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Mankiw N.G. Principles of macroeconomics (3ed., 2001)(509s).pdf |
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HOW PEOPLE MAKE DECISIONS
There is no mystery to what an “economy” is. Whether we are talking about the economy of Los Angeles, of the United States, or of the whole world, an economy is just a group of people interacting with one another as they go about their lives. Because the behavior of an economy reflects the behavior of the individuals who make up the economy, we start our study of economics with four principles of individual decisionmaking....
ef ficiency the property of society getting the most it can from its scarce resources equity the property of distributing economic prosperity fairly among the members of society...
HOW PEOPLE INTERACT
The first four principles discussed how individuals make decisions. As we go about our lives, many of our decisions affect not only ourselves but other people as well. The next three principles concern how people interact with one another....
market economy an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services...
this book is to understand how this invisible hand works its magic. As you study economics, you will learn that prices are the instrument with which the invisible hand directs economic activity. Prices reflect both the value of a good to society and the cost to society of making the good. Because households and firms look at prices when deciding what to buy and sell, they unknowingly take into account the social benefits and costs of their actions. As a result, prices guide these individual decisionmakers to reach outcomes that, in many cases, maximize the welfare of society as a whole. There is an important corollary to the skill of the invisible hand in guiding economic activity: When the government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate the millions of households and firms that make up the economy. This corollary explains why taxes adversely affect the allocation of resources: Taxes distort prices and thus the decisions of households and firms. It also explains the even greater harm caused by policies that directly control prices, such as rent control. And it explains the failure of communism. In communist countries, prices were not determined in the marketplace but were dictated by central planners. These planners lacked the information that gets reflected in prices when prices are free to respond to market...
market failure a situation in which a market left on its own fails to allocate resources efficiently externality the impact of one person’s actions on the well-being of a bystander...
PRINCIPLE #9: PRICES RISE WHEN THE GOVERNMENT PRINTS TOO MUCH MONEY
In Germany in January 1921, a daily newspaper cost 0.30 marks. Less than two years later, in November 1922, the same newspaper cost 70,000,000 marks. All other prices in the economy rose by similar amounts. This episode is one of history’s most spectacular examples of inflation, an increase in the overall level of prices in the economy. Although the United States has never experienced inflation even close to that in Germany in the 1920s, inflation has at times been an economic problem. During the 1970s, for instance, the overall level of prices more than doubled, and President Gerald Ford called inflation “public enemy number one.” By contrast, inflation in the 1990s was about 3 percent per year; at this rate it would take more than...
Phillips curve a curve that shows the short-run tradeoff between inflation and unemployment...
11. Explain whether each of the following government activities is motivated by a concern about equity or a concern about efficiency. In the case of efficiency, discuss the type of market failure involved. a. regulating cable-TV prices b. providing some poor people with vouchers that can be used to buy food c. prohibiting smoking in public places d. breaking up Standard Oil (which once owned 90 percent of all oil refineries) into several smaller companies e. imposing higher personal income tax rates on people with higher incomes f. instituting laws against driving while intoxicated 12. Discuss each of the following statements from the standpoints of equity and efficiency. a. “Everyone in society should be guaranteed the best health care possible.” b. “When workers are laid off, they should be able to collect unemployment benefits until they find a new job.” 13. In what ways is your standard of living different from that of your parents or grandparents when they were your age? Why have these changes occurred? 14. Suppose Americans decide to save more of their incomes. If banks lend this extra saving to businesses, which use the funds to build new factories, how might this lead to faster growth in productivity? Who do you suppose benefits from the higher productivity? Is society getting a free lunch? 15. Suppose that when everyone wakes up tomorrow, they discover that the government has given them an additional amount of money equal to the amount they already had. Explain what effect this doubling of the money supply will likely have on the following: a. the total amount spent on goods and services b. the quantity of goods and services purchased if prices are sticky c. the prices of goods and services if prices can adjust 16. Imagine that you are a policymaker trying to decide whether to reduce the rate of inflation. To make an intelligent decision, what would you need to know about inflation, unemployment, and the tradeoff between them?...
ECONOMIC MODELS
High school biology teachers teach basic anatomy with plastic replicas of the human body. These models have all the major organs—the heart, the liver, the kidneys, and so on. The models allow teachers to show their students in a simple way how the important parts of the body fit together. Of course, these plastic models...
OUR FIRST MODEL: THE CIRCULAR-FLOW DIAGRAM
The economy consists of millions of people engaged in many activities—buying, selling, working, hiring, manufacturing, and so on. To understand how the economy works, we must find some way to simplify our thinking about all these activities. In other words, we need a model that explains, in general terms, how the economy is organized and how participants in the economy interact with one another. Figure 2-1 presents a visual model of the economy, called a circular-flow diagram. In this model, the economy has two types of decisionmakers—households and firms. Firms produce goods and services using inputs, such as labor, land, and capital (buildings and machines). These inputs are called the factors of production. Households own the factors of production and consume all the goods and services that the firms produce. Households and firms interact in two types of markets. In the markets for goods and services, households are buyers and firms are sellers. In particular, households buy the output of goods and services that firms produce. In the markets for the factors of production, households are sellers and firms are buyers. In these markets, households provide firms the inputs that the firms use to produce goods and services. The circular-flow diagram offers a simple way of organizing all the economic transactions that occur between households and firms in the economy. The inner loop of the circular-flow diagram represents the flows of goods and services between households and firms. The households sell the use of their labor, land, and capital to the firms in the markets for the factors of production. The firms then use these factors to produce goods and services, which in turn are sold to households in the markets for goods and services. Hence, the factors of production flow from households to firms, and goods and services flow from firms to households. The outer loop of the circular-flow diagram represents the corresponding flow of dollars. The households spend money to buy goods and services from the firms. The firms use some of the revenue from these sales to pay for the factors of...
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