NINTH EDITION
   MACROECONOMICS
      Theories and Policies
      Richard T. Froyen
      University of North Carolina Chapel Hill
      PEARSON
       Prentice
         Hall
      Upper Saddle River, New Jersey 07458
          Contents
           Preface xix
       PART ONE INTRODUCTION AND MEASUREMENT l
           CHAPTER 1 Introduction 2
              N 1.1 What Is Macroeconomics? 2
                1.2 Post-World War II U.S. Economic Performance 3
                    Output 3
                    Unemployment 4
                    Inflation 5
                    Inflation and Unemployment 6
                    The U.S. Federal Budget and Trade Deficits 8
                1.3 Central Questions in Macroeconomics 10
                    Instability of Output 10
                    Movements in the Inflation Rate 10
                    The Output-Inflation Relationship 10
                    Growth Slowdown and Turnaround? 11
                    Implications of Deficits and Surpluses 11
                1.4 Conclusion 12
           CHAPTER 2 Measurement of Macroeconomic Variables 13
                2.1 The National Income Accounts 13
                2.2 Gross Domestic Product 14
                    Currently Produced 14
                    Final Goods and Services 14
                    Evaluated at Market Prices 15
                2.3 National Income 17
                2.4 Personal and Disposable Personal Income 20
                2.5 Some National Income Accounting Identities 21
                2.6 Measuring Price Changes: Real versus Nominal GDP 23
                    Real GDP in Prices from a Base Year 24
                    Chain-Weighted Real GDP 25
      x CONTENTS
             2.7 The Consumer Price Index and the Producer Price Index 26
             2.8 Measures of Cyclical Variation in Output 27
             2.9 Conclusion 29
                 Perspectives 2.1 What GDP Is Not 18
                 Perspectives 2.2 National Income Accounts for England and
                  Wales in 1688 22
                 Perspectives 2.3 Dating Business Cycles 29
      PART TWO CLASSICAL ECONOMICS AND THE KEYNESIAN
                  REVOLUTION 31
          CHAPTER 3 Classical Macroeconomics (I): Output
                     and Employment 32
            . 3.1 The Starting Point 32
             3.2 The Classical Revolution 33
             3.3 Production 34
             3.4 Employment 37
                 Labor Demand 37
                 Labor Supply 39
             3.5 Equilibrium Output and Employment 42
                 The Determinants of Output and Employment 44
                 Factors That Do Not Affect Output 48
             3.6 Conclusion 48
                 Perspectives 3-1 Real Business Cycles: A First Look 48
          CHAPTER 4 Classical Macroeconomics (II): Money,
                     Prices, and Interest 51
             4.1 The Quantity Theory of Money 51
                 The Equation of Exchange 51
                 The Cambridge Approach to the Quantity Theory 53
                 The Classical Aggregate Demand Curve 54
             4.2 The Classical Theory of the Interest Rate 56
             4.3 Policy Implications of the Classical
                 Equilibrium Model 60
                 Fiscal Policy 60
                 Monetary Policy 66
             4.4 Conclusion 66
                 Perspectives 4-1 Money in Hyperinflations 57
                 Perspectives 4-2 Supply-Side Economics—A Modern
                  Classical View 65
                                                CONTENTS xi
        CHAPTER 5 The Keynesian System (I): The Role of
                  Aggregate Demand 68
           5.1 The Problem of Unemployment 68
           5.2 The Simple Keynesian Model: Conditions for
              Equilibrium Output 71
           5.3 The Components of Aggregate Demand 76
              Consumption 76
              Investment 78
              Government Spending and Taxes 80
           5.4 Determining Equilibrium Income 80
           5.5 Changes in Equilibrium Income 83
           5.6 Fiscal Stabilization Policy 88
           5.7 Exports and Imports in the Simple Keynesian Model 90
          ^5.8 Conclusion 93
              Perspectives 5-1 Macroeconomic Controversies 72
              Perspectives 5-2 Fiscal Policy in Practice 90
        CHAPTER 6 The Keynesian System (II): Money, Interest,
                  and Income 97
           6.1 Money in the Keynesian System 97
              Interest Rates and Aggregate Demand 97
              The Keynesian Theory of the Interest Rate 99
              The Keynesian Theory of Money Demand 103
              The Effects of an Increase in the Money Supply 107
              Some Implications of Interest on Money 107
              Going Forward 109
           6.2 The IS-LM Model 109
              Money Market Equilibrium: The LM Schedule 110
              Product Market Equilibrium: The IS Schedule 119
              The IS and LM Schedules Combined 129
           6.3 Conclusion 131
              Appendix: The A Igebra of the IS-LM Model 132
              Perspectives 6-1 Residential Construction and the Interest Rate 100
        CHAPTER 7 The Keynesian System (III): Policy Effects
                  in the IS-LM Model 136
           7.1 Factors That Affect Equilibrium Income and the
              Interest Rate 136
              Monetary Influences: Shifts in the LM Schedule 136
              Real Influences: Shifts in the IS Schedule 137