Intro Econ Exam 1

The US and Chile have both grown at about 2% per year for the last 40 years. By the principle of transition dynamics, what does this imply?

Both countries are at their steady states

According to the Solow model, two countries will grow at different rates if:

Both have different steady-state level of output and the same capital stock below the steady-state level

This year a real estate agent helped you buy a house for $200,000, which was built in 1985. Agent's commission was $12,000. How will this transaction affect this year's GDP?

Consumption expenditures will increase by $12,000

If the productivity parameter is assumed to equal 1, the production model

Correctly identifies that countries are richer if they have more capital, incorrectly predicts that poor countries are substantially richer than they are, incorrectly predicts that some countries are richer than the US (All of the above)

At the height of the 2008 recession, US employment

Decreased by approximately .5% every month

In a simple model of supply and demand the equation for the demand curve is given by Q=20-10P and the equation for the supply curve is given by Q= 5 + 5P. Q and P are

Endogenous variables

T/F- A US citizen works for a US company in Germany. The income earned by the citizen increases US GDP

False

T/F- A model comparing income in the US and Algeria is successful if it predicts the US is richer than Algeria but not how much richer

False

T/F- All else equal, a higher rate of depreciation (d with line over it) increases the capital stock

False

T/F- If a variable is growing at a postitive constant rate, when plotted on a ratio scale, the slope of the plot will become steeper over time

False

T/F- In most rich countries, inflation has been relatively high since the 1980s

False

T/F- The standard replication argument implies that Italy can raise its per capita GDP by doubling the amount of capital per person

False

T/F- When price equals marginal cost, economic profits are positive

False

T/F- When the trade balance is negative, domestic producers are exporting more goods than are being imported

False

T/F-Capital per person explains about 1/2 of the difference in per capita income between the richest and poorest countries

False

T/F-If an economy has a higher investment rate and a higher depreciation rate, the economy will have a higher level of output.

False

T/F-In the last 300 years, the standards of living between the richest and poorest countries has converged.

False

T/F-Potential output is a measure of the per capita GDP in the future

False

T/F- The behavior of Germany's per capita income after WWII is an example of convergence

False (Convergence is the process of a nation's economy catching up to another nation's economy)

T/F- If the marginal product of capital is less than the rental rate of capital, the firm should rent more capital

False (Firm should only rent more capital if the MPK is greater than the rental rate of capital)

T/F-We can solve a model for all the endogenous variables if it has five equations and 6 unknowns

False (If a model has at lease the same number of equations as unknowns, it can be solved)

T/F- The fraction of people living in poverty has risen since 1960 as the populations of India and China have grown substantially.

False (has decreased)

The positive budget deficit since the early 2000s in the US implies that

Federal government spending exceeds federal government revenue

Which of the following is NOT a step that macroeconomists take to study aggregate economic questions?

Include all possible variables from the real world to construct a comprehensive model

Since the 1980s, the trade deficit in the US has been

Increasing

The level of consumption

Is largest when the economy is above its steady state

Which of the following is a cost of economic growth?

Job loss in certain sectors, increased income inequality, global warming (All of the above)

What is one endogenous variable in a model of the supply and demand for houses?

Level of housing prices

When comparing shares of consumption in GDP it is best to use (---) variables. When comparing real rates of economic growth it is best to use (---) variables.

Nominal; Chain-weighted

Under national income accounting, GDP equals

Number of goods produced in the economy, income earned in the economy, and total purchases in economy (all of the above)

In a simple model of supply and demand the equation for the demand curve is given by Q=20-10P and the equation for the supply curve is given by Q= 5 + 5P. The solution for the model is

Q= 10 and P= 1

Which of the following is NOT an example of capital?

Screws and bolts used for making cars at car factory

Which of the following doesn't increase the US GDP?

The US government increases social security payments

In the production model from the text, which of the following is NOT an exogenous variable or a parameter?

The amount of capital

If net investment is negative

The economy is above its steady state and growth of output is negative

How quickly GDP doubles depends on

The growth rate of GDP

Starting from steady state, a permanent increase in the rate of depreciation in the Solow model causes

The growth rate of output to fall temporarily and the level of GDP to fall permanently

An economy starts in a steady state. A war causes massive destruction of the capital stock. This shock will cause

The growth rate of output to rise initially as the economy begins to converge to the old steady state

Imagine a two-good economy where the quantity of the goods produces is unchanged over time, but where prices have increased. Then, in the most recent year, real GDP will be

The largest number when using the Paasche index

What is an explanation for why an economy eventually settles in steady state?

The production function exhibits diminishing returns to capital, the capital stock depreciates at a constant rate, eventually investment generated is equal to the amount of capital depreciated (All of the above)

Imagine increases in the parameters of the Solow model that are all identical in magnitude. Which one of the following parameters will result in the largest increase in steady-state output?

The productivity parameter

According to the principle of transition dynamics, which economy will grow fastest?

The same country 1 year after the natural disaster destroyed most of the capital stock

T/F- If population and GDP are growing at the same rates, then per capita GDP doesn't grow

True

T/F- If real GDP increases by 2% and nominal GDP increases by 4%, then inflation is approximately 2%.

True

T/F- In a Cobb-Douglas production function, the factor share of income going to each input is equal to the exponent on the input in the production function

True

T/F- In part, macroeconomists study individual behavior and microeconomists theories to create theories of aggregate economic activity

True

T/F- In the Solow diagram, an increase in the investment rate will cause a decrease in consumption for all levels of capital

True

T/F- In the long run, the real interest rate is equal to the marginal product of capital

True

T/F- One reason economic activity fluctuates is that the central bank lends the economy into a recession in order to bring down inflation

True

T/F- Per capita GDP can grow at a negative rate

True

T/F- The depreciation of fixed capital is a part of the GDP but not part of Net Domestic Product

True

T/F- Total factor productivity explains a larger amount of the difference in income per capita in the Solow model than in the production model

True

T/F- Wages in ancient Greece and Rome were approximately equal to wages in 17th century France

True

T/F- When comparing GDP across countries, it is better to use comparisons based on common prices than simply on exchange rate conversions

True

T/F- You plot the production function for the US on a graph with output per person on vertical axis and capital per person on horizontal axis. If a shock occurs causing the productivity parameter to increase, the production function would shift upward

True

T/F-Over the long term, economic growth swamps economic fluctuations

True

T/F-We can't tell whether the production function Y= K^αL^1-α has a constant return to scale, because we don't know the value of α

True

T/F- The change in the capital stock is a flow variable

True (A flow variable is one that lasts only for one period. Capital alone is a stock variable, but the change in capital is a flow variable.

T/F-In 1990, a country's per capita income was 1000. By year 2000, it was 1650. The average annual growth rate was approximately .05

True (Apply formula 3.9 where Yt is 1650, Y0 is 1000 and t is 10

Which of the following questions would a macro economist be most interested in answering?

Why did prices rise in many countries in the 1970s?

Which of the following questions does the Solow model NOT help to explain?

Why do countries sustain growth in the long run?

According to Figure 4.5, does the production model accurately predict the level of per capita GDP for Singapore?

Yes, because the predicted value of per capita GDP for Singapore is close to the actual value of its per capita GDP

Which of the following counts as an investment?

You buy a new house.

In 2018, the largest share of GDP was

consumption

Output per capita and output per worker are

equal in the production model, but output per capita is smaller in general

The unemployment rate in the United States has historically been

higher than Europe until 1980 and since then, lower than Europe

One reason for the larger trade deficit in the last several decades is

increased consumption

If nominal GDP grew by 7% in year 2 relative to year 1, the price level increased by 2% during the same period and the real GDP in year 1 was $1,000, what was real GDP in year 2?

$1050

After graduation, you start a job making $40,000, earnings grown at a constant growth rate of 3% per year. When you retire 40 years later, you are earning approximately

$130,000 (apply formula 3.7 where y0 equals 40,000, growth rate is .03 and t equals 40

A construction company produces a $200,000 house using $50,000 worth of wood and steel purchased from a supplier in addition to $50,000 of labor hours. The value added by the construction company is

$150,000

If exports are $10 billoin and imports are $3 billion, net exports are ____ and the country has a trade ____

$7 billion; surplus

Consider a simple economy producing 2 goods: coffee and TVs. In 2014, economy produced 2000 pounds of coffee and 10 Tvs. In 2015, economy produced 1000 pounds of coffee and 12 tvs. Price of one tv was $1000 in both years while price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on the info, the percentage in real GDP in chained prices, benchmarked to 2015 is:

-16.5%

Consider a simple economy producing 2 goods: coffee and TVs. In 2014, economy produced 2000 pounds of coffee and 10 Tvs. In 2015, economy produced 1000 pounds of coffee and 12 tvs. Price of one tv was $1000 in both years while price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on the info, and using the percentage change in real GDP in chained prices, benchmarked to 2015, the inflation rate is approximately

-6.2%

Suppose India has a per capita GDP that is .074 times the US GDP. It has a capital-per-person ratio that is .035 times that of US. Compared to the US, the implied value of total factor productivity for India is approximately

.23

Which of the following is an example of a ratio scale?

1, 5, 25, 125, 625

According to figure 3.7, the slowest growing country during 1960-2014 had a level of per capita GDP approximately equal to ___ of the US level

1/64

In 1994 parents made investment of $4000. By 2015, investment grew to $32000. Based on figure below, the approximate average annual growth rate of investment is?

10%

With an average annual growth rate of 5% per year, per capita income will increase by what factor over a century?

126 (Applying Rule of 70 implies 70/5=14. Thus, income will double in 14 years...in a century per capita income will double approximately 7 times, which is 100/14. Thus, GDP per capital will increase by a factor of 2^7.

If Y=AK1/3L2/3 and A grows at a rate of 1% per year, K grows at a rate of -3% per year, and L grows at a rate of 3% per year, then the growth rate of Y is

2%

The average annual growth rate of per capita GDP in the Us from 1870 to 2018 is

2%

If population doubels every 35 years, then the growth rate of the population is

2% (Rule of 70 implies that the growth rate equals 70/35 =2%)

Output per person is higher when

A country is more efficient in adopting technology, a country has a higher capital-to-population ratio, a country has stronger property rights and contract enforcement (All of the above)

The difference between a parameter and an exogenous variable is that

A parameter is fixed over time, while an exogenous variable is allowed to change over time.

If depreciation exceeds new investment, the capital stock in the economy is

Above it's steady state level

Which of the following is included in TFP?

Amount of labor, amount of capital, and quality of labor

The difference between an exogenous and an endogenous variable is that

An exogenous variable is an input to the model, while an endogenous variable is an outcome of the model