Principles of Macroeconomics (10th Edition)

Book Preface

Our goal in the 10th edition, as it was in the first edition, is to instill in students a fascination with both the functioning of the economy and the power and breadth of economics. The first line of every edition of our book has been “The study of economics should begin with a sense of wonder.”We hope that readers come away from our book with a basic understanding of how market economies function, an appreciation for the things they do well, and a sense of the things they do poorly.We also hope that readers begin to learn the art and science of economic thinking and begin to look at some policy and even personal decisions in a different way.

What’s New in This Edition?

• The years 2008–2009 became the fifth recession in the United States since 1970. One of the new features of this edition is a discussion of this recession in the context of the overall history of the U.S. economy. This most recent recession, however, required more than the usual revisions, both because of its severity and because of the unusual nature of both the events leading up to it and some of the remedies employed by the government to deal with it.
• In June 2010, the balance sheet of the Federal Reserve had assets of $2.3 billion. Of these assets, half, or just over $1.1 billion, was held in the form of mortgage-backed securities.
• In 2007, the Fed held no mortgage-backed securities. In June 2010, commercial banks in the United States held more than $900 billion in excess reserves at the Fed. In the past, banks have held almost no excess reserves. These extraordinary changes at the Fed follow on the heels of interventions by the federal government in financial operations of numerous private banks like J.P. Morgan and Goldman Sachs, as well as in companies like AIG and General Motors. These extraordinary actions required substantial changes throughout the macroeconomic chapters of this book. New material describing these interventions appear in a number of chapters, both in the text itself and in the Economics in Practice boxes. Revisions were also necessary in the background discussions of monetary policy, since the existence of excess reserves considerably complicates the usual workings of monetary policy.
• This edition has augmented the current research focus of many of the Economics in Practice boxes. Historically, the boxes have focused principally on newspaper excerpts related to the subject of the chapter. Beginning last edition and pushed through more strongly this edition, we have added boxes that we hope will demonstrate more clearly the ideas that lie at the heart of economic thinking. Thus, two thirds of the boxes in the chapters relate an economic principle either to a personal observation or to a recent piece of economic research (for example, new work by Rachel Croson on gender and trust). When possible, we focus on work by younger scholars and on more recent research. It is our hope that new students will be inspired by the wide breadth and exciting nature of the research currently going on in economics as they read these boxes.
• Many graphs and tables have been heavily revised and updated to include the most recent data available from 2008 to as recent as the fall of 2010. The inclusion of up-todate studies and data is essential to promoting a better understanding of recent macroeconomic developments.
• A number of the chapters have been reworked to improve their readability. The growth chapter, Chapter 17, has been completely rewritten. The other major changes concern the new discussion needed for the 2008–2009 recession and the new policy initiatives.
• We have added many new problems in the end-of-chapter materials, aiming for more text-specific questions.

Economics is a social science. Its value is measured in part in terms of its ability to help us understand the world around us and to grapple with some of the social issues of the times. As we go to press in 2010, the U.S. economy is slowly recovering from a very difficult downturn, with many people still unsuccessfully seeking work. What causes an economy to falter and unemployment rates to grow? More generally, how do we measure and understand economic growth? Are there government policies that can help prevent downturns or at least reduce their severity? In 2010, in the United States we hear increasing worries about the growing size of the government debt. Where did this debt come from, and are people right to be worried? These question are macroeconomic questions. The years 2008–2010 have been very challenging years in the macroeconomy for most of the world. In the United States the government has used policies never used before, and we have all— macroeconomists and policy makers alike—struggled to figure out what works and what does not. For someone studying macroeconomics, we are in the middle of an enormously exciting time.