Economics Chapter 1 Firms in the Domestic and International Economies

Instructor’s Manual

with

Solutions Manual

R. Glenn Hubbard

Anthony Patrick O’Brien

MACROECONOMICS

SIXTH EDITION

R. Glenn Hubbard

Contents

Part 1: Introduction

Chapter 1: Economics: Foundations and Models 1

Appendix: Using Graphs and Formulas 12

Chapter 2: Trade-offs, Comparative Advantage, and the Market System 25

Part 2: Firms in the Domestic and International Economies

Chapter 6: Firms, the Stock Market, and Corporate Governance 122

Part 3: Macroeconomic Foundations and Long-Run Growth

Chapter 8: GDP: Measuring Total Production and Income 175

Part 4: Short-Run Fluctuations

Chapter 12: Aggregate Expenditure and Output in the Short Run 271

Appendix: The Algebra of Macroeconomic Equilibrium 286

Contents iii

Part 5: Monetary and Fiscal Policy

Chapter 14: Money, Banks, and the Federal Reserve System 326

Chapter 15: Monetary Policy 352

Part 6: The International Economy

Chapter 18: Macroeconomics in an Open Economy 438

Preface

Features of this Instructor’s Manual

Each chapter of this Instructor’s Manual contains the following elements:

Chapter Summary: An overview of the main economic concepts covered.

Extra Economics in Your Life: Each chapter of the book opens and closes with a special feature entitled

Economics in Your Life that emphasizes the connection between the material and the students’ personal

experiences and questions. This Instructor’s Manual includes an extra Economics in Your Life for each

chapter to present in class.

Extra Making the Connection: Each chapter of the main text has two or more Making the Connection

Digital Features Located in MyEconLab

MyEconLab is a unique online course management, testing, and tutorial resource. It is included with the

eText version of the book or as a supplement to the print book. Students and instructors will find the

following online resources to accompany the sixth edition:

• Videos. There are 58 Making the Connection features in the book that provide real-world

Preface v

• Concept Checks. Each section of each learning objective concludes with an online Concept Check

that contains one or two multiple-choice, true/false, or fill-in questions. These checks act as “speed

• Animations of Figures. Graphs are the backbone of introductory economics, but many students

struggle to understand and work with them. Each of the 166 numbered figures in the text has a

supporting animated version online. The goal of this digital resource is to help students understand

• Interactive Solved Problems. Many students have difficulty applying economic concepts to solving

problems. The goal of this digital resource is to help students overcome this hurdle by giving them a

model of how to solve an economic problem by breaking it down step by step. Each of the 35 Solved

• Graphs Updated with Real-Time Data from FRED. Approximately 25 graphs are continuously

updated online with the latest available data from FRED (Federal Reserve Economic Data), which is

a comprehensive, up-to-date data set maintained by the Federal Reserve Bank of St. Louis. Students

• Interactive Problems and Exercises Updated with Real-Time Data from FRED. The end-of-

chapter problems in select chapters include Real-Time Data Exercises that use the latest data from

vi Preface

Organizing Your Syllabus

The Instructor’s Manual can be a valuable resource for both experienced and first-time instructors. Both

the textbook and Instructor’s Manual provide comprehensive coverage of economic theory, monetary

policy, fiscal policy, and real-world applications.

Chapter 8, “GDP: Measuring Total Production and Income,” and Chapter 9, “Unemployment and

Inflation” carefully provide definitions of macroeconomic statistics such as GDP, CPI, and payroll

employment, that dominate news headlines.

The comprehensive coverage of macroeconomic models and policy issues allows instructors with

Chapter 12, “Aggregate Expenditure and Output in the Short Run,” contains a thorough discussion of the

traditional Keynesian 45º-line aggregate expenditure model. Many instructors find this model useful in

introducing students to the short-run relationship between spending and production. However, instructors

may also safely omit Chapter 12 and proceed directly to Chapter 13, “Aggregate Demand and Aggregate

Supply Analysis.”

Chapter 13 carefully develops the AD–AS model and then makes the model dynamic in an optional

section to account better for actual movements in real GDP and the price level. Chapter 13 includes a

Preface vii

The following chart helps you organize your syllabus based on your teaching preferences and objectives:

CORE

POLICY

OPTIONAL

Chapter 1: Economics: Foundations

and Models

Chapter 2: Trade-offs, Comparative

Advantage, and the Market

System

Chapter 8: GDP: Measuring

Total Production and Income

Chapter 9: Unemployment and

Inflation

Chapter 10: Economic Growth, the

Financial System, and Business

Cycles

Chapter 4: Economic Efficiency,

Government Price Setting, and

Taxes

Chapter 5: The Economics of

Health Care

Chapter 1 Appendix: Using Graphs

and Formulas

Chapter 4 Appendix: Quantitative

Demand and Supply Analysis

Chapter 12 Appendix: The Algebra

of Macroeconomic Equilibrium

Chapter 13 Appendix:

Macroeconomic Schools of

Thought

Chapter 16 Appendix: A Closer

Look at the Multiplier

viii Preface

MyEconLab for Instructors & Students

MyEconLab is a unique online course management, testing, and tutorial resource.

MyEconLab for the Professor

Instructors can choose how much or how little time to spend setting up and using MyEconLab. Each

chapter contains two preloaded exercise sets that can be used to build an individualized study plan for

• Preloaded exercise assignments sets for each chapter include the student tutorial resources mentioned

earlier.

• Preloaded quizzes for each chapter are unique to the text and not repeated in the study plan or

homework exercise sets.

• Study plan problems are similar to the end-of-chapter problems and numbered exactly as in the book

• Experiments in MyEconLab provide a fun and engaging way to promote active learning and mastery

of important economic concepts. Pearson’s Experiments program is flexible, easy–to-assign, auto-

graded, and available in Single and Multiplayer versions. Single-player experiments allow your

students to play against virtual players from anywhere at any time, as long as they have an Internet

connection. Multiplayer experiments allow you to assign and manage a real-time experiment with

your class. Pre- and post-questions for each experiment are available for assignment in MyEconLab.

For a complete list of available experiments, visit www.myeconlab.com.

Preface ix

Customization and Communication

MyEconLab in MyLab/Mastering provides additional optional customization and communication tools.

MyEconLab for the Student

MyEconLab puts students in control of their learning through a collection of testing, practice, and study

tools tied to the online, interactive version of the textbook and other media resources. Students can study

on their own or can complete assignments created by their instructor. In MyEconLab’s structured

environment, students practice what they learn, test their understanding, and pursue a personalized study

plan generated from their performance on sample tests and from quizzes created by their instructors. In

Homework or Study Plan mode, students have access to a wealth of tutorial features, including:

• Instant feedback on exercises that helps students understand and apply the concepts

Additional MyEconLab Tools

MyEconLab includes the following additional features:

• Enhanced eText. Students actively read and learn, and with more engagement than ever before,

through embedded and auto-graded practice, real-time data-graph updates, animations, author videos,

x Preface

Other Supplements for Instructors

▪ Test Item File

▪ TestGen Computerized Test Program

▪ PowerPoint Lecture Presentation

Test Item File (in electronic TestGen format)

The Test Item File includes more than 4,000 multiple-choice, short answer, and graphing questions.

Test questions are annotated with the following information:

Difficulty: 1 for straight recall, 2 for some analysis, 3 for complex analysis

The Association to Advance Collegiate Schools of Business (AACSB)

The test bank authors have connected select test bank questions to the general knowledge and skill

guidelines found in the AACSB standards.

What Is the AACSB?

AACSB is a not-for-profit corporation of educational institutions, corporations, and other organizations

What Are AACSB Learning Standards?

One of the criteria for AACSB accreditation is the quality of the curricula. Although no specific courses

are required, the AACSB expects a curriculum to include learning experiences in such areas as:

• Written and Oral Communication

• Ethical Understanding and Reasoning

Preface xi

These categories are AACSB Learning Standards. Questions that test skills relevant to these standards

are tagged with the appropriate standard. For example, a question testing the moral questions associated

with externalities would receive the Ethical Reasoning tag.

How Can Instructors Use the AACSB Tags?

Tagged questions help you measure whether students are grasping the course content that aligns with the

TestGen

The computerized TestGen package allows instructors to customize, save, and generate classroom tests.

The test program permits instructors to edit, add, or delete questions from the test banks; edit existing

PowerPoint Slides (Three Sets)

Three sets of PowerPoint slides are available:

1. A comprehensive set of PowerPoint slides can be used by instructors for class presentations or by

students for lecture preview or review. These slides include all the graphs, tables, and equations in

the textbook. Two versions are available—step-by-step mode, in which you can build graphs as you

Learning Catalytics

Learning Catalytics is a “bring your own device” Web-based student engagement, assessment, and

classroom intelligence system. This system generates classroom discussion, guides lectures, and promotes

Digital Interactives

Focused on a single core topic and organized in progressive levels, each interactive immerses students in

xii Preface

Other Supplements for Students

In addition to MyEconLab, Pearson provides the following resources.

Dynamic Study Modules

With a focus on key topics, these modules work by continuously assessing student performance and

PowerPoint Slides

For student use as a study aide or note-taking guide, PowerPoint slides may be downloaded from the