COMBINED FINAL EXAM REVIEW

According to "monetary neutrality" by the Monetarists, using the aggregate demand-aggregate supply model, an increase in money supply by the Fed will:

increase output in the short run, but not in the long run

According to "monetary neutrality" by the Monetarists, using the aggregate demand-aggregate supply model, an increase in money supply by the Fed will:

increase output in the short run, but not in the long run.

In the IS-LM analysis, the increase in equilibrium output resulting from a tax cut is usually ______ the increase in income resulting from an equal rise in government spending.

less than

The theory of liquidity preference implies that the quantity of real money balances demanded is:

negatively related to the interest rate and positively related to income.

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

output and employment will increase in the short run

An economy's production function is Y = AK0.3L0.7. Suppose that a gift of capital from abroad raises the capital stock by 20 percent, then

real rental price will fall by 12.0% and real wage will rise by 5.62%.

In the Solow growth model, the economy ends up with a steady-state level of capital:

regardless of the starting level of capital.

Net jobs gains =

# of jobs created - # of jobs destroyed

In the Keynesian-cross model, if the MPC equals .75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$.75 billion; more than $.75 billion

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes will increase planned expenditures by ______ and increase the equilibrium level of income by ______.

$0.75 billion; $3 billion

In the Keynesian-cross model, if the MPC equals .75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$1 billion; more than $1 billion

If the GDP deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009?

$12 trillion

A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bread for $6. The value added by the miller is __________.

$2

Assume that a tire company sells four tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is:

$20,000

Assume that apples cost $0.50 in 2002 and $1 in 2007, whereas oranges cost $1 in 2002 and $1.50 in 2007. If 4 apples were produced in 2002 and 5 in 2007, whereas 3 oranges were produced in 2002 and 4 in 2007, then real GDP (in 2002 prices) in 2007 was _________

$6.50

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real GDP (in 2002 prices) in 2009 was:

$6.50.

If GDP (measured in billions of current dollars) is $5,465 and the sum of consumption, investment, and government purchases is $5,496, while exports equal $673, imports are ________.

$704

what is the real money demand function?

( M / P )^d = L(Y,r) where Y = income and r = interest rate

what is the equation for Labor Force Participation Rate?

(# in labor force / # in population) x 100

What is the equation for Unemployment Rate?

(# of unemployed/# in labor force) * 100

In the Solow growth model of Chapter 7, where s is the saving rate, y is output per worker, and i is investment per worker, consumption per worker (c) equals:

(1 - s)y

What is the equation for CPI of YR1?

(Cost of Market Basket in normal YR1 / Cost of Market Basket in YRBY) * 100

symbol for real money supply

(M^s)/P

What is the equation for inflation rate?

(New CPI-Old CPI)/(Old CPI) x 100

What is the equation for GDP Deflator?

(Nominal GDP/Real GDP) x 100

What is the equation for Nominal GDP?

(Quantity1 * Price1) + (Quantity2 * Price2)

What is the equation for Real GDP?

(Quantity1 * Price1BY) + (Quantity2 * Price2BY) Note: Base Year = use Price of Base Year

Describe CPI

- A purchase made by a typical household - average price of the market basket

how would the IS curve shift if we changed tax?

- An increase in Demand: (decrease T) will shift IS curve to the RIGHT - A decrease in Demand: (increase T) will shift IS curve to the LEFT

how would the IS curve shift if we changed government spending?

- An increase in Demand: (increase G) will shift IS curve to the RIGHT - A decrease in Demand: ( decrease G) will shift IS curve to the LEFT

expansionary fiscal policy

- An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output - budget deficit

Why does the IS curve slope downward?

- Because it has a negative slope from the Investment equation and investment demand curve? - As the real interest rate​ rises, consumption​ expenditure, planned investment​ spending, and net exports​ fall, which in turn lowers planned expenditure. Aggregate output must be lower for it to equal planned expenditure and satisfy goods market equilibrium.​ Hence, the IS curve is​ downward-sloping.

contractionary fiscal policy

- Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation. - budget surplus

How does the LM curve change as Money supply changes?

- Money Supply increases --> interest rate decreases --> LM curve shifts DOWN and to the RIGHT - Money Supply decreases --> interest rate increases --> LM curve shifts UP and to the LEFT

What are the drawbacks of using CPI?

- New product bias - Quality bias - Substitution bias

If Y1 < Y* then Y < E ...

- There is a decrease in unplanned inventory - Firms produce more - Increase output until it reaches Y*

If Y2 > Y* then Y > E ...

- There is an increase in inventory - Firms decrease production - Decrease output until it reaches Y*

what is counted towards GDP as part of Consumption (C)?

- durable - nondurable - services

Types of transactions that are NOT counted towards GDP and market value...

- illegal activities - off-the-book work - home production

Elastic means...

- large variable b - IS curve is FLAT - very sensitive to change in interest rate - decrease interest rate will increase investment by a large amount - a large increase in investment will increase Y by a large amount

what is counted towards GDP as part of Investment (I)?

- physical investment (i.e. plants, equipment) - residential investment (housing) - inventories

Inelastic means...

- small variable b - IS curve is STEEP - not sensitive to change in interest rate - decrease interest rate will increase investment by a small amount - a small increase in investment will increase Y by a small amount

what is counted towards GDP as part of Government Purchase (G)?

- state - local - federal (exclude transfer payments)

reserve requirement ratio

- the minimum required percentage of money banks must keep in their vaults - prevents bankrun

What does the LM curve map?

- the relationship between equilibrium interest rate (r) and level of income (Y) - represents equilibrium in the market - Willingness to hold cash = amount of cash available

If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and government purchases are $1,098, then net exports are:

-$31

The steady-state level of capital occurs when the change in capital stock (Δk) equals:

0

The steady-state level of capital occurs when the change in the capital stock (k) equals:

0

Suppose that the production function describing a closed economy is Y = 10 K0.25L0.75 and it has the quantities of labor L = 100 and capital K = 100. Then the economy's output is ______ and the real wage is ______.

1,000; 7.5

Suppose that the production function describing a closed economy is Y=10(K^0.25)(L^0.75) and it has the quantities of labor L = 100 and capital K = 100. Then the economy's output is _________ and the real wage is _________.

1,000; 7.5

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at:

1,600

What counts towards GDP?

1. Market value 2. only final goods and services 3. only production within a country 4. only goods and services produced during the current period

What are 4 ways the Fed changes the money supply?

1. Reserve Requirement Ratio 2. Open Market Operations Buying / Selling Bonds 3. Discount Rate 4. New Tools

GDP is not a perfect measurement of well-being because...

1. non market productive activities are left out 2. leisure and human costs are left out 3. environmental quality is left out 4. income equality (happiness index)

Assume that apples cost $0.50 in 2002 and $1 in 2007, whereas oranges cost $1 in 2002 and $0.50 in 2007. If 10 apples and 5 oranges were purchased in 2002, and 5 apples and 10 oranges were purchased in 2007, the CPI for 2007, using 2002 as the base year, is _________.

1.25

In the Keynesian-cross model, assuming that MPC is 0.75 and the planned expenditure function is E = 325 + 0.75Y. If the government wants to achieve equilibrium output of 1,600, how much would a decrease in taxes be required? [Hint: you have to find an initial equilibrium total output first.]

100

What is the equation for CPI of base year?

100

Assume that an economy is described by the following set of equations: Y=Y¯=1,200 C=125+0.75(Y−T) I=200−10r G=G¯=150 T=T¯=100 From this information, the equilibrium interest rate (r∗ ) equals _________________ and private saving equals ___________.

10; 150

2018: Apples: 10 units; $0.50 per unit Oranges: 5 units; $1 per unit 2019: Apples: 5 units; $1 per unit Oranges: 10 units; $0.50 per unit From the above information, the CPI for 2019, using 2018 as the base year, is:

125

Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6 (Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is:

13 percent.

Assume that equilibrium output (Y) is 5,000. Consumption is given by the equation C=500+0.6(Y−T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I=2,160−100r, where r is the real interest rate in percent. In this case the equilibrium real interest rate is:

13 percent.

If y = k^0.5, there is no population growth or technological progress, 5 percent of capital depreciates each year, and a country save 20 percent of output per worker each year, then the steady state level of capital per worker is:

16

Assume that apples cost $1 in 2017 and $2 in 2018, whereas oranges cost $0.50 in 2017 and $1 in 2018. If 10 apples were produced in 2017 and 12 in 2018, whereas 4 oranges were produced in 2017 and 10 in 2018, then the real GDP in 2018, using a base year of 2017, is:

17

If Y = AK0.5L0.5 and A = 2, K = 400, and L = 100, then the total payments to labor equal ___________.

200

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.

negative; price level

Assume that a typical consumer's basket of goods is composed of two goods as the following: 2018: Roses: 200 units; $5 per unit Guns: 50 units; $20 per unit 2019: Roses: 100 units; $10 per unit Guns: 80 units; $20 per unit Using year 2018 as the base year, what is the rate of inflation in year 2019, according to the GDP deflator method of calculating price index?

23.8%

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:

260

If the per-worker production function is given by y = k^0.5, the saving rate is 0.3, and the depreciation rate is 0.1, then the steady-state output per worker (y*) is:

3

According to the standard IS-LM model, if MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

300

If MPC = 0.75 (and there is only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:

300

Suppose the following equations describe a closed economy: Y=C+I+G C=200+0.75(Y−T) I=200−25r G=100 T=100 Ms=1,000 P=2 (MP)d=Y−100r From the information given above, suppose that the government tries to stimulate the economy by raising G by 200 (G2=300). And, if the Fed wants to fix interest rate at 6%, how much money supply (MS) should the Fed set? (Write your answer in the provided space.) New Ms = ________________

3200

If the per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is:

4

If the per-worker production function is given by y = k^1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is:

4

Suppose that the production function describing a closed economy is Y = 10 K0.25L0.75 and it has the quantities of labor L = 100 and capital K = 100. Then the economy's output is ______ and the real rent is ______.

4,000; 2.5

Consider a competitive economy that has the quantities of labor (L = 400) and capital (K = 400), and the technology (A = 10). The economy described by the following Cobb-Douglas production function: Y = A L.7K.3 The economy's total output is ____________ and the real wage in this economy is ____________.

4,000; 7

If MPC = 0.75 (and there are no income taxes) when G increases by 100, then the IS curve for any given interest rate shifts to the right by:

400.

Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is:

5 percent.

If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:

50

If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:

50.

Suppose that the following equations describe a closed economy: C=100+0.6(Y−T) I=100,G=100,T=100 From the above information, suppose that investment (I) declined by 40 units to a level of 60, the new level of equilibrium income (new Y*) = __________.

500

If a country's population (age 16 and over) is 50 million, with 2 million unemployed and 28 million currently holding jobs, the unemployment rate is ____ percent and the labor force participation is ___ percent.

6.7; 60

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals ______ percent.

60

Suppose that the following equations describe a closed economy: C=100+0.6(Y−T) I=100,G=100,T=100 From the above information, the equilibrium output (Y*) = _____.

600

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals ______ percent and the unemployment rate is ____ percent.

60; 3.33

A closed economy has the production function: Y = (K^0.5)(L^0.5) Suppose that saving rate (s) = 0.40 and depreciation rate (δ) = 0.05. There is no population growth or technological progress in this economy. Use the information above to solve for the steady-state output per worker. k* is

64

Assume that the adult population of the United States is 191.6 million, total employment is 117.6 million and 9.4 million are unemployed. Then the unemployment rate is approximately ___________ percent.

7.4

Formula for Government Budget Deficit

= T - G

Assume that two countries both have the per-worker production function y = k1/2, neither has population growth or technological progress, depreciation is 5 percent (δ = .05) of capital in both countries, and country A saves 10 percent (sA = 0.10) of output whereas country B saves 20 percent (sB = 0.20). If A starts out with a level of capital per worker of 4 and B starts out with a level of capital per worker of 2, in the long run, at the steady state:

A's level of capital per worker will be 4 whereas B's will be 16.

If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and net exports are -$1,910, then government purchases are: A) $2,977. B) $1,910. C) -$843. D) $1,067.

A) $2,977.

Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is: A) $20,000. B) $20,000 less the automobile company's profit on the car. C) $20,900. D) $20,900 less the profits of all three companies on the items that they sold.

A) $20,000.

One policy response to the U.S. economic slowdown of 2001 was to increase money growth. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

LM; right

Jen (American citizen) buys a designer dress produced by an American-owned fashion shop in France. As a result, U.S. consumption increases, A) U.S. net exports decrease, U.S. GDP is unaffected, but U.S. GNP increases. B) U.S. net exports decrease, U.S. GDP increases, but U.S. GNP is unaffected. C) U.S. net exports decrease, U.S. GDP increases, and French GDP increases. D) U.S. net exports are unaffected, U.S. GDP is unaffected, but French GDP increases.

A) U.S. net exports decrease, U.S. GDP is unaffected, but U.S. GNP increases.

The simple investment function shows that investment ______ as ______ increases. A) decreases; the interest rate B) increases; the interest rate C) decreases; government spending D) increases; government spending

A) decreases; the interest rate

An increase in taxes shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis: A) downward and to the left. B) upward and to the right. C) upward and to the left. D) downward and to the right.

A) downward and to the left.

All of the following are measures of GDP except the total: A) expenditures of all businesses in the economy. B) income from all production in the economy. C) expenditures on all final goods produced. D) value of all final production.

A) expenditures of all businesses in the economy.

In the Keynesian-cross and IS models, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

A) increases; increases

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

A) increases; increases

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier. A) is larger than B) equals C) is smaller than D) is the inverse of the

A) is larger than

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier. A) is larger than B) equals C) is smaller than D) is the inverse of the

A) is larger than

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will: A) lower the interest rate. B) raise the interest rate. C) have no effect on the interest rate.

A) lower the interest rate.

The investment component of GDP includes all of the following except: A) purchases of corporate stock. B) spending on new plants and equipment. C) purchases of new housing by households. D) changes in business inventories.

A) purchases of corporate stock.

An increase in the price of imported goods will show up in: A) the CPI but not in the GDP deflator. B) the GDP deflator but not in the CPI. C) both the CPI and the GDP deflator.

A) the CPI but not in the GDP deflator.

Suppose that MPC = 0.8. If T decreases by 100, then the IS curve, for any given interest rate, will shift: A) to the right by 400. B) to the right by 500. C) to the left by 400. D) to the left by 100.

A) to the right by 400.

In this graph, initially the economy is at point E, with price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the President and the Congress decide to decrease government spending (to deal with a high national debt issue). The economy moves first to point ______ and then, in the long run (through the self-corrective mechanism), to point ______. (see exam 2, question 18 for graph)

A; D

(Exhibit: Steady-State Consumption II) The Golden Rule level of steady-state consumption per worker is: (see graph in question 12 of Practice for Chapter 7)

AB

In this graph, when the level of capital per worker is OA, (see graph in Solow Model Practice Problems #5)

AB represents investment per worker, and BC represents consumption per worker.

In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______. A) $1 billion; more than $1 billion B) $0.75 billion; more than $0.75 billion C) $0.75 billion; $0.75 billion D) $1 billion; $1 billion

B) $0.75 billion; more than $0.75 billion

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If four apples were produced in 2002 and five in 2009, whereas three oranges were produced in 2002 and four in 2009, then real GDP (in 2002 prices) in 2009 was: A) $5. B) $6.50. C) $9.50. D) $11.

B) $6.50.

All of the following transactions that took place in 2009 would be included in GDP for 2009 except the purchase of a: A) book printed in 2009, entitled The Year 3000. B) 2001 Jeep Cherokee. C) year 2010 calendar printed in 2009. D) ticket to see the movie 2001.

B) 2001 Jeep Cherokee.

If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately ______ percent. A) 3.5 B) 4.7 C) 4.9 D) 7

B) 4.7

Assume that the adult population of the United States is 191.6 million, total employment is 117.6 million, and 9.4 million are unemployed. Then the unemployment rate, as normally computed, is approximately ______ percent. A) 4.9 B) 7.4 C) 7.9 D) 9.4

B) 7.4

When planned expenditure is drawn on a graph as a function of income, the slope of the line is: A) zero. B) between zero and one. C) one. D) greater than one.

B) between zero and one.

When planned expenditure is drawn on a graph as a function of income, the slope of the line is: A) zero. B) between zero and one. C) one. D) greater than one.

B) between zero and one.

Use the 3-diagram for deriving the IS curve to answer this question. As the interest rate decreases, the quantity of investment ______, and this shifts the expenditure function ______, causing the equilibrium income to _______. A) increases; downward; decrease B) increases; upward; increase C) decreases; upward; increase D) decreases; downward; decrease

B) increases; upward; increase

When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce production. C) hire more workers and increase production. D) call for more government spending.

B) lay off workers and reduce production.

According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will: A) sell interest-earning assets in order to obtain non-interest-bearing money. B) purchase interest-earning assets in order to reduce holdings of non-interest- bearing money. C) purchase more goods and services. D) be content with their portfolios.

B) purchase interest-earning assets in order to reduce holdings of non-interest- bearing money.

An increase in the price of goods bought by firms and the government will show up in: A) the CPI but not in the GDP deflator. B) the GDP deflator but not in the CPI. C) both the CPI and the GDP deflator. D) neither the CPI nor the GDP deflator.

B) the GDP deflator but not in the CPI.

If the investment demand function is I = c - dr and d is very small, then A) the IS curve will be relatively flat. B) the IS curve will be relatively steep. C) the IS curve will be vertical. D) the planned expenditure curve (E) will be flatter than usual.

B) the IS curve will be relatively steep.

If a U.S. citizen is employed by a U.S. company in Brazil, the income she earns is: A) part of U.S. GDP and Brazil's GNP B) part of U.S. GDP and Brazil's GDP C) part of U.S. GNP and Brazil's GNP D) part of U.S. GNP and Brazil's GDP

D) part of U.S. GNP and Brazil's GDP

Use the IS-LM model to answer this question. Suppose that the government of three identical countries, Alpha, Beta, and Delta, cut taxes by the same amount. The Central Bank of Alpha follows a policy of holding a constant money supply. The Central Bank of Beta follows a policy of holding a constant interest rate. The Central Bank of Delta decreases money supply. Which country will have the largest increase in equilibrium output?

Beta

In the classical model, if a production function has constant returns to scale, we could derive the demand for labor from: A) the slope of the production function. B) the marginal product of labor. C) real wage. D) Both A and B are correct.

Both A and B are correct

Consider the following statements and judge whether the statements are TRUE or not: I. The fiscal policy is more effective when investment demand is relatively inelastic. II. If money demand is extremely sensitive to change in interest rates, then the fiscal policy is more effective.

Both I and II are true

Assume a rancher sells a quarter-pound of meat to McDonald's for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, the value included in GDP should be: A) $0.50. B) $1. C) $2. D) $3.

C) $2.

If nominal GDP in 2009 equals $14 trillion and real GDP in 2009 equals $11 trillion, what is the value of the GDP deflator? A) 0.79 B) 1.03 C) 1.27 D) 1.30

C) 1.27

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor force participation rate equals ______ percent. A) 50 B) 58 C) 60 D) 67

C) 60

Assume that a bakery hires more workers and pays them wages and that the workers produce more bread. GDP increases in all of the following cases except when the bread: A) is sold to households. B) is stored away for later sale. C) grows stale and is thrown away. D) is sold to other firms.

C) grows stale and is thrown away.

The Keynesian-cross analysis assumes planned investment: A) is fixed and so does the IS analysis. B) depends on the interest rate and so does the IS analysis. C) is fixed, whereas the IS analysis assumes it depends on the interest rate. D) depends on expenditure and so does the IS analysis.

C) is fixed, whereas the IS analysis assumes it depends on the interest rate.

When a firm sells a product out of inventory, GDP: A) increases. B) decreases. C) is not changed. D) increases or decreases, depending on the year the product was produced

C) is not changed.

Real GDP is a better measure of economic well-being than nominal GDP, because real GDP: A) excludes the value of goods and services exported abroad. B) includes the value of government transfer payments. C) measures changes in the quantity of goods and services produced by holding prices constant. D) adjusts the value of goods and services produced for changes in the foreign exchange rate.

C) measures changes in the quantity of goods and services produced by holding prices constant.

GNP equals GDP ______ income earned domestically by foreigners ______ income that nationals earn abroad. A) plus; plus B) minus; minus C) minus; plus D) plus; minus

C) minus; plus

Prices of items included in the CPI are: A) averaged with the price of every item weighted equally. B) weighted according to amount of the item produced in GDP. C) weighted according to quantity of the item purchased by the typical household. D) chained to the base year by the year-to-year growth rate of the item.

C) weighted according to quantity of the item purchased by the typical household.

In this graph, initially the economy is at point E, with the price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the Fed increases money supply. The economy moves first to point ______ and then, in the long run (through the self-corrective mechanism), to point ______. (see exam 2, question 19 for graph)

C; B

What is the Laspeyres index?

CPI index

An increase in the price of imported goods will show up in __________ but not _________.

CPI, GDP Deflator

In the Keynesian-cross analysis, if the consumption function is given by C = 150 + 0.75(Y - T), and T increases by 1 unit, what would happen to consumption and the equilibrium income?

Consumption will decrease by 0.75 units; the equilibrium income will fall by 3 units.

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $0.50 in 2009. If ten apples and five oranges were purchased in 2002, and five apples and ten oranges were purchased in 2009, the CPI for 2009, using 2002 as the base year, is: A) 0.75. B) 0.80. C) 1. D) 1.25.

D) 1.25.

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: A) 200. B) 240. C) 250. D) 260.

D) 260.

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: A) 200. B) 240. C) 250. D) 260.

D) 260.

Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is: A) 200. B) 240. C) 250. D) 260.

D) 260.

Changes in fiscal policy shift the: A) LM curve. B) money demand curve. C) money supply curve. D) IS curve.

D) IS curve.

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income. A) increases; downward B) increases; upward C) decreases; upward D) decreases; downward

D) decreases; downward

GDP is the market value of all ______ goods and services produced within an economy in a given period of time. A) used B) intermediate C) consumer D) final

D) final

When the interest elasticity of money demand is low,

the LM curve is steep

If investment is NOT very sensitive to changes in interest rates, then A) the investment demand curve is relatively flat, and the IS curve is flat. B) the investment demand curve is relatively steep, and the IS curve is flat. C) the investment demand curve is relatively flat, and the IS curve is steep. D) the investment demand curve is relatively steep, and the IS curve is steep.

D) the investment demand curve is relatively steep, and the IS curve is steep.

Two equivalent ways to view GDP are as the: A) total payments made to all workers in the economy or the total profits of all firms and businesses in the economy. B) total expenditures on all goods produced in the economy or the total income earned from producing all services in the economy. C) total profits of all firms and businesses in the economy or the total consumption of goods and services by all households in the economy. D) total income of everyone in the economy or the total expenditure on the economy's output of goods and services.

D) total income of everyone in the economy or the total expenditure on the economy's output of goods and services.

What is the equation for Government Spending Multiplier?

Delta G * ( 1 / 1 - MPC)

What is the equation for net change?

Delta G * ( 1 / 1 - MPC) - Delta T * (MPC / 1 - MPC)

What is the equation for Tax Multiplier?

Delta T * (MPC / 1 - MPC)

symbol for planned expenditure

E

Formula for planned expenditure in a closed economy

E = C + I + G

If Fed A cares only about keeping the price stable at its original level and Fed B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

Fed A should decrease the money supply whereas Fed B should increase the money supply

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

Fed A should decrease the quantity of money stable whereas Fed B should increase it.

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

Fed A should keep the quantity of money stable whereas Fed B should increase it

what happens when the Federal Reserve buys bonds?

Fed buys bonds --> inject money --> increase money supply

What is left out from GDP measurement?

Financial Transactions and income transfers (i.e. brokerage fee)

what is the Paasch index?

GDP Deflator

what is the difference between GDP and GNP?

GDP measures location (within a country's borders. Japanese owned company in U.S.) GNP measures ownership (U.S. owned company overseas)

what does GDP stand for?

Gross Domestic Product

what does GNP stand for?

Gross National Product

An increase in the government spending shifts the ______, and the aggregate demand curve ______.

IS curve to the right; shifts to the right

An increase in taxation shifts the ______________ and the aggregate demand curve to the ____________.

IS curve; left

If investment demand is extremely sensitive to the interest rate, then the _______ curve is ____________ and ___________ is effective.

IS; flat; monetary

One policy response to the U.S. economic slowdown of 2001 were tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

IS; right

What would happen to the planned expenditure curve & equilibrium level of output if there was an increase in government spending?

If G increased by # then --> increase E; Parallel shift of E upward by # --> increase Y; shifts to the right

What would happen to the planned expenditure curve & equilibrium level of output if there was a tax cut?

If T decreased by # then --> increase Disposable Income by (Y - T) * (#) --> increase consumption by (# * MPC) --> increase E

what will happen to interest rate when the money supply changes?

If the Fed decreases Money Supply --> shifts the vertical supply curve to the LEFT --> increases interest rate to discourage people from holding cash

In the standard IS-LM model, which set of the policy mix will generate the largest increase in the equilibrium output?

Increase G and increase MS.

Suppose that your government is only interested in increasing the economy's output. In the standard IS-LM model, which set of the policy mix will generate the largest increase in the equilibrium output?

Increase G and increase money supply

Which of the following transactions would be included in this year's GDP?

Johnson rents a five-year-old house from Smith.

Which of the follow assumptions belongs to the Monetarist hypothesis about the IS and LM curves?

LM is very steep because people tend to hold money as a constant proportion of their income.

A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______,

LM; does not shift

Since December 2008, the target interest rate has been kept to the range of 0 to 0.25 percent. Some economists believe that the U.S. economy might experience a "liquidity trap." According to the IS-LM model, the liquidity trap hypothesis implies the _______ is flat and ________ is ineffective.

LM; monetary

what is M1

M1 = cash + checkable deposit + traveler's checks (i.e. money orders) similar to checking accounts

What is real money?

M1 and M2

what is M2

M2 = M1 + savings deposits + time deposits (i.e. CD's) + money market mutual funds (i.e. a firm / broker invests your money) includes credit cards

The profit-maximizing firm will rent capital inputs up to the point where:

MPK = real rental price of capital

what does MPC stand for?

Marginal Propensity to Consume

Is CPI across countries comparable?

NO

Which of the following statements is correct? 1. When the Fed buys U.S. government securities from the public, the money supply will increase and the national debt will increase. 2. The discount rate is the interest rate at which banks lend reserves to each other overnight.

Neither 1 nor 2 is correct.

Which of the following statements is correct? I. When the Fed increases the discount rate, the supply of real money will shift to the right causing the interest rate to fall. II. The discount rate is the interest rate at which banks lend reserves to each other overnight.

Neither I nor II is correct

Which of the following statements is correct? 1. The Keynesian-cross model assumes that investment (I) is a constant. 2. The IS analysis assumes that investment (I) is positively related to interest rate.

Only 1 is correct.

Which of the following statements is correct? 1. The IS curve will be relatively steep if investment demand is highly sensitive to changes in interest rates. 2. For the investment demand function: I = c - dr, when d is very small, the investment demand is relatively inelastic.

Only 2 is correct.

Consider the following statements and judge whether the statements are TRUE or FALSE: I. The monetary policy is more effective when the interest elasticity of investment demand is high. II. Other things equal, an increase in government spending has a larger effect on equilibrium output when the IS curve is relatively flat.

Only I is true

All of the following actions are investments in the sense of the term used by macroeconomists except: - John Smith's buying a newly constructed home. - Sandra Santiago's buying 100 shares of IBM stock. - IBM's building a new factory. - The corner candy store's buying a new computer.

Sandra Santiago's buying 100 shares of IBM stock.

What factor determines the steepness/flatness of the IS curve?

The interest elasticity of INVESTMENT demand determines the slope of the IS curve

What is MPC?

The slope of the consumption function

Consider a closed, competitive economy that has the quantities of labor L = 400 and capital K = 400, and the technology A =10. The economy is described by the Cobb-Douglas production function: Y = AK0.7L0.3 Which of the following options is INCORRECT? - The total payments to labor = the total payments to capital owners - The total payments to labor = 0.3Y. - The total payments to labor = MPL.L - The total payments to labor = real wage x L

The total payments to labor = the total payments to capital owners

An American digital camera producer in Boston has an increase in inventory of 50 cameras in 2010. In 2011, it sells all 50 cameras.

The value of increased inventory will be counted as part of GDP in 2010, but the value of the cameras sold in 2011 will not cause GDP in 2011 to increase.

According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, which of the following statements is CORRECT?

Total real payment to labor =(W/P)*L

If a U.S. household buys a $75 handbag from Italy, U.S. consumption increases by $75,

U.S. imports increase by $75, but U.S. GDP is unaffected.

If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:

Y = 1,100, r = 6 percent.

Suppose that the following equations describe a closed economy: C = 0.8(Y - T) G = 1,000 T = 1,000 I = 800 - 20r From this information, the equation for the IS curve is:

Y = 5,000 - 100r

Describe the Keynesian Equilibrium

Y = E 45 degree line

Which of the following transactions would included in this year's GDP?

Your real estate agent earns $5,000 commissions when you sell your 11-year-old house for $100,000.

Assume two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state the country with the higher saving rate will have ______ level of output per worker and ______ growth of output per worker as/than the country with the lower saving rate.

a higher; the same

Assume two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state the country with the higher saving rate will have ______ level of total output and ______ rate of growth of output per worker as/than the country with the lower saving rate.

a higher; the same

Define out of Labor Force

a person who has not been actively looking for a job, nor waiting to return to a job i.e. full time student, retired, homemakers, disabled

Define unemployed

a person who is not currently having a job, but either looking for a job OR waiting to return to a job

Define employed

a person who is working as either a full-time, part-time, or self-employed job

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run aggregate supply

In the aggregate demand/aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run and long-run aggregate supply.

what is the discount rate?

an interest rate that the Federal Reserve charges banks

Discouraged workers:

are counted as part of the adult population, but not as part of the labor force.

The theory of liquidity preference implies that:

as the interest rate rises, the demand for real balances will fall.

According to the neoclassical theory of distribution in Ch. 3, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed:

between the labor and capital used in production, according to their marginal productivities

According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed:

between the labor and capital used in production, according to their marginal productivities.

In the short run, according to the AD/AS model and assuming that short-run aggregate supply curve is upward sloping, a tax increase policy causes:

both output and prices to fall.

According to the IS-LM model, if Congress increases government spending but the Fed wants to hold interest rate constant, then the Fed must ________ .

buy bonds

If the Fed wants to decrease the interest rate, the Fed would:

buy bonds to increase the money supply.

The monetary transmission mechanism in the IS-LM model is a process whereby an increase in the money supply increases the demand for goods and services:

by lowering the interest rate so that investment spending increases

what is real GDP measured in?

constant dollar value

What does CPI stand for?

consumer price index

According to the model developed in Chapter 3, when taxes decrease without a change in government spending:

consumption increases and investment decreases.

The Golden Rule level of capital accumulation is the steady state with the highest level of:

consumption per worker.

What is nominal GDP measured in?

current dollar value

Nominal GDP means the value of goods and services measured in ___________ prices, while real GDP measures the value of goods and services in ________ prices.

current; constant

Use the 3-diagram for deriving the IS curve to answer this question. As the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, causing the equilibrium income to _______.

decreases; downward; decrease

According to the IS-LM model, if Congress cuts taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

decrease

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will:

decrease

what happens when the Federal Reserve decreases the discount rate?

decrease discount rate --> banks become more aggressive in lending out --> increase money supply

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of deltaT will:

decrease equilibrium income by (delta T)(MPC)/(1 - MPC).

According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will:

decrease equilibrium income by (∆T)(MPC)/(1 - MPC).

what happens if there is a decrease in the Reserve Requirement Ratio?

decrease in rrr --> banks keep less cash in vaults --> increase in giving out loans --> increase money supply

A shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will ______ in the long run, as compared to a short-run equilibrium.

decrease output but increase prices

An increase in the supply of capital will:

decrease the real rental price of capital.

According to the classical model, when taxes are increased but government spending is unchanged, interest rates:

decrease.

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will:

decrease.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level.

decrease; LM

According to the theory of liquidity preference, holding the supply of real money balances constant, a decrease in income will ______ the demand for real money balances and will ______ the interest rate.

decrease; decrease

In the Solow growth model, if depreciation exceeds investment, the capital stock will ______ and output will ______ until the steady state is attained.

decrease; decrease

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate

decrease; decrease; decrease; decrease

In the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease; decrease; decrease; decrease

n the IS-LM model, a decrease in government purchases leads to a(n) ______ in planned expenditures, a(n) ______ in total income, a(n) ______ in money demand, and a(n) ______ in the equilibrium interest rate.

decrease; decrease; decrease; decrease

When a firm sells a product out of inventory, investment expenditures _________ and consumption expenditures _____________.

decrease; increase

From the Expenditure Approach, when a firm sells a product (produced in a previous year) out of inventory, investment expenditures ______, consumption expenditures ______, and GDP _________.

decrease; increase; remains unchanged.

A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage:

decreases GDP by $60,000.

A woman marries her butler. Before they were married, she paid him$20,000 per year. He continues to wait on her as before (but as a husband rather than a wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage _________ (increases, decreases, or does not change) GDP.

decreases by $20,000

If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then consumption:

decreases by 0.85 unit.

In the classical model, if the consumption function is given by C=150+0.85(Y−T) and T increases by 1 unit, then consumption:

decreases by 0.85 unit.

In the IS-LM model, a decrease in the interest rate would be the result of a(n):

increase in the money supply

In the steady state, the capital stock does not change because investment equals:

depreciation of existing capital stock.

According to the definition used by the U.S. Bureau of Labor Statistics, people are considered to be unemployed if they:

do not have a job, but have been looking for work in the past four weeks.

A decrease in government spending shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

downward and to the left

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

downward and to the left.

A decrease in the price level, holding nominal money supply constant, will shift the LM curve:

downward and to the right.

According to the Solow model, if the saving rate increases, the:

economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached.

If the Fed decreases the money supply at the same time as taxes increase, the:

equilibrium level of output will definitely fall.

In the standard IS-LM model, a decrease in the money supply causes an ______ for real money balance at an initial interest rate, and thus the interest rate has to ______ to equate the quantity money demanded and the money supply, and this shifts the ______.

excess demand; rise; LM curve to the left

According to the market for real money and the IS-LM model, an increase in money supply will cause __________ real money, interest rate must ________ to bring the money market to the equilibrium. Thus, LM curve will shift to the _________.

excess supply of; fall; right

In the IS-LM model, an increase in the money supply causes an ______ for real money balance at an initial interest rate, and thus the interest rate has to _____ to equate the quantity money demanded to the money supply, and this shifts the __________.

excess supply; fall; LM to the right

An economy's production function is Y = AK0.3L0.7. Suppose that a gift of capital from abroad raises the amount of capital by 10 percent, then real rent will ________and real wage will ______.

fall by 6.45%; rise by 2.90%.

The government raises lump-sum taxes on income by $100 billion, and the classical economy adjusts so that output does not change. If the marginal propensity to consume is 0.75, private saving:

falls by $25 billion.

The government raises lump-sum taxes on income by $100 billion, and the classical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:

falls by $40 billion.

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:

falls by $40 billion.

In the standard IS-LM analysis, when taxation increases, in short-run equilibrium, the interest rate _______ and output _______.

falls; falls

In the standard IS-LM model, when tax increases, in short-run equilibrium, the interest rate _____________ and output ____________.

falls; falls

In the standard IS-LM model, when Ms remains constant but P falls, in short-run equilibrium, the interest rate ______ and output ______.

falls; rises

Other things equal, when the demand for money is extremely elastic,

fiscal policy is effective in changing equilibrium output.

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.

fiscal; low

Assume that a bakery hires more workers and pays them wages and that the workers produce more bread. GDP increases in all of the following cases EXCEPT when the bread:

grows stale and is thrown away.

Assume that a bakery hires more workers and pays them wages and that the workers produce more bread. GDP increases in all of the following cases except when the bread:

grows stale and is thrown away.

Two identical countries, A and B, start at the same equilibrium output level. They differ only in the marginal propensity to consume. Country A's MPC is 0.8. Country B's MPC is 0.75. Both countries decide to cut taxes by $2 billion. Using the Keynesian-cross model, the new equilibrium level of output will be:

higher in country A.

From the AD/AS framework with an upward-sloping SRAS curve, the dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the potential level of output is that monetary policy can either return output to the potential level, but with a ______ price level, or allow the price level to return to its original level, but with a ______ unemployment rate in the short run.

higher; higher

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.

higher; lower

what will happen to interest rate when income changes?

if income increases --> buy more goods and services --> increase # of transactions --> increase in willingness to hold cash --> increase demand for money --> demand curve shifts to the RIGHT --> increases interest rate

The Golden Rule level of the steady-state capital stock:

implies a choice of a particular saving rate.

Unlike the GDP deflator, the CPI includes the prices of:

imported goods.

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

in the long run, but not in the sho

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

in the long run, but not in the short run

What is disposable income?

income after tax (Y - T)

The neoclassical theory of distribution explains the allocation of:

income among factors of production.

According to the IS-LM model, when the government increases taxes and government purchases by equal amounts:

income and the interest rate rise, whereas consumption and investment fall

According to the IS-LM model, if Congress raises taxes but the Fed wants to hold income constant, then the Fed must ______ the money supply.

increase

In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:

increase

In this graph, starting from the level of capital per worker k1, the amount of capital per worker will: (see graph in Solow Model Practice Problems #7)

increase

In the IS-LM model, a decrease in output would be the result of a(n):

increase in money demand

Starting from a steady-state situation, if the saving rate increases, the rate of growth of capital per worker will:

increase until the new steady state is reached.

If the short-run IS-LM equilibrium occurs at a level of income below the natural level of output, then in the long run the price level will ______, shifting the ______ curve to the right and returning output to the natural level.

increase; IS

Based on the graph, starting from equilibrium at interest rate r3 ,income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant the Federal Reserve should _____ the money supply shifting to _____. (see graph on Old Final Exam #27)

increase; LM2

Use the AD/AS model with the upward-sloping short-run aggregate supply curve to answer this question. If a short-run equilibrium occurs at a level of output above the full-employment level, then in the transition to the long run through the self-correcting process, prices will ______ and output will ______ toward the full-employment level.

increase; decrease

From the Expenditure Approach, when a firm sells a product (produced in a previous year) out of inventory, consumption expenditures ___________, investment expenditures ________________, and GDP ______________.

increase; decrease; remains unchanged

In the IS-LM model, the impact of an increase in government purchases in the goods market has ramifications in the money market, because the increase in income causes a(n) ______ in money ______.

increase; demand

According to the theory of liquidity preference, holding the supply of real money balances constant, an increase in income will ______ the demand for real money balances and will ______ the interest rate.

increase; increase

In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output will ______ until the steady state is attained.

increase; increase

In the Solow growth model, if investment is greater than depreciation, the capital stock per worker will ________ and output per worker will __________ until the steady state is attained

increase; increase

In the classical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving _______.

increases; does not change

In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.

increases; increases

Suppose that an economy faces a stagflation, the Fed can return the economy back to its full-employment level of output by _____________; however this action leads to ____________.

increasing money supply; higher inflation

Starting from long-run equilibrium (assuming the upward-sloping SRAS), if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by:

increasing the money supply, but at the cost of permanently higher prices

National income equals net national product minus _________________.

indirect business taxes

what are discouraged workers

individuals who are counted as part of the adult population, but not as part of the labor force

GDP is measured in dollar value, which means ...

inflation effect

A liquidity trap occurs when:

interest rates fall so low that monetary policy is no longer effective

The reason that the income response to a fiscal expansion is generallyless in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

Use the classical model developed in Chapter 3 (and assume that consumption does not depend on the interest rate). In this case, when there is an investment tax rebate that leads to an increase in investment demand:

investment is unchanged and the interest rate rises

Use the classical model in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is an investment incentive program by the government that leads to an increase in investment demand:

investment is unchanged and the interest rate rises.

In the classical model developed in Chapter 3, when there is an investment incentive scheme that leads to an increased in investment demand,

investment is unchanged, but interest rate rises.

In this graph, when the capital-labor ratio is OA, AB represents: (see graph in question 4 of Practice for Chapter 7)

investment per worker, and BC represents consumption per worker.

If taxes are raised, but the Fed prevents income from falling by raising the money supply, then:

investment rises but consumption falls.

In the classical model, the demand for loanable funds is equivalent to:

investment.

If the production function describing an economy is Y = 100 K0.25L0.75, then the share of total income going to capital owners:

is 25 percent.

If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor:

is 75 percent.

If the production function describing an economy is Y = 100 K0.25L0.75, then the share of output going to labor:

is 75 percent.

The Keynesian-cross analysis assumes planned investment:

is fixed, whereas the IS analysis assumes it depends on the interest rate.

According to the theory of liquidity preference, the supply of real money balances:

is fixed.

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier.

is larger than

If an economy with no population growth or technological change has a steady-state MPK of 0.125, a depreciation rate of 0.1, and a saving rate of 0.225, then the steady-state capital stock:

is less than the Golden Rule level

Describe GDP Deflator

it's a byproduct after converting nominal to real it's the average price of all domestically produced goods and services that you count in GDP

what is quantitative easing?

large-scale asset purchases

A higher saving rate leads to a:

larger capital stock and a higher level of output per worker in the long run.

In the Keynesian-cross diagram, comparing with an equilibrium level Y=E, if planned expenditure exceeds total output, then output level will be on the ______ of the equilibrium output and unplanned inventory will ______.

left; decline

Other things being equal, when the Fed sells bonds, the money supply curve shifts to the _____________ causing interest rate to _____________.

left; increase

The increase in equilibrium output in response to a fiscal expansion in the IS-LM model is:

less than in the Keynesian-cross model unless the LM curve is horizontal

The increase in income in response to a fiscal expansion in the

less than in the Keynesian-cross model unless the LM curve is horizontal.

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

level of output but not prices

The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:

lower the interest rate.

According to the standard IS-LM model, if Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

If Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.

lower; lower

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

lower; to the left

If the real money demanded function is (M/P)^d = aY - br and the slope coefficient b is extremely small, then:

monetary policy is effective

If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.

monetary; low

What factor shifts the LM curve?

money supply

Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker:

more in Lowland.

When r changes, move along the IS curve or shift the IS curve?

move along IS curve

In the classical model, the supply of loanable funds is equivalent to:

national saving.

According to the AD/AS model, assume that the short-run aggregate supply curve is upward sloping and the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.

output and prices both decrease; fall

Assume that the economy begins in long-run equilibrium and the SRAS is upward-sloping curve. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.

output and prices both decrease; fall

Use the AD/AS model with the upward-sloping short-run aggregate supply curve to answer this question. Assume that the economy begins in long-run equilibrium. Then, the Fed increases the money supply. In the short run ______, whereas in the long run, prices ______ and output returns to its original level.

output and prices both increase; rise

The production function y = f(k) means:

output per worker is a function of capital per worker

According to the AD/AS framework, assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.

output; prices

For the purposes of the Keynesian cross, planned expenditure consists of:

planned investment, government spending, and consumption expenditures.

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

prices but not level of output

According to the AD/AS model, in the short run, a favorable supply shock causes:

prices to fall and output to rise.

In the short run, an adverse supply shock causes:

prices to rise and output to fall

According to the AD/AS model (assuming the upward-sloping short-run aggregate supply curve), starting from long-run equilibrium, without policy intervention, the long-run impact (based on the self-corrective mechanism) of an adverse supply shock is that:

prices will return to the old level and output will be restored to the natural rate

According to the AD/AS model (assuming the upward-sloping short-run aggregate supply curve), starting from long-run equilibrium, without policy intervention, the long-run impact (based on the self-corrective mechanism) of an adverse supply shock is that:

prices will return to the old level and output will be restored to the natural rate.

A Keynesian short-run aggregate supply curve shows fixed ______, and a Classical long-run aggregate supply curve shows fixed ______.

prices; output

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.

prices; output

For a closed economy, assume that the consumption function is given by C = 160 + 0.8(Y - T). The investment demand is I = 150 - 10r. If G= 350 and T = 200. What is the equation for IS curve?

r = 50 - 0.02Y

Suppose the following equations describe a closed economy: Y=C+I+G C=200+0.75(Y−T) I=200−25r G=100 T=100 Ms=1,000 P=2 (MP)d=Y−100r From the information given above, what are the short-run equilibrium values of r and Y? (Solve for the values of r and Y and write your answers in the space provided.) r* = _____________ Y* = ______________

r* = 6 Y* = 1100

An economy's production function is Y = AK0.3L0.7. Let MPK = 0.3AK-0.7L0.7 and MPL = 0.7AK0.3L-0.3. Suppose that a gift of capital from abroad raises the capital stock by 20 percent, then

real rental price will fall by 12.0% and real wage will rise by 5.62%

Suppose that MPC = 0.8. If both G and T decrease by 100, then the IS curve, for any given interest rate, will shift:

to the left by 100

According to the standard IS-LM model, fiscal policy tend to be more effective when the:

responsiveness of investment demand to the interest rate is small.

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:

return to the old level and output will be restored to the natural rate

According to the AD/AS model (assuming the upward-sloping short-run aggregate supply curve), starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:

return to the old level and output will be restored to the natural rate.

In the Keynesian-cross diagram, comparing with an equilibrium level Y=E, if total output exceeds planned expenditure, then output level will be on the ______ of the equilibrium output and unplanned inventory will ______.

right; rise

In a neoclassical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will:

rise $40 billion.

Stagflation occurs when prices ___________ and output _____________.

rise; fall

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, national saving:

rises by $60 billion.

In the IS-LM model when M remains constant but P rises, in short-run equilibrium, in the usual case, the interest rate ______ and output ______.

rises; falls

In the standard IS-LM model, when taxation decreases, in short-run equilibrium, the interest rate ______ and output ______.

rises; rises

Investment per worker (i) as a function of the saving ratio (s) and output per worker (f(k)) may be expressed as:

s.f(k)

how do you derive the LM equation?

set Money Supply (M^s/P) = (M/P)^d Money Demand

If MPC = 0.75, when G decreases by 100 and T decreases by 100, then the IS curve for any given interest rate:

shift to the left by 100

If MPC = 0.75, when G increases by 100 and T increases by 100, then the IS curve for any given interest rate:

shift to the right by 100.

The LM curve, in the usual case:

slopes up to the right.

Who controls the supply of money?

the Federal Reserve

An increase in the price of goods bought by firms and the government will show up in:

the GDP deflator but not in the CPI.

When the investment demand is perfectly elastic,

the IS curve is horizontal.

If investment does NOT depend on the interest rate, then: [Hint: investment demand is perfectly inelastic.]

the IS curve is vertical

If the investment demand function is I = c - dr, where r is interest rate and d is very large, then

the IS curve will be relatively flat

If a U.S. citizen buys a BMW car produced in Germany (assuming that the price of the BMW car from Germany is the same as the price paid by the U.S. buyer.), then what happens to US GDP and Net Exports?

the U.S. net exports decrease, but the U.S. GDP is unaffected

If money demand is extremely responsive to the interest rate, then:

the fiscal policy is effective

what factor determines the slope of the LM curve?

the interest elasticity of MONEY demand

Federal Funds Rate

the interest rate banks charge each other for overnight loans

If an economy is in a liquidity trap, then:

the interest rate is so low that monetary policy cannot stimulate the economy.

If investment demand is highly sensitive to changes in interest rates, then

the investment demand curve would be relatively flat, and the IS curve would be flat.

Other things equal, a tax cut has a larger effect on equilibrium output when:

the investment demand is very inelastic.

A profit-maximizing firm will hire labor up to the point where:

the marginal product of labor equals the real wage

In the classical model, a competitive, profit-maximizing firm hires labor until:

the marginal product of labor equals the real wage

In the classical model, a profit-maximizing firm will hire labor up to the point where:

the marginal product of labor equals to real wage

When the Fed buys bonds, other things being equal:

the money supply curve shifts to the right causing interest rate to decrease.

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does NOT depend on:

the money supply.

In the classical model, what adjusts to eliminate any unemployment of labor in the economy?

the real wage

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise.

If increased immigration raises the labor force, the neoclassical theory of distribution predicts:

the real wage will fall and the real rental price of capital will rise.

In the Solow growth model, if two countries are otherwise identical (with the same production function, same saving rate, same depreciation rate, and same rate of population growth) except that Country Large has a population of one billion workers and Country Small has a population of ten million workers, then the steady-state level of output per worker will be ______ and the steady-state growth rate of output per worker will be ______.

the same in both countries; the same in both countries

What does GDP measure?

total income and total expenditure

In the Keynesian-cross model, total output differs from planned expenditures by the amount of:

unplanned inventory

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

unplanned inventory investment is negative.

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left.

An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:

upward and to the right.

In the IS-LM model, if the government wants to raise investment but keep output constant, it should:

use an expansionary monetary policy and a contractionary fiscal policy

In the standard IS-LM model, an expansionary fiscal policy and a contractionary monetary policy

usually causes interest rates to rise

In the standard IS-LM model, the combination of an expansionary fiscal policy and a contractionary monetary policy ...

usually causes interest rates to rise

If investment does not depend on the interest rate, then the IS curve is ______ and ______ policy has no effect on output.

vertical; monetary

If investment does not depend on the interest rate, then the IS curve is _________ and _________ policy has no effect on output.

vertical; monetary

According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity (Y/L) is growing rapidly:

workers will experience high rates of real wage growth.

If the LM curve is vertical and government spending rises by G, in the IS-LManalysis, then equilibrium income rises by:

zero

The change in capital stock per worker ( Δk) may be expressed as a function of s — the saving ratio, f(k) — output per worker, k — capital per worker, and — δ the depreciation rate, by the equation:

Δk= sf(k) −δk

According to the capital accumulation equation (with no population growth and technological progress), the change in capital stock is:

∆k= s. y−δk