ECON 362 Midterm 2

Is the non zero steady state stable

yes

When a person purchases a 90-day Treasury bill, he or she cannot know the

ex post real interest rate

According to the Solow model, higher saving leads to higher capital and higher GDP per person. Therefore, in general, the higher the saving rate, the better-off a country's standard of living is in the long run

false

Barnes and Nobles switches to an ebook focused business model. They close stores and lay off workers. What type of unemployment is this?

frictional

Dave wants to be an accountant, but there is no accountant positions in this area. What type of unemployment is this?

frictional

Short term unemployment is most likely to be _____ unemployment, while long term unemployment is most likely to be _____ unemployment

frictional, structural

A rate of inflation that exceeds 50 percent per month is typically referred to as a

hyperinflation

When the unemployment rate is at a steady state

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

In the long run, according to the quantity theory of money and classical macroeconomics theory, if velocity is constant, then _____ determines the real GDP and _____ determines nominal GDP

the productive capability of the economy, the money supply

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

will decrease

Consider the Cobb-Douglas production function Y = Ak^aL^1-a Per capita output y = f(k) =?

y = Ak^a

Other things equal, if a country's saving rate rises, what happens?

The economy's income per capita will be higher in the long run The economy's growth rate will be higher temporarily, but remain the same in the long run The economy's standard of living may go up or down, depending on other factors

In the case of an unanticipated increase in inflation

creditors with an unindexed contract are hurt because they get less than they expected in real terms

Equilibrium in the market for goods and services determines the ____ interest rate, and the expected rate of inflation determines the _____ interest rate

ex ante real, ex ante nominal

Growth rate of Y/L in the steady state

g

According to the classical theory of money, inflation does not make workers poorer because wages increase

in proportion to the increase in the overall price level

Suppose V is constant, M is growing 5% per year, Y is growing 2% per year The inflation rate must be ____ %

3

Suppose M is growing 5% per year, Y is growing 2% per year. But V is now increasing at a rate of 2% The inflation rate must be ___%

5

Suppose V is constant, M is growing 5% per year, and Y is growing 2% per year, and r = 4%. What is the nominal interest rate, i?

7

Sectoral shifts:

make frictional unemployment inevitable

The costs of reprinting catalogs and price lists because of inflation are called

menu costs

The real return on holding money is

minus the inflation rate

The characteristic of the classical model that the money supply does not affect real variables is called

money neutrality

Growth of Y in the steady state

n + g

The opportunity cost of holding money is the

nominal interest rate

An economy grew but the supply of gold was relatively constant. What does the theory predict? New gold was discovered. What does the theory predict?

prices decrease prices increase

In the Solow growth model, 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

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

In all the versions of the Solow model we considered, the economy always converges to the steady state. Which feature is responsible for this result?

the law of diminishing returns

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

the marginal product of capital

In the Solow growth model, 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

Britney works for Coca Cola Which company's stocks have a higher risk for Britney? Coca Cola or Pepsi

Coca Cola

There are two countries. Country A has a capital per worker that is slightly higher than 0. Country B's capital per worker is slightly lower than the steady state level, k* In the next 10 years, which country will grow faster?

Country A

There are tow countries that are nearly identical. The only difference is that country A has a higher population growth rate than country B Which country has a higher level of k*?

Country B

If nominal wages cannot be cut, then the only way to reduce real wages is by

adjustments via inflation

If the FED announces that it will raise the money supply in the future but does not change the money supply today,

both the nominal interest rate and the current price level will increase

Efficiency wage theories suggest that a firm may pay workers more than the market clearing wage for all of the following reasons except to a) reduce labor turnover. b) improve the quality of the firm's labor force. c) reduce the firm's wage bill. d) increase worker effort.

c

Teachers are laid off because the state government has little revenue in an economic downturn. What type of unemployment is this?

cyclical

_____ causes the capital stock to rise, while ____ causes the capital stock to fall

investment, depreciation

The inconvenience associated with reducing money holdings to avoid the inflation tax is called

show leather costs

Given that M/P = kY, when the demand for money parameter, k, is large, the velocity of money is ____, and the money changing hands _____

small, infrequently

In the model of the steady state, unemployment rate with a fixed labor force, the rate of job fining equals the percentage of the _____ who find a job each month, while the rate of job separation equals the percentage of the ____ who lose their job each month

unemployed, employed

The quantity theory of money assumes that

velocity is constant

In the steady state, income per person stops growing

false

If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is

-4

Each month, 1% of employed workers lose their jobs (s = .01) 19% of unemployed workers find jobs (f = .19) What is the natural rate of unemployment

.05

If the steady state unemployment equals .1 and the fraction of employed workers who lose their jobs each month (the rate of job separations) is .02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be

.18

Growth of K in the steady state

0

Growth rate of k in the steady state

0

Growth rate of y in the steady state

0

Suppose the growth rate of Y falls to 1% per year What is the change in pi?

1

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is _____ percent

7

At the start of 2019, there was $1000 worth of capital Suppose the total gross investment I, was $200 in 2019 10% of capital wore out (depreciated) in 2019 What is the change in capital

100

Suppose v is constant, M is growing 5% per year, Y is growing 2% per year, and r = 4% If the Fed increases the money growth rate by 2 percentage points per year, what is the change in i?

2

If the average price of goods and services in the economy equals $10 and the quantity of money in the economy equals $200,000, the real balances in the economy equal

20,000

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ____ percent

3

If the per worker production function is given by y = k^1/2, the saving rate (s) is .2, and the depreciation rate is .1, then the steady-state capital per worker is

4

If there are 100 transactions in a year and the average value of each transaction is $10, then if there is $200 of money in the economy, transaction velocity is ________ times per year

5

Stock A and B both have a long run average return of 7.5%. But stock A's return is more likely to go up and down with the market, while stock B's return is quite stable over the business cycle. Which stock is more desirable?

Stock B

MPK - deprecation = .008 > .03 = n+g Are we saving too much or too little compared with the golden rule of saving?

Too little

Which of the following is the best example of structural unemployment? a) Kirby is seeking a job as an airline pilot, but the high union wages in the industry have limited the number of jobs available. b) Tim is looking for a job with flexible hours but has not been offered one yet. c) Fatima lost her job at a packing plant but has not looked very intensively for a new job because she still has two months of unemployment insurance benefits left. d) Vickie lost her job as a graphic artist at a movie studio because she did not have training in computer-generated animation.

a

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If the labor market were always in equilibrium, this would lead to

a lower real wage and no change in unemployment

All of the following are reasons for frictional unemployment except a) geographic mobility takes time. b) unemployed workers accept the first job offer that they receive. c) workers have different preferences and abilities. d) the flow of information is imperfect.

b

Which of the following is an example of frictional unemployment a) Elaine is willing to work for less than the minimum wage, but employers cannot hire her for less than the minimum wage. b) Dave searches for a new job after voluntarily moving to San Diego. c) Bill is qualified and would like to be an airline pilot, but airlines do not find it profitable to hire him at the wage established by the airline pilots' union. d) Joan is willing to work for less than the going wage, but there are no jobs available. Question 9

b

If the money supply is held constant, then an increase in the nominal interest rate will _____ the demand for money and ____ the price level

decrease, increase

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage

decreased 2 percent

If the real interest rate declines by 1 percent and the inflation rate increases by 2 percent, the nominal interest rate implied by the Fisher equation

increases by 1 percent

If the real interest rate and real national income are constant, according to the quantity theory and Fisher effect, a 1 percent increase in the money growth will lead to rises in

inflation of 1 percent and the nominal interest rate of 1 percent

What happens to the labor demand curve if there is an increase in investment and therefore more capital goods

it increases

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

more in Lowland

If k is greater than k*, over time does k move toward the steady state or away from it

move toward it

Does an economy's capital per person always converge to the golden rule level?

no

Assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left. If real wage were rigid, this would lead to

no change in the real wage and a rise in unemployment

Unemployment in the auto industry, where unions have relatively strong power. What type of unemployment is this?

structural

The costs of unexpected inflation, but not of expected inflation, are

the arbitrary redistribution of wealth between debtors and creditors