ECO 3203 Midterm 2

1. In a Solow model with technological change, if population grows at a 2 percent rate and the efficiency of labor grows at a 3 percent rate, then in the steady state, total output grows at a percent rate.

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________cause(s) the capital stock to rise, while _______ cause(s) the capital stock to fall

Investment; depreciation

______cause(s) the capital stock to rise, while ______ cause(s) the capital stock to fall

Investment; depreciation

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

Short-run fluctuations in output and employment are called

business cycles

International differences in income per person in accounting terms must be attributed to differences in either and/or

factor accumulation; production efficiency

In the IS—LM model when taxation increases, in short-run equilibrium, the interest rate and output

falls,falls

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth , and that creditors have a propensity to consume than debtors

from debtors to creditors; smaller

The efficiency of labor

includes the knowledge, health, and skills of labor

An explanation for the slope of the LM curve is that as:

income rises, money demand rises, and a higher interest rate is required.

If wage rigidity holds the real wage above the equilibrium level, an increase in the supply of labor will the number unemployed.

increase

An increase in investment demand for any given level of income and interest rates—due, for example, to more optimistic "animal spirits"—will, within the IS-LM framework, output and interest rates.

increase; raise

In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income

increases by more than 250

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

increases; increases

Over the business cycle, investment spending _____ consumption spending.

is more volatile than

Over the business cycle, investment spending _______ consumption spending.

is more volatile than

The increase in income in response to a fiscal expansion in the IS—LM is:

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

In the Solow growth model of Chapter 8, investment equals

saving

A rise in the price of an asset above its fundamental value is called a(n):

speculative bubble

The Solow model predicts that two economies will converge if the economies start with the same

steady states

According to the Solow model, persistently rising living standards can only be explained by

technological progress

According to the Solow model, persistently rising living standards can only be explained by

technological progress.

In a steady state with population growth and technological progress

the capital and labor shares of income are constant

The interaction of the IS curve and the LM curve together determine:

the equilibrium level of the interest rate and output.

In the Solow model with technological progress, along the balanced growth path, by increasing the efficiency of labor at rate g:

the real wage grows at rate g but the real rental price of capital is constant

(Exhibit: Keynesian Cross) In this graph, the equilibrium levels of income and expenditure are

Y2 and PE2

According to classical theory, national income depends on , while Keynes proposed that determines the level of national income

aggregate supply; aggregate demand

A favorable supply shock occurs when:

an oil cartel breaks up and oil prices fall.

In the Keynesian-cross model fiscal policy has a multiplied effect on income because fiscal policy

changes income, which changes consumption, which further changes income

Purchasers of bonds issued by companies are ________ of the company, while purchasers of shares of stock issued by a company are________ of the company

creditors; partial owners

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

The effect of the financial crisis of 2008-2009 on the real economy in the United States was a(n) in aggregate demand, a(n) in output, and a(n) in the unemployment rate

decrease; decrease; increase

A difference between the economic long run and the short run is that

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run

An increase in taxes shifts the IS curve

downward and to the left

If the saving rate increases, the

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

International differences in income per person in accounting terms must be attributed to differences in and/or

factor accumulation; production efficiency

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; inward

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

lower; the same

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

lower; the same

An increase in the money supply

lowers the interest rate and increases income in the short run but leaves both unchanged in the long run

In the Solow model with technological progress, the steady-state growth rate of total output is

n + g

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

negatively related to the interest rate and positively related to income

Starting from long-run equilibrium, an increase in aggregate demand increases in the short run, but only increases in the long

output; prices

In the Solow growth model of Chapter 8, for any given capital stock, the ______ determines how much output the economy produces and the ________ determines the allocation of output between consumption and investment

production function; saving rate

For any given interest rate and price level an increase in the money supply:

raises income

Monetary neutrality, the irrelevance of the money supply in determining values of variables, is generally thought to be a property of the economy in the long

real

In the Solow growth model of Chapter 8, the economy ends up with a steady-state level of capital

regardless of the starting level of capital

All of the following are reasons for frictional unemployment except

unemployed workers accept the first job offer that they receive

The housing price boom prior to the 2008-2009 recession was fueled by all of the following except

unusually large increases in building material costs

A policy that increases the job-finding rate the natural rate of unemployment

will decrease