ROGER A.

ARNOLD
California State University
s Marcoe

* o SOUTH-WESTERN
ac CENGAGE Learning"
A u s t r a l i a • Brazil • C a n a d a • M e x i c o • S i n g a p o r e • S p a i n • U n i t e d K i n g d o m • U n i t e d States
 BRIEF CONTENTS

[~AN INTRODUCTION TO ECONOMICS Part 5 Expectations and Growth

Chapter 16 Expectations Theory and the Economy 335
Part 1 Economics: The Science of Scarcity
Chapter 17 Economic Growth: Resources, Technology, Ideas,
Chapter 1 What Economics Is About 1 and Institutions 358
Appendix A Working with Diagrams 23
Part 6 The Financial Crisis of 2007-2009
Appendix B Should You Major in Economics? 32
Chapter 2 Production Possibilities Frontier Framework 40 Chapter 18 The Financial Crisis of 2007-2009 375

Chapter 3 Supply and Demand: Theory 55 Part 7 Government and the Economy
Chapter 4 Prices: Free, Controlled, and Relative 85 v. - Chapter 19 Debates in Macroeconomics Over the Role and
Chapter 5 Supply, Demand, and Price: Applications 100 Effects of Government 396

Part 8 Public Choice and Special-lnterest-Group

^MACROECONOMICT Politics

Part 2 Macroeconomic Fundamentals Chapter 20 Public Choice and Special-lnterest-Group Politics 410

Chapter 6 Macroeconomic Measurements, Part I: Prices and

Unemployment 117 | THE GLOBAL ECONOMY
Chapter 7 Macroeconomic Measurements, Part II: GDP and
Real GDP 132 Part 9 International Economics and
Globalization
Part 3 Macroeconimic Stability,
Chapter 21 International Trade 430
Instability, and Fiscal Policy
Chapter 22 International Finance 448
Chapter 8 Aggregate Demand and Aggregate Supply 152 Chapter 23 Globalization and International Impacts on the
Chapter 9 Classical Macroeconomics and the Self-Regulating Economy 477
Economy 182
Chapter 10 Keynesian Macroeconomics and Economic Instability: PRACTICAL ECONOMICS
A Critique of the Self-Regulating Economy 204
Part 10 Financial Matters
Chapter 11 Fiscal Policy and the Federal Budget 232
Chapter 24 Stocks, Bonds, Futures, and Options 504
Part 4 Money, The Economy, and
Monetary Policy |_WEB CHAPTER
Chapter 12 Money, Banking, and the Financial System 252 Part 11 W e b Chapter
Chapter 13 The Federal Reserve System 269
Chapter 25 Agriculture: Problems, Policies, and Unintended
Appendix C The Market for Reserves (or the Federal Funds Effects
Market) 285
Chapter 14 Money and the Economy 289 Self-Test Appendix 523
Chapter 15 Monetary Policy 314 Glossary 536
Appendix D Bond Prices and the Interest Rate 332 Index 547
 CONTENTS

INTRODUCTION TO ECONOMICS
PART 1 ECONOMICS: THE SCIENCE OF SCARCITY

CHAPTER 1: WHAT ECONOMICS IS ABOUT 1

A Definition of Economics 1
economics 24/7J. Goods and Bads 1 Resources 2 Scarcity and a Definition of Economics 2
Key Concepts in Economics 5
Opportunity Cost 5 Opportunity Cost and Behavior 5 Benefits and Costs 6 Decisions
Made at the Margin 6 Efficiency 8 Economics Is About Incentives 10 Unintended
Effects 10 Exchange 12
The Market and Government 12
Ceteris Paribus and Theory 13
Ceteris Paribus Thinking 13 What Is a Theory? 14
Economic Categories 17
Positive and Normative Economics 17 Microeconomics and Macroeconomics 17
HOURS Chapter Summary 20 ;

ISm'ii B'Aetm flat'

Key Terms and Concepts 21
U (CaMijfttirm ike M Questions and Problems 21

APPENDIX A: WORKING WITH DIAGRAMS 23

Two-Variable Diagrams 23
Slope of a Line 24
Slope of a Line is Constant 25
Slope of a Curve 25
The 45-Degree Line 27
Pie Charts 27
Bar Graphs 28
Line Graphs 28
Appendix Summary 30
Questions and Problems 30

APPENDIX B: SHOULD YOU MAJOR IN ECONOMICS? 32

Five Myths About Economics and Being an Economics Major 33

W h a t Awaits You as an Economics Major? 36
W h a t Do Economists Do? 37
Places to Find More Information 39
Concluding Remarks 39

VII
VIII LUINIbNIi

CHAPTER 2: PRODUCTION POSSIBILITIES FRONTIER

FRAMEWORK 40

The Production Possibilities Frontier 40

The Straight-Line PPF: Constant Opportunity Costs 40 The Bowed-Outward (Concave-
Downward) PPF: Increasing Opportunity Costs 41 Law of Increasing Opportunity
Costs 42 Economic Concepts in a PPF Framework 43
Specialization and Trade Can Move Us Beyond Our PPF 48
A Simple Two-Person PPF Model 48
On or Beyond the PPF? 51
Chapter Summary 52 -
uni IOC Key Terms and Concepts 53
» ,'lfti? /W
Questions and Problems 54
i . w r §a Working with Numbers and Graphs 54

:
CHAPTER 3: SUPPLY AND DEMAND:THEORY 55

W h a t Is Demand? 55
The Law of Demand 56 Four Ways to Represent the Law of Demand 56 Why Does
Quantity Demanded Go Down as Price Goes Up? 57 Individual Demand Curve and
Market Demand Curve 58 A Change in Quantity Demanded Versus a Change in
Demand 59 What Factors Cause the Demand Curve to Shift? 61 Movement
Factors and Shift Factors 64
Supply 65
The Law of Supply 66 Why Most Supply Curves Are Upward Sloping 66 Changes
in Supply Mean Shifts in Supply Curves 68 What Factors Cause the Supply Curve to
Shift? 68 A Change in Supply Versus a Change in Quantity Supplied 69
The Market: Putting Supply and Demand Together 70
Supply and Demand at Work at an Auction 71 The Language of Supply and Demand:
A Few Important Terms 71 Moving to Equilibrium: What Happens to Price When
There Is a Surplus or a Shortage? 72 Speed of Moving to Equilibrium 73 Moving
to Equilibrium: Maximum and Minimum Prices 73 Equilibrium in Terms of
r
©G HuuRS Consumers' and Producers' Surplus 75 What Can Change Equilibrium Price and
Quantity? 76
Chapter Summary 82
Key Terms and Concepts 82
Questions and Problems 83
Working with Numbers and Graphs 84

CHAPTER 4: PRICES: FREE, CONTROLLED, AND

RELATIVE 85

Price 85
Price as a Rationing Device 85 Price as a Transmitter of Information 86
Price Controls 87
Price Ceiling 87 Price Floor: Definition and Effects 89
Two Prices: Absolute and Relative 94
Absolute (Money) Price and Relative Price 94 Taxes on Specific Goods and Relative Price
Changes 96
 Chapter Summary 98
ni IIDC Key Terms and Concepts 98
iuu Questions and Problems 98
{S>,\,w«««'<ft5 " W
Working with Numbers and Graphs 99

CHAPTER 5: SUPPLY, DEMAND, AND PRICE:

APPLICATIONS 100

Application 1: Why Is It So Hard to Get Tickets to the Taping of The Big Bang
Theory 100
Application 2: Government, Easier Loans, and Housing Prices 102
Application 3: Southwest Airlines and the Price of an Aisle Seat 102
Application 4: Why Is Medical Care So Expensive? 103
Application 5: Why Do Colleges Use GPAs, ACTs, and SATs for Purposes of
Admission? 106
Uni i p r Application 6 : Supply and Demand on a Freeway 106
Application 7: Are Renters Better Off? 108
Application 8: Do You Pay for Good Weather? 109
Application 9: College Superathletes 110
Application 10: 10 a.m. Classes in College 112
Application 11: What Will Happen to the Price of Marijuana If the Purchase and Sale of
Marijuana Are Legalized? 113
Chapter Summary 115 \
Questions and Problems 115
Working with Numbers and Graphs 116

MACROECONOMICS
PART 2 MACROECONOMIC FUNDAMENTALS

CHAPTER 6: MACROECONOMIC MEASUREMENTS,

PART I: PRICES AND UNEMPLOYMENT 117

Measuring the Price Level 117

Computing the Price Level Using the CPI 117 Inflation and the CPI 119 GDP Implicit
economics'24/7{ Price Deflator 120 Converting Dollars from One Year to Another 121
Measuring Unemployment 123
Who Are the Unemployed? 123 The Unemployment and Employment
:'Wm^Ali§$§ D23 Rates 124 Common Misconceptions About the Unemployment and Employment
Rates 125 Reasons for Unemployment 125 Discouraged Workers 126 Types of
D2S Unemployment 126 The Natural Unemployment Rate and Full Employment 127
Cyclical Unemployment 127
Chapter Summary 130
©IflHCi HOURS Key Terms and Concepts 130
Questions and Problems 130
Working with Numbers and Graphs 130
 I.UI1 I l_IN I J

CHAPTER 7: MACROECONOMIC MEASUREMENTS, PART II:

GDP AND REAL GDP 132

Gross Domestic Product 132

Calculating GDP 132 Final Goods and Intermediate Goods 133 What GDP Omits 133
economics 24/7111 GDP Is Not Adjusted for Bads Generated in the Production of Goods 135 Per Capita
GDP 135 Is Either GDP or Per-Capita GDP a Measure of Happiness or Well-Being? 136
990
The Expenditure Approach to Computing GDP for a Real-World Economy 136
Computing GDP Using the Expenditure Approach 137 Common Misconceptions about
IkmrnmU DSJB
Increases in GDP 138
The Income Approach to Computing GDP for a Real-World Economy 139
Computing NationaTIncome 140' From National Income to GDP: Making Some
MS Adjustments 142 Other National Income Accounting Measurements 144 Net Domestic
Product 144 Personal Income 144 Disposable Income 144

uni IDC Real GDP 145

Why We Need Real GDP 145 Computing Real GDP 145 The General Equation
for Real GDP 146 What Does It Mean If Real GDP Is Higher in One Year Than in
Another? 146 Real GDP, Economic Growth, and Business Cycles 146
iKti) J
Chapter Summary 150
Key Terms and Concepts 150
Questions and Problems 151
Working with Numbers and Graphs 151

PART 3 MACROECONIMIC STABILITY, INSTABILITY, AND

FISCAL POLICY

CHAPTER 8: AGGREGATE DEMAND AND AGGREGATE

SUPPLY 152

A Way to View the Economy 152

i Aggregate Demand 153
Why Does the Aggregate Demand Curve Slope Downward? 154 An Important Word on the
Three Effects 155 A Change in Quantity Demanded of Real GDP Versus a Change in Aggregate
Demand 155 Changes in Aggregate Demand: Shifts in die AD Curve 157 How Spending
Components Affect Aggregate Demand 158 Why Is There More Total Spending? 159 Factors
That Can Change C, /, G, zndNX(EX- IM) and Therefore Can Change AD (Shift the AD
Curve) 160 Can a Change in the Money Supply Change Aggregate Demand? 164 If
Consumption Rises, Does Some Other Spending Component Have to Decline? 164
Short-Run Aggregate Supply 166
Short-Run Aggregate Supply Curve: What It Is and Why It Is Upward Sloping 166
What Puts the "Short Run" in the SRAS Curve? 168 Changes in Short-Run
Aggregate Supply: Shifts in the SRAS Curve 168 Something More to Come: Peoples'
Expectations 171
Putting AD and SRAS Together: Short-Run Equilibrium 171
How Short-Run Equilibrium in the Economy Is Achieved 171 Thinking in Terms of
[EtfYrTg U<~'l I D C Short-Run Equilibrium Changes in the Economy 172 An Important Exhibit 174
Long-Run Aggregate Supply 175
Going from the Short Run to the Long Run 175
Short-Run Equilibrium, Long-Run Equilibrium, and Disequilibrium 176
 LUNItNIb XI

Chapter Summary 178

Key Terms and Concepts 180
Questions and Problems 180
Working with Numbers and Graphs 181

CHAPTER 9: CLASSICAL MACROECONOMICS AND THE

SELF-REGULATING ECONOMY 182

The Classical View 182

Classical Economists and Say's Law 182 Classical Economists and Interest Rate
economicsT24/7i Flexibility 183 Classical Economists on Prices and Wages: Both Are Flexible 185
Three States of the Economy 185
Real GDP and Natural Real GDP: Three Possibilities 185 The Labor Market and the Three
States of the Economy 187 Common Misconceptions About the Unemployment Rate and the
Natural Unemployment Rate 188
The Self-Regulating Economy 191
What Happens If a Self-Regulating Economy Is in a Recessionary Gap? 191 What
D90
Happens If the Economy Is in an Inflationary Gap? 193 The Self-Regulating Economy: A
Recap 194 Policy Implication of Believing the Economy Is Self-Regulating 194 Changes
in a Self-Regulating Economy: Short Run and Long Run 195 A Recap of Classical
HuuRS Macroeconomics and a Self-Regulating Economy 196 Business-Cycle Macroeconomics and
;!
Economic-Growth Macroeconomics 197
i"am Whiti lik' Ms
Chapter Summary 200
Key Terms and Concepts 202
Questions and Problems 202
Working with Numbers and Graphs 203

CHAPTER 10: KEYNESIAN MACROECONOMICS AND

ECONOMIC INSTABILITY: A CRITIQUE OF
THE SELF-REGULATING ECONOMY 204

Questioning the Classical Position and the Self-Regulating Economy 204

Keynes's Criticism of Say's Law in a Money Economy 205 Keynes on Wage
Rates 206 Different Markets, Different Rates of Adjustment 206 Keynes on Prices 208
econorhics-24/7! Is It a Question of the Time It Takes for Wages and Prices to Adjust? 210
The Simple Keynesian Model 212
Assumptions 212 The Consumption Function 212 Consumption and Saving 214 The
Multiplier 215 The Multiplier and Reality 216
The Simple Keynesian Model in the AD-AS Framework 217
Shirts in the Aggregate Demand Curve 218 The Keynesian Aggregate Supply
Curve 218 The Economy in a Recessionary Gap 219 Government's Role in the
Economy 220 The Theme of the Simple Keynesian Model 220
The Simple Keynesian Model in the TE TP Framework 221
Deriving a Total Expenditures (TE) Curve 222 What Will Shift the TE Curve? 223
Comparing Total Expenditures (TE) and Total Production (TP) 223 Moving from
(WflCi HOURS Disequilibrium to Equilibrium 224 The Economy in a Recessionary Gap and the Role of
Government 226 Equilibrium in die Economy 226 The Theme of the Simple Keynesian
Model 227
Chapter Summary 229
Key Terms and Concepts 229
Questions and Problems 229
Working with Numbers and Graphs 230
 CHAPTER 11: FISCAL POLICY AND THE FEDERAL BUDGET 232'

The Federal Budget 232

Government Expenditures 232 Government Tax Revenues 233 Budget
Projections 233 Budget Deficit, Surplus, or Balance 235 Structural and Cyclical
Deficits 236 The Public Debt 236 Valued-Added Tax 237
Fiscal Policy 239
Some Relevant Fiscal Policy Terms 239 Two Important Notes 239
Demand-Side Fiscal Policy 240
Shifting the Aggregate Demand Curve 240 Fiscal Policy: Keynesian Perspective (Economy Is
Not Self-Regulating) 240 Crowding Out: Questioning Expansionary Fiscal Policy 241
Lags and Fiscal Policy "243, Crowding Out, Lags, and the Effectiveness of Fiscal Policy 245
Supply-Side Fiscal Policy 245
Marginal Tax Rates and Aggregate Supply 245 The Laffer Curve: Tax Rates and Tax
Revenues 246 Fiscal Policy and Expectations 248
Chapter Summary 250
Key Terms and Concepts 250
Questions and Problems 251
Working with Numbers and Graphs 251

PART 4 MONEY, THE ECONOMY, AND MONETARY POLICY

CHAPTER 12: MONEY, BANKING, AND THE

FINANCIAL SYSTEM 252

Money: W h a t Is It and How Did It Come to Be? 252

eco nom j'cs|24)©§i| Money: A Definition 252 Three Functions of Money 252 From a Barter to a Money
Economy: The Origins of Money 253 Money, Leisure, and Output 254
Defining the Money Supply 256
Ml 256 Money Is More Than Currency 256 M2 257 Where Do Credit Cards Fit In? 258
How Banking Developed 258
The Early Bankers 258
The Bank's Reserves and More 260
The Financial System 261
Direct and Indirect Finance 261 Adverse Selection and Moral Hazard Problems 261
A Thought Experiment: No Financial Intermediaries 262 The Bank's Balance Sheet 263
a&o A Bank's Business: Turning Liabilities into Assets 263
Chapter Summary 267
HuuRS Key Terms and Concepts 267
Questions and Problems 267
Working with Numbers and Graphs 268
Wtb

CHAPTER 13: THE FEDERAL RESERVE SYSTEM 269

The Structure and Functions of the Federal Reserve System (the Fed) 269
The Structure of the Fed 269 Functions of the Fed 270
Common Misconceptions About the U.S. Treasury and the Fed 273
 CUNIbNFb XIII

The Money Supply Expansion Process 274

A Quick Review of Reserves, Required Reserves, and Excess Reserves 274 The Money Supply
Expansion Process 274 The Money Supply Contraction Process 277
Other Fed Tools and Recent Fed Actions 278
The Required Reserve Ratio 279 The Discount Window and the Federal Funds Market 279
The Fed and the Federal Funds Rate Target 280 Dealing with a Financial Crisis 280
Chapter Summary 283
Key Terms and Concepts 283
Questions and Problems 283
Working with Numbers and Graphs 284

APPENDIX C: THE, MARKET FOR RESERVES (OR THE

FEDERAL FUNDS MARKET) 285

The Demand for Reserves 285

The Supply of Reserves 286
Two Different Supply Curves for Reserves 286
The Corridor and Changing the Federal Funds Rate 287

CHAPTER 14: HOMEY AND THE ECONOMY 289

Money and the Price Level 289

The Equation of Exchange 289 From the Equation of Exchange to the Simple
econ o rh ioM Quantity Theory of Money 290 The Simple Quantity Theory of Money in an AD-AS
A ' Framework 292 Dropping the Assumptions that Kand Q Are Constant 294
Monetarism 295
The Four Monetarist Positions 295 Monetarism and AD-AS 296 The Monetarist View of
the Economy 298
Inflation 298
One-Shot Inflation 299 Continued Inflation 301
luur Money and Interest Rates 305
What Economic Variables Does a Change in the Money Supply Affect? 305 The Money
Supply, the Loanable Funds Market, and Interest Rates 306 What Happens to the Interest
Rate as the Money Supply Changes? 309 The Nominal and Real Interest Rates 309
Chapter Summary 312
Key Terms and Concepts 312
Questions and Problems 312
Working with Numbers and Graphs 313

CHAPTER 15: MONETARY POLICY 314

Transmission Mechanisms 314

economrcsP4OTl The Money Market in the Keynesian Transmission Mechanism 314 The Keynesian
Transmission Mechanism: Indirect 315 The Keynesian Mechanism May Get
883 Blocked 316 The Monetarist Transmission Mechanism: Direct 319
Monetary Policy and the Problem of Inflationary and Recessionary Gaps 320
SS3 Monetary Policy and the Activist-Nonactivist Debate 322
The Case for Activist (or Discretionary) Monetary Policy 323 The Case for Nonactivist (or
Rules-Based) Monetary Policy 323
INmsf 833
XIV CONItNIb

Nonactivist Monetary Proposals 326

I fSY^nri?(? uni inr Constant-Money-Growth-Rate Rule 326 Predetermined-Money-Growth-Rate
Rule 327 The Fed and the Taylor Rule 327 Inflation Targeting 328
Chapter Summary 330
Key Terms and Concepts 330
Questions and Problems 330
Working with Numbers and Graphs 331

APPENDIX D: BOND PRICES AND THE INTEREST RATE 332

Appendix Summary 334

Questions and Problems 334

PART 5 EXPECTATIONS AND GROWTH

CHAPTER 16: EXPECTATIONS THEORY AND THE

ECONOMY 335

Phillips Curve Analysis 335

i The Phillips Curve 335 Samuelson and Solow: The Americanization of the Phillips
econorhi cs'24/7fSi Curve 336
The Controversy Begins: Are There Really Two Phillips Curves? 336
Things Aren't Always as We Think 336 Friedman and the Natural Rate Theory 337
How Do People Form Their Expectations? 340
860 Rational Expectations and New Classical Theory 341
Rational Expectations 341 Do People Really Anticipate Policy? 341 Price Level
Expectations and the SRAS Curve 342 Expected and Actual Price Levels 343 New Classical
mmmI nuu RS
/ •

? uni i Economics and Four Different Cases 344 Comparing Exhibits 9 and 10 350
*OmA*«£) wgi New Keynesians and Rational Expectations 351
|(.U
Looking at Things from the Supply Side: Real Business Cycle Theorists 352
Chapter Summary 354
V
Key Terms and Concepts 356
Questions and Problems 356
Working with Numbers and Graphs 356

CHAPTER 17: ECONOMIC GROWTH: RESOURCES,

TECHNOLOGY, IDEAS, AND
INSTITUTIONS 358

A Few Basics About Economic Growth 358

economics"24/7M| Do Economic Growth Rates Matter? 358
LsL; '13 > f ^ A Production Function and Economic Growth 360
S&3
The Graphical Representation of the Production Function 360 From the Production Function
to the LRAS Curve 362 Emphasis on Labor 362 Emphasis on Capital 364 Emphasis
on Other Resources: Natural Resources and Human Capital 366 Emphasis on die
Technology Coefficient and Ideas 366 Discovery and Ideas 367 Expanding Our
Horizons 367 Institutions Matter 368
 LUINI t N I b XV

Chapter Summary 373

HOURS Key Terms and Concepts 373
Questions and Problems 373
Working with Numbers and Graphs 374

PART 6 THE FINANCIAL CRISIS OF 2007-2009

CHAPTER 18: THE FINANCIAL CRISIS OF 2007-2009 375

Recent Economic Events"v375

The Financial Crisis as a Balance Sheet Problem 376
Which Assets Were Risky? 377 Three Questions 378
The Fed, Interest Rates, and Housing Prices 379
The Global Savings Glut and Low Interest Rates 379 Our Story So Far 380
The Taylor Rule and Interest Rates 381
Alan Greenspan Responds 382 Rising House Prices, Delinquency Rates, and
Foreclosures 383
The Politics of Housing 384
HOURS The Community Reinvestment Act 384
Fannie Mae and Freddie Mac 384 \
The Role of Leverage and Regulatory Capital Arbitrage 385
Leverage 385 Regulatory Capital Arbitrage 386
Where We Are So Far 389 House Prices Decline 389 Domino Effects 390 How the Real
Sector Affects the Financial Sector 390 The Government Response 391
Chapter Summary 392
Key Terms and Concepts 394
Questions and Problems 394
Working with Numbers and Graphs 395

PART 7 GOVERNMENT AND THE ECONOMY

CHAPTER 19: DEBATES IN MACROECONOMICS OVER THE

ROLE AND EFFECTS OF GOVERNMENT 396

Macroeconomics and Government: The Debate 396

economics"24/7S' Tax Cuts, Tax Revenue, and Budget Deficits 397
The Economy: Self-Regulating or Not? 398
More Government Spending or a Cut in Taxes: Which Gives a Bigger Bang for the
Buck? 398
More Government Spending or a Cut in Taxes: The Size and Scope of Government 399
HOURS The Degree of Crowding Out 400
The Politics of Government Spending 400
Monetary Policy: Rules Versus Discretion 401
 l_UIN I tlNIS

Bailouts 403
Demand-Side and Supply-Side Views of the Economy and Government Tools to
Change Real GDP 404
Chapter Summary 408
Key Terms and Concepts 409
Questions and Problems 409
Working with Numbers and Graphs 409

PART 8 PUBLIC CHOICE AND SPECIAL-INTEREST-GROUP POLITICS

CHAPTER 20: PUBLIC CHOICE AND SPECIAL-INTEREST-

GROUP POLITICS 410

Public Choice Theory 410

The Political Market 411
Moving Toward die Middle: The Median Voter Model 411 What Does the Theory
Predict? 412
Voters and Rational Ignorance 414
The Costs and Benefits of Voting 414 Rational Ignorance 415
More About Voting 417
Example 1: Voting for a Nonexcludable Public Good 417 Example 2: Voting and Efficiency 418
Special Interest Groups 419
Information and Lobbying Efforts 419 Congressional Districts as Special Interest
Groups 419 Public Interest Talk, Special Interest Legislation 420 Rent Seeking 420
Bringing About Transfers 421 Information, Rational Ignorance, and Seeking Transfers 422
Jjni IDC
Chapter Summary 426
Key Terms and Concepts 428
a 'ih'.tf
Questions and Problems 428
Working with Numbers and Graphs 428

THE GLOBAL ECONOMY

PART 9 INTERNATIONAL ECONOMICS AND GLOBALIZATION

CHAPTER 21: INTERNATIONAL TRADE 430

International Trade Theory 430

economic s^ How Countries Know What to Trade 430 Common Misconception About How Much
<B8 We Can Consume 434 How Countries Know When They Have a Comparative
Advantage 434
Trade Restrictions 436
The Distributional Effects of International Trade 436 Consumers' and Producers'
Surpluses 436 The Benefits and Costs of Trade Restrictions 437 Why Nations
Sometimes Restrict Trade 440
 CONTENTS xvii

Chapter Summary 444

HOURS Key Terms and Concepts 446
Questions and Problems 446
Working with Numbers and Graphs 446

CHAPTER 22: INTERNATIONAL FINANCE 448

The Balance of Payments 448

Current Account 449 Capital Account 452 Official Reserve Account 453 Statistical
Discrepancy 453 What the Balance of Payments Equals 454
The Foreign Exchange Market 455
The Demand for Goods 455 The Demand for and Supply of Currencies 456
Flexible Exchange Rates 458
The Equilibrium Exchange Rate 458 Changes in the Equilibrium Exchange
Rate 459 Factors That Affect the Equilibrium Exchange Rate 459
Fixed Exchange Rates 462
Fixed Exchange Rates and Overvalued/Undervalued Currency 462 What Is So Bad
HOURS About an Overvalued Dollar? 463 Government Involvement in a Fixed Exchange Rate
System 464 Options Under a Fixed Exchange Rate System 465
The Gold Standard 466
Fixed Exchange Rates Versus Flexible Exchange Rates 468
Promoting International Trade 468
v
Optimal Currency Areas 469
The Current International Monetary System 470
Chapter Summary 472
Key Terms and Concepts 474
Questions and Problems 474
Working with Numbers and Graphs 475

CHAPTER 23: GLOBALIZATION AND INTERNATIONAL

IMPACTS ON THE ECONOMY 477

What Is Globalization? 477

A Smaller World 477 A World Economy 478
Two Ways to See Globalization 478
No Barriers 479 A Union of States 480
<sro Globalization Facts 480
International Trade 480 Foreign Exchange Trading 480 Foreign Direct
Simm£$teWssM <ES Investment 480 Personal Investments 480 The World Trade Organization 480
Business Practices 481
The Movement Toward Globalization 481
The End of the Cold War 481 Advancing Technology 483
k8i>§§3imiitoM>®§® <»8 Policy Changes 484
Benefits and Costs of Globalization 484
The Benefits 484 The Costs 486
T£ uni inc
The Continuing Globalization Debate 487
More or Less Globalization: A Tug of War? 488
Less Globalization 488 More Globalization 489
International Factors and Aggregate Demand 489
Net Exports 490 TheJ-Curve 491
 International Factors and Aggregate Supply 493
Foreign Input Prices 493 Why Foreign Input Prices Change 493
Factors That Affect Both Aggregate Demand and Aggregate Supply 494
The Exchange Rate 494 The Role That Interest Rates Play 495
Deficits: International Effects and Domestic Feedback 496
The Budget Deficit and Expansionary Fiscal Policy 497 The Budget Deficit and
Contractionary Fiscal Policy 497 The Effects of Monetary Policy 499
Chapter Summary 502
Key Terms and Concepts 503
Questions and Problems 503
Working with Numbers and Graphs 503

PRACTICAL ECONOMICS
PART 10 FINANCIAL MATTERS

CHAPTER 24: STOCKS, BONDS, FUTURES, AND OPTIONS 504

Financial Markets 504

Stocks 504
economics 24/7• Where Are Stocks Bought and Sold? 505 The Dow Jones Industrial Average (DJIA) 505
How the Stock Market Works 507 Why Do People Buy Stock? 508 How to Buy and Sell
Stock 509 Buying Stocks or Buying the Market 509 How to Read the Stock
Market Page 510
Bonds 512
The Components of a Bond 512 Bond Ratings 512 Bond Prices and Yields
(or Interest Rates) 513 Common Misconceptions About the Coupon Rate and Yield
(Interest Rate) 514 Types of Bonds 514 How to Read the Bond Market Page 515
Risk and Return 516
HOURS Futures and Options 516
i gas Futures 516 Options 518
Chapter Summary 521
Key Terms and Concepts 521
Questions and Problems 521
Working with Numbers and Graphs 522

[[_WEB CHAPTER
PART 11 WEB CHAPTER

CHAPTER 25: AGRICULTURE: PROBLEMS, POLICIES, AND

UNINTENDED EFFECTS

Agriculture: The Issues

A Few Facts Agriculture and Income Inelasticity Agriculture and Price Inelasticity Price
Variability and Futures Contracts Can Bad Weather Be Good for Farmers?
 \_UIN I tIN I

Agricultural Policies
Price Supports Restricting Suppl Target Prices and Deficiency Payments Production
Flexibility Contract Payments, (Fixed) Direct Payments, and Countercyclical
Payments Nonrecourse Commodity Loans
Chapter Summary
Key Terms and Concepts
HOURS
Questions and Problems
Working with Numbers and Graphs

SELF-TEST APPENDIX 523

GLOSSARY 536
INDEX 547 -N "