chapter 5

Question 1

Macroeconomics

Answer 1

analyzes the performance of the whole Canadian economy and the global economy; the combined outcomes of all individual microeconomic choices

Question 2

Fallacy of Composition

Answer 2

what is true for one is not true for all; the whole is greater than the sum of the individual parts

Sometimes a choice made by one person produces a different outcome from when the same choice is made by many people

Question 3

Paradox of Thrift

Answer 3

attempts to increase saving cause total savings to decrease because of falling employment and incomes

Question 4

The macroeconomic connection

Answer 4

macroeconomics focuses on the connections between input and output markets and how those connections can break

Question 5

The microeconomic connection

Answer 5

microeconomics focuses on the interaction of demand and supply in input markets alone or in output markets alone

Question 6

Fundamental Macroeconomic Question

Answer 6

if left alone, do markets quickly self-adjust?

Question 7

Say’s Law

Answer 7

supply creates its own demand

Question 8

Market failure

Answer 8

market outcomes are inefficient or inequitable and fail to service the public interest

Question 9

Government failure

Answer 9

government policy fails to serve the public interest

Question 10

Markets Self-adjust Perspective

Answer 10

• usually believed by conservatives and libertarians in Canada, republicans in the US
• they believe that, if left alone by government, markets will produce the miracle of the continuous, ever-changing production of the products and services we want, producing rising standards of living, full employment, and stable prices

Question 11

Markets Left Alone Often Fail Perspective

Answer 11

• usually believed by politicians on the left of the political spectrum
• Argue that, if left alone by government, the self-adjusting mechanisms of market economies are often slow and weak which, as a result, business cycles, long periods of unemployment that reduce living standards, and rising/falling prices happen often → argues for a hands-on role for the government

Question 12

Macroeconomic Agreements: all macroeconomists agree that

Answer 12

1. There is some role for government (setting the rules of the game), but differ on how big a role there should be for fiscal and monetary policy
2. Prices and markets adjust, but differ on how long the adjustments take (how quick is “quickly”?)
3. Business cycles happen even without government failure, but differ in focusing on the relatively steady growth of the market economies in the long run (self-adjust), or focusing on correcting the ups and downs of business cycles in the short run (not self-adjust)

Question 13

3 Key Macroeconomic Outcomes

Answer 13

1. GDP
2. Unemployment
3. Inflation

Question 14

Gross Domestic Product (GDP)

Answer 14

the value of all final products and services produced annually in a country → the higher the GDP, the more products and services there are to satisfy our wants

Question 15

Unemployment

Answer 15

Someone is willing and able to work but can’t find a job → more unemployment is bad and less unemployment is good

Question 16

Inflation

Answer 16

the rise in the average level of all prices in an economy → higher and unpredictable inflation is bad and lower and predictable inflation is good

Question 17

Macroeconomic players

Answer 17

1. Households as consumers
2. Businesses
3. Government
4. Rest of the world

Question 18

Households as consumers

Answer 18

• individuals in households supply labor and other inputs in input markets, and use the income they earn to buy products and services in output markets
• consumers can either spend or save money and buy products and services produced in Canada or imported frm other countries

Question 19

Businesses

Answer 19

hire labor and other inputs from consumers in input markets, and sell the products and services produced with those inputs in output markets

Question 20

Government

Answer 20

besides setting the legal rules of the game for all economic activity, can choose to interact or not, in any aspect of the economy

Question 21

Government choices

Answer 21

fiscal and monetary policy

Question 22

Fiscal policy

Answer 22

government purchases and taxes/transfers to achieve macroeconomic outcomes of steady growth, full employment, and stable prices

Question 23

Monetary policy

Answer 23

the Bank of Canada changes interest rates and the supply of money to achieve the macroeconomic outcomes of steady growth, full employment, and stable prices

Question 24

Rest of the World

Answer 24

countries in the rest of the world can choose to buy Canadian products and services (exports from Canada) or not, and sell their products and services to Canada (imports to Canada)

Question 25

Why You Should Think Like a Macroeconomist

Answer 25

Reason 1: Your personal economic success is affected by the macroeconomic performance of the economy – GDP, unemployment, and inflation

Reason 2: As a citizen, you vote for governments whose policy decisions influence our economy’s performance – GDP, unemployment, and inflation