ECO 321 Final Exam

Assume that apples cost $0.50 in 2002 and $1 in 2009, whereas oranges cost $1 in 2002 and $1.50 in 2009. If 4 apples were produced in 2002 and 5 in 2009, whereas 3 oranges were produced in 2002 and 4 in 2009, then real GDP (in 2002 prices) in 2009 was:

$6.50.

In the Solow growth model, an economy in the steady state with a population growth rate of n but no technological growth, the growth rate of output per worker will be:

0.

In the Solow model with technological progress, the steady-state growth rate of output per effective worker is:

0.

Assume that equilibrium GDP (Y) is 5,000. Consumption (C) is given by the equation C = 500 + 0.6Y. In addition, assume G=0. In this case, equilibrium investment is:

1,500.

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 unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is:

10 percent.

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real GDP must be ______ percent.

3

If MPC = 0.6 (and there are no income taxes but only lump-sum taxes) when T decreases by 200, then the IS curve in a closed economy shifts to the right by:

300.

If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes minus transfers are 800, national saving is equal to:

300.

If MPC = 0.6 (and there are no income taxes) when G increases by 200, then the IS curve in a closed economy shifts to the right by:

500.

If the adult population equals 250 million, of which 145 million are employed and 5 million are unemployed, the labor-force participation rate equals ______ percent.

60

If the number of employed workers equals 200 million and the number of unemployed workers equals 20 million, the unemployment rate equals ______ percent (rounded to the nearest percent).

9

If domestic saving exceeds domestic investment, then net exports are ______ and net capital outflows are ______.

positive; positive

In a large open economy with a floating exchange rate, such as in the United States, in the short run a monetary contraction:

raises the interest rate and lowers investment and income, but also raises the exchange rate and lowers net exports.

In a small open economy, if the government adopts a policy that lowers imports, then that policy:

raises the real exchange rate and does not change net exports.

In the Solow growth model with exogenous technological progress and population growth, in the steady state:

real per capita income grows at rate of technological progress.

Investment depends on the ______ interest rate, and money demand depends on the ______ interest rate.

real; nominal

Holding other factors constant, legislation to cut taxes in an open economy will:

reduce national saving and lead to a trade deficit.

In a small open economy, if consumers shift their preference toward Japanese cars, then net exports:

remain unchanged, but the real exchange rate falls.

If the Fed reduces the money supply by 5 percent, then in a closed economy the real interest rate will:

rise in the short run but return to its original equilibrium level in the long run.

According to the Mundell-Fleming model, in an economy with flexible exchange rates, expansionary fiscal policy causes the exchange rate to ______, and expansionary monetary policy causes the exchange rate to ______.

rise; fall

In the IS-LM model of a closed economy when M remains constant but P rises, in short-run equilibrium, in the usual case the interest rate ______ and output ______.

rises; falls

If s is the rate of job separation, f is the rate of job finding, and both rates are constant, then the steady state unemployment rate is approximately:

s / (s + f).

The LM curve is steeper the ______ the interest sensitivity of money demand and the ______ the effect of income on money demand.

smaller; greater

An economy has the Cobb-Douglas production function Y = 10 K1/3 L2/3. If the economy's stock of capital doubles, the share of total income paid to the owners of capital will:

stay the same.

When prices of different goods are increasing by different amounts, the price index that will rise the fastest is:

the CPI.

The natural rate of unemployment is:

the average rate of unemployment around which the economy fluctuates.

Two interpretations of the IS-LM model are that the model explains:

the determination of income in the short run when prices are fixed or what shifts the aggregate demand curve.

If an economy is initially in a steady state in the Solow growth model and then the saving rate increases:

the economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached.

In a short-run model of a large open economy with a floating exchange rate:

the interest rate is determined in the IS-LM framework, and this value determines net capital outflow; then the exchange rate adjusts to make net exports equal net capital outflow.

The slope of the IS curve depends on:

the interest sensitivity of investment and the marginal propensity to consume.

If government purchases increease in a large open economy, in the long run:

the real interest rate increases.

In a steady state with population growth and technological progress:

the real rental price of capital is constant and the real wage grows at the rate of technological progress.

In the steady state of the Solow model with technological progress, which of the following variables is not constant?

the real wage

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts that:

the real wage will fall, and the real rental price of capital will rise.

If money demand does not depend on the interest rate, then the LM curve is ______, and ______ policy has no effect on output.

vertical; fiscal

In the Solow growth model, the steady-state growth rate of output per effective worker is ______, and the steady-state growth rate of output per actual worker is ______.

zero; the rate of technological progress

Percentage change in P is approximately equal to the percentage change in:

M minus the percentage change in Y plus the percentage change in velocity.

Assume that a war breaks out abroad, and foreign investors choose to invest more in a large safe country, the United States. Then, the U.S. real interest rate:

and net exports will both fall.

If the rate of separation is 0.02 and the rate of job finding is 0.08 but the current unemployment rate is 0.10, then the current unemployment rate is ______ the equilibrium rate, and in the next period it will move ______ the equilibrium rate.

below; toward

To increase the money supply, the Federal Reserve:

buys government bonds.

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.

Fiscal policy has a multiplying effect on income because fiscal policy:

changes income, which changes consumption, which further changes income.

In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes:

consumption per effective worker.

Assume that two countries both have the per-worker production function y = k1/2, neither has population growth or technological progress, depreciation is 5 percent of capital in both countries, and country A saves 10 percent of output whereas country B saves 20 percent. If country A starts out with a capital-labor ratio of 4 and country B starts out with a capital-labor ratio of 2, in the very long run (i.e., in the steady state):

country A's capital-labor ratio will be 4, whereas country B's will be 16.

In the case of an unanticipated increase in inflation:

creditors with an unindexed contract are hurt because they get less than they expected in real terms.

In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will:

decrease.

An increase in the rate of population growth with no change in the saving rate:

decreases the steady-state level of capital per worker.

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 (i.e., net capital outflow).

deficit; negative

A difference between the economic long run and the short run is that:

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

In the Solow growth model with population growth and labor-augmenting technological change, the break-even level of investment must cover:

depreciating capital, capital for new workers, and capital for new effective workers.

In a fractional-reserve banking system, banks create money because:

each dollar of reserves generates many dollars of demand deposits.

In a small open economy with a floating exchange rate, if the government increases the money supply, then in the new short-run equilibrium, the:

exchange rate falls and net exports increase.

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:

falls by $40 billion.

In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate (measured in units of the home currency divided by units of foreign currency):

falls, and home country net exports rise.

In a large open economy in the long run, if political instability abroad reduces the investment function in the rest of world (i.e., lowers the net capital outflow function), then the real interest rate:

falls, while the real exchange rate rises and net exports fall.

The government purchases component of GDP includes all of the following except:

federal spending on transfer payments.

Other things equal, a given change in government spending has a larger effect on aggregate demand in a closed economy the:

flatter the LM curve.

The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the:

foreign inflation rate minus the domestic inflation rate.

Analysis of population growth around the world concludes that countries with high population growth tend to:

have a lower level of income per worker than countries with low population growth.

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate but with a ______ price level or allow the price level to return to its original level but with a ______ level of output in the short run.

higher; lower

The curve showing the relationship between net exports and the real exchange rate is:

horizontal if there is purchasing power parity.

In a small open economy with a floating exchange rate, if the government imposes a tariff on foreign goods, then in the new short-run equilibrium:

imports will decrease and exports will decrease by an equal amount.

According to the IS-LM model of a closed economy, when the government increases taxes and government purchases by equal amounts:

income and the interest rate rise, whereas consumption and investment fall.

In a short-run model of a large open economy with a floating exchange rate, a fiscal expansion causes an increase in:

income, the interest rate, and the exchange rate but a decrease in investment and net exports.

When government spending increases and taxes are increased by an equal amount, interest rates:

increase.

In the Mundell-Fleming model with flexible exchange rates, an increase in the price level results in a(n) ______ in the real exchange rate and a(n) ______ in net exports.

increase; decrease

In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports, and the real exchange rate ______.

increases; depreciates

If the real interest rate and real national income are constant, according to the quantity theory and the Fisher effect, a 1 percent increase in money growth will lead to rises in:

inflation of 1 percent and the nominal interest rate of 1 percent.

An LM curve shows combinations of:

interest rates and income, which bring equilibrium in the market for real money balances.

When a firm sells a product out of inventory, GDP:

is not changed.

In a closed economy a given increase in taxes shifts the IS curve more to the left the:

larger the marginal propensity to consume.

The aggregate demand curve generally slopes downward in a closed economy because, for any given money supply M, a higher price level P causes a ______ real money supply M / P, which ______ the interest rate and ______ spending.

lower; raises; reduces

All of the following assets are included in M1 except:

money market deposit accounts.

Two economies are identical except that the level of capital per worker is higher in Highland than in Lowland. The production functions in both economies exhibit diminishing marginal product of capital. An extra unit of capital per worker increases output per worker:

more in Lowland.

Hyperinflations ultimately are the result of excessive growth rates of the money supply; the underlying motive for the excessive money growth rates is frequently a government's:

need to generate revenue to pay for spending.

The theory of liquidity preference states that the quantity of real money balances demanded is:

negatively related to the interest rate and positively related to income.

In a closed economy equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

negatively; positively

In a large open economy, if an import quota is adopted, then:

net exports remain unchanged, as imports and exports decrease by equal amounts, while the real exchange rate rises.

A fall in consumer confidence about the future, which induces consumers to spend less and save more, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

no change in income but a rise in net exports.

The introduction of a stylish new line of Toyotas, which makes some consumers prefer foreign cars over domestic cars, will, according to the Mundell-Fleming model with floating exchange rates, lead to:

no change in income or net exports.

The opportunity cost of holding money is the:

nominal interest rate.

The most frequently used tool of monetary policy is:

open-market operations.

Suppose that an economy is in its steady state and the capital stock is above the Golden Rule level. Assuming that there are no population growth or technological change, if the saving rate falls:

output, investment, and depreciation will decrease, and consumption will increase and then decrease but finally approach a level above its initial state.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run, and ______ increase(s) in the long run.

output; prices

The panel of economists appointed by the Senate Finance Committee estimated that the CPI ______ inflation by approximately ______ percentage point(s) per year.

overestimates; 1

Which of the following events would cause a currency to depreciate?

an increase in the price level.

In the Mundell-Fleming model with a floating exchange rate, a rise in the world interest rate will lead income:

and net exports both to rise.

What will happen to a country's real exchange rate if its net foreign investment exceeds its net exports, and why?

There is an excess supply of the country's currency which will cause the real value of the currency to fall.

Which of the following events would affect the CPI but not the GDP deflator?

Volvo, the Swedish auto maker, raises the prices of the cars it sells in the United States.

The ex post real interest rate will be greater than the ex ante real interest rate when the:

actual rate of inflation is less than the expected rate of inflation.