Macro Midterm 2 (Chapters 7-9)

TRUE OR FALSE: China has a higher rate of technological progress than India.

true

On a graph of the labor​ market, show the effect of a positive 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.

*parallel and above initial labor demand*

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.

*parallel and above initial labor demand*

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 wages.

*parallel and below short-run AS*

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.

*parallel and under labor supply line*

In one​ year, a​ consumer's income increases by ​$300 and her savings increases by ​$180. Her marginal propensity to consume is equal to ____ Her marginal propensity to save is equal to ____

0.4; 0.6

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.

1) *positive line above AS1* 2) *where price level meets AS2*

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.

1) *positive line that goes through where price level meets long run AS* 2) *where price level meets AS2*

If the MPC is 0.60​, the simple multiplier will be equal to

2.5 (1/(1-MPC))

At a 2 percent annual growth rate in GDP per​ capita, it will take ____ years for GDP per capita to double.

35 (70/2)

Two economists differ on their estimates of the natural rate of unemployment. One economist believes it is 5 ​percent, while the other believes it is 4 percent. All else being​ equal, the economist who estimates the natural rate at _____ will estimate a higher value for potential output.

4%

TRUE OR FALSE: If wages and employment both fall​, this is likely caused by a decrease in the demand for labor.

true

TRUE OR FALSE: The typical European works less hours per year than the typical U.S. worker.

true

In a boom​, real GDP exceeds potential GDP. This implies that

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

Consumers in Country A have an MPS of 0.5 while consumers in Country B have an MPS of 0.3. Country ___ has the higher value for the multiplier.

B

An increase in human capital is likely to shift the production function _____.

upward

An increase in the stock of capital shifts the production function ____.

upward

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

China's growth in GDP was much higher than​ India's growth in GDP.

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?

Clark's theory fits well with the rapid growth in East Asian economies since western values have become more acceptable.

Which of the following is not a component of aggregate​ demand?

Depreciation

If we cannot measure every invention or new​ idea, how can we possibly measure the contribution to growth of technological​ progress?

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

Suppose a firm increases its capital stock. How will this impact the​ firm's staff productivity and number of​ employees?

Employees will become more productive and the firm will hire more employees until marginal benefit equals marginal cost.

From 1960 until​ 2006, Singapore's capital stock grew​ rapidly, averaging almost 10 percent per year. This growth of​ Singapore's capital stock will shift the production function _____. As a​ result, the level of output produced in Singapore at any level of labor input is ______ the level of output produced before the change in the capital stock.

upward; greater than

Which of the following will promote economic growth through capital​ deepening?

Increased imports to purchase supercomputers for industry.

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?

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

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?

Larger cities allow for the specialization of​ labor, which can lead to greater creativity among chefs; There are more chances to have​ face-to-face interactions, which can lead to increased innovation and creativity; In larger​ markets, restaurants have more incentives to come up with innovative and creative new dishes

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?

Output decreased as Ireland slid to the left along its production function.

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.

Parents can borrow against their property to purchase substitutes for their​ children's labor such as new machinery; Parents with more income tend to rely less on their children for financial support; Parents will be more willing to make​ long-term investments to improve their lives.

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.

Substantial investments to improve the roads would encourage private investment; Total transportation costs would be reduced

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?

The United States produces more of its own oil and petroleum​ products, so its producers now benefit from oil price increases.

Which of the following may influence technological​ progress?

The scale of the market; Research and development spending; Monopolies

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 20,000 and 15,000 respectively. Nothing else changed during this period. Did this economy exhibit law of diminishing marginal​ returns?

Yes​,because changes in output fell.

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 shift of the aggregate demand curve from AD1 to AD2 ​(point A to​ C).

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. 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. 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? d) If the​ labor-supply curve were​ horizontal, what would be the effects on​ wages, output, and​ employment?

a) *parallel and above initial labor demand* b) Wages​ decrease, but output and employment are unchanged. c) Wages decrease by an amount equal to the tax. d) Wages would be​ unchanged, but output and employment would decrease.

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. a) What factors do you think might account for this fall in​ height? b) How would you evaluate economic welfare during this​ period?

a) Resources were invested in physical capital instead of human capital; Health conditions in urban areas were worse than in rural areas; Industrialization did little to reduce malnutrition b) Economic welfare decreased as measured by average height.

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. a) Explain why the​ "brain drain" could lead to increased education among the remaining residents. b) How would you test this​ theory?

a) When highly educated workers​ leave, more high paying jobs become available. b) Compare wages in developing countries with and without significant​ "brain drain."; Compare labor productivity in developing countries with and without significant​ "brain drain."; Compare the types of jobs in developing countries with and without significant​ "brain drain."

To finance a health care​ program, the government places a 10 percent payroll tax on all labor that is hired. a) As a​ result, the _______ curve will shift to the ____. 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? d) If the labor supply curve were​ horizontal, what would be the effects on real​ wages, output, and​ employment?

a) labor demand; left b) Wages​ decrease, but output and employment are unchanged. c) Wages decrease by an amount equal to the tax. d) Wages would be​ unchanged, but output and employment would decrease.

a) A negative supply shock temporarily ______ output _____ full employment and ______ prices. b) After the negative supply​ shock, real GDP is _________ potential GDP. c) This implies that unemployment is ______, driving wages _____. This results in a ___________ shift of the​ short-run aggregate supply curve.

a) lowers; below; raises b) lower than c) rising; down; rightward or downward

a) Higher taxes on labor ______ potential​ output, unless the labor supply curve is _______. b) This type of labor supply curve occurs when

a) reduce, vertical b) workers will supply the same amount of labor regardless of the wage.

Suppose a foreign​ country, which had allowed the United States to export to it, suddenly closes its market. In this​ case, aggregate demand will

decrease because exports are directly related to shifts in aggregate demand.

With the stock of capital​ fixed, output increases with labor​ input, but at a rate that _____.

decreases

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

classical

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

crowding in

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

crowding out

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? What will be gained for future​ generations?

current consumption; more output and more capital

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

demand

The wages of which of the following groups will not adjust​ quickly?

employees of state and local governments.

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 ____.

fall; fall

TRUE OR FALSE: Economist William Easterly is a strong proponent of foreign aid.

false

TRUE OR FALSE: New growth theory suggests that consumption spending will lead to permanent decreases in the rate of technological progress.

false

At full​ employment, there is only structural and _____unemployment.

frictional

Another term for potential output is _______.

full-employment output

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

have a stronger impact on supply near the​ border, but may not affect the overall supply of labor for the entire U.S. economy.

Suppose the supply of money​ increases, causing output to exceed full employment. As a​ result,

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.

A worldwide patent and copyright system would _______ the incentive to be innovative.

increase

An increase in immigration will __________. In the new market​ equilibrium, the real wage will _____ and the amount of labor employed will _______.

increase labor supply; fall; increase

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

increase the marginal benefit from employing labor and therefore increase the demand for labor and real wages.

Malthus believed the population would always adjust to bring real wages back to a fixed subsistence level. An improvement in technology would ____ real wages. Such changes would eventually shift the ______ curve to the ____​, bringing real wages back to a fixed subsistence level.

increase; labor supply; right

Suppose a government places a 10 percent tax on incomes and spends 50 percent of the money from taxes on investment and the rest on public consumption​ goods, such as military parades. Individuals save 30 percent of their income and consume the rest. In this​ case, total investment​ (public and​ private) ______.

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 ______.

increases; increases; increases; increases

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

is defined by economists as an increase in output with no additional increases in inputs.

Machine companies hire labor in the labor market. Now assume that machinists become more productive. The increase in labor productivity will shift the _______ curve to the _____.

labor demand; right

Consider an increase in the stock of capital. This will shift the ________ curve to the _____. Such a change in the stock of capital results in _______ shift in the​ short-run production​ function, indicating that ____ output can be produced than before.

labor demand; right; an upward; more

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.

left

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

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

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

level of employment in the economy and the level of real wages.

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.

low; difficult; increase; upward

Basing your answer on the research reported in the​ text, India is

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.

In an open​ economy, increases in government spending can crowd out​ consumption, investment, or ________.

net exports

For most​ firms, the biggest cost of doing business is

wages

To gauge living standards across countries with populations of different​ sizes, economists use

real GDP per capita

An increase in labor force participation will shift the​ labor-supply curve to the _____, leading to lower real wages and higher employment.

right

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 _____.

rise

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

rise

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

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

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

this intangible capital is an important source of economic growth.

In an economy with no government sector or foreign​ sector, saving must equal investment because

total income is equal to consumption and saving; total income is equal to total demand; total demand is equal to consumption and investment

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

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

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 ____________.

sticky; high inflation; increases in the cost of production

Using the Penn World Tables​ 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.

support

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

technological progress

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

technology

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

that there is less of a tendency for convergence.

The workers in​ _________ take the least vacation​ time, on average.

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

the amount of labor their workers supply to the market.

In the long​ run, if aggregate demand decreases​,

the price level will decrease and output or real GDP will remain unchanged.

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

the quantity supplied of labor.

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?

​No, because the worker only visited one village and it was not a controlled experiment.

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

​left, leading to a large decrease in output and a small decrease in price.