Problem Session-1
Research Assistant
Serkan Değirmenci
(Ph.D. Candidate)
# Te x t b o o k s #
• Goodwin, N., Nelson, J. A., Harris, J.
(2009), Macroeconomics in Context, M. E.
Sharpe, New York, USA.
• Blanchard, O. (2009), Macroeconomics (5th
Edition), Pearson Prentice Hall, New
Jersey, USA.
# Other Supplementaries #
Ders Kataloğu → İşletme Fakültesi → ISL244E (CRN: 22113)
Makroekonomi (Koordinatör: Derya Karakaş) → Dersin
Kaynakları (Syllabus, Slaytlar, Ders Notları vs.)
- Uygulama dersleri (saat değişikliği, iptal vs.),
- Ödevler,
- Sınavlar ve sınav sonuçları,
ile ilgili bütün duyurular.
• [email protected], [email protected],
[email protected], @sdegirmenci (twitter)
• Tel.: 0 212 293 13 00 (Internal: 2672)
• Room No.: B203 (İşl. Müh. Bölüm Sek. Çapraz Karşısında)
• Office Hours: Monday, Tuesday and Thursday (08:30-17:30)
# Today #
• GNH (2009), Macroeconomics in Context:
- Chapter 1: Economic Activity in Context:
 Review Questions (RQ): 2-3-5-6-7-9-10 (Page: 20)
 Exercises (E): 1-2-3-4-5 (Page: 20-21)
• Blanchard (2009), Macroeconomics:
- Chapter 1: A Tour of the World:
 Quick Check (QC): 2-3 (Page: 38)
GNH-Chapter 1: RQ-2 (Page: 20)
• How does macroeconomics differ from
• ANSWER: (Textbook: p.3-4-5)
Macroeconomics is the study of how economic
activity at all levels create a national (and global)
economic environment,
while microeconomics deals with the economic
activities and interactions of individuals,
households, businesses, and other groups at the
sub-national level.
GNH-Chapter 1: RQ-3 (Page: 20)
• What is the difference between positive and
normative questions?
• ANSWER: (Textbook: p.6)
Positive questions concern issues of fact (how
things are),
while normative questions deal with goals
and values (how things should be).
GNH-Chapter 1: RQ-5 (Page: 20)
• What is economic development? What factors are important in
ensuring that economic growth benefits a country’s population
as whole?
• ANSWER: (Textbook: p.6-7-8-9)
Economic development is the process of moving from a
situation of poverty and deprivation to a situation of increased
production and plenty, through investments and changes in the
organization of work.
To benefit the population of a country as a whole, economic
development must keep pace with population growth, produce
goods that increase well-being (the “what?” question), use
methods of production that increase well-being (the “how?”
question), and the gains must be distributed across the
population (the “for whom” question).
GNH-Chapter 1: RQ-6 (Page: 20)
• Why are macroeconomic fluctuations a cause
for concern?
• ANSWER: (Textbook: p.10)
Economic fluctuations make it hard for people
to plan for the future.
High unemployment is associated with many
signs of social stress, including suicide,
domestic violence, stress-related illnesses
and crime.
GNH-Chapter 1: RQ-7 (Page: 20)
• What global developments have caused financial, social, and
ecological sustainability to become increasingly prominent as
macroeconomic concerns?
• ANSWER: (Textbook: p.11-12-13)
Financial sustainability has become a concern in poor countries
due to the “debt crisis,” and in rich countries due to fears about
future tax burdens. (Textbook: p.12)
Social sustainability has become a concern, as people have come to
question whether traditional “development” will ever solve the
problem of global disparities in living standards, and whether
“more-is-better” values are good for people. (Textbook: p.12-13)
Environmental sustainability has become a concern as scientists
have pointed out the effects of economic activities on global
climate and other natural systems. (Textbook: p.13)
GNH-Chapter 1: RQ-9 (Page: 20)
What historical developments and concerns motivated—and what beliefs
characterized—the classical economists? The work of John Maynard Keynes? The
school of Keynesian economics? The work of the monetarists? The synthesis of
Keynesian and classical thought?
ANSWER: (Textbook: p.14-15-16-17-18)
The classical economists were motivated by observing the Industrial Revolution, and
believed that the division of labor, specialization, capital accumulation and selfinterested actions in markets led to the creation of wealth. They also assumed that
monetary issues affected only prices. John Maynard Keynes was motivated by
observing the Great Depression, and believed that the key to getting out of slumps
was to raise aggregate demand through government control of investment. Keynesian
economists followed J.M. Keynes, but believed that fiscal policy (not government
control of investment) should be used to get an economy out of a slump. The
monetarists were also motivated by observing the Great Depression, but believed that
it was caused by bad government monetary policies. The synthesizers of the classical
and Keynesian schools were motivated by observing the combination of rising
unemployment and rising inflation that occurred in the early 1970s. They believed
that Keynesian theory explained the short run (the course of the economy before
markets have time to adjust) while classical theory explained the long run (after the
economy has had time to adjust).
GNH-Chapter 1: RQ-10 (Page: 20)
• What historical development took place in
1973-74, and what ongoing macroeconomic
issues did it bring into focus?
• ANSWER: (Textbook: p.18)
In 1973-74 the economy experienced an oil
crisis created when OPEC countries cut
production and raised prices. This brought
economists’ attention to international linkages
and to the supply side of the economy.
GNH-Chapter 1: E-1 (Page: 20) – Self Study
• This class will be more meaningful to you, the more
you pay attention to what is going on in the
macroeconomy around you. Find an article in a
newspaper or newsmagazine (hardcopy or on-line) that
deals with a macroeconomic topic. Make a list of
terms, concepts, people, organizations, or historical
events mentioned in the article that are also
mentioned in this chapter.
Students should be able to easily come up with an
article that mentions GDP, the Federal Reserve,
unemployment, etc. You should also accept articles
that look at sustainability, such as articles on
international debt issues, education spending, or
environmental damage.
GNH-Chapter 1: E-2 (Page: 20)
• Classify each of the following as to whether it is an
example of a positive question or a normative
a. “What is the level of U.S. foreign debt?”
b. “How low should the unemployment rate be?”
c. “What policies can lower the unemployment rate?”
d. “What kinds of production should be counted in
measuring gross domestic product?”
e. “Is it better to have low unemployment or low
• ANSWER: (Textbook: p.6)
a. positive b. normative c. positive d. normative e.
GNH-Chapter 1: E-3 (Page: 20-21)
State whether the following statements are true or false. If false, also write a corrected
a. Macroeconomics is about the activities of governmental agencies.
b. Economic growth always leads to living standards growth.
c. The three areas to consider in thinking about sustainability are financial, monetary, and
d. About 20% of the world’s population lives in absolute poverty.
e. Poor countries were offered many foreign loans for economic development over the last
several decades; now all of them are paying back the loans easily.
Examples of correct answers:
a. False. Macroeconomics is about the national or global economic environment created by
all actors, including but not limited to government agencies. (Textbook: p.4)
b. False. Economic growth may not lead to living standards growth if the questions of “what,
how and for whom” are not well-addressed. (Textbook: p.9)
c. False. “….financial, social, and ecological” (Textbook: p.11-12-13)
d. True. (Textbook: p.7)
e. False “…: now many of them face a debt crisis and pay more in interest than they receive
in grants and loans.” (Textbook: p.12)
GNH-Chapter 1: E-4 (Page: 21)
State whether the following statements are true or false. If false, also write a corrected
a. Fiscal policy refers to government influences on credit and interest rates.
b. Specialization and the division of labor are characteristics of industrial production.
c. Classical economists believe that the Great Depression was caused by aggregate demand
being too low.
d. During “bank runs” and stock market crashes, people lose confidence in the financial
system and tend to cut back on their spending.
e. Keynesian economists believe that an economy that experiences a high rate of
unemployment will quickly self-correct.
Examples of correct answers:
a. False. “Monetary policy…” (Textbook: p.16)
b. True. (Textbook: p.14)
c. False. “Keynesian economists…” (Textbook: p.15-16)
d. True. (Textbook: p.15)
e. False. “Classical economists…” or “Keynesian economists believe that an economy that
experiences a high rate of unemployment requires fiscal policy (and perhaps monetary
policy) actions to recover.” (Textbook: p.15-16-17)
GNH-Chapter 1: E-5 (Page: 21)
a-5; (Textbook: p.15-16)
b-8; (Textbook: p.14-15)
c-6; (Textbook: p.16-17)
d-1; (Textbook: p.16)
e-9; (Textbook: p.6-7)
f-7; (Textbook: p.10-11)
g-11; (Textbook: p.16-17)
h-2; (Textbook: p.4)
i-3; (Textbook: p.15)
j-10; (Textbook: p.4)
k-4. (Textbook: p.7)
B-Chapter 1: QC-2 (Page: 38)
Macroeconomics Policy in Europe
Beware of simplistic answers to complicated macroeconomic questions. Consider
each of the following statements and comment on whether there is another side to
the story.
a. There is a simple solution to the problem of high European unemployment:
Reduce labor market rigidities.
b. What can be wrong about joining forces and adopting a common currency? The
euro is obviously good for Europe.
a. More flexible labor market institutions may lead to lower unemployment, but
there are questions about how precisely to restructure these institutions. The
United Kingdom has restructured its labor market institutions to resemble more
closely U.S. institutions and now has a lower unemployment rate than before the
restructuring. On the other hand, Denmark and the Netherlands have relatively
low unemployment rates while maintaining relatively generous social insurance
programs for workers.
In addition, some economists argue that tight monetary policy has at least
something to do with the high unemployment rates in Europe.
b. Although the Euro will remove obstacles to free trade between European
countries, each country will be forced to give up its own monetary policy.
B-Chapter 1: QC-3 (Page: 38)
• Productivity growth in the United States and China
Productivity growth is at the heart of recent economic developments in
the United States and China.
a. How has China achieved high rates of productivity growth in recent
b. How has the United States achieved high rates of productivity growth in
the past decade? (You can base your answer on the views of optimists
about U.S. productivity growth.)
c. Why do you think your answers to parts (a) and (b) are different? To
what degree do you think China’s methods of achieving productivity
growth are relevant to the United States?
d. Do you think China’s experience provides a model for developing
countries to follow?
B-Chapter 1: QC-3 (Page: 38)
a. The Chinese government has encouraged foreign firms to produce in China. Since
foreign firms are typically more productive than Chinese firms, the presence of foreign
firms has lead to an increase in Chinese productivity. The Chinese government has also
encouraged joint ventures between foreign and Chinese firms. These joint ventures
allow Chinese firms to learn from more productive foreign firms.
b. The recent increase in U.S. productivity growth has been a result of the development
and widespread use of information technologies.
c. The United States is a technological leader. Much of U.S. productivity growth is
related to the development of new technologies. China is involved in technological
catch-up. Much of Chinese productivity growth is related to adopting existing
technologies developed abroad.
d. It’s not clear to what extent China provides a model for other developing countries.
High investment seems a good strategy for countries with little capital, and encouraging
foreign firms to produce (and participate in joint ventures) at home seems a good
strategy for countries trying to improve productivity. On the other hand, the degree to
which China’s centralized political control has been important in managing the pace of
the transition and in protecting property rights of foreign firms remains open to
to be continued…

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