,MACROECONOMICS
,this page left intentionally blank
, NINTH EDITION
MACROECONOMICS
N. GREGORY MANKIW
Harvard University
A Macmillan Education Imprint
New York
,Vice President, Content Management: Catherine Woods
Vice President, Editorial, Sciences, and Social Sciences: Charles Linsmeier
Publisher: Shani Fisher
Developmental Editor: Jane E. Tufts
Editorial Assistant: Carlos Marin
Marketing Manager: Thomas Digiano
Marketing Assistant: Alexander Kaufman
Media Editor: Lukia Kliossis
Director, Content Management Enhancement: Tracey Kuehn
Managing Editor: Lisa Kinne
Project Editor: Julio Espin
Photo Editor: Robin Fadool
Director of Design, Content Management: Diana Blume
Cover and Text Designer: Kevin Kall
Senior Production Supervisor: Paul Rohloff
Composition: TSI evolve, Inc.
Printing and Binding: RR Donnelley
Cover Art: Sharon Paster
Library of Congress Control Number: 2015935681
ISBN-13: 978-1-4641-8289-1
ISBN-10: 1-4641-8289-2
© 2016, 2013, 2010, 2007 by Worth Publishers
All rights reserved.
Printed in the United States of America
First printing
Worth Publishers
41 Madison Avenue
New York, NY 10010
www.worthpublishers.com
,About the Author
Jordi Cabré Photography
N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard
University. He began his study of economics at Princeton University, where
he received an A.B. in 1980. After earning a Ph.D. in economics from MIT, he
began teaching at Harvard in 1985 and was promoted to full professor in 1987.
At Harvard, he has taught both undergraduate and graduate courses in macro-
economics. He is also author of the best-selling introductory textbook Principles
of Economics (Cengage Learning).
Professor Mankiw is a regular participant in academic and policy debates. His
research ranges across macroeconomics and includes work on price adjustment,
consumer behavior, financial markets, monetary and fiscal policy, and economic
growth. In addition to his duties at Harvard, he has been a research associate of
the National Bureau of Economic Research, a member of the Brookings Panel
on Economic Activity, and an adviser to the Congressional Budget Office and
the Federal Reserve Banks of Boston and New York. From 2003 to 2005 he was
chairman of the President’s Council of Economic Advisers.
Professor Mankiw lives in Wellesley, Massachusetts, with his wife, Deborah;
children, Catherine, Nicholas, and Peter; and their border terrier, Tobin.
| v
,To Deborah
,T
hose branches of politics, or of the laws of social life, on which there
exists a collection of facts sufficiently sifted and methodized to form
the beginning of a science should be taught ex professo. Among the
chief of these is Political Economy, the sources and conditions of wealth and
material prosperity for aggregate bodies of human beings. . . .
The same persons who cry down Logic will generally warn you against Politi-
cal Economy. It is unfeeling, they will tell you. It recognises unpleasant facts. For
my part, the most unfeeling thing I know of is the law of gravitation: it breaks
the neck of the best and most amiable person without scruple, if he forgets for
a single moment to give heed to it. The winds and waves too are very unfeeling.
Would you advise those who go to sea to deny the winds and waves—or to make
use of them, and find the means of guarding against their dangers? My advice
to you is to study the great writers on Political Economy, and hold firmly by
whatever in them you find true; and depend upon it that if you are not selfish or
hardhearted already, Political Economy will not make you so.
John Stuart Mill, 1867
,Brief Contents
Preface xxiii
Supplements and Media xxxii
Part I Chapter 12 Aggregate Demand II: Applying the
Introduction 1 IS-LM Model 337
Chapter 13 The Open Economy Revisited:
Chapter 1 The Science of Macroeconomics 1 The Mundell-Fleming Model and the
Chapter 2 The Data of Macroeconomics 17 Exchange-Rate Regime 367
Chapter 14 Aggregate Supply and the Short-Run
Part II Tradeoff between Inflation and
Unemployment 409
Classical Theory: The Economy
in the Long Run 47
Chapter 3 National Income: Where It Comes Part V
From and Where It Goes 47 Topics in Macroeconomic
Chapter 4 The Monetary System: What It Is Theory 439
and How It Works 81 Chapter 15 A Dynamic Model of Economic
Chapter 5 Inflation: Its Causes, Effects, and Fluctuations 439
Social Costs 105 Chapter 16 Understanding Consumer
Chapter 6 The Open Economy 139 Behavior 475
Chapter 7 Unemployment and the Labor Chapter 17 The Theory of Investment 507
Market 183
Part VI
Part III
Topics in Macroeconomic
Growth Theory: The Economy Policy 531
in the Very Long Run 211
Chapter 18 Alternative Perspectives on
Chapter 8 Economic Growth I: Capital Stabilization Policy 531
Accumulation and Population
Growth 211 Chapter 19 Government Debt and Budget
Deficits 555
Chapter 9 Economic Growth II: Technology,
Empirics and Policy 241 Chapter 20 The Financial System: Opportunities
and Dangers 581
Part IV
Epilogue: What We Know, What We
Business Cycle Theory: The Don’t 607
Economy in the Short Run 281
Chapter 10 Introduction to Economic Glossary 617
Fluctuations 281 Index 627
Chapter 11 Aggregate Demand I: Building the
IS-LM Model 311
viii |
, Contents
Preface xxiii
Supplements and Media xxxii
Part I Introduction 1
Chapter 1 The Science of Macroeconomics 1
1-1 What Macroeconomists Study 1
u CASE STUDY The Historical Performance of the U.S. Economy 3
1-2 How Economists Think 5
Theory of Model Building 6
FYI Using Functions to Express Relationships Among Variables 9
The Use of Multiple Models 10
Prices: Flexible Versus Sticky 10
Microeconomic Thinking and Macroeconomic Models 11
FYI Nobel Macroeconomists 12
1-3 How This Book Proceeds 13
Chapter 2 The Data of Macroeconomics 17
2-1 Measuring the Value of Economic Activity:
Gross Domestic Product 18
Income, Expenditure, and the Circular Flow 18
FYI Stocks and Flows 20
Rules for Computing GDP 21
Real GDP Versus Nominal GDP 23
The GDP Deflator 25
Chain-Weighted Measures of Real GDP 25
FYI Two Arithmetic Tricks for Working with Percentage Changes 26
The Components of Expenditure 27
FYI What Is Investment? 28
CASE STUDY GDP and Its Components 28
Other Measures of Income 29
Seasonal Adjustment 31
CASE STUDY The New, Improved GDP of 2013 32
2-2 Measuring the Cost of Living: The Consumer Price Index 34
The Price of a Basket of Goods 34
How the CPI Compares to the GDP and PCE Deflators 35
Does the CPI Overstate Inflation? 36
| ix
,this page left intentionally blank
, NINTH EDITION
MACROECONOMICS
N. GREGORY MANKIW
Harvard University
A Macmillan Education Imprint
New York
,Vice President, Content Management: Catherine Woods
Vice President, Editorial, Sciences, and Social Sciences: Charles Linsmeier
Publisher: Shani Fisher
Developmental Editor: Jane E. Tufts
Editorial Assistant: Carlos Marin
Marketing Manager: Thomas Digiano
Marketing Assistant: Alexander Kaufman
Media Editor: Lukia Kliossis
Director, Content Management Enhancement: Tracey Kuehn
Managing Editor: Lisa Kinne
Project Editor: Julio Espin
Photo Editor: Robin Fadool
Director of Design, Content Management: Diana Blume
Cover and Text Designer: Kevin Kall
Senior Production Supervisor: Paul Rohloff
Composition: TSI evolve, Inc.
Printing and Binding: RR Donnelley
Cover Art: Sharon Paster
Library of Congress Control Number: 2015935681
ISBN-13: 978-1-4641-8289-1
ISBN-10: 1-4641-8289-2
© 2016, 2013, 2010, 2007 by Worth Publishers
All rights reserved.
Printed in the United States of America
First printing
Worth Publishers
41 Madison Avenue
New York, NY 10010
www.worthpublishers.com
,About the Author
Jordi Cabré Photography
N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard
University. He began his study of economics at Princeton University, where
he received an A.B. in 1980. After earning a Ph.D. in economics from MIT, he
began teaching at Harvard in 1985 and was promoted to full professor in 1987.
At Harvard, he has taught both undergraduate and graduate courses in macro-
economics. He is also author of the best-selling introductory textbook Principles
of Economics (Cengage Learning).
Professor Mankiw is a regular participant in academic and policy debates. His
research ranges across macroeconomics and includes work on price adjustment,
consumer behavior, financial markets, monetary and fiscal policy, and economic
growth. In addition to his duties at Harvard, he has been a research associate of
the National Bureau of Economic Research, a member of the Brookings Panel
on Economic Activity, and an adviser to the Congressional Budget Office and
the Federal Reserve Banks of Boston and New York. From 2003 to 2005 he was
chairman of the President’s Council of Economic Advisers.
Professor Mankiw lives in Wellesley, Massachusetts, with his wife, Deborah;
children, Catherine, Nicholas, and Peter; and their border terrier, Tobin.
| v
,To Deborah
,T
hose branches of politics, or of the laws of social life, on which there
exists a collection of facts sufficiently sifted and methodized to form
the beginning of a science should be taught ex professo. Among the
chief of these is Political Economy, the sources and conditions of wealth and
material prosperity for aggregate bodies of human beings. . . .
The same persons who cry down Logic will generally warn you against Politi-
cal Economy. It is unfeeling, they will tell you. It recognises unpleasant facts. For
my part, the most unfeeling thing I know of is the law of gravitation: it breaks
the neck of the best and most amiable person without scruple, if he forgets for
a single moment to give heed to it. The winds and waves too are very unfeeling.
Would you advise those who go to sea to deny the winds and waves—or to make
use of them, and find the means of guarding against their dangers? My advice
to you is to study the great writers on Political Economy, and hold firmly by
whatever in them you find true; and depend upon it that if you are not selfish or
hardhearted already, Political Economy will not make you so.
John Stuart Mill, 1867
,Brief Contents
Preface xxiii
Supplements and Media xxxii
Part I Chapter 12 Aggregate Demand II: Applying the
Introduction 1 IS-LM Model 337
Chapter 13 The Open Economy Revisited:
Chapter 1 The Science of Macroeconomics 1 The Mundell-Fleming Model and the
Chapter 2 The Data of Macroeconomics 17 Exchange-Rate Regime 367
Chapter 14 Aggregate Supply and the Short-Run
Part II Tradeoff between Inflation and
Unemployment 409
Classical Theory: The Economy
in the Long Run 47
Chapter 3 National Income: Where It Comes Part V
From and Where It Goes 47 Topics in Macroeconomic
Chapter 4 The Monetary System: What It Is Theory 439
and How It Works 81 Chapter 15 A Dynamic Model of Economic
Chapter 5 Inflation: Its Causes, Effects, and Fluctuations 439
Social Costs 105 Chapter 16 Understanding Consumer
Chapter 6 The Open Economy 139 Behavior 475
Chapter 7 Unemployment and the Labor Chapter 17 The Theory of Investment 507
Market 183
Part VI
Part III
Topics in Macroeconomic
Growth Theory: The Economy Policy 531
in the Very Long Run 211
Chapter 18 Alternative Perspectives on
Chapter 8 Economic Growth I: Capital Stabilization Policy 531
Accumulation and Population
Growth 211 Chapter 19 Government Debt and Budget
Deficits 555
Chapter 9 Economic Growth II: Technology,
Empirics and Policy 241 Chapter 20 The Financial System: Opportunities
and Dangers 581
Part IV
Epilogue: What We Know, What We
Business Cycle Theory: The Don’t 607
Economy in the Short Run 281
Chapter 10 Introduction to Economic Glossary 617
Fluctuations 281 Index 627
Chapter 11 Aggregate Demand I: Building the
IS-LM Model 311
viii |
, Contents
Preface xxiii
Supplements and Media xxxii
Part I Introduction 1
Chapter 1 The Science of Macroeconomics 1
1-1 What Macroeconomists Study 1
u CASE STUDY The Historical Performance of the U.S. Economy 3
1-2 How Economists Think 5
Theory of Model Building 6
FYI Using Functions to Express Relationships Among Variables 9
The Use of Multiple Models 10
Prices: Flexible Versus Sticky 10
Microeconomic Thinking and Macroeconomic Models 11
FYI Nobel Macroeconomists 12
1-3 How This Book Proceeds 13
Chapter 2 The Data of Macroeconomics 17
2-1 Measuring the Value of Economic Activity:
Gross Domestic Product 18
Income, Expenditure, and the Circular Flow 18
FYI Stocks and Flows 20
Rules for Computing GDP 21
Real GDP Versus Nominal GDP 23
The GDP Deflator 25
Chain-Weighted Measures of Real GDP 25
FYI Two Arithmetic Tricks for Working with Percentage Changes 26
The Components of Expenditure 27
FYI What Is Investment? 28
CASE STUDY GDP and Its Components 28
Other Measures of Income 29
Seasonal Adjustment 31
CASE STUDY The New, Improved GDP of 2013 32
2-2 Measuring the Cost of Living: The Consumer Price Index 34
The Price of a Basket of Goods 34
How the CPI Compares to the GDP and PCE Deflators 35
Does the CPI Overstate Inflation? 36
| ix
