This book traces the history of macroeconomics, the evolution of macroeconomic thought, and the resulting theory and policy. It places the various macroeconomic theories in the order in which they developed chronologically, and illustrates the similarities and differences of the models. The author admires all points of view and the result is a comprehensive, detailed, unbiased view of modern macroeconomic theory. Chapter topics examine the measurement of macroeconomic variables; classical macroeconomics: equilibrium output and employment, money, prices, and interest; the Keynesian system; the monetarist counterrevolution; output, inflation and unemployment: monetarist and Keynesian views; new classical economics; real business cycles and new Keynesian economics; exchange rates and the international monetary system; monetary and fiscal policy in the open economy; the money supply process; monetary policy; fiscal policy; long- and intermediate-term economic growth; consumption and investment; and money demand. For individuals looking for a better understanding of macroeconomics.
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The past three decades have been challenging ones for macroeconomists. Key variables in macroeconomics—the levels of output, inflation, and unemployment; interest rates; and foreign exchange rates—have proved difficult to explain and predict. This period also has been an active one in macroeconomic theory, a period of controversy but also of progress. The years since the late 1960s saw a growing number of challenges to Keynesian economics, which was the dominant paradigm of the early 1960s. The 1970s witnessed a growing interest in monetarism and the emergence of the new classical economics. In the 1980s, Keynesian policy prescriptions came under attack from a group called the supply-side economists. The 1980s also witnessed the development of two contrasting lines of research on the business cycle: the new Keynesian economics and the real business cycle theory. However, there has been progress as well as controversy. During the past 30 years there have been significant improvements in the handling of expectations, in our understanding of labor market institutions, in accounting for the macroeconomic implications of various market structures, in the modeling of open economies, and in accounting for the ultimate sources of economic growth.
In this book I have tried to explain macroeconomics, inclusive of recent developments, in a coherent way but without glossing over the fundamental disagreements among macroeconomists on issues of both theory and policy. The major modern macroeconomic theories are presented and compared. Important areas of agreement as well as differences are discussed. An attempt is made to demonstrate that the controversies among macroeconomists center on well-defined issues that are based on theoretical differences in the underlying models.
Distinguishing features of the approach taken here include the following:
Part I (Chapters 1-2) discusses the subject matter of macroeconomics, the recent behavior of the U.S. economy, and questions of measurement. Part II (Chapters 3-13) presents the major macroeconomic models, beginning with the classical system in Chapters 3-4. Consideration of the classical system at the start is useful because the Keynesian model can then be viewed as an attack on the classical orthodoxy. Challenges to the Keynesian position can then be rooted in the parts of the classical model that provides starting points for their analysis: the quantity theory of money for the monetarists, and the classical labor market clearing assumptions and choice-theoretic-based behavioral functions for the new classical and real business cycle economists.
The Keynesian model is analyzed in detail in Chapters 5-8, beginning from a very simple model; more complex models are built up to incorporate monetary influences, wage and price flexibility, changing price expectations, and shocks to aggregate supply. Chapter 9 examines monetarism and the issues in the monetarist-Keynesian controversy. Chapter 10 examines the monetarist view of the unemployment-inflation trade-off and the natural rate theory, as well as the Keynesian view on the same issues. Chapter 11 considers the new classical theory with its central concepts of rational expectations and market clearing. The Keynesian response to the new classical economics is then considered. Chapter 12 examines two recent directions in macroeconomic research. One, very strongly rooted in the classical tradition, is the real business cycle theory. The second, the new Keynesian economics, is, as its name suggests, firmly in the Keynesian tradition. Chapter 13 summarizes and compares the different models.
Part III considers open economy macroeconomics. Chapter 14 focuses on exchange rate determination and the choice of an international monetary system. Chapter 15 utilizes the Mundell-Fleming model to examine the effects of monetary and fiscal policy in the open economy.
Part IV deals with macroeconomic policy—monetary policy in Chapters 16 and 17, then fiscal policy in Chapter 18.
In Part V we present extensions of the models and consider parts of the models in greater detail. Chapter 19 examines questions of long-term economic growth and the determinants of growth over intermediate periods, periods too long to fit the short-run framework of the models of Part II, but not necessarily situations of long-run equilibrium. Chapter 20 is a more detailed examination of the components of private sector demand: consumption and investment expenditure. Finally, Chapter 21 extends the earlier analysis of money demand.
In the section on macroeconomic models, the conceptual approach taken is to develop each model within the aggregate demand-aggregate supply framework in order to facilitate comparisons among the models. Throughout the book the aim is to provide a clear and rigorous analysis. Other pedagogical features are the explanatory captions provided for the graphs in the text and end-of-chapter questions and problems.
Most chapters also contain Perspectives sections, which relate the material in the text to events in the real economy.
NEW FEATURES IN THE SEVENTH EDITION
Overall, there has been an attempt to make the book more student friendly.
Reviewers recruited by Prentice Hall to help with the preparation of this edition provided many useful suggestions. These reviewers are: Peter Hess, Davidson College; Sharon Erenburg, East Michigan University; Bryce Sutton, St. Louis University; and Darryl Getter, U.S. Naval Academy.
Many people have been helpful in preparing the various editions of this book. I have benefited from comments by Roger Waud, Art Benavie, Alfred Field, and Pat Conway, all from the University of North Carolina, as well as by Lawrence Davidson and Williard Witte, Indiana University; Dennis Appleyard, Davidson College; Alfred Guender, University of Canterbury; Homer Erekson, Miami University; Allin Cottrell, Wake Forest University; David Van Hoose, University of Alabama; Michael Bradley, George Washington University; Rexford Santerre and Michael Tucci, Bentley College; Art Goldsmith, Washington and Lee University; Thomas Havrilesky, Duke University; Sang Sub Lee, District of Columbia Government; David Bowles, Clemson University; Michael Loy and Lawrence Ellis, Appalachian State University; and Richard Selden, University of Virginia.
Editors have been helpful at all stages and I wish to thank Rod Banister, Gladys Soto and Maureen Wilson at Prentice Hall and Lynn Steines at Carlisle Publishing Services.
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