Mankiw n gregory macroeconomics 9th edition worth publishers pdf

Intermediate Macroeconomics

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M A C R O E C O N O M I C S

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N. GREGORY MANKIW Harvard University

NINTH EDITION

M A C R O E C O N O M I C S

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| v

About the Author

N. Gregory Mankiw is the Robert M. Beren Professor of Economics at Harvard

University. He began his study 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.

At Harvard, he has taught both undergraduate and graduate courses in macro-

economics. He is also author of the best-selling introductory textbook Principles

of Economics (Cengage Learning).

Professor Mankiw 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 Economic Activity, and an adviser to the Congressional Budget Office and

the Federal Reserve Banks of Boston and New York. 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.

Jo rd

i C ab

ré P

ho to

gr ap

hy

To Deborah

T hose branches of politics, 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 you against Politi-

cal 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 and waves—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

viii |

Preface xxiii Supplements and Media xxxii

Part I Introduction 1

Chapter 1 The Science of Macroeconomics 1

Chapter 2 The Data of Macroeconomics 17

Part II Classical Theory: The Economy in the Long Run 47

Chapter 3 National Income: Where It Comes From and Where It Goes 47

Chapter 4 The Monetary System: What It Is and How It Works 81

Chapter 5 Inflation: Its Causes, Effects, and Social Costs 105

Chapter 6 The Open Economy 139

Chapter 7 Unemployment and the Labor Market 183

Part III Growth Theory: The Economy in the Very Long Run 211

Chapter 8 Economic Growth I: Capital Accumulation and Population Growth 211

Chapter 9 Economic Growth II: Technology, Empirics and Policy 241

Part IV Business Cycle Theory: The Economy in the Short Run 281

Chapter 10 Introduction to Economic Fluctuations 281

Chapter 11 Aggregate Demand I: Building the IS-LM Model 311

Chapter 12 Aggregate Demand II: Applying the IS-LM Model 337

Chapter 13 The Open Economy Revisited: The Mundell-Fleming Model and the Exchange-Rate Regime 367

Chapter 14 Aggregate Supply and the Short-Run Tradeoff between Inflation and Unemployment 409

Part V Topics in Macroeconomic Theory 439

Chapter 15 A Dynamic Model of Economic Fluctuations 439

Chapter 16 Understanding Consumer Behavior 475

Chapter 17 The Theory of Investment 507

Part VI Topics in Macroeconomic Policy 531

Chapter 18 Alternative Perspectives on Stabilization Policy 531

Chapter 19 Government Debt and Budget Deficits 555

Chapter 20 The Financial System: Opportunities and Dangers 581

Epilogue: What We Know, What We Don’t 607

Glossary 617

Index 627

Brief Contents

| ix

Preface xxiii Supplements and Media xxxii

Part I Introduction 1

Chapter 1 The Science of Macroeconomics 1

1-1 What Macroeconomists Study 1 u CASE STUDY  The Historical Performance of the U.S. Economy 3

1-2 How Economists Think 5 Theory of Model Building 6

 FYI Using Functions to Express Relationships Among Variables 9 The Use of Multiple Models 10

Prices: Flexible Versus Sticky 10

Microeconomic Thinking and Macroeconomic Models 11

 FYI Nobel Macroeconomists 12

1-3 How This Book Proceeds 13

Chapter 2 The Data of Macroeconomics 17

2-1 Measuring the Value of Economic Activity: Gross Domestic Product 18 Income, Expenditure, and the Circular Flow 18

 FYI Stocks and Flows 20 Rules for Computing GDP 21

Real GDP Versus Nominal GDP 23

The GDP Deflator 25

Chain-Weighted Measures of Real GDP 25

 FYI Two Arithmetic Tricks for Working with Percentage Changes 26 The Components of Expenditure 27

 FYI What Is Investment? 28  CASE STUDY  GDP and Its Components 28 Other Measures of Income 29

Seasonal Adjustment 31

 CASE STUDY  The New, Improved GDP of 2013 32

2-2 Measuring the Cost of Living: The Consumer Price Index 34 The Price of a Basket of Goods 34

How the CPI Compares to the GDP and PCE Deflators 35

Does the CPI Overstate Inflation? 36

Contents

x | Contents

2-3 Measuring Joblessness: The Unemployment Rate 38 The Household Survey 38

 CASE STUDY Men, Women, and Labor-Force Participation 40 The Establishment Survey 41

2-4 Conclusion: From Economic Statistics to Economic Models 42

Part II Classical Theory: The Economy in the Long Run 47

Chapter 3 National Income: Where It Comes From and Where It Goes 47

3-1 What Determines the Total Production of Goods and Services? 49 The Factors of Production 49

The Production Function 50

The Supply of Goods and Services 50

3-2 How Is National Income Distributed to the Factors of Production? 51 Factor Prices 51

The Decisions Facing a Competitive Firm 52

The Firm’s Demand for Factors 53

The Division of National Income 56

 CASE STUDY The Black Death and Factor Prices 58 The Cobb-Douglas Production Function 58

 CASE STUDY Labor Productivity as the Key Determinant of Real Wages 62 The Growing Gap Between Rich and Poor 63

3-3 What Determines the Demand for Goods and Services? 65 Consumption 65

Investment 67

 FYI The Many Different Interest Rates 68 Government Purchases 69

3-4 What Brings the Supply and Demand for Goods and Services into Equilibrium? 69 Equilibrium in the Market for Goods and Services: The Supply and

Demand for the Economy’s Output 70

Equilibrium in the Financial Markets: The Supply and Demand for Loanable Funds 71

Changes in Saving: The Effects of Fiscal Policy 73

Changes in Investment Demand 74

3-5 Conclusion 76

Contents | xi

Chapter 4 The Monetary System: What It Is and How It Works 81

4-1 What Is Money? 82 The Functions of Money 82

The Types of Money 83

 CASE STUDY Money in a POW Camp 83 The Development of Fiat Money 84

 CASE STUDY Money and Social Conventions on the Island of Yap 84  FYI Bitcoin: The Strange Case of Virtual Money 85 How the Quantity of Money Is Controlled 86

How the Quantity of Money Is Measured 86

 FYI How Do Credit Cards and Debit Cards Fit into the Monetary System? 88

4-2 The Role of Banks in the Monetary System 88 100-Percent-Reserve Banking 89

Fractional-Reserve Banking 89

Bank Capital, Leverage, and Capital Requirements 91

4-3 How Central Banks Influence the Money Supply 93 A Model of the Money Supply 93

The Instruments of Monetary Policy 95

 CASE STUDY Quantitative Easing and the Exploding Monetary Base 97 Problems in Monetary Control 98

 CASE STUDY Bank Failures and the Money Supply in the 1930s 99

4-4 Conclusion 100

Chapter 5 Inflation: Its Causes, Effects, and Social Costs 105

5-1 The Quantity Theory of Money 106 Transactions and the Quantity Equation 106

From Transactions to Income 108

The Money Demand Function and the Quantity Equation 108

The Assumption of Constant Velocity 109

Money, Prices, and Inflation 110

 CASE STUDY Inflation and Money Growth 111

5-2 Seigniorage: The Revenue from Printing Money 113  CASE STUDY Paying for the American Revolution 113

5-3 Inflation and Interest Rates 114 Two Interest Rates: Real and Nominal 114

The Fisher Effect 115

 CASE STUDY Inflation and Nominal Interest Rates 115 Two Real Interest Rates: Ex Ante and Ex Post 117

 CASE STUDY Nominal Interest Rates in the Nineteenth Century 117

xii | Contents

5-4 The Nominal Interest Rate and the Demand for Money 118 The Cost of Holding Money 118

Future Money and Current Prices 119

5-5 The Social Costs of Inflation 120 The Layman’s View and the Classical Response 120

 CASE STUDY What Economists and the Public Say About Inflation 121 The Costs of Expected Inflation 122

The Costs of Unexpected Inflation 123

 CASE STUDY The Free Silver Movement, the Election of 1896, and The Wizard of Oz 124

One Benefit of Inflation 125

5-6 Hyperinflation 126 The Costs of Hyperinflation 126

The Causes of Hyperinflation 127

 CASE STUDY Hyperinflation in Interwar Germany 128  CASE STUDY Hyperinflation in Zimbabwe 130

5-7 Conclusion: The Classical Dichotomy 131

Appendix The Cagan Model: How Current and Future Money Affect the Price Level 135

Chapter 6 The Open Economy 139

6-1 The International Flows of Capital and Goods 140 The Role of Net Exports 141

International Capital Flows and the Trade Balance 142

International Flows of Goods and Capital: An Example 144

The Irrelevance of Bilateral Trade Balances 145

6-2 Saving and Investment in a Small Open Economy 145 Capital Mobility and the World Interest Rate 146

Why Assume a Small Open Economy? 146

The Model 147

How Policies Influence the Trade Balance 148

Evaluating Economic Policy 150

 CASE STUDY The U.S. Trade Deficit 152  CASE STUDY Why Doesn’t Capital Flow to Poor Countries? 154

6-3 Exchange Rates 155 Nominal and Real Exchange Rates 155

The Real Exchange Rate and the Trade Balance 157

The Determinants of the Real Exchange Rate 157

How Policies Influence the Real Exchange Rate 159

The Effects of Trade Policies 160

The Determinants of the Nominal Exchange Rate 162

 CASE STUDY Inflation and Nominal Exchange Rates 163

Contents | xiii

The Special Case of Purchasing-Power Parity 165

 CASE STUDY The Big Mac Around the World 166

6-4 Conclusion: The United States as a Large Open Economy 168

Appendix The Large Open Economy 173

Chapter 7 Unemployment and the Labor Market 183

7-1 Job Loss, Job Finding, and the Natural Rate of Unemployment 184 7-2 Job Search and Frictional Unemployment 187

Causes of Frictional Unemployment 187

Public Policy and Frictional Unemployment 188

 CASE STUDY Unemployment Insurance and the Rate of Job Finding 189

7-3 Real-Wage Rigidity and Structural Unemployment 189 Minimum-Wage Laws 190

 CASE STUDY The Characteristics of Minimum-Wage Workers 192 Unions and Collective Bargaining 193

Efficiency Wages 194

 CASE STUDY Henry Ford’s $5 Workday 195

7-4 Labor-Market Experience: The United States 196 The Duration of Unemployment 196

CASE STUDY The Increase in U.S. Long-Term Unemployment and the Debate Over Unemployment Insurance 197

Variation in the Unemployment Rate Across Demographic Groups 199

Transitions Into and Out of the Labor Force 199

 CASE STUDY The Decline in Labor-Force Participation: 2007 to 2014 201

7-5 Labor-Market Experience: Europe 203 The Rise in European Unemployment 203

Unemployment Variation Within Europe 204

The Rise of European Leisure 205

7-6 Conclusion 207

Part III Growth Theory: The Economy in the Very Long Run 211

Chapter 8 Economic Growth I: Capital Accumulation and Population Growth 211

8-1 The Accumulation of Capital 212 The Supply and Demand for Goods 212

Growth in the Capital Stock and the Steady State 215

xiv | Contents

Approaching the Steady State: A Numerical Example 217

 CASE STUDY The Miracle of Japanese and German Growth 219 How Saving Affects Growth 220

 CASE STUDY Saving and Investment Around the World 222

8-2 The Golden Rule Level of Capital 223 Comparing Steady States 224

Finding the Golden Rule Steady State: A Numerical Example 227

The Transition to the Golden Rule Steady State 228

8-3 Population Growth 231 The Steady State With Population Growth 231

The Effects of Population Growth 233

 CASE STUDY Population Growth Around the World 234 Alternative Perspectives on Population Growth 235

8-4 Conclusion 237

Chapter 9 Economic Growth II: Technology, Empirics, and Policy 241

9-1 Technological Progress in the Solow Model 242 The Efficiency of Labor 242

The Steady State With Technological Progress 243

The Effects of Technological Progress 244

9-2 From Growth Theory to Growth Empirics 245 Balanced Growth 246

 FYI Economic Possibilities for Our Grandchildren 246 Convergence 247

Factor Accumulation Versus Production Efficiency 249

 CASE STUDY Good Management as a Source of Productivity 249

9-3 Policies to Promote Growth 251 Evaluating the Rate of Saving 251

Changing the Rate of Saving 253

Allocating the Economy’s Investment 253

 CASE STUDY Industrial Policy in Practice 255 Establishing the Right Institutions 256

 CASE STUDY The Colonial Origins of Modern Institutions 257 Encouraging Technological Progress 258

 CASE STUDY Is Free Trade Good for Economic Growth? 259

9-4 Beyond the Solow Model: Endogenous Growth Theory 260 The Basic Model 261

A Two-Sector Model 262

The Microeconomics of Research and Development 263

The Process of Creative Destruction 264

9-5 Conclusion 266

Contents | xv

Part IV Business Cycle Theory: The Economy in the Short Run 281

Chapter 10 Introduction to Economic Fluctuations 281

10-1 The Facts About the Business Cycle 282 GDP and Its Components 282

Unemployment and Okun’s Law 284

Leading Economic Indicators 287

10-2 Time Horizons in Macroeconomics 289 How the Short Run and the Long Run Differ 289

 CASE STUDY If You Want to Know Why Firms Have Sticky Prices, Ask Them 290 The Model of Aggregate Supply and Aggregate Demand 292

10-3 Aggregate Demand 293 The Quantity Equation as Aggregate Demand 293

Why the Aggregate Demand Curve Slopes Downward 294

Shifts in the Aggregate Demand Curve 295

10-4 Aggregate Supply 296 The Long Run: The Vertical Aggregate Supply Curve 296

The Short Run: The Horizontal Aggregate Supply Curve 296

From the Short Run to the Long Run 299

 CASE STUDY A Monetary Lesson from French History 300  FYI David Hume on the Real Effects of Money 301

10-5 Stabilization Policy 302 Shocks to Aggregate Demand 302

Shocks to Aggregate Supply 303

 CASE STUDY How OPEC Helped Cause Stagflation in the 1970s and Euphoria in the 1980s 305

10-6 Conclusion 307

Chapter 11 Aggregate Demand I: Building the IS–LM Model 311

11-1 The Goods Market and the IS Curve 313 The Keynesian Cross 313

 CASE STUDY Cutting Taxes to Stimulate the Economy: The Kennedy and Bush Tax Cuts 320

 CASE STUDY Increasing Government Purchases to Stimulate the Economy: The Obama Stimulus 321

 CASE STUDY Using Regional Data to Estimate Multipliers 322 The Interest Rate, Investment, and the IS Curve 324

How Fiscal Policy Shifts the IS Curve 326

11-2 The Money Market and the LM Curve 327 The Theory of Liquidity Preference 327

 CASE STUDY Does a Monetary Tightening Raise or Lower Interest Rates? 330

xvi | Contents

Income, Money Demand, and the LM Curve 330

How Monetary Policy Shifts the LM Curve 332

11-3 Conclusion: The Short-Run Equilibrium 333

Chapter 12 Aggregate Demand II: Applying the IS–LM Model 337

12-1 Explaining Fluctuations With the IS–LM Model 338 How Fiscal Policy Shifts the IS Curve and Changes the Short-Run

Equilibrium 338

How Monetary Policy Shifts the LM Curve and Changes the Short-Run Equilibrium 340

The Interaction Between Monetary and Fiscal Policy 341

Shocks in the IS–LM Model 343

 CASE STUDY The U.S. Recession of 2001 344 What Is the Fed’s Policy Instrument—The Money Supply or the

Interest Rate? 345

12-2 IS–LM as a Theory of Aggregate Demand 346 From the IS–LM Model to the Aggregate Demand Curve 347

The IS–LM Model in the Short Run and Long Run 349

12-3 The Great Depression 351 The Spending Hypothesis: Shocks to the IS Curve 351

The Money Hypothesis: A Shock to the LM Curve 353

The Money Hypothesis Again: The Effects of Falling Prices 354

Could the Depression Happen Again? 356

 CASE STUDY The Financial Crisis and Great Recession of 2008 and 2009 357 The Liquidity Trap (Also Known as the Zero Lower Bound) 360

12-4 Conclusion 361

Chapter 13 The Open Economy Revisited: The Mundell–Fleming Model and the Exchange-Rate Regime 367

13-1 The Mundell–Fleming Model 369 The Key Assumption: Small Open Economy With Perfect Capital Mobility 369

The Goods Market and the IS* Curve 370

The Money Market and the LM* Curve 370

Putting the Pieces Together 372

13-2 The Small Open Economy Under Floating Exchange Rates 373 Fiscal Policy 374

Monetary Policy 375

Trade Policy 376

13-3 The Small Open Economy Under Fixed Exchange Rates 377 How a Fixed-Exchange-Rate System Works 378

 CASE STUDY The International Gold Standard 379 Fiscal Policy 380

Contents | xvii

Monetary Policy 381

 CASE STUDY Devaluation and the Recovery from the Great Depression 382 Trade Policy 382

Policy in the Mundell–Fleming Model: A Summary 383

13-4 Interest Rate Differentials 384 Country Risk and Exchange-Rate Expectations 384

Differentials in the Mundell–Fleming Model 385

 CASE STUDY International Financial Crisis: Mexico 1994–1995 387  CASE STUDY International Financial Crisis: Asia 1997–1998 388

13-5 Should Exchange Rates Be Floating or Fixed? 389 Pros and Cons of Different Exchange-Rate Systems 389

CASE STUDY The Debate Over the Euro 390 Speculative Attacks, Currency Boards, and Dollarization 392

The Impossible Trinity 393

CASE STUDY The Chinese Currency Controversy 394

13-6 From the Short Run to the Long Run: The Mundell–Fleming Model with a Changing Price Level 395

13-7 A Concluding Reminder 398

Appendix A Short-Run Model of the Large Open Economy 402

Chapter 14 Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment 409

14-1 The Basic Theory of Aggregate Supply 410 The Sticky-Price Model 411

An Alternative Theory: The Imperfect-Information Model 413

 CASE STUDY International Differences in the Aggregate Supply Curve 415 Implications 416

14-2 Inflation, Unemployment, and the Phillips Curve 418 Deriving the Phillips Curve from the Aggregate Supply Curve 418

 FYI The History of the Modern Phillips Curve 420 Adaptive Expectations and Inflation Inertia 420

Two Causes of Rising and Falling Inflation 421

 CASE STUDY Inflation and Unemployment in the United States 421 The Short-Run Tradeoff Between Inflation and Unemployment 423

 FYI How Precise Are Estimates of the Natural Rate of Unemployment? 425 Disinflation and the Sacrifice Ratio 425

Rational Expectations and the Possibility of Painless Disinflation 426

 CASE STUDY The Sacrifice Ratio in Practice 428 Hysteresis and the Challenge to the Natural-Rate Hypothesis 429

14-3 Conclusion 431

Appendix The Mother of all Models 435

xviii | Contents

Part V Topics in Macroeconomic Theory 439

Chapter 15 A Dynamic Model of Economic Fluctuations 439

15-1 Elements of the Model 440 Output: The Demand for Goods and Services 440

The Real Interest Rate: The Fisher Equation 442

Inflation: The Phillips Curve 442

Expected Inflation: Adaptive Expectations 443

The Nominal Interest Rate: The Monetary-Policy Rule 444

 CASE STUDY The Taylor Rule 445

15-2 Solving the Model 447 The Long-Run Equilibrium 449

The Dynamic Aggregate Supply Curve 449

The Dynamic Aggregate Demand Curve 451

The Short-Run Equilibrium 453

15-3 Using the Model 454 Long-Run Growth 454

A Shock to Aggregate Supply 455

A Shock to Aggregate Demand 458

 FYI The Numerical Calibration and Simulation 458 A Shift in Monetary Policy 460

15-4 Two Applications: Lessons for Monetary Policy 463 The Tradeoff Between Output Variability and Inflation Variability 464

 CASE STUDY Different Mandates, Different Realities: The Fed Versus the ECB 466

The Taylor Principle 467

 CASE STUDY What Caused the Great Inflation? 470

15-5 Conclusion: Toward DSGE Models 471

Chapter 16 Understanding Consumer Behavior 475

16-1 John Maynard Keynes and the Consumption Function 476 Keynes’s Conjectures 476

The Early Empirical Successes 477

Secular Stagnation, Simon Kuznets, and the Consumption Puzzle 478

16-2 Irving Fisher and Intertemporal Choice 480 The Intertemporal Budget Constraint 480

 FYI Present Value, or Why a $1,000,000 Prize Is Worth Only $623,000 482 Consumer Preferences 483

Optimization 484

How Changes in Income Affect Consumption 485

Contents | xix

How Changes in the Real Interest Rate Affect Consumption 486

Constraints on Borrowing 487

16-3 Franco Modigliani and the Life-Cycle Hypothesis 489 The Hypothesis 490

Implications 490

 CASE STUDY The Consumption and Saving of the Elderly 493

16-4 Milton Friedman and the Permanent-Income Hypothesis 493 The Hypothesis 494

Implications 495

 CASE STUDY The 1964 Tax Cut and the 1968 Tax Surcharge 496  CASE STUDY The Tax Rebates of 2008 496

16-5 Robert Hall and the Random-Walk Hypothesis 497 The Hypothesis 498

Implications 498

 CASE STUDY Do Predictable Changes in Income Lead to Predictable Changes in Consumption? 499

16-6 David Laibson and the Pull of Instant Gratification 500  CASE STUDY How to Get People to Save More 501

16-7 Conclusion 502

Chapter 17 The Theory of Investment 507

17-1 Business Fixed Investment 508 The Rental Price of Capital 509

The Cost of Capital 510

The Determinants of Investment 512

Taxes and Investment 514

 CASE STUDY Inversions and Corporate Tax Reform 515 The Stock Market and Tobin’s q 517

 CASE STUDY The Stock Market as an Economic Indicator 518 Alternative Views of the Stock Market: The Efficient Markets Hypothesis Versus

Keynes’s Beauty Contest 519

Financing Constraints 521

17-2 Residential Investment 522 The Stock Equilibrium and the Flow Supply 522

Changes in Housing Demand 523

17-3 Inventory Investment 526 Reasons for Holding Inventories 526

How the Real Interest Rate and Credit Conditions Affect Inventory Investment 526

17-4 Conclusion 527

xx | Contents

Part VI Topics in Macroeconomic Policy 531

Chapter 18 Alternative Perspectives on Stabilization Policy 531

18-1 Should Policy Be Active or Passive? 532 Lags in the Implementation and Effects of Policies 533

The Difficult Job of Economic Forecasting 534

 CASE STUDY Mistakes in Forecasting 535 Ignorance, Expectations, and the Lucas Critique 536 The Historical Record 537

 CASE STUDY Is the Stabilization of the Economy a Figment of the Data? 538  CASE STUDY How Does Policy Uncertainty Affect the Economy? 539

18-2 Should Policy Be Conducted by Rule or by Discretion? 541 Distrust of Policymakers and the Political Process 541

The Time Inconsistency of Discretionary Policy 542

 CASE STUDY Alexander Hamilton Versus Time Inconsistency 544 Rules for Monetary Policy 544

 CASE STUDY Inflation Targeting: Rule or Constrained Discretion? 545  CASE STUDY Central-Bank Independence 546

18-3 Conclusion: Making Policy in an Uncertain World 548

Appendix Time Inconsistency and the Tradeoff Between Inflation and Unemployment 551

Chapter 19 Government Debt and Budget Deficits 555

19-1 The Size of the Government Debt 556  CASE STUDY The Troubling Long-Term Outlook for Fiscal Policy 559

19-2 Problems in Measurement 560 Measurement Problem 1: Inflation 561

Measurement Problem 2: Capital Assets 561

Measurement Problem 3: Uncounted Liabilities 562

Measurement Problem 4: The Business Cycle 563

Summing Up 563

19-3 The Traditional View of Government Debt 564  FYI Taxes and Incentives 566

19-4 The Ricardian View of Government Debt 566 The Basic Logic of Ricardian Equivalence 567

Consumers and Future Taxes 568

 CASE STUDY George H. W. Bush’s Withholding Experiment 569  CASE STUDY Why Do Parents Leave Bequests? 571 Making a Choice 571

 FYI Ricardo on Ricardian Equivalence 572

19-5 Other Perspectives on Government Debt 573 Balanced Budgets Versus Optimal Fiscal Policy 573

Contents | xxi

Fiscal Effects on Monetary Policy 574

Debt and the Political Process 575

International Dimensions 575

 CASE STUDY The Benefits of Indexed Bonds 576

19-6 Conclusion 577

Chapter 20 The Financial System: Opportunities and Dangers 581

20-1 What Does the Financial System Do? 582 Financing Investment 582

Sharing Risk 583

Dealing With Asymmetric Information 584

Fostering Economic Growth 586

 CASE STUDY Microfinance: Professor Yunus’s Profound Idea 587

20-2 Financial Crises 588 The Anatomy of a Crisis 588

 FYI The TED Spread 591  CASE STUDY Who Should Be Blamed for the Financial Crisis of 2008–2009? 593 Policy Responses to a Crisis 594

Policies to Prevent Crises 598

 FYI CoCo Bonds 599  CASE STUDY The European Sovereign Debt Crisis 601

20-3 Conclusion 602

Epilogue What We Know, What We Don’t 607

The Four Most Important Lessons of Macroeconomics 607 Lesson 1: In the long run, a country’s capacity to produce goods and services

determines the standard of living of its citizens. 608

Lesson 2: In the short run, aggregate demand influences the amount of goods and services that a country produces. 608

Lesson 3: In the long run, the rate of money growth determines the rate of inflation, but it does not affect the rate of unemployment. 609

Lesson 4: In the short run, policymakers who control monetary and fiscal policy face a tradeoff between inflation and unemployment. 609

The Four Most Important Unresolved Questions of Macroeconomics 610 Question 1: How should policymakers try to promote growth in the

economy’s natural level of output? 610

Question 2: Should policymakers try to stabilize the economy? If so, how? 611

Question 3: How costly is inflation, and how costly is reducing inflation? 613

Question 4: How big a problem are government budget deficits? 614

Conclusion 615

Glossary 617 Index 627

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| xxiii

Preface

An economist must be “mathematician, historian, statesman, philosopher, in some degree . . . as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician.” So remarked John Maynard Keynes, the great British economist who, as much as anyone, could be called the father of macroeconomics. No single statement summarizes better what it means to be an economist.

As Keynes’s assessment suggests, students who aim to learn economics need to draw on many disparate talents. The job of helping students find and develop these talents falls to instructors and textbook authors. My goal for this textbook is to make macroeconomics understandable, relevant, and (believe it or not) fun. Those of us who have chosen to be professional macroeconomists have done so because we are fascinated by the field. More important, we believe that the study of macroeconomics can illuminate much about the world and that the lessons learned, if properly applied, can make the world a better place. I hope this book conveys not only our profession’s accumulated wisdom but also its enthusiasm and sense of purpose.

This Book’s Approach

Macroeconomists share a common body of knowledge, but they do not all have the same perspective on how that knowledge is best taught. Let me begin this new edition by recapping my objectives, which together define this book’s approach to the field.

First, I try to offer a balance between short-run and long-run issues in macro- economics. All economists agree that public policies and other events influence the economy over different time horizons. We live in our own short run, but we also live in the long run that our parents bequeathed us. As a result, courses in macroeconomics need to cover both short-run topics, such as the business cycle and stabilization policy, and long-run topics, such as economic growth, the natural rate of unemployment, persistent inflation, and the effects of government debt. Neither time horizon trumps the other.

Second, I integrate the insights of Keynesian and classical theories. Although Keynes’s General Theory provides the foundation for much of our current under- standing of economic fluctuations, it is important to remember that classical eco- nomics provides the right answers to many fundamental questions. In this book I incorporate many of the contributions of the classical economists before Keynes and the new classical economists of the past several decades. Substantial cover- age is given, for example, to the loanable-funds theory of the interest rate, the quantity theory of money, and the problem of time inconsistency. At the same time, I recognize that many of the ideas of Keynes and the new Keynesians are

xxiv | Preface

necessary for understanding economic fluctuations. Substantial coverage is given also to the IS–LM model of aggregate demand, the short-run tradeoff between inflation and unemployment, and modern models of business cycle dynamics.

Third, I present macroeconomics using a variety of simple models. Instead of pretending that there is one model that is complete enough to explain all facets of the economy, I encourage students to learn how to use and compare a set of prominent models. This approach has the pedagogical value that each model can be kept relatively simple and presented within one or two chapters. More important, this approach asks students to think like economists, who always keep various models in mind when analyzing economic events or public policies.

Fourth, I emphasize that macroeconomics is an empirical discipline, motivated and guided by a wide array of experience. This book contains numerous Case Studies that use macroeconomic theory to shed light on real-world data and events. To highlight the broad applicability of the basic theory, I have drawn the Case Studies both from current issues facing the world’s economies and from dramatic historical episodes. The Case Studies analyze the policies of Alexander Hamilton, Henry Ford, George Bush (both of them!), and Barack Obama. They teach the reader how to apply economic principles to issues from fourteenth- century Europe, the island of Yap, the land of Oz, and today’s newspaper.

What’s New in the Ninth Edition?

Economics instructors are vigilant in keeping their lectures up to date as the economic landscape changes. Textbook authors cannot be less so. This book is therefore updated about every three years. In this ninth edition, you will find several kinds of changes.

Most obviously, tables and figures throughout the book have been revised to include the latest available data. College students take courses in economics to understand the world in which they live. It is important, therefore, that the data presented be as current as possible.

The book has also been updated to take into account recent events and eco- nomic developments. For example:

 In 2013, the Bureau of Economic Analysis revised the definition of GDP to include investment in intellectual property products; a new section in Chapter 2 discusses the change.

 Over the past few years, Bitcoin has arisen as a modern medium of exchange; a new box in Chapter 4 examines this unusual form of money.

 Between 2007 and 2014, the U.S. economy experienced a large decline in labor-force participation; a new case study in Chapter 7 examines the reasons for this development.

 In 2014, U.S. policymakers were concerned about the increasing fre- quency of corporate inversions; a new case study in Chapter 17 discusses the policy debate over inversions and corporate tax reform.

Preface | xxv

 In the wake of the financial crisis of 2008–2009, policymakers are increasingly taking a more macroeconomic perspective on regulating financial institutions; a new section in Chapter 20 discusses macropruden- tial regulation.

In addition, the book reflects the evolution of macroeconomic thought based on recent research. For example:

 A new case study in Chapter 9 discusses work by Nicholas Bloom and John Van Reenen on management practices as a source of productivity differences.

 A new case study in Chapter 11 examines research by Emi Nakamura, Jón Steinsson, and others on the size of the fiscal-policy multipliers.

 A new case study in Chapter 18 discusses work by Scott Baker, Nicholas Bloom, and Steven Davis on economic policy uncertainty.

Perhaps most important, this edition includes a significant pedagogical innovation. In most of the core chapters, some end-of-chapter problems are identified with this icon: . For these problems, students can go to LaunchPad to find a Work It Out tutorial for a similar problem. Because the Work It Out has a similar structure to the in-text problem, it is a resource for students to learn how to tackle the in-text problem. But because the Work It Out has different numbers and thus a different answer, the in-text problem can still be used as assigned homework. The Work It Out tutorials can be found at http://www.macmillanhighered.com/launchpad/mankiw9e.

Finally, very careful readers of this book will notice a subtle change in the use of pronouns. A nagging problem for authors is which pronoun to use for a person of unspecified gender. The traditional “he” sounds sexist to some modern readers, while “he or she” is cumbersome. So, in this edition, I use “she” in odd- numbered chapters and “he” in even-numbered chapters. That will have to do, until we all adopt some more perfect language.

As always, all the changes I made and the many others I considered were evaluated keeping in mind the benefits of brevity. From my own experience as a student, I know that long books are less likely to be read. My goal in this book is to offer the clearest, most up-to-date, most accessible course in macroeconomics in the fewest words possible.

The Arrangement of Topics

My strategy for teaching macroeconomics is first to examine the long run, when prices are flexible, and then to examine the short run, when prices are sticky. This approach has several advantages. First, because the classical dichotomy per- mits the separation of real and monetary issues, the long-run material is easier for students to understand. Second, when students begin studying short-run fluctuations, they understand fully the long-run equilibrium around which the economy is fluctuating. Third, beginning with market-clearing models clarifies

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the link between macroeconomics and microeconomics. Fourth, students learn first the material that is less controversial among macroeconomists. For all these reasons, the strategy of beginning with long-run classical models simplifies the teaching of macroeconomics.

Let’s now move from strategy to tactics. What follows is a whirlwind tour of the book.

Part One, Introduction The introductory material in Part One is brief so that students can get to the core topics quickly. Chapter l discusses the broad questions that macroecono- mists address and the economist’s approach of building models to explain the world. Chapter 2 introduces the key data of macroeconomics, emphasizing gross domestic product, the consumer price index, and the unemployment rate.

Part Two, Classical Theory: The Economy in the Long Run Part Two examines the long run, over which prices are flexible. Chapter 3 presents the basic classical model of national income. In this model, the factors of production and the production technology determine the level of income, and the marginal products of the factors determine its distribution to households. In addition, the model shows how fiscal policy influences the allocation of the economy’s resources among consumption, investment, and government purchases, and it highlights how the real interest rate equilibrates the supply and demand for goods and services.

Money and the price level are introduced next. Chapter 4 examines the mon- etary system and the tools of monetary policy. Chapter 5 begins the discussion of the effects of monetary policy. Because prices are assumed to be fully flexible, the chapter presents the prominent ideas of classical monetary theory: the quantity theory of money, the inflation tax, the Fisher effect, the social costs of inflation, and the causes and costs of hyperinflation.

The study of open-economy macroeconomics begins in Chapter 6. Maintain- ing the assumption of full employment, this chapter presents models to explain the trade balance and the exchange rate. Various policy issues are addressed: the relationship between the budget deficit and the trade deficit, the macroeconomic impact of protectionist trade policies, and the effect of monetary policy on the value of a currency in the market for foreign exchange.

Chapter 7 relaxes the assumption of full employment by discussing the dynamics of the labor market and the natural rate of unemployment. It examines various causes of unemployment, including job search, minimum-wage laws, union power, and efficiency wages. It also presents some important facts about patterns of unemployment.

Part Three, Growth Theory: The Economy in the Very Long Run Part Three makes the classical analysis of the economy dynamic by developing the tools of modern growth theory. Chapter 8 introduces the Solow growth model as a description of how the economy evolves over time. This chapter emphasizes the roles of capital accumulation and population growth. Chapter 9 then adds

Preface | xxvii

technological progress to the Solow model. It uses the model to discuss growth experiences around the world as well as public policies that influence the level and growth of the standard of living. Finally, Chapter 9 introduces students to the modern theories of endogenous growth.

Part Four, Business Cycle Theory: The Economy in the Short Run Part Four examines the short run when prices are sticky. It begins in Chapter 10 by examining some of the key facts that describe short-run fluctuations in eco- nomic activity. The chapter then introduces the model of aggregate supply and aggregate demand as well as the role of stabilization policy. Subsequent chapters refine the ideas introduced in this chapter.

Chapters 11 and 12 look more closely at aggregate demand. Chapter 11 pres- ents the Keynesian cross and the theory of liquidity preference and uses these models as building blocks for developing the IS–LM model. Chapter 12 uses the IS–LM model to explain economic fluctuations and the aggregate demand curve. It concludes with an extended case study of the Great Depression.

The study of short-run fluctuations continues in Chapter 13, which focuses on aggregate demand in an open economy. This chapter presents the Mundell– Fleming model and shows how monetary and fiscal policies affect the economy under floating and fixed exchange-rate systems. It also discusses the debate over whether exchange rates should be floating or fixed.

Chapter 14 looks more closely at aggregate supply. It examines various approaches to explaining the short-run aggregate supply curve and discusses the short-run tradeoff between inflation and unemployment.

Part Five, Topics in Macroeconomic Theory After developing basic theories to explain the economy in the long run and in the short run, the book turns to several topics that refine our understanding of the economy. Part Five focuses on theoretical topics, and Part Six focuses on policy topics. These chapters are written to be used flexibly, so instructors can pick and choose which topics to cover. Some of these chapters can also be cov- ered earlier in the course, depending on the instructor’s preferences.

Chapter 15 develops a dynamic model of aggregate demand and aggregate supply. It builds on ideas that students have already encountered and uses those ideas as stepping-stones to take the student close to the frontier of knowledge concerning short-run economic fluctuations. The model presented here is a simplified version of modern dynamic, stochastic, general equilibrium (DSGE) models.

The next two chapters analyze more fully some of the microeconomic deci- sions behind macroeconomic phenomena. Chapter 16 presents the various theories of consumer behavior, including the Keynesian consumption func- tion, Fisher’s model of intertemporal choice, Modigliani’s life-cycle hypothesis, Friedman’s permanent-income hypothesis, Hall’s random-walk hypothesis, and Laibson’s model of instant gratification. Chapter 17 examines the theory behind the investment function.

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Part Six, Topics in Macroeconomic Policy Once students have solid command of standard macroeconomic models, the book uses these models as the foundation for discussing some of the key debates over economic policy. Chapter 18 considers the debate over how policymakers should respond to short-run economic fluctuations. It emphasizes two broad questions: Should monetary and fiscal policy be active or passive? Should policy be conducted by rule or by discretion? The chapter presents arguments on both sides of these questions.

Chapter 19 focuses on the various debates over government debt and budget deficits. It gives a broad picture about the magnitude of government indebted- ness, discusses why measuring budget deficits is not always straightforward, recaps the traditional view of the effects of government debt, presents Ricardian equiva- lence as an alternative view, and discusses various other perspectives on govern- ment debt. As in the previous chapter, students are not handed conclusions but are given the tools to evaluate the alternative viewpoints on their own.

Chapter 20 discusses the financial system and its linkages to the overall economy. It begins by examining what the financial system does: financing investment, sharing risk, dealing with asymmetric information, and fostering economic growth. It then discusses the causes of financial crises, their macro- economic impact, and the policies that might mitigate their effects and reduce their likelihood.

Epilogue The book ends with a brief epilogue that reviews the broad lessons about which most macroeconomists agree and discusses some of the most important open questions. Regardless of which chapters an instructor chooses to cover, this cap- stone chapter can be used to remind students how the many models and themes of macroeconomics relate to one another. Here and throughout the book, I emphasize that despite the disagreements among macroeconomists, there is much that we know about how the economy works.

Alternative Routes Through the Text

Although I have organized the material in the way that I prefer to teach intermediate-level macroeconomics, I understand that other instructors have different preferences. I tried to keep this in mind as I wrote the book so that it would offer a degree of flexibility. Here are a few ways that instructors might consider rearranging the material:

 Some instructors are eager to cover short-run economic fluctuations. For such a course, I recommend covering Chapters 1 through 5 so that stu- dents are grounded in the basics of classical theory and then jumping to Chapters 10, 11, 12, 14, and 15 to cover the model of aggregate demand and aggregate supply.

 Some instructors are eager to cover long-run economic growth. These instructors can cover Chapters 8 and 9 immediately after Chapter 3.

Preface | xxix

 An instructor who wants to defer (or even skip) open-economy macro- economics can put off Chapters 6 and 13 without loss of continuity.

 An instructor who wants to emphasize economic policy can skip Chapters 8, 9, 15, 16, and 17 in order to get to Chapters 18, 19, and 20 more quickly.

The successful experiences of hundreds of instructors with previous editions suggest this text complements well a variety of approaches to the field.

Learning Tools

I am pleased that students have found the previous editions of this book user-friendly. I have tried to make this ninth edition even more so. I am most excited about the parallel problems that students can see in LaunchPad’s Work It Out feature.

Case Studies Economics comes to life when it is applied to understanding actual events. There- fore, the numerous Case Studies (many new or revised in this edition) are an impor- tant learning tool, integrated closely with the theoretical material presented in each chapter. The frequency with which these Case Studies occur ensures that a student does not have to grapple with an overdose of theory before seeing the theory applied. Students report that the Case Studies are their favorite part of the book.

FYI Boxes These boxes present ancillary material “for your information.” I use these boxes to clarify difficult concepts, to provide additional information about the tools of economics, and to show how economics relates to our daily lives. Several are new or revised in this edition.

Graphs Understanding graphical analysis is a key part of learning macroeconomics, and I have worked hard to make the figures easy to follow. I often use comment boxes within figures to briefly describe and draw attention to the important points that the figures illustrate. The pedagogical use of color, detailed captions, and com- ment boxes makes it easier for students to learn and review the material.

Mathematical Notes I use occasional mathematical footnotes to keep more difficult material out of the body of the text. These notes make an argument more rigorous or present a proof of a mathematical result. They can easily be skipped by those students who have not been introduced to the necessary mathematical tools.

Chapter Summaries Every chapter ends with a brief, nontechnical summary of its major lessons. Stu- dents can use the summaries to place the material in perspective and to review for exams.

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Key Concepts Learning the language of a field is a major part of any course. Within the chapter, each key concept is in boldface when it is introduced. At the end of the chapter, the key concepts are listed for review.

Questions for Review After studying a chapter, students can immediately test their understanding of its basic lessons by answering the Questions for Review.

Problems and Applications Every chapter includes Problems and Applications designed for homework assign- ments. Some are numerical applications of the theory in the chapter. Others encourage the student to go beyond the material in the chapter by addressing new issues that are closely related to the chapter topics. In most of the core chapters, a few problems are identified with this icon: . For each of these prob- lems, students can find a Work It Out tutorial on LaunchPad for Macroeconomics, Ninth Edition: http://www.macmillanhighered.com/launchpad/mankiw9e.

Chapter Appendices Several chapters include appendices that offer additional material, sometimes at a higher level of mathematical sophistication. These appendices are designed so that instructors can cover certain topics in greater depth if they wish. The appen- dices can be skipped altogether without loss of continuity.

Glossary To help students become familiar with the language of macroeconomics, a glos- sary of more than 250 terms is provided at the back of the book.

International Editions

The English-language version of this book has been used in dozens of countries. To make the book more accessible for students around the world, editions are (or will soon be) available in 15 other languages: Armenian, Chinese, French, German, Greek, Hungarian, Indonesian, Italian, Japanese, Korean, Portuguese, Romanian, Russian, Spanish, and Ukrainian. In addition, a Canadian adaptation coauthored with William Scarth (McMaster University) and a European adaptation coauthored with Mark Taylor (University of Warwick) are available. Instructors who would like information about these versions of the book should contact Worth Publishers.

Acknowledgments

Since I started writing the first edition of this book, I have benefited from the input of many reviewers and colleagues in the economics profession. Now that the book is in its ninth edition, these people are too numerous to list in their entirety. However, I continue to be grateful for their willingness to have given up their scarce time to help

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Preface | xxxi

me improve the economics and pedagogy of this text. Their advice has made this book a better teaching tool for hundreds of thousands of students around the world.

I would like to mention the instructors whose recent input shaped this new edition.

Dale Deboer University of Colorado–Colorado Springs

Brian Dempsey Syracuse University

Reid Click George Washington University

Alex Gialanella Fordham University

William Hauk University of South Carolina

Paul Johnson Vassar College

Bryce Kanago University of Northern Iowa

John Keating University of Kansas

Sukanya Kemp University of Akron

Mikhail Melnik Southern Polytechnic State University

Carlos Liard-Muriente Central Connecticut State University

Robert Murphy Boston College

John Neri University of Maryland

Jasminka Ninkovic Emory University

Andrew Paizis New York University

Benjamin Russo University of North Carolina– Charlotte

Mikael Sandberg Flagler College

David Spencer Brigham Young University

Liliana Stern Auburn University

Henry Terrell George Washington University

A special shout-out goes to my frequent collaborator Ricardo Reis of Columbia University. Ricardo was enormously helpful in suggesting new topics and research references for this edition. In addition, I am grateful to Tina Liu, a student at Harvard, who helped me update the data, refine my prose, and proofread the entire book.

The people at Worth Publishers have continued to be congenial and dedicated. I would like to thank Catherine Woods, Vice President, Content Management, and Media Production; Charles Linsmeier, Vice President, Editorial, Sciences, and Social Sciences; Shani Fisher, Publisher; Tom Digiano, Marketing Manager; Paul Shensa, Consulting Editor; Tom Acox, Digital Solutions Manager; Lukia Kliossis, Media Editor; Lisa Kinne, Managing Editor; Tracey Kuehn, Director, Content Manage- ment Enhancement; Julio Espin, Project Editor; Paul Rohloff, Senior Production Supervisor; Barbara Seixas, Production Manager; Diana Blume, Director of Design, Content Management; Deborah Heimann, Copyeditor; Edgar Doolan, Supplements Project Editor; and Stacey Alexander, Supplements Production Manager.

Many other people made valuable contributions as well. Most important, Jane Tufts, freelance developmental editor, worked her magic on this book once again, confirm- ing that she’s the best in the business. Alexandra Nickerson did a great job preparing the index. Deborah Mankiw, my wife and in-house editor, continued to be the first reader of new material, providing the right mix of criticism and encouragement.

Finally, I would like to thank my three children, Catherine, Nicholas, and Peter. They helped immensely with this revision—both by providing a pleasant distrac- tion and by reminding me that textbooks are written for the next generation.

March 2015

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Supplements and Media LaunchPad logo suite 1

Resources for Students and Instructors http://www.macmillanhighered.com/launchpad/mankiw9e

Our new coursespace, LaunchPad, combines an interactive e-Book with high-quality multimedia content and ready-made assessment options, including LearningCurve adaptive quizzing. Prebuilt curated units are easy to assign or adapt with your own material, such as readings, videos, quizzes, and discussion groups. LaunchPad also provides access to a gradebook that provides a clear window on performance for the whole class, for individual students, and for individual assignments.

Worth Publishers has worked closely with Greg Mankiw and a team of talented economics instructors to put together a variety of resources to aid instructors and students. We have been delighted at the positive feedback we have received on these supplements.

For Students

LearningCurve is an adaptive quizzing engine that automatically adjusts questions to a student’s mastery level. With LearningCurve activities, each student follows a unique path to understanding the material. The more questions a student answers correctly, the more difficult the questions become. Each question is written specifically for the text and is linked to the relevant e-Book section. LearningCurve also provides a personal study plan for students as well as complete metrics for instructors. Proven to raise student performance, LearningCurve serves as an ideal formative assessment and learning tool. For detailed information, visit http://learningcurveworks.com.

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NEW Work It Out Tutorials New to this edition, these tutorials guide students through the process of apply- ing economic analysis to solve a problem similar to the end-of-chapter problems found in the text. Choice-specific feedback and video explanations provide stu- dents with interactive assistance for each step of the problem.

Macro Models These modules provide simulations of the models presented in the book. Stu- dents can change the exogenous variables and see the outcomes in terms of shift- ing curves and recalculated numerical values of the endogenous variables. Each module contains exercises that instructors can assign as homework.

Fed Chairman Game Created by the Federal Reserve Bank of San Francisco, this game allows students to become Chairman of the Fed and to make macroeconomic policy decisions based on news events and economic statistics. It gives students a sense of the complex interconnections that influence the economy. It is also fun to play.

Flashcards Students can test their knowledge of the definitions in the glossary with these virtual flashcards.

For Instructors

Instructor’s Resource Manual Robert G. Murphy (Boston College) has revised the impressive resource manual for instructors. For each chapter of this book, the manual contains notes to the instruc- tor, a detailed lecture outline, additional case studies, and coverage of advanced top- ics. Instructors can use the manual to prepare their lectures, and they can reproduce whatever pages they choose as handouts for students. Each chapter also contains a Dismal Scientist Activity (www.dismalscientist.com), which challenges students to combine the chapter knowledge with a high-powered business database and analysis service that offers real-time monitoring of the global economy.

Solutions Manual Nora Underwood (University of Central Florida) has updated the Solutions Manual for all the Questions for Review and Problems and Applications found in the text.

Test Bank The Test Bank has been revised for the ninth edition so that it now includes over 2,500 multiple-choice questions, numerical problems, and short-answer graphi- cal questions to accompany each chapter of the text. The Test Bank provides a wide range of questions appropriate for assessing students’ comprehension, inter- pretation, analysis, and synthesis skills.

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Lecture Slides Ron Cronovich (Carthage College) has revised his lecture slides of the mate- rial in each chapter. They feature animated graphs with careful explanations and additional case studies, data, and helpful notes to the instructor. Designed to be customized or used as they are, they include easy directions for instructors who have little experience with PowerPoint.

Graphing Questions As a further question bank for instructors building assignments and tests, the elec- tronically gradable graphing problems utilize our own robust graphing engine. In these problems, students will be asked to draw their response to a question, and the software will automatically grade that response. Graphing questions are tagged to appropriate textbook sections and range in difficulty level and skill.

Practice and Graded Homework Assignments Each LaunchPad unit contains prebuilt assignments, providing instructors with a curated set of multiple-choice and graphing questions that can be easily assigned for practice or graded assessment.

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Additional Online Offerings

Worth/Aplia courses are all available with digital textbooks, interactive assign- ments, and detailed feedback. With Aplia, you retain complete control of and flexibility for your course. You choose the content you want students to cover, and you decide how to organize it. You decide whether online activities are prac- tice (ungraded or graded). For a preview of Aplia materials and to learn more, visit http://www.aplia.com/economics/

The integrated online version of the Aplia media and the Mankiw text includes the following items:

 Extra problem sets (derived from in-chapter questions in the book) suit- able for homework and keyed to specific topics from each chapter

 Regularly updated news analyses

 Real-time online simulations of market interactions

 Interactive tutorials to assist with math and graphing

 Instant online reports that allow instructors to target student trouble areas more efficiently

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When Albert Einstein made the above observation about the nature of science, he was probably referring to physics, chemistry, and other natural sciences. But the statement is equally true when applied to social sciences like economics. As a participant in the economy, and as a citizen in a democracy, you cannot help but think about economic issues as you go about your life or when you enter the voting booth. But if you are like most people, your everyday thinking about economics has probably been casual rather than rigorous (or at least it was before you took your first economics course). The goal of studying economics is to refine that thinking. This book aims to help you in that endeavor, focusing on the part of the field called macroeconomics, which studies the forces that influence the economy as a whole.

1-1 What Macroeconomists Study

Why have some countries experienced rapid growth in incomes over the past century while others have stayed mired in poverty? Why do some countries have high rates of inflation while others maintain stable prices? Why do all countries experience recessions and depressions—recurrent periods of falling incomes and rising unemployment—and how can government policy reduce the frequency and severity of these episodes? Macroeconomics attempts to answer these and many related questions.

To appreciate the importance of macroeconomics, you need only head over to some online news Web site. Every day you can see headlines such as INCOME GROWTH REBOUNDS, FED MOVES TO COMBAT INFLATION, or STOCKS FALL AMID RECESSION FEARS. These macroeconomic events may seem abstract, but they touch all of our lives. Business executives forecasting the demand for their products must guess how fast consumers’ incomes will grow. Senior citizens living on fixed incomes wonder how fast prices will rise. Recent college graduates looking for jobs hope that the economy will boom and that firms will be hiring.

The Science of Macroeconomics

The whole of science is nothing more than the refinement of everyday thinking.

—Albert Einstein

1C H A P T E R

1

2 |  P A R T I   Introduction

Because the state of the economy affects everyone, macroeconomic issues play a central role in national political debates. Voters are aware of how the economy is doing, and they know that government policy can affect the economy in powerful ways. As a result, the popularity of an incumbent president often rises when the economy is doing well and falls when it is doing poorly.

Macroeconomic issues are also central to world politics, and the international news is filled with macroeconomic questions. Was it a good move for much of Europe to adopt a common currency? Should China maintain a fixed exchange rate against the U.S. dollar? Why is the United States running large trade deficits? How can poor nations raise their standards of living? When world leaders meet, these topics are often high on their agenda.

Although the job of making economic policy belongs to world leaders, the job of explaining the workings of the economy as a whole falls to macroecono- mists. Toward this end, macroeconomists collect data on incomes, prices, unem- ployment, and many other variables from different time periods and different countries. They then attempt to formulate general theories to explain these data. Like astronomers studying the evolution of stars or biologists studying the evolution of species, macroeconomists cannot conduct controlled experiments in a laboratory. Instead, they must make use of the data that history gives them. Macroeconomists observe that economies differ across countries and that they change over time. These observations provide both the motivation for develop- ing macroeconomic theories and the data for testing them.

To be sure, macroeconomics is an imperfect science. The macroeconomist’s ability to predict the future course of economic events is no better than the meteorologist’s ability to predict next month’s weather. But, as you will see, mac- roeconomists know quite a lot about how economies work. This knowledge is useful both for explaining economic events and for formulating economic policy.

Every era has its own economic problems. In the 1970s, Presidents Richard Nixon, Gerald Ford, and Jimmy Carter all wrestled in vain with a rising rate of inflation. In the 1980s, inflation subsided, but Presidents Ronald Reagan and George H. W. Bush presided over large federal budget deficits. In the 1990s, with President Bill Clinton in the Oval Office, the economy and stock market enjoyed a remarkable boom, and the federal budget turned from deficit to surplus. As Clinton left office, however, the stock market was in retreat, and the economy was heading into recession. In 2001 President George W. Bush reduced taxes to help end the recession, but the tax cuts contributed to a reemergence of budget deficits.

President Barack Obama moved into the White House in 2009 during a period of heightened economic turbulence. The economy was reeling from a financial crisis, driven by a large drop in housing prices, a steep rise in mortgage defaults, and the bankruptcy or near-bankruptcy of many financial institutions. As the financial crisis spread, it raised the specter of the Great Depression of the 1930s, when in its worst year one out of four Americans who wanted to work could not find a job. In 2008 and 2009, officials in the Treasury, Federal Reserve, and other parts of government acted vigorously to prevent a recurrence of that outcome. And while they succeeded—the unemployment rate peaked at 10 percent—the downturn was nonetheless severe, the subsequent recovery was painfully slow, and the policies enacted left a legacy of greatly expanded government debt.

C H A P T E R 1 The Science of Macroeconomics | 3

Macroeconomic history is not a simple story, but it provides a rich motivation for macroeconomic theory. While the basic principles of macroeconomics do not change from decade to decade, the macroeconomist must apply these principles with flexibility and creativity to meet changing circumstances.

CASE STUDY

The Historical Performance of the U.S. Economy

Economists use many types of data to measure the performance of an economy. Three macroeconomic variables are especially important: real gross domestic product (GDP), the inflation rate, and the unemployment rate. Real GDP measures the total income of everyone in the economy (adjusted for the level of prices). The inflation rate measures how fast prices are rising. The unemployment rate measures the fraction of the labor force that is out of work. Macroeconomists study how these variables are determined, why they change over time, and how they interact with one another.

Figure 1-1 shows real GDP per person in the United States. Two aspects of this figure are noteworthy. First, real GDP grows over time. Real GDP per person

Real GDP per Person in the U.S. Economy Real GDP measures the total income of everyone in the economy, and real GDP per person measures the income of the average person in the economy. This figure shows that real GDP per person tends to grow over time and that this normal growth is sometimes interrupted by periods of declining income, called recessions or depressions.

Note: Real GDP is plotted here on a logarithmic scale. On such a scale, equal distances on the vertical axis represent equal percentage changes. Thus, the distance between $5,000 and $10,000 (a 100 percent change) is the same as the distance between $10,000 and $20,000 (a 100 percent change). Data from: U.S. Department of Commerce, Economic History Association.

World War I

Great Depression

World War II

Korean War

Vietnam War

First oil-price shock Second oil-price

shock

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990

50,000

10,000

5,000

40,000

Year 2000 2010

Real GDP per person (2009 dollars)

9/11 terrorist attack

Financial crisis

20,000

FIGURE 1-1

4 |  P A R T I   Introduction

FIGURE 1-2

The Inflation Rate in the U.S. Economy The inflation rate measures the percent- age change in the average level of prices from the year before. When the inflation rate is above zero, prices are rising. When it is below zero, prices are falling. If the inflation rate declines but remains positive, prices are rising but at a slower rate.

Note: The inflation rate is measured here using the GDP deflator. Data from: U.S. Department of Commerce, Economic History Association

1900

Percent

Inflation

Deflation

1910 1920 1930 1940 Year

1950 1960 1970 1980 1990 2000 2010 –20

–15

–10

–5

0

5

10

15

20

25

30 World War I

Great Depression

World War II

Korean War

Vietnam War

First oil-price shock Second oil-price shock

9/11 terrorist attack

Financial crisis

today is about eight times higher than it was in 1900. This growth in average income allows us to enjoy a much higher standard of living than our great- grandparents did. Second, although real GDP rises in most years, this growth is not steady. There are repeated periods during which real GDP falls, the most dramatic instance being the early 1930s. Such periods are called recessions if they are mild and depressions if they are more severe. Not surprisingly, periods of declining income are associated with substantial economic hardship.

Figure 1-2 shows the U.S. inflation rate. You can see that inflation varies substan- tially over time. In the first half of the twentieth century, the inflation rate averaged only slightly above zero. Periods of falling prices, called deflation, were almost as common as periods of rising prices. By contrast, inflation has been the norm dur- ing the past half century. Inflation became most severe during the late 1970s, when prices rose at a rate of almost 10 percent per year. In recent years, the inflation rate has been about 2 percent per year, indicating that prices have been fairly stable.

Figure 1-3 shows the U.S. unemployment rate. Notice that there is always some unemployment in the economy. In addition, although the unemployment rate has no long-term trend, it varies substantially from year to year. Recessions

C H A P T E R 1 The Science of Macroeconomics | 5

1-2 How Economists Think

Economists often study politically charged issues, but they try to address these issues with a scientist’s objectivity. Like any science, economics has its own set of tools—terminology, data, and a way of thinking—that can seem foreign and arcane to the layman. The best way to become familiar with these tools is to practice using them, and this book affords you ample opportunity to do so. To make these tools less forbidding, however, let’s discuss a few of them here.

FIGURE 1-3

The Unemployment Rate in the U.S. Economy The unemployment rate measures the percentage of people in the labor force who do not have jobs. This figure shows that the economy always has some unemployment and that the amount fluctuates from year to year.

Data from: U.S. Department of Labor, U.S. Census Bureau.

1900 1910

World War I

Great Depression

World War II

Korean War

Vietnam War

First oil-price shock Second oil-price shock

1920 1930 1940 Year

1950 1960 1970 1980 1990 2000

9/11 terrorist attack

Financial crisis

2010 0

5

10

15

20

25

Percent unemployed

and depressions are associated with unusually high unemployment. The high- est rates of unemployment were reached during the Great Depression of the 1930s. The worst economic downturn since the Great Depression occurred in the aftermath of the financial crisis of 2008–2009, when unemployment rose substantially. Even several years after the crisis, unemployment remained high.

These three figures offer a glimpse at the history of the U.S. economy. In the chapters that follow, we first discuss how these variables are measured and then develop theories to explain how they behave. n

6 |  P A R T I   Introduction

Theory as Model Building

Young children learn much about the world around them by playing with toy versions of real objects. For instance, they often put together models of cars, trains, or planes. These models are far from realistic, but the model-builder learns a lot from them nonetheless. The model illustrates the essence of the real object it is designed to resemble. (In addition, for many children, building models is fun.)

Economists also use models to understand the world, but an economist’s model is more likely to be made of symbols and equations than plastic and glue. Economists build their “toy economies” to help explain economic variables, such as GDP, inflation, and unemployment. Economic models illustrate, often in mathematical terms, the relationships among the variables. Models are useful because they help us dispense with irrelevant details and focus on underlying connections. (In addition, for many economists, building models is fun.)

Models have two kinds of variables: endogenous variables and exogenous vari- ables. Endogenous variables are those variables that a model tries to explain. Exogenous variables are those variables that a model takes as given. The pur- pose of a model is to show how the exogenous variables affect the endogenous variables. In other words, as Figure 1-4 illustrates, exogenous variables come from outside the model and serve as the model’s input, whereas endogenous variables are determined within the model and are the model’s output.

To make these ideas more concrete, let’s review the most celebrated of all economic models—the model of supply and demand. Imagine that an economist wants to figure out what factors influence the price of pizza and the quantity of pizza sold. She would develop a model that described the behavior of pizza buyers, the behavior of pizza sellers, and their interaction in the market for pizza. For example, the economist supposes that the quantity of pizza demanded by consumers Qd depends on the price of pizza P and on aggregate income Y. This relationship is expressed in the equation

Qd 5 D(P, Y ),

where D( ) represents the demand function. Similarly, the economist supposes that the quantity of pizza supplied by pizzerias Q s depends on the price of pizza

FIGURE 1-4

Endogenous VariablesModelExogenous Variables

How Models Work Models are simplified theories that show the key relationships among economic variables. The exogenous variables are those that come from outside the model. The endogenous variables are those that the model explains. The model shows how changes in the exogenous variables affect the endogenous variables.

C H A P T E R 1 The Science of Macroeconomics | 7

P and on the price of materials Pm, such as cheese, tomatoes, flour, and anchovies. This relationship is expressed as

Q s 5 S(P, Pm),

where S( ) represents the supply function. Finally, the economist assumes that the price of pizza adjusts to bring the quantity supplied and quantity demanded into balance:

Q s 5 Qd.

These three equations compose a model of the market for pizza. The economist illustrates the model with a supply-and-demand diagram, as in

Figure 1-5. The demand curve shows the relationship between the quantity of pizza demanded and the price of pizza, holding aggregate income constant. The demand curve slopes downward because a higher price of pizza encourages consumers to buy less pizza and switch to, say, hamburgers and tacos. The supply curve shows the relationship between the quantity of pizza supplied and the price of pizza, holding the price of materials constant. The supply curve slopes upward because a higher price of pizza makes selling pizza more profitable, which encourages pizzerias to produce more of it. The equilibrium for the market is the price and quantity at which the supply and demand curves intersect. At the equilibrium price, consum- ers choose to buy the amount of pizza that pizzerias choose to produce.

This model of the pizza market has two exogenous variables and two endog- enous variables. The exogenous variables are aggregate income and the price of

Supply

Demand

Price of pizza, P

Quantity of pizza, Q

Equilibrium price

Equilibrium quantity

Market equilibrium

FIGURE 1-5

The Model of Supply and Demand The most famous economic model is that of supply and demand for a good or service—in this case, pizza. The demand curve is a downward- sloping curve relating the price of pizza to the quantity of pizza that consumers demand. The supply curve is an upward- sloping curve relating the price of pizza to the quan- tity of pizza that pizzerias supply. The price of pizza adjusts until the quantity supplied equals the quantity demanded. The point where the two curves cross is the market equilibrium, which shows the equilibrium price of pizza and the equilibrium quantity of pizza.

8 |  P A R T I   Introduction

materials. The model does not attempt to explain them but instead takes them as given (perhaps to be explained by another model). The endogenous variables are the price of pizza and the quantity of pizza exchanged. These are the variables that the model attempts to explain.

The model can be used to show how a change in one of the exogenous variables affects both endogenous variables. For example, if aggregate income increases, then the demand for pizza increases, as in panel (a) of Figure 1-6. The model shows that both the equilibrium price and the equilibrium quan- tity of pizza rise. Similarly, if the price of materials increases, then the supply of pizza decreases, as in panel (b) of Figure 1-6. The model shows that in this case the equilibrium price of pizza rises and the equilibrium quantity of pizza falls.

Price of pizza, P

D2

D1

Q1 Q2

P1

P2

S

Quantity of pizza, Q

S2

S1

Q1Q2

P2

P1

D

Price of pizza, P

Quantity of pizza, Q

(a) A Shift in Demand

(b) A Shift in Supply

FIGURE 1-6

Changes in Equilibrium In panel (a), a rise in aggregate income causes the demand for pizza to increase: at any given price, consumers now want to buy more pizza. This is represented by a rightward shift in the demand curve from D1 to D2. The market moves to the new intersec- tion of supply and demand. The equilibrium price rises from P1 to P2, and the equilibrium quantity of pizza rises from Q1 to Q2. In panel (b), a rise in the price of materials decreases the supply of pizza: at any given price, pizzerias find that the sale of pizza is less profitable and therefore choose to produce less pizza. This is represented by a leftward shift in the sup- ply curve from S1 to S2. The market moves to the new intersection of supply and demand. The equilibrium price rises from P1 to P2, and the equilibrium quan- tity falls from Q1 to Q2.

C H A P T E R 1 The Science of Macroeconomics | 9

Thus, the model shows how changes either in aggregate income or in the price of materials affect price and quantity in the market for pizza.

Like all models, this model of the pizza market makes simplifying assumptions. The model does not take into account, for example, that every pizzeria is in a different location. For each customer, one pizzeria is more convenient than the others, and thus pizzerias have some ability to set their own prices. The model assumes that there is a single price for pizza, but in fact there could be a different price at every pizzeria.

How should we react to the model’s lack of realism? Should we discard the simple model of pizza supply and demand? Should we attempt to build a more complex model that allows for diverse pizza prices? The answers to these ques- tions depend on our purpose. If our goal is to explain how the price of cheese affects the average price of pizza and the amount of pizza sold, then the diversity of pizza prices is probably not important. The simple model of the pizza market does a good job of addressing that issue. Yet if our goal is to explain why towns with ten pizzerias have lower pizza prices than towns with only two, the simple model is less useful.

The art in economics lies in judging when a simplifying assumption (such as assuming a single price of pizza) clarifies our thinking and when it misleads us.

All economic models express relationships among economic variables. Often, these relationships are expressed as functions. A function is a math- ematical concept that shows how one variable depends on a set of other variables. For example, in the model of the pizza market, we said that the quantity of pizza demanded depends on the price of pizza and on aggregate income. To express this, we use functional notation to write

Qd 5 D(P, Y).

This equation says that the quantity of pizza demanded Q d is a function of the price of pizza P and aggregate income Y. In functional notation, the variable preceding the parentheses denotes the function. In this case, D( ) is the func- tion expressing how the variables in parentheses determine the quantity of pizza demanded.

If we knew more about the pizza market, we could give a numerical formula for the quantity of pizza demanded. For example, we might be able to write

Qd 5 60 2 10P 1 2Y.

Using Functions to Express Relationships Among Variables

In this case, the demand function is

D(P, Y ) 5 60 2 10P 1 2Y.

For any price of pizza and aggregate income, this function gives the corresponding quantity of pizza demanded. For example, if aggregate income is $10 and the price of pizza is $2, then the quantity of pizza demanded is 60 pies; if the price of pizza rises to $3, the quantity of pizza demanded falls to 50 pies.

Functional notation allows us to express the general idea that variables are related, even when we do not have enough information to indicate the precise numerical relationship. For example, we might know that the quantity of pizza demanded falls when the price rises from $2 to $3, but we might not know by how much it falls. In this case, functional notation is useful: as long as we know that a relationship among the variables exists, we can express that relationship using functional notation.

F Y I

10 |  P A R T I   Introduction

Simplification is a necessary part of building a useful model: any model con- structed to be completely realistic would be too complicated for anyone to understand. Yet if models assume away features of the economy that are crucial to the issue at hand, they may lead us to conclusions that do not hold in the real world. Economic modeling therefore requires care and common sense.

The Use of Multiple Models

Macroeconomists study many facets of the economy. For example, they examine the role of saving in economic growth, the impact of minimum-wage laws on unemployment, the effect of inflation on interest rates, and the influence of trade policy on the trade balance and exchange rate.

Economists use models to address all of these issues, but no single model can answer every question. Just as carpenters use different tools for different tasks, economists use different models to explain different economic phenomena. Students of macroeconomics therefore must keep in mind that there is no single “correct” model that is always applicable. Instead, there are many models, each of which is useful for shedding light on a different facet of the economy. The field of macroeconomics is like a Swiss army knife—a set of comple- mentary but distinct tools that can be applied in different ways in different circumstances.

This book presents many different models that address different questions and make different assumptions. Remember that a model is only as good as its assumptions and that an assumption that is useful for some purposes may be misleading for others. When using a model to address a question, the economist must keep in mind the underlying assumptions and judge whether they are rea- sonable for studying the matter at hand.

Prices: Flexible Versus Sticky

Throughout this book, one group of assumptions will prove especially important— those concerning the speed at which wages and prices adjust to changing economic conditions. Economists normally presume that the price of a good or a service moves quickly to bring quantity supplied and quantity demanded into balance. In other words, they assume that markets are normally in equilibrium, so the price of any good or service is found where the supply and demand curves intersect. This assumption, called market clearing, is central to the model of the pizza market discussed earlier. For answering most questions, economists use market-clearing models.

Yet the assumption of continuous market clearing is not entirely realistic. For markets to clear continuously, prices must adjust instantly to changes in supply and demand. In fact, many wages and prices adjust slowly. Labor contracts often set wages for up to three years. Many firms leave their product prices the same for long periods of time—for example, magazine publishers typically change their newsstand prices only every three or four years. Although market-clearing

C H A P T E R 1 The Science of Macroeconomics | 11

models assume that all wages and prices are flexible, in the real world some wages and prices are sticky.

The apparent stickiness of prices does not make market-clearing models use- less. After all, prices are not stuck forever; eventually, they adjust to changes in supply and demand. Market-clearing models might not describe the economy at every instant, but they do describe the equilibrium toward which the economy gravitates. Therefore, most macroeconomists believe that price flexibility is a good assumption for studying long-run issues, such as the growth in real GDP that we observe from decade to decade.

For studying short-run issues, such as year-to-year fluctuations in real GDP and unemployment, the assumption of price flexibility is less plausible. Over short periods, many prices in the economy are fixed at predetermined levels. Therefore, most macroeconomists believe that price stickiness is a better assump- tion for studying the short-run behavior of the economy.

Microeconomic Thinking and Macroeconomic Models

Microeconomics is the study of how households and firms make decisions and how these decisionmakers interact in the marketplace. A central principle of microeconomics is that households and firms optimize—they do the best they can for themselves given their objectives and the constraints they face. In micro- economic models, households choose their purchases to maximize their level of satisfaction, which economists call utility, and firms make production decisions to maximize their profits.

Because economy-wide events arise from the interaction of many households and firms, macroeconomics and microeconomics are inextricably linked. When we study the economy as a whole, we must consider the decisions of individual economic actors. For example, to understand what determines total consumer spending, we must think about a family deciding how much to spend today and how much to save for the future. To understand what determines total investment spending, we must think about a firm deciding whether to build a new factory. Because aggregate variables are the sum of the variables describing many individual decisions, macroeconomic theory rests on a microeconomic foundation.

Although microeconomic decisions underlie all economic models, in many models the optimizing behavior of households and firms is implicit rather than explicit. The model of the pizza market we discussed earlier is an example. Households’ decisions about how much pizza to buy underlie the demand for pizza, and pizzerias’ decisions about how much pizza to produce underlie the supply of pizza. Presumably, households make their decisions to maximize utility, and pizzerias make their decisions to maximize profit. Yet the model does not focus on how these microeconomic decisions are made; instead, it leaves these decisions in the background. Similarly, although microeconomic decisions underlie macroeconomic phenomena, macroeconomic models do not neces- sarily focus on the optimizing behavior of households and firms; again, they sometimes leave that behavior in the background.

12 |  P A R T I   Introduction

The Nobel Prize in economics is announced every October. Over the years, many winners have been macroeconomists. Here are a few of them, along with some of their own words about how they chose their career paths:

Milton Friedman (Nobel 1976): “I graduated from college in 1932, when the United States was at the bottom of the deepest depression in its history before or since. The dominant problem of the time was economics. How to get out of the depression? How to reduce unemployment? What explained the paradox of great need on the one hand and unused resources on the other? Under the circumstances, becoming an econo- mist seemed more relevant to the burning issues of the day than becoming an applied mathemati- cian or an actuary.”

James Tobin (Nobel 1981): “I was attracted to the field for two reasons. One was that economic theory is a fascinating intellectual challenge, on the order of mathematics or chess. I liked analytics and logical argument. . . . The other reason was the obvious relevance of economics to understanding and perhaps overcoming the Great Depression.”

Franco Modigliani (Nobel 1985): “For a while it was thought that I should study medicine because my father was a physician. . . . I went to the registration window to sign up for medicine, but then I closed my eyes and thought of blood! I got pale just thinking about blood and decided under those conditions I had better keep away from medicine. . . . Casting about for something to do, I happened to get into some economics activities. I knew some German and was asked to translate from German into Italian some articles for one of the trade associations. Thus I began to be exposed to the economic problems that were in the German literature.”

Robert Solow (Nobel 1987): “I came back [to college after being in the army] and, almost without thinking about it, signed up to finish my undergraduate degree as an economics major. The time was such that I had to make a decision in a hurry. No doubt I acted as if I were maximizing

Nobel Macroeconomists an infinite discounted sum of one-period utilities, but you couldn’t prove it by me. To me it felt as if I were saying to myself: ‘What the hell.’”

Robert Lucas (Nobel 1995): “In public school science was an unending and not very well organized list of things other people had discov- ered long ago. In college, I learned something about the process of scientific discovery, but what I learned did not attract me as a career possibility. . . . What I liked thinking about were politics and social issues.”