EC 311 Macroeconomic Theory Final Exam

if the production function Y = F(K,L) has constant returns to scale, then...

F(zK, zL) = zY, F(K/L, 1) = Y/L, y = f(k) where y is output per worker and k is capital per worker

assume that the investment function is given by I = 1,000 - 30r, where r is the real rate of interest; assume further that the nominal rate of interest is 10 percent the inflation rate is 2 percent; according to the investment function, the investment will be...

I = 760

if investment becomes very sensitive to the interest rate, the...

IS curve becomes flatter

if the money supply increases, in the the IS-LM analysis the _____ curve shifts to the _____

LM; right

(M/P)d = 1,000 - 100r, M is 1,000 and P is 2 if the Fed wishes to raise the interest rate to 7%, what money should it set?

M / 2 = 1,000 - 100(7) M = 600 Set M to $600

assume that apples cost $0.50 in 1992 and $1 in 1997, while oranges cost $1 in 1922 and $1.50 in 1997; if 4 apples were produced in 1992 and 5 in 1997, whereas 3 oranges were produced in 1992 and 4 in 1997, then real GDP (in 1992 prices) in 1997 was...

$6.50

(M/P)d = 1,000 - 100r, M is 1,000 and P is 2 assuming the price level is fixed, what happens to the equilibrium interest rate if the supply of money is raised from 1,000 to 1,200?

(1,200/2) = 100 - 100r 4 = r (decreases from 5)

assume that apples cost $0.50 in 1992 and $1 in 1997, while oranges cost $1 in 1992 and $0.50 in 1997; if 10 apples and 5 oranges were produced in 1992, while 5 apples and 10 oranges were produced in 1997, the CPI for 1997, using 1992 as the base year, is...

(10 ⋆ 1) + (5 ⋆ 0.5) / (10 ⋆ 0.5) + (5 ⋆ 1) = 12.5 / 10 1.25

(M/P)d = 1,000 - 100r, M is 1,000 and P is 2 want is the equilibrium interest rate?

(M/P)d = 100 - 100r (1,000/2) = 100 - 100r 5 = r

P = 1 C = 0.8(Y - T) I = 800 - 20r Y = C + I + G Ms = 1,200 T = 1,000 G = 1,000 Ms/P = Md/P = 0.4Y - 40r what are the short-term equilibrium values of Y, r, Y - T, private savings, public savings, national savings?

-100r + 5,000 = 100r + 3,000 r = *10* Y = 100(10) + 3,000 Y = *4,000* Y - T = 4,000 - 1,000 = *3,000* C = 0.8(3,000) = *2,400* I = 800 - 20(10) = *600* private savings = Y - C - T = 600 public savings = T - G = 0 national savings = 600

which of the following items would not be included in GDP? production of 50,000 of unsold books produced that year dollar value of a lawyer's services 1,000 shares of IDM stock that are sold to a retired engineer the sale of 450 new cars by a car dealer all of the above would be included in GDP

1,000 shares of IDM stock that are sold to a retired engineer

P = 1 C = 0.8(Y - T) I = 800 - 20r Y = C + I + G Ms = 1,200 T = 1,000 G = 1,000 Ms/P = Md/P = 0.4Y - 40r write a numerical formula for the LM curve, showing Y as a function of r alone

1,200 = 0.4Y - 40r 0.4Y = 1200 + 40r Y = 100r + 3,000

assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent.; the money supply M is 2,000 and the price level P is 2; if the price level is fixed and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at...

1,600

if the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.01 and the fraction of the unplowed who find a job each moth is 0.09 (the rate of job findings), then the natural rate of unemployment is...

10 percent

according to the Keynesian cross analysis, if the MPC is 0.6, and government expenditures and taxes are both increased by 100, equilibrium income will rise by...

100 x (1 / 0.4) + 100 * (-0.6 / 0.4) 100

in the Keynesian cross analysis, if the consumption function is given by: C = 100 + 0.6(Y - T), if planned investment is 100 and T is 100, the level of G needed to make equilibrium Y equal to 1,000 is...

260

if disposable income is 4,000, consumption is 3,500, government spending is 1,000, and tax revenues are 800, national saving is equal to...

300

if MPC 0.75 = 0.75 (and there are no income taxes), where G increases by 100, the IS curve for any given interest rate shifts to the right by...

400

assume that equilibrium GDP (Y) is 5,000; consumption is given by the equation C = 500 + 0.6Y; investment is given by the equation I = 2,160 - 100r, where r is real interest rate in percent; taxes is equal to 600 and government spending is equal to 1,000; in this case, the equilibrium real interest rate is...

5,000 = (500 + 0.6(5,000 - 600) + (2,160 - 100r) + 1,000 r = 13%

assume that equilibrium GDP (Y) is 5,000; consumption is given by the equation C = 500 + 0.6Y; investment is given by the equation I = 2,000 - 100r, where r is real interest rate in percent; there is no government; in this case, the equilibrium real interest rate is...

5,000 = (500 + 0.6(5,000) + (2,000 - 100r) r = 5%

assume that equilibrium GDP (Y) is 5,000; consumption (C) is given by equation C = 500 + 0.6Y; taxes are equal to 1,000; government spending is 600; in this case, equilibrium investment is...

5,000 = 500 + 0.6(5,000 - 1,000) + I + 600 I = 1,500

assume that equilibrium GDP (Y) is 5,000; consumption (C) is given by equation C = 500 + 0.6Y; there is no government; in this case, equilibrium investment is...

5,000 = 500 + 0.6(5,000) I = 1,500

in the Keynesian cross analysis, if the consumption function is given by: C = 100 + 0.6(Y - T), the planned investment is 100, G is 100, and T is 100, then equilibrium Y is...

600

when the capital labor ratio is OA...

AB represents investment per worker, and BC represents consumption per worker

if the consumption function is given by C = 500 + 0.5(Y - T), and Y is 6,000 and T is given by 200 + 0.2Y, then C =

C = 500 + 0.5(6,000 - (200 + 0.2(6,000))) C = 2,800

change in GDP, change in C, I, G, NX? you buy a new Ford Taurus

C, GDP increases

consumption (C) is given by the equation C = 1,200 + 0.3(Y - T); if government cuts taxes by $100, what happen to investment?

S = I investment decrease by $130

assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left; if the labor market were always in equilibrium, this would lead to...

a lower real wage and no change in unemployment

the effects of a decrease in the price of home computers, other things constant, is likely to be best represented by which of the following?

a movement down along the demand curve

stabilization policy...

aims at keeping output and employment at their national rates

if bread is produced by capital and labor using an increasing return to scale production function, if the...

amounts of equipment and workers are both doubled, four times as much bread will be produced

which of the following would not cause the demand curve for preaches to shift?

an increase in the price of peaches

in a large open economy, an increase in government purchases or a reduction intakes causes...

an increase in the real interest rate

the theory of liquidity preference implies that...

as the interest rate rises, the demand for real balances will fall

the IS and LM curves together generally determine...

both income and the interest rate

according to the Keynesian cross, a rise in taxes will...

decrease equilibrium income by (∆T)(MPC) / (1 - MPC)

an increase in the rate of population growth n will...

decrease the steady-state level of capital per worker

if the consumption function is given as C = 150 + 0.85(Y - T) and T increases by 1 unit, then savings...

decreases by 0.15 units

in a small open economy starting from a position of balanced trade, if the government increases domestic government purchases, this produces a tendency toward a trade _____ and _____ net foreign investment

deficit; positive

suppose that a country experiences an increase in productivity—that is a positive shock to the production function what happens to the labor demand curve?

demand for labor shifts out while real wages stay put graph: *note that real wages remain constant and do not move with shifting curve*

suppose that a country experiences an increase in productivity—that is a positive shock to the production function how would this change affect the labor market—that is, employment, unemployment, and real wages—if the labor market were always in equilibrium?

demand for labor shifts out, since the market remains in equilibrium, real wages increase graph: label points A and B, w is supposed to be w/p

capital-labor ratio k2 is not the strawy-state capital-labor ratio because...

depreciation is greater than gross investment

suppose that a country experiences an increase in productivity—that is a positive shock to the production function how would this change affect the labor market if unions constraint real wages to remain unaltered?

despite the increase in MPL, the insistence of unions to fix wages at (w/p)* will lead to mass labor shortages between points A and C graph: label points A, B, C, wages does not move, is solid line

change in GDP, change in C, I, G, NX? GMs' inventories of steel rises by 50,000 tons

does not effect GDP, not in current year of production

if the governments of several large foreign countries raise taxes...

domestic net exports will increase

assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent.; the money supply M is 2,000 and the price level P is 2; if the price level is fixed and the supply of money is raised to 2,800, then the equilibrium interest rate will...

drop by 2 percent

as the real exchange rate of the U.S. dollar increases

foreign goods become cheaper to U.S. citizens, U.S. net exports fall, the U.S. trade surplus decreases

if U.S. GDP exceeds U.S. GNO, then...

foreigners are producing more in the United States than Americans are producing in foreign countries

suppose that an increase in consumer confidence raises consumers' expectations about their future income and thus increases the amount they want to consume today; this might be interpreted as an upward shift in consumption function; how does this shift affect investment and the interest rate?

graph containing r on vertical, I,S on horizontal, downward sloping I(r) demand curve, vertical supply curve increase in consumption —> decrease in private savings —> decrease in national savings —> loanable funds supply curve shifts in —> notice increase in r, decrease in I

if the United States bans the import of Chinese steel, what happens to the current account, the capital account, and the exchange rate?

graph: E on vertical, NX on horizontal, vertical S - I, downward sloping NX1(E) shifts up to NX2(E), label A, B NX schedule shifts out causing E* to increase to E1, as neither S nor I are affected, CA, KA not affected

(M/P)d = 1,000 - 100r, M is 1,000 and P is 2 graph what supply and demand for real money balances

graph: r on vertical, M/P, (M/P)d on horizontal, vertical M/P (money supply), (M/P)d (money demand) sloping down

what happens when the financial sector has a generally optimistic feeling about economy?

if interest rates are the same (because of vertical national savings, fixed interest rates) —> invest more, I(r) shifts out graph: *focus on what first graph does*

if the consumption function is C = 100 + 0.8(Y - T) and taxes decrease by $1, the equilibrium level of income will...

increase by $4 0.8 / 0.2

change in GDP, change in C, I, G, NX? government buys new submarine for $1 billion

increase in G, GDP

assume that a country experiences a reduction in productivity that shifts the labor demand curve downward and to the left; if the real wage were rigid, this would lead to...

no change in the real wage and a rise in unemployment

assume that apples cost $0.50 in 1992 and $1 in 1997, while oranges cost $1 in 1992 and $1.50 in 1997; if 4 apples were produced in 1992 and 5 in 1997, while 3 oranges were produced in 1992 and 5 in 1997, then the GDP deflator in 1997, using the base year of 1992, was approximately...

nom / real = 12.5 / 7.5 $1.7

define and who the formulas for nominal exchange rate and real exchange rate

nominal exchange rate (e): rate at which one person can exchange one currency for another, P / P⋆ (P⋆ is foreign currency), e.g. $ / ¥ real exchange rate (E) : compares prices of two relative goods/services in two different countries, E = e * P / P⋆

in a small open economy, if the world real interest rate is above the rate at which national savings exceeds domestic investment, there will be a trade _____ and _____ net foreign investment

surplus; negative

marginal revenue of product of labor (MRPL) is...

the change in total revenue due to a one-unit increase in labor input, holding other inputs fixed MPL * L = MRPL change in profit = MRPL - W

suppose that OPEC suddenly collapsed and oil prices plummeted; indicate what would happen to the short-run aggregate supply and aggregate demand curves, output, and the aggregate price level

the collapse of OPEC brings prices down in the SR to P2 and increases output in the SR to Y2 graph: *ignore the shifted AD*, SRAS shifts down to SRAS2, causing price level to fall and output to increase

the value of net exports is also the value of...

the excess of national saving over domestic investment

the IS curve shifts when all of the following economic variables change except... interest rate government spending tax rates MPC

the interest rate

all of the following items are causes of wait unemployment except... minimum wage laws the monopoly power of unions unemployment insurance efficiency wages

the monopoly power of unions

efficiency wage theories imply that firms pay high wages because...

the more a firm pays its workers, the greater their incentive to stay with the firm

newspapers are currently reporting a shortages of nurses, to an economist, this means...

the wage of nurses is below the market equilibrium wage rate

suppose that nominal GDP increases in 2016 but real GDP deceases during the year; it can be concluded that...

there was an economic contraction in 2016

change in GDP, change in C, I, G, NX? grandmother gets monthly SS check

transfer payments are not included in GDP

all of the following are reasons for frictional unemployment except... workers have different preferences and abilities unemployed workers accept the first job offer that they receive the flow of information is imperfect geographic mobility takes time

unemployed workers accept the first job offer they receive

A decrease in the real money supply, other things being equal, will shift the LM curve...

upward and to the left

all of statements about the marginal product of capital (MPK) are true except... MPK = f(k + 1) - f(k) MPK tends to decline as k increases when there is only a little capital, MPK is very small MPK is equal to the slope of the production function y = f(k)

when there is only a little capital, MPK is very small

P = 1 C = 0.8(Y - T) I = 800 - 20r Y = C + I + G Ms = 1,200 T = 1,000 G = 1,000 Ms/P = Md/P = 0.4Y - 40r assume that G increases by 200, by how much will Y increase in short-run equilibrium?

ΔY = KE ⋆ ΔG 1 / MPS = 1 / (1 - 0.8) * 200 = 1,000

in his speech at the 2004 Republican National Convention, President George W. Bush promised to cut both government purchases and taxes if he were reelected explain how the magnitude of changes depicted in I,S diagram depends on the size of the marginal propensity to consume

MPC affects consumption in private savings, which constitutes part of national savings—higher MPC would see a smaller increase in supply of loanable funds, which would limit I, S, and the decrease in r (and vice versa)

if the United States cuts defense spending, what happens to the current account, the capital account, and the exchange rate?

NS↑ = Y - C - G↓ graph: E on vertical, NX on horizontal, NX(E) downward sloping, vertical S0 - I shifts out to S1 - I CA increases, KA decreases, E* falls to E1

if investment, taxes, and government purchases are held constant the planned expenditure curve...

slopes upward and its slope is equal to the MPC

Y = Y = F(K,L) = 1,200 Y = C + I + G C = 125 + 0.75(Y - T) I = I(r) = 200 - 10r G = G = 1,250 T = T = 100 in this economy, compute private savings, public savings, and national savings

Y - C - T private savings = $150 T - G public savings = -$50 national savings = $100

Y = Y = F(K,L) = 1,200 Y = C + I + G C = 125 + 0.75(Y - T) I = I(r) = 200 - 10r G = G = 1,250 T = T = 100 find the equilibrium interest rate

Y = C + I + G 1,200 = 950 + 200 - 10r + 150 r = 10

P = 1 C = 0.8(Y - T) I = 800 - 20r Y = C + I + G Ms = 1,200 T = 1,000 G = 1,000 Ms/P = Md/P = 0.4Y - 40r write a numerical formula for the IS curve, showing Y as a function of r alone

Y = C + I + G Y = 0.8(Y - 1,000) + 800 - 20r + 1,000 0.2Y = -20r + 1,000 IS: Y = -100r + 5,000

during the 1960s, President John F. Kennedy's tax cuts were enacted; draw the appropriate graphs to indicate what would happen to the IS curve, LM curve, aggregate demand, and short run aggregate supply curves, and indicate any short-run changes in equilibrium levels of r, I, C, G, Y, and P if the Fed had not changed any of its policies

can be shown using three graphs graph 1: Keynesian cross, PE shifts up, increases Y and expenditure graph 2: IS—LM above graph 1, PE shift causes IS to shift out by same distance, increases Y (still) and r* graph 3: (under first two graphs) AD starts in equilibrium with SRAS and LRAS, AD2 shifts out by same distance, increasing Y (still) but P remains constant in SR (equilibrium moves along SRAS)

during this period, the Fed actually pursued expansionary monetary policy and kept interest rates nearly constant; draw diagrams and indicate what happened to the IS curve, LM curve, aggregate demand, and short run aggregate supply curves, and indicate any short-run changes in equilibrium levels of r, I, C, G, Y, and P

can be shown using two graphs graph 1: IS—LM, IS curve shifts out first moving equilibrium up to B, expansionary monetary policy causes LM to shift out, pushing r* back down to original level, Y increases again, a lower r will increase I, G is constant graph 2: AD shifts out once due to shift in IS, shifts out once again due to shift out LM curve, Y increases by same amounts as graph 1, P constant in SR, equilibrium moves along SRAS

what are the current, capital, and official reserve account?

current account (CA): excess of national savings over domestic investment, CA = S - I and S - I = NX capital account (KA): excess of domestic investment over national savings, KA = I - S CA + KA = 0 official reserve account: foreign currencies central banks hav eon hand that is used to steady fluctuations observed by central banks in the exchange rates for their respective currencies

in his speech at the 2004 Republican National Convention, President George W. Bush promised to cut both government purchases and taxes if he were reelected use the I,S diagram to state and illustrate what the long-run impact of this program would be on national saving, investment, and real interest rate

increase in national savings pushes out supply of loanable funds, leading to more investment (S = I), lower real interest rate, allowing more firms to make profitable investments graph: vertical S curve shifts out, decreasing r

change in GDP, change in C, I, G, NX? IBM builds a new factory in Massachusetts

increases I, GDP

ab effective policy to reduce a trade deficit in a small open economy would be...

increasing taxes

an IS curve shows combinations of...

interest rates and income that bring equilibrium in the market for goods and services

if the United Auto Workers union can obtain a substantial wage increase for auto workers, other things being equal, the price of autos will rise; this rise in prices can be attributed to a (an)...

leftward shift shift of the supply curve for autos

in an economy with no population growth and no technological change, steady-state consumption is at its greatest possible level when the...

marginal product of capital equals the depreciation rate

Y = C + I + G + NX Y = 5,000 G = 1,000 T = 1,000 C = 250 + 0.75(Y - T) I = 1,000 - 50r NX - 500 - 500E r = r* = 5 solve for national savings, investment, the trade balance, and the equilibrium exchange rate

national savings = Y - C - G = 5,000 - (250 + 0.75(5,000 - 1,000)) / 1,000 = 750 I = 1,000 - 50r = 750 Y = C + I + G + NX 5,000 = (250 + 0.75(5,000 - 1,000) + 750 + 1,000 + NX 5,000 = 5,000 + NX NX = 0 NX = 500 - 500E 0 = 500 - 500E E = 1

consumption (C) is given by the equation C = 1,200 + 0.3(Y - T); if government cuts taxes by $100, what happen to national savings?

national savings = private savings + public savings national savings = -100 - 30 = -130 national savings decreases by $130

suppose that most consumers regard coffee and sugar as complementary goods; what will be the effect of a decrease in the price of coffee and an increase in the amount of subsidies paid to sugar producers in the market for sugar?

on a graph: price of sugar on vertical, Q sugar on horizontal, supply and demand, both shifting out demand for sugar increases due to the drop in price of coffee, causing increases to price and quantity; supply shifts out as a subsidy makes it easier for producers to produce, increasing quantity again but pushing prices back down

when a competitive firm is maximizing profits, it hires labor until the...

price of output multiplied by the marginal product of labor equals the wage

consumption (C) is given by the equation C = 1,200 + 0.3(Y - T); if government cuts taxes by $100, what happen to private savings?

private savings = Y - C - T T↓ by $100 ⇨ Yp↑ ⇨ C↑ by MPC = $30, (S↑ by MPS = $70) private savings decreases by $30

in his speech at the 2004 Republican National Convention, President George W. Bush promised to cut both government purchases and taxes if he were reelected if both taxes and government purchases were cut by equal amounts, state and explain what the long-run effects of this policy would be on private savings, public savings, and national savings

private savings: Y - C - T↓ (slight increase) public savings: T↓ - G↓ (constant) national savings slightly increases

consumption (C) is given by the equation C = 1,200 + 0.3(Y - T); if government cuts taxes by $100, what happen to public savings?

public savings = T↓ - G public savings decrease by $100

change in GDP, change in C, I, G, NX? you buy 100 shares of GM stonk

purchase of stock not counted in GDP

legislation to cut taxes in an open economy should...

reduce national saving and lead to a trade deficit

if s the rate of job separation, f is the rate of job finding, and both rates are constant, then the unemployment rate is approximately...

s / (s + f)

the Solow model shows that a key determinant of the steady-state ratio of capital to labor is the...

saving rate

change in GDP, change in C, I, G, NX? you buy a used computer from a friend

second-hand items not in GDP, likely not produced that year

in the Solow growth model with population growth n, the change in capital per worker is equal to...

sf(k) - (δ + n)k