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Solutions Manual For Macroeconomics 4th Canadian Edition by Glenn Hubbard, Patrick O'Brien, Jason Childs

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Solutions Manual Macroeconomics 4th Canadian Edition by Glenn Hubbard, Patrick O'Brien, Jason Childs ISBN: 9780137688319. Macroeconomics, Canadian Edition, 4th edition solutions.; TOC-=1.Economics: Foundations and Models 2.Trade-offs, Comparative Advantage and the Market System 3.Where Prices Come...

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Solutions Manual

Macroeconomics
Fourth Canadian Edition

Glenn Hubbard
Columbia University

Anthony Patrick O’Brien
Lehigh University

Apostolos Serletis
University of Calgary

Jason Childs
University of Regina

,Contents

Chapter 1: Economics: Foundations and Models................................................. 1

Chapter 2: Trade-offs, Comparative Advantage, and the Market System ....... 9

Chapter 3: Where Prices Come From: The Interaction of Supply and Demand 16

Chapter 4: GDP: Measuring Total Production and Income ................................. 30

Chapter 5: Unemployment and Inflation ............................................................... 39

Chapter 6: Economic Growth, the Financial System, and Business Cycles ....... 53

Chapter 7: Long-Run Economic Growth: Sources and Policies .......................... 64

Chapter 8: Aggregate Expenditure and Output in the Short Run ...................... 77

Chapter 9: Aggregate Demand and Aggregate Supply Analysis ..................... 89

Chapter 10: Money, Banks, and the Bank of Canada ......................................... 100

Chapter 11: Monetary Policy .................................................................................. 112

Chapter 12: Fiscal Policy .......................................................................................... 127

Chapter 13: Inflation, Unemployment, and Bank of Canada Policy .................. 137

Chapter 14: Macroeconomics in an Open Economy.......................................... 147

,CHAPTER 1 | Economics: Foundations and Models
SOLUTIONS TO END-OF-CHAPTER EXERCISES

Three Key Economic Ideas
1.1
Learning Objective: Explain these three key economic ideas: People are rational; people
respond to incentives; and optimal decisions are made at the margin.

Review Questions
1.1 “People are rational” is the assumption that decision makers explicitly or implicitly weigh the benefits
and costs of each action and then choose an action only if the benefits are expected to outweigh the
costs. “People respond to incentives” means that consumers and firms consistently respond to
economic incentives. “Optimal decisions are made at the margin” means that most decisions are not
“all or nothing” but involve doing a little more or a little less of an activity. Therefore, the optimal
decision is to continue any activity up to the point where the marginal benefit equals the marginal
cost.

1.2 Scarcity is the situation in which unlimited wants exceed the limited resources available to fulfill those
wants. Economics is the study of the choices consumers, business managers, and government officials
make to attain their goals. Scarcity is central to the study of economics because scarcity requires
people to make choices about how to use their resources to best fulfill their wants.

Problems and Applications
1.3 As noted in the chapter, the economic incentive to banks is clear—it is less costly to put up with bank
robberies than to take these additional security measures. The marginal cost of adding the additional
security is greater than the expected marginal benefit.

1.4 a. Students face scarcity of time, like everyone else, and respond to the incentives of the teacher’s
grading system. Students have more incentive to direct their efforts into the parts of the course
that have the most weight in the grading system.
b. Too little weight on outside readings or the like gives students little incentive to read and master
the material. Students will put less effort into the parts of the course that have little effect on their
grades.
c. Quizzes over assigned readings would give students an incentive to come to class having read the
upcoming material. Some teachers give preparation assignments where students have to read and
answer questions about the upcoming material, and over the course of the semester students have
to successfully complete a certain percentage of the preparation assignments to qualify for an A,
or B, or other grade in the course.

1.5 The carbon price and the subsequent increase in the price of gasoline (and other carbon-intensive
products) will encourage people to use less gasoline. If people respond to the negative incentive of
higher gas prices by using less gas, maybe by taking the bus or buying a more fuel-efficient car, we
will emit fewer greenhouse gases and do less damage to the environment.

, 2 CHAPTER 1 | Economics: Foundations and Models

1.6 a. In deciding whether or not to go to the gym on a specific day, most people aren’t comparing the
benefits of an active lifestyle and the cost of the gym membership. They’re comparing what they
stand to miss out on and the relatively small benefit any single workout will have on their overall
health. By implementing a simple payment system, the researchers increase the benefit of a small
number of trips to the gym. Further thought: The benefits of going to the gym tend to materialize
over a long time after the decision to go to the gym is made. Some of those benefits will
be received years into the future. By offering cash payments in the relatively near term, the
researchers offer a benefit that can be received in the same time frame as the costs of going to
the gym are paid.
b. Those who do not respond to the monetary incentive to go to the gym clearly value their other
options more than the health benefits and monetary reward received by going to the gym. Consider
a student who is working to pay for their education. The payment received by going to the gym is
likely less than the payment received by going to work. In short, the incentive isn’t big enough.

1.7 Jill is correct. The difference between the grade before and after watching an extra episode is exactly
the same as knowing the change in the grade.

1.8 Your friend is failing to think at the margin. It doesn’t matter how much time your friend has already
spent studying psychology. What matters is the marginal benefit to be received from studying
psychology relative to the marginal cost, where cost is measured as the opportunity cost of lower
grades in other subjects. If the course is required to graduate, that may raise the marginal benefit
associated with completing the course.

The Economic Problems All Societies Must Solve
1.2 Learning Objective: Discuss how a society answers these three key economic questions:
What goods and services will be produced? How will the goods and services be
produced? Who will receive the goods and services produced?

Review Questions
2.1 Scarcity implies that every society and every individual faces trade-offs because wants are unlimited,
but the ability to satisfy those wants is limited. Societies and individuals cannot have everything they
want, so they have to make choices about what to have and what not to have.

2.2 The three economic questions that every society must answer are: (1) What goods and services will
be produced? (2) How will the goods and services be produced? (3) Who will receive the goods and
services produced? In a centrally planned economy, the government makes most of these decisions.
In a pure market economy, almost all these decisions are made by the decentralized interaction of
households and firms in markets. In a mixed economy, most economic decisions result from the
interaction of buyers and sellers in markets, but the government plays a significant role in the
allocation of resources.

2.3 Productive efficiency occurs when a good or service is produced at the lowest possible cost. Allocative
efficiency means that what is produced reflects consumer preferences—every good or service is
produced up to the point at which the last unit provides a marginal benefit to consumers equal to the
marginal cost of producing it.

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