978-0132992282 Chapter 1 Solution Manual

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 Additional Issues for Classroom Discussion

1. What Are Society’s Major Economic Problems Today?

In the first class session, it may be interesting to discuss students’ perceptions of the major economic

problems facing the economy today. Public-opinion polls show that Americans’ views on the importance

of different issues vary sharply over the business cycle. In recessions, people perceive unemployment and

2. Let’s Forecast!

Here’s an exercise that will surprise both you and your students. On the first day of class, before they even

know much about the macroeconomic variables that will be studied in the course, ask them to forecast

such things as inflation, unemployment, the growth rate of output, and interest rates. You can give them a

3. Formulating a Model

Here’s an exercise in formulating an economic model that will help students learn how to think about

economic issues and how to model them. The idea is for you (or them) to pick a current topic like CPI

bias, the basis of the business cycle, the effect of government deficits, the effect of trade deficits, or

something else. It’s useful to do this now, before they’ve learned much about the topic. Follow the steps

1. Both total output and output per worker have risen strongly over time in the United States. Output

itself has grown by a factor of 100 in the last 133 years. Output per worker is now six times as great

2. The business cycle refers to the short-run movements (expansions and recessions) of economic

activity. The unemployment rate rises in recessions and declines in expansions. The unemployment

3. A period of inflation is one in which prices (on average) are rising over time. Deflation occurs when

prices are falling on average over time. Before World War II, prices tended to rise during war periods

and fall after the wars ended; over the long run, the price level remained fairly constant. Since World

War II, however, prices have risen fairly steadily.

4. The budget deficit is the annual excess of government spending over tax collections. The U.S. federal

government has been most likely to run deficits during wars. From the early 1980s to the mid-1990s,

5. The trade deficit is the amount by which imports exceed exports; the trade surplus is the amount by

which exports exceed imports, so it is the negative of the trade deficit. In recent years the United

6. Macroeconomists engage in forecasting, macroeconomic analysis, macroeconomic research, and data

development. Macroeconomic research can be useful in investigating forecasting models to improve

7. The steps in developing and testing an economic model or theory are: (1) state the research question;

(2) make provisional assumptions that describe the economic setting and the behavior of the economic

8. Yes, it is possible for economists to agree about the effects of a policy (that is, to agree on the positive

analysis of the policy), but to disagree about the policy’s desirability (normative analysis). For example,

9. Classicals see wage and price adjustment occurring rapidly, while Keynesians think that wages and

prices adjust only slowly when the economy is out of equilibrium. The classical theory implies that

10. Stagflation was a combination of stagnation (high unemployment) and inflation in the 1970s. It

changed economists’ views because the Keynesian approach couldn’t explain stagflation

1. (a) Average labor productivity is output divided by employment:

2011: 12,000 tons of potatoes divided by 1000 workers  12 tons of potatoes per worker

2012: 14,300 tons of potatoes divided by 1100 workers  13 tons of potatoes per worker

(b) The growth rate of average labor productivity is [(13/12)  1]  100%  8.33%.

2011: (100 unemployed/1100 workers)  100%  9.1%

2012: (50 unemployed/1150 workers)  100%  4.3%

(d) The inflation rate is [(2.5/2)  1]  100%  25%.

2. The answers to this problem will vary depending on the current date. The answers here are based on

the August 2012 release of the National Income and Product Accounts, Tables 1.1.5 and 3.2. Numbers

2010 2011 2012Q2

GDP 14,498.9 15,075.7 15,606.1

Exports 1,844.4 2,094.2 2,192.9

Imports 2,356.1 2,662.3 2,766.0

Federal Receipts 2,395.4 2,519.6 2,680.6

Federal Expenditures 3,703.4 3,757.0 3,775.1

1. Yes, average labor productivity can fall even when total output is rising. Average labor productivity is

total output divided by employment. So average labor productivity can fall if output and employment

are both rising but employment is rising faster.

Yes, the unemployment rate can also rise even though total output is rising. This can occur a number

2. Just because prices were lower in 1890 than they were in 2012 does not mean that people were better

off back then. People’s incomes have risen much faster than prices have risen over the last 100 years,

3. There are many possible theories. One possibility is that people whose last names begin with the

letters A through M vote Democratic, while those whose names begin with the letters N through

Z vote Republican. You could test this theory by taking exit polls or checking the lists of registered

voters by party. However, this theory fails the criterion of being reasonable, since there is no good

4. (a) Positive. This statement tells what will happen, not what should happen.

(b) Positive. Even though it is about income-distribution issues, it is a statement of fact, not opinion.

5. A classical economist might argue that the economy would work more efficiently without the

government trying to influence trade. The imposition of tariffs increases trade barriers, interfering