Preface1

Table of Contents

Preface...... v

Chapter 1The Scope and Method of Economics...... 1

Chapter 2The Economic Problem: Scarcity and Choice...... 12

Chapter 3Demand, Supply, and Market Equilibrium...... 23

Chapter 4Demand and Supply Applications...... 38

Chapter 5 [20]Introduction to Macroeconomics...... 49

Chapter 6 [21]Measuring National Output and National Income...... 60

Chapter 7 [22]Unemployment, Inflation, and Long-Run Growth...... 73

Chapter 8 [23]Aggregate Expenditure and Equilibrium Output...... 85

Chapter 9 [24]The Government and Fiscal Policy...... 97

Chapter 10 [25]The Money Supply and the Federal Reserve System...... 107

Chapter 11 [26]Money Demand and the Equilibrium Interest Rate...... 121

Chapter 12 [27]Aggregate Demand in the Goods and Money Markets...... 131

Chapter 13 [28]Aggregate Supply and the Equilibrium Price Level...... 142

Chapter 14 [29]The Labor Market in the Macroeconomy...... 156

Chapter 15 [30]Financial Crises, Stabilization, and Deficits...... 171

Chapter 16 [31]Household and Firm Behavior in the Macroeconomy: A Further Look...187

Chapter 17 [32]Long-Run Growth...... 201

Chapter 18 [33]Alternative Views in Macroeconomics...... 213

Chapter 19 [34]International Trade, Comparative Advantage, and Protectionism...... 225

Chapter 20 [35]Open-Economy Macroeconomics: The Balance of Payments and
Exchange Rates...... 240

Chapter 21 [36]Economic Growth in Developing and Transitional Economies...... 255

Solutions to Problems...... 274

©2012 Pearson Education, Inc. Publishing as Prentice Hall

Preface1

Preface

This Instructor’s Manual is designed for use with Case, Fair, and Oster, Principles of Economics, 10th Edition, or the microeconomics and macroeconomics split editions. It is a central resource for teachers because it includes teaching tips, topics for class discussions, numerous extended applications for use in the classroom, and solutions to the end-of-chapter problems.

Features of this Instructor’s Manual

Each chapter of this Instructor’s Manual contains the following elements:

Detailed Chapter Outlines provide key term definitions, teaching notes, and lecture suggestions.

Topics for Class Discussion provide topics and real-world situations that help ensure that economic concepts resonate with students.

Unique Economics in Practice features that are not in the main text provide extra real-world examples to present and discuss in class.

Teaching Tips provide alternative ways to cover the material and brief reminders on additional help to provide students. These tips include suggestions for exercises and experiments to complete in class.

Extended Applications include exercises, activities, and experiments to help make economics relevant to students.

Solutions for all the end-of-chapter problems are grouped in the back of the Instructor’s Manual.

Revisions to the Main Text

If you used Case/Fair, Principles of Macroeconomics,9th Edition, here is a summary of the changes the authors made to the main text. Knowing about these changes will help you revise your current teaching notes and class presentations.

  • The years 2008–2009 became the fifth recession in the United States since 1970. One ofthe new features of this edition is a discussion of this recession in the context of theoverall history of the U.S. economy. This most recent recession, however, required morethan the usual revisions, both because of its severity and because of the unusual natureof both the events leading up to it and some of the remedies employed by the governmentto deal with it.
  • In June 2010, the balance sheet of the Federal Reserve had assets of $2.3 billion. Of theseassets, half, or just over $1.1 billion, was held in the form of mortgage-backed securities.In 2007, the Fed held no mortgage-backed securities. In June 2010, commercial banks inthe United States held more than $900 billion in excess reserves at the Fed. In the past,banks have held almost no excess reserves. These extraordinary changes at the Fed followon the heels of interventions by the federal government in financial operations ofnumerous private banks like J.P. Morgan and Goldman Sachs, as well as in companieslike AIG and General Motors. These extraordinary actions required substantial changesthroughout the macroeconomic chapters of this book. New material describing theseinterventions appear in a number of chapters, both in the text itself and in the Economicsin Practice boxes. Revisions were also necessary in the background discussions of monetarypolicy, since the existence of excess reserves considerably complicates the usualworkings of monetary policy.
  • This edition has augmented the current research focus of many of the Economics inPractice boxes. Historically, the boxes have focused principally on newspaper excerptsrelated to the subject of the chapter. Beginning last edition and pushed through morestrongly this edition, we have added boxes that we hope will demonstrate moreclearly the ideas that lie at the heart of economic thinking. Thus, two thirds of theboxes in the chapters relate an economic principle either to a personal observation orto a recent piece of economic research (for example, new work by Rachel Croson ongender and trust). When possible, we focus on work by younger scholars and onmore recent research. It is our hope that new students will be inspired by the widebreadth and exciting nature of the research currently going on in economics as theyread these boxes.
  • Many graphs and tables have been heavily revised and updated to include the mostrecent data available from 2008 to as recent as the fall of 2010. The inclusion of up-todatestudies and data is essential to promoting a better understanding of recent macroeconomicdevelopments.
  • A number of the chapters have been reworked to improve their readability. The growthchapter, Chapter 17, has been completely rewritten. The other major changes concernthe new discussion needed for the 2008–2009 recession and the new policy initiatives.
  • We have added many new problems in the end-of-chapter materials, aiming for moretext-specific questions.

Organizing Your Syllabus

The authors remain committed to the view that it is a mistake simply to throw aggregate demand and aggregate supply curves at students in the first few chapters of a principles book. To understand the AS and AD curves, students need to know about the functioning of both the goods market and the money market. The logic behind the simple demand curve is wrong when it is applied to the relationship between aggregate demand and the price level. Similarly, the logic behind the simple supply curve is wrong when it is applied to the relationship between aggregate supply and the price level.

Part of teaching economics is teaching economic reasoning. Our discipline is built around deductive logic. Once we teach students a pattern of logic, we want and expect them to apply it to new circumstances. When they apply the logic of a simple demand curve or a simple supply curve to the aggregate demand or aggregate supply curve, the logic does not fit. We believe that the best way to teach the reasoning embodied in the aggregate demand and aggregate supply curves without creating confusion for students is to build up to those topics carefully.

In Chapter 8, “Aggregate Expenditure and Equilibrium Output,” and Chapter 9, “The Government and Fiscal Policy,” we examine the market for goods and services. In Chapter 10, “The Money Supply and the Federal Reserve System,” and Chapter 11, “Money Demand and the Equilibrium Interest Rate,” we examine the money market. We bring the two markets together in Chapter 12, “Aggregate Demand in the Goods and Money Markets,” which explains the links between aggregate output (Y) and the interest rate (r) and derives the AD curve. In Chapter 13, “Aggregate Supply and the Equilibrium Price Level,” we introduce the AS curve and determine the equilibrium price level (P). We then explain inChapter 14, “The Labor Market in the Macroeconomy,” how the labor markets fits into this macroeconomic picture.

One of the big issues in the organization of the macroeconomic material is whether long-run growth issues should be taught before short-run chapters on the determination of national income and countercyclical policy. In the last three editions, we moved a significant discussion of growth to Chapter 7, “Unemployment, Inflation, and Long-Run Growth,” and highlighted it. However, while we wrote Chapter 17, the major chapter on long-run growth, so that it can be taught before or after the short-run chapters, we remain convinced that it is easier for students to understand the growth issue once they have come to grips with the logic and controversies of short-run cycles, inflation, and unemployment.

Supplements for Instructors

In addition to the Instructor’s Manual, the following supplements are available:

Three Test Item Files

The Test Item Files help instructors easily and efficiently assess student understanding of economic concepts and analyses. Test questions are annotated with the following information:

Difficulty: 1 for straight recall, 2 for some analysis, 3 for complex analysis

Type: multiple-choice, true/false, short-answer, essay

Topic: the term or concept the question supports

Skill: fact, definition, analytical, conceptual

AACSB: see description that follows

Special feature in the main book: Economics in Practice

The Test Item Files include questions with tables that students must analyze to solve for numericalanswers. The Test Item Files also contain questions based on the graphs that appear in the book. The questions ask students to interpret the information presented in the graph. Many questions in the Test Item Files require students to sketch a graph on their own and interpret curve movements.

Macroeconomics Test Item File 1, by Randy Methenitis of Richland College: Test Item File 1 (TIF1) includes over 2,700questions. All questions are machine-gradable and are either multiple-choice or true-false. TIF1 is for use with the tenth edition of Principles of Macroeconomics in the first year of publication. This TIF is available in a computerized format using TestGen EQ test-generating software.

Macroeconomics Test Item File 2, by Randy Methenitis of Richland College: This additional Test Item File contains another 2,700machine-gradable questions based on TIF1 but regenerated to provide instructors with fresh questions when using the book the second year. This TIF is available in a computerized format using TestGen EQ test-generating software.

Macroeconomics Test Item File 3, by Richard Gosselin of Houston Community College:This third Test Item File includes 1,000 conceptual problems, essay questions, and short-answer questions. Application-type problems ask students to draw graphs and analyze tables. The Word files are available on the Instructor’s Resource Center (

The Association to Advance Collegiate Schools of Business (AACSB) The authors of the Test Item Files have connected select questions to the general knowledge and skill guidelines found in the AACSB assurance of learning standards.

What Is the AACSB? AACSB is a not-for-profit corporation of educational institutions, corporations, and other organizations devoted to the promotion and improvement of higher education in business administration and accounting. A collegiate institution offering degrees in business administration or accounting may volunteer for AACSB accreditation review. The AACSB makes initial accreditation decisions and conducts periodic reviews to promote continuous quality improvement in management education. Pearson Education is a proud member of the AACSB and is pleased to provide advice to help you apply AACSB assurance of learning standards.

What Are AACSB Assurance of Learning Standards? One of the criteria for AACSB accreditation is quality of the curricula. Although no specific courses are required, the AACSB expects a curriculum to include learning experiences in areas such as the following:

1. Communication

2. Ethical Reasoning

3. Analytic Skills

4. Use of Information Technology

5. Multicultural and Diversity

6. Reflective Thinking

Questions that test skills relevant to these guidelines are appropriately tagged. For example, a question testing the moral questions associated with externalities would receive the Ethical Reasoning tag.

How Can Instructors Use the AACSB Tags? Tagged questions help you measure whether students are grasping the course content that aligns with the AACSB guidelines noted. In addition, the tagged questions may help instructors identify potential applications of these skills. This in turn may suggest enrichment activities or other educational experiences to help students achieve these skills.

TestGen

The computerized TestGen package allows instructors to customize, save, and generate classroom tests. The test program permits instructors to edit, add, or delete questions from the Test Item Files; edit existing graphics and create new graphics; analyze test results; and organize a database of tests and student results. This software allows for extensive flexibility and ease of use. It provides many options for organizing and displaying tests, along with search and sort features. The software and the Test Item Files can be downloaded from the Instructor’s Resource Center (

PowerPoint® Lecture Presentation

Three sets of PowerPoint® slides, prepared by Fernando Quijano of Dickinson State University, and his assistant Shelly Tefft, are available for instructors to use.

1.A comprehensive set of PowerPoint® slides that can be used by instructors for class presentations or by students for lecture preview or review. The presentation includes all the graphs, tables, and equations in the textbook. Two versions are available—the first is in step-by-step mode so that you can build graphs as you would on a blackboard, and in an automated mode, using a single click per slide.

2.A comprehensive set of PowerPoint® slides with Classroom Response Systems (CRS) questions built in so that instructors can incorporate CRS “clickers” into their classroom lectures. For more information on Prentice Hall’s partnership with CRS, see the description below. Instructors may download these PowerPoint presentations from the Instructor’s Resource Center (

3.A student version of the PowerPoints is available as .pdf files from the book’s MyEconLab Course. This version allows students to print the slides and bring them to class for note taking.

Instructor’s Resource CD-ROM

The Instructor’s Resource CD-ROM contains all the faculty and student resources that support this text. Instructors have the ability to access and edit the following three supplements:

Instructor’s Manual

Three Test Item Files

PowerPoint® presentations

By clicking on a chapter or searching for a key word, faculty can access an interactive libraryof resources. Faculty members can pick and choose from the various supplements and export them to their hard drives.

Classroom Response Systems

Classroom Response Systems (CRS) is an exciting new wireless polling technology that makes large and small classrooms even more interactive because it enables instructors to pose questions to their students, record results, and display the results instantly. Students can answer questions easily by using compact remote-control transmitters. Prentice Hall has partnerships with leading providers of classroom response systems and can show you everything you need to know about setting up and using a CRS system. We provide the classroom hardware, text-specific PowerPoint® slides, software, and support; and we show you how your students can benefit. Learn more at

Blackboard® and WebCT® Course Content

Prentice Hall offers fully customizable course content for the Blackboard® and WebCT® Course Management Systems.

Both the text and supplement package provide ways for instructors and students to assesstheir knowledge and progress through the course. MyEconLab, the new standard in personalized online learning, is a key part of Case, Fair, and Oster’s integrated learning package for the 10th edition.

For the Instructor

MyEconLab is an online course management, testing, and tutorial resource. Instructors can choose how much or how littletime to spend setting up and using MyEconLab. Each chaptercontains two Sample Tests, Study Plan Exercises, and TutorialResources. Student use of these materials requires no initialsetup by their instructor. The online Gradebook records each student’s performance and time spent on the Tests and StudyPlan and generates reports by student or by chapter. Instructorscan assign tests, quizzes, and homework in MyEconLab usingfour resources:

Preloaded Sample Tests

Problems similar to the end-of-chapter problems

Test Item File questions

Self-authored questions using Econ Exercise Builder

Exercises use multiple-choice, graph drawing, and free-response items, many of which are generated algorithmically so that each time a student works them, a different variation is presented.MyEconLab grades every problem, even those with graphs.When working homeworkexercises, students receive immediate feedback with links to additional learning tools.

Customization and Communication MyEconLab in CourseCompass™ provides additionaloptional customization and communication tools. Instructors who teach distance learningcourses or very large lecture sections find the CourseCompass format useful because theycan upload course documents and assignments, customize the order of chapters, and usecommunication features such as Digital Drop Box and Discussion Board.

For the Student

MyEconLab puts students in control of their learning through a collection of tests, practice, and study tools tied to the online interactive version of the textbook, as well as other media resources.Within MyEconLab’s structured environment, students practice what they learn, test their understanding,and pursue a personalized Study Plan generated from their performance on Sample Tests and tests set by their instructors.At the core of MyEconLab are the following features:

Sample Tests, two per chapter

Personal Study Plan

Tutorial Instruction

Graphing Tool

Sample Tests Two Sample Tests for each chapter are preloaded in MyEconLab, enabling students to practicewhat they have learned, test their understanding, andidentify areas in which they need further work. Studentscan study on their own, or they can complete assignmentscreated by their instructor.

Personal Study PlanBased on a student’sperformance on tests,MyEconLab generates apersonal Study Plan thatshows where the studentneeds further study. TheStudy Plan consists of aseries of additional practiceexercises with detailedfeedback and guided solutionsthat are keyed toother tutorial resources.