Instructor s Resources

Instructor s Resources for use with MACROECONOMICS NINTH EDITION N. GREGORY MANKIW Robert G. Murphy Boston College WORTH PUBLISHERS

Instructor s Resources by Robert G. Murphy for use with Mankiw: Macroeconomics, Ninth Edition 2016 2013, 2010, 2007, 2003, 2000, 1997, 1994 by Worth Publishers All rights reserved. The contents, or parts thereof, may be reproduced for use with Macroeconomics, Ninth Edition, by N. Gregory Mankiw as described in the Preface to the Instructor s Resources, but may not be reproduced in any form for any other purpose without prior written permission of the publisher. ISBN 13: 978-1-4641-2314-6 ISBN 10: 1-4641-2314-4 First Printing 2015 Printed in the United States of America Worth Publishers 41 Madison Avenue New York, NY 10010 wortheconomics.com

Contents Preface Chapter Supplements v vii CHAPTER 1 The Science of Macroeconomics 1 Notes to the Instructor 1 Lecture Notes 3 Chapter Supplements 7 CHAPTER 2 The Data of Macroeconomics 15 Notes to the Instructor 15 Lecture Notes 17 Chapter Supplements 24 CHAPTER 3 National Income: Where It Comes From and Where It Goes 49 Notes to the Instructor 49 Lecture Notes 51 Chapter Supplements 59 CHAPTER 4 The Monetary System: What It Is and How It Works 73 Notes to the Instructor 73 Lecture Notes 74 Chapter Supplements 81 CHAPTER 5 Inflation: Its Causes, Effects, and Social Costs 87 Notes to the Instructor 87 Lecture Notes 89 Chapter Supplements 98 CHAPTER 6 The Open Economy 123 Notes to the Instructor 123 Lecture Notes 125 Chapter Supplements 133 CHAPTER 7 Unemployment 145 Notes to the Instructor 145 Lecture Notes 147 Chapter Supplements 154 CHAPTER 8 Economic Growth I: Capital Accumulation and Population Growth 179 Notes to the Instructor 179 Lecture Notes 182 Chapter Supplements 188 CHAPTER 9 Economic Growth II: Technology, Empirics, and Policy 207 Notes to the Instructor 207 Lecture Notes 210 Chapter Supplements 219 CHAPTER 10 Introduction to Economic Fluctuations 233 Notes to the Instructor 233 Lecture Notes 235 Chapter Supplements 241 iii

CHAPTER 11 Aggregate Demand I: Building the IS LM Model 255 Notes to the Instructor 255 Lecture Notes 257 Chapter Supplements 262 CHAPTER 12 Aggregate Demand II: Applying the IS LM Model 267 Notes to the Instructor 267 Lecture Notes 269 Chapter Supplements 275 CHAPTER 13 The Open Economy Revisited: The Mundell Fleming Model and the Exchange-Rate Regime 285 Notes to the Instructor 285 Lecture Notes 287 Chapter Supplements 294 CHAPTER 14 Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment 313 Notes to the Instructor 313 Lecture Notes 315 Chapter Supplements 323 CHAPTER 15 A Dynamic Model of Economic Fluctuations 343 Notes to the Instructor 343 Lecture Notes 345 Chapter Supplements 359 CHAPTER 16 Understanding Consumer Behavior 375 Notes to the Instructor 375 Lecture Notes 377 Chapter Supplements 385 CHAPTER 17 The Theory of Investment 395 Notes to the Instructor 395 Lecture Notes 397 Chapter Supplements 403 CHAPTER 18 Alternative Perspectives on Stabilization Policy 425 Notes to the Instructor 425 Lecture Notes 427 Chapter Supplements 433 CHAPTER 19 Government Debt and Budget Deficits 453 Notes to the Instructor 453 Lecture Notes 455 Chapter Supplements 461 CHAPTER 20 The Financial System: Opportunities and Dangers 477 Notes to the Instructor 477 Lecture Notes 479 Chapter Supplements 488 iv

Preface These Instructor s Resources provide instructional and enrichment materials for Macroeconomics, Ninth Edition, by N. Gregory Mankiw. Each chapter corresponds to a textbook chapter and is made up of three sections: Notes to the Instructor, Lecture Notes, and Chapter Supplements. The Notes to the Instructor contains a brief summary and explanation of the purpose of the textbook chapter, suggestions for presenting the material, and a list of Chapter Supplements. Where appropriate, I provide suggestions for how features of the companion Web site (www.worthpublishers.com/mankiw) might be incorporated into the teaching of the course. The Lecture Notes section presents a comprehensive outline of the chapter. The Chapter Supplements are brief, largely self-contained pieces that you can use either as additional lecture material or reproduce as handouts for students. I have classified the supplements under five headings. Case Study Extensions provide additional information for many of the case studies in the textbook, usually offering more data and/or more details. Additional Case Studies discuss points not covered in the textbook case studies. Lecture Supplements delve more deeply into topics covered in the textbook, providing more detail than appears in the Lecture Notes. Advanced Topics go substantially beyond the main lessons of the text chapter; a few of them are relatively technical. Often, they present classic articles or recent research. Additional Readings are included for many chapters. These are listings of relatively accessible supplementary readings that could provide a basis for student papers or projects. Use of the Resources These Instructor s Resources will enhance and facilitate your teaching of macroeconomics as your students study from Macroeconomics, Ninth Edition. The brief Notes to the Instructor will familiarize you with the topics covered in each chapter. The detailed Lecture Notes, which form the foundation of the Instructor s Resources, are not simply summaries of the textbook; they often differ in emphasis and take special care to describe how the models of different chapters fit together. Instructors who base their lectures on these notes will be accused of neither straying too far from the text nor slavishly following it. The Lecture Notes refer to the figures in the textbook. To accompany your lectures, full-page reproductions of these figures are available from Worth Publishers. These figures also are downloadable from the textbook s Web site. In addition, the PowerPoint presentations developed by Ron Cronovich have been updated and are available on the Web site. These presentations feature animated graphs with explanations for each chapter and include additional case studies and data. Designed to be customized or used as is, these presentations include instructions for professors who have little or no experience with PowerPoint. A Dismal Scientist data activity (www.dismalscientist.com) is provided for each chapter for use by those instructors choosing access for their class to Moody's Dismal Scientist Web site. These activities challenge students to further explore their knowledge of the chapter material by using a comprehensive economic data-base and analysis service offering up-to-date monitoring of the global economy. The Chapter Supplements are the most versatile part of the Instructor s Resources. They are referenced in the Lecture Notes to facilitate their incorporation into your lecture material. The supplements are largely self-contained, making them suitable for use as handouts to students, but they also reference relevant sections of the textbook and occasionally other supplements. By selecting from these Chapter Supplements, you can design your own distinctive course yet stay within the framework provided by the textbook. The textbook s case studies are often sufficiently compelling to warrant classroom discussion. Should that occur, the Case Study Extensions will allow you to augment the textbook s treatment. The case study in Chapter 7, Henry Ford s $5 Workday, for instance, explains Henry Ford s $5 day as an example of efficiency wages, and a case study extension, v

Supplement 7-13, adds further anecdotal details to enrich your lecture. Some of the extensions are essentially case studies in their own right: for example, Supplement 14-4, Anticipated and Unanticipated Money, and Supplement 14-8, Did the NAIRU Decline in the 1990s? The Additional Case Studies and the Lecture Supplements can be treated as additions to the textbook and so are particularly well-suited for use as handouts, either with or without discussion in lecture. Alternatively, you can simply use them as extra lecture material. Instructors wishing to cover the Advanced Topics in class will usually have to devote lecture time to them rather than simply hand them out to students. In some cases, the mathematics and/or the economics in these supplements is more difficult than in the textbook, for example, Supplement 14-7, Policy Ineffectiveness. In other cases, you may want to provide additional motivation, as in the discussion of Price Stickiness and Pareto Efficiency in Supplement 10-5. Like the Lecture Notes, the Chapter Supplements emphasize connections among the models in the textbook. Some examples of topics appearing in a number of different supplements are automatic stabilizers, the welfare cost of inflation, the Lucas critique, Ricardian equivalence, and rational expectations. Instructors can make use of the supplements to help students weave the various models into a more or less coherent view of the world. A complete list of Chapter Supplements appears starting on page xii. I know that the resources in this manual will be of help to you, and I welcome any suggestions for future editions. Acknowledgments I thank the staff at Worth Publishers, especially Lukia Kliossis and Starratt Scheetz, for their efforts in helping bring the ninth edition of this volume to completion. Many other people have assisted in the preparation of this and previous editions. I especially thank Greg Mankiw for suggesting some of the topics covered in the chapter supplements and for providing the edited textbook manuscript used in preparing the chapter summaries. I thank Andrew John and Patricia Pollard for their work on early versions of these resources. The chapter discussions of the Internet-based software draw on input from David Weil, who originally developed the software package. In addition, the comments and suggestions from individuals too numerous to list are incorporated in these resources. I thank them all. Finally, I am particularly indebted to my students at Boston College, from whom I have learned a great deal about teaching macroeconomics. They have provided helpful feedback on many of the supplements. Robert G. Murphy May 2015 vi

Chapter Supplements The following abbreviations stand for the types of supplements. ACS = Additional Case Study CSE = Case Study Extension LS = Lecture Supplement or Additional Readings AT = Advanced Topic CHAPTER 1 1-1 CSE The Recent Behavior of U.S. Economy: A Guide to the Case Studies 1-2 ACS Presidential Elections and the Economy 1-3 ACS When Is the Economy in a Recession? 1-4 LS Economy Rhetoric 1-5 LS Additional Readings CHAPTER 2 2-1 LS Measuring Output 2-2 LS Nominal and Real GDP Since 1929 2-3 LS Chain-Weighted Real GDP 2-4 CSE The Components of GDP (Case Study) 2-5 CSE Defining National Income (Case Study) 2-6 LS Seasonal Adjustment and the Seasonal Cycle 2-7 ACS Measuring the Price of Light 2-8 LS Improving the CPI 2-9 ACS CPI Improvements and the Decline in Inflation During the 1990s 2-10 ACS The Billion Prices Project 2-11 LS Alternative Measures of Unemployment 2-12 ACS Improving the National Accounts CHAPTER 3 3-1 LS How Long is the Long Run? Part One 3-2 LS What Is Capital? 3-3 LS Labor s Share of Output in the United Kingdom 3-4 ACS The Consumption Function 3-5 LS Economist s Terminology 3-6 ACS Public and Private Saving 3-7 ACS Wars and Interest Rates 3-8 LS A First Look at Nominal and Real Interest Rates CHAPTER 4 4-1 LS Money as a Medium of Exchange: The Search Model 4-2 CSE If You Think the Island of Yap Has Problems (Case Study) 4-3 LS More on Credit Cards 4-4 LS Financial Innovation, Near Money, and the Demise of Monetary Aggregates 4-5 ACS Checks Without Banks: The Irish Banking Strike 4-6 LS Additional Readings CHAPTER 5 5-1 LS The Velocity of Money in Poetry and Song 5-2 CSE Data on Money Growth and Inflation (Case Study) 5-3 LS Seigniorage as an Inflation Tax 5-4 LS Deriving the Fisher Equation 5-5 CSE Using Interest Rates to Forecast Inflation (Case Study) 5-6 LS Transaction Models of Money Demand 5-7 LS Inflation and Economic Growth 5-8 AT The Welfare Costs of Inflation and the Optimum Quantity of Money vii

5-9 ACS The Welfare Costs of Inflation Revisited 5-10 ACS Indexation 5-11 LS U.S. Treasury Issues Indexed Bonds 5-12 CSE A Guide to Oz (Case Study) 5-13 CSE Are Monetary Allegories in the Eye of the Beholder? The Case of Mary Poppins (Case Study) 5-14 LS How to Stop a Hyperinflation 5-15 ACS The Israeli Hyperinflation 5-16 LS Additional Readings CHAPTER 6 6-1 LS The Terminology of Trade 6-2 ACS Saving and Investment in Open Economies 6-3 LS The Open Economy in the Very Long Run 6-4 ACS Tourism and the Exchange Rate 6-5 CSE The Exchange Rate and the Inflation Rate (Case Study) 6-6 AT Covered Interest Parity 6-7 ACS Purchasing-Power Parity and Real Exchange Rates 6-8 CSE More on the Big Mac and PPP (Case Study) CHAPTER 7 7-1 ACS Social Costs of Unemployment 7-2 ACS Job Finding and Job Separation 7-3 LS A More General Theory of the Natural Rate of Unemployment 7-4 CSE Dutch Male Unemployment and Unemployment Benefits (Case Study) 7-5 LS Robert Lucas and $500 Bills 7-6 LS More on the Minimum Wage 7-7 CSE Minimum Wages and Efficiency Wages (Case Study) 7-8 AT Implicit Contracts 7-9 ACS The Two Views of Unions 7-10 AT Efficiency Wages I: The Solow Condition 7-11 AT Efficiency Wages II: The Shapiro Stiglitz Model 7-12 ACS Efficiency Wages and Wage Differentials 7-13 CSE More on Henry Ford (Case Study) 7-14 CSE More on the Duration of Unemployment (Case Study) 7-15 LS Trends in Unemployment 7-16 ACS The Secrets to Happiness 7-17 LS Additional Readings CHAPTER 8 8-1 LS How Long Is the Long Run? Part Two 8-2 ACS Growth Facts 8-3 CSE Does the Solow Model Really Explain Japanese Growth? (Case Study) 8-4 ACS The Decline in the U.S. Saving Rate 8-5 AT Growth Rates, Logarithms, and Elasticities 8-6 ACS Labor-Force Participation 8-7 ACS Bridge Jobs and the Transition to Retirement 8-8 CSE How Much Variation in Per-Capita Output Is Explained by s and n? (Case Studies) 8-9 LS The Solow Model: An Intuitive Approach. Part One 8-10 LS Additional Readings CHAPTER 9 9-1 ACS More on the Convergence Hypothesis 9-2 ACS Convergence of Income Across the United States 9-3 LS The Economics of Ideas 9-4 LS Green Growth 9-5 ACS Corruption and Growth 9-6 LS Income Inequality and Growth 9-7 LS The Solow Growth Model: An Intuitive Approach Part Two viii

9-8 CSE More on the Productivity Slowdown (Case Study) 9-9 CSE More on the New Economy (Case Study) 9-10 LS Additional Readings CHAPTER 10 10-1 ACS The Dating of Business Cycles 10-2 ACS Understanding Business Cycles I: The Stylized Facts 10-3 CSE Are Prices Sticky? I: Evidence from Individual Transactions (Case Study) 10-4 CSE Are Prices Sticky? II: Mail-Order Evidence (Case Study) 10-5 AT Price Stickiness and Pareto Efficiency 10-6 ACS Velocity and the 1982 Recession 10-7 LS Understanding Business Cycles II: Modeling Cycles 10-8 LS The Economy in the Long Run and the Very Long Run: Summary of Parts II and III and Introduction to Part IV 10-9 ACS The Cost of Business Cycles 10-10 LS Additional Readings CHAPTER 11 11-1 LS The Key Features of the IS LM Model 11-2 ACS Mr. Keynes and the Classics: The Art of Modeling 11-3 AT The IS LM Model: A Critical Evaluation 11-4 LS Additional Readings CHAPTER 12 12-1 ACS Do High Deficits Cause High Interest Rates? 12-2 ACS Macroeconometric Models 12-3 ACS Credit Rationing and the Great Depression 12-4 LS The Simple Algebra of the IS LM Model and Aggregate Demand Curve 12-5 LS Proportional Income Taxes and the IS Curve 12-6 LS Additional Readings CHAPTER 13 13-1 LS The Dependence of Net Exports on GDP 13-2 ACS The Rise in the Dollar, 1979 1982 13-3 LS Can World Financial Markets Usurp the Power of the Federal Reserve? 13-4 ACS Bretton Woods 13-5 ACS Finland in the 1990s 13-6 LS The Mundell Fleming Model in Y r Space 13-7 AT Uncovered Interest Parity 13-8 ACS Interest-Rate Differentials in the European Monetary System 13-9 AT The Dornbusch Overshooting Model 13-10 CSE Mexico s Foreign Exchange Reserves (Case Study) 13-11 ACS Exchange-Rate Volatility 13-12 CSE The Federal Reserve and the European Central Bank (Case Study) 13-13 LS Additional Readings CHAPTER 14 14-1 LS The Sticky-Wage Model 14-2 LS Real Wages over the Business Cycle 14-3 LS The Worker-Misperception Model 14-4 CSE Anticipated and Unanticipated Money (Case Study) 14-5 AT Is Price Flexibility Stabilizing? 14-6 LS How Long Is the Long Run? Part Three 14-7 AT Policy Ineffectiveness 14-8 CSE Did the NAIRU Decline in the 1990s? (Case Study) 14-9 CSE Costs of Disinflation (Case Study) 14-10 CSE The Unequal Costs of Disinflation (Case Study) 14-11 ACS The Poincaré Miracle ix

14-12 LS Hysteresis and the Long-Run Phillips Curve 14-13 ACS Unemployment in the United Kingdom in the 1980s 14-14 LS Additional Readings CHAPTER 15 15-1 LS How a Real Business Cycle Model Is Constructed 15-2 LS The Microeconomics of Labor Supply 15-3 LS Quits and Layoffs 15-4 LS Involuntary Unemployment and Overqualification 15-5 AT Why Technology Shocks Are So Important in Real Business Cycle Models 15-6 AT Real Business Cycles and Random Walks 15-7 LS Inflation Inertia 15-8 ACS Volatility and Growth 15-9 LS How Long Is the Long Run? Part Four 15-10 LS Additional Readings CHAPTER 16 16-1 ACS The Components of Consumption 16-2 LS The Stock Market and Consumer Spending 16-3 ACS Saving and the Fear of Nuclear War 16-4 CSE The 1975 Tax Cut (Case Study) 16-5 CSE Do Consumers Anticipate Changes in Social Security Benefits? (Case Study) 16-6 ACS Is Unemployment Insurance Really an Automatic Stabilizer? 16-7 LS Additional Readings CHAPTER 17 17-1 LS The Short Run and the Long Run: Investment and the Capital Stock 17-2 AT Asset Pricing I: Why Do We Care? 17-3 AT Asset Pricing II: Stock Prices and Efficient Markets 17-4 AT Asset Pricing III: Bond Prices and the Term Structure of Interest Rates 17-5 AT Asset Pricing IV: Bubbles, Excess Volatility, and Fads 17-6 AT Asset Pricing V: The Capital-Asset Pricing Model 17-7 ACS Financing Constraints in Japanese Firms 17-8 ACS Taxes, Babies, and Housing 17-9 LS The Tax Treatment of Housing 17-10 LS The Importance of Inventories 17-11 ACS Inventories and Production Smoothing 17-12 ACS Production Smoothing and Coordination Failure 17-13 AT The Multiplier-Accelerator Model 17-14 LS Additional Readings CHAPTER 18 18-1 AT Menu Costs, Imperfect Competition, and the Welfare-Improving Effects of Policy 18-2 ACS Profit Sharing as an Automatic Stabilizer 18-3 ACS Leading Indicators in Action 18-4 CSE The Pitfalls of Forecasting (Case Study) 18-5 CSE Are Forecasters Rational? (Case Study) 18-6 LS Microfoundations and Aggregation 18-7 CSE Spare a Thought for the Empirical Macroeconomist (Case Study) 18-8 CSE The Response to Romer (Case Study) 18-9 ACS Distrust of Policymakers 18-10 ACS The Political Business Cycle 18-11 ACS The Political Business Cycle at Its Worst 18-12 ACS The Economy Under Democratic and Republican Presidents 18-13 LS Price Level Versus Inflation Targeting 18-14 CSE Inflation Targeting (Case Study) 18-15 CSE Central-Bank Independence and Growth (Case Study) x

18-16 CSE Measuring Central-Bank Independence (Case Study) 18-17 LS Additional Readings CHAPTER 19 19-1 ACS Debt and Deficits: The Data 19-2 CSE How Important Is Crowding Out? (Case Study) 19-3 ACS Structural and Cyclical Deficits 19-4 LS Generational Accounting 19-5 LS The Government Budget Constraint 19-6 LS Borrowing Constraints Using the Fisher Diagram 19-7 ACS Social Security Benefits and Ricardian Equivalence 19-8 AT Is Everything Neutral? 19-9 CSE Does Altruism Matter? (Case Study) 19-10 LS Unpleasant Monetarist Arithmetic 19-11 CSE Inflation Indexed Bonds and Expected Inflation (Case Study) 19-12 LS Additional Readings CHAPTER 20 20-1 ACS The Perils of Employee Stock Ownership 20-2 LS How Does Financial Development Affect Growth? 20-3 LS Does Financial Development Cause Growth? 20-4 LS Financial Development and Industrial Structure 20-5 ACS Unit Banking and Economic Growth 20-6 LS The Money Multiplier During the Financial Crisis of 2008 2009 20-7 LS Banks Hoard Reserves During the Financial Crisis 20-8 ACS The Fed's Senior Loan Officer Survey 20-9 LS The Tax Treatment of Housing 20-10 LS More on the Fed's Rescue Programs 20-11 LS Exit Strategies for the Fed 20-12 ACS Greenspan Warns About Government Budget Surpluses 20-13 LS The Squam Lake Report 20-14 LS Additional Readings xi