Preface Preface
I had two main goals in writing this book:
¡ö
To make close contact with current macroeconomic events.
What makes macroeconomics exciting is the light it sheds
on what is happening around the world, from the major
economic crisis which has engulfed the world since 2008,
to monetary policy in the United States, to the problems of
the Euro area, to growth in China. These events¡ªand many
more¡ªare described in the book, not in footnotes, but in
the text or in detailed boxes. Each box shows how you can
use what you have learned to get an understanding of these
events. My belief is that these boxes not only convey the
¡°life¡± of macroeconomics, but also reinforce the lessons from
the models, making them more concrete and easier to grasp.
¡ö
To provide an integrated view of macroeconomics. The
book is built on one underlying model, a model that
draws the implications of equilibrium conditions in three
sets of markets: the goods market, the financial markets,
and the labor market. Depending on the issue at hand,
the parts of the model relevant to the issue are developed
in more detail while the other parts are simplified or lurk
in the background. But the underlying model is always
the same. This way, you will see macroeconomics as a
coherent whole, not a collection of models. And you will
be able to make sense not only of past macroeconomic
events, but also of those that unfold in the future.
New to this Edition
The crisis that started in 2008, and is still lingering, forced
macroeconomists to rethink much of macroeconomics.
They clearly had understated the role of the financial system.
They also had too optimistic a view of how the economy
returned to equilibrium. Eight years later, I believe the main
lessons have been absorbed, and this edition reflects the deep
rethinking that has taken place. Nearly all chapters have
been rewritten, and the main changes are as follows:
¡ö
A modified Chapter 5, and a modified presentation of
the IS-LM. The traditional treatment of monetary policy
assumed that the central bank chose the money supply
and then let the interest rate adjust. In fact, modern
central banks choose the interest rate and then let the
money supply adjust. In terms of the IS-LM model used
to describe the short run, the LM curve, instead of being
upward sloping, should be treated as flat. This makes for
a more realistic and a simpler model.
¡ö
A new Chapter 6. The chapter focuses on the role of the
financial system in the economy. It extends the IS-LM
model to allow for two interest rates, the interest rate
set by monetary policy and the cost of borrowing for
people or firms, with the state of the financial system
determining the relation between the two.
¡ö
A new Chapter 9. The traditional aggregate supply-
aggregate demand model was cumbersome and gave too
optimistic a view of the return of output to potential. The
model has been replaced by an IS-LM-PC model (where
PC stands for Phillips curve), which gives a simpler and
more accurate description of the role of monetary policy,
and of output and inflation dynamics.
¡ö
The constraints on monetary policy, coming from the
zero lower bound, and the constraints on fiscal policy,
coming from the high levels of public debt, are recurring
themes throughout the book.
¡ö
Many Focus boxes are new or extended. Among them:
¡°Unemployment and Happiness¡± in Chapter 2; ¡°The
Liquidity Trap in the United Kingdom¡± in Chapter 4;
Bank Runs in Chapter 6; ¡°Why is the Natural Rate of
Unemployment in Japan so Low?¡± in Chapter 8; ¡°Okun¡¯s
Law¡± and ¡°Deflation in the Great Depression¡± in Chapter 9;
¡°The Construction of PPP Numbers¡± in Chapter 10; ¡°The
Role of Technology in the Decrease in Income Inequality
in Latin America in the 2000s¡± in Chapter 13; ¡°The
Yield Curves for AAA-rated Central Government Bonds¡±
in Chapter 14; ¡°The Disappearance of Current Account
Deficits in Euro Periphery Countries: Good News or Bad
News?¡± in Chapter 18; ¡°Euro Area Fiscal Rules: A Short
History¡± in Chapter 21; and ¡°Rules versus Discretion:
New Absolute Budgetary Rules in the EU¡± and ¡°How
Japan Could Stand Such a Huge Debt?¡± in Chapter 22.
¡ö
Figures and tables have been updated using the latest
data available.
xiv
In short, I see this edition as the first true post-crisis macroeconomics
textbook. I hope it gives a clear guide not only
to what has happened, and also to what may happen in the
future.
Organization
The book is organized around two central parts: A core, and
a set of two major extensions. An introduction precedes the
core. The two extensions are followed by a review of the role
of policy. The book ends with an epilogue. A flowchart on
the front endpaper makes it easy to see how the chapters are
organized, and fit within the book¡¯s overall structure.
¡ö
Chapters 1 and 2 introduce the basic facts and issues
of macroeconomics. Chapter 1 focuses first on the crisis,
and then takes a tour of the world, from the United
States, to Europe. Some instructors will prefer to cover
Chapter 1 later, perhaps after Chapter 2, which introduces
basic concepts, articulates the notions of short
run, medium run, and long run, and gives the reader
a quick tour of the book.
While Chapter 2 gives the basics of national income accounting,
I have put a detailed treatment of national
income accounts to Appendix 1 at the end of the book.
This decreases the burden on the beginning reader, and
allows for a more thorough treatment in the appendix.
¡ö
Chapters 3 through 13 constitute the core.
Chapters 3 through 6 focus on the short run. These four
chapters characterize equilibrium in the goods market
and in the financial markets, and they derive the basic
model used to study short¨Crun movements in output, the
IS¨CLM model. Chapter 6 is new, and extends the basic
IS-LM model to take into account the role of the financial
system. It then uses it to describe what happened during
the initial phase of the crisis.
Chapters 7 through 9 focus on the medium run.
Chapter 7 focuses on equilibrium in the labor market
and introduces the notion of the natural rate of unemployment.
Chapter 8 derives and discusses the relation
between unemployment and inflation, known as the
Phillips curve. Chapter 9 develops the IS-LM-PC (PC for
Phillips curve) model which takes into account equilibrium
in the goods market, in the financial markets, and
in the labor market. It shows how this model can be used
to understand movements in activity and movements in
inflation, both in the short and in the medium run.
Chapters 10 through 13 focus on the long run. Chapter
10 describes the facts, showing the evolution of output
across countries and over long periods of time. Chapters 11
and 12 develop a model of growth and describe how
capital accumulation and technological progress determine
growth. Chapter 13 focuses on the effects of technological
progress on unemployment and on inequality,
not only in the long run, but also in the short run and in
the medium run.
¡ö
Chapters 14 through 20 cover the two major extensions.
Chapters 14 through 16 focus on the role of expectations
in the short run and in the medium run. Expectations play
a major role in most economic decisions, and, by implication,
play a major role in the determination of output.
Chapters 17 through 20 focus on the implications of
openness of modern economies. Chapter 20 focuses on
the implications of different exchange rate regimes, from
flexible exchange rates, to fixed exchange rates, currency
boards, and dollarization.
¡ö
Chapters 21 through 23 return to macroeconomic
policy. Although most of the first 20 chapters constantly
discuss macroeconomic policy in one form or another,
the purpose of Chapters 21 through 23 is to tie the
threads together. Chapter 21 looks at the role and the
limits of macroeconomic policy in general. Chapters 22
and 23 review fiscal and monetary policy. Some instructors
may want to use parts of these chapters earlier. For
example, it is easy to move forward the discussion of
the government budget constraint in Chapter 22 or the
discussion of inflation targeting in Chapter 23.
¡ö
Chapter 24 serves as an epilogue; it puts macroeconomics
in historical perspective by showing the evolution
of macroeconomics in the last 70 years, discussing
current directions of research, and the lessons of the
crisis for macroeconomics.
Alternative Course Outlines
Within the book¡¯s broad organization, there is plenty of opportunity
for alternative course organizations. I have made
the chapters shorter than is standard in textbooks, and, in
my experience, most chapters can be covered in an hour and
a half. A few (Chapters 5 and 9 for example) might require
two lectures to sink in.
¡ö
Short courses. (15 lectures or less)
A short course can be organized around the two introductory
chapters and the core (Chapter 13 can be excluded
at no cost in continuity). Informal presentations
of one or two of the extensions, based, for example, on
Chapter 16 for expectations (which can be taught as a
stand alone), and on Chapter 17 for the open economy,
can then follow, for a total of 14 lectures.
A short course might leave out the study of growth
(the long run). In this case, the course can be organized
around the introductory chapters and Chapters 3
through 9 in the core; this gives a total of 9 lectures,
leaving enough time to cover, for example, Chapter 16
on expectations, Chapters 17 through 19 on the open
economy, for a total of 13 lectures.
¡ö
Longer courses (20 to 25 lectures)
A full semester course gives more than enough time to
cover the core, plus one or both of the two extensions,
and the review of policy.
The extensions assume knowledge of the core, but are
otherwise mostly self-contained. Given the choice, the
order in which they are best taught is probably the order
in which they are presented in the book. Having studied
the role of expectations first helps students to understand
the interest parity condition, and the nature of
exchange rate crises.
Features
I have made sure never to present a theoretical result without
relating it to the real world. In addition to discussions of
facts in the text itself, I have written a large number of Focus
boxes, which discuss particular macroeconomic events
or facts, from the United States or from around the world.
I have tried to re-create some of the student¨Cteacher interactions
that take place in the classroom by the use of margin
notes, which run parallel to the text. The margin notes
create a dialogue with the reader and, in so doing, smooth
the more difficult passages and give a deeper understanding
of the concepts and the results derived along the way.
For students who want to explore macroeconomics
further, I have introduced the following two features:
¡ö
Short appendixes to some chapters, which expand on
points made within the chapter.
¡ö
A Further Readings section at the end of most chapters,
indicating where to find more information, including a
number of key Internet addresses.
Each chapter ends with three ways of making sure that the
material in the chapter has been digested:
¡ö
A summary of the chapter¡¯s main points.
¡ö
A list of key terms.
¡ö
A series of end-of-chapter exercises. ¡°Quick Check¡± exercises
are easy. ¡°Dig Deeper¡± exercises are a bit harder, and
¡°Explore Further¡± typically require either access to the
Internet or the use of a spreadsheet -program.
¡ö
A list of symbols on the back endpapers makes it easy to
recall the meaning of the symbols used in the text.
Supplements
The book comes with a number of supplements that support
teaching and learning.
¡ö
Instructor¡¯s Manual. The Online Instructor¡¯s Manual,
prepared by LaTanya Brown-Robertson, discusses pedagogical
choices, alternative ways of presenting the material,
and ways of reinforcing students¡¯ understanding. Chapters
in the manual include six main sections: objectives, in
the form of a motivating question; why the answer matters;
key tools, concepts, and assumptions; summary; and
pedagogy. Many chapters also include sections focusing on
extensions and observations. The Instructor¡¯s Manual also
includes the answers to all end-of-chapter questions and
exercises. The Instructor¡¯s Manual is available for download
as Word files or as PDFs from the Instructor Resource
Center at www.pearsonglobaleditions.com/Blanchard.
¡ö
Test Bank. The online test bank, updated by Liping
Zheng is completely revised with additional new multi-
ple¨Cchoice questions for each chapter. The Test Item File
can be downloaded from the Instructor Resource Center
at www.pearsonglobaleditions.com/Blanchard.
¡ö
Computerized Test Bank¡ªThe Computerized Test
Item File is designed for use with the computerized Test-
Gen package, which allows instructors to customize,
save, and generate classroom tests. The test program
permits instructors to edit, add, or delete questions from
the test bank; edit existing graphics and create new
graphics; 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
File can be downloaded from the Instructor¡¯s Resource
Center at www.pearsonglobaleditions.com/Blanchard,
and all questions can be assigned via MyEconLab.
¡ö
PowerPoint Lecture Slides¡ªThese electronic slides,
prepared by Jim Lee provide section lecture notes including
tables, equations, and graphs for each chapter and
can be downloaded from the Instructor¡¯s Resource Center
at www.pearsonglobaleditions.com/Blanchard.
xvi
Preface
