Economics

Paul A. Samuelson, William D. Nordhaus

Chapter 19

Overview of Macroeconomics - all with Video Answers

Educators

Chapter Questions

Problem 1

What are the major objectives of macroeconomics? Write a brief definition of each of these objectives. Explain carefully why each objective is important.

Riham Bassal

Riham Bassal

Numerade Educator

Problem 2

Using the data from the appendix to this chapter, calculate the following:
a. The inflation rate in 1981 and 2007
b. The growth rate of real GDP in 1982 and 1984
c. The average inflation rate from 1970 to 1980 and from 2000 to 2007
d. The average growth rate of real GDP from 1929 to 2008
I Hint: The formulas in the text give the technique for calculating 1-year growth rates. Growth rates for multiple years use the following formula:
$$g_{t}^{(n)}=100 \times\left[\left(\frac{X_{t}}{X_{t-n}}\right)^{1 / *}-1\right]$$
where $g_{i}^{(x)}$ is the average annual growth rate of the variable $X$ for the $n$ years between year $(t-n)$ and year $t$ For example, assume that the CPI in $(t-2)$ is 100.0 while the CPI in year $t$ is $106.09 .$ Then the average rate of inflation is $100 \times\left[\left(\frac{106.09}{100.0}\right)^{1 / 2}-1\right]=3$ percent per year.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 3

What would be the effect of each of the following on aggregate demand or on aggregate supply, as indicated (always holding other things constant)?
a. A large cut in personal and business taxes (on $A D)$
b. An arms-reduction agreement reducing defense spending (on $A D$ )
c. An increase in potential output (on $A S$ )
d. A monetary loosening that lowers interest rates $(\text { on } A D)$

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 4

For each of the events listed in question $3,$ use the $A S$. AD apparatus to show the effect on output and on the overall price level.

Md.Daniyal Arshad

Md.Daniyal Arshad

Numerade Educator

Problem 5

Put yourself in the shoes of an economic policymaker. The economy is in equilibrium with $P=100$ and $Q=$ $9000=$ potential GDP. You refuse to "accommodate" inflation; that is, you want to keep prices absolutely stable at $P=100,$ no matter what happens to output. You can use monetary and fiscal policies to affect aggregate demand, but you cannot affect aggregate supply in the short run. How would you respond to:
a. $\quad A$ surprise increase in investment spending
b. A sharp food-price increase following catastrophic flooding of the Mississippi River
c. $\quad$ A productivity decline that reduces potential output
d. $A$ sharp decrease in net exports that followed a deep depression in Fast Asia

Breanna Ollech

Numerade Educator

Problem 6

In $1981-1983,$ the Reagan administration implemented
a fiscal policy that reduced taxes and increased government spending.
a. Explain why this policy would tend to increase aggregate demand. Show the impact on output and prices assuming only an $A D$ shift.
b. The supplyside school holds that tax cuts would affect aggregate supply mainly by increasing potential output. Assuming that the Reagan fiscal measures affected $A S$ as well as $A D,$ show the impact on output and the price level. Explain why the impact of the Reagan fiscal policies on output is unambiguous while the impact on prices is unclear.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 7

The Clinton economic package as passed by Congress in 1993 had the effect of tightening fiscal policy by raising taxes and lowering spending. Show the effect of this policy $(a)$ assuming that there is no counteracting monetary policy and $(b)$ assuming that monetary policy completely neutralized the impact on GDP and that the lower deficit leads to higher investment and higher growth of potential output.

Banhishikha Sinha

Banhishikha Sinha

Numerade Educator

Problem 8

The United States experienced a major economic downturn in the early 1980 s. Consider the data on real GDP and the price level in Table $19-2$
a. For the years 1981 to $1985,$ calculate the rate of growth of real GDP and the rate of inflation. Can you determine in which year there was a steep business downturn or recession?
b. In an $A S A D$ diagram like Figure $19-6$ (page 379 ), draw a set of $A S$ and $A D$ curves that trace out the price and output equilibria shown in the table. How would you explain the recession that you have identified?

Achintya Suden

Numerade Educator