《MODERN MACOECONOMICS》

PART ⅠINTRODUCTION3

1.Macroeconomic Questions3

A.Macroeconomic Questions3

B.Macroeconomic Policy Issues6

C.Leading ‘Schools of Thought’8

Summary10

Review Questions11

2.Britain’s Macroeconomic History since 190013

A.Evolution of the Macroeconomic Variables14

B.Decade Summaries24

Summary28

Appendix：Britain’s Macroeconomic Variables 1900-198030

Review Questions33

PART ⅡMEASURING MACROECONOMIC ACTIVITY36

3.Aggregate Income Accounting36

A.Flows and Stocks37

B.Some Frequently Used Terms38

C.Aggregate Income，Output（Product），and Expenditure40

D.Measuring Aggregate Income50

E.Measuring Aggregate Income in Constant Pounds（Real）51

F.Reading National Income and Expenditure Accounts52

Summary54

Review Questions56

4.Aggregate Balance Sheet Accounting58

A.Asset，Liability，and Balance Sheet59

B.Definition and the Nature of Money61

C.Main Balance Sheet Items61

D.Measuring Aggregate Balance Sheets68

Summary70

Review Questions71

5.Measuring Inflation and Unemployment73

A.Definition of Inflation73

B.Price Index and Percentage Rate of Change75

C.Measuring Inflation in the United Kingdom75

D.Definition of Unemployment79

E.Measuring Unemployment in the United Kingdom79

Summary81

Review Questions82

6.Economic Transactions with the Rest of the World83

A.Balance of Payments84

B.Measuring the United Kingdom’s Balance of Payments Accounts87

C.Exchange Rate Definitions88

D.Measuring Exchange Rates90

Summary92

Review Questions94

7.The Business Cycle95

A.Definition of the Business Cycle97

B.Autocorrelation99

C.Co-Movement104

D.Properties of the Business Cycle106

E.The United Kingdom’s Business Cycle107

Summary116

Review Questions117

PART ⅢTHE BASIC THEORY OF INCOME，EMPLOYMENT，AND THE PRICE LEVEL120

8.Introduction to the Basic Model120

A.Why Study the Basic Model？120

B.Weaknesses of the Basic Model121

Summary122

Review Questions122

9.Aggregate Supply and the Labour Market123

A.Short-Run Aggregate Production Function123

B.Competitive Aggregate Labour Market126

C.Aggregate Supply Curve131

Summary133

Note on Elasticity134

Review Questions135

10.Aggregate Demand and the Money Market136

A.Aggregate Demand136

B.The Monetary Theory of Aggregate Demand137

Summary145

Review Questions146

11.Equilibrium in the Basic Model147

Summary151

Review Questions151

12.Unemployment152

A.Minimum Wage Laws and Unemployment153

B.Trade Unions and Unemployment155

C.Unemployment Benefits and Unemployment159

D.Taxes and Unemployment162

Summary167

Review Questions168

13.Inflation170

A.Once-for-All Price Level Rises and Inflation170

B.Labour Market Shocks and the Price Level171

C.Money Supply Growth and Inflation173

Summary181

Appendix：The Algebra of Inflation181

Review Questions183

14.Inflation，the Balance of Payments and the Exchange Rate184

A.Money Supply and Foreign Exchange Reserves185

B.‘The Law of One Price’189

C.Determination of Inflation and the Balance of Payments under Fixed Exchange Rates191

D.Determination of Inflation and the Exchange Rate under a Flexible Exchange Rate Regime196

E.Determination of the Balance of Payments and the Exchange Rate in a Managed Floating Regime201

Summary202

Review Questions204

15.Post-War United Kingdom Macroeconomic History：How Well is it Explained by the Basic Model？205

A.Review of Facts206

B.Predictions of the Basic Model206

C.Labour Market Shocks208

D.Money Supply and World Inflation215

E.What the Basic Model Fails to Explain218

Summary220

Note on the Tax Wedge221

Review Questions222

PART ⅣTHE KEYNESIAN THEORY OF INCOME，EMPLOYMENT，AND THE PRICE LEVEL226

16.Introduction to the Keynesian Model226

A.Why Study the Keynesian Model？226

B.Strengths and Weaknesses of the Keynesian Model228

Summary228

Review Questions229

17.The Keynesian Theory of Aggregate Supply230

A.Keynes’s Modification to the Basic Model230

B.The Keynesian Aggregate Supply Curve232

C.How to Derive the Keynesian Aggregate Supply Curve233

D.The Approximate Keynesian Aggregate Supply Curve-The Inverse ‘L’236

Summary238

Review Questions239

18.Aggregate Demand in the Keynesian Model：Consumption and the 45° Cross Model240

A.Components of Aggregate Demand241

B.Theories of the Consumption Function Proposed by Keynes，Friedman and Modigliani244

C.Connection Between Wealth and Income and Why Current Income is a Major Determinant of Consumption245

D.Consumption and Savings Functions in Simple Equations and Diagrams248

E.The 45° Cross Model251

Summary255

Review Questions257

19.Investment Demand258

A.Distinction Between Investment and the Capital Stock258

B.The Demand for Capital259

C.Rental Rate of Capital260

D.Investment and the Demand for Capital263

E.Investment Demand Function264

Summary266

Review Questions267

20.The IS Curve268

A.Definition of the IS Curve269

B.Derivation of the IS Curve269

C.Determination of the IS Curve Slope274

D.Shifts in the IS Curve277

Summary282

Appendix：The Algebra of the IS Curve283

Review Questions284

21.The Demand for Money，the Supply of Money and the LM Curve285

A.Definition of the LM Curve286

B.Derivation of the LM Curve286

C.Determination of the LM Curve Slope290

D.Shifts in the LM Curve292

Summary294

Review Questions295

22.Equilibrium in the Keynesian Model296

A.Equilibrium at IS-LM Intersection296

B.Properties of the IS-LM Equilibrium297

C.Changes in Government Expenditure and Taxes302

D.Change in the Money Supply306

E.The Keynesian Model as a General Theory of Aggregate Demand308

Summary311

Appendix：The Algebra of the Keynesian Model313

Review Questions316

23.The Keynesian Model of the Open Economy317

A.Derivation of the IS Curve for an Open Economy318

B.Definition of the BP Curve321

C.Derivation of the BP Curve321

D.Shifts in the IS，LM，and BP Curves324

E.Determination of Output，Interest Rate，and the Balance of Payments in a Fixed Exchange Rate Regime326

F.Determination of Output，Interest Rate，and the Exchange Rate in a Flexible Exchange Rate Regime331

Summary336

Review Questions338

24.The Neoclassical Synthesis339

A.Definition of the ‘Neoclassical Synthesis’340

B.Keynesian Theory at Full Employment340

C.The Neoclassical Theory of Price Adjustment346

D.Price Level Expectations and the ‘Natural Rate’ Hypothesis348

E.The Neoclassical Explanation of the Business Cycle351

F.Policy Implications of the Neoclassical Synthesis355

Summary355

Review Questions357

25.The United Kingdom’s Recent Economic History：How Well is it Explained by the Neoclassical Synthesis？358

A.Main Predictions of the Neoclassical Model359

B.The Facts Explained by the Neoclassical Model367

C.The Facts Not Explained by the Neoclassical Model370

D.Strengths and Shortcomings of the Neoclassical Model371

Summary372

Review Questions373

PART ⅤRATIONAL EXPECTATIONS THEORY OF INCOME，EMPLOYMENT，AND THE PRICE LEVEL376

26.Introduction to the Rational Expectations Theories of Income，Employment，and the Price Level376

Summary380

27.Information，Expectations，and the New Classical Theory of Aggregate Supply381

A.Incomplete Information and the Labour Market382

B.Wrong Expectations and the Labour Market383

C.Definition of the Expectations-Augmented Aggregate Supply Curve388

D.Derivation of the Expectations-Augmented Aggregate Supply Curve388

Summary391

Review Questions392

28.The New Keynesian Theory of Aggregate Supply393

A.Assumptions of the New Keynesian Analysis394

B.Determination of Money Wages395

C.The New Keynesian Expectations-Augmented Aggregate Supply Curve396

D.Overlapping Wage Contracts398

Summary400

Review Questions401

29.Equilibrium Income，Employment，and the Price Level with Fixed Expectations402

A.Full-Employment Equilibrium403

B.Simple Diagrams to Characterise Full-Employment Equilibrium404

C.Effects of a Change in Aggregate Demand with a Fixed Expected Price Level406

Summary412

Review Questions412

30.Price Level Expectations414

A.Subjective Expectation and Conditional Mathematical Expectation415

B.Rational Expectation417

C.Rational Expectation of the Price Level418

D.How to Work Out the Rational Expectation of the Price Level420

Summary424

Review Questions425

31.Equilibrium Income，Employment，and the Price Level with Rational Expectations426

A.Anticipated and Unanticipated Changes in Aggregate Demand427

B.Effects of an Anticipated Change in Aggregate Demand429

C.Effects of an Unanticipated Change in Aggregate Demand432

Summary434

Appendix：The Algebra of Rational Expectations Equilibrium435

Review Questions437

32.Rational Expectations Theory of the Open Economy：A Selective Sketch438

A.Need for a Rational Expectations Theory of the Open Economy439

B.Aggregate Demand when Capital is Perfectly Mobile440

C.Determination of Output and the Price Level with a Fixed Exchange Rate446

D.Determination of Output，the Price Level，and the Exchange Rate under Flexible Exchange Rates448

Summary461

Review Questions463

33.Explaining the Facts464

A.Procyclical Co-Movements in Prices466

B.Independent Movements of Output and Prices468

C.Autocorrelation of Output and Employment470

D.Interest Rate Behaviour471

E.The Business Cycle473

F.The Hypothesis Testing Problem Posed by the Rational Expectations Theories474

Summary476

Appendix：A Methodological Postscript478

Review Questions481

PART ⅥMACROECONOMIC POLICY484

34.Introduction to Macroeconomic Policy Problems484

A.What Macroeconomic Policies Seek to Achieve484

B.Highlights in the Evolution of the Policy Debate485

C.Policy——A Process，Not an Event486

Summary488

Review Questions488

35.The Constraints on Macroeconomic Policy489

A.Government Budget Constraint490

B.Government Budget Constraint and the Conduct of Monetary and Fiscal Policy493

C.Balance of Payments Constraint498

D.Government Budget and Balance of Payments Constraints and Rational Expectations501

Summary502

Review Questions504

36.Control of the Money Supply505

A.Links Between the Monetary Base and the Money Supply506

B.How the Bank of England Operates to Achieve its Target Growth Path for the Money Supply509

Summary513

Review Questions514

37.Monetary Policy Ⅰ：Aggregate Demand Shocks515

A.Monetarist and Keynesian Monetary Policy Advice516

B.Aggregate Demand Shocks and the Aggregate Demand Curve517

C.Consequences of Monetarist Policy519

D.Consequences of Keynesian Policy520

E.Why Monetarists and Keynesians Offer Conflicting Advice521

Summary526

Review Questions527

38.Monetary Policy Ⅱ：Aggregate Supply Shocks528

A.Effects of Supply Shocks529

B.Expectations-Augmented Aggregate Supply Curve and the Expectation of the Aggregate Supply Curve533

C.Consequences of Monetarist Policy534

D.Consequences of Keynesian Policy535

E.Consequences of Keynesian Policy with an Information Lag537

F.The Monetarist-Keynesian Dispute：A Presumption in Favour of Monetarism538

Summary539

Review Questions540

39.Fiscal Policy542

A.Keynesian and Monetarist Fiscal Policy Advice542

B.Anticipated and Unanticipated Fiscal Policy544

C.Effects of Anticipated Change in Government Expenditures545

D.Effects of Unanticipated Change in Government Expenditures547

Summary551

Review Questions552

40.Prices and Incomes Policies553

A.Content of a Prices and Incomes Policy554

B.Posted Price and Actual Price555

C.Wage and Price Controls and the Expected Price Level556

D.Wage and Price Controls and the Actual Price Level559

E.Wage and Price Controls Make Matters Worse560

Summary564

Review Questions565

41.United Kingdom Macroeconomic Policy566

A.Fiscal Policy567

B.Monetary Policy569

C.Policy Patterns and Effects571

D.Is the Thatcher Government Pursuing Monetarist Policies？577

Summary578

Appendix580

Review Questions586

Index587