ECON 510 Final

If population grows at rate n and workers become more effective at rate g, which variable grows at rate n + g?

Output

Which was NOT a shock that led to the recession of 2001?

A financial crisis arising from mortgage defaults

What is NOT an argument for optimal fiscal policy versus a balanced-budget amendment?

A government budget deficit may crowd out capital and depress economic grow thin the long run

Which statement is TRUE according to the Solow growth model?

A higher saving rate results in temporarily faster growth.

What criterion does the NBER's Business Cycle Dating Committee use to determine when the economy goes into recession?

A variety of data and its professional judgement

What do we call the time between policy action in response to a shock to the economy and the policy's impact on the economy?

Outside lag

Assuming the production function is 𝑦 = √𝑘, what is the steady-state capital stock for an economy with a saving rate of 0.4 and a depreciation rate of 0.2? (Show how you get your answer to get full credit)

4

What is capital budgeting?

A budget that considers both assets and liabilities

Which is an implication of the Lucas critique?

A credible announcement of a change in monetary policy will shift the Phillips curve.

What do we call the time between a shock to the economy and the enactment of policies to counter the shock?

Policy lag

What is the political business cycle?

Manipulation of the economy prior to an election to improve the electoral prospects of an incumbent government.

Assuming the labor force and technology are fixed, why is there a limit to capital accumulation?

More capital means more capital must be replaced.

According to the idea of Ricardian equivalence, what effect will a debt-financed tax cut have on saving?

National saving will not change

Which county's government holds financial assets that exceed its debt?

Australia

What is meant by quantitative easing?

Buying long-term government bonds, mortgage-backed securities, and corporate debt

What might Joseph Schumpeter have called the rise of online retailing at the expense of brick-and-mortar retail outlets?

Creative Destruction

Which statement is TRUE when the economy starts with LESS capital than the Golden Rule level?

Current generations must sacrifice to maximize future consumption

In the Solow growth model, which expression defines the marginal product of capital?

MPK = f (k + 1) − f (k )

For macroeconomists, what distinguishes the short run and the long run?

Whether prices are sticky or flexible

Which statement is TRUE regarding government debt in the United States?

With a few exceptions, wars have resulted in steep spikes in the debt-to-GDP ratio

In the IS-LM model, which variables are endogenous?

Y and r

The Golden Rule level of capital maximizes

consumption

If government purchases increase by ΔG, output will:

increase by more than ΔG

Central-bank independence is strongly associated with:

lower inflation

Steady-state consumption is the gap between

output and depreciation

The IS-LM model is best equipped to help economists analyze:

the short run

In the Solow growth model, which variable is endogenous

The capital stock

What is the approximate depreciation rate for an economy with a steady-state capital stock of 8 units of capital per worker and a saving rate of 0.4? (Show how you get your answer to get full credit)

0.14

In the model developed in the chapter, what would follow an unexpected increase in inventories?

An increase in the unemployment rate

In the Solow model with population growth and static technology, what is the Golden Rule condition?

MPK − δ = n

Which statement is TRUE when the economy starts with MORE capital than the Golden Rule level?

Decreasing the capital stock to the Golden Rule level benefits both current and future generations

In the Solow model, which two variables have similar effects on the capital stock per worker?

Depreciation and population growth

According to the text, what is the most likely reason for climbing health care costs?

Expensive new medical advances

Which statement about policy lags is TRUE?

Fiscal policy has a longer inside lag and monetary policy has a longer outside lag

Which is NOT a monetary policy mentioned in the chapter?

Flexible exchange rates

Which statement is TRUE when the interest rate is high?

Income is high on the LM curve and low on the IS curve

Which is NOT likely to follow a rapid and large increase in government debt?

Increased foreign direct investment in the domestic economy

Which variable enables actual expenditure to differ from planned expenditure?

Inventories

Which statement is TRUE regarding the Keynesian cross and the IS curve?

Investment is fixed in the Keynesian cross and a function of the interest rate in the IS diagram

Which is a valid description of the aggregate demand curve?

It tells us the possible combinations of the price level and output for a given money supply

What do economists call a situation in which an increase in the money supply is not followed by a drop in the interest rate?

Liquidity trap

According to Okun's law, how would real GDP change if the unemployment rate rose by 2 percent?

Real GDP would fall by 1 percent.

What is the hypothesis that consumers will increase saving rather than spending after a tax cut?

Ricardian equivalence

How does the economy move from a short-run equilibrium to its long-run equilibrium?

Shifts occur in the short-run aggregate supply curve.

Why might the strict monetarist prescription of steady growth in the money supply not be the best possible policy?

Shocks may change the velocity of money

Why do the short-run and long-run aggregate supply curves have different slopes?

Sticky prices

Which law first established the federal government's responsibility for macroeconomic performance?

The Employment Act of 1946

In the IS-LM model, which will follow a decrease in government purchases?

The IS curve shifts to the left.

In the IS-LM model, which will follow a decrease in the money supply?

The LM curve shifts to the left

What do we call the observation that traditional methods of policy evaluation do not adequately account for the impact of policy on expectations?

The Lucas critique

Which is NOT part of the index of leading economic indicators?

The M2 money supply

How do the Solow growth model and endogenous growth model view the marginal product of capital?

The Solow model assumes diminishing returns, and the endogenous growth model assumes constant returns to capital

How do the long-run predictions of the Solow growth model and endogenous growth model compare?

The Solow model predicts an eventual steady-state equilibrium, and the endogenous growthmodel allows for continued growth.

At the Golden Rule level of capital, what must the marginal product of capital equal?

The depreciation rate

Which statement does NOT provide evidence for the spending hypothesis, which has been proposed to explain the Great Depression?

The end of World War I led to a drastic reduction in government purchases

What is a cyclically adjusted budget deficit?

The estimated budget deficit at full employment

Which indicates that firms are NOT engaging in TOO MUCH research activity?

The positive 'standing on shoulders' externality is greater than the negative 'stepping on toes' externality

Which variable is constant in the IS-LM model?

The price level

What is the expected result of a decrease in the velocity of money in the long run?

The price level will fall, and output will not change

What impact does a high inflation rate have on the government debt?

The real debt rises much less than the nominal debt

Which variable links the IS and LM curves in the IS-LM model?

The real interest rate

What is the main target of Keynes's critique of classical economics?

The view that aggregate supply alone determines national income

From a macroeconomic theory perspective, what is unusual about the Covid-19 recession?

There was a shift in the economy's potential output

Which economist predicted that humanity's long-run prospect is poverty?

Thomas Malthus

How do the Fisher effect and the theory of liquidity preference explain the link between monetary policy and nominal interest rates?

Tighter (looser) money leads to higher (lower) nominal interest rates in the short run but lower(higher) nominal interest rates in the long run.

In the steady state in the Solow model, which is NOT one of the uses of new capital?

To replace capital exported to other countries

What lesson do we draw from the debt-deflation theory?

Unexpected deflation enriches creditors and impoverishes debtors

When does the classical dichotomy NOT hold?

When not all prices are flexible