Economics
PRINCIPLES, PROBLEMS, AND POLICIES
Campbell R. McConnell
University of Nebraska
Stanley L. Brue
Pacific Lutheran University
Sean M. Flynn
Scripps College
Mc
Graw
Hill
Education
BRIEF CONTENTS
xii
PART ONE
Introduction to Economics and the Economy
1 Limits, Alternatives, and Choices
2 The Market System and the Circular Flow
21
22
23
4
31
PART SEVEN
GDP, Growth, and Instability
24 An Introduction to Macroeconomics
25 Measuring Domestic Output and National Income
26 Economic Growth
27 Business Cycles, Unemployment, and Inflation
531
546
568
591
PART EIGHT
Macroeconomic Models and Fiscal Policy
28 Basic Macroeconomic Relationships
29 The Aggregate Expenditures Model
30 Aggregate Demand and Aggregate Supply
31
Fiscal Policy, Deficits, and Debt
614
635
659
684
PARTNINE
Money, Banking, and Monetary Policy
32
Money, Banking, and Financial Institutions
33 Money Creation
34 Interest Rates and Monetary Policy
35
Financial Economics
709
731
747
777
PARTTEN
Extensions and Issues
36 Extending the Analysis of Aggregate Supply
37 Current Issues in Macro Theory and Policy
799
820
PARTTWO
Price, Quantity, and Efficiency
3 Demand, Supply, and Market Equilibrium
4 Market Failures: Public Goods and Externalities
5 Government's Role and Government Failure
PARTTHREE
Consumer Behavior
6 Elasticity
7 Utility Maximization
8 Behavioral Economics
PARTFOUR
Microeconomics of Product Markets
9 Businesses and the Costs of Production
10 Pure Competition in the Short Run
11 Pure Competition in the Long Run
12 Pure Monopoly
13 Monopolistic Competition and Oligopoly
13w Technology, R&D, and Efficiency
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53
112
134
152
173
196
220
239
254
278
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PART FIVE
Microeconomics of Resource Markets
and Government
14 The Demand for Resources
15 Wage Determination
16 Rent, Interest, and Profit
17 Natural Resource and Energy Economics
18 Public Finance: Expenditures and Taxes
312
330
360
380
405
PART SIX
Microeconomic Issues and Policies
19 Antitrust Policy and Regulation
20 Agriculture: Economics and Policy
428
446
Income Inequality, Poverty, and Discrimination
Health Care
Immigration
465
490
513
Preface
PART ELEVEN
International Economics
38 International Trade
838
39 The Balance of Payments, Exchange Rates,
and Trade Deficits
866
39w The Economics of Developing Countries
(WEB CHARTER, www.mcconnell20e.com)
39W-1
COI1 The United States in the Global Economy
(Content Option for Instruch
COI2 Previous International Exchange-Rate Systems
(Content Option for Instructors, www.mcconnell20e.com)
Glossary
GO
List of Key Graphs
Preface
Reviewers
xi
xii
xxiv
PART ONE
Introduction to Economics and
the Economy
7
To the Student
Chapter1
CONTENTS
Limits, Alternatives, and Choices
4
The Economic Perspective
Scarcity and Choice / Purposeful Behavior / Marginal
Analysis: Comparing Benefits and Costs
ConsiderThis: Free forAII? 5
Consider This: Fast-Food Lines 6
Theories, Principles, and Models
Microeconomics and Macroeconomics
Microeconomics / Macroeconomics / Positive and
Normative Economics
Individual's Economizing Problem
Limited Income / Unlimited Wants / A Budget Line
ConsiderThis: DidZuckerberg, Winfrey, and
James Make Bad Choices? 11
Society's Economizing Problem
Scarce Resources / Resource Categories
Production Possibilities Model
Production PossibilitiesTable / Production Possibilities
Curve / Law oflncreasing Opportunity Costs /
Optimal Allocation
ConsiderThis: The Economics of War 15
Unemployment, Growth, and the Future
A Growing Economy / Present Choices and Future
Possibilities / A Qualification: International Trade
Last Word: F'itfalls toSound Economic Reasoning 18
Chapter 1 Appendix: Graphs and Their Meaning
5
7
7
9
11
72
15
24
Chapter 2
The Market System and the Circular Flow
31
Economic Systems
Laissez-FaireCapitalism / The Command System /
The Market System
Characteristics of the Market System
Private Property / Freedom of Enterprise and Choice /
Self-Interest / Competition / Markets and Prices /
Technology and Capital Goods / Specialization /
UseofMoney / Active, but Limited, Government
Five Fundamental Questions
WhatWill Be Produced? / How Will the Goods and Services
BeProduced? / Who Will Get the Output? / How Will the
System Accommodate Change? / How Will the System
Promote Progress?
Consider This: McHits and McMisses 38
32
33
37
xxviii Contents
The "Invisible Hand"
The Demiseof the Command Systems / Thelncentive
Problem
Consider This:The Two Koreas 42
The Circular Flow Model
Households / Businesses / Product Market / Resource Market
How the Market System Deals with Risk
The Profit System / Shielding Employees and
Suppliers from Business Risk / ßenefits of Restricting
Business RisktoOwners
Consider This: Insurance 46
Last Word: Shufflirig the Deck 47
41
43
45
PART TWO
Price, Quantity, and Efficiency
Chapter 3
Demand, Supply, and Market Equilibrium
Markets
Demand
Law of Demand / The Demand Curve / Market Demand /
Changes in Demand / Changes in Quantity Demanded
Supply
Law of Supply / The Supply Curve / Market Supply /
Determinants of Supply / Changes in Supply / Changes in
Quantity Supplied
Market Equilibrium
Equilibrium Price and Quantity / Rationing Function of
Prices / Efficient Allocation / Changes in Supply, Demand,
and Equilibrium
Consider This: Ticket Scalping: ABum Rap! 64
Consider This:Salsa and Coffee Beans 65
Application: Government-Set Prices
Price Ceilings on Gasoline / Rent Controls / Price Floors
on Wheat
Last Word: A Legal Market for Human Organs? 68
Chapter 3 Appendix: Additional Examples of Supply
and Demand
52
53
54
54
59
62
Market Failures in Competitive Markets
Demand-Side Market Failures / Supply-Side Market Failures
Efficiently Functioning Markets
Consumer Surplus / Producer Surplus / Efficiency
Revisited / Efficiency Losses (or Deadweight Losses)
Public Goods
Private Goods Characteristics / Public Goods Characteristics /
Optimal Quantity ofa Public Good / Demand for Public
Goods / Comparing MB and MC / Cost-Benefit Analysis /
Quasi-Public Goods / The Reallocation Process
Consider This: Street Entertainers 92
Consider This: Responding to Digital Free Riding 93
108
Chapter 5
Government's Role and Government Failure
7 72
100
Government's Economic Role
Government's Right to Coerce / The Problem of Directing
and Managing Government
Consider This: Does Big Government Equal Bad
Government? 114
Government Failure
Representative Democracy and the Principal-Agent
Problem / Clear Benefits, Hidden Costs / Unfunded
Liabilities / Chronic Budget Deficits / Misdirection of
Stabilization Policy / Limited and Bundled Choice /
ßureaucracy and Inefficiency / Inefficient Regulation
and Intervention / Corruption / Imperfect Institutions
Consider This: Mohair and the Collective Action Problem 116
Consider This:Unintended Consequences 119
Last Word:"Government Failure"in the News 123
Chapter 5 Appendix: Public Choice Theory and
Voting Paradoxes
113
115
127
PARTTHREE
Consumer Behavior
67
75
Chapter 4
Market Failures: Public Goods and
Externalities
96
Externalities
Negative Externalities / Positive Externalities /
Government Intervention /
Consider This:The Fable ofthe Bees 98
Society's Optimal Amount of Externality Reduction
MC, MB, and Equilibrium Quantity / Shifts in Locations of
theCurves / Government's Role in the Economy
Last Word: Carbon Dioxide Emissions, Cap and Trade,
and Carbon Taxes 102
Chapter 4 Appendix: Information Failures
83
84
85
90
133
Chapter 6
Elasticity
7 34
Price Elasticity of Demand
The Price-Elasticity Coefficient and Formula / Interpretation of Ed
The Total-Revenue Test
Elastic Demand / Inelastic Demand / Unit Elasticity / Price
Elasticity along a Linear Demand Curve / Price Elasticity and
the Total-Revenue Curve
Consider This: A Bit of a Stretch 137
Determinants of Price Elasticity of Demand
Applications of Price Elasticity of Demand
Price Elasticity of Supply
Price Elasticity of Supply:The Immediate Market
Period / Price Elasticity of Supply: The Short Run / Price
Elasticity of Supply: The Long Run / Applications of Price
Elasticity of Supply
Consider This: Elasticity and College Costs 144
Last Word: Elasticityand Pricing Power: Why Different
Consumers Pay Different Prices 146
Cross Elasticity and Income Elasticity of Demand
Cross Elasticity of Demand / Income Elasticity of Demand
135
137
141
743
146
Contents xxix
Chapter 7
Utility Maximization
Law of Diminishing Marginal Utility
Terminology / Total Utility and Marginal Utility /
Marginal Utility and Demand
Consider Th is: Vending Machines and Marginal Utility 155
Theory of Consumer Behavior
Consumer Choice and the Budget Constraint /
Utility-Maximizing Rule / Numerical Example /
Algebraic Generalization
Utility Maximization and the Demand Curve
Deriving the Demand Schedule and Curve
Incomeand Substitution Effects
Applications and Extension;
iPads / The Diamond-Water Paradox / Opportunity Cost
and the Value of Time / Medical Care Purchases / Cash and
Noncash Gifts
Last Word: Crimina! Behavior 161
Chapter 7 Appendix: Indifference Curve Analysis
Chapter 8
Behavioral Economics
Systematic Errors and the Origin of Behavioral
Economics
Comparing Behavioral Economics with Neoclassical
Economics
ConsiderThis: Wannamaker'sLament 176
Our Efficient, Error-Prone Brains
Heuristics Are Energy Savers / Brain Modularity
Prospect Theory
Losses and Shrinking Packages / Framing Effects and
Advertising / Anchoring and Credit Card Bills / Mental
Accounting and Overpriced Warranties / The Endowment
Effect and MarketTransactions / Status Quo Bias
Consider This: Rising Consumption and the
HedonicTreadmill 181
Myopia and Time Inconsistency
Myopia / Time Inconsistency
Consider This: Betting Against Yourself 186
Fairness and Self-Interest
Field Evidence for Fairness / Experimental Evidence
for Fairness
Last Word: Nudging People Toward Better Decisions 188
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155
158
159
159
166
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174
177
180
184
187
PART FOUR
Microeconomics of Product Markets
195
Chapter 9
Businesses and the Costs of Production
196
Economic Costs
Explicitand Implicit Costs / Accounting Profitand Normal
Profit / Economic Profit / Short Run and Long Run
197
Short-Run Production Relationships
Law of Diminishing Returns
Consider This: Diminishing Returns from Study 201
Short-Run Production Costs
Fixed, Variable, and Total Costs / Per-Unit, or
Average, Costs / Marginal Cost / Shifts ofthe
Cost Curves
Consider This: Ignoring Sunk Costs 206
Long-Run Production Costs
Firm Size and Costs / The Long-Run Cost Curve /
Economies and Diseconomies of Scale / Minimum
Efficient Scale and Industry Structure
Applications and lllustrations
Rising Gasoline Prices / Successful Start-Up Firms /
The Verson Stamping Machine / The Daily
Newspaper / Aircraft and Concrete Plants
Last Word: 3-DPrinters 214
Chapter 10
Pure Competition in the Short Run
Four Market Models
Pure Competition: Characteristics and Occurrence
Demand as Seen by a Purely Competitive Seiler
Perfectly Elastic Demand / Average, Total, and
Marginal Revenue
Profit Maximization in the Short Run:
Total-Revenue-Total-Cost Approach
Profit Maximization in the Short Run:
Marginal-Revenue-Marginal-Cost Approach
Profit-Maximizing Case / Loss-Minimizing Case /
Shutdown Case
Marginal Cost and Short-Run Supply
Generalized Depiction / Diminishing Returns, Production
Costs, and Product Supply / Changes in Supply / Firm and
Industry: Equilibrium Price
ConsiderThis: The "Still There"Motel 232
Last Word: Fixed Costs: Digging Yourself Out ofa Hole 234
Chapter V\
Pure Competition in the Long Run
The Long Run in Pure Competition
Profit Maximization in the Long Run
The Long-Run Adjustment Process in Pure Competition
Long-Run Equilibrium
Long-Run Supply Curves
Long-Run Supply for a Constant-Cost Industry / Long-Run
Supply for an Increasing-Cost Industry / Long-Run Supply
for a Decreasing-Cost Industry
Pure Competition and Efficiency
Productive Efficiency: P = Minimum ATC / Allocative
Efficiency: P = MC / Maximum Consumer and Producer
Surplus / Dynamic Adjustments / "Invisible Hand"
Revisited
200
202
209
213
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244
xxx Contents
Technological Advance and Competition
Creative Destruction
Consider This: Running a Company Is Hard Business 250
Last Word: A Patent Failure? 248
Chapter 12
Pure Monopoly
An Introduction to Pure Monopoly
Examples of Monopoly / Dual Objectives of the Study
of Monopoly
Barriers to Entry
Economiesof Scale / Legal Barriers to Entry: Patents
and Licenses / Ownership or Control of Essential
Resources / Pricing and Other Strategie Barriers
to Entry
Monopoly Demand
Marginal Revenue Is LessThan Price / The Monopolist Is a
Price Maker / The Monopolist Sets Prices in the Elastic
Region of Demand
Output and Price Determination
Cost Data / MR = MC Rule / No Monopoly Supply
Curve / MisconceptionsConcerning Monopoly
Pricing / Possibility of Losses by Monopolist
Economic Effects of Monopoly
Price, Output, and Efficiency / IncomeTransfer / Cost
Complications / Assessment and Policy Options
Price Discrimination
Conditions / Examples of Price Discrimination /
Graphical Analysis
Consider This: Price Discrimination at the Ballpark 269
Regulated Monopoly
Socially Optimal Price: P = MC / Fair-Return
Price: P = ATC / Dilemma of Regulation
Last Word: Monopoly Power in the Internet Age 272
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263
268
270
Chapter 13
Monopolistic Competition and Oligopoly
278
Monopolistic Competition
Relatively Large Number of Seilers / Differentiated
Products / Easy Entry and Exit / Advertising /
MonopolisticallyCompetitive Industries
Price and Output in Monopolistic Competition
The Firm's Demand Curve / The Short Run: Profit or
Loss / The Long Run: Onlya Normal Profit
Monopolistic Competition and Efficiency
Weither Productive nor Allocative Efficiency /
Excess Capacity
Product Variety
Benefits of Product Variety / Further Complexity
Oligopoly
A Few Large Producers / Homogeneous or
Differentiated Products / Control over Price, but
Mutual Interdependence / Entry Barriers / Mergers /
Oligopolistic Industries
Consider This:Creative Strategie Behavior 287
279
281
Oligopoly Behavior: A Game Theory Overview
Mutual Interdependence Revisited / Collusion /
Incentive to Cheat
Consider This: The Prisoner's Dilemma 289
Three Oligopoly Models
Kinked-Demand Theory: Noncollusive Oligopoly /
Cartels and Other Collusion / Price Leadership Model
Oligopoly and Advertising
Positive Effects of Advertising / Potential Negative
Effects of Advertising
Oligopoly and Efficiency
Productive and Allocative Efficiency / Qualifications
Last Word: Internet Oligopolies 299
Chapter 13 Appendix: Additional Game
Theory Applications
289
290
296
298
304
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13W-1
Technology, R&D, and Efficiency
Invention, Innovation, and Diffusion
Invention / Innovation / Diffusion / R&D
Expenditures / Modern View of Technological Advance
Role of Entrepreneurs and Other Innovators
Forming Start-Ups / Innovating within Existing Firms /
Anticipating the Future / Exploiting University and
Government Scientific Research
A Firm's Optimal Amount of R&D
Interest-Rate Cost of Funds / Expected Rate of Return /
Optimal R&D Expenditures
Increased Profit via Innovation
Increased Revenue via Product Innovation / Reduced
Cost via Process Innovation
Imitation and R&D Incentives
Benefits of Being First / Profitable Buyouts
ConsiderThis: Trade Secrets 13W-12
Role of Market Structure
Market Structure and Technological Advance /
Inverted-U Theory of R&D / Market Structure and
Technological Advance:The Evidence
Technological Advance and Efficiency
Productive Efficiency / Allocative Efficiency /
Creative Destruction
Last Word:The Relative Decline ofFederal R&D Spending I3W-I6
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PART FIVE
284
285
286
Microeconomics of Resource Markets
and Government
311
Chapter 14
The Demand for Resources
312
Significance of Resource Pricing
Marginal Productivity Theory of Resource Demand
Resource Demand as a Derived Demand / Marginal Revenue
Product / Rule for Employing Resources: MRP = MRC /
313
313
Contents xxxi
MRPas Resource Demand Schedule / Resource Demand
under Imperfect Product Market Competition / Market
Demand for a Resource
Consider This: Superstars 317
Determinants of Resource Demand
Changes in Product Demand / Changes in
Productivity / Changes in the Prices of Other
Resources / Occupational EmploymentTrends
Elasticity of Resource Demand
Optimal Combination of Resources
The Least-Cost Rule / The Profit-Maximizing
Rule / Numerical Illustration
Marginal Productivity Theory of Income Distribution
Last Word: Input Substitution: The Case ofATMs 325
Chapter 15
Wage Determination
Labor, Wages, and Earnings
General Level of Wages /
Role of Productivity / Real Wages and Productivity /
Long-Run Trend of Real Wages
A Purely Competitive Labor Market
Market Demand for Labor / Market Supply of
Labor / Labor Market Equilibrium
Consider This: Fringe Benefits vs. Take-Home Pay 335
Monopsony Model
Upsloping Labor Supply to Firm / MRC Higher Than the
Wage Rate / Equilibrium Wage and Employment /
Examples of Monopsony Power
Three Union Models
Demand-Enhancement Model / Exdusiveor Craft Union
Model / Inclusive or Industrial Union Model / Wage
Increases and Job Loss
Bilateral Monopoly Model
Indeterminate Outcome of Bilateral Monopoly / Desirability
of Bilateral Monopoly
The Minimum-Wage Controversy
Case against the Minimum Wage / Case for the Minimum
Wage / Evidence and Conclusions
Wage Differentials
Marginal Revenue Productivity / Noncompeting Croups /
Compensating Differences / Market Imperfections
Consider This: My Entire Life 345
Pay for Performance
The Principal-Agent Problem / Addenda: Negative Side
Effects of Pay for Performance
Last Word: Are Chief Executive Officers (CEOs) Overpaid? 348
Chapter 15 Appendix: Labor Unions and Their Impacts
317
320
322
324
330
331
333
335
338
340
341
342
346
Land Rent: A Surplus Payment / Land Ownership:
Fairness versus Allocative Efficiency / Application: A Single
Tax on Land
Interest
Money Is Not a Resource / Interest Rates and Interest
Income / Range of Interest Rates / Pure Rate of Interest
Loanable Funds Theory of Interest Rates
Supply ofLoanable Funds / Demand for Loanable Funds /
Extending the Model
Time-Valueof Money
Compound Interest / Future Value and PresentValue
Consider This:That Is Interest 369
Role of Interest Rates
Interest and Total Output / Interest and the Allocation of
Capital / Interest and R&D Spending / Nominal and Real
Interest Rates / Application: Usury Laws
Economic Profit
Entrepreneurship and Profit / Insurable and Uninsurable
Risks / Sources of Uninsurable Risks / Profit as
Compensation for Bearing Uninsurable Risks / Sources of
Economic Profit / Profit Rations Entrepreneurship /
Entrepreneurs, Profits, and Corporate Stockholders
Consider This: Apple CEO Steve Jobs 373
Last Word: Determining the Price of Credit 374
Income Shares
Chapter 17
Natural Resource and Energy Economics
Resource Supplies: Doom or Boom?
Population Growth / Resource Consumption per Person
Consider This:Can Governments Raise Birthrates? 382
Energy Economics
Energy Efficiency Islncreasing / Efficient Electricity Use
Running Out of Energy?
Consider This: Alternative Energy Subsidies and the
Fracking Boom 388
Natural Resource Economics
Renewables vs. Nonrenewables / Optimal Resource
Management / Using Present Values to Evaluate Future
Possibilities / Nonrenewable Resources / Incomplete
Property Rights Lead to Excessive Present Use /
Application: Conflict Diamonds
Renewable Resources
Elephant Preservation / Forest Management / Optimal
Fisheries Management / Policies to Limit Catch Sizes
Consider This:The Tragedy of the Commons 400
Last Word: Is Economic Growth Bad for the Environment? 398
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376
380
381
386
388
389
394
353
Chapter 18
Public Finance: Expenditures and Taxes
Chapter 16
Rent, Interest, and Profit
360
Economic Rent
Perfectly Inelastic Supply / Equilibrium Rent and Changes in
Demand / Productivity Differences and Rent Differences /
361
Government and the Circular Flow
Government Finance
Government Purchases and Transfers / Government
Revenues
405
406
406
xxxii Contents
Federal Finance
Federal Expenditures / Federal Tax Revenues
State and Local Finance
State Finances / Local Finances
Consider This: State Lotteries: A Good Bet? 412
Local, State, and Federal Employment
Apportioning the Tax Bürden
Benefits Received versus Abilityto Pay / Progressive,
Proportional, and RegressiveTaxes
ConsiderThis: The VAT:A VeryAlluring Tax? 415
Tax Incidence and Efficiency Loss
Elasticity and Tax Incidence / Efficiency Loss of a Tax
Probable Incidence of U.S. Taxes
Personal IncomeTax / PayrollTaxes / Corporate Income
Tax / Sales and ExciseTaxes / PropertyTaxes / The U.S.
Tax Structure
Last Word: Taxation andSpending: Redistribution versus
Recycling 422
409
410
412
413
416
419
PART SIX
Microeconomic Issues and Policies
Chapter19
Antitrust Policy and Regulation
The Antitrust Laws
Historical Background / Sherman Act of 1890 /
Clayton Act of 1914 / Federal Trade Commission Act
of 1914 / Celler-Kefauver Act of 1950
Antitrust Policy: Issues and Impacts
Issues of Interpretation / Issues of Enforcement /
Effectiveness of Antitrust Laws
Consider This:OfCatfish and Art (and Other Things in
Common) 435
Industrial Regulation
Natural Monopoly / Problems with Industrial
Regulation / Legal Cartel Theory / Deregulation
Social Regulation
Distinguishing Features / The Optimal Level of Social
Regulation / Two Reminders
Last Word: United States v. Microsoft 440
427
428
429
430
435
438
Economics of Agriculture
The Short Run: Price and Income Instability
The Long Run: A Dedining Industry
Technology and Supply Increases / Lagging Demand /
Graphical Portrayal / Consequences / Farm-Household
Income
Consider This: Risky Business 451
Economics of Farm Policy
Rationale for Farm Subsidies / Background:The Parity
Concept / Economics of Price Supports / Reduction
of Surpluses
Chapter 21
Income Inequality, Poverty,
and Discrimination
Facts about Income Inequality
Distribution by Income Category / Distribution by Quintiles
(Fifths) / The Lorenz Curve and Gini Ratio / Income
Mobility: The Time Dimension / Effect of Government
Redistribution
Causes of Income Inequality
Ability / Education and Training / Discrimination /
Preferences and Risks / Unequal Distribution ofWealth /
Market Power / Luck, Connections, and Misfortune
Income Inequality overTime
Rising Income Inequality since 1975 / Causes of
Growing Inequality
ConsiderThis: Laughing atShrek 472
Equality versus Efficiency
The Case for Equality: Maximizing Total Utility /
The Case for Inequality: Incentives and Efficiency /
The Equality-Efficiency Trade-off
Consider This: Siicing the Pizza 474
The Economics of Poverty
Definition of Poverty / Incidence of Poverty /
Poverty Trends / Measurement Issues
The U.S. Income-Maintenance System
Social Insurance Programs / Public Assistance Programs
Economic Analysis of Discrimination
Taste-for-Discrimination Model / Statistical
Discrimination / Occupational Segregation:The Crowding
Model / Cost to Society as Well asto Individuais
Last Word: U.S. Family Wealth and Its Distribution 484
457
459
465
466
469
471
473
475
477
480
Chapter 22
Chapter 20
Agriculture: Economics and Policy
Consider This: Putting Com in Your Gas Tank 456
Criticisms and Politics
Criticisms of the Parity Concept / Criticisms of the PriceSupport System / The Politics of Farm Policy
Recent Farm Policies
Freedom to Farm Act of 1996 / The Food, Conservation, and
Energy Act of 2008
Last Word: The Sugar Program: A Sweet Deal 460
446
447
450
453
Health Care
490
The Health Care Industry
The U.S. Emphasis on Private Health Insurance /
Twin Problems: Costs and Access / High and Rising
Health Care Costs / Quality of Care: Are We Healthier?
Economic Implications of Rising Costs?
Reduced Access to Care / Labor Market Effects /
Personal Bankruptcies / Impacton Government Budgets /
Too Much Spending?
Limited Access
Why the Rapid Rise in Costs?
Peculiarities of the Health Care Market / The Increasing
Demand for Health Care / Role of Health Insurance /
491
494
495
496
Contents
Supply Factors in Rising Health Care Prices /
Relative Importance
Consider This: Why Do Hospitals SometimesCharge $25 for
an Aspirin? 498
Consider This: Electronic Medical Records 502
Cost Containment: Altering Incentives
Deductibles and Copayments / Health Savings Accounts /
Managed Care / Medicare and DRG / Limits on
Malpractice Awards
The Patient Protection and Affordable Care Act
Major Provisions / Objections and Alternatives
Consider This: PPACA Implementation Problems 506
Last Word: Singapore's Efficient and Effective Health Care
System 508
Chapter 23
Immigration
Numberof Immigrants
Legal Immigrants / Illegal Immigrants
The Decision to Migrate
Earnings Opportunities / Moving Costs / Factors Affecting
Costs and Benefits
Economic Effects of Immigration
Personal Gains / Impacts on Wage Rates, Efficiency, and
Output / Income Shares / Complications and
Modifications / Fiscal Impacts / Research Findings
Consider This:Stars andStripes 518
The Illegal Immigration Debate
Employment Effects / Wage Effects / Price Effects / Fiscal
Impacts on Local and State Government: / Other Concerns
Last Word: The Startling 5lowdown in Illegal Immigration 525
Optimal Immigration
Chapter 25
Measuring Domestic Output and
National Income
503
505
513
514
575
5/7
523
526
PART SEVEN
GDP, Growth, and Instability
Chapter 24
An Introduction to Macroeconomics
Performance and Policy
The Miracle of Modern Economic Growth
Saving, Investment, and Choosing between Present
and Future Consumption
Banks and Other Financial Institutions
Consider This: Economic versus Financial Investment 535
Uncertainty, Expectations, and Shocks
The Importance of Expectations and Shocks / Demand
Shocks and Sticky Prices / Example: A Single Firm Dealing
with Demand Shocks and Sticky Prices / Generalizing from
a Single Firm to the Entire Economy
Consider This: The Great Recession 539
How Sticky Are Prices?
Last Word: Debating the Great Recession 540
Categorizing Macroeconomic Models Using
Price Stickiness
530
531
532
533
535
536
540
542
Assessing the Economy's Performance
Gross Domestic Product / A Monetary Measure / Avoiding
Multiple Counting / GDP Excludes Nonproduction
Transactions / Two Ways of Looking at GDP: Spending
and Income
The Expenditures Approach
Personal Consumption Expenditures (C) / Gross Private
Domestic Investment (lg) / Government Purchases (G) / Net
Exports (Xn) / Putting It All Together: GDP = C + lg + G + Xn
Consider This:Stocks versus Flows 553
The Income Approach
Compensation of Employees / Rents / Interest /
Proprietors'Income / Corporate Profits / Taxes
on Production and Imports / From National Income
to GDP
Other National Accounts
Net Domestic Product / National Income / Personal
Income / Disposable Income / The Circular Flow Revisited
Nominal GDP versus Real GDP
Adjustment Process in a One-Product Economy / An
Alternative Method / Real-World Considerations and Data
Shortcomings of GDP
Nonmarket Activities / Leisure / Improved Product
Quality / The Underground Economy / GDP and the
Environment / Composition and Distribution of
Output / Noneconomic Sources ofWell-Being
Last Word: MagicalMystery Tour 562
Chapter 26
Economic Growth
Economic Growth
Growth as a Goal / Arithmetic of Growth /
Growth in the United States
Modern Economic Growth
The Uneven Distribution of Growth / Catching Up Is
Possible / Institutional StructuresThat Promote Modern
Economic Growth
Consider This: Economic Growth Rates Matter! 573
Consider This: Patents and Innovation 575
Determinants of Growth
Supply Factors / Demand Factor / Efficiency Factor /
Production Possibilities Analysis
Accounting for Growth
Labor Inputs versus Labor Productivity / Technological
Advance / Quantity of Capital / Education and Training /
Economies of Scale and Resource Allocation
Consider This: Women, the Labor Force, and Economic
Growth 579
The Rise in the Average Rate of Productivity Growth
Reasons for the Rise in the Average Rate of Productivity
Growth / Implications for Economic Growth / Skepticism
about Longevity / What Can We Conclude?
546
547
550
553
555
557
561
568
569
571
575
578
581
Contents xxxv
xxxiv Contents
Is Growth Desirable and Sustainable?
585
The Antigrowth View / In Defense of Economic Growth
Last Word:Can Economic Growth Survive Population Decline? 586
Chapter 27
Business Cycles, Unemployment,
and Inflation
The Business Cycle
Phases of the Business Cycle / Causation: A First Glance /
Cyclical Impact: Durables and Nondurables
Unemployment
Measurementof Unemployment / Types of Unemployment /
Definition of Füll Employment / Economic Cost of
Unemployment / Noneconomic Costs /
International Comparisons
Consider This: Downwardly StickyWages and
Unemployment 596
Inflation
Meaning of Inflation / Measurementof Inflation /
Facts of Inflation / Types of Inflation / Complexities /
Core Inflation
Consider This:Clipping Coins 603
Redistribution Effects of Inflation
Who Is Hurt by Inflation? / Who Is Unaffected or
Helped by Inflation? / Anticipated Inflation / Other
Redistribution Issues
ConsiderThis: CouldaLittleInflation Help Reduce
Unemployment? 604
Does Inflation Affect Output?
Cost-Push Inflation and Real Output / Demand-Pull
Inflation and Real Output / Hyperinflation
Last Word:Unemployment after the Great Recession 608
597
592
594
600
603
607
613
Chapter28
Basic Macroeconomic Relationships
The Income-Consumption and Income-Saving
Relationships
The Consumption Schedule / The Saving
Schedule / Average and Marginal Propensities
Nonincome Determinants of Consumption and Saving
Other Important Considerations
Consider This: The Great Recession and the Paradox
ofThrift 621
The Interest-Rate-Investment Relationship
Expected Rate of Return / The Real Interest Rate /
Investment Demand Curve
Shifts of the Investment Demand Curve
Instability of Investment
Consider This:The Great Recession and the Investment
Riddle 626
Chapter 29
The Aggregate Expenditures Model
Assumptions and Simplifications
Consumption and Investment Schedules
Equilibrium GDP: C + lg = GDP
Tabular Analysis / Graphical Analysis
Other Features of Equilibrium GDP
Saving Equals Planned Investment / NoUnplanned
Changes in Inventories
Changes in Equilibrium GDP and the Multiplier
Adding International Trade
Net Exports and Aggregate Expenditures / The Net
Export Schedule / Net Exports and Equilibrium GDP /
International Economic Linkages
Adding the Public Sector
Government Purchases and Equilibrium GDP /
Taxation and Equilibrium GDP
Equilibrium versus Full-Employment GDP
Recessionary Expenditure Gap / Inflationary
Expenditure Gap / Application: The Recession
of 2007-2009
Last Word: Say's Law, the Great Depression,
andKeynes 653
628
635
636
637
638
641
642
643
646
650
614
615
619
622
623
Aggregate Demand and Aggregate Supply
Aggregate Demand
Aggregate Demand Curve
Changes in Aggregate Demand
Consumer Spending / InvestmentSpending /
Government Spending / Net Export Spending
Aggregate Supply
Aggregate Supply in the Immediate Short Run /
Aggregate Supply in the Short Run / Aggregate Supply
in the Long Run / Focusing on the Short Run
Changes in Aggregate Supply
Input Prices / Productivity / Legal-Institutional
Environment
Equilibrium in the AD AS Model
Changes in Equilibrium
Increases in AD: Demand-Pull Inflation / Decreases in AD:
Recession and Cyclical Unemployment / Decreases in AS:
Cost-Push Inflation / Increases in AS: Füll Employment with
Price-Level Stability
Consider This: Ratchet Effect 673
Last Word: Stimulus and the Great Recession 676
Chapter 30 Appendix:The Relationship of the
Aggregate Demand Curve to the Aggregate
Expenditures Model
Chapter31
Fiscal Policy, Deficits, and Debt
Fiscal Policy and the AD AS Model
Expansionary Fiscal Policy / Contractionary Fiscal
Policy / Policy Options: Gor T?
Built-In Stability
Automatic or Built-In Stabilizers
Evaluating How Expansionary or Contractionary
Fiscal Policy Is Determined
Cyclically Adjusted Budget
Recent and Projected U.S. Fiscal Policy
Fiscal Policy from 2000 to 2007 / Fiscal Policy during and
after the Great Recession / Past and Projected Budget
Deficits and Surpluses
Problems, Criticisms, and Complications of
Implementing Fiscal Policy
Problems of Timing / Political Considerations / Future
Policy Reversais / Offsetting State and Local Finance /
Crowding-Out Effect / CurrentThinking on Fiscal Policy
The U.S. Public Debt
Ownership / Debt and GDP / International
Comparisons / Interest Charges / False Concerns
Bankruptcy / Burdening Future Generations /
Substantive Issues / Income Distribution /
Incentives / Foreign-Owned Public Debt /
Crowding-Out Effect Revisited
Last Word: The Social Security and Medicare Shortfalis 702
684
685
689
690
692
694
697
659
660
661
664
667
670
670
681
Money, Banking, and Monetary
Policy
Chapter 32
Money, Banking, and Financial Institutions
The Functions of Money
The Components of the Money Supply
Money Definition MI / Money Definition M2
Consider This: Are Credit Cards Money? 713
What "Backs"the Money Supply?
Money as Debt / Valueof Money / Money and
Prices / Stabilizing Money's Purchasing Power
The Federal Reserve and the Banking System
Historical Background / Board ofGovernors / The 12
Federal Reserve Banks / FOMC / Commercial Banks
andThrifts
Fed Functions, Responsibilities, and Independence
Federal Reserve Independence
The Financial Crisis of 2007 and 2008
The Mortgage Default Crisis / Securitization /
Failures and Near-Failures of Financial Firms
The Policy Response to the Financial Crisis
TheTreasury Bailout:TARP / The Fed's Lender-ofLast-Resort Activities
The Postcrisis U.S. Financial Services Industry
Last Word: Too Big to Fail. Too Big to Jail? 724
Chapter 33
Money Creation
The Fractional Reserve System
lllustrating the ldea:The Goldsmiths / Significant
Characteristics of Fractional Reserve Banking
A Single Commercial Bank
Transaction 1: Creating a Bank / Transaction 2: Acquiring
Property and Equipment / Transaction 3: Accepting
Deposits / Transaction 4: Depositing Reserves in a Federal
Reserve Bank / Transaction 5: Clearing a Check Drawn
against the Bank
Money-Creating Transactions of a Commercial Bank
Transaction 6: Granting a Loan / Transaction 7: Buying
Government Securities / Profits, Liquidity, and the Federal
Funds Market
The Banking System: Multiple-Deposit Expansion
The Banking System's Lending Potential
The Monetary Multiplier
Reversibility:The Multiple Destruction of Money
Last Word: Banking, Leverage, and Financial Instability 742
Chapter 34
Interest Rates and Monetary Policy
PART MINE
Chapter 30
PART EIGHT
Macroeconomic Models and
Fiscal Policy
The Multiplier Effect
Rationale / The Multiplier and the Marginal Propensities /
How Large Is the Actual Multiplier Effect?
Last Word: Squaring the EconomicCircle 631
708
709
710
711
714
716
7/9
720
722
Interest Rates
The Demand for Money / The Equilibrium Interest
Rate / Interest Rates and Bond Prices
The Consolidated Balance Sheet of the Federal
Reserve Banks
Assets / Liabilities
Tools of Monetary Policy
Open-Market Operations / The Reserve Ratio / The
Discount Rate / Interest on Reserves / Relative Importance
Targeting the Federal Funds Rate
Expansionary Monetary Policy / Restrictive Monetary
Policy / The Taylor Rule
ConsiderThis: The FedasaSponge 760
Monetary Policy, Real GDP, and the Price Level
Cause-Effect Chain / Effects of an Expansionary Monetary
Policy / Effects ofa Restrictive Monetary Policy
Monetary Policy: Evaluation and Issues
Recent U.S. Monetary Policy / Problems and Complications
ConsiderThis: Up, Up.andAway 768
The "Big Picture"
Last Word: Worries aboutZIRP, QE,and Twist 772
Chapter 35
Financial Economics
Financial Investment
Present Value
Compound Interest / The Present Value
Model / Applications
723
731
732
733
736
739
741
747
748
751
752
757
761
765
769
777
778
778
xxxvi Contents
Some Populär Investments
Stocks / Bonds / Mutual Funds
Calculating Investment Returns
Percentage Rates of Return / The Inverse Relationship
between Asset Prices and Rates of Return
Arbitrage
Risk
Diversification
Comparing Risky Investments
Average Expected Rate of Return / Beta / Relationship of
Risk and Average Expected Rates of Return / The Risk-Free
Rate of Return
The Security Market Line
Security Market Line: Applications
Consider This: PonziSchemes 797
Last Word: Index Funds versus Actively Managed Funds 793
787
783
784
785
787
789
Chapter 36
Extending the Analysis of Aggregate Supply
From Short Run to Long Run
Short-Run Aggregate Supply / Long-Run Aggregate
Supply / Long-Run Equilibrium in the AD-AS Model
Applying the Extended AD-AS Model
Demand-Pull Inflation in the Extended AD-AS Model / CostPush Inflation in the Extended AD-AS Model / Recession
and the Extended AD-AS Model / Economic Growth with
Ongoing Inflation
The Inflation-Unemployment Relationship
The Phillips Curve / Aggregate Supply Shocks and the
Phillips Curve
The Long-Run Phillips Curve
Short-Run Phillips Curve / Long-Run Vertical Phillips
Curve / Disinflation
Taxation and Aggregate Supply
Taxesand IncentivestoWork / IncentivestoSaveand
Invest / The Laffer Curve / Criticisms of the Laffer Curve /
Rebuttal and Evaluation
Consider This:Sherwood Forest 814
Last Word: Do Tax Increases Reduce Real GDP? 816
798
799
800
802
807
810
812
Chapter 37
828
833
PART ELEVEN
International Economics
PARTTEN
Extensions and Issues
Rules or Discretion?
In Support of Policy Rules / In Defense of Discretionary
Stabilization Policy / Policy Successes
Consider This:On the Road Again 829
Summary of Alternative Views
Last Word: The Taylor Rule: Could a Robot Replace Ben
Bernanke? 832
Chapter 38
International Trade
Some Key Trade Facts
The Economic Basis for Trade
Comparative Advantage / Two Isolated Nations /
Specializing Based on Comparative Advantage /
Terms of Trade / Gains from Trade / Trade with
Increasing Costs / The Case for Free Trade
Consider This: A CPA and a House Painter 841
Consider This: Misunderstanding the Gains from Trade 847
Supply and Demand Analysis of Exports
and Imports
Supply and Demand in the United States /
Supply and Demand in Canada / Equilibrium
World Price, Exports, and Imports
Trade Barriers and Export Subsidies
Economic Impact of Tariffs / Economic Impact of
Quotas / Net Costs ofTariffs and Quotas
Consider This: Buy American? 852
The Case for Protection: A Critical Review
Military Self-Sufficiency Argument / Diversification-forStability Argument / Infant Industry Argument /
Protection-against-Dumping Argument / Increased
Domestic Employment Argument / Cheap Foreign
Labor Argument
Multilateral Trade Agreements and Free-Trade Zones
General Agreement on Tariffs and Trade / World Trade
Organization / The European Union / North American
Free Trade Agreement / RecognizingThose Hurt by Free
Trade / Trade Adjustment Assistance / Offshoring of Jobs
Last Word: Petition of the Candlemakers, 1845 860
837
838
839
840
848
857
854
857
Chapter 39
Current Issues in Macro Theory and Policy
820
What Causes Macro Instability?
Mainstream View / Monetarist View / Real-BusinessCycle View / Coordination Failures
Consider This:Too Much Money? 824
Does the Economy "Self-Correct"?
New Classical View of Self-Correction / Mainstream View
of Self-Correction
827
The Balance of Payments, Exchange
Rates, and Trade Deficits
825
International Financial Transactions
The Balance of Payments
Current Account / Capital and Financial Account /
Why the Balance? / Official Reserves, Payments Deficits,
and Payments Surpluses
866
867
867
Contents xxxvii
Flexible Exchange Rates
Depreciation and Appreciation / Determinants of
Exchange Rates / Flexible Rates and the Balance of
Payments / Disadvantages of Flexible Exchange Rates
Fixed Exchange Rates
Use of Official Reserves / Trade Policies / Exchange Controls
and Rationing / Domestic Macroeconomic Adjustments
The Current Exchange Rate System:The Managed Float
Recent U.S. Trade Deficits
CausesoftheTrade Deficits / Implications of U.S. Trade Deficits
Last Word: Speculation in Currency Markets 882
871
877
879
880
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WEB Chapter 39
The Economics of Developing Countries
39W-1
The Rieh and the Poor
Classifications / Comparisons / Growth, Decline, and
Income Gaps / The Human Realities of Poverty
Obstades to Economic Development
Natural Resources / Human Resources / Capital
Accumulation / Technological Advance / Sociocultural
and Institutional Factors
39W-2
39W-4
The Vicious Circle
The Role of Government
A Positive Role / Public Sector Problems
The Role of Advanced Nations
Expanding Trade / Admitting Temporary
Workers / Discouraging Arms Sales / Foreign Aid: Public
Loans and Grants / Flows of Private Capital
Last Word: Famine in Africa 39W-16
COM The United States in the Global Economy
(Content Option for instruetors, www.mcconnell20e.com)
C0I2 Previous International Exchange-Rate Systems
(Content Option for Instruetors, www.mcconnell20e.com)
Glossary
Credits
Index
39W-11
39W-12
39W-14
GO
CRO
IND1