Chapter 24 - An Introduction to Macroeconomics

McConnell, Brue, and Flynn 20e

DISCUSSION QUESTIONS
3. Did economic output start growing faster than population from the beginning of the human inhabitation
of the earth? When did modern economic growth begin? Have all of the worlds nations experienced the
same extent of modern economic growth? LO2
Answer: No, rapid and sustained economic growth is a modern phenomenon. Before the
Industrial Revolution began in the late 1700s in England, standards of living showed virtually no
growth over hundreds or even thousands of years. For instance, the standard of living of the
average Roman peasant was virtually the same at the start of the Roman Empire around the year
500 B.C. as it was at the end of the Roman Empire 1000 years later. Similarly, historians and
archeologists have estimated that the standard of living enjoyed by the average Chinese peasant
was essentially the same in the year A.D. 1800 as it was in the year A.D. 100.
No, the vast differences in living standards seen today between rich and poor countries are almost
entirely the result of the fact that only some countries have experienced modern economic growth.
5. How does investment as defined by economists differ from investment as defined by the general public?
What would happen to the amount of economic investment made today if firms expected the future returns
to such investment to be very low? What if firms expected future returns to be very high? LO3
Answer: Economic Investment refers to the purchase of machinery, tools, etc that can be used
to produce goods and services in the future. This investment is undertaken by firms and the way
economists think about investment. Financial Investment captures what ordinary people mean
when they say investment, namely the purchase of assets like stocks, bonds, or real estate in the
hope of reaping a financial gain. If firms expect low returns on their investments they will
typically invest less. If firms expect high returns on their investment they will typically invest
more. However these results depend on how households respond to interest rates and the
availability of savings for investment purposes.
PROBLEMS
2. Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from
$100 million to $200 million between one year and the next. Assuming that the price of gold increased by
100 percent over the same period, by what numerical amount did Glitter Gulchs real output change? If the
price of gold had not changed, what would have been the change in Glitter Gulchs real output? LO1
Answers: 0; $100 million.
Feedback: Since the price doubled and the sales revenue doubled between one year and the next,
this implies that the company sold and mined the same amount of gold over the period. The
change in real output is zero.
If the price of gold did not change and sales revenue doubled, the amount of gold sold and mined
must have doubled. The change in real output is $100 million (= $200 million (new revenue) $100 million (old revenue)).