INSTRUCTOR’S MANUAL
MACROECONOMICS
9TH CANADIAN EDITION
CHAPTER 1: INTRODUCTION TO MACROECONOMICS
ANSWERS TO TEXTBOOK PROBLEMS
REVIEW QUESTIONS
1. Both total output and output per worker have risen strongly over time in Canada.
Output itself has grown by a factor of 80 in the last 125 years. Output per worker is
now five times as great as it was in 1921. These changes have led to a much
higher standard of living today.
2. The business cycle refers to the short-run movements (expansions and
recessions) of economic activity. The unemployment rate rises in recessions
and declines in expansions. The unemployment rate never reaches zero, even
at the peak of an expansion.
3. A period of inflation is one in which prices (on average) are rising over time.
Deflation occurs when average prices are falling over time.
4. Aggregation refers to the process of adding together individual economic variables
to obtain economy-wide totals. Aggregation distinguishes microeconomics from
macroeconomics. It allows us to study the economy as a whole, rather than looking
at its individual parts.
5. Macroeconomists engage in macroeconomic forecasting, macroeconomic
analysis, basic research, and data development. Macroeconomic research can
be useful in investigating forecasting models to improve forecasts, in providing
more information on how the economy works to help macroeconomic analysts,
and in telling data developers what types of data should be collected. Research
provides the basis (results and ideas) for forecasting, analysis, and data
development.
,6. The steps in developing and testing an economic model or theory are: (1) State
the research question; (2) make provisional assumptions that describe the
economic setting and the behaviour of the economic actors; (3) work out the
implications of the theory; (4) conduct an empirical analysis to compare the
implications of the theory with the data; (5) if the theory fits the data well, use the
theory to predict what would happen if the economic setting or economic policies
change; (6) if the theory fits the data poorly, start from scratch with a new model;
(7) if the theory fits the data moderately well, either make do with a partly
successful theory or complicate the model with additional assumptions. The
criteria for a useful theory or model are that (1) it has reasonable and realistic
assumptions; (2) it is understandable and manageable enough for studying real
problems; (3) its implications can be tested empirically using real-world data; and
(4) its implications are consistent with the data.
7. Yes, it is possible for economists to agree about the effects of a policy (that is, to
agree on the positive analysis of the policy), but to disagree about the policy’s
desirability (normative analysis). For example, suppose economists agreed that
reducing inflation to zero within the next year would cause a recession (positive
analysis). Some economists might argue that inflation should be reduced,
because they prefer low inflation even at the cost of higher unemployment. Others
would argue that inflation isn’t as harmful to people as unemployment is, and
would oppose such a policy. This is normative analysis, as it involves a value
judgment about what policy should be.
8. Classicals see wage and price adjustment occurring rapidly, while Keynesians
think that wages and prices adjust only slowly to shocks. The classical theory
implies that unemployment will not persist, since wages and prices adjust to bring
the economy rapidly back to its full-employment equilibrium in response to a
shock. But if Keynesian theory is correct, then the slow response of wages and
prices means that unemployment may persist for long periods of time unless the
government intervenes.
, Numerical Problems
1. a. Average labour productivity is output divided by employment:
2011: 12 000 tonnes of potatoes per 1000 workers = 12 tonnes of potatoes per
worker
2012: 14 300 tonnes of potatoes per 1100 workers = 13 tonnes of potatoes per
worker
b. The growth rate of average labour productivity is [(13/12) – 1] × 100% = 8.33%.
c. The unemployment rate is:
2011: 100/1100 = 9.1%
2012: 50/1150 = 4.3%
d. The inflation rate is [(2.5/2) – 1] × 100% = 25%.
2. The answers to this problem will vary depending on the current date. Numbers
are at annual rates in billions of current dollars.
2015 2016
GDP 1,986.2 2,027.5
Exports 627.2 628.7
Imports 674.7 676.7
Federal Net Financial Debt 586.8 (2014) 573.2 (2015)
a.
Exports/GDP 31.6% 31.0%
Imports/GDP 34.0% 33.4%
Trade imbalance/GDP -2.39% -2.37%
b.
Federal Net Financial 29.6% (2014) 28.9% (2015)
Debt/GDP
, Analytical Problems
1. Yes, average labour productivity can fall even when total output is rising. Average
labour productivity is total output divided by employment (of workers sixteen years
old and over). So average labour productivity can fall if output and employment are
both rising but employment is rising faster.
Yes, the unemployment rate can also rise even though total output is rising. This
can occur through a number of channels. For example, average labour productivity
might be rising with employment constant, so that output is rising; but the labour
force may be increasing as well, so that unemployment is rising. Or average labour
productivity might be constant, and both employment and unemployment could rise
at the same time due to an increase in the labour force.
2. Just because prices were lower in 1914 than they were in 2013 does not mean that
people were better off back then. People’s incomes have risen much faster than
prices have risen over the last 99 years, so they are better off today in terms of real
income.
3. There are many possible theories. One possibility is that people whose last names
begin with the letters A through M vote Liberal while those whose names begin
with the letters N through Z vote Conservatives You could test this theory by taking
exit polls or checking the lists of registered voters by party. However, this theory
fails the criterion of being reasonable, since there is no good reason to expect the
first letter of people’s last names to matter for their political preferences.
A better theory might be one based on income. For example, you might make the
assumption that the Conservatives party promotes business interests, while the
Liberal party is more interested in redistributing income. Then you might expect
people with higher incomes to vote Conservatives and people with lower
incomes to vote Liberal. This could be tested by taking a survey of people as
they left the polls. In this case the assumptions of the theory seem reasonable
and realistic, and the model is simple enough to understand and to apply. So it is
potentially a useful model.
MACROECONOMICS
9TH CANADIAN EDITION
CHAPTER 1: INTRODUCTION TO MACROECONOMICS
ANSWERS TO TEXTBOOK PROBLEMS
REVIEW QUESTIONS
1. Both total output and output per worker have risen strongly over time in Canada.
Output itself has grown by a factor of 80 in the last 125 years. Output per worker is
now five times as great as it was in 1921. These changes have led to a much
higher standard of living today.
2. The business cycle refers to the short-run movements (expansions and
recessions) of economic activity. The unemployment rate rises in recessions
and declines in expansions. The unemployment rate never reaches zero, even
at the peak of an expansion.
3. A period of inflation is one in which prices (on average) are rising over time.
Deflation occurs when average prices are falling over time.
4. Aggregation refers to the process of adding together individual economic variables
to obtain economy-wide totals. Aggregation distinguishes microeconomics from
macroeconomics. It allows us to study the economy as a whole, rather than looking
at its individual parts.
5. Macroeconomists engage in macroeconomic forecasting, macroeconomic
analysis, basic research, and data development. Macroeconomic research can
be useful in investigating forecasting models to improve forecasts, in providing
more information on how the economy works to help macroeconomic analysts,
and in telling data developers what types of data should be collected. Research
provides the basis (results and ideas) for forecasting, analysis, and data
development.
,6. The steps in developing and testing an economic model or theory are: (1) State
the research question; (2) make provisional assumptions that describe the
economic setting and the behaviour of the economic actors; (3) work out the
implications of the theory; (4) conduct an empirical analysis to compare the
implications of the theory with the data; (5) if the theory fits the data well, use the
theory to predict what would happen if the economic setting or economic policies
change; (6) if the theory fits the data poorly, start from scratch with a new model;
(7) if the theory fits the data moderately well, either make do with a partly
successful theory or complicate the model with additional assumptions. The
criteria for a useful theory or model are that (1) it has reasonable and realistic
assumptions; (2) it is understandable and manageable enough for studying real
problems; (3) its implications can be tested empirically using real-world data; and
(4) its implications are consistent with the data.
7. Yes, it is possible for economists to agree about the effects of a policy (that is, to
agree on the positive analysis of the policy), but to disagree about the policy’s
desirability (normative analysis). For example, suppose economists agreed that
reducing inflation to zero within the next year would cause a recession (positive
analysis). Some economists might argue that inflation should be reduced,
because they prefer low inflation even at the cost of higher unemployment. Others
would argue that inflation isn’t as harmful to people as unemployment is, and
would oppose such a policy. This is normative analysis, as it involves a value
judgment about what policy should be.
8. Classicals see wage and price adjustment occurring rapidly, while Keynesians
think that wages and prices adjust only slowly to shocks. The classical theory
implies that unemployment will not persist, since wages and prices adjust to bring
the economy rapidly back to its full-employment equilibrium in response to a
shock. But if Keynesian theory is correct, then the slow response of wages and
prices means that unemployment may persist for long periods of time unless the
government intervenes.
, Numerical Problems
1. a. Average labour productivity is output divided by employment:
2011: 12 000 tonnes of potatoes per 1000 workers = 12 tonnes of potatoes per
worker
2012: 14 300 tonnes of potatoes per 1100 workers = 13 tonnes of potatoes per
worker
b. The growth rate of average labour productivity is [(13/12) – 1] × 100% = 8.33%.
c. The unemployment rate is:
2011: 100/1100 = 9.1%
2012: 50/1150 = 4.3%
d. The inflation rate is [(2.5/2) – 1] × 100% = 25%.
2. The answers to this problem will vary depending on the current date. Numbers
are at annual rates in billions of current dollars.
2015 2016
GDP 1,986.2 2,027.5
Exports 627.2 628.7
Imports 674.7 676.7
Federal Net Financial Debt 586.8 (2014) 573.2 (2015)
a.
Exports/GDP 31.6% 31.0%
Imports/GDP 34.0% 33.4%
Trade imbalance/GDP -2.39% -2.37%
b.
Federal Net Financial 29.6% (2014) 28.9% (2015)
Debt/GDP
, Analytical Problems
1. Yes, average labour productivity can fall even when total output is rising. Average
labour productivity is total output divided by employment (of workers sixteen years
old and over). So average labour productivity can fall if output and employment are
both rising but employment is rising faster.
Yes, the unemployment rate can also rise even though total output is rising. This
can occur through a number of channels. For example, average labour productivity
might be rising with employment constant, so that output is rising; but the labour
force may be increasing as well, so that unemployment is rising. Or average labour
productivity might be constant, and both employment and unemployment could rise
at the same time due to an increase in the labour force.
2. Just because prices were lower in 1914 than they were in 2013 does not mean that
people were better off back then. People’s incomes have risen much faster than
prices have risen over the last 99 years, so they are better off today in terms of real
income.
3. There are many possible theories. One possibility is that people whose last names
begin with the letters A through M vote Liberal while those whose names begin
with the letters N through Z vote Conservatives You could test this theory by taking
exit polls or checking the lists of registered voters by party. However, this theory
fails the criterion of being reasonable, since there is no good reason to expect the
first letter of people’s last names to matter for their political preferences.
A better theory might be one based on income. For example, you might make the
assumption that the Conservatives party promotes business interests, while the
Liberal party is more interested in redistributing income. Then you might expect
people with higher incomes to vote Conservatives and people with lower
incomes to vote Liberal. This could be tested by taking a survey of people as
they left the polls. In this case the assumptions of the theory seem reasonable
and realistic, and the model is simple enough to understand and to apply. So it is
potentially a useful model.
