ECON 510 EXAM 2

The quantity theory of money is a theory derived from the quantity equation by Irving FIsher, who asserted that the velocity of money is unimportant.

false

The natural rate of unemployment consists of

frictional unemployment plus structural unemployment.

Refer to Figure above. Holding other variables constant, an increase in the real wage rate will result in a

movement from point B to point A.

Suppose the annual growth rate of real GDP for the nation of Svengali is 5% and the growth rate of velocity is 0%. If the money supply growth rate decreases from 6% to 2%, what was the initial rate of inflation in Svengali?

1%

Recent research on the relationship between the level of income and happiness indicates that higher levels of income that result from economic growth

do make people happier.

Changes in expected inflation can change the real, after-tax cost of borrowing is called Tax Burden.

false

Financial markets operate to ensure that the level of savings exceeds the level of investment.

false

Increased worker productivity will increase the supply of labor, shifting the labor supply curve to the right, which increases the equilibrium wage and increases the quantity of labor.

false

Because there are ________ for total factor productivity, ________ must be the explanation for increases in labor productivity and the standard of living.

no diminishing marginal returns; total factor productivity

The Fisher equation states that the

nominal interest rate equals the real interest rate plus the expected inflation rate.

Refer to Figure above. Holding other variables constant, a decrease in income taxes accompanied by an increase in the skill level of workers will result in a

shift from curve D1 to curve D2 and a shift from curve S1 to curve S2.

Refer to Figure above. Holding other variables constant, a decrease in efficiency will result in

shift from curve D2 to curve D1.

Refer to Figure above. Holding other variables constant, a decrease in households' wealth will result in a

shift from curve S1 to curve S2.

All else equal, continued increases in the labor supply in an economy will lead to

smaller increases in real GDP.

Reducing ________ unemployment may be beneficial for an economy, but reducing ________ unemployment to zero would definitely reduce the efficiency of the economy

structural and cyclical; frictional

Workers who are unemployed for long periods of time are more likely to be unemployed for ________ reasons than for ________ reasons.

structural; frictional or cyclical

Two of the most important factors that influence total factor productivity are

the stock of knowledge that the world possesses and the associated level of technology.

In the short run, the labor supply curve for most people slopes upward because

the substitution effect is stronger than the income effect.

If d = the depreciation rate, n = the growth rate of the labor force, and k = the capital-labor ratio, which of the following expressions best describes break-even investment?

(d + n)k

The growth rate of real GDP per hour worked is equal to

(growth from convergence) + (balanced growth rate).

If the money supply grows at 5% and real GDP grows at 6%, the quantity theory predicts the inflation rate will be

-1%

Suppose that the production function for the economy is Y = AK0.2L0.8. If the growth rate of the capital stock = 4.25%, the growth rate of labor = 2.5%, and the growth rate of factor productivity = 1.25%, the contribution of capital to the growth of real GDP is

0.85%.

A major shortcoming of a barter economy is

the requirement of a double coincidence of wants.

Suppose that the production function for the economy is Y = AK0.5L0.5. If the capital stock = 40,000, the quantity of labor = 10,000, and the efficiency index = 3, the equilibrium real wage is

$3

Checking Account Deposits $2,200 Currency 2,500 Money Market Mutual Fund Shares 1,600 Savings Deposits 7,600 Small Time Deposits 2,800 Traveler's Checks 100 Refer to Table above. In this simple economy, M1 equals

$4800

Suppose that the production function for the economy is: Y = AK1/4L3/4. Assume that real GDP is $8,000 billion, capital stock is $32,000 billion, and the labor supply is 120 billion hours. The value of the marginal product of labor is ________ per hour of labor.

$50

f the rate of job finding equals 7%, and the rate of job separation equals 1%, then the natural rate of unemployment is

12.5%

Suppose capital's share of income is one-third, total factor productivity growth has averaged 2.3% per year, and the growth rate of labor hours have averaged 1.6% per year. If hours worked per person is constant, the steady-state growth rate for real GDP per hour worked is

3.45%

Suppose that the production function for the economy is Y = AK0.4L0.6. If the growth rate of real GDP = 3.92%, the growth rate of the capital stock = 3.4%, the growth rate of labor = 2.1%, and the growth rate of factor productivity = 1.3%, the relative share of capital growth to the growth of real GDP is

34.7%.

If the capital-labor ratio equals 1.5 in the steady state, depreciation equals 20, and dilution equals 10, break-even investment equals

45

According to the quantity theory of money, if the money supply grows at 25% and the inflation rate is 20%, the growth in real GDP is

5%

Suppose you lend $5,000 to your brother for one year at a nominal interest rate of 7%. Inflation during that year is 4%. As a result, you will receive ________ at the end of the year.

5350

If you take out a mortgage with a nominal interest rate of 8% and you expect the inflation rate to be 2%, then you expect to pay a real interest rate of

6%

Suppose Canada and Thailand have the same level of total factor productivity and capital's share of income. If capital per worker is greater in Canada than in Thailand, real GDP per hour worked in ________ will tend to ________.

Thailand; increase

Refer to Figure above. Holding other variables constant, if the economy is originally in equilibrium at the intersection of D1 and S1 and firms experience an increase in technology of production, the economy would move to the new equilibrium point represented by

W3 and L2.

Holding other factors constant, the increase in the prison population over the past 30 years in the United States has likely

decreased structural plus frictional unemployment.

In the aggregate production function, Y represents real GDP, K represents the capital stock, L represents the quantity of labor, and A represents an index of efficiency. Which of the following equations represents the aggregate production function?

Y = AF(K, L)

Over the long run and across countries, there is evidence of ________ between the growth rate of the money supply and the inflation rate.

a strong link

The level of investment necessary to keep the capital-labor ratio constant is called

break-even investment.

When new technology eliminates existing jobs but simultaneously creates jobs making new and better products elsewhere in the economy, economists refer to this situation as

creative destruction.

The M1 measure of the money supply equals

currency in circulation plus checking account deposits plus traveler's checks.

If the required reserve ratio increases and the monetary base is unchanged, the value of the money multiplier will ________ and the value of the money supply will ________

decline; decline

The sale of Treasury securities by the Federal Reserve will, in general,

decrease the quantity of reserves held by banks.

All else equal, if the demand for capital decreases and the supply of capital does not change, the equilibrium real rental cost of capital will ________ and the equilibrium quantity of capital will ________.

decrease; not change

All else equal, if individuals save less because inflation lowers returns on savings, this should ________ the supply of loanable funds and ________ the capital stock.

decrease; reduce

The quantity equation states that the

money supply times the velocity of money equals the price level times real GDP.

The Solow growth model predicts that a lower depreciation rate will lead to

higher productivity and a higher standard of living.

The Solow growth model predicts that a lower labor force growth rate will lead to

higher productivity and a higher standard of living.

As the capital-labor ratio increases, break-even investment

increases at a constant rate.

As real GDP per capita increases, life expectancy

increases at a decreasing rate.

Keeping total factor productivity constant, as the capital-labor ratio increases, labor productivity

increases at a decreasing rate.

Which of the following would be the least likely to increase total factor productivity?

increases in the population growth rate

In the long run, an increase in the money supply

increases nominal variables but not real variables.

An economy accumulates capital when

its capital-labor ratio increases

Real GDP per capita is measured as

labor productivity x hours worked per person.

As long as ________ increases, ________ will also increase, and the standard of living will rise.

labor productivity; real GDP per capita

If the marginal product of labor is less than the nominal wage divided by the price of output, a firm that wishes to maximize profits will

lay off workers

If the saving rate increases, break-even investment will be ________ than investment per hour worked, and GDP per hour worked will ________.

less; increases

If the nominal rental price of capital divided by the price of output is less than the marginal product of capital, a firm that wishes to maximize profits will

purchase more capital goods.

Economic evidence indicates that economic growth

raises the incomes of both the poor and the rich.

Changes in all of the following will shift the demand curve for labor except

real wage rate

Refer to Figure above. Suppose the economy is originally in steady state at k*1. If the saving rate increases from s1 to s2, the capital-labor ratio will begin to ________, and output per hour worked will ________.

rise; rise

The government's profit from issuing fiat money is known as

seigniorage

Refer to Figure above. All else equal, an increase in the capital stock will cause a

shift from PF1 to PF2.

Refer to Figure above. All else equal, an increase in total factor productivity will cause a

shift from PF1 to PF2.

If the real wage is above the equilibrium real wage, there would be a ________ of workers and the real wage would _______

surplus; decline

The processes a firm uses to turn inputs into outputs of goods and services are the firm's

technology

The endogenous growth model discussed in the chapter predicts the relationship between ________ and ________.

the investment rate; the growth rate of labor productivity

As the workforce ages,

the natural rate of unemployment declines.

The Cobb-Douglas production function represents real GDP as a function of all of the following variables except

the price level

In the Cobb-Douglas production function, the index of the overall level of efficiency of transforming capital and labor into real GDP is called

total factor productivity

When an economy is on the balanced growth path, the growth rate of real GDP per capita is determined by the growth rate of

total factor productivity

Diminishing marginal returns do not exist for increases in

total factor productivity.

An increase in technology increases total factor productivity.

true

Challenges to using real GDP per capita as a measure of the standard of living include the distribution of income, the value of leisure time, happiness, and life expectancy.

true

Efficiency wages are higher-than-market wages that a firm pays to motivate workers to be more productive.

true

Frictional unemployment is the unemployment that arises from the process of matching workers with jobs.

true

Gold is an example of a commodity money. With a commodity money, its value depends on the quality of the commodity.

true

If a natural disaster destroys a large portion of a country's capital stock, the country will fall below its balanced growth path.

true

The marginal product of labor is the output a firm receives from adding one more unit of labor, holding all other inputs and efficiency constant.

true

The substitution effect refers to the fact that an increase in wages raises the opportunity cost of leisure and causes workers to devote more time to working and less time to leisure activities.

true

Three sources that can explain differences in real GDP per worker in different countries are differences in capital per hour worked, or the capital-labor ratio, differences in total factor productivity, and differences in capital's share of income.

true

To maximize profits, firms will purchase capital goods as long as the capital goods produce more output than the firm has to pay for the capital goods.

true

With deflation, the real interest rate exceeds the nominal interest rate.

true

Which of the following functions of money would be least affected if the economy experiences high rates of inflation?

unit of account

The supply curves for labor and capital are ________ and the demand curves for labor and capital are ________.

vertical; downward sloping

The increase in real GDP per capita in the United States from 1949 to 2010

was due to increased labor productivity.

Endogenous growth theory tries to explain

why the growth rate of total factor productivity varies across countries.