Solutions for Macroeconomics, 10th Canadian Edition by Andrew B. Abel
Complete Chapters ✅ Latest Edition ✅
CHAPTER 1: INTRODUCTION TO MACROECONOMICS
LEARNING OBJECTIVES
I. Goals of Part I: Introduction
A. Introduce students to the main concepts in macroeconomics (Ch. 1)
B. Introduce national income accounting and major economic magnitudes (Ch. 2)
II. Goals of Chapter 1
A. Major economic issues—growth, business cycles, unemployment, inflation,
the international economy, macroeconomic policy, aggregation (Sec. 1.1)
B. What macroeconomists do—forecasting, analysis, research, data
development (Sec. 1.2)
C. Why macroeconomists disagree—Classicals vs. Keynesians, the text’s
approach (Sec. 1.3)
TEACHING NOTES
I. What Macroeconomics Is About (Sec. 1.1)
A. Long-run economic growth
1. Growth of real output in Canada over time
2. Sources of growth—rising population, increase in the average labour
productivity
This may be a good place to introduce students to the calculation of a growth-rate,
which is used throughout the textbook. You can write it first in general terms, as
%∆X = [(Xt+1 – Xt)/Xt] × 100% = [(Xt+1/Xt) – 1] x 100%.
Then you might use an example with something you’re talking about, such as real GDP
growth over the past year, or the inflation rate. We also recommend explaining how the
growth rate of a ratio is approximately the growth rate of the numerator minus that of the
denominator. Throughout the text, students may come across mathematical calculations
that are unfamiliar to them. The Appendix at the end of the textbook contains some
helpful basic guidance to mathematical topics, including discussions of functions and
graphs, slopes of functions, elasticities, functions of several variables, shifts of a curve,
exponents, and growth rate formulas.
B. Business cycles
C. Unemployment and Price Instability
Analytical Problem 1 asks students to think about average labour productivity and
unemployment and their relationship to output.
Copyright © 2026
1
,Instructor’s Manual for Macroeconomics, Tenth Canadian Edition
Analytical Problem 2 asks students to think about the welfare consequences of having a
higher price level.
You may wish to note here that the inflation rate is just the growth rate of the price
level, so that π = [(Pt + 1/Pt) − 1 × 100%. Numerical Problem 1 gives students practice
calculating growth rates, including the growth rate of average labour productivity,
unemployment rate, and the inflation rate.
D. The international economy
1. Open vs. closed economies
2. Trade imbalances; the trade deficit and the trade surplus
3. The exchange rate
E. Macroeconomic policy
1. Fiscal policy
a. Effects of large federal deficits
b. Canadian experience
c. Relation to decline in productivity growth
Numerical Problem 2 serves two purposes: (1) to get students to look at some real
data on the economy; and (2) to give them some idea how large are the trade deficit
and government budget deficit or surplus.
2. Monetary policy; the Bank of Canada
F. Aggregation; from microeconomics to macroeconomics
II. What Macroeconomists Do (Sec. 1.2)
A. Macroeconomic forecasting
1. Relatively few economists make forecasts
Data Application
There are many firms that provide forecasts for macroeconomic variables in Canada,
such as the Conference Board of Canada and most private banks. In addition, the
Federal Department of Finance, Parliamentary Budget Office, and the Bank of Canada
make projections for the economy based on large scale macroeconometric models.
Finally, international agencies such as the Organization for Economic Cooperation and
Development (OECD) and International Monetary Fund (IMF) provide regular forecasts
for Canada’s economy.
2. Forecasting is very difficult
Data Application
Francis X. Diebold presents a comprehensive survey of the development of structural
and non-structural forecasting in his article, “The Past, Present, and Future of
Macroeconomic Forecasting,” Journal of Economic Perspectives, Spring 1998, vol. 12,
pp. 175–192. Despite the difficulties in macroeconomic forecasting, he is optimistic
about its future with the rapid advances in numerical and simulation techniques.
B. Macroeconomic analysis
1. Private and public sector economists—analyze current conditions
Copyright © 2026
2
, Chapter 1: Introduction to Macroeconomics
Data Application
The Canadian financial sector hires a large number of economists, most of whom are
engaged in data analysis on a daily basis. Their job is to tell traders what the current
data means in terms of their effect on the financial markets in general, as well as on the
prices of individual assets. Many of them also make their own detailed forecasts of the
economy.
2. Does having lots of economists ensure good macroeconomic policies?
No, since politicians, not economists, make major decisions
C. Macroeconomic research
1. Goal: to make general statements about how the economy works
2. Theoretical and empirical research are necessary for forecasting
and economic analysis
3. Economic theory: a set of ideas about the economy, organized in
a logical framework
4. Economic model: a simplified description of some aspect of
the economy
This is a good point for you to talk about your own research interests. It has been found
that students are very interested in learning about the kind of research their instructors
do. You may want to talk about your research later, if and when you come to a section
of the textbook that discusses the topic on which you do your research.
5. Usefulness of economic theory or models depend on reasonableness
of assumptions, possibility of being applied to real problems,
empirically testable implications, and theoretical results consistent
with real-world data
Theoretical Application
The classic discussion of research issues by Milton Friedman is, “The Methodology of
Positive Economics,” Essays in Positive Economics, Chicago: University of Chicago
Press, 1953.
Analytical Problem 3 is an exercise in how to formulate and test a theory.
6. Data development—very important for making data more useful
Ill. Why Macroeconomists Disagree (Sec. 1.3)
A. Positive vs. normative analysis
Analytical Problem 4 gives students practice in distinguishing positive from
normative analysis.
B. Classicals vs. Keynesians
1. The classical approach
a. The economy works well on its own; the “invisible hand” leads
people, acting in their own best interests, to maximize the
general welfare
b. Wages and prices adjust rapidly to get to equilibrium
c. Result: Government should have only a limited role in
the economy
Copyright © 2026
3
, Instructor’s Manual for Macroeconomics, Tenth Canadian Edition
Theoretical Application
At this point in the discussion, you may want to talk about philosophies of economics.
Students are often fascinated by how philosophical differences arise and what they
mean, especially for policy. This helps to reinforce the idea that the Keynesian and
classical models are very different in their implications. You might suggest the idea
that economists who are skeptical of government’s role in the economy are more likely
to believe in a classical model, while those who believe the government can do good
are more likely to become Keynesians. You can point out, however, that things are
changing; some New Keynesians seem skeptical of government intervention.
2. The Keynesian approach
a. The Great Depression: Classical theory didn’t appear to work
b. Keynes: Persistent unemployment occurs because wages
and prices adjust slowly, so markets remain out of equilibrium
for long periods
c. Result: Government should intervene to restore full employment
Analytical Problem 5 asks students to distinguish between how a classical
economist and a Keynesian economist would think about the same issue.
Theoretical Application
You may wish to add a discussion of the recent progression of research. You could
start by a brief discussion of how the failure of Keynesian models in the stagflation of
the 1970s led to the growth of rational-expectations modeling, with its focus on the
importance of microfoundations. Then you could discuss New Keynesian
macroeconomics (discussed in greater detail in Chapter 13) and its attempts to provide
some microfoundations for wage and price stickiness in Keynesian models.
Although the textbook presents just a few versions of classical models and Keynesian
models, it is difficult to find a prototypical classical or Keynesian economist who
believes fully in that particular model. The lack of convincing evidence on which model
is correct has led macroeconomists to be eclectic, so that they often hedge their bets.
As a result, a one-armed macroeconomist is hard to find; analysis tends to be of the “on
the one hand, and on the other hand” variety. And, of course, that means that if you laid
all the macroeconomists on the earth end to end, they still wouldn’t reach a conclusion!
C. A unified approach to macroeconomics
1. Textbook uses a single model to present both Classical and
Keynesian ideas
2. Three markets: goods and services, assets, labour
3. Model starts with microfoundations: individual behaviour
4. Long run: wages and prices are perfectly flexible
5. Short run: Classical case—flexible wages and prices;
Keynesian case—wages and prices are slow to adjust
Copyright © 2026
4
Complete Chapters ✅ Latest Edition ✅
CHAPTER 1: INTRODUCTION TO MACROECONOMICS
LEARNING OBJECTIVES
I. Goals of Part I: Introduction
A. Introduce students to the main concepts in macroeconomics (Ch. 1)
B. Introduce national income accounting and major economic magnitudes (Ch. 2)
II. Goals of Chapter 1
A. Major economic issues—growth, business cycles, unemployment, inflation,
the international economy, macroeconomic policy, aggregation (Sec. 1.1)
B. What macroeconomists do—forecasting, analysis, research, data
development (Sec. 1.2)
C. Why macroeconomists disagree—Classicals vs. Keynesians, the text’s
approach (Sec. 1.3)
TEACHING NOTES
I. What Macroeconomics Is About (Sec. 1.1)
A. Long-run economic growth
1. Growth of real output in Canada over time
2. Sources of growth—rising population, increase in the average labour
productivity
This may be a good place to introduce students to the calculation of a growth-rate,
which is used throughout the textbook. You can write it first in general terms, as
%∆X = [(Xt+1 – Xt)/Xt] × 100% = [(Xt+1/Xt) – 1] x 100%.
Then you might use an example with something you’re talking about, such as real GDP
growth over the past year, or the inflation rate. We also recommend explaining how the
growth rate of a ratio is approximately the growth rate of the numerator minus that of the
denominator. Throughout the text, students may come across mathematical calculations
that are unfamiliar to them. The Appendix at the end of the textbook contains some
helpful basic guidance to mathematical topics, including discussions of functions and
graphs, slopes of functions, elasticities, functions of several variables, shifts of a curve,
exponents, and growth rate formulas.
B. Business cycles
C. Unemployment and Price Instability
Analytical Problem 1 asks students to think about average labour productivity and
unemployment and their relationship to output.
Copyright © 2026
1
,Instructor’s Manual for Macroeconomics, Tenth Canadian Edition
Analytical Problem 2 asks students to think about the welfare consequences of having a
higher price level.
You may wish to note here that the inflation rate is just the growth rate of the price
level, so that π = [(Pt + 1/Pt) − 1 × 100%. Numerical Problem 1 gives students practice
calculating growth rates, including the growth rate of average labour productivity,
unemployment rate, and the inflation rate.
D. The international economy
1. Open vs. closed economies
2. Trade imbalances; the trade deficit and the trade surplus
3. The exchange rate
E. Macroeconomic policy
1. Fiscal policy
a. Effects of large federal deficits
b. Canadian experience
c. Relation to decline in productivity growth
Numerical Problem 2 serves two purposes: (1) to get students to look at some real
data on the economy; and (2) to give them some idea how large are the trade deficit
and government budget deficit or surplus.
2. Monetary policy; the Bank of Canada
F. Aggregation; from microeconomics to macroeconomics
II. What Macroeconomists Do (Sec. 1.2)
A. Macroeconomic forecasting
1. Relatively few economists make forecasts
Data Application
There are many firms that provide forecasts for macroeconomic variables in Canada,
such as the Conference Board of Canada and most private banks. In addition, the
Federal Department of Finance, Parliamentary Budget Office, and the Bank of Canada
make projections for the economy based on large scale macroeconometric models.
Finally, international agencies such as the Organization for Economic Cooperation and
Development (OECD) and International Monetary Fund (IMF) provide regular forecasts
for Canada’s economy.
2. Forecasting is very difficult
Data Application
Francis X. Diebold presents a comprehensive survey of the development of structural
and non-structural forecasting in his article, “The Past, Present, and Future of
Macroeconomic Forecasting,” Journal of Economic Perspectives, Spring 1998, vol. 12,
pp. 175–192. Despite the difficulties in macroeconomic forecasting, he is optimistic
about its future with the rapid advances in numerical and simulation techniques.
B. Macroeconomic analysis
1. Private and public sector economists—analyze current conditions
Copyright © 2026
2
, Chapter 1: Introduction to Macroeconomics
Data Application
The Canadian financial sector hires a large number of economists, most of whom are
engaged in data analysis on a daily basis. Their job is to tell traders what the current
data means in terms of their effect on the financial markets in general, as well as on the
prices of individual assets. Many of them also make their own detailed forecasts of the
economy.
2. Does having lots of economists ensure good macroeconomic policies?
No, since politicians, not economists, make major decisions
C. Macroeconomic research
1. Goal: to make general statements about how the economy works
2. Theoretical and empirical research are necessary for forecasting
and economic analysis
3. Economic theory: a set of ideas about the economy, organized in
a logical framework
4. Economic model: a simplified description of some aspect of
the economy
This is a good point for you to talk about your own research interests. It has been found
that students are very interested in learning about the kind of research their instructors
do. You may want to talk about your research later, if and when you come to a section
of the textbook that discusses the topic on which you do your research.
5. Usefulness of economic theory or models depend on reasonableness
of assumptions, possibility of being applied to real problems,
empirically testable implications, and theoretical results consistent
with real-world data
Theoretical Application
The classic discussion of research issues by Milton Friedman is, “The Methodology of
Positive Economics,” Essays in Positive Economics, Chicago: University of Chicago
Press, 1953.
Analytical Problem 3 is an exercise in how to formulate and test a theory.
6. Data development—very important for making data more useful
Ill. Why Macroeconomists Disagree (Sec. 1.3)
A. Positive vs. normative analysis
Analytical Problem 4 gives students practice in distinguishing positive from
normative analysis.
B. Classicals vs. Keynesians
1. The classical approach
a. The economy works well on its own; the “invisible hand” leads
people, acting in their own best interests, to maximize the
general welfare
b. Wages and prices adjust rapidly to get to equilibrium
c. Result: Government should have only a limited role in
the economy
Copyright © 2026
3
, Instructor’s Manual for Macroeconomics, Tenth Canadian Edition
Theoretical Application
At this point in the discussion, you may want to talk about philosophies of economics.
Students are often fascinated by how philosophical differences arise and what they
mean, especially for policy. This helps to reinforce the idea that the Keynesian and
classical models are very different in their implications. You might suggest the idea
that economists who are skeptical of government’s role in the economy are more likely
to believe in a classical model, while those who believe the government can do good
are more likely to become Keynesians. You can point out, however, that things are
changing; some New Keynesians seem skeptical of government intervention.
2. The Keynesian approach
a. The Great Depression: Classical theory didn’t appear to work
b. Keynes: Persistent unemployment occurs because wages
and prices adjust slowly, so markets remain out of equilibrium
for long periods
c. Result: Government should intervene to restore full employment
Analytical Problem 5 asks students to distinguish between how a classical
economist and a Keynesian economist would think about the same issue.
Theoretical Application
You may wish to add a discussion of the recent progression of research. You could
start by a brief discussion of how the failure of Keynesian models in the stagflation of
the 1970s led to the growth of rational-expectations modeling, with its focus on the
importance of microfoundations. Then you could discuss New Keynesian
macroeconomics (discussed in greater detail in Chapter 13) and its attempts to provide
some microfoundations for wage and price stickiness in Keynesian models.
Although the textbook presents just a few versions of classical models and Keynesian
models, it is difficult to find a prototypical classical or Keynesian economist who
believes fully in that particular model. The lack of convincing evidence on which model
is correct has led macroeconomists to be eclectic, so that they often hedge their bets.
As a result, a one-armed macroeconomist is hard to find; analysis tends to be of the “on
the one hand, and on the other hand” variety. And, of course, that means that if you laid
all the macroeconomists on the earth end to end, they still wouldn’t reach a conclusion!
C. A unified approach to macroeconomics
1. Textbook uses a single model to present both Classical and
Keynesian ideas
2. Three markets: goods and services, assets, labour
3. Model starts with microfoundations: individual behaviour
4. Long run: wages and prices are perfectly flexible
5. Short run: Classical case—flexible wages and prices;
Keynesian case—wages and prices are slow to adjust
Copyright © 2026
4
