SOLUTIONS MANUAL
MACROECONOMICS
6TH CANADIAN EDITION
CHAPTER NO. 01: INTRODUCTION
TEXTBOOK PROBLEM SOLUTIONS
1. Calculating Growth Rates Data:
a) Actual Percentage Growth Rates, 2015–2017
2015 –0.161152891
2016 –0.103898032
2017 1.742102037
b) Approximate Percentage Growth Rates, 2015–2017
2015 -0.161282882
2016 -0.103952043
2017 1.727101407
The approximation is close. The approximation works well for small growth rates.
c) Actual Percentage Growth Rates for Decades, 1950–2010
1960 21.00068711
1970 37.112178
1980 29.17545181
, 1990 14.90279518
2000 19.48404444
2010 8.432583912
Approximate Percentage Growth Rates, 1950–2010
1960 19.06260382
1970 31.56292223
1980 25.60013858
1990 13.89163257
2000 17.80126572
2010 8.095844744
The approximation errors are larger because the growth rates are larger. Note that
the approximation formula actually calculates the continuously compounded
growth rate.
d) Growth is highest in the 1970s. Growth is lowest for 2000–2010.
2. The variability of real GDP per capita was larger before World War II than after, even
if we ignore the Great Depression and World War II. This could just be a
measurement issue, as the national income accounts data were not collected in a
systematic way until the 1920s. Also, it is possible that the lower variability after
World War II was due to the sound judgment of macroeconomic policymakers, who
took appropriate action at the right times. Finally, it is possible that the lower
variability in post-World War II times was just a happy accident.
3. A problem with controlled experiments in economics is that we may cause irreparable
harm. However, it would be hard to imagine a policy change that would make the
Great Depression any worse than it actually was. Some obvious possibilities include
Bank of Canada making open market purchases to keep the money supply from
, shrinking, instituting bank reforms before the depression started, and avoiding high
tariff rates.
4. Newton’s model of falling bodies:
Ignores air resistance.
Works well for most dense objects and does not work well for feathers.
Diagrams of plays in football and basketball:
Ignore the characteristics of individual players and the reactions of opponents.
Work well for evenly matched teams.
Scale models of new aircraft designs:
Ignore working engines and interior contents.
Wind tunnel testing approximates aerodynamics of actual aircraft.
5. During a recession, there are automatic effects on spending and taxes. Transfers such
as employment insurance benefits increase, while taxes decrease because private
incomes and spending fall. As well, there were increases in discretionary spending
and reductions in taxes, particularly by the federal government.
6. This may have been due to the fact that Canada is more dependent on natural
resources, for example oil and gas production, than is the United States, and world oil
prices fell significantly beginning in mid-2014, depressing natural resource extraction
industries. As well, the recession had a more severe effect on the U.S. labor market,
and in normal times the unemployment rate tends to be higher in Canada than in the
United States.
7. Inflation and nominal interest rates certainly move together – they are positively
correlated. But do movements in the nominal interest rate cause movements in the
inflation rate, or vice versa? This is hard to determine just from looking at the data,
but there appears to be a pattern of increases (decreases) in the nominal interest rate
, leading increases (decreases) in the inflation rate, perhaps indicating that the former is
causing the latter.
1. If the average nominal interest rate consistent with 2% inflation falls, and if the Bank
of Canada pursues a policy of cutting nominal interest rates when a recession occurs,
this can lead to a problem, in that the nominal interest rate cannot go below zero. That
is, the Bank of Canada could more frequently be setting interest rates to zero, and not
be able to decrease interest rates further.
2. As one possibility, fundamental changes in the supply and demand for lending may
explain changes in the real rate of interest. Alternatively, the mid-1970s was a period
of rising inflation. Borrowers’ willingness to pay interest depends on their
expectations of future inflation. If higher inflation were expected to be temporary, the
low observed real interest rates of the period would be consistent with somewhat
higher expected real interest rates. During the 2008–2009 recession, a likely cause of
low real interest rates was intervention by the Bank of Canada. Monetary policy can
act to reduce or increase real interest rates in the short run.
10. Exports grew in excess of imports at the time, but during the 2008–2009 recession, a
dramatic drop in exports sent the current account into deficit.
MACROECONOMICS
6TH CANADIAN EDITION
CHAPTER NO. 01: INTRODUCTION
TEXTBOOK PROBLEM SOLUTIONS
1. Calculating Growth Rates Data:
a) Actual Percentage Growth Rates, 2015–2017
2015 –0.161152891
2016 –0.103898032
2017 1.742102037
b) Approximate Percentage Growth Rates, 2015–2017
2015 -0.161282882
2016 -0.103952043
2017 1.727101407
The approximation is close. The approximation works well for small growth rates.
c) Actual Percentage Growth Rates for Decades, 1950–2010
1960 21.00068711
1970 37.112178
1980 29.17545181
, 1990 14.90279518
2000 19.48404444
2010 8.432583912
Approximate Percentage Growth Rates, 1950–2010
1960 19.06260382
1970 31.56292223
1980 25.60013858
1990 13.89163257
2000 17.80126572
2010 8.095844744
The approximation errors are larger because the growth rates are larger. Note that
the approximation formula actually calculates the continuously compounded
growth rate.
d) Growth is highest in the 1970s. Growth is lowest for 2000–2010.
2. The variability of real GDP per capita was larger before World War II than after, even
if we ignore the Great Depression and World War II. This could just be a
measurement issue, as the national income accounts data were not collected in a
systematic way until the 1920s. Also, it is possible that the lower variability after
World War II was due to the sound judgment of macroeconomic policymakers, who
took appropriate action at the right times. Finally, it is possible that the lower
variability in post-World War II times was just a happy accident.
3. A problem with controlled experiments in economics is that we may cause irreparable
harm. However, it would be hard to imagine a policy change that would make the
Great Depression any worse than it actually was. Some obvious possibilities include
Bank of Canada making open market purchases to keep the money supply from
, shrinking, instituting bank reforms before the depression started, and avoiding high
tariff rates.
4. Newton’s model of falling bodies:
Ignores air resistance.
Works well for most dense objects and does not work well for feathers.
Diagrams of plays in football and basketball:
Ignore the characteristics of individual players and the reactions of opponents.
Work well for evenly matched teams.
Scale models of new aircraft designs:
Ignore working engines and interior contents.
Wind tunnel testing approximates aerodynamics of actual aircraft.
5. During a recession, there are automatic effects on spending and taxes. Transfers such
as employment insurance benefits increase, while taxes decrease because private
incomes and spending fall. As well, there were increases in discretionary spending
and reductions in taxes, particularly by the federal government.
6. This may have been due to the fact that Canada is more dependent on natural
resources, for example oil and gas production, than is the United States, and world oil
prices fell significantly beginning in mid-2014, depressing natural resource extraction
industries. As well, the recession had a more severe effect on the U.S. labor market,
and in normal times the unemployment rate tends to be higher in Canada than in the
United States.
7. Inflation and nominal interest rates certainly move together – they are positively
correlated. But do movements in the nominal interest rate cause movements in the
inflation rate, or vice versa? This is hard to determine just from looking at the data,
but there appears to be a pattern of increases (decreases) in the nominal interest rate
, leading increases (decreases) in the inflation rate, perhaps indicating that the former is
causing the latter.
1. If the average nominal interest rate consistent with 2% inflation falls, and if the Bank
of Canada pursues a policy of cutting nominal interest rates when a recession occurs,
this can lead to a problem, in that the nominal interest rate cannot go below zero. That
is, the Bank of Canada could more frequently be setting interest rates to zero, and not
be able to decrease interest rates further.
2. As one possibility, fundamental changes in the supply and demand for lending may
explain changes in the real rate of interest. Alternatively, the mid-1970s was a period
of rising inflation. Borrowers’ willingness to pay interest depends on their
expectations of future inflation. If higher inflation were expected to be temporary, the
low observed real interest rates of the period would be consistent with somewhat
higher expected real interest rates. During the 2008–2009 recession, a likely cause of
low real interest rates was intervention by the Bank of Canada. Monetary policy can
act to reduce or increase real interest rates in the short run.
10. Exports grew in excess of imports at the time, but during the 2008–2009 recession, a
dramatic drop in exports sent the current account into deficit.
