andrew b. abel ben s. bernanke

333 Pages·2010·19.48 MB·English

S.
ANDREW B. ABEL BEN BERNANKE
Symbols Used in This Book
Applying Macroeconomics to the Real World
Applications A productivity IV n0I11inal vvage
y total income or output
The Uses of Saving and the Role of Government BOX 2.2 The Computer Revolution and Chain B ba ovemment debt
Budget Weighted GOP 47 BASE monetary base y full-employment output
Deficits and Surpluses ·n
BOX 23 Does CPI Inflation Overstate Increilses in C consumption
The Production Function of the U S, Economy and US
the Cost of Living? 49
ProducUvitv Growth 62 BOX 4.1 Investment and the Stock Market 131 CA current account balance
Weekly Hours' of Work and the Wealth of Nations 83 BOX 5.1 Does Mars Have a Current Account CU currency in circulation n individual wealth or assets
Output, Employment, and the Real Wage During Oil
Price Shocks 87 Surplus? 1'77 DEP bank deposits c individual consumption;
BOX 1,1 Monev in a Prisoner-of-War Camp 243
Technical Change and \"'age Inequality 88 consumption per worker
BOX 7.2 Wher~ Have All the Dollars Gone? 247 E worker effort
Consumer Sentiment and the 1990-1991 Recession 113
BOX 8.1 Temporary and Permanent Components of cu currency-deposit ratio
The Response of Consumption to Stock Market G government purchases
Recessions 277
Clashes and Booms 116 d depreciation rate
BOXR2 The Seasonal Cycle and the Business [ investment
Measuring the Effects of Taxes on Investment 132
Cvcle 295 c real exchange rate
The Effect of Vvars on Investment and the Real Interest [NT net interest payments
E~onometric Models and Macroeconomic
Rate 140 Forecasts 323 K capital stock Cnom nominal exchange rate
TThhee tUDnCite Dd eSbtta tCersi saiss In1t8e6rn ational Debtor 178 BOX 10,1 Are Price Forecasts Rational? 380 KFA capital and financial account cnom official value of nominal exchange
BO)( 11.1 Henrv Ford's Efficiency Wage 397 rate
The 1994 Mexican Crisis 189 balance
BO)( 11.2 Japa~ese Macroeconomic Policy in the
The Twin Deficits 195 nominal interest rate
19905 418 M money supply
Growth Accounting and the East Asian "Miracle" 209
BO)( 12.1 The Lucas Critique 448 nominal interest rate on money
The Post-1973 Slowdown in Productivity Growth 211 MC marginal cost
BOX 12,2 The Effect of Unemployment Insurance on
Do Economies Converge? 228 Unemployment 456 MPK marginal product of capital k capital-labor ratio
Financial Regulation, Innovation, and the Instability
of i\1[onev Demand 258 BOX 123 Indexed Contracts 460 MPN marginal product of labor II growth rate of labor force
BOX 12.4 The Sacrifice Ratio 463
Money Gro~\'th and Inflation in European Countries BO)( 13.1 McParity 477 MRPN marginal revenue product of PK price of capital goods
in Transition 264
BO)( 14.1 The Credit Channel of Monetary labor expected real interest rate
Oil Price Shocks Revisited 322
Policy 543
Calibrating the Business Cycle 355 N employment, labor world real interest rate
BO)( 14,2 The Toylor Rule 545
International Evidence on the Slope of the Short-Run BOX 15.1 Social Security and the Federal N full-employment level of expected after-tax real interest
Aggregate Supply Curve 375 fa-t
Budget 582 employment rate
Macroeconomic Policy and the Real Interest Rate in
BOX 15,2 Generational Accounts 583
the 1980s -111 NFP net factor payments res reserve-deposit ratio
The Nixon Wage-Price Controls 464
NM nonmonetary assets s individual saving; saving rate
The Value of the Dollar and US Net Exports 480
\"'hy the Dollar Rose So High and Fell So Far in the In Touch with the Macroeconomy NX net exports inCOlne tax rate
1980s 499
The National Income and Product Accounts 26 P price level unemployment rate
The Asian Crisis 504 II
Policy Coordination Failure and the Collapse of Fixed Labor Market Data 93 pC expected price level IT natUIal unemployment rate
Interest Rates 121
Ethxec EhaMnSg e R5a0t8e s: The Cases of Bretton Woods and The Balance of Payments Accounts 171 R real seignorage revenue IIC user cost of capital
The Monetary Aggregates 246 RES bank reserves
European Monetary Unification 510 w real wage
The Index of Leading Indicators 286
The i'vloney Multiplier During the Great Depression 529 Exchange Rates 482 S national saving y individual labor income; output
Money-Growth Targeting and Inflation Targeting 554
private saving per worker
Labor Supply and Tax Reform in the 19805 577 Spvt
Hyperinflation in the United States 594 The Political Environment Sgovt government saving inflation rate
T taxes expected inflation rate
Default and Sovereign Debt 189
"I Interest Boxes Economic Growth and Democracy 233 TR transfers l1y income elasticity of money
The Role of the Council of Economic Advisers in V velocity demand
Developing and Testing an Economic Formulating Economic Policy 420
Theory 15 Presidential Elections and Macroeconomic Policy 449
N<ltural Resources, the Environment, and Reliability of Fed Governors 535
the National Income Accounts 31 The Federal Budget Process 573
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Fourth Edition
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Andrew B. Abel Ben S. Bernanke
Ihe Wharf all School WoodJ"OW Wi/SOli Selwol of Public alld
Many of the designations used by manuftlcturers and sellers to distinguish their products are claimed of the Llllivcrsity of Pelll/sylvallia Illterlmtjollal Affairs, Prillcefoll LllliPL'l"sity
as trildemarks Where those designations nppcnr in this book and Addison-Wesley WilS aware of the
trudemark claim, the designntions have been printed in initial caps or ill! caps Robert Morris Professor of Finance at The Wharton School Howard Harrison and Gabrielle Snyder Beck Professor of
and professor of economics at the University of Economics and Public Affairs at Princeton University, Ben
Pennsylvania, Andrew Abel received his A B SllllIllta ClI/lI Bernanke received his B.A. in economics from Harvard
laude from Princeton University and his PhD from the University SWill/in CIII/l lal/dc-capturing both the Allyn
Massachusetts Institute of Technology Young Prize for best Harvard undergraduate economics
Library of Congress Cataloging-in-Publication Data Since his appointment to The Wharton School in 1986, thesis and the John H ·Williams prize for outstanding senior
Abel has held the Ronald 0 Perelman and the Amoco in the economics department. Like coauthor Abel, he holds
Abel, Andrew B ,1952-
Foundation Professorships He began his teaching career a Ph D. from the Massachusetts Institute of Technology
Mncroeconomics / Andrew B Abel. Ben 5 Bernilnke --Hh ed
p em at the University of Chicago and Harvard University, and Bernanke began his career at the Stanford Graduate
Includes index has held visiting appointments at both Tel Aviv School of Business in 1979 In 1985 he moved to Princeton
ISBN 0-20H4133-0 University and The Hebrew University of Jerusalem. University, where he is currently chair of the Economics
1 Mtlcroeconomics 2 United St"tes-Economic conditions A prolific researcher, Abel has published extensively Department He has twice been visiting professor at M I. I
Benltlnke. Ben 11 TH ie on fiscal policy, capital formation, monetary policy, asset and once at New York University, and has taught in
HBl72 5 A24 2001 pricing, and social security-as well as serving on the undergraduate, M.B A, M P.A, and Ph D programs He
339-dc21 00-03HI()S
editorial boards of numerous journals. He has been has authored more than 60 publications in macroeconomics,
honored as an Alfred P. Sloan Fellow, a National Science macroeconomic history, and finance
Foundation Graduate Fellow, a Fellow of the Econometric Bernanke has served as a visiting scholar and advisor to
Society, and a recipient of the John Kenneth Galbraith the Federal Reserve System He is a Guggenheim Fellmv
Award for teaching excellence Abel has served as a visiting and a Fellow of the Econometric Society He has also been
scholar at the Federal Reserve Bank of Philadelphia, as a variously honored as an Alfred P Sloan Research Fellow,
member of the Economics Advisory Panel of the National a Hoover Institution National Fellow, a National Science
Science Foundation, and as a member of the Technical Foundation Graduate Fellow, and a Research Associate of
Advisory Panel on Asswnptions and Methods for the Social the National Bureau of Economic Research
Security Advisory Board. He is also a Researdl Associate of
Copyright © 2001 by Addison Wesley Longman, Inc
the National Bureau of Economic Research and a member
of the Advisory Board of the Carnegie-Rochester
All rights reserved No ptlrt of this publication may be reproduced, stored in tl retrieval system. or
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ISBN 0-201-44133-0
234567 B Y 1O-YHP-U4 U3 U2 Ul UU
-$"
Preface xvi Preface xvi Chapter 2
The Measurement and Structure of the
introduction 1 Introduction 1 National Economy 24
1 Introduction to Macroeconomics 2 Chapter 1 201 National Income Accounting: The
2 The Measurement and Structure 01 the National Economy 24 Introduction to Macroeconomics 2 Measurement of Production, Incom"e, and
Expenditure 25
I$f. 1,1 What Macroeconomics Is About 2 In T ouch with the Macroeconomy:
long-Run Economic Performance 59
fhe National Income and Product Accounts 26
Long-Run Economic Growth 3
3 Productivity, Output, and Employment 60 VVhy the Three Approaches Are Equivalent 27
Business C ydes 5
4 Consumption, SaVing, and Investment 108 Unemployment 6 2,2 Gross Domestic Product 28
5 Saving and Investment in the Open Economy 168 Inflation '7 The Product Approach to Measuring GOP 28
The International Economy 8 Box 2,1 Natural ResoUlces, the Environment, and the
6 Long-Run Economic Growth 205
National Income Accounts 31
Macroeconomic Policy 10
7 The Asset Mar ket, Money, and 1', ices 242 The Expenditure Approach to Measuring GOP 32
Aggregation 11
The income Approach to Measuring GOP 35
Business Cycles and Macroeconomic Policy 273 1,2 What Macroeconomists Do 12
2,3 Saving and Wealth 37
Macroeconomic Forecasting 12
8 Business Cycles 274 Measures of Aggregate Saving 38
Macroeconomic Analysis 12
9 The /S-LIVl/ AD-AS Model: A General Framework lor Macroeconomic The Uses of Private Saving -10
Macroeconomic Research 13
Ana lysis 304 Application The Uses of Saving and the Role of
Data Development 15 Government Budget Deficits and Surpluses 41
10 Classical Business Cycle Analysis: Nlarket-Clcaring rvlacroeconomics 351
Box 1,1 Developing and Testing an Economic Relating Saving and Wealth 42
11 Keynesianism: The Nlac[oeconomics of Wage and Price Rigidity 390 Theory 15
2A Real GDP, Price Indexes, and Inflation 44
1.3 Why Macroeconomists Disagree 16
Real GDP 44
Macroeconomic Policy: Its Environment and Institutions 433 Classicals Versus Keynesians 17
Price lndexes 46
12 Unemployment and Inflation 434 A Unified Approach to Macroeconomics 19
Box 2,2 The Computer Revolution and
13 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Chapter Summary 20 Chain-Weighted GOP 47
Economy 471 Key Terms 21 Box 23 Does CPllnflation Overstate Increases in the
Review Questions 21 Cost of living? 49
14 MonetaIY Policy and the Federal Resclve System 520 Numerical Problems 22
Analytical Problems 22 25 Interest Rates 50
15 Government Spending and Its Financing 563 The Conference Board'L" Exercises 23
Real Versus Nominal Interest Rates 50
Chapter Summary 53
Appendix A: Some Useful Analytical Tools 601
Key Terms 53
Glossary 608 Key Equations 5-l
Review Questions 55
Name Index 620 Numerical Problems 55
Analytical Problems 57
Subject Index 622 The Conference Board"' Exercises 58
vi vii
Detailed Contents ix
viii Detailed Contents
Chapter 5 Chapter 6
lOlllg-lfh.ll1ll Ecoillomic Chapter 4
Saving and Investment in the Open Long-Run Economic Growth 205
iP'eriormalillCe 59 Consumption, Saving, and
Economy 168
Investment 108
Chapter 3 6.1 The Sources of Economic Growth 206
Productivity, Output, and Employment 60 5.1 Balance of Payments Accounting 169
4_1 Consumption and Saving 109 Growth Accounting 208
3>1 How Much Does the Economy Produce? The The Current Account 169 Application Growth Accounting and the East Asian
The Consumption and Saving Decision of an
Production Function 61 Individual 110 In To uch with the Macroeconomy: "Miracle" 209
Application The Production Function of the U S The Balance of Payments Accounts 171 Application The PosH 973 Slowdown in
Econo'!'y and U S Productivity Growth 62 Effect of Changes in Cunent income 111 Productivity Growth 211
The Capital and Financial Account 173
The Shape of the Production Function 63 Effect of Changes in Expected Future Income 112
The Relationship Between the Current Account 6.2 Growth Dynamics: The Solow Model 215
Supply Shocks 68 Application Consumer Sentiment and the
3_2 The Demand for Labor 69 1990-1991 Recession 113 and the Capital and Financial Account 174 Setup of the Solow Model 216
The Marginal Product of Labor and Labor Effect of Changes in Wealth 115 Net Foreign Assets and the Balance of Payments The Fundamental Determinants of Long-Run
Demand: An Example 70 Application The Response of Consumption to Stock Accounts 176 Living Standards 223
A Change in the Wage 72 Market Crashes and Booms 116 Box 5_1 Does Mars Have a Current Account Application Do Economies Converge? 228
Surplus? 177
The Marginal Product of Labor and the Labor Effect of Changes in the Real Interest Rate 118 Endogenous Growth Theory 230
Application The United States as International
Demand Curve 73
Fiscal Policy 120 Debtor 178 6.3 Government Policies to Raise Long-Run
Factors That Shift the Labor Demand Curve 74
In I ouch with the Macroeconomy: Living Standards 232
Aggregate Labor Demand 76 5_2 Goods Market Equilibtium in an Open
3.3 The Supply of Labor 77 [nterest Rates 121 Economy 179 Policies to Affect the Saving Rate 232
4.2 Investment 125 The Political Environment:
The [ncome-Leisure T radeNoff 77 5.3 Saving and Investment in a Small Open
Real Wages and Labor Supply 78 The Desired Capital Stock 125 Economy 180 Economic Growth and Democracy 233
Policies to Raise the Rate of Productivity Growth 234
The Labor Supply Curve 81 Changes in the Desired Capital Stock 128 The Effects of Economic Shocks in a Small Open
Aggregate labor Supply 82 Box 4.1 Investment and the Economy 183 Industrial Policy 235
Application Weekly Hours of Work and the Wealth Stock Market 131 Application The LDC Debt Crisis 186
of Nations 83 Chapter Summary 237
Application Measuring the Effects of Taxes The Political Environment: Key Terms 237
3.4 Labor Market Equilibrium 85 on Investment 132 Default and Sovereign Debt 189 Key Equations 238
Full-Employment Output 86 From the Desired Capital Stock to Application The 1994 Mexican Crisis 189 Review Questions 238
Application Output, Employment, and the Real Investment 133 Numerical Problems 239
Wage During Oil Price Shocks 87 504 Saving and Investment in Large Open Analytical Problems 240
Investment in inventOl'ies and HOllsing 135 The Conference BoardlB Exercises 241
Application Technical Change and Wage Economies 191
Inequality 88
4.3 Goods Market Equilibrium 136
3.5 Unemployment 91 5.5 Fiscal Policy and the Current Account 193
The Saving-investment Diagram 13'7
Measuring Unemployment 91 The Critical Factor: The Response of National
Application The Effect of Wars on Investment and
Changes in Employment Status 92 the Real Interest Rate 140 Saving 193
In Iouch with the Macroeconomy: The Government Budget Deficit and National
Labor Market Data 93 Chapter SUl1ullilry 143 Saving 194
How Long Are People Unemployed? 94 Key Terms 145 Application The Twin Deficits 195
Key Equations 145
Why There Always Are Unemployed People 94
Review Questions 146
Chapter Summary 197
3_6 Relating Output and Unemployment: Numerical Problems 146
Okun's Law 96 Analytical Problems 148 Key Terms 201
Key Equations 201
The Conference Board"') Exercises 149
Chapter Summary 98 Revie\v Questions 201
Key Terms 102 Appendix 4_A A Formal Model of Consumption and Numerical Problems 202
Key Equations 102 Saving 151 Analytical Problems 203
Review Questions 102 The Conference Boardl!) Exercises 204
Numerical Problems 103
Analytical Problems 105
The Conference Bonrd(ii) Exercises 106
Appendix 3_A The Growth Rate Form of
Okun's Law 107
x Detailed Contents Detailed Contents xi
Chapter 7 Business Cycles and Chapter 9 Chapter 10
The Asset Market, Money, and Prices 242 Macroeconomk The IS-LMIAD-AS Model: A General Classical Business Cycle Analysis:
Polky 273 Framework for Macroeconomic Market-Clearing Macroeconomics 351
7.1 What Is Money? 242 Analysis 304
Box 7.1 Money in a Prisoner-of-War Camp 243 Chapter 8 10.1 Business Cycles in the Classical Model 352
9.1 The FE Une: Equilibrium in the Labor
The Functions of Money 243 Business Cycles 274 The Real Business Cycle Theory 352
Market 305
Measuring Money: The Monetary Aggregates 245 Application Calibrating the Business Cycle 355
8.1 What Is a Business Cycle? 275 Factors That Shift the FELine 306
In T ouch with the Macroeconomy: Fiscal Policy Shocks in the Classical Model 362
The Monetary Aggregates 246 Box 8,1 Temporary and Permanent Components 9.2 The IS Curve: Equilibrium in the Goods Unemployment in the Classical Model 366
of Recessions 277 Mail(et 306
Box 7.2 Where Have All the Dollars Gone? 247
10.2 Money in the Classical Model 369
The Money Supply 248 8,2 The American Business Cycle: Factors That Shift the IS Curve 309
The Historical Record 279 Monetary Polky and the Economy 369
7.2 Portfolio Allocation and the Demand for 9.3 The LM Curve: Asset Market Equilibrium 311
[he Pre-World War I Period 280 Monetary Nonneutl"ality and Reverse Causation 369
Assets 249 fhe Interest Rate and the Price of a Nonmonetary
The Great Depression and World War II 280 The Nonneutrality of Money: Additional
Expected Retur n 249 Asset 312 Evidence 370
Post-World War II U S Business Cycles 281
Risk 250 The Equality of Money Demanded and Money
10.3 The Misperceptions Theory and the
The "Long Boom" 282 Supplied 312
Liquidity 250 Nonneutrality of Money 371
Have American Business Cycles Become Less Factors That Shift the LlvI Curve 315
Asset Demands 250 Application International Evidence on the Slope of
Severe? 282
9.4 General Equilibrium in the Complete IS-LM the Short-Run Aggregate Supply Curve 375
7.3 The Demand for Money 251
8.3 Business Cycle Facts 284 Model 318
tvlonelal'Y Policy and the Misperceptions Theory 376
The Price Level 251
The Cyclical Behavior of Economic Variables: Applying the lS-LM Frarnework: A Temporary Rational Expectations and the Role of rvIonetary
Real Income 252 Direction and Timing 284 Adverse Supply Shock 319 Polic)' 378
Interest Rates 252 Production 285 Application Oil Price Shocks Revisited 322 Box 10" 1 Are Price Forecasts Rational? 380
The Money Demand Function 253 In Iouch with the Macroeconorny: 9.5 Price Adjustment and the Attainment of
Other Factors Affecting Money Demand 254 The Index of Leading Indicators 286 General Equilibrium 322 CKheya pTtec rrl1 S1Su m38m3a ry 381
Elasticities of Money Demand 256 Expenditure 286 Box 9,1 Econometric Models and Macroeconomic Key Equation 383
Employment and Unemployment 288 Forecasts 323 Review Questions 383
Velocity and the Quantity Theory of Money 257 Numerical Problems 384
Application Financial Regulation, Innovation, and Average Labor Productivity and the Real Wage 290 The Effects of a Monetary Expansion 324 Analytical Problems 385
the Instability of Money Demand 258 Money Growth and Inflation 291 Classical Versus Keynesian Versions of the lS-UvI The Conference Board'~' Exercises 386
Model 328
7.4 Asset Market Equilibrium 260 I=inandal Variables 293 Appendix lO.A An Algebraic Version of the Classical
AD-llS Model with Misperceptions 388
Asset Market Equilibrium: An Aggregation International Aspects of the Business Cycle 294 9,6 Aggregate Demand and Aggregate
Supply 329
Assumption 260 Box 8.2 The Seasonal Cycle and the Business
The Asset Market Equilibrium Condition 262 Cycle 295 The Aggregate Demand Curve 330
The Aggregate Supply Curve 333
7.5 Money Growth and Inflation 263 8.4 Business Cycle Analysis: A Preview 295
Equilibrium in the AD-AS Model 334
Application Money Growth and Inflation in Aggregate Demand and Aggregate Supply: A Brief
European Countries in Transition 264 Introduction 296 Monetary Neutrality in the AD-AS Model 335
The Expected Inflation Rate and the Nominal Chapter Summary 301 Chapter Summary 337
Interest Rate 266 Key 'I erms 302 Key Terms 340
Review Questions 302 Revie\\' Questions 340
Chapter Summary 267 Analytical Problems 302 Numerical Problems 341
Key 1 erms 268 The Conference Boardl Exercises 303 Analytical Problems 342
Key Equations 268 ':'
Review Questions 269 Appendix 9.A Algebraic Versions of the IS-UH and
Numerical Problems 269 ftD-AS Models 344
Analytical Problems 270
The Conference Board'E' Exercises 2n
;:a
w
Detailed Contents xiii
xii Det<1i1ed Contents
Chapter 11 Macroeconomic Chapter 13 Chapter 14
Keynesianism: The Macroeconomics of Policy: Its Exchange Rates, Business Cycles, and Monetary Policy and the Federal Reserve
Wage and Price Rigidity 390 Macroeconomic Policy in the Open System 520
Environment and!
Economy 471
11.1 Real-Wage Rigidity 391 institutions 433 14.1 Principles of Money Supply
13.1 Exchange Rates 472 Determination 521
Some Reasons for Real-Wage Rigidity 391 Chapter 12 Nominal Exchange Rates 472
The Monel' Supply in an All-Currency Economy 521
The Efficiency Wage Model 392 Unemployment and Inflation 434 Real Exchange Rates 473
The Money Supply Under Fractional Reserve
Wage Determination in the Efficiency Wage Appreciation and Depreciation 475 Banking 522
Model 394 12.1 Unemployment and Inflation: Is There a
Purchasing Power Parity 475
Employment and Unemployment in the Efficiency Trade-Off? 435 Box 13.1 McParity 477 Bank Runs 526
Wage Model 394 The Expectations~Augmented Phillips Curve 437 The Real Exchange Rate and Net ExpOl'ts 477 The Money Supply With Both Public Holdings of
Currency and Fractional Reserve Banking 526
Efficiency Wages and the FE line 397 lhe Shifting Phillips Curve 441 Application The Value of the Dollar and U S Net
Open-Market Operations 528
Box 11.1 Henry Ford's Efficiency Wage 397 Macroeconomic Policy and the Phillips Curve 445 Exports 480
Application The Money Multiplier During the Great
13.2 How Exchange Rates Are Determined:
11.2 Ptice Stickiness 398 The Long-Run Phillips Curve 446 A Supply-and-Demand Analysis 481 Depression 529
Sources of Price Stickiness: Monopolistic 12.2 The Problem of Unemployment 447 In I ouch with the Macroeconorny: 14.2 Monetary Control in the United States 532
Competition and Menu Costs 398 Exchange Rates 482
The Costs of Unemployment 447 The Federal Reserve System 532
11.3 Monetary and Fiscal Policy in the Keynesian Box 12.1 The Lucas Critique 448 Macroeconomic Determinants of the Exchange The Federal Reserve's Balance Sheet and
Rate and Net Export Demand 484
Model 404 The Political Environment: 13.3 The IS-LM Model for an Open Economy 487 Open-Market Operations 533
Monetary Policy 404 Presidential Elections and Macroeconomic Other Means of Controlling the Money Supply 534
The Open-Economy /S Cmve 487
Fiscal Policy 408 Policy 449
Factors That Shift the Open-Economy IS Curve 490 The Political Environment:
Application Macroeconomic Policy and the Real The Long-Term Behavior of the Unemployment Reliability of Fed Governors 535
The International Transmission of Business
Interest Rate in the 1980s 411 Rate 450
Cycles 492 Intermediate Targets 538
Policies to Reduce the Natural Rate of
11.4 T he Keynesian Theory of Business Cycles 1304 Macroeconomic Policy in an Open Economy Making Monetary Policy in Practice 540
Unemployment 455
and Macroeconomic Stabilization 412 with Flexible Exchange Rates 493
Box 14.1 The Credit Channel of Monetary Policy 543
Box 12.2 The Effect of Unemployment Insurance on
Keynesian Business Cycle Theory 413 A Fiscal Expansion 493
Unemployment 456
14.3 The Conduct of Monetary Policy: Rules
Macroeconomic Stabilization 415 A Monetary Contraction 496
123 The Problem of Inflation 457 Application Why the Dollar Rose So High and Fell Versus Discretion 544
Box 11..2 Japanese Macroeconomic Policy in the
1990s 418 The Costs of Inflation 457 So Far in the 1980s 499 Box 14.2 The Taylor Rule 545
Supply Shocks in the Keynesian Model 419 Box 12..3 Indexed Contracts 460 13.5 Fixed Exchange Rates 500 The Monetarist Case for Rules 545
Fixing the Exchange Rate 500 Rules and Central Bank Credibility 547
The Political Environment: Fighting Inflation: The Role of Inflationary
Th e Role of the Council of Economic Advisers in Expectations 461 Monetary Policy and the Fixed Exchange Rate 503 Application Money-Growth Targeting and Inflation
Formulating Economic Policy 420 Box 12.4 The Sacrifice Ratio 463 Application The Asian Crisis 504 Targeting 554
Application Policy Coordination Failure and the Other Ways to Achieve Central Bank Credibility 556
Application The Nixon Wage-Price Controls 464
Chapter Summary 422 Collapse of Fixed Exchange Rates: The Cases of
Key Ter ms 423 Bretton Woods and the EMS 508 Chapter Summary 558
Chapter Summary 465
Review Questions 424 Key Terms 466 Fixed Versus Flexible Exchange Rates 509 Key 1 erms 559
Numerical Problems 424 Key Equations 560
Analytical Problems 426 Key Equation 467 Currency Unions 510 Review Questions 560
The Conference BoardLD Exercises 427 Revie\.v Questions 467 Application European Monetary Unification 510 Numerical Problems 560
Numerical Problems 467
Appendix II.A labor Contracts and Nominal-Wage Analytical Problems 468 Chapter Summary 511 Analytical Problems 561
Rigidity 428 The Conference Board!£) Exel'cises 469 Key Te r1115 512 The Conference BoardtTI! Exercises 562
Key Equations 513
Appendix 11.B I he Multiplier in the Keynesian
Review Questions 513
Model 431
Numerical Problen"ls 514
Analytical Problems 515
The Conference Board~' Exercises 516
Appendix 13A An Algebraic Version of the
Open-Economy IS-LM Model 517