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Solutin Manual For Macroeconomics 11th Edition by N. Gregory Mankiw Chapter 1-20
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Solution Manual ForMacroeconomics 11th Edition by N. Gregory Mankiw
Chapter 1-20
Answers to Textbook Questions and Problems
CHAPTER 1 The Science of Macroeconomics
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, labor 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 the United States continues to be a major topic of conversation in 2018. The
, Federal Reserve 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 and immigration. There is continuing uncertainty regarding how this will
affect consumers, workers, and firms and how other countries will respond. Third, the United States
has enacted tax reforms that will affect the entire economy, altering households’ and firms’ decisions
and posing issues for the federal budget.
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.
, Answers to Textbook Questions and Problems
CHAPTER 2 The Data of Macroeconomics
Questions for Review
1. GDP measures the total income earned from the production of final goods and services in the economy,
and it measures the total expenditure on final goods and services in the economy. GDP can measure
both at once because, as a matter of accounting, the total expenditure of buyers must equal the total
income of sellers. As the circular flow diagram in the text illustrates, these are equivalent ways of
measuring the flow of dollars in the economy.
2. The four components of GDP are consumption, investment, government purchases, and net exports.
The consumption category of GDP consists of household expenditures on new final goods and services,
such as the purchase of a new television. The investment category of GDP consists of business fixed
investment, residential fixed investment, and inventory investment. When a business buys new
equipment, this counts as investment. Government purchases consists of purchases of new final goods
and services by federal, state, and local governments, such as payments for new military equipment.
Net exports measures the value of goods and services sold to other countries minus the value of goods
and services foreigners sell to us. When the United States sells corn to foreign countries, it adds to the
net export category of GDP.
3. The consumer price index (CPI) measures the overall level of prices in the economy. It tells us the
price of a fixed basket of goods relative to the price of the same basket in the base year. The GDP
deflator is the ratio of nominal GDP to real GDP in a given year. The measures differ on three
dimensions. First, the GDP deflator measures the prices of all goods and services produced, whereas
the CPI measures only prices of goods and services bought by consumers. Second, the GDP deflator
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