Macroeconomics, 7th edition
I had two main goals in writing this book:
■■ To make close contact with current macroeconomic events. What makes macroeconomics exciting is the light it sheds on what is happening around the world, from the major economic crisis which has engulfed the world since 2008, to monetary policy in the United States, to the problems of the Euro area, to growth in China. These events—and many more—are described in the book, not in footnotes, but in the text or in detailed boxes. Each box shows how you can use what you have learned to get an understanding of these events. My belief is that these boxes not only convey the “life” of macroeconomics, but also reinforce the lessons from the models, making them more concrete and easier to grasp.
■■ To provide an integrated view of macroeconomics. The book is built on one underlying model, a model that draws the implications of equilibrium conditions in three sets of markets: the goods market, the financial markets, and the labor market. Depending on the issue at hand, the parts of the model relevant to the issue are developed in more detail while the other parts are simplified or lurk in the background. But the underlying model is always the same. This way, you will see macroeconomics as a coherent whole, not a collection of models. And you will be able to make sense not only of past macroeconomic events, but also of those that unfold in the future.
New to this Edition
The crisis that started in 2008, and is still lingering, forced macroeconomists to rethink much of macroeconomics. They clearly had understated the role of the financial system. They also had too optimistic a view of how the economy returned to equilibrium. Eight years later, I believe the main lessons have been absorbed, and this edition reflects the deep rethinking that has taken place. Nearly all chapters have been rewritten, and the main changes are as follows:
■■ A modified Chapter 5, and a modified presentation of the IS-LM. The traditional treatment of monetary policy assumed that the central bank chose the money supply and then let the interest rate adjust. In fact, modern central banks choose the interest rate and then let the money supply adjust. In terms of the IS-LM model used to describe the short run, the LM curve, instead of being upward sloping, should be treated as flat. This makes for a more realistic and a simpler model.
■■ A new Chapter 6. The chapter focuses on the role of the financial system in the economy. It extends the IS-LM model to allow for two interest rates, the interest rate set by monetary policy and the cost of borrowing for people or firms, with the state of the financial system determining the relation between the two.
■■ A new Chapter 9. The traditional aggregate supplyaggregate demand model was cumbersome and gave too optimistic a view of the return of output to potential. The model has been replaced by an IS-LM-PC model (where PC stands for Phillips curve), which gives a simpler and more accurate description of the role of monetary policy, and of output and inflation dynamics.
■■ The constraints on monetary policy, coming from the zero lower bound, and the constraints on fiscal policy, coming from the high levels of public debt, are recurring themes throughout the book.
■■ Many Focus boxes are new or extended. Among them: “Unemployment and Happiness” in Chapter 2; “The Liquidity Trap in Action” in Chapter 4; Bank Runs in Chapter 6; “Changes in the U.S. Natural Rate of Unemployment since 1990” in Chapter 8; “Okun’s Law” and “Deflation in the Great Depression” in Chapter 9; “The Construction of PPP Numbers” in Chapter 10; “The Long View: Technology, Education, and Inequality” in Chapter 13; “The Yield Curve, the Zero Lower Bound, and Lift-off” in Chapter 14; “The Disappearance of Current Account Deficits in Euro Periphery Countries: Good News or Bad News?” in Chapter 18; “Euro Area Fiscal Rules: A Short History” in Chapter 21; and “Money Financing and Hyperinflations” and “Should You Worry about U.S. Public Debt?” in Chapter 22.
■■ Figures and tables have been updated using the latest data available.
In short, I see this edition as the first true post-crisis macroeconomics textbook. I hope it gives a clear guide not only to what has happened, and also to what may happen in the future.
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