[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

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200180160CPI (1982–1984 = 100)14012010080604020019201930 19401950 1960 1970 1980 1990 2000Figure 28.1THE CONSUMER PRICE INDEXDuring the past ninety years, the consumer price index has increased enormously. Mostof the rise has occurred since 1973.SOURCE: Bureau of Labor Statistics.conducted by the Federal Reserve System. In this chapter, you will learn about theFederal Reserve and the policy tools it can use to affect the money supply.Prices and InflationThe discussion of the long-run, full employment model in Chapter 24 was conductedentirely in real terms; real output, real employment, real saving and investment,real wages, and the real rate of interest. We were able to explain the factors that determinethe economy’s full-employment output level (potential GDP) without any mentionof the aggregate price level. We could do so because the economy’s real equilibriumat full employment is independent of the level of prices. That is, regardless of whetherthe average level of prices is high or low, potential GDP is the same. This implicationis represented in Figure 28.3, which has real output on the horizontal axis andthe price level on the vertical axis. Potential GDP is denoted by Y f . Since Y f is determinedby labor demand and labor supply (both of which depend on real wages) andthe economy’s aggregate production function (which depends on the state of technologyand the capital stock), it will be the same at all price levels. Because fullemploymentoutput is independent of the price level, we have drawn a vertical linein Figure 28.3 at Y f .The price level simply tells us how many dollars (or euros in France or Germany,yen in Japan, pesos in Mexico) it takes to buy a basket of goods and services. Wemeasure the price level by using price indexes (see Chapter 23), most commonlyeither the GDP deflator or the consumer price index (CPI). The GDP deflator reflects606 ∂ CHAPTER 28 MONEY, THE PRICE LEVEL, AND THE FEDERAL RESERVE
2015RATE OF INFLATION IN CPI (%)1050–5–10–151920 1930 1940 1950 1960 1970 1980 1990 2000Figure 28.2THE RATE OF INFLATIONInflation has fluctuated considerably over the past ninety years. It reached significantlevels during World War I, World War II, and the Korean War, and was negative (i.e.,prices fell) during most of the period between the two world wars. The period from thelate 1960s until the early 1980s is sometimes described as the Great Inflation, because itrepresented an extended period of high inflation not associated with wartime.SOURCE: Bureau of Labor Statistics.the prices of all the goods and services that the economy produces as part of GDP.The CPI measures the prices of things purchased by households. In 2004, the CPIwas equal to 189. This means that in 2004 it took $1.89 to purchase what could havebeen bought for $1.00 in the index base year (an average of prices in 1982–1984).Because the price level tells us how much it costs to purchase goods and services,it is a measure of the value of money. If the price level rises, each dollar willbuy fewer goods and services: the value of money falls. If the price level falls, eachdollar will buy more goods and services: the value of money rises.The value of money, like the value of other commodities, is determined by theinteraction of demand and supply. To understand what determines the price level,we will need to examine the factors that affect the demand for and supply of money.PRICE LEVEL (P)MONEY DEMANDMoney is a financial asset, just like stocks and bonds. But money differs from thoseother assets because we use it to carry out our day-to-day transactions. If you wantto buy a cup of coffee, you cannot present the sales clerk with a share of MicrosoftCorporation and expect change. In the United States, you have to present cash. Oryou can pay with a credit card—but to pay for those credit purchases, you need towrite a check at the end of the month. Cash and balances in checking accounts arethe primary forms of money that we use. The more transactions we engage in, orthe higher the average value of these transactions, the more of those forms of moneyFigure 28.3Y fOUTPUT (Y )POTENTIAL GDP AND THEAGGREGATE PRICE LEVELThe economy’s potential GDP does notdepend on the price level; this is representedby drawing a vertical line atpotential GDP.PRICES AND INFLATION ∂ 607
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∂ECONOMICSFOURTH EDITION
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∂ECONOMICSFOURTH EDITIONBW. W. NO
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ABOUT THE AUTHORSJoseph E. Stiglitz
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CONTENTS IN BRIEFPART 1 INTRODUCTIO
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CONTENTSPREFACEXXXVPART 1 INTRODUCT
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Sources of Shifts in Demand Curves
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Short-Run and Long-Run Cost Curves
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Conditions for the Pareto Efficienc
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THINKING LIKE AN ECONOMIST: Trade-O
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Search and Information Intermediari
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CHAPTER 19 INTERNATIONAL TRADE AND
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Government Deficits and Trade Defic
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Evaluating Government Deficits and
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PART 7MACROECONOMICFLUCTUATIONS 635
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An Expansionary Shift in the ADI Cu
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CHAPTER 35 POLICY IN THE OPEN ECONO
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CASE IN POINT: Fed Policy Statement
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PREFACEThe study of economics has a
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of the economist’s approach to im
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ture also allows an instructor who
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With SmartWork’s intuitive interf
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AcknowledgmentsThe book’s first t
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Alternative Course OutlineIn the Fo
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Plus any of the optional chapters c
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∂Part 1INTRODUCTION∂1
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Chapter 1MODERNECONOMICS∂The past
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the illegal online sharing of music
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2. In making choices, individuals r
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gal activity, and on the other side
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Internet ConnectionAUCTION SITESAn
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and products. It is hard to imagine
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The primary reliance on private dec
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Microeconomics andMacroeconomics:Th
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does not prove that the coin is not
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Review and PracticeSUMMARY1. Econom
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Chapter 2THINKING LIKE ANECONOMIST
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COMPETITIVE MARKETSTo complete the
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new insights into markets and situa
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INCENTIVES VERSUS EQUALITYWhile inc
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line up to buy at that price. (The
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she has more of both goods than at
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Diminishing returns is an important
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Thinking Like an EconomistTRADE-OFF
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computers and textiles. The develop
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To understand sunk costs, let’s g
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Review and PracticeSUMMARY1. The ba
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Appendix: Reading GraphsWhether the
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Now look at point A, where the econ
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∂Part 2PERFECT MARKETS∂51
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Chapter 3DEMAND, SUPPLY,AND PRICE
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you might buy a few, and if the pri
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SHIFTS IN DEMAND CURVES1.25When the
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Case in PointGASOLINE PRICES AND TH
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In practice, both effects are often
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higher performance at that price. A
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Wrap-UpSUPPLY CURVEThe supply curve
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A change in the natural environment
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USING DEMAND AND SUPPLY CURVESThe c
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Internet ConnectionTHE DEMAND AND S
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the demand and supply curves. What
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Chapter 4USING DEMANDAND SUPPLY∂W
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ABPRICE ($)Demand fororange juice2.
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Table 4.1PRICE ELASTICITY OF DEMAND
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International PerspectiveCOMPARING
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the supply curve becomes close to v
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be reflected more in changes in qua
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to illustrate the market’s failur
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New York City leads, in the short r
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Case in PointRENT CONTROL IN NEW YO
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ment is concerned with low wages pa
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2. Imagine that the short-run price
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fall represents a larger percentage
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Chapter 5THE CONSUMPTIONDECISION∂
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As we learned in Chapter 2, a budge
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450ALL OTHER GOODS ($)300GG'FF'20 3
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The consumption of some goods actua
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Internet ConnectionWHAT WE CONSUMET
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tive or negative. Generally, though
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Normally, demand curves are downwar
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is 30, and that of the last pizza i
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CONSUMER SURPLUSIn Chapter 1, we le
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nomic model of consumer choice can
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The Status Quo Bias Loss aversion a
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of $60,000 per year. Imagine that t
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Moving along the curve in one direc
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number of CDs, having an additional
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candy increases. Now he can buy few
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Chapter 6THE FIRM’S COSTS∂Imagi
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The relationship between the quanti
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COST (THOUSANDS OF DOLLARS)AB175C15
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ABCOST (DOLLARS PER UNIT)Marginalco
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average costs are declining at outp
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Table 6.4DEBORAH’S COSTS IF SHE W
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COST (DOLLARS PER UNIT)ALong-run to
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There is one last case to consider.
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produce the same output in several
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Hydroelectric power being generated
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Review and PracticeSUMMARY1. A firm
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Chapter 7THE COMPETITIVEFIRM∂Whet
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Internet ConnectionFIRMS’ PROFIT-
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Figure 7.3 develops the graphical a
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ABCOST OR PRICE (DOLLARS PER UNIT)p
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COST OR PRICE (DOLLARS PER UNIT)c m
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e-InsightTHE 2001 RECESSION: CUTBAC
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invested in this enterprise would p
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In some cases, supplies of inputs a
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Wrap-UpACCOUNTANTS’ VERSUS ECONOM
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ant, who helps him to draw up the f
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CHAPTER 8LABOR MARKETS∂The previo
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“standard” workweek—the 40-ho
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Wrap-UpWAGE CHANGES AND LABOR SUPPL
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656055Female labor forceparticipati
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Thus, in Figure 8.5, at the price p
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market is in equilibrium, the deman
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constraint has a kink at 37 hours o
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AOriginal budgetconstraintBOriginal
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Chapter 9CAPITAL MARKETS∂At any g
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Joan chooses among the points on th
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past twenty years computer prices h
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The slope of the budget constraint
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gests that the personal saving rate
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would have earned $1,000 in interes
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Despite offering important insights
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e-InsightFINANCING THE NEW ECONOMYW
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Review and PracticeSUMMARY1. The in
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Appendix A: IndifferenceCurves and
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increase in the interest rate, we n
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Chapter 10THE EFFICIENCY OFCOMPETIT
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CONSUMER AND PRODUCERSURPLUSTo unde
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unable to find an apartment when re
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PRICE OF CIGARETTESPrice paid bycon
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Exchange Efficiency Exchange effici
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COMPETITIVE MARKETS ANDPARETO EFFIC
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more extensive government intervent
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households determine their saving,
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AUnskilled laborsupply (SU )BSkille
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today, but it will also depend on p
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Review and PracticeSUMMARY1. Genera
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∂Part 3IMPERFECT MARKETS∂237
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Chapter 11INTRODUCTION TOIMPERFECTM
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price. The basic competitive model
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is called monopoly. Your local elec
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How much the price must change as s
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Imperfect InformationThe model of p
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MARKETS FOR INFORMATIONInformation
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ness scandals in recent years have
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Thinking Like an EconomistINCENTIVE
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practical matter, this can be done
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Review and PracticeSUMMARY1. By and
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Chapter 12MONOPOLY,MONOPOLISTICCOMP
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In Chapter 7, we used a graph that
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of $9,000, it sells 2 units; and at
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United StatesJapanPRICE (p )p 1PRIC
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A natural monopoly occurs whenever
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Table 12.2DEGREE OF COMPETITION IN
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Equilibrium with MonopolisticCompet
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A firm that is part of an oligopoli
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and still be better off. However, t
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backward through time, this logic w
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Wrap-UpFORMS OF RESTRICTIVE PRACTIC
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Review and PracticeSUMMARY1. Both m
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9. Explain why frequent-flier progr
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Chapter 13GOVERNMENTPOLICIES TOWARD
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MANAGERIAL SLACKChapter 6 argued th
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e-InsightUSING THE INTERNET TO ENHA
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marginal cost and to make up the de
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let us first review why competition
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deregulation, government had retain
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demeanor.” (A 1974 amendment made
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demand for them would increase. And
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arguments brought by a small Virgin
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If we plug in the 34 percent share
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long-distance service between major
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Chapter 14STRATEGICBEHAVIOR∂Durin
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Figure 14.1, which reproduces a dia
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Consider the case of politicians A
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International PerspectiveBEGGAR-THY
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Internet ConnectionTHE ZERO-SUM GAM
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REPUTATIONSDeveloping good reputati
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If you have a deposit in a commerci
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competes peacefully. Assume Microso
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to actually carry out the threat wh
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Review and PracticeSUMMARY1. In per
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summer her parents decide whether o
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Chapter 15IMPERFECTINFORMATION INTH
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quantity demanded will actually fal
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The Incentive ProblemProviding ince
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REPUTATION SOLUTIONSReputation play
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Case in PointBUYING HEALTH INSURANC
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Thinking Like an EconomistINCENTIVE
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Internet ConnectionJOB SEARCHThe In
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stores’ buyers seek out literally
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remains the same, so the second sou
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Review and PracticeSUMMARY1. The ba
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Chapter 16IMPERFECTIONS INTHE LABOR
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unions had claimed that when they n
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ECONOMIC EFFECTSThe source of union
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When a union goes on strike, the fi
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firm long enough to make his traini
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machines have one advantage over hu
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These “wages of trust” may expl
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by the firm: the company can try to
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Review and PracticeSUMMARY1. The pr
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∂Part 4ISSUES INPUBLIC POLICY∂3
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Chapter 17THE PUBLIC SECTOR∂Throu
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Why Does the GovernmentIntervene in
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The lifetime prospects for children
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e-InsightTHE NEW ECONOMY AND INEQUA
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Wrap-UpCRITERIA FOR EVALUATING A TA
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The income tax is only one of sever
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1997, the program commonly known as
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SOCIAL INSURANCEThe United States h
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Government FailuresDecisions about
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BUDGETING AND SPENDING PROCEDURESTh
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campaign contributions affect the b
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that point, additional sources of r
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Health care is different from most
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Review and PracticeSUMMARY1. Govern
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Chapter 18ENVIRONMENTALECONOMICS∂
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Consider what happens if, in the pr
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matters? Some economists, led by th
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in such developments. The end of lo
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the socially optimal level of produ
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by 2 units and plant B by 4 units.
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operation causes. Thus, the price h
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Review and PracticeSUMMARY1. Govern
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Chapter 19INTERNATIONALTRADE AND TR
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relative to the size of the populat
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Internet ConnectionDAVID RICARDOThe
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e-InsightTHE UNITED STATES’ COMPA
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has a comparative advantage in fine
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But trade among individuals and tra
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restrict the importation of goods.
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OTHER NONTARIFF BARRIERSVERs and qu
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they can raise prices. In such a ca
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BEGGAR-THY-NEIGHBOR POLICIESConcern
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Thinking Like an EconomistDISTRIBUT
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parent: everyone can see that it is
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Environmental and human rights issu
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Internet ConnectionTHE WORLD TRADE
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9. How is it possible that while th
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Chapter 20TECHNOLOGICALCHANGE∂For
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e-InsightTHE NEW ECONOMY AND INNOVA
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uncertain about whether it will be
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Soon after Henry Ford’s Model T h
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Because expenditures on R & D are f
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SCHUMPETERIAN COMPETITIONAlthough c
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even the existence of certain mater
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increasing awareness of the importa
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Review and PracticeSUMMARY1. Ideas
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∂Part 5INTRODUCTIONTO MACROECONOM
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Chapter 21MACROECONOMICSAND THEECON
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302520PERCENT1510501900 1910 1920 1
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Today, a slight rise in the unemplo
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GOVERNMENT DEFICITS AND TRADE DEFIC
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significant periods of deflation si
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Review and PracticeSUMMARY1. The th
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Chapter 22MEASURINGOUTPUT ANDUNEMPL
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Table 22.1CALCULATING GDPPrices and
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MEASURING GDP: THE VALUE OF OUTPUTT
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Wrap-UpGDP equals consumption plus
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spending represents income for thos
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International PerspectiveWHAT GETS
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Measuring Nonmarket Goods Nonmarket
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ment represents economic hardship.
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1412FranceUNEMPLOYMENT RATE (%)1086
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Wrap-UpFORMS OF UNEMPLOYMENTSeasona
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Flows and StocksGDP is a measure of
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produces two products, lectures and
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Chapter 23THE COST OFLIVING ANDINFL
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a variety of transactions, inflatio
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JANUARY 1918 = 10010 1310 1210 1110
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To see how a price index like the C
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The second major problem is “qual
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purchase foreign goods, so their pr
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Review and PracticeSUMMARY1. The in
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∂Part 6FULL-EMPLOYMENTMACROECONOM
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Chapter 24THE FULL-EMPLOYMENTMODEL
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In macroeconomics, we stress aggreg
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duction and hire more workers. Seco
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REAL WAGE (w/P )ALabor supply curve
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capital markets to ensure that the
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to firms and in return receive paym
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est rate (perhaps rising slightly w
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REAL INTEREST RATE (r )ASavingcurve
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USING THE GENERAL EQUILIBRIUM MODEL
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Review and PracticeSUMMARY1. Macroe
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Chapter 25GOVERNMENTFINANCE AT FULL
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Adding the GovernmentIntroducing go
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From this perspective, the first eq
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revenues match expenditures. In 199
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Page 687 and 688: Chapter 29INTRODUCTION TOMACROECONO
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Page 693 and 694: Thinking Like an EconomistEMPLOYMEN
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Review and PracticeSUMMARY1. Econom
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Chapter 30AGGREGATEEXPENDITURES AND
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THE NATIONAL INCOME-OUTPUT IDENTITY
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the final increase in equilibrium o
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ical questions. First, why does the
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8,0007,000REAL CONSUMPTION(BILLIONS
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lion. If any of the components of E
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2018INVESTMENT (AS % OF GDP)1614121
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without waiting; otherwise, they ma
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The effect of exports and imports o
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became less expensive, imports rose
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Calculating Equilibrium OutputAt th
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Wrap-UpAGGREGATE EXPENDITURES AND O
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Review and PracticeSUMMARY1. Income
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Chapter 31AGGREGATEDEMAND ANDINFLAT
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When we discuss interest rates and
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Because equilibrium GDP is determin
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Fiscal Policy A change in governmen
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Wrap-UpFACTORS THAT SHIFT THE AGGRE
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But the story does not end there. A
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offsetting amount. But the contract
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Thinking Like an EconomistTOUGH TRA
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bank could cut interest rates at ea
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Case in PointTHE 1990SNow that we h
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to sustained increases in productiv
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Review and PracticeSUMMARY1. Aggreg
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Chapter 32THE FEDERALRESERVE ANDINT
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987INTEREST RATES (%)65432TargetFed
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The position of the demand curve fo
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equilibrium funds rate rises. If th
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tity of money increases. When the m
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Chapter 33THE ROLE OFMACROECONOMICP
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THE NEW TRADE-OFF:OUTPUT STABILITY-
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AggregatedemandinflationcurvesPoten
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ADI 1E 1Aggregatedemand-inflationcu
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765Actual deficitPOTENTIAL GDP (%)4
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Conducting Monetary Policy The FOMC
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The Committee perceives the upside
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stimulate aggregate expenditures, e
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Case in PointTHE INTEREST RATE CUT
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economy and lead to a resurgence of
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The Inflation Target The position o
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This discussion returns us to the t
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Wrap-UpDIFFERENCES BETWEEN MONETARY
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3. Assume that the economy is curre
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∂Part 8THE GLOBAL ECONOMY∂755
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Chapter 34THEINTERNATIONALFINANCIAL
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The foreign exchange market in Yere
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that wants to use the euros to buy
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States than moving it to Europe or
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Expectations about changes in the e
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expressed in terms of the value of
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One of the attractions of the Europ
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As speculators withdrew capital, th
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Under a currency board, the exchang
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Review and PracticeSUMMARY1. In a f
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Page 829 and 830:
Chapter 35POLICY IN THEOPEN ECONOMY
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While this discussion has focused o
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rises and its appreciation reduces
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Internet ConnectionFOREIGN EXCHANGE
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exports are a large fraction of tot
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Central Bank had increased the inte
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3. Suppose a fall in net exports du
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Chapter 36DEVELOPMENTAND TRANSITION
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$5,500$5,000$4,50019912002$4,000$3,
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LIFE IN A LESS-DEVELOPED COUNTRYJus
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Some of this inequality is simply d
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changes served to level the playing
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policies, together with macroeconom
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Trade Giving less-developed economi
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eroded significantly in 2001 as a r
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calculations of this kind allowed i
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with ethnic strife or conflicts wit
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the value of existing savings. Mafi
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6. What are some of the roles that
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∂Part 9FURTHER TOPICS INMACROECON
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Chapter 37INFLATION ANDUNEMPLOYMENT
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curve. A. W. Phillips was a New Zea
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1614INFLATION RATE (%)1210861960-19
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on the rate of inflation. The posit
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An important implication of this co
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Internet ConnectionWINNERS OF THE N
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the oil embargo imposed by the Orga
Page 883 and 884:
expected inflation rate equal to π
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unemployment rate is 5 percent (i.e
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Chapter 38CONTROVERSIES INMACROECON
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ing a large tax cut through Congres
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rather than raising taxes to financ
Page 893 and 894:
ity.” The Humphrey-Hawkins Act se
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Page 897 and 898:
THE INTERVENTIONIST PERSPECTIVEThe
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ceed in keeping the unemployment ra
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they argue that if the Fed is held
Page 903 and 904:
These actions were taken in light o
Page 905 and 906:
International PerspectiveCENTRAL BA
Page 907 and 908:
rate−1 percent expected inflation
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but doing so leads to bigger swings
Page 911 and 912:
between fluctuations in unemploymen
Page 913 and 914:
Page 915 and 916:
Chapter 39A STUDENT’S GUIDETO INV
Page 917 and 918:
Internet ConnectionCALCULATING INTE
Page 919 and 920:
regarding the prospects of the econ
Page 921 and 922:
Table 39.1ALTERNATIVE INVESTMENTS A
Page 923 and 924:
A crowd protests rate hikes by the
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12,000ADow Jones Industrial Average
Page 927 and 928:
Investing in housing, particularly
Page 929 and 930:
Thinking Like an EconomistTHE DISTR
Page 931 and 932:
subsides. Thus, if a person knows t
Page 933 and 934:
can expect to earn only a normal le
Page 935 and 936:
Strategies for Intelligent Investin
Page 937 and 938:
Review and PracticeSUMMARY1. Invest
Page 939 and 940:
Page 941 and 942:
capital goods: the machines and bui
Page 943 and 944:
Federal Open Market Committee(FOMC)
Page 945 and 946:
M1, M2, M3: measures of the money s
Page 947 and 948:
price system: the economic system i
Page 949 and 950:
substitution effect: the reduced co
Page 951 and 952:
Page 953 and 954:
Page 955 and 956:
banks:assets of, 621-22, 625balance
Page 957 and 958:
currency (continued)inflation and,
Page 959 and 960:
exchange rates (continued)appreciat
Page 961 and 962:
horizontal restrictions, oligopolie
Page 963 and 964:
investment, investments, 672-76, 69
Page 965 and 966:
monetary policy (continued)trade-of
Page 967 and 968:
price takers, 27, 131, 218price war
Page 969 and 970:
Social Security (continued)as pay-a
Page 971:
unions (continued)strikes by, 355su
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