Econ Exam 2

_____ cause(s) the capital stock to rise, while _____ cause(s) the capital stock to fall. a. Inflation; deflation b. Interest rates; the discount rate c. Investment; depreciation d. International trade; depressions

c. Investment; depreciation

If the capital per worker in the economy is 4 units and the capital per effective worker is 2 units, then the efficiency of each worker is equal to: a. 1/2. b. 1. c. 2. d. 4

d. 4

In the Solow model with population growth and labor augmenting technological progress, with depreciation rate δ, population growth rate n, and technological growth rate g, the number of effective workers grows at the rate of: a. n - g. b. n + g + δ. c. n + δ. d. n + g.

d. n + g.

In the labor market, the term replacement rate refers to the: a. average amount of time it takes firms to replace workers who quit their job voluntarily. b. fraction of employed individuals who leave or lose their jobs every month. c. fraction of unemployed individuals who find a job every month. d. percentage of previous wages replaced by government benefits in case of unemployment.

d. percentage of previous wages replaced by government benefits in case of unemployment.

In the Solow growth model, investment equals: a. output. b. consumption. c. the marginal product of capital. d. saving.

d. saving.

Unemployment insurance increases the amount of frictional unemployment by: a. making workers more frantic in their search for new jobs. b. inducing workers to accept the first job offer that they receive. c. making employers more reluctant to lay off workers. d. softening the economic hardship of unemployment.

d. softening the economic hardship of unemployment

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. a. efficiency; inefficiency b. efficiency; structural c. frictional; efficiency d. structural; frictional

d. structural; frictional

When f (k) is drawn on a graph with increases in k noted along the horizontal axis, the slope of the curve denotes: a. output per worker. b. output per unit of capital. c. the marginal product of labor. d. the marginal product of capital.

d. the marginal product of capital.

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent. a. 1; 5 b. 5; 1 c. 1; 1 d. 5; 5

5/5

In response to the great shutdown of 2020, the Congress passed legislation to increase the unemployment benefits in a way that the new benefits a. increased replacement rate to 80 percent. b. increased replacement rate to 100 percent. c. added $600 per week to the benefits of every unemployed worker. d. added $1000 per week to the benefits of every unemployed worker

c. added $600 per week to the benefits of every unemployed worker.

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. a. saving rate; production function b. depreciation rate; population growth rate c. production function; saving rate d. population growth rate; saving rate

c. production function; saving rate

The consumption function in the Solow model assumes that society saves a: a. constant proportion of income. b. smaller proportion of income as it becomes richer. c. larger proportion of income as it becomes richer. d. larger proportion of income when the interest rate is higher.

a. constant proportion of income.

In the Solow model with population growth and no technological progress, the marginal product of capital for an economy at the steady state is 0.10. Further, the depreciation rate is 5% and the population growth rate is 2 percent. Based on this, we can conclude that the economy is operating with a level of capital _____ than the Golden Rule level of capital and it must _____ the saving rate to reach a level of capital consistent with the Golden Rule. a. less; increase b. less; decrease c. more; increase d. more; increase

a. less; increase

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: a. sy. b. (1 - s) y. c. (1+s)y. d. (1 - s) y - i.

b. (1 - s) y.

Suppose an economy has 100 units of capital, 100 units of labor, and the efficiency of each worker is equal to 2. The effective number of workers for this economy is _____ and the capital per effective worker is _____. a. 50; 2 b. 200; 1/2 c. 50; 1/2 d. 200; 2

b. 200; 1/2

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in: a. inflation of 1 percent and the nominal interest rate of less than 1 percent. b. inflation of 1 percent and the nominal interest rate of 1 percent. c. inflation of 1 percent and the nominal interest rate of more than 1 percent. d. both inflation and the nominal interest rate of less than 1 percent.

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

Consider the Solow model with population growth and no technological progress with production function Y = K1/2L1/2. If the total capital per worker in year 1 is 9 units, the population growth rate is 1 percent, depreciation rate is 9 percent, and saving rate is 40 percent, then the capital per worker at the beginning of year 2 will be _____ units. a. 9 b. 9.1 c. 9.2 d. 9.3

d. 9.3

In the Solow model with population growth and labor-augmenting technological progress, which of these describes the condition for the maximization of consumption per effective worker at the steady state? a. MPK-δ=0 b. MPK - δ = g c. MPK-δ=n d. MPK - δ = n + g

d. MPK - δ = n + g

According to studies of individual unemployed workers, these workers are MOST likely to find a job: a. about three months before their unemployment insurance runs out. b. within a few weeks of their unemployment insurance running out. c. about three months after their unemployment insurance runs out. d. at a time not influenced by the remaining number of weeks of unemployment insurance.

b. within a few weeks of their unemployment insurance running out.

The efficiency of labor: a. is the marginal product of labor. b. is the rate of growth of the labor force. c. depends on the knowledge, health, and skills of labor. d. equals output per worker.

c. depends on the knowledge, health, and skills of labor.

Which of these policies adopted by the government is NOT aimed at reducing the natural rate of unemployment? a. unemployment insurance b. government employment agencies c. public retraining programs d. the Illinois bonus program for unemployment insurance claimants who found jobs quickly

a. unemployment insurance

According to the quantity theory of money and the Fisher equation, if the money growth increases by 3 percent and the real interest rate equals 2 percent, then the nominal interest rate will increase: a. 2 percent. b. 3 percent. c. 5 percent. d. 6 percent.

b. 3 percent.

For most U.S workers covered by the unemployment insurance program, the replacement rate is _____ percent of previous wages and lasts about _____ weeks. a. 100; 50 b. 50; 26 c. 33; 40 d. 80; 26

b. 50; 26

The inflation tax is paid: a. only by the central bank. b. by all holders of money. c. only by government bond holders. d. equally by every household.

b. by all holders of money.

Public policy to increase the job finding rate includes _____, and public policy to decrease the job separation rate includes _____. a. government employment agencies; higher unemployment insurance benefits b. government employment agencies; 100 percent experience-rated unemployment insurance c. higher minimum wage laws; payment of unemployment benefits for longer periods d. higher efficiency wages; partially experience-rated unemployment insurance

b. government employment agencies; 100 percent experience-rated unemployment insurance

Using average rates of money growth and inflation in the United States over many decades, Friedman and Schwartz found that decades of high money growth tended to have _____ rates of inflation and decades of low money growth tended to have _____ rates of inflation. a. high; high b. high; low c. low; low d. low; high

b. high; low

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: a. increases by 2 percent. b. increases by 1 percent. c. remains constant. d. decreases by 1 percent.

b. increases by 1 percent.

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 _____. a. lower; lower b. lower; the same as it was before c. higher; higher than it was before d. higher; lower

b. lower; the same as it was before

Government policies directed at reducing frictional unemployment include: a. abolishing minimum-wage laws. b. making unemployment insurance 100 percent experience rated. c. increasing the earned income credit. d. making government part of the union-firm wage bargaining process.

b. making unemployment insurance 100 percent experience rated.

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: a. more in Highland. b. more in Lowland. c. by the same amount in Highland and Lowland. d. in Highland but not in Lowland.

b. more in Lowland.

Exhibit: Output, Consumption, and Investment In this graph, when the capital stock per worker is OA, AB represents: a. investment per worker, and AC represents consumption per worker. b. consumption per worker, and AC represents investment per worker. c. investment per worker, and BC represents consumption per worker. d. consumption per worker, and BC represents investment per worker.

c. investment per worker, and BC represents consumption per worker.

The real interest rate is equal to the: a. amount of interest that a lender actually receives when making a loan. b. nominal interest rate plus the inflation rate. c. nominal interest rate minus the inflation rate. d. nominal interest rate.

c. nominal interest rate minus the inflation rate.

In the Solow growth model, the demand for goods equals investment: a. minus depreciation. b. plus saving. c. plus consumption. d. plus depreciation.

c. plus consumption.

Wage rigidity: a. forces labor demand to equal labor supply. b. is caused by sectoral shifts. c. prevents labor demand and labor supply from reaching the equilibrium level. d. increases the rate of job finding.

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

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

c. sf (k).

. If the nominal interest rate is 1 percent and the inflation rate is 5 percent, the real interest rate is: a. 1 percent. b. 6 percent. c. −4 percent.

c. −4 percent.

In the Solow model with population growth and labor-augmenting technological progress, there is sustained economic growth because: a. capital does not have a diminishing marginal product. b. labor does not have a diminishing marginal product. c. there is increasing returns to scale in capital and labor. d. a rise in the number of effective workers offsets the diminishing marginal product of capital.

d. a rise in the number of effective workers offsets the diminishing marginal product of capital.

The right of seigniorage is the right to: a. levy taxes on the public. b. borrow money from the public. c. draft citizens into the armed forces. d. create money.

d. create money.

In the Solow model with population growth and no technological progress, an increase in the population growth rate leads to a(n) _____ in the effective investment rate leading to a(n) _____ in the steady-state income per worker. a. increase; increase b. increase; decrease c. decrease; increase d. decrease; decrease

d. decrease; decrease