Final Exam Review
Assume that a typical consumer's basket of goods is composed of two goods as the following: 2018: Roses: 200 units; $5 per unit Guns: 50 units; $20 per unit 2019: Roses: 100 units; $10 per unit Guns: 80 units; $20 per unit Using year 2018 as the base year, what is the rate of inflation in year 2019, according to the GDP deflator method of calculating price index?
23.8%
Suppose that the production function describing a closed economy is Y = 10 K0.25L0.75 and it has the quantities of labor L = 100 and capital K = 100. Then the economy's output is ______ and the real rent is ______.
4,000; 2.5
Consider a competitive economy that has the quantities of labor (L = 400) and capital (K = 400), and the technology (A = 10). The economy described by the following Cobb-Douglas production function: Y = A L.7K.3 The economy's total output is ____________ and the real wage in this economy is ____________.
4,000; 7
Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6Y. Investment (I) is given by the equation I = 2,000 - 100r, where r is the real interest rate in percent. No government exists. In this case, the equilibrium real interest rate is:
5 percent.
Suppose that the following equations describe a closed economy: C=100+0.6(Y−T) I=100,G=100,T=100 From the above information, suppose that investment (I) declined by 40 units to a level of 60, the new level of equilibrium income (new Y*) = __________.
500
Suppose that the following equations describe a closed economy: C=100+0.6(Y−T) I=100,G=100,T=100 From the above information, the equilibrium output (Y*) = _____.
600
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 and the unemployment rate is ____ percent.
60; 3.33
A closed economy has the production function: Y = (K^0.5)(L^0.5) Suppose that saving rate (s) = 0.40 and depreciation rate (δ) = 0.05. There is no population growth or technological progress in this economy. Use the information above to solve for the steady-state output per worker. k* is
64
In this graph, when the level of capital per worker is OA, (see graph in Solow Model Practice Problems #5)
AB represents investment per worker, and BC represents consumption per worker.
In the Keynesian-cross analysis, if the consumption function is given by C = 150 + 0.75(Y - T), and T increases by 1 unit, what would happen to consumption and the equilibrium income?
Consumption will decrease by 0.75 units; the equilibrium income will fall by 3 units.
According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed:
between the labor and capital used in production, according to their marginal productivities.
In the short run, according to the AD/AS model and assuming that short-run aggregate supply curve is upward sloping, a tax increase policy causes:
both output and prices to fall.
If the Fed wants to decrease the interest rate, the Fed would:
buy bonds to increase the money supply.
According to the classical model, when taxes are increased but government spending is unchanged, interest rates:
decrease.
In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will:
decrease.
According to the theory of liquidity preference, holding the supply of real money balances constant, a decrease in income will ______ the demand for real money balances and will ______ the interest rate.
decrease; decrease
From the Expenditure Approach, when a firm sells a product (produced in a previous year) out of inventory, investment expenditures ______, consumption expenditures ______, and GDP _________.
decrease; increase; remains unchanged.
In the standard IS-LM model, when tax increases, in short-run equilibrium, the interest rate _____________ and output ____________.
falls; falls
In the standard IS-LM model, when Ms remains constant but P falls, in short-run equilibrium, the interest rate ______ and output ______.
falls; rises
Other things equal, when the demand for money is extremely elastic,
fiscal policy is effective in changing equilibrium output.
Assume that a bakery hires more workers and pays them wages and that the workers produce more bread. GDP increases in all of the following cases except when the bread:
grows stale and is thrown away.
Two identical countries, A and B, start at the same equilibrium output level. They differ only in the marginal propensity to consume. Country A's MPC is 0.8. Country B's MPC is 0.75. Both countries decide to cut taxes by $2 billion. Using the Keynesian-cross model, the new equilibrium level of output will be:
higher in country A.
Unlike the GDP deflator, the CPI includes the prices of:
imported goods.
According to "monetary neutrality" by the Monetarists, using the aggregate demand-aggregate supply model, an increase in money supply by the Fed will:
increase output in the short run, but not in the long run.
In the classical model with fixed income, if there is a decrease in government spending with no change in taxes, then public saving ______ and private saving _______.
increases; does not change
Use the classical model in Chapter 3 and assume that consumption does not depend on the interest rate. In this case, when there is an investment incentive program by the government that leads to an increase in investment demand:
investment is unchanged and the interest rate rises.
According to the theory of liquidity preference, the supply of real money balances:
is fixed.
In the Keynesian-cross diagram, comparing with an equilibrium level Y=E, if planned expenditure exceeds total output, then output level will be on the ______ of the equilibrium output and unplanned inventory will ______.
left; decline
The theory of liquidity preference implies that, other things being equal, an increase in the real money supply will:
lower the interest rate.
In the classical model, the supply of loanable funds is equivalent to:
national saving.
The theory of liquidity preference implies that the quantity of real money balances demanded is:
negatively related to the interest rate and positively related to income.
For a closed economy, assume that the consumption function is given by C = 160 + 0.8(Y - T). The investment demand is I = 150 - 10r. If G= 350 and T = 200. What is the equation for IS curve?
r = 50 - 0.02Y
When the investment demand is perfectly elastic,
the IS curve is horizontal.
If an economy is in a liquidity trap, then:
the interest rate is so low that monetary policy cannot stimulate the economy.
Other things equal, a tax cut has a larger effect on equilibrium output when:
the investment demand is very inelastic.
When the Fed buys bonds, other things being equal:
the money supply curve shifts to the right causing interest rate to decrease.
If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:
the real wage will fall and the real rental price of capital will rise.
If investment does not depend on the interest rate, then the IS curve is ______ and ______ policy has no effect on output.
vertical; monetary
According to the capital accumulation equation (with no population growth and technological progress), the change in capital stock is:
∆k= s. y−δk
In the Keynesian-cross model, if the MPC equals .75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.
$.75 billion; more than $.75 billion
In the Keynesian-cross model, if the MPC equals .75, then a $1 billion increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.
$1 billion; more than $1 billion
If the GDP deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009?
$12 trillion
A farmer grows wheat and sells it to a miller for $1; the miller turns the wheat into flour and sells it to a baker for $3; the baker uses the flour to make bread and sells the bread for $6. The value added by the miller is __________.
$2
Assume that apples cost $0.50 in 2002 and $1 in 2007, whereas oranges cost $1 in 2002 and $1.50 in 2007. If 4 apples were produced in 2002 and 5 in 2007, whereas 3 oranges were produced in 2002 and 4 in 2007, then real GDP (in 2002 prices) in 2007 was _________
$6.50
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.
If GDP (measured in billions of current dollars) is $5,465 and the sum of consumption, investment, and government purchases is $5,496, while exports equal $673, imports are ________.
$704
If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and government purchases are $1,098, then net exports are:
-$31
The steady-state level of capital occurs when the change in capital stock (Δk) equals:
0
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 per-worker production function is given by y = k1/2, the saving rate (s) is 0.2, and the depreciation rate is 0.1, then the steady-state ratio of capital to labor is:
4
If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:
50
If Y = AK0.5L0.5 and A, K, and L are all 100, the marginal product of capital is:
50.
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
Assume that the adult population of the United States is 191.6 million, total employment is 117.6 million and 9.4 million are unemployed. Then the unemployment rate is approximately ___________ percent.
7.4
If the IS curve is given by Y = 1,700 - 100r and the LM curve is given by Y = 500 + 100r, then equilibrium income and interest rate are given by:
Y = 1,100, r = 6 percent.
Discouraged workers:
are counted as part of the adult population, but not as part of the labor force.
The theory of liquidity preference implies that:
as the interest rate rises, the demand for real balances will fall.
The Golden Rule level of capital accumulation is the steady state with the highest level of:
consumption per worker.
Nominal GDP means the value of goods and services measured in ___________ prices, while real GDP measures the value of goods and services in ________ prices.
current; constant
In the classical model with fixed income, if the demand for goods and services is less than the supply, the interest rate will:
decrease
According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of deltaT will:
decrease equilibrium income by (delta T)(MPC)/(1 - MPC).
According to the Keynesian-cross analysis, if MPC stands for marginal propensity to consume, then a rise in taxes of ∆T will:
decrease equilibrium income by (∆T)(MPC)/(1 - MPC).
An increase in the supply of capital will:
decrease the real rental price of capital.
In the Solow growth model, if depreciation exceeds investment, the capital stock will ______ and output will ______ until the steady state is attained.
decrease; decrease
When a firm sells a product out of inventory, investment expenditures _________ and consumption expenditures _____________.
decrease; increase
A woman marries her butler. Before they were married, she paid him $60,000 per year. He continues to wait on her as before (but as a husband rather than as a wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage:
decreases GDP by $60,000.
A woman marries her butler. Before they were married, she paid him$20,000 per year. He continues to wait on her as before (but as a husband rather than a wage earner). She earns $1,000,000 per year both before and after her marriage. The marriage _________ (increases, decreases, or does not change) GDP.
decreases by $20,000
If the consumption function is given by C = 150 + 0.85(Y - T) and T increases by 1 unit, then consumption:
decreases by 0.85 unit.
According to the Solow model, if the saving rate increases, the:
economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached.
An economy's production function is Y = AK0.3L0.7. Suppose that a gift of capital from abroad raises the amount of capital by 10 percent, then real rent will ________and real wage will ______.
fall by 6.45%; rise by 2.90%.
The government raises lump-sum taxes on income by $100 billion, and the classical economy adjusts so that output does not change. If the marginal propensity to consume is 0.75, private saving:
falls by $25 billion.
The government raises lump-sum taxes on income by $100 billion, and the classical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving:
falls by $40 billion.
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.
The Golden Rule level of the steady-state capital stock:
implies a choice of a particular saving rate.
Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:
in the long run, but not in the sho
The neoclassical theory of distribution explains the allocation of:
income among factors of production.
Based on the graph, starting from equilibrium at interest rate r3 ,income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant the Federal Reserve should _____ the money supply shifting to _____. (see graph on Old Final Exam #27)
increase; LM2
In the Solow growth model, if investment exceeds depreciation, the capital stock will ______ and output will ______ until the steady state is attained.
increase; increase
In the Solow growth model, if investment is greater than depreciation, the capital stock per worker will ________ and output per worker will __________ until the steady state is attained
increase; increase
In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income.
increases; increases
Suppose that an economy faces a stagflation, the Fed can return the economy back to its full-employment level of output by _____________; however this action leads to ____________.
increasing money supply; higher inflation
National income equals net national product minus _________________.
indirect business taxes
Use the classical model developed in Chapter 3 (and assume that consumption does not depend on the interest rate). In this case, when there is an investment tax rebate that leads to an increase in investment demand:
investment is unchanged and the interest rate rises
If the production function describing an economy is Y = 100 K.25L.75, then the share of output going to labor:
is 75 percent.
The Keynesian-cross analysis assumes planned investment:
is fixed, whereas the IS analysis assumes it depends on the interest rate.
In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier.
is larger than
A higher saving rate leads to a:
larger capital stock and a higher level of output per worker in the long run.
According to the standard IS-LM model, if Congress passed a tax increase at the request of the president to reduce the budget deficit, but the Fed held the money supply constant, then the two policies together would generally lead to ______ income and a ______ interest rate.
lower; lower
If a liquidity trap does exist, then ______ policy will not be effective in increasing income when interest rates reach very ______ levels.
monetary; low
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.
According to the AD/AS model, assume that the short-run aggregate supply curve is upward sloping and the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.
output and prices both decrease; fall
For the purposes of the Keynesian cross, planned expenditure consists of:
planned investment, government spending, and consumption expenditures.
According to the AD/AS model, in the short run, a favorable supply shock causes:
prices to fall and output to rise.
An economy's production function is Y = AK0.3L0.7. Let MPK = 0.3AK-0.7L0.7 and MPL = 0.7AK0.3L-0.3. Suppose that a gift of capital from abroad raises the capital stock by 20 percent, then
real rental price will fall by 12.0% and real wage will rise by 5.62%
In the Solow growth model, the economy ends up with a steady-state level of capital:
regardless of the starting level of capital.
According to the standard IS-LM model, fiscal policy tend to be more effective when the:
responsiveness of investment demand to the interest rate is small.
According to the AD/AS model (assuming the upward-sloping short-run aggregate supply curve), starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:
return to the old level and output will be restored to the natural rate.
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, national saving:
rises by $60 billion.
Investment per worker (i) as a function of the saving ratio (s) and output per worker (f(k)) may be expressed as:
s.f(k)
The LM curve, in the usual case:
slopes up to the right.
In the classical model, what adjusts to eliminate any unemployment of labor in the economy?
the real wage
If increased immigration raises the labor force, the neoclassical theory of distribution predicts:
the real wage will fall and the real rental price of capital will rise.
According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:
unplanned inventory investment is negative.
A decrease in the real money supply, other things being equal, will shift the LM curve:
upward and to the left.
An increase in government spending generally shifts the IS curve, drawn with income along the horizontal axis and the interest rate along the vertical axis:
upward and to the right.
According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity (Y/L) is growing rapidly:
workers will experience high rates of real wage growth.
The change in capital stock per worker ( Δk) may be expressed as a function of s — the saving ratio, f(k) — output per worker, k — capital per worker, and — δ the depreciation rate, by the equation:
Δk= sf(k) −δk
Suppose that the production function describing a closed economy is Y = 10 K0.25L0.75 and it has the quantities of labor L = 100 and capital K = 100. Then the economy's output is ______ and the real wage is ______.
1,000; 7.5
An increase in the government spending shifts the ______, and the aggregate demand curve ______.
IS curve to the right; shifts to the right
If investment demand is extremely sensitive to the interest rate, then the _______ curve is ____________ and ___________ is effective.
IS; flat; monetary
In the standard IS-LM model, which set of the policy mix will generate the largest increase in the equilibrium output?
Increase G and increase MS.
Which of the following transactions would be included in this year's GDP?
Johnson rents a five-year-old house from Smith.
Which of the follow assumptions belongs to the Monetarist hypothesis about the IS and LM curves?
LM is very steep because people tend to hold money as a constant proportion of their income.
Since December 2008, the target interest rate has been kept to the range of 0 to 0.25 percent. Some economists believe that the U.S. economy might experience a "liquidity trap." According to the IS-LM model, the liquidity trap hypothesis implies the _______ is flat and ________ is ineffective.
LM; monetary
The profit-maximizing firm will rent capital inputs up to the point where:
MPK = real rental price of capital
Which of the following statements is correct? 1. When the Fed buys U.S. government securities from the public, the money supply will increase and the national debt will increase. 2. The discount rate is the interest rate at which banks lend reserves to each other overnight.
Neither 1 nor 2 is correct.
Which of the following statements is correct? 1. The Keynesian-cross model assumes that investment (I) is a constant. 2. The IS analysis assumes that investment (I) is positively related to interest rate.
Only 1 is correct.
Which of the following statements is correct? 1. The IS curve will be relatively steep if investment demand is highly sensitive to changes in interest rates. 2. For the investment demand function: I = c - dr, when d is very small, the investment demand is relatively inelastic.
Only 2 is correct.
All of the following actions are investments in the sense of the term used by macroeconomists except: - John Smith's buying a newly constructed home. - Sandra Santiago's buying 100 shares of IBM stock. - IBM's building a new factory. - The corner candy store's buying a new computer.
Sandra Santiago's buying 100 shares of IBM stock.
Consider a closed, competitive economy that has the quantities of labor L = 400 and capital K = 400, and the technology A =10. The economy is described by the Cobb-Douglas production function: Y = AK0.7L0.3 Which of the following options is INCORRECT? - The total payments to labor = the total payments to capital owners - The total payments to labor = 0.3Y. - The total payments to labor = MPL.L - The total payments to labor = real wage x L
The total payments to labor = the total payments to capital owners
An American digital camera producer in Boston has an increase in inventory of 50 cameras in 2010. In 2011, it sells all 50 cameras.
The value of increased inventory will be counted as part of GDP in 2010, but the value of the cameras sold in 2011 will not cause GDP in 2011 to increase.
If a U.S. household buys a $75 handbag from Italy, U.S. consumption increases by $75,
U.S. imports increase by $75, but U.S. GDP is unaffected.
An economy's production function is Y = AK0.3L0.7. Suppose that a gift of capital from abroad raises the capital stock by 20 percent, then
real rental price will fall by 12.0% and real wage will rise by 5.62%.
In a neoclassical economy, assume that the government lowers both government spending and taxes by $100 billion. If the marginal propensity to consume is 0.6, investment will:
rise $40 billion.
Stagflation occurs when prices ___________ and output _____________.
rise; fall
Assume that apples cost $0.50 in 2002 and $1 in 2007, whereas oranges cost $1 in 2002 and $0.50 in 2007. If 10 apples and 5 oranges were purchased in 2002, and 5 apples and 10 oranges were purchased in 2007, the CPI for 2007, using 2002 as the base year, is _________.
1.25
Assume that equilibrium GDP (Y) is 5,000. Consumption is given by the equation C = 500 + 0.6 (Y - T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I = 2,160 - 100r, where r is the real interest rate in percent. In this case, the equilibrium real interest rate is:
13 percent.
If y = k^0.5, there is no population growth or technological progress, 5 percent of capital depreciates each year, and a country save 20 percent of output per worker each year, then the steady state level of capital per worker is:
16
Using the Keynesian-cross analysis, assume that the consumption function is given by C = 100 + 0.6(Y - T). If planned investment is 100 and T is 100, then the level of G needed to make equilibrium Y equal 1,000 is:
260
According to the standard IS-LM model, if MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T decreases by 100, then the IS curve for any given interest rate shifts to the right by:
300
An increase in the price of imported goods will show up in __________ but not _________.
CPI, GDP Deflator
Assume that a tire company sells four tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. In this case, the amount from these transactions that should be counted in GDP is:
$20,000
Assume that an economy is described by the following set of equations: Y=Y¯=1,200 C=125+0.75(Y−T) I=200−10r G=G¯=150 T=T¯=100 From this information, the equilibrium interest rate (r∗ ) equals _________________ and private saving equals ___________.
10; 150
2018: Apples: 10 units; $0.50 per unit Oranges: 5 units; $1 per unit 2019: Apples: 5 units; $1 per unit Oranges: 10 units; $0.50 per unit From the above information, the CPI for 2019, using 2018 as the base year, is:
125
Assume that equilibrium output (Y) is 5,000. Consumption is given by the equation C=500+0.6(Y−T). Taxes (T) are equal to 600. Government spending is equal to 1,000. Investment is given by the equation I=2,160−100r, where r is the real interest rate in percent. In this case the equilibrium real interest rate is:
13 percent.
Assume that apples cost $1 in 2017 and $2 in 2018, whereas oranges cost $0.50 in 2017 and $1 in 2018. If 10 apples were produced in 2017 and 12 in 2018, whereas 4 oranges were produced in 2017 and 10 in 2018, then the real GDP in 2018, using a base year of 2017, is:
17
If Y = AK0.5L0.5 and A = 2, K = 400, and L = 100, then the total payments to labor equal ___________.
200
If the per-worker production function is given by y = k^0.5, the saving rate is 0.3, and the depreciation rate is 0.1, then the steady-state output per worker (y*) is:
3
Suppose the following equations describe a closed economy: Y=C+I+G C=200+0.75(Y−T) I=200−25r G=100 T=100 Ms=1,000 P=2 (MP)d=Y−100r From the information given above, suppose that the government tries to stimulate the economy by raising G by 200 (G2=300). And, if the Fed wants to fix interest rate at 6%, how much money supply (MS) should the Fed set? (Write your answer in the provided space.) New Ms = ________________
3200
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 (δ = .05) of capital in both countries, and country A saves 10 percent (sA = 0.10) of output whereas country B saves 20 percent (sB = 0.20). If A starts out with a level of capital per worker of 4 and B starts out with a level of capital per worker of 2, in the long run, at the steady state:
A's level of capital per worker will be 4 whereas B's will be 16.
In this graph, initially the economy is at point E, with price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the President and the Congress decide to decrease government spending (to deal with a high national debt issue). The economy moves first to point ______ and then, in the long run (through the self-corrective mechanism), to point ______. (see exam 2, question 18 for graph)
A; D
Use the IS-LM model to answer this question. Suppose that the government of three identical countries, Alpha, Beta, and Delta, cut taxes by the same amount. The Central Bank of Alpha follows a policy of holding a constant money supply. The Central Bank of Beta follows a policy of holding a constant interest rate. The Central Bank of Delta decreases money supply. Which country will have the largest increase in equilibrium output?
Beta
In this graph, initially the economy is at point E, with the price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the Fed increases money supply. The economy moves first to point ______ and then, in the long run (through the self-corrective mechanism), to point ______. (see exam 2, question 19 for graph)
C; B
Assume two economies are identical in every way except that one has a higher saving rate. According to the Solow growth model, in the steady state the country with the higher saving rate will have ______ level of output per worker and ______ growth of output per worker as/than the country with the lower saving rate.
a higher; the same
According to the IS-LM model, if Congress increases government spending but the Fed wants to hold interest rate constant, then the Fed must ________ .
buy bonds
According to the model developed in Chapter 3, when taxes decrease without a change in government spending:
consumption increases and investment decreases.
In the classical model, if the consumption function is given by C=150+0.85(Y−T) and T increases by 1 unit, then consumption:
decreases by 0.85 unit.
In the steady state, the capital stock does not change because investment equals:
depreciation of existing capital stock.
According to the definition used by the U.S. Bureau of Labor Statistics, people are considered to be unemployed if they:
do not have a job, but have been looking for work in the past four weeks.
If the Fed decreases the money supply at the same time as taxes increase, the:
equilibrium level of output will definitely fall.
In the standard IS-LM model, a decrease in the money supply causes an ______ for real money balance at an initial interest rate, and thus the interest rate has to ______ to equate the quantity money demanded and the money supply, and this shifts the ______.
excess demand; rise; LM curve to the left
According to the market for real money and the IS-LM model, an increase in money supply will cause __________ real money, interest rate must ________ to bring the money market to the equilibrium. Thus, LM curve will shift to the _________.
excess supply of; fall; right
In the classical model with fixed income, if the demand for goods and services is greater than the supply, the interest rate will:
increase
In this graph, starting from the level of capital per worker k1, the amount of capital per worker will: (see graph in Solow Model Practice Problems #7)
increase
The reason that the income response to a fiscal expansion is generallyless in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:
investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.
In the classical model developed in Chapter 3, when there is an investment incentive scheme that leads to an increased in investment demand,
investment is unchanged, but interest rate rises.
In the classical model, the demand for loanable funds is equivalent to:
investment.
If the production function describing an economy is Y = 100 K0.25L0.75, then the share of total income going to capital owners:
is 25 percent.
If the production function describing an economy is Y = 100 K0.25L0.75, then the share of output going to labor:
is 75 percent.
According to the AD/AS model (assuming the upward-sloping short-run aggregate supply curve), starting from long-run equilibrium, without policy intervention, the long-run impact (based on the self-corrective mechanism) of an adverse supply shock is that:
prices will return to the old level and output will be restored to the natural rate.
Suppose the following equations describe a closed economy: Y=C+I+G C=200+0.75(Y−T) I=200−25r G=100 T=100 Ms=1,000 P=2 (MP)d=Y−100r From the information given above, what are the short-run equilibrium values of r and Y? (Solve for the values of r and Y and write your answers in the space provided.) r* = _____________ Y* = ______________
r* = 6 Y* = 1100
If MPC = 0.75, when G increases by 100 and T increases by 100, then the IS curve for any given interest rate:
shift to the right by 100.