Macroeconomics , 5th Edition Solution Manual

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Chapter 1Introduction◼Teaching GoalsMacroeconomics primarily studies economic growth and business cycles. Over time, there is a prevailingupward trend in the standard of living. However, such growth can be rather erratic. There are someperiodsof very rapid growth, some periods of rather anemic growth, and also some periods of temporaryeconomic decline. Explanations for the overall upward trend in standards of living are the subject ofeconomic growth analysis. Explanations of variations in growth over shorter time horizons are the subjectof business cycle analysis. Students should be able to distinguish between microeconomic topics andmacroeconomic topics. Students should understand the distinction between growth analysis and businesscycle analysis.Although microeconomics and macroeconomics are separate branches of study, both branches areguided by the same set of economic principles. Standard economic theory is guided by the assumption ofmaximizing behavior. As a first approximation, we therefore view the macroeconomy as a collection ofmarkets with maximizing participants. These participants are price-taking agents and the economy isclosely approximated by a competitive equilibrium.Because the economy as a whole is extremely complex, macroeconomists must rely on somewhat abstractmodels. Although the structure of such models does not correspond to all of the details of life in a complexsociety, these models offer the best hope of providing simple, yet accurate descriptions of how themacroeconomy works, and how government policies may affect macroeconomic outcomes.Economists are in broad consensus about the mechanisms of economic growth. There is less agreementabout the causes and consequences of business cycles. While there are strong regularities inmacroeconomic data, competing theories have been developed that each have a claim to explaining thoseregularities. There are Keynesian and non-Keynesian models of the business cycle. Examples of theformer are Keynesian coordination failure models and New Keynesian sticky price models. Examples ofthe latter are the Lucas-Friedman money surprise model, the real business cycle model, and newmonetarist models.◼Classroom Discussion TopicsOne good way to get the ball rolling is to list some macroeconomic concerns like stagnant economicgrowth, unemployment, inflation, the recent recession, government budget deficits, tax burdens, balanceof trade deficits, financing of Social Security, and the like. Draw on current news or look at various policyproposals discussed in Washington. Ask or poll students as to whether they are personally concernedabout such problems and what original prejudices they might have about causes and effects. Sometimesstudents express concerns about topics that are perhaps more microeconomic in nature, like inequality inthe distribution of income and environmental concerns. Emphasize that economic growth may provideenough extra resources to help deal with these issues.

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