mankiw_-_macroeconomics_5th_edition_answers

Mankiw_macroeconom - Answers to Textbook Questions and Problems CHAPTER 1 The Science of Macroeconomics Questions for Review 1 Microeconomics is

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Answers to Textbook Questions and Problems
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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 pur- chase in order to maximize their utility, whereas firms decide how much to produce in order 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 econo- my and allow one to focus on the most important economic connections. 3. A market-clearing model is one 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. Or, firms such as magazine pub- lishers change their prices only every three to four 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. The many recent macroeconomic issues that have been in the news lately (early 2002) include the recession that began in March 2001, sharp reductions in the Federal Reserve’s target interest rate (the so-called Federal Funds rate ) in 2001, whether the government should implement tax cuts or spending increases to stimulate the economy, and a financial crisis in Argentina. 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 exam- ine data, often provided by controlled experiments, to support or disprove a hypothesis. Economists are more limited in their use of experiments. They cannot conduct con- trolled experiments on the economy; they must rely on the natural course of develop- ments 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.
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This note was uploaded on 10/15/2010 for the course ECONOMIC FM407 taught by Professor Kimcj during the Spring '04 term at 카이스트, 한국과학기술원.

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Mankiw_macroeconom - Answers to Textbook Questions and Problems CHAPTER 1 The Science of Macroeconomics Questions for Review 1 Microeconomics is

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