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Macroeconomics

SIXTH EDITION

Andrew B. Abel

The Wharton School of the

University of Pennsylvania

Ben S. Bernanke

Dean Croushore

Robins School of Business

University of Richmond

Boston San Francisco New York

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Abel, Andrew B., 1952-

Macroeconomics / Andrew B. Abel, Ben S. Bernanke, Dean Croushore. -6th ed.

p. em. - (Addison-Wesley series in economics)

Includes bibliographical references and indexes.

ISBN 0-321-41554-X

1. Macroeconomics. 2. United States-Economic conditions. 1. Bernanke, Ben.

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Andrew B. AbeL

The Wharton

School of the

University of

Pennsylvania

Ronald A. Rosen￾feld Professor of

Finance at The

Wharton School

and professor of economics at the Uni￾versity of Pennsylvania, Andrew Abel

received his A.B. summa cum laude from

Princeton University and his Ph.D.

from the Massachusetts Institute of

Technology.

He began his teaching career a t the

University of Chicago and Harvard Uni￾versity, and has held visiting appoint￾ments at both Tel Aviv University and

The Hebrew University of Jerusalem.

A prolific researcher, Abel has pub￾lished extensively on fiscal policy, cap￾ital formation, monetary policy, asset

pricing, and Social Security-as well as

serving on the editorial boards of

numerous journals. He has been hon￾ored as an Alfred P. Sloan Fellow, a

Fellow of the Econometric Socie ty,

and a recipient of the John Kenneth

Galbraith Award for teaching excel￾lence. Abel has served as a visiting

scholar at the Federal Reserve Bank of

Philadelphia, as a member of the Panel

of Economic Advisers at the Congres￾sional Budget Office, and as a member

of the Technical Ad visory Panel on

Assumptions and Methods for the

Social Security Advisory Board. He is

also a Research Associa te of the

National Bureau of Economic Research

and a member of the Advisory Board

of the Carnegie-Rochester Conference

Series.

ors

Ben S.

Bernanke

Previously the

Howard Harrison

and Gabrielle

Snyder Beck Pro￾fessor of Economics and Public Affairs at

Princeton University, Ben Bernanke

received his B.A. in economics from Har￾vard University sUlI1ma cllm laude-cap￾turing both the Allyn Young Prize for

best Harvard undergraduate economics

thesis and the John H. Williams prize for

outstanding senior in the economics

department. Like coauthor Abel, he

holds a PhD. from the Massachusetts

Institute of Technology.

Bernanke began his career at the

Stanford Graduate School of Business

in 1979. In 1985 he moved to Princeton

University, where he served as chair of

the Economics Department from 1995

to 2002. He has twice been visiting pro￾fessor at M.I.T. and once at New York

University, and has taught in under￾graduate, M.B.A., M.P.A., and Ph.D.

programs. He has authored more than

60 publications in macroeconomics,

macroeconomic history, and finance.

Bernanke has served as a visiting

scholar and advisor to the Federal

Reserve System. He is a Guggenheim

Fellow and a Fellow of the Econometric

Society. He has also been variously hon￾ored as an Alfred P. Sloan Research

Fellow, a Hoover Institution National

Fellow, a National Science Foundation

Graduate Fellow, and a Research Asso￾ciate of the National Bureau of Economic

Research. He has served as editor of the

American Economic Review. In 2005 he

became Chairman of the President's

Council of Economic Advisors. He is

currently Chairman and a member of

the Board of Governors of the Federal

Reserve System.

Dean

Croushore

Robins School of

Business, University

of Richmond

Dean Croushore is

associate professor

of economics and

Rigsby Fellow at

the University of Richmond. He

received his A.B. from Ohio University

and his PhD. from Ohio State University.

Croushore began his career at Penn￾sylvania State University in 1984. After

teaching for five years, he moved to the

Federal Reserve Bank of Philadel￾phia, where he was vice president and

economist. His duties during his four￾teen years at the Philadelphia Fed

included heading the macroeconomics

section, briefing the bank's president

and board of directors on the state of the

economy and advising them about for￾mulating monetary policy, writing arti￾cles about the economy, administering

two national surveys of forecasters, and

researching current issues in monetary

policy. In his role a t the Fed, he crea ted

the Survey of Professional Forecasters

(taking over the defunct ASAjNBER

survey and revitalizing it) and devel￾oped the Real-Time Data Set for Macro￾economists.

Croushore returned to academia at

the University of Richmond in 2003.

The focus of his research in recent

years has been on forecasting and on

how data revisions affect monetary

policy, forecasting, and macroeconomic

research. Croushore's publications

include articles in many leading eco￾nomics journals and a textbook on

money and banking. He is associate

editor of several journals and visiting

scholar at the Federal Reserve Bank of

Philadelphia.

v

•

VI

•

ne on en s

Prelace xv

PART 1 Introduction 1

1 Introduction to Macroeconomics 2

2 The Measurement and Structure of the National Economy 23

PART 2 long-Run Economic Performance 61

3 Productivity, Output, and Employment 62

4 Consumption, Saving, and Investment 110

5 Saving and Investment in the Open Economy 173

6 Long-Run Economic Growth 212

7 The Asset Market, Money, and Prices 247

PART 3 Business Cycles and Macroeconomic Policy 281

8 Business Cycles 282

9 The IS-LM/AO-AS Model: A General Framework

for Macroeconomic Analysis 310

10 Classical Business Cycle Analysis: Market-Clearing Macroeconomics 360

11 Keynesianism: The Macroeconomics of Wage and Price Rigidity 398

PART 4 Macroeconomic Policy: Its Environment

and Institutions 443

12 Unemployment and Inflation 444

13 Exchange Rates, Business Cycles, and Macroeconomic Policy

in the Open Economy 476

14 Monetary Policy and the Federal Reserve System 529

15 Government Spending and Its Financing 573

Appendix A: Some Useful Analytical Tools 610

Glossarv 617

Name Index 629

Subject Index 631

•

e al e

Preface xv

PART 1 Introduction 1

CHAPTER 1

Introduction to Macroeconomics 2

1.1 What Macroeconomics Is About 2

Long-Run Economic Growth 3

Business Cycles 4

Unemployment 5

Inflation 6

on en s

2.2 Gross Domestic Product 27

The Product Approach to Measuring GOP 27

BOX 2.1 Natural Resources, the Environment,

and the National Income Accounts 30

The Expenditure Approach to Measuring GOP 31

The Income Approach to Measuring GOP 34

2.3 Saving and Wealth 37

Measures of Aggregate Saving 37

The Uses of Private Saving 39

Relating Saving and Wealth 40

APPLICATION Wealth Versus Saving 42

The International Economy 8 2.4 Real GOP, Price Indexes, and Inflation 46

Macroeconomic Policy 9 Real GOP 46

Aggrega tion 10

1.2 What Macroeconomists Do 11

Macroeconomic Forecasting 11

Macroeconomic Analysis 12

Macroeconomic Research 13

BOX 1.1 Developing and Testing

an Economic Theory 14

Data Development 14

1.3 Why Macroeconomists Disagree 15

Classicals Versus Keynesians 16

A Unified Approach to Macroeconomics 18

CHAPTER 2

The M easurement and Structure

of the National Economy 23

2.1 National Income Accounting:

The Measurement of Production,

Income, and Expenditure 23

In Touch with the Macroeconomy:

The National Income and Product Accounts 25

Why the Three Approaches Are Equivalent 26

Price Indexes 48

BOX 2.2 The Computer Revolution

and Chain-Weighted GDP 48

BOX 2.3 Does CPI Inflation Overstate Increases in the

Cost of Living? 51

2.5 Interest Rates 52

Real Versus Nominal Interest Rates 53

PART 2 Long-Run Economic

Performance 61

CHAPTER 3

Productivity. Output. and Employment 62

3.1 How Much Does the Economy Produce?

The Production Function 63

APPLICATION The Production Function of the U.S.

Economy and U.S. Productivity Growth 64

The Shape of the Production Function 66

Supply Shocks 71

• •

VII

viii Detailed Contents

3.2 The Demand for Labor 72

The Marginal Product of Labor and

Labor Demand: An Example 73

A Change in the Wage 75

The Marginal Product of Labor and the

Labor Demand Curve 75

Factors That Shift the Labor Demand Curve 77

Aggregate Labor Demand 79

3.3 The Supply of Labor 79

The Income-Leisure Trade-off 80

Real Wages and Labor Supply 80

The Labor Supply Curve 83

Aggregate Labor Supply 84

APPLICATION Comparing U.S. and European

Labor Markets 85

3.4 Labor Market Equilibrium 87

Full-Employment Output 89

APPLICATION Output, Employment, and

the Real Wage During Oil Price Shocks 90

APPLICATION Technical Change and

Wage Inequality 91

3.5 Unemployment 93

Measuring Unemployment 94

In Touch with the Macroeconomy:

Labor Market Data 95

Changes in Employment Status 95

How Long Are People Unemployed? 96

Why There Always Are Unemployed People 97

3.6 Relating Output and Unemployment:

Okun's Law 99

Appendix 3.A The Growth Rate Form

of Okun's Law 109

CHAPTER 4

Consumption. Saving. and Investment 110

4.1 Consumption and Saving 111

The Consumption and Saving

Decision of an Individual 112

Effect of Changes in Current Income 114

Effect of Changes in Expected Future Income 114

APPLICATION Consumer Sentiment

and Forecasts of Consumer Spending 115

Effect of Changes in Wealth 118

Effect of Changes in the Real Interest Rate 119

Fiscal Policy 121

In Touch with the Macroeconomy:

Interest Rates 122

APPLICATION A Ricardian Tax Cut? 1 25

4.2 Investment 127

The Desired Ca pi ta I Stock 127

Changes in the Desired Capital Stock 130

APPLICATION Measuring the Effects

of Taxes on Investment 1 34

From the Desired Capital

Stock to Investment 135

Investment in Inventories and Housing 137

BOX 4.1 Investment and the Stock Market 1 38

4.3 Goods Market Equilibrium 139

The Saving-Investment Diagram 140

APPLICATION Macroeconomic Consequences of the

Boom and Bust in Stock Prices 144

Appendix 4.A A Formal Model

of Consumption and Saving 156

CHAPTER 5

Saving and Investment in

the Open Economy 173

5.1 Balance of Payments Accounting 174

The Current Account 174

In Touch with the Macroeconomy:

The Balance of Payments Accounts 176

The Capital and Financial Account 177

The Relationship Between the Current Account

and the Capital and Financial Account 179

BOX 5.1 Does Mars Have a Current

Account Surplus? 181

Net Foreign Assets and the Balance

of Payments Accounts 181

APPLICATION The United States

as International Debtor 183

5.2 Goods Market Equilibrium

in an Open Economy 184

5.3 Saving and Investment in a

Small Open Economy 185

The Effects of Economic Shocks in

a Small Open Economy 189

5.4 Saving and Investment in

Large Open Economies 191

APPLICATION The Impact of Globalization

on the U.S. Economy 193

APPLICATION Recent Trends in the U.S.

Current Account Deficit 196

5.5 Fiscal Policy and the

Current Account 199

The Critical Factor: The Response

of National Saving 200

The Government Budget Deficit

and National Saving 201

APPLICATION The Twin Deficits 202

CHAPTER 6

Long-Run Economic G rowth 212

6.1 The Sources of Economic Growth 213

Growth Accounting 215

APPLICATION The Post-1973 Slowdown

in Productivity Growth 217

APPLICATION The Recent Surge in U.S.

Productivity Growth 220

6.2 Growth Dynamics:

The Solow Model 223

Setup of the Solow Model 224

The Fundamental Determinants of

Long-Run Living Standards 231

APPLICATION The Growth of China 236

Endogenous Growth Theory 238

6.3 Government Policies to Raise

Long-Run Living Standards 240

Policies to Affect the Saving Rate 240

Policies to Raise the Rate of

Productivity Growth 241

Detailed Contents

CHAPTER 7

The Asset Market, Money, and Prices 247

7.1 What Is Money? 247

BOX 7.1 Money in a Prisoner-of-War Camp 248

The Functions of Money 248

•

IX

Measuring Money: The Monetary Aggregates 250

In Touch with the Macroeconomy:

The Monetary Aggregates 251

The Money Supply 251

BOX 7.2 Where Have All the Dollars Gone? 252

7.2 Portfolio Allocation and

the Demand for Assets 253

Expected Return 254

Risk 254

Liquidity 254

Time to Maturity 255

Asset Demands 256

7.3 The Demand for Money 256

The Price Level 257

Real Income 257

Interest Rates 258

The Money Demand Function 259

Other Factors Affecting Money Demand 260

Elasticities of Money Demand 261

Velocity and the Quantity Theory of Money 262

APPLICATION Financial Regulation, Innovation,

and the Instability of Money Demand 264

7.4 Asset Market Equilibrium 266

Asset Market Equilibrium: An

Aggregation Assumption 266

The Asset Market Equilibrium Condition 268

7,5 Money Growth and Inflation 269

APPLICATION Money Growth and Inflation

in European Countries in Transition 270

The Expected Inflation Rate and the

Nominal Interest Rate 272

APPLICATION Measuring Inflation Expectations 273

x Detailed Contents

PART 3 Business Cycles and

Macroeconomic Policy 281

CHAPTER 8

Business Cycles 282

8.1 What Is a Business Cycle? 283

8.2 The American Business Cycle:

The Historical Record 285

The Pre-World War I Period 285

The Great Depression and World War II 285

Post-World War II U.s. Business Cycles 287

The "Long Boom" 288

Have American Business Cycles

Become Less Severe? 288

8.3 Business Cycle Facts 290

The Cyclical Behavior of Economic

Variables: Direction and Timing 290

Production 291

In Touch with the Macroeconomy:

Leading Indicators 292

Expenditure 294

Employment and Unemployment 295

Average Labor Productivity and the

Real Wage 297

Money Growth and Inflation 298

Financial Variables 299

Interna tiona I Aspects of the Business Cycle 300

8.4 Business Cycle Analysis: A Preview 301

BOX 8.1 The Seasonal Cycle and

the Business Cycle 301

Aggregate Demand and Aggregate Supply:

A Brief Introduction 302

CHAPTER 9

The IS-LM/AO-AS Model: A General

Framework for Macroeconomic Analysis 310

9.1 The FE Line: Equilibrium

in the Labor Market 311

Factors That Shift the FE Line 312

9.2 The IS Curve: Equilibrium

in the Goods Market 313

Factors That Shift the IS Curve 315

9.3 The LM Curve: Asset

Market Equilibrium 317

The Interest Rate and the Price

of a Nonmonetary Asset 318

The Equality of Money Demanded

and Money Supplied 318

Factors That Shift the LM Curve 321

9.4 General Equilibrium in the

Complete IS-LM Model 325

Applying the IS-LM Framework: A Temporary

Adverse Supply Shock 326

APPLICATION Oil Price Shocks Revisited 328

BOX 9.1 Econometric Models and Macroeconomic

Forecasts for Monetary Policy Analysis 329

9.5 Price Adjustment and the Attainment

of General Equilibrium 330

The Effects of a Monetary Expansion 330

Classical Versus Keynesian Versions of

the IS-LM Model 334

9.6 Aggregate Demand and Aggregate Supply 336

The Aggregate Demand Curve 336

The Aggregate Supply Curve 338

Equilibrium in the AD-AS Model 341

Monetary Neutrality in the AD-AS Model 341

Appendix 9.A Worked-Out Numerical Exercise

for Solving the IS-LMIAD-AS Model 351

Appendix 9.B Algebraic Versions of the IS-LM

and AD-AS Models 353

CHAPTER 10

Classical Business Cycle Analysis:

Market-Clearing Macroeconomics 360

10.1 Business Cycles in the Classical Model 361

The Real Business Cycle Theory 361

APPLICATION Calibrating the Business Cycle 364

Fiscal Policy Shocks in the Classical Model 371

Unemployment in the Classical Model 375

Household Prod uction 377

10.2 Money in the Classical Model 378

Monetary Policy and the Economy 378

Monetary Nonneutrality and Reverse Causation 378

The Nonneutrality of Money: Additional

Evidence 379

10.3 The Misperceptions Theory and

the Nonneutrality of Money 380

Monetary Policy and the

Misperceptions Theory 383

Rational Expectations and the Role

of Monetary Policy 385

BOX 10.1 Are Price Forecasts Rational? 3B7

Appendix 10.A Worked-Out Numerical

Exercise for Solving the Classical AD-AS

Model with Misperceptions 395

Appendix 10.B An Algebraic Version

of the Classical AD-AS Model with

Misperceptions 396

CHAPTER 11

Keynesianism: The Macroeconomics

of Wage and Price Rigidity 398

11.1 Real-Wage Rigidity 399

Some Reasons for Real-Wage Rigidity 399

The Efficiency Wage Model 400

Wage Determina tion in the

Efficiency Wage Model 401

Employment and Unemployment in

the Efficiency Wage Model 402

Efficiency Wages and the FE Line 404

BOX 11.1 Henry Ford's Efficiency Wage 405

•

Detailed Contents XI

11.2 Price Stickiness 406

Sources of Price Stickiness: Monopolistic

Competition and Menu Costs 406

11.3 Monetary and Fiscal Policy in

the Keynesian Model 412

Monetary Policy 412

Fiscal Policy 416

11.4 The Keynesian Theory of Business Cycles

and Macroeconomic Stabilization 419

Keynesian Business Cycle Theory 419

Macroeconomic Stabilization 422

APPLICATION The Zero Bound 424

Supply Shocks in the Keynesian Model 427

BOX 11.2 DSGE Models and the

Classical-Keynesian Debate 429

Appendix 11.A Labor Contracts and

Nominal-Wage Rigidity 436

Appendix 11.B Worked-Out Numerical

Exercise for Calculating the Multiplier in a

Keynesian Model 439

Appendix 11.C The Multiplier

in the Keynesian Model 441

PART 4 Macroeconomic Policy:

CHAPTER 12

Its Enviro nt and

Institutions 443

Unemployment and Inflation 444

12.1 Unemployment and Inflation:

Is There a Trade-Off? 445

The Expectations-Augmented Phillips Curve 447

The Shifting Phillips Curve 451

Macroeconomic Policy and the Phillips Curve 455

BOX 12.1 The Lucas Critique 456

The Long-Run Phillips Curve 457

xii Detailed Contents

12. 2 The Problem of Unemployment 458

The Costs of Unemployment 458

The Long-Term Behavior of the

Unemployment Rate 459

12.3 The Problem of Inflation 462

The Costs of Inflation 462

BOX 12.2 Indexed Contracts 464

Fighting Inflation: The Role of

Infla tionary Expecta tions 466

BOX 12.3 The Sacrifice Ratio 468

The U.s. Disinflation of the

1980s and 1990s 469

CHAPTER 13

Exchange Rates, B usiness Cycles,

and Macroeconomic Policy in the

Open Economy 476

13.1 Exchange Rates 477

Nominal Exchange Rates 477

Real Exchange Rates 478

Appreciation and Depreciation 480

Purchasing Power Parity 480

BOX 13.1 McParity 481

The Real Exchange Rate and Net Exports 483

APPLICATION The Value of the Dollar

and U.S. Net Exports 485

13.2 How Exchange Rates Are Determined:

A Supply-and-Demand Analysis 487

In Touch with the Macroeconomy:

Exchange Rates 487

Macroeconomic Determinants of the Exchange

Rate and Net Export Demand 489

13. 3 The IS-LM Model for an

Open Economy 492

The Open-Economy IS Curve 493

Factors That Shift the Open-Economy

IS Curve 495

The International Transmission

of Business Cycles 498

13. 4 Macroeconomic Policy in an Open Economy

with Flexible Exchange Rates 499

A Fiscal Expansion 499

A Monetary Contraction 502

13. 5 Fixed Exchange Rates 504

Fixing the Exchange Rate 505

Monetary Policy and the Fixed Exchange Rate 508

Fixed Versus Flexible Exchange Rates 511

Currency Unions 511

APPLICATION European Monetary Unification 512

APPLICATION Crisis in Argentina 515

Appendix 13.A Worked-Out Numerical

Exercise for the Open-Economy

IS-LM Model 523

Appendix 13.B An Algebraic Version

of the Open-Economy IS-LM Model 526

CHAPTER 14

Monetary Policy and the

Federal Reserve System 529

14.1 Principles of Money Supply

Determination 530

The Money Supply in an All-Currency

Economy 530

The Money Supply Under Fractional

Reserve Banking 531

Bank Runs 534

The Money Supply with Both Public Holdings

of Currency and Fractional Reserve Banking 535

Open-Market Operations 537

APPLICATION The Money Multiplier

During the Great Depression 538

14.2 Monetary Control in the United States 541

The Federal Reserve System 541

The Federal Reserve's Balance Sheet

and Open-Market Operations 542

Other Means of Controlling the Money Supply 543

Intermediate Targets 547

Making Monetary Policy in Practice 550

14.3 The Conduct of Monetary Policy: Rules

Versus Discretion 552

BOX 14.1 The Credit Channel

of Monetary Policy 553

BOX 14.2 The Taylor Rule 554

The Monetarist Case for Rules 555

Rules and Central Bank Credibility 557

APPLICATION Money-Growth Targeting

and Inflation Targeting 563

Other Ways to Achieve Central Bank

Credibility 566

CHAPTER 15

Government Spending

and Its Financing 573

15. 1 The Government Budget:

Some Facts and Figures 573

Government Outlays 573

Taxes 575

Deficits and Surpluses 579

15.2 Government Spending, Taxes,

and the Macroeconomy 581

Fiscal Policy and Aggregate Demand 581

Government Capital Formation 583

Incentive Effects of Fiscal Policy 584

APPLICATION Labor Supply and Tax

Reform in the 1980s 586

Detailed Contents

15.3 Government Deficits and Debt 589

The Growth of the Government Debt 589

APPLICATION Social Security:

How Can It Be Fixed? 591

The Burden of the Government

Debt on Future Generations 594

Budget Deficits and National Saving: Ricardian

Equivalence Revisited 594

Departures from Ricardian Equivalence 597

15.4 Deficits and Inflation 5 98

The Deficit and the Money Supply 598

Real Seignorage Collection and Inflation 600

Appendix 15.A The Debt-GOP Ratio 609

Appendix A

Some Useful Analytical Tools 610

A.l Functions and Graphs 610

A.2 Slopes of Functions 611

A.3 Elasticities 612

A.4 Functions of Several Variables 613

A.5 Shifts of a Curve 614

A.6 Exponents 614

A.7 Growth Rate Formulas 614

Problems 615

Glossary 617

Name Index 629

Subject Index 631

•••

XIII

xiv Detailed Contents

s mary Tables

1 Measures of Aggregate Saving 38

2 Comparing the Benefits and Costs of Changing

the Amount of Labor 75

3 Factors That Shift the Aggregate

Labor Demand Curve 79

4 Factors That Shift the Aggregate

Labor Supply Curve 85

5 Determinants of Desired National Saving 125

6 Determinants of Desired Investment 137

7 Equivalent Measures of a Country's

International Trade and Lending 182

8 The Fundamental Determinants

of Long-Run Living Standards 232

9 Macroeconomic Determinants

of the Demand for Money 260

10 The Cyclical Behavior of Key Macroeconomic

Variables (The Business Cycle Facts) 293

11 Factors That Shift the

Full-Employment (FE) Line 312

12 Factors That Shift the IS Curve 315

13 Factors That Shift the LM Curve 321

14 Factors That Shift the AD Curve 340

15 Terminology for Changes

in Exchange Rates 480

16 Determinants of the Exchange Rate

(Real or Nominal) 491

17 Determinants of Net Exports 492

18 International Factors

That Shift the IS Curve 498

19 Factors Affecting the Monetary Base, the Money

Multiplier, and the Money Supply 545

Key Diagrams

1 The production function 102

2 The labor market 103

3 The saving-investment diagram 149

4 National saving and investment

in a small open economy 205

5 National saving and investment

in large open economies 206

6 The IS-LM model 345

7 The aggregate demand-aggregate

supply model 346

8 The misperceptions version

of the AD-AS model 389

re ace

ince February 2006, Ben Bernanke has been chairman of the Board of Governors

of the Federal Reserve System. Federal ethics rules prohibited him from making

substantive contributions to the sixth edition. Dean Croushore, associate pro￾fessor of economics and Rigsby Fellow at the University of Richmond, has helped

prepare this new edition as a coauthor. Dean has been closely associated with Macro￾economics since the first edition, having written or co-written the Instructor's Manual

and Test Bank for the first through fifth editions, the Study Guide for the third through

fifth editions, and having assisted with manuscript preparation in previous editions,

taking a major role in the fifth edition. Dean has been able to draw on his fourteen

years of experience at the Federal Reserve Bank of Philadelphia, twelve of which as

head of the Macroeconomics Section, as well as his teaching experience at Penn State

University, Temple University, the Wharton School of the University of Pennsylvania,

Johns Hopkins University, Princeton University, and the University of Richmond, to

help keep the book fresh, applied to real-world economic developments, and

appealing to students.

In the sixth edition, we have added new material to keep the text up-to-date,

while building on the strengths that underlie the book's lasting appeal to instruc￾tors and students, including:

Real-world applications. A perennial challenge for instructors is to help stu￾dents make active use of the economic ideas developed in the text. The rich

variety of applications in this book shows by example how economic concepts

can be put to work in explaining real-world issues such as the contrasting

behavior of unemployment in the United States and Europe, the slowdown

and revival in productivity growth, the challenges facing the Social Security

system and the Federal budget, the impact of globalization on the u.s. economy,

and alternative approaches to making monetary policy. The sixth edition offers

new applications as well as updates of the best applications and analyses of

previous editions.

Broad modern coverage. From its conception, Macroeconomics has responded to

students' desires to investigate and understand a wider range of macroeconomic

issues than is permitted by the course's traditional emphasis on short-run fluc￾tuations and stabilization policy. This book provides a modern treatment of these

traditional topics but also gives in-depth coverage of other important macro￾economic issues such as the determinants of long-run economic growth, the

trade balance and financial flows, labor markets, and the institutional framework

of policymaking. This comprehensive coverage also makes the book a useful tool

for instructors with differing views about course coverage and topic sequence.

Reliance on a set of core economic ideas. Although we cover a wide range of topics,

we avoid developing a new model or theory for each issue. Instead we empha￾size the broad applicability of a set of core economic ideas (such as the produc￾tion function, the trade-off between consuming today and saving for tomorrow,

and supply-demand analysis). Using these core ideas, we build a theoretical

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