SOLUTIONS MANUAL
MACROECONOMICS
6TH CANADIAN EDITION
CHAPTER NO. 01: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. 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, labour 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. First, monetary policy in Canada continues to be a major topic of conversation in
2019. The Bank of Canada must decide how quickly to raise the federal funds rate. It
watches for wage and price increases as it does so. Second, the United States is
implementing more protectionist policies, restricting international trade, which will
have consequences for the Canadian economy. There is continuing uncertainty
regarding how this will affect consumers, workers, and firms and how other countries
will respond. Third, Canada has experienced a labour shortage in 2019 with more
jobs open than ever, particularly in construction and the personal services sector.
2. 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.
3. We can use a simple variant of the supply-and-demand model for pizza to answer this
question. Assume that the quantity of ice cream demanded depends not only on the
price of ice cream and income but also on the price of frozen yogurt:
Qd = D(PIC, PFY, Y).
We expect that demand for ice cream will rise when the price of frozen yogurt rises
because ice cream and frozen yogurt are substitutes. That is, when the price of frozen
yogurt goes up, households will consume less of it and instead fulfill more of their
frozen dessert desires with ice cream. The next part of the model is the supply
function for ice cream, Qs = S(PIC). Finally, in equilibrium, supply must equal
demand, so that Qs = Qd. The exogenous variables are Y and PFY, and the endogenous
variables are Q and PIC. Figure 1-1 uses this model to show that a fall in the price of
, frozen yogurt results in an inward shift of the demand curve for ice cream. The new
equilibrium has a lower price and quantity of ice cream.
4. The price of haircuts changes rather infrequently. From casual observation,
hairstylists tend to charge the same price over a one- or two-year period, regardless of
the demand for haircuts or the supply of cutters. A market-clearing model for
analyzing the market for haircuts has the unrealistic assumption of flexible prices.
Such an assumption is unrealistic in the short run, when we observe that prices are
inflexible. Over the long run, however, the price of haircuts does tend to adjust; a
market-clearing model is therefore appropriate.
MACROECONOMICS
6TH CANADIAN EDITION
CHAPTER NO. 01: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. 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, labour 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. First, monetary policy in Canada continues to be a major topic of conversation in
2019. The Bank of Canada must decide how quickly to raise the federal funds rate. It
watches for wage and price increases as it does so. Second, the United States is
implementing more protectionist policies, restricting international trade, which will
have consequences for the Canadian economy. There is continuing uncertainty
regarding how this will affect consumers, workers, and firms and how other countries
will respond. Third, Canada has experienced a labour shortage in 2019 with more
jobs open than ever, particularly in construction and the personal services sector.
2. 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.
3. We can use a simple variant of the supply-and-demand model for pizza to answer this
question. Assume that the quantity of ice cream demanded depends not only on the
price of ice cream and income but also on the price of frozen yogurt:
Qd = D(PIC, PFY, Y).
We expect that demand for ice cream will rise when the price of frozen yogurt rises
because ice cream and frozen yogurt are substitutes. That is, when the price of frozen
yogurt goes up, households will consume less of it and instead fulfill more of their
frozen dessert desires with ice cream. The next part of the model is the supply
function for ice cream, Qs = S(PIC). Finally, in equilibrium, supply must equal
demand, so that Qs = Qd. The exogenous variables are Y and PFY, and the endogenous
variables are Q and PIC. Figure 1-1 uses this model to show that a fall in the price of
, frozen yogurt results in an inward shift of the demand curve for ice cream. The new
equilibrium has a lower price and quantity of ice cream.
4. The price of haircuts changes rather infrequently. From casual observation,
hairstylists tend to charge the same price over a one- or two-year period, regardless of
the demand for haircuts or the supply of cutters. A market-clearing model for
analyzing the market for haircuts has the unrealistic assumption of flexible prices.
Such an assumption is unrealistic in the short run, when we observe that prices are
inflexible. Over the long run, however, the price of haircuts does tend to adjust; a
market-clearing model is therefore appropriate.
