Chapter 06 – An Introduction to Macroeconomics
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CHAPTER 06
An Introduction to Macroeconomics
A. Short-Answer, Essays, and Problems
1. Macroeconomics is mainly concerned with two topics. What are these two topics and how are they related
to each other?
2. What is the difference between a slowdown in economic growth and a recession?
3. What are the three primary measures used in macroeconomics to assess the performance of an economy?
4. Describe the difference between real GDP and nominal GDP. Which concept is more useful for measuring
change in the economy over time? Why?
5. Assume that a painter produces 20 paintings this year and 20 paintings next year. What is the annual
change in nominal GPD if the price of paintings rises from $1,000 this year to $1,500 next year? Can you
conclude that the economy grew from this year to next year based on your answer? Why?
6. Assume that in year 1 an economy produces 1000 units of output and they sell for $100 a unit, on average.
In year 2, the economy produces the same 1000 units of output, and sells it for $110 a unit, on average.
Use year 1 prices to calculate real GDP in Year 1 and Year 2. What happened to real GDP between years 1
and 2? Why?
7. What is the opportunity cost of unemployment for an economy? What social problems have been linked to
higher rates of unemployment?
8. How does inflation affect people’s standards of living and savings?
9. Identify at least four important policy questions about the powers and limits of government economic
policy that macroeconomics models are able to answer.
10. Compare and contrast the characteristics of economic growth in ancient or pre–industrial times with modern
economic growth today.
11. What accounts for differences in living standards between rich and poor countries today?
12. GDP figures can be used to make international comparisons of living standards. What are three
adjustments made by the International Monetary Fund (IMF) to each country’s GDP to allow for
meaningful comparisons of living standards between countries? Explain.
13. Define saving.
14. Why are savings and investment so important for economic growth? How do savings and investment affect
present and future consumption? Explain.
15. (Consider This) What is the difference between economic investment and financial investment? Give an
example for each type of investment.
16. “Households are the principal source of savings. But businesses are the main economic investors.” Briefly
explain.
17. How do uncertainty and expectations influence economic behavior?
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18. What are demand shocks? Give an example of a positive and a negative demand shock.
19. Determine whether the following statement is true or false and provide an explanation for your answer: An
economy would adjust through changes in output if there are demand shocks and prices are flexible.
20. Answer the next four questions based on the following demand and supply model for a business firm
producing motorcycles. Assume that 300 motorcycles is the optimal and most profitable level of
production for the firm. All dollars are in thousands.
(a) What are the equilibrium price and quantity at the medium level of demand (DM)?
(b) What will be the equilibrium price and quantity if there is a demand shock that unexpectedly lowers
demand (DL)?
(c) What will be the equilibrium price and quantity if there is a demand shock that unexpectedly increases
demand (DH)?
(d) What can you conclude will happen to prices and output when this model is shocked by changes in
demand?
21. How does an economy adjust to demand shocks when prices are inflexible?
22. The following is a demand and supply model for a business firm producing baseball caps. Assume that 100
baseball caps is the optimal ad most profitable level of production for the firm. Answer the next four
questions assuming that the price of baseball caps is inflexible.
(a) What are the equilibrium price and quantity at the medium level of demand (DM)?
(b) What will be the equilibrium price and quantity if there is a demand shock that unexpectedly lowers
demand (DL)?
Chapter 06 – An Introduction to Macroeconomics
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(c) What will be the equilibrium price and quantity if there is a demand shock that unexpectedly increases
demand (DH)?
(d) What can you conclude will happen to prices and output when this model is shocked by changes in
demand?
23. How do companies deal with unexpected shifts in quantity demanded when prices are sticky?
24. Evaluate the statement that “unexpected declines in demand, with inflexible prices, generate a rise in
unemployment and a fall in output.”
25. (Consider This) Describe the economic conditions of the Great Recession.
26. (Consider This) Which took the major brunt of the decline in total demand in the Great Recession, real
output or prices?
27. What happens to inventories when prices are sticky and there is a demand shock? Explain.
28. Give examples of the stickiness of prices based on the average number of months between price changes
for selected goods and services.
29. Describe two reasons why businesses hesitate to change prices.
30. Why do economists refer to prices as “sticky” rather than “stuck”?
31. How can price stickiness be used to categorize macroeconomic models?
32. (Last Word) How has computer technology changed the way that business firms track inventories?
33. (Last Word) Discuss the effects of computerized inventory tracking on the severity of business cycles.
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B. Answers to Short-Answer, Essays, and Problems
1. Macroeconomics is mainly concerned with two topics. What are these two topics and how are they related
to each other?
2. What is the difference between a slowdown in economic growth and a recession?
3. What are the three primary measures used in macroeconomics to assess the performance of an economy?
4. Describe the difference between real GDP and nominal GDP. Which concept is more useful for measuring
change in the economy over time? Why?
changes and are misleading indicators of real growth. [text: E p. 473; MA p. 117]
5. Assume that a painter produces 20 paintings this year and 20 paintings next year. What is the annual
change in nominal GPD if the price of paintings rises from $1,000 this year to $1,500 next year? Can you
conclude that the economy grew from this year to next year based on your answer? Why?
6. Assume that in year 1 an economy produces 1000 units of output and they sell for $100 a unit, on average.
In year 2, the economy produces the same 1000 units of output, and sells it for $110 a unit, on average.
Use year 1 prices to calculate real GDP in Year 1 and Year 2. What happened to real GDP between years 1
and 2? Why?
Chapter 06 – An Introduction to Macroeconomics
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7. What is the opportunity cost of unemployment for an economy? What social problems have been linked to
higher rates of unemployment?
8. How does inflation affect people’s standards of living and savings?
9. Identify at least four important policy questions about the powers and limits of government economic
policy that macroeconomics models are able to answer.
10. Compare and contrast the characteristics of economic growth in ancient or pre–industrial times with modern
economic growth today.
11. What accounts for differences in living standards between rich and poor countries today?
12. GDP figures can be used to make international comparisons of living standards. What are three
adjustments made by the International Monetary Fund (IMF) to each country’s GDP to allow for
meaningful comparisons of living standards between countries? Explain.
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13. Define saving.
14. Why are savings and investment so important for economic growth? How do savings and investment affect
present and future consumption? Explain.
15. (Consider This) What is the difference between economic investment and financial investment? Give an
example for each type of investment.
16. “Households are the principal source of savings. But businesses are the main economic investors.” Briefly
explain.
17. How do uncertainty and expectations influence economic behavior?
18. What are demand shocks? Give an example of a positive and a negative demand shock.
Chapter 06 – An Introduction to Macroeconomics
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19. Determine whether the following statement is true or false and provide an explanation for your answer: An
economy would adjust through changes in output if there are demand shocks and prices are flexible.
20. Answer the next four questions based on the following demand and supply model for a business firm
producing motorcycles. Assume that 300 motorcycles is the optimal and most profitable level of
production for the firm. All dollars are in thousands.
(a) What are the equilibrium price and quantity at the medium level of demand (DM)?
(b) What will be the equilibrium price and quantity if there is a demand shock that unexpectedly lowers
demand (DL)?
(c) What will be the equilibrium price and quantity if there is a demand shock that unexpectedly increases
demand (DH)?
(d) What can you conclude will happen to prices and output when this model is shocked by changes in
demand?
21. How does an economy adjust to demand shocks when prices are inflexible?
Chapter 06 – An Introduction to Macroeconomics
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22. The following is a demand and supply model for a business firm producing baseball caps. Assume that 100
baseball caps is the optimal ad most profitable level of production for the firm. Answer the next four
questions assuming that the price of baseball caps is inflexible.
(a) What are the equilibrium price and quantity at the medium level of demand (DM)?
(b) What will be the equilibrium price and quantity if there is a demand shock that unexpectedly lowers
demand (DL)?
(c) What will be the equilibrium price and quantity if there is a demand shock that unexpectedly increases
demand (DH)?
(d) What can you conclude will happen to prices and output when this model is shocked by changes in
demand?
23. How do companies deal with unexpected shifts in quantity demanded when prices are sticky?
24. Evaluate the statement that “unexpected declines in demand, with inflexible prices, generate a rise in
unemployment and a fall in output.”
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25. (Consider This) Describe the economic conditions of the Great Recession.
26. (Consider This) Which took the major brunt of the decline in total demand in the Great Recession, real
output or prices?
27. What happens to inventories when prices are sticky and there is a demand shock? Explain.
28. Give examples of the stickiness of prices based on the average number of months between price changes
for selected goods and services.
29. Describe two reasons why businesses hesitate to change prices.
30. Why do economists refer to prices as “sticky” rather than “stuck”?
Chapter 06 – An Introduction to Macroeconomics
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31. How can price stickiness be used to categorize macroeconomic models?
32. (Last Word) How has computer technology changed the way that business firms track inventories?
33. (Last Word) Discuss the effects of computerized inventory tracking on the severity of business cycles.