Macro Problem Set_1Answers

Macro Problem Set_1Answers - Economics 201: Principles of...

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Economics 201: Principles of Macroeconomics Amjad Toukan Spring 2008 Due at the start of lecture on February 4/5 PROBLEM SET 1 Answers Chapter 1: 14. Because average income in the United States has roughly doubled every 35 years, we are likely to have a better standard of living than our parents, and a much better standard of living than our grandparents. This is mainly the result of increased productivity, so that an hour of work produces more goods and services than it used to. Thus, incomes have continuously risen over time, as has the standard of living. 15. If Americans save more and it leads to more spending on factories, there will be an increase in production and productivity, because the same number of workers will have more equipment to work with. The benefits from higher productivity will go to both the workers, who will get paid more because they are producing more, and the factory owners, who will get a return on their investments. There is no such thing as a free lunch, however, because when people save more, they are giving up spending. They get higher incomes at the cost of buying fewer goods. 16. To make an intelligent decision about whether to reduce inflation, a policymaker would need to know what causes inflation and unemployment, as well as what determines the trade-off between them. This means that the policymaker needs to understand how households and firms will adjust to a decrease in the money supply. How much will spending decline? How much will firms lower output? Any attempt to reduce inflation will likely lead to higher unemployment in the short run. A policymaker thus faces a
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This note was uploaded on 04/02/2008 for the course ECON 201 taught by Professor Toukan during the Spring '08 term at Chapman University .

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Macro Problem Set_1Answers - Economics 201: Principles of...

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