Macroecon Theory Test 1

Exhibit: Policies Influence Real Exchange Rate Which of the panels illustrates the impact of contractionary fiscal policies at home on the real exchange rate?

(A)

If y = k 1/2 , there is no population growth or technological progress, 5 percent of capital depreciates each year, and a country saves 20 percent of output each year, then the steady-state level of capital per worker is:

16.

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage:

decreased 2 percent.

The assumption that technological progress increases the efficiency of each unit of labor is called:

labor-augmenting technological progress.

If 5 Swiss francs trade for $1, the U.S. price level equals $1 for a good, and the Swiss price level equals 2 francs for the same good, then the real exchange rate between Swiss goods and U.S. goods is _____ Swiss good(s) per U.S. good.

2.5

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real gross domestic product (GDP) must be _____ percent.

3

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.

People use money as a store of value when they:

hold money to transfer purchasing power into the future.

Starting from a trade balance, if the world interest rate falls, then, holding other factors constant, in a small open economy the amount of domestic investment will _____, and net exports will _____.

increase; decrease

In a small open economy, if the world interest rate falls, then domestic investment will _____, and the real exchange rate will _____, holding all else constant.

increase; increase

Crowding out occurs when an increase in government spending _____ the interest rate and investment _____

increases; decreases

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

The world interest rate:

is the interest rate prevailing in world financial markets.

Assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment:

is unchanged and the real interest rate rises.

The costs of unexpected inflation, but not of expected inflation, are:

the arbitrary redistribution of wealth between debtors and creditors.

A depreciation of the real exchange rate in a small open economy could be the result of:

the expiration of an investment tax-credit provision.

In the classical model with fixed output, the supply and demand for goods and services are balanced by:

the interest rate.

In the classical model, according to the quantity theory of money and the Fisher equation, an increase in money growth increases:

the nominal interest rate.

In the classical model with fixed income, if households and the government want to save more than firms want to invest, then:

the real interest rate falls.

Which of these statements is NOT true about the steady state of the basic Solow model?

The marginal product of capital always is equal to the depreciation rate.

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.

If nominal wages cannot be cut, then the only way to reduce real wages is by:

adjustments via inflation.

If the number of dollars per yen rises, this is called a(n):

appreciation of the yen.

Based on a Cobb-Douglas production function and perfect capital mobility, capital should flow to economies in which:

capital is relatively scarce.

Exhibit: Capital per Worker and the Steady State In this graph, capital-labor ratio k2 is not the steady-state because:

depreciation is greater than gross investment.

Private saving is:

disposable income minus consumption.

When exports exceed imports, all of these are true EXCEPT :

domestic investment exceeds domestic saving.

The investment function slopes _____ because there are _____ investment projects that are profitable as the interest rate decreases.

downward; more

If an economy has a steady state MPK of 0.15 and a depreciation rate of 0.10, then the economy has _____ capital than the golden rule level and a(n) _____ in saving rate will lead to an increase in the consumption per worker in the long run.

less; increase

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will:

lower investment and raise the interest rate

Assume that two economies are identical in every way except that one has a higher population growth rate. According to the Solow growth model, in the steady state, the country with the higher population growth rate will have a _____ level of output per person and _____ rate of growth of output per worker compared to the country with the lower population growth rate.

lower; the same

National saving is:

private saving plus public saving.

In the Solow growth model, the steady-state level of output per worker would be higher if the _____ increased or the _____ decreased.

saving rate; depreciation rate.

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

saving right.

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

consumption per effective worker.

If a U.S. corporation purchases a product made in Europe and the European producer uses the proceeds to purchase a U.S. government bond, then U.S. net exports _____, and net capital outflows _____.

decrease; decrease

If the money supply is held constant, then an increase in the nominal interest rate will _____ the demand for money and _____ the price level.

decrease; increase

If the saving rate increases, the:

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

In the Solow growth model of an economy with population growth but no technological change, the break-even level of investment must do all of these EXCEPT:

equal the marginal productivity of capital (MPK)

Money's liquidity refers to the ease with which:

money can be converted into goods and services.

The rate of inflation is the:

percentage change in the overall level of prices.

The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods?

point B