Answers to Text Questions and Problems Chapter 4

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1 Answers to Text Questions and Problems Chapter 4 Answers to Review Questions 1. The catastrophic economic collapse of the 1930s convinced economists and policymakers that there were major gaps in their understanding of how the economy works, and of how government policy can be used to address problems such as high unemployment. Understanding the Depression also seemed to require studying the economy at the national level, rather than at the level of individual firms, consumers, and markets. Hence the Depression provided a major motivation for the creation of macroeconomics, the study of national economic performance, and the policies used to improve that performance. 2. Output has grown faster in the United States than in Canada in recent decades. As shown in the text, output per person and average labour productivity are both higher in the United States than in Canada. 3. Average labour productivity is output per employed worker. Because the amount we can consume is determined by the amount that we produce, increases in output per worker are a principal source of improvements in living standards. In Canada, output per employed worker has increased by more than four times in the past century. (The fact that output per person has risen even faster reflects the fact that a higher proportion of the population has a job today than in the past.) 4. False. Economic growth does not proceed at a constant rate, but sometimes slows down or speeds up for a time. Slowdowns in economic growth are called recessions (or, in particularly severe cases, depressions), and speedups in economic growth are called expansions (particularly rapid speedups are called booms). The causes of recessions and expansions are an important question in macroeconomics. 5. False. Objective analysis of the issues can often resolve debates about the likely effects of a proposed policy (positive analysis). But objective analysis does not address the question of whether a policy should be enacted (a normative question). Determining whether a policy should be enacted usually involves debates about personal values (for example, as to whether the likely consequences of the policy are desirable), which cannot be resolved by purely objective analysis. 6. This mistake is referred to as the fallacy of composition. 7a. Structural. b. Fiscal. c. Monetary. d. Fiscal. e. Structural. Answers to Problems 1. Slowing population growth and an increased share of retired people both imply slower growth in the number of people employed. If average labour productivity stagnates, then total output will grow very slowly or even decline. Living standards depend not on total output but on output divided by the total population. Slowing population growth reduces total output but also the number of people who share that output. So slower population growth in itself should not affect living standards. However, a reduced share of the population that is working, all else equal, will reduce output per person, lowering living standards. Slower productivity growth will only worsen this problem. Copyright 2005 McGraw-Hill Ryerson Limited 4-1

2 2. It is possible, if the decline in average labour productivity (output per worker) is offset by an increased share of the population that is employed. For a simple example, suppose that an economy has two people, one of whom is working. The one worker produces 10 units of output, so average labour productivity is 10. Output per person (10/2) is 5. Now suppose that average labour productivity drops to 8 but both people are working. Then total output is 16 and output per person is 8, so average living standards (output per person) rise, even though average labour productivity (output per employed worker) has fallen. 3. The answer depends on the latest economic statistics. 4a. Microeconomist (operations of an individual firm). b. Microeconomist (behaviour of an individual market). c. Macroeconomist (behaviour of the economy as a whole; uses aggregation to study a broad trend). d. Macroeconomist (behaviour of the economy as a whole). e. Macroeconomist (behaviour of a broad macroeconomic aggregate, consumer spending). Copyright 2005 McGraw-Hill Ryerson Limited 4-2

3 Sample Homework Assignment 1. Suppose that, in 1999, the country of Alpha had an unemployment rate of 3% and an inflation rate of 8%. How does the economic situation of Alpha in 1999 compare with the economic situation in Canada in 1999? How does it compare to the economic situation of Canada over the past 100 years? Would you say Alpha is in a recession? Why or why not? 2. To what extent do the aggregate unemployment and inflation statistics given above indicate the wellbeing of an individual citizen in Alpha? Multiple Choice Quiz 1. Which of the following is not a major macroeconomic issue? a. Economic growth. b. Productivity. c. Unemployment. d. Oil prices. e. Inflation. 2. Which of the following is not a major type of macroeconomic policy? a. Monetary policy. b. Fiscal policy. c. Frictional policy. d. Structural policy. e. All of the above are types of macroeconomic policy. 3. The tendency to assume that what is true at the level of a particular individual or firm is true at a higher aggregate level is known as a. the fallacy of composition. b. the fallacy of growth. c. the fallacy of macroeconomics. d. the fallacy of structure. e. the fallacy of scarcity. 4. Which of the following topics is most likely to be discussed in macroeconomics? a. Aggregate demand. b. A household. c. A firm. d. The rising price of wheat. e. Teacher salaries. 5. On average, the output of the Canadian economy through the 20 th century a. fell. b. rose and then fell. c. fell and then rose. d. rose. e. fluctuated erratically. 6. Output per employed worker is known as a. marginal labour productivity. Copyright 2005 McGraw-Hill Ryerson Limited 4-3

4 b. GDP. c. average labour productivity. d. the labour force participation rate. e. the standard of living. 7. During a recession, the unemployment rate a. rises. b. falls. c. fluctuates rapidly. d. reaches zero. e. approaches 100%. 8. During inflation, a. all prices rise. b. the unemployment rate falls. c. the cost of living falls. d. GDP decreases. e. prices in general increase. 9. During the 20 th century, the Canadian inflation rate a. was always positive. b. was always negative. c. was very steady. d. fluctuated between positive and negative. e. fell consistently. 10. The unemployment rate in Canada during the 20 th century a. became negative in some years. b. was almost constant. c. hit 25% several times. d. was never zero. e. never exceeded 8%. Problems/Short Answer 1. Would each of the following more likely be studied in microeconomics or macroeconomics? a. The price of oil. b. The Canadian unemployment rate. c. Employment in the computer industry. d. Policies to control inflation. e. Trade imbalances. 2. Suppose that the country Alpha has a population of 20, of which 10 are workers. The value of Alpha s output in the year 2000 was $18,400. Find each of the following values for Alpha: a. Output per capita. b. Average labour productivity. Copyright 2005 McGraw-Hill Ryerson Limited 4-4

5 Answer Key to Extra Questions in Instructor s Manual Sample Homework Assignment 1. Alpha has a higher rate of inflation and a lower unemployment rate in The inflation rate is higher than it has been in Canada through much of the last century while the unemployment rate is lower than the Canadian rate most of the years since It is probably not in a recession because the unemployment rate is so low. 2. Aggregate statistics do not indicate the specific situation of each individual. Aggregation does not allow for investigation of details, for example, the distribution of income or the duration of unemployment. Multiple Choice 1. d 2. c 3. a 4. a 5. d 6. c 7. a 8. e 9. d 10. d Problems/Short Answer 1a. Microeconomics. b. Macroeconomics. c. Microeconomics. d. Macroeconomics. e. Macroeconomics. 2a. $18,400/20 = $920. b. $18,400/10 = $1840. Copyright 2005 McGraw-Hill Ryerson Limited 4-5

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