SOLUTIONS MANUAL. macroeconomics. Nora Underwood University of Central Florida WORTH PUBLISHERS N. GREGORY MANKIW. for use with.

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1 SOLUTIONS MANUAL

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3 SOLUTIONS MANUAL for use with macroeconomics eighth edition N. GREGORY MANKIW Nora Underwood University of Central Florida WORTH PUBLISHERS

4 Solutions Manual by Nora Underwood for use with Mankiw: Macroeconomics, Eighth Edition 2013, 2010, 2007, 2003, 2000, 1997, 1994 by Worth Publishers All rights reserved. The contents, or parts thereof, may be reproduced for use with Macroeconomics, Eighth Edition, by N. Gregory Mankiw, as described in the Preface to this Solutions Manual, but may not be reproduced in any form for any other purpose without prior written permission of the publisher. ISBN 13: ISBN 10: First printing 2012 Printed in the United States of America. Worth Publishers 41 Madison Avenue New York, NY

5 Contents Preface vii Answers to Textbook Questions and Problems 1 Chapter 1 The Science of Macroeconomics 3 Chapter 2 The Data of Macroeconomics 5 Chapter 3 National Income: Where It Comes From and Where It Goes 11 Chapter 4 The Monetary System: What It Is and How It Works 24 Chapter 5 Inflation: Its Causes, Effects, and Social Costs 29 Chapter 6 The Open Economy 34 Chapter 7 Unemployment 54 Chapter 8 Economic Growth I: Capital Accumulation and Population Growth 60 Chapter 9 Economic Growth II: Technology, Empirics, and Policy 71 Chapter 10 Introduction to Economic Fluctuations 82 Chapter 11 Aggregate Demand I: Building the IS LM Model 91 Chapter 12 Aggregate Demand II: Applying the IS LM Model 101 Chapter 13 The Open Economy Revisited: The Mundell Fleming Model and the Exchange-Rate Regime 124 Chapter 14 Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment 147 Chapter 15 A Dynamic Model of Aggregate Demand and Aggregate Supply 159 Chapter 16 Understanding Consumer Behavior 170 Chapter 17 The Theory of Investment 184 Chapter 18 Alternative Perspectives on Stabilization Policy 190 Chapter 19 Government Debt and Budget Deficits 194 Chapter 20 The Financial System: Opportunities and Dangers 198 Answers to Selected Student Guide Problems Chapter 2 The Data of Macroeconomics A-1 Chapter 4 The Monetary System: What It Is and How It Works A-2 Chapter 5 Inflation: Its Causes, Effects, and Social Costs A-3 Chapter 6 The Open Economy A-5 Chapter 7 Unemployment A-7 Chapter 8 Economic Growth I: Capital Accumulation and Population Growth A-9 Chapter 10 Introduction to Economic Fluctuations A-9 Chapter 11 Aggregate Demand I: Building the IS LM Model A-10 Chapter 12 Aggregate Demand II: Applying the IS LM Model A-12 Chapter 14 Aggregate Supply and the Short-Run Tradeoff Between Inflation and Unemployment A-15 Chapter 16 Understanding Consumer Behavior A-16 Chapter 17 The Theory of Investment A-17 Chapter 18 Alternative Perspectives on Stabilization Policy A-18 Chapter 19 Government Debt and Budget Deficits A-19 v

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7 Preface The best way to learn any skill is to practice it. Listening to lectures and reading textbooks are important in learning to think like an economist, but alone they are insufficient for thoroughly understanding and applying the skills of economic reasoning. Each chapter of Macroeconomics, Eighth Edition by N. Gregory Mankiw contains Questions for Review and Problems and Applications. These give your students opportunities to practice and hone their skills in economic reasoning to consolidate their understanding of the concepts and analytic tools in the chapter and to apply these tools to new situations. To make the most of this opportunity, however, students need feedback. This manual provides answers to all of the questions and complete solutions to all of the problems in the text so that you can decide what feedback to give your students from this source. If students find a problem difficult, seeing an example of clear reasoning is enormously helpful. The solutions illustrate the logical application of concepts and analytic tools. In addition to the textbook questions and problems, the answers to selected questions from the Student Guide and Workbook by Roger T. Kaufman are included. In order for these questions to be used for homework or exams, their answers appear only in this Solutions Manual for instructors. I have put every effort into providing clear and complete solutions, as well as finding and correcting any typographical errors. I would like to thank and acknowledge the authors of previous editions of the solutions manual (Paula DeMasi, Jason Furman, and John Fernald) as my work has built upon what was done in past editions. I would also like to thank Lukia Kliossis, Edgar Bonilla, and Stacey Alexander of Worth Publishers for their assistance, patience, and commitment to getting all the details right. Nora Underwood vii

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