Solution Manual For Macroeconomics Ninth Edition

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Chapter 1—The Science of Macroeconomics1Answers to Textbook Questionsand ProblemsCHAPTER1The Science of MacroeconomicsQuestions for Review1.Microeconomicsis the study of how individual firms and households make decisions, and how theyinteract with one another. Microeconomic models of firms and households are based on principles ofoptimization—firms and households do the best they can given the constraints they face. For example,households choose which goods to purchase in order to maximize their utility, whereas firms decidehow much to produce in order to maximize profits. In contrast,macroeconomicsis the study of theeconomy as a whole; it focuses on issues such as how total output, total employment, and the overallprice level are determined. These economy-wide variables are based on the interaction of manyhouseholds and many firms; therefore, microeconomics forms the basis for macroeconomics.2.Economists build models as a means of summarizing the relationships among economic variables.Models are useful because they abstract from the many details in the economy and allow one to focuson the most important economic connections.3.A market-clearing model is one in which prices adjust to equilibrate supply and demand. Market-clearing models are useful in situations where prices are flexible. Yet in many situations, flexibleprices may not be a realistic assumption. For example, labor contracts often set wages for up to threeyears. Or, firms such as magazine publishers change their prices only every three to four years. Mostmacroeconomists believe that price flexibility is a reasonable assumption for studying long-run issues.Over the long run, prices respond to changes in demand or supply, even though in the short run theymay be slow to adjust.Problems and Applications1.Monetary policy in the United States and the European Union has been a big topic of conversation inearly 2015.The EU embarked upon a quantitative easing policy in March 2015 in an attempt tostimulate growth and prevent deflation.There has been some concern that the inflation rate in Europewill turn negative.In the United States,there is continued discussion and speculation concerning whenthe Federal Reserve might choose to increase the target federal funds rate.Also in the United States,the unemployment rate has declined to about 5.5percentand this suggests that wages may begin toincrease.The Federal Reserve will be watching for wage and price increases as they decide when toincrease interest rates.2.Many philosophers of science believe that the defining characteristic of a science is the use of thescientific method of inquiry to establish stable relationships. Scientists examine data, often provided bycontrolled experiments, to support or disprove a hypothesis. Economists are more limited in their useof experiments. They cannot conduct controlled experiments on the economy; they must rely on thenatural course of developments in the economy to collect data. To the extent that economists use thescientific method of inquiry, that is, developing hypotheses and testing them, economics has thecharacteristics of a science.3.We can use a simple variant of the supply-and-demand model for pizza to answer this question.Assume that the quantity of ice cream demanded depends not only on the price of ice cream andincome, but also on the price of frozen yogurt:Qd=D(PIC,PFY,Y).We expect that demand for icecream rises when the price of frozen yogurt rises, because ice creamand frozen yogurt are substitutes. That is, when the price of frozen yogurt goes up, I consume less of itand, instead, fulfill more of my frozen dessert urges through the consumption of ice cream.

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