Exam 2

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1. An increase in immigration will 2. In the new market equilibrium, the real wage will ______ and the amount of labor employed will ______ 7.3

1. increase labor supply When immigration increases, there are more workers and the supply for labor increases at any real wage. The labor-supply curve shifts to the right. 2. fall; increase When immigration increases, there are more workers and the supply for labor increases at any real wage. The labor-supply curve shifts to the right. The equilibrium real wage decreases and the amount of labor employed increases.

1. Suppose the government increases its spending on goods and services by $26 billion. After a brief period of time, total aggregate demand will increase by _____ $26 billion. 2. The total shift in the aggregate demand curve is greater than the initial shift in the curve because of the multiplier. The formula for calculating the multiplier is 3. Thus, if the marginal propensity to consume is 0.75, then the multiplier is _____ and the $26 billion increase in government spending would increase aggregate demand by a total of $_____ billion. 9.2

1. more than (because of the multiplier) 2. Multiplier=1/(1−MPC) 3. 4 ; 104 If the marginal propensity to consume is 0.75, then the multiplier is 4.0. The $26 billion increase in government spending would then increase aggregate demand by a total of $104.0 billion.

1. The short-run aggregate supply curve shows the short-run relationship between the 2. Evidence about the behavior of prices in the economy suggests that changes in aggregate demand have a relatively _____ effect on prices within a few quarters so that the short-run aggregate supply curve is relatively _____. Thus, shifts in aggregate demand lead to _____ changes in output, but _____ changes in price. 9.3

1. price level and the willingness of firms to supply output to the economy. 2. small; flat; large; small

1. A positive supply shock temporarily ______ output ______ full employment and ______ prices. 2. After the positive supply shock, real GDP is _____ potential GDP. 3. This implies that unemployment is _____ , driving wages _____. This results in a ______ shift of the short-run aggregate supply curve.

1. raises; above; lowers 2. Higher than 3. falling; up; leftward or upward

1. The aggregate demand curve shows the relationship between 2. The aggregate demand curve ______ , indicating that the quantity of aggregate demand ______ as the price level in the economy falls. 9.2

1. the level of prices and the quantity of real GDP demanded. 2. slopes downward; increases

1. For simplicity, assume that the supply of labor is not affected by real wages and is therefore a vertical line. An increase in capital shifts the production function _____ because _____ output can be produced from the same amount of labor. 2. In addition, firms _____ their demand for labor because the marginal benefit from employing labor will _____. This will _____ real wages in the economy. 8.2

1. upward; more An increase in capital shifts the production function upward because more output can be produced from the same amount of labor—labor is more productive because each worker has more capital at his or her disposal. 2. increase; rise; bid up Firms increase their demand for labor because the marginal benefit from employing labor will rise. As firms increase their demand and compete for a fixed supply of labor, they will bid up real wages in the economy.

1. In a closed economy, full-employment output is divided among the following demands: 2. Since the supply of output is fixed, increases in government spending typically _____ consumption and investment. 3. Increased competition from the government to borrow funds from the public to finance investment plans makes it _____ difficult and costly for businesses to make investments, which causes business investment spending to _____ 4. Data shows that crowding out in investment occurred in the United States during World War II because the share of investment spending as a part of GDP _____ as the share of government spending 7.6

1. consumption, investment, and government purchases. 2. crowd out both 3. more; decrease 4. decreased; increased

At a 5 percent annual growth rate in GDP per capita, it will take 8.1

14 To calculate how long it will take GDP per capita to double, divide the number 70 by the annual growth rate.

The simple multiplier is calculated as: ch 9 hw

2.5 Multiplier = 1/(1−MPC)

Saving Behavior and Multipliers in Two Countries. Consumers in Country A have an MPS of 0.2 while consumers in Country B have an MPS of 0.3. Country ____ has the higher value for the multiplier. ch 9 hw 9.2

A Multiplier= 1/MPS Multiplier A= 1/.2= 5 Multiplier B= 1/.3= 3.33

Suppose the stock of capital decreases. Show how potential output can change. Use the three-point curved line drawing tool to show how this affects output (initially holding labor constant) by adding a new production function in the provided graph. Label this curve 'K2'. 7.4

A decrease in the stock of capital shifts the entire short-run production function downward, indicating that at any level of labor input, less output can be produced than before. This is because workers become less productive.

On a graph of the labor market, show the effect of a negative shock to technology on wages and employment. ch 7 hw

A negative technological shock makes labor less productive. This shifts the labor-demand curve to the left, lowering both real wages and employment.

A tax on labor shifts the labor ____ curve to the ____ and leads to ____ wages and ____ employment. If the supply curve for labor is vertical, wages ____ and employment ____ 7.5

A tax on labor shifts the labor DEMAND curve to the LEFT and leads to LOWER wages and REDUCED employment. If the supply curve for labor is vertical, wages FALL but employment DOES NOT CHANGE

In an economy with no government sector or foreign sector, saving must equal investment because Ch 8 hw

A. total demand is equal to consumption and investment. B. total income is equal to total demand. C. total income is equal to consumption and saving. D. all of the above. Your answer is correct. E. none of the above. (in 8.2: capital deepening)

Cutting the Length of Patents. Suppose that a group of consumer activists claims that drug companies earn excessive profits because of the patents they have on drugs. The activists advocate cutting the length of time that a drug company can hold a patent to five years. They argue that this will lead to lower prices for drugs because competitors will enter the market after the five-year period. Do you see any drawbacks to this proposal? A. It will reduce the incentive for drug companies to invent new drugs. B. It will result in only induced innovation. C. It will promote "creative destruction," as outlined by Joseph Schumpeter. D. All of the above. Ch 8 hw

A. It will reduce the incentive for drug companies to invent new drugs.

Immigration and Wages Near the Border. A. Some economists have argued that while immigration does not have a major effect on the overall level of wages for the entire economy, it does decrease wages near the Mexican border. Mexican immigration will B. Suppose the supply of labor decreases. Show how potential output and wages change. C. (cont from B) The equilibrium quantity of labor ______ and therefore, output _______ D. The real wage ch 7 hw

A. have a stronger impact on supply near the border, but may not affect the overall supply of labor for the entire U.S. economy. B. If the supply of labor decreases, then the labor-supply curve will shift to the left, indicating fewer people are willing to work at any given wage. C. Decreases; Decreases D. Increases

The graph shows the initial aggregate demand (AD1) and short-run aggregate supply (AS1) curves for an economy. The initial equilibrium is point E, the point of intersection of the AD1 and AS1 curves. The economy is experiencing a negative supply shock such as an increase in the price of oil. 1.) Using the line drawing tool, draw a new aggregate demand or aggregate supply line. Label the curve appropriately. 2.) Using the point drawing tool, locate the new equilibrium point to indicate the effects of a negative supply shock on short-run output and the price level. 9.3

AS shift left (or upward) new equilibrium point is where AS2 and AD1 intersect

In the diagram to the right, the economy is currently at point A. President Donald Trump lowered taxes in 2018. The Congress also increased government spending that year. Ceteris paribus, these actions are represented by: A. a movement from point B to point A. B. a shift of the aggregate demand curve from AD1 to AD2 (point A to C). C. a shift of the aggregate demand curve from AD2 to AD1 (point C to A). D. a movement from point A to point B. ch 9 hw 9.2

B. a shift of the aggregate demand curve from AD1 to AD2 (point A to C). A reduction in taxes increases disposable income, which causes consumption and aggregate demand to increase. An increase in government spending has the same effect. Thus, a reduction in taxes shifts the aggregate demand curve to the right.

Enhanced Productivity from Infrastructure. Suppose a country makes substantial investments to improve its roads. Give an example(s) of how this would improve productivity in the economy as a whole. (Check all that apply.) A. The total employment elasticity of the economy would increase. B. The government's total tax revenue as a proportion of GDP would increase. C. Total transportation costs would be reduced. D. Substantial investments to improve the roads would encourage private investment. 8.3

C&D Substantial investments in a country's roads reduce transportation costs and result in an improvement in infrastructure. This in turn encourages private investment.

Marital Gifts and Savings. In Japan, it is a custom for the bride's family to give a gift having very large monetary value to the family of the groom. How might this affect the savings rate in this country? A. Families that anticipate receiving large marriage gifts will save less. B. Families that anticipate providing large marriage gifts will save more. C. Both a and b. D. None of the above. ch 7 hw

C. Both a and b.

In the short run, when prices are slow to adjust to changes in demand and supply, ______ determines production. ch 9 hw 9.1

Demand In the short run, when prices are slow to adjust to changes in demand and supply, production is determined by demand and not prices. Thus, if an auto maker manufactures a car which becomes very popular and the dealers cannot provide the cars to all potential buyers, the manufacturer eventually increases production instead of raising the price of the car in the short run.

Which of the following is not a component of aggregate demand? A. Depreciation. B. Exports. C. Consumption. D. State and local government expenditures. 9.2

Depreciation.

Investments in human capital are investments in human beings.

Examples include increasing knowledge and skills, which can complement current investments in physical capital.

T/F: Economists who have studied economic growth find strong evidence for convergence among countries between 1980 and 2000. 8.1

False Economists have found convergence among currently developed countries such as the United States, France, and Japan. However, economists have not found convergence between currently developed countries and less developed countries such as Pakistan, Zambia, and Zimbabwe.

T/F: Convergence happens if rich and poor countries have the same per capita GDP growth rates 9_ch8

False: convergence only happen if poor countries grow quicker than rich in order to catch up

Per capita GDP growth in China is forecast to be just over 6% this year. Using the rule of 70 9_ch8

GDP per capita should double in 12 years

Malthus, Population Size, and Technology. Malthus believed the population would always adjust to bring real wages back to a fixed subsistence level. Use the line drawing tool to draw and label a new line showing that an improvement in technology will eventually lead to a higher level of population. Properly label this line. ch 7 hw

Improved technology will shift the demand curve for labor to the right, raising real wages. This will eventually lead to a shift in the supply curve to the right, as population increases. Next Question

The Internet and Price Flexibility. The Internet has enabled consumers to search for the lowest prices of various goods and has allowed prices of many items to be rather flexible. Which of the following goods or services may NOT become more flexible in price because of the Internet? A. Medical services. B. Stereo components. C. Car rental at airports. D. DVDs. 9.1

Medical services.

Stagflation happens when 12_ch9

Negative AS shifts are bigger than negative AD shifts

Another term for full−employment output is 7.4

Potential Output Full-employment output is the level of output that is produced when the economy is at full employment. This level of output is also known as potential output. This occurs when the labor market is in equilibrium, with the quantity of labor supplied equal to the quantity of labor demanded.

Which of the following methods has the World Bank not tried to assist developing countries? A. Increases in foreign aid. B. Promotion of universal education. C. Infusions of new machinery. D. Promotion of population growth. 8.5

Promotion of population growth.

The classical school of thought came to its fruition during the 1930s 7.1

TRUE

Oil Price Increases and U.S. Recessions. Suppose an economist presented some evidence that oil price shocks have less of an effect on the United States today than in the 1970s. What changes in the U.S. economy might be able to explain this? A. The United States now caps the price at which it imports oil from some countries, which was not the case in the 1970s. B. The United States now imports more oil today than in the 1970s, making it less susceptible to oil price increases. C. The United States no longer views oil as a vital input to production. D. The United States produces more of its own oil and petroleum products, so its producers now benefit from oil price increases. ch 9 hw 9.3

The United States produces more of its own oil and petroleum products, so its producers now benefit from oil price increases. The United States now produces more of its own oil and petroleum products so there is a benefit from oil price increases to U.S. producers. This offsets the effects of some of the shocks.

In the Keynesian boom we are above potential GDP but in the classical boom we are at potential GDP 12_ch9

True

Per-capita research and development funding in the US has been hard hit by the Great Recession 8_ch8

True, but R&D as a share of GDP is still very high

Which of the following is NOT a characteristic of the data from class for the period 2014-2019 Using_ADAS_Graphs

US inflation rates increased steadily over this period (this is NOT a characteristic of the data from class for the period 2014-2019)

How Do We Measure Technological Progress? If we cannot measure every invention or new idea, how can we possibly measure the contribution to growth of technological progress? Ch 8 hw

We can measure the effects of technological progress indirectly using growth accounting methods.

According to the Keynesian model, a fall in net exports results in 12_ch9

a leftward shift in AD followed by a movement down and to the right along AD as prices fall and we move to AD=AS

classical L mkt model: In our simple model, if labor-replacing technologies reduce the demand for labor, we expect 6_ch7

a temporary increase in structural unemployment, followed by a fall in labor force participation rates and zero unemployment

Calculating the MPS and MPC. In one year, a consumer's income increases by $300 and her consumption increases by $80. a. Her marginal propensity to consume is equal to b. Her marginal propensity to save is equal to ch 9 hw

a. .27 MPC is calculated as the change in consumption divided by the change in income. Thus, MPC = ΔC/ΔY = $80/$300 = 0.27. b. .73 mps= 1-mpc : 1-.27

a. If the MPC is 0.75, then the multiplier is equal to ____ b. If the government increases its purchases of goods and services by $12 million, GDP will increase by $____ million. 9.2

a. 4 b. 48

Related to Application: Do European Soccer Stars Change Clubs to Reduce Their Taxes? Payroll Tax for a Health Program. To finance a health-care program, the government places a 10 percent payroll tax on all labor that is hired. a. Show how this shifts the demand for labor. b. If the labor-supply curve is vertical, what are the effects on real wages, output, and employment? c. Why do economists say that labor bears the full burden of the tax in this case? A. Wages decrease by an amount equal to the tax. B. Unemployment increases due to the tax. C. Workers do not value the health-care program. D. All of the above. d. If the labor-supply curve were horizontal, what would be the effects on wages, output, and employment? 7.5

a. decrease (shift left) Labor demand curve A payroll tax will make labor more expensive, raising the marginal cost of workers. Employers will respond by demanding fewer workers at any given wage, shifting the labor-demand curve to the left. b. Wages decrease, but output and employment are unchanged. If the labor-supply curve is vertical, then a shift in the labor-demand curve leaves employment and therefore output unchanged, though wages decrease. This is because workers are not sensitive to wage changes. c. A. Wages decrease by an amount equal to the tax. Because the labor-supply curve is vertical (and workers therefore are not sensitive to wage changes), the tax burden is passed to labor in the form of lower wages. In particular, wages decrease by an amount equal to the tax. d. Wages would be unchanged, but output and employment would decrease. If the labor-supply curve were horizontal, then a shift in the labor-demand curve would decrease employment and therefore output, though wages would be unchanged. This is because workers would be extremely sensitive to wage changes.

An example of a major technological innovation that could have caused major economic fluctuations is A. electricity. B. computers. C. steam power. D. all of the above. 7.5

all of the above.

In an economy with no government sector or foreign sector, saving must equal investment because A. total income is equal to consumption and saving. B. total demand is equal to consumption and investment. C. total income is equal to total demand. D. all of the above. E. none of the above. 8.2

all of the above.

classical L mkt model:as firms accumulate classical goods in our model, this results in 6_ch7

an increase in demand for labor, as capital adds to worker productivity (in the aggregate, though it may replace workers in some sectors

capital deepening

an increase in the amount of capital per worker; one source of rising labor productivity

Prices that adjust on a daily basis, such as prices of fresh fish, vegetables, and other food products 9.1

auction prices

Policies That Promote Capital Deepening. Which of the following will promote economic growth through capital deepening? A. Increased imports to purchase new flat-screen TVs for consumers. B. Increased imports to purchase supercomputers for industry. Your answer is correct. C. Higher taxes used to finance universal health care. Ch 8 hw

b. Increased imports to purchase supercomputers for industry.

According to the Keynesian model, shifts in AD are bigger if the mpc is 10_ch9

bigger total shift in AD is equal to the initial "shock" to AD (Ca, I, G, or NX) multiplied by 1/(1-mpc) if mpc rises, 1-mpc falls and 1/(1-mpc) (the multiplier) rises

In the Keynesian model we have a ______ when prices rise and real wages ______ 11_ch9

boom with GDP above potential; fall In the Keynesian model, we move along AS during booms and recessions. A boom happens when prices rise, causing real wages to fall during economic expansions. In a recession prices fall and real wages rise during the downturn. This is quite different than the classical model that predicts that GDP, employment, and real wages all move in the same direction as Ld and LRAS shift in the same direction with changes in K and/or technology.

In poor countries, the relative prices for nontraded goods (such as household services) to traded goods (such as jewelry) are ______ than in rich countries. 8.1

cheaper All residents of the world may pay the same prices for traded goods such as jewelry, but, without international trade, the relative prices of nontraded goods in poorer countries may be considerably less. For example, household helpers may be cheaper in Pakistan than in the United States.

Economic models that assume that wages and prices adjust freely to changes in demand and supply are known as ________ models. 7.1

classical The term classical refers to models developed by a school of thought that predicted wages and prices will adjust quickly and naturally over a relatively short period of time, resulting in full employment.

Education can contribute to economic growth by 8.4

complementing physical capital and developing new ideas. Education can contribute to economic growth in two ways. First, the increased knowledge and skills of people complement our current investments in physical capital. Second, education can enable the workforce in an economy to use its skills to develop new ideas or to copy ideas or import them from abroad.

In an open economy, increased government spending will crowd out 7.6

consumption, investment, or net exports. In an open economy, increased government spending need not crowd out either consumption or investment. It could lead to reduced exports and increased imports. Therefore, what could get crowded out instead is net exports.

The increase of investment, or other component of GDP, caused by a decrease in government spending is called 7.6

crowding in.

Prices that adjust slowly are ______. Prices for industrial products belong to this category. 9.1

custom prices

There is no _______ unemployment at full employment. 7.1

cyclical Cyclical unemployment is the part of unemployment that rises and falls with economic fluctuations. If the economy is at full employment, experiencing neither a boom nor a bust, then there is no cyclical unemployment.

Data shows that crowding out in consumption occurred in the United States during World War II because the share of consumption spending as a part of GDP _____ as the share of government spending _____ 7.6

decreased; increased

With the stock of capital fixed, output increases with labor input, but at a rate that 7.2 The Production Function

decreases Output increases with labor at a decreasing rate due to the principle of diminishing returns.

a decrease in the stock of capital shifts the production function ch 7 hw

downward a decrease in the stock of capital makes workers less productive, shifting the entire short-run production function downward.

Supply shocks are 9.3

external events that shift the aggregate supply curve.

The production function illustrates the relationship between 7.2 The Production Function

factors of production and output.

The production function illustrates the relationship between: A. factors of production and output. B. capital and labor. C. the natural rate of unemployment and full employment. D. output and the cost of production. ch 7 hw

factors of production and output.

Financial Collapse as a Technology Shock. Suppose we view the financial crisis of 2007 as a negative technological shock. According to the real business cycle model, wages will ______ and potential output will ______ 7.5

fall; fall The real business cycle theory states that an adverse technological shock results in a decreasing demand for labor. This, in turn, results in low levels of employment and low real wages. Output would fall because employment is low and because the economy is less productive than before. So, if we view the financial crisis of 2007 as a negative technological shock, then we can say that it would have resulted in a fall in wages due to a decreasing demand for labor and a decrease in output due to an increase in unemployment.

T/F: Investment in human capital includes the purchases of computers used by professors. 8.4

false Computers represent physical capital. Investments in human capital are investments in human beings. Examples include increasing knowledge and skills, which can complement current investments in physical capital.

T/F: China has a lower rate of technological progress than India 8.3

false Economists Barry Bosworth from the Brookings Institution and Susan Collins from the University of Michigan broke capital deepening in India and China into two parts: increases in physical capital (buildings, machines, and equipment) and increases in human capital (the knowledge of workers, as measured by their educational attainment). Their analysis revealed that China's more rapid growth was primarily caused by more rapid accumulation of physical capital and more rapid technological progress.

In the last few years, poor countries have started to catch up more quickly to US levels 9_ch8

false emerging mkts were doing well during great recession cuz US, canada, and europe seemed relatively risky. Now that oil prices r low and exports to china r slowing (as chinas demand for imports are slowing), emerging market growth is slowing

In the data, consumption tends to be more volatile than GDP 10_ch9

false: consumption tends to move with GDP but smoother

At full employment, there is only structural and __________ unemployment 7.1

frictional The economy has structural and frictional unemployment but no cyclical unemployment when it is at full employment. That is, at full employment, the economy is experiencing no unemployment due to recession.

The method that Solow developed to measure technological progress is called 8.3

growth accounting. The method that Solow developed to measure technological progress, or measure the contributions to economic growth from capital, labor, and technological progress is called growth accounting.

Wages, Real Business Cycle Theory and the Great Depression. A simple real business cycle explains all economic fluctuations with just technology shocks. During the Great Depression, real wages increased, which is 7.5

inconsistent with a simple real business cycle because if there is a negative technology shock, output and real wages would both fall.

A worldwide patent and copyright system would ___ the incentive to be innovative 8.4

increase A worldwide patent and copyright system would increase innovation by allowing firms that invent new products and more efficient ways to produce to earn monopoly profit, protecting intellectual property rights both domestically and worldwide.

An increase (to the right) in the LRAS curve can also be represented by an _______ in the aggregate production function Using_ADAS_Graphs

increase (shift up)

Examples using classical model: If income and substitution effects do not offset in labor markets, then payroll taxes 7a_ch7

increase costs for firms and reduce GDP WHY: if labor supply is not vertical, the burden of the payroll tax is "shared" between firms and workers. It lowers after-tax wages for workers but also raises the costs for firms. Because it raises costs for firms, they cut back on employment and GDP falls. In this case payroll taxes reduce (distort) GDP.

Government Spending, Taxes, and Investment. Suppose a government places a 10 percent tax on incomes and spends 40 percent of the money from taxes on investment and the rest on public consumption goods, such as military parades. Individuals save 20 percent of their income and consume the rest. In this case, total investment (public and private) Ch 8 hw

increases Since the government invests a larger portion of the money than individuals, total investment increases.

Taxes and Induced Innovations. Suppose a country imposed heavy taxes to increase the price of gasoline. This would affect the incentive to develop battery powered automobiles because as gasoline has become more expensive, the payoff for developing a good battery powered car 8.4

increases and we should see more inventions. Since gasoline has become more expensive, the payoff for developing a good battery powered car increases and we should see more inventions.

Potential or full employment output occurs when there is 7.4

labor market equilibrium and cyclical unemployment equal to zero.

A decrease in the amount of capital in the economy will shift the demand for labor curve to the ______ leading to lower real wages and employment. 7.3

left A decrease in capital will shift the demand for labor curve to the left because the change in capital makes workers less productive.

Foreign Recession. Suppose a foreign country experiences a recession and buys less goods throughout the world including the United States. This will lead to a ______ the U.S. aggregate demand curve. 9.2

leftward shift of Increases in aggregate demand shift the aggregate demand curve to the right. Conversely, factors that decrease aggregate demand shift the aggregate demand curve to the left. When a foreign country experiences a recession and buys less goods throughout the world including the United States, the U.S. aggregate demand curve shifts to the left since aggregate demand has decreased.

When the labor market is in equilibrium, the labor demand and supply curves determine the 7.3

level of employment in the economy and the level of real wages. The labor market equilibrium occurs where the quantity demanded for labor equals the quantity supplied. At equilibrium, the labor demand and supply curves determine the level of employment in the economy and the level of real wages.

The _____-run aggregate supply curve is a _____ aggregate supply curve that reflects the idea that in the _____ run, output is determined solely by the factors of production and technology. 9.3

long; vertical; long The long-run aggregate supply curve is a vertical aggregate supply curve that reflects the idea that in the long run, output is determined solely by the factors of production and technology.

Use the 3-point curved line drawing tool to draw and label a new short-run aggregate supply curve that shows the effect of a decrease in material costs ch 9 hw

lower material costs shift the aggregate supply curve downward and to the right

Economic Growth and Global Warning. Basing your answer on the research reported in the text, India is 8.1

more vulnerable now to increases in temperatures than it will be in twenty years because more development will allow the economy adapt to higher temperatures. The fact that poor countries are affected but not rich countries, suggest that the timing of global warming may matter. If global warming can be deferred sufficiently far into the future, poorer countries, like India, will have opportunities to develop and perhaps be less subject to global warming trends.

Economic Growth and Global Warning. Basing your answer on the research reported in the text, India is Ch 8 hw

more vulnerable now to increases in temperatures than it will be in twenty years because more development will allow the economy adapt to higher temperatures.: The fact that poor countries are affected but not rich countries, suggest that the timing of global warming may matter. If global warming can be deferred sufficiently far into the future, poorer countries, like India, will have opportunities to develop and perhaps be less subject to global warming trends.

In an open economy, increases in government spending can crowd out consumption, investment, or 7.6

net exports Open economies have international trade. Thus, for a fixed level of output, an increase in government spending will decrease consumption, investment, and/or net exports.

Long run aggregate supply is vertical because 11_ch9

nominal wages always adjust to match price changes and return the mkt to w/p = mpl at L*

classical L mkt model: labor demand is a downward sloping function of real wage because 6_ch7

of the joint assumptions of diminishing returns to L and perfect competition in labor markets WHY: Labor adds to productivity, not utility in this model

A(n) _____ economy is open to trade, whereas a closed economy is not. 7.6

open An economy with international trade is considered open, whereas an economy without international trade is closed.

According to the principle of diminishing marginal returns, if we produce output with two or more inputs, at some point, 7.2 The Production Function

output will increase at a decreasing rate. If we produce output with two or more inputs, and we increase one input while holding the other inputs fixed, beyond the point of diminishing marginal returns the additional input will produce less additional, or marginal, output. In other words, output will increase at a decreasing rate.

an increase in labor force participation will shift the labor-supply curve to the _____, leading to lower real wages and higher employment. ch 7 hw

right an increase in labor force participation will shift the labor-supply curve to the right because the change in participation increases the number of people willing to work at any given wage.

Both in the long run and recently, we've observed that per-capita GDP and life expectancy have been 9b_ch8

rising all over the world

Retail Price Stickiness in Catalogs. Economist Anil Kashyap of the University of Chicago found that prices of many items published in retail catalogs are considerably_____, but during periods of _____ , prices change more frequently because of _____. ch 9 hw 9.1

sticky; high inflation; increases in the cost of production

Comparing Economic Performance Using International GDP Data. Using the Penn World Tables (http://www.rug.nl/research/ggdc/data/pwt/) for real gross domestic product per capita, compare the relative growth performance for real GDP per capita of France and Japan from 1950 to 2000. The data ______ the theory of convergence. 8.1

support The real GDP per capita of France and Japan appear to be converging. For example, France's real GDP per capita increased from 977 in 1950 to 25,045 in 2000, while Japan's increased from 371 to 23,971 over this same period. (Actually, around 1990, before Japan entered a decade-long recession, its real GDP per capita had surpassed that for France.)

support: The real GDP per capita of France and Japan appear to be converging. For example, France's real GDP per capita increased from 977 in 1950 to 25,045 in 2000, while Japan's increased from 371 to 23,971 over this same period. (Actually, around 1990, before Japan entered a decade-long recession, its real GDP per capita had surpassed that for France.)

Once we account for changes in the labor force, ______ is the next biggest source of the growth of GDP in the United States. 8.3

technological progress Behind increases in the labor force, technological progress has been the second-largest factor contributing to real GDP growth, accounting for roughly 35 percent of the growth in output between 1929 and 1982.

robert solow added _______ to the conventional production function to account for technological change 8.3

technological progress Production was assumed to be a function of capital and labor. Robert Solow suggested technological progress was also a component of production such that with technological change, a fixed amount of capital and labor could produce more output.

Once we account for changes in the labor force, __________ is the next biggest source of the growth of GDP in the United States. Ch 8 hw

technological progress: Behind increases in the labor force, technological progress has been the second-largest factor contributing to real GDP growth, accounting for roughly 35 percent of the growth in output between 1929 and 1982.

Real business cycle theorists have attempted to integrate shocks to _______ into the full employment model. 7.5

technology (A)

A simple real business cycle explains all economic fluctuations with just ch 7 hw

technology shocks

Oil "shocks" that unexpectedly drive up the price of oil are considered 8_ch8

technology shocks considered tech shocks because: - energy affects productivity of capital and labor inputs; affects way capital are brought together with workers - E is not accumulated/decumulated through investment and depreciation as is capital stock- It isn't very important what we call it- technology shocks and capital shocks affect Ld the same way

Scientific method and L mkt: When economists refer to the "new economy" they mean 7b_ch7

the period in the 1990's in which we saw the transformation of production, distribution, and communication using computer technologies

to draw on graph: LS shift right Improved technology will shift the demand curve for labor to the right, raising real wages. This will eventually lead to a shift in the supply curve to the right, as population increases.

According to the Solow model, capital deepening will occur as long as 8.A appendix

total saving exceeds depreciation.

Economic growth likely causes negative externalities in terms of pollution, which then affects productivity (heat affects agricultural production but also the ability to use machinery for both manufacturing and computing), feeding back to lower GDP growth 9b_ch8

true

Governments can play a key role in designing institutions that promote economic growth, including providing secure property rights. 8.5

true

Scientific method and L mkt: T/F: Changes in the purchasing power of wages are estimated from the data. Changes in the real wage using the CPI will be lower than those using the PCE deflator 7b_ch7

true

Scientific method and L mkt: T/F: Scientific questions are those that test a falsifiable hypothesis 7b_ch7

true

Free trade leads to more research and development because it promotes larger markets. 8.4

true Governments can play a key role in designing institutions that promote economic growth, including providing secure property rights.

T/F: A higher saving rate will lead to a higher stock of capital in the long run. Ch 8 hw

true: A higher saving rate will lead to a higher stock of capital in the long run. A higher saving rate will promote capital deepening. If a country saves more, it will have a higher output. But eventually, the process of economic growth through capital deepening alone comes to an end, even though this may take decades to occur.

An increase in human capital is likely to shift the production function 7.2 The Production Function

upward

The long-run aggregate supply curve is 9.3

vertical

For most firms, the biggest cost of doing business is ch 9 hw 9.1

wages

If economic growth is driven by AD shocks (increase in government spending or consumption) then Using_ADAS_Graphs

we expect to see aggregate prices increasing

Article: Behavioral Incentives in Development Controlled Experiment? Suppose a health worker visited one village and personally gave residents sweets in order to take vaccinations. In this village, vaccination rates increased. Is this strong evidence that giving sweets would increase vaccination rates? A. No, because the worker only visited one village and it was not a controlled experiment. Your answer is correct. B. No, because the vaccination may not have been understood by the villagers. C. Yes, because in this village, vaccination rates increased. D. Yes, because the health worker kept good records. Ch 8 hw

A. No, because the worker only visited one village and it was not a controlled experiment. The mere fact that someone visited the village could increase vaccination rates. You would want to do a controlled experiment where people would visit different villages, but some would give sweets and others would not.

Controlled Experiment? Suppose a health worker visited one village and personally gave residents sweets in order to take vaccinations. In this village, vaccination rates increased. Is this strong evidence that giving sweets would increase vaccination rates? 8.1

No, because the worker only visited one village and it was not a controlled experiment. The mere fact that someone visited the village could increase vaccination rates. You would want to do a controlled experiment where people would visit different villages, but some would give sweets and others would not.

Diminishing Returns? An economy increased employment first from 20,000 to 30,000 and then from 30,000 to 40,000. The corresponding increases in output were 15,000 and 10,000 respectively. Nothing else changed during this period. Did this economy exhibit law of diminishing marginal returns? 7.2 The Production Function

Yes, because changes in output fell. Diminishing marginal returns occur we hold some input fixed (the stock of capital for example) and increase the amount of the variable input (labor). At first, as the amount of the variable input increases, the amount of output produced may also increase. Eventually, as the variable input (labor) is added to the fixed input (capital stock), the output will increase at a diminishing rate. As labor input increases from 20,000 to 30,000 labor units, output increases by 15,000 output. But as labor input increases from 30,000 to 40,000 labor units, output increases by 10,000 output units. The rate at which output increased fell from 15,000 output units per additional unit of labor to 10,000 output units per additional unit of labor input, indicating that there are diminishing marginal returns.

Increasing the stock of capital while holding the labor force constant will ________ output at ________ rate. 8.A appendix

increase; a decreasing

Higher Gas Prices, Frugal Consumers, and Economic Fluctuations. Suppose gasoline prices increased sharply and consumers became fearful of owning too many expensive cars. As a consequence, they cut back on their purchases of new cars and decided to increase their savings. Assuming a short-run aggregate supply curve, this behavior shifts the aggregate demand curve to the ch 9 hw 9.3

left, leading to a large decrease in output and a small decrease in price. When consumers became fearful and cut back on their purchases of new cars, and instead increased their savings, aggregate demand decreased. With a short-run aggregate supply curve, the decrease in aggregate demand leads to a large decrease in output but a small decrease in price.

The key factors that cause shifts in aggregate demand include: 9.2

≻Changes in the supply of money ≻Changes in taxes ≻Changes in government spending

Historical Immigration Patterns and Real Wages. Between 1870 and 1910, 60 million Europeans left Europe to go to the United States, Canada, Australia, and Argentina. This immigration sharply increased the labor force in these countries, but decreased it in Europe. The labor market for a representative European country is illustrated in the graph to the right. 1. Using the line drawing tool, show how immigration from Europe affected this labor market by adding either a new labor-supply curve or a new labor-demand curve in the provided graph. 2. Immigration from Europe _________ wages in Europe. 3. Immigration to the United States ______ wages in the U.S. 7.3

1. As immigrants left Europe, this decreased the number of people willing to work at any given wage, shifting the labor-supply curve to the left. 2. Increased When the labor-supply curve shifts to the left, real wages rise and employment falls. 3. Decreased When the labor-supply curve shifts to the right, real wages fall and employment rises.

The basic points of the Solow model are:

1. Capital deepening, an increase in the stock of capital per worker, will occur as long as total saving exceeds depreciation. As capital deepening occurs, there will be economic growth and increased real wages. 2. Eventually, the process of capital deepening will come to a halt as depreciation catches up with total saving. 3. A higher saving rate will promote capital deepening. If a country saves more, it will have a higher output. But eventually, the process of economic growth through capital deepening alone comes to an end, even though this may take decades to occur. 4. Technological progress not only directly raises output, but also it allows capital deepening to continue.

Future Generations. 1. Some economists say that economic growth involves a trade-off between current generations and future generations. If a current generation raises its saving rate, what does it sacrifice? A. Current consumption. B. Human capital. C. Capital deepening. D. Both a and b. 2. What will be gained for future generations? A. More output. B. More capital. C. Less inequality. D. Both a and b. 8.1

1. Current consumption. 2. Both a and b. (more capital and more output)

Suppose the supply of labor decreases. Show how potential output and wages change. 1. Using the line drawing tool, add either a new labor-supply line or a new labor-demand line to the labor market in the provided graph. Properly label this line. 2. The equilibrium quantity of labor ______ and therefore, output _______ 3. The real wage ______ 7.4

1. If the supply of labor decreases, then the labor-supply curve will shift to the left, indicating fewer people are willing to work at any given wage. 2. decreases; decreases 3. Increass

1. In a closed economy, full-employment output is divided among the following demands: 2. Since the supply of output is fixed, increases in government spending typically ______ consumption and investment. 7.6

1. In a closed economy, full-employment output is divided among demands for consumption, investment, and government purchases. 2. crowd out both

Health Insurance, Wages, and Compensation. 1. In recent years, total compensation of employees—including benefits—has grown, but wages, not including benefits, have not. Explain why this may have occurred, taking into account that many employers provide health insurance to their employees and health-care costs have grown more rapidly than GDP. 2. Is health insurance "free" to employees? 8.3

1. Real hourly earnings can only increase if output per worker increases more than compensation in benefits. 2. No. Holding total compensation constant, if benefits such as health insurance increase, then wages must decrease.

Analyzing the Effects of Tax Rate Changes for Families with Different Incomes. The Tax Reform Act of 1986 cut the income tax rates sharply for high-income earners. Consider the families in the top 1 percent of all families ranked in terms of income. Before the law was passed, a woman in this group faced a marginal tax rate (the rate applied to the last dollar she earned) on average of 52 percent. After the law was passed, the rate fell to 38 percent. The decreases in income tax rates, however, were much less for families with lower levels of income. According to a study by Professor Nada Eissa, after the decrease in taxes took effect, the labor supply of women in the highest income group increased more than for women in the other income groups. 1. On a graph of the labor market, illustrate the differences between the high-income group and the other groups. 2. The labor supply of _____ women increases the most. 7.5

1. The income tax cut shifts the labor-supply curve to the right. The labor-supply curve of high-income women shifts further to the right than that of other-income women because high-income women experience the largest effective tax cut. 2. High-income The labor supply of high-income women increases more than that for other-income women because the labor-supply curve for high-income women shifts further to the right.

The "Brain Drain" and Incentives for Education. Some economists are concerned about the "brain drain," the phenomenon in which highly educated workers leave developing countries to work in developed countries. Other economists have argued that "brain drain" could create incentives for others in the country to secure increased education and many of the newly educated might not emigrate. 1. Explain why the "brain drain" could lead to increased education among the remaining residents. 2. How would you test this theory? A. Compare labor productivity in developing countries with and without significant "brain drain." B. Compare the types of jobs in developing countries with and without significant "brain drain." C. Compare wages in developing countries with and without significant "brain drain." D. All of the above. 8.5

1. When highly educated workers leave, more high paying jobs become available. 2. All of the above.

1. Household Savings in the United States. In the United States, it is relatively easy to obtain a mortgage to buy a house or borrow money to buy a car. Credit card offers appear routinely in the mail. These factors most likely have a _____ effect on the rate of household savings. 2. In China, housing is very expensive in large cities and purchasers must pay the full amount from their own resources as mortgages are not that common. These factors most likely have a _____ effect on the rate of household savings. 7.6

1. negative In the United States, it is relatively easy to obtain a mortgage to buy a house or borrow money to buy a car. Credit card offers appear routinely in the mail. All these factors contribute to borrowing, which means that individuals do not have to save to make purchases. This reduces household savings. 2. positive In China, there are not extensive mortgage markets, so individuals must save more extensively to buy a house. This increases household savings.

Could Raising Capital Gains Taxes Reduce Revenues? The U.S. government currently taxes increases in the value of stocks when they are sold. This is called the capital gains tax. 1. If the government significantly decreased the tax rate on capital gains, it could actually receive more total revenue because people will 2. Which of the following statements is true? A. The tax rate is the overall value of an asset that is subject to tax and tax revenue is the tax rate times the value of the asset. B. The tax rate is the overall investment that is subject to tax and tax revenue is the tax rate times the value of the asset. C. Tax revenue is the proportion of an asset that is subject to tax and the tax rate is the value of the asset divided by income. D. The tax rate is the proportion of an asset that is subject to tax and tax revenue is the tax rate times the value of the asset. 7.5

1. pursue more stock sales, raising this source of revenue. A capital gain is the positive difference between the purchase price and the sale price of an asset, such as a share of stock. The gain is taxed when the asset is sold, not when the gain is earned. Therefore, there is a disincentive to sell stock, and people will avoid selling where possible, lowering this source of revenue. For those who cannot avoid stock sales, an increase in the capital gains tax rate will reduce spendable income, thereby reducing the demand curve for goods, lowering production, employment, income, and ultimately, U.S. tax revenue, which is based on income taxes. 2. D. The tax rate is the proportion of an asset that is subject to tax and tax revenue is the tax rate times the value of the asset.

1. An increase in the stock of capital shifts the production function (Y) 2. The diagram to the right shows the production relationship between labor input and output. Using the 3-point curved line drawing tool, illustrate how the production function shifts with an increase in the capital stock by drawing a second production function with K2 units of capital. Properly label this curve. 7.2 The Production Function

1. upward An increase in the stock of capital makes workers more productive, shifting the entire short-run production function upward. 2. Production functions have positive slopes but decreasing slopes, indicating output increases with labor, but at a diminishing rate. Further, when the capital stock increases, the production function shifts upward.

If the MPC is 0.60, the simple multiplier will be equal to ch 9 hw 9.2

2.5 The simple multiplier is calculated as: Multiplier = 1/(1−MPC)

If the private sector saves 20 percent of its income and the government raises taxes by $300 to finance public investments, total investment—private and public investment—will increase by $____ 8.2

240 With a saving rate of 20 percent, the private sector would have saved $60 of the $300 tax for investment. Therefore, the $300 tax raises investment by only $240.

At a 2 percent annual growth rate in GDP per capita, it will take _____ years for GDP per capita to double. Ch 8 hw

35 Rule of 70: To calculate how long it will take GDP per capita to double, divide the number 70 by the annual growth rate.

Estimates of the Natural Rate and Full Employment. Two economists differ on their estimates of the natural rate of unemployment. One economist believes it is 6 percent, while the other believes it is 5 percent. All else being equal, the economist who estimates the natural rate at _______ will estimate a higher value for potential output. 7.4

5% To measure full-employment output, economists first identify the natural rate of unemployment, and then estimate how many workers will be employed to determine potential output. If the natural rate of unemployment is assumed to be lower, then potential output will be higher because more workers should be employed.

Growth in Per Capita GDP. The growth rate of real GDP per capita equals the growth rate of real GDP minus the growth rate of the population. If the growth rate of the population is 1 percent per year, how fast must real GDP grow for real GDP per capita to double in 10 years? 8.1

8 If the growth rate of real GDP is 8 percent then, after subtracting the 1 percent rate of population growth, the growth rate of real GDP per capita will be 7 percent. Using the rule of 70, if real GDP per capita grows at a rate of 7 percent per year, then it will double in 10 years (from 70/7= 10).

Suppose the stock of capital decreases. Show how potential output can change. ch 7 hw

On a graph of the labor market, show the effect of a negative shock to technology on wages and employment. Using the line drawing tool, add to the labor market either a new labor-supply curve or a new labor-demand curve in the provided graph. 7.5

A negative technological shock makes labor less productive. This shifts the labor-demand curve to the left, lowering both real wages and employment.

On a graph of the labor market, show the effect of an increase on the employer's contribution to the payroll tax. Using the line drawing tool, add to the labor market either a new labor-supply curve or a new labor-demand curve in the provided graph. 7.5

A payroll tax will make labor more expensive, raising the marginal cost of workers. Employers will respond by hiring fewer workers at any given wage, shifting the labor-demand curve to the left.

Enhanced Productivity from Infrastructure. Suppose a country makes substantial investments to improve its roads. Give an example(s) of how this would improve productivity in the economy as a whole. (Check all that apply.) A. Total transportation costs would be reduced. B. Substantial investments to improve the roads would encourage private investment. C. The total employment elasticity of the economy would increase. D. The government's total tax revenue as a proportion of GDP would increase. Ch 8 hw

A&B Substantial investments in a country's roads reduce transportation costs and result in an improvement in infrastructure. This in turn encourages private investment.

Restaurant Innovation and Cities. Each year when they announce the awards for best new restaurants, the recipients are almost always in the large cities. These restaurants are praised for their creativity and bold new dishes. What are some of the factors that would explain why the innovative restaurants are found in big cities? (Check all that apply.) A. There are more chances to have face-to-face interactions, which can lead to increased innovation and creativity. B. In larger markets, restaurants have more incentives to come up with innovative and creative new dishes. C. These awards are strategically given to a restaurant in large markets to attract more growth to these megacities. D. Larger cities allow for the specialization of labor, which can lead to greater creativity among chefs. E. Restaurants in large markets don't have to invest in human capital and can instead focus on the creativity of their dishes. Ch 8 hw

A, B, & D First, specialization is more likely in large cities. Second, in large cities, there are more chances to have face-to-face interactions, which can lead to the production and sharing of new ideas that are so important in developing these creative new dishes. Finally, in large cities, restaurants have more incentives to come up with new and innovative dishes.

Restaurant Innovation and Cities. Each year when they announce the awards for best new restaurants, the recipients are almost always in the large cities. These restaurants are praised for their creativity and bold new dishes. What are some of the factors that would explain why the innovative restaurants are found in big cities? (Check all that apply.) A. There are more chances to have face-to-face interactions, which can lead to increased innovation and creativity. B. In larger markets, restaurants have more incentives to come up with innovative and creative new dishes. C. These awards are strategically given to a restaurant in large markets to attract more growth to these megacities. D. Restaurants in large markets don't have to invest in human capital and can instead focus on the creativity of their dishes. E. Larger cities allow for the specialization of labor, which can lead to greater creativity among chefs. 8.4

A, B, &E First, specialization is more likely in large cities. Second, in large cities, there are more chances to have face-to-face interactions, which can lead to the production and sharing of new ideas that are so important in developing these creative new dishes. Finally, in large cities, restaurants have more incentives to come up with new and innovative dishes.

Historical Immigration Patterns and Real Wages. A. Between 1870 and 1910, 60 million Europeans left Europe to go to the United States, Canada, Australia, and Argentina. This immigration sharply increased the labor force in these countries, but decreased it in Europe. The labor market for a representative European country is illustrated in the graph to the right. Using the line drawing tool, show how immigration from Europe affected this labor market by adding either a new labor-supply curve or a new labor-demand curve in the provided graph. B. Immigration from Europe _______ wages in Europe C. Immigration to the United States _______ wages in the U.S. ch 7 hw

A. As immigrants left Europe, this decreased the number of people willing to work at any given wage, shifting the labor-supply curve to the left. B. increased: When the labor-supply curve shifts to the left, real wages rise and employment falls. C. Decreased: When the labor-supply curve shifts to the right, real wages fall and employment rises.

AS shift left neg supply shock on short-run output (decreases) and the price level (increases)

Consider a decrease in the supply of money that causes output to fall short of full employment as shown in the diagram to the right. 1.) Using the line drawing tool, show how the short-run aggregate supply curve changes to restore full employment. Label the curve AS2. 2.) Using the point drawing tool, locate the new long-run equilibrium point. Label it C.. ch 9 hw

AS2 is shift down from AS1 and intersects where AD2 meets LRAS The new full employment equilibrium is where AD2, AS2, and the long-run aggregate supply curve all intersect.

Examples using classical model: If this open view toward immigration prevails, what impact do we expect on real wages and employment? 7a_ch7

According to the classical model, w/p will fall, labor force participation rates for all workers (including immigrants) will fall, L goes up

Secure Property Rights and Work outside the Home. With secure land titles, parents can work outside the home (rather than guarding their property) and earn higher incomes. Explain why this might reduce child labor. A. Parents will be more willing to make long-term investments to improve their lives. B. Parents with more income tend to rely less on their children for financial support. C. Parents can borrow against their property to purchase substitutes for their children's labor such as new machinery. D. All of the above. Ch 8 hw

All of the above.

Which of the following may influence technological progress? A. Monopolies. B. Research and development spending. C. The scale of the market. D. All of the above. 8.4

All of the above.

Which of the following may influence technological progress? A. Monopolies. B. The scale of the market. C. Research and development spending. D. All of the above. Ch 8 hw

All of the above.

Height and Weight during Rapid Industrialization. Economic historians have found that the average height of individuals in both the United States and the United Kingdom fell during the mid-nineteenth century before rising again. This was a period of rapid industrialization as well as migration into urban areas. What factors do you think might account for this fall in height? A. Health conditions in urban areas were worse than in rural areas. B. Resources were invested in physical capital instead of human capital. C. Industrialization did little to reduce malnutrition. D. All of the above. How would you evaluate economic welfare during this period? A. Economic welfare remained unchanged. B. Economic welfare decreased as measured by average height. C. Economic welfare increased as measured by migration into urban areas. D. Economic welfare increased as measured by the number of new factories. Ch 8 hw

All of the above. Economic welfare decreased as measured by average height.

Closing Export Markets. Suppose a foreign country, which had allowed the United States to export to it, suddenly closes its market. In this case, aggregate demand will A. increase because exports are indirectly related to shifts in aggregate demand. B. decrease because exports are directly related to shifts in aggregate demand. C. not change since consumption expenditures will fall by an equal amount. D. decrease because exports are part of aggregate supply. ch 9 hw

B. decrease because exports are directly related to shifts in aggregate demand. Any change in demand from households, firms, or the foreign sector will also change aggregate demand. For example, if a foreign country, which had allowed the United States to export to it, suddenly closes its market, U.S. aggregate demand will decrease.

Going to Medical School at the Age of 50. Although we might admire someone who decides to attend medical school at the age of 50, explain using human capital theory why this is so rare. A. Younger students have more time in which to earn higher wages after graduation. B. Younger students face a lower opportunity cost of forgone earnings while in school. C. Younger students have lower direct out-of-pocket costs associated with school. D. Both a and b. E. All of the above. 8.4

Both a and b.

Which of the following is not a component of aggregate demand? A. Business taxes. B. Investment. C. Exports. D. Federal government expenditures. ch 9 hw

Business taxes.

Compared to other countries, China has a relatively ______ share of consumption spending in GDP. ch 7 hw

China consumes about 36 percent of its GDP. This share is small relative to many other countries. Forexample, France consumes 56 percent of itsGDP, and the United States consumes 70 percent.

economic models that assume that wages and rpices adjust freely to changes in demand and supply are known as _____ models

Classical The term classical refers to models developed by a school of thought that predicted wages and prices will adjust quickly and naturally over a relatively short period of time, resulting in full employment. Next Question

Classical economists argue that AD shifts would have to be small and could never cause big recessions 10_ch9

Classical economists thing the mpc is small and swings in the AD are small Classical econ thinks households r rational & forward-looking utility maximizers & that mpc is therefore small (people spend out of lifetime income, which is determined by real wages that are in turn determined by firm productivity). A small mpc means a small multiplier, which means small swings in AD. If AD doesn't move much it isn't a likely cause of business cycles

Future Generations. Some economists say that economic growth involves a trade-off between current generations and future generations. If a current generation raises its saving rate, what does it sacrifice? A. Current consumption. B. Human capital. C. Capital deepening. D. Both a and b. What will be gained for future generations? A. More output. B. More capital. C. Less inequality. D. Both a and b. Ch 8 hw

Current consumption. Both a and b. (More output. & More capital)

T/F: If wages and employment both rise, this is likely caused by a decrease in the demand for labor. 7.3

FALSE A decrease in the demand for labor will shift thelabor-demand curve to the left. This will decrease both wages and employment.

T/F: The classical school of thought came to its fruition during the 1960s 7.1

FALSE: The term classical refers to a school of economics that believed that over a relatively short period of time wages and prices would adjust quickly and naturally to bring the economy back to full employment. The classical school of thought dominated economics until about the mid-1930s.

T/F: China has a lower rate of technological progress than India. Ch 8 hw

False Economists Barry Bosworth from the Brookings Institution and Susan Collins from the University of Michigan broke capital deepening in India and China into two parts: increases in physical capital (buildings, machines, and equipment) and increases in human capital (the knowledge of workers, as measured by their educational attainment). Their analysis revealed that China's more rapid growth was primarily caused by more rapid accumulation of physical capital and more rapid technological progress.

T/F Economist William Easterly is a strong proponent of foreign aid. 8.5

False William Easterly, a former World Bank economist, believes the World Bank and other international organizations have failed to take into account one of the basic laws of economics: Individuals and firms respond to incentives. According to Easterly, governments in developing countries have failed to provide the proper economic environment that would motivate individuals and firms to take actions that promote economic development.

T/F: When the economy operates at full employment, an increase in government spending must crowd out consumption. 7.6

False: At a fixed level of output, an increase in government spending must result in a decrease in either consumption, investment, or net exports, though a decrease in all three is not necessary.

New growth theory suggests that consumption spending will lead to permanent increases in the rate of technological progress (I am confused abt this answer- shouldn't it be true?) Ch 8 hw

False: Comprehensive education in a developing country will enhance the workforce's ability to incorporate new ideas and technologies into the workplace, permanently increasing the rate of technological progress.

New growth theory suggests that consumption spending will lead to permanent decreases in the rate of technological progress. Ch 8 hw

T/F: New growth theory suggests that consumption spending will lead to permanent decreases in the rate of technological progress. Ch 8 hw

T/F: If prices fall while GDP falls, we know it is a Keynesian recession, because negative AS shocks make prices rise 12_ch9

False: If prices rise while GDP falls, we know it is a classical recession caused by AS shifting leftward (A and/or K falling) more than AD shifts leftward (falling productivity reducing w/p and C, mpk and I). If however prices fall while GDP falls, it could be either Keynesian recession (AD shifts left, move along AS) or a classical one (AD shifts left more than AS does)

Consumption or Investment Crowding Out? Suppose local governments in suburban communities around the country started building large community swimming pools. Identify what type of spending this might crowd out, and compare this to the effect of government spending on exploration of Mars. ch 7 hw

Government spending on large community swimming pools crowds out business investment, whereas government spending on exploration of Mars does not crowd out any spending. Local governments around the country start building large community swimming pools. If they hadn't done this, private swim clubs may have sprung up to serve the market demand for pool swimming. Government is in competition with private swim clubs trying to borrow funds from the public to finance their investment plans. This increased competition from the government will make it more difficult and costly for private swim clubs to make those investments. As a result, business investment spending will decrease. In other words, government crowds out private investment. This is different than the effect of government spending on exploration of Mars because there are not many (or any) private businesses that will spend on this type of exploration, so no business investment will be crowded out.

The Uses of Singapore's Savings. In the 1980s, Singapore had a high savings rate and a very high domestic investment rate, and the government invested heavily in infrastructure, including roads and public housing. Since that time, the savings rate has remained high, but the investment rate has fallen substantially. On the other hand, the share of net exports in GDP in Singapore increased sharply. A possible explanation for this change in the use of Singapore's savings is that 7.6

In the 1980s, the savings went to domestic investment including infrastructure. In more recent times, the investment in infrastructure has decreased and the Singapore economy runs a large export surplus. In other words, Singapore is now selling more goods to other countries than it is buying from other countries. This provides them with substantial financial resources to invest throughout the world.

a worldwide patent and copyright system would _____ the incentive to be innovative. Ch 8 hw

Increase A worldwide patent and copyright system would increase innovation by allowing firms that invent new products and more efficient ways to produce to earn monopoly profit, protecting intellectual property rights both domestically and worldwide.

Policies That Promote Capital Deepening. Which of the following will promote economic growth through capital deepening? A. Increased imports to purchase supercomputers for industry. B. Increased imports to purchase new flat-screen TVs for consumers. C. Higher taxes used to finance universal health care. 8.2

Increased imports to purchase supercomputers for industry.

Increases Since the government invests a larger portion of the money than individuals, total investment increases.

If the demand for labor ______ , real wages rise and the amount of labor employed ______. If the supply of labor ______ , real wages fall and the amount of labor employed ______ 7.3

Increases; increases; increases; increases If the demand for labor increases, real wages rise and the amount of labor employed increases. If the supply of labor increases, real wages fall and the amount of labor employed increases.

Clear property rights reduce growth in an economy because producers are not able to freely use innovations. 8.5

Individuals respond to incentives. Without clear property rights, there are no proper incentives to make investments that lead to innovation, which is essential for economic growth.

Cutting the Length of Patents. Suppose that a group of consumer activists claims that drug companies earn excessive profits because of the patents they have on drugs. The activists advocate cutting the length of time that a drug company can hold a patent to five years. They argue that this will lead to lower prices for drugs because competitors will enter the market after the five-year period. Do you see any drawbacks to this proposal? A. It will promote "creative destruction," as outlined by Joseph Schumpeter. B. It will result in only induced innovation. C. It will reduce the incentive for drug companies to invent new drugs. D. All of the above. 8.4

It will reduce the incentive for drug companies to invent new drugs.

What Caused This Recession? Suppose the economy goes into a recession. The political party in power blames it on an increase in the price of world oil and food. Opposing politicians blame a tax increase that the party in power had enacted. If the recession turns out to have been caused by an increase in the price of world oil and food, all except one of following statements become true. Which is not true? A. In the short run, the aggregate supply curve shifts to the left. B. The aggregate demand curve shifts to the left in the short run. C. Falling output and rising unemployment are accompanied by rising prices in the short run. D. In the short run, aggregate supply decreases. 9.3

NOT true (all other options are true): B. The aggregate demand curve shifts to the left in the short run.

In an open economy, increases in government spending can crowd out consumption, investment, or ch 7 hw

Net Exports Open economies have international trade. Thus, for a fixed level of output, an increase in government spending will decrease consumption, investment, and/or net exports.

Diminishing Returns? An economy increased employment first from 20,000 to 30,000 and then from 30,000 to 40,000. The corresponding increases in output were 5,000 and 20,000 respectively. Nothing else changed during this period. Did this economy exhibit law of diminishing marginal returns? 7.2 The Production Function

No, because changes in output rose

Diminishing Returns? An economy increased employment first from 20,000 to 30,000 and then from 30,000 to 40,000. The corresponding increases in output were 15,000 and 20,000 respectively. Nothing else changed during this period. Did this economy exhibit law of diminishing marginal returns? ch 7 hw

No, because changes in output rose. Diminishing marginal returns occur we hold some input fixed (the stock of capital for example) and increase the amount of the variable input (labor). At first, as the amount of the variable input increases, the amount of output produced may also increase. Eventually, as the variable input (labor) is added to the fixed input (capital stock), the output will increase at a diminishing rate. As labor input increases from 20,000 to 30,000 labor units, output increases by 15,000 output. But as labor input increases from 30,000 to 40,000 labor units, output increases by 20,000 output units. The rate at which output increased rose from 15,000 output units per additional unit of labor to 20,000 output units per additional unit of labor input, indicating that there are not diminishing marginal returns.

The Production Function and Emigration. Suppose Ireland, prior to the potato famine, was at point a with L1 units of labor and K1 units of capital producing Y1 units of output. During the potato famine, many workers left Ireland. How did this affect output? ch 7 hw

Output decreased as Ireland slid to the left along its production function. A decrease in labor generates a movement to the left along the production function, indicating less output is produced. (The production function would shift with a change in capital.)

The Production Function and Emigration. Suppose Ireland, prior to the potato famine, was at point a with L1units of labor and K1 units of capital producing Y1 units of output. 7.2 The Production Function

Singapore's Growth in the Capital Stock. From 1960 until 2006, Singapore's capital stock grew rapidly, averaging almost 10 percent per year. Using the 3-point curved line drawing tool, illustrate how the production function has shifted with this growth of capital by drawing a second production function with K2 units of capital. ch 7 hw

Production functions have positive slopes but decreasing slopes, indicating output increases with labor, but at a diminishing rate. If Singapore's capital stock grew rapidly, then its entire short-run production function shifts upward. At any level of labor input, more output can be produced than before.

______ and ______ are the two factors that determine how the stock of capital changes over time. Ch 8 hw 8.A appendix

Saving (aka Investment) & depreciation The stock of capital depends on two factors: investment (or saving) and depreciation. The stock of capital increases with any gross investment spending (or saving) but decreases with depreciation. New capital stock −old capital stock = (gross investment −depreciation). Gross investment depends on saving, so: Change in the stock of capital = (saving −depreciation).

Examples using classical model: The desire to work less when w/p falls is the ______ effect; the desire to work more when w/p falls is the ______ effect 7a_ch7

Substitution; income

The aggregate demand curve is downward sloping because of the 9.2

The aggregate demand curve is downward sloping because of the the wealth effect, the interest rate effect, and the international trade effect.

Germany and the United States. Per-capita output is higher in the United States than in Germany and yet output per worker is higher in Germany. According to recent studies, the main cause for this is the difference in A. the amount of labor their workers supply to the market. B. workers' attitudes towards working. C. the amount of labor demanded by the market. D. the age of the workforce. ch 7 hw

The labor demand is not the relevant factor determining per-capita output between the U.S. and Germany. the amount of labor their workers supply to the market. Potential output depends on both capital and labor. Consequently, differences in the quantity of labor supplied to the market will affect the level of potential output in a country. Countries do differ in the amount of labor their workers supply to the market. Apart from national holidays, workers in the United States take an average of 12 days of vacation, compared to 28 days in the United Kingdom, 35 days in Germany, and an amazing 42 days (over eight work weeks) in Italy. These differences in labor supply are important. Per capita output is higher in the United States than in Germany but, other things being equal, this difference would disappear if Germans worked as many days as their U.S. counterparts.

Country; Share of Investment in GDP in 2000; Share of Investment in GDP in 2017: Canada; 19.66%; 22.99% USA; 23.14%; 20.45% Which of the following statements correctly compares the relationship between the share of investment in GDP for Canada and the United States for 2000 and 2017? 8.1

The share of investment in GDP was higher in the United States than in Canada in 2000 but lower in the United States than in Canada in 2017.

If the MPC is 0.50 , the simple multiplier will be equal to 9.2

The simple multiplier is calculated as: Multiplier = 1/(1−MPC) = 1/(1−0.50)= 2.0.

Tax Revenue and Labor Supply. Tax revenue collected from a payroll tax equals the tax rate times the earnings of individuals subject to the payroll tax. Let's say the labor-supply curve is close to vertical. Explain why raising payroll tax rates will increase the total revenue the government receives from the tax. A. The tax will have little effect on employment. Your answer is correct. B. The tax will increase wages. C. The tax will increase productivity. D. Both a and b. 7.5

The tax will have little effect on employment.

In the classical explanation of recession lower employment is the result of workers voluntarily leaving the labor force 12_ch9

True

The typical European works less hours per year than the typical U.S. worker. 7.4

True The typical worker in the United States works more hours per year than the typical European worker. For example, workers in the U.S. average 12 days of vacation. Conversely, in the United Kingdom, the typical worker has 28 vacation days, in Germany, 35 vacation days, and in Italy, 42 vacation days.

Frequent and unexplained changes in government regulations can deter new investment spending. This statement is 8.5

True. Government can affect the process of capital deepening in several ways through its policies of spending and taxation. For example, a sudden increase in taxes will reduce total income. If consumers save a fixed fraction of their income, total private savings will fall. This taxation drains the private sector of savings that would have been used for capital deepening through investment spending.

T/F: The typical European works less hours per year than the typical U.S. worker. ch 7 hw

True: The typical worker in the United States works more hours per year than the typical European worker. For example, workers in the U.S. average 12 days of vacation. Conversely, in the United Kingdom, the typical worker has 28 vacation days, in Germany, 35 vacation days, and in Italy, 42 vacation days.

The "Brain Drain" and Incentives for Education. Some economists are concerned about the "brain drain," the phenomenon in which highly educated workers leave developing countries to work in developed countries. Other economists have argued that "brain drain" could create incentives for others in the country to secure increased education and many of the newly educated might not emigrate. Explain why the "brain drain" could lead to increased education among the remaining residents. How would you test this theory? A. Compare the types of jobs in developing countries with and without significant "brain drain." B. Compare labor productivity in developing countries with and without significant "brain drain." C. Compare wages in developing countries with and without significant "brain drain." D. All of the above. Ch 8 hw

When highly educated workers leave, more high paying jobs become available. All of the above.

Malthus and Subsistence Wages. Thomas Malthus wrote that if wages exceeded subsistence levels the population would increase, which, in turn would drive real wages back down to subsistence. Suppose there were an increase in the demand for labor, which raised real wages. Under Malthus's theory, the supply curve for labor would shift. Use the line drawing tool to draw and label a new labor supply curve. 7.3

When the population increases, labor supply shifts downward and to the right, which, in turn, would drive real wages back down to subsistence.

Germany and Japan after World War II. Much of the stock of capital in the economies of Japan and Germany was destroyed during World War II. a. 1.) Use the point drawing tool to plot and label a point on the graph that indicates the position of Japan or Germany (label this J or G) 2.) Use the point drawing tool to plot and label a point that indicates the position of the U.S. immediately after World War II. b. Growth in Japan and Germany after the war was higher than that in the United States because Ch 8 hw 8.A appendix

a. "J or G" way below pt "U.S." along Y curve. The economies of Japan and Germany were destroyed during World War II so they had to rebuild. Japan and Germany increased the capital stock at a higher rate than the United States: The United States had higher levels of capital stock compared to Japan and Germany. Japan and Germany had to rebuild. Increasing the stock of capital while holding the labor force constant will increase output, but at a decreasing rate. Total saving increases in the economy with the stock of capital, but at a decreasing rate.

Calculating the MPS and MPC. In one year, a consumer's income increases by $200 and her consumption increases by $100. a. Her marginal propensity to consume is equal to_____ b. Her marginal propensity to save is equal to _____ 9.2

a. .5 MPC is calculated as the change in consumption divided by the change in income. Thus, MPC =ΔC/ΔY = $100/$200 = 0.50. b. .5 mps= 1-mpc : 1-.5=.5

Payroll Tax for a Health Program. To finance a health-care program, the government places a 10 percent payroll tax on all labor that is hired. a. Show how this shifts the demand for labor. b. If the labor-supply curve is vertical, what are the effects on real wages, output, and employment? Why do economists say that labor bears the full burden of the tax in this case? c. If the labor-supply curve were horizontal, what would be the effects on wages, output, and employment? ch 7 hw

a. A payroll tax will make labor more expensive, raising the marginal cost of workers. Employers will respond by demanding fewer workers at any given wage, shifting the labor-demand curve to the left. b. Wages decrease, but output and employment are unchanged: If the labor-supply curve is vertical, then a shift in the labor-demand curve leaves employment and therefore output unchanged, though wages decrease. This is because workers are not sensitive to wage changes. wages decrease by an amount equal to the tax: Because the labor-supply curve is vertical (and workers therefore are not sensitive to wage changes), the tax burden is passed to labor in the form of lower wages. In particular, wages decrease by an amount equal to the tax c. Wages would be unchanged, but output and employment would decrease: If the labor-supply curve were horizontal, then a shift in the labor-demand curve would decrease employment and therefore output, though wages would be unchanged. This is because workers would be extremely sensitive to wage changes.

Faster Depreciation. The graph at right shows total output as a function of the stock of capital and two lines of depreciation as a function of the stock of capital. The initial depreciation line is dK, and the new depreciation line is dK'. a. In this case, the society switches to equipment that depreciates b. In this case, the stock of capital will _____ and output Y will _____ Ch 8 hw 8.A appendix

a. slowly: If the rate of depreciation decreases, the slope of the depreciation line decreases. b. Increase;Increase When the rate of depreciation decreases, the slope of the depreciation line decreases intersecting the total output curve at a higher level, resulting in a higher stock of capital and output.

Who developed the theory of scale of the market? 8.4

adam smith Adam Smith's theory of scale of the market suggests that the size of a market is important for economic development.

demand is the total demand for goods and services in an entire economy. 9.2

aggregate Aggregate demand is the total demand for goods and services in an entire economy. In other words, it is the demand for currently produced GDP by consumers, firms, the government, and the foreign sector.

Arthur Okun distinguished between ______ prices, which changed rapidly, and _____ prices which are slow to change 9.1

auction; custom Prices that adjust on a daily basis, such as prices of fresh fish, vegetables, and other food products are auction prices. Prices that adjust slowly are custom prices. Prices for industrial products belong to this category.

classical L mkt model: According to the article, technological progress in agriculture had a short run negative effect on employment 6_ch7

but a long rum positive effect as cheap food freed up income to buy other types of goods and workers were needed there

The economic models of the economy at full employment that assume wages and prices adjust freely and quickly to changes in demand and supply are called 7.1

classical models. The economic models of the economy at full employment that assume wages and prices adjust freely and quickly to changes in demand and supply are called classical models.

The aggregate demand curve will shift from any of these four sources: A. retail spending, investment spending, government purchases, and exports. B. consumption spending, investment spending, international purchases, and net imports. C. consumption spending, investment spending, government purchases, and net exports. D. consumption spending, housing spending, government purchases, and net exports. 9.2

consumption spending, investment spending, government purchases, and net exports. Changes in demand coming from any four sources-consumption spending (C), investment spending (I), government purchases (G), and net exports (NX) -will shift the aggregate demand curve.

The reduction in investment, or other component of GDP, caused by an increase in government spending is called 7.6

crowding out.

A decrease in the stock of capital shifts the production function_____ The diagram to the right shows the production relationship between labor input and output. Using the 3-point curved line drawing tool, illustrate how the production function shifts with a decrease in the capital stock by drawing a second production function with K2 units of capital. Properly label this curve. 7.2 The Production Function

downward

According to the Solow model, capital deepening, an increase in the stock of capital per worker, will occur as long as total saving _______ depreciation. A _______ saving rate will promote capital deepening. Technological progress _______ output, and allows capital deepening to _______ 8.A appendix

exceeds; higher; raises; continue

Robert Summers and Alan Heston of the University of Pennsylvania found that using real _____ per capita provides a better measure for making economic comparisons across countries. 8.1

expenditures Robert Summers and Alan Heston of the University of Pennsylvania have devoted decades to developing methods for measuring real GNP across countries. The team's procedures are based on gathering extensive data on prices of comparable goods in each country and making adjustments for differences in relative prices and consumption patterns. They found that using real expenditures per capita rather than real GDP per capita provides a better measure for making comparisons.

Financial Collapse as a Technology Shock. Suppose we view the financial crisis of 2007 as a negative technological shock. According to the real business cycle model, wages will: fall/rise/remain the same and potential output will fall/rise/remain the same ch 7 hw

fall/fall The real business cycle theory states that an adverse technological shock results in a decreasing demand for labor. This, in turn, results in low levels of employment and low real wages. Output would fall because employment is low and because the economy is less productive than before. So, if we view the financial crisis of 2007 as a negative technological shock, then we can say that it would have resulted in a fall in wages due to a decreasing demand for labor and a decrease in output due to an increase in unemployment.

An expectation that the economy is going to do badly can cause the stock market to ______ and investment spending to ______ Using_ADAS_Graphs

fall; fall

T/F: A higher saving rate leads to a permanently higher rate of growth 8.A appendix

false A higher saving rate will lead to a higher stock of capital in the long run. A higher saving rate will promote capital deepening. If a country saves more, it will have a higher output. But eventually, the process of economic growth through capital deepening alone comes to an end, even though this may take decades to occur.

If a country runs a trade surplus to finance increased current consumption, it will have to increase consumption in the future to pay back its borrowings. 8.2

false A trade deficit to buy more consumer goods will not promote capital deepening. Consequently, the country will be poorer in the future when it is forced to pay back the funds. This is because there will be no additional GDP, and future consumption must decrease to foot the bill. If a country runs a trade surplus, it does not have any borrowings to pay back.

T/F: Countries divide GDP among its four components in very similar ways. 7.6

false Countries divide GDP among its four components in very different ways. The United States consumes 68 percent of its GDP, a higher fraction than all the other countries. As far as investment goes, Germany and the United States invest a smaller share of GDP than the other countries in the table. China invests the most by far-49 percent. Countries also differ greatly when it comes to government consumption. France has the highest rate of government consumption, while Hong Kong has the lowest.

Labor productivity growth was higher from 2007 - 2017 compared to recent years. 8.3

false From 1947 to the worldwide oil crisis in 1973, labor productivity grew rapidly. Productivity growth fell in the remainder of the 1970s and slowly increased over the next two decades. Since 2007, productivity growth has also slowed from recent trends, partly due to the recession.

There is clear evidence that poorer countries in the world are converging in per capita incomes to richer countries. 8.1

false There is debate about whether poorer countries in the world are converging in per capita incomes to richer countries.

Economist William Easterly is a strong proponent of foreign aid. Ch 8 hw

false: William Easterly, a former World Bank economist, believes the World Bank and other international organizations have failed to take into account one of the basic laws of economics: Individuals and firms respond to incentives. According to Easterly, governments in developing countries have failed to provide the proper economic environment that would motivate individuals and firms to take actions that promote economic development.

T/F: Lower population growth implies that both GDP and per capita GDP are higher 9b_ch8

false: Per capita GDP is higher but overall GDP is lower

Schumpeter's view of creative destruction is a process in which 8.4

firms will try to break a monopoly firm's dominance through more innovation. The radical notion that monopolies spur innovation was put forth by economist Joseph Schumpeter. In Schumpeter's view, a firm will try to innovate- that is, come up with new products and more efficient ways to produce existing products- only if it reaps a reward. The reward firm seeks from its innovations is high profit, and it can obtain a high profit if it is the sole seller, or monopolist, for the product. Other firms will try to break the firm's monopoly through more innovation, a process Schumpeter called creative destruction. Schumpeter believed that by allowing firms to compete to become monopolies, society benefits from increased innovation.

Technological progress is 8_ch8

hard to predict and tends to follow long waves with clumping of innovations for some periods and then a long period of tepid progress

According to economic theory, countries with lower per capita GDP are likely to 9b_ch8

have capital account surpluses, with money flowing in, which causes them to grow faster remember and accounting "surplus" means an inflow of money. This is a bit odd cuz it means Private Savings - Investment - Government borrowing < 0 (a negative number in this case is a surplus because money is coming in to pay for domestic investments, which contribute to K and GDP growth)

Long Run Effects of a Shock to Demand. Suppose consumption spending rose quickly and then fell back to its normal level. This temporary shock would 9.3

have no effect on real GDP in the long run. The long-run aggregate supply curve is shown as a vertical line that occurs at the level of full-employment output or real GDP. Shocks to aggregate demand only affect prices in the long run but do not affect real GDP in the long run.

Use the 3-point curved line drawing tool to draw and label a new short-run aggregate supply curve that shows the effect of an increase in material costs 9.3

higher material costs shift the aggregate supply curve to the left

Higher saving leads to ______ gross investment and will tend to _____ the stock of capital available for production and result in _____ depreciation because there is _____ capital to depreciate. 8.2

higher; increase; more; more The stock of capital increases with any gross investment spending but decreases with depreciation. As capital stock items such as buildings and equipment get older (depreciate), they wear out and become less productive. New investment is needed to replace the buildings and equipment that become obsolete. Higher saving, which leads to higher gross investment, will tend to increase the stock of capital available for production. As the stock of capital grows there typically will be more depreciation because there is more capital (building and equipment) to depreciate.

Examples using classical model: FDR famously instituted a variety of "make work" programs during the great depression 7a_ch7

if that were a classical downturn, the "make work" program would have reduced employment in the private sector

Suppose the supply of money increases, causing output to exceed full employment. As a result, ch 9 hw 9.4

in the short run, both prices and real output will increase and in the long run, prices will increase further, but real output will fall to the full employment level. When an increase in the money supply increases aggregate demand, the aggregate demand curve shifts to the right. Starting from a full employment position, this causes price and output to increase. As output increases beyond full employment, this increases the demand for resources, including labor. As a result, wages and prices of other resources increase. This rise in the cost of production shifts the short-run aggregate supply curve to the left. Prices continue to increase and eventually output falls to the full employment level in the long run.

Wages, Real Business Cycle Theory and the Great Depression: A simple real business cycle explains all economic fluctuations with just technology shocks. During the Great Depression, real wages increased, which is ch 7 hw

inconsistent with a simple real business cycle because if there is a negative technology shock, output and real wages would both fall.

Diminishing Returns to Capital and Real Wages. Consider this statement: Since capital is subject to diminishing returns, an increase in the supply of capital will reduce real wages. This statement is wrong because an increase in the supply of capital will 8.2

increase the marginal benefit from employing labor and therefore increase the demand for labor and real wages. An increase in capital shifts the production function upward because more output can be produced from the same amount of labor. In addition, firms increase their demand for labor because the marginal benefit from employing labor will increase. The increase in capital raises the demand for labor and increases real wages. That is, as firms increase their demand and compete for a fixed supply of labor, they will bid up real wages in the economy.

If everything else is held equal, an increase in the size of the population will ______ total output and _____ per capita output. 8.2

increase; decrease An increase in the size of the population increases output through an increase in labor input (a larger laborforce). With a fixed stock of capital, additional workers will produce less additional output (decreasing output per capita) due to diminishing marginal returns.

The idea that innovations come about through inventive activity designed specifically to reduce costs is known as 8.4

induced innovation. Some economists have emphasized that innovations come about through inventive activity designed specifically to reduce costs. This is known as induced innovation.

Technological Progress in Banking. Computers have revolutionized banking for consumers through the growth of ATMs and electronic bill paying capabilities. All of these improvements for consumers might not be counted as technological progress because technological progress 8.3

is defined by economists as an increase in output with no additional increases in inputs. Technological progress is an increase in output with no additional increases in inputs. Not all technological innovations constitute technological progress. Some add convenience rather than the ability to increase output with no additional increases in inputs.

Suppose that GDP is $18 trillion in year 1, and $19 trillion in year 2. Which of the following statements is true? 8.1

it will take 12.6 years go rGDP to double The growth rate of a variable is the percentage change in that variable from one period to another. Real GDP per capita is GDP/population. GDP is $18 trillion in year 1, and $19 trillion in year Growth rate of GDP = (19−18)/18×100 = 5.55%. Years to double for GDP = 70/5.55=12.6 years.

Fewer babies means 9b_ch8

labor supply is further to the left, real wages are higher, and per capita GDP is higher

Full-employment output is the level of output produced when the ______ market is in equilibrium and the economy is producing at full employment. It is also known as ______ output. 7.4

labor; potential Full-employment output is the level of output produced when the labor market is in equilibrium and the economy is producing at full employment. It is also known as potential output.

Compared to other countries, the United States has a relatively _____ share of consumption spending in GDP. 7.6

large The United States consumes about 70 percent of its GDP. This share is large relative to many other countries. Forexample, France consumes 56 percent of its GDP, and China consumes 36 percent.

Compared to other countries, the United States has a relatively ______ share of consumption spending in GDP. ch 7 hw

large: consumes about 70 percent of its GDP. This share is large relative to many other countries. For example, France consumes 56 percent of its GDP, and China consumes 36 percent.

A decrease in labor force participation will shift the labor-supply curve to the _______, leading to higher real wages and lower employment. 7.3

left in labor force participation will shift the labor-supply curve to the left because the change in participation decreases the number of people willing to work at any given wage.

Diversity and Economic Growth. Some economists and political scientists have suggested that when communities are more racially or ethnically diverse, they invest less in education and spend more on private goods. Assuming this theory is true, there would be 8.5

less economic growth because investment in education has a greater future return than investment in private goods.

Slower Growth in China. In 2014, China decided to cut back on its economic growth in order to prevent imbalances from occurring in their economy. With slower economic growth in China, there is ch 9 hw

less opportunity for exports to China so aggregate demand in the rest of the world will decline.

Slower Growth in China. In 2014, China decided to cut back on its economic growth in order to prevent imbalances from occurring in their economy. With slower economic growth in China, there is 9.3

less opportunity for exports to China, so aggregate demand in the rest of the world will decline

One way for a country to induce more technological progress in its economy is for government and firms to pay for research and development (R&D). While the United States has the highest number of scientists and engineers in the world and spends the most money on research and development, as a percent of GDP, the United States spends _____ Japan and Germany, _____ as much as Italy. 8.4

less than; but twice While the United States spends the most money on research and development, as a percent of GDP, the United States spends less than Japan and Germany, but twice as much as Italy.

Shifts in Aggregate Demand and Cost-Push Inflation. When wages rise and the short-run aggregate supply curve shifts up, the result is "cost-push" inflation. If the economy was initially at full-employment and the aggregate demand curve was shifted to the right, the level of unemployment will be very ______, making it ______ for firms to recruit and retain workers and purchase needed raw materials and other inputs for production. There will be a tendency for both wages and prices to_____ over time. This will shift the short-run aggregate supply curve ______ until the economy reaches the long-run equilibrium. ch 9 hw 9.4

low; difficult; increase; upward If the economy was initially at full-employment and the aggregate demand curve was shifted to the right, the level of unemployment would be very low. This will make it difficult for firms to recruit and retain workers. Firms will also find it more difficult to purchase needed raw materials and other inputs for production. Since production and employment are very high, and resources are becoming scarce, think about how this will influence prices. Increases in input prices (for example, from higher wages or oil prices) will increase firms' costs. This will shift up the short-run aggregate supply curve.

A negative supply shock temporarily ______ output ______ full employment and ______ prices After the negative supply shock, real GDP is _______ potential GDP. This implies that unemployment is ______, driving wages ______. This results in a ______ shift of the short-run aggregate supply curve.. ch 9 hw

lowers; below; raises lower than rising; down; rightward or downward As wages go down, the cost of production goes down, and the short-run aggregate supply curve shifts rightward or downward.

Household Savings in the United States. In the United States, it is relatively easy to obtain a mortgage to buy a house or borrow money to buy a car. Credit card offers appear routinely in the mail. These factors most likely have a _{positive/negative}_ effect on the rate of household savings. In China, housing is very expensive in large cities and purchasers must pay the full amount from their own resources as mortgages are not that common. These factors most likely have a _{negative/positive}_ effect on the rate of household savings. ch 7 hw

negative: In the United States, it is relatively easy to obtain a mortgage to buy a house or borrow money to buy a car. Credit card offers appear routinely in the mail. All these factors contribute to borrowing, which means that individuals do not have to save to make purchases. This reduces household savings. positive: In China, there are not extensive mortgage markets, so individuals must save more extensively to buy a house. This increases household savings.

Capital deepening will typically be 8.2

negatively affected by population growth, whereas the effects of trade and government taxing can be positive, negative, or neutral. With a fixed amount of capital and an increasing labor force, the amount of capital per worker will be less. Higher taxes will reduce total income. If consumers save a fixed fraction of their income, total private savings (savings from the nongovernmental sector) will fall. This taxation drains the private sector of savings that would have been used for capital deepening. If extra tax revenues are invested in valuable infrastructure, such as roads, buildings, and airports it will increase capital deepening. Trade deficits, financed by borrowing can be used to purchase the large amounts of capital needed to build infrastructure and result in capital deepening, but it depends on how the borrowed funds are used.

Modern theories of growth that try to explain the origins of technological progress are known as 8.4

new growth theories.

Another term for full−employment output is ch 7 hw

potential output: Full-employment output is the level of output that is produced when the economy is at full employment. This level of output is also known as potential output. This occurs when the labor market is in equilibrium, with the quantity of labor supplied equal to the quantity of labor demanded.

According to the Keynesian model, a fall in AD causes a movement along AS as 12_ch9

prices fall and labor productivity rise; firms cut employment

Capital deepening comes to an end because of the A. reality principle. B. marginal principle. C. principle of opportunity cost. D. principle of diminishing returns. Ch 8 hw 8.A appendix

principle of diminishing returns. The process of capital deepening must eventually come to an end. As the stock of capital increases, output increases, but at a decreasing rate because of diminishing returns. The process of capital deepening will come to a halt as depreciation catches up with total saving.

if capital (human or other) grows, 7.2 The Production Function

production function (Y)(displays relationship between factors of production and output) shifts upward

According to the Solow model, a higher saving rate will 8.A appendix

promote capital deepening and increase output.

Philippines and Emigration. Roughly 10 percent of the populations of the Phillipines works overseas. Suppose overseas Philippine workers returned to their home country. Relying on the linked figure, this reverse flow of people on wages and employment will ch 7 hw

raise wages in the U.S. and lower wages in the Phillipines.

Philippines and Emigration. Roughly 10 percent of the populations of the Phillipines works overseas. Suppose overseas Philippine workers returned to their home country. Relying on ~the linked figure~ this reverse flow of people on wages and employment will 7.3

raise wages in the U.S. and lower wages in the Phillipines. When overseas Philippine workers return to their home country, the supply of labor in the U.S. will fall, and the supply of labor in the Philippines will rise. U.S. wages rise, while Philippine wages fall.

According to the Solow model, technological progress 8.A appendix

raises output and promotes capital deepening.

To gauge living standards across countries with populations of different sizes, economists use Ch 8 hw

real GDP per capita.

The economic theory that emphasizes how shocks to technology can cause fluctuations in economic activity is called the 7.5

real business cycle theory.

classical L mkt model: An increase in minimum wage, holding the price level constant, will in this model 6_ch7

reduce labor demand (cuz of joint assumptions of diminishing returns to L and perfect competition [in this case, perf competition is saying the mkt for unskilled workers is perf. competitive])

an increase in the amount of capital in the economy will shift the demand for labor curve to the _______, leading to higher real wages and employment. ch 7 hw

right An increase in capital will shift the demand for labor curve to the right because the change in capital makes workers more productive.

Opening Markets to Trade. One of the normal objectives of U.S. trade negotiations with other countries is to open their markets to trade. If this process is successful, the U.S. aggregate demand curve will shift to the _____.

right If new countries open their markets to trade, goods produced in the United States will become available in those countries and the demand for U.S. goods will increase. Aggregate demand in the United States will increase at any given price. As a result, the U.S. aggregate demand curve will shift to the right.

Skilled Immigration and Wages of Unskilled Workers. Economist Giovanni Peri at University of California, Davis, has suggested that an increase in skilled immigrants may increase the demand for unskilled workers because they make unskilled workers more productive. In that case, the wages of unskilled workers will 7.3

rise If unskilled workers become more productive, this results in an increase in labor demand for unskilled workers. Because the demand for labor increases at any real wage, real wages increase and the amount of unskilled labor employed increases as well.

Technology and Potential Output.Suppose that technology improves: for any level of the capital stock, the short-run production function shifts up. Potential output will 7.4

rise. The level of potential output in an economy increases as the supply of labor increases or the stock of capital increases. Changes in technology will usually change the level of full employment or potential output. A significant technological improvement will enable the economy to increase the level of both actual and potential output. For example, the advances in technology that allowed computer users to transfer data-intensive images easily across the Internet created many new opportunities for businesses to grow and flourish. Adverse technological developments (or adverse shocks to the economy) will cause output and potential output to fall.

State and Local Governments During Recessions. During recessions, state governments often will have to raise taxes and cut spending in order to keep their own budgets balanced. If a large number of states do this, at the national level, the aggregate demand curve will 9.2

shift to the left since both of these actions are contractionary.

The _____ -run aggregate supply curve is a relatively _____ aggregate supply curve that represents the idea that prices do not change very much in the _____ run and that firms adjust production to meet demand. 9.3

short; flat; short The short-run aggregate supply curve is a relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and that firms adjust production to meet demand.

Adjustments in wages and prices take the economy from the _____ -run equilibrium to the _____ -run equilibrium.

short; long Adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium.

The _____ run in macroeconomics is the period in which prices do not change or do not change very much. In the macroeconomic _____ run, both formal and informal contracts between firms mean that changes in demand will be reflected primarily in changes in _____, not _____ 9.1

short; short; output; prices The short run in macroeconomics is the period in which prices do not change or do not change very much. In the macroeconomic short run, both formal and informal contracts between firms mean that changes in demand will be reflected primarily in changes in output, not prices.

Because of other economic factors, such as taxes, the multiplier in the United States is _____ 2.50 9.2

smaller than When we take into account taxes and interest rate effects through financial markets, the value of the multiplier for the U.S. economy turns out to be around 1.5.

Free Agency and Professional Football Players. In professional football, salaries are determined by the league for the first several years, but then the athletes have a chance to become free agents and seek employment with other teams. When they are under contract, the athletes have ch 9 hw 9.1

sticky wages but they become flexible when they become free agents.

classical L mkt model: In the classical model with frictions, labor replacing technologies will cause 6_ch7

structural unemployment to rise in the short run and for there to be increased unemployment in the long run as frictions increase

If the government or large firms employ workers and scientists to advance the frontiers of knowledge in basic sciences, their work can lead to 8.4

technological progress in the long run. One way for a country to induce more technological progress in its economy is to pay for it. If the government or large firms employ workers and scientists to advance the frontiers of knowledge in basic sciences, their work can lead to technological progress in the long run. However, although it spends the most money overall, as a percent of GDP the United States spends less than Japan. Moreover, a big part of U.S. spending on research and development is in defense-related areas, unlike in Japan. Some economists believe defense-related research and development is less likely to lead to long-run technological change than nondefense spending; however, many important technological developments, including the Internet, partly resulted from military-sponsored research and development.

that there is less of a tendency for convergence. The downward-sloping line plotted through the points indicates that the countries with higher levels of per capita income in 1870 grew more slowly than countries with lower levels. In other words, the tendency was for countries with lower levels of initial income to grow faster and catch up. A horizontal line would imply that countries with lower levels of initial income grow at the same rate and cannot catch up, so there is less tendency for convergence.

Understanding Convergence in a Figure. Convergence is the process by which poorer countries close the gap with richer countries in terms of real GDP per capita. Suppose the line in the figure at right pointed up and to the right. That would tell us A. that there is less of a tendency for convergence. B. that there is a greater tendency for convergence. C. countries with lower levels of initial income can grow faster and catch up. D. that to converge, poorer countries have to grow at more rapid rates than richer countries. Ch 8 hw

that there is less of a tendency for convergence.: The downward-sloping line plotted through the points indicates that the countries with higher levels of per capita income in 1870 grew more slowly than countries with lower levels. In other words, the tendency was for countries with lower levels of initial income to grow faster and catch up. An upward−sloping line would imply that countries with lower levels of initial income grow slower and cannot catch up, so there is less tendency for convergence.

the amount of labor their workers supply to the market. Potential output depends on both capital and labor. Consequently, differences in the quantity of labor supplied to the market will affect the level of potential output in a country. Countries do differ in the amount of labor their workers supply to the market. Apart from national holidays, workers in the United States take an average of 12 days of vacation, compared to 28 days in the United Kingdom, 35 days in Germany, and an amazing 42 days (over eight work weeks) in Italy. These differences in labor supply are important. Per capita output is higher in the United States than in Germany but, other things being equal, this difference would disappear if Germans worked as many days as their U.S. counterparts.

During the Great Depression, prices in the United States fell by 33 percent. Ceteris paribus, this led to an increase in aggregate demand through three channels. Which one of the following is not one of these channels through which aggregate demand increased? A. the international trade effect. B. the wealth effect. C. the interest rate effect. D. the multiplier effect. 9.2

the multiplier effect is NOT one of these channels through which aggregate demand increased The three channels through which a change in the price level can affect aggregate demand are the wealth effect, the interest rate effect, and the international trade effect. Changes in taxes or government spending represent changes in government policies and not caused by changes in prices.

In the long run, if aggregate demand decreases, A. the price level will remain unchanged and output or real GDP will decrease. B. both the price level and output or real GDP will remain unchanged. C. the price level will decrease and output or real GDP will decrease. D. the price level will decrease and output or real GDP will remain unchanged. ch 9 hw

the price level will decrease and output or real GDP will remain unchanged. The long-run aggregate supply curve is vertical. In the long run, there is full employment and output or real GDP is determined by factors of production. If aggregate demand decreases, the aggregate demand curve will shift to the left and only the price level will decrease. The level of output or real GDP will remain unchanged at the full employment level.

In the long run, if aggregate demand increases, 9.3

the price level will increase and output or real GDP will remain unchanged. The long-run aggregate supply curve is vertical. In the long run, there is full employment and output or real GDP is determined by factors of production. If aggregate demand increases, the aggregate demand curve will shift to the right and only the price level will increase. The level of output or real GDP will remain unchanged at the full employment level.

Labor market equilibrium occurs at a real wage at which the quantity demanded for labor equals 7.3

the quantity supplied of labor.

Supermarket Prices. In a supermarket, prices for tomatoes change quickly, but prices for mops tend to not change as rapidly because 9.1

the supply of tomatoes fluctuates frequently whereas the supply of mops does not. Because the supply of tomatoes changes with weather and season, the availability will significantly influence the price.

Scientific method and L mkt: The natural rate of unemployment falls (in theory) if 7b_ch7

there are fewer frictions in labor markets (easier for firms to find the right kinds of workers)

Related to Application: Do European Soccer Stars Change Clubs to Reduce Their Taxes? Top athletes or entertainers would be more likely to change countries to reduce their taxes as compared to ordinary middle-class workers because 7.5

these individuals can realize more tax savings than ordinary middle-class workers who have lower incomes.

Top athletes or entertainers would be more likely to change countries to reduce their taxes as compared to ordinary middle-class workers because ch 7 hw

these individuals can realize more tax savings than ordinary middle-class workers who have lower incomes.

The economist Thomas Picketty argues that capitalists start out richer, are able to save more and then 9_ch8

they earn even more capitalist income and become even richer, whereas the poor can't afford to save and earn capitalist income

Coke and Pepsi. Soft drink companies spend a considerable amount of money on marketing. These expenditures could be considered a form of capital because 8.3

Coke and Pepsi. Soft drink companies spend a considerable amount of money on marketing. These expenditures could be considered a form of capital because A. it is their primary expenditure. B. television media is very expensive. C. these companies have significant revenue to use for marketing. D. this intangible capital is an important source of economic growth. Ch 8 hw

this intangible capital is an important source of economic growth. A number of economists use measures of "intangible" capital based on expenditures on research and development, marketing, design and customer support. These companies have significant revenue to use for marketing but this does not explain why these expenditures could be considered a form of capital.

Examples using classical model: The classical model predicts w/p, GDP, and employment will all move up and down together over the business cycle 7a_ch7

this is also what is observed in the data (pro-cyclical)

T/F: The classical school of thought came to its fruition during the 1930's ch 7 hw

true The term classical refers to a school of economics that believed that over a relatively short period of time wages and prices would adjust quickly and naturally to bring the economy back to full employment. The classical school of thought dominated economics until about the mid-1930s.

Labor productivity growth was lower from 2007 - 2017 compared to recent years. 8.3

true From 1947 to the worldwide oil crisis in 1973, labor productivity grew rapidly. Productivity growth fell in the remainder of the 1970s and slowly increased over the next two decades. Since 2007, productivity growth has also slowed from recent trends, partly due to the recession.

Free trade and capital may cause economic growth for all but may at the same time widen the gap between rich and poor 9_ch8

true: developed countries may gain more from this than poor countries do- may lead to a widening in income distribution rather than convergence ( this is also true within countries: US GDP data show GDP per capita rising more quickly than median fam incomes)

Growth accounting is a useful tool for 8.3

understanding different aspects of, or contributions to, economic growth. Growth accounting is a useful tool for understanding different aspects of economic growth. Using growth accounting methods, economists typically found the slowdown during the 1970s could not be attributed to changes in the quality or quantity of labor inputs or to capital deepening. Either a slowdown in technological progress or other factors not directly included in the analysis, such as higher worldwide energy prices, must have been responsible. This led economists to suspect that higher energy prices were the primary explanation for the reduction in economic growth.

In a boom, real GDP exceeds potential GDP. This implies that. ch 9 hw 9.3

unemployment has fallen, driving wages up. This results in a leftward shift of the short-run aggregate supply curve.

In a recession, real GDP falls short of potential GDP. This implies that

unemployment has risen, driving wages down. This results in a rightward shift of the short-run aggregate supply curve.

The wages of which of the following groups will not adjust quickly? A. movie stars. B. union workers. C. defense lawyers in private practice. D. self−employed financial consultants. 9.1

union workers.

The wages of which of the following groups will not adjust quickly? A. contractors. B. movie stars. C. self−employed tax accountants. D. university professors. ch 9 hw

university professors. (get an annual salary so wont adjust as quick)

Supply shocks are external events that shift the aggregate supply curve. In the case of a negative supply shock, the aggregate supply curve shifts

up, raising the price level and lowering the level of output.

an increase in the stock of capital shifts the production function ch 7 hw

upward: an increase in the stock of capital makes workers more productive, shifting the entire short-run production function upward. Production functions have positive slopes but decreasing slopes, indicating output increases with labor, but at a diminishing rate. Further, when the capital stock increases, the production function shifts upward

Financial Institutions Close. During the recession of 2007, a number of major financial institutions shut down and went out of business. Some might consider this to be a negative supply shock. When a negative supply shock occurs, it causes the aggregate supply curve to shift ______. As a result, prices are ______ and output is ______.

upward; higher; lower Supply shocks are external events that shift the aggregate supply curve. In the case of a negative supply shock, the aggregate supply curve shifts up, raising the price level and lowering the level of output.

Foreign Investment and Technological Progress. Many economists believe countries that open themselves to foreign investment of plant and equipment will benefit in terms of increased technological change because local companies will learn from the foreign companies. In the last several decades, China has been more open to foreign investment than India. This is consistent with the two countries' patterns of economic growth because Ch 8 hw

China's growth in GDP was much higher than India's growth in GDP. Economists Barry Bosworth from the Brookings Institution and Susan Collins from the University of Michigan broke capital deepening in India and China into two parts: increases in physical capital (buildings, machines, and equipment) and increases in human capital (the knowledge of workers, as measured by their educational attainment). Their analysis revealed that China's more rapid growth was primarily caused by more rapid accumulation of physical capital and more rapid technological progress.

Timing and Cultural Explanations of Economic Growth. Some critics of cultural theories of economic growth note that some societies can suddenly start to grow very rapidly with no obvious accompanying cultural changes. How well does Professor Gregory Clark's theory fit the rapid growth in some East Asian economies in recent years? 8.4

Clark's theory fits well with the rapid growth in East Asian economies since western values have become more acceptable. According to Professor Clark, changes in culture become so sufficiently pronounced that a qualitative change takes place in society. Individuals are more able to take advantage of new developments in science and technology and embrace new technologies and social change.

Australian Trade Deficits. Australia has consistently had trade deficits. It also has a number of large foreign companies investing in mining and other natural resource industries. Based on this information, does Australia use the trade deficits for capital deepening? A. Yes, the foreign investment in mining supplies capital to Australia, and this is matched with a trade deficit that puts Australian dollars in foreign hands. B. No, foreign investors reinvest most of their profits from mining in their respective countries, leaving Australia poorer in the future. C. No, foreign mining activities result in a reduction in domestic natural resources. Also, Australia's trade deficit implies that it doesn't invest much in domestic production. D. This cannot be determined since it depends on whether capital widening due to foreign investment outweighs the capital deepening caused by Australia's trade deficit. 8.2

Yes, the foreign investment in mining supplies capital to Australia, and this is matched with a trade deficit that puts Australian dollars in foreign hands. Capital deepening is the increase in an economy's stock of capital (such as buildings and equipment) relative to its workforce. In this situation, the foreign companies investing in mining are supplying capital to Australia, which is matched with a trade deficit that puts Australian dollars in foreign hands. Both of these activities lead to capital deepening.

If wages are sticky, 9.1

firms' product prices will be sticky and reduce the economy's ability to bring demand and supply into balance in the short run. If wages are sticky, firms' overall costs will be sticky as well. This means that firms' product prices will remain sticky, too. Sticky wages cause sticky prices and hamper the economy's ability to bring demand and supply into balance in the short run.

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