Macroeconomics Fifth 5Th Canadian Edition Full Chapter
Macroeconomics Fifth 5Th Canadian Edition Full Chapter
Macroeconomics Fifth 5Th Canadian Edition Full Chapter
Canadian Edition
Visit to download the full and correct content document:
https://ebooksecure.com/download/ebook-pdf-macroeconomics-fifth-5th-canadian-edi
tion/
Contents vii
M acroecono m i c s I n A c t i o n 12.1
Quantitative Easing in the United States 415
Negative Nominal Interest Rates 417
Chapter Summary 417
Key Terms 418
Questions for Review 419
Problems 420
Structure
The text begins in Part 1 with an introduction and study of measurement issues. Chapter 1
describes the approach taken in the book and the key ideas that students should take away. It
previews the important issues that will be addressed throughout the book, along with some recent
issues in macroeconomics, and highlights how these will be studied. Measurement is discussed
in Chapters 2 and 3, first with regard to gross domestic product, prices, savings, and wealth, and
then with regard to business cycles. In Chapter 3, we develop a set of key business cycle facts that
will be used throughout the book, particularly in Chapters 13 and 14, where we investigate how
alternative business cycle theories fit the facts.
Our study of macroeconomic theory begins in Part 2. In Chapter 4, we study the behaviour
of consumers and firms in detail. In the one-period model developed in Chapter 5, we use the
approach of capturing the behaviour of all consumers and all firms in the economy with a single rep-
resentative consumer and a single representative firm. The one-period model is used to show how
changes in government spending and total factor productivity affect aggregate output, employment,
consumption, and the real wage. Then, in Chapter 6, we develop two models of search and unem-
ployment, so as to study in detail the macroeconomic determinants of labour market behaviour.
With a basic knowledge of static macroeconomic theory from Part 2, we proceed in Part 3
to the study of economic growth. In Chapter 7 we discuss a set of economic growth facts that are
then used to organize our thinking in the context of models of economic growth. The first growth
model we examine is a Malthusian growth model, consistent with the late-eighteenth century
ideas of Thomas Malthus. The Malthusian model predicts well the features of economic growth
in the world before the Industrial Revolution, but it does not predict the sustained growth in per
capita incomes that occurred in advanced countries after 1800. The Solow growth model, which
we examine next, does a good job of explaining some important observations concerning modern
economic growth. Finally, Chapter 7 explains growth accounting, which is an approach to dis-
entangling the sources of growth. In Chapter 8 we discuss income disparities across countries in
light of the predictions of the Solow model, and introduce a model of endogenous growth.
In Part 4, we first use the theory of consumer and firm behaviour developed in Part 2 to
construct (in Chapter 9) a two-period model that can be used to study consumption–savings
decisions, the behaviour of credit markets, and the effects of government deficits on the economy.
Credit market frictions, with a particular focus on applications related to the financial crisis, is the
topic of Chapter 10. The two-period model is then extended to include investment behaviour in
the real intertemporal model of Chapter 11. This model will then serve as the basis for much of
what is done in the remainder of the book.
In Part 5, we include monetary phenomena and banking in the real intertemporal model of
Chapter 12, so as to construct a monetary intertemporal model. This model is used in Chapter 12
to examine the effects of changes in monetary policy on the economy. Then, in Chapters 13 and
14, we study non-Keynesian and Keynesian theories of the business cycle. These theories are com-
pared and contrasted, and we examine how alternative business cycle theories fit the data and how
they help us to understand recent business cycle behaviour in Canada. Chapter 15 extends the
New Keynesian sticky price model of Chapter 14, so that the causes and consequences of inflation
can be studied, along with the control of inflation by central banks. This chapter also introduces
neo-Fisherian theory, which is a provocative alternative to conventional central banking theories
of inflation control.
Part 6 is devoted to international macroeconomics. In Chapter 16, the models of Chapters 5
and 11 are used to show what determines the current account surplus, along with an analysis of
the default on sovereign debt. Then, in Chapter 17, we show how exchange rates are determined,
and we investigate the roles of fiscal and monetary policy in an open economy that trades goods
and assets with the rest of the world.
Finally, Part 7 examines some important topics in macroeconomics. In Chapter 18, we study
in more depth the role of money in the economy; the effects of money growth on inflation; and
aggregate economic activity, banking, and deposit insurance.
Features
Several key features enhance the learning process and illuminate critical ideas for the student. The
intent is to make macroeconomic theory transparent, accessible, and relevant.
Real-World Applications
Applications to current and historical problems are emphasized throughout in two running fea-
tures. The first is a series of “Theory Confronts the Data” sections, which show how macroeco-
nomic theory comes to life in matching (or sometimes falling short of matching) the characteristics
of real-world economic data. A sampling of some of these sections includes the 1990s fiscal con-
traction in Canada and the government expenditure multiplier, consumption smoothing and the
stock market, and the Phillips curve. The second running feature is a series of “Macroeconomics
in Action” boxes. These real-world applications relating directly to the theory encapsulate ideas
from front-line research in macroeconomics and the history of economic thought, and they aid
students in understanding the core material. For example, some of the subjects examined in these
boxes are social security and incentives, sovereign debt and the European Monetary Union, and
forward guidance in the United States after 2008.
Art Program
Graphs and charts are plentiful in this book. They act as visual representations of macroeconomic
models that can be manipulated to derive important results and show the key features of impor-
tant macro data in applications. To aid the student, graphs and charts use a consistent system that
encodes the meaning of particular elements in graphs and of shifts in curves.
Problems
The end-of-chapter problems will help the student in learning the material and applying the
macroeconomic models developed in the chapter. These problems are intended to be challenging
and thought provoking.
Notation
For easy reference, definitions of all variables used in the text are included on the end papers.
Flexibility
This book was written to be user friendly for instructors with different preferences and with
different time allocations. The following core material is recommended for all instructors:
Chapter 1 Introduction
Chapter 2 Measurement
International Focus
Chapters 16 and 17 can be moved up in the sequence. Chapter 16 can follow Chapter 11, and
Chapter 17 can follow Chapter 12.
the interests of students and instructors, new developments in macroeconomic thought, and
recent events in the Canadian and world economies. As well, applications have been added to
help students understand macroeconomic events that have occurred since the fourth edition
was written, and the end-of-chapter problems have been expanded. In more detail, here are the
highlights of the revision:
• In Chapter 5, there is new material on the optimal choice of government spending.
• Chapter 6 has been revised to include a section on the “one-sided search model,” an approach
to modeling the behaviour of the unemployed. This model determines the reservation wage for
an unemployed worker, and shows how employment insurance benefits, job offer rates, and
separations determine the unemployment rate.
• Chapter 12, “A Monetary Intertemporal Model: Money, Banking, Prices, and Monetary
Policy,” includes a new section on unconventional monetary policy and the zero lower bound.
Unconventional policies include quantitative easing and negative nominal interest rates.
• In Chapter 13, there is a new section on business cycle theories as they relate to the 2008–2009
recession in particular.
• Chapter 14 address how New Keynesian models fit the data, and the chapter contains new
material on the liquidity trap.
• Chapter 15 is entirely new, and analyzes inflation and its causes in a New Keynesian framework.
A basic New Keynesian model shows how monetary policy is conducted, in conventional
circumstances, and when the zero lower bound on the nominal interest rate is a problem. The
chapter discusses how secular stagnation or world savings gluts can lead to low real interest
rates and zero lower bound monetary policies. Finally, a dynamic New Keynesian rational
expectations model is used to introduce neo-Fisherism—the idea that central banks should
correct too-low inflation by increasing nominal interest rates.
• Chapter 16 has been revised to incorporate a model of sovereign debt default.
• In Chapter 17, there is a new section that extends the Keynesian sticky price model of Chapter 14
to an open-economy setting.
• Macroeconomics in Action and Theory Confronts the Data features have changed. Some
have been dropped and others added to ensure contemporary relevance of the material.
• New end-of-chapter problems have been added.
Supplemental Materials
The following instructor supplements are available for downloading from a password-protected
section of Pearson Education Canada’s online catalogue (www.pearsoned.ca/highered). Navigate
to your book’s catalogue page to view a list of those supplements that are available. See your local
sales representative for details and access.
Instructor’s Manual
This manual contains chapter key ideas, teaching goals, classroom discussion topics, outline, and
textbook problem solutions.
Image Library
The Image Library provides digital versions of all the figures and tables from the text.
Acknowledgments
For this fifth Canadian edition, I am grateful to the many economists who have provided formal
reviews of the previous editions. Their observations and suggestions have been very helpful.
Special thanks go to Claudine O’Donnell, Megan Farrell, Richard di Santo, Rachel Stuckey,
and Susan M. Johnson at Pearson Canada for their work on this edition.
Stephen D. Williamson
Stephen Williamson is a Vice President at the Federal Reserve Bank of St. Louis. He attended
Merwin Greer Public School, Dale Road Junior High School, and Cobourg District Collegiate
Institute East in Cobourg, Ontario; received a B.Sc. (Honours, Mathematics) and an M.A. in
Economics from Queen’s University in Kingston, Ontario; and received his Ph.D. from the
University of Wisconsin–Madison in 1984. He has held academic positions at Queen’s University,
the University of Western Ontario, the University of Iowa and Washington University in St. Louis,
and has worked as an economist at the Federal Reserve Bank of Minneapolis and the Bank of
Canada. Professor Williamson has been an academic visitor at the Federal Reserve Banks of Atlanta,
Kansas City, Minneapolis, Cleveland, and Philadelphia, at the Board of Governors of the Federal
Reserve System in Washington, D.C., and at the Bank of Canada. He has also been a long-term vis-
itor at the University of Tilburg, the Netherlands; the London School of Economics; the University
of Edinburgh; Victoria University of Wellington, New Zealand; Seoul National University; Hong
Kong University; Indiana University; and Fudan University. Professor Williamson has published
scholarly articles in the American Economic Review, the Journal of Political Economy, the Quarterly
Journal of Economics, the Review of Economic Studies, the Journal of Economic Theory, and the Journal
of Monetary Economics, among other prestigious economics journals. His research, focused mainly
on macroeconomics, monetary theory, and the theory of financial intermediation, has been
supported by the National Science Foundation, the Lynde and Harry Bradley Foundation, and
the Social Sciences and Humanities Research Council of Canada. Professor Williamson lives in
Clayton, Missouri.
This text reflects the author’s views and does not necessarily reflect the views of the Federal
Reserve Bank of St. Louis, the Board of Governors of the Federal Reserve System, or the Federal
Reserve System.
1
Part 0 Introduction and
Measurement Issues
PART_TTL
Part 1 contains an introduction to macroeconomic analysis and a description of the approach
in this text of building useful macroeconomic models based on microeconomic principles.
We discuss the key ideas that will be analyzed and some current issues that the macroeco-
nomic theory developed in Parts 2 to 7 will help us to understand. Then, to lay a foundation
PART_FIRST
for what is done later, we explore how the key variables relating to macroeconomic theory
are measured in practice. Finally, we analyze the key empirical facts concerning business
cycles. These facts will prove useful in Parts 2 to 7 in showing the successes and shortcom-
ings of macroeconomic theory in explaining real-world phenomena.
1 Introduction
What Is Macroeconomics?
Macroeconomists are motivated by large questions, by issues that affect many people and
many nations of the world. Why are some countries exceedingly rich and others exceed-
ingly poor? Why are most Canadians so much better off than their parents and grandpar-
ents? Why are there fluctuations in aggregate economic activity? What causes inflation?
Why is there unemployment?
Macroeconomics is the study of the behaviour of large collections of economic agents.
It focuses on the aggregate behaviour of consumers and firms, the behaviour of govern-
ments, the overall level of economic activity in individual countries, the economic inter-
actions among nations, and the effects of fiscal and monetary policy. Macroeconomics is
distinct from microeconomics in that it deals with the overall effects on economies of the
choices that all economic agents make, rather than the choices of individual consumers
or firms. Since the 1970s however, the distinction between microeconomics and macro-
economics has blurred, for microeconomists and macroeconomists now use much the
same kinds of tools. That is, the economic models that macroeconomists use, consist-
ing of descriptions of consumers and firms, their objectives and constraints, and their
interactions, are built up from microeconomic principles, and these models are typically
2