Econ 4002 Final Exam Review Sapling
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: sy (1 - s) y - i (1 - s) y (1 + s) y
(1 - s) y
When capital increases by ΔK units and labor increases by ΔL units, output (ΔY) increases by: MPL + MPK units. (MPK × ΔK) + (MPL × ΔL) units. (MPL × ΔK) + (MPK × ΔK) units. ΔK + ΔL units.
(MPK × ΔK) + (MPL × ΔL) units.
The rational-expectations point of view, in the most extreme case, holds that if policymakers are credibly committed to reducing inflation, and rational people understand that commitment and quickly lower their inflation expectations, then the sacrifice ratio will be approximately: 0 2.8 5 1
0
Assume that an economy has the Phillips curve π = π-1 - 0.5 (u - 0.06). How many percentage-point-years of cyclical unemployment are needed to reduce inflation by 5 percentage points? 5 10 20 2.5
10
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. Y = 1,100, r = 5 percent. Y = 1,200, r = 5 percent. Y = 1,000, r = 5 percent.
Y = 1,100, r = 6 percent
If consumption is given by C = 200 + 0.75(Y - T) and investment is given by I = 200 - 25r, then the formula for the IS curve is: Y = 1,600 - 3T - 100r + 4G. Y = 400 - 0.75T - 25r + G. Y = 400 + 0.75T - 25r - G. Y = 1,600 + 3T - 100r - 4G.
Y = 1,600 - 3T - 100r + 4G
Analysis of the short-run Phillips curve suggests that policymakers who want to reduce unemployment in the short run should ______ aggregate demand at a cost of generating ______ inflation. increase; higher decrease; higher decrease; lower increase; lower
increase; higher
In the IS-LM model in a closed economy, an increase in government spending increases the interest rate and crowds out: investment. the money supply. prices. taxes.
investment
Business cycles are: irregular but predictable. regular and predictable. irregular and unpredictable. regular but unpredictable.
irregular and unpredicatable
According to the sticky-price model, deviations of output from the natural level are _____ deviations of the price level from the expected price level. not related to positively associated with negatively associated with equal to
positively associated with
In the short run, a favorable supply shock causes: prices to rise and output to fall. prices to fall and output to rise. both prices and output to rise. both prices and output to fall.
prices to fall and output to rise
Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______. variations in labor-market utilization; technological progress money supply growth rates; changes in velocity technological progress; variations in labor-market utilization changes in velocity; money supply growth rates
technological progress; variations in labor-market utilization
In a steady state with population growth and technological progress: the capital share of income, in some cases, increases, and sometimes the labor share increases. the capital share of income increases. the capital and labor shares of income are constant. the labor share of income increases.
the capital and labor shares of income are constant
Along an IS curve all of the following are always true except: planned expenditures equal actual expenditures. the demand for real balances equals the supply of real balances. planned expenditures equal income. there are no unplanned changes in inventories.
the demand for real balances equals the supply of real balances
Two interpretations of the IS-LM model are that the model explains: the short-run quantity theory of income or the short-run Fisher effect. the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve. changes in government spending and taxes or the determination of the supply of real money balances. the determination of investment and saving or what shifts the liquidity preference schedule.
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: government spending increases the MPC more than tax cuts. the government-spending multiplier is larger than the tax multiplier. government-spending increases do not lead to unplanned changes in inventories, but tax cuts do. increases in government spending increase planned spending, but tax cuts reduce planned spending.
the government spending multiplier is larger than the tax multiplier
In the case of cost-push inflation, other things being equal: both the inflation rate and the unemployment rate rise at the same time. the inflation rate rises but the unemployment rate falls. both the inflation rate and the unemployment rate fall. the unemployment rate rises but the inflation rate falls.
the inflation rate rises but the unemployment rate falls
Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in: neither the short run nor the long run. the long run but not in the short run. the short run but not in the long run. both the short run and the long run.
the long run but not in the short run
The hypothesis that hysteresis may play an important role in macroeconomics implies, among other things, that: hysteresis lowers the sacrifice ratio. workers get hysterical during long depressions. the natural rate of unemployment may increase if unemployment is high for a long period of time. the history of economic thought is important to macroeconomics.
the natural rate of unemployment may increase if unemployment is high for a long period of time
If y = k^1/2, the country saves 10 percent of its output each year, and the steady-state level of capital per worker is 4, then the steady-state levels of output per worker and consumption per worker are: 2 and 1.8, respectively. 4 and 3.2, respectively. 4 and 3.6, respectively. 2 and 1.6, respectively.
2 and 1.8, respectively
Making use of Okun's law, if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about: 5 percent in both the short run and the long run. 2.5 percent in both the short run and the long run. 2.5 percent in the short run but will return to its natural rate in the long run. 5 percent in the short run but will return to its natural rate in the long run.
2.5 percent in the short run but will return to its natural rate in the long run
Assume that the sacrifice ratio for an economy is 4. If the central bank wishes to reduce inflation from 10 percent to 5 percent, this will cost the economy ______ percent of one year's GDP. 4 20 40 5
20
If MPC = 0.6 (and there are no income taxes but only lump sum taxes) when T decreases by 200, The IS curve for any given interest rate shifts to the right by 100 200 300 400
300
If the IS curve is given by Y = 1,700 - 100r, the money demand function is given by (M/P)d = Y - 100r, the money supply is 1,000, and the price level is 2, then if the money supply is raised to 1,200, equilibrium income rises by: 50 and the interest rate falls by 0.5 percent. 200 and the interest rate falls by 2 percent. 100 and the interest rate falls by 1 percent. 200 and the interest rate remains unchanged.
50 and the interest rate falls by .5 percent
If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve for any given interest rate shifts to the right by: 200 300 400 500
500
The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance. 1 to 2 years 5 to 10 years 1 month 6 to 9 months
6 - 9 months
If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil: both Central Bank A and Central Bank B should keep the quantity of money stable. Central Bank A should decrease the quantity of money, whereas Central Bank B should increase it. both Central Bank A and Central Bank B should increase the quantity of money. Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable.
Central Bank A should decrease the quantity pf money, whereas Central Bank B should increase it
In the IS-LM model, starting with zero expected inflation, if expected inflation becomes negative, then the: IS curve shifts rightward. IS curve shifts leftward. LM curve shifts rightward. LM curve shifts leftward.
IS curve shifts leftward
One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______. LM; left IS; right IS; left LM; right
IS; right
According to the theory of liquidity preference, decreasing the money supply will ______ nominal interest rates in the short run, and, according to the Fisher effect, decreasing the money supply will ______ nominal interest rates in the long run. increase; decrease decrease; decrease increase; increase decrease; increase
Increase; decrease
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. lower; lower increase; raise increase; lower lower; raise
Increase; raise
In the Keynesian-cross model with an MPC > 0, if government purchases increase by 250, then the equilibrium level of income: decreases by 250. increases but by less than 250. increases by more than 250. increases by 250.
Increases by more than 250
In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income: increases by 250. increases by more than 250. increases, but by less than 250. decreases by 250.
Increases by more than 250
A liquidity trap occurs when: interest rates fall so low that monetary policy is no longer effective. the central bank mistakenly prints too much money, generating hyperinflation. banks have too much currency and close their doors to new customers. dams and locks are built to prevent flooding.
Interest rates fall so low that monetary policy is no longer effective
A decrease in the price level shifts the ______ curve to the right, and the aggregate demand curve ______.
LM, does not shift
The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a ______ real money supply M / P, which ______ the interest rate and ______ spending. lower; lowers; increases higher; raises; reduces lower; raises; reduces higher; lowers; increases
Lower; raises; reduces
If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect: level of output but not prices. prices but not level of output. both prices and level of output. neither prices nor level of output.
Prices but not level of output
A movement along an aggregate demand curve corresponds to a change in income in the IS-LM model ______, while a shift in an aggregate demand curve corresponds to a change in income in the IS-LM model ______.
Resulting from a change in the price level; at any given price level
If Y = K^0.3L^0.7, then the per-worker production function is: Y / L = (K / L)^0.3. Y = F(K / L). Y / L = (K / L)^0.5. Y / L = (K / L)^0.7.
Y / L = (K/L)^0.3
The short-run aggregate supply curve is horizontal at: a level of output determined by aggregate demand. a fixed price level. the natural level of output. the level of output at which the economy's resources are fully employed.
a fixed price level
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. no change in the interest rate. first a lower and then a higher interest rate. a lower interest rate.
a higher interest rate
Assume that 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 person and ______ rate of growth of output per worker compared to the country with the lower saving rate. the same; the same a higher; a higher the same; a higher a higher; the same
a higher; the same
The equilibrium condition in the Keynesian-cross analysis in a closed economy is: planned expenditure equals consumption plus planned investment plus government spending. actual saving equals actual investment. actual expenditure equals planned expenditure. income equals consumption plus investment plus government spending.
actual expenditure equals planned expenditures
Increases in the rate of growth of income per person in the United States in the mid-1990s is mostly likely the result of: advances in information technology. increases in human capital. an increase in the saving rate. increases in physical capital.
advances in information technology
The assumption of adaptive expectations for inflation means that people will form their expectations of inflation by: taking all information into account using the best economic model available. asking the opinions of experts. basing their opinions on recently observed inflation. flipping a coin.
basing their opinions on recently observed inflation
In the sticky price model, if no firms have flexible prices, the short run aggregate supply schedule will: be steeper than it would be if some firms had flexible prices slope upward to the right be horizontal be vertical
be horizontal
The Solow residual measures the portion of output growth that cannot be explained by growth in: capital and labor. technology. the money supply. the saving rate.
capital and labor
In the basic endogenous growth model, income can grow forever—even without exogenous technological progress—because: capital exhibits diminishing returns. the saving rate equals the rate of depreciation. the saving rate exceeds the rate of depreciation. capital does not exhibit diminishing returns.
capital does not exhibit diminishing returns
In an economy with no population growth and no technological change, steady-state consumption is at its greatest possible level when the marginal product of: labor equals the marginal product of capital. capital equals the depreciation rate. capital equals zero. labor equals the depreciation rate.
capital equals the depreciation rate
In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes: consumption per effective worker. output per worker. output per effective worker. consumption per worker.
consumption per effective worker
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 of capital in both countries, and country A saves 10 percent of output whereas country B saves 20 percent. If country A starts out with a capital-labor ratio of 4 and country B starts out with a capital-labor ratio of 2, in the long run: country A's capital-labor ratio will be 4, whereas country B's will be 16. both country A and country B will have capital-labor ratios of 4. both country A and country B will have capital-labor ratios of 16. country A's capital-labor ratio will be 16, whereas country B's will be 4.
country A's capital-labor ration will be 4, whereas country B's will be 16
The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would: decrease by 3 percent. increase by 1 percent. decrease by 2 percent. decrease by 1 percent.
decrease by 1 percent
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 increase; LM decrease; LM decrease; IS
decrease; LM
Starting from the natural level of output, an unexpected monetary contraction will cause output and the price level to ______ in the short run; and in the long run the expected price level will ______, causing the level of output to return to the natural level. decrease; decrease increase; increase decrease; increase increase; decrease
decrease; decrease
An increase in the rate of population growth with no change in the saving rate: increases the steady-state level of capital per worker. does not affect the steady-state level of capital per worker. decreases the steady-state level of capital per worker. decreases the rate of output growth in the short run.
decreases the steady-state level of capital per worker
According to the imperfect-information model, when the price level rises by the amount the producer expected it to rise, the producer: increases production. does not change production. hires more workers. decreases production.
does not change production
The short run refers to a period: during which prices are sticky and cyclical unemployment may occur. during which capital and labor are fully employed. during which there are no fluctuations. of several days.
during which prices are sticky and cyclical unemployment may occur
If the saving rate increases, the: economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached. economy will grow at a faster rate forever. capital-labor ratio will eventually decline. capital-labor ratio will increase forever.
economy will grow at a faster rate until a new, higher steady-state capital-labor ratio is reached
If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will: remain unchanged, and in the long run prices will fall. fall, and in the long run prices will fall. remain unchanged, and in the long run prices will remain unchanged. fall, and in the long run prices will remain unchanged.
fall, and in the long run prices will fall
The majority of empirical evidence supports the hypothesis that economies that are open to trade _____ than comparable closed economies. grow more rapidly have faster rates of population growth and technological progress converge more slowly to a steady-state equilibrium have lower steady-state levels of income per worker due to foreign competition
grow more rapidly
Examination of recent data for many countries shows that countries with high saving rates generally have high levels of output per person because: high saving rates mean permanently higher growth rates of output. high saving rates lead to high levels of capital per worker. countries with high levels of output per worker can afford to save a lot. countries with large amounts of natural resources have both high output levels and high saving rates.
high saving rates lead to high levels of capital per worker
For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are ______, generating a ______ quantity of output demanded. higher; smaller higher; greater lower; smaller lower; greater
higher; greater
According to the quantity theory of money, when velocity is constant, if output is higher, ______ real balances are required, and for fixed M this means ______ P. lower; higher higher; lower higher; higher lower; lower
higher; lower
The government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases. consumption income the budget deficit real balances
income
The Keynesian-cross analysis assumes planned investment: depends on expenditure, and so does the IS analysis. is fixed, and so does the IS analysis. is fixed, whereas the IS analysis assumes it depends on the interest rate. depends on the interest rate, and so does the IS analysis.
is fixed, whereas the IS analysis assumes it depends on the interest rate
With a per-worker production function y = k1/2, the steady-state capital stock per worker (k*) as a function of the saving rate (s) is given by: k* = (s / δ)2. k* = s / δ. k* = (δ / s)2. k* = δ / s.
k* = (s / δ)2.
A higher saving rate leads to a: higher rate of economic growth in the short run but a decline in the long run. higher rate of economic growth only in the long run. larger capital stock and a higher level of output in the long run. higher rate of economic growth in both the short run and the long run.
larger capital stock and a higher level of output in the long run
Along an aggregate supply curve, if the level of output is less than the natural level of output, then the price level is: equal to the natural price level. less than the expected price level. stuck at the existing price level. greater than the expected price level.
less than the expected price level
An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates. increase; raise lower; raise increase; lower lower; lower.
lower; raise
If an economy moves from a steady state with positive population growth to a zero population growth rate, then in the new steady state, total output growth will be ______, and growth of output per person will be ______. higher; higher than it was before higher; lower lower; the same as it was before lower; lower
lower; the same as it was before
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 Highland. by the same amount in Highland and Lowland. more in Lowland. in Highland but not in Lowland.
more in lowland
Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances. negatively; positively positively; negatively negatively; negatively positively; positively
negatively; positively
The balanced growth property of the Solow growth model with population growth and technological progress predicts which of the following sets of variables will grow at the same rate in the steady state? real rental price of capital, real wage, output per worker output per effective worker, capital per effective worker, real wage capital-output ratio, output per worker, capital per worker output per worker, capital per worker, real wage
output per worker, capital per worker, real wage
Suppose that an economy is in its steady state and the capital stock is above the Golden Rule level. Assuming that there are no population growth or technological change, if the saving rate falls: output and investment will decrease, and consumption and depreciation will increase. output and investment will decrease, and consumption and depreciation will increase and then decrease but finally approach levels above their initial state. output, consumption, investment, and depreciation will all decrease. output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.
output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.
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. depreciation rate; population growth rate production function; saving rate saving rate; production function population growth rate; saving rate
production function; saving rate
One explanation for greater economic development in moderate versus tropical climates is that institutions established by colonial settlers in moderate climates ______, while institutions established by colonists in tropical climates ______. were based on English common law; were based on the Napoleonic Code protected property rights; were extractive and authoritarian were extractive and authoritarian; protected property rights were based on the Napoleonic Code; were based on English common law
protected property rights; were extractive and authoritarian
Starting from long-run equilibrium, without policy intervention, the long-run impact of a temporary adverse supply shock is that prices will: be permanently higher, and output will be permanently lower. return to the old level, but output will be permanently lower. return to the old level, and output will be restored to the natural rate. be permanently higher, and output will be restored to the natural rate.
return to the old level, and output will be restored to the natural level
If the Fed reduces the money supply by 5 percent, then the real interest rate will: rise in the short run but fall below its original equilibrium level in the long run. rise in both the short run and the long run. rise in the short run but return to its original equilibrium level in the long run. be unaffected in both the short run and the long run.
rise in the short run but return to its original equilibrium level in the long run
In the Solow growth model, the steady state level of output per worker would be higher if the _____ increased or the _____ decreased. population growth rate; depreciation rate population growth rate; saving rate depreciation rate; population growth rate saving rate; depreciation rate
saving rate; depreciation rate
If the marginal product of capital net depreciation equals 8 percent, the rate of growth of population equals 2 percent, and the rate of labor-augmenting technical progress equals 2 percent, to reach the Golden Rule level of the capital stock, the ____ rate in this economy must be _____. saving; increased population growth; increased saving; decreased population growth; decreased
saving; increased
In a steady-state economy with a saving rate s, population growth n, depreciation rate δ, 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: s / ((f (k))(δ + n + g)). (s - f (k)) / (δ + n + g). f (k) / ((s)(δ + n + g)). sf (k) / (δ + n + g).
sf (k) / (δ + n + g).
The short-run Phillips curve: shifts upward if expected inflation increases. is vertical. shifts upward if expected inflation decreases. shifts downward if expected inflation increases.
shifts upward if expected inflation increases
The type of legal system and the level of corruption in a country have been found to be: significant determinants of the rate of economic growth in a country. important variables explaining the Golden Rule level of capital. unrelated to the rate of economic growth in a country. important topics for political discussion, but not economic explanations of growth.
significant determinants of the rate of economic growth in a country
In the short run, if the price level is greater than the expected price level, then in the long run the aggregate: supply curve will shift downward. demand curve will shift rightward. supply curve will shift upward. demand curve will shift leftward.
supply curve will shift upward
If the interest rate is above the equilibrium value, the: demand for real balances increases. supply of real balances exceeds the demand. market for real balances clears. demand for real balances exceeds the supply.
supply of real balances exceeds the demand
In the two-sector endogenous growth model, the steady-state stock of physical capital is determined by _____, and the growth in the stock of knowledge is determined by _____. the saving rate; the fraction of labor in universities the efficiency of labor; the saving rate the production function; the efficiency of labor the fraction of labor in universities; the saving rate
the saving rate; the fraction of labor in universities
The Phillips curve analysis described in Chapter 14 implies that there is a negative tradeoff between inflation and unemployment in: the long run only. the short run only. both the short run and the long run. neither the short run nor the long run.
the short run only
A decrease in the nominal money supply, other things being equal, will shift the LM curve: downward and to the left. downward and to the right. upward and to the right. upward and to the left.
upward and to the left
If two economies are identical (including having the same saving rates, population growth rates, and efficiency of labor), but one economy has a smaller capital stock, then the steady-state level of income per worker in the economy with the smaller capital stock: will be at the same level as in the steady state of the high capital economy. will be at a higher level than in the steady state of the high capital economy. will be at a lower level than in the steady state of the high capital economy. will be proportional to the ratio of the capital stocks in the two economies.
will be the same level as in the steady state of the high capital economy
If the production function is y = k^1/2, the steady-state value of y is: y = ((s + g) / (δ + n))^1/2. y = (s + g) / (δ + n). y = s / (δ + n + g). y = (2 / (δ + n + g))^1/2.
y = s / (δ + n + g)
In the Solow growth model, the steady-state growth rate of output per effective worker is ______, and the steady-state growth rate of output per actual worker is ______. the rate of technological progress; the rate of population growth zero; zero zero; the rate of technological progress the sum of the rate of technological progress plus the rate of population growth; zero
zero; the rate of technological progress
