Instructor's Resources - Boston College

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Instructor’s Resources for use with

MACROECONOMICS NINTH EDITION

N. GREGORY MANKIW

Robert G. Murphy Boston College

WORTH PUBLISHERS

Instructor’s Resources by Robert G. Murphy for use with Mankiw: Macroeconomics, Ninth Edition

© 2016 2013, 2010, 2007, 2003, 2000, 1997, 1994 by Worth Publishers All rights reserved. The contents, or parts thereof, may be reproduced for use with Macroeconomics, Ninth Edition, by N. Gregory Mankiw as described in the Preface to the Instructor’s Resources, but may not be reproduced in any form for any other purpose without prior written permission of the publisher.

ISBN 13: 978-1-4641-2314-6 ISBN 10: 1-4641-2314-4 First Printing 2015 Printed in the United States of America

Worth Publishers 41 Madison Avenue New York, NY 10010 wortheconomics.com

Contents Preface Chapter Supplements

v vii

CHAPTER 1 The Science of Macroeconomics

1

Notes to the Instructor Lecture Notes Chapter Supplements

1 3 7

CHAPTER 2 The Data of Macroeconomics

15

Notes to the Instructor Lecture Notes Chapter Supplements

15 17 24

CHAPTER 3 National Income: Where It Comes From and Where It Goes

49

CHAPTER 4 The Monetary System: What It Is and How It Works

73

Notes to the Instructor Lecture Notes Chapter Supplements

73 74 81

CHAPTER 5 Inflation: Its Causes, Effects, and Social Costs

87

Notes to the Instructor Lecture Notes Chapter Supplements

87 89 98

Notes to the Instructor Lecture Notes Chapter Supplements

49 51 59

CHAPTER 6 The Open Economy

123

CHAPTER 7 Unemployment

145

CHAPTER 8 Economic Growth I: Capital Accumulation and Population Growth

179

CHAPTER 9 Economic Growth II: Technology, Empirics, and Policy

207

CHAPTER 10

233

Notes to the Instructor Lecture Notes Chapter Supplements

Notes to the Instructor Lecture Notes Chapter Supplements Notes to the Instructor Lecture Notes Chapter Supplements Notes to the Instructor Lecture Notes Chapter Supplements

Introduction to Economic Fluctuations

Notes to the Instructor Lecture Notes Chapter Supplements

123 125 133 145 147 154 179 182 188 207 210 219

233 235 241 iii

CHAPTER 11

Aggregate Demand I: Building the IS–LM Model

255

Notes to the Instructor Lecture Notes Chapter Supplements

255 257 262

CHAPTER 12

267

Aggregate Demand II: Applying the IS–LM Model

Notes to the Instructor Lecture Notes Chapter Supplements

CHAPTER 13

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

Notes to the Instructor Lecture Notes Chapter Supplements

CHAPTER 14

267 269 275

285 285 287 294

Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment

313

CHAPTER 15

A Dynamic Model of Economic Fluctuations

343

CHAPTER 16

Understanding Consumer Behavior

375

Notes to the Instructor Lecture Notes Chapter Supplements Notes to the Instructor Lecture Notes Chapter Supplements

313 315 323 343 345 359

Notes to the Instructor Lecture Notes Chapter Supplements

375 377 385

CHAPTER 17

The Theory of Investment

395

CHAPTER 18

Alternative Perspectives on Stabilization Policy

425

CHAPTER 19

Government Debt and Budget Deficits

453

CHAPTER 20

The Financial System: Opportunities and Dangers

477

Notes to the Instructor Lecture Notes Chapter Supplements

Notes to the Instructor Lecture Notes Chapter Supplements Notes to the Instructor Lecture Notes Chapter Supplements

Notes to the Instructor Lecture Notes Chapter Supplements

iv

395 397 403 425 427 433 453 455 461

477 479 488

Preface These Instructor’s Resources provide instructional and enrichment materials for Macroeconomics, Ninth Edition, by N. Gregory Mankiw. Each chapter corresponds to a textbook chapter and is made up of three sections: Notes to the Instructor, Lecture Notes, and Chapter Supplements. The Notes to the Instructor contains a brief summary and explanation of the purpose of the textbook chapter, suggestions for presenting the material, and a list of Chapter Supplements. Where appropriate, I provide suggestions for how features of the companion Web site (www.worthpublishers.com/mankiw) might be incorporated into the teaching of the course. The Lecture Notes section presents a comprehensive outline of the chapter. The Chapter Supplements are brief, largely self-contained pieces that you can use either as additional lecture material or reproduce as handouts for students. I have classified the supplements under five headings. • • • • •

Case Study Extensions provide additional information for many of the case studies in the textbook, usually offering more data and/or more details. Additional Case Studies discuss points not covered in the textbook case studies. Lecture Supplements delve more deeply into topics covered in the textbook, providing more detail than appears in the Lecture Notes. Advanced Topics go substantially beyond the main lessons of the text chapter; a few of them are relatively technical. Often, they present classic articles or recent research. Additional Readings are included for many chapters. These are listings of relatively accessible supplementary readings that could provide a basis for student papers or projects.

Use of the Resources These Instructor’s Resources will enhance and facilitate your teaching of macroeconomics as your students study from Macroeconomics, Ninth Edition. The brief Notes to the Instructor will familiarize you with the topics covered in each chapter. The detailed Lecture Notes, which form the foundation of the Instructor’s Resources, are not simply summaries of the textbook; they often differ in emphasis and take special care to describe how the models of different chapters fit together. Instructors who base their lectures on these notes will be accused of neither straying too far from the text nor slavishly following it. The Lecture Notes refer to the figures in the textbook. To accompany your lectures, full-page reproductions of these figures are available from Worth Publishers. These figures also are downloadable from the textbook’s Web site. In addition, the PowerPoint presentations developed by Ron Cronovich have been updated and are available on the Web site. These presentations feature animated graphs with explanations for each chapter and include additional case studies and data. Designed to be customized or used “as is,” these presentations include instructions for professors who have little or no experience with PowerPoint. A Dismal Scientist data activity (www.dismalscientist.com) is provided for each chapter for use by those instructors choosing access for their class to Moody's Dismal Scientist Web site. These activities challenge students to further explore their knowledge of the chapter material by using a comprehensive economic data-base and analysis service offering up-to-date monitoring of the global economy. The Chapter Supplements are the most versatile part of the Instructor’s Resources. They are referenced in the Lecture Notes to facilitate their incorporation into your lecture material. The supplements are largely self-contained, making them suitable for use as handouts to students, but they also reference relevant sections of the textbook and occasionally other supplements. By selecting from these Chapter Supplements, you can design your own distinctive course yet stay within the framework provided by the textbook. The textbook’s case studies are often sufficiently compelling to warrant classroom discussion. Should that occur, the Case Study Extensions will allow you to augment the textbook’s treatment. The case study in Chapter 7, “Henry Ford’s $5 Workday,” for instance, explains Henry Ford’s $5 day as an example of efficiency wages, and a case study extension, v

Supplement 7-13, adds further anecdotal details to enrich your lecture. Some of the extensions are essentially case studies in their own right: for example, Supplement 14-4, “Anticipated and Unanticipated Money,” and Supplement 14-8, “Did the NAIRU Decline in the 1990s?” The Additional Case Studies and the Lecture Supplements can be treated as additions to the textbook and so are particularly well-suited for use as handouts, either with or without discussion in lecture. Alternatively, you can simply use them as extra lecture material. Instructors wishing to cover the Advanced Topics in class will usually have to devote lecture time to them rather than simply hand them out to students. In some cases, the mathematics and/or the economics in these supplements is more difficult than in the textbook, for example, Supplement 14-7, “Policy Ineffectiveness”. In other cases, you may want to provide additional motivation, as in the discussion of “Price Stickiness and Pareto Efficiency” in Supplement 10-5. Like the Lecture Notes, the Chapter Supplements emphasize connections among the models in the textbook. Some examples of topics appearing in a number of different supplements are automatic stabilizers, the welfare cost of inflation, the Lucas critique, Ricardian equivalence, and rational expectations. Instructors can make use of the supplements to help students weave the various models into a more or less coherent view of the world. A complete list of Chapter Supplements appears starting on page xii. I know that the resources in this manual will be of help to you, and I welcome any suggestions for future editions.

Acknowledgments I thank the staff at Worth Publishers, especially Lukia Kliossis and Starratt Scheetz, for their efforts in helping bring the ninth edition of this volume to completion. Many other people have assisted in the preparation of this and previous editions. I especially thank Greg Mankiw for suggesting some of the topics covered in the chapter supplements and for providing the edited textbook manuscript used in preparing the chapter summaries. I thank Andrew John and Patricia Pollard for their work on early versions of these resources. The chapter discussions of the Internet-based software draw on input from David Weil, who originally developed the software package. In addition, the comments and suggestions from individuals too numerous to list are incorporated in these resources. I thank them all. Finally, I am particularly indebted to my students at Boston College, from whom I have learned a great deal about teaching macroeconomics. They have provided helpful feedback on many of the supplements. Robert G. Murphy May 2015

vi

Chapter Supplements The following abbreviations stand for the types of supplements. ACS = Additional Case Study CSE = Case Study Extension LS = Lecture Supplement or Additional Readings AT = Advanced Topic CHAPTER 1 1-1 CSE 1-2 ACS 1-3 ACS 1-4 LS 1-5 LS

The Recent Behavior of U.S. Economy: A Guide to the Case Studies Presidential Elections and the Economy When Is the Economy in a Recession? Economy Rhetoric Additional Readings

CHAPTER 2 2-1 LS 2-2 LS 2-3 LS 2-4 CSE 2-5 CSE 2-6 LS 2-7 ACS 2-8 LS 2-9 ACS 2-10 ACS 2-11 LS 2-12 ACS

Measuring Output Nominal and Real GDP Since 1929 Chain-Weighted Real GDP The Components of GDP (Case Study) Defining National Income (Case Study) Seasonal Adjustment and the Seasonal Cycle Measuring the Price of Light Improving the CPI CPI Improvements and the Decline in Inflation During the 1990s The Billion Prices Project Alternative Measures of Unemployment Improving the National Accounts

CHAPTER 3 3-1 LS 3-2 LS 3-3 LS 3-4 ACS 3-5 LS 3-6 ACS 3-7 ACS 3-8 LS

How Long is the Long Run? Part One What Is Capital? Labor’s Share of Output in the United Kingdom The Consumption Function Economist’s Terminology Public and Private Saving Wars and Interest Rates A First Look at Nominal and Real Interest Rates

CHAPTER 4 4-1 LS 4-2 CSE 4-3 LS 4-4 LS 4-5 ACS 4-6 LS

Money as a Medium of Exchange: “The Search Model” If You Think the Island of Yap Has Problems… (Case Study) More on Credit Cards Financial Innovation, Near Money, and the Demise of Monetary Aggregates Checks Without Banks: The Irish Banking Strike Additional Readings

CHAPTER 5 5-1 LS 5-2 CSE 5-3 LS 5-4 LS 5-5 CSE 5-6 LS 5-7 LS 5-8 AT

The Velocity of Money in Poetry and Song Data on Money Growth and Inflation (Case Study) Seigniorage as an Inflation Tax Deriving the Fisher Equation Using Interest Rates to Forecast Inflation (Case Study) Transaction Models of Money Demand Inflation and Economic Growth The Welfare Costs of Inflation and the Optimum Quantity of Money vii

5-9 5-10 5-11 5-12 5-13 5-14 5-15 5-16

ACS ACS LS CSE CSE LS ACS LS

The Welfare Costs of Inflation Revisited Indexation U.S. Treasury Issues Indexed Bonds A Guide to Oz (Case Study) Are Monetary Allegories in the Eye of the Beholder? The Case of Mary Poppins (Case Study) How to Stop a Hyperinflation The Israeli Hyperinflation Additional Readings

CHAPTER 6 6-1 LS 6-2 ACS 6-3 LS 6-4 ACS 6-5 CSE 6-6 AT 6-7 ACS 6-8 CSE

The Terminology of Trade Saving and Investment in Open Economies The Open Economy in the Very Long Run Tourism and the Exchange Rate The Exchange Rate and the Inflation Rate (Case Study) Covered Interest Parity Purchasing-Power Parity and Real Exchange Rates More on the Big Mac and PPP (Case Study)

CHAPTER 7 7-1 ACS 7-2 ACS 7-3 LS 7-4 CSE 7-5 LS 7-6 LS 7-7 CSE 7-8 AT 7-9 ACS 7-10 AT 7-11 AT 7-12 ACS 7-13 CSE 7-14 CSE 7-15 LS 7-16 ACS 7-17 LS

Social Costs of Unemployment Job Finding and Job Separation A More General Theory of the Natural Rate of Unemployment Dutch Male Unemployment and Unemployment Benefits (Case Study) Robert Lucas and $500 Bills More on the Minimum Wage Minimum Wages and Efficiency Wages (Case Study) Implicit Contracts The Two Views of Unions Efficiency Wages I: The Solow Condition Efficiency Wages II: The Shapiro–Stiglitz Model Efficiency Wages and Wage Differentials More on Henry Ford (Case Study) More on the Duration of Unemployment (Case Study) Trends in Unemployment The Secrets to Happiness Additional Readings

CHAPTER 8 8-1 LS 8-2 ACS 8-3 CSE 8-4 ACS 8-5 AT 8-6 ACS 8-7 ACS 8-8 CSE 8-9 LS 8-10 LS

How Long Is the Long Run? Part Two Growth Facts Does the Solow Model Really Explain Japanese Growth? (Case Study) The Decline in the U.S. Saving Rate Growth Rates, Logarithms, and Elasticities Labor-Force Participation Bridge Jobs and the Transition to Retirement How Much Variation in Per-Capita Output Is Explained by s and n? (Case Studies) The Solow Model: An Intuitive Approach. Part One Additional Readings

CHAPTER 9 9-1 ACS 9-2 ACS 9-3 LS 9-4 LS 9-5 ACS 9-6 LS 9-7 LS

More on the Convergence Hypothesis Convergence of Income Across the United States The Economics of Ideas Green Growth Corruption and Growth Income Inequality and Growth The Solow Growth Model: An Intuitive Approach—Part Two

viii

9-8 9-9 9-10

CSE CSE LS

CHAPTER 10 10-1 ACS 10-2 ACS 10-3 CSE 10-4 CSE 10-5 AT 10-6 ACS 10-7 LS 10-8 LS 10-9 10-10

ACS LS

More on the Productivity Slowdown (Case Study) More on the New Economy (Case Study) Additional Readings The Dating of Business Cycles Understanding Business Cycles I: The Stylized Facts Are Prices Sticky? I: Evidence from Individual Transactions (Case Study) Are Prices Sticky? II: Mail-Order Evidence (Case Study) Price Stickiness and Pareto Efficiency Velocity and the 1982 Recession Understanding Business Cycles II: Modeling Cycles The Economy in the Long Run and the Very Long Run: Summary of Parts II and III and Introduction to Part IV The Cost of Business Cycles Additional Readings

CHAPTER 11 11-1 LS 11-2 ACS 11-3 AT 11-4 LS

The Key Features of the IS–LM Model Mr. Keynes and the Classics: The Art of Modeling The IS–LM Model: A Critical Evaluation Additional Readings

CHAPTER 12 12-1 ACS 12-2 ACS 12-3 ACS 12-4 LS 12-5 LS 12-6 LS

Do High Deficits Cause High Interest Rates? Macroeconometric Models Credit Rationing and the Great Depression The Simple Algebra of the IS–LM Model and Aggregate Demand Curve Proportional Income Taxes and the IS Curve Additional Readings

CHAPTER 13 13-1 LS 13-2 ACS 13-3 LS 13-4 ACS 13-5 ACS 13-6 LS 13-7 AT 13-8 ACS 13-9 AT 13-10 CSE 13-11 ACS 13-12 CSE 13-13 LS

The Dependence of Net Exports on GDP The Rise in the Dollar, 1979–1982 Can World Financial Markets Usurp the Power of the Federal Reserve? Bretton Woods Finland in the 1990s The Mundell–Fleming Model in Y–r Space Uncovered Interest Parity Interest-Rate Differentials in the European Monetary System The Dornbusch Overshooting Model Mexico’s Foreign Exchange Reserves (Case Study) Exchange-Rate Volatility The Federal Reserve and the European Central Bank (Case Study) Additional Readings

CHAPTER 14 14-1 LS 14-2 LS 14-3 LS 14-4 CSE 14-5 AT 14-6 LS 14-7 AT 14-8 CSE 14-9 CSE 14-10 CSE 14-11 ACS

The Sticky-Wage Model Real Wages over the Business Cycle The Worker-Misperception Model Anticipated and Unanticipated Money (Case Study) Is Price Flexibility Stabilizing? How Long Is the Long Run? Part Three Policy Ineffectiveness Did the NAIRU Decline in the 1990s? (Case Study) Costs of Disinflation (Case Study) The Unequal Costs of Disinflation (Case Study) “The Poincaré Miracle” ix

14-12 14-13 14-14

LS ACS LS

Hysteresis and the Long-Run Phillips Curve Unemployment in the United Kingdom in the 1980s Additional Readings

CHAPTER 15 15-1 LS 15-2 LS 15-3 LS 15-4 LS 15-5 AT 15-6 AT 15-7 LS 15-8 ACS 15-9 LS 15-10 LS

How a Real Business Cycle Model Is Constructed The Microeconomics of Labor Supply Quits and Layoffs Involuntary Unemployment and Overqualification Why Technology Shocks Are So Important in Real Business Cycle Models Real Business Cycles and Random Walks Inflation Inertia Volatility and Growth How Long Is the Long Run? Part Four Additional Readings

CHAPTER 16 16-1 ACS 16-2 LS 16-3 ACS 16-4 CSE 16-5 CSE 16-6 ACS 16-7 LS

The Components of Consumption The Stock Market and Consumer Spending Saving and the Fear of Nuclear War The 1975 Tax Cut (Case Study) Do Consumers Anticipate Changes in Social Security Benefits? (Case Study) Is Unemployment Insurance Really an Automatic Stabilizer? Additional Readings

CHAPTER 17 17-1 LS 17-2 AT 17-3 AT 17-4 AT 17-5 AT 17-6 AT 17-7 ACS 17-8 ACS 17-9 LS 17-10 LS 17-11 ACS 17-12 ACS 17-13 AT 17-14 LS

The Short Run and the Long Run: Investment and the Capital Stock Asset Pricing I: Why Do We Care? Asset Pricing II: Stock Prices and Efficient Markets Asset Pricing III: Bond Prices and the Term Structure of Interest Rates Asset Pricing IV: Bubbles, Excess Volatility, and Fads Asset Pricing V: The Capital-Asset Pricing Model Financing Constraints in Japanese Firms Taxes, Babies, and Housing The Tax Treatment of Housing The Importance of Inventories Inventories and Production Smoothing Production Smoothing and Coordination Failure The Multiplier-Accelerator Model Additional Readings

CHAPTER 18 18-1 AT 18-2 ACS 18-3 ACS 18-4 CSE 18-5 CSE 18-6 LS 18-7 CSE 18-8 CSE 18-9 ACS 18-10 ACS 18-11 ACS 18-12 ACS 18-13 LS 18-14 CSE 18-15 CSE

Menu Costs, Imperfect Competition, and the Welfare-Improving Effects of Policy Profit Sharing as an Automatic Stabilizer Leading Indicators in Action The Pitfalls of Forecasting (Case Study) Are Forecasters Rational? (Case Study) Microfoundations and Aggregation Spare a Thought for the Empirical Macroeconomist (Case Study) The Response to Romer (Case Study) Distrust of Policymakers The Political Business Cycle The Political Business Cycle at Its Worst The Economy Under Democratic and Republican Presidents Price Level Versus Inflation Targeting Inflation Targeting (Case Study) Central-Bank Independence and Growth (Case Study)

x

18-16 18-17

CSE LS

Measuring Central-Bank Independence (Case Study) Additional Readings

CHAPTER 19 19-1 ACS 19-2 CSE 19-3 ACS 19-4 LS 19-5 LS 19-6 LS 19-7 ACS 19-8 AT 19-9 CSE 19-10 LS 19-11 CSE 19-12 LS

Debt and Deficits: The Data How Important Is Crowding Out? (Case Study) Structural and Cyclical Deficits Generational Accounting The Government Budget Constraint Borrowing Constraints Using the Fisher Diagram Social Security Benefits and Ricardian Equivalence Is Everything Neutral? Does Altruism Matter? (Case Study) Unpleasant Monetarist Arithmetic Inflation Indexed Bonds and Expected Inflation (Case Study) Additional Readings

CHAPTER 20 20-1 ACS 20-2 LS 20-3 LS 20-4 LS 20-5 ACS 20-6 LS 20-7 LS 20-8 ACS 20-9 LS 20-10 LS 20-11 LS 20-12 ACS 20-13 LS 20-14 LS

The Perils of Employee Stock Ownership How Does Financial Development Affect Growth? Does Financial Development Cause Growth? Financial Development and Industrial Structure Unit Banking and Economic Growth The Money Multiplier During the Financial Crisis of 2008–2009 Banks Hoard Reserves During the Financial Crisis The Fed's Senior Loan Officer Survey The Tax Treatment of Housing More on the Fed's Rescue Programs Exit Strategies for the Fed Greenspan Warns About Government Budget Surpluses The Squam Lake Report Additional Readings

xi

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Instructor's Resources - Boston College

Instructor’s Resources for use with MACROECONOMICS NINTH EDITION N. GREGORY MANKIW Robert G. Murphy Boston College WORTH PUBLISHERS Instructor’s...

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