Inter. Macro. CH 3

A favorable supply shock would

shift the production function up and increase marginal products at every level of employment.

The labor force participation rate is the percentage of the adult population that is

working or actively looking for work.

According to Okun's law, if output grew 1% and full-employment output rose 3%, what would be the change in the unemployment rate?

1 percentage point

Suppose the economy's production function is Y = A . Suppose K = 200, N = 2000, and A = 1. Calculate the marginal product of capital.

1.5

A mathematical expression relating the amount of output produced to quantities of capital and labor utilized is the

production function.

According to Okun's Law, if the natural rate of unemployment is 5% and the actual unemployment rate is 4%, what is the level of full employment output if output equals $10,125 billion?

$9,926 billion

Cyclical unemployment is caused by

) business cycle fluctuations.

The aggregate supply of labor is the

sum of the labor supplied by everyone in the economy.

The marginal product of capital is the increase in

output from a one-unit increase in capital.

An adverse supply shock would

shift the production function down and decrease marginal products at every level of employment.

Changes in the capital stock occur ________, and changes in the amount of labor that firms employ occur ________.

slowly; quickly

A person is more likely to increase labor supply in response to an increase in the real wage, the ________ is the income effect and the ________ is the substitution effect.

smaller; larger

The tendency of workers to supply more labor in response to a larger reward for working is called the ________ of a higher real wage on the quantity of labor supplied.

substitution effect

The income effect of a higher real wage on the quantity of labor supply is the

tendency of workers to supply less labor in response to becoming wealthier.

Because of diminishing marginal productivity

the labor demand curve is negatively sloped.

The fact that the production function relating output to capital becomes flatter as we move from left to right means that

there is diminishing marginal productivity of capital.

The fact that the production function relating output to labor becomes flatter as we move from left to right means that

there is diminishing marginal productivity of labor.

Suppose the economy's production function is Y = A . If K = 2000, N = 100, and A = 1, then Y = 246. If K rises by 10%, and A and N are unchanged, by how much does Y increase?

3%

Suppose the marginal product of labor is MPN = 200 - 0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is the real wage. What is the equilibrium quantity of employment?

380

The marginal product of labor (measured in units of output) for Expando Corp. is given by MPN = A(400 - N) where A measures productivity and N is the number of labor hours used in production. Suppose the price of output is $3 per unit and A = 2.0. What will be the demand for labor if the nominal wage is $18?

397

How many people are employed if the labor force participation rate is 60%, there are 3 million people unemployed, and there are 30 million people not in the labor force?

42 million

Assume that the full-employment level of output is $5000 billion and the natural unemployment rate is 5%. Suppose the current unemployment rate is 8%. What would be the current level of output according to Okun's law (when the Okun's law coefficient is 2)?

4700 billion

Assuming that the growth rate of full-employment output is 3%, and that the actual unemployment rate fell 2 percentage points in the last year, Okun's Law predicts that output growth rate over the past year was

7%

The city of Hope has a labor force of 1000. Twenty people lose their jobs each month and remain unemployed for exactly one month before finding jobs. On January 1, May 1, and September 1 of each year, 50 people lose their jobs for a period of four months before finding new jobs. What is the unemployment rate in any given month?

7%

What is the participation rate if there are 125 million people in the labor force, 100 million people employed, and 25 million not in the labor force?

83%

A supply shock that reduces total factor productivity directly affects which term in the production function Y = AF(K, N)?

A

Which of the following events would lead to an increase in the marginal product of labor for every quantity of labor?

A favorable supply shock such as a fall in the price of oil

In the production function Y = AF(K, N), total factor productivity is

A.

In the production function Y = AF(K, N), A is ________, K is ________, and N is ________.

total factor productivity; the capital stock; the number of workers employed

The ________ is the number of unemployed divided by the labor force and the ________ is the number of employed divided by the adult population.

unemployment rate; employment ratio

The ________ is the number of unemployed divided by the labor force and the ________ is the labor force divided by the adult population

unemployment ratio; participation rate

Full-employment output is the level of output that firms in the economy supply when

wages and prices have fully adjusted.

Frictional unemployment arises when

workers must search for suitable jobs and firms must search for suitable workers.

According to Okun's law, if output grew 7% and full-employment output rose 5%, what would be the change in the unemployment rate?

-1 percentage point

Suppose the economy's production function is Y = A . If K = 2000, N = 100, and A = 1, then Y = 246. If K and N both rise by 20%, and A is unchanged, by how much does Y increase?

20%

Suppose the marginal product of labor is MPN = 200 - 0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is the real wage. What is the equilibrium real wage?

10

How many people are unemployed if the employment ratio is 75%, there are 90 million people employed, and there are 20 million people not in the labor force?

10 million

What is the unemployment rate if there are 170 million people employed, 25 million people unemployed, and 35 million not in the labor force?

12.8%

Suppose that Freedonia has GDP equal to 2000 million, the capital stock is 1700 million, and the number of employees equals 70 million. The production function is Y = A . Total factor productivity of the economy is approximately equal to

12.87

What is the unemployment rate if there are 150 million people employed, 25 million people unemployed, and 25 million not in the labor force?

14.3%

Suppose the marginal product of labor is MPN = 200 - 0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is the real wage. If a supply shock increases the marginal product of labor by 10 (to MPN = 210 - 0.5 N), by how much does employment increase?

16

Suppose the economy's production function is Y = A . When K = 1000, N = 50, and A = 15, what is Y?

1842

Suppose the marginal product of labor is MPN = 200 - 0.5N where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w, where w is the real wage. If a supply shock increases the marginal product of labor by 10 (to MPN = 210 - 0.5 N), by how much does the real wage increase?

2

The city of Hope has a labor force of 1000. Twenty people lose their jobs each month and remain unemployed for exactly one month before finding jobs. On January 1, May 1, and September 1 of each year, 50 people lose their jobs for a period of four months before finding new jobs. What is the average duration of an unemployment spell?

2.15 months

A tremendous flood along the Mississippi River destroys thousands of factories, reducing the nation's capital stock by 5%. What happens to current employment and the real wage rate?

Both employment and the real wage rate would decrease

An adverse oil-price shock reduces labor demand. What happens to current employment and the real wage rate?

Both employment and the real wage rate would decrease.

A beneficial oil-price shock increases labor demand. What happens to current employment and the real wage rate?

Both employment and the real wage rate would increase.

A bird flu epidemic causes many people to flee the country, but does not affect labor demand significantly because almost all the goods produced within the country are exported. What happens to current employment and the real wage rate?

Employment would decrease and the real wage would increase.

A sharp increase in stock prices makes people much wealthier. If the main effect of this increased wealth is felt on labor supply, what happens to current employment and the real wage rate?

Employment would decrease and the real wage would increase.

The government announces a tax increase on workers' wages to take effect in the future. What happens to current employment and the real wage rate?

Employment would increase and the real wage would decrease.

What two factors should you equate in deciding how many workers to employ?

The marginal product of labor and the real wage rate

If Y = A × N × (75 + K/N), where K = 1000, N = 20, and A = 10, what happens if K doubles and N doubles?

Y doubles.

An increase in the number of workers hired by a firm could result from

a decrease in the real wage.

According to Okun's law, an increase in the unemployment rate will cause ________ in the level of employment and ________ in the level of output.

a decrease; a decrease

An increase in the real wage rate will cause

a movement along the labor demand curve.

As a result of the superb economics essay that you wrote during this quarter, you won the Adam Smith prize of $100. The receipt of these funds would be an example of

a pure income effect

An invention that speeds up the Internet is an example of

a supply shock

A decrease in the number of workers hired by a firm could result from

an increase in the real wage

An adverse supply shock, such as a reduced supply of raw materials, would

decrease the marginal product of labor.

The marginal product of labor

decreases as the number of workers already employed increases.

A winter ice storm has paralyzed the entire east coast, reducing productivity sharply. This supply shock shifts the marginal product of labor curve

down and to the left, reducing the quantity of labor demanded at any given real wage.

If Jeff's wage rate rises, he decides to work more hours. From this, we can infer that

for Jeff, the substitution effect is greater than the income effect.

If Jeff's wage rate rises, he decides to work fewer hours. From this, we can infer that

for Jeff, the substitution effect is less than the income effect.

The type of unemployment for which the net economic costs are most likely to be small is

frictional unemployment

The equilibrium level of employment, achieved after the complete adjustment of wages and prices, is known as the

full-employment level of employment.

One reason that firms hire labor at the point where w = MPN is

if w > MPN, the cost (w) of hiring additional workers exceeds the benefits (MPN) of hiring them, so they should hire fewer workers.

If the marginal product of capital doesn't change as the amount of capital increases, a figure showing the relationship between output and capital

is a straight line with constant upward slope.

The two main characteristics of the production function are

it slopes upward from left to right, and the slope becomes flatter as the input increases.

Economists often treat the economy's capital stock as fixed because

it takes a long time for new investment and the scrapping of old capital to affect the overall quantity of capital.

Research on labor supply generally shows that

labor supply rises in response to a temporary increase in the real wage, but falls in response to a permanent increase in the real wage.

A permanent increase in the real wage rate has a ________ income effect on labor supply than a temporary increase in the real wage, so labor supply is ________ with a permanent wage increase than for a temporary wage increase.

larger; less

A technological breakthrough in using photons for computers will increase the productivity of those working with computers a hundredfold. You would expect this breakthrough to shift the

marginal product of labor curve up and to the right, raising the quantity of labor demanded at any given real wage.

Your boss wants to know if you should lay off any workers. You answer that you should lay off workers if the

marginal product of labor is less than the real wage rate.

An increase in the real wage would result in a

movement along the labor demand curve, causing a decrease in the number of workers hired by the firm

A decrease in the real wage would result in a

movement along the labor demand curve, causing an increase in the number of workers hired by the firm

Firms hire labor at the point where the

nominal wage rate equals the marginal revenue product of labor.

Cyclical unemployment arises when

output and employment are below full-employment levels