Page 28 - Krugmans Economics for AP Text Book_Neat

Preface

Tools for Learning...Getting the Most from This Book

Each section and its modules are structured around a common set of
features designed to help students learn while keeping them engaged.

section 4

Module 16 Income and Expenditure
The section outline Module 17 Aggregate Demand: Introduction
and Determinants
lists the modules Module 18 Aggregate Supply: Introduction and National Income
that comprise the Determinants
section and suggests Module 19 Equilibrium in the Aggregate and Price
a relevant chapter in Demand–Aggregate Supply Model
Module 20 Economic Policy and the Aggregate
Dave Anderson’s Demand–Aggregate Supply Model
book, Economics by Module 21 Fiscal Policy and the Multiplier Determination
Example, which is Economics by Example:
“How Much Debt Is Too Much?”
packaged with this
text.
FROM BOOM TO BUST
Ft. Myers, Florida, was a boom town in 2003, 2004, and most The abrupt collapse of the housing market pulled the
of 2005. Jobs were plentiful: by 2005 the unemployment rate local economy down with it, as the process that had created
was less than 3%. The shopping malls were humming, and the earlier boom operated in reverse.
new stores were opening everywhere. The boom and bust in Ft. Myers illustrates, on a small
But then the boom went bust. Jobs became scarce, and by scale, the way booms and busts often happen for the econ-
2009 the unemployment rate had reached 14%. Stores had omy as a whole. The business cycle is often driven by ups
few customers, and many were closing. One new business or downs in investment spending—either residential in-
was flourishing, however. Marc Joseph, a real estate agent, vestment spending (that is, spending on home construc-
began offering “foreclosure tours”: visits to homes that had tion) or nonresidential investment spending (such as
been seized by banks after the owners were unable to make spending on construction of office buildings, factories,
mortgage payments. and shopping malls). Changes in investment spending, in
What happened? Ft. Myers boomed from 2003 to 2005 be- turn, indirectly lead to changes in consumer spending,
cause of a surge in home construction, fueled in part by specu- which magnify—or multiply—the effect of the investment
lators who bought houses not to live in, but because they spending changes on the economy as a whole.
believed they could resell those houses at much higher prices. In this section we’ll study how this process works on
Opening Story Each section Home construction gave jobs to construction workers, electri- a grand scale. As a first step, we introduce multiplier analy-
cians, real estate agents, and others. And these workers, in turn, sis and show how it helps us understand the business
opens with a compelling story spent money locally, creating jobs for sales workers, waiters, cycle. In Module 17 we explain aggregate demand and its two
that often extends through the gardeners, pool cleaners, and more. These workers also spent most important components, consumer spending and
money locally, creating further expansion, and so on. investment spending. Module 18 introduces aggregate sup-
modules. The opening stories The boom turned into a bust when home construction ply, the other half of the model used to analyze economic
are designed to illustrate came to a virtual halt. It fluctuations. We will
turned out that specula- then be ready to explore
important concepts, to build tion had been feeding on how aggregate supply
intuition with realistic itself: people were buy- and aggregate demand
ing houses as invest- determine the levels
examples, and then to ments, then selling them of prices and real out-
to other people who put in an economy.
encourage students to read were also buying houses Finally, we will use
on and learn more. as investments, and the the aggregate demand-
prices had risen to levels aggregate supply model
far beyond what people Courtesy of the Dallas Morning News to visualize the state
who actually wanted to of the economy and
live in houses were will- examine the effects of
ing to pay. economic policy.
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xxvi PREFACE