Solutions Manual for Macroeconomics 6th Edition by
Blanchard
, CHAPTER 2. A TOUR OF THE BOOK
I. MOTIVATING QUESTIONS
1. How do economists define output, the unemployment rate, and the inflation
rate, and why do economists care about these variables?
Output and the unemployment rate are defined in the usual fashion. The text defines the inflation rate in
two ways: the percentage change in the GDP deflator and the percentage change in the CPI. The link
between output and the standard of living is implicit in the chapter. Economists care about the
unemployment rate because the unemployed suffer, particularly if they remain unemployed for long
periods of time, and because the unemployment rate provides an indicator of whether the economy is
growing too fast or too slowly (concepts that will be defined precisely later in the book). Inflation has
three main effects: it redistributes real income away from those who receive fixed nominal income, it
distorts relative prices to the extent that some nominal variables do not adjust, and it creates uncertainty
about relative price levels.
2. What factors affect output in the short run, the medium run, and long run?
This chapter introduces the basic framework of the book in terms of time. In the short run (a time frame
of a few years), output is determined primarily by demand. In the medium run (a time frame of a decade
or so), output is determined by the level of technology and the size of capital stock, both of which are
more or less fixed. In the long run (a time frame of a half century or more), output is determined by
technological progress and capital accumulation.
II. WHY THE ANSWERS MATTER
Students need a formal definition of the basic macroeconomic variables before they can analyze them.
The discussion in this chapter provides enough information for students to begin looking at
macroeconomic data. Moreover, some discussion of why economists care about these variables,
particularly inflation, is useful to orient students.
III. KEY TOOLS, CONCEPTS, AND ASSUMPTIONS
1. Tools and Concepts
i. Chapter 2 introduces index numbers.
ii. The chapter defines formally the basic macroeconomic concepts of nominal and real gross
domestic product (GDP), GDP growth, the GDP deflator, the unemployment rate, the
consumer price index (CPI), and the inflation rate, as well as associated concepts such as valued
added, intermediate inputs, the labor force, and the participation rate. All of these concepts are
defined in the usual manner.
iii. The chapter distinguishes the short run, the medium run, and the long run in the manner
described above in Part I. The distinction establishes the basic theoretical framework for the book.
7
8 CHAPTER 2
Blanchard
, CHAPTER 2. A TOUR OF THE BOOK
I. MOTIVATING QUESTIONS
1. How do economists define output, the unemployment rate, and the inflation
rate, and why do economists care about these variables?
Output and the unemployment rate are defined in the usual fashion. The text defines the inflation rate in
two ways: the percentage change in the GDP deflator and the percentage change in the CPI. The link
between output and the standard of living is implicit in the chapter. Economists care about the
unemployment rate because the unemployed suffer, particularly if they remain unemployed for long
periods of time, and because the unemployment rate provides an indicator of whether the economy is
growing too fast or too slowly (concepts that will be defined precisely later in the book). Inflation has
three main effects: it redistributes real income away from those who receive fixed nominal income, it
distorts relative prices to the extent that some nominal variables do not adjust, and it creates uncertainty
about relative price levels.
2. What factors affect output in the short run, the medium run, and long run?
This chapter introduces the basic framework of the book in terms of time. In the short run (a time frame
of a few years), output is determined primarily by demand. In the medium run (a time frame of a decade
or so), output is determined by the level of technology and the size of capital stock, both of which are
more or less fixed. In the long run (a time frame of a half century or more), output is determined by
technological progress and capital accumulation.
II. WHY THE ANSWERS MATTER
Students need a formal definition of the basic macroeconomic variables before they can analyze them.
The discussion in this chapter provides enough information for students to begin looking at
macroeconomic data. Moreover, some discussion of why economists care about these variables,
particularly inflation, is useful to orient students.
III. KEY TOOLS, CONCEPTS, AND ASSUMPTIONS
1. Tools and Concepts
i. Chapter 2 introduces index numbers.
ii. The chapter defines formally the basic macroeconomic concepts of nominal and real gross
domestic product (GDP), GDP growth, the GDP deflator, the unemployment rate, the
consumer price index (CPI), and the inflation rate, as well as associated concepts such as valued
added, intermediate inputs, the labor force, and the participation rate. All of these concepts are
defined in the usual manner.
iii. The chapter distinguishes the short run, the medium run, and the long run in the manner
described above in Part I. The distinction establishes the basic theoretical framework for the book.
7
8 CHAPTER 2
