ECO 3311 Final

Open-market operations are

Federal Reserve purchases and sales of government bonds.

According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount G and the planned expenditure schedule by an equal amount, then equilibrium income rises by

G divided by the quantity one minus the marginal propensity to consume.

Changes in fiscal policy shift the

IS curve.

Which of the following is not a function of money?

It is a means of production.

An economy starts off in a steady state with less capital than at the Golden Rule level. Now the saving rate changes to the level that will achieve the Golden Rule. What is the path of consumption during the transaction to the Golden Rule steady state?

It is lower, then higher than in the initial steady state.

Suppose that a major natural disaster destroys a large part of a country's capital stock but miraculously does not cause anybody bodily harm. What will happen to the real wage rate?

It will fall.

When the government raises revenue by printing money, it imposes an "inflation tac" because the

real value of money holdings falls.

A competitive firm hires labor until the marginal product of labor equals the

real wage.

The government is running a budget deficit if

government spending is greater than tax revenue.

Hyperinflation usually starts when

governments are forced to print money to finance their spending

One reason for unemployment is that

it takes time to match workers to jobs.

Okun's Law expresses a relationship between a change in

real GDP and a change in the unemployment rate.

A competitive firm rents capital until the marginal product of capital equals the

real rental price of capital.

The IS-LM model takes _________ as exogenous.

the price level

Suppose that a consumer has a marginal propensity to consume of 0.8. If this consumer receives an extra $2 of disposable income, her saving would be expected to increase by

$0.40

In the Keynesian-cross model, if the MPC equals 0.75, 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

Suppose that a consumer has a marginal propensity to consume of 0.7. If this consumer earns an extra $2, her consumption spending would be expected to increase by

$1.40.

In the Solow growth model of chatper 8, 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

According to the book, which of the following equations represents the money multiplier?

(cr+1)/(cr+rr)

The steady-state level of capital occurs when the change in the capital stock equals

0.

If the steady-state rate of unemployment equals 0.125 and the fraction of unemplyed workers who find jobs each month is 0.56, then the faction of employed workers who lose their jobs each month must be

0.08.

If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers who lose their jobs each month (the rate of job separations) is 0.02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be

0.18.

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.

In the Cobb-Douglas production function, Y=K^aL^1-a the fraction of income spent as payments to labor is

1-a

If the quantity of real money balances is kY, where k is a constant, then velocity is

1/k.

Suppose that output per worker is 10, the production function is y=k0.5 and the total capital stock is 1,000. How large is the labor force?

10

Suppose that the production function is y=k^0.5, s=0.4, and the depreciation rate 0.10. What level of saving will lead to the highest possible level of output in the steady state?

100 percent

Suppose that the production function is y=k0.5, s=0.4, and the depreciation rate 0.10. What is the steady-state level of capital?

16

Suppose that the production function is y=k^0.5, s=0.2, n=0, and the depreciation rate is 0.1. What is the Golden Rule level of capital per capita?

25

Using the Keynesian-cross analysis, assumes 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 labor force is growing at a 3 percent rate and the efficiency of a unit of labor is growing at a percent rate, then the number of effective workers is growing at a rate of

5 percent.

Consider an economy where the only goods traded are coconuts and pineapples. Last year, 100 coconuts were sold at $1 apiece, and 200 pineapples were sold at $2.50 apiece. If the money supply was $100, what was the velocity?

6

Assume that the money demand function is (M/P)^d=2,0200-200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is

6.

In the Keynesian-cross analysis, if the consumption function is given by C=100+0.6(Y-T), and planned investment is 100, G is 100, and T is 100, then equilibrium Y is

600.

Consider the money demand function that takes the form (M/P)d=kY, where M is the quantity of money, P is the price level, k is constant, and Y is real output. If the money supply is growing at a 10 percent rate, real output is growing at a 3 percent rate, and k is constant, what is the average inflation

7 percent

According to the simple macroeconomic model presented in Chapter 3, which of the following will not be caused by an increase in government spending?

A decrease in consumption

The Golden Rule level of steady-state investment per worker is

BC

Which of the following is NOT a characteristic of the Cobb-Douglas production function?

Capital and labor receive equal fractions of income.

An economy is in a steady state with capital higher than the Golden Rule level. Now the saving rate falls to a level that will achieve the Golden Rule capital stock in the long run. What will happen to the level of consumption between the initial and new steady states?

It will rise instantly and then will fall gradually.

Changes in monetary policy shift the

LM curve.

Consider an economy where the money supply is growing at 7 percent per yard and velocity is constant. Which of the following statements about real GDP growth and the inflation rate could be TRUE if the Quantity Theory of Money holds?

Real GDP is growing at 2 percent and inflation is 5 percent.

In this graph, the equilibrium levels of income and expenditure are

Y2 and PE2

With the real money supply held constant, the theory of liquidity preference implies that a higher income level will be consistent with

a higher interest rate.

For a fixed money supply, a higher level of real money balances implies

a lower price level.

If an individual is to hold lower money balances on average, she must make more frequent trips to the bank to withdraw money. This inconvenience of reducing money holding is called

a shoe leather cost.

The equilibrium condition in the Keynesian-cross analysis in a closed economy is

actual expenditure equals planned expenditure.

According to classical theory, national income depends on ________, while Keynes proposed that _________ determined the level of national income.

aggregate supply; aggregate demand

The theory of liquidity preference implies that

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

Economist use the term money to refer to

assets used for transactions.

Based on the graph, if the interest rate is r1, then people will ________ bonds and the interest rate will ________.

buy; fall

To increase the money supply, the Federal Reserve

buys government bonds.

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.

Demand deposits are funds held in

checking accounts.

The Solow growth model assumes that the production function exhibits

constant returns to scale.

In the basic endogenous growth model, the production function exhibits

constant returns.

The returns to scale in the production function Y=K^0.5L^0.5 are

constant.

In a closed economy, the supply of goods and services must be equal to

consumption+investment+government purchases.

Which of the following is a part of M1?

currency

In a 100-percent reserve banking system, if a customer withdraws $500 from his checking account, the bank's deposit will _________ while its reserves will _________.

decrease $500; decrease $500

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).

Faced with a positive investment shock, if the central bank wants to stabilize output, it should

decrease the money supply.

Faced with an adverse supply shock, if the central bank wants to prevent inflation, it should

decrease the money supply.

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.

decreases; downward

The income velocity of money increases and the money demand parameter k ________ when people want to hold ________ money.

decreases; less

In the IS-LM model, which two variables are influences by the interest rate?

demand for real money balances and investment spending

An increase in income raises money ________ and ________ the equilibrium interest rate.

demand; raises

Bank reserve equals

deposits that banks have received but have not lent out.

At the Golden Rule level of capital accumulation, the marginal product of capital equals the

depreciation rate.

In the steady state with no population growth of technological change, the capital stock does not change because investment equals

depreciation.

If a production function has two inputs and exhibits constant returns to scale, then doubling both inputs will cause the output to

double.

The quantity equation MV=PY implies that the AD curve is

downward sloping.

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 supply of money is raised to 2,800, then the equilibrium interest rate will

drop by 2 percent.

If a firm with a constant returns to scale production function pays all factors their marginal products, then

economic profit is zero and accounting profit is positive.

Euler's theorem implies that if a production function exhibits constant returns to scale, then

economic profit is zero.

The Keynesian cross shows

equality of planned expenditure and income in the short run.

In this graph, if firms are producing at level Y1, then inventories will _________, inducing firms to __________ production.

fall; increase

If the supplies of capital and labor are fixed and technology is unchanging, then real output is

fixed.

In the Solow model, the depreciation rate represents the

fraction of the capital stock that wears out each year.

Which of the following is NOT an example of fiat money?

gold coins

The Golden Rule level of capital accumulation is defined as the level of the capital stock that achieves a steady state with the

highest level of consumption.

In the short run, if prices are fixed, the aggregate supply curve is

horizontal.

The Solow Growth model describes

how saving, population growth, and technological change affect output over time.

One possible benefit from inflation is

if nominal wages are fixed, inflation decreases real wages.

The government-purchases multiplier indicates how much ________ change(s) in response to a $1 change in government purchases.

income

The tax multiplier indicates how much ________ change(s) in response to a $1 change in taxes.

income

The supply of loanable funds, or "national saving," is equal to

income-consumption-government spending.

Private saving is equal to

income-consumption-taxes

The demand for real money balances is generally assumed to

increase as real income increases.

In a closed economy with fixed output, an increase in government spending without any change in taxes will lead to an

increase in the real interest rate and no change in private saving.

A leftward shift of the savings curve CANNOT be caused by an

increase in the real interest rate.

In a closed economy with output fixed, an increase in government spending matched by an equal increase in taxes will

increase the interest rate.

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures __________ for any given level of income.

increase, but by less than 100

According to the theory of liquidity preference, tightening the money supply will _________ nominal interest rates in the short run, and, according to the Fisher effect, tightening the money supply will __________ nominal interest rates in the long run.

increase; decrease

In the Keynesian-cross model, if government purchases increase by 250, then the equilibrium level of income

increases by more than 250.

In the Keynesian-cross model, if taxes are reduced 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

A general increase in the price level is called

inflation.

A variable that links the market for goods and services and the market for real money balances in the IS-LM model is the

interest rate.

An IS curve shows combinations of

interest rates and income that bring equilibrium in the market for goods and services.

An LM curve shows combinations of

interest rates and income, which bring equilibrium in the market for real money balances.

In a closed economy, with total output and taxes fixed, if government spending rises

investment falls.

In this graph, when the capital-labor ratio is OA, AB represents

investment per worker, and BC represents consumption per worker.

The change in the capital stock is equal to

investment-depreciation

According to the theory of liquidity preference, the supply of nominal money balances

is chosen by the central bank.

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 the capital stock is above the steady-state level, then investment

is smaller than depreciation.

Public policy to increase the job finding rate include ___________ and public policy to decrease the job separation rate include _________.

job training programs; 100 percent experience rated unemployment insurance.

The Golden Rule level of the capital-labor ratio is

k*A

Assuming that technological progress increases the efficiency of labor at a constant rate is called

labor-augmenting technological progress.

An increase in the expected rate of inflation will

lower demand for real balances because the nominal interest rate will rise.

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

lower interest rate.

The AS/AD model with sticky prices predicts that, in the long run, a reduction of the money supply results in

lower prices and no change in output.

If two economies are identical except for their rates of population growth, then the economy with the higher rate of population growth will have

lower steady-state output per worker.

One purpose of money is to be the item we use to buy and sell things. This function of money is called

medium of exchange.

The central bank's control over the money supply is called

monetary policy.

Money's liquidity refers to the ease with which

money can be converted into goods and services.

Suppose the monetary base doubles and the money multiplier doubles as well. Consequently, the money supply

more than doubles.

Planned expenditure is a function of

national income and planned investment, government spending, and taxes.

The IS curve plots the relationship between the interest rate and __________ that arises in the market for __________.

national income; goods and services

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.

With population growth at rate n and labor-augmenting technological progress at rate g, the Golden Rule steady state requires that the marginal product of capital (MPK)

net of depreciation be equal to n+g

According to the quantity equation, if M increases by 3 percent and V increases by 2 percent, then

nominal income increases by approximately 5 percent.

The Fisher effect states that a 1 percent rise in the rate of inflation causes a 1 percent rise in the

nominal interest rate.

Investment depends on the _______ interest rate because higher inflation will ________ the value of the dollars with which the firm will repay the loan.

nominal; decrease

If a production function has the property of diminishing marginal product, then doubling

one of the inputs will reduct its marginal product.

An increase in aggregate demand, such as that due to an increase in government purchases, increases

output in the short run and prices in the long run.

Which of the following is not assumed by the Solow growth model?

output is constant

Rank the following assets according to size from smallest to largest: M2, M1, Paper bills, Currency.

paper bills, currency, M1, M2

For the purpose of the Keynesian cross, planned expenditure consists of

planned investment, government spending, and consumption expenditures.

Wage rigidity

prevents labor demand and labor supply from reaching the equilibrium level.

The model of aggregate supply and aggregate demand in the short run differs from our long-run model of the economy because, in the short run

prices are fixed.

In a closed economy that is in equilibrium, investment is equal to

private saving plus public saving.

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; depreciation

According to the theory of liquidity preference, if the supply of real money balances exceeds the demand for real money balances, individuals will

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

Reducing the money supply _________ nominal interest rates in the short run, and __________ nominal interest rates in the long run.

raises; lowers

Any policy aimed at lowering the natural rate of unemployment must either ________ the rate of job separation or ___________ the rate of job finding.

reduce; increase

With planned expenditure and the equilibrium condition Y=PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the _________ of equilibrium income and there is unplanned inventory __________.

right; accumulation

When there is structural unemployment, the real wage is

rigid at a level above the market-clearing level.

If an economy is initially in a steady state and it experiences an increase in its saving rate, then the steady-state capital stock will

rise.

Suppose that there is a positive shock to investment demand: that is, at every interest rate, the desired amount of investment rises. In a closed economy with the national saving fixed, the real interest rate will

rise.

In this graph, if firms are producing at level Y3, then inventories will __________, inducing firms to __________ production.

rise; decrease

If s is the rate of job separation, f is the rate of job finding, and both rates are constant, then the unemployment rate is approximately

s/(s+f)

In the Solow growth model of Chapter 8, investment equals

saving.

In the supply and demand of loanable funds in Chapter 3, a decrease in taxes will shift the

savings curve to the left.

The revenue raised by printing money is called

seigniorage.

Based on the graph, if the interest rate is r3, then people will _______ bonds and the interest rate will __________.

sell; rise

To reduce the money supply, the Federal Reserve

sells government bonds.

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

sf(k).

In a steady-state economy with a saving rate s, population growth n, and labor-augmenting technological progress g, the formula for the steady-state ratio of capital per effective worker (k*), in terms of output per effective worker (f(k*)), is

sf(k)/(8+n+g)

If the money supply is held constant, an increase in the velocity of money would cause the AD curve to

shift outward.

The LM curve, in the usual case

slopes up to the right.

When the demand for money parameter, k, is large, the velocity of money is ________ and money is changing hands ________.

small; infrequently

The occurrence of falling output combined with rising prices is called

stagflation.

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

steady states

One purpose of money is to transfer purchasing power from the present into the future. This function of money is called

store of value.

The unemployment resulting when real wages are held above equilibrium is called _________ unemployment, while the unemployment that occurs as workers search for a job that best suits their skills is called __________ unemployment.

structural; frictional

If the interest rate is above the equilibrium value, the

supply of real balances exceeds the demand.

In the Solow model, increased saving leads to ___________ growth, but in the Y=AK model, increased saving can lead to _________ growth,

temporary; persistent

The natural rate of unemployment is

the average rate of unemployment around which the economy fluctuates.

Two interpretations of the IS-LM model are that the model explains

the determination of income in the short run when prices are fixed, or what shifts the aggregate demand curve.

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that

the government-spending multiplier is larger than the tax multiplier.

The difference between the nominal interest rate and the real interest rate is

the inflation rate.

The real interest rate is equal to the nominal interest rate minus:

the inflation rate.

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?

the interest rate

The IS curve shows combinations of _________ that are consistent with equilibrium in the market for goods and services.

the interest rate and the level of income

When f(k) is drawn on a graph with increases in k noted along the horizontal axis, the slope of the line denotes

the marginal product of capital.

The quantity theory of money assumes that

the money supply is constant.

In a steady state

the number of people finding jobs equals the number of people losing jobs.

In the Solow growth model with population growth, the Golden Rule steady state is achieved when the marginal product of capital equals

the population growth rate plus the rate of depreciation.

In the long run, according to the quantity theory of money and the classical macroeconomic theory, if velocity is constant, then _______ determines real GDP and ________ determines nominal GDP.

the productive capability of the economy; the money supply

When the real wage is above the level that equilibrates supply and demand

the quantity of labor supplied exceeds the quantity demanded.

In a Solow model with population growth and technological progress, the steady-state level of consumption is maximized when the steady state marginal product of capital equals the rate of depreciation plus

the rate of population growth plus the rate of technological change.

Suppose that an economy is in steady state and has no more capital than it would have in the Golden Rule steady state. A policy maker would want to pursue policies aimed at decreasing

the rate of saving.

In the supply and demand of loanable funds model presented in Chapter 3, the variable that adjusts to equilibrate the supply and demand for goods and services is

the real interest rate.

When the LM curve is drawn, the quantity that is held fixed is

the real money supply.

Frictional unemployment is unemployment caused by

the time is takes workers to search for a job.

Which component of the quantity equation is assumed constant by the quantity theory of money?

the velocity of money

Conditional convergence occurs when economies converge to

their own, individual steady states.

In a closed economy with a fixed total income, a reduction in taxes will cause consumption

to rise and investment to fall.

In the quantity equation MV=PT, V is the

transactions velocity of money.

All of the following are reasons for frictional unemployment EXCEPT

unemployed workers accept the first job offer that they receive.

One purpose of money is to provide the terms in which prices are quoted and debts are recorded. This function of money is called

unit of account.

When a pizza maker lists the price of a pizza as $10, this is an example of using money as a

unit of account.

In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of

unplanned inventory investment.

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.

The LRAS curve of the classical model is

vertical.

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

will decrease

IF the real interest rate rises, the quantity of investment demanded

will fall.