Skip to content
Textbook Guides

Solution Manual for Macroeconomics: Principles and Policy, 14th Edition

Solution Manual for Macroeconomics: Principles and Policy, 14th Edition gives you the clarity you need to excel in your studies.

Preview 16 of 113 pages

See the first 16 pages exactly as they appear in the document.

  1. Page 1
    Read page 1 as text

    Part II/Solutions P ART II S OLUTIONS

  2. Page 2
  3. Page 3
    Read page 3 as text

    Chapter 1/What is Economics? C HAPTER 1 W HAT I S E CONOMICS ? D ISCUSSION Q UESTIONS 1. Think about a way you would construct a model of how your co l lege is governed. Which officers and administrators would you include and e x clude from your model if the objective were one of the following: a. To explain how decisions on financial aid are made b. To explain the quality of the faculty Relate this to the map example in the chapter. This question is designed to make students construct their own version of the map example. A good answer is one in which (i) the people who are principally involved in the decision are identified, (ii) the flow of information and persuasion between those people is outlined and (iii) extraneous detail is eliminated. The “model” is likely to be quite different for part (a) and part (b). Thus decisions on financial aid may depend upon the trustees, who set overall policy and attempt to raise funds; the president, who allocates the college budget; the admissions office, which determines what portion of each class is financially needy; and the counselors in the financial aid office, who make decisions about individual cases. Information about policy flows from the top of the bureaucratic hierarchy, and information about need from the bottom. In part (b), faculty quality may be determined by the trustees, who may be responsible for setting salary levels; the president or dean, who must agree to each faculty appointment and promotion; and the faculty committees in each department and division, that search for potential appointees. Instructors who assign this question may be amazed at the image of their institution’s structure held by the students. 2. Relate the process of abstraction to the way you take notes in a lecture. Why do you not try to transcribe every word uttered by the lecturer? Why don’t you write down just the title of the lecture and stop there? How do you decide, roughly speaking, on the correct amount of detail? Most students are familiar with the need to abstract from detail, and take notes only about the essential points. The student will want enough detail to be able to reconstruct the instructor’s argument, but not so much detail as to obscure the main point. It is unlikely that simply writing down the title of the lecture will enable the student to recall the main arguments at a later date. The choices of how much detail, and what particular detail, are similar to the choices an economist makes in thinking about a problem, that is to say, in constructing a model. [This is a good opportunity to discuss note - taking with the students. While most understand the basic idea, few are skilled at it. Take a look at a few students’ lecture notes, and ask whether you would be comfortable learning economics from those notes.]

  4. Page 4
    Read page 4 as text

    Chapter 1/What is Economics? 3. Explain why a government policy maker cannot afford to ignore economic the o ry. Without theory, an economist (or anyone else) can only assemble facts, but she cannot understand the relationship between those facts, in particular the cause - and - effect relationships. F or example, a person who ignores theory can notice that average prices sometimes rise a short time after the country’s money supply increases, but has no way of knowing whether there is a causal relationship between those two phenomena, or whether they are just coincidences. A government policy maker who wants to change something in the country only has a few policy “tools” to use, and so she must have a theory to indicate to her whether changing one of those tools is likely to have the desired result in the country. A PPENDIX — U SING G RAPHS : A R EVIEW T EST Y OURSELF 1. Portray the following hypothetical data on a two variable diagram: Measure the slope of the resulting line, and explain what this number means Slope is 100 interpreted as 100 new students each academic year. Academic Year Total Enrollment Enrollment in Economics Courses 2012 – 20 13 3,000 300 2013 – 201 4 3,100 325 2014 – 2015 3,200 350 2015 – 201 6 3,300 375 2016 – 201 7 3,400 400

  5. Page 5
    Read page 5 as text

    Chapter 1/What is Economics? Slope is 25 interpreted as 25 new economics students each academic year.

  6. Page 6
    Read page 6 as text

    Chapter 1/What is Economics? 2. From Figure 5, calculate the slope of the curve at point M. Slope is 0. 3. Arthur believes that the number of job offers he will get depends on the number of courses in which his grade is B+ or better. He concludes from observation that the following figures are typical: Number of grades of B+ or better 0 1 2 3 4 Number of job offers 1 3 4 5 6 Put these numbers into a graph like Figure 1(a). Measure and interpret the slopes between adjacent dots. A marginal increase in the number of job offers is relatively larger with the first good grade compared to additional good grades. 4. In Figure 6, determine the values of X and Y at point K and at point E . What do you conclude about the slopes of the lines on which K and E are located? K = (2,2); E = (2,1) The slope of 1 for the line on which K is located indicates that this is the steeper of the two curves. On this curve, the variable on the vertical axis responds more significantly to a change in the variable on the horizontal axis. 5. In Figure 8, interpret the economic meaning of points A and B . What do the two points have in common? What is the difference in their economic interpretation?

  7. Page 7
    Read page 7 as text

    Chapter 1/What is Economics? A => 30 hours labor and 40 yds. cloth = 20 units of output. B => 40 hours labor and 28 yds. cloth = 20 units of output. Common: 20 units of output; Difference : Amount of labor and cloth chan ge — more labor, less cloth.

  8. Page 8
    Read page 8 as text

    Chapter 2/ The Economy: Myth and Realit y C HAPTER 2 T HE E CONOMY : M YTH AND R EALITY D ISCUSSION Q UESTIONS 1. Which is the biggest national economy on earth? Why has it remained bigger than other countries with much larger labor forces or those with higher per capita incomes? The United States is the country with the largest economy in the world. The relatively large p opulation in the U.S. is a contributing factor but productivity of workers and accumulated wealth are significant reasons why the U.S. economy is so large. 2. What is meant by a “factor of production”? Have you ever sold any on a market? A factor of production, or input, is something that is used to produce a finished good known as “output.” There are several possible answers, but probably most students have been employed in some capacity (babysitter, paperboy, or a campus job), so they have sold their labor in the market to produce output. 3. Why do you think per capita income in Maryland is nearly double that in Mississippi ? There are several possible answers to this question — the question is designed to get students to think about these differences before using models. One straightforward answer is that the factors of production in Maryland produce output that is worth more than what is produced in Mississippi. This could be because labor is more productive in Maryland because of a better educated workforce. Another answer is that the cost of living is higher in Maryland than it is in Mississippi . 4. Roughly speaking, what fraction of U.S. labor works in factories? In service businesses? In government? Roughly 14 percent produce goods, 71 percent are service workers, and approximately 15 percent work in federal, state, and local government. 5. Most American businesses are small, but most of the output is produced by large businesses. That sounds paradoxical. How can it be true? While there are many small businesses in the U.S. economy, the value of what they produ ce is relatively small. For example, a local grocer cannot produce the same amount as a large national grocery store. It would take several small grocers to match th e production of a large store. So, while a large retailer like Wal - M art is considered to be one business, its production exceeds that of a smaller business. 6. What is the role of government in a mixed economy? The government is a referee — it enforc es laws and establishes order. The government is a business regulator — it imposes restrictions on businesses on society’s behalf. The government provides security through national defense. The government levies taxes to

  9. Page 9
    Read page 9 as text

    Chapter 2/ The Economy: Myth and Realit y finance its spending. Finally, the government redistributes income from high income households to lower - income ones.

  10. Page 10
    Read page 10 as text

    Chapter 3/The Fundamental Economic Problem: Scarcity and Choice C HAPTER 3 T HE F UNDAMENTAL E CONOMIC P ROBLEM : S CARCITY AND C HOICE T EST Y OURSELF 1. A person rents a house for $24,000 per year. The house can be pu r chased for $200,000, and the tenant has this much money in a bank account that pays 4 percent interest per year. Is buying the house a good deal for the tenant? Where does opportunity cost enter the picture? This question asks the students to apply opportunity cost to a straightforward decision: to rent or buy. After buying the house, the person would no longer have to pay $24,000 annual rent. On the other hand, she would lose the $8,000 she currently earns in interest from her bank account. She would be ahead by $16,000, and the purchase is therefore a good deal. In order to get a service (housing) for which she had been willing to pay $24,000, she only has to give up (that is, the opportunity cost is) goods and services worth $8,000. It is worth pointing out to students that if she did continue to rent the house, it must be because the services she receives from the landlord are worth more than $16,000. Also, it is important to realize that this question is very simplified — it ignores home equity, property taxes, etc. 2. Graphically show the production possibilities frontier for the nation of Stromboli, using the data given in the following table. Does the principle of increasing cost hold in Stromboli? Stromboli’s 2018 Production Possibilities Pizzas per Year Pizza Ovens per Year 75,000,000 0 60,000,000 6,000 45,000,000 11,000 30,000,000 15,000 15,000,000 18,000 0 20,000 Figure 1 shows the production possibilities frontier. The principle of increasing cost holds, because the curve is concave. For example, begin at the point of producing 20 pizza ovens and 0 pizzas. To produce 15 pizzas we must give up the production of 2 pizza ovens; this brings us the point of 18 pizza ovens and 15 pizzas. To gain another 15 pizzas, we must now give up the production of 3 pizza ovens. As we continue to produce more pizzas we must give up increasing quantities of pizza ovens. There are diminishing returns as resources are shifted from pizzas to pizza ovens, or vice versa.

  11. Page 11
    Read page 11 as text

    Chapter 3/The Fundamental Economic Problem: Scarcity and Choice FIGURE 1 ( Pizza n umbers a re in m illions, o vens a re in t housands ) 3. Consider two alternatives for Stromboli is 2018. In one case (a) its inhabitants eat 60 million pizzas and build 6,000 pizza ovens. In case (b), the population eats 15million pizzas but builds 18,000 ovens. Which case will lead to a more generous production possibilities frontier for Stomboli in 2018? In case (b), the production possibilities frontier will be further from the origin in future years , since Stromboli will have more pizza ovens with which it can produce more pizzas. 4. Jasmine’s Snack Shop sells two brands of potato chips. She produces them by bu y ing them from a wholesale supplier. Brand X costs Jasmine $1 per bag, and Brand Y costs her $1.40. Draw Jasmine’s production possibilities frontier if she has $280 budgeted to spend on the purchase of potato ch ips from the wholesaler. Why is it not “bowed out”? Figure 2 shows the production possibilities frontier. It is a straight line rather than a curve, because for each additional box of brand X that Jasmine buys, no matter how many boxes she already has, she must cut her purchases of Brand Y by the same amount . The production possibilities frontier in this question is really like a budget constraint. Brand X is $ 1 . 00, Brand Y is $1.4 0. FIGURE 2

  12. Page 12
    Read page 12 as text

    Chapter 3/The Fundamental Economic Problem: Scarcity and Choice D ISCUSSION Q UESTIONS 1. Discuss the resource limitations that affect a. the poorest person on earth b. the richest person in the United States c. a farmer in Kansas d. the government of Indonesia (a) The poorest person on earth has access to so few resources that she is in danger of perishing. The opportunity cost of any additional good or service is life threatening. For example, if she takes the time to cut and sharpen a stick for hunting, she may not be able to gather the food she needs to stay alive. (b) Even the richest person in America faces resource limitations. If he buys a shipping company, he will lack the resources to buy an oil company. He is constantly approached for philanthropic donations; he cannot support them all, and if he increases his donations, he may lack the funds to expand into new business ventures. (c) A farmer in Kansas (or anywhere) has limited resources with which to produce goods, and therefore hard choices to make. If she produces more wheat, she will have to cut back its production of soybeans. (d) The government of Indonesia has the authority to command the use of a certain amount of labor and other productive resources. If it decides to increase the production of petroleum, it will have to shift some productive resources away from another use, thereby causing the output of coffee, for example, to fall. 2. If you were president of your college, what would you change if your budget were cut by 10 percent? By 25 percent? By 50 percent? This question will help students begin to develop a better understanding of their institution. They may be surprised to learn that about 90 percent of the college’s budget goes to wages and benefits — and that therefore a reduction in the budget implies a reduction in programs and the laying off of people. An important trade - off to consider is between the level of services per student on the one hand and the size of the student body on the other. 3. If you were to leave college, what things would change in your life? What, then, is the opportunity cost of your education? The answer to this question obviously depends upon the student. Students should be encouraged to think broadly. A student who leaves college would not have to pay tuition and fees, nor the college room and board expenses (on the other hand, these may be paid currently by her parents, so they would not represent a savings to her). She would earn money from a job, but she might have to pay for her own living expenses. The point to stress is that the opportunity cost of a college education includes indirect items (such as income foregone from a job) as well as costs that the student pays directly. 4. Raising chickens requires several types of feed, such as corn and soy meal. Co n sider a farm in the former Soviet Union. Try to describe how decisions on the number of chickens to be raised, and the amount of each feed to use in raising them, were made under the old communist regime. If the farm is now privately owned, how does the market guide the decisions that used to be made by the ce n tral planning agency? Under the former communist regime, the farmer was allocated a certain amount of each type of feed, at a fixed cost, and was also given a quota for the number of chickens to be produced. The farmer did as he was told, and took few if any risks or innovations. Under

  13. Page 13
    Read page 13 as text

    Chapter 3/The Fundamental Economic Problem: Scarcity and Choice private enterprise now, the farmer can get richer by producing more chickens. He is free to buy any combination of feed grains, subject only to the limit of his budget, at the going market prices. Through a process of trial and error, he will select the combination of feed grains that maximizes his profit — and if the price of soy meal rises, he will shift toward corn. The price of soy meal will in fact rise if soy meal becomes scarcer in the economy as a whole. Thus the market system leads the farmer to economize in his use of a resource that is becoming increasingly scarce — a task that used to be the responsibility of the central planning agency. 5. The United States is one of the world’s wealthiest countries. Think of a recent case in which the decisions of the U.S. government were severely constrained by scarcity. Describe the trade - offs that were involved. What were the opportunity costs of the decisions that were actually made? There are countless good answers to this question. An increase in defense purchases, for example, may require a reduction in educational expenditures. For some students, it may also be important to note that a larger deficit now may lead to a decrease in expenditures in the future.

  14. Page 14
    Read page 14 as text

    Chapter 4/Supply and Demand: An Initial Look C HAPTER 4 S UPPLY AND D EMAND : A N I NITIAL L OOK T EST Y OURSELF 1. What shapes would you expect for the following demand curves? a. A medicine that means life or death for a patient b. French fries in a food court with kiosks offering many types of food (a) The demand curve for a medicine that means life or death for a patient will be vertical. One would not expect a decline in quantity demanded as the price rises, if that decline meant that the patient would die. (b) The demand curve for french fries in a food court with many other stands will be fairly flat, perhaps even horizontal. If the firm raises its price at all, many if not most of its customers will just move to a different stand. Thus a small change in price results in a large change in the amount of fries bought. 2. The following are the assumed supply and demand schedules for hamburgers in Collegetown: Demand Schedule Supply Schedule Price Quantity Demanded per Year (thousands) Price Quantity Supplied per Year (thousands) $2.75 14 $2.75 32 2.50 18 2.5 30 2.25 22 2.25 28 2 26 2 26 1.75 30 1.75 24 1.5 34 1.5 22 a. Plot the supply and demand curves and indicate the equilibrium price and quantity. b. What effect would a decrease in the price of beef (a hamburger input) have on the equilibrium price and quantity of hamburgers, assuming all other things remained constant? Explain your answer with the help of a diagram. c. What effect would an increase in the price of pizza (a substitute commodity) have on the equilibrium price and quantity of hamburgers, assuming again that all other things remain constant? Use a diagram in your answer. The answers to all three parts are shown in Figure 1. (a) Initially, the equilibrium price is $ 2.00 , and the equilibrium quantity is 26 ,000 hamburgers, as shown by the intersection of D 0 and S 0 . (b) The decrease in the price of beef increases the supply of hamburgers, from S 0 to S 1 . So the equilibrium price falls and the equilibrium quantity rises.

  15. Page 15
    Read page 15 as text

    Chapter 4/Supply and Demand: An Initial Look (c) Returning to the original supply curve, an increase in the price of pizza raises the demand for hamburgers, to D 1 . This raises the price and raises the quantity. FIGURE 1 3. Suppose the supply and demand schedules for bicycles are as they appear in the following table. Price Quantity Demanded per Year (millions) Quantity Supplied per Year (millions) $170 43 27 210 39 31 250 35 35 300 31 39 330 27 43 370 23 47 a. Graph these curves and show the equilibrium price and quantity. b. Now suppose that it becomes unfashionable to ride a bicycle, so that the quantity demanded at each price falls by 8 million bikes per year. What is the new equilibrium price and quantity? Show this solution graphically. Explain why the quantity falls by less than 8 million bikes per year. c. Suppose instead that several major bicycle producers go out of business, thereby reducing the quantity supplied by 8 million bikes at every price. Find the new equilibrium price and quantity, and show it graphically. Explain again why quantity falls by less than 8 million.

  16. Page 16
    Read page 16 as text

    Chapter 4/Supply and Demand: An Initial Look d. What are the equilibrium price and quantity if the shifts described in Test Yourself Questions 3(b) and 3(c) happen at the same time? The answers to all three parts are shown in Figure 2. (a) Initially, the equilibrium price is $2 5 0, and the equilibrium quantity is 3 5 million bicycles, as shown by the intersection of D 0 and S 0 . (b) If demand falls by 8 million bikes per year, the new demand curve is D 1 . The price falls to $210, and the quantity falls to 31 million, as shown by the intersection of D 1 and S 0 . Although demand falls by 8 million at each price, the quantity exchanged falls by only 4 million because the price fall has induced a movement out along the new demand curve, as well as a movement back along the old supply curve. (c) If supply falls by 8 million bikes per year, the new supply curve is S 1 . The price rises to $300, and the quantity falls to 31 million, as shown by the intersection of D 0 and S 1 . Although supply falls by 8 million at each price, the quantity exchanged falls by only 4 million because the price increase has induced a movement out along the new supply curve, as well as a movement back along the old demand curve. (d) If demand and supply each fall by 8 million bikes per year, the equilibrium price is $250, and the equilibrium quantity is 27 million bicycles, as shown by the intersection of D 1 and S 1 . FIGURE 2 4. The following table summarizes information about the market for principles of economics textbooks: Price Quantity Demanded per Year Quantity Supplied per Year $45 4,300 300 55 2,300 700 65 1,300 1,300 75 800 2,100 85 650 3,100 a. What is the market equilibrium price and quantity of textbooks? b. To quell outrage over tuition increases, the college places a $55 limit on the price of textbooks. How many textbooks will be sold now?

97 more pages in the full document

Unlock it once and it stays in your library, ready to chat with or turn into flashcards.

Unlock the full document

More Economics study materials

See all

Study this document with CramX

Once it is in your library, every tool can work from it.