SOLUTIONS MANUAL
MACROECONOMICS
12TH EDITION
CHAPTER 1 THE SCIENCE OF MACROECONOMICS
ANSWERS TO TEXTBOOK QUESTIONS AND PROBLEMS
QUESTIONS FOR REVIEW
1. Microeconomics is the study of how individual firms and households make decisions and how they
interact with one another. Microeconomic models of firms and households are based on principles of
optimization: firms and households do the best they can, given the constraints they face. For example,
households choose which goods to purchase to maximize their utility, whereas firms choose inputs and
outputs to maximize profits. In contrast, macroeconomics is the study of the economy as a whole; it
focuses on issues such as how total output, total employment, and the overall price level are determined.
These economy-wide variables are based on the interaction of many households and many firms;
therefore, microeconomics forms the basis for macroeconomics.
2. Economists build models as a means of summarizing the relationships among economic variables.These
models are essential for explaining important economic variables, such as GDP, inflation, and
unemployment, by demonstrating the relationships between them, often through mathematical
expressions. Models are useful because they abstract from the many details in the economy and allow
one to focus on the most important economic connections.
3. A market-clearing model is a model in which prices adjust to equilibrate supply and demand. Market-
clearing models are useful in situations where prices are flexible. Yet, in many situations, flexible prices
may not be a realistic assumption. For example, labor contracts often set wages for up to three years, and
firms such as magazine publishers may change their prices only every few years. Most macroeconomists
, 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 they may be slow to adjust.
PROBLEMS AND APPLICATIONS
1.
Since the beginning of 2021, inflation has become a significant macroeconomic issue, notably
accelerating throughout 2022 before coming down in 2023. Current inflation remains above the target
of the Federal Reserve Bank. The pandemic's economic disruptions led to a rapid price increase with
inflation reaching 9 percent in June 2022. The rapid rise in prices can be attributed to several key factors,
such as disruptions in the supply chain and an increased demand for certain goods and services.
Additionally, the price increase was exacerbated by the military conflict in Ukraine and the government's
fiscal expansion enacted to combat the economic effects of the pandemic.
In response to rising inflation, the Federal Reserve Bank and other central banks around the world took
decisive steps to restore price stability. These measures include increasing interest rates to dampen
inflationary pressures and inflation expectations while keeping a delicate balance of supporting
economic recovery.
2. Between 1960 and 2020, real GDP per capita increased by about a total of 215 percent.
Between 1960 and 2022, real GDP per capita increased by about a total of 238 percent.
2b. 10; 14.8
2c. 190; 14.6 percent
3. Many philosophers of science believe that the defining characteristic of a science is the use of the
scientific method of inquiry to establish stable relationships. Scientists examine data, often provided by
controlled experiments, to support or disprove a hypothesis. Economists are more limited in their use of
experiments. They cannot conduct controlled experiments on the economy; they must instead rely on the
natural course of developments in the economy to collect data. To the extent that economists use the
scientific method of inquiry—that is, developing hypotheses and testing them—economics has the
characteristics of a science.
,4a. We can use a simple variant of the supply-and-demand model to answer this question.
The new peanut-grinding technology lowers the cost of making peanut butter, which benefits producers
as it means they can produce more peanut butter at the same cost as before. The decrease in production
costs leads to a rightward shift in the supply curve. This shift indicates that at every price level, a larger
quantity of peanut butter is supplied to the market than before the introduction of the new machine. The
rightward shift in the supply curve results in a new equilibrium where the quantity of peanut butter
increases while the equilibrium price decreases. This is illustrated in Fig 1-1 where the rightward shift
in the supply curve from S1 to S2 causes the price of peanut butter to fall and the quantity of peanut butter
to increase.
b. A drought reduces the supply of peanuts, which increases the cost of production for peanut butter. This
decrease in supply would be represented by a leftward shift of the supply curve for peanut butter. As a
result, the equilibrium price of peanut butter would increase, and the equilibrium quantity would decrease,
assuming the demand remains constant. This is illustrated in Fig 1-2 where the leftward shift in the
, supply curve from S1 to S2 causes the price of peanut butter to fall and the quantity of peanut butter to
increase.
c. When the price of a complement, like grape jelly, increases, the demand for peanut butter is likely to
decrease as the two products are often consumed together. This demand curve for peanut butter would
shift to the left. Consequently, the equilibrium price of peanut butter would fall, and the equilibrium
quantity would also decrease. This is illustrated in Fig 1-3 where the leftward shift in the demand curve
from D1 to D2 causes the price of peanut butter and the quantity of peanut butter to decrease.
MACROECONOMICS
12TH EDITION
CHAPTER 1 THE SCIENCE OF MACROECONOMICS
ANSWERS TO TEXTBOOK QUESTIONS AND PROBLEMS
QUESTIONS FOR REVIEW
1. Microeconomics is the study of how individual firms and households make decisions and how they
interact with one another. Microeconomic models of firms and households are based on principles of
optimization: firms and households do the best they can, given the constraints they face. For example,
households choose which goods to purchase to maximize their utility, whereas firms choose inputs and
outputs to maximize profits. In contrast, macroeconomics is the study of the economy as a whole; it
focuses on issues such as how total output, total employment, and the overall price level are determined.
These economy-wide variables are based on the interaction of many households and many firms;
therefore, microeconomics forms the basis for macroeconomics.
2. Economists build models as a means of summarizing the relationships among economic variables.These
models are essential for explaining important economic variables, such as GDP, inflation, and
unemployment, by demonstrating the relationships between them, often through mathematical
expressions. Models are useful because they abstract from the many details in the economy and allow
one to focus on the most important economic connections.
3. A market-clearing model is a model in which prices adjust to equilibrate supply and demand. Market-
clearing models are useful in situations where prices are flexible. Yet, in many situations, flexible prices
may not be a realistic assumption. For example, labor contracts often set wages for up to three years, and
firms such as magazine publishers may change their prices only every few years. Most macroeconomists
, 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 they may be slow to adjust.
PROBLEMS AND APPLICATIONS
1.
Since the beginning of 2021, inflation has become a significant macroeconomic issue, notably
accelerating throughout 2022 before coming down in 2023. Current inflation remains above the target
of the Federal Reserve Bank. The pandemic's economic disruptions led to a rapid price increase with
inflation reaching 9 percent in June 2022. The rapid rise in prices can be attributed to several key factors,
such as disruptions in the supply chain and an increased demand for certain goods and services.
Additionally, the price increase was exacerbated by the military conflict in Ukraine and the government's
fiscal expansion enacted to combat the economic effects of the pandemic.
In response to rising inflation, the Federal Reserve Bank and other central banks around the world took
decisive steps to restore price stability. These measures include increasing interest rates to dampen
inflationary pressures and inflation expectations while keeping a delicate balance of supporting
economic recovery.
2. Between 1960 and 2020, real GDP per capita increased by about a total of 215 percent.
Between 1960 and 2022, real GDP per capita increased by about a total of 238 percent.
2b. 10; 14.8
2c. 190; 14.6 percent
3. Many philosophers of science believe that the defining characteristic of a science is the use of the
scientific method of inquiry to establish stable relationships. Scientists examine data, often provided by
controlled experiments, to support or disprove a hypothesis. Economists are more limited in their use of
experiments. They cannot conduct controlled experiments on the economy; they must instead rely on the
natural course of developments in the economy to collect data. To the extent that economists use the
scientific method of inquiry—that is, developing hypotheses and testing them—economics has the
characteristics of a science.
,4a. We can use a simple variant of the supply-and-demand model to answer this question.
The new peanut-grinding technology lowers the cost of making peanut butter, which benefits producers
as it means they can produce more peanut butter at the same cost as before. The decrease in production
costs leads to a rightward shift in the supply curve. This shift indicates that at every price level, a larger
quantity of peanut butter is supplied to the market than before the introduction of the new machine. The
rightward shift in the supply curve results in a new equilibrium where the quantity of peanut butter
increases while the equilibrium price decreases. This is illustrated in Fig 1-1 where the rightward shift
in the supply curve from S1 to S2 causes the price of peanut butter to fall and the quantity of peanut butter
to increase.
b. A drought reduces the supply of peanuts, which increases the cost of production for peanut butter. This
decrease in supply would be represented by a leftward shift of the supply curve for peanut butter. As a
result, the equilibrium price of peanut butter would increase, and the equilibrium quantity would decrease,
assuming the demand remains constant. This is illustrated in Fig 1-2 where the leftward shift in the
, supply curve from S1 to S2 causes the price of peanut butter to fall and the quantity of peanut butter to
increase.
c. When the price of a complement, like grape jelly, increases, the demand for peanut butter is likely to
decrease as the two products are often consumed together. This demand curve for peanut butter would
shift to the left. Consequently, the equilibrium price of peanut butter would fall, and the equilibrium
quantity would also decrease. This is illustrated in Fig 1-3 where the leftward shift in the demand curve
from D1 to D2 causes the price of peanut butter and the quantity of peanut butter to decrease.
