Deck 6: Part A: An Introduction to Macroeconomics

Question 1

Suppose that we are in a condition of "stuck" prices so that the price of nails will not go above or below $2/kg.Further suppose that nail factories have been built on a business plan designed to deliver 6,000 kg/week.How many nails will be sold in a market in which demand (which includes a modest amount of inventory) is characterized by: (a) P = 5 - 0.5Q, (b) P = 6 - 0.5Q, and (c) P = 4 - 0.5Q, where P is in $/kg and Q is in thousands of kg/week? In each case, what happens to inventory.

Answer 1

(a) At $2/kg we get 2 = 5 - 0.5Q, -3 = -0.5Q, Q = 3/0.5, Q = 6 thousand kg/week.This is exactly the same production as the business plan, so inventory does not change.
(b) At $2/kg we get 2 = 6 - 0.5Q, -4 = -0.5Q, Q = 4/0.5, Q = 8 thousand kg/week.This is 2,000 kg/week (6,000 - 8,000) more demand than the business plan, so inventory unexpectedly falls by 2,000 kg/week.
(c) At $2/kg we get 2 = 4 - 0.5Q, -2 = -0.5Q, Q = 2/0.5, Q = 4 thousand kg/week.This is 2,000 kg/week (6,000 - 4,000) less demand than the business plan, so inventory unexpectedly increases by 2,000 kg/week.

Question 2

What are two broad categories of macroeconomic shocks?

Answer 2

In macroeconomics, shocks are categorized as either demand shocks or supply shocks.Demand shocks are unexpected changes in the demand for goods and services while supply shocks are unexpected changes in the supply of goods and services (usually due to input price changes).

Question 3

Suppose that we are in a condition of fully flexible prices, but production of nails will not go above 6,000 kg/week.What price will nails sell for if market demand is characterized by: (a) P = 5 - 0.5Q, (b) P = 6 - 0.5Q, and (c) P = 4 - 0.5Q, where P is in $/kg and Q is in thousands of kg/week?

Answer 3

(a) P = 5 - 0.5(6), P = 5 - 3, P = $2/kg; (b) P = 6 - 0.5(6), P = 6 - 3, P = $3/kg; (c) P = 4 - 0.5(6), P = 4 - 3, P = $1/kg.

Question 4

Suppose that we are in a condition of "stuck" prices so that the price of wooden chairs will not go above or below $125/unit.Further suppose that chair factories have been built on a business plan designed to deliver 200/month.How many chairs will be sold in a market in which demand (which includes a modest amount of inventory) is characterized by: (a) P = 425 - 1.5Q, (b) P = 530 - 1.5Q, and (c) P = 400 - 0.5Q, where P is in $/chair and Q is in chairs/month? In each case, what happens to planned inventory.

Question 5

Why do economists measure growth in an economy using real GDP rather than nominal GDP?

Question 6

Which are the richest and poorest countries listed in Global Perspective6.1.How does Canada compare to these two countries?

Question 7

What three key statistics do macroeconomists study to assess the health of the economy? Give a short explanation of each.

Question 8

In this list, identify those investments which are financial (F) and those that are economic (E): Canada Savings Bonds, stock in Potash Corporation of Saskatchewan, an old house you plan on fixing and reselling, new machinery for a factory you own, land that you plan to develop, an old window factory, your university education.

Question 9

List two concerns with inflation.

Question 10

Why do economists worry about unemployment?

Question 11

In order to grow, what must a country do?

Question 12

What is the difference between financial investment and economic investment?

Question 13

If households are typically the source of savings and businesses the source of investments, how then are savings and investments coordinated?

Question 14

What roles do expectations play in macroeconomics?

Question 15

What is the difference between nominal and real GDP?

Question 16

Suppose that we are in a condition of fully flexible prices, but production of nails will not go above 200 chairs/month.What price will chairs sell for if market demand is characterized by: (a) P = 425 - 1.5Q, (b) P = 530 - 1.5Q, and (c) P = 400 - 0.5Q, where P is in $/chair and Q is in chairs/month?

Question 17

Define macroeconomics and provide two key concerns it studies.

Question 18

What is modern economic growth?

Question 19

What is GDP per capita?

Question 20

In order to compare GDP across nations, economists typically make 3 adjustments.What are these adjustments and why are they carried out?

Question 21

What will happen to prices and output levels if there is an unexpected decrease in demand and prices are fully flexible?

Question 22

Describe and discuss two economic solutions to solve the Great Recession.

Question 23

What is the Great Recession? Describe its causes and also its impact on the Canadian Economy.

Question 24

What are inventories and what role do they play in an economy with sticky prices?

Question 25

Why do economists use the term "sticky" prices rather than "stuck" prices?

Question 26

Describe and discuss the two explanations of the Great Recession?

Question 27

"Most prices are not that sticky." Evaluate this claim.

Question 28

If prices are "stuck" and there is an unexpected demand decrease, describe what happens in the economy.

Question 29

What are two reasons why prices might be sticky?

Question 30

What will happen to prices and output levels if there is an unexpected demand increase and prices are fully flexible?

Question 31

If prices are "stuck" and there is an unexpected demand increase, describe what happens in the economy.