Eighth Edition MACROECONOMICS - Pearson

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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 ViciousCycles 474 Debt Default 476 MoneyFinance 476Common Currency Areas 431 HardPegs, Currency Boards, andDollarization 433xA01 BLAN7899 08 SE FM.indd 10Fiscal Policy: A Summing Up 46122-1 What We Have Learned 46222-2 The Government BudgetConstraint: Deficits, Debt,Spending, and Taxes 46320-1 The Medium Run 420Appendix 1: Deriving the ISRelation under Fixed ExchangeRates 439Appendix 2: The Real Exchange Rateand Domestic and Foreign Real InterestRates 439 hould Policymakers BeSRestrained? 44322-5 The Challenges Facing US Fiscal PolicyToday 479Chapter 23 onetary Policy: A SummingMUp 48523-1 What We Have Learned 48623-2 From Money Targeting to InflationTargeting 487Contents14/11/19 5:20 PM

Money Targeting 487 Inflation Targeting 489 The Interest Rate Rule 490The Three Implications of RationalExpectations 512 The Integration ofRational Expectations 51323-3 The Optimal Inflation Rate 49124-4 Developments in Macroeconomics upto the 2009 Crisis 514The Costs of Inflation 491 TheBenefits of Inflation 494 TheOptimal Inflation Rate: The State of theDebate 495New Classical Economics and RealBusiness Cycle Theory 515 NewKeynesian Economics 515 NewGrowth Theory 516 Toward anIntegration 51723-4 Unconventional MonetaryPolicy 496Monetary Policy since the End of theLiquidity Trap 49723-5 Monetary Policy and FinancialStability 498Liquidity Provision and Lender of LastResort 499 MacroprudentialTools 499Chapter 24 pilogue: The Story ofEMacroeconomics 50724-1 Keynes and the Great Depression 50824-2 The Neoclassical Synthesis 508Progress on All Fronts 509 Keynesiansversus Monetarists 51024-3 The Rational ExpectationsCritique 51124-5 First Lessons for Macroeconomicsafter the Crisis 518Appendix 1 AnIntroduction to theNational Income and ProductAccounts A-1Appendix 2A Math Refresher A-7Appendix 3 AnIntroduction toEconometrics A-12Glossary G-1IndexI-1CreditsC-1Symbols Used in This Book   S-1ContentsA01 BLAN7899 08 SE FM.indd 11xi14/11/19 5:20 PM

Focus BoxesReal GDP, Technological Progress, and the Price ofComputers 25The Vocabulary of Bond Markets 294Unemployment and Happiness 28Making (Some) Sense of (Apparent) Nonsense: Why the StockMarket Moved Yesterday, and Other Stories 305The Lehman Bankruptcy, Fears of Another Great Depression,and Shifts in the Consumption Function 57Famous Bubbles: From Tulipmania in 17th-Century Holland toRussia in 1994 306The Paradox of SavingThe Increase in US Housing Prices During the First Half of the2000s: Fundamentals or Bubble? 30861Semantic Traps: Money, Income, and Wealth69Who Holds US Currency? 71Will Bitcoins Replace Dollars?The Liquidity Trap in ActionDo People Save Enough for Retirement?80Investment and the Stock Market82315318323Profitability versus Cash Flow 326The US Recession of 2001 98Deficit Reduction: Good or Bad for Investment? 101Bank RunsUp Close and Personal: Learning from Panel Datasets118The Current Population Survey138From Henry Ford to Jeff Bezos143Rational Expectations 341Can a Budget Deficit Reduction Lead to an Output Expansion?Ireland in the 1980s 345Uncertainty and FluctuationsTheory ahead of Facts: Milton Friedman and EdmundPhelps 163Can Exports Exceed GDP?348358GDP versus GNP: The Example of Kuwait368Changes in the US Natural Rate of Unemployment since1990 166Buying Brazilian Bonds 370What Explains European Unemployment?The Disappearance of the Current Account Deficit in Greece:Good News or Bad News? 388Okun’s Law across Time and CountriesDeflation in the Great Depression167180186Oil Price Increases: Why Were the 2000s So Different from the1970s? 192The Construction of PPP NumbersDoes Money Buy Happiness?204384Capital Flows, Sudden Stops, and the Limits to the InterestParity Condition 400Monetary Contraction and Fiscal Expansion: The United Statesin the Early 1980s 407US Trade Deficits and Trump Administration Trade Tariffs 408206The Reality of Growth: A US Workingman’s Budget in 1851 210Capital Accumulation and Growth in France in the Aftermath ofWorld War II 226Social Security, Saving, and Capital Accumulation in the UnitedStates 231Nudging US Households to Save MoreThe G20 and the 2009 Fiscal Stimulus236The Diffusion of New Technology: Hybrid Corn252German Reunification, Interest Rates, and the EMS412The Return of Britain to the Gold Standard: Keynes versusChurchill 423The 1992 EMS Crisis426The Euro: A Short History433Lessons from Argentina’s Currency Board 434Was Alan Blinder Wrong in Speaking the Truth? 451Management Practices: Another Dimension of TechnologicalProgress 254Euro Area Fiscal Rules: A Short HistoryThe Importance of Institutions: North Korea and SouthKorea 256How Countries Decreased Their Debt Ratios after WorldWar II 469What Lies Behind Chinese Growth?Job Destruction, Churn and Earnings Losses 270Deficits, Consumption, and Investment in the United States during World War II 473The Long View: Technology, Education, andInequality 273Money Financing and HyperinflationsMoney IllusionInequality and the Gini CoefficientLTV Ratios and Housing Price Increases from 2000 to 2007 501258276456Inflation Accounting and the Measurement of Deficits464478493xiiA01 BLAN7899 08 SE FM.indd 1214/11/19 5:20 PM

Prefacetour of the world, from the United States, to the Euro area,and to China. Some instructors will prefer to cover Chapter 1 later, perhaps after Chapter 2, which introduces basicconcepts, articulates the notions of short run, medium run,and long run, and gives the reader a quick tour of the book.I had two main goals in writing this book: To make close contact with current macroeconomic events.What makes macroeconomics exciting is the light it shedson what is happening around the world, from the majoreconomic crisis which engulfed the world in the late 2000s,to monetary policy in the United States, to the problems ofthe Euro area, to growth in China. These events—and manymore—are described in the book, not in footnotes, but in thetext or in detailed boxes. Each box shows how you can usewhat you have learned to get an understanding of theseevents. My belief is that these boxes not only convey the lifeof macroeconomics, but also reinforce the lessons from themodels, making them more concrete and easier to grasp.While Chapter 2 gives the basics of national incomeaccounting, I have put a detailed treatment of nationalincome accounts in Appendix 1 at the end of the book.This decreases the burden on the beginning reader andallows for a more thorough treatment in the appendix. Chapters 3 through 6 focus on the short run. Chapters 3to 5 characterize equilibrium in the goods market and inthe financial markets, and derive the basic model used tostudy short-run movements in output, the IS-LM model.Chapter 6 extends the basic IS-LM model to reflect the roleof the financial system. It then uses it to describe whathappened during the initial phase of the financial crisis.To provide an integrated view of macroeconomics. Thebook is built on one underlying model, a model thatdraws the implications of equilibrium conditions in threesets of markets: the goods market, the financial markets,and the labor market. Depending on the issue at hand,the parts of the model relevant to the issue are developedin more detail while the other parts are simplified or lurkin the background. But the underlying model is alwaysthe same. This way, you will see macroeconomics as acoherent whole, not a collection of models. And you willbe able to make sense not only of past macroeconomicevents but also of those that unfold in the future.Chapters 7 through 9 focus on the medium run. Chapter 7 focuses on equilibrium in the labor market and introduces the notion of the natural rate of unemployment.Chapter 8 derives and discusses the relation between unemployment and inflation, known as the Phillips curve.Chapter 9 develops the IS-LM-PC (PC for P hillips curve)model which takes into account e quilibrium in the goodsmarket, in the financial markets, and in the labor market.It shows how this model can be used to understand movements in activity and movements in inflation, both in theshort and in the medium run.Solving Learning and TeachingChallengesFlexible OrganizationThe book is organized around two central parts: a core,and a set of two major extensions. An introduction precedes the core. The two extensions are followed by a reviewof the role of policy. The book ends with an epilogue. Theflowchart at the beginning of this book makes it easy to seehow the chapters are organized and fit within the book’soverall structure. Chapters 1 and 2 introduce the basic facts and issues ofmacroeconomics. Chapter 1 takes you on an economicChapters 3 through 13 constitute the core.Chapters 10 through 13 focus on the long run. Chapter 10describes the facts, showing the evolution of output acrosscountries and over long periods of time. Chapters 11 and 12develop a model of growth and describe how capital accumulation and technological progress determine growth.Chapter 13, which is new, focuses on the challenges togrowth, from inequality to climate change. Chapters 14 through 20 cover the two major extensions.Chapters 14 through 16 focus on the role of expectationsin the short run and in the medium run. Expectations playxiiiA01 BLAN7899 08 SE FM.indd 1314/11/19 5:20 PM

a major role in most economic decisions and, by implication, play a major role in the determination of output. A full semester course gives more than enough time tocover the core, plus one or both of the two extensions, andthe review of policy. The extensions assume knowledge ofthe core, but are otherwise mostly self-contained. Given thechoice, the order in which they are best taught is probablythe order in which they are presented in the book. Havingstudied the role of expectations first helps students to understand the interest parity condition and the nature of exchange rate crises.Chapters 17 through 20 examine the implications ofopenness of modern economies. Chapter 20 looks at theimplications of differen

Flexible Organization Macroeconomics, eighth edition is organized around two central parts: A core and a set of two major extensions. The text’s flexible organization emphasizes an integrated view of macroeconomics, while enabling professors to focus on the theories, models, and applications that they deem central to their particular course.

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