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THE ECONOMICS OF MONEY
  • BANKING 著
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  • 出版时间:1997
  • 标注页数:732页
  • 文件大小:120MB
  • 文件页数:831页
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图书目录

PART Ⅰ Introduction 1

CHAPTER 1 WHY STUDY MONEY,BANKING,AND FINANCIAL MARKETS? 3

Preview 3

Why Study Financial Markets? 3

The Bond Market and Interest Rates 4

The Stock Market 4

The Foreign Exchange Market 6

Why Study Banking and Financial Institutions? 7

Structure of the Financial System 7

Banks and Other Financial Institutions 8

Financial Innovation 8

Why Study Money and Monetary Policy? 9

Money and Business Cycles 9

Money and Inflation 10

Money and Interest Rates 12

Conduct of Monetary Policy 12

Budget Deficits and Monetary Policy 13

How We Will Study Money,Banking,and Financial Markets 14

Concluding Remarks 15

Summary,Key Terms,Questions and Problems 15

Appendix to Chapter 1:Defining Aggregate Output,Income,and the Price Level 17

CHAPTER 2 AN OVERVIEW OF THE FINANCIAL SYSTEM 20

Preview 20

Function of Financial Markets 21

Structure of Financial Markets 23

Debt and Equity Markets 23

Primary and Secondary Markets 23

Exchanges and Over-the-Counter Markets 24

Money and Capital Markets 25

Financial Market Instruments 25

Money Market Instruments 25

Following the Financial News Money Market Rates 27

Capital Market Instruments 29

BOX 1 Mortgage-Backed Securities 31

Internationalization of Financial Markets 32

International Bond Market and Eurobonds 32

World Stock Markets 32

Following the Financial News Foreign Stock Market Indexes 33

Function of Financial Intermediaries 33

BOX 2 The Importance of Financial Intermediaries to Securities Markets:An International Comparison 34

Transaction Costs 34

Asymmetric Information:Adverse Selection and Moral Hazard 35

Financial Intermediaries 37

Depository Institutions 37

Contractual Savings Institutions 40

Investment Intermediaries 41

Regulation of the Financial System 42

Increasing Information Available to Investors 42

Ensuring the Soundness of Financial Intermediaries 42

Improving Control of Monetary Policy 45

Financial Regulation Abroad 45

Summary,Key Terms,Questions and Problems 45

CHAPTER 3 WHAT IS MONEY? 48

Preview 48

Meaning of Money 48

Functions of Money 49

Medium of Exchange 49

Unit of Account 50

Store of Value 51

Evolution of the Payments System 52

BOX 1 Birth of a New European Currency:The Euro? 54

Electronic Money:A Coming Global Phenomenon 55

Are We Moving to a Cashless Society? 56

Measuring Money 57

Theoretical and Empirical Definitions of Money 57

The Federal Reserve’s Monetary Aggregates 58

Following the Financial News The Monetary Aggregates 61

Money as a Weighted Aggregate 61

How Reliable Are the Money Data? 62

Summary,Key Terms,Questions and Problems 63

PARTⅡ Financial Markets 67

CHAPTER 4 UNDERSTANDING INTEREST RATES 69

Preview 69

Measuring Interest Rates 70

Present Value 71

Application The Cost of the S&L Bailout:Was It Really $500 Billion? 72

Yield to Maturity 72

Other Measures of Interest Rates 79

Current Yield 79

Yield on a Discount Basis 80

Application Reading the Wall Street Journal:The Bond Page 81

Following the Financial News Bond Prices and Interest Rates 82

The Distinction Between Interest Rates and Returns 84

Maturity and the Volatility of Bond Returns:Interest-Rate Risk 87

Summary 88

Application Should Retirees Invest in “Gilt-Edged”Long-Term Bonds? 88

The Distinction Between Real and Nominal Interest Rates 89

Summary,Key Terms,Questions and Problems 92

CHAPTER 5 PORTFOLIO CHOICE 94

Preview 94

Determinants of Asset Demand 94

Wealth 95

Expected Returns 96

Risk 96

Liquidity 97

Theory of Portfolio Choice 97

Benefits of Diversification 98

Systematic Risk 100

Risk Premiums:Capital Asset Pricing Model and Arbitrage Pricing Theory 101

Summary,Key Terms,Questions and Problems 102

CHAPTER 6 THE BEHAVIOR OF INTEREST RATES 104

Preview 104

Loanable Funds Framework:Supply and Demand in the Bond Market 104

Demand Curve 105

Supply Curve 106

Market Equilibrium 107

Supply and Demand Analysis 108

Changes in Equilibrium Interest Rates 109

Shifts in the Demand for Bonds 110

Shifts in the Supply of Bonds 113

Application Changes in the Equilibrium Interest Rate Due to Expected Inflation or Business Cycle Expansions 115

Application Reading the Wall Street Journal:The “Credit Markets” Column 119

Following the Financial News The “Credit Markets” Column 120

Application Have Low Savings Rates in the United States Led to Higher Interest Rates? 121

Liquidity Preference Framework:Supply and Demand in the Market for Money 122

Changes in Equilibrium Interest Rates 124

Shifts in the Demand for Money 124

Shifts in the Supply of Money 125

Application Changes in the Equilibrium Interest Rate Due to Changes in Income,the Price Level,or the Money Supply 125

Application Money and Interest Rates 128

Following the Financial News Forecasting Interest Rates 132

Summary,Key Terms,Questions and Problems 135

Appendix to Chapter 6:Applying the Asset Market Approach to a Commodity Market:The Case of Gold 137

Application Changes in the Equilibrium Price of Gold Due to a Rise in Expected Inflation 140

Following the Financial News The “Commodities” Column 141

Application Reading the Wall Street Journal:The “Commodities”Column 142

CHAPTER 7 THE RISK AND TERM STRUCTURE OF INTEREST RATES 143

Preview 143

Risk Structure of Interest Rates 143

Default Risk 144

Application The Stock Market Crash of 1987 and the Junk Bond-Treasury Spread 147

Application What If Treasury Securities Were No Longer Default-Free? 148

Liquidity 148

Income Tax Considerations 149

Summary 150

Application Effects of the Clinton Tax Increase on Bond Interest Rates 150

Term Structure of Interest Rates 151

Following the Financial News Yield Curves 153

Expectations Hypothesis 153

Segmented Markets Theory 157

Preferred Habitat and Liquidity Premium Theories 158

Recent Evidence on the Term Structure 160

Summary 160

Application Interpreting Yield Curves,1980-1997 161

Summary,Key Terms,Questions and Problems 163

CHAPTER 8 THE FOREIGN EXCHANGE MARKET 165

Preview 165

Foreign Exchange Market 165

What Are Foreign Exchange Rates? 167

Why Are Exchange Rates Important? 167

Following the Financial News Foreign Exchange Rates 168

How Is Foreign Exchange Traded? 169

Exchange Rates in the Long Run 169

Law of One Price 170

Theory of Purchasing Power Parity 170

Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates 171

Factors That Affect Exchange Rates in the Long Run 172

Exchange Rates in the Short Run 174

Comparing Expected Returns on Domestic and Foreign Deposits 174

Interest Parity Condition 176

Equilibrium in the Foreign Exchange Market 177

Explaining Changes in Exchange Rates 179

Shifts in the Expected-Return Schedule for Foreign Deposits 179

Shifts in the Expected-Return Schedule for Domestic Deposits 181

Application Changes in the Equilibrium Exchange Rate:Two Examples 182

Application Why Are Exchange Rates So Volatile? 187

Application The Dollar and Interest Rates,1973-1996 187

BOX 1 Forecasting Exchange Rates 188

Application Reading the Wall Street Journal:The “Foreign Exchange” Column 189

Following the Financial News The “Foreign Exchange”Column 190

Summary,Key Terms,Questions and Problems 191

PART Ⅲ Financial Institutions 193

CHAPTER 9 AN ECONOMIC ANALYSIS OF FINANCIAL STRUCTURE 195

Preview 195

Basic Puzzles About Financial Structure Throughout the World 195

Transaction Costs 199

How Transaction Costs Influence Financial Structure 199

How Financial Intermediaries Reduce Transaction Costs 200

Asymmetric Information:Adverse Selection and Moral Hazard 201

The Lemons Problem:How Adverse Selection Influences Financial Structure 201

Lemons in the Stock and Bond Markets 202

Tools to Help Solve Adverse Selection Problems 203

How Moral Hazard Affects the Choice Between Debt and Equity Contracts 207

Moral Hazard in Equity Contracts:The Principal-Agent Problem 207

Tools to Help Solve the Principal-Agent Problem 208

BOX 1 “Hollywood Accounting”:Has Forrest Gump Been a Loser? 209

How Moral Hazard Influences Financial Structure in Debt Markets 210

Tools to Help Solve Moral Hazard in Debt Contracts 211

Summary 213

Application Financial Development and Economic Growth 213

Financial Crises and Aggregate Economic Activity 215

Factors Causing Financial Crises 215

Application Financial Crises in the United states 217

Application Financial Crises in Developing Countries:The Case of Mexico,1994-1995 219

BOX 2 Case Study of a Financial Crisis:The Great Depression 220

Summary,Key Terms,Questions and Problems 223

CHAPTER 10 THE BANKING FIRM AND THE MANAGEMENT OF FINANCIAL INSTITUTIONS 226

Preview 226

The Bank Balance Sheet 226

Liabilities 227

Assets 229

BOX 1 Understanding Loan Loss Reserves 230

Basic Operation of a Bank 231

General Principles of Bank Management 234

Liquidity Management and the Role of Reserves 235

Asset Management 238

Liability Management 239

Capital Adequacy Management 240

Application Strategies for Managing Bank Capital 243

Application Did the Capital Crunch Cause a Credit Crunch in the Early 1990s? 243

Managing Credit Risk 244

Screening and Monitoring 245

Long-Term Customer Relationship 246

Loan Commitments 247

Collateral and Compensating Balances 247

BOX 2 Japanese and German Banking Arrangements:A Better Way to Deal with Asymmetric Information? 248

Credit Rationing 249

Managing Interest-Rate Risk 249

Gap and Duration Analysis 250

Application Strategies for Managing Interest-Rate Risk 251

Off-Balance-Sheet Activities 252

Loan Sales 252

Generation of Free Income 252

Trading Activities and Risk Management Techniques 253

BOX 3 Barings,Daiwa,and Sumitomo:Rogue Traders and the Principal-Agent Problem 254

Financial Innovation 255

Responses to Changes in Demand Conditions 256

Responses to Changes in Supply Conditions 257

Avoidance of Existing Regulations 259

Summary,Key Terms,Questions and Problems 261

CHAPTER 11 BANKING INDUSTRY:STRUCTURE AND COMPETITION 264

Preview 264

Historical Development of the Banking System 264

Multiple Regulatory Agencies 267

Structure of the U.S.Commercial Banking Industry 267

Restrictions on Branching 268

Response to Branching Restrictions 269

Nationwide Banking and Bank Consolidation 271

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 272

What Will the Structure of the U.S.Banking Industry Look Like in the Future? 273

BOX 1 Comparison of Banking Structure in the United States and Abroad 274

Are Bank Consolidation and Nationwide Banking Good Things? 274

Separation of the Banking and Securities Industries 275

Repeal of the Glass-Steagall Act 278

Separation of the Banking and Securities Industries in Other Countries 278

Thrift Industry:Regulation and Structure 278

Savings and Loan Associations 278

Mutual Savings Banks 279

Credit Unions 279

International Banking 280

Eurodollar Market 281

BOX 2 Ironic Birth of the Eurodollar Market 282

Structure of U.S.Banking Overseas 282

Foreign Banks in the United States 283

Financial Innovation and the Decline of Traditional Banking 284

Behind the Decline:Four Financial Innovations 284

Decline of Traditional Banking 288

Reasons for the Decline 288

Banks’Responses 292

Decline of Traditional Banking in Other Industrialized Countries 293

Summary,Key Terms,Questions and Problems 294

CHAPTER 12 ECONOMIC ANALYSIS OF BANKING REGULATION 296

Preview 296

Asymmetric Information and Bank Regulation 296

Government Safety Net:Deposit Insurance and the FDIC 297

BOX 1 A Tale of Two Bank Collapses:Bank of New England and Freedom National Bank 300

Restrictions on Asset Holdings and Bank Capital Requirements 301

Bank Supervision:Chartering and Examination 302

BOX 2 The Basel Accord on Risk-Based Capital Requirements 303

A New Trend in Bank Supervision:Assessment of Risk Management 304

Disclosure Requirements 305

BOX 3 New Zealand’s Disclosure-Based Experiment in Bank Regulation 306

BOX 4 The Community Reinvestment Act:A Political Hot Button 307

Consumer Protection 307

Restrictions on Competition 307

Separation of the Banking and Securities Industries:The Glass-Steagall Act 308

International Banking Regulation 308

Problems in Regulating International Banking 310

Summary 310

BOX 5 The BCCI Scandal 311

The 1980s U.S.Banking Crisis:Why? 312

Early Stages of the Crisis 312

Later Stages of the Crisis:Regulatory Forbearance 314

Competitive Equality in Banking Act of 1987 315

Political Economy of the Savings and Loan Crisis 315

Principal-Agent Problem for Regulators and Politicians 316

Application Principal-Agent Problem in Action:Charles Keating and the Lincoln Savings and Loan Scandal 317

Savings and Loan Bailout:Financial Institutions Reform,Recovery,and Enforcement Act of 1989 318

Federal Deposit Insurance Corporation Improvement Act of 1991 319

BOX 6 The SAIF Fix and the Future of the S&L Industry 321

Application Evaluating FDICIA and Other Proposed Reforms of the Banking Regulatory System 322

Banking Crises Throughout the World 326

Scandinavia 326

Latin America 328

Eastern Europe 328

Japan 328

“Deja Vu All Over Again” 329

Summary,Key Terms,Questions and Problems 329

CHAPTER 13 NONBANK FINANCIAL INSTITUTIONS 332

Preview 332

Insurance Companies 332

Life Insurance Companies 333

Property and Casualty Insurance Companies 334

The Competitive Threat from the Banking Industry 335

BOX 1 The Woes of Lloyd’s of London 336

BOX 2 Are Independent Insurance Agents Going the Way of the Milkman? 337

Application Insurance Management 337

Pension Funds 341

Private Pension Plans 342

Public Pension Plans 342

BOX 3 Will Social Security Be Privatized? 343

Finance Companies 343

Mutual Funds 345

Money Market Mutual Funds 346

Government Financial Intermediation 346

Federal Credit Agencies 346

Government Loan Guarantees:Another Crisis Waiting to Happen? 347

BOX 4 The Downside of Government Downsizing 348

Securities Market Institutions 348

Investment Banks 348

BOX 5 America Is Number One—at Least in Investment Banking 349

Following the Financial News New Securities Issues 350

Securities Brokers and Dealers 350

Organized Exchanges 351

Summary,Key Terms,Questions and Problems 352

CHAPTER 14 FINANCIAL DERIVATIVES 354

Preview 354

Forward Markets 354

Interest-Rate Forward Contracts 354

Application Hedging with Interest-Rate Forward Contracts 355

Pros and Cons of Forward Contracts 355

Financial Futures Markets 356

Financial Futures Contracts 356

Following the Financial News Financial Futures 358

Application Hedging with Financial Futures 359

Organization of Trading in Financial Futures Markets 359

The Globalization of Financial Futures Markets 360

Explaining the Success of Futures Markets 360

BOX 1 The Hunt Brothers and the Silver Crash 363

Some Problems with Financial Futures Markets 364

Stock Index Futures 365

BOX 2 Program Trading and Portfolio Insurance:Were They to Blame for the Stock Market Crash of 1987? 366

Stock Index Futures Contracts 366

Options 367

Following the Financial News Futures Options 368

Option Contracts 368

Profits and Losses on Option and Futures Contracts 369

Application Hedging with Futures Options 372

Factors Affecting the Prices of Option Premiums 373

Summary 375

Interest-Rate Swaps 375

Interest-Rate Swap Contracts 375

Application Hedging with Interest-Rate Swaps 376

Advantages of Interest-Rate Swaps 377

Disadvantages of Interest-Rate Swaps 377

Financial Intermediaries in Interest-Rate Swaps 378

Application Hedging Foreign Exchange Risk 379

Application Are Financial Derivatives a Worldwide Time Bomb? 382

BOX 3 The Orange County Bankruptcy 383

Summary,Key Terms,Questions and Problems 384

PARTⅣ Central Banking and the Conduct of Monetary Policy 387

CHAPTER 15 STRUCTURE OF CENTRAL BANKS AND THE FEDERAL RESERVE SYSTEM 389

Preview 389

Origins of the Federal Reserve System 389

Formal Structure of the Federal Reserve System 390

BOX 1 INSIDE THE FED The Political Genius of the Founders of the Federal Reserve System 391

Federal Reserve Banks 391

BOX 2 INSIDE THE FED Special Role of the Federal Reserve Bank of New York 394

Member Banks 394

Board of Governors of the Federal Reserve System 395

Federal Open Market Committee(FOMC) 396

BOX 3 INSIDE THE FED Role of the Research Staff 397

The FOMC Meeting 398

BOX 4 INSIDE THE FED Green,Blue,and Beige 399

Informal Structure of the Federal Reserve System 399

BOX 5 INSIDE THE FED Decoding the FOMC Derivative 400

BOX 6 INSIDE THE FED Role of Member Banks in the Federal Reserve System 402

How Independent Is the Fed? 403

Structure and Independence of Foreign Central Banks 405

Bank of England 405

Deutsche Bundesbank 406

Bank of Canada 406

Bank of Japan 406

The Trend Toward Greater Independence 407

Explaining Central Bank Behavior 407

Should the Fed Be Independent? 408

The Case for Independence 408

BOX 7 INSIDE THE FED Games the Fed Plays 409

The Case Against Independence 410

Central Bank Independence and Macroeconomic Performance in Seventeen Countries 411

Summary,Key Terms,Questions and Problems 412

CHAPTER 16 MULTIPLE DEPOSIT CREATION AND THE MONEY SUPPLY PROCESS 414

Preview 414

Four Players in the Money Supply Process 414

The Fed’s Balance Sheet and the Monetary Base 415

Assets 415

Liabilities 415

Monetary Base 417

Control of the Monetary Base 418

Federal Reserve Open Market Operations 418

BOX 1 Foreign Exchange Rate Intervention and the Monetary Base 423

Shifts from Deposits into Currency 423

Discount Loans 424

Overview of the Fed’s Ability to Control the Monetary Base 425

Multiple Deposit Creation:A Simple Model 425

Deposit Creation:The Single Bank 425

Deposit Creation:The Banking System 427

Multiple Deposit Contraction 430

Deriving the Formula for Multiple Deposit Creation 431

Critique of the Simple Model 433

Summary,Key Terms,Questions and Problems 433

CHAPTER 17 DETERMINANTS OF THE MONEY SUPPLY 435

Preview 435

The Money Supply Model and the Money Multiplier 436

Deriving the Money Multiplier 436

Intuition Behind the Money Multiplier 438

Factors That Determine the Money Multiplier 439

Changes in the Required Reserve Ratio rD 439

Changes in the Currency Ratio {C/D} 440

Changes in the Excess Reserves Ratio {ER/D} 441

Additional Factors That Determine the Money Supply 444

Changes in the Nonborrowed Monetary Base MB n 444

Changes in Discount Loans DL from the Fed 444

Market Interest Rates and the Discount Rate 445

Overview of the Money Supply Process 445

Application Explaining Movements in the Money Supply,1980-1996 447

Application The Great Depression Bank Panics,1930-1933 449

Summary,Key Terms,Questions and Problems 453

Appendix to Chapter 17:The M2 Money Multiplier 455

CHAPTER 18 TOOLS OF MONETARY POLICY 458

Preview 458

Open Market Operations 458

A Day at the Trading Desk 459

Advantages of Open Market Operations 461

Discount Policy 461

Operation of the Discount Window 461

BOX 1 INSIDE THE FED Why Has Adjustment Credit Borrowing Shrunk to Such Low Levels in the 1990s? 462

Lender of Last Resort 464

BOX 2 INSIDE THE FED Discounting to Troubled Banks:Franklin National and Continental Illinois 464

BOX 3 INSIDE THE FED Discounting to Prevent a Financial Panic:The Black Monday Stock Market Crash of 1987 466

Announcement Effect 467

Advantages and Disadvantages of Discount Policy 467

Application Evaluating Proposed Reforms of Discount Policy 467

Reserve Requirements 469

Advantages and Disadvantages of Reserve Requirement Changes 469

Application Evaluating Proposed Reforms of Reserve Requirements 470

Application Why Have Reserve Requirements Been Declining Worldwide? 471

Summary,Key Terms,Questions and Problems 472

CHAPTER 19 CONDUCT OF MONETARY POLICY:GOALS AND TARGETS 474

Preview 474

Goals of Monetary Policy 474

High Employment 474

Economic Growth 475

Price Stability 476

Interest-Rate Stability 476

Stability of Financial Markets 476

BOX 1 The Growing European Commitment to Price Stability 477

Stability in Foreign Exchange Markets 477

Conflict Among Goals 477

Central Bank Strategy:Use of Targets 478

Choosing the Targets 480

Criteria for Choosing Intermediate Targets 481

Criteria for Choosing Operating Targets 483

Fed Policy Procedures:Historical Perspective 483

The Early Years:Discount Policy as the Primary Tool 484

Discovery of Open Market Operations 484

The Great Depression 485

Reserve Requirements as a Policy Tool 485

BOX 2 INSIDE THE FED Bank Panics of 1930-1933:Why Did the Fed Let Them Happen? 486

War Finance and the Pegging of Interest Rates:1942-1951 487

Targeting Money Market Conditions:The 1950sand 1960s 487

Targeting Monetary Aggregates:The 1970s 489

New Fed Operating Procedures:October 1979-October 1982 490

Deemphasis of Monetary Aggregates:October 1982-Early 1990s 492

Federal Funds Targeting Again:Early 1990s and Beyond 493

International Considerations 493

BOX 3 International Policy Coordination:The Plaza Agreement and the Louvre Accord 494

Monetary Targeting in Other Countries 494

United Kingdom 495

Canada 495

Germany 496

Japan 496

Lessons from Monetary Targeting Experiences 497

The New International Trend in Monetary Policy Strategy:Inflation Targeting 498

New Zealand 498

Canada 499

United Kingdom 499

Lessons from Inflation Targeting Experiences 499

Summary,Key Terms,Questions and Problems 500

CHAPTER 20 THE INTERNATIONAL FINANCIAL SYSTEM 502

Preview 502

Intervention in the Foreign Exchange Market 502

Foreign Exchange Intervention and the Money Supply 502

BOX 1 INSIDE THE FED A Day at the Federal Reserve Bank of New York’s Foreign Exchange Desk 504

Unsterilized Intervention 505

Sterilized Intervention 506

Balance of Payments 507

Current Account 508

Following the Financial News The Balance of Payments 509

Capital Account 510

Official Reserve Transactions Balance 510

Methods of Financing the Balance of Payments 511

Evolution of the International Financial System 511

Gold Standard 511

Bretton Woods System and the IMF 512

Box 2 Argentina’s Currency Board 516

Managed Float 517

European Monetary System(EMS) 518

Application September 1992 Foreign Exchange Crisis 519

Application Mexican Peso Crisis of December 1994 520

International Considerations and Monetary Policy 521

Direct Effects of the Foreign Exchange Market on the Money Supply 522

Balance-of-Payments Considerations 522

Exchange Rate Considerations 523

Summary,Key Terms,Questions and Problems 523

PART Ⅴ Monetary Policy 527

CHAPTER 21 THE DEMAND FOR MONEY 529

Preview 529

Quantity Theory of Money 529

Velocity of Money and Equation of Exchange 530

Quantity Theory 531

Quantity Theory of Money Demand 531

Cambridge Approach to Money Demand 532

Is Velocity a Constant? 533

Keynes’s Liquidity Preference Theory 535

Transactions Motive 535

Precautionary Motive 535

Speculative Motive 535

Putting the Three Motives Together 536

Further Developments in the Keynesian Approach 539

Transactions Demand 539

Precautionary Demand 542

Speculative Demand 542

Friedman’s Modern Quantity Theory of Money 544

Distinguishing Between the Friedman and Keynesian Theories 545

Empirical Evidence on the Demand for Money 548

Interest Rates and Money Demand 548

Stability of Money Demand 550

Summary,Key Terms,Questions and Problems 553

CHAPTER 22 THE KEYNESIAN FRAMEWORK AND THE ISLM MODEL 555

Preview 555

Determination of Aggregate Output 555

Consumer Expenditure and the Consumption Function 557

Investment Spending 558

BOX 1 Meaning of the Word Investment 559

Equilibrium and the Keynesian Cross Diagram 560

Expenditure Multiplier 561

Application The Collapse of Investment Spending and the Great Depression 564

Government’s Role 564

Role of International Trade 567

Summary of the Determinants of Aggregate Output 567

The ISLM Model 571

Equilibrium in the Goods Market:The IS Curve 571

Equilibrium in the Market for Money:The LM Curve 575

ISLM Approach to Aggregate Output and Interest Rates 577

Summary,Key Terms,Questions and Problems 578

CHAPTER 23 MONETARY AND FISCAL POLICY IN THE ISLM MODEL 580

Preview 580

Factors That Cause the IS Curve to Shift 581

Factors That Cause the LM Curve to Shift 583

Changes in Equilibrium Level of the Interest Rate and Aggregate Output 585

Response to a Change in Monetary Policy 585

Response to a Change in Fiscal Policy 586

Application The Vietnam War Buildup and the Rise in Interest Rates,1965-1966 588

Effectiveness of Monetary Versus Fiscal Policy 590

Monetary Policy Versus Fiscal Policy:The Case of Complete Crowding Out 590

Application Targeting Money Supply Versus Interest Rates 592

ISLM Model in the Long Run 596

ISLM Model and the Aggregate Demand Curve 598

Deriving the Aggregate Demand Curve 598

Factors That Cause the Aggregate Demand Curve to Shift 599

Summary,Key Terms,Questions and Problems 601

CHAPTER 24 AGGREGATE DEMAND AND SUPPLY ANALYSIS 603

Preview 603

Aggregate Demand 603

Following the Financial News Aggregate Output,Unemployment,and the Price Level 604

Monetarist View of Aggregate Demand 604

Keynesian View of Aggregate Demand 606

The Crowding-Out Debate 607

Aggregate Supply 608

Shifts in the Aggregate Supply Curve 609

Equilibrium in Aggregate Supply and Demand Analysis 610

Equilibrium in the Short Run 610

Equilibrium in the Long Run 611

Shifts in Aggregate Demand 614

Shifts in Aggregate Supply 616

Shifts in the Long-Run Aggregate Supply Curve:Real Business Cycle Theory and Hysteresis 617

Conclusions 620

Application Explaining Past Business Cycle Episodes 620

Application Predicting Future EconomicActivity 622

Summary,Key Terms,Questions and Problems 623

Appendix to Chapter 24:Aggregate Supply and the Phillips Curve:Historical Perspective 625

CHAPTER 25 TRANSMISSION MECHANISMS OF MONETARY POLICY:THE EVIDENCE 629

Preview 629

Framework for Evaluating Empirical Evidence 630

Structural Model Evidence 630

Reduced-Form Evidence 631

Advantages and Disadvantages of Structural Model Evidence 631

Advantages and Disadvantages of Reduced-Form Evidence 632

BOX 1 Perils of Reverse Causation:A Russian Folk Tale 633

Conclusions 633

BOX 2 Perils of Ignoring an Outside Driving Factor:How to Lose a Presidential Election 634

Early Keynesian Evidence on the Importance of Money 634

Objections to Early Keynesian Evidence 635

Early Monetarist Evidence on the Importance of Money 637

Timing Evidence 638

Statistical Evidence 641

Historical Evidence 642

Overview of the Monetarist Evidence 643

Transmission Mechanisms of Monetari Policy 643

BOX 3 Real Business Cycle Theory and the Debate on Money and Economic Activity 644

Traditional Interest-Rate Channels 644

Other Asset Price Channels 647

Credit View 649

BOX 4 Consumers’ Balance Sheets and the Great Depression 652

Why Are Credit Channels Likely to Be Important? 653

Application Credit Crunch and Slow Recovery from the 1990-1991 Recession 653

Lessons for Monetary Policy 654

Summary,Key Terms,Questions and Problems 656

CHAPTER 26 MONEY AND INFLATION 659

Preview 659

Money and Inflation:Evidence 659

German Hyperinflation,1921-1923 660

BOX 1 Inflation and Money Growth Rates in Latin America,1986-1996 661

Recent Episodes of Rapid Inflation 662

Meaning of Inflation 663

Views of Inflation 663

Monetarist View 663

Keynesian View 664

Summary 667

Origins of Inflationary Monetary Policy 667

High Employment Targets and Inflation 668

Budget Deficits and Inflation 671

Application Explaining the Rise in U.S.Inflation,1960-1980 675

Activist/Nonactivist Policy Debate 679

Responses to High Unemployment 679

Activist and Nonactivist Positions 680

Expectations and the Activist/Nonactivist Debate 681

BOX 2 Perils of Accommodating Policy:The Terrorism Dilemma 683

Rules Versus Discretion:Conclusions 683

Application Importance of Credibility to Volcker’s Victoryover Inflation 684

Summary,Key Terms,Questions and Problems 684

CHAPTER 27 THEORY OF RATIONAL EXPECTATIONS AND EFFICIENT CAPITAL MARKETS 686

Preview 686

Role of Expectations in Economic Activity 687

Theory of Rational Expectations 689

Formal Statement of the Theory 691

Rationale Behind the Theory 691

Implications of the Theory 692

Efficient Markets Theory:Rational Expectations in Financial Markets 692

Rationale Behind the Theory 694

Stronger Version of Efficient Markets Theory 695

Evidence on Efficient Markets Theory 695

Evidence in Favor of Market Efficiency 696

BOX 1 An Exception That Proves the Rule:Ivan Boesky 697

Application Should Foreign Exchange Rates Follow a Random Walk? 699

Evidence Against Market Efficiency 699

Overview of the Evidence on Efficient Markets Theory 701

Application Practical Guide to Investing in the Stock Market 702

Following the Financial News Stock Prices 703

BOX 2 Should You Hire an Ape as Your Investment Adviser? 704

Evidence on Rational Expectations in Other Markets 705

Application What Does the Stock Market Crash of1987 Tell Us About Rational Expectations and Efficient Markets? 707

Summary,Key Terms,Questions and Problems 708

CHAPTER 28 RATIONAL EXPECTATIONS:IMPLICATIONS FOR POLICY 710

Preview 710

The Lucas Critique of Policy Evaluation 711

Econometric Policy Evaluation 711

Example:The Term Structure of Interest Rates 712

New Classical Macroeconomic Model 713

Effects of Unanticipated and Anticipated Policy 713

BOX 1 Proof of the Policy Ineffectiveness Proposition 715

Can an Expansionary Policy Lead to a Decline in Aggregate Output? 716

Implications for Policymakers 717

New Keynesian Model 717

Effects of Unanticipated and Anticipated Policy 718

Implications for Policymakers 720

Comparison of the Two New Models with the Traditional Model 720

Short-Run Output and Price Responses 721

Stabilization Policy 722

Anti-inflation Policies 724

Credibility in Fighting Inflation 727

BOX 2 Ending the Bolivian Hyperinflation:Case Study of a Successful Anti-inflation Program 728

Application Credibility and the Reagan Budget Deficits 728

Impact of the Rational Expectations Revolutions 729

Summary,Key Terms,Questions and Problems 731

MATHEMATICAL APPENDIX TO CHAPTER 21:A Mathematical Treatment of the Baumol-Tobin and Tobin Mean Variance Models 733

MATHEMATICAL APPENDIX TO CHAPTER 23:Algebra of the ISLM Model 739

GLOSSARY 743

ANSWERS TO SELECTED QUESTIONS AND PROBLEMS 755

CREDITS 771

INDEX 773

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