ANSWERS
TO THE EXERCISES
IN
MACROECONOMICS:
An Introduction
2003 Edition
by Charles R. Nelson
Copyright
© 2003 by Charles R. Nelson
Revised
July 17, 2003
This document may be found on
the internet at:
http://www.econ.washington.edu/user/cnelson/ANSWERS.html
or
may be obtained from the author; phone (206) 525-6727 or e-mail
cnelson@u.washington.edu. The author grants permission to reproduce this
document for distribution to classes for which MACROECONOMICS: An Introduction has been adopted as a required
text.
Exercises
from Chapter 1
An Overview of Economics
Exercises
1.1
A. LAND
CANNOT BE CHANGED AT ALL, EXCEPT IN HOLLAND.
LABOR IS NOT JUST THE NUMBER OF WORKERS BUT ALSO THEIR SKILLS, AND THAT
CAN BE ENHANCED BY TRAINING AND EDUCATION.
CAPITAL IS ALL HUMAN-MADE AND SO WE CAN MAKE MORE OF IT; MORE COMPUTERS
AND FASTER COMPUTERS FOR EXAMPLE.
ENTREPRENEURSHIP IS PARTLY AN ABILITY THAT SOME PEOPLE HAVE (READING ONE
OF THE EXCELLENT BOOKS ABOUT BILL GATES IS HIGHLY RECOMMENDED), BUT BUSINESS
SCHOOLS SHARPEN ENTREPRENEURIAL SKILLS AND TRY TO MAKE MANAGEMENT MORE
SYSTEMATIC.
B. EDUCATION
IS AN INVESTMENT, JUST LIKE BUYING A NEW COMPUTER. IT COSTS MONEY, BOTH DIRECTLY AND IN TIME SPENT, AND IT RAISES
PRODUCTIVITY AND THE STANDARD OF LIVING.
C. SWITZERLAND
HAS A MUCH LARGER AMOUNT OF MODERN CAPITAL PER WORKER AND A HIGHER LEVEL OF
EDUCATION ON AVERAGE. SINCE BOTH
COUNTRIES HAVE A VERY HIGH POPULATION DENSITY (PERSONS PER SQUARE MILE), IN
FACT THE DENSITIES ARE ROUGHLY EQUAL, IT MUST BE THE DIFFERENCE IN PHYSICAL
CAPITAL AND HUMAN CAPITAL THAT ACCOUNT FOR THE DIFFERENCE. BOTH HAVE ABLE ENTREPRENEURS, BUT SWISS
MANAGERS WILL AGAIN HAVE MORE TRAINING ON AVERAGE.
D. IT
CAN INVEST IN NEW CAPITAL EQUIPMENT WITH BETTER TECHNOLOGY, AND OR TRAIN AND
EDUCATE WORKERS WHO CAN USE IT. IT CAN ENACT REGULATIONS THAT HARMONIZE PUBLIC
AND PRIVATE INTEREST. IT CAN AFFECT THE DISTRIBUTION OF INCOME IN THE LONG RUN
BY AFFECTING THE DISTRIBUTION OF EDUCATION TODAY. ECONOMICS CANNOT ANSWER IF A
HIGHER STANDARD OF LIVING RAISES PEOPLE’S HAPPINESS!
Exercises 1.2
A. 1.
CAPITAL. 2. LABOR. 3. CAPITAL.
4. LAND. 5. CAPITAL. 6. LAND. 7. ENTREPRENEUR. 8. LABOR
B. William Gates III founded Microsoft
Corporation, which has become one of the most successful technology companies
in the world.
C. 1.
HOUSEHOLD. 2. BUSINESS. 3.
GOVERNMENT. 4. AS PUBLIC UNIVERSITY IT IS PART OF
GOVERNMENT, BUT IT IS MUCH MORE INDEPENDENT THAN MOST GOVERNMENT AGENCIES AND
IN MANY WAYS OPERATES MORE LIKE A FIRM IN THE BUSINESS SECTOR. 5. BUSINESS. 6. REST-OF-THE-WORLD
SECTOR SINCE IT IS A FOREIGN FIRM.
D. 1.
TRANSFER PAYMENTS. 2. PROVIDES THE
RULES OF THE GAME FOR THE AIRLINE INDUSTRY.
3. RULES OF THE GAME. 4.
TAXATION. 5. PROVIDING GOODS AND SERVICES.
SOME WOULD ARGUE THAT THE FERRY SYSTEM IS A PUBLIC GOOD, BUT THERE ARE
PRIVATE FERRY SYSTEMS IN MANY PLACES.
6. RULES OF THE GAME.
E. Russia needs to develop a legal framework
which provides the “rules of the game” for the operation of a market economy. This includes laws defining property rights,
commercial relationships, and corporations.
Exercises
1.3
A. THEY
ARE: 1) WHAT WILL BE PRODUCED? 2) HOW
SHOULD IT BE PRODUCED? 3) WHO WILL
CONSUME IT?
HOW
MANY PEOPLE WILL TRAVEL AND HOW OFTEN WILL THE SERVICE BE? WILL PEOPLE TRAVEL BY SHIP OR BY PLANE? WHO WILL TRAVEL TO HONG KONG?
TECHNOLOGY
IN THE FORM OF JET AIRLINERS HAS DRASTICALLY REDUCED THE COST OF TRAVEL BOTH IN
MONETARY TERMS AND IN TIME REQUIRED.
THE RESULT HAS BEEN TREMENDOUS GROWTH IN THE NUMBER OF PEOPLE TRAVELING
TO HONG KONG, AND MANY WHO COULD NOT HAVE AFFORDED THE TRIP IN THE DAYS OF
OCEAN LINERS ARE NOW GOING THERE ON VACATION.
B. People do things that we want them to do, like
making microwave ovens and cutting our hair, mainly because they gain from
doing so rather than because they are just nice people. The private enterprise economy works by
harnessing the motivation of self interest to activities that benefit society.
C. EMISSIONS
FROM POWER PLANTS ARE AN EXAMPLE OF AN EXTERNALITY. ACID RAIN WILL AFFECT PEOPLE WHO ARE NOT PARTY TO THE PURCHASE OF
ELECTRIC POWER FROM A PARTICULAR UTILITY.
THE UTILITY WILL BE RELUCTANT TO INSTALL SCRUBBERS ON ITS OWN BECAUSE OF
THE COST. HOWEVER, IF THE COST TO
SOCIETY OF HAVING ACID RAIN IS GREATER THAN THE COST OF THE SCRUBBERS THEN THE
WELFARE OF SOCIETY WOULD BE IMPROVED BY REQUIRING THE POWER PLANTS TO INSTALL
SCRUBBERS.
Exercises 1.4
A. 1.
MICRO 2. MACRO 3. MACRO
4. MICRO 5. MACRO 6. MICRO
B. THE
OBJECTIVE HERE IS TO DRAW STUDENTS INTO DISCUSSION, NOT TO PROVIDE A REAL
ANALYSIS OF THE ISSUES - THAT REQUIRES (AT LEAST) THE REST OF THE COURSE. WHAT DO THEY THINK THE TWIN DEFICITS MEAN
AND WHY DO PEOPLE WORRY ABOUT THEM?
WHAT WORRIES PEOPLE ABOUT THE SUCCESS OF JAPAN AND OUR LARGE TRADE
DEFICIT WITH JAPAN? DOES JAPAN’S
SUCCESS HURT US? HOW WILL THE
GENERATION NOW IN COLLEGE BE AFFECTED BY THE SOCIAL SECURITY SYSTEM AND
MEDICARE OR NATIONAL HEALTH CARE? HOW
WILL MEDICAL TECHNOLOGY AFFECT THE RELATIONSHIP BETWEEN THE OLD AND YOUNG? INFLATION, RECESSION OR BOTH? IS ALWAYS
TOPICAL BECAUSE THERE IS ALWAYS DISCUSSION AND SPECULATION IN THE MEDIA ABOUT
THE DIRECTION OF THE ECONOMY.
Exercises for Microeconomics
Supplement
A. YOUR DEMAND SCHEDULE SHOULD REFLECT THE
LAW OF DEMAND, THAT THE QUANTITY DEMANDED IS GREATER THE LOWER THE PRICE. IF
YOUR INCOME RISES, YOU WILL ALMOST SURELY BUY MORE OF THE GOOD AT ANY GIVEN
PRICE.
B. THE IDEA HERE IS TO MULTIPLY YOUR DEMAND
AT EACH PRICE BY THE NUMBER OF CONSUMERS IN THE U.S., MAKING THE ASSUMPTION
THAT THEY ARE LIKE YOU. IF YOU THINK YOU ARE UNUSUAL, THE WORLD’S GREATEST
CONSUMER OF WHATEVER, THEN YOU SHOULD ADJUST YOUR NUMBERS ACCORDINGLY. YOUR
TABLE AND GRAPH SHOULD AGAIN REFLECT THE LAW OF DEMAND; HIGHER QUANTITY
DEMANDED AT LOWER PRICES. THAT MEANS A DOWNWARD SLOPING DEMAND CURVE IN YOUR
GRAPH. WHEN CONSUMERS ENJOY AN INCREASE IN INCOME, THE QUANTITIES DEMANDED
PRESUMABLY INCREASE AT EVERY PRICE (CAN YOU THINK OF GOODS THAT ARE EXCEPTIONS
TO THIS?) AND YOUR DEMAND CURVE SHIFTS TO THE RIGHT.
C. A SUBSTITUTE CAN BE ANY GOOD THAT YOU
WOULD CONSIDER BUYING INSTEAD; IT NEED NOT BE PHYSICALLY SIMILAR. FOR EXAMPLE,
A NEW CAR AND A VACATION TO HAWAII MAY BE SUBSTITUTES. IF THE PRICE OF THE
SUBSTITUTE FALLS, THE DEMAND FOR THE ORIGINAL GOOD WILL FALL, SHIFT TO THE
LEFT.
D. BOTH SUPPLY CURVES SLOPE FROM LOWER LEFT
TO UPPER RIGHT, A POSITIVE SLOPE. THE
SHORT RUN SUPPLY CURVE WILL BE STEEPER, THOUGH, BECAUSE IT TAKES A BIGGER PRICE
INCREASE TO ELICIT ANOTHER UNIT OF OUTPUT IN THE SHORT RUN THAN IT DOES IN THE
LONG RUN WHILE NEW CAPACITY AND SOURCES OF SUPPLY CAN COME ON LINE. A FACTORY
FIRE WILL SHIFT THE SHORT RUN SUPPLY CURVE LEFTWARD, BECAUSE AT ANY PRICE FEWER
UNITS WILL BE PRODUCED THAN BEFORE. THE LONG RUN SUPPLY CURVE IS UNCHANGED,
BECAUSE IN THE LONG RUN THAT FACTORY CAN BE REPLACED. THE DEMAND CURVE WILL NOT
SHIFT UNLESS PEOPLE ANTICIPATE FURTHER SUPPLY CONTRACTIONS IN THE FUTURE. THE
LEFTWARD SHIFT IN THE SHORT RUN SUPPLY CURVE WILL MOVE THE INTERSECTION OF
SUPPLY AND DEMAND LEFT AND UP TO A HIGHER PRICE AND LOWER QUANTITY.
E. IF THE PRICE OF A GOOD RISES AND STAYS UP,
CONSUMERS WILL ADJUST OVER TIME BY FINDING SUBSTITUTES, LEARNING TO DRINK TEA
INSTEAD OF COFFEE, OR BY ADOPTING DIFFERENT TECHNOLOGIES OF CONSUMPTION, A SAIL
BOAT INSTEAD OF AN OUTBOARD. THAT MEANS THAT THE SHORT RUN DEMAND CURVE IS
STEEPER THAN THE LONG RUN DEMAND CURVE. THUS IF THE SUPPLY OF COFFEE IS
RESTRICTED, SAY BY A TRADE EMBARGO, THE IMMEDIATE RESPONSE OF PRICE WILL BE A
LARGE INCREASE, BUT THE PRICE WILL COME DOWN OVER A COUPLE OF YEARS AS MORE
CONSUMERS FIND A BLEND OF TEA THEY LIKE AND BUY MORE EFFICIENT COFFEE MAKERS
THAT EXTRACT MORE OUT OF THEIR COFFEE GROUNDS.
Exercises
from Chapter 2
National Income
Exercises 2.1
A. fishing net INVESTMENT, fish CONSUMPTION, chair CONSUMPTION, spear
GOVERNMENT, look-out tower GOVERNMENT, cleared garden plot INVESTMENT.
Similarly, classify: theater ticket CONSUMPTION, car CONSUMPTION, taxi
INVESTMENT, Boeing 747 INVESTMENT, stealth fighter GOVERNMENT.
Exercises 2.2
A. All of the dollar amounts double, so income
measured in dollars doubles but in terms of the real value of what is produced
it remains the same.
B. Income rises because now 120 cars are
produced. Wages will rise if the shares
of income DISTRIBUTED TO LABOR AND CAPITAL remain roughly stable. If the wage is $9,000 and a car still costs
$10,000 then national product and income is $1,200,000, wages are $900,000, and
profits are $300,000.
Exercises 2.3
A. Now there are two less cars produced, so
consumption is 88 CARS X $10,000 = $880,000, investment is 6 TRUCKS X $20,000 =
$120,000, SO national product is still $1,000,000 which is $880,000 + $120,000.
WORKERS ARE SHIFTED FROM THE AUTO
INDUSTRY TO THE TRUCK INDUSTRY, SO THERE IS STILL A TOTAL OF 100 WORKERS X $8,000
PAID IN WAGES IN THE ECONOMY wages and profits are the same as before,
$800,000. LOOKING AT TABLES 2.2 and
2.3, and given the wage and prices, the profit per car is $2,000 and the profit
per truck is $4,000, so profits will be 88 cars x $2,000 = $176,000, plus 6
trucks x $4,000 = $24,000, for a total of $200,000 as before. thus, national income is again $800,000 +
$200,000 = $1 million, and is of course the same as national product.
B. (1) The production possibilities frontier is
now
cars/1.1 + trucks • 2 = 100 workers
so the economy can
produce a maximum of 1.1x100=110 cars.
(2) If the economy still produces 5 trucks then there will still be 90
worker making cars and they will produce 1.1x90 = 99 cars. (3) The new Product and Factor Income
statement for auto firms is
|
Auto
Firms' Product and Factor Income in Model II, 2.3.B |
|
|||||||
|
Value of Goods Produced |
|
Factor Incomes |
||||||
|
Sales to Households |
990000 |
|
Wages |
792000 |
|
|||
|
|
|
|
Profit of $198,000 allocated to- |
|
|
|||
|
|
|
|
Capital investment |
100000 |
|
|||
|
|
|
|
Dividend payment to shareholders |
98,000 |
|
|||
|
Value of Product |
990000 |
|
Total Factor Income |
990000 |
|
|||
and for truck firms
|
Truck
Firms' Product and Factor Income in Model II, 2.3.B |
|||||
|
Value of Goods Produced |
|
Factor Income |
|
||
|
Sales |
100000 |
|
Wages (10 workers |
88,000 |
|
|
|
|
|
Profit of $12,000 to- |
|
|
|
|
|
|
Dividend payment to shareholders |
12,000 |
|
|
Value of Product |
100000 |
|
Total Factor Income |
100000 |
|
(4) Now the national income and expenditure are
|
National
Product and Income in Model II, 2.3.B |
||||
|
Value of Goods Produced |
|
Factor Income |
||
|
Consumption goods |
$990,000 |
|
Wages |
$880,000 |
|
Investment goods |
100,000 |
|
Profits |
210,000 |
|
National Product |
1,090,000 |
|
National Income |
1,090,000 |
VERIFYING THAT
Savings of $100,000 (INCOME OF $1,090,000 less consumption of $990,000) equals
investment.
C. Since investment equals savings, a low level
of savings will mean that we cannot be investing much in modern technology for
our industries. THAT RAISES CONCERNS
THAT THE LONG TERM GROWTH OF OUR ECONOMY MAY BE LESS THAN WE WOULD LIKE.
D. 1) THE PRODUCTION POSSIBILITIES FRONTIER IS
DERIVED FROM THE FACT THAT
PIZZA MAKERS + OVEN MAKERS = 50 WORKERS
SO WE HAVE THAT
(1/1000) X NUMBER OF PIZZAS + 0.5 X NUMBER OF
OVENS = 50
OR, MULTIPLYING THROUGH BY 1000 WE HAVE
PIZZAS + 500 X OVENS = 50,000
TO GRAPH THIS, PUT PIZZAS ON THE Y AXIS AND
OVENS ON THE X AXIS. NOTE THAT IF THE
ECONOMY PRODUCES NO OVENS IT CAN PRODUCE 50,000 PIZZAS, AND THAT GIVES YOU A
POINT AT 50,000 ON THE Y AXIS. IF IT
PRODUCES NO PIZZAS, IT CAN PRODUCE 100 OVENS AND THAT GIVES YOU THE POINT 100
ON THE X AXIS. SINCE THIS EQUATION IS
LINEAR, WE OBTAIN THE WHOLE FUNCTION BY CONNECTING THOSE TWO POINTS. THE ECONOMY CANNOT OPERATE ABOVE THAT LINE.
2)
THE OPPORTUNITY COST TO THIS SOCIETY OF PRODUCING ONE MORE OVEN IS
OBTAINED BY SOLVING THE EQUATION FOR PIZZAS, SO WE HAVE
PIZZAS =
50,000 - 500 X OVENS
WHICH SAYS THAT
INCREASING PRODUCTION OF OVENS BY ONE REDUCES PRODUCTION OF PIZZAS BY 500. OR NOTE THAT ONE OVEN TAKES HALF A WORKER TO
MAKE, AND HALF A WORKER CAN PRODUCE 0.5 X 1,000 = 500 PIZZAS PER YEAR. SO THE OPPORTUNITY COST OF AN OVEN IS 500
PIZZAS.
3) THE ACCOUNTS FOR THIS ECONOMY WHEN IT
PRODUCES 6 OVENS AND THEREFORE 50,000 - 500 X 6 = 47,000 PIZZAS IS AS FOLLOWS:
|
PIZZA
Firms' Product and Factor Income, 2.3.D |
|
|||||||
|
Value of Goods Produced |
|
Factor Incomes |
||||||
|
Sales to Households |
470000 |
|
Wages |
423000 |
|
|||
|
|
|
|
Profit of $47,000 allocated to- |
|
|
|||
|
|
|
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Capital investment |
30,000 |
|
|||
|
|
|
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Dividend payment to shareholders |
17,000 |
|
|||
|
Value of Product |
470000 |
|
Total Factor Income |
470000 |
|
|||
|
OVEN
Firms' Product and Factor Income, 2.3.D |
|
||||
|
Value of Goods Produced |
|
Factor Income |
|||
|
Sales |
30,000 |
|
Wages (3 workers |
27,000 |
|
|
|
|
|
Profit of $3,000 to- |
|
|
|
|
|
|
Dividend payment to shareholders |
3,000 |
|
|
Value of Product |
30,000 |
|
Total Factor Income |
30,000 |
|
|
National
Product and Income, 2.3.D |
||||
|
Value of Goods Produced |
|
Factor Income |
||
|
Consumption goods |
$470,000 |
|
Wages |
$450,000 |
|
Investment goods |
30,000 |
|
Profits |
50,000 |
|
National Product |
$500,000 |
|
National Income |
$500,000 |
Savings IS NATIONAL
INCOME OF $500,000 less consumption of $470,000 = $30,000 WHICH equals
investment of $30,000.
Exercises 2.4
A. Income of $960,000 less consumption of
$900,000 IS $60,000 WHICH equals net investment of $60,000.
B. Yes, it could produce 100 cars this year by
not replacing the trucks that wear out, but the next year the AUTO INDUSTRY
would have TWO LESS trucks to HELP IN MAKING CARS, and thereforE IT could not
continue to produce at its previous level OF 100 CARS. OVER TIME, THE RATE OF PRODUCTION OF CARS
WOULD DECLINE AS THE CAPITAL GOODS USED TO MAKE THEM WEAR OUT.
C. For the auto firms we WOULD have then
Auto Firms' Product and Factor
Income in Model III, 2.4.C
|
Value of Goods Produced |
|
Factor Incomes |
|||||
|
Sales to Households (90 cars @ $10,000) |
900000 |
|
Wages (90 workers @ $8,000) |
720000 |
|
||
|
|
|
|
Profit of $120,000 allocated to - |
|
|
||
|
Gross value of product |
900000 |
|
Net investment (2 trucks @ $20,000) |
40,000 |
|
||
|
less Depreciation (3 trucks @ $20,000) |
-60,000 |
|
Dividend payment to shareholders |
80,000 |
|
||
|
Net Value of Product |
840000 |
|
Total Factor Income |
840000 |
|
||
and for the economy
|
National
Product and Income in Model III, 2.4.C |
||||
|
Value of Goods Produced |
|
Factor Income |
||
|
Consumption goods |
900000 |
|
Wages |
800000 |
|
Gross Investment |
100000 |
|
Profits |
140000 |
|
Gross National Product |
1000000 |
|
|
|
|
less Depreciation |
-60,000 |
|
|
|
|
Net National Product |
940000 |
|
National Income |
940000 |
The tables for the truck firms WILL REMAIN unchanged.
D. WE WOULD HAVE THE
FOLLOWING TABLES FOR THIS ECONOMY:
|
Ovens at beginning of year |
40 |
|
Ovens produced during year |
+6 |
|
Ovens scrapped during year (depreciation) |
-4 |
|
Ovens at end of year |
42 |
|
Gross National Product (unchanged from before) |
$500,000 |
|
less Depreciation: 4 ovens x $5,000 |
-20,000 |
|
equals Net National Product |
$
480,000 |
|
Gross Investment 6 ovens x $5,000 |
$30,000 |
|
less Depreciation |
|