Contents
PART ONE: INTRODUCTION AND MEASUREMENT
Chapter 1: Introduction.............................................................................................................................................. 1
Chapter 2: Measurement of Macroeconomic Variables................................................................................. 3
PART TWO: CLASSICAL ECONOMICS AND THE KEYNESIAN REVOLUTION
Chapter 3: Classical Macroeconomics (I): Output and Employment.....................................................16
Chapter 4 Classical Macroeconomics (II): Money, Prices, and Interest................................................28
Chapter 5: Keynesian System (I): The Role of Aggregate Demand.........................................................39
Chapter 6: Keynesian System (II): Money, Interest, and Income............................................................52
Chapter 7: Keynesian System (III): Policy Effects in the IS-LM Model..................................................65
Chapter 8: Keynesian System (IV): Aggregate Supply and Demand......................................................80
PART THREE: MACROECONOMIC THEORY AFTER KEYNES
Chapter 9: The Monetarist Counterrevolution............................................................................................... 92
Chapter 10: Output, Inflation, and Unemployment: Alternative Views.............................................104
Chapter 11: New Classical Economics............................................................................................................. 117
Chapter 12: Real Business Cycles and New Keynesian Economics.....................................................129
Chapter 13: Macroeconomic Models: A Summary.....................................................................................141
PART FOUR: OPEN ECONOMY MACROECONOMICS
Chapter 14: Exchange Rates and the International Monetary System...............................................152
Chapter 15: Monetary and Fiscal Policy in the Open Economy............................................................163
PART FIVE: ECONOMIC POLICY
Chapter 16: Money, the Banking System, and Interest Rates................................................................173
Chapter 17: Optimal Monetary Policy............................................................................................................. 186
Chapter 18: Fiscal Policy....................................................................................................................................... 198
PART SIX: ECONOMIC GROWTH
Chapter 19: Policies for Intermediate-Run Growth................................................................................... 210
Chapter 20: Long-Run Economic Growth: Origins of the Wealth Of Nations..................................222
,PART ONE: INTRODUCTION AND MEASUREMENT
CHAPTER 1: INTRODUCTION
Additional Questions
Chapter 1 is intended primarily to introduce the student to the subject matter of the book.
Multiple-choice questions do not seem appropriate to this chapter. Additional essay
questions are:
1. Explain the difference between Microeconomics and Macroeconomics.
Microeconomics and macroeconomics differ in the economic unit on which they focus.
Microeconomics focuses on the individual economic agent, i.e., the consumer or the
firm. Whereas macroeconomics considers the economy as a whole. There is a close
link between the two branches, however, because many macroeconomic relationships
are based on aggregate versions of the behavioral relationships derived on the
microeconomic level.
2. In general terms describe trends in the inflation rate, considering the period since
1953. How are these trends related to movements in the inflation rate over this
period?
Trend inflation rose steadily in the 1950s and 1960s, then rose dramatically during the
1970s. Beginning in the early 1980s, inflation fell precipitously until 1987, then has
remained relatively constant around 2% since.
3. Briefly discuss three macroeconomic issues that have been in the news recently. Find
articles from newspapers or the internet that discuss these issues.
Answers will vary.
4. What is meant by real Gross Domestic Product? How do you think that you calculate a
real statistic?
Real Gross Domestic product measures total output in the U.S. adjusted for changes in
the price level. The easiest way to calculate a real statistic is to use a constant set of
prices across every year.
5. We measure economic growth by the percentage change in real GDP. In general terms
outline the course of the U.S. output growth rate in recent decades, both in terms of its
trend and its changes around trend. Pay particular attention to the stability of the
growth rate.
Real output growth has been highly volatile around a trend of roughly 3% a year. It
was relatively steady during the 1960s and consistently positive. During the 1970s and
early 1980s there were numerous periods of negative growth. Since 1983, growth has
been positive and relatively stable except for brief periods in 1990-1991 and 2001.
,6. In general terms describe how the federal budget deficit has changed since the early
1950s. How has the U.S. trade balance changed since the 1950s? Does it appear that
there is any correlation between the two?
7. Both the trade and budget balance were in roughly zero until the 1980s when the
budget deficit increased dramatically and the U.S. trade deficit increased dramatically.
However, during the late 1990s the budget deficit shrank—in fact, moving to surplus
—at the same time that the U.S. trade deficit increased significantly. Since 2000, the
budget deficit has increased significantly, particularly after 2008.What is the
relationship between a country’s trade balance and its stance as a borrower or lender?
Historically, has the U.S. been a net lender or net borrower? Why do you think that this
is? Do you think that the U.S. budget situation might have anything to do with this?
Countries that run trade deficits must borrow from other countries to pay for this.
Thus, countries that run trade deficits are net borrowers. The huge budget deficits in
the U.S. coupled with its high levels of consumption (and low savings) have led it to
becoming the largest debtor nation in the world. Large trade deficits have occurred
during the same time that the U.S. has also been running large budget deficits,
indicating that there may well be some cause and effect between the two.
8. What are the four primary questions in macroeconomics? Which focus on short-run
issues? Which focus on long-run issues?
The four questions are:
1. What determines the cyclical behavior of output and employment? What causes
recessions?
2. What are the determinants of the rate of inflation? What role do macroeconomic
policies play in determining inflation?
3. What relationship exists between inflation and unemployment? Why were both
the unemployment rate and the inflation rate so high during much of the 1970s?
What became of the negative relationship that existed between these two
variables in the 1950s and 1960s (see Figure 1-5a)?
4. What determines the rate of growth in output over periods of one or two decades?
Over longer periods such as a century?
Questions 1 and 3 are primarily short-run issues, 2 and 4 are long-run issues.
9. Here is some data of real PC GDP in the US. Calculate the actual average growth rates
for each decade. Is there a significant difference between the two periods?
1970 $20,915
1980 $25,675
1990 $32,157
2000 $39,750
, 2010 $42,189
The growth rates are 22.8%, 25.3%, 23.6%, and 6.1%. Obviously, growth has been
much slower the last decade.
10. Explain the difference between macroeconomic variables that are in terms of levels
and growth rates. Which important macroeconomic variables are which? Which one is
the unemployment rate?
Variables such as GDP and the price level are in terms of levels. Inflation and GDP
growth are in terms of growth rates, meaning that they are measured between two
different points in time. Unemployment rates are a percentage, but the unemployment
rate is not a growth rate because it is not measured over time.
PART ONE: INTRODUCTION AND MEASUREMENT
Chapter 1: Introduction.............................................................................................................................................. 1
Chapter 2: Measurement of Macroeconomic Variables................................................................................. 3
PART TWO: CLASSICAL ECONOMICS AND THE KEYNESIAN REVOLUTION
Chapter 3: Classical Macroeconomics (I): Output and Employment.....................................................16
Chapter 4 Classical Macroeconomics (II): Money, Prices, and Interest................................................28
Chapter 5: Keynesian System (I): The Role of Aggregate Demand.........................................................39
Chapter 6: Keynesian System (II): Money, Interest, and Income............................................................52
Chapter 7: Keynesian System (III): Policy Effects in the IS-LM Model..................................................65
Chapter 8: Keynesian System (IV): Aggregate Supply and Demand......................................................80
PART THREE: MACROECONOMIC THEORY AFTER KEYNES
Chapter 9: The Monetarist Counterrevolution............................................................................................... 92
Chapter 10: Output, Inflation, and Unemployment: Alternative Views.............................................104
Chapter 11: New Classical Economics............................................................................................................. 117
Chapter 12: Real Business Cycles and New Keynesian Economics.....................................................129
Chapter 13: Macroeconomic Models: A Summary.....................................................................................141
PART FOUR: OPEN ECONOMY MACROECONOMICS
Chapter 14: Exchange Rates and the International Monetary System...............................................152
Chapter 15: Monetary and Fiscal Policy in the Open Economy............................................................163
PART FIVE: ECONOMIC POLICY
Chapter 16: Money, the Banking System, and Interest Rates................................................................173
Chapter 17: Optimal Monetary Policy............................................................................................................. 186
Chapter 18: Fiscal Policy....................................................................................................................................... 198
PART SIX: ECONOMIC GROWTH
Chapter 19: Policies for Intermediate-Run Growth................................................................................... 210
Chapter 20: Long-Run Economic Growth: Origins of the Wealth Of Nations..................................222
,PART ONE: INTRODUCTION AND MEASUREMENT
CHAPTER 1: INTRODUCTION
Additional Questions
Chapter 1 is intended primarily to introduce the student to the subject matter of the book.
Multiple-choice questions do not seem appropriate to this chapter. Additional essay
questions are:
1. Explain the difference between Microeconomics and Macroeconomics.
Microeconomics and macroeconomics differ in the economic unit on which they focus.
Microeconomics focuses on the individual economic agent, i.e., the consumer or the
firm. Whereas macroeconomics considers the economy as a whole. There is a close
link between the two branches, however, because many macroeconomic relationships
are based on aggregate versions of the behavioral relationships derived on the
microeconomic level.
2. In general terms describe trends in the inflation rate, considering the period since
1953. How are these trends related to movements in the inflation rate over this
period?
Trend inflation rose steadily in the 1950s and 1960s, then rose dramatically during the
1970s. Beginning in the early 1980s, inflation fell precipitously until 1987, then has
remained relatively constant around 2% since.
3. Briefly discuss three macroeconomic issues that have been in the news recently. Find
articles from newspapers or the internet that discuss these issues.
Answers will vary.
4. What is meant by real Gross Domestic Product? How do you think that you calculate a
real statistic?
Real Gross Domestic product measures total output in the U.S. adjusted for changes in
the price level. The easiest way to calculate a real statistic is to use a constant set of
prices across every year.
5. We measure economic growth by the percentage change in real GDP. In general terms
outline the course of the U.S. output growth rate in recent decades, both in terms of its
trend and its changes around trend. Pay particular attention to the stability of the
growth rate.
Real output growth has been highly volatile around a trend of roughly 3% a year. It
was relatively steady during the 1960s and consistently positive. During the 1970s and
early 1980s there were numerous periods of negative growth. Since 1983, growth has
been positive and relatively stable except for brief periods in 1990-1991 and 2001.
,6. In general terms describe how the federal budget deficit has changed since the early
1950s. How has the U.S. trade balance changed since the 1950s? Does it appear that
there is any correlation between the two?
7. Both the trade and budget balance were in roughly zero until the 1980s when the
budget deficit increased dramatically and the U.S. trade deficit increased dramatically.
However, during the late 1990s the budget deficit shrank—in fact, moving to surplus
—at the same time that the U.S. trade deficit increased significantly. Since 2000, the
budget deficit has increased significantly, particularly after 2008.What is the
relationship between a country’s trade balance and its stance as a borrower or lender?
Historically, has the U.S. been a net lender or net borrower? Why do you think that this
is? Do you think that the U.S. budget situation might have anything to do with this?
Countries that run trade deficits must borrow from other countries to pay for this.
Thus, countries that run trade deficits are net borrowers. The huge budget deficits in
the U.S. coupled with its high levels of consumption (and low savings) have led it to
becoming the largest debtor nation in the world. Large trade deficits have occurred
during the same time that the U.S. has also been running large budget deficits,
indicating that there may well be some cause and effect between the two.
8. What are the four primary questions in macroeconomics? Which focus on short-run
issues? Which focus on long-run issues?
The four questions are:
1. What determines the cyclical behavior of output and employment? What causes
recessions?
2. What are the determinants of the rate of inflation? What role do macroeconomic
policies play in determining inflation?
3. What relationship exists between inflation and unemployment? Why were both
the unemployment rate and the inflation rate so high during much of the 1970s?
What became of the negative relationship that existed between these two
variables in the 1950s and 1960s (see Figure 1-5a)?
4. What determines the rate of growth in output over periods of one or two decades?
Over longer periods such as a century?
Questions 1 and 3 are primarily short-run issues, 2 and 4 are long-run issues.
9. Here is some data of real PC GDP in the US. Calculate the actual average growth rates
for each decade. Is there a significant difference between the two periods?
1970 $20,915
1980 $25,675
1990 $32,157
2000 $39,750
, 2010 $42,189
The growth rates are 22.8%, 25.3%, 23.6%, and 6.1%. Obviously, growth has been
much slower the last decade.
10. Explain the difference between macroeconomic variables that are in terms of levels
and growth rates. Which important macroeconomic variables are which? Which one is
the unemployment rate?
Variables such as GDP and the price level are in terms of levels. Inflation and GDP
growth are in terms of growth rates, meaning that they are measured between two
different points in time. Unemployment rates are a percentage, but the unemployment
rate is not a growth rate because it is not measured over time.
