Macroeconomics (12th Edition)

Book Preface

As in previous editions this book begins with business cycles, unemployment, and inflation. Experience teaches us that students want to understand what is happening today, and particularly why the Global Economic Crisis occurred and why the unemployment rate was above 9 percent during the first two years of the economic recovery. The curiosity of students about what is wrong with today’s economy engages them with the subject matter, in no small measure because they know that the economy will influence their job prospects after graduation. This book provides an immediate payoff to that curiosity within the first few chapters by placing its treatment of business cycles first. The economics of long-term growth are important but should come later, after students learn about the models, answers, and puzzles surrounding business cycles.

What’s New in This Edition?

• The book’s organization is an ideal home for systematic treatment of the Global Economic Crisis, the single most important macroeconomic event since the Great Depression. It poses a challenge for intermediate macro instructors whose students will be expecting answers, not only about the causes of the Crisis but also the reasons why the recovery has been so slow. Fortunately, the structure of previous editions allows the treatment of the Crisis and recovery to fit seamlessly into the existing organization. Chapter 4 on the IS-LM model has always ended with sections on “strong and weak effects of monetary and fiscal policy” (pp. 102–06 in this edition).
• The new Chapter 5, “Financial Markets, Financial Regulation, and Economic Instability,” introduces the concepts relevant to the housing bubble and financial market meltdown, including risk, leverage, securitization, and bubbles. Balance sheets are introduced to contrast traditional banks with the “wild west” of finance in which loans are financed not from deposits but by borrowing. The post-2001 housing bubble is compared with the stock market bubble of 1927–29 that led to the Great Depression.
• Financial market concepts are integrated into the IS-LM analysis of monetary policy weakness. The “zero lower bound” is interpreted as a horizontal LM curve lying along the horizontal axis to the left of full employment, and the economy’s problem is portrayed as a leftward shift in the IS curve that pushes its full-employment equilibrium interest rate into negative territory, below the zero lower bound. In addition to shifting leftward, the IS curve becomes steeper, i.e., less sensitive to interest rate changes, due to the effect of the post-bubble “hangover” on demand (foreclosures and excess consumer debt) and on supply (too many unsold houses and condos).