about the authorsbrief contentscontentsprefaceThis Book’s ApproachWhat’s New in the Fifth Edition?The Canadian PerspectiveThe Arrangement of TopicsAlternative Routes through the TextLearning ToolsSupplements for StudentsCompanion Website (www.worthpublishers.com/mankiw)Supplements for InstructorsTest BankAcknowledgments1.1 What Macroeconomists Study1.2 How Economists ThinkTheory as Model BuildingThe Use of Multiple ModelsPrices: Flexible Versus StickyMicroeconomic Thinking and Macroeconomic Models1.3 How This Book ProceedsSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS2.1 Measuring the Value of Economic Activity: Gross Domestic ProductIncome, Expenditure, and the Circular FlowSome Rules for Computing GDPReal GDP versus Nominal GDPThe GDP DeflatorChain-Weighted Measures of Real GDPThe Components of ExpenditureSeveral Measures of Income2.2 Measuring the Cost of Living: The Consumer Price IndexThe Price of a Basket of GoodsThe CPI Versus the GDP Deflator2.3 Measuring Joblessness: The Unemployment RateUnemployment, GDP, and Okun’s Law2.4 Conclusion: From Economic Statistics to Economic ModelsSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS3.1 What Determines the Total Production of Goods and Services?The Factors of ProductionThe Production FunctionThe Supply of Goods and Services3.2 How Is National Income Distributed to the Factors of Production?Factor PricesThe Decisions Facing the Competitive FirmThe Firm’s Demand for FactorsThe Division of National IncomeThe Cobb–Douglas Production Function3.3 What Determines the Demand for Goods and Services?ConsumptionInvestmentGovernment Purchases3.4 What Brings the Supply and Demand for Goods and Services Into Equilibrium?Equilibrium in the Market for Goods and Services: The Supply and Demand for the Economy’s OutputEquilibrium in the Financial Markets: The Supply and Demand for Loanable FundsChanges in Saving: The Effects of Fiscal PolicyChanges in Investment Demand3.5 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS4.1 What Is Money?The Functions of MoneyThe Types of MoneyThe Development of Fiat MoneyHow the Quantity of Money Is ControlledHow the Quantity of Money Is Measured4.2 The Quantity Theory of MoneyTransactions and the Quantity EquationFrom Transactions to IncomeThe Money Demand Function and the Quantity EquationThe Assumption of Constant VelocityMoney, Prices, and Inflation4.3 Seigniorage: The Revenue from Printing Money4.4 Inflation and Interest RatesTwo Interest Rates: Real and NominalThe Fisher EffectTwo Real Interest Rates: Ex Ante and Ex Post4.5 The Nominal Interest Rate and the Demand for MoneyThe Cost of Holding MoneyFuture Money and Current Prices4.6 The Social Costs of InflationThe Layman’s View and the Classical ResponseThe Costs of Expected InflationThe Costs of Unexpected InflationOne Possible Benefit of Inflation4.7 HyperinflationThe Costs of HyperinflationThe Causes of Hyperinflation4.8 Conclusion: The Classical DichotomySummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSMORE PROBLEMS AND APPLICATIONS5.1 The International Flows of Capital and GoodsThe Role of Net ExportsNet Foreign Investment and the Trade BalanceInternational Flows of Goods and Capital: An Example5.2 Saving and Investment in a Small Open EconomyCapital Mobility and the World Interest RateThe ModelHow Policies Influence the Trade BalanceEvaluating Economic Policy5.3 Exchange RatesNominal and Real Exchange RatesThe Real Exchange Rate and the Trade BalanceThe Determinants of the Real Exchange RateHow Policies Influence the Real Exchange RateThe Effects of Trade PoliciesThe Determinants of the Nominal Exchange RateThe Special Case of Purchasing-Power Parity5.4 Large Versus Small Open EconomiesSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSForeign DebtFiscal PolicyTrickle-Down EconomicsMORE PROBLEMS AND APPLICATIONS6.1 Job Loss, Job Finding, and the Natural Rate of Unemployment6.2 Job Search and Frictional UnemploymentPublic Policy and Frictional Unemployment6.3 Real-Wage Rigidity and Structural UnemploymentMinimum-Wage LawsUnions and Collective BargainingEfficiency Wages6.4 Labour Market Experience: CanadaThe Duration of UnemploymentVariation in the Unemployment Rate Across Age Groups and RegionsTrends in Unemployment6.5 Labour Market Experience: EuropeThe Rise in European UnemploymentUnemployment Variation Within EuropeThe Rise of European Leisure6.6 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSInequalityGovernment PolicyThe Globalization ChallengeMORE PROBLEMS AND APPLICATIONS7.1 The Accumulation of CapitalThe Supply and Demand for GoodsGrowth in the Capital Stock and the Steady StateApproaching the Steady State: A Numerical ExampleHow Saving Affects Growth7.2 The Golden Rule Level of CapitalComparing Steady StatesFinding the Golden Rule Steady State: A Numerical ExampleThe Transition to the Golden Rule Steady State7.3 Population GrowthThe Steady State with Population GrowthThe Effects of Population GrowthAlternative Perspectives on Population Growth7.4 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS8.1 Technological Progress in the Solow ModelThe Efficiency of LabourThe Steady State with Technological ProgressThe Effects of Technological Progress8.2 From Growth Theory to Growth EmpiricsBalanced GrowthConvergenceFactor Accumulation Versus Production Efficiency8.3 Policies to Promote GrowthEvaluating the Rate of SavingChanging the Rate of SavingAllocating the Economy’s InvestmentEstablishing the Right InstitutionsEncouraging Technological Progress8.4 Beyond the Solow Model: Endogenous Growth TheoryThe Basic ModelA Two-Sector ModelThe Microeconomics of Research and Development8.5 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSIncreases in the Factors of ProductionTechnological ProgressThe Sources of Growth in CanadaThe Solow Residual in the Short RunMORE PROBLEMS AND APPLICATIONS9.1 Time Horizons in MacroeconomicsHow the Short Run and the Long Run DifferThe Model of Aggregate Supply and Aggregate Demand9.2 Aggregate DemandThe Quantity Equation as Aggregate DemandWhy the Aggregate Demand Curve Slopes DownwardShifts in the Aggregate Demand Curve9.3 Aggregate SupplyThe Long Run: The Vertical Aggregate Supply CurveThe Short Run: The Horizontal Aggregate Supply CurveFrom the Short Run to the Long Run9.4 Stabilization PolicyShocks to Aggregate DemandShocks to Aggregate Supply9.5 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS10.1 The Goods Market and the IS CurveThe Keynesian CrossThe Interest Rate, Investment, and the IS CurveHow Fiscal Policy Shifts the IS CurveA Loanable-Funds Interpretation of the IS Curve10.2 The Money Market and the LM CurveThe Theory of Liquidity PreferenceIncome, Money Demand, and the LM CurveHow Monetary Policy Shifts the LM CurveA Quantity-Equation Interpretation of the LM Curve10.3 Conclusion: The Short-Run EquilibriumSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS11.1 Explaining Fluctuations With the IS–LM ModelHow Fiscal Policy Shifts the IS Curve and Changes the Short-Run EquilibriumHow Monetary Policy Shifts the LM Curve and Changes the Short-Run EquilibriumThe Interaction Between Monetary and Fiscal PolicyShocks in the IS–LM Model11.2IS–LM as a Theory of Aggregate DemandFrom the IS–LM Model to the Aggregate Demand CurveThe IS–LM Model in the Short Run and the Long Run11.3 The Great DepressionThe Spending Hypothesis: Shocks to the IS CurveThe Money Hypothesis: A Shock to the LM CurveThe Money Hypothesis Again: The Effects of Falling PricesCould the Depression Happen Again?11.4 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSAggregate Demand in a Closed EconomyAggregate Demand in a Small Open Economy12.1 The Mundell–Fleming ModelComponents of the ModelThe Model on a Y–r GraphThe Model on a Y–e Graph12.2 The Small Open Economy Under Floating Exchange RatesFiscal PolicyMonetary PolicyTrade PolicyWorld Interest-Rate Changes12.3 The Small Open Economy Under Fixed Exchange RatesHow a Fixed-Exchange-Rate System WorksFiscal PolicyMonetary PolicyTrade PolicyWorld Interest-Rate ChangesPolicy in the Mundell–Fleming Model: A Summary12.4 Interest-Rate DifferentialsCountry Risk and Exchange-Rate ExpectationsDifferentials in the Mundell–Fleming Model12.5 Should Exchange Rates Be Floating or Fixed?Pros and Cons of Different Exchange-Rate SystemsSpeculative Attacks, Currency Boards, and DollarizationThe Impossible Trinity12.6 From the Short Run to the Long Run: The Mundell–Fleming Model With a Changing Price Level12.7 A Concluding ReminderSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSThe Exchange Rate and the CPIFlexible Domestic PricesExchange-Rate ExpectationsAn Attempt at PerspectiveMORE PROBLEMS AND APPLICATIONS13.1 The Basic Theory of Aggregate SupplyThe Sticky-Price ModelAn Alternative Theory: The Imperfect-Information ModelImplications13.2 Inflation, Unemployment, and the Phillips CurveDeriving the Phillips Curve from the Aggregate Supply CurveAdaptive Expectations and Inflation InertiaTwo Causes of Rising and Falling InflationThe Short-Run Tradeoff Between Inflation and UnemploymentDisinflation and the Sacrifice RatioRational Expectations and the Possibility of Painless DisinflationChallenges to the Natural-Rate Hypothesis13.3 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSSpecial Case 1: The Classic Closed EconomySpecial Case 2: The Classic Small Open EconomySpecial Case 3: The Basic Model of Aggregate Demand and Aggregate SupplySpecial Case 4: The IS–LM ModelSpecial Case 5: The Mundell–Fleming Model with a Floating Exchange RateSpecial Case 6: The Mundell–Fleming Model with a Fixed Exchange RateMORE PROBLEMS AND APPLICATIONS14.1 Elements of the ModelOutput: The Demand for Goods and ServicesThe Real Interest Rate: The Fisher EquationInflation: The Phillips CurveExpected Inflation: Adaptive ExpectationsThe Nominal Interest Rate: The Monetary-Policy Rule14.2 Solving the Dynamic ModelThe Long-Run EquilibriumThe Dynamic Aggregate Supply CurveThe Dynamic Aggregate Demand CurveThe Short-Run Equilibrium14.3 Using the ModelLong-Run GrowthA Shock to Aggregate SupplyA Shock to Aggregate DemandA Shift in Monetary Policy14.4 Two Applications: Lessons for Monetary PolicyThe Tradeoff Between Output Variability and Inflation VariabilityThe Taylor Principle14.5 Conclusion: Toward DSGE ModelsSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSThe Theory of Real Business CyclesThe Economics of Robinson CrusoeThe Interpretation of the Labour MarketThe Importance of Technology ShocksThe Neutrality of MoneyThe Flexibility of Wages and PricesNew Keynesian EconomicsSmall Menu Costs and Aggregate-Demand ExternalitiesRecessions as Coordination FailureThe Staggering of Wages and PricesConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWMORE PROBLEMS AND APPLICATIONS15.1 Should Policy Be Active or Passive?Lags in the Implementation and Effects of PoliciesThe Difficult Job of Economic ForecastingIgnorance, Expectations, and the Lucas CritiqueThe Historical Record15.2 Should Policy Be Conducted by Rule or by Discretion?Distrust of Policymakers and the Political ProcessThe Time Inconsistency of Discretionary PolicyRules for Monetary Policy15.3 Conclusion: Making Policy in an Uncertain WorldSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSMORE PROBLEMS AND APPLICATIONS16.1 The Size of the Government Debt16.2 Problems in MeasurementMeasurement Problem 1: InflationMeasurement Problem 2: Capital AssetsMeasurement Problem 3: Uncounted LiabilitiesMeasurement Problem 4: The Business CycleSumming Up16.3 The Traditional View of Government Debt16.4 The Ricardian View of Government DebtThe Basic Logic of Ricardian EquivalenceConsumers and Future TaxesMaking a Choice16.5 Other Perspectives on Government DebtBalanced Budgets Versus Optimal Fiscal PolicyEffects on Monetary PolicyDebt and the Political ProcessInternational Dimensions16.6 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS17.1 John Maynard Keynes and the Consumption FunctionKeynes’s ConjecturesThe Early Empirical SuccessesSecular Stagnation, Simon Kuznets, and the Consumption Puzzle17.2 Irving Fisher and Intertemporal ChoiceThe Intertemporal Budget ConstraintConsumer PreferencesOptimizationHow Changes in Income Affect ConsumptionHow Changes in the Real Interest Rate Affect ConsumptionConstraints on Borrowing17.3 Franco Modigliani and the Life-Cycle HypothesisThe HypothesisImplications17.4 Milton Friedman and the Permanent-Income HypothesisThe HypothesisImplications17.5 Robert Hall and the Random-Walk HypothesisThe HypothesisImplications17.6 David Laibson and the Pull of Instant GratificationThe HypothesisImplications17.7 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS18.1 Business Fixed InvestmentThe Rental Price of CapitalThe Cost of CapitalThe Determinants of InvestmentTaxes and InvestmentThe Stock Market and Tobin’s qAlternative Views of the Stock Market: The Efficient Markets Hypothesis Versus Keynes’s Beauty ContestFinancing ConstraintsBanking Crises and Credit Crunches18.2 Residential InvestmentThe Stock Equilibrium and the Flow SupplyChanges in Housing DemandThe Tax Treatment of Housing18.3 Inventory InvestmentReasons for Holding InventoriesThe Accelerator Model of InventoriesHow the Real Interest Rate and Credit Conditions Affect Inventory Investment18.4 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS19.1 Money Supply100-Percent-Reserve BankingFractional-Reserve BankingA Model of the Money SupplyThe Instruments of Monetary PolicyBank Capital, Leverage, and Capital Requirements19.2 Money DemandPortfolio Theories of Money DemandTransactions Theories of Money DemandThe Baumol–Tobin Model of Cash ManagementFinancial Innovation and the Rise of Near Money19.3 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONS20.1 What Does the Financial System Do?Financing InvestmentSharing RiskDealing With Asymmetric InformationFostering Economic Growth20.2 Financial CrisesThe Anatomy of a CrisisPolicy Responses to a CrisisPolicies to Prevent Crises20.3 ConclusionSummaryKEY CONCEPTSQUESTIONS FOR REVIEWPROBLEMS AND APPLICATIONSThe Four Most Important Lessons of MacroeconomicsLesson No. 1: In the long run, a country’s capacity to produce goods and services determines the standard of living of its citizens.Lesson No. 2: In the short run, aggregate demand influences the amount of goods and services that a country produces.Lesson No. 3: In the long run, the rate of money growth determines the rate of inflation, but it does not affect the rate of unemployment.Lesson No. 4: In the short run, policymakers who control monetary and fiscal policy face a tradeoff between inflation and unemployment.The Four Most Important Unresolved Questions of MacroeconomicsQuestion No. 1: How should policymakers try to promote growth in the economy’s natural level of output?Question No. 2: Should policymakers try to stabilize the economy?Question No. 3: How costly is inflation, and how costly is reducing inflation?Question No. 4: How big a problem are government budget deficits?Conclusion