Macroeconomics solution manual EXAM TESTBANK AND A
COMPREHENSIVE STUDY GUIDE COMPLETE ACCURATE TEST QUESTIONS
AND CORRECT VERIFIED ANSWERS (A NEW UPDATED VERSIONS)
|GUARANTEED PASS A+ (BRAND NEW!) FULL REVISED
Most students should be at least somewhat familiar with the key concepts presented in Chapter
1 from their introductory macroeconomics course, and discussion of this chapter helps the
instructor get a sense of what students have retained. Ample time should be given to the discussion
of the different time frames or economic situations for which the vertical, horizontal, and upward-
sloping AS-curves are most useful.
The very long-run AS-curve is vertical, that is, output is determined by aggregate supply
alone.
The very short-run AS-curve is horizontal, that is, output is determined by aggregate demand
alone.
The medium-run AS-curve is upward sloping, that is, fluctuations in aggregate supply or
aggregate demand can determine actual output and the price level under the assumption that
productive capacity is given.
In this framework, the effects of changes in aggregate demand on output and prices depend
largely on the slope of the AS-curve. Macroeconomic stabilization policies have different effects
on economies in different circumstances; prices remain fairly fixed in periods of high
unemployment but tend to rise fairly rapidly when the economy is close to full employment.
Although the AD-AS framework is a very rudimentary tool for explaining real world events, for
many students this analysis is probably still the most intuitive way to show how prices and output
are affected by economic disturbances or policy measures designed to mitigate them. Most will
remember the AD-AS diagram from their introductory macroeconomics course, but it may be
useful to stress again that there is a significant difference between the demand and supply
analysis they use in their microeconomics classes and the aggregate demand and aggregate
supply framework in a macroeconomics class.
It is always helpful for students to learn early on that there are no clear-cut answers to many
of the questions that this course will address, and that economists’ interpretations of events and
proposals for solutions often vary widely. Students should be aware of the historical and
economic situations that led to the development of different macroeconomic theories and should
understand that new theories continue to be formulated.
, It is beyond the scope of this chapter to go into details about the different schools of
macroeconomic thought, but it is worthwhile to broadly outline some of the major advances in
macroeconomic thinking. For example, out of the Great Depression in the 1930s came John
Maynard Keynes' General Theory. Keynes questioned Adam Smith's and the classicals’ contention
that the free market, if left alone, would lead to an optimal allocation of resources and that
unsatisfactory outcomes are only temporary. He also advocated government intervention, mainly
fiscal stimulation of aggregate demand, as a way out of a deep recession.
Much earlier Karl Marx also questioned the free market approach, believing that capitalism
would lead inevitable to a class struggle. His views remain controversial and are often neglected
in textbooks, but some instructors may want to make reference to Marx, especially if they plan to
discuss the developments in Eastern Europe in recent decades. After many years of an economic
system that was based to a large degree on Marx's theories, Eastern European countries started
to embrace capitalism, but had to undergo a painful adjustment period.
In the 1960s, monetarists, led by Milton Friedman, challenged Keynes' views, stating that
unstable monetary growth is the primary cause of economic fluctuations. Monetarists tend to favor
minimal government intervention and advocate the control of money supply as a way to keep
inflation low.
The new classical school, which includes Robert Lucas, Thomas Sargent, Robert Barro and
others, emerged in the 1970s. The neo-classicals believed that government intervention has little
value for stabilization policy. Consumers and firms make rational decisions using all available
information and, as a result, wages and prices adjust and markets clear rapidly. In their view, most
unemployment is voluntary and attempts to affect the unemployment rate are likely to be
counterproductive.
In the 1980s, economists including Larry Summers, Gregory Mankiw, George Akerlof, Ben
Bernanke and others moved beyond the Keynesian tradition. These new Keynesians believe that
markets do not clear easily because of the information and adjustment costs involved. They try
to provide a theoretical explanation for the slow adjustment of wages and prices and suggest that
a better understanding of the wage and price adjustment may lead to more successful activist
policies designed to stabilize the economy.
The late 1970s and early 1980s also saw the emergence of supply-side economists such as
Arthur Laffer, Paul Craig Roberts and others, who advocated tax cuts. They suggest that tax cuts
would stimulate incentives to work, save, and invest, which would increase productivity and
therefore reduce inflation and unemployment simultaneously. Any discussion of the successes or
failures of the tax cuts during the Reagan administration should include an assessment of the
claims made by supply-side economists. One undeniable result of the Reagan policies was an
enormous increase in the U.S. national debt caused by massive federal deficits. By the late 1990s,
,huge federal budget deficits were finally eliminated and turned into budget surpluses for the first
time in three decades, leading policy makers to discuss what to do with these surpluses. However,
new tax cuts under George W. Bush, combined with policies implemented after the events of
September 11, 2001, including the war in Afghanistan and Iraq, led to a quick turnaround as large
federal budget deficits developed again.
Budget deficits really ballooned as a result of the stimulus package that was implemented to
address the financial crisis that started in 2008. As some of the terms originally coined by J.M.
Keynes, such as "liquidity trap" and "paradox of thrift," resurfaced in newspaper articles during
what is now termed as "the Great Recession of 2007-2009," instructors may want to emphasize
that the success or failure of fiscal or monetary policy measures often depends on the exact
nature of the economic circumstances at the time. For example, as U.S. interest rates fell to near
zero, rendering traditional monetary policy measures ineffective, fiscal stimulation was needed
despite a rapidly growing public debt. Also, while protectionist sentiments dominated during the
Great Depression, international policy coordination was favored during this most recent world-
wide financial crisis, despite continued disagreements among nations on whether fiscal prudence
should be favored over continued stimulation to avoid a double-dip recession.
The government shut-down in 2013 that cost the U.S. economy billions of dollars in lost GDP
and the fiscal crises in other countries around the world (most notably Greece) may still be on
students’ minds. Therefore it may be helpful to start a discussion on the size of the government
and its role in stabilizing the economy even before this subject is raised in the new Chapter 20.
For example, a question such as: "Is it more important to curtail budget deficits and the national
debt than to create additional jobs through expanded government spending despite an increasing
national debt if the economy faces an economic slump and lackluster job growth?" is likely to
engender a heated classroom discussion. While students may not yet have all the facts to
adequately address such a complex question, it is worthwhile to get students to interact with
each other and express their views on issues from the very start, as this creates more active
classroom participation throughout the semester.
As Chapter 1 provides an outlook of some of the issues that will be discussed in later chapters
of this textbook, instructors should always keep in mind that it is much less important that
students remember a specific theory representing a specific school of thought than it is for
students to develop an ability to apply certain ideas, concepts, or models to the economic issues
of today. The ultimate goal of any student of economics should be to be able to use economic
reasoning in a meaningful way when discussing current economic problems.
Additional Readings
Baumohl, Bernard, “The Secrets of Economic Indicators,” 2nd edition, Wharton School
Publishing, NJ, 2008.
, Blinder, Alan, “Is There a Core of Practical Macroeconomics That We Should All Believe?” in
Papers and Proceedings, American Economic Review, May, 1997.
Clayton, G. and Giesbrecht, M., A Guide to Everyday Economic Statistics, 3rd ed., McGraw-Hill,
Inc., New York, 1995.
The Economist, “Economics Textbooks: Revise and Resubmit,” April 3, 2010.
Estrella, A. and Mishkin, F. “Predicting U.S. Recessions: Financial Variables as Leading
Indicators,” Review of Economics and Statistics, February, 1998.
Fox, Justin, “What in the World Happened to Economics?” Fortune, March 15, 1999.
Friedman, Milton, Money Mischief, Harcourt, Brace, Jovanovich, New York, 1992.
Frumkin, Norman, “Guide to Economic Indicators, 4th edition, Sharpe Publishing, Armonk, NY,
2005.
Hall, Robert, "The Long Slump," American Economic Review, April, 2011.
Lansing, Kevin J., “Can the Phillips Curve Help Forecast Inflation?” FRB of San Francisco,
Economic Letter, 2002-29
Mandel, Michael, “Restating the ‘90s,” Business Week, April 1, 2002.
Mankiw, Gregory, “A Quick Refresher Course in Macroeconomics,” Journal of Economic
Literature, December, 1990.
Prescott, Edward, “Five Macroeconomic Myths,” The Wall Street Journal, December 11, 2006.
Smith, Stephen, “What Do Asset Prices Tell Us About the Future,” Economic Review, FRB of
Atlanta, Third Quarter, 1999.
Starobin, Paul, “The Economy You Can't See,” The National Journal, June 18, 1994.
Uchitelle, Louis, “Seizing Intangibles from the GDP,” The New York Times, April 9, 2006.
l
2
COMPREHENSIVE STUDY GUIDE COMPLETE ACCURATE TEST QUESTIONS
AND CORRECT VERIFIED ANSWERS (A NEW UPDATED VERSIONS)
|GUARANTEED PASS A+ (BRAND NEW!) FULL REVISED
Most students should be at least somewhat familiar with the key concepts presented in Chapter
1 from their introductory macroeconomics course, and discussion of this chapter helps the
instructor get a sense of what students have retained. Ample time should be given to the discussion
of the different time frames or economic situations for which the vertical, horizontal, and upward-
sloping AS-curves are most useful.
The very long-run AS-curve is vertical, that is, output is determined by aggregate supply
alone.
The very short-run AS-curve is horizontal, that is, output is determined by aggregate demand
alone.
The medium-run AS-curve is upward sloping, that is, fluctuations in aggregate supply or
aggregate demand can determine actual output and the price level under the assumption that
productive capacity is given.
In this framework, the effects of changes in aggregate demand on output and prices depend
largely on the slope of the AS-curve. Macroeconomic stabilization policies have different effects
on economies in different circumstances; prices remain fairly fixed in periods of high
unemployment but tend to rise fairly rapidly when the economy is close to full employment.
Although the AD-AS framework is a very rudimentary tool for explaining real world events, for
many students this analysis is probably still the most intuitive way to show how prices and output
are affected by economic disturbances or policy measures designed to mitigate them. Most will
remember the AD-AS diagram from their introductory macroeconomics course, but it may be
useful to stress again that there is a significant difference between the demand and supply
analysis they use in their microeconomics classes and the aggregate demand and aggregate
supply framework in a macroeconomics class.
It is always helpful for students to learn early on that there are no clear-cut answers to many
of the questions that this course will address, and that economists’ interpretations of events and
proposals for solutions often vary widely. Students should be aware of the historical and
economic situations that led to the development of different macroeconomic theories and should
understand that new theories continue to be formulated.
, It is beyond the scope of this chapter to go into details about the different schools of
macroeconomic thought, but it is worthwhile to broadly outline some of the major advances in
macroeconomic thinking. For example, out of the Great Depression in the 1930s came John
Maynard Keynes' General Theory. Keynes questioned Adam Smith's and the classicals’ contention
that the free market, if left alone, would lead to an optimal allocation of resources and that
unsatisfactory outcomes are only temporary. He also advocated government intervention, mainly
fiscal stimulation of aggregate demand, as a way out of a deep recession.
Much earlier Karl Marx also questioned the free market approach, believing that capitalism
would lead inevitable to a class struggle. His views remain controversial and are often neglected
in textbooks, but some instructors may want to make reference to Marx, especially if they plan to
discuss the developments in Eastern Europe in recent decades. After many years of an economic
system that was based to a large degree on Marx's theories, Eastern European countries started
to embrace capitalism, but had to undergo a painful adjustment period.
In the 1960s, monetarists, led by Milton Friedman, challenged Keynes' views, stating that
unstable monetary growth is the primary cause of economic fluctuations. Monetarists tend to favor
minimal government intervention and advocate the control of money supply as a way to keep
inflation low.
The new classical school, which includes Robert Lucas, Thomas Sargent, Robert Barro and
others, emerged in the 1970s. The neo-classicals believed that government intervention has little
value for stabilization policy. Consumers and firms make rational decisions using all available
information and, as a result, wages and prices adjust and markets clear rapidly. In their view, most
unemployment is voluntary and attempts to affect the unemployment rate are likely to be
counterproductive.
In the 1980s, economists including Larry Summers, Gregory Mankiw, George Akerlof, Ben
Bernanke and others moved beyond the Keynesian tradition. These new Keynesians believe that
markets do not clear easily because of the information and adjustment costs involved. They try
to provide a theoretical explanation for the slow adjustment of wages and prices and suggest that
a better understanding of the wage and price adjustment may lead to more successful activist
policies designed to stabilize the economy.
The late 1970s and early 1980s also saw the emergence of supply-side economists such as
Arthur Laffer, Paul Craig Roberts and others, who advocated tax cuts. They suggest that tax cuts
would stimulate incentives to work, save, and invest, which would increase productivity and
therefore reduce inflation and unemployment simultaneously. Any discussion of the successes or
failures of the tax cuts during the Reagan administration should include an assessment of the
claims made by supply-side economists. One undeniable result of the Reagan policies was an
enormous increase in the U.S. national debt caused by massive federal deficits. By the late 1990s,
,huge federal budget deficits were finally eliminated and turned into budget surpluses for the first
time in three decades, leading policy makers to discuss what to do with these surpluses. However,
new tax cuts under George W. Bush, combined with policies implemented after the events of
September 11, 2001, including the war in Afghanistan and Iraq, led to a quick turnaround as large
federal budget deficits developed again.
Budget deficits really ballooned as a result of the stimulus package that was implemented to
address the financial crisis that started in 2008. As some of the terms originally coined by J.M.
Keynes, such as "liquidity trap" and "paradox of thrift," resurfaced in newspaper articles during
what is now termed as "the Great Recession of 2007-2009," instructors may want to emphasize
that the success or failure of fiscal or monetary policy measures often depends on the exact
nature of the economic circumstances at the time. For example, as U.S. interest rates fell to near
zero, rendering traditional monetary policy measures ineffective, fiscal stimulation was needed
despite a rapidly growing public debt. Also, while protectionist sentiments dominated during the
Great Depression, international policy coordination was favored during this most recent world-
wide financial crisis, despite continued disagreements among nations on whether fiscal prudence
should be favored over continued stimulation to avoid a double-dip recession.
The government shut-down in 2013 that cost the U.S. economy billions of dollars in lost GDP
and the fiscal crises in other countries around the world (most notably Greece) may still be on
students’ minds. Therefore it may be helpful to start a discussion on the size of the government
and its role in stabilizing the economy even before this subject is raised in the new Chapter 20.
For example, a question such as: "Is it more important to curtail budget deficits and the national
debt than to create additional jobs through expanded government spending despite an increasing
national debt if the economy faces an economic slump and lackluster job growth?" is likely to
engender a heated classroom discussion. While students may not yet have all the facts to
adequately address such a complex question, it is worthwhile to get students to interact with
each other and express their views on issues from the very start, as this creates more active
classroom participation throughout the semester.
As Chapter 1 provides an outlook of some of the issues that will be discussed in later chapters
of this textbook, instructors should always keep in mind that it is much less important that
students remember a specific theory representing a specific school of thought than it is for
students to develop an ability to apply certain ideas, concepts, or models to the economic issues
of today. The ultimate goal of any student of economics should be to be able to use economic
reasoning in a meaningful way when discussing current economic problems.
Additional Readings
Baumohl, Bernard, “The Secrets of Economic Indicators,” 2nd edition, Wharton School
Publishing, NJ, 2008.
, Blinder, Alan, “Is There a Core of Practical Macroeconomics That We Should All Believe?” in
Papers and Proceedings, American Economic Review, May, 1997.
Clayton, G. and Giesbrecht, M., A Guide to Everyday Economic Statistics, 3rd ed., McGraw-Hill,
Inc., New York, 1995.
The Economist, “Economics Textbooks: Revise and Resubmit,” April 3, 2010.
Estrella, A. and Mishkin, F. “Predicting U.S. Recessions: Financial Variables as Leading
Indicators,” Review of Economics and Statistics, February, 1998.
Fox, Justin, “What in the World Happened to Economics?” Fortune, March 15, 1999.
Friedman, Milton, Money Mischief, Harcourt, Brace, Jovanovich, New York, 1992.
Frumkin, Norman, “Guide to Economic Indicators, 4th edition, Sharpe Publishing, Armonk, NY,
2005.
Hall, Robert, "The Long Slump," American Economic Review, April, 2011.
Lansing, Kevin J., “Can the Phillips Curve Help Forecast Inflation?” FRB of San Francisco,
Economic Letter, 2002-29
Mandel, Michael, “Restating the ‘90s,” Business Week, April 1, 2002.
Mankiw, Gregory, “A Quick Refresher Course in Macroeconomics,” Journal of Economic
Literature, December, 1990.
Prescott, Edward, “Five Macroeconomic Myths,” The Wall Street Journal, December 11, 2006.
Smith, Stephen, “What Do Asset Prices Tell Us About the Future,” Economic Review, FRB of
Atlanta, Third Quarter, 1999.
Starobin, Paul, “The Economy You Can't See,” The National Journal, June 18, 1994.
Uchitelle, Louis, “Seizing Intangibles from the GDP,” The New York Times, April 9, 2006.
l
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