List of figures xi
List of tables xv
List of Focus boxes xvi
About the authors xvii
Publisher's acknowledgements xviii
Guided tour xx
Preface xxii
Author acknowledgements xxiii
INTRODUCTION 1
Chapter 1
A tour of the world 2
1.1 Europe and the euro 3
1.2 The economic outlook in the USA 6
1.3 The largest emerging economies 10
1.4 Looking ahead 11
Key terms 12
Questions and problems 12
Further reading 13
Appendix Where to find the numbers? 14
Chapter 2
A tour of the book 15
2.1 Aggregate output 16
2.2 Other major macroeconomic variables 21
2.3 Output, unemployment and the inflation rate,
Okun's law and the Philips curve 27
2.4 The short run, the medium run and the long run 29
2.5 A tour of the book 30
Summary 32
Key terms 33
Questions and problems 33
Further reading 35
Appendix The construction of real GDP and
chain-type indexes 36
THE SHORT RUN 41
Chapter 3
The goods market 42
3.1 The composition of GDP 43
3.2 The demand for goods 44
3.3 The determination of equilibrium output 47
3.4 Investment equals saving: an alternative way of
thinking about the goods-market equilibrium 54
3.5 Is the government omnipotent? A warning 57
Summary 58
Key terms 58
Questions and problems 59
Chapter 4
Financial markets 61
4.1 The demand for money 62
4.2 Determining the interest rate: part 1 66
4.3 Determining the interest rate: part 2 70
4.4 Two alternative ways of looking at the
equilibrium 76
Summary 79
Key terms 79
Questions and problems 80
Further reading 81
Chapter 5
Goods and financial markets:
the IS-LM model 82
5.1 The goods market and the IS relation 83
5.2 Financial markets and the LM relation 87
5.3 Putting the IS and the LM relations together 90
5.4 Using a policy mix 95
5.5 IS-LM and the liquidity trap 96
5.6 How does the IS-LM model fit the facts? 99
Summary 101
Key terms 101
Questions and problems 102
Further reading 103
Appendix An analytical version of the IS-LM model 104
Chapter 6
The IS-LM model in an open economy 108
6.1 Openness in goods markets 109
6.2 Openness in financial markets 116
6.3 The IS relation in an open economy 122
6.4 The LM relation in an open economy 128
6.5 Putting goods and financial markets together
in an open economy 131
Summary 133
Key terms 133
Questions and problems 134
Further reading 134
Chapter 7
Output, the interest rate and
the exchange rate 136
7.1 Increases in demand, domestic or foreign 137
7.2 Depreciation, the trade balance and output 143
7.3 Looking at dynamics: the J-curve 145
7.4 Saving, investment and the trade balance 147
7.5 The effects of policy in an open economy 151
7.6 Fixed exchange rates 152
Summary 157
Key terms 157
Questions and problems 157
Further reading 160
Appendix Derivation of the Marshall-Lerner
condition 161
THE MEDIUM RUN 163
Chapter 8
The labour market 164
8.1 A tour of the labour market 165
8.2 Wage determination 170
8.3 Price determination 177
8.4 The natural rate of unemployment 178
8.5 Where we go from here 182
Summary 183
Key terms 184
Questions and problems 184
Further reading 186
Appendix Wage and price setting relations versus
labour supply and labour demand 187
Chapter 9
Putting all markets together:
the AS-AD model 189
9.1 Aggregate supply 190
9.2 Aggregate demand 192
9.3 Equilibrium in the short run and in
the medium run 194
9.4 The effects of a monetary expansion 197
9.5 A decrease in the budget deficit 200
9.6 An increase in the price of oil 204
9.7 Conclusions 210
Summary 211
Key terms 212
Questions and problems 212
Chapter 10
The Phillips curve, the natural rate
of unemployment and inflation 215
10.1 Inflation, expected inflation and
unemployment 216
10.2 The Phillips curve 217
10.3 The Phillips curve and the natural rate of
unemployment in Europe 224
Summary 232
Key terms 232
Questions and problems 233
Further reading 234
Appendix From the aggregate supply relation to
a relation between inflation, expected
inflation and unemployment 235
Chapter 11
Inflation, money growth and
the real rate of interest 236
11.1 Output, unemployment and inflation 237
11.2 Nominal versus real interest rates 241
11.3 Nominal and real interest rates and
the IS-LM model 244
11.4 The effects of money growth 245
11.5 Money growth, inflation and nominal and
real interest rates 252
11.6 Disinflation 254
Summary 260
Key terms 261
Questions and problems 261
Chapter 12
The medium run in an open
economy 264
12.1 The medium run 265
12.2 Exchange rate crises under fixed
exchange rates 270
12.3 Exchange rate movements under flexible
exchange rates 274
12.4 Choosing between exchange rate
regimes 277
Summary 280
Key terms 280
Questions and problems 281
THE LONG RUN 285
Chapter 13
The facts of growth 286
13.1 Measuring the standard of living 287
13.2 Growth in rich countries since 1950 290
13.3 A broader look across time and space 293
13.4 Thinking about growth: a primer 296
Summary 301
Key terms 301
Questions and problems 302
Further reading 303
Chapter 14
Saving, capital accumulation and
output 304
14.1 Interactions between output and capital 305
14.2 The implications of alternative saving rates 308
14.3 Getting a sense of magnitudes 317
14.4 Physical versus human capital 320
Summary 323
Key terms 323
Questions and problems 323
Further reading 325
Appendix The Cobb-Douglas production function
and the steady state 326
Chapter 15
Technological progress and growth 327
15.1 Technological progress and the rate
of growth 328
15.2 The determinants of technological progress 334
15.3 The facts of growth revisited 337
Summary 342
Key terms 343
Questions and problems 343
Further reading 345
Appendix Constructing a measure of technological
progress 346
EXPECTATIONS 351
Chapter 16
Financial markets and expectations 352
16.1 Expected present discounted values 353
16.2 Bond prices and bond yields 359
16.3 The stock market and movements in stock
prices 367
16.4 Risk, bubbles, fads and asset prices 374
Summary 378
Key terms 379
Questions and problems 379
Further reading 381
Chapter 17
Expectations, consumption and
investment 382
17.1 Consumption theory and the role of
expectations 383
17.2 Toward a more realistic description 387
17.3 Investment 391
17.4 The volatility of consumption and investment 398
Summary 400
Key terms 401
Questions and problems 401
Appendix Derivation of the expected present
value of profits under static
expectations 404
Chapter 18
Expectations, output and policy 405
18.1 Expectations and decisions: taking stock 406
18.2 Monetary policy, expectations and output 409
18.3 Deficit reduction, expectations and output 415
Summary 420
Key terms 421
Questions and problems 421
EUROPE: PAST, PRESENT AND FUTURE
Chapter 19
The euro at fourteen: was it a
good idea and why is it in trouble? 424
19.1 The monetary history of Europe from post-war
to the present day 425
19.2 Is Europe an optimal currency area? 431
19.3 The European system of central banks:
structure and objectives 434
19.4 The first thirteen years of the euro (1999-2011) 439
19.5 Should the outs join? 443
Summary 445
Key terms 446
Questions and problems 446
Further reading 447
Chapter 20
The crisis 448
20.1 From a housing problem to a financial crisis 449
20.2 The use and limits of policy 454
20.3 The slow recovery 464
Summary 469
Key terms 469
Questions and problems 469
Further reading 470
Chapter 21
High debt 471
21.1 The government's budget constraint 472
21.2 The evolution of the debt-to-GDP ratio 476
21.3 The return from a high debt 486
Summary 490
Key terms 490
Questions and problems 490
Further reading 491
SHOULD POLICY MAKERS BE
RESTRAINED?
Chapter 22
Policy and policy makers: what do
we know? 494
22.1 Uncertainty and policy 495
22.2 Expectations and policy 498
22.3 Politics and policy 503
Summary 505
Key terms 506
Questions and problems 506
Further reading 508
Chapter 23
Monetary and fiscal policy rules and
constraints 509
23.1 The optimal inflation rate 510
23.2 Monetary policy rules 514
23.3 Fiscal policy rules and constraints 523
Summary 532
Key terms 533
Questions and problems 533
Further reading 536
Appendix The time inconsistency problem:
Barro and Gordon model 537
EPILOGUE 539
Chapter 24 540
The story of macroeconomics 541
24.1 Keynes and the Great Depression 541
24.2 The neoclassical synthesis 541
24.3 The rational expectations critique 544
24.4 Recent developments up to the crisis 547
24.5 First lessons from the crisis 550
Summary 552
Key terms 552
Further reading 553
Appendix 1 A maths refresher 554
Appendix 2 An introduction to econometrics 559
Glossary 564
Symbols used in this book 575
Index 577
