about the authors glenn hubbard, policymaker, professor, … · 2013. 8. 9. · about the authors...

ABOUT THE AUTHORS Glenn Hubbard, policymaker, professor, and

researcher. R. Glenn Hubbard is the dean and Russell L. Carson Professor of Finance and Economics in the Graduate School of Business at Columbia University and professor of economics in Columbia’s Faculty of Arts and Sciences. He is also a research associate of the National Bureau of Economic Research and a director of Automatic Data Processing, Black Rock Closed-End Funds, KKR Financial Corporation, and MetLife. He received his Ph.D. in economics from Harvard University in 1983. From 2001 to 2003, he served as chairman of the White

House Council of Economic Advisers and chairman of the OECD Economy Policy Committee, and from 1991 to 1993, he was deputy assistant secretary of the U.S. Treasury Department. He currently serves as co-chair of the nonpartisan Committee on Capital Markets Regulation. Hubbard’s fields of specialization are public economics, financial markets and institutions, corporate finance, macroeconomics, industrial organization, and public policy. He is the author of more than 100 articles in leading journals, including American Economic Review, Brookings Papers on Economic Activity, Journal of Finance, Journal of Financial Economics, Journal of Money, Credit, and Banking, Journal of Political Economy, Journal of Public Economics, Quarterly Journal of Economics, RAND Journal of Economics, and Review of Economics and Statistics. His research has been supported by grants from the National Science Foundation, the National Bureau of Economic Research, and numerous private foundations.

Tony O’Brien, award-winning professor and researcher. Anthony Patrick O’Brien is a professor of economics at Lehigh University. He received his Ph.D. from the University of California, Berkeley, in 1987. He has taught principles of economics for more than 15 years, in both large sections and small honors classes. He received the Lehigh University Award for Distinguished Teaching. He was formerly the director of the Diamond Center for Economic Education and was named a Dana Foundation Faculty Fellow and Lehigh Class of 1961 Professor of Economics. He has been a visiting professor at the University of

California, Santa Barbara, and the Graduate School of Industrial Administration at Carnegie Mellon University. O’Brien’s research has dealt with such issues as the evolution of the U.S. automobile industry, sources of U.S. economic competitiveness, the development of U.S. trade policy, the causes of the Great Depression, and the causes of black-white income differences. His research has been published in leading journals, including American Economic Review, Quarterly Journal of Economics, Journal of Money, Credit, and Banking, Industrial Relations, Journal of Economic History, and Explorations in Economic History. His research has been supported by grants from government agencies and private foundations. In addition to teaching and writing, O’Brien also serves on the editorial board of the Journal of Socio-Economics.

IV

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Apostolos Serletis is Professor of Economics at the University of Calgary. Since receiving his Ph.D. from McMaster University in 1984, he has held visiting appointments at the University of Texas at Austin, the Athens University of Economics and Business, and the Research Department of the Federal Reserve Bank of St. Louis.

Professor Serletis’ teaching and research interest focus on monetary and financial economics, macroeconometrics, and nonlinear and complex dynamics. He is the author of 12 books, including The

Economics of Money, Banking, and Financial Markets: Fifth Canadian Edition, with Frederic S. Mishkin (Pearson, 2014); Macroeconomics: A Modern Approach: First Canadian Edition, with Robert J. Barro (Nelson, 2010); The Demand for Money: Theoretical and Empirical Approaches (Springer, 2007); Financial Markets and Institutions: Canadian Edition, with Frederic S. Mishkin and Stanley G. Eakins (Addison-Wesley, 2004); and The Theory of Monetary Aggregation, co-edited with William A. Barnett (Elsevier, 2000).

In addition, he has published more than 200 articles in such journals as the Journal of Economic Literature, Journal of Monetary Economics, Journal of Money, Credit, and Banking, Journal of Econometrics, Journal of Applied Econometrics, Journal of Business and Economic Statistics, Macroeconomic Dynamics, Journal of Banking and Finance, Journal of Economic Dynamics and Control, Economic Inquiry, Canadian Journal of Economics, Econometric Reviews, and Studies in Nonlinear Dynamics and Econometrics.

Professor Serletis is currently an Associate Editor of two academic journals, Macroeconomic Dynamics and Energy Economics, and a member of the Editorial Board at the Journal of Economic Asymmetries and the Journal of Economic Studies. He has also served as Guest Editor of the Journal of Econometrics, Econometric Reviews, and Macroeconomic Dynamics.

Jason Childs is an Associate Professor of Economics at the University of Regina. He received his PhD from McMaster University in 2003. He has taught introductory economics (both microeconomics and macroeconomics) his entire career. He began his teaching career with the McCain Postdoctoral Fellowship at Mount Allison University. After this fellowship he spent six years at the University of New Brunswick, where he received one teaching award and was nominated for two others. Since joining the University of Regina, he has continued to teach introductory-level economics courses and was instrumental in designing a graduate-

level program applying economics to problems of public policy. While in Saskatchewan, he has also consulted for the Ministry of Education on the social science curriculum. Professor Childs’ research has dealt with a wide variety of issues ranging from the voluntary provision of public services, uncovered interest rate parity, rent controls, to lying. His work has been published in leading journals, including the Journal of Public Economics, Review of International Economics, Computational Economics, and Economics Letters.

A B O U T T H E A U T H O R S V

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VI C h a p t e r T T L

VI

BRIEF CONTENTS

Preface xvA Word of Thanks 000

PART 1: Introduction

Chapter 1: Economics: Foundations and Models 2

Appendix: Using Graphs and Formulas 22

Chapter 2: Trade-offs, Comparative Advantage, and the Market System 34

Chapter 3: Where Prices Come From: The Interaction of Supply and Demand 60

Appendix: Quantitative Demand and Supply Analysis 90

PART 2: Macroeconomic Foundations and Long-Run Growth

Chapter 4: GDP: Measuring Total Production and Income 94

Chapter 5: Unemployment and Inflation 120

Chapter 6: Economic Growth, the Financial System, and Business Cycles 146

Chapter 7: Long-Run Economic Growth: Sources and Policies 174

PART 3: Short-Run Fluctuations

Chapter 8: Aggregate Expenditure and Output in the Short Run 212

Appendix C: The Algebra of Macroeconomic Equilibrium 250

Chapter 9: Aggregate Demand and Aggregate Supply Analysis 252

Appendix: Macroeconomic Schools of Thought 287

Part 4: Monetary and Fiscal Policy

Chapter 10 Money, Banks, and the Bank of Canada 290

Chapter 11: Monetary Policy 324

Chapter 12: Fiscal Policy 000

Chapter 13: Inflation, Unemployment, and Bank of Canada Policy 000

PART 5: The International Economy

Chapter 14: Macroeconomics in an Open Economy 000

Chapter 15: The International Financial System 000

Appendix: The Gold Standard and the Bretton Woods System 000

Glossary G-1Company Index I-1Subject Index I-2Credits C-1

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VII

CONTENTS

Slopes of Nonlinear Curves 29Formulas 30

Formula for a Percentage Change 30Formulas for the Areas of a Rectangle and a Triangle 31Summary of Using Formulas 31Problems and Applications 32

Chapter 2: Trade-offs, Comparative Advantage, and the Market System 34

Managers Make Choices at Toyota 352.1 Production Possibilities Frontiers and Opportunity Costs 36

Graphing the Production Possibilities Frontier 36Solved Problem 2.1 Drawing a Production

Possibilities Frontier for Pat’s Pizza Pit 38Making the Connection Facing the Trade-offs of

Health Care Spending 40Increasing Marginal Opportunity Costs 40Economic Growth 41

2.2 Comparative Advantage and Trade 42Specialization and Gains from Trade 42Absolute Advantage versus Comparative Advantage 44Comparative Advantage and the Gains from Trade 45Don’t Let This Happen to You Don’t Confuse Absolute

Advantage and Comparative Advantage 46Solved Problem 2.2 Comparative Advantage and the

Gains from Trade 462.3 The Market System 48

The Circular Flow of Income 48The Gains from Free Markets 50Making the Connection A Story of the Market

System in Action: How Do you Make a PlayBook? 50

The Legal Basis of a Successful Market System 51Conclusion 53

An Inside Look Toyota Faces a Trade-off 54

Chapter 3: Where Prices Come From: The Interaction of Supply and Demand 60

Red Bull and the Market for Energy Drinks 613.1 The Demand Side of the Market 62

Demand Schedules and Demand Curves 62The Law of Demand 63What Explains the Law of Demand? 63That Magic Latin Phrase Ceteris Paribus 64Variables That Shift Market Demand 64Making the Connection Is Beer an Inferior Good? 65Making the Connection The Aging Baby Boomers 66

Preface xvA Word of Thanks 000

PART 1: Introduction

Chapter 1: Economics: Foundations and Models 2

You versus Caffeine 31.1 Three Key Economic Ideas 4

People are Rational 4People Respond to Incentives 5Making the Connection Will Women in Quebec have

More Babies if the Government Pays them to? 5Optimal Decisions are Made at the Margin 6Solved Problem 1.1 McCain Foods Makes a Decision

at the Margin 61.2 The Economic Problems all Societies must Solve 7

What Goods and Services will be Produced? 7How will the Goods and Services be Produced? 8Who will Receive the Goods and Services Produced? 8Centrally Planned Economies versus Market Economies 8The Modern Mixed Economy 9Efficiency and Equity 9

1.3 Economic Models 10The Role of Assumptions in Economic Models 10Forming and Testing Hypotheses in Economic Models 10Normative and Positive Analysis 11Don’t Let This Happen to You Don’t Confuse Positive

Analysis with Normative Analysis 12Economics as a Social Science 12Making the Connection Should the Government of

Ontario Increase its Minimum Wage? 121.4 Microeconomics and Macroeconomics 131.5 The Language of Economics 13Conclusion 15

An Inside Look Coffee Prices Set to Soar 16*Chapter Summary and Problems 18

Key Terms, Summary, Review Questions, Problems and Applications

Appendix A: Using Graphs and Formulas 22Graphs of One Variable 23Graphs of Two Variables 24Slopes of Lines 24Taking into Account More Than Two Variables on a Graph 25Positive and Negative Relationships 26Determining Cause and Effect 26Are Graphs of Economic Relationships Always Straight Lines? 29

*These end-of-chapter resource materials repeat in all chapters.

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VIII C O N T E N T S

4.2 Does GDP Measure What We Want It to Measure? 104Shortcomings of GDP as a Measure of Total Production 104Shortcomings of GDP as a Measure of Well-Being 105Making the Connection GDP and Happiness 106

4.3 Real GDP versus Nominal GDP 107Calculating Real GDP 107Solved Problem 4.2 Calculating Real GDP 108Comparing Real GDP and Nominal GDP 108The GDP Deflator 109

4.4 Other Measures of Total Production and Total Income 110

Gross National Product (GNP) 110National Income 110Household Income 111Household Disposable Income 111The Division of Income 111

Conclusion 113An Inside Look A Slowdown in the Export of Goods

and Services Is Shrinking the Canadian Economy 114

Chapter 5: Unemployment and Inflation 120

Canadian Manufacturers Grow While Others Shrink 1215.1 Measuring the Unemployment Rate and the Labour Force Participation Rate 122

The Labour Force Survey 122Problems with Measuring the Unemployment Rate 124Trends in Labour Force Participation 124How Long Are People Typically Unemployed? 125Job Creation and Job Destruction over Time 125

5.2 Types of Unemployment 126Frictional Unemployment and Job Search 126Structural Unemployment 127Cyclical Unemployment 127Seasonal Unemployment 127Full Employment 128Making the Connection How Should We

Categorize the Unemployment of Laid-off Canada Post Employees? 128

5.3 Explaining Unemployment 129Government Policies and the Unemployment Rate 129Labour Unions 130Efficiency Wages 130Making the Connection Why Does Costco Pay Its

Workers More than Walmart? 1315.4 Measuring Inflation 131

The Consumer Price Index 132Is the CPI Accurate? 133Don’t Let This Happen to You Don’t Miscalculate

the Inflation Rate 134The Producer Price Index 134

5.5 Using Price Indexes to Adjust for the Effects of Inflation 135

Solved Problem 5.1 Calculating Real Hourly Wages 1355.6 Real versus Nominal Interest Rates 136

A Change in Demand versus a Change in Quantity Demanded 68

3.2 The Supply Side of the Market 69Supply Schedules and Supply Curves 69The Law of Supply 70Variables That Shift Market Supply 71A Change in Supply versus a Change in Quantity Supplied 72

3.3 Market Equilibrium: Putting Buyers and Sellers Together 73

How Markets Eliminate Surpluses and Shortages: Getting to Equilibrium 74Demand and Supply Both Count 74Solved Problem 3.1 Demand and Supply Both Count:A Tale of Two Cards 75

3.4 The Effect of Demand and Supply Shifts on Equilibrium 77

The Effect of Shifts in Supply on Equilibrium 77Making the Connection The Falling Price of

LCD TVs 77The Effect of Shifts in Demand on Equilibrium 78The Effect of Shifts in Demand and Supply over Time 79Solved Problem 3.2 High Demand and Low

Prices in the Lobster Market 80Don’t Let This Happen to You Remember:

A Change in a Good’s Price Does Not Cause the Demand or Supply Curve to Shift 81

Shifts in a Curve versus Movements along a Curve 82Conclusion 83

An Inside Look PepsiCo Tries to Create a New Category of Drinks That Promises Energy and Health Benefits 84

Appendix B: Quantitative Demand and Supply Analysis 90Demand and Supply Equations 90

Review Questions 93Problems and Applications 93

PART 2: Macroeconomic Foundations and Long-Run Growth

Chapter 4: GDP: Measuring Total Production and Income 94

The Health of the Canadian Economy 954.1 Gross Domestic Product Measures Total Production 96

Measuring Total Production: Gross Domestic Product 96Solved Problem 4.1 Calculating GDP 97Production, Income, and the Circular-Flow Diagram 98Components of GDP 100Don’t Let This Happen to You Remember What

Economists Mean by Investment 100An Equation for GDP and Some Actual Values 101Making the Connection Do Canadians Spend

Too Much? 102Measuring GDP Using the Value-Added Method 103

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C O N T E N T S IX

5.7 Does Inflation Impose Costs on the Economy? 137Inflation Affects the Distribution of Income 138The Problem with Anticipated Inflation 138The Problem with Unanticipated Inflation 139

Conclusion 139An Inside Look The Link between the Demand for

Manufactured Products and Employment 140

Chapter 6: Economic Growth, the Financial System, and Business Cycles 146

Economic Growth and the Business Cycle at Bombardier 1476.1 Long-Run Economic Growth 148

Making the Connection Economic Prosperity and Health 149

Calculating Growth Rates and the Rule of 70 150What Determines the Rate of Long-Run Growth? 151Solved Problem 6.1 The Role of Technological

Change in Economic Growth 152Making the Connection Rapid Economic

Growth in Botswana 153Potential GDP 154

6.2 Saving, Investment, and the Financial System 155An Overview of the Financial System 155

The Macroeconomics of Saving and Investment 156The Market for Loanable Funds 158Solved Problem 6.2 How Does a Consumption

Tax Affect Saving, Investment, the Interest Rate, and Economic Growth? 161

6.3 The Business Cycle 162Some Basic Business Cycle Definitions 162How Do We Know When the Economy Is in a Recession? 163What Happens during the Business Cycle 163Don’t Let This Happen to You Don’t Confuse the

Price Level with the Inflation Rate 165Conclusion 166

An Inside Look Bombardier and the Global Recession 168

Chapter 7: Long-Run Economic Growth: Sources and Policies 174

Google’s Dilemma in China 1757.1 Economic Growth over Time and around the World 176

Economic Growth from 1 000 000 bce to the Present 176Making the Connection Why Did the Industrial

Revolution Begin in England? 177Small Differences in Growth Rates Are Important 178Why Do Growth Rates Matter? 178Don’t Let This Happen to You Don’t Confuse

the Average Annual Percentage Change with the Total Percentage Change 179

“The Rich Get Richer and…” 179Making the Connection Is Income All That Matters? 180

7.2 What Determines How Fast Economies Grow? 181

The Per-Worker Production Function 182Which Is More Important for Economic Growth: More Capital or Technological Change? 183Technological Change: The Key to Sustaining Economic Growth 184Making the Connection What Explains the Economic

Failure of the Soviet Union? 184Solved Problem 7.1 Using the Economic Growth

Model to Analyze the Failure of the Soviet Economy 185

New Growth Theory 186Joseph Schumpeter and Creative Destruction 188Thomas Malthus and Endogenous Population Growth 188

7.3 Economic Growth in Canada 189Economic Growth in Canada since 1950 189What Caused the Productivity Slowdown from 1973 to 1994? 190Can Canada Maintain High Rates of Productivity Growth? 190

7.4 Why Isn’t the Whole World Rich? 191Catch-up: Sometimes but Not Always 191Solved Problem 7.2 The Economic Growth Model’s

Prediction of Catch-up 192Why Haven’t Most Western European Countries, Canada, and Japan Caught Up to the United States? 194Why Don’t More Low-Income Countries Experience Rapid Growth? 196Making the Connection What Do Parking Tickets

in New York City Tell Us about Poverty in the Developing World? 197

The Benefits of Globalization 1997.5 Growth Policies 200

Enhancing Property Rights and the Rule of Law 200Making the Connection Will China’s Standard of

Living Ever Exceed That of Canada? 200Improving Health and Education 201Policies That Promote Technological Change 202Policies That Promote Saving and Investment 202Is Economic Growth Good or Bad? 202

Conclusion 203An Inside Look Despite a Plan for Change,

Investment Still Spurs China’s Growth 204

PART 3: Short-Run Fluctuations

Chapter 8: Aggregate Expenditure and Output in the Short Run 212

Fluctuating Demand at Tim Hortons 2138.1 The Aggregate Expenditure Model 214

Aggregate Expenditure 214The Difference between Planned Investment and Actual Investment 215Macroeconomic Equilibrium 215

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X C O N T E N T S

Getting to Macroeconomic Equilibrium 2168.2 Determining the Level of Aggregate Expenditure in the Economy 217

Consumption 218Making the Connection Do Changes in Consumer

Confidence Affect Consumption Spending? 219The Relationship between Consumption and National Income 222Income, Consumption, and Saving 223Solved Problem 8.1 Calculating the Marginal

Propensity to Consume and the Marginal Propensity to Save 224

Planned Investment 225Making the Connection The Hills and Valleys of

Snowmobile Purchases 227Government Purchases 228Net Exports 228

8.3 Graphing Macroeconomic Equilibrium 230Showing a Recession on the 45°-Line Diagram 233The Important Role of Inventories 234A Numerical Example of Macroeconomic Equilibrium 235

8.4 The Multiplier Effect 235A Formula for the Multiplier 237Summarizing the Multiplier Effect 239Solved Problem 8.2 Using the Multiplier Formula 239Don’t Let This Happen to You Understand Why

Protectionism Doesn’t Raise the Multiplier 240The Paradox of Thrift 241

8.5 The Aggregate Demand Curve 241Conclusion 243

An Inside Look Tim Hortons Depends on the Broader Economy 244

Appendix C: The Algebra of Macroeconomic Equilibrium 250

Review Questions 251

Chapter 9: Aggregate Demand and Aggregate Supply Analysis 252

Canadian National Railway and the Business Cycle 2539.1 Aggregate Demand 254

Why Is the Aggregate Demand Curve Downward Sloping? 254Shifts of the Aggregate Demand Curve versus Movements along It 256Variables That Shift the Aggregate Demand Curve 256Don’t Let This Happen to You Understand Why the

Aggregate Demand Curve Is Downward Sloping 256Making the Connection The Role of Exports in

Aggregate Demand 258Solved Problem 9.1 Movements along the

Aggregate Demand Curve versus Shifts of the Aggregate Demand Curve 259

Making the Connection Predicting Shifts of the Aggregate Demand Curve 261

9.2 Aggregate Supply 262The Long-Run Aggregate Supply Curve 262The Short-Run Aggregate Supply Curve 263Shifts of the Short-Run Aggregate Supply Curve versus Movements along It 264Variables That Shift the Short-Run Aggregate Supply Curve 264

9.3 Macroeconomic Equilibrium in the Long Run and the Short Run 267

Recessions, Expansions, and Supply Shocks 267Making the Connection Does the Canadian

Economy Import Recessions? 269 Making the Connection Does Government

Intervention Help Fight a Recession? 2719.4 A Dynamic Aggregate Demand and Aggregate Supply Model 272

What Is the Usual Cause of Inflation? 275The Canadian Recession of 2008–2009 275Solved Problem 9.2 Showing the Millennium

Economic Boom on a Dynamic Aggregate Demand and Aggregate Supply Graph 277

Conclusion 279An Inside Look Higher Freight Volumes Signal

Good News for the Canadian Economy 280Appendix D: Macroeconomic Schools of Thought 287

The Monetarist Model 287The New Classical Model 288The Real Business Cycle Model 288 Making the Connection Karl Marx:

Capitalism’s Severest Critic 289

Part 4: Monetary and Fiscal Policy

Chapter 10 Money, Banks, and the Bank of Canada 290

Coca-Cola Dries Up as Money Floods Zimbabwe 29110.1 What Is Money, and Why Do We Need It? 292

What Is Money, and Why Do We Need It? 292Barter and the Invention of Money 292The Functions of Money 293What Can Serve as Money? 294Making the Connection The Pokémon

Currency System 29510.2 How Is Money Measured in Canada Today? 295

The M1+ and M1++ Definitions of the Money Supply 297The M2, M2+, and M2++ Definitions of the Money Supply 297The M3 Definition of the Money Supply 297Making the Connection Canada Drops the Penny 297Don’t Let This Happen to You Don’t Confuse Money

with Income or Wealth 298Solved Problem 10.1 The Definitions of

M1+ and M1++ 298

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C O N T E N T S XI

What about Credit Cards and Debit Cards? 29910.3 How Do Banks Create Money? 299

Bank Balance Sheets 299Using T-Accounts to Show How a Bank Can Create Money 300The Simple Deposit Multiplier 302Don’t Let This Happen to You Don’t Confuse

Assets and Liabilities 303Solved Problem 10.2 Showing How Banks

Create Money 304The Simple Deposit Multiplier versus the Real-World Deposit Multiplier 306

10.4 The Bank of Canada 306The Establishment of the Bank of Canada 307The Bank of Canada’s Operating Band for the Overnight Interest Rate 307How the Bank of Canada Implements Monetary Policy 308The Bank of Canada’s Approach to Monetary Policy 310The “Shadow Banking System” and the Global Financial Crisis of 2007–2009 310

10.5 The Quantity Theory of Money 313Connecting Money and Prices: The Quantity Equation 313The Quantity Theory Explanation of Inflation 314How Accurate Are Estimates of Inflation Based on the Quantity Theory? 314High Rates of Inflation 315Making the Connection The German

Hyperinflation of the Early 1920s 316Conclusion 317

An Inside Look Price-Level Targeting versus Inflation-Rate Targeting 318

Chapter 11: Monetary Policy 324

Monetary Policy and the Canadian Housing Market 32511.1 What Is Monetary Policy? 326

The Goals of Monetary Policy 32611.2 The Money Market and the Bank of Canada’s Choice of Monetary Policy Targets 328

Monetary Policy Targets 328The Demand for Money 328Shifts in the Money Demand Curve 329How the Bank of Canada Manages the Money Supply: A Quick Review 329Equilibrium in the Money Market 330A Tale of Two Interest Rates 331Choosing a Monetary Policy Target 332The Importance of the Overnight Interest Rate 332

11.3 Monetary Policy and Economic Activity 333How Interest Rates Affect Aggregate Demand 333The Effects of Monetary Policy on Real GDP and the Price Level 334Making the Connection Too Low for Zero:

Central Banks Try “Quantitative Easing” 335

Can the Bank of Canada Eliminate Recessions? 337A Summary of How Monetary Policy Works 338Don’t Let This Happen to You Remember That with

Monetary Policy, It’s the Interest Rates—Not the Money—That Counts 338

11.4 Monetary Policy in the Dynamic Aggregate Demand and Aggregate Supply Model 339

The Effects of Monetary Policy on Real GDP and the Price Level: A More Complete Account 339Using Monetary Policy to Fight Inflation 340Solved Problem 11.1 The Effects of Monetary Policy 341

11.5 A Closer Look at the Bank of Canada’s Setting of Monetary Policy Targets 343

Should the Bank of Canada Target the Money Supply? 343Why Doesn’t the Bank of Canada Target Both the Money Supply and the Interest Rate? 344The Taylor Rule 344 Making the Connection How Does the Bank of

Canada Measure Inflation? 34511.6 Central Bank Policies during the 2007–2009 Global Financial Crisis 346

The Inflation and Deflation of the Housing Market Bubble in the United States 346The Changing Mortgage Market in the United States 348The Role of Investment Banks in the United States 348Why Didn’t Canada Have a Housing Bubble and Banking Crisis in 2008? 349Making the Connection The Wonderful World of

Leverage 349The US Federal Reserve and the US Treasury Department Respond 350The US Federal Reserve Adopts Flexible Inflation Targeting 352

Conclusion 353An Inside Look The Bank of Canada’s Response to a

Developing Housing Price Bubble 354

Chapter 12: Fiscal Policy 000

Canadian Fiscal Policy during and after the 2008–2009 Recession 00012.1 What Is Fiscal Policy? 000

What Fiscal Policy Is and What It Isn’t 000Automatic Stabilizers versus Discretionary Fiscal Policy 000An Overview of Government Spending and Taxes 000Where Does the Money Go? 000Where Does the Money Come From? 000Making the Connection The Exploding

Costs of Health Care 00012.2 The Effects of Fiscal Policy on Real GDP and the Price Level 000

Expansionary and Contractionary Fiscal Policy 000A Summary of How Fiscal Policy Affects Aggregate Demand 000

12.3 Fiscal Policy in the Dynamic Aggregate Demand and Aggregate Supply Model 000

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XII C O N T E N T S

How Does a Vertical Long-Run Phillips Curve Affect Monetary Policy? 000Making the Connection Does the Natural Rate of

Unemployment Ever Change? 000Solved Problem 13.1 Changing Views of the

Phillips Curve 00013.3 Expectations of the Inflation Rate and Monetary Policy 000

The Effect of Rational Expectations on Monetary Policy 000Is the Short-Run Phillips Curve Really Vertical? 000Real Business Cycle Models 000

13.4 Bank of Canada Policy from the 1970s to the Present 000

The Effect of a Supply Shock on the Phillips Curve 000The Canadian Disinflation, 1989-1993 000Inflation Targeting, 1989-Present 000Don’t Let This Happen to You Don’t Confuse

Disinflation with Deflation 000Solved Problem 13.2 Using Monetary Policy to

Lower the Inflation Rate 000The 2007–2009 Global Recession and the Crisis in Monetary Policy 000

Conclusion 000An Inside Look Can the Federal Reserve Balance the

Trade-off between Unemployment and Inflation in the United States? 000

PART 5: THE INTERNATIONAL ECONOMY

Chapter 14: Macroeconomics in an Open Economy 000

A Strong U. S. dollar Hurts McDonald’s Profits 00014.1 The Balance of Payments: Linking Canada to the International Economy 000

The Current Account 000The Financial Account 000The Capital Account 000Why Is the Balance of Payments Always Zero? 000Don’t Let This Happen to You Don’t Confuse the

Balance of Trade, the Current Account Balance, and the Balance of Payments 000

Solved Problem 14.1 Understanding the Arithmetic of Open Economies 000

14.2 The Foreign Exchange Market and Exchange Rates 000

Making the Connection Exchange Rate Listings 000Equilibrium in the Market for Foreign Exchange 000How Do Shifts in Demand and Supply Affect the Exchange Rate? 000Making the Connection What Explains the

Fall and Rise and Fall of the Canadian Dollar? 000Some Exchange Rates Are Not Determined by the Market 000

12.4 The Government Purchases and Tax Multipliers 000The Effect of Changes in Tax Rates 000Taking into Account the Effects of Aggregate Supply 000The Multipliers Work in Both Directions 000Don’t Let This Happen to You Don’t Overestimate

the Size of the Multiplier 000Making the Connection Fiscal Policy in Action:

The Federal Government Responds to the Global Recession of 2007–2009 000

Solved Problem 12.1 Fiscal Policy Multipliers 00012.5 The Limits of Fiscal Policy as a Stimulus 000

Does Government Spending Reduce Private Spending 000Crowding Out in the Short Run 000Crowding Out in the Long Run 000Making the Connection Is Losing Your Job

Good for Your Health? 00012.6 Deficits, Surpluses, and Federal Government Debt 000

How the Federal Budget Can Serve as an Automatic Stabilizer 000Making the Connection The Greek Debt Crisis and

Austerity 000Solved Problem 12.2 The Effect of Economic

Fluctuations on the Budget Deficit 000Should the Federal Budget Always Be Balanced? 000The Federal Government Debt 000Is Government Debt a Problem? 000

12.7 The Effects of Fiscal Policy in the Long Run 000The Long-Run Effects of Tax Policy 000Tax Simplification 000Making the Connection Should Canada Adopt the

“Flat Tax”? 000The Economic Effect of Tax Reform 000How Big Are Supply-Side Effects? 000

Conclusion 000An Inside Look Austerity Measures Aren’t Always the

Answer in Tough Economic Times 000

Chapter 13: Inflation, Unemployment, and Bank of Canada Policy 000

Leverage, Bubbles, Bank of Canada Policies, and Macroprudential Regulation 00013.1 The Discovery of the Short-Run Trade-off between Unemployment and Inflation 000

Explaining the Phillips Curve with Aggregate Demand and Aggregate Supply Curves 000Is the Phillips Curve a Policy Menu? 000Is the Short-Run Phillips Curve Stable? 000The Long-Run Phillips Curve 000The Role of Expectations of Future Inflation 000Making the Connection Do Workers Understand

Inflation? 00013.2 The Short-Run and Long-Run Phillips Curves 000

Shifts in the Short-Run Phillips Curve 000

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C O N T E N T S XIII

How Movements in the Exchange Rate Affect Exports and Imports 000Don’t Let This Happen to You Don’t Confuse

What Happens When a Currency Appreciates with What Happens When It Depreciates 000

Solved Problem 14.2 The Effect of Changing Exchange Rates on the Prices of Imports and Exports 000

The Real Exchange Rate 00014.3 The International Sector and National Saving and Investment 000

Net Exports Equal Net Foreign Investment 000Domestic Saving, Domestic Investment, and Net Foreign Investment 000Solved Problem 14.3 Arriving at the Saving and

Investment Equation 00014.4 The Effect of a Government Budget Deficit on Investment 000

Making the Connection Why Is the United States Called the “World’s Largest Debtor”? 000

14.5 Monetary Policy and Fiscal Policy in an Open Economy 000

Monetary Policy in an Open Economy 000Fiscal Policy in an Open Economy 000

ConclusionAn Inside Look The Canadian Dollar and the Effects of

Economic Interdependence 000

Chapter 15: The International Financial System 000

Airbus Deals with Fluctuating Exchange Rates 000

15.1 Exchange Rate Systems 000Don’t Let This Happen to You Remember

That Modern Currencies Are Fiat Money 00015.2 The Current Exchange Rate System 000

The Floating Canadian Dollar 000Making the Connection The Canadian

Province of . . . Arizona? 000What Determines Exchange Rates in the Long Run? 000Making the Connection The Big Mac Theory of

Exchange Rates 000Solved Problem 15.1 Calculating Purchasing Power

Parity Exchange Rates Using Big Macs 000The Euro 000Making the Connection Can the Euro Survive? 000Pegging against Another Currency 000Making the Connection Crisis and Recovery in

South Korea 00015.3 International Capital Markets 000Conclusion 000

An Inside Look At Policy Can Tariffs Offset the Effect of Overvaluation? 000

Glossary 000

Company Index 000

Subject Index 000

Credits 000

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PREFACE

There have been dramatic advances in macroeconomics over the past 40 years, and the field is changing rapidly. Today, macroeconomics assumes that economic agents (i.e., people) have rational expectations and are forward-looking, relies on market-clearing conditions for households and firms, and relies on financial shocks and mechanisms that amplify and propagate those shocks over time. Yet, in the aftermath of the global financial crisis of 2007–2009, a number of economists, the media, and policymakers have argued that modern mac-roeconomics can’t capture the complexity of the world that is to be explained.

We believe that with the increasing complexity and interdependence of real economies, macroeconomics must be relevant and applicable. However, most first-year books do not help students understand a number of contemporary issues and economic events and the policy responses to them. We realized that the 4th US edition of R. Glenn Hubbard and Anthony P. O’Brien’s Principles of Macroeconomics is the kind of textbook that makes mod-ern macroeconomics valuable and applicable. It is the textbook that we always wanted to use in our classes and decided to work on the Canadian edition of the book.

The Canadian edition of Principles of Macroeconomics is completely widget-free. It delivers economics coverage using many fresh, lively, real-world examples from newspapers, magazines, websites, and professional journals from around the world. By building from the specific example to the general case, this text fosters student engagement. In our testing of early drafts of the text in the classroom, we found that the degree of student engagement improved substantially when real-world examples and applications were placed at the fore-front rather than treated as add-ons or afterthoughts. This approach is appealing to both instructors and students, because it captures the richness and interactions of the real world while demonstrating the value and applicability of modern macroeconomics.

Highlights of This EditionThe severe global financial crisis that began in 2007 when the housing bubble burst in the United States and the “Great Recession” and European debt crisis that followed still affect the world economy today. In many countries, unemployment has risen to levels not seen in decades. The crisis in the financial system was the worst since the Great Depression of the 1930s. Policy debates intensified as governments around the world introduced the largest packages of spending increases and tax cuts in history. Central banks, including the Bank of Canada, sailed into uncharted waters as they developed new policy tools to deal with the unprecedented financial turmoil. Other long-running policy debates continued as well, as huge long-run budget deficits, environmental problems, income inequality, and changes to the tax system all received attention from economists, policymakers, and the public.

The Canadian edition helps students understand recent economic events and the policy responses to them. It places applications at the forefront of the discussion. We believe that students find the study of economics more interesting and easier to master when they see economic analysis applied to real-world issues that concern them.

The Foundation: Contextual Learning and Modern OrganizationStudents come to study macroeconomics with a strong interest in understanding events and developments in the economy. We try to capture that interest and develop students’ eco-nomic intuition and understanding in this text. We present macroeconomics in a way that is modern and based in the real world of business and economic policy. And we believe that we do so without making the analysis more difficult. We avoid the recent trend of using simplified versions of intermediate models, which are often more detailed and more com-plex than what students need to understand the basic macroeconomic issues. Instead, we

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XVI P R E F A C E

use a more realistic version of the familiar aggregate demand and aggregate supply model to analyze short-run fluctuations and monetary and fiscal policy. We also avoid the “duelling schools of thought” approach often used to teach macroeconomics at the principles level. We emphasize the many areas of macroeconomics where most economists agree. We also present real business and policy situations throughout to develop students’ intuition.

This edition includes the following:

• A broad discussion of macro statistics. Many students pay at least some attention to the financial news and know that the release of statistics by government agencies can cause movements in stock and bond prices. A background in macroeconomic statis-tics helps clarify some of the policy issues encountered in later chapters. In Chapter 4, “GDP: Measuring Total Production and Income,” and Chapter 5, “Unemployment and Inflation,” we provide students with an understanding of the uses and potential short-comings of the key macroeconomic statistics, without getting bogged down in the mi-nutiae of how the statistics are constructed.

• Early coverage of long-run topics. We place key macroeconomic issues in their long-run context in Chapter 6, “Economic Growth, the Financial System, and Business Cy-cles,” and Chapter 7, “Long-Run Economic Growth: Sources and Policies.” Chapter 6 puts the business cycle in the context of underlying long-run growth and discusses what actually happens during the phases of the business cycle. We believe that this material is important if students are to have the understanding of business cycles they will need to interpret economic events; this material is often discussed only briefly or omitted entirely in other textbooks. We know that many instructors prefer to have a short-run orientation to their macro courses, with a strong emphasis on policy. Accordingly, we have structured Chapter 6 so that its discussion of long-run growth would be sufficient for instructors who want to move quickly to short-run analysis. Chapter 7 uses a sim-ple neoclassical growth model to explain important economic growth issues. We apply the model to topics such as the decline of the Soviet economy, the surprisingly strong growth performance of Botswana, and the failure of many developing countries to sus-tain high growth rates. And we challenge students with the discussion “Why Isn’t the Whole World Rich?”

• A dynamic model of aggregate demand and aggregate supply. We take a fresh ap-proach to the standard aggregate demand and aggregate supply (AD–AS) model. We realize there is no good, simple alternative to using the AD–AS model when explaining movements in the price level and in real GDP. But we know that more instructors are dissatisfied with the AD–AS model than with any other aspect of the macro principles course. The key problem, of course, is that AD–AS is a static model that attempts to account for dynamic changes in real GDP and the price level. Our approach retains the basics of the AD–AS model but makes it more accurate and useful by making it more dynamic. We emphasize two points: First, changes in the position of the short-run (upward-sloping) aggregate supply curve depend mainly on the state of expec-tations of the inflation rate. Second, the existence of growth in the economy means that the long-run (vertical) aggregate supply curve shifts to the right every year. This “dynamic” AD–AS model provides students with a more accurate understanding of the causes and consequences of fluctuations in real GDP and the price level. We introduce this model in Chapter 9, “Aggregate Demand and Aggregate Supply Analysis,” and use it to discuss monetary policy in Chapter 11, “Monetary Policy,” and fiscal policy in Chapter 12, “Fiscal Policy.” Instructors may safely omit the sections on the dynamic AD–AS model without any loss in continuity to the discussion of macroeconomic the-ory and policy.

• Extensive coverage of monetary policy. Because of the central role monetary policy plays in the economy and in students’ curiosity about business and financial news, we devote two chapters—Chapters 11, “Monetary Policy,” and 13, “Inflation, Unemploy-ment, and Bank of Canada Policy”—to the topic. We emphasize the issues involved in the Bank of Canada’s choice of monetary policy targets, and we include coverage of the

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P R E F A C E XVII

Taylor rule. We also cover the Bank of Canada’s new policies aimed at dealing with the bubble in the Canadian housing market and its effects on financial markets.

• Coverage of both the demand-side and supply-side effects of fiscal policy. Our dis-cussion of fiscal policy in Chapter 12, “Fiscal Policy,” carefully distinguishes between automatic stabilizers and discretionary fiscal policy. We also provide significant cover-age of the supply-side effects of fiscal policy.

• A self-contained but thorough discussion of the Keynesian income-expenditure approach. The Keynesian income-expenditure approach (the “45°-line diagram,” or “Keynesian cross”) is useful for introducing students to the short-run relationship be-tween spending and production. Many instructors, however, prefer to omit this mate-rial. Therefore, we use the 45°-line diagram only in Chapter 8, “Aggregate Expenditure and Output in the Short Run.” The discussion of monetary and fiscal policy in later chapters uses only the AD–AS model, which makes it possible to omit Chapter 8.

• Extensive international coverage. We include two chapters devoted to international topics: Chapter 14, “Macroeconomics in an Open Economy,” and Chapter 15, “The In-ternational Financial System.” Having a good understanding of the international trading and financial systems is essential to understanding the macroeconomy and to satisfying students’ curiosity about the economic world around them. In addition to the material in our two international chapters, we weave international comparisons into the narra-tives of several other chapters, including our discussion of labour market policies in Chapter 13, “Inflation, Unemployment, and Bank of Canada Policy,” and central bank-ing in Chapter 10, “Money, Banks, and the Bank of Canada.”

• Flexible chapter organization. Because we realize that there are a variety of approaches to teaching principles of macroeconomics, we have structured our chapters for maxi-mum flexibility. For example, our discussion of long-run economic growth in Chapter 6, “Economic Growth, the Financial System, and Business Cycles,” makes it possible for instructors to omit the more thorough discussion of these issues in Chapter 7, “Long-Run Economic Growth: Sources and Policies.” Our discussion of the Keynesian 45°-line diagram is confined to Chapter 8, “Aggregate Expenditure and Output in the Short Run,” so that instructors who do not use this approach can proceed directly to aggregate demand and aggregate supply analysis in Chapter 9, “Aggregate Demand and Aggre-gate Supply Analysis.” While we devote two chapters to monetary policy, the first of these—Chapter 11, “Monetary Policy”—is a self-contained discussion, so instructors may safely omit the material in Chapter 13, “Inflation, Unemployment, and Bank of Canada Policy,” if they choose to. Finally, instructors may choose to omit both of the in-ternational chapters (Chapter 14, “Macroeconomics in an Open Economy,” and Chapter 15, “The International Financial System”), cover just Chapter 14; or cover Chapter 14 and Chapter 15.

Special Features: A Real-World, Hands-on Approach to Learning Macroeconomics

Chapter-Opening Cases and An Inside Look News ArticlesEach chapter-opening case provides a real-world context for learning, sparks students’ inter-est in economics, and helps to unify the chapter. Each chapter-opening case describes a real situation that students can relate to. Here are a few examples of the topics we explore in the chapter openers in this new edition:

• Red Bull and the market for energy drinks (Chapter 3) • Economic growth and the business cycle at Bombardier (Chapter 6) • The effect of the business cycle on Canadian National Railways (Chapter 9) • Monetary policy and the Canadian housing market (Chapter 11) • Leverage, bubbles, and central bank policies (Chapter 13)

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XVIII P R E F A C E

An Inside Look is a two-page feature that shows students how to apply the concepts from the chapter to the analysis of a news article. The articles selected deal with policy issues and are titled An Inside Look. Articles are from sources such as the Hamilton Spectator, the Econ-omist, National Post, the Toronto Star, and the Montreal Gazette. An Inside Look presents an excerpt from an article, an analysis of the article, and critical thinking questions.

C

HA

PTER

Chapter Outline and Learning Objectives

3.1 The Demand Side of the Market, page 62 Discuss the variables that influence demand.

3.2 The Supply Side of the Market, page 69 Discuss the variables that influence supply.

3.3 Market Equilibrium: Putting Buyers and Sellers Together, page 73

Use a graph to illustrate market equilibrium.

3.4 The Effect of Demand and Supply Shifts on Equilibrium, page 77

Use demand and supply graphs to predict changes in prices and quantities.

Appendix B: Quantitative Demand and Supply Analysis, page 90

Use quantitative demand and supply analysis.

Where Prices Come From: The Interaction of Supply and Demand

3

Economics in Your Life

Red Bull or Beaver Buzz Energy: What’s Your Beverage?

Suppose you are about to buy an energy drink and you are choosing between a Red Bull and a Beaver Buzz Energy. As the more established, well-known brand, Red Bull has many advantages over a recent entrant like Beaver Buzz Energy. One strategy DD Beverage Company can use to overcome Red Bull’s advantages is to have Beaver Buzz Energy compete based on price and value. Would you choose to buy a can of Beaver Buzz Energy if it had a lower price than a can of Red Bull? Would you be less likely to drink Beaver Buzz Energy if your income dropped? As you read this chapter, see if you can answer these questions. You can check your answers against those we provide on page 82 at the end of this chapter.

market. Coca-Cola signed an agreement to distribute Monster Energy in Canada, 20 US states, and 6 Western European countries, and Pepsi struck a similar deal with Rockstar Energy Drink. A Canadian company that has recently entered the market, DD Beverage Company, produces Beaver Buzz Energy and other energy and sports beverages. Well over 200 energy drinks are now available in the North American marketplace.

The intense competition among firms selling energy drinks is a striking example of how the market responds to changes in consumer tastes. Although intense competi-tion is not always good news for firms trying to sell products, it is great news to consum-ers. Competition among firms increases the variety of products available and reduces the price consumers pay for those products.

AN INSIDE LOOK on page 84 dis-cusses Kickstart, PepsiCo’s latest high-energy breakfast drink, which the company hopes will attract young consumers who enjoy energy drinks but are looking for an alternative with the promise of health benefits.

Sources: “Sports and Energy Drinks in Canada,” Just-Drinks , March 2013, http://www.just-drinks.com/market-

research/sports-and-energy-drinks-in-canada_id166423.

aspx?lk=pcl ; “The Buzz Surrounding Energy Drinks,” Cal-gary Herald , February 3, 2005; National Geographic , “Why

We Love Caffeine,” January 2005 edition.

Markets for some products suddenly explode. This was the case in the market for energy drinks. Red Bull was developed in Austria by Dietrich Mateschitz, who based it on a drink he discovered being sold in pharmacies in Thailand. Before Red Bull entered the market, few soft drinks included caffeine. Red Bull didn’t enter the Canadian market until 2004, likely due to soft drink regulations. In Canada, caffeine may not be added to a traditional soft drink other than a cola. For example, Mountain Dew sold in the United States has a relatively high amount of caffeine, but the version sold in Canada contains none. Red Bull and other energy drinks are sold in Canada as natural health products, and are therefore subject to differ-ent regulations. Despite not being available in Canada before 2004, the Canadian sports and energy drink sector saw $876 million in retail sales in 2012. The market for energy drinks has found a particularly valuable niche with students wanting an extra boost of energy for sports, gaming, or studying. Some people have speculated that energy drinks might replace coffee as the morning drink for the current generation.

The success of Red Bull, Monster Energy, and Rockstar Energy Drink has attracted the attention of huge multinational beverage corporations as well as entrepreneurs look-ing to introduce new products into a hot

Red Bull and the Market for Energy Drinks

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84 85

of caffeine on health, particularly in younger

consumers. Kickstart has much less caf-

feine than an energy drink or even a

medium-sized coffee at some of the most

popular coffee shops in Canada.

Thinking Critically 1. How would you show the impact of the

launch of Kickstart on the market for

energy drinks in a graph?

2. If health researchers find strong evi-

dence that high-caffeine beverages

damage the health of younger consum-

ers, what would be the impact on the

market for energy drinks?

offering a product that fits into both catego-

ries. The new product also addresses some

of the concerns about the large amount of

caffeine in energy drinks by offering much

less in Kickstart.

b The energy drink market has been

dominated by Red Bull and Monster

Energy, two firms that are not part of either

major soft drink maker (Coca Cola and Pep-

siCo). Kickstart also offers less sugar than

many other soft drinks by using artificial

sweeteners, thereby reducing the calories

in the new product. By trying to meet the

concerns of different consumers, PepsiCo

is entering not only the energy drink market,

but also the market for vitamin-fortified

drinks at the same time.

c As energy drinks have become more

popular, many people have become

concerned about the impact of large doses

Key Points in the Article PepsiCo has introduced a new product

intended to fill the space between traditional

coffee/tea and the more caffeinated energy

drinks. Soft drink giants Coca Cola and Pep-

siCo hadn’t entered the caffeinated drink

market with the same intensity they have

other drinks markets, but PepsiCo is now

focusing on increasing its sales in this mar-

ket. Kickstart is based on a mix of orange

juice and Mountain Dew, which was devel-

oped by Taco Bell (that’s owned by Yum!

Brands Inc., which was part of PepsiCo).

Analyzing the News a In addition to the growth in the demand

for energy drinks, demand for healthier

drinks has expanded as well. PepsiCo is

hoping to capture parts of both markets by

The promise of “energy” has been a big seller in the beverage industry in recent years, with the energy drink market increasing 17% in 2011 even as broader soft drink consumption has continued to decline, according to Beverage Digest. PepsiCo and the Coca-Cola Co. have largely watched that growth from the sidelines, however, with players such as Monster Beverage and Red Bull dominating the market.

“But the surging popularity of energy drinks has also led to sharper scrutiny. This summer, New York’s attorney general launched an investiga-tion into the marketing prices of energy drink makers including Monster and PepsiCo, which also makes Amp. Law-makers and consumer advocacy groups have also called on the Food and Drug Administration to investigate the safety of the high levels of caffeine in energy drinks for younger people.

Although Kickstart may look like an energy drink, it has far less caffeine, at 92 milligrams for a 16-ounce can. A comparable amount of regular Moun-tain Dew would have 72 milligrams of caffeine while a can of PepsiCo’s Amp energy drink has 142 milligrams, according to the Center for Science in the Public Interest.

By comparison, a 16-ounce cup of Starbucks coffee has 330 milligrams of caffeine.

Source: Associated Press, “Mountain Dew for Breakfast? Soda Giant’s New Morning Beverage Is Packed with Caffeine and Vitamins (Just Don’t Call It an Energy Drink),” Mail Online, February 11, 2013, http://www.dailymail.co.uk/femail/article-2277065/Mountain-Dew-breakfast-Soda-giants-new-morning-beverage-packed-caffeine-vitamins-just-dont-energy-drink.html.

c

Monster Beverage Corp., which also offers options with juice content.

Simon Lowden, chief market-ing officer for PepsiCo’s Americas beverages, says the idea for Kickstart came about after the company learned through consumer research that Moun-tain Dew fans were looking for an alter-native to traditional morning drinks such as coffee, tea and juice.

Kickstart was developed indepen-dently from a Taco Bell breakfast drink last year

“They didn’t really see anything that fit their needs,” he said.

Lowden said Kickstart was devel-oped independently from a Taco Bell breakfast drink introduced last year that combines Mountain Dew and orange juice.

With the growth of energy drinks such as Monster and Red Bull expected to slow, Kickstart could also signal the emergence of a new category that plays off the promise of energy and other health benefits, said John Sicher, publisher of the trade journal Beverage Digest.

In a nod to the growing concerns about sugary drinks, for example, Kickstart also uses artificial sweeteners to reduce its caloric content to about half that of regular soda; a can has 80 calories.

“It’s a very interesting experiment capturing a number of attributes,” Sicher said, likening it to Starbucks’ Refreshers drinks, which promise “natural energy” from green coffee extract.

PepsiCo and the Coca-Cola Co. have largely watched the growth of energy drinks from the sidelines

b

Mountain Dew for Breakfast? Soda Giant’s New Morning Beverage Is Packed with Caffeine and Vitamins (Just Don’t Call It an Energy Drink) If you don’t like coffee or tea, Moun-tain Dew has a new breakfast drink that might perk you up .

PepsiCo Inc. is rolling out a new drink called Kickstart this month that has Mountain Dew flavour but is made with 5% juice and Vitamins B and C, along with an extra jolt of caffeine.

The company, based in Purchase, N.Y., is hoping to boost sales by reach-ing Mountain Dew fans at a new time of day: morning.

PepsiCo said it doesn’t consider Kickstart to be an energy drink, not-ing that it still has far less caffeine than drinks such as Monster and Red Bull and none of the mysterious ingredients that have raised concerns among law-makers and consumer advocates.

But Kickstart, which comes in fla-vours such as “energizing orange citrus” and “energizing fruit punch,” could nev-ertheless give the company a side-door into the fast-growing energy drink mar-ket without getting tangled in any of its controversies.

It also comes in the same 16-ounce cans as popular energy drinks made by

a

PepsiCo Tries to Create a New Category of Drinks That Promises Energy and Health Benefits

AN INSIDE

LOOK

ABC NEWS

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Here are a few examples of the articles featured in An Inside Look:

• “Coffee Prices Soar” (Chapter 1)• “Canada’s Economy Shrinks for First Time in Two Years” (Chapter 4)• “Bombardier Cuts Regional Jet Production” (Chapter 6)

• “Tim Hortons Earnings Fall Short of Forecasts” (Chapter 8)

• “Canada’s Housing Market: Look Out Below” (Chapter 11)

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P R E F A C E XIX

Economics in Your LifeAfter the chapter-opening real-world business case, we have added a personal dimension to the chapter opener, with a feature titled Economics in Your Life, which asks students to consider how economics affects their own lives. The feature piques the interest of stu-dents and emphasizes the connection between the material they are learning and their own experiences.

At the end of the chapter, we use the chapter concepts to answer the questions asked at the beginning of the chapter.

Here are a few examples of the topics featured in Economics in Your Life:

• Red Bull or Beaver Buzz Energy: what’s your beverage? (Chapter 3) • What’s the best country for you to work in? (Chapter 4) • Do you help the economy more if you spend or if you save? (Chapter 6) • When consumer confidence falls, is your job at risk? (Chapter 8) • Should you buy a house during a recession? (Chapter 11)

Solved ProblemsMany students have great difficulty handling applied economics problems. We help students overcome this hurdle by including two or three worked-out problems tied to select chapter-opening learning objectives. Our goals are to keep students focused on the main ideas of each chapter and to give students a model of how to solve an economic problem by breaking it down step by step. Additional exercises in the end-of-chapter Problems and Applications section are tied to every Solved Problem. Additional Solved Problems appear in the Instruc-tor’s Manual and the print Study Guide. In addition, the Test Item Files include problems tied to the Solved Problems in the main book.

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XX P R E F A C E

Don’t Let This Happen to YouWe know from many years of teaching which concepts students find most difficult. Each chapter contains a box feature called Don’t Let This Happen to You that alerts students to the most common pitfalls in that chapter’s material. We follow up with a related question in the end-of-chapter Problems and Applications section.

Making the ConnectionEach chapter includes two or more Making the Connection features that provide real-world reinforcement of key concepts and help students learn how to interpret what they read on the Web and in newspapers. Most Making the Connection features use relevant, stimulating, and provocative news stories focused on businesses and policy issues. Each Making the Con-nection has at least one supporting end-of-chapter problem to allow students to test their understanding of the topic discussed. Here are a few examples of Making the Connectionfeatures:

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P R E F A C E XXI

• Will China’s Standard of Living Ever Exceed That of Canada? (Chapter 7)

• Does the Canadian Economy Import Recessions? (Chapter 9)

• Too Low for Zero: Central Banks Try “Quantita-tive Easing” (Chapter 11)

• Why Is the United States Called the “World’s Largest Debtor”? (Chapter 14)

• Can the Euro Survive? (Chapter 15)

Graphs and Summary TablesGraphs are an indispensable part of a principles of economics course but are a major stumbling block for many students. Every chapter except Chapter 1 includes end-of-chapter problems that require students to draw, read, and interpret graphs. Interactive graphing exercises appear on the book’s supporting website. We use four devices to help stu-dents read and interpret graphs:

1. Detailed captions 2. Notes in the graphs

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XXII P R E F A C E

3. Colour-coded curves 4. Summary tables with graphs (see pages xx, xx, and xx for examples)

Review Questions and Problems and ApplicationsEvery exercise in a chapter’s Problems and Applications section is available in MyEconLab. Using MyEconLab, students can complete these and many other exercises online, get tuto-rial help, and receive instant feedback and assistance on exercises they answer incorrectly. Also, student learning is enhanced by having the summary material and problems grouped together by learning objective, which will allow students to focus on the parts of the chap-ter they found most challenging. Each major section of the chapter, paired with a learning objective, has at least two review questions and three problems.

We include one or more end-of-chapter problems that test students’ understanding of the content presented in the Solved Problem, Making the Connection, and Don’t Let This Hap-pen to You features in the chapter. Instructors can cover a feature in class and assign the corresponding problem for homework. The Test Item Files also include test questions that pertain to these special features.

Integrated SupplementsThe authors and Pearson Canada have worked together to integrate the text, print, and media resources to make teaching and learning easier.

MyEconLabMyLab and Mastering, our leading online learning products, deliver customizable content and highly personalized study paths, responsive learning tools, and real-time evaluation and diagnostics. MyLab and Mastering products give educators the ability to move each student toward the moment that matters most—the moment of true understanding and learning.

MyEconLab® for Hubbard, Canadian can be used as a powerful out-of-the-box resource for students who need extra help, or instructors can take full advantage of its advanced customization options. Students can also benefit from MyEconLab’s Study Play, now pow-ered by a sophisticated adaptive learning engine that tailors learning material to meet their unique learning needs.

Pearson eText gives students access to the text whenever and wherever they have access to the Internet. eText pages look exactly like the printed text, offering powerful new func-tionality for students and instructors. Users can create notes, highlight text in different colours, create bookmarks, zoom, click hyperlinked words and phrases to view definitions, and view in single-page or two-page view. Pearson eText allows for quick navigation to key parts of the eText using a table of contents and provides full-text search. The eText may also offer links to associated media files, enabling users to access videos, animations, or other activities as they read the text.

Other Resources for the Instructor

Instructor’s ManualThe Instructor’s Manual includes chapter-by-chapter summaries grouped by learning objec-tives, teaching outlines incorporating key terms and definitions, teaching tips, topics for class discussion, new Solved Problems, new Making the Connection features, new Economics in Your Life scenarios, and solutions to all review questions and problems in the book. The Instructor’s Manual is available for download from the Instructor’s Resource Centre (www.pearsoned.ca/highered). The authors, Jason Childs and Apostolis Serletis, prepared the solu-tions to the end-of-chapter review questions and problems.

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P R E F A C E XXIII

Two Test Item FilesThis edition is accompanied by two Test Item Files. Each Test Item File includes 2000 class-tested multiple-choice, true/false, short-answer, and graphing questions. The first Test Item File will be available upon publication of the text; the second Test Item File of 2000 ques-tions will be added a year following publication in order to incorporate market feedback and to provide a fresh and updated store of questions. There are questions to support each key feature in the book. The Test Item Files are available in print and for download from the Instructor’s Resource Centre (www.pearsonhighered.com/hubbard). Test questions are annotated with the following information:

• Difficulty: 1 for straight recall, 2 for some analysis, 3 for complex analysis • Type: multiple-choice, true/false, short-answer, essay • Topic: the term or concept the question supports • Learning outcome • AACSB (see description that follows) • Page number • Special feature in the main book: chapter-opening case example, Economics in Your

Life, Solved Problem, Making the Connection, Don’t Let This Happen to You, and An In-side Look

The Association to Advance Collegiate Schools of Business (AACSB) The Test Item File author has connected select questions to the general knowledge and skill guidelines found in the AACSB Assurance of Learning Standards.

TestGenThe computerized TestGen package allows instructors to customize, save, and generate classroom tests. The test program permits instructors to edit, add, or delete questions from the Test Item Files; analyze test results; and organize a database of tests and student results. This software allows for extensive flexibility and ease of use. It provides many options for organizing and displaying tests, along with search and sort features. The software and the Test Item Files can be downloaded from the Instructor’s Resource Center (www.pearson-highered.com/hubbard).

PowerPoint Lecture PresentationTwo sets of PowerPoint slides are available:

1. A comprehensive set of animated PowerPoint slides can be used by instructors for class presentations or by students for lecture preview or review. These animated slides include all the graphs, tables, and equations in the textbook.

2. A second set of PowerPoint slides without animations is available for those who prefer a more streamlined presentation for class use.

CourseSmart for Instructors CourseSmart goes beyond traditional expectations—providing instant, online access to the textbooks and course materials you need at a lower cost for students. And even as students save money, you can save time and hassle with a digital eTextbook that allows you to search for the most relevant content at the very moment you need it. Whether it’s evaluating textbooks or creating lecture notes to help students with difficult concepts, CourseSmart can make life a little easier. See how when you visit www.coursesmart.com/instructors.

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XXIV P R E F A C E

Technology Specialists Pearson’s Technology Specialists work with faculty and campus course designers to ensure that Pearson technology products, assessment tools, and online course materials are tailored to meet your specific needs. This highly qualified team is dedicated to helping students take full advantage of a wide range of educational resources by assisting in the integration of a variety of instructional materials and media formats. Your local Pearson Canada sales repre-sentative can provide you with more details about this service program.

Pearson Custom LibraryFor enrollments of at least 25 students, you can create your own textbook by choosing the chapters that best suit your own course needs. To begin building your custom text, visit www.pearsoncustomlibrary.com. You may also work with a dedicated Pearson Custom edi-tor to create your ideal text—publishing your own original content or mixing and matching Pearson content. Contact your local Pearson Representative to get started.

Writing Space Writing Space is a way to develop and assess critical thinking skills through writing. It pro-vides a single place within the Pearson MyLabs to create, track, grade writing assignments, access writing resources, and exchange meaningful, personalized feedback quickly and eas-ily. Writing Space can also check students’ work for citation and plagiarism by evaluating it against the world’s most accurate text comparison database available from Turnitin.

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Jim Butko, Niagara College Michael G. Lanyi, University of LethbridgePerry Martens, University of ReginaVettivelu Nallainayagam, Mount Royal CollegeFrank Trimnell, Ryerson UniversityChristopher Willmore, University of VictoriaRauf Azhar, University of Guelph-HumberConstantin Colonescu, MacEwan UniversityCarol Derksen, Red River CollegeSigrid Ewender, Kwantlen Polytechnic UniversityBruno Fullone, George Brown CollegeNarine Gregorian, Camosun CollegeShahidul Islam, Grant MacEwan UniversityNargess Kayhani, Mount Saint Vincent UniversityStephen M. Law, Mount Allison UniversityJoan McEachern, Kwantlen Polytechnic UniversityManish Pandey, University of WinnipegFiona Rahman, University of WaterlooNeil Roberts, Kwantlen Polytechnic UniversityDuane Rockerbie, University of LethbridgeRizwan Tahir, Wilfred Laurier UniversityAndrew Wong, Grant MacEwan University

ACKNOWLEDGMENTS

XXV

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about the authors glenn hubbard, policymaker, professor, … · 2013. 8. 9. · about the authors...

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