关关对《Principles of Economics, 7th Edition》的笔记(1)

全书摘抄

  
PartI Introduction 
Chapter 1 Ten Principles of Economics
1-1 How People Make Decisions
Principle 1: People Face Trade-offs
Principle 2: The Cost of Something Is What You Give Up to Get It
Principle 3: Rational People Think at the Margin
Principle 4: People Respond to Incentives 
• The fundamental lessons about individual decision making are that people face trade-offs among alternative goals, that the cost of any action is measured in terms of forgone opportunities, that rational people make decisions by comparing marginal costs and marginal benefits, and that people change their behavior in response to the incentives they face.
1-2 How People Interact
Principle 5: Trade Can Make Everyone Better Off
Principle 6: Markets Are Usually a Good Way to Organize Economic Activity
Principle 7: Governments Can Sometimes Improve Market Outcomes
• The fundamental lessons about interactions among people are that trade and interdependence can be mutually beneficial, that markets are usually a good wayof coordinating economic activity among people, and that the government can potentially improve market outcomes by remedying a market failure or by promoting greater economic equality.
1-3 How the Economy as a Whole Works
Principle 8: A Country's Standard of Living Depends on Its Ability to Produce Goods andServices
Principle 9: Prices Rise When the GovernmentPrints Too Much Money
Principle 10: Society Faces a Short-Run Trade-off between Inflation and Unemployment
• The fundamental lessons about the economy as a whole are that productivity is the ultimate source of living standards, that growth in the quantity of money is the ultimate source of inflation, and that society faces a short-run trade-off between inflation and unemployment.
Key Concepts
scarcity, p. 4 economics, p. 4 efficiency, p. 5 equality, p. 5 opportunity cost, p. 6 rational people, p. 6marginal change, p. 6 incentive, p. 7 market economy, p. 10 property rights, p. 12 market failure, p. 12 externality, p. 12market power, p. 12 productivity, p. 13 inflation, p. 14 business cycle, p. 15
Chapter 2 Thinking Like an Economist
2-1 The Economist as Scientist
The Scientific Method: Observation, Theory, and More Observation
The Role of Assumptions
Economic Models
Our First Model: The Circular-Flow Diagram
Our Second Model: The Production Possibilities Frontier
Microeconomics and Macroeconomics
• Economists try to address their subject with a scientist's objectivity. Like all scientists, they make appropriate assumptions and build simplified models to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier.
• The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole.
2-2 The Economist as Policy Adviser
Positive versus Normative Analysis
Economists in Washington
Why Economists' Advice Is Not Always Followed
• A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than as scientists.
2-3 Why Economists Disagree
Differences in Scientific Judgments
Differences in Values
Perception versus Reality
• Economists who advise policymakers sometimes offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the political process.
Key Concepts
circular-flow diagram, p. 22 production possibilities frontier, p. 24 microeconomics, p. 27 macroeconomics, p. 27positive statements, p. 28 normative statements, p. 28
Chapter 3 Interdependence and the Gains from Trade
3-1 A Parable for the Modern Economy
Production Possibilities
Specialization and Trade
•Each person consumes goods and services produced by many other people both in the United States and around the world. Interdependence and trade are desirable because they allow everyone to enjoy a greater quantity and variety of goods and services.
3-2 Comparative Advantage: The Driving Force of Specialization
Absolute Advantage
Opportunity Cost and Comparative Advantage
Comparative Advantage and Trade
The Price of the Trade
•There are two ways to compare the ability of twopeople to produce a good. The person who can produce the good with the smaller quantity of inputs is said to have an absolute advantage in producing the good. The person who has the smaller opportunity cost of producing the good is said to have a comparativeadvantage. The gains from trade are based on comparative advantage, not absolute advantage.
•Trade makes everyone better off because it allowspeople to specialize in those activities in which they have a comparative advantage.
3-3 Applications of Comparative Advantage
Should Tom Brady Mow His Own Lawn?
Should the United States Trade with Other Countries?
•The principle of comparative advantage applies to countries as well as to people. Economists use the principle of comparative advantage to advocate free trade among countries.
Key Concepts
absolute advantage, p. 52 opportunity cost, p. 52comparative advantage, p. 53 imports, p. 57 exports, p. 57
PartII How Markets Work
Chapter 4 The Market Forces of Supply and Demand
4-1 Markets and Competition
What Is a Market?
What Is Competition?
• Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.
4-2 Demand
The Demand Curve: The Relationship between Price and Quantity Demanded
Market Demand versus Individual Demand
Shifts in the Demand Curve
•The demand curve shows how the quantity of a good demanded depends on the price. According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward.
•In addition to price, other determinants of how much consumers want to buy include income, the prices of substitutes and complements, tastes, expectations, andthe number of buyers. If one of these factors changes, the demand curve shifts.
4-3 Supply
The Supply Curve: The Relationship between Price and Quantity Supplied
Market Supply versus Individual Supply
Shifts in the Supply Curve
•The supply curve shows how the quantity of a good supplied depends on the price. According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward.
•In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers. If one of these factors changes, the supply curve shifts.
4-4 Supply and Demand Together
Equilibrium
Three Steps to Analyzing Changes in Equilibrium
•The intersection of the supply and demand curvesdetermines the market equilibrium. At the equilibriumprice, the quantity demanded equals the quantity supplied.
•The behavior of buyers and sellers naturally drives markets toward their equilibrium. When the market price is above the equilibrium price, there is a surplus of the good, which causes the market price to fall. When the market price is below the equilibrium price, there is a shortage, which causes the market price to rise.
•To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity. To dothis, we follow three steps. First, we decide whether the event shifts the supply curve or the demand curve (or both). Second, we decide in which direction the curve shifts. Third, we compare the new equilibrium with the initial equilibrium.
4-5 Conclusion: How Prices Allocate Resources
•In market economies, prices are the signals that guide economic decisions and thereby allocate scarce resources. For every good in the economy, the price ensures that supply and demand are in balance. The equilibrium price then determines how much of the good buyers choose to consume and how much sellers choose to produce.
Key Concepts
market, p. 66 competitive market, p. 66 quantity demanded, p. 67 law of demand, p. 67 demand schedule, p. 67 demand curve, p. 68 normal good, p. 70inferior good, p. 70 substitutes, p. 70 complements, p. 70 quantity supplied, p. 73 law of supply, p. 73 supply schedule, p. 74 supply curve, p. 74equilibrium, p. 77 equilibrium price, p. 77 equilibrium quantity, p. 77 surplus, p. 77 shortage, p. 78 law of supply and demand, p. 79
Chapter 5 Elasticity and Its Application
5-1 The Elasticity of Demand
The Price Elasticity of Demand and Its Determinants
Computing the Price Elasticity of Demand
The Midpoint Method: A Better Way to Calculate Percentage Changes and Elasticities
The Variety of Demand Curves 
Total Revenue and the Price Elasticity of Demand
Elasticity and Total Revenue along a Linear Demand Curve
Other Demand Elasticities 
• The price elasticity of demand measures how much the quantity demanded responds to changes in the price. Demand tends to be more elastic if close substitutes are available, if the good is a luxury rather than a necessity, if the market is narrowly defined, or if buyers have substantial time to react to a price change.
•The price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. If quantity demanded moves proportionately less than the price, then the elasticity is less than 1 and demand is said to be inelastic. If quantity demanded moves proportionately more than the price, then the elasticity is greater than 1 and demand is said to be elastic.
•Total revenue, the total amount paid for a good, equals the price of the good times the quantity sold. For inelastic demand curves, total revenue moves in the same direction as the price. For elastic demand curves, total revenue moves in the opposite direction as the price.
•The income elasticity of demand measures how much the quantity demanded responds to changes inconsumers' income. The cross-price elasticity of demand measures how much the quantity demanded of one good responds to changes in the price of another good.
5-2 The Elasticity of Supply
The Price Elasticity of Supply and Its Determinants
Computing the Price Elasticity of Supply
The Variety of Supply Curves
•The price elasticity of supply measures how much the quantity supplied responds to changes in the price. This elasticity often depends on the time horizon under consideration. In most markets, supply is more elastic in the long run than in the short run.
•The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the percentage change in price. If quantity supplied moves proportionately less than the price, then the elasticity is less than 1 and supply is said to be inelastic. If quantity supplied moves proportionately more than the price, then the elasticity is greater than 1 and supply is said to be elastic.
5-3 Three Applications of Supply, Demand, and Elasticity
Can Good News for Farming Be Bad News for Farmers?
Why Did OPEC Fail to Keep the Price of Oil High?
Does Drug Interdiction Increase or Decrease Drug- Related Crime?
•The tools of supply and demand can be applied in many different kinds of markets. This chapter uses them to analyze the market for wheat, the market for oil, and the market for illegal drugs.
Key Concepts
elasticity, p. 90 price elasticity of demand, p. 90total revenue, p. 94 income elasticity of demand, p. 97cross-price elasticity of demand, p. 98 price elasticity of supply, p. 98
Chapter 6 Supply, Demand, and Government Policies
6-1 Controls on Prices
How Price Ceilings Affect Market Outcomes
How Price Floors Affect Market Outcomes
Evaluating Price Controls
• A price ceiling is a legal maximum on the price of a good or service. An example is rent control. If the price ceiling is below the equilibrium price, then the price ceiling is binding, and the quantity demanded exceeds the quantity supplied. Because of the resulting shortage, sellers must in some way ration the good or service among buyers.
•A price floor is a legal minimum on the price of a good or service. An example is the minimum wage. If the price floor is above the equilibrium price, then the price floor is binding, and the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyers' demands for the good or service must in some way be rationed among sellers.
6-2 Taxes
How Taxes on Sellers Affect Market Outcomes
How Taxes on Buyers Affect Market Outcomes
Elasticity and Tax Incidence 
•When the government levies a tax on a good, the equilibrium quantity of the good falls. That is, a tax on a market shrinks the size of the market.
•A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this sense, buyers and sellers share the tax burden. The incidence of a tax (that is, the division of the tax burden) does not depend on whether the tax is levied on buyers or sellers.
•The incidence of a tax depends on the price elasticities of supply and demand. Most of the burden falls on the side of the market that is less elastic because that side of the market cannot respond as easily to the tax by changing the quantity bought or sold.
Key Concepts
price ceiling, p. 112price floor, p. 112tax incidence, p. 122
PartIII Markets and Welfare
Chapter 7 Consumers, Producers, and the Efficiency of Markets
7-1 Consumer Surplus
Willingness to Pay
Using the Demand Curve to Measure Consumer Surplus
How a Lower Price Raises Consumer Surplus
What Does Consumer Surplus Measure?
• Consumer surplus equals buyers' willingness to pay for a good minus the amount they actually pay, and it measures the benefit buyers get from participating in a market. Consumer surplus can be computed by finding the area below the demand curve and above theprice.
7-2 Producer Surplus
Cost and the Willingness to Sell
Using the Supply Curve to Measure Producer Surplus
How a Higher Price Raises Producer Surplus
•Producer surplus equals the amount sellers receive for their goods minus their costs of production, and it measures the benefit sellers get from participating in a market. Producer surplus can be computed by finding the area below the price and above the supply curve.
7-3 Market Efficiency
The Benevolent Social Planner
Evaluating the Market Equilibrium
•An allocation of resources that maximizes the sum of consumer and producer surplus is said to be efficient. Policymakers are often concerned with the efficiency, as well as the equality, of economic outcomes.
•The equilibrium of supply and demand maximizes the sum of consumer and producer surplus. That is, the invisible hand of the marketplace leads buyers and sellers to allocate resources efficiently.
7-4 Conclusion: Market Efficiency and Market Failure
•Markets do not allocate resources efficiently in the presence of market failures such as market power or externalities.
Key Concepts
welfare economics, p. 136 willingness to pay, p. 136 consumer surplus, p. 137cost, p. 141 producer surplus, p. 141efficiency, p. 145 equality, p. 145
Chapter 8 Application: The Costs of Taxation
8-1 The Deadweight Loss of Taxation
How a Tax Affects Market Participants
Deadweight Losses and the Gains from Trade
• A tax on a good reduces the welfare of buyers and sellers of the good, and the reduction in consumer and producer surplus usually exceeds the revenue raised by the government. The fall in total surplus—the sum of consumer surplus, producer surplus, and tax revenue—is called the deadweight loss of the tax.
8-2 The Determinants of the Deadweight Loss
•Taxes have deadweight losses because they cause buyers to consume less and sellers to produce less, and these changes in behavior shrink the size of the market below the level that maximizes total surplus. Becausethe elasticities of supply and demand measure how much market participants respond to market conditions, larger elasticities imply larger deadweight losses.
8-3 Deadweight Loss and Tax Revenue as Taxes Vary
•As a tax grows larger, it distorts incentives more, and its deadweight loss grows larger. Because a tax reduces the size of the market, however, tax revenue does not continually increase. It first rises with the size of a tax, but if the tax gets large enough, tax revenue starts tofall.
Key Concepts
deadweight loss, p. 159
Chapter 9 Application: International Trade
9-1 The Determinants of Trade
The Equilibrium without Trade
The World Price and Comparative Advantage
• The effects of free trade can be determined by comparing the domestic price without trade to the world price. A low domestic price indicates that the country has a comparative advantage in producing the good and that the country will become an exporter. A high domestic price indicates that the rest of the world has a comparative advantage in producing the good and that the country will become an importer.
9-2 The Winners and Losers from Trade
The Gains and Losses of an Exporting Country
The Gains and Losses of an Importing Country
The Effects of a Tariff
The Lessons for Trade Policy
Other Benefits of International Trade
•When a country allows trade and becomes an exporter of a good, producers of the good are better off, and consumers of the good are worse off. When a country allows trade and becomes an importer of a good, consumers are better off, and producers are worse off. In both cases, the gains from trade exceed the losses.
•A tariff—a tax on imports—moves a market closer to the equilibrium that would exist without trade and, therefore, reduces the gains from trade. Although domestic producers are better off and the government raises revenue, the losses to consumers exceed these gains.
9-3 The Arguments for Restricting Trade
The Jobs Argument
The National-Security Argument
The Infant-Industry Argument
The Unfair-Competition Argument
The Protection-as-a-Bargaining-Chip Argument
•There are various arguments for restricting trade: protecting jobs, defending national security, helping infant industries, preventing unfair competition, and responding to foreign trade restrictions. Although some of these arguments have merit in some cases, economists believe that free trade is usually the better policy.
Key Concepts
world price, p. 173tariff, p. 177
PartIVThe Economics of the Public Sector
Chapter 10 Externalities
10-1 Externalities and Market Inefficiency
Welfare Economics: A Recap
Negative Externalities
Positive Externalities 
• When a transaction between a buyer and seller directly affects a third party, the effect is called an externality. If an activity yields negative externalities, such as pollution, the socially optimal quantity in a market is less than the equilibrium quantity. If an activity yields positive externalities, such as technology spillovers, the socially optimal quantity is greater than the equilibrium quantity.
10-2 Public Policies toward Externalities
Command-and-Control Policies: Regulation
Market-Based Policy 1: Corrective Taxes and Subsidies
Market-Based Policy 2: Tradable Pollution Permits
Objections to the Economic Analysis of Pollution
•Governments pursue various policies to remedy the inefficiencies caused by externalities. Sometimes the government prevents socially inefficient activity by regulating behavior. Other times it internalizes an externality using corrective taxes. Another public policy is to issue permits. For example, the government couldprotect the environment by issuing a limited number of pollution permits. The result of this policy is largely the same as imposing corrective taxes on polluters.
10-3 Private Solutions to Externalities
The Types of Private Solutions
The Coase Theorem
Why Private Solutions Do Not Always Work
•Those affected by externalities can sometimes solve the problem privately. For instance, when one business imposes an externality on another business, the two businesses can internalize the externality by merging. Alternatively, the interested parties can solve the problem by negotiating a contract. According to the Coase theorem, if people can bargain without cost, then they can always reach an agreement in which resources are allocated efficiently. In many cases, however, reaching a bargain among the many interested parties is difficult, so the Coase theorem does not apply.
Key Concepts
externality, p. 196 internalizing the externality, p. 199corrective tax, p. 203 Coase theorem, p. 209transaction costs, p. 211
Chapter 11 Public Goods and Common Resources
11-1 The Different Kinds of Goods
• Goods differ in whether they are excludable and whether they are rival in consumption. A good is excludable if it is possible to prevent someone from using it. A good is rival in consumption if one person's use of the good reduces others' ability to use the same unit of the good. Markets work best for private goods, which are both excludable and rival in consumption. Markets do not work as well for other types of goods.
11-2 Public Goods
The Free-Rider Problem
Some Important Public Goods
The Difficult Job of Cost–Benefit Analysis
•Public goods are neither rival in consumption nor excludable. Examples of public goods include fireworks displays, national defense, and the creationof fundamental knowledge. Because people are not charged for their use of the public good, they have an incentive to free ride, making private provision of the good untenable. Therefore, governments provide public goods, basing their decision about the quantity of each good on cost–benefit analysis.
11-3 Common Resources
The Tragedy of the Commons
Some Important Common Resources
•Common resources are rival in consumption but not excludable. Examples include common grazing land, clean air, and congested roads. Because people are not charged for their use of common resources, they tend to use them excessively. Therefore, governments use various methods to limit the use of common resources.
11-4 Conclusion: The Importance of Property Rights
Key Concepts
excludability, p. 216 rivalry in consumption, p. 216 private goods, p. 216public goods, p. 216 common resources, p. 216 club goods, p. 217free rider, p. 218 cost–benefit analysis, p. 221 Tragedy of the Commons, p. 223
Chapter 12 The Design of the Tax System
12-1 A Financial Overview of the U.S. Government
The Federal Government
State and Local Governments
• The U.S. government raises revenue using various taxes. The most important taxes for the federal government are individual income taxes and payroll taxes for social insurance. The most important taxes for state and local governments are sales taxes and property taxes.
12-2 Taxes and Efficiency
Deadweight Losses
Administrative Burden
Marginal Tax Rates versus Average Tax Rates
Lump-Sum Taxes
•The efficiency of a tax system refers to the costs it imposes on taxpayers. There are two costs of taxes beyond the transfer of resources from the taxpayer to the government. The first is the deadweight loss that arises as taxes alter incentives and distort the allocation of resources. The second is the administrative burden of complying with the tax laws.
12-3 Taxes and Equity
The Benefits Principle
The Ability-to-Pay Principle
Tax Incidence and Tax Equity
•The equity of a tax system concerns whether the tax burden is distributed fairly among the population.According to the benefits principle, it is fair for people to pay taxes based on the benefits they receive from the government. According to the ability-to-pay principle, it is fair for people to pay taxes based on their capability to handle the financial burden. When evaluating the equity of a tax system, it is important to remember a lesson from the study of tax incidence: The distribution of tax burdens is not the same as the distribution of tax bills.
12-4 Conclusion: The Trade-off between Equity and Efficiency
•When considering changes in the tax laws, policymakers often face a trade-off between efficiency and equity. Much of the debate over tax policy arises because people give different weights to these two goals.
Key Concepts
budget deficit, p. 238 budget surplus, p. 238 average tax rate, p. 245 marginal tax rate, p. 245lump-sum tax, p. 245 benefits principle, p. 246 ability-to-pay principle, p. 247 vertical equity, p. 247horizontal equity, p. 247 proportional tax, p. 247 regressive tax, p. 247 progressive tax, p. 247
PartVFirm Behavior and the Organization of Industry
Chapter 13 The Costs of Production
13-1 What Are Costs?
Total Revenue, Total Cost, and Profit
Costs as Opportunity Costs
The Cost of Capital as an Opportunity Cost
Economic Profit versus Accounting Profit
• The goal of firms is to maximize profit, which equals total revenue minus total cost.
•When analyzing a firm's behavior, it is important to include all the opportunity costs of production. Some of the opportunity costs, such as the wages a firm pays its workers, are explicit. Other opportunity costs, such as the wages the firm owner gives up by working at the firm rather than taking another job, are implicit.Economic profit takes both explicit and implicit costs into account, whereas accounting profit considers only explicit costs.
13-2 Production and Costs
The Production Function
From the Production Function to the Total-Cost Curve
•A firm's costs reflect its production process. A typical firm's production function gets flatter as the quantity of an input increases, displaying the property of diminishing marginal product. As a result, a firm's total-cost curve gets steeper as the quantity produced rises.
13-3 The Various Measures of Cost
Fixed and Variable Costs
Average and Marginal Cost
Cost Curves and Their Shapes
Typical Cost Curves
• Afirm'stotalcostscanbedividedbetweenfixedcostsandvariablecosts.Fixedcostsarecoststhatdonotchangewhenthefirmaltersthequantityofoutputproduced.Variablecostsarecoststhatchangewhenthefirmaltersthequantityofoutputproduced.
• Fromafirm'stotalcost,tworelatedmeasuresofcostarederived.Averagetotalcostistotalcostdividedbythequantityofoutput.Marginalcostistheamountbywhichtotalcostrisesifoutputincreasesby1unit.
• Whenanalyzingfirmbehavior,itisoftenusefultographaveragetotalcostandmarginalcost.Foratypicalfirm, marginalcostriseswiththequantityofoutput.Averagetotalcostfirstfallsasoutputincreasesand then rises as output increases further. Themarginal-costcurvealwayscrossestheaverage-total-costcurveattheminimumofaveragetotalcost.
13-4 Costs in the Short Run and in the Long Run
The Relationship between Short-Run and Long-Run Average Total Cost
Economies and Diseconomies of Scale
• Afirm'scostsoftendependonthetimehorizonconsidered.Inparticular,manycostsarefixedintheshortrunbutvariableinthelongrun.Asaresult,whenthefirmchangesitslevelofproduction,averagetotalcostmayrisemoreintheshortrunthaninthelongrun.
Key Concepts
totalrevenue, p. 260 totalcost, p. 260 profit, p. 260 explicitcosts, p. 261 implicitcosts, p. 261 economicprofit, p. 262 accountingprofit, p. 262productionfunction, p. 263 marginalproduct, p. 264 diminishingmarginalproduct, p. 265 fixedcosts, p. 266 variablecosts, p. 267 averagetotalcost, p. 267 averagefixedcost, p. 268averagevariablecost, p. 268 marginalcost, p. 268 efficientscale, p. 270 economiesofscale, p. 273 diseconomiesofscale, p. 273 constantreturnstoscale, p. 273
Chapter 14 Firms in Competitive Markets
14-1 What Is a Competitive Market?
The Meaning of Competition
The Revenue of a Competitive Firm
• Becauseacompetitivefirmisapricetaker,itsrevenueisproportionaltotheamountofoutputitproduces.Thepriceofthegoodequalsboththefirm'saveragerevenueanditsmarginalrevenue.
14-2 Profit Maximization and the Competitive Firm's Supply Curve
A Simple Example of Profit Maximization
The Marginal-Cost Curve and the Firm's Supply Decision
The Firm's Short-Run Decision to Shut Down
Spilt Milk and Other Sunk Costs
The Firm's Long-Run Decision to Exit or Enter a Market
Measuring Profit in Our Graph for the Competitive Firm
• Tomaximizeprofit,afirmchoosesaquantityofoutputsuchthatmarginalrevenueequalsmarginalcost.Becausemarginalrevenueforacompetitivefirmequalsthemarketprice,thefirmchoosesquantitysothatpriceequalsmarginalcost.Thus,thefirm'smarginal-costcurveisitssupplycurve.
• Intheshortrunwhenafirmcannotrecoveritsfixedcosts,thefirmwillchoosetoshutdowntemporarilyifthepriceofthegoodislessthanaveragevariablecost.Inthelongrunwhenthefirmcanrecoverbothfixedandvariablecosts,itwillchoosetoexitifthepriceislessthanaveragetotalcost.
14-3 The Supply Curve in a Competitive Market
The Short Run: Market Supply with a Fixed Number of Firms
The Long Run: Market Supply with Entry and Exit
Why Do Competitive Firms Stay in Business If They Make Zero Profit?
A Shift in Demand in the Short Run and Long Run
Why the Long-Run Supply Curve Might Slope Upward
• Inamarketwithfreeentryandexit,profitisdriventozerointhelongrun.Inthislong-runequilibrium,allfirmsproduceattheefficientscale,priceequalstheminimumofaveragetotalcost,andthenumberoffirmsadjuststosatisfythequantitydemandedatthisprice.
• Changesindemandhavedifferenteffectsoverdifferenttimehorizons.Intheshortrun,anincreasein demandraisespricesandleadstoprofits,andadecreaseindemandlowerspricesandleadstolosses.Butiffirmscanfreelyenterandexitthemarket,theninthelongrun,thenumberoffirmsadjuststodrivethemarketbacktothezero-profitequilibrium.
14-4 Conclusion: Behind the Supply Curve
Key Concepts
competitivemarket, p. 280 averagerevenue, p. 281marginalrevenue, p. 282sunkcost, p. 286
Chapter 15 Monopoly
15-1 Why Monopolies Arise
Monopoly Resources
Government-Created Monopolies
Natural Monopolies
• A monopoly is a firm that is the sole seller in its market. A monopoly arises when a single firm owns a key resource, when the government gives a firm the exclusive right to produce a good, or when a single firm can supply the entire market at a lower cost than many firms could.
15-2 How Monopolies Make Production and Pricing Decisions
Monopoly versus Competition
A Monopoly's Revenue
Profit Maximization
A Monopoly's Profit
•Because a monopoly is the sole producer in its market, it faces a downward-sloping demand curve for its product. When a monopoly increases production by 1 unit, it causes the price of its good to fall, which reduces the amount of revenue earned on all units produced. As a result, a monopoly's marginal revenue is always below the price of its good.
•Like a competitive firm, a monopoly firm maximizes profit by producing the quantity at which marginal revenue equals marginal cost. The monopoly then sets the price at which that quantity is demanded. Unlike a competitive firm, a monopoly firm's price exceeds its marginal revenue, so its price exceeds marginal cost.
15-3 The Welfare Cost of Monopolies
The Deadweight Loss
The Monopoly's Profit: A Social Cost? 
•A monopolist's profit-maximizing level of output is below the level that maximizes the sum of consumer and producer surplus. That is, when the monopoly charges a price above marginal cost, some consumerswho value the good more than its cost of production do not buy it. As a result, monopoly causes deadweight losses similar to those caused by taxes.
15-4 Price Discrimination
A Parable about Pricing
The Moral of the Story
The Analytics of Price Discrimination
Examples of Price Discrimination
•A monopolist can often increase profits by charging different prices for the same good based on a buyer's willingness to pay. This practice of price discrimination can raise economic welfare by getting the good to some consumers who otherwise would not buy it. In the extreme case of perfect price discrimination, the deadweight loss of monopoly is completely eliminated and the entire surplus in the market goes to the monopoly producer. More generally, when price discrimination is imperfect, it can either raise or lower welfare compared to the outcome with a single monopoly price.
15-5 Public Policy toward Monopolies
Increasing Competition with Antitrust Laws
Regulation
Public Ownership
Doing Nothing
•Policymakers can respond to the inefficiency of monopoly behavior in four ways. They can use the antitrust laws to try to make the industry more competitive. They can regulate the prices that the monopoly charges. They can turn the monopolist into a government-run enterprise. Or, if the market failure is deemed small compared to the inevitable imperfections of policies, they can do nothing at all.
15-6 Conclusion: The Prevalence of Monopolies
Key Concepts
monopoly, p. 300natural monopoly, p. 302price discrimination, p. 314
Chapter 16 Monopolistic Competition
16-1 Between Monopoly and Perfect Competition
• A monopolistically competitive market is characterized by three attributes: many firms, differentiated products, and free entry.
16-2 Competition with Differentiated Products
The Monopolistically Competitive Firm in the Short Run
The Long-Run Equilibrium
Monopolistic versus Perfect Competition
Monopolistic Competition and the Welfare of Society
•The long-run equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market in two related ways.First, each firm in a monopolistically competitive market has excess capacity. That is, it chooses a quantity that puts it on the downward-sloping portion of the average-total-cost curve. Second, each firm charges a price above marginal cost.
•Monopolistic competition does not have all the desirable properties of perfect competition. There isthe standard deadweight loss of monopoly caused by the markup of price over marginal cost. In addition, the number of firms (and thus the variety of products) can be too large or too small. In practice, the ability of policymakers to correct these inefficiencies is limited.
16-3 Advertising
The Debate over Advertising
Advertising as a Signal of Quality
Brand Names
•The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names. Critics of advertising and brand names argue that firms use them to manipulate consumers' tastes and to reduce competition. Defenders of advertising and brand names argue that firms use them to inform consumers and to compete more vigorously on price and product quality.
Key Concepts 
oligopoly, p. 330 monopolistic competition, p. 330
Chapter 17 Oligopoly
17-1 Markets with Only a Few Sellers
A Duopoly Example
Competition, Monopolies, and Cartels
The Equilibrium for an Oligopoly
How the Size of an Oligopoly Affects the Market Outcome
• Oligopolists maximize their total profits by forming a cartel and acting like a monopolist. Yet, if oligopolists make decisions about production levels individually, the result is a greater quantity and a lower price than under the monopoly outcome. The larger the number of firms in the oligopoly, the closer the quantity and price will be to the levels that would prevail under perfect competition.
17-2 The Economics of Cooperation
The Prisoners' Dilemma
Oligopolies as a Prisoners' Dilemma
Other Examples of the Prisoners' Dilemma
The Prisoners' Dilemma and the Welfare of Society 
Why People Sometimes Cooperate
•The prisoners' dilemma shows that self-interest can prevent people from maintaining cooperation, evenwhen cooperation is in their mutual interest. The logic of the prisoners' dilemma applies in many situations, including arms races, common-resource problems, and oligopolies.
17-3 Public Policy toward Oligopolies
Restraint of Trade and the Antitrust Laws
Controversies over Antitrust Policy
•Policymakers use the antitrust laws to prevent oligopolies from engaging in behavior that reduces competition. The application of these laws can be controversial, because some behavior that can appear to reduce competition may in fact have legitimate business purposes.
Key Concepts 
oligopoly, p. 347game theory, p. 348 collusion, p. 349cartel, p. 349 Nash equilibrium, p. 351 prisoners' dilemma, p. 353dominant strategy, p. 354
PartVIThe Economics of Labor Markets
Chapter 18 The Markets for the Factors of Production
18-1 The Demand for Labor
The Competitive Profit-Maximizing Firm
The Production Function and the Marginal Product of Labor
The Value of the Marginal Product and the Demand for Labor
What Causes the Labor-Demand Curve to Shift?
• The economy's income is distributed in the marketsfor the factors of production. The three most importantfactors of production are labor, land, and capital.
• The demand for factors, such as labor, is a deriveddemand that comes from firms that use the factorsto produce goods and services. Competitive, profit-maximizingfirms hire each factor up to the pointat which the value of the factor's marginal productequals its price.
18-2 The Supply of Labor
The Trade-off between Work and Leisure
What Causes the Labor-Supply Curve to Shift?
• The supply of labor arises from individuals' trade-offbetween work and leisure. An upward-sloping labor supplycurve means that people respond to an increasein the wage by working more hours and enjoying lessleisure.
18-3 Equilibrium in the Labor Market 
Shifts in Labor Supply
Shifts in Labor Demand
• The price paid to each factor adjusts to balance the supplyand demand for that factor. Because factor demandreflects the value of the marginal product of that factor,in equilibrium each factor is compensated according toits marginal contribution to the production of goodsand services.
18-4 The Other Factors of Production: Land and Capital
Equilibrium in the Markets for Land and Capital
Linkages among the Factors of Production
• Because factors of production are used together, themarginal product of any one factor depends on thequantities of all factors that are available. As a result,a change in the supply of one factor alters the equilibriumearnings of all the factors.
Key Concepts
factors of production, p. 374production function, p. 376marginal product of labor, p. 376diminishing marginal product, p. 376value of the marginal product, p. 377capital, p. 387
Chapter 19 Earnings and Discrimination
19-1 Some Determinants of Equilibrium Wages
Compensating Differentials
Human Capital
Ability, Effort, and Chance
An Alternative View of Education: Signaling
The Superstar Phenomenon
Above-Equilibrium Wages: Minimum-Wage Laws, Unions, and Efficiency Wages
• Workers earn different wages for many reasons. Tosome extent, wage differentials compensate workersfor job attributes. Other things being equal, workers inhard, unpleasant jobs are paid more than workersin easy, pleasant jobs.
• Workers with more human capital are paid more thanworkers with less human capital. The return to accumulatinghuman capital is high and has increased overthe past several decades.
• Although years of education, experience, and jobcharacteristicsaffect earnings as theory predicts, thereis much variation in earnings that cannot be explainedby things that economists can measure. The unexplainedvariation in earnings is largely attributable tonatural ability, effort, and chance.
• Some economists have suggested that more educatedworkers earn higher wages not because educationraises productivity but because workers with highnatural ability use education as a way to signal theirhigh ability to employers. If this signaling theory iscorrect, then increasing the educational attainment ofall workerswould not raise the overall level of wages.
19-2 The Economics of Discrimination
Measuring Labor-Market Discrimination
Discrimination by Employers
Discrimination by Customers and Governments
• Wages are sometimes pushed above the level thatbrings supply and demand into balance. Three reasonsfor above-equilibrium wages are minimum-wagelaws, unions, and efficiency wages.
• Some differences in earnings are attributable to discriminationbased on race, sex, or other factors.Measuringthe amount of discrimination is difficult,however, because one must correct for differences inhuman capital and job characteristics.
• Competitive markets tend to limit the impact of discriminationon wages. If the wages of a group of workersare lower than those of another group for reasonsnot relatedto marginal productivity, then nondiscriminatoryfirms will be more profitable than discriminatoryfirms. Profit-maximizing behavior, therefore, can reducediscriminatory wage differentials. Discrimination persistsin competitive markets, however, if customers arewilling to pay more to discriminatory firms or if thegovernment passes laws requiring firms to discriminate.
Key Concepts
compensating differential, p. 396human capital, p. 397union, p. 402strike, p. 403efficiency wages, p. 403discrimination, p. 403
Chapter 20 Income Inequality and Poverty
20-1 The Measurement of Inequality
U.S. Income Inequality
Inequality around the World
The Poverty Rate
Problems in Measuring Inequality
Economic Mobility
• Data on the distribution of income show a wide disparityin U.S. society. The richest fifth of families earns morethan twelve times as much income as the poorest fifth.
• Because in-kind transfers, the economic life cycle,transitory income, and economic mobility are soimportant for understanding variation in income, itis difficult to gauge the degree of inequality in oursociety using data on the distribution of income in asingle year. When these other factors are taken intoaccount, they tend to suggest that economic well-beingis more equally distributed than is annualincome.
20-2 The Political Philosophy of Redistributing Income
Utilitarianism
Liberalism
Libertarianism
• Political philosophers differ in their views about therole of government in altering the distribution of income.Utilitarians (such as John Stuart Mill) wouldchoose the distribution of income to maximize the sumof utility of everyone in society. Liberals (such as JohnRawls) would determine the distribution of income asif we were behind a “veil of ignorance” that preventedus from knowing our stations in life. Libertarians (suchas Robert Nozick) would have the government enforceindividual rights to ensure a fair process but then notbe concerned about inequality in the resulting distributionof income.
20-3 Policies to Reduce Poverty
Minimum-Wage Laws
Welfare
Negative Income Tax
In-Kind Transfers
Antipoverty Programs and Work Incentives 
• Various policies aim to help the poor—minimum-wagelaws, welfare, negative income taxes, and in-kindtransfers. While these policies help some familiesescape poverty, they also have unintended side effects.Because financial assistance declines as income rises,the poor often face very high effective marginal taxrates, which discourage poor families from escapingpoverty on their own.
Key Concepts 
poverty rate, p. 417poverty line, p. 417in-kind transfers, p. 419life cycle, p. 419permanent income, p. 419utilitarianism, p. 421utility, p. 421liberalism, p. 422maximin criterion, p. 422social insurance, p. 423libertarianism, p. 423welfare, p. 425negative income tax, p. 425
PartVIITopics for Further Study
Chapter 21 The Theory of Consumer Choice
21-1 The Budget Constraint: What the Consumer Can Afford
• A consumer's budget constraint shows the possiblecombinations of different goods she can buy givenher income and the prices of the goods. The slope ofthe budget constraint equals the relative price of thegoods.
21-2 Preferences: What the Consumer Wants 
Representing Preferences with IndifferenceCurves
Four Properties of Indifference Curves
Two Extreme Examples of Indifference Curves
• The consumer 's indifference curves represent herpreferences. An indifference curve shows the variousbundlesof goods that make the consumer equallyhappy. Points on higher indifference curves are preferredto points on lower indifference curves. The slopeof an indifference curve at any point is the consumer'smarginal rate of substitution—the rate at which theconsumer is willing to trade one good for the other.
21-3 Optimization: What the Consumer Chooses
The Consumer's Optimal Choices
How Changes in Income Affect the Consumer'sChoices
How Changes in Prices Affect the Consumer'sChoices
Income and Substitution Effects
Deriving the Demand Curve
• The consumer optimizes by choosing the point on herbudget constraint that lies on the highest indifferencecurve. At this point, the slope of the indifference curve(the marginal rate of substitution between the goods)equals the slope of the budget constraint (the relativeprice of the goods), and the consumer's valuationof the two goods (measured by the marginal rate ofsubstitution) equals the market's valuation (measuredby the relative price).
• When the price of a good falls, the impact on the consumer'schoices can be broken down into an incomeeffect and a substitution effect. The income effect isthe change in consumption that arises because a lowerprice makes the consumer better off. The substitutioneffect is the change in consumption that arises becausea price change encourages greater consumption of thegood that has become relatively cheaper. The incomeeffect is reflected in the movement from a lower to ahigher indifference curve, whereas the substitutioneffectis reflected by a movement along an indifferencecurve to a point with a different slope.
21-4 Three Applications
Do All Demand Curves Slope Downward? 
How Do Wages Affect Labor Supply? 
How Do Interest Rates Affect Household Saving?
• The theory of consumer choice can be applied in manysituations. It explains why demand curves can potentiallyslope upward, why higher wages could eitherincrease or decrease the quantity of labor supplied,and why higher interest rates could either increase ordecrease saving.
21-5 Conclusion: Do People Really Think This Way?
Key Concepts 
budget constraint, p. 436indifference curve, p. 438marginal rate of substitution, p. 438perfect substitutes, p. 441perfect complements, p. 441
normal good, p. 444inferior good, p. 444income effect, p. 446substitution effect, p. 446Giffen good, p. 449
Chapter 22 Frontiers of Microeconomics
22-1 Asymmetric Information
Hidden Actions: Principals, Agents, andMoralHazard
Hidden Characteristics: Adverse Selection and the Lemons Problem
Signaling to Convey Private Information
Screening to Uncover Private Information
Asymmetric Information and Public Policy
• In many economic transactions, information is asymmetric.When there are hidden actions, principals maybe concerned that agents suffer from the problem ofmoral hazard. When there are hidden characteristics,buyers may be concerned about the problem ofadverse selection among the sellers. Private marketssometimes deal with asymmetric information with signalingand screening.
22-2 Political Economy
The Condorcet Voting Paradox
Arrow's Impossibility Theorem
The Median Voter Is King
Politicians Are People Too
• Although government policy can sometimes improvemarket outcomes, governments are themselves imperfectinstitutions. The Condorcet paradox shows thatmajority rule fails to produce transitive preferences forsociety, and Arrow's impossibility theorem shows thatno voting system will be perfect. In many situations,democratic institutions will produce the outcomedesiredby the median voter, regardless of the preferencesof the rest of the electorate. Moreover, the individualswho set government policy may be motivatedby self-interest rather than the national interest.
22-3 Behavioral Economics
People Aren't Always Rational
People Care about Fairness
People Are Inconsistent over Time
• The study of psychology and economics reveals thathuman decision making is more complex than isassumedin conventional economic theory. People arenot always rational, they care about the fairness ofeconomicoutcomes (even to their own detriment), andthey can be inconsistent over time.
Key Concepts 
moral hazard, p. 462agent, p. 462principal, p. 462adverse selection, p. 464signaling, p. 465screening, p. 466political economy, p. 467Condorcet paradox, p. 468Arrow's impossibility theorem, p. 469median voter theorem, p. 470behavioral economics, p. 471
PartVIIIThe Data of Macroeconomics
Chapter 23 Measuring a Nation's Income
23-1 The Economy's Income and Expenditure
• Because every transaction has a buyer and a seller, thetotal expenditure in the economy must equal the totalincome in the economy.
23-2 The Measurement of GDP 
“GDP Is the Market Value . . .”
“. . . of All . . .”
“. . . Final . . .”
“. . . Goods and Services . . .”
“. . . Produced . . .”
“. . . Within a Country . . .”
“. . . In a Given Period of Time.”
• Gross domestic product (GDP) measures an economy'stotal expenditure on newly produced goods and servicesand the total income earned from the productionof these goods and services. More precisely, GDP is themarket value of all final goods and services producedwithin a country in a given period of time.
23-3 The Components of GDP
Consumption
Investment
Government Purchases 
Net Exports
• GDP is divided among four components of expenditure:consumption, investment, government purchases,and net exports. Consumption includesspending on goods and services by households, withthe exception of purchases of new housing. Investmentincludes spending on new equipment and structures,including households' purchases of new housing.Government purchases include spending on goodsand services by local, state, and federal governments.Net exports equal the value of goods and services produceddomestically and sold abroad (exports) minusthe value of goods and services produced abroad andsold domestically (imports).
23-4 Real versus nominal GDP 
 A Numerical Example
The GDP Deflator
• Nominal GDP uses current prices to value the economy'sproduction of goods and services. Real GDPuses constant base-year prices to value the economy'sproduction of goods and services. The GDP deflator—calculated from the ratio of nominal to real GDP—measures the level of prices in the economy.
23-5 Is GDP a Good Measure of Economic Well-Being? 
• GDP is a good measure of economic well-being becausepeople prefer higher to lower incomes. But it isnot a perfect measure of well-being. For example, GDPexcludes the value of leisure and the value of a cleanenvironment.
Key Concepts 
microeconomics, p. 484macroeconomics, p. 484gross domestic product (GDP), p. 486consumption, p. 489investment, p. 489government purchases, p. 490net exports, p. 490nominal GDP, p. 492real GDP, p. 492GDP deflator, p. 494
Chapter 24 Measuring the Cost of Living
24-1 The Consumer Price Index
How the CPI Is Calculated 
Problems in Measuring the Cost of Living 
The GDP Deflator versus the Consumer Price
• The consumer price index shows the cost of a basket ofgoods and services relative to the cost of the same basketin the base year. The index is used to measure the overalllevel of prices in the economy. The percentage change inthe consumer price index measures the inflation rate.
• The consumer price index is an imperfect measure ofthe cost of living for three reasons. First, it does nottake into account consumers' ability to substitute towardgoods that become relatively cheaper over time.Second, it does not take into account increases in thepurchasing power of the dollar due to the introductionof new goods. Third, it is distorted by unmeasuredchanges in the quality of goods and services. Becauseof these measurement problems, the CPI overstatestrue inflation.
• Like the consumer price index, the GDP deflator measuresthe overall level of prices in the economy. The twoprice indexes usually move together, but there are importantdifferences. The GDP deflator differs from theCPI because it includes goods and services producedrather than goods and services consumed. As a result,imported goods affect the consumer price index but notthe GDP deflator. In addition, while the consumer priceindex uses a fixed basket of goods, the GDP deflatorautomatically changes the group of goods and servicesover time as the composition of GDP changes.
24-2 Correcting Economic Variables for the Effects of Inflation
Dollar Figures from Different Times
Indexation
Real and Nominal Interest Rates
• Dollar figures from different times do not represent avalid comparison of purchasing power. To comparea dollar figure from the past to a dollar figure today,the older figure should be inflated using a price index.
• Various laws and private contracts use price indexesto correct for the effects of inflation. The tax laws,however, are only partially indexed for inflation.
• A correction for inflation is especially important whenlooking at data on interest rates. The nominal interestrate is the interest rate usually reported; it is the rateat which the number of dollars in a savings accountincreases over time. By contrast, the real interest ratetakes into account changes in the value of the dollar overtime. The real interest rate equals the nominal interestrate minus the rate of inflation.
Key Concepts 
consumer price index (CPI), p. 506inflation rate, p. 508producer price index, p. 509indexation, p. 514nominal interest rate, p. 516real interest rate, p. 516
Part IX The Real Economy inthe Long Run
Chapter 25Production and Growth
25-1 Economic Growth around the World
• Economic prosperity, as measured by GDP per person,varies substantially around the world. The average incomein the world's richest countries is more than tentimes that in the world's poorest countries. Becausegrowth rates of real GDP also vary substantially, therelative positions of countries can change dramaticallyover time.
25-2 Productivity: Its Role and Determinants
Why Productivity Is So Important 
How Productivity Is Determined
• The standard of living in an economy depends onthe economy's ability to produce goods and services.Productivity, in turn, depends on the physical capital,human capital, natural resources, and technologicalknowledge available to workers.
25-3 Economic Growth and Public Policy
Saving and Investment
Diminishing Returns and the Catch-Up Effect
Investment from Abroad 
Education
Health and Nutrition
Property Rights and Political Stability
Free Trade 
Research and Development
Population Growth
• Government policies can try to influence the economy'sgrowth rate in many ways: by encouraging savingand investment, encouraging investment fromabroad, fostering education, promoting good health,maintaining property rights and political stability, allowingfree trade, and promoting the research and developmentof new technologies.
• The accumulation of capital is subject to diminishingreturns: The more capital an economy has, the less additionaloutput the economy gets from an extra unitof capital. As a result, although higher saving leads tohigher growth for a period of time, growth eventuallyslows down as capital, productivity, and income rise.Also because of diminishing returns, the return to capitalis especially high in poor countries. Other thingsbeing equal, these countries can grow faster because ofthe catch-up effect.
• Population growth has a variety of effects on economicgrowth. On the one hand, more rapid populationgrowth may lower productivity by stretching the supplyof natural resources and by reducing the amount ofcapital available for each worker. On the other hand,a larger population may enhance the rate of technologicalprogress because there are more scientists andengineers.
25-4 Conclusion: The Importance of Long-Run Growth
Key Concepts
productivity, p. 527physical capital, p. 530human capital, p. 530natural resources, p. 530technological knowledge, p. 530diminishing returns, p. 533catch-up effect, p. 534
Chapter 26 Saving, Investment, and the Financial System
26-1 Financial Institutions in the U.S. Economy
Financial Markets 
Financial Intermediaries
Summing Up
• The U.S. financial system is made up of many typesof financial institutions, such as the bond market,the stock market, banks, and mutual funds. All theseinstitutions act to direct the resources of householdsthat want to save some of their income into thehands of households and firms that want to borrow.
26-2 Saving and Investment in the national Income Accounts
Some Important Identities
The Meaning of Saving and Investment
• National income accounting identities reveal some importantrelationships among macroeconomic variables.In particular, for a closed economy, national savingmust equal investment. Financial institutions are themechanism through which the economy matches oneperson's saving with another person's investment.
26-3 The Market for Loanable Funds
Supply and Demand for Loanable Funds
Policy 1: Saving Incentives
Policy 2: Investment Incentives
Policy 3: Government Budget Deficits and Surpluses
• The interest rate is determined by the supply anddemand for loanable funds. The supply of loanablefunds comes from households that want to savesome of their income and lend it out. The demandfor loanable funds comes from households and firmsthat want to borrow for investment. To analyze howany policy or event affects the interest rate, one mustconsider how it affects the supply and demand for
loanable funds.
• National saving equals private saving plus publicsaving. A government budget deficit representsnegative public saving and, therefore, reduces nationalsaving and the supply of loanable funds available tofinance investment. When a government budget deficitcrowds out investment, it reduces the growth ofproductivity and GDP.
Key Concepts
financial system, p. 548financial markets, p. 548bond, p. 548stock, p. 549financial intermediaries, p. 550mutual fund, p. 551national saving (saving), p. 555private saving, p. 555public saving, p. 555budget surplus, p. 555budget deficit, p. 555market for loanable funds, p. 556crowding out, p. 562
Chapter 27 The Basic Tools of Finance
27-1 Present Value: Measuring the Time Value of Money
• Because savings can earn interest, a sum of money todayis more valuable than the same sum of money inthe future. A person can compare sums from differenttimes using the concept of present value. The presentvalue of any future sum is the amount that would beneeded today, given prevailing interest rates, to producethat future sum.
27-2 Managing Risk
Risk Aversion
The Markets for Insurance
Diversification of Firm-Specific Risk
The Trade-off between Risk and Return
• Because of diminishing marginal utility, most peopleare risk averse. Risk-averse people can reduce risk bybuying insurance, diversifying their holdings, andchoosing a portfolio with lower risk and lower return.
27-3 Asset Valuation
Fundamental Analysis
The Efficient Markets Hypothesis
Market Irrationality
• The value of an asset equals the present value ofthe cash flows the owner will receive. For a shareof stock, these cash flows include the stream ofdividends and the final sale price. According tothe efficient markets hypothesis, financial marketsprocess available information rationally, so a stockprice always equals the best estimate of the value ofthe underlying business. Some economists questionthe efficient markets hypothesis, however, andbelieve that irrational psychological factors alsoinfluence asset prices.
Key Concepts
finance, p. 570present value, p. 570future value, p. 570compounding, p. 570risk aversion, p. 572diversification, p. 574firm-specific risk, p. 575market risk, p. 575fundamental analysis, p. 577efficient markets hypothesis, p. 577informational efficiency, p. 578random walk, p. 578
Chapter 28 Unemployment
28-1 Identifying Unemployment
How Is Unemployment Measured?
Does the Unemployment Rate Measure What We Want It To?
How Long Are the Unemployed without Work?
Why Are There Always Some PeopleUnemployed? 
• The unemployment rate is the percentage of those whowould like to work who do not have jobs. The Bureauof Labor Statistics calculates this statistic monthlybased on a survey of thousands of households.
• The unemployment rate is an imperfect measureof joblessness. Some people who call themselvesunemployed may actually not want to work, and somepeople who would like to work have left the laborforce after an unsuccessful search and therefore are notcounted as unemployed.
• In the U.S. economy, most people who becomeunemployed find work within a short period of time.Nonetheless, most unemployment observed at anygiven time is attributable to the few people who areunemployed for long periods of time.
28-2 Job Search
Why Some Frictional Unemployment Is Inevitable
Public Policy and Job Search
Unemployment Insurance 
• One reason for unemployment is the time it takesworkers to search for jobs that best suit their tastesand skills. This frictional unemployment is increasedas a result of unemployment insurance, a governmentpolicy designed to protect workers' incomes.
28-3 Minimum-Wage Laws
• A second reason our economy always has some unemploymentis minimum-wage laws. By raising the wageof unskilled and inexperienced workers above the equilibriumlevel, minimum-wage laws raise the quantity oflabor supplied and reduce the quantity demanded. Theresulting surplus of labor represents unemployment.
28-4 Unions and Collective Bargaining
The Economics of Unions 
Are Unions Good or Bad for the Economy?
• A third reason for unemployment is the market powerof unions. When unions push the wages in unionizedindustries above the equilibrium level, they create asurplus of labor.
28-5 The Theory of Efficiency Wages 
Worker Health 
Worker Turnover 
Worker Quality 
Worker Effort
• A fourth reason for unemployment is suggested by thetheory of efficiency wages. According to this theory,firms find it profitable to pay wages above theequilibrium level. High wages can improve workerhealth, lower worker turnover, raise worker quality,and increase worker effort.
Key Concepts
labor force, p. 587unemployment rate, p. 587labor-force participationrate, p. 587natural rate of unemployment, p. 588cyclical unemployment, p. 589discouraged workers, p. 591frictional unemployment, p. 593structural unemployment, p. 593job search, p. 593unemployment insurance, p. 595union, p. 598collective bargaining, p. 599strike, p. 599efficiency wages, p. 601
PartXMoney and Prices in the Long Run
Chapter 29 The Monetary System
29-1 The Meaning of Money
The Functions of Money
The Kinds of Money
Money in the U.S. Economy

• The term money refers to assets that people regularlyuse to buy goods and services.
• Money serves three functions. As a medium of exchange,it is the item used to make transactions. As aunit of account, it provides the way in which pricesand other economic values are recorded. As a storeof value, it offers a way to transfer purchasing powerfrom the present to the future.
• Commodity money, such as gold, is money that hasintrinsic value: It would be valued even if it were notused as money. Fiat money, such as paper dollars, ismoney without intrinsic value: It would be worthless ifit were not used as money.
• In the U.S. economy, money takes the form of currencyand various types of bank deposits, such aschecking accounts.
29-2 The Federal Reserve System
The Fed's Organization
The Federal Open Market Committee

• The Federal Reserve, the central bank of the UnitedStates, is responsible for regulating the U.S. monetarysystem. The Fed chairman is appointed by the presidentand confirmed by Congress every 4 years. Thechairman is the head of the Federal Open MarketCommittee, which meets about every 6 weeks to considerchanges in monetary policy.
29-3 Banks and the Money Supply
The Simple Case of 100-Percent-Reserve Banking
Money Creation with Fractional-Reserve Banking
The Money Multiplier 
Bank Capital, Leverage, and the Financial Crisis of 2008–2009

• Bank depositors provide resources to banks by depositingtheir funds into bank accounts. These deposits arepart of a bank’s liabilities. Bank owners also provideresources (called bank capital) for the bank. Because ofleverage (the use of borrowed funds for investment),a small change in the value of a bank’s assets can leadto a large change in the value of the bank’s capital. Toprotect depositors, bank regulators require banks tohold a certain minimum amount of capital.
29-4 The Fed's Tools of Monetary Control
How the Fed Influences the Quantity of Reserves
How the Fed Influences the Reserve Ratio
Problems in Controlling the Money Supply
The Federal Funds Rate

• The Fed controls the money supply primarily throughopen-market operations: The purchase of governmentbonds increases the money supply, and the sale of governmentbonds decreases the money supply. The Fedalso uses other tools to control the money supply. It canexpand the money supply by decreasing the discountrate, increasing its lending to banks, lowering reserverequirements, or decreasing the interest rate on reserves.It can contract the money supply by increasing the discountrate, decreasing its lending to banks, raising reserverequirements, or increasing the interest rate on reserves.
• When individuals deposit money in banks and banksloan out some of these deposits, the quantity of moneyin the economy increases. Because the banking systeminfluences the money supply in this way, the Fed’scontrol of the money supply is imperfect.
• The Fed has in recent years set monetary policy bychoosing a target for the federal funds rate, a short-terminterest rate at which banks make loans to oneanother. As the Fed achieves its target, it adjusts themoney supply.
Key Concepts
money, p. 610medium of exchange, p. 611unit of account, p. 611store of value, p. 611liquidity, p. 611commodity money, p. 611fiat money, p. 612currency, p. 613demand deposits, p. 613Federal Reserve (Fed), p. 615central bank, p. 615money supply, p. 616monetary policy, p. 616reserves, p. 617fractional-reserve banking, p. 618reserve ratio, p. 618money multiplier, p. 620bank capital, p. 620leverage, p. 621leverage ratio, p. 621capital requirement, p. 621open-market operations, p. 622discount rate, p. 623reserve requirements, p. 624federal funds rate, p. 628
Chapter 30 Money Growth and Inflation
30-1 The Classical Theory of Inflation
The Level of Prices and the Value of Money
Money Supply, Money Demand, and Monetary Equilibrium
The Effects of a Monetary Injection
A Brief Look at the Adjustment Process
The Classical Dichotomy and Monetary Neutrality
Velocity and the Quantity Equation
The Inflation Tax
The Fisher Effect

• The overall level of prices in an economy adjusts tobring money supply and money demand into balance.When the central bank increases the supply of money,it causes the price level to rise. Persistent growth inthe quantity of money supplied leads to continuinginflation.
• The principle of monetary neutrality asserts thatchanges in the quantity of money influence nominalvariables but not real variables. Most economistsbelieve that monetary neutrality approximatelydescribes the behavior of the economy in the long run.
• A government can pay for some of its spending simplyby printing money. When countries rely heavily on this“inflation tax,” the result is hyperinflation.
• One application of the principle of monetary neutralityis the Fisher effect. According to the Fisher effect,when the inflation rate rises, the nominal interest raterises by the same amount so that the real interest rateremains the same.
30-2 The Costs of Inflation 
A Fall in Purchasing Power? The Inflation Fallacy
Shoeleather Costs
Menu Costs
Relative-Price Variability and the Misallocation of Resources
Inflation-Induced Tax Distortions
Confusion and Inconvenience
A Special Cost of Unexpected Inflation: ArbitraryRedistributions of Wealth
Inflation Is Bad, But Deflation May Be Worse

• Many people think that inflation makes them poorerbecause it raises the cost of what they buy. This viewis a fallacy, however, because inflation also raisesnominal incomes.
• Economists have identified six costs of inflation:shoeleather costs associated with reduced moneyholdings, menu costs associated with more frequentadjustment of prices, increased variability of relativeprices, unintended changes in tax liabilities due tononindexation of the tax code, confusion and inconvenienceresulting from a changing unit of account,and arbitrary redistributions of wealth between debtorsand creditors. Many of these costs are large duringhyperinflation, but the size of these costs for moderateinflation is less clear.
Key Concepts 
quantity theory of money, p. 637nominal variables, p. 639real variables, p. 639classical dichotomy, p. 639monetary neutrality, p. 640velocity of money, p. 640quantity equation, p. 641inflation tax, p. 643Fisher effect, p. 645shoeleather costs, p. 647menu costs, p. 648
PartXIThe Macroeconomics of Open Economies
Chapter 31 Open-Economy Macroeconomics: Basic Concepts
31-1 The International Flows of Goods and Capital
The Flow of Goods: Exports, Imports, and Net Exports
The Flow of Financial Resources: Net Capital Outflow
The Equality of Net Exports andNetCapitalOutflow
Saving, Investment, and Their Relationship to the International Flows
Summing Up
• Net exports are the value of domestic goods and servicessold abroad (exports) minus the value of foreigngoods and services sold domestically (imports).Net capital outflow is the acquisition of foreign assets bydomestic residents (capital outflow) minus the acquisitionof domestic assets by foreigners (capital inflow).Because every international transaction involves an exchangeof an asset for a good or service, an economy'snet capital outflow always equals its net exports.
• An economy's saving can be used either to financeinvestment at home or to buy assets abroad. Thus,national saving equals domestic investment plus netcapital outflow.
31-2 The Prices for International Transactions: Real and nominal Exchange Rates
Nominal Exchange Rates
Real Exchange Rates
• The nominal exchange rate is the relative price of thecurrency of two countries, and the real exchange rateis the relative price of the goods and services of twocountries. When the nominal exchange rate changesso that each dollar buys more foreign currency, thedollar is said to appreciate or strengthen. When the nominalexchange rate changes so that each dollar buys lessforeign currency, the dollar is said to depreciate or weaken.
31-3 A First Theory of Exchange-Rate Determination: Purchasing-Power Parity
The Basic Logic of Purchasing-Power Parity
Implications of Purchasing-Power Parity
Limitations of Purchasing-Power Parity 
• According to the theory of purchasing-power parity, adollar (or a unit of any other currency) should be ableto buy the same quantity of goods in all countries. Thistheory implies that the nominal exchange rate betweenthe currencies of two countries should reflect the pricelevels in those countries. As a result, countries withrelatively high inflation should have depreciatingcurrencies, and countries with relatively low inflationshould have appreciating currencies.
Key Concepts
closed economy, p. 660open economy, p. 660exports, p. 660imports, p. 660net exports, p. 660trade balance, p. 660trade surplus, p. 660trade deficit, p. 661balanced trade, p. 661net capital outflow, p. 664nominal exchange rate, p. 670appreciation, p. 671depreciation, p. 671real exchange rate, p. 672purchasing-power parity, p. 674
Chapter 32 A Macroeconomic Theory of the Open Economy 
32-1 Supply and Demand for Loanable Funds and for Foreign-Currency Exchange
The Market for Loanable Funds
The Market for Foreign-Currency Exchange
• Two markets are central to the macroeconomicsof open economies: the market for loanable fundsand the market for foreign-currency exchange. Inthe market for loanable funds, the real interest rateadjuststo balancethe supply of loanable funds (fromnationalsaving) and the demand for loanable funds(for domesticinvestmentand net capital outflow).In the market for foreign-currency exchange, the realexchangerate adjuststo balance the supply of dollars(from net capital outflow) and the demand for dollars(for net exports).
32-2 Equilibrium in the Open Economy
Net Capital Outflow: The Link between theTwo Markets
Simultaneous Equilibrium in Two Markets
• Because net capital outflow is part ofthe demand for loanable funds and because it providesthe supply of dollars for foreign-currency exchange, itis the variable that connects these two markets.
32-3 How Policies and Events Affect an Open Economy
Government Budget Deficits
Trade Policy
Political Instability and Capital Flight
• A policy that reduces national saving, such as a governmentbudget deficit, reduces the supply of loanablefunds and drives up the interest rate. The higher interestrate reduces net capital outflow, which reduces thesupply of dollars in the market for foreign-currencyexchange. The dollar appreciates, and net exports fall.
• Although restrictive trade policies, such as tariffs orquotas on imports, are sometimes advocated as a wayto alter the trade balance, they do not necessarily havethat effect. A trade restriction increases net exports forany given exchange rate and, therefore, increases thedemand for dollars in the market for foreign-currencyexchange. As a result, the dollar appreciates in value,making domestic goods more expensive relative to foreigngoods. This appreciation offsets the initial impactof the trade restriction on net exports.
• When investors change their attitudes about holdingassets of a country, the ramifications for the country'seconomy can be profound. In particular, political instabilitycan lead to capital flight, which tends to increaseinterest rates and cause the currency to depreciate.
Key Concepts
trade policy, p. 694 capital flight, p. 697
PartXIIShort-Run Economic Fluctuations
Chapter 33 Aggregate Demand and Aggregate Supply 
33-1 Three Key Facts about Economic Fluctuations
Fact 1: Economic Fluctuations Are Irregular and Unpredictable
Fact 2: Most Macroeconomic Quantities Fluctuate Together
Fact 3: As Output Falls, Unemployment Rises
• All societies experience short-run economic fluctuationsaround long-run trends. These fluctuationsare irregular and largely unpredictable. Whenrecessions do occur, real GDP and other measures ofincome, spending, and production fall, and unemploymentrises.
33-2 Explaining Short-Run Economic Fluctuations
The Assumptions of Classical Economics
The Reality of Short-Run Fluctuations
The Model of Aggregate Demand and Aggregate Supply
• Classical economic theory is based on the assumptionthat nominal variables such as the moneysupply and the price level do not influence realvariables such as output and employment. Mosteconomists believe that this assumption is accuratein the long run but not in the short run. Economistsanalyze short-run economic fluctuationsusing the model of aggregate demand and aggregatesupply. According to this model, the output ofgoods and services and the overall level of pricesadjust to balance aggregate demand and aggregatesupply.
33-3 The Aggregate-Demand Curve
Why the Aggregate-Demand Curve Slopes Downward
Why the Aggregate-Demand Curve Might Shift
• The aggregate-demand curve slopes downward forthree reasons. The first is the wealth effect: A lowerprice level raises the real value of households' moneyholdings, which stimulates consumer spending. Thesecond is the interest-rate effect: A lower price level reducesthe quantity of money households demand; ashouseholds try to convert money into interest-bearingassets, interest rates fall, which stimulates investmentspending. The third is the exchange-rate effect: As alower price level reduces interest rates, the dollar depreciatesin the market for foreign-currency exchange,which stimulates net exports.
• Any event or policy that raises consumption, investment,government purchases, or net exports at a givenprice level increases aggregate demand. Any event orpolicy that reduces consumption, investment, governmentpurchases, or net exports at a given price leveldecreases aggregate demand.
33-4 The Aggregate-Supply Curve
Why the Aggregate-Supply Curve Is Vertical in the Long Run
Why the Long-Run Aggregate-Supply Curve Might Shift
Using Aggregate Demand and Aggregate Supply to Depict Long-Run Growth and Inflation
Why the Aggregate-Supply Curve Slopes Upward in the Short Run
Why the Short-Run Aggregate-Supply Curve Might Shift
• The long-run aggregate-supply curve is vertical. Inthe long run, the quantity of goods and services supplieddepends on the economy's labor, capital, naturalresources, and technology but not on the overall levelof prices.
• Three theories have been proposed to explain the upwardslope of the short-run aggregate-supply curve.According to the sticky-wage theory, an unexpectedfall in the price level temporarily raises real wages,which induces firms to reduce employment and production.According to the sticky-price theory, an unexpectedfall in the price level leaves some firms withprices that are temporarily too high, which reducestheir sales and causes them to cut back production. Accordingto the misperceptions theory, an unexpectedfall in the price level leads suppliers to mistakenlybelieve that their relative prices have fallen, whichinduces them to reduce production. All three theoriesimply that output deviates from its natural level whenthe actual price level deviates from the price level thatpeople expected.
• Events that alter the economy's ability to produce output,such as changes in labor, capital, natural resources,or technology, shift the short-run aggregate-supplycurve (and may shift the long-run aggregate-supplycurve as well). In addition, the position of the shortrunaggregate-supply curve depends on the expectedprice level.
33-5 Two Causes of Economic Fluctuations
The Effects of a Shift in Aggregate Demand
The Effects of a Shift in Aggregate Supply 
• One possible cause of economic fluctuations is a shiftin aggregate demand. When the aggregate-demandcurve shifts to the left, for instance, output and pricesfall in the short run. Over time, as a change in the expectedprice level causes wages, prices, and perceptionsto adjust, the short-run aggregate-supply curveshifts to the right. This shift returns the economy to itsnatural level of output at a new, lower price level.
• A second possible cause of economic fluctuationsis a shift in aggregate supply. When the short-run
aggregate-supply curve shifts to the left, the effect isfalling output and rising prices—a combination calledstagflation. Over time, as wages, prices, and perceptionsadjust, the short-run aggregate-supply curveshifts back to the right, returning the price level andoutput to their original levels.
Key Concepts
recession, p. 707depression, p. 707model of aggregate demand andaggregate supply, p. 712aggregate-demand curve, p. 712aggregate-supply curve, p. 713natural level of output, p. 721stagflation, p. 737
Chapter 34 The Influence of Monetary and Fiscal Policy on Aggregate Demand
34-1 How Monetary Policy Influences Aggregate Demand
The Theory of Liquidity Preference
The Downward Slope of the Aggregate-Demand Curve
Changes in the Money Supply
The Role of Interest-Rate Targets in Fed Policy
• In developing a theory of short-run economic fluctuations,Keynes proposed the theory of liquidity preferenceto explain the determinants of the interest rate.According to this theory, the interest rate adjusts to balancethe supply and demand for money.
• An increase in the price level raises money demand andincreases the interest rate that brings the money marketinto equilibrium. Because the interest rate representsthe cost of borrowing, a higher interest rate reducesinvestment and, thereby, the quantity of goods andservices demanded. The downward-sloping aggregate-demandcurve expresses this negative relationshipbetweenthe price level and the quantity demanded.
• Policymakers can influence aggregate demand withmonetary policy. An increase in the money supplyreducesthe equilibrium interest rate for any given pricelevel. Because a lower interest rate stimulates investmentspending, the aggregate-demand curve shifts tothe right. Conversely, a decrease in the money supplyraises the equilibrium interest rate for any given pricelevel and shifts the aggregate-demand curve to the left.
34-2 How Fiscal Policy Influences Aggregate Demand
Changes in Government Purchases
The Multiplier Effect
A Formula for the Spending Multiplier
Other Applications of the Multiplier Effect
The Crowding-Out Effect
Changes in Taxes
• Policymakers can also influence aggregate demandwith fiscal policy. An increase in government purchasesor a cut in taxes shifts the aggregate-demand curve tothe right. A decrease in government purchases or anincrease in taxes shifts the aggregate-demand curve tothe left.
• When the government alters spending or taxes, theresulting shift in aggregate demand can be larger or
smaller than the fiscal change. The multiplier effecttends to amplify the effects of fiscal policy on aggregatedemand. The crowding-out effect tends to dampen theeffects of fiscal policy on aggregate demand.
34-3 Using Policy to Stabilize the Economy
The Case for Active Stabilization Policy
The Case against Active Stabilization Policy
Automatic Stabilizers
• Because monetary and fiscal policy can influenceaggregatedemand, the government sometimes uses
these policy instruments in an attempt to stabilize theeconomy. Economists disagree about how active thegovernment should be in this effort. According toadvocates of active stabilization policy, changes in
attitudes by households and firms shift aggregatedemand;if the government does not respond, the
resultis undesirable and unnecessary fluctuations inoutput and employment. According to critics of activestabilization policy, monetary and fiscal policy workwith such long lags that attempts at stabilizing theeconomy often end up being destabilizing.
Key Concepts
theory of liquidity preference, p. 747fiscal policy, p. 755multiplier effect, p. 756crowding-out effect, p. 758automatic stabilizers, p. 764
Chapter 35 The Short-Run Trade-off between Inflation and Unemployment 
35-1 The Phillips Curve
Origins of the Phillips Curve
Aggregate Demand, Aggregate Supply, and the Phillips Curve
• The Phillips curve describes a negative relationshipbetween inflation and unemployment. By expandingaggregate demand, policymakers can choose a pointon the Phillips curve with higher inflation and lowerunemployment. By contracting aggregate demand,policymakers can choose a point on the Phillips curvewith lower inflation and higher unemployment.
35-2 Shifts in the Phillips Curve: The Role of Expectations
The Long-Run Phillips Curve
The Meaning of“Natural”
Reconciling Theory and Evidence
The Short-Run Phillips Curve
The Natural Experiment for the Natural-Rate Hypothesis 
• The trade-off between inflation and unemploymentdescribed by the Phillips curve holds only in the shortrun. In the long run, expected inflation adjusts tochanges in actual inflation, and the short-run Phillipscurve shifts. As a result, the long-run Phillips curve isvertical at the natural rate of unemployment.
35-3 Shifts in the Phillips Curve: The Role of Supply Shocks
• The short-run Phillips curve also shifts becauseof shocks to aggregate supply. An adverse supplyshock, such as an increase in world oil prices, givespolicymakers a less favorable trade-off between inflationand unemployment. That is, after an adversesupply shock, policymakers have to accept a higherrate of inflation for any given rate of unemploymentor a higher rate of unemployment for any given rateof inflation.
35-4 The Cost of Reducing Inflation
The Sacrifice Ratio
Rational Expectations and the Possibility of Costless Disinflation
The Volcker Disinflation
The Greenspan Era 
A Financial Crisis Takes Us for a Ride along the Phillips Curve
• When the Fed contracts growth in the money supply toreduce inflation, it moves the economy along the short-runPhillips curve, which results in temporarily highunemployment. The cost of disinflation depends onhow quickly expectations of inflation fall. Some economistsargue that a credible commitment to low inflationcan reduce the cost of disinflation by inducing aquick adjustment of expectations.
Key Concepts
Phillips curve, p. 770natural-rate hypothesis, p. 778supply shock, p. 780sacrifice ratio, p. 784rational expectations, p. 784
PartXIIIFinal Thoughts
Chapter 36 Six Debates over Macroeconomic Policy
36-1 Should Monetary and Fiscal Policymakers Try to Stabilize the Economy? 
Pro: Policymakers Should Try toStabilizetheEconomy
Con: Policymakers Should Not Try to Stabilizethe Economy 
• Advocates of active monetary and fiscal policy viewthe economy as inherently unstable and believe that
policy can manage aggregate demand to offset the inherentinstability. Critics of active monetary and fiscalpolicy emphasize that policy affects the economywith a lag and that our ability to forecast future economicconditions is poor. As a result, attempts to stabilizethe economy can end up being destabilizing.
36-2 Should the Government Fight Recessions with SpendingHikes Rather Than Tax Cuts?
Pro: The Government Should Fight Recessions with Spending Hikes
Con: The Government Should Fight Recessionswith Tax Cuts
• Advocates of increased government spending to fightrecessions argue that because tax cuts may be savedrather than spent, direct government spending doesmore to increase aggregate demand, which is key topromoting production and employment. Critics ofspending hikes argue that tax cuts can expand both aggregatedemand and aggregate supply and that hastyincreases in government spending may lead to wastefulpublic projects.
36-3 Should Monetary Policy Be Made by Rule Rather Than by Discretion?
Pro: Monetary Policy Should Be Made by Rule
Con: Monetary Policy Should Not Be Made by Rule
• Advocates of rules for monetary policy argue that discretionarypolicy can suffer from incompetence, theabuse of power, and time inconsistency. Critics of rulesfor monetary policy argue that discretionary policyis more flexible in responding to changing economic circumstances.
36-4 Should the Central Bank Aim for Zero Inflation?
Pro: The Central Bank Should Aim for Zero Inflation
Con: The Central Bank Should Not Aim forZero Inflation 
• Advocates of a zero-inflation target emphasize thatinflation has many costs and few if any benefits.Moreover, the cost of eliminating inflation—depressedoutput and employment—is only temporary.Even this cost can be reduced if the central bankannounces a credible plan to reduce inflation, therebydirectly lowering expectations of inflation. Critics of azero-inflation target claim that moderate inflation imposesonly small costs on society, whereas the recessionnecessary to reduce inflation is quite costly. Thecritics also point out several ways in which moderateinflation may be helpful to an economy.
36-5 Should the Government Balance Its Budget?
Pro: The Government Should Balance Its Budget
Con: The Government Should Not Balance Its Budget 
• Advocates of a balanced government budget arguethat budget deficits impose an unjustifiable burdenon future generations by raising their taxes andlowering their incomes. Critics of a balanced governmentbudget argue that the deficit is only one smallpiece of fiscal policy. Single-minded concern aboutthe budget deficit can obscure the many ways inwhich policy, including various spending programs,affects different generations.
36-6 Should the Tax Laws Be Reformed to Encourage Saving?
Pro: The Tax Laws Should Be Reformed to Encourage Saving
Con: The Tax Laws Should Not Be Reformed to Encourage Saving
• Advocates of tax incentives for saving point out that oursociety discourages saving in many ways, such as byheavily taxing capital income and by reducing benefitsfor those who have accumulated wealth. They endorsereforming the tax laws to encourage saving, perhapsby switching from an income tax to a consumption tax.Critics of tax incentives for saving argue that many proposedchanges to stimulate saving would primarily benefitthe wealthy, who do not need a tax break. They alsoargue that such changes might have only a small effecton private saving. Raising public saving by decreasingthe government's budget deficit would provide a moredirect and equitable way to increase national saving.