# Table of Content

**INTRODUCTION**

**Chapter 1. A tour of the world**

1.1 Europe and the euro 3

1.2 The economic outlook in the USA 6

1.3 The largest emerging economies 10

1.4 Looking ahead 11

**Chapter 2. A tour of the book**

2.1 Aggregate output 16

2.2 Other major macroeconomic variables 21

2.3 Output, unemployment and the inflation rate, Okun’s law and the Philips curve 27

2.4 The short run, the medium run and the long run 29

2.5 A tour of the book 30

**THE SHORT RUN**

**Chapter 3. The goods market**

3.1 The composition of GDP 43

3.2 The demand for goods 44

3.3 The determination of equilibrium output 47

3.4 Investment equals saving: an alternative way of thinking about the goods–market equilibrium 54

3.5 Is the government omnipotent? A warning 57

**Chapter 4. Financial markets**

4.1 The demand for money 62

4.2 Determining the interest rate: part 1 66

4.3 Determining the interest rate: part 2 70

4.4 Two alternative ways of looking at the equilibrium 76

**Chapter 5. Goods and financial markets: the IS–LM model**

5.1 The goods market and the IS relation 83

5.2 Financial markets and the LM relation 87

5.3 Putting the IS and the LM relations together 90

5.4 Using a policy mix 95

5.5 IS–LM and the liquidity trap 96

5.6 How does the IS–LM model fit the facts? 99

**Chapter 6. The IS–LM model in an open economy **

6.1 Openness in goods markets 109

6.2 Openness in financial markets 116

6.3 The IS relation in an open economy 122

6.4 The LM relation in an open economy 128

6.5 Putting goods and financial markets together in an open economy 131

**Chapter 7. Output, the interest rate and the exchange rate**

7.1 Increases in demand, domestic or foreign 137

7.2 Depreciation, the trade balance and output 143

7.3 Looking at dynamics: the J-curve 145

7.4 Saving, investment and the trade balance 147

7.5 The effects of policy in an open economy 151

7.6 Fixed exchange rates 152

**THE MEDIUM RUN **

**Chapter 8. The labour market**

8.1 A tour of the labour market 165

8.2 Wage determination 170

8.3 Price determination 177

8.4 The natural rate of unemployment 178

8.5 Where we go from here 182

**Chapter 9. Putting all markets together: the AS–AD model**

9.1 Aggregate supply 190

9.2 Aggregate demand 192

9.3 Equilibrium in the short run and in the medium run 194

9.4 The effects of a monetary expansion 197

9.5 A decrease in the budget deficit 200

9.6 An increase in the price of oil 204

9.7 Conclusions 210

**Chapter 10. The Phillips curve, the natural rate of unemployment and inflation **

10.1 Inflation, expected inflation and unemployment 216

10.2 The Phillips curve 217

10.3 The Phillips curve and the natural rate of unemployment in Europe 224

**Chapter 11. Inflation, money growth and the real rate of interest**

11.1 Output, unemployment and inflation 237

11.2 Nominal versus real interest rates 241

11.3 Nominal and real interest rates and the IS–LM model 244

11.4 The effects of money growth 245

11.5 Money growth, inflation and nominal and real interest rates 252

11.6 Disinflation 254

**Chapter 12. The medium run in an open economy**

12.1 The medium run 265

12.2 Exchange rate crises under fixed exchange rates 270

12.3 Exchange rate movements under flexible exchange rates 274

12.4 Choosing between exchange rate regimes 277

**THE LONG RUN**

**Chapter 13. The facts of growth**

13.1 Measuring the standard of living 287

13.2 Growth in rich countries since 1950 290

13.3 A broader look across time and space 293

13.4 Thinking about growth: a primer 296

**Chapter 14. Saving, capital accumulation and output**

14.1 Interactions between output and capital 305

14.2 The implications of alternative saving rates 308

14.3 Getting a sense of magnitudes 317

14.4 Physical versus human capital 320

**Chapter 15. Technological progress and growth **

15.1 Technological progress and the rate of growth 328

15.2 The determinants of technological progress 334

15.3 The facts of growth revisited 337

**EXPECTATIONS**

**Chapter 16. Financial markets and expectations**

16.1 Expected present discounted values 353

16.2 Bond prices and bond yields 359

16.3 The stock market and movements in stock prices 367

16.4 Risk, bubbles, fads and asset prices 374

**Chapter 17. Expectations, consumption and investment**

17.1 Consumption theory and the role of expectations 383

17.2 Toward a more realistic description 387

17.3 Investment 391

17.4 The volatility of consumption and investment 398

**Chapter 18. Expectations, output and policy **

18.1 Expectations and decisions: taking stock 406

18.2 Monetary policy, expectations and output 409

18.3 Deficit reduction, expectations and output 415

**EUROPE: PAST, PRESENT AND FUTURE**

**Chapter 19. The euro at fourteen: was it a good idea and why is it in trouble?**

19.1 The monetary history of Europe from post-war to the present day 425

19.2 Is Europe an optimal currency area? 431

19.3 The European system of central banks: structure and objectives 434

19.4 The first thirteen years of the euro (1999–2011) 439

19.5 Should the outs join? 443

**Chapter 20. The crisis**

20.1 From a housing problem to a financial crisis 449

20.2 The use and limits of policy 454

20.3 The slow recovery 464

**Chapter 21. High debt**

21.1 The government’s budget constraint 472

21.2 The evolution of the debt-to-GDP ratio 476

21.3 The return from a high debt 486

**SHOULD POLICY MAKERS BE RESTRAINED?**

**Chapter 22. Policy and policy makers: what do we know?**

22.1 Uncertainty and policy 495

22.2 Expectations and policy 498

22.3 Politics and policy 503

**Chapter 23. Monetary and fiscal policy rules and constraints**

23.1 The optimal inflation rate 510

23.2 Monetary policy rules 514

23.3 Fiscal policy rules and constraints 523

**EPILOGUE**

**Chapter 24. The story of macroeconomics**

24.1 Keynes and the Great Depression 541

24.2 The neoclassical synthesis 541

24.3 The rational expectations critique 544

24.4 Recent developments up to the crisis 547

24.5 First lessons from the crisis 550

Appendix 1 A maths refresher 554

Appendix 2 An introduction to econometrics 559

Glossary 564

Symbols used in this book 575

Index 577

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