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Macroeconomics A Modern Approach First Canadian Edition Robert J Barro Harvard University and Apostolos Serletis University of Calgary NELSON EDUCATION
AUTHORS iv,PREFACE xvi,PART 1 INTRODUCTION 1,CHAPTER 1 Thinking About Macroeconomics 2. Output Unemployment and Prices in Canadian History 3. By The Numbers History of U S real GDP unemployment and inflation 8. Economic Models 10,A Simple Example The Coffee Market 12. Extending The Model Demand and supply curves are functions 13. Flexible Versus Sticky Prices 17,Key Terms and Concepts 18. CHAPTER 2 National Income Accounting Gross Domestic Product and. the Price Level 19,Nominal and Real GDP 19,Calculating Real GDP 21. Real GDP as a Measure of Welfare 23, Alternative Views of GDP Expenditure Income and Production 23. Measuring GDP by Expenditure 24,Measuring GDP by Income 26. Differences between GDP and national income 28,Personal income and personal disposable income 30. Measuring GDP by Production 30,Seasonal Adjustment 30. By The Numbers Gross provincial and territorial product by Canadian. provinces and territories 32, Back To Reality Problems with the consumer price index 33. Key Terms and Concepts 34,Questions and Problems 35. PART 2 ECONOMIC GROWTH 37,CHAPTER 3 Introduction to Economic G r o w t h 38. Facts About Economic Growth 40,Economic Growth Around the World 1960 to 2000 40. World Poverty and Income Inequality 44, Long Term Growth in Canada and Other Rich Countries 46. Patterns of World Economic Growth 48,Theory of Economic Growth 49. The Production Function 49,Growth Accounting 52,The Solow Growth Model SS. Back To Reality Intellectual origin of the Solow growth model 56. The growth rate of the capital stock 57,VIII Contents. The growth rate of labour 58, The growth rate of capital and real GDP per worker 59. The transition and the steady state 60,Do The Math 63. Summing Up 65,Key Terms and Concepts 65,Questions and Problems 65. Appendix 67,Part A The Growth Accounting Equation 67. Part B The Solow Residual 69,Part C The Cobb Douglas Production Function 69. CHAPTER 4 Working with the Solow Growth Model 71,A Change in the Saving Rate 72. Do The Math 73,A Change in the Technology Level 73. Extending The Model Consumption in the Solow model 74. Do The Math 76, Changes in Labour Input and the Population Growth Rate 76. A Change in Labour Input 76,Do The Math 78,A Change in the Population Growth Rate 79. Do The Math 80,Convergence 81,Convergence in the Solow Model 81. Extending The Model Endogenous population growth 82. Facts About Convergence 85,Conditional Convergence in the Solow Model 86. Where Do We Stand with the Solow Model 92,Key Terms and Concepts 92. Questions and Problems 93,Appendix 94,The Rate of Convergence 94. CHAPTER 5 Conditional Convergence and Long Run Economic Growth 98. Conditional Convergence in Practice 98, Recent Research on the Determinants of Economic Growth 99. Examples of Conditional Convergence 101, Back To Reality A rock star s perspective on debt relief. and foreign aid 102,Long Run Economic Growth 103, Models with Constant Average Product of Capital 104. Exogenous Technological Progress 106,The steady state growth rate 107. Steady state saving 109,The transition path and convergence 110. Endogenous Growth Theory 111, Back To Reality The story of Napster and Viagra 115. The Diffusion of Technology 117, Back To Reality Hybrid corn A case of technological diffusion 118. What Do We Know About Economic Growth 119,Key Terms and Concepts 119. Questions and Problems 120,Contents IX,Appendix 120. The Steady State Path in the Solow Model with Exogenous. Technological Progress 120,PART 3 ECONOMIC FLUCTUATIONS 123. CHAPTER 6 Markets Prices Supply and Demand 124,Markets in the Macroeconomy 126. The Goods Market 126,The Labour Market 126,The Rental Market 127. The Bond Market 128,Money as a Medium of Exchange 128. Back To Reality Common currency 129,Markets and Prices 129. The Goods Market 129,The Labour Market 130,The Rental Market 131. The Bond Market 131, Extending The Model On bonds interest rates and the. yield curve 132,Constructing the Budget Constraint 133. Income 134,Profit 134,Wage income 134,Rental income 134. Interest income 135,Total income 135,Consumption 135. Assets 136,Household Budget Constraint 137, Extending The Model Allowing for a risk premium on ownership. of capital 138, Clearing of the Markets for Labour and Capital Services 140. Profit Maximization 140,The Labour Market 140,Demand for labour 140. Supply of labour 142,Clearing of the labour market 142. The Market for Capital Services 144,Demand for capital services 144. Supply of capital services 145,Clearing of the market for capital services 145. The interest rate 146,Profit in Equilibrium 147, Back To Reality Economic profit versus accounting profit 148. Summing Up 148,Key Terms and Concepts 149,Questions and Problems 149. Appendix 151, Output Equals Real Factor Incomes and Profit Equals Zero 151. CHAPTER 7 Consumption Saving and Investment 153,Consumption and Saving 153. Consumption Over Two Years 155,Present value 160,Choosing consumption income effects 160. Choosing consumption the intertemporal substitution effect 161. By The Numbers Empirical evidence on intertemporal substitution. of consumption 163, The income effect from a change in the interest rate 163. Combining income and substitution effects 164,Consumption Over Many Years 164. By The Numbers Empirical evidence on the propensity to consume 168. Consumption Saving and Investment in Equilibrium 168. By The Numbers The response of consumption to anticipated. income changes 169,Summing Up 170,Key Terms and Concepts 171. Questions and Problems 171,Appendix 172, The Multiyear Budget Constraint and the Planning Horizon 172. CHAPTER 8 An Equilibrium Business Cycle Model 175, Cyclical Behaviour of Real GDP Recessions and Booms 175. By The Numbers Recessions in long term Canadian history 179. An Equilibrium Business Cycle Model 180,Conceptual Issues 180. The Model 181, The marginal product of labour and the real wage rate 182. Marginal product of capital real rental price and the interest rate 183. Consumption saving and investment 186,Matching the Theory with the Facts 187. Consumption and Investment 187,The Real Wage Rate 190. The Real Rental Price 191,The Interest Rate 191, By The Numbers The real rental price of capital in the United States 192. Temporary Changes in the Technology Level 193,Variations in Labour Input 194. Labour Supply 194 I, The substitution effect for leisure and consumption 194. Income effects on labour supply 195, Intertemporal substitution effects on labour supply 196. By The Numbers Empirical evidence on intertemporal substitution of. labour supply 197,Fluctuations in Labour Input 197. The cyclical behaviour of labour input empirical 197. The cyclical behaviour of labour input theory 198,The cyclical behaviour of labour productivity 200. Summing Up 201,Key Terms and Concepts 202,Questions and Problems 202. Contents XI, CHAPTER 9 Capital Utilization and Unemployment 204. Capital Input 204,The Demand for Capital Services 205. The Supply of Capital Services 206, Back To Reality Multiple shifts and overtime hours 209. Market Clearing and Capital Utilization 210, The Cyclical Behaviour of Capacity Utilization 212. The Labour Force Employment and Unemployment 212,Basic Concepts and Empirical Patterns 213. A Model of Job Finding 217,Search by Firms 220,Job Separations 221. Job Separations Job Finding and the Natural Unemployment Rate 222. Economic Fluctuations Employment and Unemployment 225. Vacancies 226, By The Numbers Labour market fluctuations in the United States 227. Back To Reality Seasonal fluctuations 229,Summing Up 230. Key Terms and Concepts 230,Questions and Problems 231. PART 4 MONEY AND PRICES 233, CHAPTER 10 The Demand for Money and the Price Level 234. Concepts of Money 234, Back To Reality Money in a prisoner of war camp 235. Back To Reality Where is all the currency 236,The Demand for Money 238. The Interest Rate and the Demand for Money 240,The Price Level and the Demand for Money 240. Real GDP and the Demand for Money 240,Other Influences on the Demand for Money 241. The Money Demand Function 241, Back To Reality The payments period and the demand for money 242. Empirical Evidence on the Demand for Money 242,Determination of the Price Level 243. The Nominal Quantity of Money Supplied Equals,the Nominal Quantity Demanded 243. A Change in the Nominal Quantity of Money 245,The Neutrality of Money 247. A Change in the Demand for Money 248,The Cyclical Behaviour of the Price Level 249. Back To Reality The quantity theory of money 250,Price Level Targeting and Endogenous Money 251. Trend growth of money 253,Cyclical behaviour of money 253. Seasonal variations in money 255,Summing Up 255,Key Terms and Concepts 256. Questions and Problems 256,References 259,xii Contents. CHAPTER 11 Inflation Money Growth and Interest Rates 260. Cross Country Data on Inflation and Money Growth 261. Inflation and Interest Rates 266,Actual and Expected Inflation 266. Real and Nominal Interest Rates 267, The Real Interest Rate and Intertemporal Substitution 269. Actual and Expected Real Interest Rates 270,Measuring expected inflation 270. Canadian expected inflation and interest rates since World War II 271. Indexed bonds real interest rates and expected inflation rates 272. Interest Rates on Money 274, By The Numbers Indexed bonds real interest rates and expected inflation. rates in the United States 275, Inflation in the Equilibrium Business Cycle Model 276. Intertemporal Substitution Effects 277,Bonds and Capital 277. Interest Rates and the Demand for Money 278,Inflation and the Real Economy 278. Money Growth Inflation and the Nominal Interest Rate 280. Back To Reality International evidence on the neutrality of money. and the Fisherian link 281,A Trend in the Real Demand for Money 283. A Shift in the Money Growth Rate 284,Government Revenue from Printing Money 288. The Welfare Cost of Inflation 289, By The Numbers Money and prices during the German hyperinflation 290. Summing Up 291,Key Terms and Concepts 292,Questions and Problems 292. PART 5 THE GOVERNMENT SECTOR 297,CHAPTER 12 Government Expenditure 298. Data on Government Expenditure 298,The Government s Budget Constraint 300. By The Numbers Just how much bigger is government in Canada 303. Public Production 304,Public Services 305,The Household s Budget Constraint 305. Permanent Changes in Government Purchases 307, A Permanent Change in Government Purchases Theory 307. Extending The Model Useful public services 310, The Cyclical Behaviour of Government Purchases 312. Temporary Changes in Government Purchases 312, A Temporary Change in Government Purchases Theory 312. Government Purchases and Real GDP During Wartime Empirical 314. Extending The Model Effects on the term structure of interest rates 3 17. Wartime Effects on the Economy 318,Employment during wartime 318. Effects of war on labour supply 318,Effects of war on the real wage rate 320. Effects of war on the rental market 320,Summing Up 322. Contents XIII,Key Terms and Concepts 322,Questions and Problems 322. CHAPTER 13 Taxes 325,Taxes in Canada 325,Types of Taxes 327. By The Numbers Average marginal income tax rates 330. Taxes in the Model 331,A Tax on Labour Income 332,A Tax on Asset Income 336. Extending The Model A consumption tax 337, An Increase in Government Purchases Financed by a Labour Income Tax 339. Back To Reality The Laffer curve 340,Transfer Payments 343. Summing Up 343,Key Terms and Concepts 343,Questions and Problems 344. CHAPTER 14 Public Debt 346,The History of Canadian Public Debt 346. Public Debt in the U S and U K 348,Characteristics of Government Bonds 351. Budget Constraints and Budget Deficits 352,The Government s Budget Constraint 352. The Budget Deficit 353, Public Saving Private Saving and National Saving 355. Public Debt and Households Budget Constraints 356,A Simple Case of Ricardian Equivalence 356. Another Case of Ricardian Equivalence 359,Ricardian Equivalence More Generally 360. Economic Effects of a Budget Deficit 361,Lump Sum Taxes 361. Labour Income Taxes 362,Asset Income Taxes 363,The Timing of Taxes and Tax Rate Smoothing 364. Strategic Budget Deficits 365, Back To Reality Unpleasant monetarist arithmetic 366. The Standard View of a Budget Deficit 366,Finite lifetimes 368. Imperfect credit markets 369,Social Security 370, By The Numbers Empirical evidence on the macroeconomic effects. of budget deficits 371,Open Market Operations 372,Summing Up 374. Key Terms and Concepts 374,Questions and Problems 375. PART 6 MONEY A N D BUSINESS CYCLES 377, CHAPTER 15 Money and Business Cycles I The Price Misperceptions Model 378. Effects of Money in the Equilibrium Business Cycle Model 378. The Price Misperceptions Model 379,A Model with Non Neutral Effects of Money 379. xiv Contents,Money Is Neutral in the Long Run 383, Only Unperceived Inflation Affects Real Variables 383. Predictions for Economic Fluctuations 385, Empirical Evidence on the Real Effects of Monetary Shocks 386. Friedman and ScKwartz s Monetary History 386,Unanticipated money growth 387. Romer and Romer on U S Federal Reserve policy 387,A brief overview 388. Real Shocks 388, Back To Reality Incomplete information about prices Is it significant 389. Rules Versus Discretion 391,Summing Up 395,Key Terms and Concepts 396. Questions and Problems 396, CHAPTER 16 Money and Business Cycles II Sticky Prices and Nominal Wage Rates 398. The New Keynesian Model 398,Price Setting Under Imperfect Competition 399. Short Run Responses to a Monetary Shock 401,New Keynesian Predictions 403. Price Adjustment in the Long Run 404, By The Numbers Evidence on the stickiness of prices 406. Comparing Predictions for Economic Fluctuations 407. Shocks to Aggregate Demand 407,Money and Nominal Interest Rates 409. The Operating Band for the Overnight Rate 409,The Market for Reserves 410. The Tools of Monetary Policy 411,Open market buy back operations 412. Receiver General auctions 412,Settlement balances 413. Monetary Policy at Times of Financial Crisis 413, Extending The Model Monetary policy tools of the Federal Reserve 414. The Role of Monetary Aggregates 415,Inflation Targeting 416. The Keynesian Model Sticky Nominal Wage Rates 418, Back To Reality Keynes Friedman and the Great Depression 419. Back To Reality The real wage rate during the New Deal 422. Long Term Contracts and Sticky Nominal Wage Rates 423. By The Numbers Empirical evidence on the contracting approach 424. Summing Up 426,Key Terms and Concepts 426,Questions and Problems 427. PART 7 INTERNATIONAL MACROECONOMICS 429,CHAPTER 17 World Markets in Goods and Credit 430. The Balance of International Payments 431, History of the Canadian Current Account Balance 434. Determinants of the Current Account Balance 437,Economic Fluctuations 441. Harvest Failures Government Purchases Developing Countries 442. Examples of International Borrowing and Lending 444. The Current Account Deficit and the Budget Deficit 446. Contents XV,The Terms of Trade 447, Back To Reality Why was the U S current account deficit so large in 2000 06 448. The Terms of Trade and the Current Account Balance 450. The Terms of Trade and Investment 452,Empirical Evidence from Oil Producers 452. The Volume of International Trade 454,SummingvUp 455. Key Terms and Concepts 456,Questions and Problems 456. CHAPTER 18 Exchange Rates 457,Different Currencies and Exchange Rates 457. By The Numbers Exchange rates around the world 458. Purchasing Power Parity 461,The PPP Condition and the Real Exchange Rate 461. The Relative PPP Condition 465, By The Numbers The purchasing power parity puzzle 466. Interest Rate Parity 468, Extending The Model Covered interest rate parity 471. Fixed Exchange Rates 472, Purchasing Power Parity Under Fixed Exchange Rates 474. The Nominal Quantity of Money Under Fixed Exchange Rates 474. Devaluation and Revaluation 477,Back To Reality The Asian financial crisis 478. Flexible Exchange Rates 479, Fixed and Flexible Exchange Rates A Comparison 480. Summing Up 481,Key Terms and Concepts 482,Questions and Problems 482.