Macroeconomics: Principles and Tools (3rd Edition)

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9780130358110: Macroeconomics: Principles and Tools (3rd Edition)

This modern principles book has a strong foundation in demand and supply—the most important topic in learning principles of economics. Its improved coverage of change in demand vs. change in quantity demanded (also in supply coverage) enables learner to better visualize and truly understand the difference between these two fundamental concepts. A seven-part presentation covers an introduction and key principles; the basic concepts in macroeconomics; the economy in the long run; economic fluctuations; inflation, unemployment, and economic policy; and the international economy. For individuals using the tools of economics to help them grasp the logic of economic reasoning.

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About the Author:

Arthur O'Sullivan is a professor of economics at Lewis and Clark College in Portland, Oregon. After receiving his B.S. Degree in economics at the University of Oregon, he spent two years in the Peace Corps, working with city planners in the Philippines. He received his Ph.D. degree in economics from Princeton University in 1981 and has taught at the University of California, and Davis and Oregon State University, winning several teaching awards at both schools. He recently accepted an endowed professorship at Lewis and Clark College, where he teaches microeconomics and urban economics. He is the author of the best-selling textbook, Urban Economics, currently in its fifth edition.

Professor O'Sullivan's research explores economic issues concerning urban land use, environmental protection, and public policy. His articles appear in many economics journals, including Journal of Urban Economics, Journal of Environmental Economics and Management, National Tax Journal, Journal of Public Economics, and Journal of Law and Economics.

Professor O'Sullivan lives with his family in Lake Oswego, Oregon. He enjoys outdoor activities, including tennis, rafting, and hiking. Indoors, he plays chess, foosball, and ping-pong with his two kids, and is lucky to win one of five games.

Steven M. Sheffrin is dean of the division of social sciences and professor of economics at the University of California, Davis. He has been a visiting professor at Princeton University, Oxford University, and the London School of Economics, and served as a financial economist with the Office of Tax Analysis of the United States Department of Treasury. He has been on the faculty at Davis since 1976 and served as the chairman of the department of economics. He received his B.A. from Wesleyan University and his Ph.D. in economics from the Massachusetts Institute of Technology.

Professor Sheffrin is the author of eight other books and monographs and over 100 articles in the fields of macroeconomics, public finance, and international economics. His most recent books include Rational Expectations (Second Edition) and Property Taxes and Tax Revolts: The Legacy of Proposition 13 (with Arthur O'Sullivan and Terri Sexton), both from Cambridge University Press.

Professor Sheffrin has taught macroeconomics at all levels, from large lectures of principles (classes of 400) to graduate classes for doctoral students. He is the recipient of the Thomas Mayer Distinguished Teaching Award in economics.

He lives with his wife Anjali (also an economist) and his two children in Davis, California. In addition to a passion for current affairs and travel, he plays a tough game of tennis.

Excerpt. © Reprinted by permission. All rights reserved.:

Our Story

When we set out to write an economics text, we were driven by the vision of the sleeping student. A few years ago, one of the authors was in the middle of a fascinating lecture on monopoly pricing when he heard snoring. It wasn't the first time a student had fallen asleep in one of his classes, but this was the loudest snoring he had ever heard—it sounded like a sputtering chain saw. The instructor turned to Bill, who was sitting next to the sleeping student and asked, "Could you wake him up?" Bill looked at the sleeping student and then gazed theatrically around the room at the other students. He finally looked back at the instructor and said, "Well professor, I think you should wake him up. After all, you put him to sleep."

That experience changed the way we taught economics. It highlighted for us a basic truth—for many students, economics isn't exactly exciting. We took this as a challenge—to get first-time economics students to see the relevance of economics to their lives, their careers, and their futures.

In order to get students to see the relevance of economics we knew that we had to engage them. With the first and second editions of Macroeconomics: Principles and Tools, we helped professors to do that by emphasizing an active learning approach. We engaged students by teaching them how to do something—economic analysis. We kept the book brief, lively, and to the point, and used the five key principles of economics as an organizing theme. The result was that the first and second editions were a success in classrooms across the country, and we strove in this edition to do even better.

Key Changes

We knew that our text's brevity and student accessibility were key strengths and we worked to enhance and preserve them in the third edition. We also found that professors and students truly appreciated our concerted effort to use economic principles to explain current and topical events. For the third edition, we made a systematic attempt to refine this feature of the book. We made a special effort to enhance our chapter opening stories, Economic Detective exercises, end Closer Look boxes. The result is a text that applies economic reasoning to the most current economic controversies and debates.

In macroeconomics, we use the tools of growth accounting to assess the growth of productivity in the late 1990s and discuss whether or not we are experiencing a "new economy." We also take a more in-depth look at the problems facing the Japanese economy through the last decade and the role that two extraordinary chairmen of the Federal Reserve played in promoting economic stability. Some of our new features include the elusive link between money and happiness, whether committees make more or less effective economic decisions than individuals, and the role that climate and economic geography play in economic growth. In addition to these new topics, we added more historical material on our experiences with monetary and fiscal policy and how our economic thinking has changed over time.

The September 11, 2001 terrorist attack impacted the economy in many different ways. In this edition, we have updated our discussion of the recent performance of the U.S. economy, the status of the federal budget, and monetary and fiscal policy in light of this event. In particular, we provide an extended discussion of the key role that the Federal Reserve played in calming financial markets directly after the attack, and discuss changes in fiscal policy that occurred as well.

In addition to these changes, we undertook a thorough review of our test bank to ensure accuracy and to provide a more focused range of questions for instructors' use. A totally new test bank was added to the supplement package to give instructors even greater flexibility in creating quizzes and exams. We incorporated the Active Learning aspect of the text into the questions in the supplement package—focusing new questions on asking students to create graphs, rather than just interpreting them. The Active Learning CD-ROM also was enhanced in this fashion through the addition of a Graphing Tool and Tutorial. In addition, we added videos to the CD-ROM so that students could see the economic experiments referred to in the text in action.

Teaching Philosophy

We began with the idea that an introductory economics course should be taught as if it is the last economics class a student will ever take. Because this is true for most students, we have just one opportunity to teach them how to use economics. The best way to teach economics is to focus on a few key concepts and ideas and apply them repeatedly in different circumstances.

We start the book with the five key principles of economics and then apply them throughout the book. This approach provides students with the big picture—the framework of economic reasoning. We make the key concepts unforgettable by using them repeatedly, illustrating them with intriguing examples, and giving students many opportunities to practice what they've learned.

Our book is designed to be accessible to students. We have kept the writing lean, the examples lively and topical, and the visuals exciting.

Principles and Tools

In keeping with the themes of relevance and student accessibility, we have once again organized our text around the five key principles of economics. Throughout the text, every point of theory is tied back to the five key principles and is indicated by the key symbol (see margin).

  • The Principle of Opportunity Cost. The opportunity cost of something is what you sacrifice to get it.
  • The Marginal Principle. Pick the level of an activity at which the marginal benefit equals the marginal cost.
  • The Principle of Diminishing Returns. If we increase one input while holding the other inputs fixed, output will increase, but at a decreasing rate.
  • The Spillover Principle. In some circumstances, decision makers do not bear all the cost or experience all the benefits from their decision.
  • The Reality Principle. What matters to people is the real value of money or income—its purchasing power—not the face value of money or income.
  • We use these principles to explain the logic underpinning the most important tools of economics. By using these five principles repeatedly, we reveal the logic of economic reasoning and demystify the tools of economics. Students see the big picture and also learn how to use the tools of economics properly.

    "What I Do, I Understand"—Confucius

    Our book is based on Active Learning, a teaching approach based on the idea that students learn best by doing. Our book engages students by letting them do activities as they read. We implement Active Learning with the following features:

    • Economics Detective exercises provide a few clues and then ask the student to solve the economic mystery.
    • Using the Tools questions at the end of each chapter give students opportunities to do their own economic analysis. Complete answers appear at the end of each chapter.
    • Economic Experiments actively involve the student in role-playing as consumers, producers, and policymakers. All these activities are designed to be fun for students and easy for professors, who decide when and how to use them.
    • Test Your Understanding questions help students determine whether they understand the preceding material before continuing. These are straightforward questions that ask students to review and synthesize what they have read. Complete answers appear at the end of each chapter.
    • Chapter-Opening Stories open each chapter and motivate the chapter's subject matter.
    • Each chapter starts with a list of practical questions that are answered in the chapter.
    • Lively Examples are integrated throughout the text and help bring economic concepts to life. We have hundreds of fresh, new examples in this edition.
    • A Closer Look book boxes are featured throughout the text and provide brief, interesting examples of the tools and concepts discussed in the text.
    Book Organization

    Throughout most of the 1990s, the U.S. economy performed very well—low inflation, low unemployment, and rapid economic growth. This robust performance contributed to an increasing interest by economists in understanding the processes of economic growth. Our theories of economic growth address the fundamental question of how long-term living standards are determined and why some countries prosper while others do not. This is the essence of economic growth. As one noted economist says, "Once you start thinking about growth, it is hard to think of anything else."

    Yet, the great economic expansion of the 1990s came to an end in 2001, as the economy started to contract. Difficult economic times remind us that macroeconomics is also concerned with understanding the causes and consequences of economic fluctuations. Why do economies experience recessions and depressions, and what steps can be taken to stabilize the economy? This has been a constant theme of macroeconomics throughout its entire history.

    A key dilemma confronting economics professor has always been how much time to devote to classical topics such as growth and production, versus more Keynesian topics such as economic fluctuations. Our book is designed to let professors choose. It works like this: to pursue a classical approach, professors should initially concentrate on the first four chapters, followed by the first four chapters in the macroeconomics section. To focus on Keynesian themes, start with Chapters 1 through 4, cover the first two chapters in macroeconomics, and then turn to the chapter on aggregate demand and supply.

    The Active Learning Package

    Each component of the teaching and learning package has been carefully reevaluated to ensure that it is consistent with the changes made to this edition and with the needs of our audience.

    Print Supplements New Two-Volume Test Bank

    Our team of instructors has striven to write, edit, review, and accuracy check the over ' 9,000 questions in both of the microeconomics and macroeconomics test banks.

    Test Bank #1—The test bank for Macroeconomics: Principles and Tools, prepared by Mary Lesser of Iona College, offers approximately 3,000 multiple-choice, true/false, short answer, and graphing questions. The questions are referenced by topic and are presented in sequential order. Each question is keyed by degree of difficulty as easy, moderate, or difficult. Easy questions involve straightforward recall of information in the text. Moderate questions require some analysis on the student's part. Difficult questions usually entail more complex analysis and may require the student to go one step further than the material presented in the text. Questions are also classified as fact, definition, conceptual, and analytical. A question labeled Fact tests student's knowledge of factual information presented in the text. A Definition question asks the student to define an economic concept. Conceptual questions test a student's understanding of a concept. Analytical questions require the student to apply an analytical procedure to answer the question.

    The test bank includes tables and a series of questions asking students to solve for numerical values, such as profit or equilibrium output. It also contains numerous questions based on graphs. The test bank includes examples of all of the graphs that students have seen in the textbook. The questions ask the students to interpret the information that is presented in the graph.

    There are also many questions in the test bank that are not referenced by a graph, but which require students to sketch out a graph on their own to be able to answer the question. The author worked to create many new questions focused on testing the graphing ability of student and their ability to actively answering each question.

    Test Bank #2—This new addition to the supplement package, prepared by Linda S. Ghent of Eastern Illinois University, will serve as another important resource for instructors. This new test bank for Macroeconomics: Principles and Tools contains over 1,500 multiple-choice, true/false, and short answer questions. Each question is also keyed by degree of difficulty (easy, moderate, or difficult), topic reference, and type of question (definition, fact, conceptual, or analytical).

    Instructor's Manual

    The instructor's manual to accompany Macroeconomics: Principles and Tools, prepared by Stephen Perez of California State University, Sacramento, follow the textbook's organization, incorporating policy problems in case studies, exercises, extra questions, and useful Internet links. The manual also provides detailed outlines (suitable for use as lecture notes) and solutions to all questions in the textbook. The instructor's manual is also designed to help the instructor incorporate applicable elements of the supplement package.

    The instructor's manual contains by chapter: a summary, objectives, an outline, opening questions, examples for class discussion, teaching tips, extended examples, problems and discussion questions, Test Your Understanding questions, Internet exercises, and tips for classroom experiments.

    Study Guide

    The study guide to accompany Macroeconomics: Principles and Tools, prepared by Janice Boucher Breuer of University of South Carolina, emphasize the practical application of theory. This study guide is a practicum designed to promote comprehension of economic principles and develop each student's ability to apply them to different problems.

    Integrated throughout this study guide are Performance Enhancing Tips (PETs), which are designed to help students understand economics by applying the principles and promoting analytical thinking.

    Two practice exams, featuring both multiple-choice and essay questions, are included at the end of each chapter. Both exams require students to apply one or more economic principles to arrive at each correct answer. Full solutions to the multiple-choice questions are included, not only listing each correct answer but also explaining in detail why one answer is correct and the others are not. Detailed answers to the essay questions are also provided.

    This study guide contains by chapter: an overview of the corresponding chapter in the textbook, a checklist to provide a quick summary of material covered in the textbook and lectures, a list of key terms and their definitions, practice exams, and the detailed answer keys.

    Using Experiments, Cases, and Activities in the Classroom

    Prepared by Dirk Yandell of the University of San Diego, this manual contains experiments that illustrate topics such as positive versus normative economics and monopoly. The experiments include tables and charts, in addition to an overview, learning objectives, a list of preparations and materials needed, a detailed what-to-do section, an analysis of the results, and questions that require students to interpret and analyze the material.

    Color Transparencies

    All figures and tables from the text are reproduced as full-page, four-color acetates.

    E-Commerce Guide

    Electronic commerce is playing an increasingly important role in how business is conducted. Prentice Hall's Guide to E-Commerce and E-Businesses provides readers with background on the history and direction of E-Commerce, the impact

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