1. The two theories of aggregate supply—the sticky-price and imperfect-information
models—attribute deviations of output and employment from their natural levels to various market imperfections. According to both theories, output rises above its natural level when the price level exceeds the expected price level, and output falls below its natural level when the price level is less than the expected price level.
2. Economists often express aggregate supply in a relationship called the Phillips curve. The Phillips curve says that inflation depends on expected inflation, the deviation of
unemployment from its natural rate, and supply shocks. According to the Phillips curve, policymakers who control aggregate demand face a short-run tradeoff between inflation and unemployment.
3. If expected inflation depends on recently observed inflation, then inflation has inertia, which means that reducing inflation requires either a beneficial supply shock or a period of high unemployment and reduced output. If people have rational expectations, however, then a credible announcement of a change in policy might be able to influence expectations directly and, therefore, reduce inflation without causing a recession.
4. Most economists accept the natural-rate hypothesis, according to which fluctuations in aggregate demand have only short-run effects on output and unemployment. Yet some economists have suggested ways in which recessions can leave permanent scars on the economy by raising the natural rate of unemployment.
3、Short Answer Questions(4×10, 40 points) Chapter 1
QUESTIONS FOR REVIEW:1,3
1.Explain the difference between macroeconomics and microeconomics. How are these two fields related?
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 in order to maximize their utility, whereas firms decide how much to produce in order 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.
3.What is a market-clearing model? When is it appropriate to assume that markets clear? A market-clearing model is one 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, labor contracts often set wages for up to three years. Or, firms such as magazine publishers change their prices only every three to four 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.
Chapter 2
QUESTIONS FOR REVIEW:1
PROBLEMS AND APPLICATIONS:3,4
1.List the two things that GDP measures. How can GDP measure two things at once?
GDP measures the total income earned from the production of the new final goods and services in the economy, and it measures the total expenditures on the new final goods and services produced in the economy. GDP can measure two things at once because the total expenditures on the new final goods and services by the buyers must be equal to the income earned by the sellers of the new final goods and services. As the circular flow diagram in the text illustrates, these are alternative, equivalent ways of measuring the flow of dollars in the economy.
3.Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee). How does the marriage affect GDP? How should it affect GDP?
When a woman marries her butler, GDP falls by the amount of the butler’s salary. This happens because measured total income, and therefore measured GDP, falls by the amount of the butler’s loss in salary. If GDP truly measured the value of all goods and services, then the marriage would not affect GDP since the total amount of economic activity is unchanged. Actual GDP, however, is an imperfect measure of economic activity because the value of some goods and services is left out. Once the butler’s work becomes part of his household chores, his services are no longer counted in GDP. As this example illustrates, GDP does not include the value of any output produced in the home. Similarly, GDP does not include other goods and services, such as the imputed rent on durable goods (e.g., cars and refrigerators) and any illegal trade.
4.Place each of the following transactions in one of the four components of expenditure: consumption, investment, government purchases, and net exports. a. Boeing sells an airplane to the Air Force.
b. Boeing sells an airplane to American Airlines. c. Boeing sells an airplane to Air France. d. Boeing sells an airplane to Amelia Earhart. e. Boeing builds an airplane to be sold next year.
a. The airplane sold to the Air Force counts as government purchases because the Air Force is part of the government.
b. The airplane sold to American Airlines counts as investment because it is a capital good sold to a private firm.
c. The airplane sold to Air France counts as an export because it is sold to a foreigner.
d. The airplane sold to Amelia Earhart counts as consumption because it is sold to a private individual. e. The airplane built to be sold next year counts as investment. In particular, the airplane is counted as inventory investment, which is where goods that are produced in one year and sold in another year are counted.
Chapter 3
QUESTIONS FOR REVIEW:1
1.What determines the amount of output an economy produces?
The factors of production and the production technology determine the amount of output an economy can produce. The factors of production are the inputs used to produce goods and services: the most important factors are capital and labor. The production technology determines how much output can be produced from any given amounts of these inputs. An increase in one of the factors of production or an improvement in technology leads to an increase in the economy’s output.
Chapter 4
QUESTIONS FOR REVIEW:1,4,8 1.Describe the functions of money.
Money has three functions: it is a store of value, a unit of account, and a medium of exchange. As a store of value, money provides a way to transfer purchasing power from the present to the future. As a unit of account, money provides the terms in which prices are quoted and debts are recorded. As a medium of exchange, money is what we use to buy goods and services.
4.Write the quantity equation and explain it.
The quantity equation is an identity that expresses the link between the number of transactions that people make and how much money they hold. We write it as Money ??Velocity = Price ??Transactions
M ??V = P ??T.
The right-hand side of the quantity equation tells us about the total number of transactions that occur during a given period of time, say, a year. T represents the total number of transactions. P represents the price of a typical transaction. Hence, the product P ??T represents the number of dollars exchanged in a year.
The left-hand side of the quantity equation tells us about the money used to make these transactions.
M represents the quantity of money in the economy. V represents the transactions velocity of
money—the rate at which money circulates in the economy.
Because the number of transactions is difficult to measure, economists usually use a slightly different version of the quantity equation, in which the total output of the economy Y replaces the number of transactions T: Money ??Velocity = Price ??Output
M ??V = P ??Y.
P now represents the price of one unit of output, so that P ??Y is the dollar value of output—
nominal GDP. V represents the income velocity of money—the number of times a dollar bill becomes a
part of someone’s income.
8.List all the costs of inflation you can think of,and rank them according to how important you think they are.
The costs of expected inflation include the following:
a. Shoeleather costs. Higher inflation means higher nominal interest rates, which mean that people want to hold lower real money balances. If people hold lower money balances, they must make more frequent trips to the bank to withdraw money. This is inconvenient (and it causes shoes to wear out more quickly).
b. Menu costs. Higher inflation induces firms to change their posted prices more often. This may be costly if they must reprint their menus and catalogs.
c. Greater variability in relative prices. If firms change their prices infrequently, then inflation causes greater variability in relative prices. Since free-market economies rely on relative prices to allocate resources efficiently, inflation leads to microeconomic inefficiencies.
d. Altered tax liabilities. Many provisions of the tax code do not take into account the effect of inflation. Hence, inflation can alter individuals’ and firms’ tax liabilities, often in ways that lawmakers did not intend.
e. The inconvenience of a changing price level. It is inconvenient to live in a world with a changing price level. Money is the yardstick with which we measure economic transactions. Money is a less
useful measure when its value is always changing. There is an additional cost to unexpected inflation:
f. Arbitrary redistributions of wealth. Unexpected inflation arbitrarily redistributes wealth among individuals. For example, if inflation is higher than expected, debtors gain and creditors lose. Also, people with fixed pensions are hurt because their dollars buy fewer goods.
Chapter 6
QUESTIONS FOR REVIEW:2,3
2. Describe the difference between frictional unemployment and structural unemployment.
Frictional unemployment is the unemployment caused by the time it takes to match workers and jobs. Finding an appropriate job takes time because the flow of information about job candidates and job vacancies is not instantaneous. Because different jobs require different skills and pay different wages, unemployed workers may not accept the first job offer they receive.
In contrast, structural unemployment is the unemployment resulting from wage rigidity and job rationing. These workers are unemployed not because they are actively searching for a job that best suits their skills (as in the case of frictional unemployment), but because at the prevailing real wage the supply of labor exceeds the demand.
If the wage does not adjust to clear the labor market, then these workers must wait for jobs to become available. Structural unemployment thus arises because firms fail to reduce wages despite an excess supply of labor.
3. Give three explanations the real wage may remain above the level that equilibrates labor supply and labor demand.
The real wage may remain above the level that equilibrates labor supply and labor demand because of
minimum wage laws, the monopoly power of unions, and efficiency wages.
Minimum-wage laws cause wage rigidity when they prevent wages from falling to equilibrium levels. Although most workers are paid a wage above the minimum level, for some workers, especially the unskilled and inexperienced, the minimum wage raises their wage above the equilibrium level. It therefore reduces the quantity of their labor that firms demand, and an excess supply of workers—that is, unemployment—results.
The monopoly power of unions causes wage rigidity because the wages of unionized workers are determined not by the equilibrium of supply and demand but by collective bargaining between union leaders and firm management. The wage agreement often raises the wage above the equilibrium level and allows the firm to decide how many workers to employ. These high wages cause firms to hire fewer workers than at the market-clearing wage, so structural unemployment increases.
Efficiency-wage theories suggest that high wages make workers more productive. The influence of wages on worker efficiency may explain why firms do not cut wages despite an excess supply of labor. Even though a wage reduction decreases the firm’s wage bill, it may also lower worker productivity and therefore the firm’s profits.
Chapter 7
QUESTIONS FOR REVIEW:1,4
1.In the Solow model, how does the saving rate affect the steady-state level of income? How does it affect the steady-state rate of growth?
In the Solow growth model, a high saving rate leads to a large steady-state capital stock and a high level of steady-state output. A low saving rate leads to a small steadystate capital stock and a low level of steady-state output. Higher saving leads to faster economic growth only in the short run. An increase
in the saving rate raises growth until the economy reaches the new steady state. That is, if the economy maintains a high saving rate, it will also maintain a large capital stock and a high level of output, but it will not maintain a high rate of growth forever. In the steady state, the growth rate of output (or income) is independent of the saving rate.
4.In the Solow model, how does the rate of population growth affect the steady-state level of income? How does it affect the steady-state rate of growth?
Chapter 8
QUESTIONS FOR REVIEW:1,2,6
1. In the Solow model, what determines the steady-state rate of growth of income per worker?
In the Solow model, we find that only technological progress can affect the steady-state rate of growth in income per worker. Growth in the capital stock (through high saving) has no effect on the steady-state growth rate of income per worker; neither does population growth. But technological progress can lead to sustained growth.
2.In the steady state of the Solow model, at what rate does output per person grow? At what rate does capital per person grow? How does this compare with the U.S. experience?
In the steady state, output per person in the Solow model grows at the rate of technological progress g. Capital per person also grows at rate g. Note that this implies that output and capital per effective worker are constant in steady state. In the U.S. data, output and capital per worker have both grown at about 2 percent per year for the past half-century.
6.How does endogenous growth theory explain persistent growth without the assumption of exogenous technological progress? How does this differ from the Solow model?
Endogenous growth theories attempt to explain the rate of technological progress by explaining the decisions that determine the creation of knowledge through research and development. By contrast, the