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Principles of Macroeconomics

Chapter 21

Principles of MacroeconomicsChapter 21
  1. Preface
  2. 1 Welcome to Economics!
    1. Introduction
    2. 1.1 What Economics Is and Why It's Important
    3. 1.2 Microeconomics and Macroeconomics
    4. 1.3 How Economists Use Theories and Models to Understand Economic Issues
    5. 1.4 How Economies Can Be Organized: An Overview of Economic Systems
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
  3. 2 Choice in a World of Scarcity
    1. Introduction to Choice in a World of Scarcity
    2. 2.1 How Individuals Make Choices Based on Their Budget Constraint
    3. 2.2 The Production Possibilities Frontier and Social Choices
    4. 2.3 Confronting Objections to the Economic Approach
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  4. 3 Demand and Supply
    1. Introduction to Demand and Supply
    2. 3.1 Demand, Supply, and Equilibrium in Markets for Goods and Services
    3. 3.2 Shifts in Demand and Supply for Goods and Services
    4. 3.3 Changes in Equilibrium Price and Quantity: The Four-Step Process
    5. 3.4 Price Ceilings and Price Floors
    6. 3.5 Demand, Supply, and Efficiency
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  5. 4 Labor and Financial Markets
    1. Introduction to Labor and Financial Markets
    2. 4.1 Demand and Supply at Work in Labor Markets
    3. 4.2 Demand and Supply in Financial Markets
    4. 4.3 The Market System as an Efficient Mechanism for Information
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  6. 5 Elasticity
    1. Introduction to Elasticity
    2. 5.1 Price Elasticity of Demand and Price Elasticity of Supply
    3. 5.2 Polar Cases of Elasticity and Constant Elasticity
    4. 5.3 Elasticity and Pricing
    5. 5.4 Elasticity in Areas Other Than Price
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  7. 6 The Macroeconomic Perspective
    1. Introduction to the Macroeconomic Perspective
    2. 6.1 Measuring the Size of the Economy: Gross Domestic Product
    3. 6.2 Adjusting Nominal Values to Real Values
    4. 6.3 Tracking Real GDP over Time
    5. 6.4 Comparing GDP among Countries
    6. 6.5 How Well GDP Measures the Well-Being of Society
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  8. 7 Economic Growth
    1. Introduction to Economic Growth
    2. 7.1 The Relatively Recent Arrival of Economic Growth
    3. 7.2 Labor Productivity and Economic Growth
    4. 7.3 Components of Economic Growth
    5. 7.4 Economic Convergence
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  9. 8 Unemployment
    1. Introduction to Unemployment
    2. 8.1 How the Unemployment Rate is Defined and Computed
    3. 8.2 Patterns of Unemployment
    4. 8.3 What Causes Changes in Unemployment over the Short Run
    5. 8.4 What Causes Changes in Unemployment over the Long Run
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  10. 9 Inflation
    1. Introduction to Inflation
    2. 9.1 Tracking Inflation
    3. 9.2 How Changes in the Cost of Living are Measured
    4. 9.3 How the U.S. and Other Countries Experience Inflation
    5. 9.4 The Confusion Over Inflation
    6. 9.5 Indexing and Its Limitations
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  11. 10 The International Trade and Capital Flows
    1. Introduction to the International Trade and Capital Flows
    2. 10.1 Measuring Trade Balances
    3. 10.2 Trade Balances in Historical and International Context
    4. 10.3 Trade Balances and Flows of Financial Capital
    5. 10.4 The National Saving and Investment Identity
    6. 10.5 The Pros and Cons of Trade Deficits and Surpluses
    7. 10.6 The Difference between Level of Trade and the Trade Balance
    8. Key Terms
    9. Key Concepts and Summary
    10. Self-Check Questions
    11. Review Questions
    12. Critical Thinking Questions
    13. Problems
  12. 11 The Aggregate Demand/Aggregate Supply Model
    1. Introduction to the Aggregate Demand/Aggregate Supply Model
    2. 11.1 Macroeconomic Perspectives on Demand and Supply
    3. 11.2 Building a Model of Aggregate Demand and Aggregate Supply
    4. 11.3 Shifts in Aggregate Supply
    5. 11.4 Shifts in Aggregate Demand
    6. 11.5 How the AD/AS Model Incorporates Growth, Unemployment, and Inflation
    7. 11.6 Keynes’ Law and Say’s Law in the AD/AS Model
    8. Key Terms
    9. Key Concepts and Summary
    10. Self-Check Questions
    11. Review Questions
    12. Critical Thinking Questions
    13. Problems
  13. 12 The Keynesian Perspective
    1. Introduction to the Keynesian Perspective
    2. 12.1 Aggregate Demand in Keynesian Analysis
    3. 12.2 The Building Blocks of Keynesian Analysis
    4. 12.3 The Phillips Curve
    5. 12.4 The Keynesian Perspective on Market Forces
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
  14. 13 The Neoclassical Perspective
    1. Introduction to the Neoclassical Perspective
    2. 13.1 The Building Blocks of Neoclassical Analysis
    3. 13.2 The Policy Implications of the Neoclassical Perspective
    4. 13.3 Balancing Keynesian and Neoclassical Models
    5. Key Terms
    6. Key Concepts and Summary
    7. Self-Check Questions
    8. Review Questions
    9. Critical Thinking Questions
    10. Problems
  15. 14 Money and Banking
    1. Introduction to Money and Banking
    2. 14.1 Defining Money by Its Functions
    3. 14.2 Measuring Money: Currency, M1, and M2
    4. 14.3 The Role of Banks
    5. 14.4 How Banks Create Money
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  16. 15 Monetary Policy and Bank Regulation
    1. Introduction to Monetary Policy and Bank Regulation
    2. 15.1 The Federal Reserve Banking System and Central Banks
    3. 15.2 Bank Regulation
    4. 15.3 How a Central Bank Executes Monetary Policy
    5. 15.4 Monetary Policy and Economic Outcomes
    6. 15.5 Pitfalls for Monetary Policy
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  17. 16 Exchange Rates and International Capital Flows
    1. Introduction to Exchange Rates and International Capital Flows
    2. 16.1 How the Foreign Exchange Market Works
    3. 16.2 Demand and Supply Shifts in Foreign Exchange Markets
    4. 16.3 Macroeconomic Effects of Exchange Rates
    5. 16.4 Exchange Rate Policies
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  18. 17 Government Budgets and Fiscal Policy
    1. Introduction to Government Budgets and Fiscal Policy
    2. 17.1 Government Spending
    3. 17.2 Taxation
    4. 17.3 Federal Deficits and the National Debt
    5. 17.4 Using Fiscal Policy to Fight Recession, Unemployment, and Inflation
    6. 17.5 Automatic Stabilizers
    7. 17.6 Practical Problems with Discretionary Fiscal Policy
    8. 17.7 The Question of a Balanced Budget
    9. Key Terms
    10. Key Concepts and Summary
    11. Self-Check Questions
    12. Review Questions
    13. Critical Thinking Questions
    14. Problems
  19. 18 The Impacts of Government Borrowing
    1. Introduction to the Impacts of Government Borrowing
    2. 18.1 How Government Borrowing Affects Investment and the Trade Balance
    3. 18.2 Fiscal Policy, Investment, and Economic Growth
    4. 18.3 How Government Borrowing Affects Private Saving
    5. 18.4 Fiscal Policy and the Trade Balance
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  20. 19 Macroeconomic Policy Around the World
    1. Introduction to Macroeconomic Policy around the World
    2. 19.1 The Diversity of Countries and Economies across the World
    3. 19.2 Improving Countries’ Standards of Living
    4. 19.3 Causes of Unemployment around the World
    5. 19.4 Causes of Inflation in Various Countries and Regions
    6. 19.5 Balance of Trade Concerns
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  21. 20 International Trade
    1. Introduction to International Trade
    2. 20.1 Absolute and Comparative Advantage
    3. 20.2 What Happens When a Country Has an Absolute Advantage in All Goods
    4. 20.3 Intra-industry Trade between Similar Economies
    5. 20.4 The Benefits of Reducing Barriers to International Trade
    6. Key Terms
    7. Key Concepts and Summary
    8. Self-Check Questions
    9. Review Questions
    10. Critical Thinking Questions
    11. Problems
  22. 21 Globalization and Protectionism
    1. Introduction to Globalization and Protectionism
    2. 21.1 Protectionism: An Indirect Subsidy from Consumers to Producers
    3. 21.2 International Trade and Its Effects on Jobs, Wages, and Working Conditions
    4. 21.3 Arguments in Support of Restricting Imports
    5. 21.4 How Trade Policy Is Enacted: Globally, Regionally, and Nationally
    6. 21.5 The Tradeoffs of Trade Policy
    7. Key Terms
    8. Key Concepts and Summary
    9. Self-Check Questions
    10. Review Questions
    11. Critical Thinking Questions
    12. Problems
  23. A | The Use of Mathematics in Principles of Economics
  24. The Expenditure-Output Model
  25. Answer Key
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 8
    9. Chapter 9
    10. Chapter 10
    11. Chapter 11
    12. Chapter 12
    13. Chapter 13
    14. Chapter 14
    15. Chapter 15
    16. Chapter 16
    17. Chapter 17
    18. Chapter 18
    19. Chapter 19
    20. Chapter 20
    21. Chapter 21
  26. References
  27. Index
1.

This is the opposite case of the Work It Out feature. A reduced tariff is like a decrease in the cost of production, which is shown by a downward (or rightward) shift in the supply curve.

2.

A subsidy is like a reduction in cost. This shifts the supply curve down (or to the right), driving the price of sugar down. If the subsidy is large enough, the price of sugar can fall below the cost of production faced by foreign producers, which means they will lose money on any sugar they produce and sell.

3.

Trade barriers raise the price of goods in protected industries. If those products are inputs in other industries, it raises their production costs and then prices, so sales fall in those other industries. Lower sales lead to lower employment. Additionally, if the protected industries are consumer goods, their customers pay higher prices, which reduce demand for other consumer products and thus employment in those industries.

4.

Trade based on comparative advantage raises the average wage rate economy-wide, though it can reduce the incomes of import-substituting industries. By moving away from a country’s comparative advantage, trade barriers do the opposite: they give workers in protected industries an advantage, while reducing the average wage economy-wide.

5.

By raising incomes, trade tends to raise working conditions also, even though those conditions may not (yet) be equivalent to those in high-income countries.

6.

They typically pay more than the next-best alternative. If a Nike firm did not pay workers at least as much as they would earn, for example, in a subsistence rural lifestyle, they many never come to work for Nike.

7.

Since trade barriers raise prices, real incomes fall. The average worker would also earn less.

8.

Workers working in other sectors and the protected sector see a decrease in their real wage.

9.

If imports can be sold at extremely low prices, domestic firms would have to match those prices to be competitive. By definition, matching prices would imply selling under cost and, therefore, losing money. Firms cannot sustain losses forever. When they leave the industry, importers can “take over,” raising prices to monopoly levels to cover their short-term losses and earn long-term profits.

10.

Because low-income countries need to provide necessities—food, clothing, and shelter—to their people. In other words, they consider environmental quality a luxury.

11.

Low-income countries can compete for jobs by reducing their environmental standards to attract business to their countries. This could lead to a competitive reduction in regulations, which would lead to greater environmental damage. While pollution management is a cost for businesses, it is tiny relative to other costs, like labor and adequate infrastructure. It is also costly for firms to locate far away from their customers, which many low-income countries are.

12.

The decision should not be arbitrary or unnecessarily discriminatory. It should treat foreign companies the same way as domestic companies. It should be based on science.

13.

Restricting imports today does not solve the problem. If anything, it makes it worse since it implies using up domestic sources of the products faster than if they are imported. Also, the national security argument can be used to support protection of nearly any product, not just things critical to our national security.

14.

The effect of increasing standards may increase costs to the small exporting country. The supply curve of toys will shift to the left. Exports will decrease and toy prices will rise. Tariffs also raise prices. So the effect on the price of toys is the same. A tariff is a “second best” policy and also affects other sectors. However, a common standard across countries is a “first best” policy that attacks the problem at its root.

15.

A free trade association offers free trade between its members, but each country can determine its own trade policy outside the association. A common market requires a common external trade policy in addition to free trade within the group. An economic union is a common market with coordinated fiscal and monetary policy.

16.

International agreements can serve as a political counterweight to domestic special interests, thereby preventing stronger protectionist measures.

17.

Reductions in tariffs, quotas, and other trade barriers, improved transportation, and communication media have made people more aware of what is available in the rest of the world.

18.

Competition from firms with better or cheaper products can reduce a business’s profits, and may drive it out of business. Workers would similarly lose income or even their jobs.

19.

Consumers get better or less expensive products. Businesses with the better or cheaper products increase their profits. Employees of those businesses earn more income. On balance, the gains outweigh the losses to a nation.

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