6.8 PROBLEMS

Question 6.12

Which of the following questions are relevant for the study of macroeconomics and which for microeconomics?

  1. How will Ms. Martin’s tips change when a large manufacturing plant near the restaurant where she works closes?

  2. What will happen to spending by consumers when the economy enters a downturn?

  3. How will the price of apples change when a late frost damages Ontario’s apple orchards?”

  4. How will wages at a manufacturing plant change when its workforce is unionized?

  5. What will happen to Canadian exports as the dollar becomes less expensive in terms of other currencies?

  6. What is the relationship between a nation’s unemployment rate and its inflation rate?

Question 6.13

When one person saves more, that person’s wealth is increased, meaning that he or she can consume more in the future. But when everyone saves more, everyone’s income falls. If everyone’s income falls, then the nation’s wealth might actually fall, meaning that the nation might be forced to consume less in the future. Explain this seeming contradiction.

Question 6.14

Before the Great Depression, the conventional wisdom among economists and policy-makers was that the economy is largely self-regulating.

  1. Is this view consistent or inconsistent with Keynesian economics? Explain.

  2. What effect did the Great Depression have on conventional wisdom?

  3. Contrast the response of policy-makers during the 2007–2009 recession to the actions of policy-makers during the Great Depression. What would have been the likely outcome of the 2007–2009 recession if policy-makers had responded in the same fashion as policy-makers during the Great Depression?

Question 6.15

How do economists in Canada determine whether or not a recession is occurring? How do economists in the United States determine when a recession begins and when it ends?

Question 6.16

Statistics Canada reports statistics on employment and earnings that are used as key indicators by many economists to gauge the health of the economy. Figure 6-5 in the text plots historical data on the unemployment rate. Noticeably, the numbers were high during the recessions in the early 1980s, early 1990s, and 2008–2009.

  1. Locate the latest data on the national unemployment rate. (Hint: Go to the website of Statistics Canada, www.statcan.gc.ca, and locate the latest release of the Labour Force Survey, which can be easily accessed in either the Latest Indicators or Labour sections.)

  2. Compare the current numbers with the recessions in the early 1980s, early 1990s, and 2008–2009 as well as with the periods of relatively high economic growth just before the recessions. Are the current numbers indicative of a recessionary trend?

Question 6.17

The accompanying figure shows the annual rate of growth in employment for the United Kingdom and Japan from 1991 to 2010. (The annual growth rate is the percent change in each year’s employment over the previous year.)

  1. Comment on the business cycles of these two economies. Are their business cycles similar or dissimilar?

  2. Use the accompanying figure and the figure in the Global Comparison on international business cycles in the chapter to compare the business cycles of each of these two economies with those of Canada and the eurozone.

Question 6.18

  1. What three measures of the economy tend to move together during the business cycle? Which way do they move during an upturn? During a downturn?

  2. Who in the economy is hurt during a recession? How?

  3. How did Milton Friedman alter the consensus that had developed in the aftermath of the Great Depression on how the economy should be managed? What is the current goal of policy-makers in managing the economy?

Question 6.19

Why do we consider a business-cycle expansion different from long-run economic growth? Why do we care about the size of the long-run growth rate of real GDP versus the size of the growth rate of the population?

Question 6.20

In 1798, Thomas Malthus’s Essay on the Principle of Population was published. In it, he wrote: “Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio …. This implies a strong and constantly operating check on population from the difficulty of subsistence.” Malthus was saying that the growth of the population is limited by the amount of food available to eat; people will live at the subsistence level forever. Why didn’t Malthus’s description apply to the world after 1800?

Question 6.21

University tuition has risen significantly in the last few decades. The average full-time undergraduate paid $1706 in tuition in 1991–1992 and $4917 in 2009–2010, an average rise of 5.9% per year. In contrast, over the same time, on average, the Consumer Price Index rose by 1.8% per year and families’ real after-tax income rose by 1.3% per year. Have these tuition increases made it more difficult for the average student to afford higher education?

Question 6.22

Each year, The Economist publishes data on the price of the Big Mac in different countries and exchange rates. The accompanying table shows some data used for the index from 2007 and 2011. Use this information to answer the following questions.

  1. Where was it cheapest to buy a Big Mac in Canadian dollars in 2007?

  2. Where was it cheapest to buy a Big Mac in Canadian dollars in 2011?

  3. Using the increase in the local currency price of the Big Mac in each country to approximate the percent change in the overall price level from 2007 to 2011, which nation experienced the most inflation? Did any of the nations experience deflation?

Question 6.23

The accompanying figure illustrates the current account balance for Canada from 1986 to 2010. A positive balance represents a trade surplus, while a negative one represents a trade deficit. While Canada often ran a trade surplus over this time period, it has also been running a growing trade deficit with China. Which of the following statements are valid possible explanations of this fact? Explain.

  1. Many products, such as televisions, that were formerly manufactured in Canada are now manufactured in China.

  2. The wages of the average Chinese worker are far lower than the wages of the average Canadian worker.

  3. Investment spending in Canada is high relative to its level of savings.