Krugman_SolMan_CH23.pdf

Solution Solution Macroeconomics: The Big Picture 1. Which of the following questions are relevant for the study of macroeconomics and which for microeconomics? a. How will Ms. Martin’s tips change when a large manufacturing plant near the restaurant where she works closes? b. What will happen to spending by consumers when the economy enters a down- turn? c. How will the price of oranges change when a late frost damages Florida’s orange groves? d. How will wages at a manufacturing plant change when its workforce is unionized? e. What will happen to U.S. exports as the dollar becomes less expensive in terms of other currencies? f. What is the relationship between a nation’s unemployment rate and its inflation rate? 1. a. This is a microeconomic question because it addresses the effects of a single firm’s actions (the closure of a manufacturing plant) on a single individual (the waitress). b. This is a macroeconomic question because it considers how overall spending by consumers is affected by the state of the macroeconomy. c. This is a microeconomic question because it looks at how a single market (oranges) will be affected by a late frost. d. This is a microeconomic question because it addresses how wages in a particular plant will change when the firm’s workforce is unionized. e. This is a macroeconomic question because it considers the change in the overall level of exports as the exchange rate changes. f. This is a macroeconomic question because it addresses the relationship between two aggregate measures of economic activity, inflation and unemployment. 2. When one person saves, that person’s wealth is increased, meaning that he or she can consume more in the future. But when everyone saves, everyone’s income falls, meaning that everyone must consume less today. Explain this seeming contradiction. 2. This questio concerns the Paradox of Thrift; what is true for an individual—that saving makes you better off—is not always true for the economy as a whole. Whe