Chapter 6 Corporations Also Experience Fall Profits During Recessions

Unlock access to all the studying documents.

View Full Document

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

CHAPTER

KrugWellsECPS4e_Macro_CH06.indd S-95KrugWellsECPS4e_Macro_CH06.indd S-95 1/26/15 10:13 AM1/26/15 10:13 AM

S-96 CHAPTER 6 MACROECONOMICS: THE BIG PICTURE

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%

KrugWellsECPS4e_Macro_CH06.indd S-96KrugWellsECPS4e_Macro_CH06.indd S-96 1/26/15 10:13 AM1/26/15 10:13 AM

CHAPTER 6 MACROECONOMICS: THE BIG PICTURE S-97

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)

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

Solution

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

KrugWellsECPS4e_Macro_CH06.indd S-98KrugWellsECPS4e_Macro_CH06.indd S-98 1/26/15 10:13 AM1/26/15 10:13 AM

CHAPTER 6 MACROECONOMICS: THE BIG PICTURE S-99

Solution

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

KrugWellsECPS4e_Macro_CH06.indd S-99KrugWellsECPS4e_Macro_CH06.indd S-99 1/26/15 10:13 AM1/26/15 10:13 AM

S-100 CHAPTER 6 MACROECONOMICS: THE BIG PICTURE

Solution

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

KrugWellsECPS4e_Macro_CH06.indd S-100 1/26/15 10:13 AM