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

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investment, they can have different longer-run effects on the economy. A monetaryexpansion lowers real interest rates, stimulating investment. In contrast, a fiscalexpansion reduces national saving and results in a higher real interest rate andlower investment. Using fiscal policy to stimulate the economy, by reducing privateinvestment, may have harmful effects on future potential output.Fiscal and monetary policies differ as well in their impact on exports and imports.A monetary expansion that lowers interest rates will also tend to cause the currencyto depreciate as foreign investors seek higher returns elsewhere. 7 A depreciationdecreases imports (by making foreign goods more expensive) and increasesexports. In contrast, a fiscal expansion that causes interest rates to rise also causesthe currency to appreciate; net exports fall as foreign goods become less expensive.In recent decades, monetary policy has been the chief tool for macroeconomicstabilization policies, and discretionary fiscal policy has played little role in theUnited States. The chief reason, as already noted, is the lags inherent in the fiscalpolicy process—particularly the inside lag, or time needed to implement the necessaryexpenditure or tax changes. First, it takes time to recognize the need to stimulateor restrain aggregate spending. Data are subject to revision, and conflictingdevelopments often can frustrate attempts to determine the true condition of the economy.For example, after the 2001 recession, one survey of households tended to indicatestrong employment growth even as a survey of firms showed continued joblosses. Then, after some change in the economy is recognized, there is the delay dueto the time it takes to design a package of new tax or spending initiatives (whetherincreases or cuts) and get it approved by Congress. While the delay in recognizingchanged economic conditions is the same whatever the approach, the inside lag ismuch longer for fiscal than for monetary policy. Postwar recessions have lasted lessthan a year on average. By the time—often longer than a year—a tax bill is approvedby Congress, the economy is entering a different phase of the business cycle. A policythat makes sense when it is introduced may easily turn out to be inappropriate whenit comes into effect. This unwieldiness limits the effectiveness of discretionary fiscalpolicy. In contrast, the FOMC meets every six weeks, and, if conditions warrant,committee members can hold telephone conferences more frequently. Hence,monetary policy can act swiftly to deal with new economic developments.Monetary and fiscal policies also differ in the speed with which a policy actionaffects the economy. Monetary policy stimulates the economy by lowering interestrates, thereby increasing investment in equipment and housing and increasing netexports. Even after firms see a decrease in the real interest rate, it may take sometime before they commit to new investment, and before the capital goods industrystarts producing the newly ordered goods. Similarly, though in the long run a lowerreal interest rate leads to increased demand for housing, it takes a while before plansare drawn up, permits are obtained, and construction starts. Typically, six monthsor longer must pass before monetary policy’s effects on output are realized. By contrast,increased government purchases have a direct and immediate effect on totalspending. The time required for the change in policy to affect the economy is calledthe outside lag, and it is normally shorter for fiscal policy. Wrap-Up7 The reason that interest rate changes affect the exchange rate is discussed in Chapter 35.750 ∂ CHAPTER 33 THE ROLE OF MACROECONOMIC POLICY
Wrap-UpDIFFERENCES BETWEEN MONETARY ANDFISCAL POLICYEffects on Aggregate DemandFiscal policy and monetary policy have different effects on the economy. Expansionaryfiscal policy raises the real interest rate and crowds out private investment spending.Expansionary monetary policy lowers the real interest rate and stimulatesprivate investment spending.Policy LagsInside lag: The time required to recognize a need for a change in policy and toimplement the policy change. The inside lag is much shorter for monetary policy.Outside lag: The time required for the change in policy to affect the economy. Theoutside lag is normally shorter for fiscal policy.INTERACTIONS BETWEEN MONETARY AND FISCAL POLICIES ∂ 751
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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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International PerspectiveDEFICITS I
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investment increases the capital st
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400AThe Federal Deficit300200BILLIO
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collected fell; Congress passed a l
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Review and PracticeSUMMARY1. When t
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Chapter 26THE OPENECONOMY AT FULLEM
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domestic economy is borrowing more
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The discussion so far has also assu
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to be a simple matter: the buyer pa
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2520DomesticinvestmentPERCENTAGE OF
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50,000Exports40,00030,000MILLIONS O
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curve for dollars represents the do
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Trade deficits mean the country is
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Review and PracticeSUMMARY1. In an
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Chapter 27GROWTH ANDPRODUCTIVITY∂
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3.53.03.122.66PERCENT2.52.01.52.202
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The growth rate of output is the su
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production function: the relationsh
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telecommunications industry, other
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its marginal cost is therefore zero
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residual (i.e., TFP). The decrease
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because the United States has been
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2. Explain why a rapid influx of wo
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Chapter 28MONEY, THE PRICELEVEL, AN
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2015RATE OF INFLATION IN CPI (%)105
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Since we are interested in the dema
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807060INFLATION RATE (%)50403020100
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important of these are banks, but t
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pay their workers. How could the lo
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Money as a Store of Value People wi
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Table 28.2GLOSSARY OF FINANCIAL TER
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Table 28.3AMERICABANK BALANCE SHEET
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e-InsightELECTRONIC CASHA TV ad sho
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Table 28.5SUPERBANK BALANCE SHEETAs
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The Federal Reserve was created by
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the banking system as a whole remai
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If (for good reasons or bad) many d
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Review and PracticeSUMMARY1. In the
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∂Part 7MACROECONOMICFLUCTUATIONS
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Chapter 29INTRODUCTION TOMACROECONO
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A11,0001960-1961recession1969-1970r
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broken only by two brief recessions
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Thinking Like an EconomistEMPLOYMEN
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L 1 - L 0 , is the level of cyclica
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Thinking Like an EconomistINFORMATI
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market. Once this has happened, the
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assuming that the firm’s output i
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labor markets. Conversely, wages wi
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Fundamentals of Fluctuations 4INFLA
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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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Page 751 and 752: offsetting amount. But the contract
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Page 765 and 766: Chapter 32THE FEDERALRESERVE ANDINT
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Page 799: This discussion returns us to the t
Page 803 and 804: 3. Assume that the economy is curre
Page 805 and 806: ∂Part 8THE GLOBAL ECONOMY∂755
Page 807 and 808: Chapter 34THEINTERNATIONALFINANCIAL
Page 809 and 810: The foreign exchange market in Yere
Page 811 and 812: that wants to use the euros to buy
Page 813 and 814: States than moving it to Europe or
Page 815 and 816: Expectations about changes in the e
Page 817 and 818: expressed in terms of the value of
Page 819 and 820: One of the attractions of the Europ
Page 821 and 822: As speculators withdrew capital, th
Page 823 and 824: Under a currency board, the exchang
Page 825 and 826: Review and PracticeSUMMARY1. In a f
Page 829 and 830: Chapter 35POLICY IN THEOPEN ECONOMY
Page 831 and 832: While this discussion has focused o
Page 833 and 834: rises and its appreciation reduces
Page 835 and 836: Internet ConnectionFOREIGN EXCHANGE
Page 837 and 838: exports are a large fraction of tot
Page 839 and 840: Central Bank had increased the inte
Page 841 and 842: 3. Suppose a fall in net exports du
Page 843 and 844: Chapter 36DEVELOPMENTAND TRANSITION
Page 845 and 846: $5,500$5,000$4,50019912002$4,000$3,
Page 847 and 848: LIFE IN A LESS-DEVELOPED COUNTRYJus
Page 849 and 850: Some of this inequality is simply d
Page 851 and 852:
changes served to level the playing
Page 853 and 854:
policies, together with macroeconom
Page 855 and 856:
Trade Giving less-developed economi
Page 857 and 858:
eroded significantly in 2001 as a r
Page 859 and 860:
calculations of this kind allowed i
Page 861 and 862:
with ethnic strife or conflicts wit
Page 863 and 864:
the value of existing savings. Mafi
Page 865 and 866:
6. What are some of the roles that
Page 867 and 868:
∂Part 9FURTHER TOPICS INMACROECON
Page 869 and 870:
Chapter 37INFLATION ANDUNEMPLOYMENT
Page 871 and 872:
curve. A. W. Phillips was a New Zea
Page 873 and 874:
1614INFLATION RATE (%)1210861960-19
Page 875 and 876:
on the rate of inflation. The posit
Page 877 and 878:
An important implication of this co
Page 879 and 880:
Internet ConnectionWINNERS OF THE N
Page 881 and 882:
the oil embargo imposed by the Orga
Page 883 and 884:
expected inflation rate equal to π
Page 885 and 886:
unemployment rate is 5 percent (i.e
Page 887 and 888:
Chapter 38CONTROVERSIES INMACROECON
Page 889 and 890:
ing a large tax cut through Congres
Page 891 and 892:
rather than raising taxes to financ
Page 893 and 894:
ity.” The Humphrey-Hawkins Act se
Page 895 and 896:
Page 897 and 898:
THE INTERVENTIONIST PERSPECTIVEThe
Page 899 and 900:
ceed in keeping the unemployment ra
Page 901 and 902:
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
Page 909 and 910:
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
Page 925 and 926:
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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