R. Glenn Hubbard Anthony Patrick O’Brien Matthew Rafferty

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R. Glenn HubbardAnthony Patrick O’BrienMatthew Rafferty

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Table of Contents

Cover

Title

Contents

Chapter 1 The Long and Short ofWhen You Enter the Job Market can Matter a Lot

1.1 What Macroeconomics Is AboutMacroeconomics in the Short Run and in the Long Run

Long-Run Growth in the United States

Some Countries Have Not Experienced Significant Long-Run Growth

Aging Populations Pose a Challenge to Governments Around the World

Unemployment in the United States

Unemployment Rates Differ Across Developed Countries

Inflation Rates Fluctuate Over Time and Across Countries

Economic Policy Can Help Stabilize the Economy

International Factors Have Become Increasingly Important in Explaining

Macroeconomic Events

1.2 How Economists Think About MacroeconomicsWhat Is the Best Way to Analyze Macroeconomic Issues?

Macroeconomic Models

Solved Problem 1.2: Do Rising Imports Lead to a Permanent Reduction in U.S.

Employment?

Assumptions, Endogenous Variables, and Exogenous Variablesin Economic Models

Forming and Testing Hypotheses in Economic Models

Making the Connection: Why Should the United States Worry About the Euro

Crisis?

1.3 Key Issues and Questions of Macroeconomics

Key Terms and Problems

Key Terms and Concepts, Review Questions

Problems and Applications, Data Exercise

Chapter 2 Measuring the MacroeconomyHow Do We Know When We Are in a Recession?

Key Issue and Question

2.1 GDP: Measuring Total Production and Total IncomeHow the Government Calculates GDP

Production and Income

The Circular Flow of Income

An Example of Measuring GDP

Table of Contents

National Income Identities and the Components of GDP

The Relationship Between GDP and GNP

GDP Versus GDI

GDP and National Income

2.2 Real GDP, Nominal GDP, and the GDP DeflatorSolved Problem 2.2A: Calculating Real GDP

Price Indexes and the GDP Deflator

Solved Problem 2.2B: Calculating the Inflation Rate

The Chain-Weighted Measure of Real GDP

Making the Connection: Trying to Hit a Moving Target: Forecasting with

Real-Time Data

Comparing GDP Across Countries

Making the Connection: The Incredible Shrinking Chinese Economy

2.3 Inflation Rates and Interest RatesThe Consumer Price Index

Making the Connection: Does the CPI Provide a Good Measure of Inflation for a

Family with College Students?

How Accurate Is the CPI?

The Way the Federal Reserve Measures Inflation

Interest Rates

2.4 Measuring Employment and Unemployment

Answering the Key Question




Chapter 3 The U.S. Financial SystemThe Wonderful World of Credit


3.1 An Overview of the Financial SystemFinancial Markets and Financial Intermediaries

Making the Connection: The Controversial World of Subprime Lending

Making the Connection: Investing in the Worldwide Stock Market

Banking and Securitization

Asymmetric Information and PrincipalAgent Problems in Financial Markets

3.2 Financial Crises, Government Policy, and the Financial SystemFinancial Intermediaries and Leverage

Bank Panics

Government Policies to Deal with Bank Panics

The Financial Crisis of 20072009

The Mortgage Market and the Subprime Lending Disaster

Runs on the Shadow Banking System

Table of Contents

Government Policies to Deal with the Financial Crisis of 20072009

Making the Connection: Fed Policy During Panics, Then and Now: The Collapse of

the Bank of United States in 1930 and the Collapse of Lehman Brothers in 2008

3.3 The Money Market and the Risk Structure and Term Structure of Interest RatesThe Demand and Supply of Money

Shifts in the Money Demand Curve

Equilibrium in the Money Market

Calculating Bond Interest Rates and the Concept of Present Value

Present Value and the Prices of Stocks and Bonds

Solved Problem 3.3: Interest Rates and Treasury Bond Prices

The Economys Many Interest Rates


Appendix: More on the Term Structure of Interest Rates




Chapter 4 The Global Financial SystemDid U.S. Monetary Policy Slow Brazils Growth?


4.1 The Balance of PaymentsThe Current Account

The Financial Account

The Capital Account

4.2 Exchange Rates and Exchange Rate PolicyNominal Exchange Rates

Real Exchange Rates

The Foreign-Exchange Market

Exchange Rate Policy

Policy Choices and the Current Exchange Rate Systems

Making the Connection: Greece Experiences a Bank Jog

4.3 What Factors Determine Exchange Rates?Purchasing Power Parity

Why Purchasing Power Parity Doesnt Hold Exactly

The Interest Parity Condition

Solved Problem 4.3: Making a Financial Killing by Buying Brazilian Bonds?

Making the Connection: Brazilian Firms Grapple with an Unstable Exchange Rate

4.4 The Loanable Funds Model and the International Capital MarketSaving and Supply in the Loanable Funds Market

Investment and the Demand for Loanable Funds

Explaining Movements in Saving, Investment, and the Real Interest Rate

Table of Contents

The International Capital Market and the Interest Rate

Small Open Economy

Large Open Economy





Chapter 5 The Standard of Living over Time and Across CountriesWho Is Number One?


5.1 The Aggregate Production FunctionThe CobbDouglas Production Function

The Demand for Labor and the Demand for Capital

Changes in Capital, Labor, and Total Factor Productivity

Making the Connection: Foreign Direct Investment Increases Real GDP in China

5.2 A Model of Real GDP in the Long RunThe Markets for Capital and Labor

Combining the Factor Markets with the Aggregate Production Function

The Division of Total Income

Solved Problem 5.2: Calculating the Marginal Product of Labor and the Marginal

Product of Capital

What Determines Levels of Real GDP Across Countries?

5.3 Why Real GDP per Worker Varies Among CountriesThe per Worker Production Function

What Determines Labor Productivity?

Macro Data: How Well do International Capital Markets Allocate Capital?

What Determines Real GDP per Capita?

5.4 Total Factor Productivity and Labor ProductivityWhat Explains Total Factor Productivity?

Making the Connection: Comparing Research and Development Spending and Labor

Productivity in China and the United States

Making the Connection: How Important Were the Chinese Economic Reforms of 1978?





Chapter 6 Long-Run Economic GrowthThe Surprising Economic Rise of India


6.1 The Solow Growth Model

Table of Contents

Capital Accumulation

The Steady State

Transition to the Steady State

Saving Rates and Growth Rates

Macro Data: Do High Rates of Saving and Investment Lead to High Levels of

Income?

6.2 Labor Force Growth and the Solow Growth ModelLabor Force Growth and the Steady State

The Effect of an Increase in the Labor Force Growth Rate

Solved Problem 6.2: The Effect of a Decrease in the Labor Force Growth Rate on

Real GDP per Worker

6.3 Technological Change and the Solow Growth ModelTechnological Change

Technological Change and the Steady State

Steady-State Growth Rates

6.4 Balanced Growth, Convergence, and Long-Run EquilibriumConvergence to the Balanced Growth Path

Making the Connection: Will Chinas Standard of Living Ever Exceed that of the

United States?

Do All Countries Converge to the Same Steady State?

6.5 Endogenous Growth TheoryAK Growth Models: Reconsidering Diminishing Returns

Two-Sector Growth Model: The Production of Knowledge

Policies to Promote Economic Growth

Making the Connection: What Explains Recent Economic Growth in India?

Making the Connection: Should the Federal Government Invest in Green Energy?





Appendix: Growth AccountingThe Growth Accounting Equation for Real GDP

Growth Accounting for the United States

Total Factor Productivity as the Ultimate Source of Growth

Chapter 7 Money and InflationWhat Can You Buy With $100 Trillion?


7.1 What Is Money, and Why Do We Need It?The Functions of Money

Commodity Money Versus Fiat Money

Making the Connection: When Money Is No Longer Money: Hyperinflation in Zimbabwe

Table of Contents

How Is Money Measured?

Which Measure of the Money Supply Should We Use?

7.2 The Federal Reserve and the Money SupplyHow the Fed Changes the Monetary Base

The Process of Money Creation

7.3 The Quantity Theory of Money and InflationThe Quantity Theory of Money

The Quantity Theory Explanation of Inflation

Making the Connection Is the Inflation Rate Around the World Going to Increase

in the Near Future?

Solved Problem 7.3: The Effect of a Decrease in the Growth Rate of the Money

Supply

Can the Quantity Theory Accurately Predict the Inflation Rate?

7.4 The Relationships Among the Growth Rate of Money, Inflation, and the NominalInterest Rate

Real Interest Rates and Expected Real Interest Rates

The Fisher Effect

Money Growth and the Nominal Interest Rate

7.5 The Costs of InflationCosts of Expected Inflation

How Large Are the Costs of Expected Inflation?

Costs of Unexpected Inflation

Macro Data: What Is the Expected Inflation Rate?

Making the Connection: Did the Feds Actions During the Financial Crisis of

20072009 Increase the Expected Inflation Rate?

Inflation Uncertainty

Benefits of Inflation

7.6 Hyperinflation and Its CausesCauses of Hyperinflation

German Hyperinflation After World War I





Appendix: The Money MultiplierOpen Market Operations

The Simple Deposit Multiplier

A More Realistic Money Multiplier

Chapter 8 The Labor MarketIf Firms Have Trouble Finding Workers, Why Is the Unemployment Rate so High?


Table of Contents

8.1 The Labor MarketNominal and Real Wages

The Demand for Labor Services

Shifting the Demand Curve

The Supply of Labor Services

Factors That Shift the Labor Supply Curve

Equilibrium in the Labor Market

The Effect of Technological Change

Solved Problem 8.1: Why Dont People Work as Much as They Did Decades Ago?

8.2 Categories of UnemploymentFrictional Unemployment and Job Search

Structural Unemployment

Macro Data: Is the Decline of Industries That Produce Goods a Recent Phenomenon?

Cyclical Unemployment

Making the Connection: Did the Structural Unemployment Rate Rise During the

Recession of 20072009?

Full Employment

Unemployment Around the World

Duration of Unemployment Around the World

8.3 The Natural Rate of UnemploymentA Simple Model of the Natural Rate of Unemployment

Solved Problem 8.3: How Many Jobs Does the U.S. Economy Create Every Month?

What Determines the Natural Rate of Unemployment?

Making the Connection: Are Strict Labor Laws to Blame for Unemployment in

France?

8.4 Why Does Unemployment Exist?Equilibrium Real Wages and Unemployment

Efficiency Wages

Labor Unions Around the World

Minimum Wage Laws





Chapter 9 Business CyclesIs the Housing Cycle the Business Cycle?


9.1 The Short Run and the Long Run in MacroeconomicsThe Keynesian and Classical Approaches

Macroeconomic Shocks and Price Flexibility

Why Are Prices Sticky in the Short Run?

Table of Contents

Making the Connection: The Curious Case of the 5-Cent Bottle of Coke

9.2 What Happens During a Business Cycle?The Changing Severity of the U.S. Business Cycle

How Do We Know the Economy Is in an Expansion or a Recession?

Measuring Business Cycles

Solved Problem 9.2: Dating U.S. Recessions

Costs of the Business Cycle

Making the Connection: Did the 20072009 Recession Break Okuns Law?

Movements of Economic Variables During the Business Cycle

The Global Business Cycle

9.3 Shocks and Business CyclesMultiplier Effects

An Example of a Shock with Multiplier Effects: The Bursting of the Housing

Bubble

9.4 A Simple Model of the Business Cycle: Aggregate Demand and Aggregate SupplyAggregate Demand and Aggregate Supply: An Introduction

Aggregate Supply Shocks and the Business Cycle

Aggregate Demand Shocks and the Business Cycle

Should Policy Try to Offset Shocks?

Making the Connection: How Important Is Housing in the Business Cycle?





Appendix: The Formula for the Expenditure Multiplier

Chapter 10 Explaining Aggregate Demand: The ISMP ModelFear of Falling (into a Recession)


10.1 The IS Curve: The Relationship Between Real Interest Rates and AggregateExpenditure

Equilibrium in the Goods Market

The Multiplier Effect

The Government Purchases and Tax Multipliers

Solved Problem 10.1: Calculating Equilibrium Real GDP

Constructing the IS Curve

Shifts of the IS Curve

The IS Curve and the Output Gap

10.2 The Monetary Policy Curve: The Relationship Between the Central BanksTarget Interest Rate and Output

The Link Between the Short-Term Nominal Interest Rate and the Long-Term Real

Table of Contents

Interest RateMacro Data Box: Real Interest Rates and the Global Savings Glut

Interest Rate Movements During the 20072009 Recession

Deriving the MP Curve Using the Money Market Model

Shifts of the MP Curve

10.3 Equilibrium in the ISMP ModelDemand Shocks and Fluctuations in Output

Making the Connection: Will the European Financial Crisis Cause a Recession in

the United States?

Monetary Policy and Fluctuations in Real GDP

Solved Problem 10.3: Using the ISMP Model to Analyze the 2001 Tax Cut

ISMP and Aggregate Demand





Appendix: ISLM: An Alternative Short-Run Macroeconomic Model

Asset Market Equilibrium

Deriving the LM Curve

Shifting the LM Curve

Equilibrium in the ISLM Model

Solved Problem 10A.1: Monetary Policy During the Great Depression

An Alternative Derivation of the MP Curve




Chapter 11 The ISMP Model: Adding Inflation and the Open EconomyWheres the Inflation?


11.1 The ISMP Model and the Phillips CurveOkuns Law, the Output Gap, and the Phillips Curve

Movement Along an Existing Phillips Curve

Shifts of the Phillips Curve

How Well Does the Phillips Curve Fit the Inflation Data?

Making the Connection: Lots of Money but Not Much Inflation Following the

Recession of 20072009

Using Monetary Policy to Fight a Recession

Solved Problem 11.1: Fed Policy to Keep Inflation from Increasing

11.2 The Performance of the U.S. Economy During 20072009Using the ISMP Model to Analyze the Financial Crisis and the Housing Crash

Table of Contents

The ISMP Model and the Oil Shock of 20072008

11.3 The ISMP Model in an Open Economy"The IS Curve with a Floating Exchange Rate

Monetary Policy with a Floating Exchange Rate

Equilibrium in an Open Economy with a Floating Exchange Rate

The ISMP Model with a Fixed Exchange Rate

The IS Curve with a Fixed Exchange Rate

The MP Curve with a Fixed Exchange Rate

Macro Data: Did the Gold Standard Make the Great Depression Worse?

Equilibrium in an Open Economy with a Fixed Exchange Rate

Making the Connection: Can the Euro Survive?





Chapter 12 Monetary Policy in the Short RunWhy Didnt the Fed Avoid the Recession of 20072009?


12.1 The Federal Reserve SystemCreation of the Federal Reserve System

The Structure of the Federal Reserve System

12.2 The Goals of Monetary PolicyPrice Stability

High Employment

Financial Market Stability

Interest Rate Stability

The Feds Dual Mandate

12.3 Monetary Policy ToolsOpen Market Operations

Discount Loans and the Lender of Last Resort

Macro Data: Does the Federal Reserve Hit Its Federal Funds Rate Target?

Reserve Requirements

New Monetary Policy Tools in Response to the 20072009 Financial Crisis

Making the Connection: On the Board of Governors, Four Can Be a Crowd

12.4 Monetary Policy and the ISMP ModelMonetary Policy and Aggregate Expenditure

Using Monetary Policy to Fight a Recession

Using Monetary Policy to Fight Inflation

Using Monetary Policy to Deal with a Supply Shock

Solved Problem 12.4: Did the Federal Reserve Make the Great Depression Worse?

Table of Contents

The Liquidity Trap, the Zero Lower Bound, and Alternative Channels of Monetary

Policy

12.5 The Limitations of Monetary PolicyPolicy Lags

Economic Forecasts

Model Uncertainty

Consequences of Policy Limitations

Solved Problem 12.5: Did the Fed Help Cause the 2001 Recession?

Moral Hazard

Making the Connection: Too Big to FailThe Legacy of Continental Illinois

12.6 Central Bank IndependenceThe Independence of the U.S. Federal Reserve

12.7 Monetary Policy in an Open EconomyMonetary Policy with Floating Exchange Rates

Monetary Policy with a Fixed Exchange Rate

The Policy Trilemma for Economic Policy





Chapter 13 Fiscal Policy in the Short RunDriving Toward a Fiscal Cliff


13.1 The Goals and Tools of Fiscal PolicyWho Conducts Fiscal Policy?

Traditional Tools of Fiscal Policy

Making the Connection: Why Was the Severity of the 20072009 Recession So

Difficult to Predict?

13.2 Budget Deficits, Discretionary Fiscal Policy, andAutomatic StabilizersDiscretionary Fiscal Policy and Automatic Stabilizers

The Budget Deficit and the Budget Surplus

Making the Connection: How Did the Federal Government Run a Budget Surplus in

the Late 1990s and Early 2000s?

Macro Data: Did Fiscal Policy Fail During the Great Depression?

The Deficit and the Debt

Is the Federal Debt a Problem?

13.3 The Short-Run Effects of Fiscal PolicyFiscal Policy and the IS Curve

Using Discretionary Fiscal Policy to Fight a Recession

Automatic Stabilizers

Solved Problem 13.3A: Should the Federal Government Eliminate the Budget

Table of Contents

Deficit?Making the Connection: State and Local Government Spending During the 20072009

Recession

Personal Income Tax Rates and the Multiplier

Solved Problem 13.3B: Calculating Equilibrium Real GDP and the Expenditure

Multiplier with Income Taxes

The Effects of Changes in Tax Rates on Potential GDP

13.4 The Limitations of Fiscal PolicyPolicy Lags

Economic Forecasts

The Uncertainty of Economic Models

Crowding Out and Forward-Looking Households

When Will Fiscal Multipliers Be Large?

Moral Hazard

Consequences of Policy Limitations

Evaluating the American Recovery and Reinvestment Act

13.5 Fiscal Policy in an Open EconomyFiscal Policy with Floating Exchange Rates

Fiscal Policy with a Fixed Exchange Rate





Chapter 14 Aggregate Demand, Aggregate Supply, and Monetary PolicyDid the Fed Create and Then Kill the Great Moderation?


14.1 Aggregate Demand RevisitedThe Aggregate Demand Curve

Shifts of the Aggregate Demand Curve

When Are Shifts to the Aggregate Demand Curve Permanent?

14.2 Aggregate Supply and the Phillips CurveShifts in the Aggregate Supply Curve

14.3 The Aggregate Demand and Aggregate Supply ModelEquilibrium in the ADAS Model

The Effects of a Supply Shock

Permanent Demand Shocks: Changes in the Central Bank Reaction Function

Macro Data: Are Oil Supply Shocks Really That Important?

Making the Connection: The End of Stagflation and the Volcker Recession

Temporary Demand Shocks: Changes in Aggregate Expenditure

Solved Problem 14.3: Applying the ADAS Model to an Increase in Housing

Construction

Table of Contents

14.4 Rational Expectations and Policy IneffectivenessRational Expectations and Anticipated Policy Changes

Rational Expectations and Unanticipated Policy Changes

Rational Expectations and Demand Shocks

Are Anticipated and Credible Policy Changes Actually Ineffective?

14.5 Monetary Policy: Rules Versus DiscretionThe Taylor Rule

The Taylor Rule and the Real Interest Rate

The Case for Discretion

The Case for Rules

Making the Connection: Central Banks Around the World Try Inflation Targeting



Key Terms and Concepts, Review Questions,


Chapter 15 Fiscal Policy and the Government Budget in the Long RunDrowning in a Sea of Debt?


15.1 Debt and Deficits in Historical PerspectiveThe Government Budget Constraint

The Relationship Between the Deficit and the National Debt

Gross Federal Debt Versus Debt Held by the Public

The Debt-to-GDP Ratio

Composition of Federal Government Revenue and Expenditure

Federal Government Expenditure

15.2 The Sustainability of Fiscal PolicyExpressing the Deficit as a Percentage of GDP

Making the Connection: The European Debt Crisis

When Is Fiscal Policy Sustainable?

Solved Problem 15.2: Can Japan Grow Its Way Out of Debt?

15.3 The Effects of Budget Deficits in the Long RunThe Budget Deficit and Crowding Out

The Conventional View: Crowding Out Private Investment

Ricardian Equivalence

Macro Data: Do Government Deficits Increase Real Interest Rates?

15.4 The Fiscal Challenges Facing the United StatesProjections of Federal Government Revenue and Expenditure

Making the Connection: Many Proposals but Not Much Progress on the Deficit

Will the United States Pay Off Its Debt?

Policy Options

Table of Contents





Appendix A: Showing the Conditions for a Sustainable Fiscal Policy

Appendix B: Showing the Relationship between Budget Deficits and PrivateExpenditure

Chapter 16 Consumption and InvestmentAre All Tax Cuts Created Equal?


16.1 The Macroeconomic Implications of Microeconomic Decision Making:Intertemporal Choice

Households and Firms are Forward Thinking

An Important Difference Between Consumption and Investment

16.2 Factors That Determine ConsumptionConsumption and GDP

The Intertemporal Budget Constraint and Consumption Smoothing

Two Theories of Consumption Smoothing

Permanent Versus Transitory Changes in Income

Consumption and the Real Interest Rate

Housing Wealth and Consumption

How Policy Affects Consumption

Solved Problem 16.2: Effects of a Temporary Tax Cut on Your Consumption

Credit Rationing of Households

Making the Connection: The Temporary Cut in Payroll Taxes

Precautionary Saving

Tax Incentives and Saving

16.3 Factors That Determine Private InvestmentThe Investment Decisions of Firms

Corporate Taxes and the Desired Capital Stock

Macro Data: How Important Are Corporate Taxes for Investment?

Making the Connection: From Transitory Tax Cuts to Tax Reform

From the Desired Capital Stock to Investment

Solved Problem 16.3: Depreciation, Taxes, and Investment Spending

Tobins q: Another Framework for Explaining Investment

Credit Rationing and the Financial Accelerator

Uncertainty and Irreversible Investment




Table of Contents


Glossary

Index

Documents

R. Glenn Hubbard Anthony Patrick O’Brien Matthew Rafferty