PART 1: INTRODUCTION

Principles of Macroeconomics, 8th Canadian Edition, 8e Gregory Mankiw, Ronald Kneebone, Kenneth McKenzie

(Solutions Manual All Chapter)

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CONTENTS

PART 1: INTRODUCTION

CHAPTER 1 Ten Principles of Economics ................................................................................. 1 CHAPTER 2 Thinking Like an Economist ................................................................................. 9 CHAPTER 3 Interdependence and the Gains from Trade ......................................................... 21

PART 2: SUPPLY AND DEMAND: HOW MARKETS WORK

CHAPTER 4 The Market Forces of Supply and Demand ......................................................... 37

PART 3: THE DATA OF MACROECONOMICS

CHAPTER 5 Measuring a Nation’s Income .............................................................................. 65 CHAPTER 6 Measuring the Cost of Living .............................................................................. 73

PART 4: THE REAL ECONOMY IN THE LONG RUN

CHAPTER 7 Production and Growth ........................................................................................ 81 CHAPTER 8 Saving, Investment, and the Financial System .................................................... 89 CHAPTER 9 Unemployment and Its Natural Rate ................................................................. 101

PART 5: MONEY AND PRICES IN THE LONG RUN

CHAPTER 10 The Monetary System ........................................................................................ 113 CHAPTER 11 Money Growth and Inflation ............................................................................. 121

PART 6: THE MACROECONOMICS OF OPEN ECONOMIES

CHAPTER 12 Open-Economy Macroeconomics: Basic Concepts ........................................... 129 CHAPTER 13 A Macroeconomic Theory of the Small Open Economy ................................... 137

PART 7: SHORT-RUN ECONOMIC FLUCTUATIONS

CHAPTER 14 Aggregate Demand and Aggregate Supply ....................................................... 145 CHAPTER 15 The Influence of Monetary Policy on Aggregate Demand ................................ 165 CHAPTER 16 The Influence of Fiscal Policy on Aggregate Demand ...................................... 173 CHAPTER 17 The Short-Run Tradeoff between Inflation and Unemployment ....................... 179

PART 8: FINAL THOUGHTS

CHAPTER 18 Five Debates over Macroeconomic Policy ........................................................ 193 2 / 4

Copyright © 2020 Nelson Education Ltd.Chapter 1 Ten Principles of Economics

SOLUTIONS TO TEXTBOOK PROBLEMS

Quick Quizzes

1 . Describe an important tradeoff you recently faced. • Give an example of some action that has both a monetary and nonmonetary opportunity cost. • Describe an incentive your parents and/or guardians offered to you in an effort to influence your behaviour .

Usually students are able to come up with standard examples of tradeoffs: buy a textbook instead of a ticket to a favourite performance, go to a group study session instead of a birthday party, etc. Instructors may wish to point out less straightforward instances of how the principles work. For instance, when discussing incentives instructors may point out perverse effects of incentives. Other examples include the invention of the seat belt, or crosswalk countdown signals, discussed in the text. Examples of actions that have both monetary and nonmonetary opportunity costs are watching a movie (time + money) and driving a car (money + pollution + traffic congestion). Parents and/or guardians may offer their children gifts conditional on good results in school.

2.Why is a country better off not isolating itself from all other countries? • Why do we have markets and, according to economists, what roles should government play in them?

A country is better off not isolating itself from other countries for the simple reason that doing so would prevent it from engaging in mutually beneficial trade, which gives consumers access to more diverse and cheaper products.

Markets are usually a good way of organizing economic activity because they allocate resources to their most efficient use, maximizing the size of the economic pie. This is because market prices convey information about the scarcity of various resources, which provides important signals to consumers and producers when making their decisions.

A fundamental role of government is to define and enforce property rights for scarce resources, to allow markets to work in an efficient manner. In some cases, however, markets may nonetheless fail to allocate resources in an efficient manner, and governments can intervene to improve market outcomes. This is the case when market failures exist, such as externalities and market power.

Another role for government can be to address concerns about the equitable distribution of the economic pie. While in the absence of market failures markets will lead to an efficient outcome (maximizing the size of the economic pie), there is no guarantee that the outcome will be equitable (result in a fair distribution of the pie). Governments can therefore play a role in pursuing equity objectives. However, this often requires interventions that may impinge upon efficiency, shrinking the overall size of the economic pie; thus the notion of the efficiency-equity tradeoff.

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2 • Chapter 1: Ten Principles of Economics

Copyright © 2020 Nelson Education Ltd.

3.List and briefly explain the three principles that describe how the economy as a whole works.

The three principles that describe how the economy as a whole works are: (1) a country’s standard of living depends on its ability to produce goods and services; (2) prices rise when the government prints too much money; and (3) society faces a short-run tradeoff between inflation and unemployment. A country’s standard of living depends on its ability to produce goods and services, which in turn depends on its productivity, which is a function of the education of workers and the access workers have to the necessary tools and technology. Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation. Society faces a short-run tradeoff between inflation and unemployment that is only temporary, and policymakers have some ability to exploit this relationship using various policy instruments.

Questions for Review

1.What is a tradeoff? Give two examples of tradeoffs that you face in your life.

A tradeoff is what you give up in order to get something else. Examples of tradeoffs include time tradeoffs (such as studying one subject over another, or studying at all compared to engaging in social activities), and spending tradeoffs (such as whether to use your last $15 to purchase a pizza or to buy an online study guide for that tough economics course).

2.What is the opportunity cost of seeing a movie?

The opportunity cost of seeing a movie includes the monetary cost of admission plus the time cost of going to the theatre and attending the show. The time cost depends on what else you might do with that time; if it’s staying home and watching TV, the time cost may be small, but if it’s working an extra three hours at your job, the time cost is the money you could have earned.

3.Water is necessary for life. Is the marginal benefit of a glass of water large or small?

The marginal benefit of a glass of water depends on your circumstances. If you’ve just run a marathon, or you’ve been walking in the desert sun for three hours, the marginal benefit is very high. But if you’ve been drinking a lot of liquids recently, the marginal benefit is quite low. The point is that even the necessities of life, like water, don’t always have large marginal benefits.

4.Why should policymakers think about incentives?

Policymakers need to think about incentives so they can understand how people will respond to the policies they put in place. The text’s examples of seat belts and crosswalk countdown signals show that policy actions can have quite unintended consequences. If incentives matter a lot, they may lead to a very different type of policy; for example, some economists have suggested putting knives in steering columns so that people will drive much more carefully! While this suggestion is silly, it highlights the importance of incentives.

5.Why isn’t trade among countries like a game, with some winners and some losers?

Trade among countries isn’t a game with some losers and some winners because trade can make everyone better off. By allowing specialization, trade between people and trade between countries can improve everyone’s welfare.

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