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Solution
Solution
1. Which of the following questions are relevant for the study of macroeconomics and
which for microeconomics?
a. How will Ms. Martin’s tips change when a large manufacturing plant near the res-
taurant where she works closes?
1. a. This is a microeconomic question because it addresses the effects of a single firm’s
actions (the closure of a manufacturing plant) on a single individual (the waitress).
b. This is a macroeconomic question because it considers how overall spending by
consumers is affected by the state of the macroeconomy.
2. When one person saves more, that person’s wealth is increased, meaning that he
or she can consume more in the future. But when everyone saves more, everyone’s
income falls, meaning that everyone must consume less today. Explain this seeming
contradiction.
2. This question concerns the paradox of thrift; what is true for an individual—that
3. Before the Great Depression, the conventional wisdom among economists and policy
makers was that the economy is largely self-regulating.
a. Is this view consistent or inconsistent with Keynesian economics? Explain.
Macroeconomics: The Big Picture
S-95
6
CHAPTER
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S-96 CHAPTER 6 MACROECONOMICS: THE BIG PICTURE
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Solution
Solution
3. a. The view that the economy is largely self-regulating is at odds with Keynesian
economics, which claims that managing the economy, via the tools of fiscal and
monetary policy, is the government’s responsibility.
4. How do economists in the United States determine when a recession begins and
when it ends? How do other countries determine whether or not a recession is
occurring?
4. In the United States, economists assign the task of identifying recessions to an
independent panel of experts at the National Bureau of Economic Research who
5. The U.S. Department of Labor reports statistics on employment and earnings
that are used as key indicators by many economists to gauge the health of the
economy. Figure 6-4 in the text plots historical data on the unemployment rate
5. a. Answers will vary. In the December 2011 Employment Situation, the Bureau of
Labor Statistics states that the October 2014 unemployment rate was 5.8%.
b. During the recession of the early 1990s, the unemployment rate rose from 5.5%
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CHAPTER 6 MACROECONOMICS: THE BIG PICTURE S-97
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Solution
6. In the 1990s there were some dramatic economic events that came to be known as
the Asian financial crisis. A decade later similar events came to be known as the global
financial crisis. The accompanying figure shows the growth rate of real GDP in the
United States and Japan from 1995 to 2011. Using the graph, explain why the two
sets of events are referred to this way.
Growth rate
of real GDP
(percent)
6%
United States
6. In the late 1990s, Japanese real GDP slumped, but U.S. growth continued without
7. a. What three measures of the economy tend to move together during the business
cycle? Which way do they move during an upturn? During a downturn?
b. Who in the economy is hurt during a recession? How?
7. a. The three measures that tend to move together are (1) industrial output, called
real gross domestic product, (2) employment, and (3) inflation. All three tend to
rise during an upturn and fall during a downturn.
b. Workers and their families experience a great deal of pain and hardship during
recessions because many people lose their jobs and many who retain their jobs see
8. Why do we consider a business - cycle expansion different from long - run economic
growth? Why do we care about the size of the long - run growth rate of real GDP
relative to the size of the growth rate of the population?
S-98 CHAPTER 6 MACROECONOMICS: THE BIG PICTURE
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8. Long - run economic growth is the sustained upward trend in the economy’s output
over long periods of time. Long-run growth per capita is the key to rising wages
9. In 1798, Thomas Malthus’s Essay on the Principle of Population was published. In it,
he wrote: “Population, when unchecked, increases in a geometrical ratio. Subsistence
9. Malthus expected that life would continue as it had for the previous 800 or so years.
He did not know that advances in technology would bring large changes in produc-
10. Each year, The Economist publishes data on the price of the Big Mac in different
countries and exchange rates. The accompanying table shows some data from 2007
and 2014. Use this information to answer the following questions.
a. Where was it cheapest to buy a Big Mac in U.S. dollars in 2007?
b. Where was it cheapest to buy a Big Mac in U.S. dollars in 2014?
c. Using the increase in the local currency price of the Big Mac in each country to
measure the percent change in the overall price level from 2007 to 2014, which
nation experienced the most inflation? Did any of the nations experience deflation?
2007 2014
Price of Price of Price of Price of
Big Mac Big Mac Big Mac Big Mac
(in local (in U.S. (in local (in U.S.
Country currency) dollars) currency) dollars)
Argentina peso8.25 $2.65 peso21.0 $2.57
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10. a. In U.S. dollars, a Big Mac was cheapest in Japan in 2007.
b. In U.S. dollars, a Big Mac was cheapest in Argentina in 2014.
c. First we must calculate the percent change of the local currency price of the Big
Mac during the period from 2007 to 2014.
11. The accompanying figure illustrates the increasing trade deficit of the United States
since 1987. The United States has been consistently and, on the whole, increasingly
importing more goods than it has been exporting. One of the countries it runs a
trade deficit with is China. Which of the following statements are valid possible
explanations of this fact? Explain.
U.S. trade
deficit
(billions)
$800
700
600
500
400
300
11. a. This is not a valid possible explanation. The determination of where goods are pro-
duced around the world is a microeconomic phenomenon, based on comparative
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S-100 CHAPTER 6 MACROECONOMICS: THE BIG PICTURE
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c. This is a valid explanation. A country’s levels of savings and investment spending
are macroeconomic phenomena that determine whether it runs a trade surplus or
deficit.
12. College tuition has risen significantly in the last few decades. From the 1981–1982
academic year to the 2011–2012 academic year, total tuition, room, and board
paid by full - time undergraduate students went from $2,871 to $16,789 at public
12. To determine whether it is more or less difficult for a typical person to afford college,
we would need to compare the increase in tuition to the average increase in personal
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