 Part 1 Introduction
Chapter 1 What is Economics? 1
Appendix Graphs in Economics 9
Chapter 2 The Economic Problem 21
Chapter 3 Demand and Supply 39
 Part 2 Monitoring Macroeconomic Performance
Chapter 4 Measuring GDP and Economic Growth 53
Chapter 5 Monitoring Jobs and Inflation 67
 Part 3 Macroeconomic Trends
Chapter 6 Economic Growth 81
Chapter 7 Finance, Saving, and Investment 93
Chapter 8 Money, the Price Level, and Inflation 105
Chapter 9 The Exchange Rate and the Balance of Payments 119
 Part 4 Macroeconomic Fluctuations
Chapter 10 Aggregate Supply and Aggregate Demand 133
Chapter 11 Expenditure Multipliers 149
Chapter 12 The Business Cycle, Inflation, and Deflation 165
 Part 5 Macroeconomic Policy
Chapter 13 Fiscal Policy 181
Chapter 14 Monetary Policy 195
Chapter 15 International Trade Policy 211
T a b l e o f C o n t e n t s

Introduction
At no time in history has teaching the principles of economics been
either more challenging or more important. Your decision to adopt the
thirteenth edition of my textbook brings to your task a set of teaching and
learning tools that are unmatched in their clarity, relevance, and currency.
It is my hope that with the help of these tools, you will enable your
students to become as excited about economics as you are.
This Solutions Manual has the complete answers to all the questions and
problems from the textbook in one handy source. You can either use these
solutions to help you grade problems you have assigned or photocopy them and
hand them out directly to the students.
In addition to the answers, this Solutions Manual also has the questions
copied directly from the textbook. If you are working through the questions
and answers in class you will no longer need to turn from the textbook for
the questions to another book for the answers because this one book has
both.
At the end of each chapter in this book there are extra problems (and
answers) which are similar to some of the End of Chapter problems from the
textbook. You can use these problems by either handing them out to your
class for credit or for practice. Either way your students are sure to
benefit.
Acknowledgments
Mark Rush of the University of Florida put together the initial draft of
the book. His work was checked by Jeannie Gilmore of the University of
Western Ontario. Mark reports that based on the errors and extensive
comments Jeannie made, he is worried that he might not pass this class.
Even with the quality of all the help, there remains room for improvement
in the text and (says Mark) in this manual. Any corrections, suggestions, or
comments that you have will be greatly appreciated. Send your comments on
this manual to Mark (MarkRush@ufl.edu) and your comments on the text to me
(michael.parkin@uwo.ca).
Whether you’re teaching the principles course for the first time or are
an experienced teacher at this level, I hope you will find this manual
helpful. I wish you success and enjoyment in your course!
Michael Parkin
University of Western Ontario
P r e f a c e

A n s w e r s t o t h e
R e v i e w Q u i z
Page 2
1. List some examples of the scarcity that you face.
Examples of scarcity common to students include not enough income to
afford both tuition and a nice car, not enough learning capacity to
study for both an economics exam and a chemistry exam in one night,
and not enough time to allow extensive studying and extensive
socializing.
2. Find examples of scarcity in today’s headlines.
A headline in The Baltimore Sun on June 20, 2017 was “Davis Says
Special Deployment Helped Stall Violence.” The story presented
Police Commissioner Kevin Davis stating that a week-long deployment
of uniformed police officers on the streets of Baltimore helped
reduce shootings in the city. But the story pointed out the role of
scarcity when Commissioner Davis said that “the deployment was not
sustainable over the long term” due to its cost.
3. Find an example of the distinction between microeconomics and macroeconomics in
today’s headlines.
Microeconomics: On June 20, 2017 a headline in East Bay Times was
“Reality vs Fantasy: FTC to Block FanDuel-DraftKings Merger.” This
story covers a microeconomic topic because it discusses how two on-
line fantasy sports sites, which were trying to merge, now faced
opposition by the Federal Trade Commission (FTC) which announced

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4 C H A P T E R 1
attend a meeting of a club if the student’s significant other is
eager to attend the meeting.
Page 11
1. Distinguish between a positive statement and a normative statement and provide
examples.
A positive statement is a description of how the world is. It is
testable. A normative statement is a description of how the world
ought to be. It is, by its very nature, not testable because there
is no universally approved criterion by which the statement can be
judged. “I will receive an A for this course,” is a positive
statement made by an economics student—it might not be true, but

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W H A T I S E C O N O M I C S ? 5
level of property taxes, the amount to fund higher education, or the
level of a tariff on Brazilian ethanol.
Page 13
1. What types of jobs do economists do?
Economists are found in a large variety of jobs. Many of these jobs
are analysts of various sorts. Some economists are market research
analysts—they work with data on sales and try to predict a product’s
success and the price that should be set for it. Other economists
are financial analysts—they work with data on interest rates, stock
and bond prices to try to forecast the cost of borrowing the returns
that can be expected on investments. Still other economists work as
budget analysts—they use data on an organization’s cash inflows (its
receipts) and its outflows (its payments) in order to prepare plans
forecasting future cash flows.
2. What is the range and median level of economists’ pay?
Economists’ pay ranges from $41,226 to $124,177 and has a median
salary of $72,279. Students who earn a PhD in economics

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6 C H A P T E R 1
A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d A p p l i c a t i o n s
1. Apple Inc. decides to make iTunes freely available in unlimited quantities.
a. Does Apple’s decision change the incentives that people face?
Apple’s decision changes people’s incentives. For example, it
increases people’s incentives to buy an iPod to take advantage of
the newly “free” music available on iTunes.
b. Is Apple’s decision an example of a microeconomic or a macroeconomic issue?
Apple’s decision is a microeconomic decision because it affects a
single company and a single market.
2. Which of the following pairs does not match?
a. Labor and wages
Labor earns wages, so this pair matches.
b. Land and rent
Land earns rent, so this pair matches.
c. Entrepreneurship and profit
Entrepreneurship earns profit, so this pair matches.
d. Capital and profit
Capital earns interest, so this pair does not match.
3. Explain how the following news headlines concern self-interest and the social interest.
a. Starbucks Expands in China
Starbucks’ expansion is a decision made by Starbucks to further
Starbucks’ interest. Thus the decision is directly in Srarbucks’
self interest. The social interest is affected because Starbucks’
expansion will have an effect in China. For instance, more Chinese
citizens might drink coffee rather than tea and fewer coffee shops
run by Chinese firms might open.
b. McDonald’s Moves into Gourmet Coffee
McDonald’s decision to serve gourmet coffee is a decision made by
McDonald’s to further McDonald’s interest. Thus the decision is
directly in McDonald’s self interest. The social interest

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8 C H A P T E R 1
5. Cost of Rio Olympics
Brazilian federal, state, and local governments spent R$2.8 billion and private sponsors
spent R$4.2 billion on 17 new Olympic facilities, 10 of which will be used for sporting
events after the Olympics.
Source: Financial Times, August 6, 2016
Was the opportunity cost of the Rio Olympics R$2.8 or R$7 billion? Explain your answer.
The R$7 billion spent on the 17 new Olympic facilities is an
opportunity cost of the Olympics if the funds would not have spent
otherwise. However, if there were already plans underway to build
the 10 facilities that will be used after the Olympics, then their
cost is not an opportunity cost of the Olympics because the cost
would have been paid even if Rio did not host the Olympics.. The
cost of the 7 facilities that will not be used afterwards, however,
is definitely an opportunity cost of the Rio Olympics.
6. Which of the following statements is positive, which is normative, and which can be tested?
a. The United States should cut its imports.
The statement is normative and cannot be tested.
b. China is the largest trading partner of the United States.
The statement is positive and can be tested.
c. If the price of gasoline rises, people will drive less and use less gasoline.
The statement is positive and can be tested.

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W H A T I S E C O N O M I C S ? 9
Answers to Additional Problems and Applications
7. Kanye West Offers Free Concert Tickets
Kanye West has teamed with Los Angeles inner-city schools to offer free passes for students.
Source: consequenceofsound.net, November 27, 2016
When Kanye West gave away tickets, what was free and what was scarce? Explain your
answer.
The seats in the arenas are scarce—there are only a limited number.
The time of school adminstrators used to distribute the tickets is
also not free. In addition, if the students who are given the “free”
ticket attended the concert rather than sell their free tickets,
they incurred the opportunity cost of the foregone ticket price. So
the concert was far from “free” for the concert-goers. The publicity
that Kanye West receives is free to him but the publicity used
reporters’ scarce time to report on the tickets rather than
reporting on other news worthy events.
8. How does the creation of a successful movie influence what, how, and for whom goods and
services are produced?
The “what” question is affected in two ways. First, one good or
service that is produced is the successful movie. Second,

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1 0 A P P E N D I X 1
4. Draw a graph to show the relationship between two variables that move in the same
direction.
A graph that shows the
relationship between two
variables that move in the same
direction is shown by a line that
slopes upward. Figure A1.1
illustrates such a relationship.
5. Draw a graph to show the relationship between two variables that move in opposite
directions.
A graph that shows the
relationship between two
variables that move in the
opposite directions is shown by a
line that slopes downward. Figure
A1.2 illustrates such a
relationship.
F I G U R E A l . 1
Review problem 4
2 _
1 _
_t----1----1----1----1----1----1----1----1----1----1---- x
2 3 4 5 6 7 8 9 10 1 1 1 2
F I G U R E A l . 2
Review problem 5
2 _
1 _
_t---- 1----1---- 1----1---- 1----1----1----1---- 1----1---- x
2 3 4 5 6 7 8 9 10 1 1 1 2

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G R A P H S I N E C O N O M I C S 1 1
6. Draw a graph of two variables whose relationship shows (i) a maximum and (ii) a
minimum.
A graph that shows the
relationship between two
variables that have a maximum
is shown by a line that
starts out sloping upward,
reaches a maximum, and then
slopes downward. Figure A1.3
illustrates such a
relationship with curve B.
A graph that shows the
relationship between two
variables that have a minimum
is shown by a line that
starts out sloping downward,
reaches a minimum, and then
slopes upward. Figure A1.3
illustrates such a
relationship with curve A.
7.

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G R A P H S I N E C O N O M I C S 1 3
A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d A p p l i c a t i o n s
Use the spreadsheet to work Problems 1
to 3. The spreadsheet provides data on
the U.S. economy: Column A is the year,
column B is the inflation rate, column C
is the interest rate, column D is the
growth rate, and column E is the
unemployment rate.
1. Draw a scatter diagram of the inflation rate and the interest rate. Describe the relationship.
To make a scatter diagram of the inflation rate and the interest
rate, plot the inflation rate on the x-axis and the interest rate on
the y-axis. The graph will be a set of dots and is shown in Figure
A1.4. The pattern made by the dots tells us that as the inflation
rate increases, the interest rate usually increases so there is a
(weak) positive relationship.
2. Draw a scatter diagram of the growth rate and the unemployment rate. Describe the
relationship.
To make a scatter diagram of the growth rate and the unemployment
rate, plot the growth rate on the x-axis and the unemployment rate
on the y-axis. The graph will be a set of dots and is shown in
Figure A1.5. The pattern made by the dots tells us that when

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1 4 A P P E N D I X 1
growth rate increases, the unemployment rate usually decreases so
there is a negative relationship.
3. Draw a scatter diagram of the interet rate and the unemployment rate. Describe the
relationship.
To make a scatter diagram of the
interest rate and the
unemployment rate, plot the
interest rate on the x-axis and
the unemployment rate on the y-
axis. The graph will be a set of
dots and is shown in Figure
A1.6. The pattern made by the
dots tells us that when the
interest rate increases, the
unemployment rate usually
decreases so there is a negative
relationship.
Use the following news clip to work Problems 4 to 6.
Lego Shatters More Records:
Source: Boxofficemojo.com,
Data for weekend of March 10-12, 2017
4. Draw a graph of the relationship
between the revenue per theater
on the y-axis and the number of
theaters on the x-axis. Describe
the relationship.
Figure A1.7 shows the
relationship. As the
figure shows, there is a
positive relationship.
5. Calculate the slope of the relationship in
Problem 4 between 3,846 and 4,071
theaters.

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G R A P H S I N E C O N O M I C S 1 7
9. Calculate the slope across the arc AB.
The slope across the arc AB is −1.125. The slope across an arc AB
equals the change in y, which is 4.5 (6.0 minus 1.5) divided by the
change in x, which equals −4 (2 minus 6). The slope across the arc
AB equals 4.5/−4, which is −1.125.
Price
(dollar
s per
ride)
Balloon rides
(number per day)
50F 70F 90F
5 32 40 50
10 27 32 40
15 18 27 32

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1 8 A P P E N D I X 1
Use the table to work Problems 10 and 11. The table gives the price of a balloon ride, the
temperature, and the number of rides a day.
10. Draw a graph to show the relationship between the price and the number of rides, when
temperature is 70°F. Describe this relationship.
Figure A1.10 shows the
relationship between the price
and the number of balloon rides
when the temperature is 70F.
The relationship between the
price and the number of rides is
inverse; that is, when the price
rises, the number of rides
decreases.
11. What happens in the graph in Problem 10 if
the temperature rises to 90°F?
If the temperature rises to
90F, the curve shifts
rightward. This shift is
illustrated in Figure A1.11. In
that figure, both the initial
curve, which applies when the
temperature is 70F, and the new
curve, which applies when the
temperature is 90F, are
illustrated. The curve when the
temperature is 90F lies to the
right of the curve when the
temperature is 70F indicating
that at every price, more
balloon rides are taken when the
temperature is 90F rather than
70F.
FIGURE A l . 1 0
Problem 10
15.00
10.00
5.00
5 10 15 20 25 30 35 40 45 50
Number of rides
FIGURE A l . 1 1
Problem 11
5.00
5 10 15 20 25 30 35 40 45 50
Number of rides

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G R A P H S I N E C O N O M I C S 1 9
Answers to Additional Problems and Applications
Use the spreadsheet to work Problems
12 to 14. The spreadsheet provides data
on oil and gasoline: Column A is the
year, column B is the price of oil (dollars
per barrel), column C is the price of
gasoline (cents per gallon), column D is
U.S. oil production, and column E is the
U.S. quantity of gasoline refined (both in
millions of barrels per day).
12. Draw a scatter diagram of the price of oil and the quantity of U.S. oil produced. Describe the
relationship.
Figure A1.12 shows the scatter diagram between the price of a barrel
of oil and the quantity of U.S. oil produced. It shows a weak
negative relationship.
13. Draw a scatter diagram of the price of gasoline and the quantity of gasoline refined.
Describe the relationship.
Figure A1.13 shows the scatter diagram between the price of a gallon
of gasoline and the quantity of gasoline refined. It shows a weak
negative relationship.
A B C D E
1 2006 66 262 5.1 15.6
2 2007 72 284 5.1 15.4

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2 0 A P P E N D I X 1
14. Draw a scatter diagram of the quantity of U.S. oil produced and the quantity of gasoline
refined. Describe the relationship.
Figure A1.14 shows the scatter
diagram between the quantity of
U.S. oil produced and the
quantity of gasoline refined. It
shows a positive relationship.
Use the following data to work Problems 15 to 17.
Draw a graph that shows the relationship
between the two variables x and y in the
table to the right.
To make a graph that shows the
relationship between x and y,
plot the x variable on the x-axis
and the y variable on the y-axis.
Figure A1.15 shows this graph.
15. a. Is the relationship positive or negative?
The relationship is negative
because x and y move in opposite
directions: As x increases, y
decreases.
b. Does the slope of the relationship become
steeper or flatter as the value of x increases?
The slope becomes steeper as x
increases.
c. Think of some economic relationships that
might be similar to this one.
The less expensive a good, the
greater is the number of

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2 2 A P P E N D I X 1
find a second point on the tangent and calculate the slope of the
tangent.
The tangent at point A cuts the x-axis at 2.5. The slope of the
tangent equals the change in y divided by the change in x. The
change in y equals 6 (6 minus 0) and the change in x equals −1.5 (1
minus 2.5). The slope at point A is 6/−1.5, which equals −4.
Similarly, the slope at point B is −1. The tangent at point B cuts
the y-axis at 5. The change in

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G R A P H S I N E C O N O M I C S 2 3
23. What happens in the graph in Problem 21 if
the rainfall increases from 1 inch to 2 inches?
As shown in Figure A1.19, the
curve shifts rightward. In that
figure, both the initial curve,
which applies when the rainfall
is 1 inch, and the new curve,
which applies when the rainfall
is 2 inches, are illustrated. The
curve when the rainfall is 2
inches lies to the right of the
curve when the rainfall is 1 inch
indicating that at every price,
more umbrellas are purchased when
the rainfall is 2 inches than
when the rainfall is 1 inch.
F I G U R E A 1 . 1 9
Problem 23
Price (dollars per umbrella)
NJ co
o o o
1 2 3 4 5 6 7 8
Umbrellas (number)

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A n s w e r s t o t h e R e v i e w Q u i z z e s
Page 36
1. How does the production possibilities frontier illustrate scarcity?
The unattainable combinations of production that lie beyond the PPF illustrate the concept of
scarcity. There simply are not enough resources to produce any of these combinations of outputs.
Additionally, while moving along the PPF to increase the production of one good requires that
the production of another good be reduced, which also illustrates scarcity.
2. How does the production possibilities frontier illustrate production efficiency?
The combinations of outputs that lie on the PPF illustrate the concept of production efficiency.
These points are the maximum production points possible and are attained only by producing
the goods and services at the lowest possible cost. Any point inside the frontier reflects
production where one or both outputs may be increased without decreasing the other output
level. Clearly, such points cannot be production efficient.
3. How does the production possibilities frontier show that every choice involves a tradeoff?
Movements along the PPF frontier illustrate that producing more of one good requires producing
less of other good. This observation reflects the result that a tradeoff must be made when
producing output efficiently.
4. How does the production possibilities frontier illustrate opportunity cost?
The negative slope of the production possibility curve illustrates the concept of opportunity cost.
Moving along the production possibility frontier, producing additional units of a good requires
that the output of another good must fall. This sacrifice is the opportunity cost of producing more
of the first good.
5. Why is opportunity cost a ratio?
The slope of the PPF is a ratio that expresses the quantity of lost production of the good on the y-
axis to the increase in the production of the good on the x-axis moving downward along the PPF.
The steeper the slope, the greater ratio, and the greater is the opportunity cost of increasing the
output of the good measured on the horizontal axis.
6. Why does the PPF bow outward and what does that imply about the relationship between
opportunity cost and the quantity produced?
Some resources are better suited to produce one type of good or service, like pizza. Other
resources are better suited to produce other goods or services, like DVDs. If society allocates
resources wisely, it will use each resource to produce the kind of output for which it is best
suited. Consider a PPF with pizza measured on the x-axis and DVDs measured on the y-axis. A
small increase in pizza output when pizza production is relatively low requires only a small
increase in the use of those resources still good at making pizza and not good at making DVDs.
This yields a small decrease in DVD production for a large increase in pizza production, creating
a relatively low opportunity cost reflected in the gentle slope of the PPF over this range of output.
However, the same small increase in pizza output when pizza production is relatively large will
require society to devote to pizza production those resources that are less suited to making pizza
2 THE ECONOMIC
PROBLEM
C h a p t e r

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2 2 C H A P T E R 2
and more suited to making DVDs. This reallocation of resources yields a relatively small increase
in pizza output for a large decrease in DVD output, creating a relatively high opportunity cost
reflected in the steep slope of the PPF over this range of output. The opportunity cost of pizza
production increases with the quantity of pizza produced as the slope of the PPF becomes ever
steeper. This effect creates the bowed out effect (the concavity of the PPF function) and means
that as more of a good is produced, the opportunity cost of producing additional units increases.
Page 39
1. What is marginal cost? How is it measured?
Marginal cost is the opportunity cost of producing one more unit of a good or service. Along a PPF
marginal cost is reflected in the absolute value of the slope of the PPF. In particular, the
magnitude of the slope of the PPF is the marginal cost of a unit of the good measured along the x-
axis. As the magnitude of the slope changes moving along the PPF, the marginal cost changes.
2. What is marginal benefit? How is it measured?
The marginal benefit from a good or service is the benefit received from consuming one more
unit of it. It is measured by what an individual is willing to give up (or pay) for an additional that
last unit.
3. How does the marginal benefit from a good change as the quantity produced of that good
increases?
As the more of a good is consumed, the marginal benefit received from each unit is smaller than
the marginal benefit received from the unit consumed immediately before it, and is larger than
the marginal benefit from the unit consumed immediately after it. This set of results is known as
the principle of decreasing marginal benefit and is often assumed by economists to be a common
characteristic of an individual’s preferences over most goods and services in the economy.
4. What is allocative efficiency and how does it relate to the production possibilities frontier?
Production efficiency occurs when production takes place at a point on the PPF. This indicates
that all available resources are being used for production and society cannot produce additional
units of one good or service without reducing the output of another good or service. Allocative
efficiency, however, requires that the goods and services produced are those that provide the
greatest possible benefit. This definition means that the allocative efficient level of output is the
point on the PPF (and hence is a production efficient point) for which the marginal benefit equals
the marginal cost.
5. What conditions must be satisfied if resources are used efficiently?
Resources are used efficiently when more of one good or service cannot be produced without
producing less of some of another good or service that is valued more highly. This is known as
allocative efficiency and it occurs when: 1) production efficiency is achieved, and 2) the marginal
benefit received from the last unit produced is equal to the marginal cost of producing the last
unit.
Page 44
1. What gives a person a comparative advantage?
A person has a comparative advantage in an activity if that person can perform the activity at a
lower opportunity cost than anyone else, If the person gives up the least amount of other goods
and services to produce a particular good or service, the person has the lowest opportunity cost
of producing that good or service.
2. Distinguish between comparative advantage and absolute advantage.
A person has a comparative advantage in producing a good when he or she has the lowest
opportunity cost of producing it. Comparative advantage is based on the output forgone. A person

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Solution Manual for Macroeconomics, 13th Edition

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