Policy Revisited 38318-4 Depreciation, the Trade Balance, andOutput 385Depreciation and the Trade Balance: theMarshall-Lerner Condition 386 TheEffects of a Real Depreciation 386 Combining Exchange Rateand Fiscal Policies 38718-5 Saving, Investment, and the CurrentAccount Balance 390Appendix: Derivation of the Marshall-LernerCondition 395ContentsA01 BLAN7899 08 SE FM.indd 9ix14/11/19 5:20 PM

Chapter 19 utput, the Interest Rate, and theOExchange Rate 39719-1 Equilibrium in the GoodsMarket 39819-2 Equilibrium in FinancialMarkets 399Back to Policy 441Chapter 2121-1 Uncertainty and Policy 444How Much Do MacroeconomistsActually Know? 444 ShouldUncertainty Lead Policymakers toDo Less? 446 Uncertainty andRestraints on Policymakers 446Domestic Bonds versus ForeignBonds 39919-3 Putting Goods and Financial MarketsTogether 40219-4 The Effects of Policy in an OpenEconomy 40421-2 Expectations and Policy 447Hostage Takings and Negotiations 448 Inflation and Unemployment Revisited 448 EstablishingCredibility 449 Time Consistency andRestraints on Policymakers 451The Effects of Monetary Policy in an OpenEconomy 404 The Effects of FiscalPolicy in an Open Economy 40519-5 Fixed Exchange Rates 409Pegs, Crawling Pegs, Bands, theEMS, and the Euro 409 MonetaryPolicy When the Exchange Rate IsFixed 410 Fiscal Policy When theExchange Rate Is Fixed 411Appendix: Fixed Exchange Rates, InterestRates, and Capital Mobility 416Chapter 2021-3 Politics and Policy 451Games between Policymakers andVoters 452 Games between Policymakers 453 Politics and Fiscal Restraints 454Chapter 22Exchange Rate Regimes 419The Arithmetic of Deficits andDebt 463 Current versus FutureTaxes 465 Full Repayment inYear 2 465 Full Repayment inYear t 466 Debt Stabilizationin Year 2 467 The Evolution of theDebt-to-GDP Ratio 468The IS Relation under FixedExchange Rates 421 Equilibriumin the Short and the MediumRun 421 The Case for and againsta Devaluation 42220-2 Exchange Rate Crises under FixedExchange Rates 42420-3 Exchange Rate Movements underFlexible Exchange Rates 42722-3 Ricardian Equivalence, CyclicalAdjusted Deficits, and WarFinance 470Ricardian Equivalence 470 Deficits,Output Stabilization, and the CyclicallyAdjusted Deficit 471 Wars andDeficits 472Exchange Rates and the CurrentAccount 428 Exchange Ratesand Current and Future InterestRates 429 Exchange RateVolatility 42922-4 The Dangers of High Debt 47420-4 Choosing between Exchange RateRegimes 430High Debt, Default Risk, and ViciousCycle

The Goods Market Chapter 3 Financial Markets I Chapter 4 Goods and Financial Markets: The IS-LM Model . A Summing Up Chapter 23 The Story of Macroeconomics Chapter 24 Financial Markets and Expectations Chapter 14 Expectat

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