Macroeconomics

MACROECONOMICS

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S E V E N T H

E D I T I O N

MACROECONOMICS
N. GREGORY MANKIW
Harvard University

Worth Publishers

Senior Publishers: Catherine Woods and Craig Bleyer Senior Acquisitions Editor: Sarah Dorger Senior Marketing Manager: Scott Guile Consulting Editor: Paul Shensa Senior Development Editor: Marie McHale Development Editor: JaneTufts Assistant Editor, Media and Supplements: Tom Acox Associate Managing Editor: Tracey Kuehn Project Editor: Dana Kasowitz Art Director: Babs Reingold Cover and Text Designer: Kevin Kall Production Manager: Barbara Anne Seixas Composition: TSI Graphics Printing and Binding: RR Donnelley Cover art: Barbara Ellmann WHAT’S YOUR ANGLE? Encaustic on Wood Panel 24'' x 24'' © 2005 Library of CongressCataloging-in-Publication Number: 2009924581 ISBN-13: 978-1-4292-1887-0 ISBN-10: 1-4292-1887-8 © 2010, 2007, 2003 by N. Gregory Mankiw All rights reserved. Printed in the United States of America First Printing 2009

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about the author

N. Gregory Mankiw is Professor of Economics at Harvard University. He began hisstudy 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. Today, he regularly teaches both undergraduate and graduate courses in macroeconomics. He is also author of the popular introductory textbook Principles of Economics (Cengage Learning). ProfessorMankiw 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 EconomicActivity, and an adviser to the Federal Reserve Bank of Boston and the Congressional Budget Office. 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.
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Photo by Deborah Mankiw

To Deborah

T

hose branches ofpolitics, 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 youagainst Political 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 andwaves – 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 xxxiipart I
Introduction 1
Chapter 1 The Science of Macroeconomics 3 Chapter 2 The Data of Macroeconomics 17

Chapter 11 Aggregate Demand II: Applying the IS–LM Model 311 Chapter 12 The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime 339 Chapter 13 Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment 379 Chapter 14 A Dynamic Model of...