Macroeconomics 12th Edition Solution Manual – Complete Answers & Step-by-Step Explanations

CHAPTERM1



INTRODUCTION




1

,ChapterMOutline

 IntroductionMtoMmacroeconomics
 TheMlongMrunMandMshortMrun
 EconomicMmodelsMandMtheMrealMworld
 AMfirstMlookMatMtheMAD-ASMframework
 UnemploymentMandMinflation
 ActualMandMpotentialMGDP
 EconomicMcycles
 RecessionsMandMeconomicMslumps




ChangesMfromMtheMPreviousMEdition

AMfewMminorMmodificationsMhaveMbeenMmadeMtoMChapterM1.MAllMfiguresMinvolvingMdataMhaveMbe
enMupdated,MasMhaveMTableM1-1MandMSectionM1-3M(theMpreviewMofMtheMtext).MNewMFigureM1-
10MandMtwoMnewMparagraphsMexplainingMtheMdistinctionMbetweenMaMrecessionMandMaMslumpMhav
eMbeenMaddedMtoMSectionM1-
2.MAllMofMtheMsubsequentMfiguresMhaveMbeenMrenumbered.MFinally,MhereMandMthroughoutMtheMre
stMofMtheMtextbookMeachMboxMhasMbeenMlabeledMeitherM"HistoryMSpeaks"MorM"WhatMMoreMDoMWeM
Know?"MtoMletMstudentsMknowMwhatMtheyMcanMexpectMtoMlearnMfromMtheseMmaterials.




IntroductionMtoMtheMMaterial

ChapterM1MprovidesManMoverviewMofMtheMkeyMconceptsMcoveredMinMtheMtextbook.MItMalsoMoutline
sMtheMdifferentMtimeMframesMthatMareMusedMtoMdescribeMtheMeconomyMinMtheMaggregate.MTheMver
yMlong-
runMmodelMfocusesMonMtheMgrowthMofMproductiveMcapacityMandMignoresMfluctuationsMinMemploy
mentMandMoutput.MThisMisMimportantMwhenMtryingMtoMexplainMwhyMsomeMcountriesMhaveMhigherM
averageMgrowthMratesM(andMthusMhigherMlivingMstandards)MthanMothers.MInMtheMlongMrun,Mfluctua
tionsMinMdemandMrelativeMtoMtheMlevelMofMproductiveMcapacityMdetermineMtheMlevelMofMprices.MBu
tMinMtheMveryMshortMrun,MtheMlevelMofMoutputMisMdeterminedMbyMaggregateMdemandMalone,Mwhile
MpricesMareMnotMaffectedMbyMchangesMinMaggregateMdemand.MTheMmediumMrunMdescribesMtheMtr


ansitionMbetweenMtheMshortMrunMandMtheMlongMrun.MInMthisMcase,MeconomicMpoliciesMorMdisturba
ncesMaffectMtheMratesMofMinflationMandMunemploymentMsimultaneously,MandMtheMspeedMatMwhic
hMpricesMadjustMisMcriticalMforManalyzingMtheMeffectsMofMtheMdisturbancesMorMpolicyMchanges.

TheMbehaviorMofMtheMeconomyMcanMbeManalyzedMusingMtheMAD-
ASMmodel.MThreeMdifferentMAS-
2

,McurvesMareMpresentedMhere,MeachMdescribingMaMdifferentMtimeMframe:MtheMverticalMAS-
curveMdescribesMtheM veryM longM run,M theM horizontalM AS-
curveM describesM theM veryM shortM run,M andM theM upward-sloping




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, AS-curveMdescribesMtheMmediumMrun.MTheMAD-
ASMframeworkMisMaMveryMsimplifiedMrepresentationMofMtheMrealMworldMthatMcannotMdescribeMtheMb
ehaviorMofMallMpeopleMandMenterprisesMinManMeconomy.MHowever,MitMservesMveryMwellMtoMexplain
MhowMeconomicMdisturbancesMaffectMoutput,Memployment,MandMprices,MandMhowMpoliciesMcanMbeM

usedMtoMmitigateMeconomicMdisturbances.
ToMunderstandMtheMbehaviorMofMtheMeconomyMasMaMwhole,MstudentsMmustMlearnMsomeMbasi
cMconcepts.MAmongMtheMmajorMconceptsMpresentedMinMChapterM1MisMGDP,MthatMis,MtheMmarketMv
alueMofMallMfinalMgoodsMandMservicesMcurrentlyMproducedMinMaMcountryMoverMaMcertainMtimeMperio
d.MAMnation'sMGDPMchangesMasMtheMamountMofMavailableMresourcesMandMtheMefficiencyMwithMwhic
hMtheseMresourcesMareMusedMchanges.MSinceMtheMlevelMofMnominalMGDPMcanMchangeMsimplyMdueM
toMinflationMorMaMchangeMinMpopulation,MrealMGDPMperMcapitaMisMoftenMusedMasMaMmeasureMforMtheM
standardMofMlivingMinMaMcountry.MButMevenMrealMGDPMperMcapitaMisMnotMaMperfectMmeasureMforMpe
ople'sMwelfareMsinceMitMdoesMnotMtakeMintoMconsiderationMsuchMthingsMasMchangesMinMtheMdistribu
tionMofMincome,MenvironmentalMquality,MorMleisureMactivities.

TheMperformanceMofManMeconomyMisMgenerallyMjudgedMbyMthreeMbroadMmeasures:MtheMgrow
thMrateMofMoutput,MtheMunemploymentMrate,MandMtheMinflationMrate.MTheMtrendMpathMofMoutputM
isMtheMpathMthatMrealMGDPMwouldMtakeMifMallMfactorsMofMproductionMwereMfullyMemployedM(alsoM
knownMasMpotentialMGDP).MActualMGDPMgenerallyMtendsMtoMbeMbelowMthisMtrendMpath,MsinceMinM
mostMyearsMtheMfactorsMofMproductionMareMnotMfullyMemployed.MTheMoutputMgapMmeasuresMtheM
sizeMofMtheseMcyclicalMdeviationsMandMisMdefinedMasMtheMgapMbetweenMpotentialMGDPMandMactualM
GDP.MThisMgapMgrowsMduringMrecessionsMwhenMunemploymentMincreases.MInMperiodsMofMexceptio
nalMgrowth,MlikeMinMtheMlateM1990s,MactualMGDPMcanMbecomeMlargerMthanMpotentialMGDP,MsoMthe
MGDPMgapMcanMactuallyMbecomeMnegative.MSectionM1-


2MdiscussesMhowMinflation,Mgrowth,MandMunemploymentMareMrelatedMthroughMeconomicMcycles,M
thatMis,MpatternsMofMexpansionMandMcontractionMinMeconomicMactivityMaroundMtheMtrendMpathMof
MGDP.MAMdistinction MisMmadeMbetweenMaMrecessionMasMitMisMofficiallyMdefinedMandManMeconomicM


slump.

KnowingMtheMspeedMwithMwhichMpricesMadjustMisMcriticalMinMunderstandingMtheMworkingsMofM
theMeconomy,MandMmuchMeconomicMresearchMisMdevotedMtoMthisMsubject.MTheMPhillipsMcurveMsh
owsManMempiricalMrelationshipMbetweenMchangesMinMinflationMandMtheMunemploymentMrateMinMt
heMmediumMrun.MTheMquestionMofMwhetherMthereMisMaMusefulMtrade-
offMbetweenMunemploymentMandMinflationMisMofMconsiderableMimportanceMforMtheMimplementati
onMofMmacroeconomicMstabilizationMpolicies,MandMthereMisMmuchMcontroversyMamongMeconomist
sMaboutMtheMusefulnessMofMtheMPhillips-curve.




SuggestionsMforMLecturing

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