DescriptionMacroeconomics is widely praised for its ability to present theory as a way of evaluating key macro questions, such as why some countries are rich and others are poor. Gordon makes extensive use of data, international examples, and case studies throughout, and the Eleventh Edition incorporates critical developments in the field. New topics include the housing bubble and housing wealth, the effect of oil prices on the economy, and the purchase of dollar reserves by China to finance the U.S. import deficit.
Students have a natural interest in what is happening today and what will happen in the near future. Macroeconomics capitalizes on their interest by beginning with business cycles and monetary-fiscal policy in both closed and open economy. After that, Gordon presents a unique dynamic analysis of demand and supply shocks as causes of inflation and unemployment, followed by a dual approach to economic growth in which theory and real-world examples are used to compare rich and poor countries.
- Theory as a way to evaluate macro questions. Gordon believes that all macro questions relate to a core set of basic macro puzzles and presents theory with this in mind. Students not only see how theory applies to the real world, but they also learn how to recognize the connections between concepts, such as output and unemployment.
- Patient and early introduction to business cycles. Because students care most about today’s issues, business cycles and inflation are discussed up front. The IS-LM model is presented early, and an integrated treatment covers monetary and fiscal policy stabilization, fiscal and foreign deficits and national saving, and the interplay between the balance of payments and exchange rates.
- A dynamic version of the AS-AD model. Gordon pioneered the dynamic analysis of aggregate demand and supply shocks that can cause inflation and unemployment to be either positively or negatively correlated. In this edition, the rising prices of oil provide a new test for this theory.
- A clear distinction between short- and long-run macro models. By clearly distinguishing short-run macro (business cycles and their prevention) from long-run macro (economic growth and the long-run consequences of debt and deficits), Gordon helps students understand how different models relate and connect to one another.
- Pedagogically designed figures. Color is used consistently throughout chapters to demonstrate the link between theoretical curves and related data graphs.
- Case studies. Directly following theoretical discussions, case studies bring the material to life using real-world examples to which students can relate.
- International Perspective boxes. Students gain a well-rounded view of the global economy through International Perspective boxes that compare economic performance in the United States with selected foreign countries.
- Self-Tests. At the end of every section, Self-Tests immediately check to ensure students retain the topics covered. Answers are provided at the end of each chapter.
- Data Appendixes. A robust set of data tables is available as appendixes, including annual data for the U.S. back to 1875 and quarterly data back to 1947, as well as annual data since 1960 for other leading nations. This data can also be downloaded from the Companion Website.
New to This Edition
- Unifying theme of housing. Gordon introduces a discussion of the housing bubble generated by the Federal Reserve’s monetary policy then moves to the role that housing wealth plays in the determination of consumer expenditures. The text includes recent literature on the relative importance of stock market and housing wealth as determinants of consumer expenditures and the low measured U.S. saving rate.
- Increased focus on China. The purchase of American dollars by China helps the U.S. to run a persistent current account deficit. Why is China willing to acquire so many dollar reserves, and will this continue? The best recent academic research on this puzzle is integrated into the text’s treatment of international macroeconomics.
- Two unique perspectives on growth. In addition to presenting the Solow theory of economic growth, Gordon also presents “puzzles the Solow theory cannot explain.” This frames the discussion of growth theory around the need to explain these puzzles.
- A new test of the dynamic analysis of aggregate demand and supply shocks. Gordon pioneered the dynamic analysis of aggregate demand and supply shocks that could cause inflation and unemployment to be either positively or negatively correlated. A new test for this theory comes with the soaring price of oil in 2004–2007. Gordon explores questions such as:
- Why did the 2004–2007 increases in oil prices not derail the economic recovery?
- Is there some fundamental change occurring in the role of oil prices?
- New comparative economics. The treatment of rich and poor nations is among the first to introduce literature on new comparative economics to the undergraduate classroom, broaching such subjects as the role of corruption, civil wars, and other disruptions of property rights in holding back progress in some poor nations.
- The latest news and research developments. A selection of new examples, case studies, and International Perspective boxes reflecting recent topics include:
- Did monetary policy make a big mistake in the early part of this decade by allowing interest rates to fall too low and create a housing bubble that subsequently collapsed?
- Does monetary policy bear responsibility for enticing home borrowers into mortgages they could not afford, leading to subsequent home foreclosures?
- Should monetary policy be judged only by its success in taming inflation or should a higher standard be applied to the role of monetary policy in making the housing industry directly, and the overall economy indirectly, less stable than before?
- At least two Excel-based problems per chapter, by David Ring of SUNY Oneonta, ask students to use real data to compute answers. Solutions are available for instructors to download from the Instructor Resource Center.
Table of Contents
Part I: Introduction and Measurement
Chapter 1. What Is Macroeconomics?
1-1 How Macroeconomics Affects Our Everyday Lives
1-2 Defining Macroeconomics
1-3 Actual and Natural Real GDP
1-4 Macroeconomics in the Short Run and Long Run
1-5 Case Study: A Century of Business Cycles
1-6 Macroeconomics at the Extremes
1-7 Taming Business Cycles: Stabilization Policy
1-8 The “Internationalization” of Macroeconomics
Chapter 2. The Measurement of Income, Prices, and Unemployment
2-1 Why We Care About Income
2-2 The Circular Flow of Income and Expenditure
2-3 What Transactions Should Be Included in Income and Expenditure?
2-4 Components of Expenditure
2-5 The “Magic” Equation and the Twin Deficits
2-6 How Much Income Flows from Business Firms to Households?
2-7 Nominal GDP, Real GDP, and the GDP Deflator
2-8 Measuring Unemployment
2-9 Case Study: Conflicting Measurements: Was the 2002-04 Recover “Jobless” or Not?
Appendix: How We Measure Real GDP and the Inflation Rate
Part II: Income, Interest Rates, Policy, and the Open Economy
Chapter 3. Spending, Income, and Interest Rates
3-1 Business Cycles and the Theory of Income Determination
3-2 Income Determination, Unemployment, and the Price Level
3-3 Planned Expenditure
3-4 Case Study: Why Did U.S. Saving Almost Vanish in This Decade?
3-5 The Economy In and Out of Equilibrium
3-6 The Multiplier Effect
3-7 Sources of Shifts in Planned Spending
3-8 How Can Monetary Policy Affect Planned Spending?
3-9 The Relation of Autonomous Planned Spending to the Interest Rate
3-10 The IS Curve
3-11 Conclusion: The Missing Relation
Appendix: Allowing for Income Taxes and Income-Dependent Net Exports
Chapter 4. Monetary and Fiscal Policy in the IS-LM Model
4-1 Introduction: The Power of Monetary and Fiscal Policy
4-2 Why People Use Money
4-3 Income, the Interest Rate, and the Demand for Money
4-4 The LM Curve
4-5 The IS Curve Meets the LM Curve
4-6 Monetary Policy in Action
4-7 How Fiscal Expansion Can “Crowd Out” Investment
4-8 Strong and Weak Effects of Monetary Policy
4-9 Strong and Weak Effects of Fiscal Policy
4-10 Using Fiscal and Monetary Policy Together
Appendix: The Elementary Algebra of the IS-LM Model
Chapter 5. The Government Budget, Foreign Borrowing, and the Twin Deficits
5-2 The Pervasive Effects of the Government Budget
5-3 Case Study: The Government Budget In Historical Perspective
5-4 The Structural Budget
5-5 National Saving and the Consequences of the Government Budge
5-6 Case Study: How the Deficits Rejoined to Become “Twins”
5-7 The Current Account and the Balance of Payments
5-8 Conclusion: Solutions to the National Saving Squeeze
Chapter 6. International Trade, Exchange Rates, and Macroeconomic Policy
6-2 Exchange Rates
6-3 The Market for Foreign Exchange
6-4 Real Exchange Rates and Purchasing Power Parity
6-5 Exchange Rate Systems
6-6 Case Study: Asia Intervenes with Buckets to Buy Dollars and Finance the U.S. Current Account Deficit—How Long Can This Continue?
6-7 Determinants of Net Exports
6-8 The Real Exchange Rate and Interest Rate
6-9 Effects of Monetary and Fiscal Policy with Fixed and Flexible Exchange Rates
6-10 Conclusion: Economic Policy in the Open Economy
Part III: Aggregate Demand, Aggregate Supply, Unemployment and Inflation
Chapter 7. Aggregate Demand, Aggregate Supply, and the Self-Correcting Economy
7-1 Combining Aggregate Demand with Aggregate Supply
7-2 Flexible Prices and the AD Curve
7-3 Shifting the Aggregate Demand Curve with Monetary and Fiscal Policy
7-4 Alternative Shapes of the Short-Run Aggregate Supply Curve
7-5 The Short-Run Aggregate Supply (SAS) Curve When the Nominal Wage Rate Is Constant
7-6 How the Wage Rate Is Set
7-7 Fiscal and Monetary Expansion in the Short and Long Run
7-8 Classical Macroeconomics: The Quantity Theory of Money and the Self-Correcting Economy
7-9 The Keynesian Revolution: The Failure of Self-Correction
7-10 Case Study: What Caused the Great Depression
Chapter 8. Inflation: Its Causes and Cures
8-2 Real GDP, the Inflation Rate, and the Short-Run Phillips Curve
8-3 The Adjustment of Expectations
8-4 Nominal GDP Growth and Inflation
8-5 Effects of an Acceleration in Nominal GDP Growth
8-6 Expectations and the Inflation Cycle
8-7 Recession as a Cure for Inflation
8-8 The Importance of Supply Shocks
8-9 The Response of Inflation and the Output Ratio to a Supply Shock
8-10 Case Study: Why Did Inflation Creep Up After 2003?
8-11 Inflation and Output Fluctuations: Recapitulation of Causes and Cures
8-12 How Is the Unemployment Rate Related to the Inflation Rate?
Appendix: The Elementary Algebra of the SP-DG Model
Chapter 9. The Goals of Stabilization Policy: Low Inflation and Low Unemployment
9-1 The Costs and Causes of Inflation
9-2 Money and Inflation
9-3 Why Inflation Is Not Harmless
9-4 Indexation and Other Reforms to Reduce the Costs of Inflation
9-5 The Government Budget Constraint and the Inflation Tax
9-6 Starting and Stopping in Hyperinflation
9-7 Why the Unemployment Rate Cannot Be Reduced to Zero
9-8 Sources of Mismatch Unemployment
9-9 Turnover Unemployment and Job Search
Part IV: Macroeconomics in the Long Run: Growth and Public Finance
Chapter 10. The Theory of Economic Growth
10-1 The Importance of Economic Growth
10-2 Standards of Living as the Consequence of Economic Growth
10-3 The Production Function and Economic Growth
10-4 Solow’s Theory of Economic Growth
10-5 Technology in Theory and Practice
10-6 Puzzles That Solow’s Theory Cannot Explain
10-7 Human Capital, Immigration, and the Solow Puzzles
10-8 Endogenous Growth Theory: How Is Technological Change Produced?
10-9 Conclusion: Are There Secrets of Growth?
Appendix: General Functional Forms and the Production Function
Chapter 11. The Big Questions of Economic Growth
11-1 Answering the Big Questions
11-2 The Standard of Living and Concepts of Productivity
11-3 The Failure of Convergence
11-4 Human Capital and Technology
11-5 Political Capital, Infrastructure, and Geography
11-6 Case Study: Uneven U.S. Growth Across Eras: Why Did U.S. Productivity Growth Slow Down and Then Revive?
11-7 Labor Supply Shifts as a Source of Faster or Slower Productivity Growth
11-8 Case Study: The Productivity Growth Contrast Between Europe and the United States
11-9 Conclusion to the Great Questions of Growth
Chapter 12. The Government Budget, the Public Debt, and Social Security
12-1 Introduction: The Government Budget and Long-Run Economic Growth
12-2 Long-Run Effects of Fiscal Policy on Economic Growth and Welfare
12-3 The Future Burden of the Government Debt
12-4 Will the Government Remain Solvent?
12-5 Case Study: Historical Behavior of the Debt-GDP Ratio Since 1790
12-6 Why the Budget Deficit Disappeared Temporarily and the Reappeared
12-7 Alternative Views of Fiscal Policy: Supply-Side Economics
12-8 Alternative Views of Fiscal Policy: The Barro-Ricardo Equivalence Theorem
12-9 The Great Debate over Social Security
12-10 Long-Run Economic Growth and the Fiscal Debate
Part V: Stabilization Policy in an Open Economy
Chapter 13. Money and Financial Markets
13-1 Money in a World of Many Financial Assets and Liabilities
13-2 Financial Institutions, Markets, and Instruments
13-3 Definitions of Money
13-4 High-Powered Money and Determinants of the Money Supply
13-5 The Fed's Three Tools for Changing the Money Supply
13-6 Theories of the Demand for Money
13-7 Case Study: Why Interest Rates Were More Volatile in the 1980s and Less Volatile in the 1990s
13-8 Why the Federal Reserve "Sets" Interest Rates
Chapter 14. Stabilization Policy in the Closed and Open Economy
14-1 The Central Role of Demand Shocks
14-2 Stabilization Targets and Instruments in the Activists' Paradise
14-3 Policy Rules
14-4 Policy Pitfalls: Lags and Uncertain Multipliers
14-5 Case Study: Was the Fed Responsible for the Great Moderation?
14-6 Time Inconsistency, Credibility, and Reputation
14-7 Case Study: The Taylor Rule and the Changing Fed Attitude Toward Inflation and Output
14-8 Rules Versus Discretion: An Assessment
14-9 Case Study: Should Monetary Policy Target the Exchange Rate?
Part VI: Stability and Instability in the Private Economy
Chapter 15. The Economics of Consumption Behavior
15-1 Consumption and Economic Stability
15-2 Case Study: Main Features of U.S. Consumption Data
15-3 Background: The Conflict Between the Time-Series and Cross-Section Evidence
15-4 Forward-Looking Behavior: The Permanent-Income Hypothesis
15-5 Forward-Looking Behavior: The Life-Cycle Hypothesis
15-6 Rational Expectations and Other Amendments to the Simple Forward-Looking Theories
15-7 Bequests and Uncertainty
15-8 Case Study: Did Souring Household Assets Cause the Collapse in the Household Saving Rate?
15-9 Why the Official Household Saving Data Are Misleading
15-10 Conclusion: Consumption and the Case For and Against Activism
Chapter 16. The Economics of Investment Behavior
16-1 Investment and Economic Stability
16-2 Case Study: The Historical Instability of Investment
16-3 The Accelerator Hypothesis of Net Investment
16-4 Case Study: The Simple Accelerator and the Postwar U.S. Economy
16-5 The Flexible Accelerator
16-6 The Neoclassical Theory of Investment Behavior
16-7 User Cost and the Role of Monetary and Fiscal Policy
16-8 Business Confidence and Speculation
16-9 Case Study: The Boom and Bust in the "New Economy" Investment
16-10 Investment as a Source of Instability of Output and Interest Rates
16-11 Conclusion: Investment and the Case For and Against Activism
Part VII: Debates at the Macroeconomic Frontier
Chapter 17. New Classical Macro Confronts New Keynesian Macro
17-1 Introduction: Classical and Keynesian Economics, Old and New
17-2 Imperfect Information and the "Fooling Model"
17-3 The Lucas Model and the Policy Ineffectiveness Proposition
17-4 The Real Business Cycle Model
17-5 New Classical Macroeconomics: Limitations and Positive Contributions
17-6 Essential Features of the New Keynesian Economics
17-7 Why Small Nominal Rigidities Have Large Macroeconomic Effects
17-8 Coordination Failures and Indexation
17-9 Long-Term Labor Contracts as a Source of the Business Cycle
17-10 "Real" Sources of Wage Stickiness
17-11 Assessment of the New Keynesian Model
Chapter 18. Conclusion: Where We Stand
18-1 The Evolution of Events and Ideas
18-2 The Reaction of Ideas to Events, 1923–47
18-3 The Reaction of Ideas to Events, 1947–69
18-4 The Reaction of Ideas to Events, 1970–2007
18-5 The Reaction of Ideas to Events in the World Economy
18-6 Macro Mysteries: Unsettled Issues and Debates
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About the Author(s)
Robert J. Gordon
is Stanley G. Harris Professor in the Social Sciences and Professor of Economics at Northwestern University. He holds a bachelor’s degree from Harvard University, after which he attended Oxford University in England on a Marshall Scholarship. He received his PhD from the Massachusetts Institute of Technology. He taught at Harvard and the University of Chicago before moving to Northwestern in 1973, where he has taught for more than thirty years and where he was the chair of the Department of Economics from 1992 to 1996.
Professor Gordon is one of the world’s leading experts on inflation, unemployment, and productivity growth. His recent research includes work on the rise and fall of the New Economy, the U.S. productivity growth revival, and the recent stalling of European productivity growth. He is the author of several books, more than 100 scholarly articles, and more than 60 published comments on the research of others.
He is a research associate at the National Bureau of Economic Research (NBER), a research fellow of the Centre for Economic Policy Research in London, a Guggenheim Fellow, a fellow of the American Academy of Arts and Sciences, and a fellow of the Econometric Society.
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